Filed
pursuant to Rule 497(e) under
the Securities Act of 1933, as amended
File
No. 333-149315
PROSPECTUS SUPPLEMENT
(To prospectus dated January 31, 2011)
$30,000,000
Tortoise Energy Capital
Corporation
Common Stock
We have entered into a Controlled Equity
Offering
SM
Sales Agreement (the Sales Agreement) with Cantor
Fitzgerald & Co. (Cantor, or the
Sales Agent) relating to our shares of common stock.
In accordance with the terms of the Sales Agreement, we may
offer and sell from time to time shares of our common stock
having an aggregate sales price of up to $30,000,000 through the
Sales Agent.
We seek to provide our stockholders with an efficient vehicle to
invest in a portfolio consisting primarily of publicly traded
master limited partnerships (MLPs) and their
affiliates in the energy infrastructure sector. Our investment
objective is to seek a high level of total return with an
emphasis on current distributions to stockholders. We are a
nondiversified, closed-end management investment company. This
prospectus supplement, together with the accompanying prospectus
dated January 31, 2011, sets forth the information that you
should know before investing.
Our currently outstanding shares of common stock are, and the
shares offered in this prospectus supplement and accompanying
prospectus will be, listed on the New York Stock Exchange
(NYSE) under the symbol TYY. The last
reported sale price of our common stock on July 15, 2011
was $26.62 per share. The net asset value (NAV) per
share of our common stock at the close of business on
July 15, 2011 was $25.84.
Sales of our common stock, if any, will be made by means of
ordinary brokers transactions on the NYSE or otherwise at
market prices prevailing at the time of the sale, at prices
related to the prevailing market prices or at negotiated prices.
As of the date of this prospectus supplement, we have sold in
this offering an aggregate of 426,301 shares of our common
stock, representing net proceeds to us of $8,907,725.49, after
payment of commissions of $254,685.40 in the aggregate.
Under the terms of the Sales Agreement, we will pay the Sales
Agent a total commission up to 2.0% of the gross sales price per
share of any common stock sold through the Sales Agent. If the
Sales Agent engages in special selling efforts, as that term is
used in Regulation M under the Securities Exchange Act of
1934, the Sales Agent will receive from us a commission agreed
upon at the time of sale.
The Sales Agent is not required to sell any specific number or
dollar amount of common shares, but will use its commercially
reasonable efforts to sell the common shares offered by this
prospectus supplement and the accompanying prospectus. There is
no arrangement for common shares to be received in an escrow,
trust or similar arrangement.
Investing in our common stock involves risks that are
described in the Risk Factors section beginning on
page 31 of the accompanying prospectus.
The Securities and Exchange Commission has not approved or
disapproved of these securities or passed upon the adequacy of
this prospectus supplement or the accompanying prospectus. Any
representation to the contrary is a criminal offense.
Cantor Fitzgerald &
Co.
The date of this prospectus supplement is July 21, 2011.
TABLE OF
CONTENTS
Prospectus
Supplement
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Page
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S-1
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S-3
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S-3
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S-4
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S-6
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S-8
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S-9
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S-9
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Prospectus
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Prospectus Summary
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1
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Summary of Company Expenses
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10
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Financial Highlights
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12
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Senior Securities
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14
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Market and Net Asset Value Information
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17
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Use of Proceeds
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18
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The Company
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19
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Investment Objective and Principal Investment Strategies
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19
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Leverage
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28
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Risk Factors
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31
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Management of the Company
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40
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Closed-End Company Structure
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43
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Certain Federal Income Tax Matters
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44
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Determination of Net Asset Value
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49
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Automatic Dividend Reinvestment Plan
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50
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Description of Securities
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52
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Rating Agency Guidelines
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60
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Certain Provisions in the Companys Charter and Bylaws
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61
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Selling Stockholders
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63
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Plan of Distribution
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63
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Administrator and Custodian
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66
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Legal Matters
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66
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Available Information
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66
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Table of Contents of the Statement of Additional Information
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67
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You should rely only on the information contained or
incorporated by reference in this prospectus supplement, the
accompanying prospectus and in the statement of additional
information. We have not, and the Sales Agent has not,
authorized anyone to provide you with different information. We
are not making an offer of these securities where the offer is
not permitted. The information appearing in this prospectus
supplement, the accompanying prospectus and in the statement of
additional information is accurate only as of the dates on their
respective 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.
S-i
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus 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 Securities and Exchange Commission (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 the prospectus accompanying
this prospectus supplement. All forward-looking statements
contained or incorporated by reference in this prospectus
supplement or the accompanying prospectus are made as of the
date of this prospectus supplement or the accompanying
prospectus, 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 supplement and the accompanying prospectus are
excluded from the safe harbor protection provided by
Section 27A of the Securities Act of 1933 (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 the prospectus accompanying this
prospectus supplement. We urge you to review carefully these
sections for a more complete discussion of the risks of an
investment in our common stock.
S-ii
PROSPECTUS
SUPPLEMENT SUMMARY
This summary contains basic information about us and the
offering but does not contain all of the information that is
important to your investment decision. You should read this
summary together with the more detailed information contained
elsewhere in this prospectus supplement and accompanying
prospectus and in the statement of additional information,
especially the information set forth under the heading
Risk Factors beginning on page 31 of the
accompanying prospectus. When used in this prospectus
supplement, the terms we, us, and
our refer to Tortoise Energy Capital Corporation,
unless specified otherwise.
The
Company
We seek to provide our stockholders with an efficient vehicle to
invest in a portfolio consisting primarily of publicly traded
master limited partnerships (MLPs) and their
affiliates in the energy infrastructure sector. Our investment
objective is to seek a high level of total return with an
emphasis on current distributions paid 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. Similar to the tax characterization of
distributions made by MLPs to unitholders, a significant portion
of our distributions to stockholders are expected to be treated
as a return of capital to stockholders.
We are a nondiversified, closed-end management investment
company. We commenced operations in May 2005 following our
initial public offering. As of the date of this prospectus
supplement, we have outstanding $50 million of our
Mandatory Redeemable Preferred Stock due March 1, 2018 (the
Tortoise Preferred Shares) and $104.1 million
of our privately placed senior debt securities (the
Tortoise Notes).
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, allowing us to borrow up to $40 million.
Outstanding balances under the credit facility generally accrue
interest at a variable annual rate equal to the one-month LIBOR
plus 1.25%, with a fee of 0.20% on any unused balance of the
credit facility. As of the date of this prospectus supplement,
the rate is 1.44%. The credit facility matures on June 18,
2012. We currently expect to seek to renew the credit facility
at an amount sufficient to meet our operating needs. We may draw
on the facility from time to time in accordance with our
investment policies. As of the date of this prospectus
supplement, we have approximately $19.4 million outstanding
under the credit facility. We have a fiscal year ending
November 30.
We expect to distribute substantially all of our distributable
cash flow (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 their affiliates, and interest
payments received on debt securities owned by us, less current
or anticipated operating expenses, current taxes on our taxable
income, and leverage costs paid by us (including leverage costs
of the Tortoise Notes and Tortoise Preferred Shares). Our Board
of Directors adopted a policy to target distributions to common
stockholders in an amount of at least 95% of DCF on an annual
basis.
Investment
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 June 30, 2011, the
Adviser managed assets of approximately $6.8 billion in the
energy sector, including the assets of six publicly traded
closed-end funds, an open-end fund and separate accounts. The
Advisers investment committee is comprised of five
portfolio managers. See Management of the Company in
the accompanying prospectus.
The principal business address of the Adviser is 11550 Ash
Street, Suite 300, Leawood, Kansas 66211.
Recent
Developments
Amendment of Credit Facility
.
On
June 20, 2011, we entered into an amendment to our credit
facility with U.S. Bank, N.A. and a lending syndicate. The
amendment extends the credit facility through June 18, 2012.
Common Stock Distribution
.
On
June 1, 2011, we paid a distribution in the amount of
$0.4025 per common share to stockholders of record as of
May 24, 2011.
S-1
The
Offering
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Common stock offered
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Up to $30,000,000
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Use of proceeds
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We intend to use the net proceeds of this offering primarily to
repay short-term debt outstanding under our credit facility and
to invest in energy infrastructure companies in accordance with
our investment objective and policies or for working capital
purposes. See Use of Proceeds.
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Risk factors
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See the section titled Risk Factors and other
information included in the accompanying prospectus for a
discussion of factors you should carefully consider before
deciding to invest in shares of our common stock.
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NYSE symbol
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TYY
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Stockholder
transaction expenses:
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Sales load (as a percentage of offering price)
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Up to 2.0%
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Offering expenses borne by us (as a percentage of offering price)
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0.38%
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Dividend reinvestment plan fees(1)
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None
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(1)
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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 in the accompanying prospectus.
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Example
This example replaces the example as set forth on page 10
of the accompanying prospectus with respect to this offering.
The following example illustrates the expenses that common
stockholders would pay on a $1,000 investment in common stock
assuming (1) a sales load of 2.0% and offering expenses of
0.38% of the offering price; (2) total annual expenses of
19.04% (including the deferred income tax expense) of net assets
attributable to shares of common stock; (3) a 5% annual
return; and (4) all distributions are reinvested at net
asset value:
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1 Year
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3 Years
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5 Years
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10 Years
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Total Expenses Paid by Common Stockholders(1)
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$
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197
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$
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474
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$
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678
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$
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985
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(1)
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Includes deferred income tax expense.
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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.
S-2
ISSUANCE
BELOW NET ASSET VALUE
The offering price per common share in this offering, after
deducting all expenses of issuance, including the compensation
paid to the Sales Agent, may be below our net asset value
(NAV) per common share. The NAV of our currently
outstanding shares of common stock will be diluted upon the
issuance of any shares of common stock below NAV. At our Annual
Meeting of Stockholders held on May 20, 2011, our
stockholders granted us the authority to sell shares of our
common stock for less than NAV, subject to certain conditions.
See Description of Securities Common
Stock Issuance of Additional Shares in the
accompanying prospectus.
USE OF
PROCEEDS
We intend to use the net proceeds of this offering primarily to
repay short-term debt outstanding under our credit facility and
to invest in energy infrastructure companies in accordance with
our investment objective and policies or for working capital
purposes.
S-3
CAPITALIZATION
The following table sets forth our capitalization: (i) as
of May 31, 2011, (ii) pro forma to reflect the
subsequent borrowing under our credit facility through the date
of this prospectus supplement, the issuance of
29,000 shares of common stock under our
at-the-market
offering program during the period from June 1, 2011
through the date of this prospectus supplement and the issuance
of 37,118 shares of common stock pursuant to our dividend
reinvestment plan on June 1, 2011; and (iii) pro forma
as adjusted to reflect the issuance of shares offered hereby
(assuming the sale of 782,775 common shares at a price of $26.62
per share (the last reported sale price of our common shares on
the New York Stock Exchange on July 15, 2011)). Actual
sales, if any, of our common shares, and the actual application
of the proceeds thereof, under this prospectus supplement and
the accompanying prospectus may be different than as set forth
in the table below. In addition, the price per share of any such
sale may be greater or less than $26.62, depending on the market
price of our common shares at the time of any such sale. As
indicated below, common stockholders will bear the offering
costs associated with this offering.
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Actual
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Pro Forma as
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May 31, 2011
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Pro Forma
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Adjusted
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Short-term investments(1)
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$
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103,151
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$
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103,151
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$
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1,043,873
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Short-term debt:
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Unsecured credit facility: $40,000,000 available(1)
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4,500,000
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19,400,000
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Long-term debt:
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Tortoise Notes, denominations of $25,000 or any multiple
thereof(2)
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107,500,000
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104,100,000
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104,100,000
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Preferred Stock:
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Mandatory Redeemable Preferred Shares, $10.00 stated value
per share at liquidation, 10,000,000 shares authorized;
5,000,000 shares outstanding actual, pro forma and pro
forma as adjusted)(2)
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50,000,000
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50,000,000
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50,000,000
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Net Assets Applicable to Common Stockholders Consist of:
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Capital Stock, $0.001 par value, 100,000,000 common shares
authorized; 19,400,238 common shares issued and outstanding
actual; 19,466,356 common shares issued and outstanding pro
forma; 20,249,131 common shares issued and outstanding pro forma
as adjusted(2)
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19,400
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19,466
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(3)
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20,249
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(3)(5)
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Additional paid-in capital
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286,175,400
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287,838,358
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(4)
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308,178,297
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(4)(6)
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Common stock subscribed
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319,424
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319,424
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319,424
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Subscriptions receivable
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(319,424
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(319,424
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(319,424
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Accumulated net investment loss, net of income taxes
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(58,370,776
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(58,370,776
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(58,370,776
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Undistributed realized gain, net of income taxes
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41,906,784
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41,906,784
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41,906,784
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Net unrealized appreciation of investments, net of income taxes
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224,761,072
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224,761,072
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224,761,072
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Net assets applicable to common stockholders
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$
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494,491,880
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$
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496,154,904
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$
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516,495,626
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(1)
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We have an unsecured credit facility with U.S. Bank, N.A. and a
lending syndicate that allows us to borrow up to
$40 million. The amended credit facility expires on
June 18, 2012. As of the date of this prospectus
supplement, we had $19.4 million borrowed under our credit
facility. The Pro Forma as Adjusted column reflects using all of
the proceeds of this offering to pay short-term debt outstanding
under our credit facility and make short-term investments;
however, we may use a portion of the proceeds to invest in
energy infrastructure companies in accordance with our
investment objective and policies.
