As
filed with the Securities and Exchange Commission on March 6, 2009
Securities Act Registration No. 333-149315
Investment Company Act Registration No. 811-21725
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PRE-EFFECTIVE AMENDMENT NO.
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POST-EFFECTIVE AMENDMENT NO. 4
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and/or
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
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Tortoise Energy Capital Corporation
11550 Ash Street, Suite 300
Leawood, Kansas 66211
(913) 981-1020
Agent for Service
David J. Schulte
11550 Ash Street, Suite 300
Leawood, Kansas 66211
Copies of Communications to
Steven F. Carman, Esq.
Husch Blackwell Sanders LLP
4801 Main Street, Suite 1000
Kansas City, MO 64112
(816) 983-8000
Approximate Date of Proposed Public Offering:
From time to time after the effective date of
the Registration Statement.
If any of the securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities
offered in connection with a dividend reinvestment plan, check the following box.
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It is proposed that this filing will become effective (check appropriate box):
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when declared effective pursuant to Section 8(c).
Tortoise Energy Capital Corporation (Registrant)
Contents of Registration Statement
This Post-Effective Amendment consists of the following:
1.
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Facing sheet of the Registration Statement.
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2.
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Contents of Registration Statement.
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3.
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Tortoise Energy Capital Corporation Base Prospectus dated
March 6, 2009.
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4.
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Tortoise Energy Capital Corporation Statement of Additional
Information dated March 6, 2009.
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5.
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Part C of the Registration Statement (including signature page).
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6.
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Exhibits (b) and (n) filed pursuant to Item 25 of the Registration Statement.
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EX-99.B
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EX-99.N
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Base Prospectus
$300,000,000
Tortoise Energy Capital Corporation
Common Stock
Preferred Stock
Debt Securities
Tortoise Energy Capital Corporation (the Company, we, us or our) is a non-diversified
closed-end management investment company. Our investment objective is to seek a high level of total
return with an emphasis on current distributions to stockholders. We seek to provide our
stockholders with an efficient vehicle to invest in a portfolio consisting primarily of master
limited partnerships (MLPs) and their affiliates in the energy infrastructure sector. Under
normal circumstances we invest at least 80% of our net assets, plus any borrowings for investment
purposes, in equity securities of entities in the energy sector and at least 80% of our total
assets (including assets obtained through leverage) in equity securities of MLPs and their
affiliates in the energy infrastructure sector. We may invest up to 50% of our total assets in
restricted securities purchased directly from MLPs, from unitholders of MLPs or from private
companies. We cannot assure you we will meet our investment objective. Unlike most investment
companies, we have not elected to be treated as a regulated investment company under the Internal
Revenue Code.
We may offer, on an immediate, continuous or delayed basis, up to $300,000,000 aggregate
initial offering price of our common stock ($0.001 par value per share), preferred stock
($0.001 par value per share) or debt securities, which we refer to in this prospectus collectively
as our securities, in one or more offerings. We may offer our common stock, preferred stock and
debt securities separately or together, in amounts, at prices and on terms set forth in a
prospectus supplement to this prospectus. In addition, from time to time, certain of our
stockholders may offer our common stock in one or more offerings. The sale of such stock by
certain of our stockholders may involve shares of common stock that were issued to the stockholders
in one or more private transactions and will be registered by us for resale. The identity of any
selling stockholder, the number of shares of our common stock to be offered by such selling
stockholder, and the price and terms upon which our shares of common stock are to be sold from time
to time by such selling stockholder, and the percentage of common stock held by any selling
stockholder after the offering will be set forth in a prospectus supplement to this prospectus. You
should read this prospectus and the related prospectus supplement carefully before you decide to
invest in any of our securities. We will not receive any of the proceeds from common stock sold by
any selling stockholder.
We may offer our securities, or certain of our stockholders may offer our common stock,
directly to one or more purchasers, through designated agents from time to time, or to or through
underwriters or dealers. The prospectus supplement relating to the particular offering will
identify any agents or underwriters involved in the sale of our securities, and will set forth any
applicable purchase price, fee, commission or discount arrangement between us or any selling
stockholder and such agents or underwriters or among the underwriters or the basis upon which such
amount may be calculated. For more information about the manners in which we may offer our
securities, or a selling stockholder may offer our common stock, see Plan of Distribution. Our
securities may not be sold through agents, underwriters or dealers without delivery of a prospectus
supplement.
Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol TYY. As
of March 5, 2009, the last reported sale price for our common
stock was $14.12.
Investing in our securities involves certain risks. You could lose some or all of your
investment. See Risk Factors beginning on page 29 of this prospectus. You should consider
carefully these risks together with all of the other information contained in this prospectus and
any prospectus supplement before making a decision to purchase our securities.
Neither the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
Prospectus
Dated March 6, 2009
This prospectus, together with any prospectus supplement, sets forth concisely the information
that you should know before investing. You should read this prospectus and any related prospectus
supplement, which contain important information, before deciding whether to invest in our
securities. You should retain this prospectus and any related prospectus supplement for future
reference. A statement of additional information, dated March 6, 2009, as supplemented from time to
time, containing additional information, has been filed with the Securities and Exchange Commission
(SEC) and is incorporated by reference in its entirety into this prospectus. You may request a
free copy of the statement of additional information, the table of
contents of which is on page 62 of this prospectus, request a free copy of our annual, semi-annual and quarterly reports, request
other information or make stockholder inquiries, by calling toll-free at 1-866-362-9331 or by
writing to us at 11550 Ash Street, Suite 300, Leawood, Kansas 66211. Our annual, semi-annual and
quarterly reports and the statement of additional information also are available on our investment
advisers website at www.tortoiseadvisors.com. Information included on such website does not form
part of this prospectus. You can review and copy documents we have filed at the SECs Public
Reference Room in Washington, D.C. Call 1-202-551-5850 for information. The SEC charges a fee for
copies. You can get the same information free from the SECs website (http://www.sec.gov). You may
also e-mail requests for these documents to publicinfo@sec.gov or make a request in writing to the
SECs Public Reference Section, 100 F. Street, N.E., Room 1580, Washington, D.C. 20549.
Our securities do not represent a deposit or obligation of, and are not guaranteed or endorsed
by, any bank or other insured depository institution and are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, any accompanying prospectus supplement and the statement of additional
information contain forward-looking statements. Forward-looking statements can be identified by
the words may, will, intend, expect, estimate, continue, plan, anticipate, and
similar terms and the negative of such terms. Such forward-looking statements may be contained in
this prospectus supplement as well as in the accompanying prospectus. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking statements. Several factors that could
materially affect our actual results are the performance of the portfolio of securities we hold,
the conditions in the U.S. and international financial, petroleum and other markets, the price at
which our shares will trade in the public markets and other factors discussed in our periodic
filings with the SEC.
Although we believe that the expectations expressed in our forward-looking statements are
reasonable, actual results could differ materially from those projected or assumed in our
forward-looking statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and are subject to inherent risks and
uncertainties, such as those disclosed in the Risk Factors section of this prospectus. All
forward-looking statements contained or incorporated by reference in this prospectus or any
accompanying prospectus supplement are made as of the date of this prospectus or any accompanying
prospectus supplement, as the case may be. Except for our ongoing obligations under the federal
securities laws, we do not intend, and we undertake no obligation, to update any forward-looking
statement. The forward-looking statements contained in this prospectus and any accompanying
prospectus supplement are excluded from the safe harbor protection provided by Section 27A of the
Securities Act of 1933, as amended (the 1933 Act).
Currently known risk factors that could cause actual results to differ materially from our
expectations include, but are not limited to, the factors described in the Risk Factors section
of this prospectus. We urge you to review carefully that section for a more detailed discussion of
the risks of an investment in our securities.
TABLE OF CONTENTS
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PROSPECTUS SUMMARY
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1
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SUMMARY OF COMPANY EXPENSES
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9
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FINANCIAL HIGHLIGHTS
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11
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SENIOR SECURITIES
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13
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MARKET AND NET ASSET VALUE INFORMATION
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15
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USE OF PROCEEDS
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THE COMPANY
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INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
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LEVERAGE
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25
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RISK FACTORS
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29
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MANAGEMENT OF THE COMPANY
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37
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CLOSED-END COMPANY STRUCTURE
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39
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CERTAIN FEDERAL INCOME TAX MATTERS
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41
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DETERMINATION OF NET ASSET VALUE
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45
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AUTOMATIC DIVIDEND REINVESTMENT PLAN
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46
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DESCRIPTION OF SECURITIES
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48
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RATING AGENCY GUIDELINES
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55
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CERTAIN PROVISIONS IN OUR CHARTER AND BYLAWS
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56
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SELLING STOCKHOLDERS
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57
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PLAN OF DISTRIBUTION
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59
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ADMINISTRATOR AND CUSTODIAN
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61
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LEGAL MATTERS
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61
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AVAILABLE INFORMATION
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61
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TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
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62
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You should rely only on the information contained or incorporated by reference in this prospectus
and any related prospectus supplement in making your investment decisions. We have not authorized
any other person to provide you with different or inconsistent information. If anyone provides you
with different or inconsistent information, you should not rely on it. This prospectus and any
prospectus supplement do not constitute an offer to sell or solicitation of an offer to buy any
securities in any jurisdiction where the offer or sale is not permitted. The information appearing
in this prospectus and in any related prospectus supplement is accurate only as of the dates on
their covers. Our business, financial condition and prospects may have changed since such dates. We
will advise investors of any material changes to the extent required by applicable law.
PROSPECTUS SUMMARY
This is only a summary. It is not complete and may not contain all of the information you may want to consider. You
should review the more detailed information contained elsewhere in this prospectus, in any related prospectus
supplement and in the statement of additional information, especially the information set forth under the heading
Risk Factors beginning on page 29 of this prospectus.
The Company
We are a non-diversified, closed-end management investment company registered under the Investment Company Act of 1940,
as amended (the 1940 Act). Our investment objective is to seek a high level of total return with an emphasis on
current distributions to stockholders. For purposes of our investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which we invest regardless of the tax character of
the distributions. We seek to provide our stockholders with an efficient vehicle to invest in a portfolio consisting
primarily of master limited partnership (MLPs) and their affiliates in the energy infrastructure sector.
We were organized as a corporation on March 4, 2005 pursuant to a charter (the Charter) governed by the laws of the
State of Maryland. Our fiscal year ends on November 30. We commenced operations in May 2005 following our initial
public offering. As of November 30, 2008, we had net assets of $224,483,149 attributable to our common stock. Our
common stock is listed on the New York Stock Exchange (the NYSE) under the symbol TYY. As of the date of this
prospectus, we have outstanding $95 million of auction rate preferred stock designated as Tortoise Auction Preferred
Shares (Tortoise Preferred Shares) and $90 million of privately-placed senior debt securities (Tortoise Notes).
We have entered into a $92.5 million unsecured revolving credit facility with U.S. Bank, NA. serving as a lender and
the lending syndicate agent on behalf of other lenders participating in the credit facility. The credit facility
remains in effect through March 20, 2009. We currently expect to seek to renew the credit facility at an amount less
than $92.5 million, but sufficient to meet our operating needs. As of the date of this prospectus, we have no
outstanding balance under the credit facility.
Our Adviser
Tortoise Capital Advisors, L.L.C., a registered investment adviser specializing in managing portfolios of investments
in MLPs and other energy companies (the Adviser), serves as our investment adviser. As of January 31, 2009, our
Adviser managed investments of approximately $1.7 billion in the energy sector, including the assets of four publicly
traded and two privately held closed-end management investment companies, and separate accounts for institutions and
high net worth individuals. Our Advisers investment committee is comprised of five portfolio managers. See
Management of the Company.
The principal business address of our Adviser is 11550 Ash Street, Suite 300, Leawood, Kansas 66211.
The Offering
We may offer on an immediate, continuous or delayed basis, up to $300,000,000 of our securities, or certain of our
stockholders who purchase shares from us in private placement transactions may offer our common stock, on terms to be
determined at the time of the offering. Our securities will be offered at prices and on terms to be set forth in one or
more prospectus supplements to this prospectus. Subject to certain conditions, we may offer our common stock at prices
below our net asset value (NAV). We will provide information in the prospectus supplement for the expected trading
market, if any, for our preferred stock or debt securities.
While the number and amount of securities we may issue pursuant to this registration statement is limited to
$300,000,000 of securities, our board of directors (the Board of Directors or the Board) may, without any action by
our stockholders, amend our Charter from time to time to increase or decrease the aggregate number of shares of stock
or the number of shares of stock of any class or series that we have authority to issue under our Charter or the 1940
Act.
We may offer our securities, or certain of our stockholders may offer our common stock, directly to one or more
purchasers, through agents that we designate from time to time, or to or through underwriters or dealers. The
prospectus supplement relating to the offering will identify any agents or underwriters involved in the sale of our
securities, and will set forth any applicable purchase price, fee, commission or discount arrangement between us or any
selling stockholder and such agents or underwriters or among the underwriters or the basis upon which such amount may
be calculated. See Plan of Distribution. Our securities may not be sold through agents, underwriters or dealers
without delivery of a prospectus supplement describing the method and terms of the offering of our securities.
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Use of Proceeds
Unless otherwise specified in a prospectus supplement, we intend to use the net proceeds of any sale of our securities
primarily to invest in accordance with our investment objective and policies as described under Investment Objective
and Principal Investment Strategies within approximately three months of the receipt of such proceeds. We may also use
proceeds from the sale of our securities to retire all or a portion of any debt we incur, to redeem preferred stock, or
for working capital purposes, including the payment of distributions, interest and operating expenses, although there
is currently no intent to issue securities primarily for this purpose. We will not receive any of the proceeds from a
sale of our common stock by any selling stockholder.
Federal Income Tax Status of Company
Unlike most investment companies, we have not elected to be treated as a regulated investment company under the
U.S. Internal Revenue Code of 1986, as amended (the Internal Revenue Code). Therefore, we are obligated to pay
federal and applicable state corporate taxes on our taxable income. On the other hand, we are not subject to the
Internal Revenue Codes diversification rules limiting the assets in which regulated investment companies can invest.
Under current federal income tax law, these rules limit the amount that regulated investment companies may invest
directly in the securities of certain MLPs to 25% of the value of their total assets. We invest a substantial portion
of our assets in MLPs. Although MLPs generate taxable income to us, we expect the MLPs to pay cash distributions in
excess of the taxable income reportable by us. Similarly, we expect to distribute substantially all of our
distributable cash flow (DCF) to our common stockholders. DCF is the amount we receive as cash or paid-in-kind
distributions from MLPs or affiliates of MLPs in which we invest and interest payments received on debt securities
owned by us, less current or anticipated operating expenses, taxes on our taxable income, and leverage costs paid by us
(including leverage costs of the Tortoise Preferred Shares and Tortoise Notes, and borrowings under our unsecured
credit facility). However, unlike regulated investment companies, we are not effectively required by the Internal
Revenue Code to distribute substantially all of our income and capital gains. See Certain Federal Income Tax Matters.
Distributions
We expect to distribute substantially all of our DCF to holders of common stock through quarterly distributions. Our
Board of Directors adopted a policy to target distributions to common stockholders in an amount of at least 95% of our
DCF on an annual basis. We will pay distributions on our common stock each fiscal quarter out of our DCF, if any. As of
the date of this prospectus, we have paid distributions every quarter since the completion of our first full fiscal
quarter ended on August 31, 2005. There is no assurance that we will continue to make regular distributions. If
distributions paid to holders of our common and preferred stock exceed the current and accumulated earnings and profits
allocated to the particular shares held by a stockholder, the excess of such distribution will constitute, for federal
income tax purposes, a tax-free return of capital to the extent of the stockholders basis in the shares and capital
gain thereafter. A return of capital reduces the basis of the shares held by a stockholder, which may increase the
amount of gain recognized upon the sale of such shares. Our preferred stock and debt securities will pay dividends and
interest, respectively, in accordance with their terms. So long as we have preferred stock and debt securities
outstanding, we may not declare distributions or dividends on common or preferred stock unless we meet applicable asset
coverage tests.
Principal Investment Strategies
As a nonfundamental investment policy, under normal circumstances we invest at least 80% of our net assets, plus any
borrowings for investment purposes, in equity securities of entities in the energy sector and at least 80% of our total
assets (including assets obtained through leverage) in equity securities of MLPs and their affiliates in the energy
infrastructure sector. We view the energy infrastructure sector as a subset of the broader energy sector. Companies
(including MLPs) in the energy infrastructure sector engage in the business of gathering, transporting, processing,
storing, distributing or marketing natural gas, natural gas liquids, coal, crude oil, refined petroleum products or
other natural resources, or exploring, developing, managing or producing such commodities. We invest primarily in
entities organized in the United States.
Nonfundamental Investment Policies
. We have adopted the following additional nonfundamental investment policies:
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We may invest up to 50% of our total assets in restricted securities, all of which may be illiquid securities. The
restricted securities that we may purchase include MLP convertible subordinated units, unregistered MLP common units
and securities of publicly traded and privately held companies (i.e., non-MLPs).
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We may invest up to 20% of our total assets in debt securities, including securities rated below investment grade
(commonly referred to as junk bonds). Below investment grade debt securities will be rated at least B3 by Moodys and
at least B- by Standard & Poors Ratings Group (S&Ps) at the time of purchase, or comparably rated by another
statistical rating organization or if unrated, determined to be of comparable quality by our Adviser.
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We will not invest more than 15% of our total assets in any single issuer.
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We will not engage in short sales.
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As used in the bullets above, the term total assets includes assets obtained through leverage for the purpose of each
nonfundamental investment policy. The Board of Directors may change our nonfundamental investment policies without
stockholder approval and will provide notice to stockholders of material changes (including notice through stockholder
reports); provided, however, that a change in the policy of investing at least 80% of our net assets, plus any
borrowings for investment purposes, in equity securities of entities in the energy sector requires at least 60 days
prior written notice to stockholders. Unless otherwise stated, these investment restrictions apply at the time of
purchase and we will not be required to reduce a position due solely to market value fluctuations. During the period in
which we are investing the net proceeds of this offering, we may deviate from our investment policies with respect to
the net proceeds by investing the net proceeds in cash, cash equivalents, securities issued or guaranteed by the U.S.
Government or its instrumentalities or agencies, high quality, short-term money market instruments, short-term debt
securities, certificates or deposit, bankers acceptances and other bank obligations, commercial paper rated in the
highest category by a rating agency or other liquid fixed income securities.
Equity Securities of MLPs and their Affiliates
. We invest primarily in equity securities of MLPs, which currently
consist of common units and convertible subordinated units. We also may invest in I-Shares issued by affiliates of
MLPs. As of the date of this prospectus, substantially all MLP common units and I-Shares in which we invest are of a
class listed and traded on the NYSE, NYSE Alternext U.S. (formerly known as AMEX) or NASDAQ National Market. We also
may purchase MLP common units directly from MLPs or unitholders of MLPs. MLP convertible subordinated units are a class
of securities generally not listed or publicly traded, and are typically purchased in direct transactions with MLP
affiliates or institutional holders of such shares. MLP subordinated units are typically convertible into a class of
securities listed and traded on the NYSE, NYSE Alternext U.S. or NASDAQ National Market. We also may invest in
securities of general partners or other affiliates of MLPs and in securities of private companies. It is anticipated
that all publicly traded MLPs in which we invest will have an equity market capitalization greater than $100 million at
the time of investment.
MLP common unit holders have typical limited partner rights, including limited management and voting rights. MLP common
units have priority over convertible subordinated units upon liquidation. Common unit holders are entitled to minimum
quarterly distributions (MQD), including arrearage rights, prior to any distribution payments to convertible
subordinated unit holders or incentive distribution payments to the general partner. MLP convertible subordinated units
generally are convertible to common units on a one-to-one basis after the passage of time and/or achievement of
specified financial goals. MLP convertible subordinated units are entitled to MQD after the payments to holders of
common units and before incentive distributions to the general partner. MLP convertible subordinated units generally do
not have arrearage rights. I-Shares typically are issued by a limited liability company (LLC) that owns an interest
in and manages an MLP. An I-Share issuers assets consist solely of MLP I-units and, therefore, I-Shares represent an
indirect investment in MLPs. I-Shares have similar features to common units except that distributions are payable in
additional I-Shares rather than cash. We invest in I-Shares only if we believe the issuer will have adequate cash to
satisfy its distribution targets.
Some energy infrastructure companies in which we invest have been organized as LLCs. Such LLCs are treated in the same
manner as MLPs for federal income tax purposes. Consistent with our investment objective and policies, we may invest in
common units or other securities of such LLCs. These common units possess characteristics similar to those of MLP
common units, as discussed in more detail below. See Investment Objective and Principal Investment Strategies
Investment Securities.
Temporary Investments and Defensive Investments.
Pending investment of the proceeds of any offering (which we expect
may take up to approximately three months following the closing of this offering), we may invest up to 100% of the net
offering proceeds in cash, cash equivalents, securities issued or guaranteed by the U.S. Government or its
instrumentalities or agencies, high quality, short-term money market instruments, short-term debt securities,
certificates of deposit, bankers acceptances and other bank obligations, commercial paper rated in the highest
category by a rating agency or other liquid fixed income securities. We also may invest in these instruments on a
temporary basis to meet working capital needs including, but not limited to, for collateral in connection with certain
investment techniques, to hold a reserve pending payment of distributions, and to facilitate the payment of expenses
and settlement of trades. We anticipate that under normal market conditions not more than 5% of our total assets will
be invested in these instruments.
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In addition, and although inconsistent with our investment objective, under adverse market or economic conditions, we
may invest 100% of our total assets in these securities. The yield on these securities may be lower than the returns on
MLPs or yields on lower rated fixed income securities. To the extent we invest in these securities on a temporary basis
or for defensive purposes, we may not achieve our investment objective.
Use of Leverage by the Company
The borrowing of money and the issuance of preferred stock and debt securities represent the leveraging of our common
stock. The issuance of additional common stock may enable us to increase the aggregate amount of our leverage. We
reserve the right at any time to use financial leverage to the extent permitted by the 1940 Act (50% of total assets
for preferred stock and
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% of total assets for senior debt securities) or we may elect to reduce the use of leverage
or use no leverage at all. Historically, our leverage target has been up to 33% of our total assets at the time of
incurrence. Our Board of Directors has approved a policy permitting temporary increases in the amount of leverage we
may use from 33% of our total assets to up to 38% of our total assets at the time of incurrence, provided that (i) such
leverage is consistent with the limits set forth in the 1940 Act, and (ii) such increased leverage is reduced over time
in an orderly fashion. The timing and terms of any leverage transactions will be determined by our Board of Directors.
Additionally, the percentage of our assets attributable to leverage may vary significantly during periods of extreme
market volatility and will increase during periods of declining market prices of our portfolio holdings.
Our currently outstanding Tortoise Preferred Shares generally may be bought at auctions normally held every 28 days
for Series I and every 7 days for Series II. We may exercise our option to designate special rate periods for our
outstanding Tortoise Preferred Shares. See LeverageEffects of Leverage.
The use of leverage creates an opportunity for increased income and capital appreciation for common stockholders, but
at the same time creates special risks that may adversely affect common stockholders. Because our Advisers fee is
based upon a percentage of our Managed Assets (defined as our total assets (including any assets attributable to any
leverage that may be outstanding but excluding any net deferred tax assets) minus the sum of accrued liabilities other
than (1) net deferred tax liabilities, (2) debt entered into for purposes of leverage and (3) the aggregate liquidation
preference of any outstanding preferred stock). Our Adviser does not charge an advisory fee based on net deferred tax
assets. Our Advisers fee is higher when we are leveraged. Therefore, our Adviser has a financial incentive to use
leverage, which will create a conflict of interest between our Adviser and our common stockholders, who will bear the
costs of our leverage. There can be no assurance that a leveraging strategy will be successful during any period in
which it is used. The use of leverage involves risks, which can be significant. See Leverage and Risk Factors
Additional Risks to Common Stockholders Leverage Risk.
We may use interest rate transactions for economic hedging purposes only, in an attempt to reduce the interest rate
risk arising from our leveraged capital structure. We do not intend to hedge the interest rate risk of our portfolio
holdings. Accordingly, if no leverage is outstanding, we currently do not expect to engage in interest rate
transactions. Interest rate transactions that we may use for hedging purposes may expose us to certain risks that
differ from the risks associated with our portfolio holdings. See Leverage Hedging Transactions and Risk Factors
Company Risks Hedging Strategy Risk.
Conflicts of Interest
Conflicts of interest may arise from the fact that our Adviser and its affiliates carry on substantial investment
activities for other clients, in which we have no interest. Our Adviser or its affiliates may have financial incentives
to favor certain of these accounts over us. Any of their proprietary accounts or other customer accounts may compete
with us for specific trades. Our Adviser or its affiliates may give advice and recommend securities to, or buy or sell
securities for, other accounts and customers, which advice or securities recommended may differ from advice given to,
or securities recommended or bought or sold for, us, even though their investment objectives may be the same as, or
similar to, ours.
Situations may occur when we could be disadvantaged because of the investment activities conducted by our Adviser and
its affiliates for their other accounts. Such situations may be based on, among other things, the following: (1) legal
or internal restrictions on the combined size of positions that may be taken for us or the other accounts, thereby
limiting the size of our position; (2) the difficulty of liquidating an investment for us or the other accounts where
the market cannot absorb the sale of the combined position; or (3) limits on co-investing in private placement
securities under the 1940 Act. Our investment opportunities may be limited by affiliations of our Adviser or its
affiliates with energy infrastructure companies. See Investment Objective and Principal Investment Strategies
Conflicts of Interest.
4
Company Risks
Our NAV, our ability to make distributions, our ability to service debt securities and preferred stock, and our ability
to meet asset coverage requirements depends on the performance of our investment portfolio. The performance of our
investment portfolio is subject to a number of risks, including the following:
Recent Developments Risk
. Our capital structure and performance was adversely impacted by the weakness in the credit
markets and broad stock market, and the resulting rapid and dramatic declines in the value of MLPs that occurred in
late 2008, and may continue to be adversely affected if the weakness in the credit and stock markets continue. If our
NAV declines or remains volatile, there is an increased risk that we may be required to reduce outstanding leverage,
which could adversely affect our stock price and ability to pay distributions at historical levels. A sustained
economic slowdown may adversely affect the ability of MLPs to sustain their historical distribution levels, which in
turn, may adversely affect our ability to sustain distributions at historical levels. MLPs that have historically
relied heavily on outside capital to fund their growth have been impacted by the slowdown in the capital markets. The
recovery of the MLP sector is dependent on several factors, including the recovery of the financial sector, the general
economy and the commodity markets. Measures taken by the U.S. Government to stimulate the U.S. economy may not be
successful or may not have the intended effect.
Concentration Risk.
Under normal circumstances, we concentrate our investments in the energy sector, with an emphasis
on securities issued by MLPs and their affiliates in the energy infrastructure sector, a subset of the energy sector.
The primary risks inherent in investments in MLPs and their affiliates in the energy infrastructure sector include the
following: (1) the performance and level of distributions of MLPs can be affected by direct and indirect commodity
price exposure; (2) a decrease in market demand for natural gas or other energy commodities could adversely affect MLP
revenues or cash flows; (3) energy infrastructure assets deplete over time and must be replaced; and (4) a rising
interest rate environment could increase an MLPs cost of capital.
Industry Specific Risk.
MLPs and their affiliates also are subject to risks specific to the industry they serve. For
risks specific to the pipeline, processing, propane, coal and marine shipping industries, see Risk Factors Company
Risks Industry Specific Risk.
MLP Risk.
We invest primarily in equity securities of MLPs and their affiliates. As a result, we are subject to the
risks associated with an investment in MLPs, including cash flow risk, tax risk, deferred tax risk and capital market
risk. Cash flow risk is the risk that MLPs will not make distributions to holders (including us) at anticipated levels
or that such distributions will not have the expected tax character. MLPs also are subject to tax risk, which is the
risk that MLPs might lose their partnership status for tax purposes. Deferred tax risk is the risk that we incur a
current tax liability on that portion of an MLPs income and gains that is not offset by tax deductions and losses.
Capital market risk is the risk that MLPs will be unable to raise capital to meet their obligations as they come due or
execute their growth strategies, complete future acquisitions, take advantage of other business opportunities or
respond to competitive pressures.
Equity Securities Risk.
MLP common units and other equity securities can be affected by macro economic and other
factors affecting the stock market in general, expectations of interest rates, investor sentiment toward MLPs or the
energy sector, changes in a particular issuers financial condition, or unfavorable or unanticipated poor performance
of a particular issuer (in the case of MLPs, generally measured in terms of DCF). Prices of common units of individual
MLPs and other equity securities also can be affected by fundamentals unique to the partnership or company, including
size, earnings power, coverage ratios and characteristics and features of different classes of securities. See Risk
Factors Company Risks Equity Securities Risk and Risk Factors Additional Risks to Common Stockholders
Leverage Risk.
Hedging Strategy Risk.
We may use interest rate transactions for hedging purposes only, in an attempt to reduce the
interest rate risk arising from our leveraged capital structure. There is no assurance that the interest rate hedging
transactions into which we enter will be effective in reducing our exposure to interest rate risk. Hedging
transactions are subject to correlation risk, which is the risk that payment on our hedging transactions may not
correlate exactly with our payment obligations on senior securities. Interest rate transactions that we may use for
hedging purposes, such as swaps, caps and floors, will expose us to certain risks that differ from the risks associated
with our portfolio holdings. See Risk Factors Company Risks Hedging Strategy Risk.
Competition Risk.
Since the time of our initial public offering a number of alternative vehicles for investment in a
portfolio of MLPs and their affiliates, including other publicly traded investment companies and private funds, have
emerged. In addition, tax law changes have increased the ability of regulated investment companies or other
institutions to invest in MLPs. These competitive conditions may adversely impact our ability to meet our investment
objective, which in turn could adversely impact our ability to make distributions or interest or dividend payments
5
Restricted Securities Risk.
We may invest up to 50% of total assets in restricted securities purchased directly from
MLPs, from unitholders of MLPs or from private companies. Restricted securities are less liquid than securities traded
in the open market because of statutory and contractual restrictions on resale. Such securities are, therefore, unlike
securities that are traded in the open market, which can be expected to be sold immediately if the market is adequate.
This lack of liquidity creates special risks for us. See Risk
Factors Company Risks Restricted Securities Risk.
Liquidity Risk.
Certain MLP securities may trade less frequently than those of other companies due to their smaller
capitalizations. Investments in securities that are less actively traded or over time experience decreased trading
volume may be difficult to dispose of when we believe it is desirable to do so, may restrict our ability to take
advantage of other opportunities, and may be more difficult to value.
Valuation Risk.
We may invest up to 50% of our total assets in restricted securities, which are subject to
restrictions on resale. The value of such investments ordinarily will be based on fair valuations determined by our
Adviser pursuant to procedures adopted by the Board of Directors. Restrictions on resale or the absence of a liquid
secondary market may affect adversely our ability to determine NAV. The sale price of securities that are restricted or
otherwise are not readily marketable may be higher or lower than our most recent valuations.
Non-diversification Risk.
We are a non-diversified investment company under the 1940 Act and we are not a regulated
investment company under the Internal Revenue Code. Accordingly, there are no limits under the 1940 Act or Internal
Revenue Code with respect to the number or size of issuers held by us and we may invest more assets in fewer issuers as
compared to a diversified fund.
Tax Risk
. Because we are treated as a corporation for federal income tax purposes, our financial statements reflect
deferred tax assets or liabilities according to generally accepted accounting principles. Deferred tax assets may
constitute a relatively high percentage of NAV. Realization of deferred tax assets including net operating loss and
capital loss carryforwards, are dependent, in part, on generating sufficient taxable income of the appropriate
character prior to expiration of the loss carryforwards. Unexpected significant decreases in MLP cash distributions or
significant declines in the fair value of our MLP investments, among other factors, may change our assessment regarding
the recoverability of deferred tax assets and would likely result in a valuation allowance, or recording of a larger
allowance. If a valuation allowance is required to reduce the deferred tax asset in the future, it could have a
material impact on our NAV and results of operations in the period it is recorded. Conversely, in periods of generally
increasing MLP prices, we will accrue a deferred tax liability to the extent the fair value of our assets exceeds our
tax basis. We may incur significant tax liability during periods in which gains on MLP investments are realized.
Management Risk.
Our Adviser was formed in October 2002 to provide portfolio management services to institutional and
high-net worth investors seeking professional management of their MLP investments. Our Adviser has been managing our
portfolio since we began operations in May 2005. As of January 31, 2009, our Adviser had client assets under
management of approximately $1.7 billion. To the extent that our Advisers assets under management continue to grow,
our Adviser may have to hire additional personnel and, to the extent it is unable to hire qualified individuals, its
operations may be adversely affected.
See Risk FactorsCompany Risks for a more detailed discussion of these and other risks of investing in our securities.
Additional Risks to Common Stockholders
Additional risks of investing in our common stock include the following:
Leverage Risk.
We are currently leveraged and intend to continue to use leverage primarily for investment purposes.
Leverage, which is a speculative technique, could cause us to lose money and can magnify the effect of any losses. If the
dislocations in the credit markets continue, our leverage costs may increase and there is a risk that we may not be able to
renew or replace existing leverage on favorable terms or at all. Because senior debt is subject to stricter coverage
requirements than preferred stock, we may not be able to maintain leverage at historical levels if a viable alternative for
auction rate preferred stock does not develop. If the cost of leverage is no longer favorable, or if we are otherwise
required to reduce our leverage, we may not be able to maintain common stock distributions at historical levels and common
stockholders will bear any costs associated with selling portfolio securities. If our net asset value of our portfolio
declines or remains subject to heightened market volatility, there is an increased risk that we will be unable to maintain
coverage ratios for senior debt securities and preferred stock mandated by the 1940 Act, rating agency guidelines or
contractual terms of bank lending facilities or privately-placed notes. If we do not cure any deficiencies within
specified cure periods, we will be required to redeem such senior securities in amounts that are sufficient to restore the
required coverage ratios or, in some cases, offer to redeem all of such securities. As a result, we may be required to
sell portfolio securities at inopportune times, and we may incur significant losses upon the sale of such securities. There
is no assurance that a
6
leveraging strategy will be successful. See Leverage for additional information.
The markets for auction rate securities, including Tortoise Preferred Shares, have continued to face reduced demand and
a number of failed auctions, including failed auctions for each series of our Tortoise Preferred Shares. We expect
future auctions for our auction rate Tortoise Preferred Shares to fail. A failed auction results when there are not
enough bidders in the auction at rates below the maximum rate as prescribed by the terms of the security. When an
auction fails, the rate is automatically set at the maximum rate. A failed auction does not cause an acceleration of,
or otherwise have any impact on, outstanding principal amounts due, or in the case of preferred stock, the securitys
liquidation preference. These market developments may increase our financing costs, which may reduce our total return
to common stockholders and may impact our DCF. See Leverage.
Market Impact Risk.
The sale of our common stock (or the perception that such sales may occur) may have an adverse
effect on prices in the secondary market for our common stock by increasing the number of shares available, which may
put downward pressure on the market price for our common stock. Our ability to sell shares of common stock below NAV
may increase this pressure. These sales also might make it more difficult for us to sell additional equity securities
in the future at a time and price we deem appropriate.
Dilution Risk.
The voting power of current stockholders will be diluted to the extent that such stockholders do not
purchase shares in any future common stock offerings or do not purchase sufficient shares to maintain their percentage
interest. In addition, if we sell shares of common stock below NAV, our NAV will fall immediately after such issuance.
See Description of Securities Common Stock Issuance of Additional Shares which includes a table reflecting the
dilutive effect of selling our common stock below NAV.
If we are unable to invest the proceeds of such offering as intended, our per share distribution may decrease and we
may not participate in market advances to the same extent as if such proceeds were fully invested as planned.
Market Discount Risk.
Our common stock has traded both at a premium and at a discount in relation to NAV. We cannot
predict whether our shares will trade in the future at a premium or discount to NAV.
See Risk Factors Additional Risks to Common Stockholders for a more detailed discussion of these risks.
Additional Risks to Senior Security Holders
Additional risks of investing in senior securities, include the following:
Interest Rate Risk.
Dividends and interest payable on our senior securities are subject to interest rate risk. To the
extent that dividends or interest on such securities are based on short-term rates, our leverage costs may rise so that
the amount of dividends or interest due to holders of senior securities would exceed the cash flow generated by our
portfolio securities. To the extent that our leverage costs are fixed, our leverage costs may increase when special
rate periods, if any, terminate or our debt securities mature. This might require that we sell portfolio securities at
a time when we would otherwise not do so, which may adversely affect our future ability to generate cash flow. In
addition, rising market interest rates could negatively impact the value of our investment portfolio, reducing the
amount of assets serving as asset coverage for senior securities.
Senior Leverage Risk.
Our preferred stock will be junior in liquidation and with respect to distribution rights to our
debt securities and any other borrowings. Senior securities representing indebtedness may constitute a substantial lien
and burden on preferred stock by reason of their prior claim against our income and against our net assets in
liquidation. We may not be permitted to declare dividends or other distributions with respect to any series of our
preferred stock unless at such time we meet applicable asset coverage requirements and the payment of principal or
interest is not in default with respect to our senior debt securities or any other borrowings.
Our debt securities, upon issuance, are expected to be unsecured obligations and, upon our liquidation, dissolution or
winding up, will rank: (1) senior to all of our outstanding common stock and any outstanding preferred stock; (2) on a
parity with any of our unsecured creditors and any unsecured senior securities representing our indebtedness, including
Tortoise Notes; and (3) junior to any of our secured creditors. Secured creditors of ours may include without
limitation parties entering into any interest rate swap, floor or cap transactions, or other similar transactions with
us that create liens, pledges, charges, security interests, security agreements or other encumbrances on our assets.
7
Ratings and Asset Coverage Risk.
To the extent that senior securities are rated, a rating does not eliminate or
necessarily mitigate the risks of investing in our senior securities, and a rating may not fully or accurately reflect
all of the credit and market risks associated with that senior security. A rating agency could downgrade the rating of
our shares of preferred stock or debt securities, which may make such securities less liquid at an auction or in the
secondary market, though probably with higher resulting interest rates. If a rating agency downgrades, or indicates a
potential downgrade to, the rating assigned to a senior security, we may alter our portfolio or redeem a portion of our
senior securities. We may voluntarily redeem a senior security under certain circumstances to the extent permitted by
its governing documents.
Inflation Risk
. Inflation is the reduction in the purchasing power of money resulting from an increase in the price of
goods and services. Inflation risk is the risk that the inflation adjusted or real value of an investment in
preferred stock or debt securities or the income from that investment will be worth less in the future. As inflation
occurs, the real value of the preferred stock or debt securities and the dividend payable to holders of preferred stock
or debt securities declines.
Decline in Net Asset Value Risk
. A material decline in our NAV may impair our ability to maintain required levels of
asset coverage for our preferred stock or debt securities.
See Risk FactorsAdditional Risks to Senior Security Holders for a more detailed discussion of these risks.
8
SUMMARY OF COMPANY EXPENSES
The following table and example contain information about the costs and expenses that common
stockholders will bear directly or indirectly. In accordance with SEC requirements, the table below
shows our expenses, including leverage costs, as a percentage of our net assets as of November 30,
2008, and not as a percentage of gross assets or Managed Assets. By showing expenses as a
percentage of net assets, expenses are not expressed as a percentage of all of the assets in which
we invest. The table and example are based on our capital structure as of November 30, 2008. As of
that date, we had $185 million in senior securities outstanding, including two series of Tortoise
Preferred Shares with an aggregate liquidation preference of $95 million, three series of Tortoise
Notes in an aggregate principal amount of $90 million and no outstanding balance under our
unsecured credit facility. Such senior securities represented approximately 44.7% of our total
assets as of November 30, 2008.
Stockholder Transaction Expense
|
|
|
|
|
Sales Load (as a percentage of offering price)
|
|
|
|
(1)
|
Offering Expenses Borne by Us (as a percentage of offering price)
|
|
|
|
(1)
|
Dividend Reinvestment Plan Fees
(2)
|
|
None
|
|
|
|
|
|
|
|
|
Percentage of Net Assets
|
|
|
Attributable to Common
|
Annual Expenses
|
|
Stockholders
|
Management Fee
|
|
|
1.61
|
%
|
Leverage Costs
(3)
|
|
|
4.14
|
%
|
Other Expenses
(4)
|
|
|
0.42
|
%
|
Current Income Tax Expense
|
|
|
0.19
|
%
|
Deferred Income Tax Expense
(5)
|
|
|
0.00
|
%
|
|
|
|
|
|
Total Annual Expenses
(6)
|
|
|
6.36
|
%
|
|
|
|
|
|
Example:
|
|
The following example illustrates the expenses that common stockholders would pay on a $1,000 investment in common stock, assuming (1) total annual expenses of 6.36% of
net assets attributable to common shares, (2) a 5% annual return, and (3) all distributions are reinvested at NAV:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
3 Years
|
|
5 Years
|
|
10 Years
|
|
|
|
Total Expenses Paid by Common Stockholders
(7) (8)
|
|
$
|
63
|
|
|
$
|
186
|
|
|
$
|
307
|
|
|
$
|
594
|
|
The example should not be considered a representation of future expenses. Actual expenses may be greater or less than those assumed. Moreover, our actual rate of return may
be greater or less than the hypothetical 5% return shown in the example.
|
|
|
(1)
|
|
If the securities to which this prospectus relates are sold to or through underwriters, the
prospectus supplement will set forth any applicable sales load, the estimated offering expenses
borne by us and a revised expense example.
|
|
(2)
|
|
Stockholders will pay a transaction fee plus brokerage charges if they direct the Plan Agent to
sell common stock held in a dividend reinvestment account. See Automatic Dividend Reinvestment
Plan.
|
|
(3)
|
|
Leverage Costs in the table reflect the weighted average cost of distributions payable on Tortoise
Preferred Shares and the interest payable on Tortoise Notes, expressed as a percentage of net
assets as of November 30, 2008 and borrowing rates as of November 30, 2008.
|
|
(4)
|
|
Other Expenses are based on amounts incurred for the period ended November 30, 2008.
|
|
(5)
|
|
For the year ended November 30, 2008, we accrued deferred income tax benefits primarily related to
unrealized losses on investments. Realization of a deferred tax benefit is dependent on whether
there will be sufficient taxable income of the appropriate character within the carryforward
periods to realize a portion or all of the deferred tax benefit. Because it cannot be predicted
whether we will incur a benefit or liability in the future, a deferred income tax expense of 0.00%
has been assumed.
|
|
(6)
|
|
The table presented in this footnote presents certain of our annual expenses as a percentage of
our Managed Assets as of November 30, 2008, excluding current and deferred income tax expense.
|
|
|
|
|
|
Annual Expenses
|
|
Percentage of Managed Assets
|
Management Fee
|
|
|
0.95
|
%
|
Leverage Costs
(a)
|
|
|
2.45
|
%
|
Other Expenses (excluding current and deferred income tax expenses)
(b)
|
|
|
0.25
|
%
|
|
|
|
|
|
Total Annual Expenses (excluding current and deferred income tax expenses)
|
|
|
3.65
|
%
|
|
|
|
|
|
9
|
|
|
|
(a)
|
|
Leverage Costs are calculated as described in Note 3 above.
|
|
(b)
|
|
Other Expenses are based on amounts incurred for the period ended November 30,
2008.
|
(7)
|
|
Includes deferred income tax expense. See footnote (5) above for more details.
|
|
(8)
|
|
The example does not include sales loads or estimated offering costs.
|
The purpose of the table and the example above is to help investors understand the fees and
expenses that they, as common stockholders, would bear directly or indirectly. For additional
information with respect to our expenses, see Management of the Company.
10
FINANCIAL HIGHLIGHTS
Information contained in the table below under the heading Per Common Share Data and
Supplemental Data and Ratios shows our per common share operating performance. The yearly
information in this table is derived from our financial statements audited by Ernst & Young LLP,
whose report on such financial statements is contained in our 2008 Annual Report and is
incorporated by reference into the statement of additional information, both of which are available
from us upon request. See Available Information in this prospectus.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
2005
(1)
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
Year Ended
|
|
|
through
|
|
|
|
2008
|
|
|
2007
|
|
|
November 30, 2006
|
|
|
November 30, 2005
|
|
|
|
|
Per Common Share Data
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, beginning of period
|
|
$
|
27.84
|
|
|
$
|
26.79
|
|
|
$
|
23.23
|
|
|
$
|
|
|
Public offering price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.00
|
|
Underwriting discounts and offering costs on issuance of common and
preferred stock
(3)
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.06
|
)
|
|
|
(1.18
|
)
|
Premiums less underwriting discounts and offering costs on offering of
common stock
(4)
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
Income (loss) from Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
(5) (6)
|
|
|
(0.89
|
)
|
|
|
(0.64
|
)
|
|
|
(0.36
|
)
|
|
|
0.04
|
|
Net realized and unrealized gain (loss) on investments.
