AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION NOVEMBER 24, 2004
1933 Act File No. 333-119784
1940 Act File No. 811-21462
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|X| PRE-EFFECTIVE AMENDMENT NO. 1
|_| POST-EFFECTIVE AMENDMENT NO. __
AND
|_| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| AMENDMENT NO. 12
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
10801 Mastin Boulevard, Suite 222
Overland Park, Kansas 66210
(913) 981-1020
AGENT FOR SERVICE
David J. Schulte
10801 Mastin Boulevard, Suite 222
Overland Park, Kansas 66210
COPIES OF COMMUNICATIONS TO:
COPIES OF COMMUNICATIONS TO:
Deborah Bielicke Eades, Esq. John R. Short, Esq. Richard Kronthal, Esq.
Vedder, Price, Kaufman & Kammholz, P.C. Blackwell Sanders Peper Martin, LLP Kaye Scholer LLP
222 North LaSalle Street 720 Olive Street 425 Park Avenue
Chicago, Illinois 60601 St. Louis, Missouri 63101 New York, New York 10022
(312) 609-7661 (314) 345-6430 (212) 836-8039
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement
If any of the securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. |_|
It is proposed that this filing will become effective (check appropriate box):
|_| when declared effective pursuant to section 8(c).
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
==========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED (1) PER UNIT (1) OFFERING PRICE(1) REGISTRATION FEE
------------------------- --------------------- ---------------------- ---------------------- ------------------------
Common Stock 40,000 $25.00 $1,000,000 $126.70
==========================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
THE REGISTRANT INTENDS TO AMEND THIS REGISTRATION STATEMENT TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT
SPECIFICALLY STATES THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATES AS THE
SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 2004
PROSPECTUS (TORTOISE LOGO)
___________ COMMON SHARES
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
$_______ PER SHARE
Tortoise Energy Infrastructure Corporation (the "Company") is a nondiversified,
closed-end management investment company which commenced operations in February
2004. The Company's investment objective is to seek a high level of total return
with an emphasis on current distributions paid to stockholders. The Company
seeks to provide its stockholders with an efficient vehicle to invest in a
portfolio of publicly traded master limited partnerships in the energy
infrastructure sector ("MLPs"). Under normal circumstances, the Company invests
at least 90% of its total assets (including assets obtained through leverage) in
securities of energy infrastructure companies and invests at least 70% of its
total assets in equity securities of MLPs. Similar to the tax characterization
of distributions made by MLPs to their unit holders, the Company believes that
it will have relatively high levels of deferred taxable income (i.e., return of
capital) associated with distributions to its stockholders. There is no
assurance that the Company will achieve its objective.
The Company currently anticipates an offering size of approximately
$150,000,000. Depending on the offering price, this would likely result in the
issuance of approximately 5.5 million shares.
The Company's currently outstanding shares of common stock are, and the shares
offered in this prospectus will be, listed on the New York Stock Exchange under
the trading or "ticker" symbol "TYG." The net asset value of the Company's
common stock at the close of business on ______, 2004 was $_______ per share,
and the last sale price of the common stock on the New York Stock Exchange on
such date was $__________. See "Market and Net Asset Value Information."
--------------------
INVESTING IN THE COMPANY'S COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
INVESTORS COULD LOSE SOME OR ALL OF THEIR INVESTMENT IN THE COMPANY. SEE "RISKS"
BEGINNING ON PAGE __ OF THIS PROSPECTUS.
--------------------
PER SHARE TOTAL(1)
--------- --------
Public offering price................................ $ $
Underwriting discounts and commissions............... $ $
Proceeds, before expenses, to the Company(2)......... $ $
------------------
(1) The underwriters named in this prospectus have the option to purchase
up to ____________ additional shares at the public offering price, less
the underwriting discounts and commissions, within 45 days from the
date of this prospectus to cover over-allotments.
(2) The aggregate expenses of the offering are estimated to be
$____________, which represents $___ per share issued.
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.
--------------------
The underwriters expect to deliver the shares on or about ____________,
2004.
STIFEL, NICOLAUS &
LEHMAN BROTHERS COMPANY INCORPORATED
OPPENHEIMER & CO. RBC CAPITAL MARKETS WACHOVIA SECURITIES
--------------------
Prospectus dated __________, 2004
Unlike most investment companies, the Company is taxed like a
corporation and has not elected to be treated as a regulated investment company
under the Internal Revenue Code.
On July 15, 2004, the Company issued two series of auction rate senior
notes due July 15, 2044, in an aggregate principal amount of $110,000,000
("Tortoise Notes"). On September 16, 2004, the Company issued 1,400 auction rate
preferred shares (denominated as Money Market Cumulative Preferred Shares or
"MMP Shares"), liquidation preference $25,000 per share ($35,000,000 in the
aggregate). The Tortoise Notes are rated "Aaa" and "AAA" by Moody's Investors
Service Inc. ("Moody's") and Fitch Ratings ("Fitch"), respectively. The MMP
Shares are rated "Aa2" and "AA" by Moody's and Fitch, respectively. As of
October 31, 2004, Tortoise Notes and MMP Shares represented 22.4% and 7.1% of
the Company's total assets, respectively. The Company may, in the future, issue
additional series of Tortoise Notes or MMP Shares or other senior securities to
the extent permitted by the Investment Company Act of 1940, as amended (the
"1940 Act").
The Company's common stock is junior in liquidation and distribution
rights to Tortoise Notes and MMP Shares. The issuance of debt and preferred
stock, including Tortoise Notes and MMP Shares, represent the leveraging of the
Company's common stock. The issuance of additional common stock offered by this
prospectus will enable the Company to increase the aggregate amount of its
leverage. The use of leverage creates an opportunity for increased income and
capital appreciation for common stockholders, but at the same time, it creates
special risks that may adversely affect common stockholders. Because the
Adviser's fee is based on total assets (including assets obtained through
leverage), the Adviser's fee is higher when the Company is leveraged. There can
be no assurance that a leveraged strategy will be successful during any period
in which it is used. See "Leverage" and "Risks--Leverage Risk."
The prospectus sets forth concisely the information about the Company
that a prospective investor should know before investing. You should read this
prospectus, which contains important information about the Company, before
deciding whether to invest in the Company's common stock and retain it for
future reference. A statement of additional information, dated ___________,
2004, containing additional information about the Company, has been filed with
the Securities and Exchange Commission 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 ___ of this
prospectus, by calling 1-888-728-8784 or by writing to the Company at 10801
Mastin Boulevard, Suite 222, Overland Park, Kansas 66210. You can review and
copy documents the Company has filed at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information.
The Securities and Exchange Commission charges a fee for copies. You can get the
same information free from the Securities and Exchange Commission's 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 Securities and Exchange
Commission's Public Reference Section, Washington, D.C. 20549-0102.
The Company's common stock does not represent a deposit or obligation
of, and is not guaranteed or endorsed by, any bank or other insured depository
institution and is not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
TABLE OF CONTENTS
PAGE
Prospectus Summary.............................................................1
Summary of Company Expenses...................................................14
Financial Highlights..........................................................16
Market and Net Asset Value Information........................................17
Use of Proceeds...............................................................18
Capitalization................................................................19
The Company...................................................................20
Leverage......................................................................27
Risks.........................................................................29
Management of the Company.....................................................38
Distributions.................................................................41
Closed-End Company Structure..................................................43
Tax Matters...................................................................44
Net Asset Value...............................................................46
Description of Capital Stock..................................................47
Description of Tortoise Notes and Borrowings..................................50
Certain Provisions in the Company's Charter and Bylaws........................51
Underwriting..................................................................52
Administrator, Custodian, Transfer Agent and Dividend Paying Agent............56
Legal Matters.................................................................56
Intellectual Property Rights..................................................56
Table of Contents for the Statement of Additional Information.................57
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE COMPANY HAS NOT, AND THE UNDERWRITERS HAVE
NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF
ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT
RELY ON IT. THE COMPANY IS NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER TO
SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS
IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS. THE COMPANY'S BUSINESS,
FINANCIAL CONDITION AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. THE COMPANY
WILL AMEND OR SUPPLEMENT THIS PROSPECTUS TO REFLECT MATERIAL CHANGES TO THE
INFORMATION CONTAINED IN THIS PROSPECTUS TO THE EXTENT REQUIRED BY APPLICABLE
LAW.
i
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the
information that you should consider before investing in the Company's shares of
common stock offered by this prospectus (the "Common Shares"). You should review
the more detailed information contained in this prospectus and in the statement
of additional information, especially the information set forth under the
heading "Risks" beginning on page __ of this prospectus. Unless otherwise
indicated, the information presented in this prospectus assumes that the
underwriters do not exercise their over-allotment option.
THE COMPANY
Tortoise Energy Infrastructure Corporation (the "Company") is a
nondiversified, closed-end management investment company which commenced
operations in February 2004. The Company's investment objective is to seek a
high level of total return with an emphasis on current distributions paid to
stockholders. For purposes of the Company's investment objective, total return
includes capital appreciation of, and all distributions received from,
securities in which the Company will invest regardless of the tax character of
the distributions. The Company seeks to provide its stockholders with an
efficient vehicle to invest in a portfolio of publicly traded master limited
partnerships in the energy infrastructure sector ("MLPs"). Similar to the tax
characterization of distributions made by MLPs to its unit holders, the Company
believes that it will have relatively high levels of deferred taxable income
associated with distributions made to its stockholders. Tortoise Capital
Advisors, LLC (the "Adviser") serves as the Company's investment adviser.
The Company completed its initial public offering of common stock in
February 2004, raising approximately $315 million in equity. The Company raised
an additional $110 million through the issuance of Tortoise Notes in July 2004
and an additional $35 million through the issuance of MMP Shares in September
2004. The Company declared distributions to holders of common stock in May,
August and November 2004 in the amount of $0.20, $0.34 and $0.43 per share,
respectively. The Company expects that a significant portion of these
distributions will be treated as a return of capital to stockholders for tax
purposes.
THE OFFERING
The Company is offering ___________ Common Shares at an offering price
of $_____ per share through a group of underwriters (the "Underwriters") led by
Lehman Brothers Inc., Stifel, Nicolaus & Company, Incorporated, RBC Capital
Markets Corporation, Oppenheimer & Co. Inc. and Wachovia Capital Markets, LLC.
An investor must purchase at least 100 Common Shares ($_____) in order to
participate in this offering. The Company has given the Underwriters an option
to purchase up to _________ additional Common Shares at the public offering
price, less the underwriting discounts and commissions, within 45 days from the
date of this prospectus to cover over-allotments. The provisions of the 1940 Act
require that the public offering price of the Common Shares, less underwriting
commissions and discounts, must equal or exceed the net asset value per share of
the Company's common stock (calculated within 48 hours of pricing). See
"Underwriting."
The offering will commence as soon as practical following the Company's
ex-dividend date for its distribution for the fiscal quarter ending November 30,
2004, which was November 17, 2004.
LISTING
Like the Company's outstanding shares of common stock, the Common
Shares will be listed on the New York Stock Exchange ("NYSE") under the trading
or "ticker" symbol "TYG."
1
TAX STATUS OF COMPANY
Unlike most investment companies, the Company is not treated as a
regulated investment company under the U.S. Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). Therefore, the Company is obligated to
pay federal and applicable state corporate taxes on its taxable income. On the
other hand, the Company is not subject to the "qualifying income" rules
applicable to regulated investment companies. Under current tax law, the
qualifying income rules limit the ability of regulated investment companies to
invest directly in MLPs. Unlike regulated investment companies, the Company is
not required to distribute substantially all of its income and capital gains.
The Company invests a substantial portion of its assets in MLPs. Although the
MLPs generate taxable income to the Company, the Company expects the MLPs to pay
cash distributions in excess of the taxable income reportable by the Company.
Similarly, the Company expects to distribute cash in excess of its taxable
income to its stockholders and intends to distribute substantially all of its
distributable cash flow (generally, cash from operations less certain operating
expenses and reserves). The taxation of Company distributions is discussed below
under "Prospectus Summary--Stockholder Tax Features." See also "Tax Matters."
TAXATION OF MLPs AND MLP INVESTORS
The Company invests primarily in MLPs, which are treated as
partnerships for federal income tax purposes. Limited partners, such as the
Company, are required to pay tax on their allocable share of the MLPs' income,
gains, losses and deductions, including accelerated depreciation and
amortization deductions. Such items generally are allocated among the general
partner and limited partners in accordance with their percentage interests in
the MLP. Partners recognize and must report their allocable share of income
regardless of whether any cash distributions are paid out. MLPs typically are
required by their charter documents to distribute substantially all of their
distributable cash flow. The types of MLPs in which the Company invests have
historically made cash distributions to limited partners that exceed the amount
of taxable income allocable to limited partners. This may be due to a variety of
factors, including that the MLP may have significant non-cash deductions, such
as accelerated depreciation. If the cash distributions exceed the taxable income
reported, the MLP investor's basis in MLP units will decrease. This feature will
reduce current income tax liability, but potentially will increase the
investor's gain upon the sale of its MLP interest.
STOCKHOLDER TAX FEATURES
Stockholders of the Company hold common stock of a corporation. Shares
of common stock differ substantially from partnership interests for federal
income tax purposes. Unlike holders of MLP common units, stockholders of the
Company will not recognize an allocable share of the Company's income, gains,
losses and deductions. Stockholders recognize income only if the Company pays
out distributions. The tax character of the distributions can vary. If the
Company makes distributions from current or accumulated earnings and profits
allocable to the particular shares held by a stockholder, such distributions
will be taxable to a stockholder in the current period as dividend income.
Dividend income will be treated as "qualified dividends" for federal income tax
purposes, subject to favorable capital gains rates. If distributions exceed the
Company's allocated current or accumulated earnings and profits, such excess
distributions will constitute a tax-free return of capital to the extent of a
stockholder's basis in its common stock. To the extent excess distributions
exceed a stockholder's basis, the amount in excess of basis will be taxed as
capital gain. Based on the historical performance of MLPs, the Company expects
that a significant portion of distributions to holders of common stock will
constitute a tax-free return of capital. In addition, earnings and profits are
treated generally, for federal income tax purposes, as first being used to pay
distributions on the MMP Shares, and then to the extent remaining, if any, to
pay distributions on common stock. There is no assurance that the Company
will make regular distributions
2
or that the Company's expectation regarding the tax character of its
distributions will be realized. The special tax treatment for qualified
dividends is scheduled to expire as of December 31, 2008.
Upon the sale of common stock, a stockholder generally will recognize
capital gain or loss measured by the difference between the sale proceeds
received by the stockholder and the stockholder's federal income tax basis in
its common stock sold, as adjusted to reflect return(s) of capital. Generally,
such capital gain or loss will be long-term capital gain or loss if common stock
were held as a capital asset for more than one year. The tax basis for common
stock owned by an individual stockholder will be adjusted to equal their full
market value upon such stockholder's death. See "Tax Matters."
COMPARISON WITH DIRECT INVESTMENTS IN MLPs
The Company is designed to provide an efficient vehicle for investing
in a portfolio of MLPs. The Company was the first publicly traded investment
company offering access to a portfolio of energy infrastructure MLPs. The
Company believes that an investor who invests in the Company will benefit from a
number of portfolio and tax features that would not be available from a direct
investment in MLPs, including the following:
o An investment in the Company offers exposure to a number of
MLPs within the energy infrastructure sector through a single
investment vehicle;
o An investment in the Company offers access to direct
placements. Direct placements offer the potential for
increased return, but are typically only available to a
limited number of institutional investors such as the Company;
o Each stockholder of the Company will receive a single Form
1099, rather than a Form K-1 from each MLP if an investor
invested directly in the MLP;
o Stockholders of the Company will not be required to file state
income tax returns in each state in which MLPs owned by the
Company operate, whereas limited partners of MLPs may be
required to make state filings in states in which the MLP
operates;
o The passive activity income and loss rules apply to a direct
investment in MLPs, but not to an investment in the Company
(these rules limit the ability of an investor to use losses to
offset other gains);
o The Internal Revenue Code generally excludes corporate
dividends from treatment as unrelated business taxable income
("UBTI") (unless the stock is debt-financed). Tax-exempt
investors, including employee benefit plans and IRAs, will not
have UBTI upon receipt of distributions from the Company,
whereas a tax-exempt limited partner's allocable share of
income of an MLP is treated as UBTI; and
o There is a limit on the extent to which regulated investment
companies can invest in MLP units, but such limit does not
apply to the Company.
Unlike MLPs, the Company is obligated to pay current and deferred tax
with respect to its income, thereby subjecting the Company's income to a double
layer of tax upon distribution to the Company's stockholders. Like other
investment companies, stockholders of the Company bear the operating costs of
the Company, including management fees, custody and administration, and the
costs of operating as a public company.
3
INVESTMENT POLICIES
Under normal circumstances, the Company invests at least 90% of its
total assets (including assets obtained through leverage) in securities of
energy infrastructure companies and invests at least 70% of its total assets in
equity securities of MLPs. Energy infrastructure companies engage in the
business of transporting, processing, storing, distributing or marketing natural
gas, natural gas liquids (primarily propane), coal, crude oil or refined
petroleum products, or exploring, developing, managing or producing such
commodities. The Company invests solely in energy infrastructure companies
organized in the United States. All publicly traded companies in which the
Company invests have an equity market capitalization greater than $100 million.
The Company invests primarily in equity securities of MLPs, which
currently consist of the following instruments: common units, convertible
subordinated units and I-Shares. As of the date of this prospectus, almost all
MLP common units and I-Shares in which the Company invests are listed and traded
on the NYSE, American Stock Exchange ("AMEX") or NASDAQ National Market. The
Company also may purchase MLP common units through direct placements. MLP
convertible subordinated units are not listed or publicly traded and are
typically purchased in directly negotiated transactions with MLP affiliates or
institutional holders of such shares.
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 are convertible into 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 do not have arrearage rights. I-Shares have
similar features to common units except that distributions are payable in
additional I-Shares rather than cash. The Company invests in I-Shares only if it
has adequate cash to satisfy its distribution targets.
Although the Company also may invest in equity and debt securities of
energy infrastructure companies that are organized and/or taxed as corporations,
it is likely that any such investments will be in debt securities because the
dividends from equity securities of such corporations typically do not meet the
Company's investment objective. The Company also may invest in securities of
general partners or other affiliates of MLPs and private companies operating
energy infrastructure assets.
The Company has adopted the following additional nonfundamental
investment policies:
o The Company may invest up to 30% of its total assets in
restricted securities, primarily through direct placements.
Subject to this policy, the Company may invest without
limitation in illiquid securities. The types of restricted
securities that the Company may purchase consist of MLP
convertible subordinated units, MLP common units and
securities of private energy infrastructure companies (i.e.,
non-MLPs). Investments in private companies that do not have
any publicly traded shares or units are limited to 5% of total
assets.
o The Company may invest up to 25% of total assets in debt
securities of energy infrastructure companies, including
securities rated below investment grade (commonly referred to
as "junk bonds"). Below investment grade debt securities will
be rated at least B3 by Moody's Investors Service, Inc.
("Moody's") and at least B- by Standard & Poor's Ratings Group
("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 the Adviser.