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(2)
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None of these outstanding shares/notes are held by us or for our
account.
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S-4
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(3)
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Reflects the issuance of 29,000 shares of common stock
(aggregate par value $29) under our
at-the-market
offering program during the period from June 1, 2011
through the date of this prospectus supplement and the issuance
of 37,118 shares of common stock (aggregate par value $37)
pursuant to our dividend reinvestment plan on June 1, 2011.
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(4)
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Reflects the issuance of 29,000 shares of common stock
during the period from June 1, 2011 through the date of
this prospectus supplement in an aggregate amount of $716,886
less $0.001 par value per share ($29) and the issuance of
37,118 shares of common stock pursuant to our dividend
reinvestment plan on June 1, 2011 in an aggregate amount of
$946,138 less $0.001 par value per share ($37).
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(5)
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Pro forma as adjusted common stock reflects the issuance of
782,775 shares of common stock offered hereby (aggregate
par value $783).
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(6)
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Pro forma as adjusted additional paid-in capital reflects the
proceeds from the issuance of shares of common stock offered
hereby ($20,837,471), less $0.001 par value per share of
common stock ($783), less the sales commission ($416,749) and
less the estimated offering costs borne by us ($80,000) related
to the issuance of shares of common stock in this offering.
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S-5
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. Except where noted, the 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 2010 Annual Report and is
incorporated by reference into the statement of additional
information, both of which are available from us upon request.
The information as of May 31, 2011, and for the period from
December 1, 2010 through May 31, 2011, is derived from
our unaudited interim financial statements as filed with the SEC
in our most recent stockholder report for the period ended
May 31, 2011, which report is incorporated by reference
into the statement of additional information, and both of which
are available from us upon request. See Where You Can Find
More Information in this prospectus supplement.
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Period
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from
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December 1,
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2010
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Year
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Year
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Year
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Year
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Year
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through
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Ended
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Ended
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Ended
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Ended
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Ended
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May 31,
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November 30,
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November 30,
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November 30,
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November 30,
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November 30,
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2011
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2010
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2009
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2008
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2007
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2006
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(Unaudited)
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Per Common Share Data(1)
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Net Asset Value, beginning of period
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$
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25.27
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$
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19.90
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$
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12.85
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$
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27.84
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$
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26.79
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$
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23.23
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Income (Loss) from Investment Operations
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Net investment loss(2)(3)
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(0.49
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)
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(0.60
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)
|
|
|
(0.20
|
)
|
|
|
(0.89
|
)
|
|
|
(0.64
|
)
|
|
|
(0.36
|
)
|
Net realized and unrealized gains (losses) on investments and
interest rate swap contracts(2)(3)
|
|
|
1.51
|
|
|
|
7.50
|
|
|
|
8.88
|
|
|
|
(12.05
|
)
|
|
|
3.80
|
|
|
|
5.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from investment operations
|
|
|
1.02
|
|
|
|
6.90
|
|
|
|
8.68
|
|
|
|
(12.94
|
)
|
|
|
3.16
|
|
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Auction Preferred Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
(0.35
|
)
|
|
|
(0.33
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to auction preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
(0.35
|
)
|
|
|
(0.33
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
(0.80
|
)
|
|
|
(1.60
|
)
|
|
|
(1.60
|
)
|
|
|
(1.70
|
)
|
|
|
(1.63
|
)
|
|
|
(1.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to common stockholders
|
|
|
(0.80
|
)
|
|
|
(1.60
|
)
|
|
|
(1.60
|
)
|
|
|
(1.70
|
)
|
|
|
(1.63
|
)
|
|
|
(1.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and offering costs on issuance of auction
preferred stock(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.06
|
)
|
Premiums less underwriting discounts and offering costs on
issuance of common stock(5)(6)
|
|
|
0.00
|
|
|
|
0.07
|
|
|
|
0.01
|
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital stock transactions
|
|
|
0.00
|
|
|
|
0.07
|
|
|
|
0.01
|
|
|
|
|
|
|
|
(0.15
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, end of period
|
|
$
|
25.49
|
|
|
$
|
25.27
|
|
|
$
|
19.90
|
|
|
$
|
12.85
|
|
|
$
|
27.84
|
|
|
$
|
26.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share market value, end of period
|
|
$
|
26.72
|
|
|
$
|
27.06
|
|
|
$
|
22.38
|
|
|
$
|
11.11
|
|
|
$
|
25.47
|
|
|
$
|
26.50
|
|
Total Investment Return Based on Market Value(7)
|
|
|
1.77
|
%
|
|
|
29.31
|
%
|
|
|
120.32
|
%
|
|
|
(52.44
|
)%
|
|
|
1.73
|
%
|
|
|
27.67
|
%
|
Supplemental Data and Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common stockholders, end of period
(000s)
|
|
$
|
494,492
|
|
|
$
|
488,835
|
|
|
$
|
356,015
|
|
|
$
|
224,483
|
|
|
$
|
484,645
|
|
|
$
|
429,010
|
|
Average net assets (000s)
|
|
$
|
507,117
|
|
|
$
|
435,781
|
|
|
$
|
289,712
|
|
|
$
|
402,149
|
|
|
$
|
501,668
|
|
|
$
|
390,212
|
|
Ratio of Expenses to Average Net Assets(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
|
1.50
|
%
|
|
|
1.46
|
%
|
|
|
1.51
|
%
|
|
|
1.84
|
%
|
|
|
1.69
|
%
|
|
|
1.41
|
%
|
Other operating expenses
|
|
|
0.23
|
|
|
|
0.26
|
|
|
|
0.38
|
|
|
|
0.30
|
|
|
|
0.25
|
|
|
|
0.28
|
|
Expense reimbursement(6)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1.73
|
|
|
|
1.72
|
|
|
|
1.89
|
|
|
|
2.14
|
|
|
|
1.94
|
|
|
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage expenses(9)
|
|
|
2.59
|
|
|
|
2.23
|
|
|
|
2.02
|
|
|
|
4.37
|
|
|
|
2.51
|
|
|
|
1.78
|
|
Income tax expense (benefit)(10)
|
|
|
5.38
|
|
|
|
17.59
|
|
|
|
22.42
|
|
|
|
(28.32
|
)
|
|
|
6.06
|
|
|
|
13.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
9.70
|
%
|
|
|
21.54
|
%
|
|
|
26.33
|
%
|
|
|
(21.81
|
)%
|
|
|
10.51
|
%
|
|
|
17.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net investment loss to average net assets before
expense reimbursement(8)(9)
|
|
|
(3.73
|
)%
|
|
|
(2.65
|
)%
|
|
|
(1.53
|
)%
|
|
|
(3.67
|
)%
|
|
|
(2.33
|
)%
|
|
|
(1.47
|
)%
|
Ratio of net investment loss to average net assets after expense
reimbursement(8)(9)
|
|
|
(3.73
|
)%
|
|
|
(2.65
|
)%
|
|
|
(1.53
|
)%
|
|
|
(3.67
|
)%
|
|
|
(2.33
|
)%
|
|
|
(1.47
|
)%
|
Portfolio turnover rate(8)
|
|
|
16.98
|
%
|
|
|
12.92
|
%
|
|
|
14.86
|
%
|
|
|
6.44
|
%
|
|
|
9.90
|
%
|
|
|
5.56
|
%
|
S-6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
through
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
May 31,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings, end of period (000s)
|
|
$
|
4,500
|
|
|
$
|
7,400
|
|
|
$
|
14,600
|
|
|
|
|
|
|
$
|
24,700
|
|
|
$
|
28,000
|
|
Long-term debt obligations, end of period (000s)
|
|
$
|
107,500
|
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
|
$
|
190,000
|
|
|
$
|
120,000
|
|
Preferred stock, end of period (000s)
|
|
$
|
50,000
|
|
|
$
|
65,000
|
|
|
$
|
60,000
|
|
|
$
|
95,000
|
|
|
$
|
110,000
|
|
|
$
|
70,000
|
|
Per common share amount of long-term debt obligations
outstanding, end of period
|
|
$
|
5.54
|
|
|
$
|
4.65
|
|
|
$
|
5.03
|
|
|
$
|
5.15
|
|
|
$
|
10.92
|
|
|
$
|
7.49
|
|
Per common share amount of net assets, excluding long-term debt
obligations, end of period
|
|
$
|
31.03
|
|
|
$
|
29.92
|
|
|
$
|
24.93
|
|
|
$
|
18.00
|
|
|
$
|
38.76
|
|
|
$
|
34.28
|
|
Asset coverage, per $1,000 of principal amount of long-term debt
obligations and short-term borrowings(11)
|
|
$
|
5,862
|
|
|
$
|
6,686
|
|
|
$
|
4,977
|
|
|
$
|
4,550
|
|
|
$
|
3,770
|
|
|
$
|
4,372
|
|
Asset coverage ratio of long-term debt obligations and
short-term borrowings(11)
|
|
|
586
|
%
|
|
|
669
|
%
|
|
|
498
|
%
|
|
|
455
|
%
|
|
|
377
|
%
|
|
|
437
|
%
|
Asset coverage, per $25,000 liquidation value per share of
auction preferred stock(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,336
|
|
|
$
|
62,315
|
|
|
$
|
74,198
|
|
Asset coverage, per $10 liquidation value per share of mandatory
redeemable preferred stock(12)
|
|
$
|
41
|
|
|
$
|
40
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage ratio of preferred stock(12)
|
|
|
405
|
%
|
|
|
401
|
%
|
|
|
316
|
%
|
|
|
221
|
%
|
|
|
249
|
%
|
|
|
297
|
%
|
|
|
|
(1)
|
|
Information presented relates to a share of common stock
outstanding for the entire period.
|
|
(2)
|
|
The per common share data for the years ended November 30,
2010, 2009, 2008, 2007, and 2006 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.
|
|
(3)
|
|
The per common share data for the year ended November 30,
2008 reflects the cumulative effect of adopting
ASC 740-10,
which was a $776,852 increase to the beginning balance of
accumulated net investment loss, or $(0.04) per share.
|
|
(4)
|
|
Represents the issuance of auction preferred stock for the years
ended November 30, 2007 and 2006.
|
|
(5)
|
|
Represents the premiums on the shelf offerings of less than
$0.01 per share, less the underwriter discount and offering
costs of less than $0.01 per share for the period from
December 1, 2010 through May 31, 2011. Represents the
premiums on the shelf offerings of $0.10 per share, less the
underwriting discount and offering costs of $0.03 per share for
the year ended November 30, 2010. Represents the premiums
on the shelf offerings of $0.02 per share, less the underwriting
discount and offering costs of $0.01 per share for the year
ended November 30, 2009. 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 for the year
ended November 30, 2007.
|
|
(6)
|
|
Less than $0.01 or 0.01% for the period from December 1,
2010 through May 31, 2011.
|
|
(7)
|
|
Not annualized for periods less than one full year. Total
investment return is calculated assuming a purchase of common
stock at the beginning of the period 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)
|
|
The expense ratios and net investment loss ratios do not reflect
the effect of distributions to auction preferred stockholders.
|
|
(10)
|
|
For the period from December 1, 2010 through May 31,
2011, the Company accrued $16,663 for net current income tax
expense and $13,593,472 for net deferred income tax expense. For
the year ended November 30, 2010, the Company accrued
$409,606 for net current income tax expense and $76,240,282 for
net deferred income tax expense. For the year ended
November 30, 2009, the Company accrued $302,906 for net
current income tax benefit and $65,242,595 for net deferred
income tax expense. For the year ended November 30, 2008,
the Company accrued $427,891 for net current income tax expense
and $114,309,765 for net deferred income tax benefit. For the
year ended November 30, 2007, the Company accrued $152,988
for current income tax expense and $30,223,686 for net deferred
tax expense. For
|
S-7
|
|
|
|
|
the year ended November 30, 2006, the Company accrued
$27,973 for current income tax expense and $54,264,141 for net
deferred tax expense.
|
|
(11)
|
|
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.
|
|
(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 the sum of long-term debt obligations,
short-term borrowings and preferred stock outstanding at the end
of the period.
|
PLAN OF
DISTRIBUTION
We have entered into the Sales Agreement under which we may
issue and sell from time to time shares of our common stock
having an aggregate sales price of up to $30,000,000 through the
Sales Agent as our agent or as principal. Sales of the shares of
common stock, if any, will be made by means of ordinary
brokers transactions on the NYSE or otherwise at market
prices prevailing at the time of sale, at prices related to
prevailing market prices or at negotiated prices. As agent, the
Sales Agent will not engage in any transactions that stabilize
our common stock.