(5)(6)
|
|
|
(12.05
|
)
|
|
|
3.80
|
|
|
|
5.68
|
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) from investment operations
|
|
|
(12.94
|
)
|
|
|
3.16
|
|
|
|
5.32
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Distributions to Preferred Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
(0.35
|
)
|
|
|
(0.33
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to preferred stockholders
|
|
|
(0.35
|
)
|
|
|
(0.33
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Distributions to Common Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
Return of capital
|
|
|
(1.70
|
)
|
|
|
(1.63
|
)
|
|
|
(1.51
|
)
|
|
|
(0.55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to common stockholders
|
|
|
(1.70
|
)
|
|
|
(1.63
|
)
|
|
|
(1.51
|
)
|
|
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, end of period
|
|
$
|
12.85
|
|
|
$
|
27.84
|
|
|
$
|
26.79
|
|
|
$
|
23.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share market value, end of period
|
|
$
|
11.11
|
|
|
$
|
25.47
|
|
|
$
|
26.50
|
|
|
$
|
22.09
|
|
Total Investment Return Based on Market Value
(7)
|
|
|
(52.44
|
)%
|
|
|
1.73
|
%
|
|
|
27.67
|
%
|
|
|
(8.33)
|
%
|
Supplemental Data and Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common stockholders, end of period (000s)
|
|
$
|
224,483
|
|
|
$
|
484,645
|
|
|
$
|
429,010
|
|
|
$
|
370,455
|
|
Ratio of expenses (including net current and deferred income tax (benefit)
expense) average net assets
(8)(9)(10)
|
|
|
(21.81
|
)%
|
|
|
10.51
|
%
|
|
|
17.38
|
%
|
|
|
1.29
|
%
|
Ratio of expenses (excluding net current and deferred income tax (benefit)
expense) to average net assets
(8)(10)(11)
|
|
|
6.51
|
%
|
|
|
4.46
|
%
|
|
|
3.47
|
%
|
|
|
1.39
|
%
|
Ratio of net investment income (loss) to average net assets (including
(net) current and deferred income tax (benefit) expense)
(8)(9)(10)
|
|
|
23.33
|
%
|
|
|
(9.84
|
)%
|
|
|
(16.31
|
)%
|
|
|
0.60
|
%
|
Ratio of net investment income (loss) to average net assets (excluding net
current and deferred income tax (benefit) expense)
(8)(10)(11)
|
|
|
(4.99
|
)%
|
|
|
(3.79
|
)%
|
|
|
(2.40
|
)%
|
|
|
0.50
|
%
|
Portfolio turnover rate
(8)
|
|
|
6.44
|
%
|
|
|
9.90
|
%
|
|
|
5.56
|
%
|
|
|
0.08
|
%
|
Short-Term Borrowings, end of period (000s)
|
|
|
|
|
|
$
|
24,700
|
|
|
$
|
28,000
|
|
|
|
|
|
Long-Term Debt Obligations, end of period (000s)
|
|
$
|
90,000
|
|
|
$
|
190,000
|
|
|
$
|
120,000
|
|
|
$
|
120,000
|
|
Preferred Stock, end of period (000s)
|
|
$
|
95,000
|
|
|
$
|
110,000
|
|
|
$
|
70,000
|
|
|
|
|
|
Per common share amount of long-term debt obligations outstanding, at end
of period
|
|
$
|
5.15
|
|
|
$
|
10.92
|
|
|
$
|
7.49
|
|
|
$
|
7.52
|
|
Per common share amount of net assets, excluding long-term debt
obligations, at end of period
|
|
$
|
18.00
|
|
|
$
|
38.76
|
|
|
$
|
34.28
|
|
|
$
|
30.75
|
|
Asset coverage, per $1,000 of principal amount of long-term debt
obligations and short-term borrowings
(12)
|
|
$
|
4,550
|
|
|
$
|
3,770
|
|
|
$
|
4,372
|
|
|
$
|
4,087
|
|
Asset coverage ratio of long-term debt obligations and short-term
borrowings
(12)
|
|
|
455
|
%
|
|
|
377
|
%
|
|
|
437
|
%
|
|
|
409
|
%
|
Asset coverage, per $25,000 liquidation value per share of preferred
stock
(13)
|
|
$
|
84,075
|
|
|
$
|
135,147
|
|
|
$
|
178,218
|
|
|
|
|
|
Asset coverage, per $25,000 liquidation value per share of preferred
stock
(14)
|
|
$
|
55,336
|
|
|
$
|
62,315
|
|
|
$
|
74,198
|
|
|
|
|
|
Asset coverage ratio of preferred stock
(14)
|
|
|
221
|
%
|
|
|
249
|
%
|
|
|
297
|
%
|
|
|
|
|
|
|
|
(1)
|
|
Commencement of Operations.
|
|
(2)
|
|
Information presented relates to a share of common stock outstanding for the entire period.
|
|
(3)
|
|
Represents the issuance of preferred stock for the years ended November 30, 2007 and 2006.
Represents the issuance of common stock for the period from May 31, 2005 through November 30,
2005.
|
|
(4)
|
|
Represents the premium on the shelf offering of less than $0.01 per share, less the
underwriting and offering costs of $0.13 per share.
|
|
(5)
|
|
The per common share data for the periods ended November 30, 2008, 2007, 2006 and 2005, do
not reflect the change in estimate of investment income and return of capital, for the
respective period. See Note 2C to the financial statements for further disclosure.
|
|
(6)
|
|
The per common share data for the year ended November 30, 2008 reflects the cumulative effect
of adopting FIN 48, which was a $776,852 increase to the beginning balance of accumulated net
investment loss, or $(0.04) per share. See Note 5 to the financial statements for further
disclosure.
|
11
|
|
|
(7)
|
|
Not annualized. Total investment return is calculated assuming a purchase of common stock at
the beginning of period (or initial public offering price) and a sale at the closing price on
the last day of the period reported (excluding brokerage commissions). The calculation also
assumes reinvestment of distributions at actual prices pursuant to the Companys dividend
reinvestment plan.
|
|
(8)
|
|
Annualized for periods less than one full year.
|
|
(9)
|
|
For the year ended November 30, 2008, the Company accrued $427,891 for current tax expense
and $114,309,765 for net deferred income tax benefit. The Company accrued $30,376,674 and
$54,292,114 for the years ended November 30, 2007 and 2006, respectively, for current and
deferred income tax expense. For the period from May 31, 2005 through November 30, 2005, the
Company accrued $192,462 in net deferred income tax benefit.
|
|
(10)
|
|
The expense ratios and net investment income (loss) ratios do not reflect the effect of
distributions to preferred stockholders.
|
|
(11)
|
|
This ratio excludes the impact of current and deferred income taxes.
|
|
(12)
|
|
Represents value of total assets less all liabilities and indebtedness not represented by
long-term debt obligations, short-term borrowings and preferred stock at the end of the period
divided by long-term debt obligations and short-term borrowings outstanding at the end of the
period.
|
|
(13)
|
|
Represents value of total assets less all liabilities and indebtedness not represented by
preferred stock at the end of the period divided by preferred stock outstanding at the end of
the period, assuming the retirement of all long-term debt obligations and short-term
borrowings.
|
|
(14)
|
|
Represents value of total assets less all liabilities and indebtedness not represented by
long-term debt obligations, short-term borrowings and preferred stock at the end of the period
divided by the sum of long-term debt obligations, short-term borrowings and preferred stock
outstanding at the end of the period.
|
12
SENIOR SECURITIES
The following table sets forth information about our outstanding senior securities as of each
fiscal year ended November 30 since our inception:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Fair
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Asset
|
|
|
Value Per
|
|
|
|
|
|
|
|
|
|
|
|
Coverage Per
|
|
|
Coverage Per
|
|
|
$25,000
|
|
|
|
|
|
|
|
Total Principal
|
|
|
$1,000 of
|
|
|
Share ($25,000
|
|
|
Denomination or
|
|
|
|
|
|
Title of
|
|
Amount/Liquidation
|
|
|
Principal
|
|
|
Liquidation
|
|
|
Per Share
|
|
Year
|
|
|
Security
|
|
Preference Outstanding
|
|
|
Amount
|
|
|
Preference)
|
|
|
Amount
|
|
|
2005
|
|
|
Tortoise Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
$
|
60,000,000
|
|
|
$
|
4,087
|
|
|
|
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Series B
|
|
$
|
60,000,000
|
|
|
$
|
4,087
|
|
|
|
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
120,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
Tortoise Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
$
|
60,000,000
|
|
|
$
|
4,372
|
|
|
|
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Series B
|
|
$
|
60,000,000
|
|
|
$
|
4,372
|
|
|
|
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Tortoise Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series I
(2)
|
|
$
|
70,000,000
|
|
|
|
|
|
|
$
|
74,198
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Revolving Credit Facility
(3)
|
|
$
|
28,000,000
|
|
|
$
|
4,372
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
218,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
Tortoise Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
(4)
|
|
$
|
60,000,000
|
|
|
$
|
3,770
|
|
|
|
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Series B
(5)
|
|
$
|
60,000,000
|
|
|
$
|
3,770
|
|
|
|
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Series C
(6)
|
|
$
|
70,000,000
|
|
|
$
|
3,770
|
|
|
|
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Tortoise Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series I
(2)
|
|
$
|
70,000,000
|
|
|
|
|
|
|
$
|
62,315
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Series II
(7)
|
|
$
|
40,000,000
|
|
|
|
|
|
|
$
|
62,315
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Revolving Credit Facility
(3)
|
|
$
|
24,700,000
|
|
|
$
|
3,770
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
324,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Tortoise Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D
(8)
|
|
$
|
39,400,000
|
|
|
$
|
4,550
|
|
|
|
|
|
|
$
|
22,934
|
(9)
|
|
|
|
|
Series E
(10)
|
|
$
|
15,900,000
|
|
|
$
|
4,550
|
|
|
|
|
|
|
$
|
24,449
|
(9)
|
|
|
|
|
Series F
(11)
|
|
$
|
34,700,000
|
|
|
$
|
4,550
|
|
|
|
|
|
|
$
|
23,596
|
(9)
|
|
|
|
|
Tortoise Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series I
(2) (12)
|
|
$
|
60,000,000
|
|
|
|
|
|
|
$
|
55,336
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Series II
(7) (13)
|
|
$
|
35,000,000
|
|
|
|
|
|
|
$
|
55,336
|
|
|
$
|
25,000
|
(1)
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Revolving Credit Facility
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
185,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
(1)
|
|
Estimated Fair value approximates the principal amount of
liquidation preference as applicable, because the interest or
dividend rates payable are
generally determined at auction and fluctuate with changes in prevailing market interest
rates.
|
|
(2)
|
|
Formerly designated Series I MMP Shares
|
|
(3)
|
|
We have an unsecured credit facility which, as of November 30, 2008, allowed us to borrow up
to $92.5 million. The credit facility remains in effect through March 20, 2009. We currently
expect to seek to renew the credit facility at an amount less than $92.5 million, but
sufficient to meet our operating needs.
|
|
(4)
|
|
On February 1, 2008 we redeemed $20,000,000 in principal amount of our auction rate Series A
Tortoise Notes. On April 25, 2008 we redeemed an additional $10,000,000 in principal amount of our auction
rate Series A Tortoise Notes. On July 18, 2008, we redeemed the remaining $30,000,000 in principal amount of
our auction rate Series A Tortoise Notes.
|
|
(5)
|
|
On January 22, 2008 we redeemed all of our auction rate Series B Tortoise Notes.
|
|
(6)
|
|
On February 5, 2008 we redeemed $20,000,000 in principal amount of our auction rate Series C
Tortoise Notes. On April 29, 2008 we redeemed the remaining $50,000,000 in principal amount of our auction
rate Series C Tortoise Notes.
|
|
(7)
|
|
Formerly designated Series II MMP Shares
|
|
(8)
|
|
On December 21, 2007 we completed a private offering of $100,000,000 of Series D Tortoise Notes. The
Series D Notes mature on December 21, 2014 and bear a fixed interest rate of 6.07 percent. We partially
redeemed the Series D Notes in the amount of $24,300,000 on November 7, 2008, and $36,300,000 on November 26,
2008.
|
|
(9)
|
|
Estimated fair values of the Tortoise Notes were calculated using the spread between the AAA corporate
finance debt rate and the U.S. Treasury rate with a maturity, equivalent to the remaining rate period plus the
average spread between the fixed rates and the AAA corporate finance debt rate. At November 30, 2008, the
total spread was applied to the equivalent U.S. Treasury rate for the series and future cash flows were
discounted to determine the estimated fair value.
|
|
(10)
|
|
On June 17, 2008, we completed a private offering of $25,000,000 of Series E Tortoise Notes. The Series E
Notes mature on June 17, 2011 and bear a fixed interest rate of 5.56 percent. We partially redeemed the Series
E Notes in the amount of $3,600,000 on November 7, 2008, and $5,500,000 on November 26, 2008.
|
|
(11)
|
|
On June 17, 2008, we completed a private offering of $65,000,000 of Series F Tortoise Notes. The Series F
Notes mature on June 17, 2013 and bear a fixed Interest rate of 6.02 percent. We partially redeemed the Series
F Notes in the amount of $12,100,000 on November 7, 2008 and $18,200,000 on November 26, 2008.
|
|
(12)
|
|
On October 7, 2008, we redeemed $10,000,000 of our Series I Tortoise Preferred Shares at liquidation
value.
|
|
(13)
|
|
On October 2, 2008, we redeemed $5,000,000 of our Series II Tortoise Preferred Shares at liquidation value.
|
14
MARKET AND NET ASSET VALUE INFORMATION
Our common stock is listed on the NYSE under the symbol TYY. Shares of our common stock
commenced trading on the NYSE in May 2005.
Our common stock has traded both at a premium and at a discount in relation to NAV. We cannot
predict whether our shares will trade in the future at a premium or discount to NAV. The provisions
of the 1940 Act generally require that the public offering price of common stock (less any
underwriting commissions and discounts) must equal or exceed the NAV per share of a companys
additional common stock (calculated within 48 hours of pricing). However, at our Annual Meeting of
Stockholders held on April 21, 2008, our common stockholders granted to us the authority to sell
shares of our common stock for less than NAV, subject to certain conditions. Our issuance of
additional common stock may have an adverse effect on prices in the secondary market for our common
stock by increasing the number of shares of common stock available, which may put downward pressure
on the market price for our common stock. The continued development of alternatives as vehicles for
investing in a portfolio of energy infrastructure MLPs, including other publicly traded investment
companies and private funds, may reduce or eliminate any tendency of our shares of common stock to
trade at a premium in the future. Shares of common stock of closed-end investment companies
frequently trade at a discount from NAV. See Risk Factors Additional Risks to Common
Stockholders Market Discount Risk.
The following table sets forth for each of the periods indicated the high and low closing
market prices for our shares of common stock on the NYSE, the NAV per share and the premium or
discount to NAV per share at which our shares of common stock were trading. NAV is generally
determined on the last business day of each calendar month. See Determination of Net Asset Value
for information as to the determination of our NAV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Discount) To
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset
|
|
|
Market Price
(1)
|
|
Net Asset
|
|
Value
(3)
|
Month Ended
|
|
High
|
|
Low
|
|
Value
(2)
|
|
High
|
|
Low
|
November 30, 2006
|
|
|
26.58
|
|
|
|
24.38
|
|
|
|
26.21
|
|
|
|
1.4
|
%
|
|
|
-7.0
|
%
|
December 31, 2006
|
|
|
28.24
|
|
|
|
27.10
|
|
|
|
26.79
|
|
|
|
5.4
|
%
|
|
|
1.2
|
%
|
January 31, 2007
|
|
|
27.51
|
|
|
|
26.36
|
|
|
|
27.38
|
|
|
|
0.5
|
%
|
|
|
-3.7
|
%
|
February 28, 2007
|
|
|
29.39
|
|
|
|
28.42
|
|
|
|
28.89
|
|
|
|
1.7
|
%
|
|
|
-1.6
|
%
|
March 31, 2007
|
|
|
29.75
|
|
|
|
28.35
|
|
|
|
29.28
|
|
|
|
1.6
|
%
|
|
|
-3.2
|
%
|
April 30, 2007
|
|
|
32.02
|
|
|
|
29.80
|
|
|
|
30.72
|
|
|
|
4.2
|
%
|
|
|
-3.0
|
%
|
May 31, 2007
|
|
|
31.06
|
|
|
|
29.44
|
|
|
|
32.36
|
|
|
|
-4.0
|
%
|
|
|
-9.0
|
%
|
June 30, 2007
|
|
|
30.93
|
|
|
|
29.46
|
|
|
|
31.94
|
|
|
|
-3.2
|
%
|
|
|
-7.8
|
%
|
July 31, 2007
|
|
|
31.54
|
|
|
|
28.53
|
|
|
|
32.38
|
|
|
|
-2.6
|
%
|
|
|
-11.9
|
%
|
August 31, 2007
|
|
|
30.15
|
|
|
|
26.75
|
|
|
|
31.93
|
|
|
|
-5.6
|
%
|
|
|
-16.2
|
%
|
September 30, 2007
|
|
|
30.45
|
|
|
|
26.04
|
|
|
|
29.18
|
|
|
|
4.4
|
%
|
|
|
-10.8
|
%
|
October 31, 2007
|
|
|
28.55
|
|
|
|
26.21
|
|
|
|
27.75
|
|
|
|
2.9
|
%
|
|
|
-5.5
|
%
|
November 30, 2007
|
|
|
27.00
|
|
|
|
24.01
|
|
|
|
29.72
|
|
|
|
-9.2
|
%
|
|
|
-19.2
|
%
|
December 31, 2007
|
|
|
26.37
|
|
|
|
24.13
|
|
|
|
27.84
|
|
|
|
-5.3
|
%
|
|
|
-13.3
|
%
|
January 31, 2008
|
|
|
27.75
|
|
|
|
25.26
|
|
|
|
27.75
|
|
|
|
0.0
|
%
|
|
|
-9.0
|
%
|
February 29, 2008
|
|
|
28.45
|
|
|
|
25.59
|
|
|
|
27.20
|
|
|
|
4.6
|
%
|
|
|
-5.9
|
%
|
March 31, 2008
|
|
|
26.00
|
|
|
|
23.88
|
|
|
|
26.32
|
|
|
|
-1.2
|
%
|
|
|
-9.3
|
%
|
April 30, 2008
|
|
|
26.13
|
|
|
|
25.00
|
|
|
|
24.45
|
|
|
|
6.9
|
%
|
|
|
2.2
|
%
|
May 31, 2008
|
|
|
25.77
|
|
|
|
25.04
|
|
|
|
26.38
|
|
|
|
-2.3
|
%
|
|
|
-5.1
|
%
|
June 30, 2008
|
|
|
27.40
|
|
|
|
24.87
|
|
|
|
26.05
|
|
|
|
5.2
|
%
|
|
|
-4.5
|
%
|
July 31, 2008
|
|
|
24.99
|
|
|
|
21.97
|
|
|
|
24.27
|
|
|
|
3.0
|
%
|
|
|
-9.5
|
%
|
August 31, 2008
|
|
|
25.31
|
|
|
|
21.44
|
|
|
|
23.64
|
|
|
|
7.1
|
%
|
|
|
-9.3
|
%
|
September 30, 2008
|
|
|
24.86
|
|
|
|
16.01
|
|
|
|
23.51
|
|
|
|
5.7
|
%
|
|
|
-31.9
|
%
|
October 31, 2008
|
|
|
17.14
|
|
|
|
7.00
|
|
|
|
17.21
|
|
|
|
-0.4
|
%
|
|
|
-59.3
|
%
|
November 30, 2008
|
|
|
17.65
|
|
|
|
9.00
|
|
|
|
17.95
|
|
|
|
-1.7
|
%
|
|
|
-49.9
|
%
|
December 31, 2008
|
|
|
12.85
|
|
|
|
10.48
|
|
|
|
12.85
|
|
|
|
0.0
|
%
|
|
|
-18.4
|
%
|
January 31, 2009
|
|
|
15.47
|
|
|
|
12.74
|
|
|
|
11.94
|
|
|
|
29.6
|
%
|
|
|
6.7
|
%
|
February 28, 2009
|
|
|
17.30
|
|
|
|
14.08
|
|
|
|
15.33
|
|
|
|
12.9
|
%
|
|
|
-8.2
|
%
|
Source: Bloomberg Financial and Fund Accounting Records.
|
|
|
(1)
|
|
Based on high and low closing market price for the respective month.
|
15
|
|
|
(2)
|
|
Based on the NAV calculated on the close of business on the last business day of each prior calendar month.
|
|
(3)
|
|
Calculated based on the information presented. Percentages are rounded.
|
The last reported NAV per share, market price and percentage premium to NAV per share of our
common stock on February 28, 2009, were $14.42,
$15.85 and 9.92%, respectively. As of February 28, 2009, we
had 17,470,673 shares of our common stock outstanding and net assets of approximately
$252 million.
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement, we intend to use the net proceeds of
any sale of our securities in accordance with our investment objective and policies as described
under Investment Objective and Principal Investment Strategies within approximately three months
of receipt of such proceeds. We may also use proceeds from the sale of our securities to retire all
or a portion of any debt we incur, to redeem preferred stock or for working capital purposes,
including the payment of distributions, interest and operating expenses, although there is
currently no intent to issue securities primarily for this purpose. Our investments may be delayed
if suitable investments are unavailable at the time or for other reasons. Pending such investment,
we anticipate that we will invest the proceeds in securities issued by the U.S. Government or its
instrumentalities or agencies, or in high quality, short-term or long-term debt obligations. A
delay in the anticipated use of proceeds could lower returns, reduce our distribution to common
stockholders and reduce the amount of cash available to make dividend and interest payments on
preferred stock and debt securities, respectively. We will not receive any of the proceeds from
our common stock sold by any selling stockholder.
16
THE COMPANY
We are a non-diversified, closed-end management investment company registered under the 1940
Act. We were organized as a Maryland corporation on March 4, 2005 pursuant to the Charter. We
commenced operations in May 2005 following our initial public offering. Our fiscal year ends on
November 30. As of November 30, 2008, we had net assets of $224,483,149 attributable to our common
stock. Our common stock is listed on the NYSE under the symbol TYY. As of the date of this
prospectus, we have $90 million of Tortoise Notes and $95 million of Tortoise Preferred Shares
outstanding. The outstanding Tortoise Notes are rated AAA by Fitch Ratings (Fitch). The
outstanding Tortoise Preferred Shares are rated Aa2 by Moodys Investors Service Inc.
(Moodys).
The following table provides information about our outstanding securities as of November 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Held
|
|
|
|
|
|
|
|
|
by the Company
|
|
|
|
|
Amount
|
|
or for its
|
|
Amount
|
Title of Class
|
|
Authorized
|
|
Account
|
|
Outstanding
|
Common Stock
|
|
|
100,000,000
|
|
|
|
0
|
|
|
|
17,470,673
|
|
Tortoise Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Tortoise Series Notes
(1)
|
|
$
|
100,000,000
|
|
|
|
0
|
|
|
$
|
39,400,000
|
|
Series E Tortoise Series Notes
(2)
|
|
$
|
25,000,000
|
|
|
|
0
|
|
|
$
|
15,900,000
|
|
Series F Tortoise Series Notes
(3)
|
|
$
|
65,000,000
|
|
|
|
0
|
|
|
$
|
34,700,000
|
|
Tortoise Preferred Shares
|
|
|
10,000,000
|
(4)
|
|
|
|
|
|
|
|
|
Series I Tortoise Preferred Shares
|
|
|
2,400
|
(5)
|
|
|
0
|
|
|
|
2,400
|
|
Series II Tortoise Preferred Shares
|
|
|
1,400
|
(5)
|
|
|
0
|
|
|
|
1,400
|
|
|
|
|
(1)
|
|
On December 21, 2007, we completed a private offering of $100,000,000 of Series D Tortoise Notes. The Series D Notes mature on December 21,
2014 and bear a fixed interest rate of 6.07 percent. The net proceeds of approximately $99,700,000 were used to retire a portion of our Series
A and C, and all of our Series B, auction rate Tortoise Notes.
|
|
(2)
|
|
On June 17, 2008, we completed a private offering of $25,000,000 of Series E Tortoise Notes. The Series E Notes mature on June 17, 2011 and
bear a fixed interest rate of 5.56%.
|
|
(3)
|
|
On June 17, 2008 we completed a private offering of $65,000,000 of Series F Tortoise Notes. The Series F Notes mature on June 17, 2013 and
bear a fixed interest rate of 6.02%.
|
|
(4)
|
|
Includes 4,400 shares of preferred stock designated as Tortoise Preferred Shares Series I and Series II as set forth below.
|
|
(5)
|
|
Each share has a liquidation preference of $25,000 ($60,000,000 in the aggregate for Series I and $35,000,000 in the aggregate for Series II).
|
17
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
Investment Objective
Our investment objective is to seek a high level of total return with an emphasis on current
distributions to stockholders. For purposes of our investment objective, total return includes
capital appreciation of, and all distributions received from, securities in which we invest
regardless of the tax character of the distributions. We seek to provide our stockholders with an
efficient vehicle to invest in a portfolio consisting primarily of MLPs and their affiliates in the
energy infrastructure sector. Similar to the tax characterization of cash distributions made by
MLPs to the MLPs unit holders, we believe that a relatively high portion of our distributions to
stockholders may be treated as return of capital.
Energy Infrastructure Sector
We invest primarily in the energy infrastructure sector. We pursue our objective by investing
principally in a portfolio of equity securities issued by MLPs and their affiliates, including
restricted securities. MLP common units historically have generated higher average total returns
than domestic common stock (as measured by the S&P 500) and fixed income securities. Restricted
securities are expected to provide us a higher total return than securities traded in the open
market, although restricted securities are subject to risks not associated with listed securities.
A more detailed description of investment policies and restrictions, including those deemed to be
fundamental and thus subject to change only with the approval of the holders of a majority of the
Companys outstanding voting securities, and more detailed information about portfolio investments
are contained later in this prospectus and in the statement of additional information.
Energy Infrastructure Sector.
Companies (including MLPs) in the energy infrastructure sector
engage in the business of gathering, transporting, processing, storing, distributing or marketing
natural gas, natural gas liquids, coal, crude oil, refined petroleum products or other natural
resources, or exploring, developing, managing or producing such commodities. Energy infrastructure
companies (other than most pipeline MLPs) do not operate as public utilities or local
distribution companies, and are therefore not subject to rate regulation by state or federal
utility commissions. However, energy infrastructure companies may be subject to greater competitive
factors than utility companies, including competitive pricing in the absence of regulated tariff
rates, which could reduce revenues and adversely affect profitability. Most pipeline MLPs are
subject to government regulation concerning the construction, pricing and operation of pipelines.
Pipeline MLPs are able to set prices (rates or tariffs) to cover operating costs, depreciation and
taxes, and provide a return on investment. These rates are monitored by the Federal Energy
Regulatory Commission (FERC) which seeks to ensure that consumers receive adequate and reliable
supplies of energy at the lowest possible price while providing energy suppliers and transporters a
just and reasonable return on capital investment and the opportunity to adjust to changing market
conditions.
Master Limited Partnerships.
Under normal circumstances, we invest at least 80% of our total
assets (including assets obtained through leverage) in equity securities of MLPs and their
affiliates in the energy infrastructure sector. MLPs are generally taxed as partnerships for
federal income tax purposes, thereby eliminating income tax at the entity level. The typical MLP
has two classes of partners, the general partner and the limited partners. The general partner is
usually a major energy company, investment fund or the direct management of the MLP. The general
partner normally controls the MLP through a 2% equity interest plus units that are subordinated to
the common (publicly traded) units for at least the first five years of the partnerships existence
and that only convert to common if certain financial tests are met.
As a motivation for the general partner to manage the MLP successfully and increase cash
flows, the terms of most MLPs partnership agreements typically provide that the general partner
receives a larger portion of the net income as distributions reach higher target levels. As cash
flow grows, the general partner receives a greater interest in the incremental income compared to
the interest of limited partners. The general partners incentive compensation typically increases
up to 50% of incremental income. Nevertheless, the aggregate amount distributed to limited partners
will increase as MLP distributions reach higher target levels. Given this structure, the general
partner has an incentive to streamline operations and undertake acquisitions and growth projects in
order to increase distributions to all partners.
MLPs in which we invest can generally be classified in the following categories:
|
|
|
Pipeline MLPs.
Pipeline MLPs are common carrier transporters of natural gas, natural gas
liquids (primarily propane, ethane, butane and natural gasoline), crude oil or refined
petroleum products (gasoline, diesel fuel and jet fuel). Pipeline MLPs may also operate
ancillary businesses such as storage and marketing of such products. Revenue is derived from
capacity and
transportation fees. Historically, pipeline output has been less exposed to cyclical economic
forces due to its low cost structure
|
18
|
|
|
and government-regulated nature. In addition, pipeline
MLPs do not have direct commodity price exposure because they do not own the product being
shipped.
|
|
|
|
|
Processing MLPs.
Processing MLPs are gatherers and processors of natural gas as well as
providers of transportation, fractionation and storage of natural gas liquids (NGLs).
Revenue is derived from providing services to natural gas producers, which require treatment
or processing before their natural gas commodity can be marketed to utilities and other end
user markets. Revenue for the processor is fee based, although it is not uncommon to have
some participation in the prices of the natural gas and NGL commodities for a portion of
revenue.
|
|
|
|
|
Propane MLPs.
Propane MLPs are distributors of propane to homeowners for space and water
heating. Revenue is derived from the resale of the commodity at a margin over wholesale
cost. The ability to maintain margin is a key to profitability. Propane serves approximately
3% of the household energy needs in the United States, largely for homes beyond the
geographic reach of natural gas distribution pipelines. Approximately 70% of annual cash
flow is earned during the winter heating season (October through March). Accordingly,
volumes are weather dependent, but have utility type functions similar to electricity and
natural gas.
|
|
|
|
|
Coal MLPs.
Coal MLPs own, lease and manage coal reserves. Revenue is derived from
production and sale of coal, or from royalty payments related to leases to coal producers.
Electricity generation is the primary use of coal in the United States. Demand for
electricity and supply of alternative fuels to generators are the primary drivers of coal
demand. Coal MLPs are subject to operating and production risks, such as: the MLP or a
lessee meeting necessary production volumes; federal, state and local laws and regulations
which may limit the ability to produce coal; the MLPs ability to manage production costs
and pay mining reclamation costs; and the effect on demand that the Environmental Protection
Agencys standards set in the 1990 Clean Air Act (the Clean Air Act) have on coal-end
users.
|
|
|
|
|
Marine Shipping MLPs
. Marine Shipping MLPs are primarily marine transporters of natural
gas, crude oil or refined petroleum products. Marine shipping MLPs derive revenue from
charging customers for the transportation of these products utilizing the MLPs vessels.
Transportation services are typically provided pursuant to a charter or contract, the terms
of which vary depending on, for example, the length of use of a particular vessel, the
amount of cargo transported, the number of voyages made, the parties operating a vessel or
other factors.
|
Investment Process
Under normal circumstances, we invest at least 80% of our total assets (including assets
obtained through leverage) in equity securities of MLPs and their affiliates in the energy
infrastructure sector. We invest primarily in entities organized in the United States and do not
anticipate that investments in non-U.S. issuers will exceed 5% of our total assets. Our Adviser
seeks to invest in securities that offer a combination of quality, growth and yield intended to
result in superior total returns over the long run. Our Advisers securities selection process
includes a comparison of quantitative, qualitative, and relative value factors. Although our
Adviser intends to use research provided by broker-dealers and investment firms, primary emphasis
will be placed on proprietary analysis and valuation models conducted and maintained by our
Advisers in-house investment analysts. To determine whether a company meets its criteria, our
Adviser generally will look for a strong record of distribution growth, a solid ratio of debt to
equity and coverage ratio with respect to distributions to unit holders, and a proven track record,
incentive structure and management team. It is anticipated that all of the publicly traded MLPs in
which we invest will have a market capitalization greater than $100 million at the time of
investment.
Investment Policies
We seek to achieve our investment objective by investing primarily in securities of MLPs and
their affiliates that our Adviser believes offer attractive distribution rates and capital
appreciation potential.
We have adopted the following nonfundamental policies:
|
|
|
Under normal circumstances, we will invest at least 80% of our net assets, plus any
borrowings for investment purposes, in equity securities of entities in the energy sector.
|
|
|
|
|
We will also invest at least 80% of our total assets in equity securities of MLPs and
their affiliates in the energy infrastructure sector.
|
19
|
|
|
We may invest up to 50% of our total assets in restricted securities, all of which may be
illiquid securities. The restricted securities that we may purchase include MLP convertible
subordinated units, unregistered MLP common units and securities of publicly traded and
privately held companies (i.e., non-MLPs).
|
|
|
|
|
We may invest up to 20% of our total assets in debt securities, including certain
securities rated below investment grade (commonly referred to as junk bonds). Below
investment grade debt securities will be rated at least B3 by Moodys and at least B- by S&P
at the time of purchase, or comparably rated by another statistical rating organization or
if unrated, determined to be of comparable quality by our Adviser.
|
|
|
|
|
We will not invest more than 15% of our total assets in any single issuer.
|
|
|
|
|
We will not engage in short sales.
|
As used in the bullets above, the term total assets includes assets to be obtained through
leverage for the purpose of each nonfundamental investment policy. During the period in which we
are investing the net proceeds of this offering, we will deviate from our investment policies with
respect to the net proceeds by investing the net proceeds in cash, cash equivalents, securities
issued or guaranteed by the U.S. Government or its instrumentalities or agencies, high quality,
short-term money market instruments, short-term debt securities, certificates of deposit, bankers
acceptances and other bank obligations, commercial paper rated in the highest category by a rating
agency or other liquid fixed income securities.
The Board of Directors may change our nonfundamental investment policies without stockholder
approval and will provide notice to stockholders of material changes (including notice through
stockholder reports); provided, however, that a change in the policy of investing at least 80% of
our net assets, plus any borrowings for investment purposes, in equity securities of entities in
the energy sector requires at least 60 days prior written notice to stockholders. Unless otherwise
stated, these investment restrictions apply at the time of purchase and we will not be required to
reduce a position due solely to market value fluctuations.
20
Investment Securities
The types of securities in which we may invest include, but are not limited to, the following:
Equity Securities of MLPs
.
Consistent with our investment objective, we may invest up to 100%
of our total assets in equity securities issued by MLPs, including common units, convertible
subordinated units, and equity securities issued by affiliates of MLPs, including I-Shares and LLC
common units.
The table below summarizes the features of these securities, and a further discussion of these
securities follows:
|
|
|
|
|
|
|
|
|
Common Units
|
|
Convertible Subordinated Units
|
|
|
|
|
(for MLPs taxed as partnerships) (1)
|
|
(for MLPs taxed as partnerships)
|
|
I-Shares
|
Voting Rights
|
|
Limited to certain significant
decisions; no annual election of
directors
|
|
Same as common units
|
|
No direct MLP voting rights
|
|
|
|
|
|
|
|
Dividend Priority
|
|
First right to MQD specified in
Partnership Agreement; arrearage
rights
|
|
Second right to MQD; no
arrearage rights; may be paid
in additional units
|
|
Equal in amount and
priority to common units
but paid in additional
I-Shares at current market
value of I-Shares
|
|
|
|
|
|
|
|
Dividend Rate
|
|
Minimum set in Partnership
Agreement; participate pro rata
with subordinated after both MQDs
are met
|
|
Equal in amount to common
units; participate pro rata
with common units above the MQD
|
|
Equal in amount to common
units
|
|
|
|
|
|
|
|
Trading
|
|
Listed on NYSE, NYSE Alternext U.S.
and NASDAQ National Market
|
|
Not publicly traded
|
|
Listed on NYSE
|
|
|
|
|
|
|
|
Federal Income Tax
Treatment
|
|
Generally, ordinary income to the
extent of taxable income allocated
to holder; distributions are
tax-free return of capital to
extent of holders basis; remainder
as capital gain
|
|
Same as common units
|
|
Full distribution treated
as return of capital;
since distribution is in
shares, total basis is not
reduced
|
|
|
|
|
|
|
|
Type of Investor
|
|
Retail; creates unrelated business
taxable income for tax-exempt
investor; investment by regulated
investment companies limited to 25%
of total assets
|
|
Same as common units
|
|
Retail and institutional;
does not create unrelated
business taxable income;
qualifying income for
regulated investment
companies
|
|
|
|
|
|
|
|
Liquidity Priority
|
|
Intended to receive return of all
capital first
|
|
Second right to return of
capital; pro rata with common
units thereafter
|
|
Same as common units
(indirect right through
I-Share issuer)
|
|
|
|
|
|
|
|
Conversion Rights
|
|
None
|
|
Typically one-to-one ratio into
common units
|
|
None
|
|
|
|
(1)
|
|
Some energy infrastructure companies in which we may invest have been organized as LLCs. Such
LLCs are treated in the same manner as MLPs for federal income tax purposes. Common units of
LLCs have similar characteristics of those of MLP common units, except that LLC common units
typically have voting rights with respect to the LLC and LLC common units held by management
are not entitled to increased percentages of cash distributions as increased levels of cash
distributions are received by the LLC. The characteristics of LLCs and their common units are
more fully discussed below.
|
MLP Common Units.
MLP common units represent an equity ownership interest in a partnership,
providing limited voting rights and entitling the holder to a share of the companys success
through distributions and/or capital appreciation. Unlike stockholders of a corporation, common
unit holders do not elect directors annually and generally have the right to vote only on certain
significant events, such as a merger, a sale of substantially all of the assets, removal of the
general partner or material amendments to the partnership agreement. MLPs are required by their
partnership agreements to distribute a large percentage of their current operating
21
earnings. Common unit holders generally have first right to a MQD prior to distributions to
the convertible subordinated unit holders or the general partner (including incentive
distributions). Common unit holders typically have arrearage rights if the MQD is not met. In the
event of liquidation, MLP common unit holders have first rights to the partnerships remaining
assets after bondholders, other debt holders, and preferred unit holders have been paid in full.
MLP common units trade on a national securities exchange or over-the-counter. Also, like common
stock, prices of MLP common units are sensitive to general movements in the stock market and a drop
in the stock market may depress the price of MLP common units to which we have exposure.
Limited Liability Company Units.
Some energy infrastructure companies in which we may invest
have been organized as LLCs. Such LLCs are treated in the same manner as MLPs for federal income
tax purposes. Consistent with its investment objective and policies, we may invest in common units
or other securities of such LLCs. LLC common units represent an equity ownership interest in an
LLC, entitling the holder to a share of the LLCs success through distributions and/or capital
appreciation. Similar to MLPs, LLCs typically do not pay federal income tax at the entity level and
are required by their operating agreements to distribute a large percentage of their earnings. LLC
common unit holders generally have first rights to a MQD prior to distributions to subordinated
unit holders and typically have arrearage rights if the MQD is not met. In the event of
liquidation, LLC common unit holders have first rights to the LLCs remaining assets after bond
holders, other debt holders and preferred unit holders, if any, have been paid in full. LLC common
units may trade on a national securities exchange or over-the-counter.
In contrast to MLPs, LLCs have no general partner and there are generally no incentives that
entitle management or other unit holders to increased percentages of cash distributions as
distributions reach higher target levels. In addition, LLC common unit holders typically have
voting rights with respect to the LLC, whereas MLP common units have limited voting rights.
MLP Convertible Subordinated Units.
MLP convertible subordinated units are typically issued
by MLPs to founders, corporate general partners of MLPs, entities that sell assets to the MLP, and
institutional investors. The purpose of the convertible subordinated units is to increase the
likelihood that during the subordination period there will be available cash to be distributed to
common unit holders. Convertible subordinated units generally are not entitled to distributions
until holders of common units have received specified MQD, plus any arrearages, and may receive
less than common unit holders in distributions upon liquidation. Convertible subordinated unit
holders generally are entitled to MQD prior to the payment of incentive distributions to the
general partner, but are not entitled to arrearage rights. Therefore, convertible subordinated
units generally entail greater risk than MLP common units. They are generally convertible
automatically into the senior common units of the same issuer at a one-to-one ratio upon the
passage of time and/or the satisfaction of certain financial tests. These units generally do not
trade on a national exchange or over-the-counter, and there is no active market for convertible
subordinated units. Although the means by which convertible subordinated units convert into senior
common units depend on a securitys specific terms, MLP convertible subordinated units typically
are exchanged for common shares. The value of a convertible security is a function of its worth if
converted into the underlying common units. Convertible subordinated units generally have similar
voting rights as MLP common units. Distributions may be paid in cash or in-kind.
MLP I-Shares.
I-Shares represent an indirect investment in MLP I-units. I-units are equity
securities issued to an affiliate of an MLP, typically a limited liability company, that owns an
interest in and manages the MLP. The I-Shares issuer has management rights but is not entitled to
incentive distributions. The I-Share issuers assets consist exclusively of MLP I-units.
Distributions by MLPs to I-unit holders are made in the form of additional I-units, generally equal
in amount to the cash received by common unit holders of MLPs. Distributions to I-Share holders are
made in the form of additional I-Shares, generally equal in amount to the I-units received by the
I-Share issuer. The issuer of the I-Shares is taxed as a corporation, however, the MLP does not
allocate income or loss to the I-Share issuer. Accordingly, investors receive a Form 1099, are not
allocated their proportionate share of income of the MLPs and are not subject to state income tax
filing obligations based solely on the issuers operations within a state.
Equity Securities of MLP Affiliates
.
In addition to equity securities of MLPs, we may also
invest in equity securities of MLP affiliates, by purchasing securities of limited liability
entities that own general partner interests of MLPs. General partner interests of MLPs are
typically retained by an MLPs original sponsors, such as its founders, corporate partners,
entities that sell assets to the MLP and investors such as the entities from which we may purchase
general partner interests. An entity holding general partner interests, but not its investors, can
be liable under certain circumstances for amounts greater than the amount of the entitys
investment in the general partner interest. General partner interests often confer direct board
participation rights and in many cases, operating control, over the MLP. These interests themselves
are generally not publicly traded, although they may be owned by publicly traded entities. General
partner interests receive cash distributions, typically 2% of the MLPs aggregate cash
distributions, which are contractually defined in the partnership agreement. In addition, holders
of general partner interests typically hold incentive distribution rights (IDRs), which provide
them with a larger share of the aggregate MLP cash distributions as the distributions to limited
partner unit holders are increased to prescribed levels. General partner interests generally cannot
be converted into common units. The general partner interest can be redeemed by the MLP if the MLP
unitholders choose to remove the general partner, typically with a supermajority vote by limited
partner unitholders.
22
Other Non-MLP Equity Securities.
In addition to equity securities of MLPs, we may also invest
in common and preferred stock, limited partner interests, convertible securities, warrants and
depository receipts of companies that are organized as corporations, limited liability companies or
limited partnerships. Common stock generally represents an equity ownership interest in an issuer.
Although common stocks have historically generated higher average total returns than fixed-income
securities over the long term, common stocks also have experienced significantly more volatility in
those returns and may under-perform relative to fixed-income securities during certain periods. An
adverse event, such as an unfavorable earnings report, may depress the value of a particular common
stock we hold. Also, prices of common stocks are sensitive to general movements in the stock market
and a drop in the stock market may depress the price of common stocks to which we have exposure.
Common stock prices fluctuate for several reasons including changes in investors perceptions of
the financial condition of an issuer or the general condition of the relevant stock market, or when
political or economic events affecting the issuers occur. In addition, common stock prices may be
particularly sensitive to rising interest rates, which increases borrowing costs and the costs of
capital.
Debt Securities
.
We may invest up to 20% of our assets in debt securities, including
securities rated below investment grade. Debt securities in which we invest may have fixed or
variable principal payments and all types of interest rate and dividend payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred, payment in kind and
auction rate features. To the extent we invest in auction rate securities we will be subject to
certain risks associated with participating in an auction, including the risk that an auction may
fail and we may lose our investment. To the extent that we invest in below investment grade debt
securities, such securities will be rated, at the time of investment, at least B- by S&Ps or B3 by
Moodys or a comparable rating by at least one other rating agency or, if unrated, determined by
our Adviser to be of comparable quality. If a security satisfies our minimum rating criteria at the
time of purchase and is subsequently downgraded below such rating, we will not be required to
dispose of such security. If a downgrade occurs, our Adviser will consider what action, including
the sale of such security, is in our best interest and the best interest of our stockholders.
Because the risk of default is higher for below investment grade securities than investment
grade securities, our Advisers research and credit analysis is an especially important part of
managing securities of this type. Our Adviser will attempt to identify those issuers of below
investment grade securities whose financial condition our Adviser believes is adequate to meet
future obligations or has improved or is expected to improve in the future. Our Advisers analysis
focuses on relative values based on such factors as interest or dividend coverage, asset coverage,
earnings prospects and the experience and managerial strength of the issuer.
Restricted Securities
.
We may invest up to 50% of our total assets in restricted securities.
An issuer may be willing to offer the purchaser more attractive features with respect to securities
issued in direct placements because it has avoided the expense and delay involved in a public
offering of securities. Adverse conditions in the public securities markets also may preclude a
public offering of securities. MLP convertible subordinated units typically are purchased in
private placements and do not trade on a national exchange or over-the-counter, and there is no
active market for convertible subordinated units. MLP convertible subordinated units typically are
purchased from affiliates of the issuer or other existing holders of convertible units rather than
directly from the issuer.
Restricted securities obtained by means of direct placements are less liquid than securities
traded in the open market because of statutory and contractual restrictions on resale. Such
securities are, therefore, unlike securities that are traded in the open market, which can be
expected to be sold immediately if the market is adequate. This lack of liquidity creates special
risks for us. However, we could sell such securities in private transactions with a limited number
of purchasers or in public offerings under the 1933 Act. MLP convertible subordinated units
generally also convert to publicly traded common units upon the passage of time and/or satisfaction
of certain financial tests.
Temporary Investments and Defensive Investments.
Pending investment of the proceeds of an
offering (which we expect may take up to approximately three months following the closing of an
offering), we may invest offering proceeds in cash, cash equivalents, securities issued or
guaranteed by the U.S. Government or its instrumentalities or agencies, high quality, short-term
money market instruments, short-term debt securities, certificates of deposit, bankers acceptances
and other bank obligations, commercial paper rated in the highest category by a rating agency or
other liquid fixed income securities all of which are expected to provide a lower yield than the
securities of MLPs and their affiliates. We may also invest in these instruments on a temporary
basis to meet working capital needs including, but not limited to, for collateral in connection
with certain investment techniques, to hold a reserve pending payment of distributions, and to
facilitate the payment of expenses and settlement of trades. We anticipate that under normal
market conditions not more than 5% of our total assets will be invested in these instruments.
Under adverse market or economic conditions, we may invest 100% of our total assets in these
securities. The yield on these securities may be lower than the returns on MLPs or yields on lower
rated fixed income securities. To the extent we invest in these securities on a temporary basis or
for defensive purposes, we may not achieve our investment objective.