4
o The Company will not invest more than 10% of total assets in
any single issuer.
o The Company will not engage in short sales.
The Company may change its 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 90% of its total assets in energy
infrastructure companies requires at least 60 days prior written notice to
stockholders. Unless otherwise stated, all investment restrictions apply at the
time of purchase and the Company will not be required to reduce a position due
solely to market value fluctuations. The term total assets includes assets
obtained through leverage for the purpose of each investment restriction.
CONFLICTS OF INTEREST
Conflicts of interest may arise from the fact that the Adviser and its
affiliates carry on substantial investment activities for other clients, in
which the Company has no interest. The Adviser or its affiliates may have
financial incentives to favor certain of such accounts over the Company. Any of
their proprietary accounts and other customer accounts may compete with the
Company for specific trades. The Adviser or its affiliates may give advice and
recommend securities to, or buy or sell securities for, the Company, which
advice or securities recommended 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, those of the
Company.
Situations may occur when the Company could be disadvantaged because of
the investment activities conducted by the Adviser and its affiliates for its
other accounts. Such situations may be based on, among other things, the
following: (i) legal or internal restrictions on the combined size of positions
that may be taken for the Company or the other accounts, thereby limiting the
size of the Company's position; (ii) the difficulty of liquidating an investment
for the Company or the other accounts where the market cannot absorb the sale of
the combined position; or (iii) limits on co-investing in private placement
securities under the 1940 Act. The Company's investment opportunities may be
limited by affiliations of the Adviser or its affiliates with energy
infrastructure companies. See "The Company--Conflicts of Interest."
USE OF LEVERAGE BY THE COMPANY
The Company currently is engaged in, and may in the future engage in,
the use of financial leverage. On July 15, 2004, the Company issued $110,000,000
in aggregate principal amount of Tortoise Notes. On September 16, 2004, the
Company issued 1,400 MMP Shares with an aggregate liquidation preference of
$35,000,000. Together, the aggregate principal amount of outstanding Tortoise
Notes and the aggregate liquidation preference of outstanding MMP Shares
represent approximately 29.5% of its total assets, as of October 31, 2004. The
aggregate liquidation preference of MMP Shares represents approximately 7.1% of
the Company's total assets and the aggregate principal amount of the Tortoise
Notes represents approximately 22.4% of the Company's total assets, as of
October 31, 2004. The Company may make further use of financial leverage through
the issuance of additional Tortoise Notes or MMP Shares or other senior
securities to the extent permitted by the 1940 Act. Currently under the 1940
Act, the Company may not borrow for investment purposes more than 33 1/3% of
its total assets, including the amount borrowed, and may not issue preferred
stock with an aggregate liquidation preference of more than 50% of its total
assets.
Because the Adviser's fee is based upon a percentage of the Company's
Managed Assets (as defined below), the Adviser's fee is higher when the Company
is leveraged. Therefore, the Adviser has a financial incentive to leverage the
Company, which may create a conflict of interest between the Adviser
5
and the holders of the Common Shares. 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
"Risks--Leverage Risk."
The Company may, but is not required to, hedge general interest rate
exposure arising from its leverage transactions. Under current market
conditions, hedging would be accomplished principally by entering into interest
rate transactions such as swaps, caps and floors. The Company has entered into
an interest rate swap transaction that is intended to hedge the Company's
interest payment obligations under the Tortoise Notes against material
increases in interest rates through June 2007. The Company's dividend payment
obligations under the MMP Shares remain unhedged at this time. 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. See "Risks--Hedging Strategy Risk."
INVESTMENT ADVISER
Tortoise Capital Advisors, LLC was formed in October 2002 to provide
portfolio management services to institutional and high-net-worth investors
seeking professional management of their MLP investments. The Adviser is
controlled equally by Fountain Capital Management, L.L.C. ("Fountain Capital")
and Kansas City Equity Partners LC ("KCEP"). As of October 31, 2004, the
Adviser had approximately $591 million of client assets under management.
Affiliates of the Adviser had an additional $325 million of energy
infrastructure investment assets under management. The Adviser's investment
committee is comprised of five portfolio managers led by David J. Schulte, CFA.
The principal business address of the Adviser is 10801 Mastin
Boulevard, Suite 222, Overland Park, Kansas 66210.
The Adviser is responsible for the investment of the Company's
portfolio in accordance with the Company's investment objective and policies.
The Adviser makes all investment decisions for the Company, subject to oversight
by the Company's Board of Directors. Day-to-day management of the Company's
portfolio is the responsibility of a team of investment analysts and portfolio
managers led by Mr. Schulte. Three of the four other members of the Adviser's
investment committee are affiliates of, but not employees of, the Adviser, and
have significant responsibilities with KCEP, Fountain Capital and their
affiliates. All members of the investment committee have undertaken to provide
such services as are necessary to fulfill the obligations of the Adviser to the
Company. The Company pays the Adviser a fee for its investment management
services equal to an annual rate of 0.95% of the Company's average monthly total
assets (including any assets attributable to any leverage) minus accrued
liabilities other than (i) deferred taxes, (ii) debt entered into for purposes
of leverage and (iii) the aggregate liquidation preference of any outstanding
preferred shares ("Managed Assets"). This fee is calculated monthly and paid
quarterly.
DISTRIBUTIONS
The Company intends to pay out substantially all of its Distributable
Cash Flow ("DCF") to holders of common stock through quarterly distributions.
DCF is the amount received by the Company as cash or paid-in-kind distributions
from MLPs or their affiliates, and interest payments received on debt securities
owned by the Company, less current or anticipated operating expenses, taxes on
Company taxable income, and leverage costs paid by the Company. The Company's
board of directors (the "Board of Directors" or the "Board") adopted a policy to
target distributions to common stockholders in an amount of at least 95% of DCF
on an annual basis. Distributions will be paid each fiscal quarter out of DCF,
if any. There is no assurance that the Company will continue to make regular
distributions. The Company has a fiscal year ending November 30.
6
If a stockholder's shares are registered directly with the Company or
with a brokerage firm that participates in the Company's Automatic Dividend
Reinvestment Plan, distributions will be automatically reinvested in additional
common stock under the Automatic Dividend Reinvestment 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. See
"Distributions--Automatic Dividend Reinvestment Plan."
RISKS
Limited Operating History. The Company is a nondiversified, closed-end
management investment company which commenced operations in February 2004.
Delay in Use of Proceeds. Although the Company currently intends to
invest the proceeds of any sales of Common Shares as soon as practicable
following the closing, such investments may be delayed if suitable investments
are unavailable at the time or for other reasons or if the Company is unable to
secure firm commitments for direct placements. Due to the trading market and
volumes for MLPs, it may take the Company a period of time to accumulate
positions in certain securities. Because the market for MLP securities may at
times be less liquid than the market for many other securities, the Company may
be unable to obtain such securities within the time, and in the amount,
currently anticipated by the Company. As a result, the proceeds may be invested
in cash, cash equivalents, high-quality debt instruments, or other securities
pending investment in MLPs or securities of energy infrastructure companies. A
delay in the anticipated use of proceeds could lower returns and lower the
Company's distribution for the outstanding shares of common stock and the Common
Shares offered in this prospectus. See "Use of Proceeds."
Energy Infrastructure Sector. Under normal circumstances, the Company
concentrates its investments in the energy infrastructure sector, with an
emphasis on securities issued by MLPs. Certain risks inherent in the energy
infrastructure business of these types of MLPs include the following:
o 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 the 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, the Adviser intends to seek high
quality MLPs that are able to mitigate or manage direct margin
exposure to commodity price levels. The MLP sector can be hurt
by market perception that MLPs' performance and distributions
are directly tied to commodity prices.
o 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 the decline of
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.
o 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.
7
o A portion of any one MLP's assets may be dedicated to natural
gas reserves and other commodities that naturally deplete over
time, which could have a material adverse impact on an MLP's
ability to make distributions. MLPs are often dependent upon
exploration and development activities by third parties. 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. 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
received by the Company from MLPs that grow through
acquisitions.
o The profitability of MLPs could be adversely affected by
changes in the regulatory environment. The business of MLPs is
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.
o 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 because of the
increased availability of alternative investments at
competitive yields with MLPs. Rising interest rates may also
increase an MLP's cost of capital. A higher cost of capital
could limit growth from acquisition/expansion projects and
limit MLP distribution growth rates.
o Since the September 11th 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 will likely increase volatility for prices in natural
gas and oil and could affect the market for products of MLPs.
o Holders of MLP units are subject to certain risks inherent in
the partnership structure of MLPs including (i) tax risks
(described in detail below), (ii) limited ability to elect or
remove management, (iii) limited voting rights, except with
respect to extraordinary transactions, and (iv) conflicts of
interest of the general partner, including those arising from
incentive distribution payments.
Cash Flow Risk. The Company derives substantially all of its cash flow
from investments in equity securities of MLPs. The amount of cash that the
Company has available to distribute to stockholders is completely dependent on
the ability of MLPs held by the Company to make distributions to its partners.
The Company has no control over the actions of underlying MLPs. The amount of
cash that each individual MLP can distribute to its partners depends 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.
8
Tax Risk of MLPs. The value of the Company's investment in MLPs depends
largely on the MLPs being treated as partnerships for federal income tax
purposes. If an MLP does not meet current law requirements to maintain
partnership status, or if it is unable to do so because of tax law changes, it
would be taxed as a corporation. In that case, the MLP would be obligated to pay
income tax at the entity level and distributions received by the Company would
be taxed entirely as dividend income. As a result, there would be a material
reduction in the Company's cash flow and there would likely be a material
decrease in the value of the Common Shares.
Items of income, gains, losses and deductions of each MLP flow through
to the Company in its capacity as a partner of the MLP. Historically, a
substantial portion of MLP income has been offset by tax deductions. If the
amount of MLP income tax deductions that may be claimed by the Company is less
than anticipated or the Company turns over its portfolio more rapidly than
anticipated, the Company will incur greater current income taxes. A significant
slowdown in acquisition activity by the MLPs in the Company's portfolio also
could accelerate the Company's obligations to pay income taxes due in part to
less accelerated depreciation generated by new acquisitions. In such a case, the
portion of the Company's distributions that is treated as a return of capital
will be reduced and the portion treated as dividend income would increase,
resulting in lower after tax distributions for the Company's stockholders. See
"Risks--Deferred Tax Risk."
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 issuer's 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 can also be affected
by fundamentals unique to the partnership or company, including earnings power
and coverage ratios.
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.
Because MLP convertible subordinated units generally convert into
common units at a one-to-one ratio, the price that the Company 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.
Leverage Risk. The issuance of senior debt securities and preferred
stock, including Tortoise Notes and MMP Shares, represents the leveraging of the
Company's common stock. Leverage creates an opportunity for an increased return
to common stockholders, but it is a speculative technique that could adversely
affect common stockholders. Unless the income and capital appreciation, if any,
on securities acquired with leverage proceeds or other borrowed funds exceed the
costs of the leverage, the use of leverage could cause the Company to lose
money. When leverage is used, the net asset value and market value of the
Company's common stock will be more volatile. There is no assurance that the use
of leverage will be successful during any period in which it is used.
Common stockholders bear the costs of leverage, including outstanding
Tortoise Notes and MMP Shares, through higher operating expenses. Common
stockholders also bear management fees. Because
9
management fees are based on Managed Assets, the use of leverage increases the
effective management fee borne by holders of common stock. In addition, the
issuance of additional senior debt securities or preferred stock by the Company
would result in offering expenses and other costs, which would ultimately be
borne by the holders of the Company's common stock. Fluctuations in interest
rates could increase the Company's interest or dividend payments on Tortoise
Notes, MMP Shares or other senior securities and could reduce cash available for
distributions on common stock. The Tortoise Notes and MMP Shares are each
subject to covenants regarding asset coverage, portfolio composition and other
matters, which may affect the Company's ability to pay distributions on common
stock in certain instances. The Company may also be required to pledge its
assets to the lenders in connection with certain other types of borrowing. See
"Risks--Leverage Risk."
Hedging Strategy Risk. The Company currently uses, and may in the
future use, interest rate transactions for hedging purposes only, in an attempt
to reduce the interest rate risk arising from the Company's leveraged capital
structure. The Company does not intend to hedge interest rate risk of portfolio
holdings. Interest rate transactions that the Company may use for hedging
purposes will expose the Company to certain risks that differ from the risks
associated with its portfolio holdings. There are economic costs of hedging
reflected in the price of interest rate swaps, caps and similar techniques, the
costs of which can be significant. In addition, the Company's success in using
hedging instruments is subject to the Adviser's ability to predict correctly
changes in the relationships of such hedging instruments to the Company's
leverage risk, and there can be no assurance that the Adviser's judgment in this
respect will be accurate.
Depending on the state of interest rates in general, the Company's use
of interest rate transactions such as swaps, caps or floors could enhance or
decrease distributions on the Company's common stock. To the extent there is
a decline in interest rates, the value of interest rate transactions could
decline, and result in a decline in the net asset value of the Company's common
stock. In addition, if the counterparty to an interest rate transaction
defaults, the Company would not be able to use the anticipated net receipts
under the interest rate transaction to offset the Company's cost of financial
leverage. Consequently, the use of hedging transactions might result in a poorer
overall performance for the Company, whether or not adjusted for risk, than if
the Company had not engaged in such transactions. See "Risks--Hedging Strategy
Risk."
Competition Risk. At the time the Company completed its initial public
offering in February 2004, it was the only publicly traded investment company
offering access to a portfolio of energy infrastructure MLPs. Since that time a
limited number of other alternatives to the Company as a vehicle for investment
in a portfolio of energy infrastructure MLPs, including other publicly traded
investment companies and private funds, have been developed. In addition, recent
tax law changes or future tax law changes may increase the ability of regulated
investment companies or other institutions to invest in MPLs. These competitive
conditions may adversely impact the Company's ability to make investments in the
MLP market and could adversely impact the Company's distributions to common
stockholders. See "Risks--Competition Risk."
Portfolio Turnover Risk. The Company's annual portfolio turnover rate
may vary greatly from year to year. Although the Company cannot accurately
predict its annual portfolio turnover rate, it is not expected to exceed 30%
under normal circumstances. From the commencement of operations through October
31, 2004, the Company's actual portfolio turnover rate was less than 1%.
However, portfolio turnover rate is not considered a limiting factor in the
execution of investment decisions for the Company. High portfolio turnover may
result in the Company's realization of gains that will be taxable as ordinary
income to the Company. In addition, high portfolio turnover may increase the
Company's current and accumulated earnings and profits, resulting in a greater
portion of the Company's distributions being
10
treated as dividend income to the Company's stockholders. See "The
Company--Portfolio Turnover" and "Tax Matters."
Restricted Securities. The Company may invest up to 30% of total assets
in restricted securities, primarily through direct placements. Restricted
securities are subject to statutory and contractual restrictions on their public
resale, which may make it more difficult to value them, may limit the Company's
ability to dispose of them and may lower the amount the Company could realize
upon their sale. To enable the Company to sell its holdings of a restricted
security not registered under the Securities Act of 1933, as amended (the "1933
Act"), the Company may have to cause those securities to be registered. If the
Company decides to pursue a public sale of restricted securities, 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 the Company could sell it. The
Company would bear the risks of any downward price fluctuation during that
period.
Liquidity Risk. Although common units of MLPs trade on the NYSE, 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 the Company 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 the Company believes it is desirable to do so. These securities are
also more difficult to value, and the Adviser's judgment as to value will often
be given greater weight than market quotations, if any exist. Investment of the
Company's capital in securities that are less actively traded or over time
experience decreased trading volume may restrict the Company's ability to take
advantage of other market opportunities. See "The Company--Investment Policies."
Valuation Risk. Market prices generally will not be available for
convertible subordinated units or securities of private companies, and the value
of such investments will ordinarily be determined based on fair valuations
determined by the Adviser pursuant to procedures adopted by the Board of
Directors. Similarly, common units acquired through direct placements will be
based on fair value determinations if they are subject to legal and contractual
restrictions on resale; however, the 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 the
ability of the Company to determine its net asset value. The sale price of
securities that are restricted or otherwise not readily marketable may be lower
or higher than the Company's most recent fair valuation. In addition, the
Company relies on information provided by MLPs to estimate taxable income
allocable to MLP units held by the Company and to calculate associated deferred
tax liability. See "Net Asset Value."
Interest Rate Risk. Interest rate risk is the risk that debt securities
will decline in value because of changes in market interest rates. Generally,
when market interest rates rise, the values of debt securities decline, and vice
versa. The Company's investment in such securities means that the net asset
value and market price of the Common Shares 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 the Company 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. Below investment grade debt
securities are commonly referred to as "junk bonds." Below investment grade
quality securities are considered speculative with
11
respect to an issuer's capacity to pay interest and repay principal while they
are outstanding. Below investment grade debt securities are susceptible to
default or decline in market value due to adverse economic and business
developments. The Company does not intend to invest in distressed securities
(securities issued by a company in a bankruptcy reorganization, subject to a
public or private debt restructuring or otherwise in default or in significant
risk of default in the payment of interest and principal). However, in the event
any below investment grade debt security becomes distressed while held by the
Company, the Company may be required to incur extraordinary expenses in order to
protect and recover its investment, and there will be significant uncertainty as
to when, in what manner and for what value, if any, the distressed obligations
will be satisfied. See "Risks--Below Investment Grade Securities."
Management Risk. The Adviser was formed in October 2002 to provide
portfolio management services to institutional and high-net worth investors
seeking professional management of their MLP investments. The Adviser has been
managing the Company since the Company began operations in February 2004. The
Adviser relies on the officers, employees, and resources of Fountain Capital,
KCEP and their affiliates for certain functions. Three of the five members of
the investment committee are affiliates of, but not employees of, the Adviser,
and each have other significant responsibilities with such affiliated entities.
Fountain Capital, KCEP and their affiliates conduct businesses and activities of
their own in which the Adviser has no economic interest. If these separate
activities become significantly greater than the Adviser's activities, there
could be material competition for the efforts of key personnel.
Nondiversification. The Company is a nondiversified, closed-end
management investment company under the 1940 Act and is 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 held by the Company. There currently are
approximately fifty-five (55) companies presently organized as MLPs and only a
limited amount of those companies operate energy infrastructure assets. The
Company selects MLP investments from this small pool of issuers. The Company may
invest in non-MLP securities to a lesser degree, consistent with its investment
objective and policies.
Market Discount Risk. The Company's common stock has a limited trading
history and has traded both at a premium and at a discount relative to net asset
value. The public offering price for the Common Shares represents a __% premium
over the per share net asset value on ________, 2004, there can be no assurance
that this premium will continue after this offering or that the shares will not
again trade at a discount. Shares of closed-end investment companies frequently
trade at a discount from net asset value, but in some cases have traded above
net asset value. Continued development of alternatives to the Company as a
vehicle for investment in MLP securities may contribute to reducing or
eliminating any premium or may result in the 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 the Company's net asset value as a result of investment
activities. Depending on the premium of the Company's common stock, the
Company's net asset value may be reduced immediately following this offering by
the costs of the offering, which will be borne entirely by the Company. See
"Risks--Market Discount Risk" and "Risks--Competition Risk."