The Sales Agent will offer the common stock subject to the terms
and conditions of the Sales Agreement on a daily basis or as
otherwise agreed upon by us and the Sales Agent. We will
designate the maximum amount of common stock to be sold through
the Sales Agent on a daily basis or otherwise determine such
maximum amount together with the Sales Agent. Subject to the
terms and conditions of the Sales Agreement, the Sales Agent
will use its commercially reasonable efforts to sell on our
behalf all of the designated common stock. We may instruct the
Sales Agent not to sell common stock if the sales cannot be
effected at or above the price designated by us in any such
instruction. We or the Sales Agent may suspend the offering of
the common stock being made through the Sales Agent under the
Sales Agreement upon proper notice to the other party.
Under the terms of the Sales Agreement, the Sales Agent will
receive from us a total commission up to 2.0% of the gross sales
price per share of common stock for any shares sold through the
Sales Agent. The actual commission will be agreed upon at the
time of sale by us and the Sales Agent. The remaining sales
proceeds, after deducting any expenses payable by us and any
transaction fees imposed by any governmental, regulatory, or
self-regulatory organization in connection with the sales, will
equal our net proceeds for the sale of such common stock. If the
Sales Agent engages in special selling efforts, as that term is
used in Regulation M under the Securities Exchange Act of
1934, as amended (the 1934 Act), the Sales
Agent will receive from us a commission agreed upon at the time
of sale.
The Sales Agent will provide written confirmation to us before
the opening of trading on the NYSE on the day immediately
following each day on which shares of common stock are sold
under the Sales Agreement. Each confirmation will include the
number of shares of common stock sold on that day, the net
proceeds to us and the compensation payable by us to the Sales
Agent.
Settlement for sales of common stock will occur, unless the
parties agree otherwise, on the third business day that is also
a trading day following the date on which any sales were made in
return for payment of the net proceeds to us. There is no
arrangement for funds to be received in escrow, trust or similar
arrangement.
We will report at least quarterly the number of shares of common
stock sold through the Sales Agent in connection with the sales
of common stock.
In connection with the sales of the common stock on our behalf,
the Sales Agent may be deemed to be an underwriter
within the meaning of the 1933 Act, and the compensation
paid to the Sales Agent may be deemed to be underwriting
commissions or discounts. We have agreed in the Sales Agreement
to provide indemnification and contribution to the Sales Agent
against certain liabilities, including liabilities under the
1933 Act.
S-8
In the ordinary course of its business, the Sales Agent
and/or
its
affiliates have in the past performed, and may continue to
perform, investment banking, broker dealer, lending, financial
advisory, or other services for us for which they have received,
or may receive, separate fees.
If the Sales Agent or we have reason to believe that the
exemptive provisions set forth in Rule 101(c)(1) of
Regulation M under the 1934 Act are not satisfied,
that party will promptly notify the other and sales of common
stock under the Sales Agreement will be suspended until that or
other exemptive provisions have been satisfied in the judgment
of the Sales Agent and us.
We estimate that the total expenses of the offering payable by
us, excluding commissions payable to the Sales Agent under the
Sales Agreement, will be approximately $80,000.
The offering of shares of common stock pursuant to the Sales
Agreement will terminate upon the earlier of (1) the sale
of shares of our common stock having an aggregate sales price of
$30,000,000 and (2) the termination of the Sales Agreement
by the Sales Agent or us.
As of the date of this prospectus supplement, we have sold in
this offering an aggregate of 426,301 shares of our common
stock, representing net proceeds to us of $8,907,725.49, after
payment of commissions of $254,685.40 in the aggregate.
LEGAL
MATTERS
Certain legal matters in connection with the securities offered
hereby will be passed upon for us by Husch Blackwell LLP, Kansas
City, Missouri (Husch Blackwell). Certain legal
matters in connection with the securities offered hereby will be
passed upon for the Sales Agent by Andrews Kurth LLP, New York,
New York (Andrews Kurth). Husch Blackwell and
Andrews Kurth may rely on the opinion of Venable LLP, Baltimore,
Maryland, on certain matters of Maryland law.
WHERE YOU
CAN FIND MORE INFORMATION
We are subject to the informational requirements of the
1934 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 2010 annual report, as filed with the SEC and which contains
our audited financial statements as of November 30, 2010
and for the year then ended, notes thereto, and other
information about us is incorporated by reference into our
statement of additional information. Our 2011 first and second
quarter reports, as filed with the SEC and containing our
unaudited financial statements as of February 28, 2011 and
May 31, 2011, notes thereto, and other information about us
are incorporated by reference into our statement of additional
information. 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 supplement and the accompanying prospectus do
not contain all of the information in our registration
statement, including amendments, exhibits, and schedules.
Statements in this prospectus supplement and the accompanying
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 on our
Advisers website at www.tortoiseadvisors.com and in our
registration statement (including amendments, exhibits, and
schedules) on
Form N-2
filed with the SEC. Information included on our Advisers
website does not form part of this prospectus supplement. 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
other reports we have filed with the SEC.
S-9
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,
including through a rights offering to existing stockholders 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 or 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, 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 agents that we or they designate 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 manner in which we may offer our
securities, or a selling stockholder may offer our common stock,
see Plan of Distribution and Selling
Stockholders. 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
January 28, 2011, the last reported sale price for our
common stock was $27.64.
Investing in our securities involves certain risks. You could
lose some or all of your investment. See Risk
Factors beginning on page 31 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 January 31, 2011
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
January 31, 2011, 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 67 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 as well as in any related prospectus supplement.
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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10
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Financial Highlights
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12
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Senior Securities
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14
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Market and Net Asset Value Information
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17
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Use of Proceeds
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18
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The Company
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19
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Investment Objective and Principal Investment Strategies
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19
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Leverage
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28
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Risk Factors
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31
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Management of the Company
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40
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Closed-End Company Structure
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43
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Certain Federal Income Tax Matters
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44
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Determination of Net Asset Value
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49
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Automatic Dividend Reinvestment Plan
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50
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Description of Securities
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52
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Rating Agency Guidelines
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60
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Certain Provisions in our Charter and Bylaws
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61
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Selling Stockholders
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63
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Plan of Distribution
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63
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Administrator and Custodian
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66
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Legal Matters
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66
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Available Information
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66
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Table of Contents of the Statement of Additional Information
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67
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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.
i
PROSPECTUS
SUMMARY
The following summary contains basic information about us and
our securities. 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 31 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. Our common stock is
listed on the New York Stock Exchange (the NYSE)
under the symbol TYY. As of December 31, 2010,
we had net assets of approximately $502 million
attributable to our common stock. As of the date of this
prospectus, we have outstanding $45 million of our
Mandatory Redeemable Preferred Stock due November 30, 2016
(the MRP Shares) and $90 million of our
privately-placed Senior Notes (the Tortoise Notes).
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
$35 million. Outstanding balances under the credit facility
generally accrue interest at a variable annual rate equal to the
one-month LIBOR plus 1.25%, with a fee of 0.20% on any unused
balance of the credit facility. As of the date of this
prospectus, the current rate is 1.51%. The credit facility
remains in effect through June 20, 2011. We currently
expect to seek to renew the credit facility at an amount
sufficient to meet our operating needs. We may draw on the
facility from time to time in accordance with our investment
policies. As of the date of this prospectus, we have outstanding
approximately $28.45 million under the credit facility.
Investment
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 December 31, 2010,
our Adviser managed assets of approximately $6.1 billion in
the energy sector, including the assets of six publicly traded
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, including common stock pursuant
to a rights offering, or certain of our stockholders who
purchased 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.
1
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 and Selling Stockholders. 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.
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 preferred stock, debt securities 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
2
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
distributions and interest, respectively, in accordance with
their terms. So long as we have preferred stock and debt
securities outstanding, we may not declare distributions 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
Investors Service (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
3
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 an offering (which we expect may take up to approximately
three months following the closing of an 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.
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
33
1
/
3
%
of total assets for senior debt securities) or we may elect to
reduce the use of leverage or use no leverage at all. Our Board
of Directors has approved a leverage target of up to 25% of our
total assets at the time of incurrence and has also approved a
policy permitting temporary increases in the amount of leverage
we may use from 25% of our total assets to up to 30% 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) that we expect to reduce such
increased leverage 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.
4
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.
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:
Capital Markets Volatility Risk.
Our capital
structure and performance may be adversely impacted by weakness
in the credit markets and stock market if such weakness results
in declines in the value of MLPs in which we invest. If the
value of our investments decline or are volatile, there is a
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 may be impacted by a
slowdown in the capital markets. The performance of the MLP
sector is dependent on several factors, including the condition
of the financial sector, the general economy and the commodity
markets.
5
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 markets 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 an MLP might lose its 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 markets 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 payments.
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.
6
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. In addition, a substantial
change in our ownership may limit our ability to utilize our
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
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 December 31, 2010,
our Adviser had client assets under management of approximately
$6.1 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 Factors Company Risks for a
more detailed discussion of these and other risks of investing
in our securities.
Additional
Risks to Common Stockholders
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.
Weakness in the credit markets may cause our leverage costs to
increase and there is a risk that we may not be able to renew or
replace existing leverage on favorable terms or at all. 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
7
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 leveraging strategy will be successful. See
Leverage for additional information.
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.
Distributions and interest
payable on our senior securities are subject to interest rate
risk. To the extent that distributions or interest on such
securities are based on short-term rates, our leverage costs may
rise so that the amount of distributions 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
our senior 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 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, 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.
8
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 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 distributions or interest 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 Factors Additional Risks to Senior
Security Holders for a more detailed discussion of these
risks.
9
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, 2010, 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, 2010. On November 30, 2010, we had
$162.4 million in senior securities outstanding, including
$65 million of our MRP Shares, three series of Tortoise
Notes in an aggregate principal amount of $90 million, and
$7.4 million outstanding under our unsecured credit
facility. Senior securities represented approximately 21.2% of
our total assets as of November 30, 2010.
Stockholder
Transaction Expenses
|
|
|
|
|
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
|
|
|
1.48
|
%
|
Leverage Costs(3)
|
|
|
1.95
|
%
|
Other Expenses(4)
|
|
|
0.23
|
%
|
Current Income Tax Expense
|
|
|
0.08
|
%
|
Deferred Income Tax Expense(5)
|
|
|
15.60
|
%
|
|
|
|
|
|
Total Annual Expenses(6)
|
|
|
19.34
|
%
|
|
|
|
|
|
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 (including deferred
income tax expense) of 19.34% 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)
|
|
$
|
180
|
|
|
$
|
466
|
|
|
$
|
676
|
|
|
$
|
988
|
|
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 MRP Shares and the interest payable on
the Tortoise Notes and unsecured credit facility at borrowing
rates as of November 30, 2010, expressed as a percentage of
net assets as of November 30, 2010.
|
|
(4)
|
|
Other Expenses are based on amounts incurred for the period
ended November 30, 2010.
|
10
|
|
|
(5)
|
|
For the year ended November 30, 2010, we accrued
$76,240,282 in net deferred income tax expense related to our
net investment loss and net realized and unrealized gains.
Deferred income tax expense represents an estimate of our
potential tax liability if we were to recognize the unrealized
appreciation of our portfolio assets accumulated during our
fiscal year ended November 30, 2010, based on the market
value and tax basis of our assets as of November 30, 2010.