23
Portfolio Turnover
Our annual portfolio turnover rate may vary greatly from year to year. Although we cannot
accurately predict our annual portfolio turnover rate, it is not expected to exceed 30% under
normal circumstances. For the fiscal years ended November 30, 2008 and 2007, our actual portfolio
turnover rate was 6.44% and 9.90%, respectively. Portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions for us. A higher turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses that the Company
bears. High portfolio turnover may result in our recognition of gains that will increase our tax
liability and thereby lower the amount of our after-tax distributions. In addition, high portfolio
turnover may increase our current and accumulated earnings and profits, resulting in a greater
portion of our distributions being treated as taxable dividends for federal income tax purposes.
See Certain Federal Income Tax Matters.
Conflicts of Interest
Conflicts of interest may arise from the fact that our Adviser and its affiliates carry on
substantial investment activities for other clients in which we have no interest, some of which may
have investment strategies similar to ours. Our Adviser or its affiliates may have financial
incentives to favor certain of such accounts over us. For example, our Adviser may have an
incentive to allocate potentially more favorable investment opportunities to other funds and
clients that pay our Adviser an incentive or performance fee. Performance and incentive fees also
create the incentive to allocate potentially riskier, but potentially better performing,
investments to such funds and other clients in an effort to increase the incentive fee. Our
Adviser also may have an incentive to make investments in one fund, having the effect of increasing
the value of a security in the same issuer held by another fund, which, in turn, may result in an
incentive fee being paid to our Adviser by that other fund. Any of the Advisers or its affiliates
proprietary accounts and other customer accounts may compete with us for specific trades. Our
Adviser or its affiliates may give advice and recommend securities to, or buy or sell securities
for us which advice or securities may differ from advice given to, or securities recommended or
bought or sold for, other accounts and customers, even though their investment objectives may be
the same as, or similar to our objectives. Our Adviser has written allocation policies and
procedures designed to address potential conflicts of interest. For instance, when two or more
clients advised by our Adviser or its affiliates seek to purchase or sell the same publicly traded
securities, the securities actually purchased or sold will be allocated among the clients on a good
faith equitable basis by our Adviser in its discretion and in accordance with the clients various
investment objectives and our Advisers procedures. In some cases, this system may adversely affect
the price or size of the position we may obtain. In other cases, the ability to participate in
volume transactions may produce better execution for us. When possible, our Adviser combines all
of the trade orders into one or more block orders, and each account participates at the average
unit or share price obtained in a block order. When block orders are only partially filled, our
Adviser considers a number of factors in determining how allocations are made, with the overall
goal to allocate in a manner so that accounts are not preferred or disadvantaged over time. Our
Adviser also has allocation policies for transactions involving private placement securities, which
are designed to result in a fair and equitable participation in offerings or sales for each
participating client.
Our Adviser also serves as investment Adviser for three other publicly traded and two
privately held closed-end management investment companies, all of which invest in the energy
sector. See Management of the CompanyInvestment Adviser.
Our Adviser will evaluate a variety of factors in determining whether a particular investment
opportunity or strategy is appropriate and feasible for the relevant account at a particular time,
including, but not limited to, the following: (1) the nature of the investment opportunity taken in
the context of the other investments at the time; (2) the liquidity of the investment relative to
the needs of the particular entity or account; (3) the availability of the opportunity (i.e., size
of obtainable position); (4) the transaction costs involved; and (5) the investment or regulatory
limitations applicable to the particular entity or account. Because these considerations may differ
when applied to us and relevant accounts under management in the context of any particular
investment opportunity, our investment activities, on the one hand, and other managed accounts, on
the other hand, may differ considerably from time to time. In addition, our fees and expenses will
differ from those of the other managed accounts. Accordingly, stockholders should be aware that our
future performance and the future performance of the other accounts of our Adviser may vary.
Situations may occur when we could be disadvantaged because of the investment activities
conducted by our Adviser and its affiliates for its other accounts. Such situations may be based
on, among other things, the following: (1) legal or internal restrictions on the combined size of
positions that may be taken for us or the other accounts, thereby limiting the size of our
position; or (2) the difficulty of liquidating an investment for us or the other accounts where the
market cannot absorb the sale of the combined position.
Under the 1940 Act, we may be precluded from co-investing in negotiated private placements of
securities with our affiliates, including other funds managed by the Adviser. We and the Adviser
have applied to the SEC for exemptive relief to permit us and our affiliates to make such
investments. There is no guarantee that the requested relief will be granted by SEC. Unless and
until we obtain an exemptive order, we will not co-invest with our affiliates in negotiated private
placement transactions. Unless we receive
24
exemptive relief, the Adviser will observe a policy for allocating negotiated private
placement opportunities among its clients that takes into account the amount of each clients
available cash and its investment objectives.
To the extent that our Adviser sources and structures private investments in MLPs, certain
employees of our Adviser may become aware of actions planned by MLPs, such as acquisitions, that
may not be announced to the public. It is possible that we could be precluded from investing in or
selling securities of an MLP about which our Adviser has material, non-public information; however,
it is our Advisers intention to ensure that any material, non-public information available to
certain employees of our Adviser is not shared with those employees responsible for the purchase
and sale of publicly traded MLP securities. Our investment opportunities may also be limited by
affiliations of our Adviser or its affiliates with energy infrastructure companies.
Our Adviser and its principals, officers, employees, and affiliates may buy and sell
securities or other investments for their own accounts and may have actual or potential conflicts
of interest with respect to investments made on our behalf. As a result of differing trading and
investment strategies or constraints, positions may be taken by principals, officers, employees,
and affiliates of our Adviser that are the same as, different from, or made at a different time
than positions taken for us. Further, our Adviser may at some time in the future, manage other
investment funds with the same investment objective as ours.
LEVERAGE
Use of Leverage
We currently engage in leverage and may borrow money or issue additional debt securities,
and/or issue additional preferred stock, to provide us with additional funds to invest. The
borrowing of money and the issuance of preferred stock and debt securities represents the
leveraging of our common stock. The issuance of additional common stock may enable us to increase
the aggregate amount of our leverage or to maintain existing leverage. We reserve the right at any
time to use financial leverage to the extent permitted by the 1940 Act (50% of total assets for
preferred stock and 33.33% of total assets for senior debt securities) or we may elect to reduce
the use of leverage or use no leverage at all. Historically, our leverage target has been up to
33% of our total assets at the time of incurrence. Our Board of Directors has approved a policy
permitting temporary increases in the amount of leverage we may use from 33% of our total assets to
up to 38% of our total assets at the time of incurrence, provided that (i) such leverage is
consistent with the limits set forth in the 1940 Act, and (ii) such increased leverage is reduced
over time in an orderly fashion. We generally will not use leverage unless we believe that
leverage will serve the best interests of our stockholders. The principal factor used in making
this determination is whether the potential return is likely to exceed the cost of leverage. We
will not issue additional leverage where the estimated costs of issuing such leverage and the
on-going cost of servicing the payment obligations on such leverage exceed the estimated return on
the proceeds of such leverage. We note, however, that in making the determination of whether to
issue leverage, we must rely on estimates of leverage costs and expected returns. Actual costs of
leverage vary over time depending on interest rates and other factors. Additionally, the
percentage of our assets attributable to leverage may vary significantly during periods of extreme
market volatility and will increase during periods of declining market prices of our portfolio
holdings. Actual returns vary, of course, depending on many factors. The Board also will consider
other factors, including whether the current investment opportunities will help us achieve our
investment objective and strategies.
We have established an unsecured credit facility with U.S. Bank N.A. serving as a lender and
the lending syndicate agent on behalf of other lenders participating in the credit facility, which
currently allows us to borrow up to $92,500,000. Outstanding balances under the credit facility
accrue interest at a variable annual rate equal to the one-month LIBOR plus 0.75%. As of November
30, 2008, the current rate was 2.65%. The credit facility remains in effect through March 20,
2009. We currently expect to seek to renew the credit facility at an amount less than $92.5
million, but sufficient to meet our operating needs. We may draw on the facility from time to
time in accordance with our investment policies. As of November 30, 2008, we had no outstanding
balance under our credit facility.
We also may borrow up to an additional 5% of our total assets (not including the amount so
borrowed) for temporary purposes, including the settlement and clearance of securities
transactions, which otherwise might require untimely dispositions of portfolio holdings.
Under the 1940 Act, we are not permitted to issue preferred stock unless immediately after
such issuance, the value of our total assets (including the proceeds of such issuance) less all
liabilities and indebtedness not represented by senior securities is at least equal to 200% of the
total of the aggregate amount of senior securities representing indebtedness plus the aggregate
liquidation value of the outstanding preferred stock. Stated another way, we may not issue
preferred stock that, together with outstanding preferred stock and debt securities, has a total
aggregate liquidation value and outstanding principal amount of more than 50% of the value of our
total assets, including the proceeds of such issuance, less liabilities and indebtedness not
represented by senior securities. In addition, we are not permitted to declare any cash dividend
or other distribution on our common stock, or purchase any of our shares of common
25
stock (through tender offers or otherwise) unless we would satisfy this 200% asset coverage
requirement test after deducting the amount of such dividend, distribution or share price, as the
case may be. We may, as a result of market conditions or otherwise, be required to purchase or
redeem preferred stock, or sell a portion of our investments when it may be disadvantageous to do
so, in order to maintain the required asset coverage. Common stockholders would bear the costs of
issuing additional preferred stock, which may include offering expenses and the ongoing payment of
dividends. Under the 1940 Act, we may only issue one class of preferred stock. So long as
Tortoise Preferred Shares are outstanding, any preferred stock offered pursuant to this prospectus
and any related prospectus supplement will rank on parity with any outstanding Tortoise Preferred
Shares.
Under the 1940 Act, we are not permitted to issue debt securities or incur other indebtedness
constituting senior securities unless immediately thereafter, the value of our total assets
(including the proceeds of the indebtedness) less all liabilities and indebtedness not represented
by senior securities is at least equal to 300% of the amount of the outstanding indebtedness.
Stated another way, we may not issue debt securities or incur other indebtedness with an aggregate
principal amount of more than 33 1/3% of the value of our total assets, including the amount
borrowed, less all liabilities and indebtedness not represented by senior securities. We also must
maintain this 300% asset coverage for as long as the indebtedness is outstanding. The 1940 Act
provides that we may not declare any cash dividend or other distribution on common or preferred
stock, or purchase any of our shares of stock (through tender offers or otherwise), unless we would
satisfy this 300% asset coverage requirement test after deducting the amount of the dividend, other
distribution or share purchase price, as the case may be. If the asset coverage for indebtedness
declines to less than 300% as a result of market fluctuations or otherwise, we may be required to
redeem debt securities, or sell a portion of our investments when it may be disadvantageous to do
so. Under the 1940 Act, we may only issue one class of senior securities representing
indebtedness. So long as Tortoise Notes are outstanding, any debt securities offered pursuant to
this prospectus and any related prospectus supplement will be rank on parity with any outstanding
Tortoise Notes.
Hedging Transactions
In an attempt to reduce the interest rate risk arising from our leveraged capital structure,
we may use interest rate transactions such as swaps, caps and floors. There is no assurance that
the interest rate hedging transactions into which we enter will be effective in reducing our
exposure to interest rate risk. Hedging transactions are subject to correlation risk, which is the
risk that payment on our hedging transactions may not correlate exactly with our payment
obligations on senior securities. The use of interest rate transactions is a highly specialized
activity that involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. In an interest rate swap, we would agree to pay to the
other party to the interest rate swap (known as the counterparty) a fixed rate payment in
exchange for the counterparty agreeing to pay to us a variable rate payment intended to approximate
our variable rate payment obligations on outstanding leverage. The payment obligations would be
based on the notional amount of the swap. In an interest rate cap, we would pay a premium to the
counterparty up to the interest rate cap and, to the extent that a specified variable rate index
exceeds a predetermined fixed rate of interest, would receive from the counterparty payments equal
to the difference based on the notional amount of such cap. In an interest rate floor, we would be
entitled to receive, to the extent that a specified index falls below a predetermined interest
rate, payments of interest on a notional principal amount from the party selling the interest rate
floor. Depending on the state of interest rates in general, our use of interest rate transactions
could affect our ability to make required interest or dividend payments on our outstanding
leverage. To the extent there is a decline in interest rates, the value of the interest rate
transactions could decline. If the counterparty to an interest rate transaction defaults, we would
not be able to use the anticipated net receipts under the interest rate transaction to offset our
cost of financial leverage.
We may, but are not obligated to, enter into interest rate swap transactions intended to
reduce our interest rate risk with respect to our interest and dividend payment obligations under
our outstanding leverage. See Risk Factors Company Risks Hedging Strategy Risk.
26
Effects of Leverage
As of November 30, 2008, we were obligated to pay the following rates on our outstanding
Tortoise Notes and Tortoise Preferred Shares.
|
|
|
|
|
|
|
|
|
|
|
Aggregate Principal
|
|
Remaining Term
|
|
|
|
|
Amount/Liquidation
|
|
of Current Rate
|
|
Interest/Dividend
|
Title of Security
|
|
Preference
|
|
Period
|
|
Rate Per Annum
|
Tortoise Notes:
|
|
|
|
|
|
|
|
|
Series D Tortoise Notes
(1)
|
|
|
39,400,000
|
|
|
6.5 years through
12/21/14
|
|
6.07%
|
Series E Tortoise Notes
(1)
|
|
|
15,900,000
|
|
|
2.5 years through
6/17/11
|
|
5.56%
|
Series F Tortoise Notes
(1)
|
|
|
34,700,000
|
|
|
4.5 years through
6/17/13
|
|
6.02%
|
|
|
|
|
|
|
|
|
|
Tortoise Preferred Shares:
|
|
|
|
|
|
|
|
|
Series I Tortoise Preferred Shares
(2)
|
|
|
60,000,000
|
|
|
28 days
|
|
4.72%
|
Series II Tortoise Preferred Shares
(2)
|
|
|
35,000,000
|
|
|
7 days
|
|
2.35%
|
|
|
|
|
|
|
|
|
|
|
|
|
$185,000,000
|
(total)
|
|
|
|
|
|
|
|
(1)
|
|
Does not include commissions paid by us in connection with the issuance of these Notes.
|
|
(2)
|
|
Excludes commissions paid to the auction agent.
|
Assuming that the dividend rates payable on Tortoise Preferred Shares and the interest rates
payable on the Tortoise Notes remain as described above (an average annual cost of 5.01% based on
the amount of leverage outstanding at November 30, 2008), the annual return that our portfolio must
experience net of expenses, but excluding deferred and current taxes, in order to cover leverage
costs would be 3.71%.
The following table is designed to illustrate the effect of the foregoing level of leverage on
the return to a common stockholder, assuming hypothetical annual returns (net of expenses) of our
portfolio of -10% to 10%. As the table shows, the leverage generally increases the return to common
stockholders when portfolio return is positive or greater than the cost of leverage and decreases
the return when the portfolio return is negative or less than the cost of leverage. The figures
appearing in the table are hypothetical, and actual returns may be greater or less than those
appearing in the table.
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|
Assumed Portfolio Return (net of expenses)
|
|
|
-10
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%
|
|
|
-5
|
%
|
|
|
0
|
%
|
|
|
5
|
%
|
|
|
10
|
%
|
Corresponding Common Share Return
|
|
|
-28.4
|
%
|
|
|
-17.8
|
%
|
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-7.1
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%
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3.5
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%
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14.2
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%
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Because we use leverage, the amount of the fees paid to our Adviser for investment advisery
and management services are higher than if we did not use leverage because the fees paid are
calculated based on our Managed Assets, which include assets purchased with leverage. Therefore,
our Adviser has a financial incentive to use leverage, which creates a conflict of interest between
our Adviser and our common stockholders. Because payments on any leverage would be paid by us at a
specified rate, only our common stockholders would bear management fees and other expenses we
incur.
We cannot fully achieve the benefits of leverage until we have invested the proceeds resulting
from the use of leverage in accordance with our investment objective and policies. For further
information about leverage, see Risk Factors Additional Risks to Common Stockholders Leverage
Risk.
The markets for auction rate securities have continued to experience failed auctions. A
failed auction results when there are not enough bidders in the auction rates below the maximum
rate as prescribed by the terms of the security. When an auction fails, the rate is automatically
set at the maximum rate. A failed auction does not cause an acceleration of, or otherwise have any
impact on, outstanding principal amounts due, or in the case of preferred stock, the securitys
liquidation preference. In the case of our outstanding Tortoise Preferred Shares, the maximum rate
under the terms of those securities has been two hundred percent of the
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greater of: (i) the applicable AA Composite Commercial Paper Rate or the applicable Treasury
Index Rate or (ii) the applicable LIBOR.
As a result of the developments in the auction markets, we have taken steps to reduce our
exposure to the uncertainty and volatility of the auction markets, including refinancing some of
our auction rate securities with privately-placed senior notes. As of the date of this prospectus,
we had outstanding $185,000,000 in long-term leverage, with $95 million aggregate liquidation value
of our Tortoise Preferred Shares remaining in the auction market. Our remaining outstanding
long-term leverage consists of Tortoise Notes. We may issue additional senior securities,
including Tortoise Notes, to refinance our remaining auction rate securities. Common stockholders
will bear the costs of these refinancing efforts. See Additional Risks to Common
StockholdersLeverage Risk.
Recent Developments
In early 2008, the markets for auction rate securities began to fail and have continued to do
so as of the date of this prospectus. A failed auction results when there are not enough bidders
in the auction rates below the maximum rate as prescribed by the terms of the security. When an
auction fails, the rate is automatically set at the maximum rate. A failed auction does not cause
an acceleration of, or otherwise have any impact on, outstanding principal amounts due, or in the
case of preferred stock, the securitys liquidation preference. In the case of our outstanding
auction rate securities, the maximum rate under the terms of those securities has been two hundred
percent of the greater of: (i) the applicable AA Composite Commercial Paper Rate or the applicable
Treasury Index Rate or (ii) the applicable LIBOR.
As a result of the developments in the auction markets, we have taken steps to reduce our
exposure to the uncertainty and volatility of the auction markets. These steps include redeeming
auction rate senior securities and refinancing some of our auction rate securities with
privately-placed senior securities such as Senior Notes. As of the date of this prospectus, we had
outstanding $185 million in long-term leverage, with $95 million aggregate principal amount of
Tortoise Preferred Shares remaining in the auction market. Our remaining outstanding long-term
leverage consists of Senior Notes which pay interest at a fixed rate. Our currently outstanding
Tortoise Preferred Shares generally may be bought at auctions normally held every 28 days for
Series I and every 7 days for Series II. We may exercise our option to designate special rate
periods for our outstanding Tortoise Preferred Shares. We may issue additional senior securities
to refinance our remaining auction rate securities. Common stockholders will bear the costs of
these refinancing efforts.
Additionally, our capital structure was adversely affected by the deepening problems in the
broad stock market and the resulting dramatic decline in the value of MLP investments. As a result,
we were required to sell investments at inopportune times to reduce our outstanding leverage to
comply with the coverage ratios as mandated by the 1940 Act and our loan documents. See Risk
FactorsAdditional Risks to Common StockholdersLeverage Risk.
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RISK FACTORS
Investing in our securities involves risk, including the risk that you may receive little or
no return on your investment or even that you may
lose
part or all of your investment. Therefore,
before investing in any of our securities you should consider carefully the following risks, as
well as any risk factors included in the applicable prospectus supplement.
Company Risks
We are a non-diversified, closed-end management investment company designed primarily as a
long-term investment vehicle and not as a trading tool. An investment in our securities should not
constitute a complete investment program for any investor and involves a high degree of risk. Due
to the uncertainty in all investments, there can be no assurance that we will achieve our
investment objective.
The following are the general risks of investing in our securities that affect our ability to
achieve our investment objective. The risks below could lower the returns and distributions on
common stock and reduce the amount of cash and net assets available to make dividend payments on
preferred stock and interest payments on debt securities.
Recent Developments Risk
. Our capital structure and performance was adversely impacted by the
weakness in the credit markets and broad stock market, and the resulting rapid and dramatic
declines in the value of MLPs that occurred in late 2008, and may continue to be adversely affected
if the weakness in the credit and stock markets continue. If our NAV declines or remains volatile,
there is an increased risk that we may be required to reduce outstanding leverage, which could
adversely affect our stock price and ability to pay distributions at historical levels. A
sustained economic slowdown may adversely affect the ability of MLPs to sustain their historical
distribution levels, which in turn, may adversely affect our ability to sustain distributions at
historical levels. MLPs that have historically relied heavily on outside capital to fund their
growth have been impacted by the slowdown in the capital markets. The recovery of the MLP sector
is dependent on several factors, including the recovery of the financial sector, the general
economy and the commodity markets. Measures taken by the U.S. Government to stimulate the U.S.
economy may not be successful or may not have the intended effect.
Concentration Risk.
Under normal circumstances, we concentrate our investments in the energy
sector, with an emphasis on securities issued by MLPs and their affiliates in the energy
infrastructure sector, a subset of the energy sector. Risks inherent in the energy infrastructure
business of these types of MLPs and their affiliates include the following:
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Processing and coal MLPs may be directly affected by energy commodity prices. The volatility of commodity prices can
indirectly affect certain other MLPs due to the impact of prices on volume of commodities transported, processed,
stored or distributed. Pipeline MLPs are not subject to direct commodity price exposure because they do not own the
underlying energy commodity. While propane MLPs do own the underlying energy commodity, our Adviser seeks high quality
MLPs that are able to mitigate or manage direct margin exposure to commodity price levels.
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The profitability of MLPs, particularly processing and pipeline MLPs, may be materially impacted by the volume of
natural gas or other energy commodities available for transporting, processing, storing or distributing. A significant
decrease in the production of natural gas, oil, coal or other energy commodities, due to a decline in production from
existing facilities, import supply disruption, depressed commodity prices or otherwise, would reduce revenue and
operating income of MLPs and, therefore, the ability of MLPs to make distributions to partners.
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A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect MLP
revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse
economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory
actions that increase costs, or a shift in consumer demand for such products. Demand may also be adversely impacted
by consumer sentiment with respect to global warming and/or by any state or federal legislation intended to promote
the use of alternative energy sources such as bio-fuels.
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A portion of any one MLPs assets may be dedicated to natural gas reserves and other commodities that naturally
deplete over time, which could have a materially adverse impact on an MLPs ability to make distributions. Often the
MLPs depend upon exploration and development activities by third parties.
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MLPs employ a variety of means of increasing cash flow, including increasing utilization of existing facilities, expanding
operations through new construction, expanding operations through acquisitions, or securing additional long-term contracts.
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Thus, some
MLPs may be subject to construction risk, acquisition risk or other risk factors arising from their specific business strategies. A
significant slowdown in large energy companies disposition of energy infrastructure assets and other merger and acquisition activity
in the energy MLP industry could reduce the growth rate of cash flows
we receive from MLPs that grow through acquisitions.
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The profitability of MLPs could be adversely affected by changes in the regulatory environment. Most MLPs assets are
heavily regulated by federal and state governments in diverse matters, such as the way in which certain MLP assets are
constructed, maintained and operated and the prices MLPs may charge for their services. Such regulation can change
over time in scope and intensity. For example, a particular byproduct of an MLP process may be declared hazardous by a
regulatory agency and unexpectedly increase production costs. Moreover, many state and federal environmental laws
provide for civil as well as regulatory remediation, thus adding to the potential exposure an MLP may face.
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Extreme weather patterns, such as hurricane Ivan in 2004 and hurricane Katrina in 2005, could result in significant
volatility in the supply of energy and power and could adversely impact the value of the securities in which we
invest. This volatility may create fluctuations in commodity prices and earnings of companies in the energy
infrastructure industry.
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A rising interest rate environment could adversely impact the performance of MLPs. Rising interest rates could limit
the capital appreciation of equity units of MLPs as a result of the increased availability of alternative investments
at competitive yields with MLPs. Rising interest rates also may increase an MLPs cost of capital. A higher cost of
capital could limit growth from acquisition/expansion projects and limit MLP distribution growth rates.
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Since the September 11, 2001 terrorist attacks, the U.S. Government has issued public warnings indicating that energy
assets, specifically those related to pipeline infrastructure, production facilities and transmission and distribution
facilities, might be specific targets of terrorist activity. The continued threat of terrorism and related military
activity likely will increase volatility for prices in natural gas and oil and could affect the market for products of
MLPs.
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Holders of MLP units are subject to certain risks inherent in the partnership structure of MLPs including: (1) tax
risks (described below); (2) limited ability to elect or remove management; (3) limited voting rights, except with
respect to extraordinary transactions; and (4) conflicts of interest of the general partner, including those arising
from incentive distribution payments.
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Industry Specific Risk.
Energy infrastructure companies also are subject to risks specific to the industry they serve.
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Pipeline MLPs are subject to demand for crude oil or refined products in the markets served by the pipeline, sharp
decreases in crude oil or natural gas prices that cause producers to curtail production or reduce capital spending for
exploration activities, and environmental regulation. Demand for gasoline, which accounts for a substantial portion of
refined product transportation, depends on price, prevailing economic conditions in the markets served, and
demographic and seasonal factors. Pipeline MLP unit prices are primarily driven by distribution growth rates and
prospects for distribution growth. Pipeline MLPs are subject to regulation by FERC with respect to tariff rates these
companies may charge for pipeline transportation services. An adverse determination by FERC with respect to the tariff
rates of a pipeline MLP could have a material adverse effect on the business, financial condition, results of
operations and cash flows of that pipeline MLP and its ability to make cash distributions to its equity owners.
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Processing MLPs are subject to declines in production of natural gas fields, which utilize the processing facilities
as a way to market the gas, prolonged depression in the price of natural gas or crude oil refining, which curtails
production due to lack of drilling activity and declines in the prices of natural gas liquids products and natural gas
prices, resulting in lower processing margins.
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Propane MLPs are subject to earnings variability based upon weather patterns in the locations where the company
operates and the wholesale cost of propane sold to end customers. Propane MLP unit prices are based on safety in
distribution coverage ratios, interest rate environment and, to a lesser extent, distribution growth.
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Coal MLPs are subject to demand variability based on favorable weather conditions, strong or weak domestic economy,
the level of coal stockpiles in the customer base, and the general level of prices of competing sources of fuel for
electric generation. They also are subject to supply variability based on the geological conditions that reduce
productivity of mining operations, regulatory permits for mining activities and the availability of coal that meets
Clean Air Act standards. Demand and prices for coal may also be impacted by current and proposed laws, regulations
and/or trends, at the federal, state or local
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levels, to impose limitations on chemical emissions from coal-fired
power plants and other coal end-users. Any such limitations may reduce the demand for coal produced, transported or
delivered by coal MLPs.
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Marine shipping MLPs are subject to the demand for, and the level of consumption of, refined petroleum products, crude
oil or natural gas in the markets served by the marine shipping MLPs, which in turn could affect the demand for tank
vessel capacity and charter rates. These MLPs vessels and their cargoes are also subject to the risks of being
damaged or lost due to marine disasters, bad weather, mechanical failures, grounding, fire, explosions and collisions,
human error, piracy, and war and terrorism.
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MLP Risk.
We invest primarily in equity securities of MLPs and their affiliates. As a result,
we are subject to the risks associated with an investment in MLPs, including cash flow risk, tax
risk, deferred tax risk and capital market risk, as described in more detail below.
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Cash Flow Risk.
We derive substantially all of our cash flow from
investments in equity securities of MLPs and their affiliates. The
amount of cash that we have available to pay or distribute to holders
of our securities depends on the ability of the MLPs whose securities
we hold to make distributions to their partners and the tax character
of those distributions. We have no control over the actions of
underlying MLPs. The amount of cash that each individual MLP can
distribute to its partners will depend on the amount of cash it
generates from operations, which will vary from quarter to quarter
depending on factors affecting the energy infrastructure market
generally and on factors affecting the particular business lines of
the MLP. Available cash will also depend on the MLPs level of
operating costs (including incentive distributions to the general
partner), level of capital expenditures, debt service requirements,
acquisition costs (if any), fluctuations in working capital needs and
other factors.
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Tax Risk of MLPs.
Our ability to meet our investment objective will
depend on the level of taxable income, dividends and distributions we
receive from the MLPs and other securities of energy infrastructure
companies in which we invest, a factor over which we have no control.
The benefit we derive from our investment in MLPs depends largely on
the MLPs being treated as partnerships for federal income tax
purposes. As a partnership, an MLP has no federal income tax liability
at the entity level. If, as a result of a change in current law or a
change in an MLPs business, an MLP were treated as a corporation for
federal income tax purposes, the MLP would be obligated to pay federal
income tax on its income at the corporate tax rate. If an MLP were
classified as a corporation for federal income tax purposes, the
amount of cash available for distribution would be reduced and the
distributions we receive might be taxed entirely as dividend income.
Therefore, treatment of one or more MLPs as a corporation for federal
income tax purposes could affect our ability to meet our investment
objective and would reduce the amount of cash available to pay or
distribute to holders of our securities.
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Deferred Tax Risks of MLPs.
As a limited partner in the MLPs in which
we invest, we will receive a pro rata share of income, gains, losses
and deductions from those MLPs. Historically, a significant portion of
income from such MLPs has been offset by tax deductions. We will incur
a current tax liability on that portion of an MLPs income and gains
that is not offset by tax deductions and losses. The percentage of an
MLPs income and gains which is offset by tax deductions and losses
will fluctuate over time for various reasons. A significant slowdown
in acquisition activity by MLPs held in our portfolio could result in
a reduction of accelerated depreciation generated by new acquisitions,
which may result in increased current income tax liability to us.
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We will accrue deferred income taxes for any future tax liability
associated with that portion of MLP distributions considered to be a
tax-deferred return of capital as well as capital appreciation of our
investments. Upon the sale of an MLP security, we may be liable for
previously deferred taxes. We will rely to some extent on information
provided by the MLPs, which is not necessarily timely, to estimate
deferred tax liability for purposes of financial statement reporting
and determining our NAV. From time to time we will modify our
estimates or assumptions regarding our deferred tax liability as new
information becomes available.
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Capital Market Risk
. Global financial markets and economic conditions
have been, and continue to be, volatile due to a variety of factors,
including significant write-offs in the financial services sector. As
a result, the cost of raising capital in the debt and equity capital
markets has increased substantially while the ability to raise capital
from those markets has diminished significantly. In particular, as a
result of concerns about the general stability of financial markets
and specifically the solvency of lending counterparties, the cost of
raising capital from the credit markets generally has increased as
many lenders and institutional investors have increased interest
rates, enacted tighter lending standards, refused to refinance debt on
existing terms or at all and reduced, or in some cases ceased to
provide, funding to borrowers. In addition, lending counterparties
under existing revolving credit facilities and other debt instruments
may be unwilling or unable to meet their funding obligations.
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Due to these factors, MLPs may be unable to obtain new debt or equity
financing on acceptable terms. If funding is not available when
needed, or is available only on unfavorable terms, MLPs may not be
able to meet their obligations as they come due. Moreover, without
adequate funding, MLPs may be unable to execute their growth
strategies, complete future acquisitions, take advantage of other
business opportunities or respond to competitive pressures, any of
which could have a material adverse effect on their revenues and
results of operations.
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Equity Securities Risk.
MLP common units and other equity securities can be affected by
macro-economic and other factors affecting the stock market in general, expectations of interest
rates, investor sentiment towards MLPs or the energy sector, changes in a particular issuers
financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in
the case of MLPs, generally measured in terms of distributable cash flow). Prices of common units
of individual MLPs and other equity securities also can be affected by fundamentals unique to the
partnership or company, including size, earnings power, coverage ratio and characteristics and
features of different classes of securities.
Investing in securities of smaller companies may involve greater risk than is associated with
investing in more established companies. Companies with smaller capitalization may have limited
product lines, markets or financial resources; may lack management depth or experience; and may be
more vulnerable to adverse general market or economic developments than larger more established
companies.
Because MLP convertible subordinated units generally convert to common units on a one-to-one
ratio, the price that we can be expected to pay upon purchase or to realize upon resale is
generally tied to the common unit price less a discount. The size of the discount varies depending
on a variety of factors including the likelihood of conversion, the length of time remaining to
conversion and the size of the block purchased.
The price of I-Shares and their volatility tend to be correlated to the price of common units,
although the price correlation is not precise.
Hedging Strategy Risk.
We may use interest rate transactions for hedging purposes only, in an
attempt to reduce the interest rate risk arising from our leveraged capital structure. There is no
assurance that the interest rate hedging transactions into which we enter will be effective in
reducing our exposure to interest rate risk. Hedging transactions are subject to correlation risk,
which is the risk that payment on our hedging transactions may not correlate exactly with our
payment obligations on senior securities.
Interest rate transactions that we may use for hedging purposes will expose us to certain
risks that differ from the risks associated with our portfolio holdings. There are economic costs
of hedging reflected in the price of interest rate swaps, floors, caps and similar techniques, the
costs of which can be significant, particularly when long-term interest rates are substantially
above short-term rates. In addition, our success in using hedging instruments is subject to our
Advisers ability to predict correctly changes in the relationships of such hedging instruments to
our leverage risk, and there can be no assurance that our Advisers judgment in this respect will
be accurate. Consequently, the use of hedging transactions might result in a poorer overall
performance, whether or not adjusted for risk, than if we had not engaged in such transactions.
Depending on the state of interest rates in general, our use of interest rate transactions
could enhance or decrease the cash available to us for payment of distributions, dividends or
interest, as the case may be. To the extent there is a decline in interest rates, the value of
interest rate swaps or caps could decline, and result in a decline in our net assets. In addition,
if the counterparty to an interest rate transaction defaults, we would not be able to use the
anticipated net receipts under the interest rate swap or cap to offset our cost of financial
leverage.
Competition Risk.
A number of alternatives to us as vehicles for investment in a portfolio of
energy infrastructure MLPs and their affiliates, including other publicly traded investment
companies and private funds, currently exist. In addition, recent tax law changes have increased
the ability of regulated investment companies or other institutions to invest in MLPs. These
competitive conditions may adversely impact our ability to meet our investment objective, which in
turn could adversely impact our ability to make distributions or interest or dividend payments.
Restricted Securities Risk.
We may invest up to 50% of total assets in restricted securities.
Restricted securities are less liquid than securities traded in the open market because of
statutory and contractual restrictions on resale. Such securities are, therefore, unlike securities
that are traded in the open market, which can be expected to be sold immediately if the market is
adequate. As discussed further below, this lack of liquidity creates special risks for us. However,
we could sell such securities in private transactions with a limited number of purchasers or in
public offerings under the 1933 Act. MLP convertible subordinated units generally convert to
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publicly-traded common units upon the passage of time and/or satisfaction of certain financial
tests. Although the means by which convertible subordinated units convert into senior common units
depend on a securitys specific terms, MLP convertible subordinated units typically are exchanged
for common shares.
Restricted securities are subject to statutory and contractual restrictions on their public
resale, which may make it more difficult to value them, may limit our ability to dispose of them
and may lower the amount we could realize upon their sale. To enable us to sell our holdings of a
restricted security not registered under the 1933 Act, we may have to cause those securities to be
registered. The expenses of registering restricted securities may be determined at the time we buy
the securities. When we must arrange registration because we wish to sell the security, a
considerable period may elapse between the time the decision is made to sell the security and the
time the security is registered so that we could sell it. We would bear the risks of any downward
price fluctuation during that period.
Liquidity Risk.
Although common units of MLPs trade on the NYSE, NYSE Alternext U.S.
(formerly known as AMEX), and the NASDAQ National Market, certain MLP securities may trade less
frequently than those of larger companies due to their smaller capitalizations. In the event
certain MLP securities experience limited trading volumes, the prices of such MLPs may display
abrupt or erratic movements at times. Additionally, it may be more difficult for us to buy and sell
significant amounts of such securities without an unfavorable impact on prevailing market prices.
As a result, these securities may be difficult to dispose of at a fair price at the times when we
believe it is desirable to do so. Investment of our capital in securities that are less actively
traded or over time experience decreased trading volume may restrict our ability to take advantage
of other market opportunities or to dispose of securities. This also may affect adversely our
ability to make required interest payments on the debt securities and dividend distributions on the
preferred stock, to redeem such securities, or to meet asset coverage requirements.
Valuation Risk.
Market prices generally will not be available for MLP convertible
subordinated units, or securities of private companies, and the value of such investments
ordinarily will be determined based on fair valuations determined by our Adviser pursuant to
procedures adopted by the Board of Directors. Similarly, common units acquired through direct
placements will be valued based on fair value determinations because of their restricted nature;
however, our Adviser expects that such values will be based on a discount from publicly available
market prices. Restrictions on resale or the absence of a liquid secondary market may adversely
affect our ability to determine our NAV. The sale price of securities that are not readily
marketable may be lower or higher than our most recent determination of their fair value.
Additionally, the value of these securities typically requires more reliance on the judgment of our
Adviser than that required for securities for which there is an active trading market. Due to the
difficulty in valuing these securities and the absence of an active trading market for these
investments, we may not be able to realize these securities true value, or may have to delay their
sale in order to do so. This may affect adversely our ability to make required interest payments on
the debt securities and dividend distributions on the preferred stock, to redeem such securities,
or to meet asset coverage requirements.
Nondiversification Risk.
We are a non-diversified, closed-end management investment company
under the 1940 Act and are not treated as a regulated investment company under the Internal Revenue
Code. Accordingly, there are no regulatory limits under the 1940 Act or the Internal Revenue Code
on the number or size of securities that we hold and we may invest more assets in fewer issuers as
compared to a diversified fund. There currently are approximately 70 companies presently organized
as MLPs and only a limited number of those companies operate energy infrastructure assets. We
select MLP investments from this small pool of issuers. We may invest in non-MLP securities issued
by energy infrastructure companies to a lesser degree, consistent with our investment objective and
policies.
Tax Risk
. Because we are treated as a corporation for federal income tax purposes, our
financial statements reflect deferred tax assets or liabilities according to generally accepted
accounting principles. Deferred tax assets may constitute a relatively high percentage of NAV.
Realization of deferred tax assets including net operating loss and capital loss carryforwards, are
dependent, in part, on generating sufficient taxable income of the appropriate character prior to
expiration of the loss carryforwards. Unexpected significant decreases in MLP cash distributions or
significant declines in the fair value of our MLP investments, among other factors, may change our
assessment regarding the recoverability of deferred tax assets and would likely result in a
valuation allowance, or recording of a larger allowance. If a valuation allowance is required to
reduce the deferred tax asset in the future, it could have a material impact on our NAV and results
of operations in the period it is recorded. Conversely, in periods of generally increasing MLP
prices, we will accrue a deferred tax liability to the extent the fair value of our assets exceeds
our tax basis. We may incur significant tax liability during periods in which gains on MLP
investments are realized.
Interest Rate Risk.
Generally, when market interest rates rise, the values of debt securities
decline, and vice versa. Our investment in such securities means that the NAV and market price of
our common stock will tend to decline if market interest rates rise. During periods of declining
interest rates, the issuer of a security may exercise its option to prepay principal earlier than
scheduled, forcing us to reinvest in lower yielding securities. This is known as call or prepayment
risk. Lower grade securities frequently have call features
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that allow the issuer to repurchase the security prior to its stated maturity. An issuer may
redeem a lower grade obligation if the issuer can refinance the debt at a lower cost due to
declining interest rates or an improvement in the credit standing of the issuer.
Below Investment Grade Securities Risk.
Investing in lower grade debt instruments involves
additional risks than investment grade securities. Adverse changes in economic conditions are more
likely to lead to a weakened capacity of a below investment grade issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn could adversely affect
the ability of highly leveraged issuers to service their obligations or to repay their obligations
upon maturity. Similarly, downturns in profitability in the energy infrastructure industry could
adversely affect the ability of below investment grade issuers in that industry to meet their
obligations. The market values of lower quality securities tend to reflect individual developments
of the issuer to a greater extent than do higher quality securities, which react primarily to
fluctuations in the general level of interest rates.
The secondary market for below investment grade securities may not be as liquid as the
secondary market for more highly rated securities. There are fewer dealers in the market for below
investment grade securities than investment grade obligations. The prices quoted by different
dealers may vary significantly, and the spread between the bid and asked price is generally much
larger than for higher quality instruments. Under adverse market or economic conditions, the
secondary market for below investment grade securities could contract further, independent of any
specific adverse change in the condition of a particular issuer, and these instruments may become
illiquid. As a result, it may be more difficult to sell these securities or we may be able to sell
the securities only at prices lower than if such securities were widely traded. This may affect
adversely our ability to make required dividend or interest payments on our outstanding senior
securities. Prices realized upon the sale of such lower-rated or unrated securities, under these
circumstances, may be less than the prices used in calculating our NAV.
Because investors generally perceive that there are greater risks associated with lower
quality securities of the type in which we may invest a portion of our assets, the yields and
prices of such securities may tend to fluctuate more than those for higher rated securities. In the
lower quality segments of the debt securities market, changes in perceptions of issuers
creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in
higher quality segments of the debt securities market, resulting in greater yield and price
volatility.
Factors having an adverse impact on the market value of below investment grade securities may
have an adverse effect on our NAV and the market value of our common stock. In addition, we may
incur additional expenses to the extent we are required to seek recovery upon a default in payment
of principal or interest on our portfolio holdings. In certain circumstances, we may be required to
foreclose on an issuers assets and take possession of its property or operations. In such
circumstances, we would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
Counterparty Risk.
We may be subject to credit risk with respect to the counterparties to
certain derivative agreements entered into by us. If a counterparty becomes bankrupt or otherwise
fails to perform its obligations under a derivative contract due to financial difficulties, we may
experience significant delays in obtaining any recovery under the derivative contract in a
bankruptcy or other reorganization proceeding. We may obtain only a limited recovery or may obtain
no recovery in such circumstances.
Effects of Terrorism.
The U.S. securities markets are subject to disruption as a result of
terrorist activities, such as the terrorist attacks on the World Trade Center on September 11,
2001; the war in Iraq and its aftermath; other hostilities; and other geopolitical events. Such
events have led, and in the future may lead, to short-term market volatility and may have long-term
effects on the U.S. economy and markets.
Anti-Takeover Provisions.
Our Charter and Bylaws include provisions that could delay, defer
or prevent other entities or persons from acquiring control of us, causing us to engage in certain
transactions or modifying our structure. These provisions may be regarded as anti-takeover
provisions. Such provisions could limit the ability of common stockholders to sell their shares at
a premium over the then-current market prices by discouraging a third party from seeking to obtain
control of us. See Certain Provisions in Our Charter and Bylaws.
Management Risk.
Our Adviser was formed in October 2002 to provide portfolio management to
institutional and high-net worth investors seeking professional management of their MLP
investments. Our Adviser has been managing investments in portfolios of MLP investments since that
time, including since May 2005, management of our investments, and management of 3 other
publicly-traded and 2 privately held closed-end management investment companies. As of January 31,
2009, our Adviser had client assets under management of approximately $1.7 billion. To the extent
that our Advisers assets under management continue to grow, our Adviser may have to hire
additional personnel and, to the extent it is unable to hire qualified individuals, its operations
may be adversely affected.
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Additional Risks to Common Stockholders
Leverage Risk.
Our use of leverage through the issuance of Tortoise Preferred Shares and
Tortoise Notes along with the issuance of any additional preferred stock or debt securities, and
any additional borrowings or other transactions involving indebtedness (other than for temporary or
emergency purposes) are or would be considered senior securities for purposes of the 1940 Act and
create risks. Leverage is a speculative technique that may adversely affect common stockholders. If
the return on securities acquired with borrowed funds or other leverage proceeds does not exceed
the cost of the leverage, the use of leverage could cause us to lose money. Successful use of
leverage depends on our Advisers ability to predict or hedge correctly interest rates and market
movements, and there is no assurance that the use of a leveraging strategy will be successful
during any period in which it is used. Because the fee paid to our Adviser will be calculated on
the basis of Managed Assets, the fees will increase when leverage is utilized, giving our Adviser
an incentive to utilize leverage.
Our issuance of senior securities involves offering expenses and other costs, including
interest payments, which are borne indirectly by our common stockholders. Fluctuations in interest
rates could increase interest or dividend payments on our senior securities, and could reduce cash
available for distributions on common stock. Increased operating costs, including the financing
cost associated with any leverage, may reduce our total return to common stockholders.
The 1940 Act and/or the rating agency guidelines applicable to senior securities impose asset
coverage requirements, dividend limitations, voting right requirements (in the case of the senior
equity securities), and restrictions on our portfolio composition and our use of certain investment
techniques and strategies. The terms of any senior securities or other borrowings may impose
additional requirements, restrictions and limitations that are more stringent than those currently
required by the 1940 Act, and the guidelines of the rating agencies that rate outstanding senior
securities. These requirements may have an adverse effect on us and may affect our ability to pay
distributions on common stock and preferred stock. To the extent necessary, we intend to redeem our
senior securities to maintain the required asset coverage. Doing so may require that we liquidate
portfolio securities at a time when it would not otherwise be desirable to do so. Nevertheless, it
is not anticipated that the 1940 Act requirements, the terms of any senior securities or the rating
agency guidelines will impede our Adviser in managing our portfolio in accordance with our
investment objective and policies. See Leverage Use of Leverage.
Market Impact Risk.
The sale of our common stock (or the perception that such sales may
occur) may have an adverse effect on prices in the secondary market for our common stock. An
increase in the number of common shares available may put downward pressure on the market price for
our common stock. Our ability to sell shares of common stock below NAV may increase this pressure.
These sales also might make it more difficult for us to sell additional equity securities in the
future at a time and price we deem appropriate.
Dilution Risk.
The voting power of current stockholders will be diluted to the extent that
current stockholders do not purchase shares in any future common stock offerings or do not purchase
sufficient shares to maintain their percentage interest. In addition, if we sell shares of common
stock below NAV, our NAV will fall immediately after such issuance. See Description of
Securities Common Stock Issuance of Additional Shares which includes a table reflecting the
dilutive effect of selling our common stock below NAV.
If we are unable to invest the proceeds of such offering as intended, our per share
distribution may decrease and we may not participate in market advances to the same extent as if
such proceeds were fully invested as planned.
Market Discount Risk.