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; war, such as the war in Iraq and
its aftermath; 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. The Company's Charter and Bylaws include
provisions that could delay, defer or prevent other entities or persons from
acquiring control of the Company, causing it to
12
engage in certain transactions or modifying its structure. These provisions may
be regarded as "anti-takeover" provisions. Such provisions could limit the
ability of 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
the Company. See "Certain Provisions in the Company's Charter and Bylaws."
For more information on the risks of investing in the Company, see
"Risks."
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT
U.S. Bancorp Fund Services, LLC serves as the Company's administrator.
Computershare Investor Services, LLC serves as the Company's transfer agent,
dividend paying agent, and agent for the dividend reinvestment plan. U.S. Bank
N.A. serves as the Company's custodian. See "Administrator, Custodian, Transfer
Agent and Dividend Paying Agent."
13
SUMMARY OF COMPANY EXPENSES
The following table contains information about the costs and expenses
that common stockholders will bear directly or indirectly, after giving effect
to issuance of Common Shares pursuant to this prospectus. Both the table and
footnote (4) assume that existing leverage (Tortoise Notes in an aggregate
principal amount of $110 million and MMP Shares with an aggregate liquidation
preference of $35 million) remain outstanding. The table also assumes that the
Company issues additional Tortoise Notes following this offering in an aggregate
principal amount of $100 million, which would increase oustanding leverage to
approximately 33 and 1/3% of total assets (including the proceeds of leverage).
Footnote (4) assumes that no additional leverage is used. In this case, existing
leverage would represent 22.9% of total assets.
STOCKHOLDER TRANSACTION EXPENSE
Underwriting discounts and commissions (as a percentage of offering price)............ 4.25%
Offering Expenses Borne by the Company (as a percentage of offering price)(1)............ .40%
Dividend Reinvestment Plan Fees(2)....................................................... None
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON
STOCK, AFTER GIVING EFFECT
TO THE SALE OF COMMON SHARES
OFFERED IN THIS PROSPECTUS
(ASSUMES 33-1/3% LEVERAGE IS
OUTSTANDING)
----------------------------
Management Fee................................................... 1.49%
Leverage Costs(3)(4)............................................. 1.92%
Other Expenses(5)................................................ .23%
-----
Total Annual Expenses............................................ 3.64%
Less Fee and Expense Reimbursement (through 2/28/06)(6)....... .36%
-----
Net Annual Expenses.............................................. 3.28%
------------------
(1) The total estimated offering costs to be incurred by the Company in
connection with the offering described in this prospectus is $600,000.
(2) Stockholders will pay brokerage charges if they direct the Plan Agent
to sell their Common Shares held in a dividend reinvestment account.
See "Distributions--Automatic Dividend Reinvestment Plan."
(3) Leverage Costs in the table reflect the weighted average cost to the
Company of Tortoise Notes and MMP Shares based on interest rates and
dividend rates in effect as of October 31, 2004. The table assumes
outstanding Tortoise Notes of $210 million, which reflects leverage in
an amount representing 33 and 1/3% of total assets, and footnote (4)
assumes outstanding Tortoise Notes of $110 million, which reflects
existing leverage. Because interest payment obligations on Tortoise
Notes are fully hedged by a swap agreement and the interest payable
under the swap agreement currently exceeds the interest payable on
Tortoise Notes, the cost of Tortoise Notes is based on the rates
payable under the swap agreement. MMP Shares are unhedged and their
cost reflects current dividend rates on MMP Shares.
14
(4) The table presented in this footnote estimates what the Company's
annual expenses would be, stated as percentages of the Company's net
assets attributable to the Company's common stock but, unlike the table
above, assumes that the Company does not add any additional leverage to
the amount currently outstanding. In accordance with these assumptions,
the Company's expenses would be estimated as follows:
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON
STOCK, AFTER GIVING EFFECT
TO THE SALE OF COMMON SHARES
OFFERED IN THIS PROSPECTUS
(ASSUMES NO ADDITIONAL
LEVERAGE)
----------------------------
Management Fee................................................. 1.28%
Leveraged Costs(3)............................................. 1.09%
Other Expenses(5).............................................. .22%
-----
Total Annual Expenses.......................................... 2.59%
Less Fee Expense and Reimbursement (through 2/28/06)(6)..... (.31)%
-----
Net Annual Expenses............................................ 2.28%
------------------
(5) Does not include current income tax expense, which is estimated to be
insignificant.
(6) Through February 28, 2006, the Adviser has agreed to waive or reimburse
the Company for fees and expenses in an amount equal to 0.23% of the
average monthly Managed Assets (as defined on page [40]) of the
Company. Through February 28, 2009, the Adviser has agreed to waive or
reimburse the Company for fees and expenses in an amount equal to 0.10%
of the average monthly Managed Assets of the Company. Management fees
and waivers are expressed as a percentage of net assets in the table.
Because holders of Tortoise Notes and MMP Shares do not bear management
fees and other expenses, the costs to common stockholders increases as
leverage increases.
The purpose of the table above and the example below is to help
investors understand the fees and expenses that they, as common stockholders,
would bear directly or indirectly. The Other Expenses shown in the table and
related footnotes are based on estimated amounts for the Company's first year of
operations unless otherwise indicated and assume that the Company has issued
Common Shares in aggregate amount of $150 million in this offering. If the
Company issues fewer Common Shares, all other things being equal, these expenses
would increase. For additional information with respect to the Company's
expenses, see "Management of the Company."
EXAMPLE:
The following example illustrates the expenses (including the
underwriting discounts and commissions of $_____ and estimated offering costs of
this offering of $____ per Common Share) that stockholders would pay on a $1,000
investment in Common Shares, assuming (1) total annual expenses of 3.28% of net
assets attributable to Common Shares in year 1, increasing to 3.48% in years 2
through 4 and increasing further to 3.64% in years 5 through 10 and (2) a 5%
annual return:(1)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Total Expenses Paid(2)
------------------
(1) The example assumes that the estimated Other Expenses set forth in the
fee table are accurate, that all distributions are reinvested at net
asset value and that the Company is engaged in leverage of 33-1/3% of
total assets, assuming a 3.66% cost of leverage. The cost of leverage
is expressed as an interest rate and represents the weighted average of
interest payable on Tortoise Notes and dividends payable on MMP Shares.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE ASSUMED.
MOREOVER, THE COMPANY'S ACTUAL RATE OF RETURN MAY BE GREATER OR LESS
THAN THE HYPOTHETICAL 5% RETURN SHOWN IN THE EXAMPLE.
(2) Assumes waiver or reimbursement of fees and expenses of 0.36% of net
assets in year one, and 0.16% of net assets in years two through four.
The Adviser has not agreed to reimburse the Company for any year beyond
2009.
15
FINANCIAL HIGHLIGHTS
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Company from the commencement of the Company's
investment operations on February 27, 2004 until August 31, 2004. Since the
Company commenced operations on February 27, 2004, the table covers
approximately six months of operations, during which a substantial portion of
the Company's assets were held in cash pending investment in securities that
meet the Company's investment objective and policies. Accordingly, the
information presented may not provide a meaningful picture of the Company's
operating performance.
[TO BE UPDATED AS OF OCTOBER 31, 2004]
PERIOD FROM FEBRUARY 27,
2004(1) THROUGH
AUGUST 31,2004
(UNAUDITED)
------------------------
COMMON STOCK PER SHARE DATA(2):
Net Asset Value, beginning of period..........................................
Public offering price...................................................... $ 25.00
Underwriting discounts and offering costs.................................. (1.18)
Income from Investment Operations:............................................
Net investment loss(5)..................................................... --
Net realized and unrealized gain on investments............................ 1.11
-------
Total gain from investment operations.................................... 1.11
-------
Less Distributions to Common Shareholders:....................................
Net investment income......................................................
Return of capital.......................................................... (0.54)
-------
Total distributions to common shareholders............................... (0.54)
-------
Net Asset Value, end of period................................................ $24.39
=======
Common stock per share market value, end of period............................ $25.06
Total Investment Return Based on Market Value(3).............................. 2.53%
SUPPLEMENTAL DATA AND RATIOS(4)
Net assets applicable to common shareholders, end of period (000's)........... $308,347
Ratio of expenses to average net assets before waiver......................... 1.64%
Ratio of expenses to average net assets after waiver.......................... 1.39%
Ratio of expenses, without regard to non-recurring organizational expenses,
to average net assets before waiver........................................ 1.48%
Ratio of expenses, without regard to non-recurring organizational expenses,
to average net assets after waiver......................................... 1.23%
Ratio of investment income to average net assets before waiver................ (0.25%)
Ratio of investment income to average net assets after waiver................. --
Portfolio turnover rate....................................................... 0.30%
Tortoise Auction Rate Senior Notes (000's).................................... $110,000
Per share, amount of outstanding at end of period.......................... 8.70
Per share, amount of net assets, excluding Senior Notes, at end of period.. 33.08
Series A................................................................. $3,800
Series B................................................................. $3,800
Asset coverage ratio of auction rate senior notes(6).......................... 380%
------------------
(1) Commencement of Operations.
(2) Information presented relates to a share of common stock outstanding
for the entire period.
16
(3) Not Annualized. Total investment return is calculated assuming a
purchase of common stock at the market price on the first day and a
sale at the current market price on the last day of the period
reported. The calculation also assumes reinvestment of distributions at
actual prices pursuant to the Company's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions.
(4) Information is annualized for periods less than one full year.
(5) Amount is less than 0.01 per share.
(6) Represents value of total assets less all liabilities and indebtedness
not represented by Senior Notes at the end of the period divided by
Senior Notes outstanding at the end of the period.
The following table sets forth information about the Company's
outstanding senior securities as of October 31, 2004:
ASSET COVERAGE AVERAGE FAIR
TOTAL PRINCIPAL PER SHARE VALUE PER $25,000
AMOUNT/LIQUIDATION ASSET COVERAGE ($25,000 DENOMINATION
PREFERENCE PER $1,000 OF LIQUIDATION OR PER
TITLE OF SECURITY OUTSTANDING PRINCIPAL AMOUNT PREFERENCE) SHARE AMOUNT
----------------- ----------- ---------------- ----------- ------------
Tortoise Notes......
Series A......... $60,000,000 $4,263 $25,000
Series B......... $50,000,000 $4,263 $25,000
Money Market
Cumulative
Preferred Shares
(1,400 MMP
shares).......... $35,000,000 $80,856 $25,000
------------------
* Fair value of the Notes and MMP Shares approximates the principal
amount and liquidation preference, respectively, because interest and
dividend rates payable on the Notes and MMP Shares are determined at
auctions and fluctuate with changes in interest rates.
MARKET AND NET ASSET VALUE INFORMATION
The Company's currently outstanding shares of common stock are, and the
Common Shares offered by this prospectus, subject to notice of issuance, will
be, listed on the NYSE. Shares of the Company's common stock commenced trading
on the NYSE on February 25, 2004.
The Company's common stock has a limited trading history and has traded
both at a premium and at a discount in relation to net asset value. Although the
Company's shares recently have been trading at a premium above net asset value,
there can be no assurance that this will continue after the offering or that the
shares will not again trade at a discount. The continued development of
alternatives to the Company as a vehicle for investment in a portfolio of energy
infrastructure MLPs, including other publicly traded investment companies and
private funds, may reduce or eliminate any tendency of the shares to trade at a
premium in the future or may result in the shares trading at a discount. Shares
of closed-end investment companies frequently trade at a discount from net asset
value. See "Risks--Market Discount Risk."
17
The following table sets forth for each of the periods indicated the
high and low closing market prices for shares of the Company on the NYSE, the
net asset value per share and the premium or discount to net asset value per
share at which the Company's shares were trading. Net asset value is generally
determined on the last business day of each calendar month. See "Net Asset
Value" for information as to the determination of the Company's net asset value.
PREMIUM/
(DISCOUNT)
TO NET
ASSET
MARKET PRICE(3) VALUE(2)
------------------ NET ASSET -------------
MONTH ENDED HIGH LOW VALUE(1) HIGH LOW
----------- ------ ------ -------- ---- -----
March 31, 2004......................... $26.00 $24.95 $23.77 9.4% 5.0%
April 30, 2004......................... 25.00 23.10 23.83 4.9% -3.1%
May 31, 2004........................... 24.20 21.99 22.84 6.0% -3.7%
June 30, 2004.......................... 24.00 22.45 22.67 5.9% -1.0%
July 31, 2004.......................... 24.19 22.74 23.25 4.0% -2.2%
August 31, 2004........................ 25.06 23.86 24.19 3.6% -1.4%
September 30, 2004..................... 26.60 24.98 24.38 9.1% 2.5%
October 31, 2004....................... 26.60 24.65 25.30 5.1% -2.6%
November 30, 2004 25.54
------------------
Source: Bloomberg Financial and Fund Accounting Records.
(1) Based on the net asset value calculated on the close of business on the
last business day of each prior calendar month.
(2) Calculated based on the information presented.
(3) Based on high and low closing market price for the respective month.
The last reported sale price, net asset value per share and percentage
premium to net asset value per share of the common stock on ________, 2004 were
$_____, $____ and ___%, respectively. As of October 31, 2004, the Company had
12,684,154 shares of common stock outstanding and net assets of the Company were
$323,966,194.
USE OF PROCEEDS
As of October 31, 2004, the Company had invested ____% of its total
assets. The net proceeds of the offering of Common Shares will be approximately
$___________ after payment of the underwriting discounts and commissions and
estimated offering costs. The Company will invest the net proceeds of the
offering in accordance with the Company's investment objective and policies as
described under "Investment Objective and Principal Investment Strategies" as
soon as practicable. It is presently anticipated that the Company will be able
to invest substantially all of the net proceeds of this offering in securities
of energy infrastructure companies that meet the Company's investment objective
and policies within approximately three months after the completion of the
offering. Whether the Company can meet this timeframe depends to a significant
degree on the availability of direct placement opportunities. Pending such
investment, it is anticipated that the proceeds will be invested in securities
issued by the U.S. government or its agencies or instrumentalities or in high
quality, short-term or long-term debt obligations. A delay in the anticipated
use of proceeds could lower returns and lower the Company's distribution for the
outstanding shares of common stock and the Common Shares offered hereby.
18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 2004, and as adjusted to give effect to the issuance of the Common
Shares offered hereby. As indicated below, common stockholders will bear the
offering costs associated with this offering.
ACTUAL AS ADJUSTED
------------ ------------
(UNAUDITED)
LONG-TERM DEBT:
Tortoise Notes, denominations of $25,000 or any multiple thereof*..... $110,000,000 $110,000,000
PREFERRED SHARES OUTSTANDING:
MMP Shares, $.001 par value per share, $25,000 stated value per share
at liquidation; 7,500 shares authorized/1,400 shares issued*....... $ 35,000,000 $ 35,000,000
COMMON STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value per share; 100,000,000 shares authorized;
12,684,154 shares outstanding and __________ shares
outstanding as adjusted, respectively*............................. $ 12,684
Additional paid-in capital............................................ $294,154,142
Undistributed net investment income................................... --
Accumulated net investment loss, net of ($54,682) deferred tax
benefit............................................................ --
Accumulated net realized loss from investments, net of deferred
tax benefit:....................................................... (88,778)
Net unrealized appreciation of investments............................ 29,942,828
------------
Net assets applicable to common stock................................. $323,966,194
------------------
* None of these outstanding shares/notes are held by or for the account
of the Company.
** As adjusted, additional paid-in capital reflects the proceeds of the
issuance of Common Shares ($__________) less $.001 par value per share
of common stock ($______), the underwriting commissions ($__________)
and less the estimated offering costs ($600,000) related to the
issuance of Common Shares in the amount of $_____ per share of common
stock.
19
THE COMPANY
The Company is a nondiversified, closed-end management investment
company registered under the 1940 Act which began operations in February 2004.
The Company was organized as a Maryland corporation on October 30, 2003,
pursuant to a charter (the "Charter") governed by the laws of the State of
Maryland. On February 27, 2004, the Company issued an aggregate of 11,000,000
shares of common stock, par value $0.001 per share, in an initial public
offering. On March 23, 2004 and April 8, 2004, the Company issued an additional
1,100,000 shares of common stock and 500,000 shares common stock, respectively,
in connection with the partial exercises by the underwriters of their
over-allotment option. The proceeds of the initial public offering and
subsequent exercises of the over-allotment option of common stock was
approximately $285,000,000 after the payment of offering expenses. On July 15,
2004, the Company issued $110,000,000 aggregate principal amount of Tortoise
Notes. On September 16, 2004, the Company issued 1,400 MMP Shares, liquidation
preference $25,000 per share ($35,000,000 in the aggregate). The Company's
common stock is listed on the NYSE under the symbol "TYG."
The following provides information about the Company's outstanding
securities as of October 31, 2004:
AMOUNT HELD
BY THE
COMPANY OR
AMOUNT FOR ITS AMOUNT
TITLE OF CLASS AUTHORIZED ACCOUNT OUTSTANDING
-------------------------------------------------------------- ---------- ------- -----------
Common Stock.................................................. 100,000,000 0 12,684,154
Tortoise Notes................................................
Series A................................................... $60,000,000 0 $60,000,000
Series B................................................... $50,000,000 0 $50,000,000
Preferred Shares (including MMP Shares)....................... 10,000,000 0 1,400
MMP Shares................................................. 7,500 0 1,400
INVESTMENT OBJECTIVE
The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to stockholders. For
purposes of the Company's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Company invests regardless of the tax character of the distributions. The
Company seeks to provide its stockholders with an efficient vehicle to invest in
a portfolio of MLPs. Similar to the tax characterization of cash distributions
made by MLPs to its unit holders, the Company believes that its stockholders
will have relatively high levels of the deferred taxable income associated with
cash distributions made by the Company to stockholders.
ENERGY INFRASTRUCTURE INDUSTRY
The Company concentrates its investments in the energy infrastructure
sector. The Company pursues its objective by investing principally in a
portfolio of equity securities issued by MLPs. 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. A more detailed
description of investment policies and restrictions and more detailed
information about portfolio investments are contained in the statement of
additional information.
Energy Infrastructure Companies. For purposes of the Company's policy
of investing 90% of total assets in securities of energy infrastructure
companies, an energy infrastructure company is one that
20
derives at least 50% of its revenues from "Qualifying Income" under Section 7704
of the Internal Revenue Code or one that derives at least 50% of its revenues
from the provision of services directly related to the generation of Qualifying
Income. Qualifying Income is defined as any income and/or gains from the
exploration, development, mining or production, processing, refining,
transportation (including pipelines transporting natural gas, oil or products
thereof), or the marketing or delivery of any mineral or natural resource
(including fertilizer, geothermal energy, and timber).
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 cause a reduction in revenue and
which could 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, the Company
invests at least 70% of its total assets in equity securities of MLPs that
derive at least 90% of their income from energy infrastructure operations and
are organized as partnerships, thereby eliminating income tax at the entity
level. The 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 partnership's
existence and then only converting to common if certain financial tests are met.
As a motivation for the general partner to successfully manage the MLP
and increase cash flows, the terms of most 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. The general partner's 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 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.
Energy infrastructure MLPs in which the Company invests can generally
be classified in the following categories:
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. 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 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
21
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 are distributors of propane to homeowners for
space and water heating. Revenue is derived 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 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
Clean Air Act standards have on coal-end users.