Actual income tax expense (if any) will be incurred over many
years depending on if and when investment gains are realized,
the then-current tax basis of assets, the level of net loss
carryforwards and other factors.
|
|
(6)
|
|
The table presented in this footnote presents certain of our
annual expenses as a percentage of our Managed Assets as of
November 30, 2010, excluding current and deferred income
tax expense.
|
|
|
|
|
|
|
|
Percentage of
|
Annual Expenses
|
|
Managed Assets
|
|
Management Fee
|
|
|
0.95
|
%
|
Leverage Costs(a)
|
|
|
1.25
|
%
|
Other Expenses (excluding current and deferred income tax
expenses)(b)
|
|
|
0.15
|
%
|
|
|
|
|
|
Total Annual Expenses (excluding current and deferred income tax
expenses)
|
|
|
2.35
|
%
|
|
|
|
|
|
|
|
|
(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, 2010.
|
|
|
|
(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.
11
TORTOISE
ENERGY CAPITAL CORPORATION
FINANCIAL
HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Per Common Share Data(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, beginning of year
|
|
$
|
19.90
|
|
|
$
|
12.85
|
|
|
$
|
27.84
|
|
|
$
|
26.79
|
|
|
$
|
23.23
|
|
Income (Loss) from Investment Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment loss(2)(3)
|
|
|
(0.60
|
)
|
|
|
(0.20
|
)
|
|
|
(0.89
|
)
|
|
|
(0.64
|
)
|
|
|
(0.36
|
)
|
Net realized and unrealized gains (losses) on investments and
interest rate swap contracts(2)(3)
|
|
|
7.50
|
|
|
|
8.88
|
|
|
|
(12.05
|
)
|
|
|
3.80
|
|
|
|
5.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from investment operations
|
|
|
6.90
|
|
|
|
8.68
|
|
|
|
(12.94
|
)
|
|
|
3.16
|
|
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Auction Preferred Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
(0.35
|
)
|
|
|
(0.33
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to auction preferred stockholders
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
(0.35
|
)
|
|
|
(0.33
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
(1.60
|
)
|
|
|
(1.60
|
)
|
|
|
(1.70
|
)
|
|
|
(1.63
|
)
|
|
|
(1.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to common stockholders
|
|
|
(1.60
|
)
|
|
|
(1.60
|
)
|
|
|
(1.70
|
)
|
|
|
(1.63
|
)
|
|
|
(1.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and offering costs on issuance of common
and auction preferred stock(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.06
|
)
|
Premiums less underwriting discounts and offering costs on
issuance of common stock(5)
|
|
|
0.07
|
|
|
|
0.01
|
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital stock transactions
|
|
|
0.07
|
|
|
|
0.01
|
|
|
|
|
|
|
|
(0.15
|
)
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, end of year
|
|
$
|
25.27
|
|
|
$
|
19.90
|
|
|
$
|
12.85
|
|
|
$
|
27.84
|
|
|
$
|
26.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share market value, end of year
|
|
$
|
27.06
|
|
|
$
|
22.38
|
|
|
$
|
11.11
|
|
|
$
|
25.47
|
|
|
$
|
26.50
|
|
Total Investment Return Based on Market Value(6)
|
|
|
29.31
|
%
|
|
|
120.32
|
%
|
|
|
(52.44
|
)%
|
|
|
1.73
|
%
|
|
|
27.67
|
%
|
Supplemental Data and Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common stockholders, end of year
(000s)
|
|
$
|
488,835
|
|
|
$
|
356,015
|
|
|
$
|
224,483
|
|
|
$
|
484,645
|
|
|
$
|
429,010
|
|
Average net assets (000s)
|
|
$
|
435,781
|
|
|
$
|
289,712
|
|
|
$
|
402,149
|
|
|
$
|
501,668
|
|
|
$
|
390,212
|
|
Ratio of Expenses to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
|
1.46
|
%
|
|
|
1.51
|
%
|
|
|
1.84
|
%
|
|
|
1.69
|
%
|
|
|
1.41
|
%
|
Other operating expenses
|
|
|
0.26
|
|
|
|
0.38
|
|
|
|
0.30
|
|
|
|
0.25
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1.72
|
|
|
|
1.89
|
|
|
|
2.14
|
|
|
|
1.94
|
|
|
|
1.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage expenses(7)
|
|
|
2.23
|
|
|
|
2.02
|
|
|
|
4.37
|
|
|
|
2.51
|
|
|
|
1.78
|
|
Income tax expense (benefit)(8)
|
|
|
17.59
|
|
|
|
22.42
|
|
|
|
(28.32
|
)
|
|
|
6.06
|
|
|
|
13.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
21.54
|
%
|
|
|
26.33
|
%
|
|
|
(21.81
|
)%
|
|
|
10.51
|
%
|
|
|
17.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net investment loss to average net assets(7)
|
|
|
(2.65
|
)%
|
|
|
(1.53
|
)%
|
|
|
(3.67
|
)%
|
|
|
(2.33
|
)%
|
|
|
(1.47
|
)%
|
Portfolio turnover rate
|
|
|
12.92
|
%
|
|
|
14.86
|
%
|
|
|
6.44
|
%
|
|
|
9.90
|
%
|
|
|
5.56
|
%
|
Short-term borrowings, end of year (000s)
|
|
$
|
7,400
|
|
|
$
|
14,600
|
|
|
|
|
|
|
$
|
24,700
|
|
|
$
|
28,000
|
|
Long-term debt obligations, end of year (000s)
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
|
$
|
190,000
|
|
|
$
|
120,000
|
|
Preferred stock, end of year (000s)
|
|
$
|
65,000
|
|
|
$
|
60,000
|
|
|
$
|
95,000
|
|
|
$
|
110,000
|
|
|
$
|
70,000
|
|
Per common share amount of long-term debt obligations
outstanding, end of year
|
|
$
|
4.65
|
|
|
$
|
5.03
|
|
|
$
|
5.15
|
|
|
$
|
10.92
|
|
|
$
|
7.49
|
|
Per common share amount of net assets, excluding long-term debt
obligations, end of year
|
|
$
|
29.92
|
|
|
$
|
24.93
|
|
|
$
|
18.00
|
|
|
$
|
38.76
|
|
|
$
|
34.28
|
|
Asset coverage, per $1,000 of principal amount of long-term debt
obligations and short-term borrowings(9)
|
|
$
|
6,686
|
|
|
$
|
4,977
|
|
|
$
|
4,550
|
|
|
$
|
3,770
|
|
|
$
|
4,372
|
|
Asset coverage ratio of long-term debt obligations and
short-term borrowings(9)
|
|
|
669
|
%
|
|
|
498
|
%
|
|
|
455
|
%
|
|
|
377
|
%
|
|
|
437
|
%
|
Asset coverage, per $25,000 liquidation value per share of
auction preferred stock(10)
|
|
|
|
|
|
|
|
|
|
$
|
55,336
|
|
|
$
|
62,315
|
|
|
$
|
74,198
|
|
Asset coverage, per $10 liquidation value per share of mandatory
redeemable preferred stock(10)
|
|
$
|
40
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage ratio of preferred stock(10)
|
|
|
401
|
%
|
|
|
316
|
%
|
|
|
221
|
%
|
|
|
249
|
%
|
|
|
297
|
%
|
12
|
|
|
(1)
|
|
Information presented relates to a share of common stock
outstanding for the entire year.
|
|
(2)
|
|
The per common share data for the years ended
November 30, 2009, 2008, 2007, and 2006 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.
|
|
(3)
|
|
The per common share data for the year ended
November 30, 2008 reflects the cumulative effect of
adopting
ASC 740-10,
which was a $776,852 increase to the beginning balance of
accumulated net investment loss, or $(0.04) per share.
|
|
(4)
|
|
Represents the issuance of auction preferred stock for the
years ended November 30, 2007 and 2006.
|
|
(5)
|
|
Represents the premiums on the shelf offerings of $0.10 per
share, less the underwriting discount and offering costs of
$0.03 per share for the year ended November 30, 2010.
Represents the premiums on the shelf offerings of $0.02 per
share, less the underwriting discount and offering costs of
$0.01 per share for the year ended November 30, 2009.
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 for the year ended November 30, 2007.
|
|
(6)
|
|
Not annualized. Total investment return is calculated
assuming a purchase of common stock at the beginning of the year
and a sale at the closing price on the last day of the year
reported (excluding brokerage commissions). The calculation also
assumes reinvestment of distributions at actual prices pursuant
to the Companys dividend reinvestment plan.
|
|
(7)
|
|
The expense ratios and net investment loss ratios do not
reflect the effect of distributions to auction preferred
stockholders.
|
|
(8)
|
|
For the year ended November 30, 2010, the Company
accrued $409,606 for net current income tax expense and
$76,240,282 for net deferred income tax expense. For the year
ended November 30, 2009, the Company accrued $302,906 for
net current income tax benefit and $65,242,595 for net deferred
income tax expense. For the year ended November 30, 2008,
the Company accrued $427,891 for current income tax expense and
$114,309,765 for net deferred income tax benefit. For the year
ended November 30, 2007, the Company accrued $152,988 for
current income tax expense and $30,223,686 for net deferred tax
expense. For the year ended November 30, 2006, the Company
accrued $27,973 for current income tax expense and $54,264,141
for net deferred tax expense.
|
|
(9)
|
|
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 year
divided by long-term debt obligations and short-term borrowings
outstanding at the end of the year.
|
|
(10)
|
|
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 year
divided by the sum of long-term debt obligations, short-term
borrowings and preferred stock outstanding at the end of the
year.
|
13
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Asset
|
|
|
Value per
|
|
|
|
|
|
|
|
|
|
Coverage per
|
|
|
Coverage per
|
|
|
$25,000
|
|
|
|
|
|
|
Total Principal
|
|
|
$1,000 of
|
|
|
Share ($25,000
|
|
|
Denomination or
|
|
|
|
|
|
|
Amount/Liquidation
|
|
|
Principal
|
|
|
or $10 Liquidation
|
|
|
per Share
|
|
Year
|
|
|
Title of 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Asset
|
|
|
Value per
|
|
|
|
|
|
|
|
|
|
Coverage per
|
|
|
Coverage per
|
|
|
$25,000
|
|
|
|
|
|
|
Total Principal
|
|
|
$1,000 of
|
|
|
Share ($25,000
|
|
|
Denomination or
|
|
|
|
|
|
|
Amount/Liquidation
|
|
|
Principal
|
|
|
or $10 Liquidation
|
|
|
per Share
|
|
Year
|
|
|
Title of Security
|
|
Preference Outstanding
|
|
|
Amount
|
|
|
Preference)
|
|
|
Amount
|
|
|
|
2009
|
|
|
Tortoise Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D(8)
|
|
$
|
39,400,000
|
|
|
$
|
4,977
|
|
|
|
|
|
|
$
|
27,125
|
(9)
|
|
|
|
|
Series E(10)
|
|
$
|
15,900,000
|
|
|
$
|
4,977
|
|
|
|
|
|
|
$
|
26,422
|
(9)
|
|
|
|
|
Series F(11)
|
|
$
|
34,700,000
|
|
|
$
|
4,977
|
|
|
|
|
|
|
$
|
27,144
|
(9)
|
|
|
|
|
Tortoise Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRP(14)
|
|
$
|
60,000,000
|
|
|
|
|
|
|
$
|
32
|
|
|
$
|
10
|
|
|
|
|
|
Unsecured Revolving Credit Facility
|
|
$
|
14,600,000
|
|
|
$
|
4,977
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
164,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Tortoise Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D(8)
|
|
$
|
39,400,000
|
|
|
$
|
6,686
|
|
|
|
|
|
|
$
|
28,156
|
(9)
|
|
|
|
|
Series E(10)
|
|
$
|
15,900,000
|
|
|
$
|
6,686
|
|
|
|
|
|
|
$
|
25,765
|
(9)
|
|
|
|
|
Series F(11)
|
|
$
|
34,700,000
|
|
|
$
|
6,686
|
|
|
|
|
|
|
$
|
27,680
|
(9)
|
|
|
|
|
Tortoise Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MRP(14)
|
|
$
|
65,000,000
|
|
|
|
|
|
|
$
|
40
|
|
|
$
|
10
|
|
|
|
|
|
Unsecured Revolving Credit Facility(3)
|
|
$
|
7,400,000
|
|
|
$
|
6,686
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
162,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Average estimated fair value approximates the principal amount
or 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, liquidation
preference $25,000 per share.
|
|
(3)
|
|
We have an unsecured credit facility which, as of
November 30, 2008, allowed us to borrow up to $92,500,000.