Our common stock has traded both at a premium and at a discount in
relation to NAV. We cannot predict whether our shares will trade in the future at a premium or
discount to NAV. Shares of closed-end investment companies frequently trade at a discount from NAV,
but in some cases have traded above NAV. Continued development of alternatives as a vehicle for
investment in MLP securities may contribute to reducing or eliminating any premium or may result in
our shares trading at a discount. The risk of the shares of common stock trading at a discount is a
risk separate from the risk of a decline in our NAV as a result of investment activities. Our NAV
will be reduced immediately following an offering of our common or preferred stock, due to the
offering costs for such stock, which are borne entirely by us. Although we also bear the offering
costs of debt securities, such costs are amortized over time and therefore do not impact our NAV
immediately following an offering.
Whether stockholders will realize a gain or loss for federal income tax purposes upon the sale
of our common stock depends upon whether the market value of the common shares at the time of sale
is above or below the stockholders basis in such shares, taking into account transaction costs,
and is not directly dependent upon our NAV. Because the market value of our common stock will be
35
determined by factors such as the relative demand for and supply of the shares in the market,
general market conditions and other factors beyond our control, we cannot predict whether our
common stock will trade at, below or above NAV, or at, below or above the public offering price for
common stock.
Additional Risks to Senior Security Holders
Generally, an investment in preferred stock or debt securities (collectively, senior
securities) is subject to the following risks:
Interest Rate Risk.
Dividends and interest payable on our senior securities are subject to
interest rate risk. To the extent that dividends or interest on such securities are based on
short-term rates, our leverage costs may rise so that the amount of dividends or interest due to
holders of senior securities would exceed the cash flow generated by our portfolio securities. To
the extent that any of our leverage costs are fixed, our leverage costs may increase when our
special rate periods terminate or our debt securities mature. This might require that we sell
portfolio securities at a time when we would otherwise not do so, which may adversely affect our
future ability to generate cash flow. In addition, rising market interest rates could negatively
impact the value of our investment portfolio, reducing the amount of assets serving as asset
coverage for senior securities. See Recent Developments.
Senior Leverage Risk.
Preferred stock will be junior in liquidation and with respect to
distribution rights to debt securities and any other borrowings. Senior securities representing
indebtedness may constitute a substantial lien and burden on preferred stock by reason of their
prior claim against our income and against our net assets in liquidation. We may not be permitted
to declare dividends or other distributions with respect to any series of preferred stock unless at
such time we meet applicable asset coverage requirements and the payment of principal or interest
is not in default with respect to the Tortoise Notes or any other borrowings.
Our debt securities, upon issuance, are expected to be unsecured obligations and, upon our
liquidation, dissolution or winding up, will rank: (1) senior to all of our outstanding common
stock and any outstanding preferred stock; (2) on a parity with any of our unsecured creditors and
any unsecured senior securities representing our indebtedness; and (3) junior to any of our secured
creditors. Secured creditors of ours may include, without limitation, parties entering into
interest rate swap, floor or cap transactions, or other similar transactions with us that create
liens, pledges, charges, security interests, security agreements or other encumbrances on our
assets.
Ratings and Asset Coverage Risk.
To the extent that senior securities are rated, a rating
does not eliminate or necessarily mitigate the risks of investing in our senior securities, and a
rating may not fully or accurately reflect all of the credit and market risks associated with a
security. A rating agency could downgrade the rating of our shares of preferred stock or debt
securities, which may make such securities less liquid at an auction or in the secondary market,
though probably with higher resulting interest rates. If a rating agency downgrades, or indicates a
potential downgrade to, the rating assigned to a senior security, we may alter our portfolio or
redeem a portion of our senior securities. We may voluntarily redeem a senior security under
certain circumstances to the extent permitted by its governing documents.
Inflation Risk.
Inflation is the reduction in the purchasing power of money resulting from an
increase in the price of goods and services. Inflation risk is the risk that the inflation adjusted
or real value of an investment in preferred stock or debt securities or the income from that
investment will be worth less in the future. As inflation occurs, the real value of the preferred
stock or debt securities and the dividend payable to holders of preferred stock or interest payable
to holders of debt securities declines.
Decline in Net Asset Value Risk.
A material decline in our NAV may impair our ability to
maintain required levels of asset coverage for our preferred stock or debt securities.
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MANAGEMENT OF THE COMPANY
Directors and Officers
Our business and affairs are managed under the direction of our Board of Directors.
Accordingly, our Board of Directors provides broad supervision over our affairs, including
supervision of the duties performed by our Adviser. Our officers are responsible for our day-to-day
operations. The names, ages and addresses of each of our directors and officers, together with
their principal occupations and other affiliations during the past five years, are set forth below.
Each director and officer will hold office until his successor is duly elected and qualified, or
until he resigns or is removed in the manner provided by law. Unless otherwise indicated, the
address of each director and officer is 11550 Ash Street, Leawood, Kansas 66211. Our Board of
Directors consists of a majority of directors who are not interested persons (as defined in the
1940 Act) of our Adviser or its affiliates.
Investment Adviser
Pursuant to an advisory agreement, our Adviser provides us with investment research and advice
and furnishes us with an investment program consistent with our investment objective and policies,
subject to the supervision of the Board. Our Adviser determines which portfolio securities will be
purchased or sold, arranges for the placing of orders for the purchase or sale of portfolio
securities, selects brokers or dealers to place those orders, maintains books and records with
respect to our securities transactions and reports to the Board on our investments and performance.
Our Adviser is located at 11550 Ash Street, Suite 300, Leawood, Kansas 66211. Our Adviser
specializes in managing portfolios of investments in MLPs and other energy companies. Our Adviser
was formed in October 2002 to provide portfolio management services to institutional and high-net
worth investors seeking professional management of their MLP investments. As of January 31, 2009,
our Adviser had approximately $1.7 billion of client assets under management. Our Advisers
investment committee is comprised of five seasoned portfolio managers.
Our Adviser also serves as investment adviser to Tortoise Energy Infrastructure Corporation
(TYG) and Tortoise North American Energy Corporation (TYN), which are nondiversified,
closed-end investment management companies, and managed accounts that invest in MLPs. TYG, which
commenced operations on February 27, 2004, invests primarily in equity securities of MLPs and their
affiliates in the energy infrastructure sector. TYN, which commenced operations on October 31,
2005, invests primarily in equity securities of companies in the energy sector whose primary
operations are in North America. Our Adviser also serves as the investment adviser to Tortoise
Capital Resources Corporation (TTO), a non-diversified closed-end management investment company
that has elected to be regulated as a business development company under the 1940 Act. TTO, which
commenced operations on December 8, 2005, invests primarily in privately held and micro-cap public
energy companies operating in the midstream and downstream segments, and to a lesser extent the
upstream segment. In addition, our Adviser serves as the investment adviser to two privately held,
closed-end management investment companies. To the extent certain MLP securities or other energy
infrastructure company securities meet our investment objective and the objectives of other
investment companies or accounts managed by our Adviser, we may compete with such companies or
accounts for the same investment opportunities.
FCM Tortoise, L.L.C. (FCM) and Kansas City Equity Partners LC (KCEP) control our Adviser
through their equity ownership and management rights in our Adviser. FCM and KCEP have no
operations and serve as holding companies. FCMs ownership interest was formerly held by Fountain
Capital Management, L.L.C. (Fountain Capital).
Our Adviser has 33 full-time employees, including the five members of the investment committee
of our Adviser.
The investment management of our portfolio is the responsibility of our Advisers investment
committee. The investment committees members are H. Kevin Birzer, Zachary A. Hamel, Kenneth P.
Malvey, Terry C. Matlack and David J. Schulte, all of whom share responsibility for such investment
management. It is the policy of the investment committee that any one member can require our
Adviser to sell a security and any one member can veto the committees decision to invest in a
security. Each committee member has been a portfolio manager since TYG commenced operations in
February 2004.
H. Kevin Birzer.
Mr. Birzer has been a Managing Director of our Adviser since 2002
and also is a Member of Fountain Capital. Mr. Birzer has also served as a Director of ours since
inception and of each of TYG, TYN, TTO, and two private investment companies managed by our Adviser
since inception. Mr. Birzer, who joined Fountain Capital in 1990, has 22 years of investment
experience including 19 in high-yield securities. Mr. Birzer began his career with Peat Marwick.
His subsequent experience includes three years working as a Vice President for F. Martin Koenig &
Co., focusing on equity and option investments, and three years at Drexel Burnham Lambert, where he
was a Vice President in the Corporate Finance Department. Mr. Birzer graduated with a Bachelor
37
of Business Administration degree from the University of Notre Dame and holds a Master of
Business Administration degree from New York University. He earned his CFA designation in 1988.
Zachary A. Hamel.
Mr. Hamel has been a Managing Director of our Adviser since 2002
and also is a Partner with Fountain Capital. Mr. Hamel has served as our Senior Vice President
since 2005, as Senior Vice President of TYG, TYN and two private investment companies managed by
our Adviser since 2007, and as Senior Vice President of TTO since 2005. Mr. Hamel also served as
our Secretary from inception to April 2007 and as Secretary of TYG, TYN and TTO from their
inception to April 2007. Mr. Hamel joined Fountain Capital in 1997. He covered the energy,
chemicals and utilities sectors. Prior to joining Fountain Capital, Mr. Hamel worked for the
Federal Deposit Insurance Corporation (FDIC) for eight years as a Bank Examiner and a Regional
Capital Markets Specialist. Mr. Hamel graduated from Kansas State University with a Bachelor of
Science in Business Administration. He also attained a Master in Business Administration from the
University of Kansas School of Business. He earned his CFA designation in 1998.
Kenneth P. Malvey.
Mr. Malvey has been a Managing Director of our Adviser since 2002
and also is a Partner with Fountain Capital. Mr. Malvey has served as our Treasurer and as
Treasurer of TYG and TYN since November 2005, as Treasurer of TTO since September 2005, and as
Treasurer of two private investment companies managed by our Adviser since 2007; as our Senior Vice
President since 2005, as Senior Vice President of TTO since 2005, and as Senior Vice President of
TYG, TYN and the two private investment companies since 2007; as our Assistant Treasurer and
Assistant Treasurer of TYG and TYN from inception to November 2005; and as Chief Executive Officer
of one of the private investment companies since December 2008. Prior to joining Fountain Capital
in 2002, Mr. Malvey was one of three members of the Global Office of Investments for GE Capitals
Employers Reinsurance Corporation. Most recently he was the Global Investment Risk Manager for a
portfolio of approximately $24 billion of fixed-income, public equity and alternative investment
assets. Prior to joining GE Capital in 1996, Mr. Malvey was a Bank Examiner and Regional Capital
Markets Specialist with the FDIC for nine years. Mr. Malvey graduated with a Bachelor of Science
degree in Finance from Winona State University, Winona, Minnesota. He earned his CFA designation in
1996.
Terry C. Matlack.
Mr. Matlack has been a Managing Director of our Adviser since 2002
and has also served as our Chief Financial Officer and Director since inception and as Chief
Financial Officer and Director since inception of TYG, TYN, TTO and two private investment
companies managed by our Adviser. From 2001 to 2002, Mr. Matlack was a full-time Managing Director
of KCEP. Prior to joining KCEP, from 1998 to 2001, Mr. Matlack was President of GreenStreet Capital
and its affiliates in the telecommunications service industry. Mr. Matlack served as our Chief
Compliance Officer and as Chief Compliance Officer of TYG and TYN from inception through May 2006;
as our Treasurer and Treasurer of TYG and TYN from inception to November 2005; as our Assistant
Treasurer and Assistant Treasurer of TYG and TYN from November 2005 to April 2008, as Assistant
Treasurer of TTO and one of the private investment companies from inception to April 2008, and as
Assistant Treasurer of the other private investment company since its inception. Prior to 1995, he
was Executive Vice President and a member of the board of directors of W.K. Communications, Inc., a
cable television acquisition company, and Chief Operating Officer of W.K. Cellular, a cellular
rural service area operator. He also has served as a specialist in corporate finance with George K.
Baum & Company, and as Executive Vice President of Corporate Finance at B.C. Christopher Securities
Company. Mr. Matlack graduated with a Bachelor of Science in Business Administration from Kansas
State University and holds a Masters of Business Administration and a Juris Doctorate from the
University of Kansas. He earned his CFA designation in 1985.
David J. Schulte.
Mr. Schulte has been a Managing Director of our Adviser since 2002;
has served as our and TYGs Chief Executive Officer and President since 2005; as Chief Executive
Officer of TYN since 2005 and President of TYN from 2005 to September 2008; as Chief Executive
Officer of TTO since 2005 and as President of TTO from 2005 to April 2007; as President of two
private investment companies managed by our Adviser since 2007; as Chief Executive Officer of one
of the two private investment companies since 2007 and as Chief Executive Officer of the other
private investment company from 2007 to December 2008. From 1993 to 2002, Mr. Schulte was a
full-time Managing Director of KCEP. While a Managing Director of KCEP, he led private financing
for two growth MLPs in the energy infrastructure sector. Since February 2004, Mr. Schulte has been
an employee of the Adviser. Prior to joining KCEP in 1993, Mr. Schulte had over five years of
experience completing acquisition and public equity financings as an investment banker at the
predecessor of Oppenheimer & Co, Inc. From 1986 to 1989, he was a securities law attorney.
Mr. Schulte holds a Bachelor of Science degree in Business Administration from Drake University and
a Juris Doctorate degree from the University of Iowa. He passed the CPA examination in 1983 and
earned his CFA designation in 1992.
The statement of additional information provides additional information about the compensation
structure of, the other accounts managed by, and the ownership of our securities by the portfolio
managers listed above.
38
Compensation and Expenses
Under our Advisory agreement we pay our Adviser a fee equal to 0.95% annually of our average
monthly Managed Assets for the services rendered by it. Managed Assets means our total assets
(including any assets attributable to any leverage that may be outstanding but excluding any net
deferred tax assets) minus the sum of accrued liabilities other than (1) net deferred tax
liabilities, (2) debt entered into for purposes of leverage, and (3) the aggregate liquidation
preference of any outstanding preferred stock. Our Adviser does not charge an advisory fee based
on net deferred tax assets. Because the fee paid to the Adviser is determined on the basis of our
Managed Assets, the Advisers interest in determining whether we should incur additional leverage
will conflict with our interests. Because deferred taxes are not taken into account in calculating
Managed Assets, the Adviser may have an incentive to defer taxes rather than incur taxes in the
current period. When we have a high level of deferred tax liabilities at the time the Advisers
fee is calculated, the Advisers fee is higher than it would be if we had a lower level of deferred
tax liabilities. Our average monthly Managed Assets are determined for the purpose of calculating
the management fee by taking the average of the monthly determinations of Managed Assets during a
given calendar quarter. The fees are payable for each calendar quarter within five days after the
end of that quarter.
A discussion regarding the basis of the Board of Directors decision to approve the selection
of our Adviser and our Advisory agreement is available in our annual report to stockholders for the
period ended November 30, 2008. Our Advisory agreement was most recently approved by the Board of
Directors in November 2008.
We bear all expenses not specifically assumed by our Adviser incurred in our operations and
will bear the expenses related to all future offerings. Expenses we bear will include, but are not
limited to, the following: (1) expenses of maintaining and continuing our existence and related
overhead, including, to the extent services are provided by personnel of our Adviser or its
affiliates, office space and facilities and personnel compensation, training and benefits; (2) our
registration under the 1940 Act; (3) commissions, spreads, fees and other expenses connected with
the acquisition, holding and disposition of securities and other investments including placement
and similar fees in connection with direct placements entered into on our behalf; (4) auditing,
accounting and legal expenses; (5) taxes and interest; (6) governmental fees; (7) expenses of
listing our shares with a stock exchange, and expenses of issue, sale, repurchase and redemption
(if any) of our interests, including expenses of conducting tender offers for the purpose of
repurchasing common stock; (8) expenses of registering and qualifying us and our shares under
federal and state securities laws and of preparing and filing registration statements and
amendments for such purposes; (9) expenses of communicating with stockholders, including website
expenses and the expenses of preparing, printing and mailing press releases, reports and other
notices to stockholders and of meetings of stockholders and proxy solicitations therefor; (10)
expenses of reports to governmental officers and commissions; (11) insurance expenses; (12)
association membership dues; (13) fees, expenses and disbursements of custodians and subcustodians
for all services to us (including without limitation safekeeping of funds, securities and other
investments, keeping of books, accounts and records, and determination of NAVs); (14) fees,
expenses and disbursements of transfer agents, dividend and interest paying agents, stockholder
servicing agents and registrars for all services to us; (15) compensation and expenses of our
directors who are not members of our Advisers organization; (16) pricing and valuation services
employed by us; (17) all expenses incurred in connection with leveraging of our assets through a
line of credit or other indebtedness or issuing and maintaining notes or preferred stock; (18) all
expenses incurred in connection with offerings of our common and preferred stock and debt
securities; and (19) such non-recurring items as may arise, including expenses incurred in
connection with litigation, proceedings and claims and our obligation to indemnify our directors,
officers and stockholders with respect thereto.
CLOSED-END COMPANY STRUCTURE
We are a non-diversified closed-end investment company and as such our stockholders will not
have the right to cause us to redeem their shares. Instead, our common stock trades in the open
market at a price that will be a function of several factors, including distribution levels (which
are in turn affected by expenses), NAV, call protection, dividend stability, portfolio credit
quality, relative demand for and supply of such shares in the market, general market and economic
conditions and other factors.
Shares of closed-end companies frequently trade at a discount to their NAV. This
characteristic of shares of closed-end management investment companies is a risk separate and
distinct from the risk that our NAV may decrease as a result of investment activities. To the
extent our common shares do trade at a discount, the Board of Directors may from time to time
engage in open-market repurchases or tender offers for shares after balancing the benefit to
stockholders of the increase in the NAV per share resulting from such purchases against the
decrease in our assets, the potential increase in the ratio of our expenses to our assets and the
decrease in asset coverage with respect to any outstanding preferred stock, including Tortoise
Preferred Shares. The Board of Directors believes that, in addition to the beneficial effects
described above, any such purchase or tender offers may result in the temporary narrowing of any
discount but will not have any long-term effect on the level of any discount. There is no guarantee
or
39
assurance that the Board of Directors will decide to engage in any of these actions. Nor is
there any guarantee or assurance that such actions, if undertaken, would result in the shares
trading at a price equal or close to NAV per share. Any share repurchase or tender offers will be
made in accordance with requirements of the Exchange Act, the 1940 Act and the principal stock
exchange on which the common shares are traded.
Conversion to an open-end mutual fund is extremely unlikely in light of our investment
objective and policies and would require stockholder approval of an amendment to our Charter. If
we converted to an open-end mutual fund, we would be required to redeem all Tortoise Notes and
Tortoise Preferred Shares then outstanding (requiring us, in turn, to liquidate a significant
portion of our investment portfolio), and our common stock would no longer be listed on the NYSE or
any other exchange. In contrast to a closed-end management investment company, shareholders of an
open-end mutual fund may require a fund to redeem its shares of common stock at any time (except in
certain circumstances as authorized by the 1940 Act or the rules thereunder) at their NAV. In
addition, certain of our investment policies and restrictions are incompatible with the
requirements applicable to an open-end investment company. Accordingly, conversion to an open-end
investment company would require material changes to our investment policies.
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CERTAIN FEDERAL INCOME TAX MATTERS
The following is a general summary of certain federal income tax considerations affecting us
and our security holders. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to security holders in light of their
particular circumstances or who are subject to special rules, such as banks, thrift institutions
and certain other financial institutions, real estate investment trusts, regulated investment
companies, insurance companies, brokers and dealers in securities or currencies, certain securities
traders, tax-exempt investors, individual retirement accounts, certain tax-deferred accounts, and
foreign investors. Tax matters are very complicated, and the tax consequences of an investment in
and holding of our securities will depend on the particular facts of each investors situation.
Investors are advised to consult their own tax advisors with respect to the application to their
own circumstances of the general federal income taxation rules described below and with respect to
other federal, state, local or foreign tax consequences to them before making an investment in our
securities. Unless otherwise noted, this discussion assumes that investors are U.S. persons and
hold our securities as capital assets. More detailed information regarding the federal income tax
consequences of investing in our securities is in the statement of additional information.
Pursuant to U.S. Treasury Department Circular 230, we are informing you that (1) this
discussion is not intended to be used, was not written to be used, and cannot be used, by any
taxpayer for the purpose of avoiding penalties under the U.S. federal tax laws, (2) this discussion
was written by us in connection with the registration of our securities and our promotion or
marketing, and (3) each taxpayer should seek advice based on his, her or its particular
circumstances from an independent tax advisor.
Company Federal Income Taxation
We are treated as a corporation for federal and state income tax purposes. Thus, we are
obligated to pay federal and state income tax on our taxable income. We invest our assets primarily
in MLPs, which generally are treated as partnerships for federal income tax purposes. As a partner
in the MLPs, we must report our allocable share of the MLPs taxable income in computing our
taxable income regardless of whether the MLPs make any distributions. Based upon our review of the
historic results of the type of MLPs in which we invest, we expect that the cash flow received by
us with respect to our MLP investments will exceed the taxable income allocated to us. There is no
assurance that our expectation regarding the tax character of MLP distributions will be realized.
If this expectation is not realized, there may be greater tax expense borne by us and less cash
available to distribute to stockholders or to pay to creditors. In addition, we will take into
account in determining our taxable income the amounts of gain or loss recognized on the sale of MLP
interests. Currently, the maximum regular federal income tax rate for a corporation is 35 percent.
We may be subject to a 20 percent federal alternative minimum tax on our alternative minimum
taxable income to the extent that the alternative minimum tax exceeds our regular federal income
tax.
We are not treated as a regulated investment company under the Internal Revenue Code of 1986,
as amended (the Internal Revenue Code). The Internal Revenue Code generally provides that a
regulated investment company does not pay an entity level income tax, provided that it distributes
all or substantially all of its income. Our assets do not, and are not expected to, meet current
tests for qualification as a regulated investment company for federal income tax purposes. The
regulated investment company taxation rules therefore have no application to us or to our
stockholders. Although changes to the federal income tax laws permit regulated investment companies
to invest up to 25% of their total assets in securities of certain MLPs, such changes still would
not allow us to pursue our objective. Accordingly, we do not intend to change our federal income
tax status as a result of such legislation.
Because we are treated as a corporation for federal income tax purposes, our financial
statements reflect deferred tax assets or liabilities according to generally accepted accounting
principles. This differs from many closed-end funds that are taxed as regulated investment
companies under the Internal Revenue Code. Deferred income taxes reflect (i) taxes on unrealized
gains/(losses), which are attributable to the temporary difference between fair market value and
tax basis, (ii) 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 and
(iii) the net tax benefit of accumulated net operating losses and capital losses. To the extent we
have a deferred tax asset, consideration is given as to whether or not a valuation allowance is
required. We periodically assess the need to establish a valuation allowance for deferred tax
assets based on the criterion established by the Statement of Financial Accounting Standards,
Accounting for Income Taxes (SFAS No. 109) that it is more likely than not that some portion or
all of the deferred tax asset will not be realized. Our assessment considers, among other matters,
the nature, frequency and severity of current and cumulative losses, forecasts of future
profitability (which are highly dependent on future MLP cash distributions), the duration of
statutory carryforward periods and the associated risk that operating loss and capital loss
carryforwards may expire unused. We periodically review the recoverability of deferred tax assets
based on the weight of available evidence. Accordingly, realization of a deferred tax asset is
dependent on whether there will be sufficient taxable income of the appropriate character within
the carryforward periods to realize a portion or all of the deferred tax benefit. We will accrue
deferred federal income liability associated with that portion of MLP distributions considered to
be a tax-deferred return of capital, as well as capital appreciation of our investments. Upon the
sale of an MLP security,
41
we may be liable for previously deferred taxes, if any. We will rely to some extent on
information provided by the MLPs, which is not necessarily timely, to estimate deferred tax
liability for purposes of financial statement reporting and determining our NAV. From time to time
we will modify our estimates or assumptions regarding our deferred tax liability as new information
becomes available.
Federal Income Taxation of Common and Preferred Stock
Federal Income Tax Treatment of Holders of Common Stock.
Unlike a holder of a direct interest
in MLPs, a stockholder will not include its allocable share of our income, gains, losses or
deductions in computing its own taxable income. Instead, since we are of the opinion that, under
present law, the common stock will constitute equity, distributions with respect to such shares
(other than distributions in redemption of shares subject to Section 302(b) of the Internal Revenue
Code) will generally constitute dividends to the extent of our allocable current or accumulated
earnings and profits, as calculated for federal income tax purposes. Generally, a corporations
earnings and profits are computed based upon taxable income, with certain specified adjustments. As
explained above, based upon the historic performance of the MLPs, we anticipate that the
distributed cash from the MLPs will exceed our share of the MLPs income and our gain on the sale
of MLP interests. In addition, earnings and profits are treated generally, for federal income tax
purposes, as first being used to pay distributions on preferred stock, and then to the extent
remaining, if any, to pay distributions on the common stock. Thus, we anticipate that only a
portion of the distributions of DCF will be treated as dividend income to common stockholders. To
the extent that distributions to a stockholder exceed our current and accumulated earnings and
profits, the stockholders basis in shares of stock with respect to which the distribution is made
will be reduced, which may increase the amount of gain realized upon the sale of such shares. If a
stockholder has no further basis in its shares, the stockholder will report any excess
distributions as capital gain if the stockholder holds such shares as a capital asset.
Dividends of current or accumulated earnings and profits generally will be taxable as ordinary
income to holders but are expected to be treated as qualified dividend income that is generally
subject to reduced rates of federal income taxation for noncorporate investors and are also
expected to be eligible for the dividends received deduction available to corporate stockholders
under Section 243 of the Internal Revenue Code. Under federal income tax law, qualified dividend
income received by individual and other noncorporate stockholders is taxed at long-term capital
gain rates, which currently reach a maximum of 15%. Qualified dividend income generally includes
dividends from domestic corporations and dividends from non-U.S. corporations that meet certain
criteria. To be treated as qualified dividend income, the stockholder must hold the shares paying
otherwise qualifying dividend income more than 60 days during the 121-day period beginning 60 days
before the ex-dividend date (or more than 90 days during the 181-day period beginning 90 days
before the ex-dividend date in the case of certain preferred stock dividends). A stockholders
holding period may be reduced for purposes of this rule if the stockholder engages in certain risk
reduction transactions with respect to the common or preferred stock. The provisions of the
Internal Revenue Code applicable to qualified dividend income are effective through 2010.
Thereafter, higher federal income tax rates will apply unless further legislative action is taken.
Corporate holders should be aware that certain limitations apply to the availability of the
dividends received deduction, including limitations on the aggregate amount of the deduction that
may be claimed and limitations based on the holding period of the shares of common or preferred
stock on which the dividend is paid, which holding period may be reduced if the holder engages in
risk reduction transactions with respect to its shares. Corporate holders should consult their own
tax advisors regarding the application of these limitations to their particular situation.
If a common stockholder participates in our Automatic Dividend Reinvestment Plan, such
stockholder will be treated as receiving the amount of the distributions made by the Company, which
amount generally will be either equal to the amount of the cash distribution the stockholder would
have received if the stockholder had elected to receive cash or, for shares issued by the Company,
the fair market value of the shares issued to the stockholder.
Federal Income Tax Treatment of Holders of Preferred Stock.
Under present law, we are of the
opinion that preferred stock will constitute equity, and thus distributions with respect to
preferred stock (other than distributions in redemption of preferred stock subject to
Section 302(b) of the Internal Revenue Code) will generally constitute dividends to the extent of
our current or accumulated earnings and profits, as calculated for federal income tax purposes.
Such dividends generally will be taxable as ordinary income to holders but are expected to be
treated as qualified dividend income that is generally subject to reduced rates of federal income
taxation for noncorporate investors and are also expected to be eligible for the dividends received
deduction available to corporate stockholders under Section 243 of the Internal Revenue Code.
Please see the discussion above on qualified dividend income and the dividends received deductions.
Earnings and profits are generally treated, for federal income tax purposes, as first being
used to pay distributions on the preferred stock, and then to the extent remaining, if any, to pay
distributions on the common stock. Distributions in excess of the Companys
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earnings and profits, if any, will first reduce a stockholders adjusted tax basis in his or
her preferred stock and, after the adjusted tax basis is reduced to zero, will constitute capital
gains to a stockholder who holds such shares as a capital asset.
Sale of Shares.
The sale of shares of common or preferred stock by holders will generally be
a taxable transaction for federal income tax purposes. Holders of shares of stock who sell such
shares will generally recognize gain or loss in an amount equal to the difference between the net
proceeds of the sale and their adjusted tax basis in the shares sold. If the shares are held as a
capital asset at the time of the sale, the gain or loss will generally be a capital gain or loss.
Similarly, a redemption by us (including a redemption resulting from our liquidation), if any, of
all the shares actually and constructively held by a stockholder generally will give rise to
capital gain or loss under Section 302(b) of the Internal Revenue Code, provided that the
redemption proceeds do not represent declared but unpaid dividends. Other redemptions may also give
rise to capital gain or loss, but certain conditions imposed by Section 302(b) of the Internal
Revenue Code must be satisfied to achieve such treatment.
Capital gain or loss will generally be long-term capital gain or loss if the shares were held
for more than one year and will be short-term capital gain or loss if the disposed shares were held
for one year or less. Net long-term capital gain recognized by a noncorporate U.S. holder generally
will be subject to federal income tax at a lower rate (currently a maximum rate of 15%) than net
short-term capital gain or ordinary income (currently a maximum rate of 35%). Under current law,
the maximum federal income tax rate on capital gain for noncorporate holders is scheduled to
increase to 20% for taxable years after 2010. For corporate holders, capital gain is generally
taxed at the same rate as ordinary income, that is, currently at a maximum rate of 35%. A holders
ability to deduct capital losses may be limited.
Investment by Tax-Exempt Investors and Regulated Investment Companies.
Employee benefit
plans, other tax-exempt organizations and regulated investment companies may want to invest in our
securities. Employee benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject to federal income
tax on unrelated business taxable income (UBTI). Because we are a corporation for federal income
tax purposes, an owner of shares of common stock will not report on its federal income tax return
any of our items of income, gain, loss and deduction. Therefore, a tax-exempt investor generally
will not have UBTI attributable to its ownership or sale of our common or preferred stock unless
its ownership of the stock is debt-financed. In general, stock would be debt-financed if the
tax-exempt owner of stock incurs debt to acquire the stock or otherwise incurs or maintains debt
that would not have been incurred or maintained if the stock had not been acquired.
For federal income tax purposes, a regulated investment company or mutual fund, may not have
more than 25% of the value of its total assets, at the close of any quarter, invested in the
securities of one or more qualified publicly traded partnerships, which will include most MLPs.
Shares of our common stock are not securities of a qualified publicly traded partnership and will
not be treated as such for purposes of calculating the limitation imposed upon regulated investment
companies.
Backup Withholding.
We may be required to withhold, for U.S. federal income tax purposes, a
portion of all distributions (including redemption proceeds) payable to stockholders who fail to
provide us with their correct taxpayer identification number, who fail to make required
certifications or who have been notified by the Internal Revenue Service (IRS) that they are
subject to backup withholding (or if we have been so notified). Certain corporate and other
stockholders specified in the Internal Revenue Code and the regulations thereunder are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be
credited against the stockholders U.S. federal income tax liability provided the appropriate
information is furnished to the IRS in a timely manner.
Other Taxation.
Foreign stockholders, including stockholders who are nonresident alien
individuals, may be subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rates as may be prescribed by any applicable treaty. Our distributions also may be
subject to state and local taxes.
Federal Income Taxation of Debt Securities
Federal Income Tax Treatment of Holders of Debt Securities.
Under present law, we are of the
opinion that the debt securities will constitute indebtedness of the Company for federal income tax
purposes, which the discussion below assumes. We intend to treat all payments made with respect to
the debt securities consistent with this characterization.
Taxation of Interest.
Payments or accruals of interest on debt securities generally will be
taxable to you as ordinary interest income at the time such interest is received (actually or
constructively) or accrued, in accordance with your regular method of accounting for federal income
tax purposes.
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Purchase, Sale and Redemption of Debt Securities.
Initially, your tax basis in debt
securities acquired generally will be equal to your cost to acquire such debt securities. This
basis will increase by the amounts, if any, that you include in income under the rules governing
market discount, and will decrease by the amount of any amortized premium on such debt securities,
as discussed below. When you sell or exchange any of your debt securities, or if any of your debt
securities are redeemed, you generally will recognize gain or loss equal to the difference between
the amount you realize on the transaction (less any accrued and unpaid interest, which will be
subject to federal income tax as interest in the manner described above) and your tax basis in the
debt securities relinquished.
Except as discussed below with respect to market discount, the gain or loss that you recognize
on the sale, exchange or redemption of any of your debt securities generally will be capital gain
or loss. Such gain or loss will generally be long-term capital gain or loss if the disposed debt
securities were held for more than one year and will be short-term capital gain or loss if the
disposed debt securities were held for one year or less. Net long-term capital gain recognized by a
noncorporate U.S. holder generally will be subject to federal income tax at a lower rate (currently
a maximum rate of 15%, although this rate will increase to 20% after 2010) than net short-term
capital gain or ordinary income (currently a maximum rate of 35%). For corporate holders, capital
gain is generally taxed for federal income tax purposes at the same rate as ordinary income, that
is, currently at a maximum rate of 35%. A holders ability to deduct capital losses may be limited.
Amortizable Premium.
If you purchase debt securities at a cost greater than their stated
principal amount, plus accrued interest, you will be considered to have purchased the debt
securities at a premium, and you generally may elect to amortize this premium as an offset to
interest income, using a constant yield method, over the remaining term of the debt securities. If
you make the election to amortize the premium, it generally will apply to all debt instruments that
you hold at the beginning of the first taxable year to which the election applies, as well as any
debt instruments that you subsequently acquire. In addition, you may not revoke the election
without the consent of the IRS. If you elect to amortize the premium, you will be required to
reduce your tax basis in the debt securities by the amount of the premium amortized during your
holding period. If you do not elect to amortize premium, the amount of premium will be included in
your tax basis in the debt securities. Therefore, if you do not elect to amortize the premium and
you hold the debt securities to maturity, you generally will be required to treat the premium as a
capital loss when the debt securities are redeemed.
Market Discount.
If you purchase debt securities at a price that reflects a market
discount, any principal payments on or any gain that you realize on the disposition of the debt
securities generally will be treated as ordinary interest income to the extent of the market
discount that accrued on the debt securities during the time you held such debt securities. Market
discount is defined under the Internal Revenue Code as, in general, the excess of the stated
redemption price at maturity over the purchase price of the debt security, except that if the
market discount is less than 0.25% of the stated redemption price at maturity multiplied by the
number of complete years to maturity, the market discount is considered to be zero. In addition,
you may be required to defer the deduction of all or a portion of any interest paid on any
indebtedness that you incurred or continued to purchase or carry the debt securities that were
acquired at a market discount. In general, market discount will be treated as accruing ratably over
the term of the debt securities, or, at your election, under a constant yield method.
You may elect to include market discount in gross income currently as it accrues (on either a
ratable or constant yield basis), in lieu of treating a portion of any gain realized on a sale of
the debt securities as ordinary income. If you elect to include market discount on a current basis,
the interest deduction deferral rule described above will not apply and you will increase your
basis in the debt security by the amount of market discount you include in gross income. If you do
make such an election, it will apply to all market discount debt instruments that you acquire on or
after the first day of the first taxable year to which the election applies. This election may not
be revoked without the consent of the IRS.
Information Reporting and Backup Withholding.
In general, information reporting requirements
will apply to payments of principal, interest, and premium, if any, paid on debt securities and to
the proceeds of the sale of debt securities paid to U.S. holders other than certain exempt
recipients (such as certain corporations). Information reporting generally will apply to payments
of interest on the debt securities to non-U.S. Holders (as defined below) and the amount of tax, if
any, withheld with respect to such payments. Copies of the information returns reporting such
interest payments and any withholding may also be made available to the tax authorities in the
country in which the non-U.S. Holder resides under the provisions of an applicable income tax
treaty. In addition, for non-U.S. Holders, information reporting will apply to the proceeds of the
sale of debt securities within the United States or conducted through United States-related
financial intermediaries unless the certification requirements described below have been complied
with and the statement described below in Taxation of Non-U.S. Holders has been received (and the
payor does not have actual knowledge or reason to know that the holder is a United States person)
or the holder otherwise establishes an exemption.
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We may be required to withhold, for U.S. federal income tax purposes, a portion of all
payments (including redemption proceeds) payable to holders of debt securities who fail to provide
us with their correct taxpayer identification number, who fail to make required certifications or
who have been notified by the IRS that they are subject to backup withholding (or if we have been
so notified). Certain corporate and other shareholders specified in the Internal Revenue Code and
the regulations thereunder are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the holders U.S. federal income tax
liability provided the appropriate information is furnished to the IRS. If you are a
non-U.S. Holder, you may have to comply with certification procedures to establish your
non-U.S. status in order to avoid backup withholding tax requirements. The certification procedures
required to claim the exemption from withholding tax on interest income described below will
satisfy these requirements.
Taxation of Non-U.S. Holders.
If you are a non-resident alien individual or a foreign
corporation (a non-U.S. Holder), the payment of interest on the debt securities generally will be
considered portfolio interest and thus generally will be exempt from U.S. federal withholding
tax. This exemption will apply to you provided that (1) interest paid on the debt securities is not
effectively connected with your conduct of a trade or business in the United States, (2) you are
not a bank whose receipt of interest on the debt securities is described in Section 881(c)(3)(A) of
the Internal Revenue Code, (3) you do not actually or constructively own 10 percent or more of the
combined voting power of all classes of the Companys stock entitled to vote, (4) you are not a
controlled foreign corporation that is related, directly or indirectly, to the Company through
stock ownership, and (5) you satisfy the certification requirements described below.
To satisfy the certification requirements, either (1) the holder of any debt securities must
certify, under penalties of perjury, that such holder is a non-U.S. person and must provide such
owners name, address and taxpayer identification number, if any, on IRS Form W-8BEN, or (2) a
securities clearing organization, bank or other financial institution that holds customer
securities in the ordinary course of its trade or business and holds the debt securities on behalf
of the holder thereof must certify, under penalties of perjury, that it has received a valid and
properly executed IRS Form W-8BEN from the beneficial holder and comply with certain other
requirements. Special certification rules apply for debt securities held by a foreign partnership
and other intermediaries.
Interest on debt securities received by a non-U.S. Holder that is not excluded from
U.S. federal withholding tax under the portfolio interest exemption as described above generally
will be subject to withholding at a 30% rate, except where (1) the interest is effectively
connected with the conduct of a U.S. trade or business, in which case the interest will generally
be subject to U.S. income tax on a net basis as applicable to U.S. holders generally or (2) a
non-U.S. Holder can claim the benefits of an applicable income tax treaty to reduce or eliminate
such withholding tax. To claim the benefit of an income tax treaty or to claim an exemption from
withholding because the interest is effectively connected with a U.S. trade or business, a non-U.S.
Holder must timely provide the appropriate, properly executed IRS forms. These forms may be
required to be periodically updated. Also, a non-U.S. Holder who is claiming the benefits of an
income tax treaty may be required to obtain a U.S. taxpayer identification number and to provide
certain documentary evidence issued by foreign governmental authorities to prove residence in the
foreign country.
Any capital gain that a non-U.S. Holder realizes on a sale, exchange or other disposition of
debt securities generally will be exempt from U.S. federal income tax, including withholding tax.
This exemption will not apply to you if your gain is effectively connected with your conduct of a
trade or business in the U.S. or you are an individual holder and are present in the U.S. for a
period or periods aggregating 183 days or more in the taxable year of the disposition and either
your gain is attributable to an office or other fixed place of business that you maintain in the
U.S. or you have a tax home in the United States.
DETERMINATION OF NET ASSET VALUE
We compute the NAV of our common stock as of the close of trading of the NYSE (normally
4:00 p.m. Eastern time) no less frequently than the last business day of each calendar month and at
such other times as the Board may determine. When considering an offering of common stock, we
calculate our NAV on a more frequent basis, generally daily, to the extent necessary to comply with
the provisions of the 1940 Act. Due to recent market volatility, we currently make our NAV
available for publication weekly. The NAV per share of common stock equals our NAV divided by the
number of outstanding shares of common stock. Our NAV equals the value of our total assets (the
value of the securities held plus cash or other assets, including interest accrued but not yet
received and net deferred tax assets) less: (i) all of our liabilities (including accrued expenses
and both current and net deferred tax liabilities); (ii) accumulated and unpaid dividends on any
outstanding preferred stock; (iii) the aggregate liquidation preference of any outstanding
preferred stock; (iv) accrued and unpaid interest payments on any outstanding indebtedness; (v) the
aggregate principal amount of any outstanding indebtedness; and (vi) any distributions payable on
our common stock.
Pursuant to an agreement with U.S. Bancorp Fund Services, LLC (the Accounting Services
Provider), the Accounting Services Provider values our assets in accordance with valuation
procedures adopted by the Board of Directors. The Accounting Services
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Provider obtains securities market quotations from independent pricing services approved by
our Adviser and ratified by the Board of Directors. Securities for which market quotations are
readily available shall be valued at market value. Any other securities shall be valued at fair
value.
Valuation of certain assets at market value will be as follows:
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for equity securities, the Accounting Services Provider will first use readily available
market quotations and will obtain direct written broker-dealer quotations if a security is
not traded on an exchange or quotations are not available from an approved pricing service;
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for fixed income securities, the Accounting Services Provider will use readily available
market quotations based upon the last sale price of a security on the day we value our
assets or a market value from a pricing service or by obtaining a direct written
broker-dealer quotation from a dealer who has made a market in the security; and
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other assets will be valued at market value pursuant to the valuation procedures.
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If the Accounting Services Provider cannot obtain a market value or our Adviser determines
that the value of a security as so obtained does not represent a fair value as of the valuation
time (due to a significant development subsequent to the time its price is determined or
otherwise), fair value for the security shall be determined pursuant to the valuation procedures. A
report of any prices determined pursuant to fair value methodologies will be presented to the Board
of Directors or a designated committee thereof for approval at the next regularly scheduled board
meeting.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
General
Our Automatic Dividend Reinvestment Plan (the Plan) allows participating common stockholders
to reinvest distributions in additional shares of our common stock. Shares of common stock will be
issued by us under the Plan when our common stock is trading at a premium to NAV. If our common
stock is trading at a discount to NAV, shares issued under the Plan will be purchased on the open
market. Shares of common stock issued directly from us under the Plan will be acquired at the
greater of (1) NAV at the close of business on the payment date of the distribution, or (2) 95% of
the market price per common share on the payment date. Common stock issued under the Plan when
shares are trading at a discount to NAV will be purchased in the market at a market price. See
below for more details about the Plan.
Automatic Dividend Reinvestment
If a stockholders shares are registered directly with us or with a brokerage firm that
participates in our Plan through the facilities of DTC and such stockholders account is coded
dividend reinvestment by such brokerage firm, all distributions are automatically reinvested for
stockholders by the Plan Agent, Computershare Trust Company, N.A. (the Plan Agent), in additional
shares of our common stock (unless a stockholder is ineligible or elects otherwise). If a
stockholders shares are registered with a brokerage firm that participates in the Plan through the
facilities of DTC, but such stockholders account is not coded dividend reinvestment by such
brokerage firm or if a stockholders shares are registered with a brokerage firm that does not
participate in the Plan through the facilities of DTC, a stockholder will need to ask their
investment executive what arrangements can be made to set up their account to participate in the
Plan. In either case, until such arrangements are made, a stockholder will receive distributions in
cash.
Stockholders who elect not to participate in the Plan will receive all distributions payable
in cash paid by check mailed directly to the stockholder of record (or, if the shares are held in
street or other nominee name, then to such nominee) by the Plan Agent, as dividend paying agent.
Participation in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by giving written, telephone or internet instructions to the Plan Agent; such
termination will be effective with respect to a particular distribution if notice is received prior
to the record date for the next distribution.
Whenever we declare a distribution payable either in shares or in cash, non-participants in
the Plan will receive cash, and participants in the Plan will receive the equivalent in shares of
common stock. The shares are acquired by the Plan Agent for the participants account, depending
upon the circumstances described below, either (i) through receipt of additional shares of common
stock from us (Additional Common Stock) or (ii) by purchase of outstanding common stock on the
open market (open-market purchases) on the NYSE or elsewhere. If, on the payment date, the NAV
per share of our common stock is equal to or less than the market price per share of our common
stock plus estimated brokerage commissions (such condition being referred to herein as market
premium), the Plan Agent will receive Additional Common Stock from us for each participants
account. The number of Additional Common Stock to be credited to the participants account will be
determined by dividing the dollar amount of the dividend
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or distribution by the greater of (i) the NAV per share of common stock on the payment date,
or (ii) 95% of the market price per share of common stock on the payment date.
If, on the payment date, the NAV per share of common stock exceeds the market price plus
estimated brokerage commissions (such condition being referred to herein as market discount), the
Plan Agent will invest the distribution amount in shares acquired in open-market purchases as soon
as practicable but not later than thirty (30) days following the payment date. We expect to
declare and pay quarterly distributions. The weighted average price (including brokerage
commissions) of all common stock purchased by the Plan Agent as Plan Agent will be the price per
share of common stock allocable to each participant.
The Plan Agent maintains all stockholders accounts in the Plan and furnishes written
confirmation of each acquisition made for the participants account as soon as practicable, but in
no event later than 60 days after the date thereof. Shares in the account of each Plan participant
will be held by the Plan Agent in non-certificated form in the Plan Agents name or that of its
nominee, and each stockholders proxy will include those shares purchased or received pursuant to
the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote
proxies for shares held pursuant to the Plan first in accordance with the instructions of the
participants, and then with respect to any proxies not returned by such participant, in the same
proportion as the Plan Agent votes the proxies returned by the participants.