Although the Company also may invest in equity and debt securities of
energy infrastructure companies that are organized and/or taxed as corporations,
it is likely that any such investments will be in debt securities because the
equity dividends from such corporations typically do not meet the Company's
investment objective. The Company also may invest in securities of general
partners or other affiliates of MLPs and private companies operating energy
infrastructure assets.
INVESTMENT PROCESS
Under normal circumstances, the Company invests at least 90% of its
total assets (including assets obtained through leverage) in securities of
energy infrastructure companies. The 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. The Adviser's securities selection process
includes a comparison of quantitative, qualitative, and relative value factors.
Although the Adviser uses research provided by broker-dealers and investment
firms, primary emphasis is placed on proprietary analysis and valuation models
conducted and maintained by the Adviser's in-house investment analysts. To
determine whether a company meets its criteria, the Adviser generally looks 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. All of the public energy
infrastructure companies in which the Company invests have a market
capitalization greater than $100 million.
INVESTMENT POLICIES
The Company seeks to achieve its investment objective by investing
primarily in securities of MLPs that the Adviser believes offer attractive
distribution rates and capital appreciation potential. The Company also may
invest in other securities set forth below if the Adviser expects to achieve the
Company's objective with such investments.
The Company's policy of investing at least 90% of its total assets
(including assets obtained through leverage) in securities of energy
infrastructure companies is nonfundamental and may be changed by the Board of
Directors without stockholder approval, provided that stockholders receive at
least 60 days' prior written notice of any change.
22
The Company has adopted the following additional nonfundamental
policies:
o Under normal circumstances, the Company invests at least 70%
and up to 100% of total assets in equity securities issued by
MLPs. Equity units currently consist of common units,
convertible subordinated units, and pay-in-kind units.
o The Company may invest up to 30% of total assets in restricted
securities, primarily through direct placements. Subject to
this policy, the Company may invest without limitation in
illiquid securities. The types of restricted securities that
the Company may purchase include MLP convertible subordinated
units, unregistered MLP common units and securities of private
companies (i.e., non-MLPs). Investments in private companies
that do not have any publicly traded shares or units are
limited to 5% of total assets.
o The Company may invest up to 25% of total assets in debt
securities of energy infrastructure companies, including
certain securities rated below investment grade ("junk
bonds"). Below investment grade debt securities will be rated
at least B3 by Moody's 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 the Adviser.
o The Company will not invest more than 10% of total assets in
any single issuer.
o The Company will not engage in short sales.
Unless otherwise stated, all investment restrictions apply at the time
of purchase and the Company will not be required to reduce a position due solely
to market value fluctuations.
23
INVESTMENT SECURITIES
The types of securities in which the Company may invest include, but
are not limited to, the following:
Equity Securities of MLPs. Consistent with its investment objective,
the Company may invest up to 100% of its total assets in equity securities
issued by energy infrastructure MLPs, including common units, convertible
subordinated units and I-Shares. The table below summarizes the features of
these securities, and a further discussion of these securities follows:
CONVERTIBLE
COMMON UNITS SUBORDINATED UNITS I-SHARES
-------------------------- ---------------------- ----------------------------
VOTING RIGHTS.............. Limited to certain Same as common units No direct MLP voting rights
significant decisions; no
annual election of
directors
DIVIDEND PRIORITY.......... First right to minimum Second right to MQD; no Equal in amount and
quarterly distribution arrearage rights priority to common units
("MQD") specified in but paid in additional
Partnership Agreement; I-Shares at current market
arrearage rights value of I-Shares
DIVIDEND RATE.............. Minimum set in Partnership Equal in amount to common Equal in amount to common
Agreement; participate pro units; participate pro units
rata with subordinated rata with common units
units after both MQDs are above the MQD
met
TRADING.................... Listed on NYSE, AMEX and Not publicly traded Listed on NYSE
NASDAQ National Market
TAX TREATMENT.............. Ordinary income to the Same as common units Full distribution treated
extent of taxable income as return of capital;
allocated to holder; since distribution is in
tax-free return of capital shares, total basis is not
thereafter to extent of reduced
holder's basis; remainder
as capital gain
TYPE OF INVESTOR........... Retail; creates UBTI for Same as common units Institutional; does not
investment companies create UBTI; qualifying
tax-exempt investor; not income for regulated
qualifying income for companies
regulated investment
companies
LIQUIDITY PRIORITY......... Intended to receive return Second right to return of Same as common units
of all capital first capital; pro rata with (indirect right through
common units thereafter I-share issuer)
CONVERSION RIGHTS.......... None One-to-one ratio into None
common units
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 company's 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
24
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
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 partnership's
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.
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. The Company expects to purchase subordinated units in
direct placements from such persons. 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 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, they 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. 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 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.
MLP I-Shares. I-Shares represent an indirect investment in MLP I-units.
I-units are equity securities issued to 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
issuer's 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-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 MLPs and are not subject to
state filing obligations.
Debt Securities. The Company may invest up to 25% of its assets in debt
securities of energy infrastructure companies, including securities rated below
investment grade. The Company's debt securities may have fixed or variable
principal payments and all types of interest rate and dividend payment and reset
terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features. To the extent that the Company
invests in below investment grade debt securities, such securities will be
rated, at the time of investment, at least B- by S&P or B3 by Moody's or a
comparable rating by at least one other rating agency or, if unrated, determined
by the Adviser to be of comparable quality. If a security satisfies the
Company's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Company will not be required to dispose of
such security. If a downgrade occurs, the Adviser will consider what action,
including the sale of such security, is in the best interest of the Company and
its stockholders.
Because the risk of default is higher for below investment grade
securities than investment grade securities, the Adviser's research and credit
analysis is an especially important part of managing securities of this type.
The Adviser will attempt to identify those issuers of below investment grade
securities
25
whose financial condition the Adviser believes are adequate to meet future
obligations or have improved or are expected to improve in the future. The
Adviser's 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. The Company may invest up to 30% of total assets
in restricted securities, primarily through direct placements. 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 may also preclude a public offering of securities. MLP
convertible subordinated units are typically purchased from affiliates of the
issuer or other existing holders of convertible units rather than directly from
the issuer.
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 the
Company. However, the Company could sell such securities in privately negotiated
transactions with a limited number of purchasers or in public offerings under
the 1933 Act. MLP convertible subordinated units also convert to publicly traded
common units upon the passage of time and/or satisfaction of certain financial
tests.
Defensive and Temporary Investments. Under adverse market or economic
conditions or pending investment of offering or leverage proceeds, the Company
may invest up to 100% of its total assets in securities issued or guaranteed by
the U.S. government or its instrumentalities or agencies, 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 deemed by the Adviser to be consistent with a
defensive posture, or may hold cash. The Adviser also may invest in such
instruments 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. The yield on such securities may be lower than the returns
on MLPs or yields on lower rated fixed income securities. To the extent the
Company uses this strategy, it may not achieve its investment objective.
CONFLICTS OF INTEREST
Conflicts of interest may arise from the fact that the Adviser and its
affiliates carry on substantial investment activities for other clients, in
which the Company has no interest. The Adviser or its affiliates may have
financial incentives to favor certain of such accounts over the Company. Any of
their proprietary accounts and other customer accounts may compete with the
Company for specific trades. The Adviser or its affiliates may give advice and
recommend securities to, or buy or sell securities for the Company 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, those of the Company.
The Adviser evaluates 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: (i) the nature of the investment opportunity taken in the context of
the other investments at the time; (ii) the liquidity of the investment relative
to the needs of the particular entity or account; (iii) the availability of the
opportunity (i.e., size of obtainable position); (iv) the transaction costs
involved; and (v) the investment or regulatory limitations applicable to the
particular entity or account. Because these considerations may differ when
applied to the Company and relevant accounts under management in the context of
any particular investment opportunity, the investment
26
activities of the Company, on the one hand, and other managed accounts, on the
other hand, may differ considerably from time to time. In addition, the fees and
expenses of the Company differ from those of the other managed accounts.
Accordingly, stockholders should be aware that the future performance of the
Company and other accounts of the Adviser may vary.
Situations may occur when the Company could be disadvantaged because of
the investment activities conducted by the Adviser and its affiliates for its
other accounts. Such situations may be based on, among other things, the
following: (i) legal or internal restrictions on the combined size of positions
that may be taken for the Company or the other accounts, thereby limiting the
size of the Company's position; or (ii) the difficulty of liquidating an
investment for the Company or the other accounts where the market cannot absorb
the sale of the combined position. The Company's investment opportunities may be
limited by affiliations of the Adviser or its affiliates with energy
infrastructure companies.
Under the 1940 Act, the Company and its affiliates may be precluded
from co-investing in negotiated private placements of securities. The Company
may apply to the SEC for exemptive relief to permit the Company and its
affiliates to make such investments. Unless and until the Company obtains an
exemptive order, the Company will not co-invest with its affiliates in
negotiated private placement transactions.
The 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
behalf of the Company. As a result of differing trading and investment
strategies or constraints, positions may be taken by principals, officers,
employees, and affiliates of the Adviser that are the same as, different from,
or made at a different time than positions taken for the Company.
PORTFOLIO TURNOVER
The Company's annual portfolio turnover rate may vary greatly from year
to year. Although the Company cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 30% under normal circumstances. From
the commencement of operations through October 31, 2004, the Company's actual
portfolio turnover rate was less than 1%. However, portfolio turnover rate is
not considered a limiting factor in the execution of investment decisions for
the Company. A higher turnover rate results in correspondingly greater brokerage
commissions and other transactional expenses that are borne by the Company. High
portfolio turnover may result in the Company's recognition of gains that will
increase the Company's tax liability and thereby lower the after-tax
distributions of the Company. In addition, high portfolio turnover may increase
the Company's current and accumulated earnings profits, resulting in a greater
portion of the Company's distributions being treated as taxable dividends for
federal income tax purposes. See "Tax Matters."
LEVERAGE
The Company may borrow money, issue preferred stock, or issue other
senior securities to the extent permitted by the 1940 Act. These practices are
known as leverage. The Company has Tortoise Notes and MMP Shares outstanding in
an aggregate principal amount and liquidation preference representing 29.5% of
total assets as of October 31, 2004. The Company generally will not use leverage
unless it believes that leverage will serve the best interests of its
stockholders. The principal, although not exclusive, factor used in making this
determination is whether the potential return is likely to exceed the cost of
leverage. The Company also may borrow up to an additional 5% of its 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.
27
Under the 1940 Act, the Company is not permitted to incur indebtedness
constituting senior securities unless immediately thereafter the Company has
total assets (including the proceeds of the indebtedness) at least equal to 300%
of the amount of the indebtedness. Stated another way, the Company may not
borrow for investment purposes more than 33 1/3% of its total assets, including
the amount borrowed. The Company also must maintain this 300% "asset coverage"
for as long as the indebtedness is outstanding. The 1940 Act provides that the
Company may not declare any cash dividend or other distribution on its shares,
or purchase any of its shares of capital stock (through tender offers or
otherwise), unless it would satisfy this 300% asset coverage after deducting the
amount of the dividend, other distribution or share purchase price, as the case
may be. If the asset coverage for indebtedness declines to less than 300% as a
result of market fluctuations or otherwise, the Company may be required to sell
a portion of its investments when it may be disadvantageous to do so. Under the
1940 Act, the Company may only issue one class of senior securities representing
indebtedness. So long as Tortoise Notes are outstanding, additional senior
securities representing indebtedness must rank on a parity with Tortoise Notes.
Under the 1940 Act, the Company is not permitted to issue preferred
stock unless immediately after such issuance the total assets are at least 200%
of the liquidation value of the outstanding preferred stock. Stated another way,
the Company may not issue preferred stock that has an aggregate liquidation
value of more than 50% of its total assets (less liabilities and indebtedness),
including the amount leveraged. In addition, the Company is not permitted to
declare any cash dividend or other distribution on its common stock unless, at
the time of such declaration, the total assets less liabilities and indebtedness
(determined after deducting the amount of such dividend or distribution) is at
least 200% of such liquidation value. The Company may, as a result of market
conditions or otherwise, be required to purchase or redeem MMP shares, or sell a
portion of its investments when it may be disadvantageous to do so, in order
maintain asset coverage for MMP Shares or any other preferred stock of at least
200%. Common stockholders would bear the costs of an additional preferred stock
offering which would include offering expenses and the ongoing payment of
dividends. Under the 1940 Act, the Company may only issue one class of senior
securities representing equity. So long as MMP Shares are outstanding,
additional senior equity securities must rank on a parity with MMP Shares.
The Company may, but is not required to, hedge general interest rate
exposure arising from its use of leverage by entering into interest rate
transactions. Interest rate transactions are hedging transactions such as
interest rate swaps and the purchase of interest rate caps and floors. Interest
rate swaps involve the exchange by the Company with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed payments). The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor. The Company
uses interest rate transactions solely for the purpose of hedging its leveraged
capital structure. 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.
The Company has entered into an interest rate swap transaction that is
intended to hedge the Company's interest payment obligations under the Tortoise
Notes against material increases in interest rates through June 2007. The
Company's dividend payment obligations under the MMP Shares remain unhedged at
this time. See "Risks--Hedging Strategy Risk."
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EFFECTS OF LEVERAGE
On July 15, 2004, the Company issued Tortoise Notes (Series A) in an
aggregate principal amount of $60,000,000 and Tortoise Notes (Series B) in an
aggregate principal amount of $50,000,000. The aggregate principal amount of
Tortoise Notes represented 22.4% of total assets as of October 31, 2004. Asset
coverage with respect to Tortoise Notes was 395% as of that date. The interest
rate payable by the Company on both series of Tortoise Notes varies based on
auctions normally held every twenty-eight (28) days. As of October 31, 2004, the
current interest rate payable on Tortoise Notes Series A and Series B was 2.19%
and 2.20%, respectively. However, the Company has entered into an interest rate
swap agreement to protect itself from increasing interest expense on Tortoise
Notes resulting from increasing short-term interest rates. Under the terms of
outstanding swap agreements as of October 31, 2004, the Company is obligated to
pay a rate of 3.91% and 3.88%, respectively, on a notional amount of $60 million
for Series A Tortoise Notes and a notional amount of $50 million for Series B
Tortoise Notes.
On September 16, 2004, the Company issued 1400 MMP Shares with an
aggregate liquidation preference of $35,000,000. The aggregate liquidation
preference of MMP Shares represented 7.1% of total assets as of October 31,
2004. Asset coverage with respect to MMP Shares was 323% as of that date. The
dividend rate payable by the Company on MMP Shares varies based on auctions
normally held every twenty-eight (28) days. As of October 31, 2004, a dividend
rate of 2.32% was in effect for MMP Shares.
Assuming that the Company's leverage costs remain as described above
(an average annual cost of 3.51%) the annual return that the Company's
portfolio must experience (net of expenses) in order to cover its leverage costs
would be 2.20%.
The following table is designed to illustrate the effect of the
foregoing level of leverage on the return to a stockholder, assuming
hypothetical annual returns (net of expenses) of the Company's portfolio of -10%
to 10%. As the table shows, the leverage generally increases the return to
stockholders when portfolio return is positive and 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.
Assumed Portfolio Return (net of expenses)... (10)% (5)% 0% 5% 10%
Corresponding Common Share Return............ (17.9)% (10.6)% (3.4)% 3.9% 11.2%
While the Company is using leverage, the amount of the fees paid to the
Adviser for investment advisory and management services are higher than if the
Company did not use leverage because the fees paid are calculated based on the
Company's Managed Assets, which include assets purchased with leverage.
Therefore, the Adviser has a financial incentive to leverage the Company, which
may create a conflict of interest between the Adviser and the common
stockholders. Because payments on any leverage would be paid by the Company at a
specified rate, only the Company's common stockholders would bear the Company's
management fees and other expenses.
Any benefits of leverage cannot be fully achieved until the proceeds
resulting from the use of leverage have been invested in accordance with the
Company's investment objective and policies. For further information about
leveraging, see "Risks--Leverage Risk."
RISKS
General. The Company is a nondiversified, closed-end management
investment company designed primarily as a long-term investment vehicle and not
as a trading tool. An investment in the Company's Common Shares should not
constitute a complete investment program for any investor and
29
involves a high degree of risk. Due to the uncertainty in all investments, there
can be no assurance that the Company will achieve its investment objective.
Limited Operating History. The Company is a nondiversified, closed-end
management investment company which commenced operations in February 2004.
Delay in Use of Proceeds. Although the Company currently intends to
invest the proceeds of any sales of Common Shares as soon as practicable
following the closing, such investments may be delayed if suitable investments
are unavailable at the time or for other reasons or if the Company is unable to
secure firm commitments for direct placements. Due to the trading market and
volumes for MLPs, it may take the Company a period of time to accumulate
positions in certain securities. Because the market for MLP securities may at
times be less liquid than the market for many other securities, the Company may
be unable to obtain such securities within the time, and in the amount,
currently anticipated by the Company. As a result, the proceeds may be invested
in cash, cash equivalents, high-quality debt instruments, or other securities
pending investment in MLPs or securities of energy infrastructure companies. A
delay in the anticipated use of proceeds could lower returns and lower the
Company's distribution on the outstanding shares of common stock and the Common
Shares offered in this prospectus.
Energy Infrastructure Sector. Under normal circumstances, the Company
concentrates its investments in the energy infrastructure sector, with an
emphasis on securities issued by MLPs. Certain risks inherent in the energy
infrastructure business of these types of MLPs include the following:
o 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, the Adviser seeks high quality
MLPs that are able to mitigate or manage direct margin
exposure to commodity price levels. The MLP sector can be hurt
by market perception that MLPs performance and distributions
are directly tied to commodity prices.
o 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 the decline of
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.
o 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.
o A portion of any one MLP's assets may be dedicated to natural
gas reserves and other commodities that naturally deplete over
time, which could have a material adverse impact on an MLP's
ability to make distributions. Often the MLPs are dependent
upon exploration and development activities by third parties.
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
30
contracts. 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
received by the Company from MLPs that grow through
acquisitions.
o 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.
o 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 may also
increase an MLP's cost of capital. A higher cost of capital
could limit growth from acquisition/expansion projects and
limit MLP distribution growth rates.
o Since the September 11th 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 will likely increase volatility for prices in natural
gas and oil and could affect the market for products of MLPs.
o Holders of MLP units are subject to certain risks inherent in
the partnership structure of MLPs including (i) tax risks
(described below), (ii) limited ability to elect or remove
management, (iii) limited voting rights, except with respect
to extraordinary transactions, and (iv) conflicts of interest
of the general partner, including those arising from incentive
distribution payments.
Industry Specific Risk. Energy infrastructure companies are also
subject to risks that are specific to the industry they serve.
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 upon
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.
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 NGL products and natural gas
prices, resulting in lower processing margins.
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.
31
Propane MLP unit prices are based on safety in distribution coverage
ratios, interest rate environment and, to a lesser extent, distribution
growth.
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 are also
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.
Cash Flow Risk. The Company derives substantially all of its cash flow
from investments in equity securities of MLPs. The amount of cash that the
Company has available to distribute to stockholders depends entirely on the
ability of MLPs held by the Company to make distributions to its partners and
the tax character of those distributions. The Company has no control over the
actions of underlying MLPs. The amount of cash that each individual MLP can
distribute to its partners depends 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.