On March 20, 2009, we entered into an extension of the
agreement establishing a $40,000,000 unsecured credit facility
maturing on June 20, 2009. On June 19, 2009, we
entered into an amendment to our credit facility that provides
for an unsecured credit facility of $50,000,000 through
June 20, 2010. On June 20, 2010, we entered into an
amendment to our credit facility that provides for an unsecured
credit facility of $35,000,000 through June 20, 2011. We
currently expect to seek to renew the credit facility at an
amount 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, liquidation
preference $25,000 per share.
|
|
(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.
|
15
|
|
|
(9)
|
|
Average estimated fair values of the Tortoise Notes were
calculated by discounting future cash flows by a rate equal to
the current U.S. Treasury rate with an equivalent maturity date,
plus either (i) the spread between the interest rate on
recently issued debt and the U.S. Treasury rate with a similar
maturity date or (ii) if there has not been a recent debt
issuance, the spread between the AAA corporate finance debt rate
and the U.S. Treasury rate with an equivalent maturity date plus
the spread between the fixed rates of the Notes and the AAA
corporate finance debt rate. There is no active trading market
for these securities. Average estimated fair value does not take
into account any liquidity discounts that a shareholder may have
incurred upon sale.
|
|
(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 and July 14, 2009, we redeemed
$10,000,000 and $20,000,000, respectively, of our Series I
Tortoise Preferred Shares at liquidation value. On
November 30, 2009, we defeased the remaining $40,000,000 of
our Series I Tortoise Preferred Shares.
|
|
(13)
|
|
On October 2, 2008 and July 16, 2009, we redeemed
$5,000,000 and $10,000,000, respectively, of our Series II
Tortoise Preferred Shares at liquidation value. On
November 30, 2009, we defeased the remaining $25,000,000 of
our Series II Tortoise Preferred Shares.
|
|
(14)
|
|
On November 30, 2009 and December 4, 2009,
respectively, we issued $60 million and $5 million of
our MRP Shares, liquidation preference $10.00 per share.
Distributions on the MRP Shares are payable monthly at a rate of
5.60% per annum. On December 13, 2010, we redeemed
$20,000,000 of our MRP Shares at the liquidation preference
amount of $10.00 per share plus a premium of $0.10 per share. We
must redeem the remaining MRP Shares on November 30, 2016
and may redeem the remaining MRP Shares prior to
November 30, 2016 under certain circumstances.
|
16
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 May 21, 2010, 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. See Determination of Net Asset Value for
information as to the determination of our NAV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium/
|
|
|
|
|
|
|
|
|
|
|
|
|
(Discount) to
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Net Asset
|
|
|
|
Market Price(1)
|
|
|
Asset
|
|
|
Value(3)
|
|
Month Ended
|
|
High
|
|
|
Low
|
|
|
Value(2)
|
|
|
High
|
|
|
Low
|
|
|
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
|
)%
|
March 31, 2009
|
|
|
21.64
|
|
|
|
16.84
|
|
|
|
14.42
|
|
|
|
50.1
|
%
|
|
|
16.8
|
%
|
April 30, 2009
|
|
|
16.90
|
|
|
|
15.60
|
|
|
|
14.51
|
|
|
|
16.5
|
%
|
|
|
7.5
|
%
|
May 31, 2009
|
|
|
18.25
|
|
|
|
16.48
|
|
|
|
16.17
|
|
|
|
12.9
|
%
|
|
|
1.9
|
%
|
June 30, 2009
|
|
|
18.38
|
|
|
|
17.00
|
|
|
|
17.21
|
|
|
|
6.8
|
%
|
|
|
(1.2
|
)%
|
July 31, 2009
|
|
|
20.25
|
|
|
|
17.13
|
|
|
|
17.02
|
|
|
|
19.0
|
%
|
|
|
0.6
|
%
|
August 31, 2009
|
|
|
20.74
|
|
|
|
18.23
|
|
|
|
19.09
|
|
|
|
8.6
|
%
|
|
|
(4.5
|
)%
|
September 30, 2009
|
|
|
20.52
|
|
|
|
17.98
|
|
|
|
18.01
|
|
|
|
13.9
|
%
|
|
|
(0.2
|
)%
|
October 31, 2009
|
|
|
20.44
|
|
|
|
18.80
|
|
|
|
18.71
|
|
|
|
9.2
|
%
|
|
|
0.5
|
%
|
November 30, 2009
|
|
|
22.38
|
|
|
|
20.10
|
|
|
|
19.25
|
|
|
|
16.3
|
%
|
|
|
4.4
|
%
|
December 31, 2009
|
|
|
24.31
|
|
|
|
22.38
|
|
|
|
19.90
|
|
|
|
22.2
|
%
|
|
|
12.5
|
%
|
January 31, 2010
|
|
|
24.13
|
|
|
|
22.52
|
|
|
|
21.31
|
|
|
|
13.2
|
%
|
|
|
5.7
|
%
|
February 28, 2010
|
|
|
23.66
|
|
|
|
21.46
|
|
|
|
21.40
|
|
|
|
10.6
|
%
|
|
|
0.3
|
%
|
March 31, 2010
|
|
|
25.47
|
|
|
|
23.53
|
|
|
|
21.76
|
|
|
|
17.0
|
%
|
|
|
8.1
|
%
|
April 30, 2010
|
|
|
27.07
|
|
|
|
25.26
|
|
|
|
22.27
|
|
|
|
21.6
|
%
|
|
|
13.4
|
%
|
May 31, 2010
|
|
|
26.07
|
|
|
|
22.91
|
|
|
|
22.74
|
|
|
|
14.6
|
%
|
|
|
0.7
|
%
|
June 30, 2010
|
|
|
24.43
|
|
|
|
22.50
|
|
|
|
21.27
|
|
|
|
14.9
|
%
|
|
|
5.8
|
%
|
July 31, 2010
|
|
|
26.83
|
|
|
|
22.60
|
|
|
|
22.52
|
|
|
|
19.1
|
%
|
|
|
0.4
|
%
|
August 31, 2010
|
|
|
27.80
|
|
|
|
24.57
|
|
|
|
23.93
|
|
|
|
16.2
|
%
|
|
|
2.7
|
%
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium/
|
|
|
|
|
|
|
|
|
|
|
|
|
(Discount) to
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Net Asset
|
|
|
|
Market Price(1)
|
|
|
Asset
|
|
|
Value(3)
|
|
Month Ended
|
|
High
|
|
|
Low
|
|
|
Value(2)
|
|
|
High
|
|
|
Low
|
|
|
September 30, 2010
|
|
|
26.47
|
|
|
|
24.81
|
|
|
|
22.85
|
|
|
|
15.8
|
%
|
|
|
8.6
|
%
|
October 31, 2010
|
|
|
27.23
|
|
|
|
25.64
|
|
|
|
24.06
|
|
|
|
13.2
|
%
|
|
|
6.6
|
%
|
November 30, 2010
|
|
|
28.31
|
|
|
|
26.78
|
|
|
|
25.32
|
|
|
|
11.8
|
%
|
|
|
5.8
|
%
|
December 31, 2010
|
|
|
27.77
|
|
|
|
26.14
|
|
|
|
25.27
|
|
|
|
9.9
|
%
|
|
|
3.4
|
%
|
Source: Bloomberg Financial and Fund Accounting Records.
|
|
|
(1)
|
|
Based on high and low closing market price for the respective
month.
|
|
(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 NAV per share, market price and percentage premium to NAV
per share of our common stock on December 31, 2010, were
$25.97, $27.77 and 6.9%, respectively. As of December 31,
2010, we had 19,345,016 shares of our common stock
outstanding and net assets of approximately $502.4 million.
USE OF
PROCEEDS
Unless otherwise specified in a prospectus supplement, we intend
to use the net proceeds of a 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 distributions 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.
18
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. Our common stock is listed on the NYSE under
the symbol TYY. As of December 31, 2010, we had
net assets of approximately $502 million attributable to
our common stock. As of the date of this prospectus, we have
$45 million of MRP Shares and $90 million of Tortoise
Notes outstanding.
The following table provides information about our outstanding
securities as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Held
|
|
|
|
|
|
|
by the Company
|
|
|
|
|
Amount
|
|
or for its
|
|
Amount
|
Title of Class
|
|
Authorized
|
|
Account
|
|
Outstanding
|
|
Common Stock
|
|
|
100,000,000
|
|
|
|
0
|
|
|
|
19,345,016
|
|
Tortoise Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Notes(1)
|
|
$
|
100,000,000
|
|
|
|
0
|
|
|
$
|
39,400,000
|
|
Series E Notes(2)
|
|
$
|
25,000,000
|
|
|
|
0
|
|
|
$
|
15,900,000
|
|
Series F Notes(3)
|
|
$
|
65,000,000
|
|
|
|
0
|
|
|
$
|
34,700,000
|
|
Tortoise Preferred Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
MRP Shares(4)
|
|
$
|
45,000,000
|
|
|
|
0
|
|
|
$
|
45,000,000
|
|
|
|
|
(1)
|
|
The Series D Notes mature on December 21, 2014 and
bear a fixed interest rate of 6.07%.
|
|
(2)
|
|
The Series E Notes mature on June 17, 2011 and bear a
fixed interest rate of 5.56%.
|
|
(3)
|
|
The Series F Notes mature on June 17, 2013 and bear a
fixed interest rate of 6.02%.
|
|
(4)
|
|
The MRP Shares have a mandatory redemption date of
November 30, 2016 and pay distributions at an annual rate
of 5.6%. Each share has a liquidation preference of $10.00.
|
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 our 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
19
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 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.
|
20
|
|
|
|
|
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.
The following are our fundamental investment limitations set
forth in their entirety. We may not:
|
|
|
|
|
issue senior securities, except as permitted by the 1940 Act and
the rules and interpretive positions of the SEC thereunder;
|
|
|
|
borrow money, except as permitted by the 1940 Act and the rules
and interpretive positions of the SEC thereunder;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
underwrite securities issued by others, except to the extent
that we may be considered an underwriter within the meaning of
the 1933 Act, in the disposition of restricted securities
held in our portfolio;
|
|
|
|
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
|
21
|
|
|
|
|
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.
|
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.
|
|
|
|
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.
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.
22
The table below summarizes the features of these securities, and
a further discussion of these securities follows:
|
|
|
|
|
|
|
|
|
|
|
Convertible Subordinated
|
|
|
|
|
Common Units
|
|
Units (for MLPs Taxed
|
|
|
|
|
(for MLPs Taxed as Partnerships)(1)
|
|
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 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,
23
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
24
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.
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 and payment
in kind features. 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.
25
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.
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, 2009
and 2010, our actual portfolio turnover rate was 14.86% and
12.92%, 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 (losses) that will increase (decrease) our
tax liability and thereby impact 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
26
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 five other
publicly traded closed-end management investment companies, all
of which invest in the energy sector. See Management of
the Company Investment 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 funds or 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, or
(3) limits on co-investing in negotiated transactions under
the 1940 Act, as discussed further below.
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. As such, we will
not co-invest with our affiliates in negotiated private
placement transactions. 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.
27
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. Our Board of
Directors has approved a leverage target of up to 25% of our
total assets at the time of incurrence and has also approved a
policy permitting temporary increases in the amount of leverage
we may use from 25% of our total assets to up to 30% of our
total assets at the time of incurrence, provided (i) that
such leverage is consistent with the limits set forth in the
1940 Act, and (ii) that we expect to reduce such increased
leverage 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
$35 million. Outstanding balances under the credit facility
generally accrue interest at a variable annual rate equal to the
one-month LIBOR plus 1.25%, with a fee of 0.20% on any unused
balance of the credit facility. As of the date of this
prospectus, the current rate is 1.51%. The credit facility
remains in effect through June 20, 2011. We currently
expect to seek to renew the credit facility at an amount
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, 2010, we had outstanding
approximately $7.4 million under the credit facility. As of
the date of this prospectus, we had outstanding approximately
$28.45 million under the 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
distribution on our common stock, or purchase any of our shares
of common stock (through tender offers or otherwise) unless we
would satisfy this 200% asset coverage requirement test after
deducting the amount of such 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 distributions. Under the
28
1940 Act, we may only issue one class of preferred stock. So
long as MRP Shares are outstanding, any preferred stock offered
pursuant to this prospectus and any related prospectus
supplement will rank on parity with any outstanding MRP 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 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 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 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 distribution 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 distribution payment obligations
under our outstanding leverage. See Risk
Factors Company Risks Hedging Strategy
Risk.