There will be no brokerage charges with respect to shares issued directly by us as a result of
distributions payable either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agents open-market purchases in
connection with the reinvestment of distributions. If a participant elects to have the Plan Agent
sell part or all of his or her shares of common stock and remit the proceeds, such participant will
be charged his or her pro rata share of brokerage commissions on the shares sold plus a $15.00
transaction fee.
The automatic reinvestment of distributions will not relieve participants of any federal,
state or local income tax that may be payable (or required to be withheld) on such distributions.
See Certain Federal Income Tax Matters.
Stockholders participating in the Plan may receive benefits not available to stockholders not
participating in the Plan. If the market price plus commissions of our shares of common stock is
higher than the NAV, participants in the Plan will receive shares of our common stock at less than
they could otherwise purchase such shares and will have shares with a cash value greater than the
value of any cash distribution they would have received on their shares. If the market price plus
commissions is below the NAV, participants will receive distributions of shares of common stock
with a NAV greater than the value of any cash distribution they would have received on their
shares. However, there may be insufficient shares available in the market to make distributions in
shares at prices below the NAV. Also, because we do not redeem our shares, the price on resale may
be more or less than the NAV. See Certain Federal Income Tax Matters for a discussion of tax
consequences of the Plan.
Experience under the Plan may indicate that changes are desirable. Accordingly, we reserve the
right to amend or terminate the Plan if in the judgment of the Board of Directors such a change is
warranted. The Plan may be terminated by the Plan Agent or by us upon notice in writing mailed to
each participant at least 60 days prior to the effective date of the termination. Upon any
termination, the Plan Agent will cause a certificate or certificates to be issued for the full
shares held by each participant under the Plan and cash adjustment for any fraction of a share of
common stock at the then current market value of the common stock to be delivered to him or her. If
preferred, a participant may request the sale of all of the shares of common stock held by the Plan
Agent in his or her Plan account in order to terminate participation in the Plan. If such
participant elects in advance of such termination to have the Plan Agent sell part or all of his or
her shares, the Plan Agent is authorized to deduct from the proceeds a $15.00 fee plus a $0.05 fee
per share for the transaction. If a participant has terminated his or her participation in the Plan
but continues to have shares of common stock registered in his or her name, he or she may re-enroll
in the Plan at any time by notifying the Plan Agent in writing at the address below. The terms and
conditions of the Plan may be amended by the Plan Agent or by us at any time. Any such amendments
to the Plan may be made by mailing to each participant appropriate written notice at least 30 days
prior to the effective date of the amendment, except when necessary or appropriate to comply with
applicable law or the rules or policies of the SEC or any other regulatory authority, such prior
notice does not apply. The amendment shall be deemed to be accepted by each participant unless,
prior to the effective date thereof, the Plan Agent receives notice of the termination of the
participants account under the Plan. Any such amendment may include an appointment by the Plan
Agent of a successor Plan Agent, subject to the prior written approval of the successor Plan Agent
by us.
All correspondence concerning the Plan should be directed to Computershare Trust Company,
N.A., P.O. Box 43078, Providence, Rhode Island 02940.
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Cash Purchase Option
In the future, we may amend the Plan to implement a cash purchase option, whereby participants
in the Plan may elect to purchase additional shares of common stock through optional cash
investments in limited amounts on a monthly or other periodic basis. If and when we implement the
cash purchase option under the Plan, common stockholders will receive notice 60 days prior to its
implementation and further details including information on the offering price and other terms, the
frequency of offerings and how to participate in the cash purchase option.
DESCRIPTION OF SECURITIES
The information contained under this heading is only a summary and is subject to the
provisions contained in our Charter and Bylaws and the laws of the State of Maryland.
Common Stock
General.
Our Charter authorizes us to issue up to 100,000,000 shares of common stock,
$0.001 par value per share. The Board of Directors may, without any action by the stockholders,
amend our Charter from time to time to increase or decrease the aggregate number of shares of stock
or the number of shares of stock of any class or series that we have authority to issue under our
Charter and the 1940 Act. Additionally, our Charter authorizes our Board of Directors, without any
action by our stockholders, to classify and reclassify any unissued common stock and preferred
stock into other classes or series of stock from time to time by setting or changing the terms,
preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms and conditions of redemption for each class or
series. Although we have no present intention of doing so, we could issue a class or series of
stock that could delay, defer or prevent a transaction or a change in control of us that might
otherwise be in the stockholders best interests. Under Maryland law, stockholders generally are
not liable for our debts or obligations.
All common stock offered pursuant to this prospectus and any related prospectus supplement
will be, upon issuance, duly authorized, fully paid and nonassessable. All outstanding common stock
offered pursuant to this prospectus and any related prospectus supplement will be of the same class
and will have identical rights, as described below. Holders of shares of common stock are entitled
to receive distributions when authorized by the Board of Directors and declared by us out of assets
legally available for the payment of distributions. Holders of common stock have no preference,
conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any of our securities. All shares of common stock have equal distribution,
liquidation and other rights.
Distributions.
We intend to pay out substantially all of our DCF to holders of common stock
through quarterly distributions. DCF is the amount we receive as cash or paid-in-kind distributions
from MLPs or affiliates of MLPs in which we invest, and interest payments received on debt
securities we own, less current or anticipated operating expenses, taxes on our taxable income, and
leverage costs we pay (including costs related to Tortoise Notes, Tortoise Preferred Shares and
borrowings under our credit facility). Our Board of Directors has adopted a policy to target
distributions to common stockholders in an amount equal to at least 95% of DCF on an annual basis.
It is expected that we will declare and pay a distribution to holders of common stock at the end of
each fiscal quarter. There is no assurance that we will continue to make regular distributions.
If a stockholders shares are registered directly with us or with a brokerage firm that
participates in the Plan, distributions will be automatically reinvested in additional common stock
under the Plan unless a stockholder elects to receive distributions in cash. If a stockholder
elects to receive distributions in cash, payment will be made by check. The federal income tax
treatment of distributions is the same whether they are reinvested in our shares or received in
cash. See Automatic Dividend Reinvestment Plan.
The yield on our common stock will likely vary from period to period depending on factors
including the following:
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market conditions;
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the timing of our investments in portfolio securities;
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the securities comprising our portfolio;
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changes in interest rates (including changes in the relationship between short-term rates
and long-term rates);
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the amount and timing of the use of borrowings and other leverage by us;
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the effects of leverage on our common stock (discussed above under Leverage);
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the timing of the investment of offering proceeds and leverage proceeds in portfolio
securities; and
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our net assets and operating expenses.
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Consequently, we cannot guarantee any particular yield on our common stock, and the yield for any
given period is not an indication or representation of future yields on the common stock.
Limitations on Distributions.
So long as shares of preferred stock are outstanding, holders
of shares of common stock will not be entitled to receive any distributions from us unless we have
paid all accumulated dividends on preferred stock, and unless asset coverage (as defined in the
1940 Act) with respect to preferred stock would be at least 200% after giving effect to such
distributions. See Leverage.
So long as senior securities representing indebtedness are outstanding, holders of shares of
common stock will not be entitled to receive any distributions from us unless we have paid all
accrued interest on such senior indebtedness, and unless asset coverage (as defined in the 1940
Act) with respect to any outstanding senior indebtedness would be at least 300% after giving effect
to such distributions. See Leverage.
Liquidation Rights.
Common stockholders are entitled to share ratably in the assets legally
available for distribution to stockholders in the event of liquidation, dissolution or winding up,
after payment of or adequate provision for all known debts and liabilities, including any
outstanding debt securities or other borrowings and any interest accrued thereon. These rights are
subject to the preferential rights of any other class or series of our stock, including the
preferred stock. The rights of common stockholders upon liquidation, dissolution or winding up are
subordinated to the rights of holders of outstanding Tortoise Notes and Tortoise Preferred Shares.
Voting Rights.
Each outstanding share of common stock entitles the holder to one vote on all
matters submitted to a vote of stockholders, including the election of directors. The presence of
the holders of shares of common stock entitled to cast a majority of the votes entitled to be cast
shall constitute a quorum at a meeting of stockholders. Our Charter provides that, except as
otherwise provided in the Bylaws, directors shall be elected by the affirmative vote of the holders
of a majority of the shares of stock outstanding and entitled to vote thereon. The Bylaws provide
that directors are elected by a plurality of all the votes cast at a meeting of stockholders duly
called and at which a quorum is present. There is no cumulative voting in the election of
directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the
outstanding shares of stock entitled to vote will be able to elect all of the successors of the
class of directors whose terms expire at that meeting provided that holders of preferred stock have
the right to elect two directors at all times. Pursuant to our Charter and Bylaws, the Board of
Directors may amend the Bylaws to alter the vote required to elect directors.
Under the rules of the NYSE applicable to listed companies, we normally will be required to
hold an annual meeting of stockholders in each fiscal year. If we are converted to an open-end
company or if for any other reason the shares are no longer listed on the NYSE (or any other
national securities exchange the rules of which require annual meetings of stockholders), we may
amend our Bylaws so that we are not otherwise required to hold annual meetings of stockholders.
Issuance of Additional Shares.
The provisions of the 1940 Act generally require that the
public offering price of common stock of a closed-end investment company (less underwriting
commissions and discounts) must equal or exceed the NAV of such companys common stock (calculated
within 48 hours of pricing), unless such sale is made with the consent of a majority of the
companys outstanding common stockholders. At our Annual Meeting of Stockholders held on April 21,
2008, our stockholders granted us the authority to sell shares of our common stock for less than
NAV, subject to the conditions listed below. We plan to seek re-approval of this authority at a
meeting of stockholders. We believe that having the ability to issue and sell a limited number of
shares of common stock below NAV benefits all stockholders in that it allows us to quickly raise
cash and capitalize on attractive investment opportunities while remaining fully invested at all
times. When considering an offering of common stock, we calculate our NAV on a more frequent
basis, generally daily, to the extent necessary to comply with the provisions of the 1940 Act. We
expect to sell shares of common stock below NAV only when we have identified attractive near-term
investment opportunities. We may only sell shares of common stock below NAV in accordance with the
following conditions:
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1.
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The per share offering price, before deduction of underwriting fees, commissions and
offering expenses, will not be less than the NAV per share of our common stock, as
determined at any time within two business days of pricing of the common stock to be sold in
the offering.
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2.
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Immediately following the offering, after deducting offering expenses and underwriting
fees and commissions, the NAV per share of our common stock, as determined at any time
within two business days of pricing of the common stock to be sold in the offering, would
not have been diluted by greater than a total of 1% of the NAV per share of all of our
outstanding common stock. We will not be subject to a maximum number of shares that can
be sold or a defined minimum sales price
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per share in any offering so long as the aggregate number of shares offered and the price at
which such shares are sold together would not result in dilution of the NAV per share of our
common stock in excess of the 1% limitation.
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3.
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A majority of our independent directors makes a determination, based on information and a
recommendation from the Adviser, that they reasonably expect that the investment(s) to be
made with the net proceeds of such issuance will lead to a long-term increase in
distribution growth.
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The table below sets forth the pro forma maximum dilutive effect on our NAV if we were to have
issued shares below our NAV as of November 30, 2008. The table assumes that we issue
4,211,330 shares, which represents all of the shares we are currently authorized to issue, at a net
sale price to us after deducting all expenses of issuance, including underwriting discounts and
commissions, equal to $12.21, which is 95% of the NAV of our common shares as of November 30, 2008.
Pro Forma Maximum Impact of Below NAV Issuances of Common Shares
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Common shares currently outstanding
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17,470,673
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Common shares that currently may be issued below NAV
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4,211,330
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Total common shares outstanding if all permissible shares are issued below NAV
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21,682,003
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Net asset value per share as of November 30, 2008
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$
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12.85
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Aggregate net asset value of all currently outstanding common shares based on NAV as
of November 30, 2008
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$
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224,483,149
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Aggregate net proceeds to the Company (assuming the Company sold all permissible
shares and received net proceeds equal to $12.21 per share (95% of the NAV as of
November 30, 2008))
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$
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51,420,339
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Expected aggregate net asset value of the Company after issuance
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$
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275,903,488
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NAV per share after issuance
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$
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12.73
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Percentage dilution to pre-issuance NAV
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-0.93
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Because our Advisers management fee is based upon our average monthly Managed Assets
(excluding any net deferred tax assets), our Advisers interest in recommending the issuance and
sale of common stock below NAV will conflict with our interests and those of our stockholders.
Market.
Our common stock trades on the NYSE under the ticker symbol TYY. Common stock
issued pursuant to this prospectus and related prospectus supplement is expected to trade on the
NYSE.
Transfer Agent,
Dividend Paying Agent and Automatic Dividend Reinvestment Plan
Agent.
Computershare Trust Company, N.A., P.O. Box 43078, Providence, Rhode Island 02940, serves
as the transfer agent and agent for the Automatic Dividend Reinvestment Plan for our common stock
and the dividend paying agent for our common stock.
Preferred Stock
General.
Our Charter authorizes the issuance of up to 10,000,000 shares of preferred stock,
with preferences, conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions or redemption as
determined by the Board of Directors, of which 2,800 shares are classified and designated as Series
I Tortoise Preferred Shares, liquidation preference $25,000 per share, and 1,600 shares are
classified and designated as Series II Tortoise Preferred Shares, liquidation preference $25,000
per share.
Our Board of Directors may, without any action by our stockholders, amend our Charter from
time to time to increase or decrease the aggregate number of shares of stock or the number of
shares of stock of any class or series that we have authority to issue under our Charter and under
the 1940 Act. Additionally, our Charter authorizes the Board of Directors, without any action by
the stockholders, to classify and reclassify any unissued preferred stock into other classes or
series of stock from time to time by setting or changing the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each class or series.
Preferred stock (including outstanding Tortoise Preferred Shares) ranks junior to our debt
securities (including Tortoise Notes), and senior to all common stock. Under the 1940 Act, we may
only issue one class of senior equity securities, which in the aggregate may represent no more than
50% of our total assets. So long as any Tortoise Preferred Shares are outstanding, additional
issuances of preferred stock must be considered to be of the same class as any Tortoise Preferred
Shares under the 1940 Act and interpretations thereunder and must rank on a parity with the any
Tortoise Preferred Shares with respect to the payment of dividends and upon the distribution of our
assets. The details on how to buy and sell preferred stock, along with other terms of such
preferred stock, will be described in a related prospectus supplement and will include the
following:
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the form and title of the security;
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the aggregate liquidation preference of preferred stock;
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the dividend rate of the preferred stock;
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any optional or mandatory redemption provisions;
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any changes in paying agents or security registrar; and
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any other terms of the preferred stock.
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Dividends.
Holders of preferred stock will be entitled to receive cash dividends, when, as
and if authorized by the Board of Directors and declared by us, out of funds legally available
therefor. The prospectus supplement for preferred stock will describe the dividend payment
provisions for those shares. Dividends so declared and payable shall be paid to the extent
permitted under Maryland law and to the extent available and in preference to and priority over any
distribution declared and payable on the common stock. Because of our emphasis on investments in
MLPs and their affiliates, which are expected to generate cash in excess of the taxable income
allocated to holders, it is possible that dividends payable on preferred stock could exceed our
current and accumulated earnings and profits, which would be treated for federal income tax
purposes as a tax-free return of capital to the extent of the basis of the shares on which the
dividend is paid and thereafter as gain from the sale or exchange of the preferred stock.
Limitations on Dividends.
So long as we have senior securities representing indebtedness
(including Tortoise Notes) outstanding, holders of preferred stock will not be entitled to receive
any dividends from us unless asset coverage (as defined in the 1940 Act) with respect to
outstanding debt securities and preferred stock would be at least 300% after giving effect to such
dividends. See Leverage.
Liquidation Rights.
In the event of any voluntary or our involuntary liquidation, dissolution
or winding up, the holders of preferred stock would be entitled to receive a preferential
liquidating distribution, which is expected to equal the original purchase price per share plus
accumulated and unpaid dividends, whether or not declared, before any distribution of assets is
made to holders of common stock. After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of preferred stock will not be entitled to any further
participation in any distribution of our assets. Preferred stock ranks junior to our debt
securities upon liquidation, dissolution or winding up.
Voting Rights.
Except as otherwise indicated in our Charter or Bylaws, or as otherwise
required by applicable law, holders of preferred stock have one vote per share and vote together
with holders of common stock as a single class.
The 1940 Act requires that the holders of any preferred stock, voting separately as a single
class, have the right to elect at least two directors at all times. The remaining directors will be
elected by holders of common stock and preferred stock, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class of senior
securities outstanding (including Tortoise Notes), the holders of any shares of preferred stock
have the right to elect a majority of the directors at any time two years accumulated dividends on
any preferred stock are unpaid. The 1940 Act also requires that, in addition to any approval by
stockholders that might otherwise be required, the approval of the holders of a majority of shares
of any outstanding preferred stock, voting separately as a class, would be required to (i) adopt
any plan of reorganization that would adversely affect the preferred stock, and (ii) take any
action requiring a vote of security holders under Section 13(a) of the 1940 Act, including, among
other things, changes in our subclassification as a closed-end investment company or changes in our
fundamental investment restrictions. See Certain Provisions in Our Charter and Bylaws. As a
result of these voting rights, our ability to take any such actions may be impeded to the extent
that any shares of our preferred stock are outstanding.
The affirmative vote of the holders of a majority of the outstanding preferred stock, voting
as a separate class, will be required to amend, alter or repeal any of the preferences, rights or
powers of holders of preferred stock so as to affect materially and adversely such preferences,
rights or powers. The class vote of holders of preferred stock described above will in each case be
in addition to any other vote required to authorize the action in question.
We will have the right (to the extent permitted by applicable law) to purchase or otherwise
acquire any preferred stock, so long as we are current in the payment of dividends on the preferred
stock and on any other of our shares ranking on a parity with the preferred stock with respect to
the payment of dividends or upon liquidation.
Market.
The details on how to buy and sell preferred stock, along with other terms of such
preferred stock, will be described in a related prospectus supplement. We cannot assure you that
any secondary market will exist or that if a secondary market does exist, whether it will provide
holders with liquidity.
Book-Entry, Delivery and Form.
Unless otherwise indicated in the related prospectus
supplement, preferred stock will be issued in book-entry form and will be represented by one or
more share certificates in registered global form. The global certificates will be
held by The Depository Trust Company (DTC) and registered in the name of Cede & Co., as
nominee of DTC. DTC will maintain the certificates in specified denominations per share through its
book-entry facilities.
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We may treat the persons in whose names any global certificates are registered as the owners
thereof for the purpose of receiving payments and for any and all other purposes whatsoever.
Therefore, so long as DTC or its nominee is the registered owner of the global certificates, DTC or
such nominee will be considered the sole holder of outstanding preferred stock.
A global certificate may not be transferred except as a whole by DTC, its successors or their
respective nominees, subject to the provisions restricting transfers of shares contained in the
related articles supplementary.
Transfer Agent, Registrar, Dividend Paying Agent and Redemption Agent.
Unless otherwise
stated in a prospectus supplement, The Bank of New York, 101 Barclay Street, New York, New York,
serves as the transfer agent, registrar, dividend paying agent and redemption agent with respect to
our preferred stock.
Debt Securities
General.
Under Maryland law and our Charter, we may borrow money, without prior approval of
holders of common and preferred stock to the extent permitted by our investment restrictions and
the 1940 Act. We may issue debt securities, including additional Tortoise Notes, or other evidence
of indebtedness (including bank borrowings or commercial paper) and may secure any such notes or
borrowings by mortgaging, pledging or otherwise subjecting as security our assets to the extent
permitted by the 1940 Act or rating agency guidelines. Any borrowings, including without limitation
the Tortoise Notes, will rank senior to the preferred stock and the common stock.
Under the 1940 Act, we may only issue one class of senior securities representing
indebtedness, which in the aggregate, may represent no more than 33.33% of our total assets. So
long as any Tortoise Notes are outstanding, additional debt securities must rank on a parity with
Tortoise Notes with respect to the payment of interest and upon the distribution of our assets. The
details on how to buy and sell debt securities, along with other terms of such debt securities,
will be described in a related prospectus supplement and will include the following:
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the form and title of the security;
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the aggregate principal amount of the securities;
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the interest rate of the securities;
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the maturity dates on which the principal of the securities will be payable;
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any changes to or additional events of default or covenants;
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any optional or mandatory redemption provisions;
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any changes in trustees, paying agents or security registrar; and
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any other terms of the securities.
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Interest.
The prospectus supplement will describe the interest payment provisions relating to
those debt securities. Interest on debt securities shall be payable when due as described in the
related prospectus supplement. If we do not pay interest when due, it will trigger an event of
default and we will be restricted from declaring dividends and making other distributions with
respect to our common stock and preferred stock.
Limitations.
Under the requirements of the 1940 Act, immediately after issuing any senior
securities representing indebtedness, we must have an asset coverage of at least 300%. Asset
coverage means the ratio which the value of our total assets, less all liabilities and indebtedness
not represented by senior securities, bears to the aggregate amount of senior securities
representing indebtedness. Borrowings also may result in our being subject to covenants in credit
agreements that may be more stringent than the restrictions imposed by the 1940 Act.
Events of Default and Acceleration of Maturity of Debt Securities; Remedies.
Unless stated
otherwise in the related prospectus supplement, any one of the following events will constitute an
event of default for that series under the indenture dated as of July 14, 2004 (the Indenture):
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default in the payment of any interest upon a series of debt securities when it becomes
due and payable and the continuance of such default for 30 days;
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default in the payment of the principal of, or premium on, a series of debt securities at
its stated maturity;
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default in the performance, or breach, of any covenant or warranty of ours in the
Indenture, and continuance of such default or breach for a period of 90 days after written
notice has been given to us by the trustee;
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certain voluntary or involuntary proceedings involving us and relating to bankruptcy,
insolvency or other similar laws;
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if, on the last business day of each of twenty-four consecutive calendar months, the debt
securities have a 1940 Act asset coverage of less than 100%; or
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any other event of default provided with respect to a series, including a default in
the payment of any redemption price payable on the redemption date.
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Upon the occurrence and continuance of an event of default, the holders of a majority in principal
amount of a series of outstanding debt securities or the trustee may declare the principal amount
of that series of debt securities immediately due and payable upon written notice to us. A default
that relates only to one series of debt securities does not affect any other series and the holders
of such other series of debt securities are not entitled to receive notice of such a default under
the Indenture. Upon an event of default relating to bankruptcy, insolvency or other similar laws,
acceleration of maturity occurs automatically with respect to all series. At any time after a
declaration of acceleration with respect to a series of debt securities has been made, and before a
judgment or decree for payment of the money due has been obtained, the holders of a majority in
principal amount of the outstanding debt securities of that series, by written notice to us and the
trustee, may rescind and annul the declaration of acceleration and its consequences if all events
of default with respect to that series of debt securities, other than the non-payment of the
principal of that series of debt securities which has become due solely by such declaration of
acceleration, have been cured or waived and other conditions have been met.
Liquidation Rights.
In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or proceeding in connection
therewith, relative to us or to our creditors, as such, or to our assets, or (b) any liquidation,
dissolution or other winding up of us, whether voluntary or involuntary and whether or not
involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of ours, then (after any payments with respect to any secured
creditor of ours outstanding at such time) and in any such event the holders of debt securities
shall be entitled to receive payment in full of all amounts due or to become due on or in respect
of all debt securities (including any interest accruing thereon after the commencement of any such
case or proceeding), or provision shall be made for such payment in cash or cash equivalents or
otherwise in a manner satisfactory to the holders of the debt securities, before the holders of any
of our common or preferred stock are entitled to receive any payment on account of any redemption
proceeds, liquidation preference or dividends from such shares. The holders of debt securities
shall be entitled to receive, for application to the payment thereof, any payment or distribution
of any kind or character, whether in cash, property or securities, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any other indebtedness
of ours being subordinated to the payment of the debt securities, which may be payable or
deliverable in respect of the debt securities in any such case, proceeding, dissolution,
liquidation or other winding up event.
Unsecured creditors of ours may include, without limitation, service providers including our
Adviser, custodian, administrator, broker-dealers and the trustee, pursuant to the terms of various
contracts with us. Secured creditors of ours may include without limitation parties entering into
any interest rate swap, floor or cap transactions, or other similar transactions with us that
create liens, pledges, charges, security interests, security agreements or other encumbrances on
our assets.
A consolidation, reorganization or merger of us with or into any other company, or a sale,
lease or exchange of all or substantially all of our assets in consideration for the issuance of
equity securities of another company shall not be deemed to be a liquidation, dissolution or
winding up of us.
Voting Rights.
Debt securities have no voting rights, except to the extent required by law or
as otherwise provided in the Indenture relating to the acceleration of maturity upon the occurrence
and continuance of an event of default. In connection with any other borrowings (if any), the 1940
Act does in certain circumstances grant to the lenders certain voting rights in the event of
default in the payment of interest on or repayment of principal.
Market.
The details on how to buy and sell debt securities, along with other terms of such
debt securities, will be described in a related prospectus supplement. We cannot assure you that
any secondary market will exist or if a secondary market does exist, whether it will provide
holders with liquidity.
Book-Entry, Delivery and Form.
Unless otherwise stated in the related prospectus supplement,
the debt securities will be issued in book-entry form and will be represented by one or more notes
in registered global form. The global notes will be deposited with the trustee as custodian for DTC
and registered in the name of Cede & Co., as nominee of DTC. DTC will maintain the notes in
designated denominations through its book-entry facilities.
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Under the terms of the Indenture, we and the trustee may treat the persons in whose names any
notes, including the global notes, are registered as the owners thereof for the purpose of
receiving payments and for any and all other purposes whatsoever. Therefore, so long as DTC or its
nominee is the registered owner of the global notes, DTC or such nominee will be considered the
sole holder of outstanding notes under the Indenture. We or the trustee may give effect to any
written certification, proxy or other authorization furnished by DTC or its nominee.
A global note may not be transferred except as a whole by DTC, its successors or their
respective nominees. Interests of beneficial owners in the global note may be transferred or
exchanged for definitive securities in accordance with the rules and procedures of DTC. In
addition, a global note may be exchangeable for notes in definitive form if:
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DTC notifies us that it is unwilling or unable to continue as a depository and we do not
appoint a successor within 60 days;
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we, at our option, notify the trustee in writing that we elect to cause the issuance of
notes in definitive form under the Indenture; or
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an event of default has occurred and is continuing.
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In each instance, upon surrender by DTC or its nominee of the global note, notes in definitive
form will be issued to each person that DTC or its nominee identifies as being the beneficial owner
of the related notes.
Under the Indenture, the holder of any global note may grant proxies and otherwise authorize
any person, including its participants and persons who may hold interests through DTC participants,
to take any action which a holder is entitled to take under the Indenture.
Trustee, Transfer Agent, Registrar, Paying Agent and Redemption Agent.
Unless otherwise
stated in a prospectus supplement, The Bank of New York Trust Company, N.A., 2 N. LaSalle Street,
Chicago, Illinois 60602, serves as the trustee under the Indenture and acts as transfer agent,
registrar, paying agent and redemption agent with respect to our debt securities.
RATING AGENCY GUIDELINES
The Rating Agencies, which assign ratings to our senior securities, impose asset coverage
requirements, which may limit our ability to engage in certain types of transactions and may limit
our ability to take certain actions without confirming that such action will not impair the
ratings. The Tortoise Preferred Shares are currently rated Aa2 by Moodys. The Tortoise Notes are
currently rated AAA by Fitch. Moodys and Fitch, and any other agency that may rate our debt
securities (including Tortoise Notes) or preferred stock (including Tortoise Preferred Shares) in
the future, are collectively referred to as the Rating Agencies.
We may, but are not required to, adopt any modification to the guidelines that may hereafter
be established by any Rating Agency. Failure to adopt any modifications, however, may result in a
change in the ratings described above or a withdrawal of ratings altogether. In addition, any
Rating Agency may, at any time, change or withdraw any rating. The Board may, without stockholder
approval, modify, alter or repeal certain of the definitions and related provisions which have been
adopted pursuant to each Rating Agencys guidelines (Rating Agency Guidelines) only in the event
we receive written confirmation from the Rating Agency or Agencies that any amendment, alteration
or repeal would not impair the ratings then assigned to the senior securities.
We are required to satisfy two separate asset maintenance requirements with respect to
outstanding debt securities and with respect to outstanding preferred stock: (1) we must maintain
assets in our portfolio that have a value, discounted in accordance with guidelines set forth by
each Rating Agency, at least equal to the aggregate principal amount/aggregate liquidation
preference of the debt securities/preferred stock, respectively, plus specified liabilities,
payment obligations and other amounts (the Basic Maintenance Amount); and (2) we must satisfy the
1940 Act asset coverage requirements.
Basic Maintenance Amounts.
We must maintain, as of each valuation date on which senior
securities are outstanding, eligible assets having an aggregate discounted value at least equal to
115% of the applicable basic maintenance amount (Basic Maintenance Amount), which is calculated
separately for debt securities and preferred stock for each Rating Agency that is then rating the
senior securities and so requires. If we fail to maintain eligible assets having an aggregated
discounted value at least equal to the applicable Basic Maintenance Amount as of any valuation date
and such failure is not cured, we will be required in certain circumstances to redeem certain of
the senior securities.
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The applicable Basic Maintenance Amount is defined in the Rating Agencys Guidelines. Each
Rating Agency may amend the definition of the applicable Basic Maintenance Amount from time to
time. The market value of our portfolio securities (used in calculating the discounted value of
eligible assets) is calculated using readily available market quotations when appropriate, and in
any event, consistent with our valuation procedures. For the purpose of calculating the applicable
Basic Maintenance Amount, portfolio securities are valued in the same manner as we calculate our
NAV. See Determination of Net Asset Value.
Each Rating Agencys discount factors, the criteria used to determine whether the assets held
in our portfolio are eligible assets, and the guidelines for determining the discounted value of
our portfolio holdings for purposes of determining compliance with the applicable Basic Maintenance
Amount are based on Rating Agency Guidelines established in connection with rating the senior
securities. The discount factor relating to any asset, the applicable basic maintenance amount
requirement, the assets eligible for inclusion in the calculation of the discounted value of our
portfolio and certain definitions and methods of calculation relating thereto may be changed from
time to time by the applicable Rating Agency, without our approval, or the approval of our Board of
Directors or stockholders.
A Rating Agencys Guidelines will apply to the senior securities only so long as that Rating
Agency is rating such securities. We will pay certain fees to Moodys, Fitch and any other Rating
Agency that may provide a rating for the senior securities. The ratings assigned to the senior
securities are not recommendations to buy, sell or hold the senior securities. Such ratings may be
subject to revision or withdrawal by the assigning Rating Agency at any time.
1940 Act Asset Coverage.
We are also required to maintain, with respect to senior securities,
as of the last business day on any month in which any senior securities are outstanding, asset
coverage of at least 300% for debt securities and 200% for preferred stock (or such other
percentage as may in the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities representing shares of a closed-end investment company as a condition of
declaring dividends on its common stock). If we fail to maintain the applicable 1940 Act asset
coverage as of the last business day of any month and such failure is not cured as of the last
business day of the following month (the Asset Coverage Cure Date), we will be required to redeem
certain senior securities.
Notices.
Under the current Rating Agency Guidelines, in certain circumstances, we are
required to deliver to any Rating Agency which is then rating the senior securities (1) a
certificate with respect to the calculation of the applicable Basic Maintenance Amount; (2) a
certificate with respect to the calculation of the applicable 1940 Act asset coverage and the value
of our portfolio holdings; and (3) a letter prepared by our independent accountants regarding the
accuracy of such calculations.
Notwithstanding anything herein to the contrary, the Rating Agency Guidelines, as they may be
amended from time to time by each Rating Agency will be reflected in a written document and may be
amended by each Rating Agency without the vote, consent or approval of us, the Board of Directors
or any of our stockholders.
A copy of the current Rating Agency Guidelines will be provided to any holder of senior
securities promptly upon request made by such holder by writing to us at 11550 Ash Street, Suite
300, Leawood, Kansas 66211.
CERTAIN PROVISIONS IN OUR CHARTER AND BYLAWS
The following description of certain provisions of our Charter and Bylaws is only a summary.
For a complete description, please refer to our Charter and Bylaws, which have been filed as
exhibits to our registration statement on Form N-2, of which this prospectus forms a part.
Our Charter and Bylaws include provisions that could delay, defer or prevent other entities or
persons from acquiring control of us, causing us to engage in certain transactions or modifying our
structure. Further, these provisions can have the effect of depriving stockholders of the
opportunity to sell their shares at a premium over prevailing market prices by discouraging third
parties from seeking to obtain control of us. These provisions, all of which are summarized below,
may be regarded as anti-takeover provisions.
Classification of the Board of Directors; Election of Directors
Our Charter provides that the number of directors may be established only by the Board of
Directors pursuant to the Bylaws, but may not be less than one. The Bylaws provide that the number
of directors may not be greater than nine. Subject to any applicable limitations of the 1940 Act,
any vacancy may be filled, at any regular meeting or at any special meeting called for that
purpose, only by a majority of the remaining directors, even if those remaining directors do not
constitute a quorum. Pursuant to our Charter, the
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Board of Directors is divided into three classes: Class I, Class II and Class III. Upon the
expiration of their current terms, which expire in 2009, 2010 and 2011, respectively, directors of
each class will be elected to serve for three-year terms and until their successors are duly
elected and qualified. Each year only one class of directors will be elected by the stockholders.
The classification of the Board of Directors should help to assure the continuity and stability of
our strategies and policies as determined by the Board of Directors.
The classified Board provision could have the effect of making the replacement of incumbent
directors more time-consuming and difficult. At least two annual meetings of stockholders, instead
of one, will generally be required to effect a change in a majority of the Board of Directors.
Thus, the classified Board provision could increase the likelihood that incumbent directors will
retain their positions. The staggered terms of directors may delay, defer or prevent a change in
control of the Board, even though a change in control might be in the best interests of the
stockholders.
Removal of Directors
Our Charter provides that, subject to the rights of holders of one or more classes of
preferred stock, a director may be removed only for cause and only by the affirmative vote of at
least two-thirds of the votes entitled to be cast in the election of directors. This provision,
when coupled with the provision in the Bylaws authorizing only the Board of Directors to fill
vacant directorships, precludes stockholders from removing incumbent directors, except for cause
and by a substantial affirmative vote, and filling the vacancies created by the removal with
nominees of stockholders.
Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter,
merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business, unless declared advisable by the Board of
Directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds
of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its
charter for stockholder approval of these matters by a lesser percentage, but not less than a
majority of all of the votes entitled to be cast on the matter. Our Charter generally provides for
approval of Charter amendments and extraordinary transactions by the stockholders entitled to cast
at least a majority of the votes entitled to be cast on the matter. Our Charter also provides that
certain Charter amendments and any proposal for our conversion, whether by merger or otherwise,
from a closed-end company to an open-end company or any proposal for our liquidation or dissolution
requires the approval of stockholders entitled to cast at least 80 percent of the votes entitled to
be cast on such matter. However, if such amendment or proposal is approved by at least two-thirds
of our continuing directors (in addition to the approval by our Board of Directors otherwise
required), such amendment or proposal may be approved by stockholders entitled to cast a majority
of the votes entitled to be cast on such a matter. The continuing directors are defined in our
Charter as the directors named in our Charter as well as those directors whose nomination for
election by the stockholders or whose election by the directors to fill vacancies is approved by a
majority of the continuing directors then on the Board of Directors.
Our Charter and Bylaws provide that the Board of Directors will have the exclusive power to
make, alter, amend or repeal any provision of our Bylaws.
Advance Notice of Director Nominations and New Business
The Bylaws provide that, with respect to an annual meeting of stockholders, nominations of
persons for election to the Board of Directors and the proposal of business to be considered by
stockholders may be made only (1) pursuant to notice of the meeting, (2) by or at the direction of
the Board of Directors, or (3) by a stockholder who is entitled to vote at the meeting and who has
complied with the advance notice procedures of the Bylaws. With respect to special meetings of
stockholders, only the business specified in the Companys notice of the meeting may be brought
before the meeting. Nominations of persons for election to the Board of Directors at a special
meeting may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of
the Board of Directors, or (3) provided that the Board of Directors has determined that directors
will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has
complied with the advance notice provisions of the Bylaws.
SELLING STOCKHOLDERS
An unspecified number of shares of our common stock may be offered and sold for resale from
time to time under this prospectus by certain of our stockholders; provided, however, that no
stockholder will be authorized to use this prospectus for an offering of our common stock without
first obtaining our consent. We may consent to the use of this prospectus by certain of our
stockholders for a limited period of time and subject to certain limitations and conditions
depending on the terms of any agreements between us and such stockholders. The identity of any
selling stockholder, including any material relationship between us and our affiliates and such
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selling stockholder, the percentage of our common stock owned by such selling stockholder
prior to the offering, the number of shares of our common stock to be offered by such selling
stockholder, the percentage of our common stock to be owned (if greater than one percent) by such
selling stockholder following the offering, and the price and terms upon which our shares of common
stock are to be sold by such selling stockholder will be set forth in a prospectus supplement to
this prospectus. We will not receive any of the proceeds from the common stock sold by any selling
stockholder.
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PLAN OF DISTRIBUTION
We may sell our common stock, preferred stock and debt securities, and certain of our stockholders
may sell our common stock, on an immediate, continuous or delayed basis, in one or more offerings
under this prospectus and any related prospectus supplement. The aggregate amount of securities
that may be offered by us and any selling stockholders is limited to $300,000,000. We may offer
our common stock, preferred stock and debt securities: (1) directly to one or more purchasers;
(2) through agents; (3) through underwriters; (4) through dealers; or (5) pursuant to our Dividend
Reinvestment Plan. Any selling stockholders may offer our common stock: (1) directly to one or more
purchasers; (2) through agents; (3) through underwriters; or (4) through dealers. Each prospectus
supplement relating to an offering of securities will state the terms of the offering, including as
applicable:
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the names of any agents, underwriters or dealers;
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any sales loads or other items constituting underwriters compensation;
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any discounts, commissions, or fees allowed or paid to dealers or agents;
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the public offering or purchase price of the offered securities and the net proceeds we
will receive from the sale; provided, however that we will not receive any of the proceeds
from a sale of our common stock by any selling stockholder; and
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any securities exchange on which the offered securities may be listed.
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Direct Sales
We may sell our common stock, preferred stock and debt securities, or certain of our
stockholders may sell our common stock, directly to, and solicit offers from, institutional
investors or others who may be deemed to be underwriters as defined in the 1933 Act for any resales
of the securities. In this case, no underwriters or agents would be involved. We or any selling
stockholder may use electronic media, including the Internet, to sell offered securities directly.
The terms of any of those sales will be described in a prospectus supplement.
By Agents
We may offer our common stock, preferred stock and debt securities, or certain of our
stockholders may sell our common stock, through agents that we or they designate. Any agent
involved in the offer and sale will be named and any commissions payable by us or any selling
stockholder will be described in the prospectus supplement. Unless otherwise indicated in the
prospectus supplement, the agents will be acting on a best efforts basis for the period of their
appointment.
By Underwriters
We may offer and sell securities, or certain of our stockholders may offer our common stock,
from time to time to one or more underwriters who would purchase the securities as principal for
resale to the public, either on a firm commitment or best efforts basis. If we sell securities or a
selling stockholder offers our common stock to underwriters, we and such selling stockholder will
execute an underwriting agreement with them at the time of the sale and will name them in the
prospectus supplement. In connection with these sales, the underwriters may be deemed to have
received compensation from us or such selling stockholder in the form of underwriting discounts and
commissions. The underwriters also may receive commissions from purchasers of securities for whom
they may act as agent. Unless otherwise stated in the prospectus supplement, the underwriters will
not be obligated to purchase the securities unless the conditions set forth in the underwriting
agreement are satisfied, and if the underwriters purchase any of the securities, they will be
required to purchase all of the offered securities. The underwriters may sell the offered
securities to or through dealers, and those dealers may receive discounts, concessions or
commissions from the underwriters as well as from the purchasers for whom they may act as agent.
Any public offering price and any discounts or concessions allowed or reallowed or paid to dealers
may be changed from time to time.
If a prospectus supplement so indicates, we may grant the underwriters an option to purchase
additional shares of common stock at the public offering price, less the underwriting discounts and
commissions, within 45 days from the date of the prospectus supplement, to cover any
overallotments.
By Dealers
We, or certain of our stockholders may offer our common stock, may offer and sell securities,
or certain of our stockholders may offer our common stock, from time to time to one or more dealers
who would purchase the securities as principal. The dealers then
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may resell the offered securities to the public at fixed or varying prices to be determined by
those dealers at the time of resale. The names of the dealers and the terms of the transaction will
be set forth in the prospectus supplement.
General Information
Agents, underwriters, or dealers participating in an offering of securities may be deemed to
be underwriters, and any discounts and commission received by them and any profit realized by them
on resale of the offered securities for whom they act as agent, may be deemed to be underwriting
discounts and commissions under the 1933 Act.
We may offer to sell securities either at a fixed price or at prices that may vary, at market
prices prevailing at the time of sale, at prices related to prevailing market prices, or at
negotiated prices.
Ordinarily, each series of offered securities will be a new issue of securities, and other
than our common stock, will have no established trading market.
To facilitate an offering of common stock in an underwritten transaction and in accordance
with industry practice, the underwriters may engage in transactions that stabilize, maintain, or
otherwise affect the market price of the common stock or any other security. Those transactions may
include overallotment, entering stabilizing bids, effecting syndicate covering transactions, and
reclaiming selling concessions allowed to an underwriter or a dealer.
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An overallotment in connection with an offering creates a short position in the common
stock for the underwriters own account.
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An underwriter may place a stabilizing bid to purchase the common stock for the purpose
of pegging, fixing, or maintaining the price of the common stock.
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Underwriters may engage in syndicate covering transactions to cover overallotments or to
stabilize the price of the common stock by bidding for, and purchasing, the common stock or
any other securities in the open market in order to reduce a short position created in
connection with the offering.
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The managing underwriter may impose a penalty bid on a syndicate member to reclaim a
selling concession in connection with an offering when the common stock originally sold by
the syndicate member is purchased in syndicate covering transactions or otherwise.
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Any of these activities may stabilize or maintain the market price of the securities above
independent market levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
Any underwriters to whom the offered securities are sold for offering and sale may make a
market in the offered securities, but the underwriters will not be obligated to do so and may
discontinue any market-making at any time without notice. The offered securities may or may not be
listed on a securities exchange. We cannot assure you that there will be a liquid trading market
for the offered securities.
Under agreements entered into with us, underwriters and agents and related persons (or their
affiliates) may be entitled to indemnification by us against certain civil liabilities, including
liabilities under the 1933 Act, or to contribution for payments the underwriters or agents may be
required to make.
The underwriters, agents, and their affiliates may engage in financial or other business
transactions with us and our subsidiaries in the ordinary course of business.
The maximum commission or discount to be received by any member of the National Association of
Securities Dealers, Inc. or independent broker-dealer will not be greater than eight percent of the
initial gross proceeds from the sale of any security being sold.
The aggregate offering price specified on the cover of this prospectus relates to the offering
of the securities not yet issued as of the date of this prospectus.
To the extent permitted under the 1940 Act and the rules and regulations promulgated
thereunder, the underwriters may from time to time act as a broker or dealer and receive fees in
connection with the execution of our portfolio transactions after the underwriters have ceased to
be underwriters and, subject to certain restrictions, each may act as a broker while it is an
underwriter.
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A prospectus and accompanying prospectus supplement in electronic form may be made available
on the websites maintained by underwriters. The underwriters may agree to allocate a number of
securities for sale to their online brokerage account holders. Such allocations of securities for
internet distributions will be made on the same basis as other allocations. In addition, securities
may be sold by the underwriters to securities dealers who resell securities to online brokerage
account holders.
Automatic Dividend Reinvestment Plan
We may issue and sell shares of common stock pursuant to our Automatic Dividend Reinvestment
Plan.
ADMINISTRATOR AND CUSTODIAN
U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves
as our administrator. We pay the administrator a monthly fee computed at an annual rate of 0.04%
of the first $1 billion of our Managed Assets, 0.03% on the next $1 billion of our Managed Assets
and 0.02% on the balance of our Managed Assets.
U.S. Bank, NA, 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212, serves as
our custodian. We pay the custodian a monthly fee computed at an annual rate of 0.015% on the first
$100 million of the Companys portfolio assets and 0.010% on the balance of the Companys portfolio
assets, subject to a minimum annual fee of $4,800. U.S. Bank is also a lender under our
$92,500,000 unsecured revolving credit facility. We agreed to reimburse U.S. Bank for legal fees
and other expenses incurred by U.S. Bank in documenting the credit facility.
LEGAL MATTERS
Certain legal matters in connection with the securities offered hereby will be passed upon for
us by Husch Blackwell Sanders LLP (HBS), Kansas City, Missouri. HBS may rely as to certain
matters of Maryland law on the opinion of Venable LLP, Baltimore, Maryland. If certain legal
matters in connection with an offering of securities are passed upon by counsel for the
underwriters of such offering, such counsel to the underwriters will be named as named in a
prospectus supplement.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act and the 1940 Act and are
required to file reports, including annual and semi-annual reports, proxy statements and other
information with the SEC. We voluntarily file quarterly shareholder reports. Our most recent
shareholder report filed with the SEC is for our fiscal year ended November 30, 2008. These
documents are available on the SECs EDGAR system and can be inspected and copied for a fee at the
SECs public reference room, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Additional
information about the operation of the public reference room facilities may be obtained by calling
the SEC at (202) 551-5850.
This prospectus does not contain all of the information in our registration statement,
including amendments, exhibits, and schedules. Statements in this prospectus about the contents of
any contract or other document are not necessarily complete and in each instance reference is made
to the copy of the contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by this reference.
Additional information about us can be found in our Registration Statement (including
amendments, exhibits, and schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains our Registration Statement, other documents incorporated by
reference, and other information we have filed electronically with the SEC, including proxy
statements and reports filed under the Exchange Act.