Tax Risk. The ability of the Company to meet its investment objective
depends on the level of taxable income and distributions of the MLPs in which it
invests. The Company has no control over the taxable income of underlying MLPs.
A significant slowdown in large energy companies' disposition of energy
infrastructure assets and other merger and acquisition activity in the energy
MLP industry could limit the appreciation potential of the Company. In addition,
such a slowdown by the MLPs in the Company's portfolio could accelerate the
Company's obligations to pay income taxes due in part to less accelerated
depreciation generated by new acquisitions. In such a case, the portion of the
Company's distributions that is treated as a return on capital will be reduced
and the portion treated as dividend income to the Company's stockholders will
increase, resulting in lower after-tax yields for the Company's investors.
Tax Law Change Risk. Future changes in tax laws or regulations, or
related interpretations of such laws and regulations, could adversely affect the
Company or MLPs, which could negatively impact the Company's stockholders and
the amount of distributions they receive from the Company. These changes could
include changes in the federal income tax rate applicable to qualifying
dividends. Historically, dividend income was taxed as ordinary income. In 2003,
legislation reduced the maximum federal income tax rate on qualifying dividends
to fifteen percent. The reduced rate on qualifying dividends is scheduled to
expire for tax years after 2008. In addition, legislative changes have been
considered that would make it easier for MLP interests to be owned by regulated
investment companies. If such legislation is enacted, the NAV of the Company may
be enhanced due to additional demand for MLP units; however, the relative value
of the Common Shares may be adversely affected, since a regulated investment
company generally is taxed as a flow-through entity.
Deferred Tax Risk. Historically, a substantial portion of the MLPs'
income has been offset by tax deductions. As a result, MLPs generally have made
cash flow payments that have significantly exceeded taxable income. This aspect
of MLPs, and the Company's use of leverage, will likely reduce the Company's
current income taxes and, concomitantly, increase the Company's cash
distributions to its stockholders. The Company accrues deferred income taxes for
the anticipated potential future income tax liability attributable to the MLP
cash flow distributions in excess of the related MLP taxable income reported by
the Company. In addition, the Company accrues deferred income tax with respect
to any
32
appreciation of interests in MLPs or other investments. If the amount of MLP
income tax deductions that may be claimed by the Company is smaller than
anticipated or the Company turns over its portfolio more rapidly than
anticipated, the Company will incur greater current income taxes. This may
reduce the Company's current cash flow distributions and the amount of assets
available to the Company for investment. Moreover, if the Company's taxable
income is greater, it is possible that a larger portion of the cash
distributions that it makes to stockholders will be treated as taxable
dividends, thus reducing the after-tax yield to stockholders.
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 issuer's 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 can also be affected
by fundamentals unique to the partnership or company, including earnings power
and coverage ratios.
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.
Because MLP convertible subordinated units generally convert into
common units on a one-to-one ratio, the price that the Company 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, and 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.
Leverage Risk. Borrowings or other transactions involving Company
indebtedness (other than for temporary or emergency purposes) and any preferred
stock issued by the Company are considered "senior securities" for purposes of
the 1940 Act and constitute leverage. The Company's use of leverage through the
issuance of Tortoise Notes, MMP Shares and other senior securities creates
risks. Leverage creates an opportunity for an increased return to common
stockholders, but it is a speculative technique that may adversely affect common
stockholders. If the return on securities acquired with leverage proceeds or
other borrowed funds does not exceed the cost of the leverage, the use of
leverage could cause the Company to lose money. Successful use of leverage
depends on the Adviser's 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.
Capital raised through leverage is subject to interest costs or
dividend payments, which could exceed the income and appreciation on the
securities purchased with the proceeds of the leverage. The issuance of senior
securities by the Company, in addition to the Tortoise Notes and MMP Shares,
would involve offering expenses and other costs, including interest payments,
which would be borne indirectly by the common stockholders. Fluctuations in
interest rates could increase interest or dividend payments on Tortoise Notes,
MMP Shares and other senior securities, and could reduce cash available for
dividends on common stock. Increased operating costs, including the financing
cost associated with any leverage, may reduce the Company's total return.
The 1940 Act and/or the rating agency guidelines of the outstanding
Tortoise Notes and MMP Shares impose on the Company asset coverage requirements,
dividend limitations, voting right
33
requirements (in the case of the MMP Shares), and restrictions on the Company's
portfolio composition and its use of certain investment techniques and
strategies. The terms of any additional notes or preferred stock issued by the
Company, 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 the Tortoise Notes
and MMP Shares. These requirements may have an adverse effect on the Company. To
the extent necessary, the Company intends to redeem Tortoise Notes and MMP
Shares to maintain the required asset coverage. Doing so may require the Company
to 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 the Adviser in managing the Company's portfolio in accordance with
the Company's investment objective and policies.
The premise underlying the use of leverage is that the costs of
leveraging generally is based on short-term rates, which normally are lower than
the return (including the potential for capital appreciation) that the Company
can earn on the longer-term portfolio investments that it makes with the
proceeds obtained through the leverage. Thus, the stockholders would benefit
from an incremental return. However, if the differential between the return on
the Company's investments and the cost of leverage were to narrow, the
incremental benefit would be reduced and could be eliminated or even become
negative. Accordingly, the costs of leveraging may exceed the return from the
portfolio securities purchased with the leveraged capital, which could reduce
the net asset value of the Company's common stock, including the Common Shares.
Furthermore, if long-term rates rise, the net asset value of the Company's
common stock will reflect the resulting decline in the value of a larger
aggregate amount of portfolio assets than the Company would hold if it had not
leveraged. Thus, leveraging exaggerates changes in the value of and in the yield
on the Company's portfolio. This, in turn, may result in greater volatility of
both the net asset value and the market price of the Company's common stock,
including the Common Shares.
To the extent the income or capital appreciation derived from
securities purchased with funds received from leverage exceeds the cost of
leverage, the Company's return will be greater than if leverage had not been
used. Conversely, if the income or capital appreciation from the securities
purchased with such funds is not sufficient to cover the cost of leverage, the
Company's return will be less than if leverage had not been used, and therefore
the amount available for distribution to stockholders as dividends and other
distributions will be reduced.
Hedging Strategy Risk. The Company currently uses, and may in the
future use, interest rate transactions for hedging purposes only, in an attempt
to reduce the interest rate risk arising from the Company's leveraged capital
structure. Interest rate transactions that the Company may use for hedging
purposes expose the Company to certain risks that differ from the risks
associated with its portfolio holdings. There are economic costs of hedging
reflected in the price of interest rate swaps, 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, the Company's success in
using hedging instruments is subject to the Adviser's ability to predict
correctly changes in the relationships of such hedging instruments to the
Company's leverage risk, and there can be no assurance that the Adviser's
judgment in this respect will be accurate. Consequently, the use of hedging
transactions might result in a poorer overall performance for the Company,
whether or not adjusted for risk, than if the Company had not engaged in such
transactions.
Depending on the state of interest rates in general, the Company's use
of interest rate transactions could enhance or decrease Distributable Cash Flow
available to holders of common stock. 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 the net asset value of the common stock. In addition, if
the counterparty to an interest rate
34
swap or cap defaults, the Company would not be able to use the anticipated net
receipts under the interest rate swap or cap to offset the Company's cost of
financial leverage.
Competition Risk. At the time the Company completed its initial public
offering in February 2004, it was the only publicly traded investment company
offering access to a portfolio of energy infrastructure MLPs. Since that time a
limited number of other alternatives to the Company as a vehicle for investment
in a portfolio of energy infrastructure MLPs, including other publicly traded
investment companies and private funds, have been developed. In addition, recent
tax law changes or future tax law changes may increase the ability of regulated
investment companies or other institutions to invest directly in MLPs. These
competitive conditions may adversely impact the Company's ability to make
investments in the MLP market and could adversely impact the Company's
distributions to common stockholders.
Restricted Securities. The Company may invest up to 30% of total assets
in restricted securities, primarily through direct placements. 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 the Company.
However, the Company could sell such securities in privately negotiated
transactions with a limited number of purchasers or in public offerings under
the Securities Act of 1933. MLP convertible subordinated units also convert into
publicly traded common units upon the passage of time and/or satisfaction of
certain financial tests.
Restricted securities are subject to statutory and contractual
restrictions on their public resale, which may make it more difficult to value
them, may limit the Company's ability to dispose of them and may lower the
amount the Company could realize upon their sale. To enable the Company to sell
its holdings of a restricted security not registered under the 1933 Act, the
Company may have to cause those securities to be registered. The expenses of
registering restricted securities may be negotiated by the Company with the
issuer at the time the Company buys the securities. When the Company must
arrange registration because the Company wishes 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 the Company could sell
it. The Company would bear the risks of any downward price fluctuation during
that period.
Liquidity Risk. Although common units of MLPs trade on the NYSE, 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 the Company 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 the Company believes it is desirable to do so. These securities are
also more difficult to value, and the Adviser's judgment as to value will often
be given greater weight than market quotations, if any exist. Investment of the
Company's capital in securities that are less actively traded or over time
experience decreased trading volume may restrict the Company's ability to take
advantage of other market opportunities.
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 will ordinarily be determined based on fair valuations
determined by the Adviser pursuant to procedures adopted by the Board of
Directors. Similarly, direct placements of common units will be based on fair
value determinations because of their restricted nature; however, the Adviser
expects that such values will be based on a
35
discount from publicly available market prices. Restrictions on resale or the
absence of a liquid secondary market may adversely affect the ability of the
Company to determine its net asset value. The sale price of securities that are
not readily marketable may be lower or higher than the Company's most recent
determination of their fair value. Additionally, the value of these securities
typically requires more reliance on the judgment of the 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, the Company may not be able to realize these
securities' true value, or may have to delay their sale in order to do so. In
addition, the Company relies to some extent on information provided by MLPs to
estimate taxable income allocable to MLP units held by the Company and to
estimate associated deferred tax liability. See "Net Asset Value."
Interest Rate Risk. Generally, when market interest rates rise, the
values of debt securities decline, and vice versa. The Company's investment in
such securities means that the net asset value and market price of the Common
Shares 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 the Company 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.
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, the
Company could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower-rated or unrated securities,
under these circumstances, may be less than the prices used in calculating the
Company's net asset value.
Because investors generally perceive that there are greater risks
associated with lower quality securities of the type in which the Company may
invest a portion of its 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.
36
Factors having an adverse impact on the market value of below
investment grade securities may have an adverse effect on the Company's net
asset value and the market value of its common stock. In addition, the Company
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, the Company may be required to foreclose on an issuer's
assets and take possession of its property or operations. In such circumstances,
the Company would incur additional costs in disposing of such assets and
potential liabilities from operating any business acquired.
Management Risk. The Adviser was formed in October 2002 to provide
portfolio management services to institutional and high-net worth investors
seeking professional management of their MLP investments. The Adviser has been
managing the Company since it began operations in February 2004. The Adviser
relies on the officers, employees, and resources of Fountain Capital, KCEP and
their affiliates for certain functions. Three of the five members of the
investment committee are affiliates of, but not employees of, the Adviser, and
each have other significant responsibilities with such affiliated entities.
Fountain Capital, KCEP and their affiliates conduct businesses and activities of
their own in which the Adviser has no economic interest. If these separate
activities become significantly greater than the Adviser's activities, there
could be material competition for the efforts of key personnel.
Nondiversification. The Company is a nondiversified, closed-end
management investment company under the 1940 Act and is 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 held by the Company. There currently are
approximately fifty-five (55) companies presently organized as MLPs and only a
limited amount of those companies operate energy infrastructure assets. The
Company selects MLP investments from this small pool of issuers. The Company may
invest in non-MLP securities issued by energy infrastructure companies to a
lesser degree, consistent with its investment objective and policies.
Market Discount Risk. The Company's common stock has a limited trading
history and has traded both at a premium and at a discount in relation to net
asset value. The public offering price for the Common Shares represents a __%
premium over the per share net asset value on ________, 2004, there can be no
assurance that this premium will continue after this offering or that the shares
will not again trade at a discount. Shares of closed-end investment companies
frequently trade at a discount from net asset value, but in some cases have
traded above net asset value. Continued development of alternatives to the
Company as a vehicle for investment in MLP securities may contribute to reducing
or eliminating any premium or may result in the 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 the Company's net asset value as a result of
investment activities. Depending on the premium of the Company's common stock,
the Company's net asset value may be reduced immediately following this offering
by the offering costs for Common Shares, which will be borne entirely by the
Company.
Whether stockholders will realize a gain or loss upon the sale of the
Company's common stock depends upon whether the market value of the shares at
the time of sale is above or below the price the stockholder paid, taking into
account transaction costs for the shares, and is not directly dependent upon the
Company's net asset value. Because the market value of the Company's 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
the control of the Company, the Company cannot predict whether its common stock
will trade at, below or above net asset value, or below or above the public
offering price for the Common Shares.
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; war, such as the
37
war in Iraq and its aftermath; 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. The Company's Charter and Bylaws include
provisions that could delay, defer or prevent other entities or persons from
acquiring control of the Company, causing it to engage in certain transactions
or modifying its structure. These provisions may be regarded as "anti-takeover"
provisions. Such provisions could limit the ability of 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 the Company. See "Certain
Provisions in the Company's Charter and Bylaws."
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The business and affairs of the Company are managed under the direction
of the Board of Directors. Accordingly, the Company's Board of Directors
provides broad supervision over the affairs of the Company, including
supervision of the duties performed by the Adviser. The officers of the Company
are responsible for the Company's day-to-day operations. The names and business
addresses of the directors and officers of the Company, together with their
principal occupations and other affiliations during the past five years, are set
forth in the statement of additional information. The Board of Directors of the
Company consists of a majority of directors who are not interested persons (as
defined in the 1940 Act) of the Adviser or its affiliates.
INVESTMENT ADVISER
Pursuant to an Advisory Agreement, the Adviser provides the Company
with investment research and advice and furnishes the Company with an investment
program consistent with the Company's investment objective and policies, subject
to the supervision of the Board. The 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 the Company's
securities transactions and reports to the Board on the Company's investments
and performance.
The Adviser is located at 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210. The Adviser specializes in managing portfolios of MLPs and
other energy infrastructure companies. The Adviser was formed in October 2002 to
provide portfolio management services to institutional and high net worth
investors seeking professional management of their MLP investments. The Adviser
is controlled equally by Fountain Capital Management, L.L.C. ("Fountain
Capital") and Kansas City Equity Partners LC ("KCEP"). As of October 31, 2004,
the Adviser had approximately $581 million of client assets under management.
Affiliates of the Adviser have an additional $___ million of energy
infrastructure investment assets under management. The Adviser's investment
committee is comprised of five seasoned portfolio managers led by David J.
Schulte, CFA.
Fountain Capital was formed in 1990 and is focused primarily on
providing investment advisory services to institutional investors with respect
to below investment grade debt. Fountain Capital had $____ billion of client
assets under management as of October 31, 2004. Atlantic Asset Management LLC
("Atlantic") is a minority owner, and an affiliate, of Fountain Capital.
Atlantic was formed in 1992 and provides, directly or through affiliates, a
variety of fixed-income investment advisory services including investment grade
bond and high-yield bond strategies, investment grade collateralized debt
obligations and mortgage hedge funds. Including Fountain Capital, the Atlantic
group had approximately $____ billion in assets under management as of October
31, 2004. KCEP was formed in 1993 and is
38
focused solely on managing two private equity funds, which have had combined
committed capital of $110 million. KCEP focuses on private equity investments in
the consumer, telecom/media and natural resource distribution and services
industries.
The Adviser relies on the officers, employees, and resources of certain
affiliated entities for certain functions. Three of the five members of the
investment committee of the Adviser are affiliates of, but not employees of, the
Adviser. Each member of the investment committee has other significant
responsibilities with such affiliated entities. The affiliated entities conduct
businesses and activities of their own in which the Adviser has no economic
interest. If these separate activities become significantly greater than the
Adviser's activities, there could be material competition for the efforts of key
personnel.
The investment management of the Company's 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.
David J. Schulte. Mr. Schulte is a Managing Director of KCEP
and a Manager of the Adviser. Mr. Schulte focuses on acquisition
financings primarily for natural resource distribution and service
companies. 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
earned his CFA designation in 1992, and is a member of the Corporate
Governance Task Force of the CFA Institute.
H. Kevin Birzer. Mr. Birzer is a Partner/Senior Analyst with
Fountain Capital and a Manager of the Adviser. Mr. Birzer, who has 20
years of investment experience including 16 in high-yield securities,
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 magna cum laude 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 is a Partner/Senior Analyst with
Fountain Capital and a Manager of the Adviser. Mr. Hamel joined
Fountain in 1997. He covers energy, chemicals and utilities. Prior to
joining Fountain, Mr. Hamel worked for the Federal Deposit Insurance
Corporation 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 joined Fountain Capital as an
Investment Analyst in 2002 and is a Manager of the Adviser. Prior to
joining Fountain Capital, Mr. Malvey was one of three members of the
Global Office of Investments for GE Capital's 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 magna cum
laude with a Bachelor of Science degree in Finance from Winona State
University, Winona, Minnesota. He received his CFA designation in 1996.
39
Terry C. Matlack. Mr. Matlack is a Managing Director of KCEP
and a Manager of the Adviser. Prior to joining KCEP in 2001, Mr.
Matlack was President of GreenStreet Capital and its affiliates in the
telecommunications service industry. 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.
COMPENSATION AND EXPENSES
Under the Advisory Agreement, the Company pays to the Adviser
quarterly, as compensation for the services rendered by it, a fee equal on an
annual basis to 0.95% of the Company's average monthly Managed Assets. Managed
Assets means the total assets of the Company (including any assets attributable
to leverage that may be outstanding) minus accrued liabilities other than (1)
deferred taxes, (2) debt entered into for the purpose of leverage and (3) the
aggregate liquidation preference of any outstanding preferred stock. Because the
fee paid to the Adviser is determined on the basis of the Company's Managed
Assets, the Adviser's interest in determining whether to leverage the Company
may conflict with the interests of the Company. The Company's 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 Adviser has contractually agreed to
waive or reimburse the Company for fees and expenses, including the investment
advisory fee and other expenses in the amount of 0.23% of average monthly
Managed Assets through February 28, 2006 and 0.10% of average monthly Managed
Assets through February 28, 2009.
The Company bears all expenses not specifically assumed by the Adviser
incurred in the Company's operations and will bear the expenses related to the
offering of the Common Shares. Expenses borne by the Company include, but are
not limited to, the following: (1) expenses of maintaining the Company and
continuing its existence, (2) registration of the Company 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 behalf of the Company, (4) auditing, accounting and legal
expenses, (5) taxes and interest, (6) governmental fees, (7) expenses of listing
shares of the Company with a stock exchange, and expenses of issue, sale,
repurchase and redemption (if any) of interests in the Company, including
expenses of conducting tender offers for the purpose of repurchasing Company
interests, (8) expenses of registering and qualifying the Company and its shares
under federal and state securities laws and of preparing and filing registration
statements and amendments for such purposes, (9) expenses of reports and 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 the
Company (including without limitation safekeeping of funds, securities and other
investments, keeping of books, accounts and records, and determination of net
asset values), (14) fees, expenses and disbursements of transfer agents,
dividend and interest paying agents, stockholder servicing agents and registrars
for all services to the Company, (15) compensation and expenses of directors of
the Company who are not members of the Adviser's organization, (16) pricing and
valuation services employed by the Company, (17) all expenses incurred in
connection with leveraging of the Company's assets through a line of credit,
indebtedness or issuing and maintaining preferred stock, (18) all expenses
incurred in connection with the organization of the Company and the
40
initial public offering of the Company's common stock and this offering of
common stock, and (19) such non-recurring items as may arise, including expenses
incurred in connection with litigation, proceedings and claims and the
obligation of the Company to indemnify its directors, officers and stockholders
with respect thereto.