29
Effects
of Leverage
As of November 30, 2010, we were obligated to pay the
following rates on our outstanding Tortoise Notes, Tortoise
Preferred Shares, and unsecured revolving credit facility.
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Aggregate Principal
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Amount/Liquidation
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Remaining Term of
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Interest/Dividend
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Title of Security
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Preference
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Rate Period
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Rate per Annum
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Tortoise Notes:
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Series D Tortoise Notes
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$
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39,400,000
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4.1 years through 12/21/14
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6.07
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%
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Series E Tortoise Notes
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15,900,000
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0.5 years through 6/17/11
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5.56
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%
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Series F Tortoise Notes
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34,700,000
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2.5 years through 6/17/13
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6.02
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%
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Tortoise Preferred Shares:
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MRP Shares(1)
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65,000,000
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6.0 years through 11/30/16
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5.60
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%
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Unsecured Revolving Credit Facility(2)
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7,400,000
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1.51
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%
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$
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162,400,000
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(1)
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On December 13, 2010, we redeemed $20,000,000 of our MRP
Shares at the liquidation preference amount of $10.00 per share
plus a premium of $0.10 per share.
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(2)
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As of November 30, 2010, we had an unsecured revolving
credit facility of $35,000,000 that matures on June 20,
2011. Outstanding balances under the credit facility generally
accrue interest at a variable annual rate equal to the one-month
LIBOR plus 1.25%, with a fee of 0.20% on any unused balance of
the credit facility.
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Assuming that the distribution rates payable on MRP Shares and
the interest rates payable on the Tortoise Notes and unsecured
credit facility remain as described above (an average annual
cost of 5.89% based on the amount of leverage outstanding at
November 30, 2010), 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 2.35%.
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)
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(10
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)%
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(5
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)%
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0
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%
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5
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%
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10
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%
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Corresponding Common Share Return
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(18.06
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)%
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(10.74
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)%
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(3.43
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)%
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3.89
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%
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11.20
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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.
30
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 distribution payments on preferred
stock and interest payments on debt securities.
Capital Markets Volatility Risk.
Our capital
structure and performance may be adversely impacted by weakness
in the credit markets and stock market if such weakness results
in declines in the value of MLPs in which we invest. If the
value of our investments decline or are volatile, there is a
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 may be impacted by a
slowdown in the capital markets. The performance of the MLP
sector is dependent on several factors, including the condition
of the financial sector, the general economy and the commodity
markets.
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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31
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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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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 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 markets 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
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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 Markets 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. 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.
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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 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 distribution 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 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 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
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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 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. In addition, a substantial
change in our ownership may limit our ability to utilize our
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 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.
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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 distributions 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
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 five
other publicly-traded closed-end management investment
companies. As of December 31, 2010, our Adviser had client
assets under management of approximately $6.1 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 MRP 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 distribution 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, distribution 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
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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 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.
Distributions and interest
payable on our senior securities are subject to interest rate
risk. To the extent that distributions or interest on such
securities are based on short-term rates, our leverage costs may
rise so that the amount of distributions 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 senior 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.
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 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 distributions or interest 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.
39
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 2002 to provide portfolio management
services to institutional and
high-net
worth investors seeking professional management of their MLP
investments. As of December 31, 2010, our Adviser had
approximately $6.1 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), Tortoise North
American Energy Corporation (TYN), Tortoise
Power & Energy Infrastructure Fund Inc.
(TPZ), and Tortoise MLP Fund, Inc. (NTG)
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
securities of MLPs, including energy infrastructure, oil and gas
exploitation and production, and energy shipping companies. TPZ,
which commenced operations on July 31, 2009, invests in a
portfolio consisting primarily of fixed income and equity
securities issued by power and energy infrastructure companies.
NTG, which commenced operations on July 30, 2010, invests
primarily in energy infrastructure MLPs and their affiliates,
with an emphasis on natural gas infrastructure MLPs. 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
companies operating in the midstream and downstream segments,
and to a lesser extent the upstream and coal/aggregates
segments, of the energy infrastructure sector. 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.
Our Adviser is wholly-owned by Tortoise Holdings, LLC, a holding
company. Montage Asset Management, LLC, a registered investment
adviser, owns a majority interest in Tortoise Holdings, LLC with
the remaining interests held by the five members of our
Advisers investment committee and certain other senior
employees of our Adviser. In September 2009, the five members of
our Advisers investment committee
40
entered into employment agreements with our Adviser that have a
3-year
initial term as well as two
1-year
automatic renewals under normal circumstances.
Our Adviser has 38 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.
Mr. Birzer has also served as a Director of ours since
inception and of each of TYG, TYN, TPZ, TTO and NTG since
inception. Mr. Birzer, who was a member in Fountain Capital
Management, L.L.C. (Fountain Capital), a registered
investment adviser, from 1990 to May 2009, has 29 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 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 and TYN since 2007, of TTO since 2005 and of TPZ since
inception, and as President of NTG since 2010. 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
TPZ and NTG since inception; as our Senior Vice President since
2005, as Senior Vice President of TTO since 2005, and as Senior
Vice President of TYG and TYN since 2007 and of TPZ and NTG
since inception; as our Assistant Treasurer and Assistant
Treasurer of TYG and TYN from inception to November 2005. 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 since inception, as a
Director from inception until September 15, 2009 and as
Chief Financial Officer since inception and Director from
inception until September 15, 2009 of TYG, TYN, TPZ, and
TTO, and Chief Executive Officer of NTG since 2010. From 2001 to
2002, Mr. Matlack was a full-time Managing Director of
Kansas City Equity Partners LC (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 from inception through May 2006 and
as Chief Compliance Officer of TYG from 2004 through May 2006
and of TYN from inception through May 2006; as our
Treasurer and Treasurer of TYG and TYN from inception to
November 2005; as our
41
Assistant Treasurer and Assistant Treasurer of TYG and TYN from
November 2005 to April 2008, and as Assistant Treasurer of TTO
from inception to April 2008. 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 and President of TPZ since inception; as Chief Executive
Officer of TTO since 2005 and as President of TTO from 2005 to
April 2007; and as Senior Vice President of NTG since 2010.
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.
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.
The advisory agreement has a term ending on December 31,
2011 and may be continued from year to year thereafter as
provided in the 1940 Act. The continuation of the advisory
agreement was most recently approved by the Board of Directors
in November, 2010. A discussion regarding the basis of the Board
of Directors decision to approve the continuation of the
advisory agreement is available in our Annual Report to
stockholders for the fiscal year ended November 30, 2010.
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;
42
(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, distribution
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 MRP
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 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 preferred stock or debt securities, including
Tortoise Notes and MRP 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.
43
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
44
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. In addition, a
substantial change in our ownership may limit our ability to
utilize our loss carryforwards. 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, 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. Our current earnings and profits may be increased
if our portfolio turnover is increased, which may occur to
utilize our capital loss carryforwards. Thus, a reduction in the
return of capital portion of the distributions we receive from
the MLPs or an increase in our portfolio turnover may increase
our current earnings and profits and increase the portion of our
distributions treated as dividends as opposed to a tax deferred
return of capital. 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. 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 as
of the date of this prospectus 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 attributable to
45
periods exceeding 366 days). 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 December 31, 2012. 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 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 (as of
the date of this prospectus a maximum rate of 35%, which rate is
scheduled to increase to 39.6% for taxable years after 2012).
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 2012. 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.
46
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.
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 (as of the date of this
prospectus a maximum rate of 15%, although this rate will
47
increase to 20% after December 31, 2012) than net
short-term capital gain or ordinary income (as of the date of
this prospectus 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, as of the date of
this prospectus 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. 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, although regulations have been
proposed to expand information reporting for
non-U.S. Holders.
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
48
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.
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. 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
49
deferred tax liabilities); (ii) accumulated and unpaid
distributions 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 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 pursuant to fair value
methodologies approved by the Board.
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
over-the-counter
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
50
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 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
51
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.
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 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
52
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, MRP 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 distributions 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.
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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 preferred stock or debt
securities, including Tortoise Notes and MRP 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. We intend to seek approval at our Annual Meeting
of Stockholders in 2010, for the authority to sell shares of our
common stock for less than NAV, subject to the conditions listed
below. The number of shares that we may sell below NAV in one or
more public or private offerings may not exceed twenty-five
percent (25%) of our then outstanding common stock. We believe
that having the ability to issue and sell 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 otherwise 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. If stockholders approve the proposal at our Annual Meeting,
the Company will only issue shares of its common stock,
including common stock issued in a rights offering, at a price
below NAV pursuant to this stockholder proposal if the following
conditions are met:
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a majority of the Companys directors who have no financial
interest in the transaction and a majority of the Companys
independent directors have determined that any such sale would
be in the best interests of the Company and its stockholders;
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a majority of the Companys directors who have no financial
interest in the transaction and a majority of the Companys
independent directors, in consultation with the underwriter or
underwriters of the offering if it is to be underwritten, have
determined in good faith, and as of a time immediately prior to
the first solicitation by or on behalf of the Company of firm
commitments to purchase such common stock or immediately prior
to the issuance of such common stock, that the price at which
such shares of common stock are to be sold is not less than a
price which closely approximates the market value of those
shares of common stock, less any distributing commission or
discount;
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if the net proceeds of any such sale are to be used to make
investments, a majority of the Companys directors who have
no financial interest in the transaction and a majority of the
Companys independent
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directors, have made a determination, based on information and a
recommendation from the Adviser, that they reasonably expect
that the investment(s) to be made will lead to a long-term
increase in distribution growth; and
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the price per common share in any such sale, after deducting
offering expenses and commissions, reflects a discount to NAV,
as determined at any time within two business days prior to the
pricing of the common stock to be sold, of no more than 10%.
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For these purposes, directors will not be deemed to have a
financial interest solely by reason of their ownership of our
common stock.
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, 2010. The table assumes that we issue
4,836,254 shares, which represents twenty-five percent
(25%) of our common stock as of November 30, 2010, at a net
sale price to us after deducting all expenses of issuance,
including underwriting discounts and commissions, equal to
$22.75, which is 90% of the NAV of our common shares as of
November 30, 2010.
Pro Forma
Maximum Impact of Below NAV Issuances of Common Shares
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Common shares outstanding
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19,345,016
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Common shares that may be issued below NAV
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4,836,254
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Total common shares outstanding if all permissible shares are
issued below NAV
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24,181,270
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Net asset value per share as of November 30, 2010
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$
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25.27
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Aggregate net asset value of all outstanding common shares based
on NAV as of November 30, 2010
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$
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488,834,563
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Aggregate net proceeds to the Company (assuming the Company sold
all permissible shares and received net proceeds equal to $22.75
per share (90% of the NAV as of November 30, 2010))
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$
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110,024,779
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Expected aggregate net asset value of the Company after issuance
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$
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598,859,342
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NAV per share after issuance
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$
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24.77
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Percentage dilution to pre-issuance NAV
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(1.98
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)%
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In addition to the conditions in our proxy statement, although
we believe it is unlikely to occur under the current proxy
conditions, we are required pursuant to interpretations of the
staff of the Commission to amend our shelf registration
statement before commencing a below NAV offering if the
cumulative dilution from the current offering as calculated in
the table above, together with previous below NAV offerings
under this amendment to our shelf registration statement,
exceeds 15%. We also must amend our registration statement
before commencing an offering of shares pursuant to the issuance
of rights to subscribe for shares below net asset value to
existing shareholders.
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, including common stock issued
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 distributions, qualifications
55
and terms and conditions or redemption as determined by the
Board of Directors, of which 4,500,000 are classified and
designated as Mandatory Redeemable Preferred Shares, liquidation
preference $10.00 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 distributions, qualifications and terms and
conditions of redemption for each class or series.
Preferred stock (including outstanding MRP 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
MRP Shares are outstanding, additional issuances of preferred
stock must be considered to be of the same class as any MRP
Shares under the 1940 Act and interpretations thereunder and
must rank on a parity with the any MRP Shares with respect to
the payment of distributions 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 distribution rate of the preferred stock;
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any optional or mandatory redemption provisions;
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any provisions concerning conversion, amortization, sinking
funds,
and/or
retirement;
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the transfer agent, paying agents or security registrar; and
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any other terms of the preferred stock.
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Distributions.
Holders of preferred stock will
be entitled to receive cash distributions, 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 distributions payment
provisions for those shares. Distributions 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
distributions 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
distribution is paid and thereafter as gain from the sale or
exchange of the preferred stock.
Limitations on Distributions.
So long as we
have senior securities representing indebtedness (including
Tortoise Notes) outstanding, holders of preferred stock will not
be entitled to receive any distributions 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 distributions. 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 distributions, 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.