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TABLE OF CONTENTS
OF THE STATEMENT OF ADDITIONAL INFORMATION
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Investment Limitations
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S-1
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Investment Objective and Policies
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S-3
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Management of the Company
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S-12
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Portfolio Transactions
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S-23
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Net Asset Value
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S-23
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Certain Federal Income Tax Matters
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S-24
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Proxy Voting Policies
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S-30
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Independent Registered Public Accounting Firm
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S-30
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Custodian
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S-30
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Internal Accountant
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S-31
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Additional Information
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S-31
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Financial Statements
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S-31
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Appendix A Rating of Investments
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A-1
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$300,000,000
Tortoise Energy Capital Corporation
Common Stock
Preferred Stock
Debt Securities
PROSPECTUS
March 6, 2009
TORTOISE ENERGY CAPITAL CORPORATION
STATEMENT OF ADDITIONAL INFORMATION
Tortoise Energy Capital Corporation, a Maryland corporation (the Company, we, us, or
our), is a non-diversified, closed-end management investment company that commenced operations in
May 2005.
This statement of additional information relates to the offering, on an immediate, continuous
or delayed basis, of up to $300,000,000 aggregate initial offering price of our common stock,
preferred stock and debt securities in one or more offerings. This statement of additional
information does not constitute a prospectus, but should be read in conjunction with our prospectus
relating thereto dated March 6, 2009 and any related prospectus supplement. This statement of
additional information does not include all information that a prospective investor should consider
before purchasing any of our securities. You should obtain and read our prospectus and any related
prospectus supplement prior to purchasing any of our securities. A copy of our prospectus and any
related prospectus supplement may be obtained without charge from us by calling 1-866-362-9331. You
also may obtain a copy of our prospectus and any related prospectus supplement on the SECs web
site (http://www.sec.gov). Capitalized terms used but not defined in this statement of additional
information have the meanings ascribed to them in the prospectus and any related prospectus
supplement. This statement of additional information is dated March 6, 2009.
TABLE OF CONTENTS
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Investment Limitations
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S-1
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Investment Objective and Principal Investment Strategies
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S-3
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Management of the Company
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S-12
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Portfolio Transactions
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S-22
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Net Asset Value
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S-23
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Certain Federal Income Tax Matters
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S-24
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Proxy Voting Policies
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S-30
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Independent Registered Public Accounting Firm
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S-30
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Custodian
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S-30
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Internal Accountant
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S-31
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Additional Information
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S-31
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Financial Statements
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S-31
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Appendix A Rating of Investments
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A-1
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INVESTMENT LIMITATIONS
This section supplements the disclosure in the prospectus and provides additional information
on our investment limitations. Investment limitations identified as fundamental may only be changed
with the approval of the holders of a majority of our outstanding voting securities (which for this
purpose and under the Investment Company Act of 1940, as amended (the 1940 Act) means the lesser
of (1) 67% of the voting shares represented at a meeting at which more than 50% of the outstanding
voting shares are represented or (2) more than 50% of the outstanding voting shares).
Investment limitations stated as a maximum percentage of our assets are only applied
immediately after, and because of, an investment or a transaction by us to which the limitation is
applicable (other than the limitations on borrowing). Accordingly, any later increase or decrease
resulting from a change in values, net assets or other circumstances will not be considered in
determining whether the investment complies with our investment limitations. All limitations with
respect to nonfundamental investment policies that are based on a percentage of total assets
include assets obtained or expected to be obtained through leverage.
Fundamental Investment Limitations
The following are our fundamental investment limitations set forth in their entirety. We may
not:
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issue senior securities, except as permitted by the 1940 Act and the rules and
interpretive positions of the SEC thereunder;
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borrow money, except as permitted by the 1940 Act and the rules and interpretive
positions of the SEC thereunder;
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make loans, except by the purchase of debt obligations, by entering into repurchase
agreements or through the lending of portfolio securities and as otherwise permitted by the
1940 Act and the rules and interpretive positions of the SEC thereunder;
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concentrate (invest 25% or more of total assets) our investments in any particular
industry, except that we will concentrate our assets in the group of industries
constituting the energy sector;
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underwrite securities issued by others, except to the extent that we may be considered
an underwriter within the meaning of the Securities Act of 1933, as amended (the 1933
Act), in the disposition of restricted securities held in our portfolio;
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purchase or sell real estate unless acquired as a result of ownership of securities or
other instruments, except that we may invest in securities or other instruments backed by
real estate or securities of companies that invest in real estate or interests therein; and
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purchase or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except that we may purchase or sell options and futures
contracts or invest in securities or other instruments backed by physical commodities.
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Nonfundamental Investment Policies
We have adopted the following nonfundamental policies:
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Under normal circumstances, we will invest at least 80% of our net assets, plus any
borrowings for investment purposes, in equity securities of entities in the energy sector.
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We will also invest at least 80% of our total assets in equity securities of master
limited partnerships (MLPs) and their affiliates in the energy infrastructure sector.
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We may invest up to 50% of our total assets in restricted securities, all of which may
be illiquid securities. The restricted securities that we may purchase include MLP
convertible subordinated units, MLP common units and securities of publicly traded and
privately held companies (i.e., non-MLPs).
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We may invest up to 20% of our total assets in debt securities, including certain
securities rated below investment grade (commonly referred to as junk bonds). Below
investment grade debt securities will be rated at least B3 by Moodys Investors Service,
Inc. (Moodys) and at least B- by Standard & Poors Ratings Group (S&Ps) at the time
of purchase, or comparably rated by another statistical rating organization or if unrated,
determined to be of comparable quality by Tortoise Capital Advisors L.L.C., a Delaware
limited liability company (the Adviser).
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We will not invest more than 15% of our total assets in any single issuer.
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We will not engage in short sales.
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S-1
As used in the bullets above, the term total assets includes assets obtained through
leverage for the purpose of each nonfundamental investment policy. During the period in which we
are investing the net proceeds of this offering, we will deviate from our investment policies with
respect to the net proceeds by investing the net proceeds in cash, cash equivalents, securities
issued or guaranteed by the U.S. Government or its instrumentalities or agencies, high quality,
short-term money market instruments, short-term debt securities, certificates of deposit, bankers
acceptances and other bank obligations, commercial paper rated in the highest category by a rating
agency or other fixed income securities.
Our Board of Directors (the Board of Directors or the Board) may change our nonfundamental
investment policies without stockholder approval and will provide notice to stockholders of
material changes (including notice through stockholder reports); provided, however a change in the
policy of investing at least 80% of our net assets, plus any borrowings for investment purposes, in
equity securities of entities in the energy sector requires at least 60 days prior written notice
to stockholders. Unless otherwise stated, all investment restrictions apply at the time of purchase
and we will not be required to reduce a position due solely to market value fluctuations.
Currently under the 1940 Act, we are not permitted to incur indebtedness unless immediately
after such borrowing we have asset coverage of at least 300% of the aggregate outstanding principal
balance of indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the value of our total
assets including the amount borrowed, less all liabilities and indebtedness not represented by
senior securities). Additionally, currently under the 1940 Act, we may not declare any dividend or
other distribution upon our common or preferred stock, or purchase any such stock, unless our
aggregate indebtedness has, at the time of the declaration of any such dividend or distribution or
at the time of any such purchase, an asset coverage of at least 300% after deducting the amount of
such dividend, distribution, or purchase price, as the case may be. Currently under the 1940 Act,
we are not permitted to issue preferred stock unless immediately after such issuance we have asset
coverage of at least 200% of the total of the aggregate amount of senior securities representing
indebtedness plus the aggregate liquidation value of the outstanding preferred stock (i.e., the
aggregate principal amount of such indebtedness and liquidation value may not exceed 50% of the
value of our total assets, including the proceeds of such issuance, less liabilities and
indebtedness not represented by senior securities). In addition, currently under the 1940 Act, we
are not permitted to declare any cash dividend or other distribution on our common stock or
purchase any such common stock unless, at the time of such declaration or purchase, we would
satisfy this 200% asset coverage requirement test after deducting the amount of such dividend,
distribution or share price.
Under the 1940 Act, a senior security does not include any promissory note or evidence of
indebtedness where such loan is for temporary purposes only and in an amount not exceeding 5% of
the value of the total assets of the issuer at the time the loan is made. A loan is presumed to be
for temporary purposes if it is repaid within sixty days and is not extended or renewed. Both
transactions involving indebtedness and any preferred stock issued by us would be considered senior
securities under the 1940 Act, and as such, are subject to the asset coverage requirements
discussed above.
Currently under the 1940 Act, we are not permitted to lend money or property to any person,
directly or indirectly, if such person controls or is under common control with us, except for a
loan from us to a company which owns all of our outstanding securities. Currently, under
interpretative positions of the staff of the SEC, we may not have on loan at any given time
securities representing more than one-third of our total assets.
We interpret our policies with respect to borrowing and lending to permit such activities as
may be lawful, to the full extent permitted by the 1940 Act or by exemption from the provisions
therefrom pursuant to an exemptive order of the SEC.
We interpret our policy with respect to concentration to include energy infrastructure
companies, as defined in the prospectus and below. See Investment Objective and Principal
Investment Strategies.
Under the 1940 Act, we may, but do not intend to, invest up to 10% of our total assets in the
aggregate in shares of other investment companies and up to 5% of our total assets in any one
investment company, provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a shareholder in any
investment company, we will bear our ratable share of that investment companys expenses, and would
remain subject to payment of our advisory fees and other expenses with respect to assets so
invested. Holders of common stock would therefore be subject to duplicative expenses to the extent
we invest in other investment companies. In addition, the securities of other investment companies
also may be leveraged and will therefore be subject to the same leverage risks described herein and
in the prospectus. The net asset value and market value of leveraged shares will be more volatile
and the yield to shareholders will tend to fluctuate more than the
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yield generated by unleveraged shares. A material decline in net asset value may impair our
ability to maintain asset coverage on preferred stock and debt securities, including any interest
and principal for debt securities.
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The prospectus presents our investment objective and principal investment strategies and
risks. This section supplements the disclosure in our prospectus and provides additional
information on our investment policies, strategies and risks. Restrictions or policies stated as a
maximum percentage of our assets are only applied immediately after a portfolio investment to which
the policy or restriction is applicable (other than the limitations on borrowing). Accordingly, any
later increase or decrease resulting from a change in values, net assets or other circumstances
will not be considered in determining whether the investment complies with our restrictions and
policies.
Our investment objective is to seek a high level of total return with an emphasis on current
distributions to stockholders. For purposes of our investment objective, total return includes
capital appreciation of, and all distributions received from, securities in which we invest
regardless of the tax character of the distribution. There is no assurance that we will achieve our
objective. Our investment objective and the investment policies discussed below are nonfundamental.
The Board of Directors may change an investment objective, or any policy or limitation that is not
fundamental, without a stockholder vote. Shareholders will receive at least 60 days prior written
notice of any change to the nonfundamental investment policy of investing at least 80% of net
assets, plus any borrowings for investment purposes, in equity securities of entities in the energy
sector. Unlike most other investment companies, we are not treated as a regulated investment
company under the U.S. Internal Revenue Code of 1986, as amended (the Internal Revenue Code).
Therefore, we are taxed as a regular C corporation and are subject to federal and applicable
state corporate income taxes.
Under normal circumstances, we will invest at least 80% of our total assets (including assets
to be obtained through anticipated leverage) in equity securities of MLPs and their affiliates in
the energy infrastructure sector. MLP equity securities (known as units) currently consist of
common units and convertible subordinated units. We also may invest in other securities, consistent
with its investment objective and fundamental and nonfundamental policies.
The following pages contain more detailed information about the types of issuers and
instruments in which we may invest, strategies our Adviser may employ in pursuit of investment
objective and a discussion of related risks. Our Adviser may not buy these instruments or use these
techniques unless it believes that doing so will help us achieve our objective.
Master Limited Partnerships
Under normal circumstances, we will invest at least 80% of our total assets (including assets
obtained through leverage) in equity securities of MLPs and their affiliates in the energy
infrastructure sector. An MLP is an entity that is generally taxed as a partnership for federal
income tax purposes and that derives each year at least 90% of its gross income from Qualifying
Income. Qualifying Income for MLPs includes interest, dividends, real estate rents, gain from the
sale or disposition of real property, income and gain from commodities or commodity futures, and
income and gain from mineral or natural resources activities that generate Qualifying Income. MLP
interests (known as units) are traded on securities exchanges or over-the-counter. An MLPs
organization as a partnership and compliance with the Qualifying Income rules generally eliminates
federal tax at the entity level.
An MLP has one or more general partners (who may be individuals, corporations, or other
partnerships) which manage the partnership, and limited partners, which provide capital to the
partnership but have no role in its management. Typically, the general partner is owned by company
management or another publicly traded sponsoring corporation. When an investor buys units in an
MLP, the investor becomes a limited partner.
MLPs are formed in several ways. A nontraded partnership may decide to go public. Several
nontraded partnerships may roll up into a single MLP. A corporation may spin-off a group of assets
or part of its business into an MLP of which it is the general partner, to realize the assets full
value on the marketplace by selling the assets and using the cash proceeds received from the MLP to
address debt obligations or to invest in higher growth opportunities, while retaining control of
the MLP. A corporation may fully convert to an MLP, although since 1986 the tax consequences have
made this an unappealing option for most corporations. Unlike the ways described above, it is also
possible for a newly formed entity to commence operations as an MLP from its inception.
The sponsor or general partner of an MLP, other energy companies, and utilities may sell
assets to MLPs in order to generate cash to fund expansion projects or repay debt. The MLP
structure essentially transfers cash flows generated from these acquired assets directly to MLP
limited partner unit holders.
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In the case of an MLP buying assets from its sponsor or general partner the transaction is
intended to be based upon comparable terms in the acquisition market for similar assets. To help
insure that appropriate protections are in place, the board of the MLP generally creates an
independent committee to review and approve the terms of the transaction. The committee often
obtains a fairness opinion and can retain counsel or other experts to assist its evaluation. Since
both parties normally have a significant equity stake in the MLP, both parties are aligned to see
that the transaction is accretive and fair to the MLP.
MLPs tend to pay relatively higher distributions than other types of companies and we intend
to use these MLP distributions in an effort to meet our investment objective.
As a motivation for the general partner to successfully manage the MLP and increase cash
flows, the terms of MLPs typically provide that the general partner receives a larger portion of
the net income as distributions reach higher target levels. As cash flow grows, the general partner
receives a greater interest in the incremental income compared to the interest of limited partners.
Although the percentages vary among MLPs, the general partners marginal interest in distributions
generally increases from 2% to 15% at the first designated distribution target level moving up to
25% and ultimately 50% as pre-established distribution per unit thresholds are met. Nevertheless,
the aggregate amount distributed to limited partners will increase as MLP distributions reach
higher target levels. Given this incentive structure, the general partner has an incentive to
streamline operations and undertake acquisitions and growth projects in order to increase
distributions to all partners.
Because the MLP itself generally does not pay federal income tax, its income or loss is
allocated to its investors, irrespective of whether the investors receive any cash payment or other
distributions from the MLP. An MLP typically makes quarterly cash distributions. Although they
resemble corporate dividends, MLP distributions are treated differently for tax purposes. The MLP
distribution is treated as a return of capital to the extent of the investors basis in his MLP
interest and, to the extent the distribution exceeds the investors basis in the MLP, generally as
capital gain. The investors original basis is the price paid for the units. The basis is adjusted
downwards with each distribution and allocation of deductions (such as depreciation) and losses,
and upwards with each allocation of taxable income and gain.
The partner will not incur federal income tax on distributions until: (1) he sells his MLP
units and pays tax on his gain, which gain is increased due to the basis decrease due to prior
distributions; or (2) his basis reaches zero. When the units are sold, the difference between the
sales price and the investors adjusted basis is gain or loss for federal income tax purposes.
The business of MLPs is affected by supply and demand for energy commodities because most MLPs
derive revenue and income based upon the volume of the underlying commodity produced, transported,
processed, distributed, and/or marketed. Specifically, processing and coal MLPs may be directly
affected by energy commodity prices. Propane MLPs own the underlying energy commodity, and
therefore have direct exposure to energy commodity prices, although our Adviser intends to seek
high quality MLPs that are able to mitigate or manage direct margin exposure to commodity prices.
Pipeline MLPs have indirect commodity exposure to oil and gas price volatility because although
they do not own the underlying energy commodity, the general level of commodity prices may affect
the volume of the commodity the MLP delivers to its customers and the cost of providing services
such as distributing natural gas liquids. The MLP industry in general could be hurt by market
perception that MLPs performance and valuation are directly tied to commodity prices.
MLPs in the energy sector in which we will invest can generally be classified into the
following categories:
Pipeline MLPs.
Pipeline MLPs are common carrier transporters of natural gas, natural gas
liquids (primarily propane, ethane, butane and natural gasoline), crude oil or refined petroleum
products (gasoline, diesel fuel and jet fuel). Pipeline MLPs also may operate ancillary businesses
such as storage and marketing of such products. Pipeline MLPs derive revenue from capacity and
transportation fees. Historically, pipeline output has been less exposed to cyclical economic
forces due to its low cost structure and government-regulated nature. In addition, most pipeline
MLPs have limited direct commodity price exposure because they do not own the product being
shipped.
Processing MLPs.
Processing MLPs are gatherers and processors of natural gas as well as
providers of transportation, fractionation and storage of natural gas liquids (NGLs). Processing
MLPs derive revenue from providing services to natural gas producers, which require treatment or
processing before their natural gas commodity can be marketed to utilities and other end user
markets. Revenue
for the processor is fee based, although it is not uncommon to have some participation in the
prices of the natural gas and NGL commodities for a portion of revenue.
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Propane MLPs.
Propane MLPs are distributors of propane to homeowners for space and water
heating. Propane MLPs derive revenue from the resale of the commodity on a margin over wholesale
cost. The ability to maintain margin is a key to profitability. Propane serves approximately 3% of
the household energy needs in the United States, largely for homes beyond the geographic reach of
natural gas distribution pipelines. Approximately 70% of annual cash flow is earned during the
winter heating season (October through March). Accordingly, volumes are weather dependent, but have
utility type functions similar to electricity and natural gas.
Coal MLPs.
Coal MLPs own, lease and manage coal reserves. Coal MLPs derive revenue from
production and sale of coal, or from royalty payments related to leases to coal producers.
Electricity generation is the primary use of coal in the United States. Demand for electricity and
supply of alternative fuels to generators are the primary drivers of coal demand. Coal MLPs are
subject to operating and production risks, such as: the MLP or a lessee meeting necessary
production volumes; federal, state and local laws and regulations which may limit the ability to
produce coal; the MLPs ability to manage production costs and pay mining reclamation costs; and
the effect on demand that the Environmental Protection Agencys standards set in the 1990 Clean Air
Act or other laws, regulations or trends have on coal-end users.
Marine Shipping MLPs
. Marine shipping MLPs are primarily marine transporters of natural gas,
crude oil or refined petroleum products. Marine shipping MLPs derive revenue from charging
customers for the transportation of these products utilizing the MLPs vessels. Transportation
services are typically provided pursuant to a charter or contract, the terms of which vary
depending on, for example, the length of use of a particular vessel, the amount of cargo
transported, the number of voyages made, the parties operating a vessel or other factors.
MLPs typically achieve distribution growth by internal and external means. MLPs achieve growth
internally by experiencing higher commodity volume driven by the economy and population, and
through the expansion of existing operations including increasing the use of underutilized
capacity, pursuing projects that can leverage and gain synergies with existing infrastructure and
pursuing so called greenfield projects. External growth is achieved by making accretive
acquisitions.
MLPs are subject to various federal, state and local environmental laws and health and safety
laws as well as laws and regulations specific to their particular activities. These laws and
regulations address: health and safety standards for the operation of facilities, transportation
systems and the handling of materials; air and water pollution requirements and standards; solid
waste disposal requirements; land reclamation requirements; and requirements relating to the
handling and disposition of hazardous materials. MLPs are subject to the costs of compliance with
such laws applicable to them, and changes in such laws and regulations may adversely affect their
results of operations.
MLPs operating interstate pipelines and storage facilities are subject to substantial
regulation by the Federal Energy Regulatory Commission (FERC), which regulates interstate
transportation rates, services and other matters regarding natural gas pipelines including: the
establishment of rates for service; regulation of pipeline storage and liquified natural gas
facility construction; issuing certificates of need for companies intending to provide energy
services or constructing and operating interstate pipeline and storage facilities; and certain
other matters. FERC also regulates the interstate transportation of crude oil, including:
regulation of rates and practices of oil pipeline companies; establishing equal service conditions
to provide shippers with equal access to pipeline transportation; and establishment of reasonable
rates for transporting petroleum and petroleum products by pipeline.
MLPs may be subject to liability relating to the release of substances into the environment,
including liability under federal SuperFund and similar state laws for investigation and
remediation of releases and threatened releases of hazardous materials, as well as liability for
injury and property damage for accidental events, such as explosions or discharges of materials
causing personal injury and damage to property. Such potential liabilities could have a material
adverse effect upon the financial condition and results of operations of MLPs.
MLPs are subject to numerous business related risks, including: deterioration of business
fundamentals reducing profitability due to development of alternative energy sources, consumer
sentiment with respect to global warming, changing demographics in the markets served, unexpectedly
prolonged and precipitous changes in commodity prices and increased competition that reduces the
MLPs market share; the lack of growth of markets requiring growth through acquisitions;
disruptions in transportation systems; the dependence of certain MLPs upon the energy exploration
and development activities of unrelated third parties; availability of capital for expansion and
construction of needed facilities; a significant decrease in natural gas production due to
depressed commodity prices or otherwise; the inability of MLPs to successfully integrate recent or
future acquisitions; and the general level of the economy.
For a further discussion and a general description of MLP federal income tax matters, see the
section entitled Certain Federal Income Tax Matters.
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Non-MLPs
Although we emphasize investments in MLPs, we also may invest in companies that are not
organized as MLPs. Non-MLP companies may include companies that operate energy assets but which are
organized as corporations or limited liability companies rather than in partnership form.
Generally, the partnership form is more suitable for companies that operate assets which generate
more stable cash flows. Companies that operate midstream assets (e.g., transporting, processing,
storing, distributing and marketing) tend to generate more stable cash flows than those that engage
in exploration and development or delivery of products to the end consumer. Non-MLP companies also
may include companies that provide services directly related to the generation of income from
energy-related assets, such as oil drilling services, pipeline construction and maintenance, and
compression services.
The energy industry and particular energy infrastructure companies may be adversely affected
by possible terrorist attacks, such as the attacks that occurred on September 11, 2001. It is
possible that facilities of energy infrastructure companies, due to the critical nature of their
energy businesses to the United States, could be direct targets of terrorist attacks or be
indirectly affected by attacks on others. They may have to incur significant additional costs in
the future to safeguard their assets. In addition, changes in the insurance markets after September
11, 2001 may make certain types in insurance more difficult to obtain or obtainable only at
significant additional cost. To the extent terrorism results in a lower level economic activity,
energy consumption could be adversely affected, which would reduce revenues and impede growth.
Terrorist or war related disruption of the capital markets could also affect the ability of energy
infrastructure companies to raise needed capital.
Our Investments
The types of securities in which we may invest include, but are not limited to, the following:
MLP Equity Securities
. Consistent with our investment objective, we may invest up to 100% of
our total assets in equity securities issued by MLPs and their affiliates in the energy
infrastructure sector, including common units, convertible subordinated units, I-Shares and limited
liability company (LLC) common units (each discussed below). We also may invest up to 20% of our
total assets in equity securities of entities not in the energy infrastructure sector.
The value of equity securities will be affected by changes in the stock markets, which may be
the result of domestic or international political or economic news, changes in interest rates or
changing investor sentiment. At times, stock markets can be volatile and stock prices can change
substantially. Equity securities risk will affect our net asset value per share, which will
fluctuate as the value of the securities held by us change. Not all stock prices change uniformly
or at the same time, and not all stock markets move in the same direction at the same time. Other
factors affect a particular stocks prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental regulations
affecting an industry. Adverse news affecting one company can sometimes depress the stock prices of
all companies in the same industry. Not all factors can be predicted.
Investing in securities of smaller companies may involve greater risk than is associated with
investing in more established companies. Smaller capitalization companies may have limited product
lines, markets or financial resources; may lack management depth or experience; and may be more
vulnerable to adverse general market or economic developments than larger more established
companies.
MLP Common Units
. MLP common units represent an equity ownership interest in a partnership,
providing limited voting rights and entitling the holder to a share of the companys success
through distributions and/or capital appreciation. Unlike stockholders of a corporation, common
unit holders do not elect directors annually and generally have the right to vote only on certain
significant events, such as mergers, a sale of substantially all of the assets, removal of the
general partner or material amendments to the partnership agreement. MLPs are required by their
partnership agreements to distribute a large percentage of their current operating earnings. Common
unit holders generally have first right to a minimum quarterly distribution (MQD) prior to
distributions to the convertible subordinated unit holders or the general partner (including
incentive distributions). Common unit holders typically have arrearage rights if the MQD is not
met. In the event of liquidation, MLP common unit holders have first rights to the partnerships
remaining assets after bondholders, other debt holders, and preferred unit holders have been paid
in full. MLP common units trade on a national securities exchange or over-the-counter.
Limited Liability Company Common Units.
Some energy infrastructure companies in which we may
invest have been organized as LLCs. Such LLCs are treated in the same manner as MLPs for federal
income tax purposes. Consistent with its investment objective
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and policies, the Company may invest
in common units or other securities of such LLCs. LLC common units represent an equity ownership
interest in an LLC, entitling the holders to a share of the LLCs success through distributions
and/or capital appreciation. Similar to MLPs, LLCs typically do not pay federal income tax at the
entity level and are required by their operating agreements to distribute a large percentage of
their current operating earnings. LLC common unit holders generally have first right to a MQD prior
to distributions to subordinated unit holders and typically have arrearage rights if the MQD is not
met. In the event of liquidation, LLC common unit holders have first right to the LLCs remaining
assets after bondholders, other debt holders and preferred unit holders, if any, have been paid in
full. LLC common units trade on a national securities exchange or over-the-counter.
In contrast to MLPs, LLCs have no general partner and there are generally no incentives that
entitle management or other unit holders to increased percentages of cash distributions as
distributions reach higher target levels. In addition, LLC common unit holders typically have
voting rights with respect to the LLC, whereas MLP common units have limited voting rights.
MLP Convertible Subordinated Units
. MLP convertible subordinated units are typically issued by
MLPs to founders, corporate general partners of MLPs, entities that sell assets to the MLPs, and
institutional investors. The purpose of the convertible subordinated units is to increase the
likelihood that during the subordination period there will be available cash to be distributed to
common unit holders. We expect to purchase subordinated units in direct placements from such
persons or other persons that may hold such units. MLP convertible subordinated units generally are
not entitled to distributions until holders of common units have received specified MQD, plus any
arrearages, and may receive less than common unitholders in distributions upon liquidation.
Convertible subordinated unit holders generally are entitled to MQD prior to the payment of
incentive distributions to the general partner, but are not entitled to arrearage rights.
Therefore, MLP convertible subordinated units generally entail greater risk than MLP common units.
They are generally convertible automatically into the senior common units of the same issuer at a
one-to-one ratio upon the passage of time or the satisfaction of certain financial tests. Although
the means by which convertible subordinated units convert into senior common units depend on a
securitys specific terms, MLP convertible subordinated units typically are exchanged for common
shares. These units do not trade on a national exchange or over-the-counter, and there is no
active market for convertible subordinated units. The value of a convertible subordinated unit is a
function of its worth if converted into the underlying common units. Convertible subordinated units
generally have similar voting rights as do MLP common units.
MLP I-Shares
. I-Shares represent an indirect investment in MLP common units. I-Shares are
equity securities issued by affiliates of MLPs, typically a limited liability company, that owns an
interest in and manages the MLP. The issuer has management rights but is not entitled to incentive
distributions. The I-Share issuers assets consist exclusively of MLP common units. Distributions
to I-Share holders in the form of additional I-Shares are generally equal in amount to the I-Units
received by the I-Share issuer. The issuer of the I-Share is taxed as a corporation, however, the
MLP does not allocate income or loss to the I-Share issuer. Accordingly, investors receive a Form
1099, are not allocated their proportionate share of income of the MLP and are not subject to state
filing obligations solely as a result of holding such I-Shares. Distributions of I-Shares generally
do not generate unrelated business taxable income for federal income tax purposes and are
qualifying income for mutual fund investors.
Equity Securities of MLP Affiliates
. We may also invest in equity securities of MLP
affiliates, by purchasing securities of limited liability entities that own general partner
interests of MLPs. General partner interests of MLPs are typically retained by an MLPs original
sponsors, such as its founders, corporate partners, entities that sell assets to the MLP and
investors such as the entities from which we may purchase general partner interests. A holder of
general partner interests can be liable under certain circumstances for amounts greater than the
amount of the holders investment in the general partner interest. General partner interests often
confer direct board participation rights and in many cases, operating control, over the MLP. These
interests themselves are not publicly traded, although they may be owned by publicly traded
entities. General partner interests receive cash distributions, typically 2% of the MLPs aggregate
cash distributions, which are contractually defined in the partnership agreement. In addition,
holders of general partner interests typically hold incentive distribution rights (IDRs), which
provide them with a larger share of the aggregate MLP cash distributions as the distributions to
limited partner unit holders are increased to prescribed levels. General partner interests
generally cannot be converted into common units. The general partner interest can be redeemed by
the MLP if the MLP unitholders choose to remove the general partner, typically with a supermajority
vote by the MLP limited partner unitholders.
Non-MLP Equity Securities.
We also may invest in common and preferred stock, limited liability
company interests, limited partner interests, convertible securities, warrants and depository
receipts of companies that are organized as corporations, limited liability companies or limited
partnerships. Common stock generally represents an equity ownership interest in an issuer. Although
common stocks have historically generated higher average total returns than fixed-income securities
over the long term, common
stocks also have experienced significantly more volatility in those returns and may
under-perform relative to fixed-income securities during certain periods. An adverse event, such as
an unfavorable earnings report, may depress the value of a particular common stock held by us.
Also, prices of common stocks are sensitive to general movements in the stock market and a drop in
the stock market may
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depress the price of common stocks to which we have exposure. Common stock
prices fluctuate for several reasons including changes in investors perceptions of the financial
condition of an issuer or the general condition of the relevant stock market, or the occurrence of
political or economic events which effect the issuers. In addition, common stock prices may be
particularly sensitive to rising interest rates, which increases borrowing costs and the costs of
capital.
Debt Securities
. We may invest up to 20% of our total assets in debt securities, including
certain securities rated below investment grade (junk bonds). Our debt securities may have fixed
or variable principal payments and all types of interest rate and dividend payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred, payment in kind and
auction rate features. To the extent we invest in auction rate securities we will be subject to
certain risks associated with participating in an auction, including the risk that an auction may
fail and we may lose our investment. If a security satisfies our minimum rating criteria at the
time of purchase and is subsequently downgraded below such rating, we will not be required to
dispose of such security. If a downgrade occurs, our Adviser will consider what action, including
the sale of such security, is in the best interest of us and our stockholders.
Below Investment Grade Debt Securities
. We may invest up to 20% of our assets in below
investment grade securities. The below investment grade debt securities in which we invest are
rated from B3 to Ba1 by Moodys, from B- to BB+ by S&Ps, are comparably rated by another
nationally recognized rating agency or are unrated but determined by our Adviser to be of
comparable quality.
Investment in below investment grade securities involves substantial risk of loss. Below
investment grade debt securities or comparable unrated securities are commonly referred to as junk
bonds and are considered predominantly speculative with respect to the issuers ability to pay
interest and principal and are susceptible to default or decline in market value due to adverse
economic and business developments. The market values for high yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt securities. For these
reasons, your investment in us is subject to the following specific risks:
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increased price sensitivity to changing interest rates and to a deteriorating economic
environment;
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greater risk of loss due to default or declining credit quality;
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adverse company specific events are more likely to render the issuer unable to make
interest and/or principal payments; and
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if a negative perception of the below investment grade debt market develops, the price
and liquidity of below investment grade debt securities may be depressed. This negative
perception could last for a significant period of time.
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Adverse changes in economic conditions are more likely to lead to a weakened capacity of a
below investment grade debt issuer to make principal payments and interest payments than an
investment grade issuer. The principal amount of below investment grade securities outstanding has
proliferated in the past decade as an increasing number of issuers have used below investment grade
securities for corporate financing. An economic downturn could severely affect the ability of
highly leveraged issuers to service their debt obligations or to repay their obligations upon
maturity. Similarly, down-turns in profitability in specific industries, such as the energy
infrastructure industry, could adversely affect the ability of below investment grade debt issuers
in that industry to meet their obligations. The market values of lower quality debt securities tend
to reflect individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of interest rates. Factors
having an adverse impact on the market value of lower quality securities may have an adverse effect
on our net asset value and the market value of its common stock. In addition, we may incur
additional expenses to the extent it is required to seek recovery upon a default in payment of
principal or interest on its portfolio holdings. In certain circumstances, we may be required to
foreclose on an issuers assets and take possession of its property or operations. In such
circumstances, we would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for below investment grade securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an adverse effect on our
ability to dispose of a particular security when necessary to meet its liquidity needs. There are
fewer dealers in the market for below investment grade securities than investment grade
obligations. The prices quoted by different dealers may vary significantly and the spread between
the bid and asked price is generally much larger than those for higher quality instruments. Under
adverse market or economic conditions, the secondary market for below investment grade securities
could contract further, independent of any specific adverse changes in the condition of a
particular issuer, and these instruments may become illiquid. As a result, we could find it more
difficult to sell these securities or may be able to sell the securities
only at prices lower than if such securities were widely traded. Prices realized upon the sale
of such lower rated or unrated securities, under these circumstances, may be less than the prices
used in calculating our net asset value.
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Because investors generally perceive that there are greater risks associated with lower
quality debt securities of the type in which we may invest a portion of our assets, the yields and
prices of such securities may tend to fluctuate more than those for higher rated securities. In the
lower quality segments of the debt securities market, changes in perceptions of issuers
creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in
higher quality segments of the debt securities market, resulting in greater yield and price
volatility.
We will not invest in distressed, below investment grade securities (those that are in default
or the issuers of which are in bankruptcy). If a debt security becomes distressed while held by us,
we may be required to bear certain extraordinary expenses in order to protect and recover its
investment if it is recoverable at all.
See Appendix A to this statement of additional information for a description of Moodys, Fitch
Ratings (Fitch) and S&P.
Commercial Paper
. We may invest in commercial paper. Commercial paper is a debt obligation
usually issued by corporations and may be unsecured or secured by letters of credit or a surety
bond. Commercial paper is usually repaid at maturity by the issuer from the proceeds of the
issuance of new commercial paper. As a result, investment in commercial paper is subject to the
risk that the issuer cannot issue enough new commercial paper to satisfy its outstanding commercial
paper, also known as rollover risk.
Asset-backed commercial paper is a debt obligation generally issued by a corporate-sponsored
special purpose entity to which the corporation has contributed cash-flowing receivables like
credit card receivables, auto and equipment leases, and other receivables. Investment in
asset-backed commercial paper is subject to the risk that insufficient proceeds from the projected
cash flows of the contributed receivables are available to repay the commercial paper.
U.S. Government Securities
. We may invest in U.S. Government securities. There are two broad
categories of U.S. Government-related debt instruments: (a) direct obligations of the U.S.
Treasury, and (b) securities issued or guaranteed by U.S. Government agencies.
Examples of direct obligations of the U.S. Treasury are Treasury Bills, Notes, Bonds and other
debt securities issued by the U.S. Treasury. These instruments are backed by the full faith and
credit of the United States. They differ primarily in interest rates, the length of maturities and
the dates of issuance. Treasury Bills have original maturities of one year or less. Treasury Notes
have original maturities of one to ten years and Treasury Bonds generally have original maturities
of greater than ten years.
Some agency securities are backed by the full faith and credit of the United States and others
are backed only by the rights of the issuer to borrow from the U.S. Treasury, while still others,
such as the securities of the Federal Farm Credit Bank, are supported only by the credit of the
issuer. With respect to securities supported only by the credit of the issuing agency or by an
additional line of credit with the U.S. Treasury, there is no guarantee that the U.S. Government
will provide support to such agencies and such securities may involve risk of loss of principal and
interest.
Restricted, Illiquid and Thinly-Traded Securities
. We may invest up to 50% of our total assets
in restricted securities. Restricted securities are less liquid than securities traded in the open
market, therefore, we may not be able to readily sell such securities. Investments currently
considered by our Adviser to be illiquid because of such restrictions include subordinated
convertible units and certain direct placements of common units. Such securities are unlike
securities that are traded in the open market, which can be expected to be sold immediately if the
market is adequate. The sale price of securities that are not readily marketable may be lower or
higher than the Companys most recent determination of their fair value. Additionally, the value of
these securities typically requires more reliance on the judgment of our Adviser than that required
for securities for which there is an active trading market. Due to the difficulty in valuing these
securities and the absence of an active trading market for these securities, we may not be able to
realize these securities true value, or may have to delay their sale in order to do so.
Restricted securities generally can be sold in private transactions, pursuant to an exemption
from registration under the 1933 Act, or in a registered public offering. If the issuer of the
restricted securities has an effective registration statement on file with the SEC covering the
restricted securities, our Adviser has the ability to deem restricted securities as liquid. To
enable us to sell our holdings of a restricted security not registered under the 1933 Act, we may
have to cause those securities to be registered. When we must arrange registration because we wish
to sell the security, a considerable period may elapse between the time the decision is made to
sell the
security and the time the security is registered so that we can sell it. We would bear the
risks of any downward price fluctuation during that period.
S-9
In recent years, a large institutional market has developed for certain securities that are
not registered under the 1933 Act, including private placements, repurchase agreements, commercial
paper, foreign securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are either themselves exempt from registration or were sold in
transactions not requiring registration, such as Rule 144A transactions. Institutional investors
generally will not seek to sell these instruments to the general public, but instead will often
depend on an efficient institutional market in which such unregistered securities can be resold or
on an issuers ability to honor a demand for repayment. Therefore, the fact that there are
contractual or legal restrictions on resale to the general public or certain institutions is not
dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration requirements of
the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional
markets for restricted securities that exist or may develop as a result of Rule 144A may provide
both readily ascertainable values for restricted securities and the ability to liquidate an
investment. An insufficient number of qualified institutional buyers interested in purchasing Rule
144A-eligible securities held by us, however, could affect adversely the marketability of such
portfolio securities and we might be unable to dispose of such securities promptly or at reasonable
prices.
We may also invest in securities that may not be restricted, but are thinly-traded. Although
securities of certain MLPs trade on the New York Stock Exchange (NYSE), NYSE Alternext U.S.
(formerly known as AMEX), the NASDAQ National Market or other securities exchanges or markets, such
securities may have a lower trading volume less than those of larger companies due to their
relatively smaller capitalizations. Such securities may be difficult to dispose of at a fair price
during times when we believe it is desirable to do so. Thinly-traded securities are also more
difficult to value and our Advisers judgment as to value will often be given greater weight than
market quotations, if any exist. If market quotations are not available, thinly-traded securities
will be valued in accordance with procedures established by the Board. Investment of capital in
thinly-traded securities may restrict our ability to take advantage of market opportunities. The
risks associated with thinly-traded securities may be particularly acute in situations in which our
operations require cash and could result in us borrowing to meet our short term needs or incurring
losses on the sale of thinly-traded securities.
Investment Company Securities
. We do not intend to invest in shares of other investment
companies to achieve our investment objective.
Repurchase Agreements
. We may enter into repurchase agreements backed by U.S. Government
securities. A repurchase agreement arises when we purchase a security and simultaneously agrees to
resell it to the vendor at an agreed upon future date. The resale price is greater than the
purchase price, reflecting an agreed upon market rate of return that is effective for the period of
time we hold the security and that is not related to the coupon rate on the purchased security.
Such agreements generally have maturities of not more than seven days and could be used to permit
us to earn interest on assets awaiting long term investment. We require continuous maintenance by
the custodian for our account in the Federal Reserve/Treasury Book Entry System of collateral in an
amount equal to, or in excess of, the market value of the securities that are the subject of a
repurchase agreement. Repurchase agreements maturing in more than seven days are considered
illiquid securities. In the event of a bankruptcy or other default of a seller of a repurchase
agreement, we could experience both delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying security during the period while we
seek to enforce our rights thereto; (b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements
. We may enter into reverse repurchase agreements for temporary
purposes with banks and securities dealers if the creditworthiness of the bank or securities dealer
has been determined by our Adviser to be satisfactory. A reverse repurchase agreement is a
repurchase agreement in which we are the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse repurchase agreement
may be preferable to a regular sale and later repurchase of securities because it avoids certain
market risks and transaction costs.
At the time when we enter into a reverse repurchase agreement, liquid assets (such as cash,
U.S. Government securities or other high-grade debt obligations) of ours having a value at least
as great as the purchase price of the securities to be purchased will be segregated on our books
and held by the custodian throughout the period of the obligation. The use of reverse repurchase
agreements by us creates leverage which increases our investment risk. If the income and gains on
securities purchased with the proceeds of these transactions exceed the cost, our earnings or net
asset value will increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the cost, earnings or net asset value would decline faster than otherwise
would be the case. We intend
to enter into reverse repurchase agreements only if the income from the investment of the
proceeds is expected to be greater than the expense of the transaction, because the proceeds are
invested for a period no longer than the term of the reverse repurchase agreement.
S-10
Margin Borrowing
. Although we do not currently intend to, we may in the future use margin
borrowing of up to 33.33% of our total assets for investment purposes when our Adviser believes it
will enhance returns. Margin borrowing creates certain additional risks. For example, should the
securities that are pledged to brokers to secure margin accounts decline in value, or should
brokers from which we have borrowed increase their maintenance margin requirements (i.e., reduce
the percentage of a position that can be financed), then we could be subject to a margin call,
pursuant to which we must either deposit additional funds with the broker or suffer mandatory
liquidation of the pledged securities to compensate for the decline in value. In the event of a
precipitous drop in the value of our assets, we might not be able to liquidate assets quickly
enough to pay off the margin debt and might suffer mandatory liquidation of positions in a
declining market at relatively low prices, thereby incurring substantial losses. For these reasons,
the use of borrowings for investment purposes is considered a speculative investment practice. Any
use of margin borrowing by us would be subject to the limitations of the 1940 Act, including the
prohibition on our issuing more than one class of senior securities, and the asset coverage
requirements discussed earlier in this statement of additional information. See Investment
Limitations.
Interest Rate Transactions
. We may, but are not required to, use interest rate transactions
such as swaps, caps and floors in an attempt to reduce the interest rate risk arising from our
leveraged capital structure. There is no assurance that the interest rate hedging transactions
into which we enter will be effective in reducing our exposure to interest rate risk. Hedging
transactions are subject to correlation risk, which is the risk that payment on our hedging
transactions may not correlate exactly with our payment obligations on senior securities.
The use of interest rate transactions is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary portfolio security
transactions. In an interest rate swap, we would agree to pay to the other party to the interest
rate swap (known as the counterparty) a fixed rate payment in exchange for the counterparty
agreeing to pay to us a variable rate payment that is intended to approximate our variable rate
payment obligation on any variable rate borrowings or preferred stock. The payment obligations
would be based on the notional amount of the swap. In an interest rate cap, we would pay a premium
to the counterparty to the interest rate cap and, to the extent that a specified variable rate
index exceeds a predetermined fixed rate, it would receive from the counterparty payments of the
difference based on the notional amount of such cap. In an interest rate floor, we would be
entitled to receive, to the extent that a specified index falls below a predetermined interest
rate, payments of interest on a notional principal amount from the party selling the interest rate
floor. When interest rate transactions are outstanding, we will segregate liquid assets with its
custodian in an amount equal to its net payment obligation under the transactions. Therefore,
depending on the state of interest rates in general, our use of interest rate transactions could
enhance or decrease cash flow available to make payments with respect to the MMP Shares. Further,
to the extent there is a decline in interest rates, the value of the interest rate transactions
could decline, and could result in a decline in our net asset value. In addition, if the
counterparty to an interest rate transaction defaults, we would not be able to use the anticipated
net receipts under the interest rate transaction to offset our cost of financial leverage.
Delayed-Delivery Transactions
. Securities may be bought and sold on a delayed-delivery or
when-issued basis. Delayed-delivery transactions involve a commitment to purchase or sell specific
securities at a predetermined price or yield, with payment and delivery taking place after the
customary settlement period for that type of security. Typically, no interest accrues to the
purchaser until the security is delivered. We may receive fees or price concessions for entering
into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the purchaser assumes the rights and
risks of ownership, including the risks of price and yield fluctuations and the risk that the
security will not be issued as anticipated. Because payment for the securities is not required
until the delivery date, these risks are in addition to the risks associated with our investments.
If we remain substantially fully invested at a time when delayed-delivery purchases are
outstanding, the delayed-delivery purchases may result in a form of leverage. When delayed-delivery
purchases are outstanding, we will set aside appropriate liquid assets in a segregated custodial
account to cover its purchase obligations. When we sell a security on a delayed-delivery basis, we
do not participate in further gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, we could miss a favorable
price or yield opportunity or suffer a loss.
Securities Lending
. We may lend securities to parties such as broker-dealers or institutional
investors. Securities lending allows us to retain ownership of the securities loaned and, at the
same time, to earn additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower fail financially,
loans will be made only to parties deemed by our Adviser to be of good credit and legal standing.
Furthermore, loans of securities will only be made if, in our Advisers judgment, the consideration
to be earned from such loans would justify the risk.
Our Adviser understands that it is the current view of the SEC staff that we may engage in
loan transactions only under the following conditions: (1) we must receive 100% collateral in the
form of cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the securities loaned
(determined on a
S-11
daily basis) rises above the value of the collateral; (3) after giving notice, we
must be able to terminate the loan at any time; (4) we must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any dividends, interest, or other
distributions on the securities loaned and to any increase in market value; (5) we may pay only
reasonable custodian fees in connection with the loan; and (6) the Board must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering into an alternative
arrangement with the borrower.