DISTRIBUTIONS
DISTRIBUTION POLICY
The Company intends to pay out substantially all of its DCF to holders
of common stock through quarterly distributions. DCF is the amount received by
the Company as cash or paid-in-kind distributions from MLPs or their affiliates
and interest payments received on debt securities owned by the Company, less
current or anticipated operating expenses, taxes on Company taxable income, and
leverage costs paid by the Company. The Board of Directors has adopted a policy
to target distributions to common stockholders in an amount of at least 95% of
DCF on an annual basis. It is expected that the Company will declare and pay a
distribution to holders of common stock at the end of each fiscal quarter
beginning, with respect to the Common Shares offered in this prospectus, with
the quarter ending February 28, 2005. All realized capital gains, if any, net of
applicable taxes, will be retained by the Company. Unless a stockholder elects
to receive distributions in cash, the distributions will be used to purchase
additional common stock of the Company. The tax status of distributions is the
same whether they are reinvested in shares of the Company or received in cash.
See "Automatic Dividend Reinvestment Plan."
The yield on Common Shares will likely vary from period to period
depending on factors including market conditions, the timing of the Company's
investments in portfolio securities, the securities comprising the Company's
portfolio, changes in interest rates (including changes in the relationship
between short-term rates and long-term rates), the amount and timing of the use
of borrowings and other leverage by the Company, the effects of leverage on the
Common Shares (discussed above under "Leverage"), the timing of the investment
of offering proceeds and leverage proceeds in portfolio securities and the
Company's net assets and its operating expenses. Consequently, the Company
cannot guarantee any particular yield on the Common Shares, and the yield for
any given period is not an indication or representation of future yields on the
Common Shares.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
If a stockholder's shares are registered directly with the Company or
with a brokerage firm that participates in the Company's Automatic Dividend
Reinvestment Plan (the "Plan"), all distributions are automatically reinvested
for stockholders by the Plan Agent, Computershare Investors Services, LLC
("Computershare"), in additional shares of common stock of the Company (unless a
stockholder is ineligible or elects otherwise). 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 Computershare, as
dividend paying agent. Such stockholders may elect not to participate in the
Plan and to receive all distributions in cash by sending written instructions to
Computershare, as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by giving notice in writing to the Plan
Agent; such termination will be effective with respect to a particular
distribution if notice is received prior to such record date.
Whenever the Company declares 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 amount in shares of common stock. The
shares are acquired by the Plan Agent for the participant's account, depending
upon the circumstances described below, either (i) through receipt of additional
common stock
41
from the Company ("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 net asset value per share of the common
stock is equal to or less than the market price per share of common stock plus
estimated brokerage commissions (such condition being referred to herein as
"market premium"), the Plan Agent will receive Additional Common Stock from the
Company for each participant's account. The number of Additional Common Stock to
be credited to the participant's account will be determined by dividing the
dollar amount of the distribution by the greater of (i) the net asset value 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 net asset value per shares of common stock
exceeds the market price plus estimated brokerage commissions (such condition
being referred to herein as "market discount"), the Plan Agent has until the
last business day before the next date on which the shares trade on an
"ex-dividend" basis or in no event more than 90 days after the payment date
("last purchase date") to invest the distribution amount in shares acquired in
open-market purchases. The Company expects to declare and pay quarterly
distributions. Therefore, the period during which open-market purchases can be
made will exist only from the payment date on the distribution through the date
before the next ex-dividend date. 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.
If, before the Plan Agent has completed its open-market purchases, the market
price of a share of common stock exceeds the net asset value per share, the
average per share purchase price paid by the Plan Agent may exceed the net asset
value of the Company's shares, resulting in the acquisition of fewer shares than
if the distribution had been paid in Additional Common Stock on the payment
date. Because of the foregoing difficulty with respect to open-market purchases,
the Plan provides that if the Plan Agent is unable to invest the full
distribution amount in open-market purchases during the purchase period or if
the market discount shifts to a market premium during the purchase period, the
Plan Agent will cease making open-market purchases and will invest the
uninvested portion of the distribution amount in Additional Common Stock at the
close of business on the last purchase date.
The Plan Agent maintains all stockholders' accounts in the Plan and
furnishes written confirmation of each acquisition made for the participant's
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 Agent's name or that of its
nominee, and each stockholder's 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 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 are no brokerage charges with respect to shares issued directly
by the Company 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 Agent's 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 common stock and remit the proceeds, such
participant will be charged his or her pro rata share of brokerage commissions
on the shares sold.
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 "Tax Matters."
42
Stockholders participating in the Plan may receive benefits not
available to stockholders not participating in the Plan. If the market price
plus commissions of the Company's shares of common stock is higher than the net
asset value, participants in the Plan will receive shares of common stock of the
Company 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 net asset value, participants will receive distributions of shares of
common stock with a net asset value greater than the value of any cash
distribution they would have received on their shares. However, there may be
insufficient shares available in the market to make distributions in shares at
prices below the net asset value. Also, because the Company does not redeem its
shares, the price on resale may be more or less than the net asset value. See
"Tax Matters" for a discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves 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 the Company 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 common stock to be delivered to him or her. If
preferred, a participant may request the sale of all of the 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 the brokerage commissions incurred
for the transaction. If a participant has terminated his or her participation in
the Plan but continues to have 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 the Company at any time, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Commission or any
other regulatory authority, only by mailing to each participant appropriate
written notice at least 30 days prior to the effective date thereof. 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 participant's 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 the Company.
All correspondence concerning the Plan should be directed to
Computershare at Two North LaSalle Street, Chicago, Illinois 60602.
CLOSED-END COMPANY STRUCTURE
The Company is a nondiversified, closed-end management investment
company (commonly referred to as a closed-end fund) which began operations in
February 2004. Closed-end companies differ from open-end companies (which are
generally referred to as mutual funds) in that closed-end companies generally
list their shares for trading on a stock exchange and do not redeem their shares
at the request of the stockholder. This means that if a stockholder wishes to
sell shares of a closed-end company, he or she must trade them on the market
like any other stock at the prevailing market price at that time. In a mutual
fund, if the stockholder wishes to sell shares of the company, the mutual fund
will redeem or buy back the shares at net asset value. Also, mutual funds
generally offer new shares on a continuous basis to new investors, and
closed-end companies generally do not. The continuous inflows and outflows of
assets in a mutual fund can make it difficult to manage the company's
investments. By comparison, closed-end companies are generally able to stay more
fully invested in securities that are consistent with their
43
investment objectives and also have greater flexibility to make certain types of
investments and to use certain investment strategies, such as financial leverage
and investments in illiquid securities.
Shares of closed-end companies frequently trade at a discount to their
net asset value. This characteristic of shares of closed-end management
investment companies is a risk separate and distinct from the risk that the
Company's net asset value may decrease as a result of investment activities. To
the extent the Common Shares do trade at a discount, the Company's 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 net asset value per share resulting from such purchases against the decrease
in the assets of the Company and potential increase in the expense ratio of
expenses to assets of the Company. The Board of Directors believes that in
addition to the beneficial effects described above, any such purchases 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 Company's Board of Directors will decide to engage in any of
these actions. There is also no guarantee or assurance that such actions, if
undertaken, would result in the shares trading at a price equal or close to net
asset value per share. Conversion of the Company to an open-end mutual fund is
extremely unlikely and would require an amendment to the Company's Charter.
TAX MATTERS
The following is a general summary of certain federal tax
considerations affecting the Company and its stockholders. This discussion does
not purport to be complete or to deal with all aspects of federal income
taxation that may be relevant to stockholders 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 and certain tax-deferred accounts, and foreign
investors. Unless otherwise noted, this discussion assumes that stockholders are
U.S. persons and hold Common Shares as capital assets. More detailed information
regarding the tax consequences of investing in the Company is in the statement
of additional information.
Company Federal Income Taxation. The Company is treated as a
corporation for federal and state income tax purposes. Thus, the Company is
obligated to pay federal and state income tax on its taxable income. The Company
invests its assets primarily in MLPs, which generally are treated as
partnerships for federal income tax purposes. As a partner in the MLPs, the
Company must report its allocable share of the MLP's taxable income in computing
its taxable income. Based upon the Company's review of the historic results of
the type of MLPs in which the Company invests, the Company expects that the cash
flow received by the Company with respect to its MLP investments will exceed the
taxable income allocated to the Company. There is no assurance that the
Company's expectation regarding the tax character of MLP distributions will be
realized. If this expectation is not realized, there will be greater tax expense
borne by the Company and less cash available to distribute to stockholders. In
addition, the Company will take into account in its taxable income 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. The Company may
be subject to a 20 percent alternative minimum tax on its alternative minimum
taxable income to the extent that the alternative minimum tax exceeds the
Company's regular income tax.
The Company is not treated as a regulated investment company under 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. The Company's assets
and expected income 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
44
taxation rules have no application to the Company or to stockholders of the
Company. Recent changes to the federal tax laws permit regulated investment
companies to invest up to 25% of their total assets in MLPs. Such changes would
not allow the Company to pursue its objective. Accordingly, the Company does not
intend to change its tax status as a result of such legislation.
Stockholder Federal Income Taxation. Unlike a holder of a direct
interest in MLPs, a stockholder will not include its allocable share of the
Company's income, gains, losses or deductions in computing its own taxable
income. The Company expects to distribute to its common stockholders at least
95% of DCF. The Company's distribution of its DCF will be treated as a taxable
dividend income to the stockholder to the extent of the Company's current or
accumulated earnings and profits allocable to the shares held by the
stockholder. If the distribution exceeds the earnings and profits, the
distribution is treated as a tax-free return of capital to the stockholder to
the extent of the stockholder's basis in the shares of common stock, and then as
capital gain. Stockholders will receive a Form 1099 from the Company (rather
than a Form K-1 from each MLP if an investor invested directly in the MLPs) and
will recognize dividend income only to the extent of the Company's current or
accumulated earnings and profits.
Generally, a corporation's earnings and profits are computed based upon
taxable income, with certain specified adjustments. As explained above, based
upon the historic performance of the MLPs, the Company anticipates that the
distributed cash from the MLPs will exceed the Company's share of the MLP income
and the Company's gain on the sale of MLP interests. Thus, the Company
anticipates that only a portion of distributions of DCF will be treated as
dividend income to its stockholders. In addition, earnings and profits are
treated generally, for federal income tax purposes, as first being used to pay
distributions on the MMP Shares, and then to the extent remaining, if any, to
pay distributions on the common stock. To the extent that distributions to a
stockholder exceed the Company's earnings and profits, a stockholder's basis in
shares of common stock will be reduced and, if a stockholder has no further
basis in its shares, a stockholder will report any excess as capital gain.
The Jobs Growth and Tax Relief Reconciliation Act of 2003 amended the
federal income tax law generally to reduce the maximum federal income tax rate
of qualifying dividend income to the rate applicable to long-term capital gains,
which is generally fifteen percent. The portion of the Company's distributions
of DCF treated as a dividend for federal income tax purposes should be treated
as a qualifying dividend for federal income tax purposes. This rate of tax on
dividends is currently scheduled to increase back to ordinary income rates after
December 31, 2008.
If a stockholder participates in the Company's automatic dividend
reinvestment plan, such stockholder will be taxed upon the amount of
distributions as if such amount had been received by the participating
stockholder and the participating stockholder reinvested such amount in
Additional Common Stock.
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 the Company. 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 UBTI. Because the Company is a corporation for federal income tax
purposes, an owner of Common Shares will not report on its federal income tax
return any of the Company's items of income, gain, loss and deduction.
Therefore, a tax-exempt investor generally will not have UBTI attributable to
its ownership or sale of common stock, including Common Shares, unless its
ownership of the common stock is debt-financed. In general, common stock would
be debt-financed if the tax-exempt owner of common stock incurs debt to acquire
common stock or otherwise incurs or maintains a debt that would not have been
incurred or maintained if the common stock had not been acquired.
45
For federal income tax purposes, a regulated investment company, or
"mutual fund," is required to derive 90% or more of its gross income from
interest, dividends and gains from the sale of stocks or securities or foreign
currency or specified related sources. As stated above, an owner of common stock
will not report on its federal income tax return any of the Company's items of
income, gain, loss and deduction. Instead, the owner will simply report income
with respect to the Company's distributions or gain with respect to the sale of
common stock. Thus, ownership of common stock will not result in income that is
not qualifying income for a mutual fund. Furthermore, any gain from the sale or
other disposition of the common stock, and the associated purchase and exchange
rights, will constitute gain from the sale of stock or securities and will
qualify for purposes of the 90% test applicable to mutual funds. Finally, common
stock, and the associated purchase and exchange rights, will constitute
qualifying assets to mutual funds, which also must own at least 50% of
qualifying assets at the end of each quarter.
Sale of the Common Stock. Upon sale of the Company's common stock,
including Common Shares, a stockholder generally will recognize capital gain or
loss measured by the difference between the sales proceeds received and the
stockholder's federal income tax basis of common stock sold. Generally, such
capital gain or loss will be long-term capital gain or loss if common stock was
held as a capital asset for more than twelve months.
Backup Withholding and Information Reporting. Backup withholding of
U.S. federal income tax may apply to the distributions of DCF to be made by the
Company if a stockholder fails to timely provide taxpayer identification numbers
or if the Company is so instructed by the Internal Revenue Service ("IRS"). Any
amounts withheld from a payment to a U.S. holder under the backup withholding
rules are allowable as a refund or credit against the holder's U.S. federal
income tax, provided that the required information is furnished to the IRS in a
timely manner.
State and Local Taxes. Company distributions also may be subject to
state and local taxes.
Tax matters are very complicated, and the federal tax consequences of
an investment in and holding of the Common Shares will depend on the facts of
each investor's situation. Investors are encouraged to consult their own tax
advisers regarding the specific tax consequences that may affect such investors.
NET ASSET VALUE
The Company computes its net asset value for its 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. The Company makes its net asset value
available for publication monthly. For purposes of determining the net asset
value of a share of the Company's common stock, the net asset value of the
Company will equal the value of the total assets of the Company (the value of
the securities the Company holds plus cash or other assets, including interest
accrued but not yet received) less (i) all of its liabilities (including accrued
expenses and both current and deferred income taxes), (ii) accumulated and
unpaid dividends on any outstanding preferred shares, (iii) the aggregate
liquidation preference of any outstanding preferred shares, (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 the Company's common stock. The net asset value per share of common
stock will equal the net asset value of the Company 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 values the
assets in the Company's portfolio in accordance
46
with Valuation Procedures adopted by the Board of Directors. The Accounting
Services Provider obtains securities market quotations from independent pricing
services approved by the Adviser and ratified by the Board of Directors.
Securities for which market quotations are readily available shall be valued at
"market value." Any other securities shall be valued at "fair value."
Valuation of certain assets at market value will be as follows. 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 updated sale price or 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 of futures
contracts, the Accounting Services Provider will use readily available market
quotations. If no sales are reported on any exchange or OTC market, the
Accounting Services Provider will use the calculated mean based on bid and asked
prices obtained from the primary exchange or OTC market. Other assets will be
valued at market value pursuant to the Valuation Procedures.
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.
A report of any prices determined pursuant to fair value methodologies will be
presented to the Board of Directors or a designated committee thereof at the
next regularly scheduled Board meeting.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue up to 100,000,000 shares of common
stock, $.001 par value per share ("common stock"), and up to 10,000,000 shares
of preferred stock, $.001 par value per share ("preferred stock"). As of October
31, 2004, the Company had 12,684,154 shares of common stock outstanding and
1,400 shares of preferred stock outstanding. The Board of Directors may, without
any action by the stockholders, amend the Company's 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 the Company has authority to issue.
Additionally, the Charter authorizes the Board of Directors, without any action
by the stockholders, to classify and reclassify any unissued common stock and
preferred stock into other classes or series of stock from time to time by
setting or changing the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each class or series.
Although there is no present intention of doing so, the Company could issue a
class or series of stock that could delay, defer or prevent a transaction or a
change in control of the Company that might otherwise be in the shareholders'
best interests. Under Maryland law, stockholders generally are not liable for
Company debts or obligations.
COMMON STOCK
All Common Shares offered by this prospectus will be duly authorized,
fully paid and nonassessable. Holders of shares of common stock, including
Common Shares, are entitled to receive distributions when authorized by the
Board of Directors and declared 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 the Company's securities. All shares of common
stock have equal distribution, liquidation and other rights.
47
Limitations on Distributions. So long as Tortoise Notes or other senior
securities representing indebtedness are outstanding, holders of shares of
common stock will not be entitled to receive any distributions from the Company
unless all accrued interest on such senior indebtedness has been paid, 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.
So long as MMP Shares or other shares of preferred stock are
outstanding, holders of shares of common stock will not be entitled to receive
any distributions from the Company unless all accumulated dividends on preferred
stock have been paid, 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."
Distribution Rights. Holders of shares of common stock 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 Tortoise Notes or other borrowings and any interest accrued thereon.
These rights are subject to the preferential rights of any other class or series
of the Company's capital stock, including the MMP 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. The 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 capital 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 capital 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 MMP Shares have the right to elect two
directors at all times. Pursuant to the Charter and Bylaws, the Board of
Directors may amend the Bylaws to alter the vote required to elect directors.
The Charter provides for approval of certain extraordinary transactions
by the stockholders entitled to cast at least a majority of the votes entitled
to be cast on the matter. The Charter also provides that any proposal to convert
the Company from a closed-end investment company to an open-end investment
company or any proposal to liquidate or dissolve the Company requires the
approval of the stockholders entitled to cast at least 80 percent of the votes
entitled to be cast on such matter. However, if such a proposal is approved by
at least two-thirds of the continuing directors (in addition to approval by the
full Board of Directors), such proposal may be approved by a majority of the
votes entitled to be cast on such matter. The "continuing directors" are defined
in the Charter as the current directors 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 continuing directors then on the
Board of Directors.
Under the rules of the NYSE applicable to listed companies, the Company
normally will be required to hold an annual meeting of stockholders in each
fiscal year. If the Company is 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),
the Company may decide not to hold annual meetings of stockholders.
Additional Offerings. Other offerings of common stock, if made, will
require approval of the Board of Directors and will be subject to the
requirement of the 1940 Act that common stock may not be sold at a price below
the then-current net asset value, exclusive of underwriting discounts and
48
commissions, except in limited circumstances including in connection with an
offering to existing stockholders.
The information contained under this heading is subject to the
provisions contained in the Company's Charter and Bylaws and the laws of the
State of Maryland.