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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 distributions 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 distributions 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
distributions 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.
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.
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.
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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 events of default or covenants;
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any optional or mandatory redemption provisions;
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any provisions concerning conversion, amortization, sinking
funds,
and/or
retirement;
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the trustees, transfer agent, 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, it is anticipated that any
one of the following events will constitute an event of
default for that series:
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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 any document governing the Tortoise Notes,
and continuance of such default or breach for a period of
90 days after written notice has been given to us;
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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 generally not entitled to receive notice of such
a default. 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
distributions 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 any documents governing the Tortoise Notes 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 a 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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We 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. We 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 appropriate party in writing that
we elect to cause the issuance of notes in definitive
form; 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.
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.
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. As of the date of
this prospectus, the MRP Shares are currently rated by Fitch and
by Moodys and the Tortoise Notes are currently rated by
Fitch. Moodys and Fitch, and any other agency that may
rate our debt securities (including Tortoise Notes) or preferred
stock (including MRP 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 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
60
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.
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
distributions on its common stock). Notwithstanding the
foregoing, we have agreed, while the MRP Shares are outstanding,
to maintain asset coverage of at least 225%. If we fail to
maintain the applicable 1940 Act or other more stringent agreed
upon asset coverage as of the last business day of the week,
month or other period required with respect to the applicable
senior security and such failure is not cured within
30 days (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.
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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 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
2012, 2013 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.
62
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 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.
PLAN OF
DISTRIBUTION
We may sell our common stock, preferred stock or 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,
including existing stockholders in a rights offering;
(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. In the case of a rights offering, the
applicable prospectus supplement will set forth the number of
shares of our common stock issuable upon the exercise of each
right and the other terms of such rights offering. 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 and addresses 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 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.
64
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 Financial Industry Regulatory Authority
(FINRA) or independent broker-dealer will not be
greater than eight percent of the initial gross proceeds from
the sale of any security being sold. In connection with any
rights offering to our common stockholders, we may also enter
into a standby underwriting arrangement with one or more
underwriters pursuant to which the underwriter(s) will purchase
our common stock remaining unsubscribed for after the rights
offering.
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.
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.
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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
and provides certain back-office support such as payment of
expenses and preparation of financial statements and related
schedules. We pay the administrator a monthly fee computed at an
annual rate of 0.04% of the first $1 billion of our Managed
Assets, 0.01% on the next $500 million of our Managed
Assets and 0.005% 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 0.004% of our portfolio assets, plus portfolio
transactions fees.
LEGAL
MATTERS
Certain legal matters in connection with the securities offered
hereby will be passed upon for us by Husch Blackwell LLP
(HB), Kansas City, Missouri. HB 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
placement agents or underwriters of such offering, such counsel
to the placement agents or 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 annual shareholder report
filed with the SEC is for our fiscal year ended
November 30, 2010. 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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Page
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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-14
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Portfolio Transactions
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S-24
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Net Asset Value
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S-25
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Certain Federal Income Tax Matters
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S-27
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Proxy Voting Policies
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S-34
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Independent Registered Public Accounting Firm
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S-34
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Administrator and Custodian
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S-34
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Internal Accountant
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S-35
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Additional Information
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S-35
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Financial Statements
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S-35
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Appendix A Rating of Investments
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A-1
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67
$30,000,000
Tortoise Energy Capital
Corporation
Common Stock
PROSPECTUS SUPPLEMENT
July 21, 2011
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 January 31, 2011 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 January 31, 2011.
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 Principal Investment Strategies
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S-3
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Management of the Company
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S-14
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Portfolio Transactions
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S-24
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Net Asset Value
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S-25
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Certain Federal Income Tax Matters
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S-27
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Proxy Voting Policies
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S-34
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Independent Registered Public Accounting Firm
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S-34
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Administrator and Custodian
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S-34
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Internal Accountant
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S-35
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Additional Information
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S-35
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Financial Statements
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S-35
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Appendix A Rating of Investments
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A-1
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S-i
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 that
are based on a percentage of total assets include assets 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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(1)
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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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(2)
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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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(3)
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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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(4)
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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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(5)
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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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(6)
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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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(7)
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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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All other investment policies are considered nonfundamental and may be changed by the Board of
Directors of the Company (the Board of Directors or the Board) without prior approval of our
outstanding voting securities.
Nonfundamental Investment Policies
We have adopted the following nonfundamental policies:
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(1)
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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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(2)
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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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(3)
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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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(4)
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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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(5)
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We will not invest more than 15% of our total assets in any single issuer.
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(6)
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We will not engage in short sales.
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For purposes of nonfundamental restrictions (3)-(5), during the periods in which we anticipate
receiving proceeds from an offering of securities pursuant to this registration statement, we
include the amount of the anticipated proceeds in our calculation of total assets. Accordingly,
holdings in the specified securities may temporarily exceed the amounts shown.
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 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 distribution or at the time of any such purchase,
an asset coverage of at least 300% after deducting the amount of such 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
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 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.
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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 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,
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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.
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.
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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.
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.
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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.
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.
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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 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
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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 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
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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
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rated or unrated securities, under these circumstances, may be less than the prices used in
calculating our net asset value.
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.
S-10
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.
In recent years, a large institutional market 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.
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 agree 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
S-11
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 agree 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.
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, we 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 our
custodian in an amount equal to our 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 our senior securities.
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
S-12
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 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 an
offering (which we expect may take up to approximately three months following the closing of an
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.
S-13
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.
Company Officers and Directors
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Number of
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Position(s) Held
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Portfolios in
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With Company,
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Fund
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Other Public
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Term of Office
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Complex
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Company
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and Length of
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Principal Occupation During Past
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Overseen by
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Directorships
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Name and Age*
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Time Served
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Five Years
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Director
1
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Held
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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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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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6
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None
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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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(1)
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This number includes Tortoise Energy Infrastructure Corporation (TYG), Tortoise North American Energy Corporation (TYN), Tortoise Capital Resources Corporation
(TTO), Tortoise Power and Energy
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S-14
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Infrastructure Fund, Inc. (TPZ), Tortoise MLP Fund, Inc. (NTG) and the Company. Our Adviser also serves as the investment
adviser to TYG, TYN, TTO, TPZ and NTG.
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*
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The address of each director and officer is 11550 Ash Street, Suite 300, Leawood, Kansas 66211.
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S-15
Company Officers and Directors
(Continued)
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Number of
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Position(s) Held
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Portfolios in
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|
|
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With Company,
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Fund
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Other Public
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Term of Office
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Complex
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Company
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and Length of
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Principal Occupation During Past
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Overseen by
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Directorships
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Name and Age*
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Time Served
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Five Years
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Director
1
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Held
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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), a registered
investment adviser, (1990-May 2009); Director and Chairman of the
Board of each of TYG, TYN, TTO, TPZ and NTG 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 Matlack
(Born 1956)
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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 of each of the Company, TYG, TYN, TTO
and TPZ from its inception to September 15, 2009; Chief Executive
Officer of NTG since 2010; Chief Financial Officer of each of
TYG, TYN, TPZ and TTO since its inception; Chief Compliance
Officer of each 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 from its inception to
April 2008. CFA designation since 1985.
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N/A
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Epiq Systems, Inc.
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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 and of TPZ since inception; 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; Senior Vice President
of NTG since 2010; 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
2005
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Managing Director of the Adviser since 2002; Partner, Fountain
Capital (1997-present). Senior Vice President of TTO since 2005,
of TYG and TYN since 2007 and of TPZ since inception; President
of NTG since 2010; Secretary of each of the Company, TYG, TYN and
TTO from their inception to April 2007. CFA designation since
1998.
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N/A
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None
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S-16
|
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Number of
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Position(s) Held
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Portfolios in
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With Company,
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Fund
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Other Public
|
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Term of Office
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Complex
|
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Company
|
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and Length of
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Principal Occupation During Past
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Overseen by
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Directorships
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Name and Age*
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Time Served
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Five Years
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Director
1
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Held
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Kenneth P. Malvey
(Born 1965)
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Senior Vice President since
inception; Treasurer since
November 2005
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Managing Director of the Adviser since 2002; Partner, Fountain
Capital (2002-present); formerly, Investment Risk Manager and
member of the Global Office of Investments, GE Capitals
Employers Reinsurance Corporation (1996-2002); Treasurer of each
of TYG, TYN and TTO since 2005, and of TPZ and NTG since their
inception; Senior Vice President of TTO since 2005, of each of
TYG and TYN since 2007 and of TPZ and NTG since their inception;
Assistant Treasurer of each of the Company, TYG and TYN from
their inception to November 2005; 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 TYG, TYN, TTO, TPZ, NTG and the Company. Our Adviser also serves as the investment adviser to TYG, TYN, TTO, TPZ and NTG.
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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 within the meaning of the 1940 Act.
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*
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The address of each director and officer is 11550 Ash Street, Suite 300, Leawood, Kansas 66211.
|
Each director was selected to join our Board of Directors based upon their character and
integrity; their service as a director for other funds in the Tortoise fund complex; and their
willingness and ability to serve and commit the time necessary to perform the duties of a director.
In addition, as to each director other than Mr. Birzer, their status as an Independent Director;
and, as to Mr. Birzer, his role with our Adviser was an important factor in his selection as a
director. No factor was by itself controlling.
In addition to the information provided in the table above, each director possesses the
following attributes: Mr. Ciccotello, experience as a college professor, a Ph.D. in finance and
knowledge of energy infrastructure MLPs; Mr. Graham, experience as a college professor, executive
leadership and business executive; Mr. Heath, executive leadership and business experience; and Mr.
Birzer, investment management experience as an executive, portfolio manager and leadership roles
with our Adviser.
Mr. Birzer serves as Chairman of the Board of Directors. Mr. Birzer is an interested person
of ours within the meaning of the 1940 Act. The appointment of Mr. Birzer as Chairman reflects the
Board of Directors belief that his experience, familiarity with our day-to-day operations and
access to individuals with responsibility for our management and operations provides the Board of
Directors with insight into our business and activities and, with his access to appropriate
administrative support, facilitates the efficient development of meeting agendas that address our
business, legal and other needs and the orderly conduct of meetings of the Board of Directors. Mr.
Heath serves as Lead Independent Director. The Lead Independent Director will, among other things,
chair executive sessions of the three directors who are Independent Directors, serve as a
spokesperson for the Independent Directors and serve as a liaison between the Independent Directors
and our management. The Independent Directors will regularly meet outside the presence of
management and are advised by independent legal counsel. The Board of Directors also has determined
that its leadership structure, as described above, is appropriate in light of our size and
complexity, the number of Independent Directors and the Board of Directors general oversight
responsibility. The Board of Directors also believes that its leadership structure not only
facilitates the orderly and efficient flow of information to the Independent Directors from
management, but also enhances the independent and orderly exercise of its responsibilities.
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
S-17
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 2010.
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. Nominees recommended by stockholders in compliance
with the Companys Bylaws will be evaluated on the same basis as other nominees considered by the
Nominating Committee. The Nominating Committee held one meeting during fiscal year 2010.
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 2010.
The Board of Directors role in our risk oversight reflects its responsibility under
applicable state law to oversee generally, rather than to manage, our operations. In line with this
oversight responsibility, the Board of Directors will receive reports and make inquiry at its
regular meetings and as needed regarding the nature and extent of significant risks (including
investment, compliance and valuation risks) that potentially could have a materially adverse impact
on our business operations, investment performance or reputation, but relies upon our management to
assist it in identifying and understanding the nature and extent of such risks and determining
whether, and to what extent, such risks may be eliminated or mitigated. In addition to reports and
other information received from our management regarding our investment program and activities, the
Board of Directors as part of its risk oversight efforts will meet at its regular meetings and as
needed with our Advisers Chief Compliance Officer to discuss, among other things, risk issues and
issues regarding our policies, procedures and controls. The Board of Directors may be assisted in
performing aspects of its role in risk oversight by the Audit Committee and such other standing or
special committees as may be established from time to time. For example, the Audit Committee will
regularly meet with our independent public accounting firm to review, among other things, reports
on our internal controls for financial reporting.
The Board of Directors believes that not all risks that may affect us can be identified, that
it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be
necessary to bear certain risks (such as investment-related risks) to achieve our goals and
objectives, and that the processes, procedures and controls employed to address certain risks may
be limited in their effectiveness. Moreover, reports received by the directors as to risk
management matters are typically summaries of relevant information and may be inaccurate or
incomplete. As a result of the foregoing and other factors, the risk management oversight of the
Board of Directors is subject to substantial limitations.