Temporary Investments and Defensive Investments
. Pending investment of the proceeds of this
offering (which we expect may take up to approximately three months following the closing of this
offering), we may invest up to 100% of net offering proceeds in cash, cash equivalents, securities
issued or guaranteed by the U.S. Government or its instrumentalities or agencies, high quality,
short-term money market instruments, short-term debt securities, certificates of deposit, bankers
acceptances and other bank obligations, commercial paper rated in the highest category by a rating
agency or other fixed income securities-all of which are expected to provide a lower yield than the
securities of MLPs and their affiliates, or may hold cash. We also may invest in such instruments
on a temporary basis to meet working capital needs including, but not limited to, the need for
collateral in connection with certain investment techniques, to hold a reserve pending payment of
dividends, and to facilitate the payments of expenses and settlement of trades. We anticipate that
under normal market conditions not more than 5% of our assets will be invested in these
instruments.
Under adverse market or economic conditions, we may invest 100% of our total assets in these
securities. The yield on such securities may be lower than the returns on MLP securities or yields
on lower rated fixed income securities. To the extent we use this strategy, we may not achieve our
investment objective.
MANAGEMENT OF THE COMPANY
Directors and Officers
Our business and affairs are managed under the direction of the Board of Directors.
Accordingly, the Board of Directors provides broad supervision over our affairs, including
supervision of the duties performed by our Adviser. Our officers are responsible for our day-to-day
operations. The names, ages and addresses of each of our directors and officers, together with
their principal occupations and other affiliations during the past five years, are set forth below.
Each director and officer will hold office until his successor is duly elected and qualified, or
until he resigns or is removed in the manner provided by law. Unless otherwise indicated, the
address of each director and officer is 11550 Ash Street, Leawood, Kansas 66211. The Board of
Directors consists of a majority of directors who are not interested persons (as defined in the
1940 Act) of our Adviser or its affiliates.
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POSITION(S) HELD
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WITH COMPANY, TERM
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NUMBER OF
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OTHER BOARD
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OF OFFICE AND
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PRINCIPAL
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PORTFOLIOS IN FUND
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POSITIONS
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LENGTH OF
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OCCUPATION DURING
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COMPLEX OVERSEEN BY
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HELD BY
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NAME AND AGE
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TIME SERVED
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PAST FIVE YEARS
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DIRECTOR (1)
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DIRECTOR
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Independent
Directors
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Conrad S. Ciccotello
(Born 1960)
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Director since 2005
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Tenured Associate Professor of Risk
Management and Insurance, Robinson
College of Business, Georgia State
University (faculty member since
1999); Director of Graduate Personal
Financial Planning Programs;
Formerly Editor, Financial Services
Review (an academic journal
dedicated to the study of individual
financial management) (2001-2007);
Published several academic and
professional journal articles about
energy infrastructure and MLPs.
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6
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None
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S-12
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POSITION(S) HELD
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WITH COMPANY, TERM
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NUMBER OF
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OTHER BOARD
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OF OFFICE AND
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PRINCIPAL
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PORTFOLIOS IN FUND
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POSITIONS
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LENGTH OF
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OCCUPATION DURING
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COMPLEX OVERSEEN BY
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HELD BY
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NAME AND AGE
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TIME SERVED
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PAST FIVE YEARS
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DIRECTOR (1)
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DIRECTOR
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John R. Graham
(Born 1945)
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Director since 2005
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Executive-in-Residence and Professor
of Finance (part-time), College of
Business Administration, Kansas
State University (has served as a
professor or adjunct professor since
1970); Chairman of the Board,
President and CEO, Graham Capital
Management, Inc., primarily a real
estate development, investment and
venture capital company; Owner of
Graham Ventures, a business services
and venture capital firm; Part-time
Vice President Investments, FB
Capital Management, Inc. (a
registered investment adviser),
since 2007; formerly, CEO, Kansas
Farm Bureau Financial Services,
including seven affiliated insurance
or financial service companies
(1979-2000).
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Kansas State Bank
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Charles E. Heath
(Born 1942)
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Director since 2005
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Retired in 1999,
Formerly Chief
Investment Officer,
GE Capitals
Employers
Reinsurance
Corporation
(1989-1999).
Chartered Financial
Analyst (CFA)
designation since
1974.
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6
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None
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S-13
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POSITION(S) HELD
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WITH COMPANY, TERM
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NUMBER OF
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OTHER BOARD
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OF OFFICE AND
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PRINCIPAL
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PORTFOLIOS IN FUND
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POSITIONS
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LENGTH OF
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OCCUPATION DURING
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COMPLEX OVERSEEN BY
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HELD BY
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NAME AND AGE
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TIME SERVED
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PAST FIVE YEARS
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DIRECTOR (1)
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DIRECTOR
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Interested Directors
and Officers(2)
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H. Kevin Birzer
(Born 1959)
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Director and Chairman of
the Board since 2005
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Managing Director
of the Adviser
since 2002; Member,
Fountain Capital
Management, LLC
(Fountain
Capital)
(1990-present);
Director and
Chairman of the
Board of each of
TYG, TYN, TTO and
the two private
investment
companies managed
by the Adviser
since its
inception; Vice
President,
Corporate Finance
Department, Drexel
Burnham Lambert
(1986-1989); Vice
President, F.
Martin Koenig &
Co., an investment
management firm
(1983-1986). CFA
designation since
1988.
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6
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None
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Terry C. Matlack
(Born 1956)
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Director and
Chief Financial Officer
since 2005
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Managing Director
of the Adviser
since 2002;
Full-time Managing
Director, Kansas
City Equity
Partners, LC
(KCEP)
(2001-2002);
Formerly President,
GreenStreet
Capital, a private
investment firm
(1998-2001);
Director and Chief
Financial Officer
of each of TYG,
TYN, TTO and two
private investment
companies managed
by the Adviser
since its
inception; Chief
Compliance Officer
of the Company and
TYN from their
inception through
May 2006 and of TYG from
2004 through May
2006; Treasurer of
each of the
Company, TYG and
TYN from their
inception to
November 2005;
Assistant Treasurer
of the Company, TYG
and TYN from
November 2005 to
April 2008, of TTO
and one of the two
private investment
companies from
their inception to
April 2008, and of
the other private investment company
since its
inception. CFA
designation since
1985.
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6
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None
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S-14
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POSITION(S) HELD
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WITH COMPANY, TERM
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NUMBER OF
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OTHER BOARD
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OF OFFICE AND
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PRINCIPAL
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PORTFOLIOS IN FUND
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POSITIONS
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LENGTH OF
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OCCUPATION DURING
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COMPLEX OVERSEEN BY
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HELD BY
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NAME AND AGE
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TIME SERVED
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PAST FIVE YEARS
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DIRECTOR (1)
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DIRECTOR
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David J. Schulte
(Born 1961)
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President and Chief
Executive Officer since
2005
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Managing Director
of the Adviser
since 2002;
Full-time Managing
Director, KCEP
(1993-2002);
President and Chief
Executive Officer
of TYG since 2003;
Chief Executive
Officer of TYN
since 2005 and
President of TYN
from 2005 to
September 2008;
Chief Executive
Officer of TTO
since 2005 and
President of TTO
from 2005 to April
2007; President of
the two private
investment
companies since
2007; Chief
Executive Officer
of one of the two
private investment
companies since
2007 and of the
other private
investment company
from 2007 to
December 2008. CFA
designation since
1992.
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N/A
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None
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Zachary A. Hamel
(Born 1965)
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Senior Vice President
since April 2005
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Managing Director
of the Adviser
since 2002;
Partner, Fountain
Capital
(1997-present).
Senior Vice
President of TTO
since 2005 and of TYG, TYN
and the two private
investment
companies since
2007; Secretary of
each of the
Company, TYG, TYN
and TTO from their
inception to April
2007. CFA
designation since
1988.
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N/A
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None
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S-15
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POSITION(S) HELD
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WITH COMPANY, TERM
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NUMBER OF
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OTHER BOARD
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OF OFFICE AND
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PRINCIPAL
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PORTFOLIOS IN FUND
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POSITIONS
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LENGTH OF
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OCCUPATION DURING
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COMPLEX OVERSEEN BY
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HELD BY
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NAME AND AGE
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TIME SERVED
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PAST FIVE YEARS
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DIRECTOR (1)
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DIRECTOR
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Interested Directors
and Officers(2)
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Kenneth P. Malvey
(Born 1965)
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Senior Vice
President since
April 2005;
Treasurer since November
2005
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Managing Director of
the Adviser since
2002; Partner,
Fountain Capital
Management
(2002-present);
formerly, Investment
Risk Manager and
member of the Global
Office of
Investments, GE
Capitals Employers
Reinsurance
Corporation
(1996-2002);
Treasurer of TYG,
TYN, and TTO since
2005, and of the two
private investment
companies since
2007; Senior Vice
President of TTO since 2005, and
of TYG, TYN and the two
private investment
companies since
2007; Assistant
Treasurer of the
Company, TYG and TYN
from their inception
to November 2005;
Chief Executive
Officer of one of
the private
investment companies
since December 2008;
CFA designation
since 1996.
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N/A
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None
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(1)
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This number includes us, TYG, TYN, TTO and two private investment companies. Our Adviser
also serves as the investment adviser to TYG, TYN, TTO and the two private investment
companies.
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(2)
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As a result of their respective positions held with our Adviser or its affiliates, these
individuals are considered interested persons of ours within the meaning of the 1940 Act.
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We have an audit committee consisting of three directors (the Audit Committee) who are not
interested persons of ours within the meaning of the 1940 Act (Independent Directors). The
Audit Committee members are Conrad S. Ciccotello (Chairman), John R. Graham and Charles E. Heath.
The Audit Committees function is to oversee the Companys accounting policies, financial reporting
and internal control system. The Audit Committee makes recommendations regarding the selection of
our independent registered public accounting firm, reviews the independence of such firm, reviews
the scope of the audit and internal controls, considers and reports to the Board on matters
relating to the Companys accounting and financial reporting practices, and performs such other
tasks as the full Board deems necessary or appropriate. The Audit Committee held two meetings
during fiscal year 2008.
We have a nominating and governance committee that consists exclusively of three Independent
Directors (the Nominating Committee). The Nominating Committee members are Conrad S. Ciccotello,
John R. Graham (Chairman) and Charles E. Heath. The Nominating Committees function is to nominate
and evaluate Independent Director candidates, review the compensation arrangements for each of the
directors, review corporate governance issues and developments, and to develop and recommend to the
Board corporate governance guidelines and procedures, to the extent appropriate. The Nominating
Committee will consider nominees recommended by shareholders so long as such recommendations are
made in accordance with the Companys Bylaws. The Nominating Committee held two meetings during
fiscal year 2008.
S-16
The Company also has a compliance committee that consists exclusively of three Independent
Directors (the Compliance Committee). The Compliance Committees function is to review and
assess managements compliance with applicable securities laws, rules and regulations, monitor
compliance with our Code of Ethics, and handle other matters as the Board or committee chair deems
appropriate. The Compliance Committee members are Conrad S. Ciccotello, John R. Graham and Charles
E. Heath (Chairman). The Compliance Committee held one meeting during fiscal year 2008.
Directors and officers who are interested persons of the Company or the Administrator will
receive no salary or fees from us. For the current fiscal year, each Independent Director receives
from us an annual retainer of $21,000 (plus an additional $4,000 for the Chairman of the Audit
Committee and an additional $1,000 for each other committee Chairman) and a fee of $2,000 (and
reimbursement for related expenses) for each meeting of the Board or Audit Committee attended in
person (or $1,000 for each Board or Audit Committee meeting attended telephonically, or for each
Audit Committee meeting attended in person that is held on the same day as a Board meeting), and an
additional $1,000 for each other committee meeting attended in person or telephonically. No
director or officer is entitled to receive pension or retirement benefits from us.
The table below sets forth the compensation paid to the directors by us for the fiscal year
ended November 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
Aggregate Compensation From
|
Name and Position With
|
|
Compensation From
|
|
the Company and Fund Complex
|
the Company
|
|
the Company
|
|
Paid to Directors*
|
Independent Directors
|
|
|
|
|
|
|
|
|
Conrad S. Ciccotello
|
|
$
|
50,667
|
|
|
$
|
182,000
|
|
John R. Graham
|
|
$
|
47,667
|
|
|
$
|
171,000
|
|
Charles E. Heath
|
|
$
|
47,667
|
|
|
$
|
171,000
|
|
|
|
|
|
|
|
|
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
H. Kevin Birzer
|
|
$
|
0
|
|
|
$
|
0
|
|
Terry C. Matlack
|
|
$
|
0
|
|
|
$
|
0
|
|
The following table sets forth the dollar range of equity securities beneficially owned by
each director of the Company as of December 31, 2008.
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of
|
|
|
|
|
Equity Securities in all
|
|
|
Aggregate Dollar Range of
|
|
Registered Investment
|
|
|
Company Securities
|
|
Companies Overseen by
|
|
|
Beneficially Owned By
|
|
Director in Family of
|
Name of Director
|
|
Director**
|
|
Investment Companies*
|
Independent Directors
|
|
|
|
|
Conrad S. Ciccotello
|
|
$10,001 $50,000
|
|
Over $100,000
|
John R. Graham
|
|
$50,001 $100,000
|
|
Over $100,000
|
Charles E. Heath
|
|
$50,001 $100,000
|
|
Over $100,000
|
|
|
|
|
|
Interested Directors
|
|
|
|
|
H. Kevin Birzer
|
|
Over $100,000
|
|
Over $100,000
|
Terry C. Matlack
|
|
Over $100,000
|
|
Over $100,000
|
|
|
|
*
|
|
Includes TYG, TYY, TYN and TTO and the two privately held closed-end management investment
companies.
|
|
**
|
|
As of December 31, 2008, the officers and directors of the Company, as a group, own less than
1% of any class of the Companys outstanding shares of stock.
|
Control Persons
As of December 31, 2008, the following persons owned of record or beneficially more than 5% of
our common shares.
S-17
|
|
|
|
|
|
|
|
|
|
|
Outstanding Shares at
|
|
Percentage
|
Name and Address
|
|
12/31/2008
|
|
Shares Held
|
|
Stifel, Nicolaus & Company Inc.
501 North Broadway
St. Louis, MO 63102
|
|
|
1,633,659
|
|
|
|
9.35
|
%
|
|
|
|
|
|
|
|
|
|
National Financial Services LLC
200 Liberty Street
New York, NY 10281
|
|
|
1,410,874
|
|
|
|
8.08
|
%
|
|
|
|
|
|
|
|
|
|
Morgan Stanley & Co. Incorporated
75 Varick Street
New York, NY 11201
|
|
|
1,198,498
|
|
|
|
6.86
|
%
|
|
|
|
|
|
|
|
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
|
|
|
1,101,589
|
|
|
|
6.31
|
%
|
|
|
|
|
|
|
|
|
|
First Clearing, LLC
Riverfront Plaza (West Tower)
901 East Byrd Street
Richmond, VA 23219
|
|
|
1,070,417
|
|
|
|
6.13
|
%
|
|
|
|
|
|
|
|
|
|
Merrill Lynch Safekeeping
4 Corporate Place
Piscataway, NJ 08854
|
|
|
1,031,501
|
|
|
|
5.90
|
%
|
|
|
|
|
|
|
|
|
|
Fifth Third Bank/State Teachers
Retirement of Ohio
Fifth Third Center
Cincinnati, OH 45283
|
|
|
880,493
|
|
|
|
5.04
|
%
|
Indemnification of Directors and Officers
Maryland law permits a Maryland corporation to include in its charter a provision limiting the
liability of its directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty which is established by a final
judgment as being material to the cause of action. Our Charter (the Charter) contains such a
provision which eliminates directors and officers liability to the maximum extent permitted by
Maryland law and the 1940 Act.
Our Charter authorizes, to the maximum extent permitted by Maryland law and the 1940 Act, to
obligate itself to indemnify any present or former director or officer or any individual who, while
a director or officer of ours and at our request, serves or has served another corporation, real
estate investment trust, partnership, joint venture, trust, employee benefit plan or other
enterprise as a director, officer, partner or trustee, from and against any claim or liability to
which that person may become subject or which that person may incur by reason of his or her status
as a present or former director or officer of ours or as a present or former director, officer,
partner or trustee of another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise, and to pay or reimburse his or her
reasonable expenses in advance of final disposition of a proceeding. Our Bylaws obligate us, to the
maximum extent permitted by Maryland law to indemnify any present or former director or officer or
any individual who, while a director of ours and at our request, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan
or other enterprise as a director, officer, partner or trustee and who is made, or threatened to be
made, a party to the proceeding by reason of his or her service in that capacity from and against
any claim or liability to which that person may become subject or which that person may incur by
reason of his or her status as a present or former director or officer of ours and to pay or
reimburse his or her reasonable expenses in advance of final disposition of a proceeding. Our
obligation to
S-18
indemnify any director, officer or other individual, however, is limited by the 1940 Act which
prohibits us from indemnifying any director, officer or other individual from any liability
resulting from the willful misconduct, bad faith, gross negligence in the performance of duties or
reckless disregard of applicable obligations and duties of the directors, officers or other
individuals. To the maximum extent permitted by Maryland law and the 1940 Act, our Charter and
Bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of
ours in any of the capacities described above and any employee or agent of ours or a predecessor of
ours.
Maryland law requires a corporation (unless its charter provides otherwise, which our Charter
does not) to indemnify a director or officer who has been successful in the defense of any
proceeding to which he is made, or threatened to be made, a party by reason of his service in that
capacity. Maryland law permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be made, or
threatened to be made, a party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (1) was committed in bad faith, or (2) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was unlawful.
However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment
in a suit by or in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders indemnification and
then only for expenses. In addition, Maryland law permits a corporation to advance reasonable
expenses to a director or officer upon the corporations receipt of (a) a written affirmation by
the director or officer of his good faith belief that he has met the standard of conduct necessary
for indemnification by the corporation, and (b) a written undertaking by him or on his behalf to
repay the amount paid or reimbursed by the corporation if it is ultimately determined that the
standard of conduct was not met.
Investment Adviser
Tortoise Capital Advisors, L.L.C. serves as our investment adviser. Our Adviser specializes
in managing portfolios of investments in MLPs and other energy infrastructure companies. Our
Adviser was formed by Fountain Capital and KCEP in October 2002 to provide portfolio management
services exclusively with respect to energy infrastructure investments. Fountain Capitals
ownership in the Adviser was transferred to FCM Tortoise, L.L.C. (FCM), a recently formed entity
with the same principals as Fountain Capital. FCM has no operations and serves as a holding
company. The transfer was effective as of August 2, 2007, and did not result in a change of
control of the Adviser. The Adviser is controlled equally by FCM and KCEP, each of which own
approximately half of all of the voting shares of the Adviser.
Our Adviser is located at 11550 Ash Street, Suite 300, Leawood, Kansas 66211. As of January
31, 2009, our Adviser had approximately $1.7 billion in assets under management in the energy
sector.
Pursuant to an Investment Advisory agreement (the Advisory agreement), our Adviser, subject
to overall supervision by the Board, manages our investments. Our Adviser regularly provides us
with investment research advice and supervision and will furnish continuously an investment program
for us, consistent with our investment objective and policies.
The investment management of our portfolio is the responsibility of a team of portfolio
managers consisting of David J. Schulte, H. Kevin Birzer, Zachary A. Hamel, Kenneth P. Malvey, and
Terry C. Matlack, all of whom are Managers of our Adviser and members of its investment committee
and share responsibility for such investment management. It is the policy of the investment
committee, that any one member can require our Adviser to sell a security and any one member can
veto the committees decision to invest in a security. All members of our Advisers investment
committee are full-time employees of our Adviser.
The following table provides information about the number of and total assets in other
accounts managed on a day-to-day basis by each of the portfolio managers as of November 30, 2008.
S-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Total Assets of
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
Accounts
|
|
|
|
|
|
|
|
|
|
|
Paying a
|
|
Paying a
|
|
|
Number of
|
|
Total Assets of
|
|
Performance
|
|
Performance
|
Name of Manager
|
|
Accounts
|
|
Accounts
|
|
Fee
|
|
Fee
|
H. Kevin Birzer
Registered investment companies
|
|
|
4
|
|
|
$
|
798,668,045
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$
|
158,054,961
|
|
|
|
1
|
|
|
$
|
106,802,516
|
|
Other accounts
|
|
|
210
|
|
|
$
|
1,388,290,551
|
|
|
|
0
|
|
|
|
|
|
Zachary A. Hamel
Registered investment companies
|
|
|
4
|
|
|
$
|
798,668,045
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$
|
158,054,961
|
|
|
|
1
|
|
|
$
|
106,802,516
|
|
Other accounts
|
|
|
210
|
|
|
$
|
1,388,290,551
|
|
|
|
0
|
|
|
|
|
|
Kenneth P. Malvey
Registered investment companies
|
|
|
4
|
|
|
$
|
798,668,045
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$
|
158,054,961
|
|
|
|
1
|
|
|
$
|
106,802,516
|
|
Other accounts
|
|
|
210
|
|
|
$
|
1,388,290,551
|
|
|
|
0
|
|
|
|
|
|
Terry C. Matlack
Registered investment companies
|
|
|
4
|
|
|
$
|
798,668,045
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
1
|
|
|
$
|
106,802,516
|
|
|
|
1
|
|
|
$
|
106,802,516
|
|
Other accounts
|
|
|
197
|
|
|
$
|
228,230,735
|
|
|
|
0
|
|
|
|
|
|
David J. Schulte
Registered investment companies
|
|
|
4
|
|
|
$
|
798,668,045
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
1
|
|
|
$
|
106,802,516
|
|
|
|
1
|
|
|
$
|
106,802,516
|
|
Other accounts
|
|
|
197
|
|
|
$
|
228,230,735
|
|
|
|
0
|
|
|
|
|
|
None of Messrs. Schulte, Matlack, Birzer, Hamel or Malvey receive any direct compensation from
the Company or any other of the managed accounts reflected in the table above. All such accounts
are managed by our Adviser or Fountain Capital. Messrs. Birzer, Hamel, Malvey, Matlack and Schulte
are full-time employees of our Adviser and receive a fixed salary for the services they provide.
Each of Messrs. Schulte, Matlack, Birzer, Hamel and Malvey own an equity interest in either KCEP or
FCM, the two entities that control our Adviser, and each thus benefits from increases in the net
income of our Adviser.
The following table sets forth the dollar range of our equity securities beneficially owned by
each of the portfolio managers as of November 30, 2008.
|
|
|
|
|
Aggregate Dollar Range of Company
|
|
|
Securities Beneficially Owned by
|
Name of Manager
|
|
Manager
|
H. Kevin Birzer
|
|
Over $100,000
|
Zachary A. Hamel
|
|
$10,001-$50,000
|
Kenneth P. Malvey
|
|
$10,001-$50,000
|
Terry C. Matlack
|
|
Over $100,000
|
David J. Schulte
|
|
$10,001-$50,000
|
In addition to portfolio management services, our Adviser is obligated to supply our Board and
officers with certain statistical information and reports, to oversee the maintenance of various
books and records and to arrange for the preservation of records in accordance with applicable
federal law and regulations. Under the Investment Advisory agreement, we pay our Adviser a fee
equal to 0.95% annually of our average monthly Managed Assets for the services rendered by it.
Managed Assets means our total assets (including any assets attributable to any leverage that may
be outstanding and excluding any net deferred tax asset) minus the sum of accrued liabilities other
than (1) net deferred tax liability, (2) debt entered into for the purpose of leverage, and (3) the
aggregate liquidation preference of any outstanding preferred shares. For our fiscal year ending
November 30, 2006, our Adviser received $5,510,366 as compensation for advisory services. For our
fiscal year ending November 30, 2007, our Adviser received $8,493,246 as compensation for advisory
services. For our fiscal year ending November 30, 2008, our Adviser received $7,399,871 as
compensation for advisory services.
S-20
Because the management fees paid to our Adviser are based upon a percentage of our Managed
Assets, fees paid to our Adviser are higher when we are leveraged; thus, our Adviser will have an
incentive to leverage us. Our Adviser intends to leverage us only when it believes it will serve
the best interests of our stockholders. Our average monthly Managed Assets are determined for the
purpose of calculating the management fee by taking the average of the monthly determinations of
Managed Assets during a given calendar quarter. The fees are payable for each calendar quarter
within five (5) days of the end of that quarter. Net deferred tax assets are not included in the
calculation of our management fee.
The Advisory agreement provides that we will pay all expenses other than those expressly
stated to be payable by our Adviser, which expenses payable by the Company shall include, without
implied limitation: (1) expenses of maintaining and continuing our existence and related overhead,
including, to the extent services are provided by personnel of our Adviser or its affiliates,
office space and facilities and personnel compensation, training and benefits, (2) our registration
under the 1940 Act, (3) commissions, spreads, fees and other expenses connected with the
acquisition, holding and disposition of securities and other investments including placement and
similar fees in connection with direct placements entered into on our behalf, (4) auditing,
accounting and legal expenses, (5) taxes and interest, (6) governmental fees, (7) expenses of
listing our shares with a stock exchange, and expenses of issue, sale, repurchase and redemption
(if any) of our interests, including expenses of conducting tender offers for the purpose of
repurchasing common stock, (8) expenses of registering and qualifying us and our shares under
federal and state securities laws and of preparing and filing registration statements and
amendments for such purposes, (9) expenses of communicating with stockholders, including website
expenses and the expenses of preparing, printing and mailing press releases, reports and other
notices to stockholders and of meetings of stockholders and proxy solicitations therefor, (10)
expenses of reports to governmental officers and commissions, (11) insurance expenses, (12)
association membership dues, (13) fees, expenses and disbursements of custodians and subcustodians
for all services to us (including without limitation safekeeping of funds, securities and other
investments, keeping of books, accounts and records, and determination of NAVs), (14) fees,
expenses and disbursements of transfer agents, dividend and interest paying agents, stockholder
servicing agents and registrars for all services to us, (15) compensation and expenses of our
directors who are not members of our Advisers organization, (16) pricing and valuation services
employed by us, (17) all expenses incurred in connection with leveraging of our assets through a
line of credit or other indebtedness or issuing and maintaining notes or preferred stock, (18) all
expenses incurred in connection with offerings of our common and preferred stock and debt
securities, and (19) such non-recurring items as may arise, including expenses incurred in
connection with litigation, proceedings and claims and our obligation to indemnify our directors,
officers and stockholders with respect thereto.
The Advisory agreement provides that our Adviser will not be liable in any way for any
default, failure or defect in any of the securities comprising portfolio if it has satisfied the
duties and the standard of care, diligence and skill set forth in the Advisory agreement. However,
our Adviser shall be liable to us for any loss, damage, claim, cost, charge, expense or liability
resulting from our Advisers willful misconduct, bad faith or gross negligence or disregard by our
Adviser of our Advisers duties or standard of care, diligence and skill set forth in the Advisory
agreement or a material breach or default of our Advisers obligations under the Advisory
agreement.
The Advisory agreement has a term ending on December 31st of each year and is submitted to the
Board of Directors for renewal each year. A discussion regarding the basis of the Board of
Directors decision to approve the renewal of the Advisory agreement is available in our Annual
Report to stockholders for the fiscal year ended November 30, 2008. The Advisory agreement will
continue from year to year, provided such continuance is approved by a majority of the Board or by
vote of the holders of a majority of our outstanding voting securities. Additionally, the Advisory
agreement must be approved annually by vote of a majority of the Independent Directors. The
Advisory agreement may be terminated by our Adviser or us, without penalty, on sixty (60) days
written notice to the other. The Advisory agreement will terminate automatically in the event of
its assignment.
Code of Ethics
We and our Adviser have each adopted a Code of Ethics under Rule 17j-1 of the 1940 Act, which
is applicable to officers, directors and designated employees of us and our Adviser (collectively,
the Codes). Subject to certain limitations, the Codes permit those officers, directors and
designated employees of ours and our Adviser (Covered Persons) to invest in securities, including
securities that may be purchased or held by us. The Codes contain provisions and requirements
designed to identify and address certain conflicts of interest between personal investment
activities of Covered Persons and the interests of investment advisory clients such as ours. Among
other things, the Codes prohibit certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain securities, and requires
submission of duplicate broker confirmations and statements and quarterly reporting of securities
transactions. Exceptions to these and other provisions of the Codes may be granted in particular
circumstances after review by appropriate personnel.
S-21
Our Code of Ethics can be reviewed and copied at the SECs Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at (202) 942-8090. Our code of ethics is also available on the EDGAR Database on
the SECs Internet site at http://www.sec.gov, and, upon payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by writing the SECs
Public Reference Section, Washington, D.C. 20549-0102.
Our Code of Ethics is also available on our Advisers website at www.tortoiseadvisors.com.
PORTFOLIO TRANSACTIONS
Execution of Portfolio Transactions
Our Adviser is responsible for decisions to buy and sell securities for us, broker-dealer
selection, and negotiation of brokerage commission rates. Our Advisers primary consideration in
effecting a security transaction will be to obtain the best execution. In selecting a broker-dealer
to execute each particular transaction, our Adviser will take the following into consideration: the
best net price available; the reliability, integrity and financial condition of the broker-dealer;
the size of and the difficulty in executing the order; and the value of the expected contribution
of the broker-dealer to our investment performance on a continuing basis. Accordingly, the price to
us in any transaction may be less favorable than that available from another broker-dealer if the
difference is reasonably justified by other aspects of the execution services offered.
The ability to invest in direct placements of MLP securities is critical to our ability to
meet its investment objective because of the limited number of MLP securities available for
investment and, in some cases, the relatively small trading volumes of certain securities.
Accordingly, we may, from time to time, enter into arrangements with placement agents in connection
with direct placement transactions.
In evaluating placement agent proposals, we will consider each brokers access to issuers of
MLP securities and experience in the MLP market, particularly the direct placement market. In
addition to these factors, we will consider whether the proposed services are customary, whether
the proposed fee schedules are within the range of customary rates, whether any proposal would
obligate us to enter into transactions involving a minimum fee, dollar amount or volume of
securities, or into any transaction whatsoever, and other terms such as indemnification provisions.
Subject to such policies as the Board may from time to time determine, our Adviser shall not
be deemed to have acted unlawfully or to have breached any duty solely by reason of its having
caused us to pay a broker or dealer that provides brokerage and research services to our Adviser an
amount of commission for effecting an investment transaction in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction, if our Adviser
determines in good faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in terms of either
that particular transaction or our Advisers overall responsibilities with respect to us and to
other clients of our Adviser as to which our Adviser exercises investment discretion. Our Adviser
is further authorized to allocate the orders placed by it on behalf of us to such brokers and
dealers who also provide research or statistical material or other services to us, our Adviser or
to any sub-adviser. Such allocation shall be in such amounts and proportions as our Adviser shall
determine and our Adviser will report on said allocations regularly to the Board indicating the
brokers to whom such allocations have been made and the basis therefor. For the fiscal years ended
November 30 , 2006 and November 30, 2007 and November 30, 2008, we paid aggregate brokerage
commissions of $52,247, $456,842 and $126,370, respectively. No direct placement fees were paid in
fiscal 2006, 2007 or 2008.
Portfolio Turnover
Our annual portfolio turnover rate may vary greatly from year to year. Although we cannot
accurately predict our annual portfolio turnover rate, it is not expected to exceed 30% under
normal circumstances. For our fiscal years ended November 30, 2007 and November 30, 2008, our
portfolio turnover rates were 9.90% and 6.44%, respectively. However, portfolio turnover rate is
not considered a limiting factor in the execution of our investment decisions. A higher turnover
rate results in correspondingly greater brokerage commissions and other transactional expenses that
are borne by us. High portfolio turnover also may result in our recognition of gains that will
increase our current and accumulated earnings and profits resulting in a greater portion of our
distributions being treated as taxable dividends for Federal income tax purposes. See Certain
Federal Income Tax Matters.
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NET ASSET VALUE
We will compute our net asset value for our shares of common stock as of the close of trading
on the NYSE (normally 4:00 p.m. Eastern time) no less frequently than the last business day of each
calendar month and at such other times as the Board may determine. Due to recent market volatility,
we currently make our net asset value available for publication weekly. Our investment transactions are
generally recorded on a trade date plus one day basis, other than for quarterly and annual
reporting purposes. For purposes of determining the net asset value of a share of common stock, our
net asset value will equal the value of our total assets (the value of the securities we hold, plus
cash or other assets, including interest accrued but not yet received and net deferred tax assets)
less (1) all of its liabilities (including without limitation accrued expenses and both current and
net deferred tax liabilities), (2) accumulated and unpaid interest payments and dividends on any
outstanding debt or preferred stock, respectively, (3) the aggregate liquidation value of any
outstanding preferred stock, (4) the aggregate principal amount of any outstanding senior notes,
including any series of Tortoise Notes, and (5) any distributions payable on the common stock. The
net asset value per share of our common stock will equal our net asset value divided by the number
of outstanding shares of common stock.
Pursuant to an agreement with U.S. Bancorp Fund Services, LLC (the Accounting Services
Provider), the Accounting Services Provider will value our assets in accordance with Valuation
Procedures adopted by the Board of Directors. The Accounting Services Provider will obtain
securities market quotations from independent pricing services approved by the Adviser and ratified
by the Board. Securities for which market quotations are readily available shall be valued at
market value. Any other securities shall be valued at fair value.
Valuation of certain assets at market value will be as follows. For equity securities, the
Accounting Services Provider will first use readily available market quotations and will obtain
direct written broker-dealer quotations if a security is not traded on an exchange or quotations
are not available from an approved pricing service. For fixed income securities, the Accounting
Services Provider will use readily available market quotations based upon the last sale price of a
security on the day we value our assets or a market value from a pricing service or by obtaining a
direct written broker-dealer quotation from a dealer who has made a market in the security. For
options, futures contracts and options on futures contracts, the Accounting Services Provider will
use readily available market quotations. If no sales are reported on any exchange or
over-the-counter (OTC) market for an option, futures contract or option on futures contracts, the
Accounting Services Provider will use the calculated mean based on bid and asked prices obtained
from the primary exchange or OTC market.
If the Accounting Services Provider cannot obtain a market value or the Adviser determines
that the value of a security as so obtained does not represent a fair value as of the valuation
time (due to a significant development subsequent to the time its price is determined or
otherwise), fair value for the security shall be determined pursuant to the Valuation Procedures
adopted by the Board. The Valuation Procedures provide that the Adviser will consider a variety of
factors with respect to the individual issuer and security in determining and monitoring the
continued appropriateness of fair value, including, without limitation, financial statements and
fundamental data with respect to the issuer, cost, the amount of any discount, restrictions on
transfer and registration rights and other information deemed relevant. A report of any prices
determined pursuant to certain preapproved methodologies will be presented to the Board or a
designated committee thereof for approval at the next regularly scheduled board meeting. The
Valuation Procedures currently provide for methodologies to be used to fair value equity securities
and debt securities. With respect to equity securities, among the factors used to fair value a
security subject to restrictions on resale is whether the security has a common share counterpart
trading in a public market. If a security does not have a common share counterpart, the security
shall be valued initially and thereafter by the Investment Committee of our Adviser (the Pricing
Committee) based on all relevant factors and such valuation will be presented to the Board for
review and ratification no less frequently than quarterly. If a security has a common share
counterpart trading in a public market or is convertible into publicly-traded common shares, the
Pricing Committee shall determine an appropriate percentage discount for the security in light of
its resale restrictions and/or, as applicable, conversion restrictions and other factors.
With respect to debt securities, among the various factors that can affect the value of such
securities are (i) whether the issuing company has freely trading debt securities of the same
maturity and interest rate; (ii) whether the issuing company has an effective registration
statement in place for the securities; and whether a market is made in the securities. Subject to
the particular considerations of an issue, debt securities generally will be valued at amortized
cost.
The foregoing methods for fair valuing securities may be used only as long as the Adviser
believes they continue to represent fair value and the discussion above is qualified in its
entirety by our Valuation Procedures.
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In computing net asset value, we will review the valuation of the obligation for income taxes
separately for current taxes and deferred taxes due to the differing impact of each on (i) the
anticipated timing of required tax payments and (ii) the impact of each on the treatment of
distributions by us to our stockholders.
The allocation between current and deferred income taxes is determined based upon the value of
assets reported for book purposes compared to the respective net tax bases of assets for federal
income tax purposes. It is anticipated that cash distributions from MLPs in which we invest will
not equal the amount of taxable income allocable to us primarily as a result of depreciation and
amortization deductions recorded by the MLPs. This may result, in effect, in a portion of the cash
distribution received by us not being treated as income for federal income tax purposes. The
relative portion of such distributions not treated as income for tax purposes will vary among the
MLPs, and also will vary year by year for each MLP, but in each case will reduce our remaining tax
basis, if any, in the particular MLP. The Adviser will be able to directly confirm the portion of
each distribution recognized as taxable income when it receives annual tax reporting information
from each MLP.
CERTAIN FEDERAL INCOME TAX MATTERS
The following is a summary of certain material U.S. federal income tax considerations relating
to us and our investments in MLPs and to the purchase, ownership and disposition of our securities.
The discussion generally applies only to holders of securities that are U.S. holders. You will be a
U.S. holder if you are an individual who is a citizen or resident of the United States, a U.S.
domestic corporation, or any other person that is subject to U.S. federal income tax on a net
income basis in respect of an investment in our securities. This summary deals only with U.S.
holders that hold our securities as capital assets and who purchase the securities in connection
with the offering(s) herein. It does not address considerations that may be relevant to you if you
are an investor that is subject to special tax rules, such as a financial institution, insurance
company, regulated investment company, real estate investment trust, investor in pass-through
entities, U.S. holder of securities whose functional currency is not the United States dollar,
tax-exempt organization, dealer in securities or currencies, trader in securities or commodities
that elects mark to market treatment, a person who holds the securities in a qualified tax deferred
account such as an IRA, or a person who will hold the securities as a position in a straddle,
hedge or as part of a constructive sale for federal income tax purposes. In addition, this
discussion does not address the possible application of the U.S. federal alternative minimum tax.
This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code), the applicable Treasury regulations promulgated thereunder, judicial
authority and current administrative rulings, as in effect on the date of this Statement of
Additional Information, all of which may change. Any change could apply retroactively and could
affect the continued validity of this summary.
As stated above, this discussion does not discuss all aspects of U.S. federal income taxation
that may be relevant to a particular holder of our securities in light of such holders particular
circumstances and income tax situation. Prospective holders should consult their own tax advisors
as to the specific tax consequences to them of the purchase, ownership and disposition of the
securities, including the application and the effect of state, local, foreign and other tax laws
and the possible effects of changes in U.S. or other tax laws.
Pursuant to U.S. Treasury Department Circular 230, we are informing you that (1) this
discussion is not intended to be used, was not written to be used, and cannot be used, by any
taxpayer for the purpose of avoiding penalties under the U.S. federal tax laws, (2) this discussion
was written by us in connection with the registration of our securities and our promotion or
marketing, and (3) each taxpayer should seek advice based on his, her or its particular
circumstances from an independent tax advisor.
Taxation of the Company
We are treated as a C corporation for federal and state income tax purposes. We compute and
pay federal and state income tax on our taxable income. Thus, we are subject to federal income tax
on our taxable income at tax rates up to 35%. Additionally, in certain instances we could be
subject to the federal alternative minimum tax of 20% on our alternative minimum taxable income to
the extent that the alternative minimum tax exceeds our regular federal income tax.
As indicated above, we generally invest our assets primarily in MLPs. MLPs generally are
treated as partnerships for federal income tax purposes. Since partnerships are generally not
subject to federal income tax, the partnerships partners must report as their income their
proportionate share of the partnerships income. Thus, as a partner in MLPs, we will report our
proportionate share of the MLPs income in computing our federal taxable income, irrespective of
whether any cash or other distributions are made by the MLPs to us. We will also take into account
in computing our taxable income any other items of our income, gain, deduction or loss. We
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anticipate that these may include interest and dividend income earned on our investment in
securities, deductions for our operating expenses and gain or loss recognized by us on the sale of
MLP interests or any other security.
As explained below, based upon the historic performance of MLPs, we anticipate initially that
our proportionate share of the MLPs taxable income will be significantly less than the amount of
cash distributions we receive from the MLPs. In such case, we anticipate that we will not incur
federal income tax on a significant portion of our cash flow, particularly after taking into
account our current operational expenses. If the MLPs taxable income is a significantly greater
portion of the MLPs cash distributions, we will incur additional current federal income tax
liability, possibly in excess of the cash distributions we receive.
We anticipate that each year we will turn over a certain portion of our investment assets. We
will recognize gain or loss on the disposition of all or a portion of our interests in MLPs in an
amount equal to the difference between the sales price and our basis in the MLP interests sold. To
the extent we receive MLP cash distributions in excess of the taxable income reportable by us with
respect to such MLP interest, our basis in the MLP interest will be reduced and our gain on the
sale of the MLP interest likewise will be increased.
We are not treated as a regulated investment company under the federal income tax laws. The
Internal Revenue Code generally provides that a regulated investment company does not pay an entity
level income tax, provided that it distributes all or substantially all of its net income. Our
assets do not, and are not expected to, meet current tests for qualification as a regulated
investment company for federal income tax purposes. The regulated investment company taxation rules
have no application to us or our stockholders. Although changes to the federal tax laws permit
regulated investment companies to invest up to 25% of the value of their total assets in securities
of certain MLPs, such changes still would not allow us to pursue our objective. Accordingly, we do
not intend to change our tax status as a result of such legislation.
Federal Income Taxation of MLPs
MLPs are similar to corporations in many respects, but differ in others, especially in the way
they are taxed for federal income tax purposes. A corporation is a distinct legal entity, separate
from its stockholders and employees and is treated as a separate entity for federal income tax
purposes as well. Like individual taxpayers, a corporation must pay a federal income tax on its
income. To the extent the corporation distributes its income to its stockholders in the form of
dividends, the stockholders must pay federal income tax on the dividends they receive. For this
reason, it is said that corporate income is double-taxed, or taxed at two levels.
An MLP that satisfies the Qualifying Income rules described below, and does not elect
otherwise, is treated for federal income tax purposes as a pass-through entity. No federal income
tax is paid at the partnership level. A partnerships income is considered earned by all the
partners; it is allocated among all the partners in proportion to their interests in the
partnership (generally as provided in the partnership agreement), and each partner pays tax on his,
her or its share of the partnerships income. All the other items that go into determining taxable
income and tax owed are passed through to the partners as well capital gains and losses,
deductions, credits, etc. Partnership income is thus said to be single-taxed or taxed only at one
level that of the partner.
The Internal Revenue Code generally requires publicly traded partnerships to be treated as
corporations for federal income tax purposes. However, if the publicly traded partnership satisfies
certain requirements and does not elect otherwise, the publicly traded partnership will be taxed as
a partnership for federal income tax purposes, referred to herein as an MLP. Under these
requirements, an MLP must derive each taxable year at least 90% of its gross income from Qualifying
Income.
Qualifying Income for MLPs includes interest, dividends, real estate rents, gain from the sale
or disposition of real property, certain income and gain from commodities or commodity futures, and
income and gain from certain mineral or natural resources activities. Mineral or natural resources
activities that generate Qualifying Income include income and gains from the exploration,
development, mining or production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of any mineral or natural resource
(including fertilizer, geothermal energy, and timber). This means that most MLPs today are in
energy, timber, or real estate related businesses.
Because the MLP itself does not pay federal income tax, its income or loss is allocated to its
investors, irrespective of whether the investors receive any cash or other payment from the MLP. It
is important to note that an MLP investor is taxed on his share of partnership income whether or
not he actually receives any cash or other property from the partnership. The tax is based not on
money or other property he actually receives, but his proportionate share of what the partnership
earns. However, most MLPs make it a policy to make quarterly distributions to their partners that
will comfortably exceed any income tax owed. Although they resemble corporate dividends, MLP
distributions are treated differently for federal income tax purposes. The MLP distribution is
treated as a return of capital to the extent of the investors basis in his MLP interest and, to
the extent the distribution exceeds the investors basis in the
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MLP interest, as capital gain. The investors original basis is generally the price paid for
the units. The basis is adjusted downward with each distribution and allocation of deductions (such
as depreciation) and losses, and upwards with each allocation of income and gain.
The partner generally will not be taxed on MLP distributions until (1) he sells his MLP units
and pays tax on his gain, which gain is increased due to the basis decrease resulting from prior
distributions; or (2) his basis reaches zero. When the units are sold, the difference between the
sales price and the investors adjusted basis is the gain or loss for federal income tax purposes.
At tax filing season an MLP investor will receive a Schedule K-1 form showing the investors
share of each item of the partnerships income, gain, loss, deductions and credits. The investor
will use that information to figure the investors taxable income (MLPs generally provide their
investors with material that walks them through all the steps). If there is net income derived from
the MLP, the investor pays federal income tax at his, her or its tax rate. If there is a net loss
derived from the MLP, it is generally considered a passive loss under the Internal Revenue Code
and generally may not be used to offset income from other sources, but must be carried forward.
Because we are a corporation, we, and not our stockholders, will report the income or loss of
the MLPs. Thus, our stockholders will not have to deal with any Schedules K-1 reporting income and
loss items of the MLPs. Stockholders, instead, will receive a Form 1099 from us. In addition, due
to our broad public ownership, we do not expect to be subject to the passive loss limitation rules
mentioned in the preceding paragraph.