PREFERRED STOCK
The Company has 1,400 MMP Shares with an aggregate liquidation
preference of $35,000,000 outstanding. The MMP Shares pay cash dividends at
dividend rates that vary based on auctions normally held every twenty-eight (28)
days. The MMP Shares rank junior to the Tortoise Notes and any other borrowings,
on par with other preferred stock of the Company, if any, and senior to all
common stock. Under the 1940 Act, the Company may only issue one class of senior
equity securities. So long as MMP Shares are outstanding, additional issuances
of preferred stock must be of the same class as MMP Shares and will have no
preference or priority over the MMP Shares upon the distributions of assets of
the Company. It is expected that any additional issuance of preferred stock
would be additional series of MMP Shares. The MMP Shares are not convertible
into shares of common stock or other stock of the Company, have no preemptive
rights, and are not subject to any sinking fund. The MMP Shares are subject to
optional and mandatory redemption under certain circumstances. Any redemption or
purchase of preferred stock by the Company will reduce the leverage applicable
to the common stock, while any resale of shares by the Company will increase
that leverage.
Distribution Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of preferred
stock would be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per share plus
accumulated and unpaid dividends, whether or not declared, before any
distribution of assets is made to holders of common stock. After payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of preferred stock will not be entitled to any further participation in
any distribution of assets by the Company.
Voting Rights. Except as otherwise indicated in the Charter or Bylaws,
or as otherwise required by applicable law, holders of MMP Shares 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, the holders of any shares of preferred stock have the right to
elect a majority of the directors at any time two years' accumulated dividends
on any preferred stock are unpaid. The 1940 Act also requires that, in addition
to any approval by stockholders that might otherwise be required, the approval
of the holders of a majority of shares of any outstanding preferred stock,
voting separately as a class, would be required to (i) adopt any plan of
reorganization that would adversely affect the preferred stock, and (ii) take
any action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, changes in the Company's subclassification
as a closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Company's Charter and Bylaws." As a
result of these voting rights, the Company's ability to take any such actions
may be impeded to the extent that any shares of its 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
49
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.
Except in an auction in which the MMP Shares are traded, the Company
will have the right (to the extent permitted by applicable law) to purchase or
otherwise acquire any MMP Share, so long as the Company is current in the
payment of dividends on the MMP Shares and on any other shares of the Company
ranking on a parity with the MMP Shares with respect to the payment of dividends
or upon liquidation.
DESCRIPTION OF TORTOISE NOTES AND BORROWINGS
The Charter authorizes the Company, without prior approval of holders
of common and preferred stock, to borrow money. The Company may issue additional
Tortoise Notes, other 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 the Company's assets to
the extent permitted by the 1940 Act or rating agency guidelines. Any
borrowings, including without limitation the Tortoise Notes discussed below,
will rank senior to the MMP Shares and the common stock.
On July 15, 2004, the Company issued two series of Tortoise Notes in an
aggregate principal amount of $110,000,000 pursuant to the provisions of an
indenture. BNY Midwest Trust Company serves as trustee and transfer agent and
the Bank of New York serves as transfer agent for the Tortoise Notes. The
Tortoise Notes pay interest at rates that vary based on auctions normally held
every twenty-eight (28) days. The Tortoise Notes rank senior to the Company's
common and preferred stock. Under the 1940 Act, the Company may only issue one
class of senior securities representing indebtedness. So long as Tortoise Notes
are outstanding, additional senior debt securities must rank on a parity with
Tortoise Notes. The Tortoise Notes may be redeemed prior to their maturity at
the option of the Company, in whole or in part, under certain circumstances and
are subject to mandatory redemption upon failure of the Company to maintain
asset coverage requirements with respect to the Tortoise Notes.
Limitations. Under the requirements of the 1940 Act, immediately after
issuing any senior securities representing indebtedness, including Tortoise
Notes, the Company must have an asset coverage of at least 300%. With respect to
any Tortoise Notes or other senior securities representing indebtedness, asset
coverage means the ratio which the value of the total assets of the Company,
less all liabilities and indebtedness not represented by senior securities,
bears to the aggregate amount of senior securities representing indebtedness.
The Company is subject to certain restrictions imposed by guidelines of one or
more rating agencies that issued ratings for the Tortoise Notes, including
restrictions related to asset coverage and portfolio composition. Such
restrictions may be more stringent than those imposed by the 1940 Act. Other
types of borrowings also may result in the Company being subject to similar
covenants in credit agreements.
Distribution Preference. A declaration of a dividend or other
distribution on or purchase or redemption of common or preferred stock, is
restricted: (i) at any time that an event of default under the Tortoise Notes or
any other Borrowings has occurred and is continuing; or (ii) if after giving
effect to such declaration, the Company would not have eligible portfolio
holdings with an aggregated Discounted Value at least equal to any asset
coverage requirements associated with such Tortoise Notes or other Borrowings;
or (iii) if the Company has not redeemed the full amount of Tortoise Notes or
other Borrowings, if any, required to be redeemed by any provision for mandatory
redemption. In addition, the terms of any other Borrowings may contain
provisions that limit certain activities of the Company, including the payment
of dividends to holders of common and preferred stock, in certain circumstances.
50
Voting Rights. Tortoise Notes have no voting rights, except to the
extent required by law or as otherwise provided in the indenture relating to the
acceleration of maturity upon the occurrence and continuance of an event of
default. In connection with any other borrowings (if any), the 1940 Act does (in
certain circumstances) grant to the lenders to the Company certain voting rights
in the event of default in the payment of interest on or repayment of principal.
CERTAIN PROVISIONS IN THE COMPANY'S CHARTER AND BYLAWS
The following description of certain provisions of the Charter and
Bylaws is only a summary. For a complete description, please refer to the
Charter and Bylaws, which have been filed as exhibits to the Company's
registration statement. A more detailed description can also be found in the
Company's statement of additional information.
The Company's Charter and Bylaws include provisions that could delay,
defer or prevent other entities or persons from acquiring control of the
Company, causing it to engage in certain transactions or modifying its
structure. These provisions may be regarded as "anti-takeover" provisions. Such
provisions could limit the ability of 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 the Company.
CLASSIFICATION OF THE BOARD OF DIRECTORS; ELECTION OF DIRECTORS
The 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 the Charter, the Board of
Directors is divided into three classes: Class I, Class II and Class III. The
initial terms of Class I, Class II and Class III directors will expire in 2005,
2006 and 2007, respectively. Beginning in 2005, upon the expiration of their
current terms, 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
the Company's 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
The Charter provides that 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.
51
AMENDMENT TO THE CHARTER AND BYLAWS
The Charter provides that amendments to the Charter must be declared
advisable by the Board of Directors and generally approved by the affirmative
vote of stockholders entitled to cast at least a majority of the votes entitled
to be cast on the matter. Certain provisions of the Charter, including its
provisions on classification of the Board of Directors, election and removal of
directors and conversion of the Company to an open-end investment company, may
be amended only by the affirmative vote of the stockholders entitled to cast at
least 80 percent of the votes entitled to be cast on the matter. However, if
such a proposal is approved by at least two-thirds of the continuing directors
(in addition to approval by the full Board of Directors), such proposal may be
approved by a majority of the votes entitled to be cast on such matter. The
Board of Directors has the exclusive power to adopt, alter or repeal any
provision of the Bylaws and to make new Bylaws.
DISSOLUTION OF THE COMPANY
The Charter provides that any proposal to liquidate or dissolve the
Company requires the approval of the stockholders entitled to cast at least 80
percent of the votes entitled to be cast on such matter. However, if such a
proposal is approved by at least two-thirds of the continuing directors (in
addition to approval by the full Board), such proposal may be approved by a
majority of the votes entitled to be cast on such matter.
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 (i)
pursuant to notice of the meeting, (ii) by the Board of Directors or (iii) 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 Company's 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 (i) pursuant to notice
of the meeting by the Company, (ii) by the Board of Directors, or (iii) 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.
UNDERWRITING
The Underwriters named below, acting through Lehman Brothers Inc.,
Stifel, Nicolaus & Company, Incorporated, RBC Capital Markets Corporation,
Oppenheimer & Co. Inc. and Wachovia Capital Markets, LLC, as their
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of an underwriting agreement dated ________, 2004, to
purchase from the Company the number of Common Shares set forth opposite their
respective names.
UNDERWRITER NUMBER OF COMMON SHARES
------------------------------------------------- -----------------------
Lehman Brothers Inc..............................
Stifel, Nicolaus & Company, Incorporated.........
RBC Capital Markets Corporation..................
Oppenheimer & Co. Inc............................
Wachovia Capital Markets, LLC....................
Total.........................................
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The underwriting agreement provides that the obligations of the
Underwriters to purchase the shares included in this offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to purchase all the Common Shares listed in the
table above if any of the Common Shares are purchased.
The Common Shares will be listed on the NYSE under the symbol "TYG."
The provisions of the 1940 Act require that the public offering price of the
Common Shares, less underwriting commissions and discounts, must equal or exceed
the net asset per share of the Company's common stock (computed within 48
hours). Consequently, the offering price for the Common Shares was determined
based on, among other factors, the Company's net asset value and the last sale
price of the Company's common stock on the NYSE, on __________, 2004. Investors
must pay for any shares purchased in the public offering on or before
___________, 2004.
The Underwriters propose initially to offer some of the Common Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Common Shares to certain dealers at the
public offering price less a concession not in excess of $_____ per share. The
underwriting discounts and commissions the Company will pay of $_____ per share
are equal to ____% of the initial offering price. The Underwriters may allow,
and the dealers may reallow, a discount not in excess of $____ per share on
sales to other dealers. After the public offering of Common Shares, the public
offering price, concession and discount may be changed. The Representatives have
advised the Company that the Underwriters do not intend to confirm any sales to
any account over which they exercise discretionary authority.
Certain officers and directors of the Company are expected to purchase
approximately $___________ of the Company's common stock at the public offering
price in this offering.
COMMISSION AND EXPENSES
The following table shows the public offering price, underwriting
discounts and commissions and proceeds before expenses to the Company. The
information assumes either no exercise or full exercise by the Underwriters of
their over-allotment option.
PER SHARE WITHOUT OPTION WITH OPTION
----------------------------------------------- --------------------- ----------------------
Public offering price.......................... $ $
Underwriting discounts and commissions......... $ $
Proceeds, before expenses to the Company....... $ $
The expenses of the offering are estimated to be $__________. The
Company will pay all of its offering expenses.
Until the distribution of the Common Shares is complete, the Securities
and Exchange Commission rules may limit Underwriters and selling group members
from bidding for and purchasing the Company's Common Shares.
OVER-ALLOTMENT OPTION
The Company has granted the Underwriters an option to purchase up to
___________ additional Common Shares at the public offering price, less the
underwriting discounts and commissions, within 45 days from the date of this
prospectus, to cover any over-allotments. If the Underwriters exercise this
option, each will be obligated, subject to conditions contained in the
underwriting agreement, to purchase a number of additional shares proportionate
to that underwriter's initial amount reflected in the table below.
53
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In connection with this offering, the Underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Shares in accordance with Regulation M under
the Securities Exchange Act of 1934, as amended.
o Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not
exceed a specified maximum.
o Over-allotment transactions involve sales by the Underwriters
of the Common Shares in excess of the number of Common Shares
the Underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be
either a covered short position or a naked short position. In
a covered short position, the number of Common Shares over-
allotted by the Underwriters is not greater than the number of
Common Shares they may purchase in the over-allotment option.
In a naked short position, the number of Common Shares
involved is greater than the number of Common Shares in the
over-allotment option. The Underwriters may close out any
short position by either exercising their over-allotment
option and/or purchasing the Common Shares in the open market.
o Syndicate covering transactions involve purchases of the
Common Shares in the open market after the distribution has
been completed in order to cover syndicate short positions. In
determining the source of the Common Shares to close out the
short position, the Underwriters will consider, among other
things, the price of Common Shares available for purchase in
the open market as compared to the price at which they may
purchase Common Shares through the over-allotment option. If
the Underwriters sell more Common Shares than could be covered
by the over-allotment option, a naked short position, the
position can only be closed out by buying Common Shares in the
open market. A naked short position is more likely to be
created if the Underwriters are concerned that there could be
downward pressure on the price of the Common Shares in the
open market after pricing that could adversely affect
investors who purchase in the offering.
o Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when the Common Shares
originally sold by the syndicate member are purchased in a
stabilizing or syndicate covering transaction to cover a
syndicate short position.
These stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the market price of
the Company's common stock or preventing or retarding a decline in the market
price of the common stock. As a result, the price of the Company's common stock
may be higher than the price that might otherwise exist in the open market.
These transactions may be effected on the NYSE or otherwise and, if commenced,
may be discontinued at any time.
Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of common stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
54
INDEMNIFICATION
The Company and the Adviser have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act of
1933 and liabilities arising from breaches of representations and warranties
contained in the underwriting agreement, and to contribute to payments the
Underwriters may be required to make in respect of any of those liabilities;
provided that such indemnification shall not extend to any liability or action
resulting from the gross negligence or willful misconduct of the Underwriters.
ELECTRONIC DISTRIBUTION
A prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by one or more of the
underwriters and/or selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view offering terms
online and, depending upon the particular underwriter or selling group member,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the representatives on the same basis as other allocations.
Other than the prospectus in electronic format, the information on any
underwriter's or selling group member's website and any information contained in
any other website maintained by an underwriter or selling group member is not
part of the prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or any underwriter or
selling group member in its capacity as underwriter or selling group member and
should not be relied upon by investors.
LOCK-UP AGREEMENTS
The Company has agreed not to offer or sell any additional common stock
for a period of 90 days after the date of the underwriting agreement without
the prior written consent of the Underwriters, except for the sale of Common
Shares to the Underwriters pursuant to the underwriting agreement.
The Company anticipates that the Underwriters may from time to time act
as brokers or dealers in executing the Company's portfolio transactions after
they have ceased to be Underwriters and, subject to certain restrictions may so
act while they are underwriters. The Underwriters are active underwriters of,
and dealers in, securities and act as market makers in a number of such
securities, and therefore can be expected to engage in portfolio transactions
with the Company.
CERTAIN RELATIONSHIPS
Pursuant to a letter dated November 26, 2003, the Company agreed that
until November 26, 2004, Lehman Brothers Inc. had the right, but not the
obligation, to act as exclusive underwriter, arranger and/or advisor with
respect to the issuance of any indebtedness by the Company or other security
that ranks senior to the common stock, other than bank loans. The Company also
agreed that until November 26, 2004, the Company would not make direct or
indirect minority investments in certain MLPs, or enter into any transaction
that results in the acquisition of any equity investment in these MLPs (other
than open market purchases on a national securities exchange) unless Lehman
Brothers Inc. acted as placement agent in connection with such investment. The
direct placement fees the issuers of the MLP securities in which the Company
invested paid to Lehman Brothers Inc. for acting as placement agent were
separate and distinct from the discounts and commissions that were paid by the
Company in connection with previous offerings. The direct placement agreement
expired November 26, 2004. The Company believes that the agreement provided it
with greater access to direct placement opportunities than would have been
55
the case absent the agreement and that services were provided on competitive
terms for the MLP market. See "Portfolio Transactions--Execution of Portfolio
Transactions" in the Statement of Additional Information.
The addresses of the Representatives are: Lehman Brothers Inc., 745
Seventh Ave., New York, NY 10019; Stifel, Nicolaus & Company, Incorporated, 501
North Broadway, St. Louis, MO 63102; RBC Capital Markets Corporation, 60 South
Sixth Street, Minneapolis, MN 55402; Oppenheimer & Co. Inc., 125 Broad St., 15th
Floor, New York, NY 10004; and Wachovia Capital Markets, LLC, 7 St. Paul Street,
First Floor, Baltimore, MD 21202.
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT
U.S. Bancorp Fund Services, LLC serves as the Company's administrator.
The Company pays the administrator a monthly fee computed at an annual rate of
0.07% of the first $300 million of the Company's Managed Assets, 0.06% on the
next $500 million of Managed Assets and 0.04% on the balance of the Company's
Managed Assets, subject to a minimum annual fee of $45,000.
Computershare Investor Services, LLC serves as the Company's transfer
agent, dividend paying agent, and agent for the automatic dividend reinvestment
plan.
U.S. Bank N.A. serves as the Company's custodian. The Company pays the
custodian a monthly fee computed at an annual rate of 0.015% on the first $100
million of the Company's Managed Assets and 0.01% on the balance of the
Company's Managed Assets, subject to a minimum annual fee of $4,800.
LEGAL MATTERS
Blackwell Sanders Peper Martin, LLP ("Blackwell"), Kansas City,
Missouri, serves as counsel to the Company. Vedder, Price, Kaufman & Kammholz,
P.C. ("Vedder Price"), Chicago, Illinois, is serving as special counsel to the
Company in connection with this offering. Kaye Scholer LLP serves as counsel to
the Underwriters. Stroock & Stroock & Lavan LLP is serving as special counsel to
the Underwriters in connection with this offering. Certain legal matters in
connection with the Common Shares offered hereby are passed on for the Company
by Vedder Price, and for the Underwriters by Kaye Scholer LLP. Vedder Price may
rely on the opinion of Venable LLP, Baltimore, Maryland, on certain matters of
Maryland law.
INTELLECTUAL PROPERTY RIGHTS
A patent application has been filed with the United States Patent and
Trademark Office describing the Adviser's systems and methods for managing a
portfolio of MLPs. There is no assurance that the patent will ultimately be
granted. The scope of the patent, if granted, is not known at this time and will
not necessarily preclude other firms from developing and operating a portfolio
of MLPs.
56
TABLE OF CONTENTS
FOR THE STATEMENT OF ADDITIONAL INFORMATION
Investment Limitations.......................................................S-1
Investment Objective and Policies............................................S-3
Management of the Company...................................................S-15
Portfolio Transactions......................................................S-23
Net Asset Value.............................................................S-24
Leverage....................................................................S-25
Description of Capital Stock................................................S-26
Description of Tortoise Notes and Borrowings................................S-29
Rating Agency Guidelines....................................................S-30
Certain Federal Income Tax Matters..........................................S-32
Proxy Voting Policies.......................................................S-35
Independent Registered Public Accounting Firm...............................S-36
Administrator, Custodian, Transfer Agent and Dividend Paying Agent..........S-36
Additional Information......................................................S-37
Financial Statements.........................................................F-1
Appendix A--Rating of Investments............................................A-1
57
================================================================================
_____ COMMON SHARES
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
____________________
PROSPECTUS
___________, 2004
____________________
LEHMAN BROTHERS STIFEL, NICOLAUS &
COMPANY INCORPORATED
OPPENHEIMER & CO. RBC CAPITAL MARKETS WACHOVIA SECURITIES
================================================================================
(TORTOISE LOGO)
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 2004
The information in this statement of additional information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This statement of additional information is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
____________, 2004
STATEMENT OF ADDITIONAL INFORMATION
Tortoise Energy Infrastructure Corporation (the "Company") is a
nondiversified, closed-end management investment company which began operations
in February 2004. This statement of additional information relating to this
offering of the Company's shares of common stock ("Common Shares") is not a
prospectus, but should be read in conjunction with the Company's prospectus
relating thereto dated ____________, 2004.