Directors and officers who are interested persons of the Company or our administrator will
receive no salary or fees from us. For the 2011 fiscal year, each Independent Director receives
from us an annual retainer of $19,000 (plus an additional $2,000 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.
S-18
The table below sets forth the compensation paid to the directors by us for the fiscal year
ended November 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
33,000
|
|
|
$
|
169,667
|
|
John R. Graham
|
|
$
|
30,000
|
|
|
$
|
156,667
|
|
Charles E. Heath
|
|
$
|
30,000
|
|
|
$
|
156,667
|
|
|
|
|
|
|
|
|
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
H. Kevin Birzer
|
|
$
|
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, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$50,001-$100,000
|
|
Over $100,000
|
John R. Graham
|
|
Over $100,000
|
|
Over $100,000
|
Charles E. Heath
|
|
Over $100,000
|
|
Over $100,000
|
|
|
|
|
|
|
|
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
H. Kevin Birzer
|
|
Over $100,000
|
|
Over $100,000
|
|
|
|
*
|
|
Includes the Company, TYG, TYN, TPZ, TTO and NTG.
|
|
**
|
|
As of December 31, 2010, the officers and directors of the Company, as a group, owned less
than 1% of any class of the Companys outstanding shares of stock.
|
S-19
Control Persons
As of December 31, 2010, the following persons owned of record or beneficially more than 5% of
our common shares.
|
|
|
|
|
|
|
|
|
|
|
Outstanding Shares
|
|
|
|
|
at
|
|
Percentage
|
Name and Address
|
|
12/31/2010
|
|
Shares Held
|
The Bank of New York Mellon
One Wall Street
New York, NY 10286
|
|
|
2,392,867
|
|
|
|
12.37
|
%
|
|
Merrill Lynch Safekeeping
4 Corporate Place
Piscataway, NJ 08854
|
|
|
2,235,488
|
|
|
|
11.56
|
%
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
|
|
|
1,819,335
|
|
|
|
9.40
|
%
|
|
Morgan Stanley Smith Barney LLC
2000 Westchester Avenue
Purchase, NY 10577
|
|
|
1,292,250
|
|
|
|
6.68
|
%
|
|
First Trust Portfolios L.P.*
First Trust Advisers L.P.*
The Charger Corporation*
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
|
|
|
1,176,281
|
|
|
|
6.10
|
%
|
|
National Financial Services LLC
200 Liberty Street
New York, NY 10281
|
|
|
1,062,493
|
|
|
|
5.49
|
%
|
|
Stifel, Nicolaus & Company Inc.
501 North Broadway
St. Louis, MO 63102
|
|
|
1,051,373
|
|
|
|
5.43
|
%
|
|
First Clearing, LLC
Riverfront Plaza (West Tower)
901 East Byrd Street
Richmond, VA 23219
|
|
|
1,018,397
|
|
|
|
5.26
|
%
|
|
|
|
*
|
|
Information based on 13G filing jointly filed by The Charger Corporation, First Trust
Portfolios L.P. and First Trust Advisors L.P. on January 24, 2011. The Charger Corporation is
the General Partner of both First Trust Portfolios L.P. and First Trust Advisors L.P. First
Trust Portfolios L.P. acts as sponsor of certain unit investment trusts which hold shares of
the Company.
|
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
S-20
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 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 in 2002 to provide portfolio management services exclusively with respect to energy
infrastructure investments. On September 15, 2009, Mariner Holdings, LLC acquired a majority
interest in our Adviser. Our Adviser is now wholly-owned by Tortoise Holdings, LLC. Montage Asset
Management, LLC, a wholly-owned subsidiary of Mariner Holdings, LLC, owns a majority interest in
Tortoise Holdings, LLC with the remaining interests held by the five members of our Advisers
investment committee and certain other senior employees of our Adviser. Management of our Adviser,
its investment committee and its funds remains unchanged since inception. In September 2009, the
five members of our Advisers investment committee entered into employment agreements with our
Adviser that have a 3-year initial term as well as two 1-year automatic renewals under normal
circumstances.
Our Adviser is located at 11550 Ash Street, Suite 300, Leawood, Kansas 66211. As of December
31, 2010, our Adviser had approximately $6.1 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
S-21
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, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
7
|
|
|
$
|
3,607,472,338
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
5
|
|
|
$
|
161,554,734
|
|
|
|
1
|
|
|
$
|
90,650,668
|
|
Other accounts
|
|
|
417
|
|
|
$
|
1,396,629,115
|
|
|
|
0
|
|
|
|
|
|
Zachary A. Hamel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
7
|
|
|
$
|
3,607,472,338
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
7
|
|
|
$
|
215,889,637
|
|
|
|
1
|
|
|
$
|
90,650,668
|
|
Other accounts
|
|
|
429
|
|
|
$
|
2,507,799,381
|
|
|
|
0
|
|
|
|
|
|
Kenneth P. Malvey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
7
|
|
|
$
|
3,607,472,338
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
7
|
|
|
$
|
215,889,637
|
|
|
|
1
|
|
|
$
|
90,650,668
|
|
Other accounts
|
|
|
429
|
|
|
$
|
2,507,799,381
|
|
|
|
0
|
|
|
|
|
|
Terry C. Matlack
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
7
|
|
|
$
|
3,607,472,338
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
5
|
|
|
$
|
161,554,734
|
|
|
|
1
|
|
|
$
|
90,650,668
|
|
Other accounts
|
|
|
417
|
|
|
$
|
1,396,629,115
|
|
|
|
0
|
|
|
|
|
|
David J. Schulte
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
7
|
|
|
$
|
3,607,472,338
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
5
|
|
|
$
|
161,554,734
|
|
|
|
1
|
|
|
$
|
90,650,668
|
|
Other accounts
|
|
|
417
|
|
|
$
|
1,396,629,115
|
|
|
|
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. 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 Tortoise Holdings, LLC, the sole member of 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, 2010.
|
|
|
|
|
|
|
Aggregate Dollar Range of Company
|
|
|
|
Securities Beneficially Owned by
|
|
Name of Manager
|
|
Manager
|
|
|
H. Kevin Birzer
|
|
Over $100,000
|
|
Zachary A. Hamel
|
|
Over $100,000
|
|
Kenneth P. Malvey
|
|
$50,001 - $100,000
|
|
Terry C. Matlack
|
|
Over $100,000
|
|
David J. Schulte
|
|
$50,001 - $100,000
|
|
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
S-22
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, 2008,
our Adviser received $7,399,871 as
compensation for advisory services. For our fiscal year ending November 30, 2009, our Adviser
received $4,378,566 as compensation for advisory services. For our fiscal year ending November 30,
2010, our Adviser received $6,381,443 as compensation for advisory services.
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 31, 2011 and may be continued from year
to year thereafter as provided in the 1940 Act. The Advisory Agreement will be submitted to the
Board of Directors for renewal each year. A discussion regarding the basis of the Board of
Directors decision to approve the continuation of the Advisory Agreement is available in our
Annual Report to stockholders for the fiscal year ended November 30, 2010. 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.
S-23
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.
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) 551-8090. 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 initially consider their ability to
execute transactions at the most favorable prices and lowest overall execution costs, while also
taking into consideration other relevant factors, such as, the reliability, integrity and financial
condition of the broker-dealer, the size of and difficulty in executing the order, the quality of
execution and custodial services, and the provision of valuable research services that can be
reasonably expected to enhance the investment return of clients managed by the Adviser. Research
services may include reports on MLPs, the market, the economy and other general widely distributed
research, and may be used by the Adviser in servicing all funds and accounts managed by the
Adviser, including the Company. Receipt of research is one of a number of factors considered in
assigning an overall internal ranking to brokers. 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
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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, 2008, November 30, 2009 and
November 30, 2010, we paid aggregate brokerage commissions of $126,370, $110,418, and $71,887,
respectively. No direct placement fees were paid in fiscal 2008, 2009 or 2010.
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, 2009 and November 30, 2010, our
portfolio turnover rates were 14.86% and 12.92%, 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.
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. 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 distributions 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 pursuant to fair value methodologies
approved by the Board.
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 for exchange traded options, the mean between the highest bid
and lowest asked prices obtained as of the closing of the exchanges
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on which the option is traded, and for non-exchange traded options and futures, the calculated
mean based on bid and asked prices obtained from the 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.
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.
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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 advisers
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 adviser.
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
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
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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, products thereof or certain alcohol or biodiesel fuels), 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
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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 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 and our gain on
the sale of MLP interests. Our current earnings and profits may be increased if our portfolio
turnover is increased, which may occur to utilize our capital loss carry forwards. Thus, a
reduction in the return of capital portion of the distributions we receive from the MLPs or an
increase in our portfolio turnover may increase our current earnings and profits and increase the
portion of our distributions treated as dividends as opposed to a tax deferred return of capital.
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. To the extent that distributions to a stockholder exceed our
current and accumulated earnings and profits, such distributions may 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 as of the date of this prospectus 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 attributable to periods exceeding 366 days). A stockholders holding
period may be reduced for purposes of this rule if the stockholder engages in certain risk
reduction transactions with
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respect to the common or preferred stock. The provisions of the Internal Revenue Code
applicable to qualified dividend income are effective through December 31, 2012. 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 advisers 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 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 (as
of the date of this prospectus a maximum rate of 15%) than net short-term capital gain or ordinary
income (as of the date of this prospectus a maximum rate of 35%, which rate is scheduled to
increase to 39.6% for taxable years after 2012). 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 2012. For corporate holders, capital gain is generally taxed at the same rate as ordinary
income, that is, as of the date of this prospectus 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
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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 advisers 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, 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.
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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 (as of the date of this prospectus a maximum rate of 15%,
although this rate will increase to 20% after December 31, 2012) than net short-term capital gain
or ordinary income (as of the date of this prospectus a maximum rate of 35%, although this rate
will increase to 39.6% after December 31, 2012). For corporate holders, capital gain is generally
taxed for federal income tax purposes at the same rate as ordinary income, that is, as of the date
of this prospectus 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. 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, although regulations have been proposed to expand information reporting
for non-U.S. Holders. 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.
S-32
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 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 generally 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.
S-33
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, or
a Manager of the Adviser designated by the Investment Committee, and shall be executed by the Chief
Executive Officer or, if the proxy may be voted electronically, electronically voted by the Chief
Executive Officer or his designee. 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, 2010, 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.
ADMINISTRATOR AND CUSTODIAN
U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves
as our administrator and provides certain back-office support such as payment of expenses and
preparation of financial statements and related schedules. We pay the administrator a monthly fee
computed at an annual rate of 0.04% of the first $1 billion of our Managed Assets, 0.01% on the
next $500 million of our Managed Assets and 0.005% on the balance of our Managed Assets. For the
fiscal years ended November 30, 2008, November 30, 2009 and
S-34
November 30, 2010, we paid U.S. Bancorp Fund Services, LLC $338,562, $202,295 and $279,592,
respectively for administrative services.
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 0.004% of our portfolio assets, subject to a minimum annual fee of $4,800, plus
portfolio transaction fees.
INTERNAL ACCOUNTANT
U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202, 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, 0.0075% on the
next $250 million of net assets, and 0.0025% on the balance of our net assets. For the fiscal
years ended November 30, 2008, November 30, 2009 and November 30, 2010, we paid U.S. Bancorp Fund
Services, LLC, $66,761, $60,798, and $62,458, 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 2010 Annual Report contains our audited financial statements as of November 30, 2010,
notes thereto, and other information about us. Our 2010 Annual Report is incorporated by reference
into, and shall be deemed to accompany, this Statement of Additional Information.
Our 2010 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.
S-35
APPENDIX A RATING OF INVESTMENTS
MOODYS INVESTORS SERVICE, INC.
Moodys long-term obligation ratings are opinions of the relative credit risk of financial
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 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 ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
A-1
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 moderate
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.
A-2
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 an assessment of default risk, but
may incorporate an assessment of relative seniority or ultimate recovery in the event of default.
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.
A-3
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.
BB An obligation rated BB is less vulnerable in the near-term 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 is assigned to obligations that are
currently highly vulnerable to nonpayment, obligations that have
payment arrearages allowed by the terms of the documents, or
obligations of an issuer that is the subject of a bankruptcy
petition or similar action which have not experienced a payment
default.
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.
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.
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.
A-4
Tortoise Energy Capital Corporation
STATEMENT OF ADDITIONAL INFORMATION
January
31, 2011
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