Common and Preferred Stock
Federal Income Tax Treatment of Common Stock Distributions. Unlike a holder of a direct
interest in MLPs, a stockholder will not include its allocable share of our income, gains, losses
or deductions in computing its own taxable income. Instead, since we are of the opinion that, under
present law, our shares of common stock will constitute equity, distributions with respect to such
shares (other than distributions in redemption of shares subject to Section 302(b) of the Internal
Revenue Code) will generally constitute dividends to the extent of our allocable current or
accumulated earnings and profits, as calculated for federal income tax purposes. Generally, a
corporations earnings and profits are computed based upon taxable income, with certain specified
adjustments. As explained above, based upon the historic performance of the MLPs, we anticipate
that the distributed cash from the MLPs will exceed our share of the MLPs income. In addition,
earnings and profits are treated generally, for federal income tax purposes, as first being used to
pay distributions on preferred stock, and then to the extent remaining, if any, to pay
distributions on the common stock. Thus, we anticipate that only a portion of the distributions of
distributable cash flow (DCF) will be treated as dividend income to common stockholders. To the
extent that distributions to a stockholder exceed our current and accumulated earnings and profits,
such distributions will be treated as a return of capital and the stockholders basis in the shares
of stock with respect to which the distributions are made will be reduced and, if a stockholder has
no further basis in the shares, the stockholder will report any excess as capital gain if the
stockholder holds such shares as a capital asset.
Dividends of current or accumulated earnings and profits generally will be taxable as ordinary
income to holders but are expected to be treated as qualified dividend income that is generally
subject to reduced rates of federal income taxation for noncorporate investors and are also
expected to be eligible for the dividends received deduction available to corporate stockholders
under Section 243 of the Internal Revenue Code. Under federal income tax law, qualified dividend
income received by individual and other noncorporate stockholders is taxed at long-term capital
gain rates, which currently reach a maximum of 15%. Qualified dividend income generally includes
dividends from domestic corporations and dividends from non-U.S. corporations that meet certain
criteria. To be treated as qualified dividend income, the stockholder must hold the shares paying
otherwise qualifying dividend income more than 60 days during the 121-day period beginning 60 days
before the ex-dividend date (or more than 90 days during the 181-day period beginning 90 days
before the ex-dividend date in the case of certain preferred stock dividends). A stockholders
holding period may be reduced for purposes of this rule if the stockholder engages in certain risk
reduction transactions with respect to the common or preferred stock. The provisions of the
Internal Revenue Code applicable to qualified dividend income are effective through 2010.
Thereafter, higher tax rates will apply unless further legislative action is taken. Because we are
not treated as a regulated investment company under the Internal Revenue Code, we are not entitled
to designate any dividends made with respect to our stock as capital gain distributions.
Corporate holders should be aware that certain limitations apply to the availability of the
dividends received deduction, including limitations on the aggregate amount of the deduction that
may be claimed and limitations based on the holding period of the shares on which the dividend is
paid, which holding period may be reduced if the holder engages in risk reduction transactions with
respect to its shares. Corporate holders should consult their own tax advisors regarding the
application of these limitations to their particular situation.
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If a common stockholder participates in our Automatic Dividend Reinvestment Plan, such
stockholder will be treated as receiving the amount of the distributions made by the Company, which
amount generally will be either equal to the amount of cash distribution the stockholder would have
received if the stockholder had elected to receive cash or, for shares issued by the Company, the
fair market value of the shares issued to the stockholder.
Federal Income Tax Treatment of Preferred Stock Distributions. Under present law, we believe
that our preferred stock will constitute equity for federal income tax purposes, and thus
distributions with respect to the preferred stock (other than distributions in redemption of
preferred stock subject to Section 302(b) of the Internal Revenue Code) will generally constitute
dividends to the extent of our current or accumulated earnings and profits allocable to such
shares, as calculated for federal income tax purposes. Earnings and profits are generally treated,
for federal income tax purposes, as first being allocable to distributions on the preferred stock
and then to the extent remaining, if any, to distributions on our common stock. Dividends generally
will be taxable as ordinary income to holders, but are expected to be treated as qualified dividend
income that is generally subject to reduced rates of federal income taxation for noncorporate
investors, as described above. In the case of corporate holders of preferred stock, subject to
applicable requirements and limitations, dividends may be eligible for the dividends received
deduction available to corporations under Section 243 of the Internal Revenue Code (see discussion
above). Distributions in excess of our earnings and profits allocable to preferred stock, if any,
will first reduce a shareholders adjusted tax basis in his or her shares and, after the adjusted
tax basis is reduced to zero, will constitute capital gains to a holder who holds such shares as a
capital asset. Because we are not treated as a regulated investment company under the Internal
Revenue Code, we are not entitled to designate any dividends made with respect to our stock as
capital gain distributions.
Sale of Shares. The sale of shares of common or preferred stock by holders will generally be a
taxable transaction for federal income tax purposes. Holders of shares who sell such shares will
generally recognize gain or loss in an amount equal to the difference between the net proceeds of
the sale and their adjusted tax basis in the shares sold. If the shares are held as a capital asset
at the time of the sale, the gain or loss will generally be a capital gain or loss. Similarly, a
redemption by us (including a redemption resulting from our liquidation), if any, of all the shares
actually and constructively held by a stockholder generally will give rise to capital gain or loss
under Section 302(b) of the Internal Revenue Code, provided that the redemption proceeds do not
represent declared but unpaid dividends. Other redemptions may also give rise to capital gain or
loss, but certain conditions imposed by Section 302(b) of the Internal Revenue Code must be
satisfied to achieve such treatment.
The capital gain or loss recognized on a sale of shares will generally be long-term capital
gain or loss if the shares were held for more than one year and will be short-term capital gain or
loss if the disposed shares were held for one year or less. Net long-term capital gain recognized
by a noncorporate U.S. holder generally will be subject to federal income tax at a lower rate
(currently a maximum rate of 15%) than net short-term capital gain or ordinary income (currently a
maximum rate of 35%). Under current law, the maximum federal income tax rate on capital gain for
noncorporate holders is scheduled to increase to 20% for taxable years after 2010. For corporate
holders, capital gain is generally taxed at the same rate as ordinary income, that is, currently at
a maximum rate of 35%. A holders ability to deduct capital losses may be limited.
Losses on sales or other dispositions of shares may be disallowed under wash sale rules in
the event of other investments in the Company (including those made pursuant to reinvestment of
dividends) or other substantially identical stock or securities within a period of 61 days
beginning 30 days before and ending 30 days after a sale or other disposition of shares. In such a
case, the disallowed portion of any loss generally would be included in the U.S. federal income tax
basis of the shares acquired. Shareholders should consult their own tax advisors regarding their
individual circumstances to determine whether any particular transaction in the Companys shares is
properly treated as a sale for U.S. federal income tax purposes and the tax treatment of any gains
or losses recognized in such transactions.
Investment by Tax-Exempt Investors and Regulated Investment Companies. Employee benefit plans,
other tax-exempt organizations and regulated investment companies may want to invest in our
securities. Employee benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject to federal income
tax on unrelated business taxable income (UBTI). Because we are a corporation for federal income
tax purposes, an owner of shares will not report on its federal income tax return any of our items
of income, gain, loss and deduction. Therefore, a tax-exempt investor generally will not have UBTI
attributable to its ownership or sale of our stock unless its ownership of the stock is
debt-financed. In general, stock would be debt-financed if the tax-exempt owner of stock incurs
debt to acquire the stock or otherwise incurs or maintains debt that would not have been incurred
or maintained if the stock had not been acquired.
For federal income tax purposes, a regulated investment company, or mutual fund, may not
have more than 25% of the value of its total assets, at the close of any fiscal quarter, invested
in the securities of one or more qualified publicly traded partnerships,
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which will include most MLPs. Shares of our stock are not securities of a qualified publicly
traded partnership and will not be treated as such for purposes of calculating the limitation
imposed upon regulated investment companies.
Backup Withholding. We may be required to withhold, for U.S. federal income tax purposes, a
portion of all distributions (including redemption proceeds) payable to stockholders who fail to
provide us with their correct taxpayer identification number, who fail to make required
certifications or who have been notified by the Internal Revenue Service (IRS) that they are
subject to backup withholding (or if we have been so notified). Certain corporate and other
stockholders specified in the Internal Revenue Code and the regulations thereunder are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be
credited against the stockholders U.S. federal income tax liability provided the appropriate
information is furnished to the IRS in a timely manner.
Other Taxation. Foreign stockholders, including stockholders who are nonresident alien
individuals, may be subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rates as may be prescribed by any applicable treaty. Our distributions also may be
subject to state and local taxes.
Debt Securities
Federal Income Tax Treatment of Holders of Debt Securities. Under present law, we are of the
opinion that our debt securities will constitute indebtedness for federal income tax purposes,
which the discussion below assumes. We intend to treat all payments made with respect to the debt
securities consistent with this characterization.
Taxation of Interest. Payments or accruals of interest on debt securities generally will be
taxable to you as ordinary interest income at the time such interest is received (actually or
constructively) or accrued, in accordance with your regular method of accounting for federal income
tax purposes.
Purchase, Sale and Redemption of Debt Securities. Initially, your tax basis in debt securities
acquired generally will be equal to your cost to acquire such debt securities. This basis will
increase by the amounts, if any, that you include in income under the rules governing market
discount, and will decrease by the amount of any amortized premium on such debt securities, as
discussed below. When you sell or exchange any of your debt securities, or if any of your debt
securities are redeemed, you generally will recognize gain or loss equal to the difference between
the amount you realize on the transaction (less any accrued and unpaid interest, which will be
subject to federal income tax as interest in the manner described above) and your tax basis in the
debt securities relinquished.
Except as discussed below with respect to market discount, the gain or loss that you recognize
on the sale, exchange or redemption of any of your debt securities generally will be capital gain
or loss if you hold the debt securities as a capital asset. Such gain or loss will generally be
long-term capital gain or loss if the disposed debt securities were held for more than one year and
will be short-term capital gain or loss if the disposed debt securities were held for one year or
less. Net long-term capital gain recognized by a noncorporate U.S. holder generally will be subject
to federal income tax at a lower rate (currently a maximum rate of 15%, although this rate will
increase to 20% after 2010) than net short-term capital gain or ordinary income (currently a
maximum rate of 35%). For corporate holders, capital gain is generally taxed for federal income tax
purposes at the same rate as ordinary income, that is, currently at a maximum rate of 35%. A
holders ability to deduct capital losses may be limited.
Amortizable Premium. If you purchase debt securities at a cost greater than their stated
principal amount, plus accrued interest, you will be considered to have purchased the debt
securities at a premium, and you generally may elect to amortize this premium as an offset to
interest income, using a constant yield method, over the remaining term of the debt securities. If
you make the election to amortize the premium, it generally will apply to all debt instruments that
you hold at the beginning of the first taxable year to which the election applies, as well as any
debt instruments that you subsequently acquire. In addition, you may not revoke the election
without the consent of the IRS. If you elect to amortize the premium, you will be required to
reduce your tax basis in the debt securities by the amount of the premium amortized during your
holding period. If you do not elect to amortize premium, the amount of premium will be included in
your tax basis in the debt securities. Therefore, if you do not elect to amortize the premium and
you hold the debt securities to maturity, you generally will be required to treat the premium as a
capital loss when the debt securities are redeemed.
Market Discount. If you purchase debt securities at a price that reflects a market discount,
any principal payments on, or any gain that you realize on the disposition of, the debt securities
generally will be treated as ordinary interest income to the extent of the market discount that
accrued on the debt securities during the time you held such debt securities. Market discount is
defined under the Internal Revenue Code as, in general, the excess of the stated redemption price
at maturity over the purchase price of the debt security, except that if the market discount is
less than 0.25% of the stated redemption price at maturity multiplied by the number of
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complete years to maturity, the market discount is considered to be zero. In addition, you may
be required to defer the deduction of all or a portion of any interest paid on any indebtedness
that you incurred or continued to purchase or carry the debt securities that were acquired at a
market discount. In general, market discount will be treated as accruing ratably over the term of
the debt securities, or, at your election, under a constant yield method.
You may elect to include market discount in gross income currently as it accrues (on either a
ratable or constant yield basis), in lieu of treating a portion of any gain realized on a sale of
the debt securities as ordinary income. If you elect to include market discount on a current basis,
the interest deduction deferral rule described above will not apply and you will increase your
basis in the debt security by the amount of market discount you include in gross income. If you do
make such an election, it will apply to all market discount debt instruments that you acquire on or
after the first day of the first taxable year to which the election applies. This election may not
be revoked without the consent of the IRS.
Information Reporting and Backup Withholding. In general, information reporting requirements
will apply to payments of principal, interest, and premium, if any, paid on debt securities and to
the proceeds of the sale of debt securities paid to U.S. holders other than certain exempt
recipients (such as certain corporations). Information reporting generally will apply to payments
of interest on the debt securities to non-U.S. Holders (as defined below) and the amount of tax, if
any, withheld with respect to such payments. Copies of the information returns reporting such
interest payments and any withholding may also be made available to the tax authorities in the
country in which the non-U.S. Holder resides under the provisions of an applicable income tax
treaty. In addition, for non-U.S. Holders, information reporting will apply to the proceeds of the
sale of debt securities within the United States or conducted through United States-related
financial intermediaries unless the certification requirements described below have been complied
with and the statement described below in Taxation of Non-U.S. Holders has been received (and the
payor does not have actual knowledge or reason to know that the holder is a United States person)
or the holder otherwise establishes an exemption.
We may be required to withhold, for U.S. federal income tax purposes, a portion of all
payments (including redemption proceeds) payable to holders of debt securities who fail to provide
us with their correct taxpayer identification number, who fail to make required certifications or
who have been notified by the IRS that they are subject to backup withholding (or if we have been
so notified). Certain corporate and other shareholders specified in the Internal Revenue Code and
the regulations thereunder are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the holders U.S. federal income tax
liability provided the appropriate information is furnished to the IRS. If you are a non-U.S.
Holder, you may have to comply with certification procedures to establish your non-U.S. status in
order to avoid backup withholding tax requirements. The certification procedures required to claim
the exemption from withholding tax on interest income described below will satisfy these
requirements.
Taxation of Non-U.S. Holders. If you are a non-resident alien individual or a foreign
corporation (a non-U.S. Holder), the payment of interest on the debt securities generally will be
considered portfolio interest and thus generally will be exempt from U.S. federal withholding
tax. This exemption will apply to you provided that (1) interest paid on the debt securities is not
effectively connected with your conduct of a trade or business in the United States, (2) you are
not a bank whose receipt of interest on the debt securities is described in Section 881(c)(3)(A) of
the Internal Revenue Code, (3) you do not actually or constructively own 10 percent or more of the
combined voting power of all classes of our stock entitled to vote, (4) you are not a controlled
foreign corporation that is related, directly or indirectly, to us through stock ownership, and (5)
you satisfy the certification requirements described below.
To satisfy the certification requirements, either (1) the holder of any debt securities must
certify, under penalties of perjury, that such holder is a non-U.S. person and must provide such
owners name, address and taxpayer identification number, if any, on IRS Form W-8BEN, or (2) a
securities clearing organization, bank or other financial institution that holds customer
securities in the ordinary course of its trade or business and holds the debt securities on behalf
of the holder thereof must certify, under penalties of perjury, that it has received a valid and
properly executed IRS Form W-8BEN from the beneficial holder and comply with certain other
requirements. Special certification rules apply for debt securities held by a foreign partnership
and other intermediaries.
Interest on debt securities received by a non-U.S. Holder that is not excluded from U.S.
federal withholding tax under the portfolio interest exemption as described above generally will be
subject to withholding at a 30% rate, except where (1) the interest is effectively connected with
the conduct of a U.S. trade or business, in which case the interest will be subject to U.S. income
tax on a net basis as applicable to U.S. holders generally or (2) a non-U.S. Holder can claim the
benefits of an applicable income tax treaty to reduce or eliminate such withholding tax. To claim
the benefit of an income tax treaty or to claim an exemption from withholding because the interest
is effectively connected with a U.S. trade or business, a non-U.S. Holder must timely provide the
appropriate, properly executed IRS forms. These forms may be required to be periodically updated.
Also, a non-U.S. Holder who is claiming the
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benefits of an income tax treaty may be required to obtain a U.S. taxpayer identification
number and to provide certain documentary evidence issued by foreign governmental authorities to
prove residence in the foreign country.
Any capital gain that a non-U.S. Holder realizes on a sale, exchange or other disposition of
debt securities generally will be exempt from U.S. federal income tax, including withholding tax.
This exemption will not apply to you if your gain is effectively connected with your conduct of a
trade or business in the U.S. or you are an individual holder and are present in the U.S. for a
period or periods aggregating 183 days or more in the taxable year of the disposition and either
your gain is attributable to an office or other fixed place of business that you maintain in the
U.S. or you have a tax home in the United States.
PROXY VOTING POLICIES
We and our Adviser have adopted proxy voting policies and procedures (Proxy Policy), which
they believe are reasonably designed to ensure that proxies are voted in our best interests and the
best interests of our stockholders. Subject to the oversight of the Board of Directors, the Board
has delegated responsibility for implementing the Proxy Policy to our Adviser. Because of the
unique nature of MLPs in which we primarily invest, our Adviser shall evaluate each proxy on a
case-by-case basis. Because proxies of MLPs are expected to relate only to extraordinary measures,
we do not believe it is prudent to adopt pre-established voting guidelines.
In the event requests for proxies are received with respect to the voting of equity securities
other than MLP equity units, on routine matters, such as election of directors or approval of
auditors, the proxies usually will be voted with management unless our Adviser determines it has a
conflict or our Adviser determines there are other reasons not to vote with management. On
non-routine matters, such as amendments to governing instruments, proposals relating to
compensation and stock option and equity compensation plans, corporate governance proposals and
stockholder proposals, our Adviser will vote, or abstain from voting if deemed appropriate, on a
case by case basis in a manner it believes to be in the best economic interest of our stockholders.
In the event requests for proxies are received with respect to debt securities, our Adviser will
vote on a case by case basis in a manner it believes to be in the best economic interest of our
stockholders.
The Chief Executive Officer is responsible for monitoring our actions and ensuring that: (1)
proxies are received and forwarded to the appropriate decision makers; and (2) proxies are voted in
a timely manner upon receipt of voting instructions. We are not responsible for voting proxies we
do not receive, but will make reasonable efforts to obtain missing proxies. The Chief Executive
Officer shall implement procedures to identify and monitor potential conflicts of interest that
could affect the proxy voting process, including: (1) significant client relationships; (2) other
potential material business relationships; and (3) material personal and family relationships. All
decisions regarding proxy voting shall be determined by the Investment Committee of our Adviser and
shall be executed by the Chief Executive Officer. Every effort shall be made to consult with the
portfolio manager and/or analyst covering the security. We may determine not to vote a particular
proxy, if the costs and burdens exceed the benefits of voting (e.g., when securities are subject to
loan or to share blocking restrictions).
If a request for proxy presents a conflict of interest between our stockholders on one hand,
and our Adviser, the principal underwriters, or any affiliated persons of ours, on the other hand,
our management may: (1) disclose the potential conflict to the Board of Directors and obtain
consent; or (2) establish an ethical wall or other informational barrier between the persons
involved in the conflict and the persons making the voting decisions.
Information regarding how we voted proxies for the 12-month period ended June 30, 2008, is
available without charge by calling us at (866) 362-9331. You may also access this information on
the SECs website at
http://www.sec.gov.
Our link on our Advisers website at
http://www.tortoiseadvisors.com
provides a link to all of our reports filed with the SEC.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, 1200 Main Street, Kansas City, Missouri, serves as our independent
registered public accounting firm. Ernst & Young LLP provides audit and audit-related services,
tax return preparation and assistance and consultation in connection with review of our filings
with the SEC.
CUSTODIAN
U.S. Bank, N.A., 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212 serves as
the custodian of our cash and investment securities. We pay the custodian a monthly fee computed at
an annual rate of 0.015% on the first $100 million of our
portfolio assets and 0.01% on the balance of our Managed Assets, subject to a minimum annual
fee of $4,800. U.S. Bank, N.A. is also
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a lender under our $92,500,000 unsecured revolving credit
facility. We agreed to reimburse U.S. Bank, N.A. for legal fees and other expenses incurred by U.S.
Bank, N.A. in documenting the credit facility.
INTERNAL ACCOUNTANT
U.S. Bancorp Fund Services, LLC (U.S. Bancorp) serves as our internal accountant. For its
services, we pay U.S. Bancorp a fee computed at $24,000 for the first $50 million of our net
assets, 0.0125% on the next $200 million of net assets and 0.0075% on the balance of our net
assets. For the fiscal years ended November 30, 2006, November 30, 2007 and November 30, 2008, we
paid U.S. Bancorp $62,294, $74,123 and $66,761, respectively, for internal accounting services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to the common
stock, preferred stock and debt securities offered hereby, has been filed by us with the SEC. The
prospectus, prospectus supplement, and this statement of additional information do not contain all
of the information set forth in the Registration Statement, including any exhibits and schedules
thereto. Please refer to the Registration Statement for further information with respect to us and
the offering of our securities. Statements contained in the prospectus, prospectus supplement, and
this statement of additional information as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to a Registration Statement, each such statement
being qualified in all respects by such reference. Copies of the Registration Statement may be
inspected without charge at the SECs principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the SEC upon the payment of certain fees prescribed by the
SEC.
FINANCIAL STATEMENTS
Our 2008 Annual Report, which contains our audited financial statements as of November 30,
2008, notes thereto, and other information about us, are hereby incorporated by reference into, and
shall accompany, this Statement of Additional Information.
Our 2008 Annual Report includes supplemental financial information which presents selected
ratios as a percentage of our total investment portfolio and a calculation of our distributable
cash flow (DCF) and related information. You may request a free copy of the Statement of
Additional Information, our annual, semi-annual and quarterly reports, or make other requests for
information about us, by calling toll-free 1-866-362-9331, or by writing to us at 11550 Ash Street,
Suite 300, Leawood, Kansas 66211.
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APPENDIX A RATING OF INVESTMENTS
MOODYS INVESTORS SERVICE, INC.
Moodys long-term obligation ratings are opinions of the relative credit risk of fixed-income
obligations with an original maturity of one year or more. They address the possibility that a
financial obligation will not be honored as promised. Such ratings reflect both the likelihood of
default and any financial loss suffered in the event of default.
Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit
risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit
risk.
A Obligations rated A are considered upper-medium grade and are subject to low credit risk.
Baa Obligations rated Baa are subject to moderate credit risk. They are considered
medium-grade and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged to have speculative elements and are subject to
substantial credit risk.
B Obligations rated B are considered speculative and are subject to high credit risk.
Caa Obligations rated Caa are judged to be of poor standing and are subject to very high
credit risk.
Ca Obligations rated Ca are highly speculative and are likely in, or very near, default,
with some prospect of recovery of principal and interest.
C Obligations rated C are the lowest rated class of bonds and are typically in default,
with little prospect for recovery of principal and interest.
Note
: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
US Municipal and Tax-Exempt Ratings
Municipal ratings are based upon the analysis of four primary factors relating to municipal
finance: economy, debt, finances, and administration/management strategies. Each of the factors
is evaluated individually and for its effect on the other factors in the context of the
municipalitys ability to repay its debt.
Aaa Issuers or issues rated Aaa demonstrate the strongest creditworthiness relative to other
US municipal or tax-exempt issuers or issues.
Aa Issuers or issues rated Aa demonstrate very strong creditworthiness relative to other US
municipal or tax-exempt issuers or issues.
A Issuers or issues rated A present above average creditworthiness relative to other US
municipal or tax-exempt issuers or issues.
Baa Issuers or issues rated Baa represent average creditworthiness relative to other US
municipal or tax-exempt issuers or issues.
Ba Issuers or issues rated Ba demonstrate below-average creditworthiness relative to other
US municipal or tax-exempt issuers or issues.
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B Issuers or issues rated B demonstrate weak creditworthiness relative to other US municipal
or tax-exempt issuers or issues.
Caa Issuers or issues rated Caa demonstrate very weak creditworthiness relative to other US
municipal or tax-exempt issuers or issues.
Ca Issuers or issues rated Ca demonstrate extremely weak creditworthiness relative to other
US municipal or tax-exempt issuers or issues.
C Issuers or issues rated C demonstrate the weakest creditworthiness relative to other US
municipal or tax-exempt issuers or issues.
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating category from Aa
through Caa. The modifier 1 indicates that the issuer or obligation ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
Description of Moodys Highest Ratings of State and Municipal Notes and Other Short-Term
Loans
Moodys ratings for state and municipal notes and other short-term loans are designated
Moodys Investment Grade (MIG or, for variable or floating rate obligations, VMIG). Such
ratings recognize the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are critical in short-term
ratings. Symbols used will be as follows:
MIG-1 This designation denotes superior credit quality. Excellent protection is afforded
by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to
the market for refinancing.
MIG-2 This designation denotes strong credit quality. Margins of protection are ample,
although not as large as in the preceding group.
MIG-3 This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt instruments in this
category may lack sufficient margins of protection. Demand features rated in this category may be
supported by a liquidity provider that does not have an investment grade short-term rating or may
lack the structural and/or legal protections necessary to ensure the timely payment of purchase
price upon demand.
VMIG 1 This designation denotes superior credit quality. Excellent protection is afforded
by the superior short-term credit strength of the liquidity provider and structural and legal
protections that ensure the timely payment of purchase price upon demand.
VMIG 2 This designation denotes strong credit quality. Good protection is afforded by the
strong short-term credit strength of the liquidity provider and structural and legal protections
that ensure the timely payment of purchase price upon demand.
VMIG 3 This designation denotes acceptable credit quality. Adequate protection is afforded
by the satisfactory short-term credit strength of the liquidity provider and structural and legal
protections that ensure the timely payment of purchase price upon demand.
Description of Moodys Short Term Ratings
Moodys short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs or to individual
short-term debt instruments. Such obligations generally have an original maturity not exceeding
thirteen months, unless explicitly noted.
P-1 Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
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P-2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3 Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
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FITCH RATINGS
A brief description of the applicable Fitch Ratings (Fitch) ratings symbols and meanings (as
published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit risk.
They are assigned only in case of exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be affected adversely by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A High credit quality. A ratings denote a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered strong. This capacity may, nevertheless,
be more vulnerable to changes in circumstances or in economic conditions than is the case for
higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time; however, business or
financial alternatives may be available to allow financial commitments to be met. Securities rated
in this category are not investment grade.
B Highly speculative. B ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met; however, capacity
for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or economic
developments. A CC rating indicates that default of some kind appears probable. C ratings
signal imminent default.
DDD, DD, And D Default The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor.
While expected recovery values are highly speculative and cannot be estimated with any precision,
the following serve as general guidelines. DDD obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. DD indicates potential
recoveries in the range of 50%-90%, and D the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated
DDD have the highest prospect for resumption of performance or continued operation with or
without a formal reorganization process. Entities rated DD and D are generally undergoing a
formal reorganization or liquidation process; those rated DD are likely to satisfy a higher
portion of their outstanding obligations, while entities rated D have a poor prospect for
repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most obligations, or up to
three years for U.S. public finance securities, and thus places greater emphasis on the liquidity
necessary to meet financial commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment of
financial commitments; may have an added + to denote any exceptionally strong credit feature.
A-4
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA Long-term rating category, to categories
below CCC, or to Short-term ratings other than F1.
NR indicates that Fitch Ratings does not rate the issuer or issue in question.
Withdrawn A rating is withdrawn when Fitch Ratings deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures, is called, or
refinanced.
Rating Watch Ratings are placed on Rating Watch to notify investors that there is a
reasonable probability of a rating change and the likely direction of such change. These are
designated as Positive, indicating a potential upgrade, Negative, for a potential downgrade, or
Evolving, if ratings may be raised, lowered or maintained. Rating Watch typically is resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over a one to two year
period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does
not imply a rating change is inevitable. Similarly, ratings for which outlooks are `stable could
be downgraded before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these
cases, the Rating Outlook may be described as evolving.
A-5
STANDARD & POORS CORPORATION
A brief description of the applicable Standard & Poors Corporation, a division of The
McGraw-Hill Companies (Standard & Poors or S&P), rating symbols and their meanings (as
published by S&P) follows:
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of financial obligations,
or a specific financial program (including ratings on medium term note programs and commercial
paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment
as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by
Standard & Poors from other sources it considers reliable. Standard & Poors does not perform an
audit in connection with any credit rating and may, on occasion, rely on unaudited financial
information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally
assigned to those obligations considered short-term in the relevant market. In the U.S., for
example, that means obligations with an original maturity of no more than 365 days including
commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor with respect
to put features on long-term obligations. The result is a dual rating, in which the short-term
ratings address the put feature, in addition to the usual long-term rating. Medium-term notes are
assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following considerations:
1. Likelihood of payment capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors rights. The issue ratings definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior obligations are typically rated
lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA An obligation rated AAA has the highest rating assigned by Standard & Poors. The
obligors capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in small
degree. The obligors capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher-rated categories. However, the
obligors capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, AND C Obligations rated BB, B, CCC, CC, and C are regarded as
having significant speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major exposures to adverse
conditions.
A-6
BB An obligation rated BB is less vulnerable to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions, which could lead to the obligors inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse
business, financial, or economic conditions will likely impair the obligors capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has been filed
or similar action has been taken, but payments on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poors believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of
a similar action if payments on an obligation are jeopardized.
+/- Plus (+) or minus (-). The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating categories.
c The c subscript is used to provide additional information to investors that the bank
may terminate its obligation to purchase tendered bonds if the long-term credit rating of the
issuer is below an investment-grade level and/or the issuers bonds are deemed taxable.
P The letter p indicates that the rating is provisional. A provisional rating assumes
the successful completion of the project financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the successful, timely
completion of the project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with respect to such
likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poors receipt of an executed
copy of the escrow agreement or closing documentation confirming investments and cash flows.
r The r highlights derivative, hybrid, and certain other obligations that Standard &
Poors believes may experience high volatility or high variability in expected returns as a result
of noncredit risks. Examples of such obligations are securities with principal or interest return
indexed to equities, commodities, or currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an r symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are rated on the
same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of
the obligor but do not take into account currency exchange and related uncertainties.
Bond Investment Quality Standards
Under present commercial bank regulations issued by the Comptroller of the Currency, bonds
rated in the top four categories (AAA, AA, A, BBB, commonly known as investment-grade
ratings) generally are regarded as eligible for bank investment.
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Also, the laws of various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust companies, insurance
companies, and fiduciaries in general.
Short-Term Issue Credit Ratings
Notes
Standard & Poors note ratings reflects the liquidity factors and market access risks unique
to notes. Notes due in three years or less will likely receive a note rating. Notes maturing
beyond three years will most likely receive a long-term debt rating. The following criteria will
be used in making that assessment:
Amortization schedule the larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
Source of payment the more dependent the issue is on the market for its refinancing, the
more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security inasmuch as it
does not comment as to market price or suitability for a particular investor. The ratings are
based on current information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable.
S&P does not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result
of changes in or unavailability of such information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded into several
categories, ranging from A-1 for the highest quality obligations to D for the lowest. These
categories are as follows:
A-1 A short-term obligation rated A-1 is rated in the highest category by Standard &
Poors. The obligors capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+). This indicates that
the obligors capacity to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligors capacity to meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
A-8
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors believes that such payments will be made during
such grace period. The D rating also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold a security inasmuch as
it does not comment as to market price or suitability for a particular investor. The ratings are
based on current information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable.
S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a result of changes
in or unavailability of such information or based on other circumstances.
A-9
Tortoise Energy Capital Corporation
STATEMENT OF ADDITIONAL INFORMATION
March 5, 2009
PART C OTHER INFORMATION
Item 25: Financial Statements and Exhibits
1. Financial Statements:
The Registrants audited financial statements dated November 30, 2008, notes to such financial
statements and the report of independent registered public accounting firm on the Registrants
audited financial statements dated November 30, 2008, are incorporated by reference into the
statement of additional information.
2. Exhibits:
a.1.
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Articles of Incorporation (1)
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a.2.
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Articles of Amendment (2)
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a.3.
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Articles Supplementary relating to Series I Tortoise Preferred Shares (7)
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a.4.
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Articles Supplementary relating to Series II Tortoise Preferred Shares (10)
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b.
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Amended and Restated By-laws*
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c.
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Inapplicable
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d.1.
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Form of Common Share Certificate (11)
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d.2.
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Form of Preferred (MMP) Stock Certificate(11)
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d.3.
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Form of Note (11)
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d.4.
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Indenture of Trust (8)
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d.5.
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Form of Supplemental Indenture of Trust (11)
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d.6.
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Statement of Eligibility of Trustee on Form T-1 (3)
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d.7.
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Form of Fitch Rating Guidelines and Moodys Rating Guidelines (11)
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d.8.
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Master Note Purchase Agreement (12)
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e.
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Terms and Conditions of Dividend Reinvestment Plan (3)
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f.
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Inapplicable
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g.
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Investment Advisory Agreement with Tortoise Capital Advisors, L.L.C. (4)
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h.1.
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Form of Underwriting Agreement relating to Common Stock (11)
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h.2.
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Form of Underwriting Agreement relating to Preferred Stock (11)
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h.3.
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Form of Underwriting Agreement relating to Notes (11)
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h.4.
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Form of Purchase Agreement for Direct Placement of Common Stock (11)
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h.5.
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Form of Placement Agency Agreement for Direct Placement of Common Stock (11)
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i.
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Inapplicable
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j.
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Custody Agreement (5)
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k.1.
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Stock Transfer Agency Agreement (5)
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k.2.
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Administration Agreement (5)
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k.3.
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Fund Accounting Agreement (5)
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k.4.
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Form of Auction Agency Agreement relating to Preferred Stock (11)
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k.5.
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Form of Auction Agency Agreement relating to Notes (11)
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k.6.
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Form of Broker-Dealer Agreement relating to Preferred Stock (11)
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k.7.
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Form of Broker-Dealer Agreement relating to Notes (11)
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k.8.
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DTC Representation Letter relating to Preferred Stock and Notes (6)
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k.9
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Credit Agreement (9)
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k.10.
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Amendment One to Credit Agreement (11)
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k.11.
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Amendment Two to Credit Agreement (11)
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k.12.
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Amendment Three to Credit Agreement (12)
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l.
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Opinion of Venable LLP (12)
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m.
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Inapplicable
|
|
n.
|
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Consent of Independent Registered Public Accounting Firm *
|
|
o.
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Inapplicable
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p.
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Initial Subscription Agreement (2)
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q.
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Inapplicable (2)
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r1.
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Code of Ethics for the Registrant (2)
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C-1
r2.
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Code of Ethics for the Adviser (2)
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(*)
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Filed herewith
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(1)
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Incorporated by reference to Registrants Registration Statement on Form N-2, filed on March 8, 2005 (File Nos.
333-123180 and 811-21725).
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(2)
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Incorporated by reference to Pre-Effective Amendment No. 1 to Registrants Registration Statement on Form N-2, filed
on April 29, 2005 (File Nos. 333-123180 and 811-21725).
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(3)
|
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Incorporated by reference to Pre-Effective Amendment No. 1 to Registrants Registration Statement on Form N-2, filed
on October 12, 2005 (File Nos. 333-128063 and 811-21725).
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(4)
|
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Incorporated by reference to Pre-Effective Amendment
No. 7 to Registrants Registration Statement on Form
N-2, filed on November 8, 2005 (File Nos. 333-1231803
and 811-21725)
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(5)
|
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Incorporated by reference to Registrants Registration
Statement on Form N-2, filed on September 5, 2005 (File
Nos. 333-128063 and 811-21725).
|
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(6)
|
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Incorporated by reference to Pre-Effective Amendment
No. 1 to Registrants Registration Statement on Form
N-2, filed on January 11, 2006 (File Nos. 333-129878
and 811-21725).
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(7)
|
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Incorporated by reference to Appendix A of Pre-Effective
Amendment No. 3 to Registrants Registration Statement on Form N-2, filed on January
26, 2006 (File Nos. 333-129878 and 811-21725).
|
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(8)
|
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Incorporated by reference to Registrants Registration
Statement on Form N-2, filed on October 12, 2005 (File
Nos. 333-128063 and 811-21725).
|
|
(9)
|
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Incorporated by reference to Post-Effective Amendment
No. 1 to Registrants Registration Statement on Form
N-2, filed on March 30, 2007 (File Nos. 333-139963 and
811-21725).
|
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(10)
|
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Incorporated by reference to Post-Effective Amendment
No. 4 to Registrants Registration Statement on Form
N-2, filed on April 4, 2007 (File Nos. 333-139963 and
811-217251).
|
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(11)
|
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Incorporated by reference to Pre-Effective Amendment
No. 1 to Registrants Registration Statement on Form
N-2, filed on February 19, 2008 (File Nos. 333-149315
and 811-21725)
|
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(12)
|
|
Incorporated by reference to Pre-Effective Amendment
No. 2 to Registrants Registration Statement on Form
N-2, filed on April 10, 2008 (File Nos. 333-149315 and
811-21725)
|
Item 26: Marketing Arrangements
The information contained under the heading Plan of Distribution in the prospectus is
incorporated herein by reference, and information concerning any underwriters will be contained in
an accompanying prospectus supplement.
Item 27: Other Expenses and Distribution
The following table sets forth the estimated expenses to be incurred in connection with all
potential offerings described in this Registration Statement:
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Securities and Exchange Commission Fees
|
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$
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11,790
|
|
Directors Fees and Expenses
|
|
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7,000
|
|
Printing (other than certificates)
|
|
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120,500
|
|
Accounting fees and expenses
|
|
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175,000
|
|
C-2
|
|
|
|
|
Legal fees and expenses
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|
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300,000
|
|
NASD fee
|
|
|
7,500
|
|
Rating Agency Fees
|
|
|
|
|
Miscellaneous
|
|
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66,000
|
|
|
|
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|
Total
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$
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687,790
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*
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(*)
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These expenses will be borne by the Company unless otherwise specified in a prospectus
supplement.
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Item 28. Persons Controlled by or Under Common Control
None.
Item 29. Number of Holders of Securities
As
of November 30, 2008, the number of record holders of each class of securities of the
Registrant was:
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Number
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of Record
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Title of Class
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Holders
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Common Shares ($0.001 par value)
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58
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Preferred Stock (Liquidation Preference $25,000 per share)
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1
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Long-term Debt ($90,000,000 aggregate principal amount)
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13
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Item 30. Indemnification
Maryland law permits a Maryland corporation to include in its charter a provision limiting the
liability of its directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty which is established by a final
judgment as being material to the cause of action. The Registrants charter contains such a
provision which eliminates directors and officers liability to the maximum extent permitted by
Maryland law.
The Registrants charter authorizes it, to the maximum extent permitted by Maryland law and
the Investment Company Act of 1940, as amended (the 1940 Act), to indemnify any present or former
director or officer or any individual who, while a director of the Registrant and at the request of
the Registrant, serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise as a director,
officer, partner or trustee, from and against any claim or liability to which that person may
become subject or which that person may incur by reason of his or her status as a present or former
director or officer of the Registrant and to pay or reimburse his or her reasonable expenses in
advance of final disposition of a proceeding. The Registrants Bylaws obligate it, to the maximum
extent permitted by Maryland law and the 1940 Act, to indemnify any present or former director or
officer or any individual who, while a director of the Registrant and at the request of the
Registrant, serves or has served another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or
trustee and who is made a party to the proceeding by reason of his service in that capacity from
and against any claim or liability to which that person may become subject or which that person may
incur by reason of his or her status as a present or former director or officer of the Registrant
and to pay or reimburse his or her reasonable expenses in advance of final disposition of a
proceeding. The charter and Bylaws also permit the Registrant to indemnify and advance expenses to
any person who served as a predecessor of the Registrant in any of the capacities described above
and any employee or agent of the Registrant or a predecessor of the Registrant.
Maryland law requires a corporation (unless its charter provides otherwise, which the
Registrants charter does not) to indemnify a director or officer who has been successful in the
defense of any proceeding to which he is made a party by reason of his service in that capacity.
Maryland law permits a corporation to indemnify its present and former directors and officers,
among others, against judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the act or omission of
the director or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director
or officer actually received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable cause to believe that
the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not
indemnify for an adverse judgment
in a suit by or in the right of the corporation or for a judgment of liability on the basis
that personal benefit was improperly received,
C-3
unless in either case a court orders indemnification
and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable
expenses to a director or officer upon the corporations receipt of (a) a written affirmation by
the director or officer of his good faith belief that he has met the standard of conduct necessary
for indemnification by the corporation and (b) a written undertaking by him or on his behalf to
repay the amount paid or reimbursed by the corporation if it is ultimately determined that the
standard of conduct was not met.
The provisions set forth above apply insofar as they are consistent with Section 17(h) of the
1940 Act, which prohibits indemnification of any director or officer of the Registrant against any
liability to the Registrant or its stockholders to which such director or officer otherwise would
be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as
amended (1933 Act), may be provided to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant in connection with
the successful defense of any action, suit or proceeding or payment pursuant to any insurance
policy) is asserted against the Registrant by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed
in the 1933 Act and will be governed by the final adjudication of such issue.
Item 31. Business and Other Connections of Investment Adviser
The information in the statement of additional information under the caption Management of
the Company Directors and Officers is hereby incorporated by reference.
Item 32. Location of Accounts and Records
All such accounts, books, and other documents are maintained at the offices of the Registrant,
at the offices of the Registrants investment adviser, Tortoise Capital Advisors, L.L.C., 11550 Ash
Street, Suite 300, Leawood, Kansas 66211, at the offices of the custodian, U.S. Bank, N.A., 1555
North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212, at the offices of the transfer
agent, Computershare Trust Company, N.A., P.O. Box 43078, Providence, Rhode Island, at the offices
of the administrator, U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee, WI
53202, at the offices of the Auction Agent and Paying Agent, The Bank of New York, 101 Barclay
Street, 7W, New York, NY 10280 or at the offices of the Trustee, BNY Midwest Trust Company, N.A. 2
N. LaSalle Street, Chicago, IL 60602.
Item 33. Management Services
Not applicable.
Item 34. Undertakings
1. The Registrant undertakes to suspend the offering of common stock until the prospectus is
amended if (1) subsequent to the effective date of this registration statement, the net asset value
declines more than ten percent from its net asset value as of the effective date of this
registration statement or (2) the net asset value increases to an amount greater than its net
proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. The securities being registered will be offered on a delayed or continuous basis in
reliance on Rule 415 under the 1933 Act. Accordingly, the Registrant undertakes:
(a) to file, during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
C-4
(1) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(2) to reflect in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information set forth in the registration
statement; and
(3) to include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to such information in
the registration statement.
(b) that, for the purpose of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of those securities at that time shall be deemed to be
the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering;
(d) that, for the purpose of determining liability under the 1933 Act to any purchaser, if the
Registrant is subject to Rule 430C: each prospectus filed pursuant to Rule 497(b), (c), (d) or
(e) under the 1933 Act as part of this registration statement relating to an offering, other than
prospectuses filed in reliance on Rule 430A under the 1933 Act, shall be deemed to be part of and
included in this registration statement as of the date it is first used after effectiveness.
Provided, however,
that no statement made in this registration statement or prospectus that
is part of this registration statement or made in a document incorporated or deemed incorporated by
reference into this registration or prospectus that is part of this registration statement will, as
to a purchaser with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in this registration statement or prospectus that was part of this
registration statement or made in any such document immediately prior to such date of first use.
(e) that for the purpose of determining liability of the Registrant under the 1933 Act to any
purchaser in the initial distribution of securities:
The undersigned Registrant undertakes that in a primary offering of securities of the
undersigned Registrant pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned Registrant will be a
seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
(1) any preliminary prospectus or prospectus of the undersigned Registrant relating to the
offering required to be filed pursuant to Rule 497 under the 1933 Act;
(2) the portion of any advertisement pursuant to Rule 482 under the 1933 Act relating to the
offering containing material information about the undersigned Registrant or its securities
provided by or on behalf of the undersigned Registrant; and
(3) any other communication that is an offer in the offering made by the undersigned
Registrant to the purchaser.
5. (a) That for the purpose of determining any liability under the 1933 Act, the information
omitted from the form of prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 497(h) under the
1933 Act (17 CFR 230.497(h)) shall be deemed to be part of this registration statement as of the
time it was declared effective; and
(b) for the purpose of determining any liability under the 1933 Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the securities at that time shall
be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means designed to ensure
equally prominent delivery within two business days of receipt of a written or oral request the
Registrants statement of additional information.
7. Upon each issuance of securities pursuant to this Registration Statement, the
Registrant undertakes to file a form of prospectus and/or form of prospectus supplement pursuant to
Rule 497 and a post-effective amendment to the extent required by the
C-5
1933 Act and the rules and
regulations thereunder, including, but not limited to a post-effective amendment pursuant to Rule
462(c) or Rule 462(d) under the 1933 Act.
8. The Registrant undertakes to file a post-effective amendment pursuant to Section 8(c) of
the 1933 Act in connection with any offering of its securities below net asset value.
C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in this City of Leawood and State of Kansas, on the 5th day
of March, 2009.
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|
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|
|
TORTOISE ENERGY CAPITAL CORPORATION
|
|
|
By:
|
/s/ David J. Schulte
|
|
|
|
David J. Schulte, President
|
|
|
|
|
|
|
Pursuant to the requirements of the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the date indicated.
|
|
|
|
|
/s/ Terry C. Matlack
Terry C. Matlack
|
|
Director (and Principal Financial
and Accounting Officer)
|
|
March 5, 2009
|
|
|
|
|
|
/s/ Conrad S. Ciccotello*
Conrad S. Ciccotello
|
|
Director
|
|
March 5, 2009
|
|
|
|
|
|
/s/ John R. Graham*
John R. Graham
|
|
Director
|
|
March 5, 2009
|
|
|
|
|
|
/s/ Charles E. Heath*
Charles E. Heath
|
|
Director
|
|
March 5, 2009
|
|
|
|
|
|
/s/ H. Kevin Birzer*
H. Kevin Birzer
|
|
Director
|
|
March 5, 2009
|
|
|
|
|
|
/s/ David J. Schulte
David J. Schulte
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
March 5, 2009
|
|
|
|
*
|
|
By David J. Schulte, pursuant to power of attorney filed with the Registrants Registration
Statement on Form N-2, filed on February 21, 2008 (File Nos. 333-149315 and 811-21725).
|
C-7
Exhibit Index
b.
|
|
Amended and Restated By-laws
|
|
n.
|
|
Consent of Independent Registered Public Accounting Firm
|
C-8
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