On July 15, 2004, the Company issued two series of auction rate senior
notes due July 15, 2044, in an aggregate principal amount of $110,000,000
("Tortoise Notes"). On September 16, 2004, the Company issued 1,400 auction rate
preferred shares (denominated as Money Market Cumulative Preferred Shares or
"MMP Shares"), liquidation preference $25,000 per share ($35,000,000 in
aggregate). The Company may, in the future, issue additional series of Tortoise
Notes or MMP Shares or other senior securities to the extent permitted by the
Investment Company Act of 1940, as amended (the "1940 Act"). The Company's
common stock is junior in liquidation and distribution rights to Tortoise Notes
and MMP Shares. The issuance of debt and preferred stock, including Tortoise
Notes and MMP Shares, represent the leveraging of the Company's common stock.
The issuance of additional common stock in this offering will enable the Company
to increase the aggregate amount of its leverage.
This statement of additional information does not include all
information that a prospective investor should consider before purchasing Common
Shares of the Company. Investors should obtain and read the Company's prospectus
prior to purchasing Common Shares. A copy of the Company's prospectus is
available without charge from the Company by calling 1-888-728-8784. You may
also obtain a copy of the Company's prospectus on the Securities and Exchange
Commission's 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. This statement of additional information is dated
____________, 2004.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Investment Limitations.......................................................S-1
Investment Objective and Policies............................................S-3
Management of the Company...................................................S-15
Portfolio Transactions......................................................S-23
Net Asset Value.............................................................S-24
Leverage....................................................................S-25
Description of Capital Stock................................................S-26
Description of Tortoise Notes and Borrowings................................S-29
Rating Agency Guidelines....................................................S-30
Certain Federal Income Tax Matters..........................................S-32
Proxy Voting Policies.......................................................S-35
Independent Registered Public Accounting Firm...............................S-36
Administrator, Custodian, Transfer Agent and Dividend Paying Agent..........S-36
Additional Information......................................................S-37
Financial Statements.........................................................F-1
Appendix A--Rating of Investments............................................A-1
i
INVESTMENT LIMITATIONS
This section supplements the disclosure in the prospectus and provides
additional information on the Company's investment limitations. Investment
limitations identified as fundamental may not be changed without the approval of
the holders of a majority of the Company's 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 the Company's
assets are only applied immediately after, and because of, an investment or a
transaction by the Company 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 the Company's
investment limitations.
FUNDAMENTAL INVESTMENT LIMITATIONS
The following are the Company's fundamental investment limitations set
forth in their entirety. The Company may not:
(1) issue senior securities, except as permitted by the 1940
Act and the rules and interpretive positions of the SEC thereunder;
(2) borrow money, except as permitted by the 1940 Act and the
rules and interpretive positions of the SEC thereunder;
(3) 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;
(4) concentrate (invest 25% or more of total assets) its
investments in any particular industry, except that the Company will
concentrate its assets in the group of industries constituting the
energy infrastructure sector;
(5) underwrite securities issued by others, except to the
extent that the Company 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 its portfolio;
(6) purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments, except that the
Company may invest in securities or other instruments backed by real
estate or securities of companies that invest in real estate or
interests therein; and
(7) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments, except that the
Company may purchase or sell options and futures contracts or invest in
securities or other instruments backed by physical commodities.
All other investment policies of the Company are considered
nonfundamental and may be changed by the Company's Board of Directors (the
"Board") without prior approval of the Company's outstanding voting shares.
S-1
NONFUNDAMENTAL INVESTMENT POLICIES
The Company has adopted the following nonfundamental policies:
(1) Under normal circumstances, the Company invests at least
90% of its total assets (including assets obtained through leverage) in
securities of energy infrastructure companies.
(2) The Company invests at least 70% and up to 100% of its
total assets in equity securities issued by master limited partnerships
("MLPs").
(3) The Company may invest up to 30% of total assets in
restricted securities, primarily through direct placements. The types
of direct placements that the Company may purchase include MLP
convertible subordinated units, MLP common units and securities of
private energy infrastructure companies (i.e., non-MLPs). Investments
in private companies that do not have any publicly traded shares or
units are limited to 5% of the Company's total assets.
(4) The Company may invest up to 25% of total assets in debt
securities of energy infrastructure companies, including securities
rated below investment grade (commonly referred to as "junk bonds").
Below investment grade debt securities will be rated at least B3 by
Moody's Investors Service, Inc. ("Moody's") and at least B- by Standard
& Poor's Ratings Group ("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 Tortoise Capital Advisors LLC
(the "Advisor").
(5) The Company will not invest more than 10% of its total
assets in any single issuer.
(6) The Company will not engage in short sales.
Currently under the 1940 Act, the Company is not permitted to incur
indebtedness unless immediately after such borrowing the Company has 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 the
Company's total assets). Additionally, currently under the 1940 Act, the Company
may not declare any distribution upon its common stock, or purchase any such
stock, unless the aggregate indebtedness of the Company 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, the Company
is not permitted to issue preferred stock unless immediately after such issuance
the Company has asset coverage of at least 200% of the liquidation value of the
outstanding preferred stock (i.e., such liquidation value may not exceed 50% of
the value of the Company's total assets). In addition, currently under the 1940
Act, the Company is not permitted to declare any cash distribution on its common
stock unless, at the time of such declaration, the Company's total assets less
liabilities and indebtedness not represented by senior securities (determined
after deducting the amount of such distribution) is at least 200% of such
liquidation value.
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 the Company would be
considered senior securities under the 1940 Act, and as such, are subject to the
asset coverage requirements discussed above.
S-2
Currently under the 1940 Act, the Company is not permitted to lend
money or property to any person, directly or indirectly, if such person controls
or is under common control with the Company, except for a loan from the Company
to a company which owns all of the outstanding securities of the Company.
Currently, under interpretative positions of the staff of the SEC, the Company
may not have on loan at any given time securities representing more than
one-third of its total assets.
The Company interprets its policies with respect to borrowing and
lending to permit such activities as may be lawful for the Company, to the full
extent permitted by the 1940 Act or by exemption from the provisions therefrom
pursuant to an exemptive order of the SEC.
The Company interprets its policy with respect to concentration to
include energy infrastructure companies, as defined in the prospectus and below.
See "Investment Objective and Policies."
Under the 1940 Act, the Company may, but does not intend to, invest up
to 10% of its total assets in the aggregate in shares of other investment
companies and up to 5% of its 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
stockholder in any investment company, the Company will bear its ratable share
of that investment company's expenses, and would remain subject to payment of
the Company's advisory fees and other expenses with respect to assets so
invested. Holders of the Company's common stock would therefore be subject to
duplicative expenses to the extent the Company invests in other investment
companies. In addition, the securities of other investment companies may also be
leveraged and will therefore be subject to the same leverage risks described
herein and in the prospectus. As described in the prospectus in the section
entitled "Leverage," the net asset value and market value of leveraged shares
will be more volatile and the yield to stockholders will tend to fluctuate more
than the yield generated by unleveraged shares.
INVESTMENT OBJECTIVE AND POLICIES
The prospectus presents the investment objective and the principal
investment strategies and risks of the Company. This section supplements the
disclosure in the Company's prospectus and provides additional information on
the Company's investment policies, strategies and risks. Restrictions or
policies stated as a maximum percentage of the Company's 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 the Company's restrictions and policies.
The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to stockholders. For
purposes of the Company's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Company invests regardless of the tax character of the distribution. There is no
assurance that the Company will achieve its objective. The investment objective
and the investment policies discussed below are nonfundamental. The Board may
change the investment objective, or any policy or limitation that is not
fundamental, without a stockholder vote. Stockholders will receive at least 60
days' prior written notice of any change to the nonfundamental investment policy
of investing at least 90% of total assets in energy infrastructure companies.
Unlike most other investment companies, the Company is not treated as a
regulated investment company under the U.S. Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). Therefore, the Company is taxed as a
regular "C" corporation and is subject to federal and applicable state corporate
income taxes.
S-3
Under normal circumstances, the Company invests at least 90% of its
total assets (including assets obtained through leverage) in securities of
energy infrastructure companies. Energy infrastructure companies engage in the
business of transporting, processing, storing, distributing or marketing natural
gas, natural gas liquids (primarily propane), coal, crude oil or refined
petroleum products, or exploring, developing, managing or producing such
commodities. Companies that provide energy-related services to the foregoing
businesses are also considered energy infrastructure companies, if they derive
at least 50% of revenues from the provision of energy-related services to such
companies. The Company invests at least 70% of its total assets in a portfolio
of equity securities of energy infrastructure companies that are MLPs that the
Adviser believes offer attractive distribution rates and capital appreciation
potential. MLP equity securities (known as "units") currently consist of common
units, convertible subordinated units and pay-in-kind units or I-Shares
("I-Shares"). The Company 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 the Company may invest, strategies the
Adviser may employ in pursuit of the Company's investment objective and a
discussion of related risks. The Adviser may not buy these instruments or use
these techniques unless it believes that doing so will help the Company achieve
its objective.
ENERGY INFRASTRUCTURE COMPANIES
For purposes of the Company's policy of investing 90% of its total
assets in securities of energy infrastructure companies, an energy
infrastructure company is one that derives at least 50% of its revenues from
"Qualifying Income" under Section 7704 of the Internal Revenue Code or one that
derives at least 50% of its revenues from the provision of services directly
related to the generation of Qualifying Income. Qualifying Income is defined as
any income and/or gains from the exploration, development, mining or production,
processing, refining, transportation (including pipelines transporting natural
gas, oil or products thereof), or the marketing of any mineral or natural
resource (including fertilizer, geothermal energy, and timber); or the
transportation, delivery or processing of natural resources or minerals.
Energy infrastructure MLPs are limited partnerships that derive each
year at least 90% of their gross income from Qualifying Income and are taxed as
partnerships, thereby eliminating federal income tax at the entity level. The
business of energy infrastructure 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 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 the 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 sector in
general could be hurt by market perception that MLP's performance and valuation
are directly tied to commodity prices.
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 cause a reduction in revenue and
which could adversely affect profitability. Most pipeline MLPs are subjected 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
S-4
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.
Energy infrastructure MLPs in which the Company invests 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 also may 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, 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"). 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
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. 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 Clean Air
Act standards have on coal-end users.
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. While opportunities for growth by acquisition appear
abundant based on current market conditions, especially for smaller MLPs, the
Adviser expects MLPs to grow primarily through internal means.
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. Such 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
S-5
hazardous materials. Energy infrastructure 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 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 liquefied
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.
Energy infrastructure 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 energy infrastructure MLPs.
Energy infrastructure MLPs are subject to numerous business related
risks, including: deterioration of business fundamentals reducing profitability
due to development of alternative energy sources, changing demographics in the
markets served, unexpectedly prolonged and precipitous changes in commodity
prices and increased competition which takes 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.
Although the Company emphasizes investments in MLPs, it also may invest
in energy infrastructure companies that are not organized as MLPs. Non-MLP
companies may include companies that operate energy assets but which are
organized in corporate 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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MASTER LIMITED PARTNERSHIPS
Under normal circumstances, the Company invests at least 70% of its
total assets in equity securities of MLPs. An MLP is an entity that is taxed as
a partnership and that derives each year at least 90% of its gross income from
Qualifying Income. An MLP is a limited partnership the interests in which (known
as units) are traded on securities exchanges or over the counter. Organization
as a partnership and compliance with the Qualifying Income rules 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 a
MLP, he or she 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 a 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 a MLP,
although since 1986 the tax consequences have made this an unappealing option
for most corporations. Also, a newly formed company may operate as a 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 the Company intends to use these MLP distributions in an effort to
meet its 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 partner's 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 does not pay federal income tax, its income or
loss is allocated to its investors, irrespective of whether the investors
receive any cash payment from the MLP. An MLP typically makes quarterly cash
distributions. Although they resemble corporate dividends, MLP
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distributions are treated differently for tax purposes. The MLP distribution is
treated as a return of capital to the extent of the investor's basis in his MLP
interest and, to the extent the distribution exceeds the investor's basis in the
MLP, capital gain. The investor's 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 income.
When the units are sold, the difference between the sales price and the
investor's adjusted basis is gain or loss for federal income tax purposes. The
partner will not be taxed on 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.
For a further discussion and a description of MLP tax matters, see the
section entitled "Certain Federal Income Tax Matters."
THE COMPANY'S INVESTMENTS
The types of securities in which the Company may invest include, but
are not limited to the following:
Equity Securities. Consistent with its investment objective, the
Company may invest up to 100% of its total assets in equity securities issued by
energy infrastructure MLPs, including common units, convertible subordinated
units and I-Shares units (each discussed below). The Company may also invest up
to 30% of total assets in equity securities of non-MLPs.
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 the Company's net asset value per share,
which will fluctuate as the value of the securities held by the Company 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 stock's 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 company's 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 discount ("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 partnership's 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.
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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. The Company expects to purchase subordinated units in
direct placements from such persons. 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 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, they 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. 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 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.
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 issuer's assets consist exclusively of MLP common units. Distributions
to I-Share holders are made in the form of additional I-Shares, generally equal
in amount to the cash distribution received by common unit holders of the MLP.
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 do not generate unrelated business taxable
income and are qualifying income for mutual fund investors.
Debt Securities. The Company may invest up to 25% of its assets in debt
securities of energy infrastructure companies, including certain securities
rated below investment grade ("junk bonds"). The Company's debt securities may
have fixed or variable principal payments and all types of interest rate and
dividend payment and reset terms, including fixed rate, adjustable rate, zero
coupon, contingent, deferred, payment in kind and auction rate features. If a
security satisfies the Company's minimum rating criteria at the time of purchase
and is subsequently downgraded below such rating, the Company will not be
required to dispose of such security. If a downgrade occurs, the Adviser will
consider what action, including the sale of such security, is in the best
interest of the Company and its stockholders.
Below Investment Grade Debt Securities. The Company may invest up to
25% of the Company's assets in below investment grade securities. The below
investment grade debt securities in which the Company invests are rated from B3
to Ba1 by Moody's, from B- to BB+ by S&P, are comparably rated by another
nationally recognized rating agency or are unrated but determined by the 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 issuer's 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 the
Company is subject to the following specific risks:
S-9
o increased price sensitivity to changing interest rates and to
a deteriorating economic environment;
o greater risk of loss due to default or declining credit
quality;
o adverse company specific events are more likely to render the
issuer unable to make interest and/or principal payments; and
o 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.
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 the Company's net asset
value and the market value of its common stock. In addition, the Company 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, the Company may be required to foreclose on an issuer's
assets and take possession of its property or operations. In such circumstances,
the Company 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 the Company's 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
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, the Company
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the
Company's net asset value.
Because investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the Company
may invest a portion of its 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.
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The Company 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 the Company,
the Company 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 Moody's and S&P ratings.
Restricted, Illiquid and Thinly-Traded securities. The Company may
invest up to 30% of its total assets in restricted securities, primarily through
direct placements of MLP securities. Restricted securities obtained by means of
direct placements are less liquid than securities traded in the open market,
therefore, the Company may not be able to readily sell such securities.
Investments currently considered by the 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 and 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 Company's most recent determination
of their fair value. Additionally, the value of these securities typically
requires more reliance on the judgment of the 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, the Company 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 privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. The Adviser has the ability to deem restricted
securities as liquid. To enable the Company to sell its holdings of a restricted
security not registered under the 1933 Act, the Company may have to cause those
securities to be registered. When the Company must arrange registration because
the Company wishes 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 the Company could sell it. The Company would bear
the risks of any downward price fluctuation during that period.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or 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 readily resold or on an
issuer's 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 the Company, however, could
affect adversely the marketability of such portfolio securities and the Company
might be unable to dispose of such securities promptly or at reasonable prices.
The Company also may invest in securities that may not be restricted,
but are thinly-traded. Although securities of certain MLPs trade on the NYSE,
the AMEX, the NASDAQ National Market or other securities exchanges or markets,
such securities may trade less than those of larger companies due
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to their relatively smaller capitalizations. Such securities may be difficult to
dispose of at a fair price during times when the Company believes it is
desirable to do so. Thinly-traded securities are also more difficult to value
and the Adviser's 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 the Company's capital in thinly-traded
securities may restrict the Company's ability to take advantage of market
opportunities. The risks associated with thinly-traded securities may be
particularly acute in situations in which the Company's operations require cash
and could result in the Company borrowing to meet its short-term needs or
incurring losses on the sale of thinly-traded securities.
Commercial Paper. The Company 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. The Company 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 (such as Federal Home Loan Bank Bonds and Federal
National Mortgage Association Bonds), 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.
Repurchase Agreements. The Company may enter into "repurchase
agreements" backed by U.S. Government Securities. A repurchase agreement arises
when the Company purchases a security and simultaneously agrees to resell it to
the vendor at an agreed upon future date. The resale price is greater than the
purchase price, reflecting an agreed upon market rate of return that is
effective for the period of time the Company holds the security and that is not
related to the coupon rate on the purchased security. Such agreements generally
have maturities of no more than seven days and could be used to permit the
Company to earn interest on assets awaiting long term investment. The Company
requires continuous maintenance by the custodian for the Company's 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
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considered illiquid securities. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Company 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 the Company
seeks to enforce its 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. The Company 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
the Adviser to be satisfactory. A reverse repurchase agreement is a repurchase
agreement in which the Company is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed-upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of securities because it avoids certain market risks and transaction
costs.
At the time when the Company enters into a reverse repurchase
agreement, liquid assets (cash, U.S. Government Securities or other "high-grade"
debt obligations) of the Company having a value at least as great as the
purchase price of the securities to be purchased will be segregated on the books
of the Company and held by the custodian throughout the period of the
obligation. The use of reverse repurchase agreements by the Company creates
leverage which increases the Company's investment risk. If the income and gains
on securities purchased with the proceeds of these transactions exceed the cost,
the Company's 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. The Company intends to enter into reverse repurchase agreements only if
the income from the investment of the proceeds is 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 it does not currently intend to, the Company
may in the future use margin borrowing of up to 33-1/3% of total assets for
investment purposes when the Adviser believes it will enhance returns. Any use
of margin borrowing by the Company would be subject to the asset coverage
requirements discussed earlier in this statement of additional information. See
"Investment Limitations." Margin borrowings by the Company create 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 the
Company has borrowed increase their maintenance margin requirements (i.e.,
reduce the percentage of a position that can be financed), then the Company
could be subject to a "margin call," pursuant to which it 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 the assets of the Company, it 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.
Interest Rate Transactions. In an attempt to reduce the interest rate
risk arising from the Company's leveraged capital structure, the Company may,
but is not obligated to, enter into interest rate transactions such as swaps,
caps and floors. 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, the Company would agree to pay to the other party to the interest rate
swap (which is known as the "counterparty") a fixed rate payment in exchange for
the counterparty agreeing to pay to the Company a variable rate payment that is
intended to approximate the Company's 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, the Company
would pay a premium to the counterparty to the interest rate cap and, to the
extent that
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a specified variable rate index exceeds a predetermined fixed rate, would
receive from the counterparty payments of the difference based on the notional
amount of such cap. In an interest rate floor, the Company 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, the Company's use of interest rate transactions could enhance or
decrease Distributable Cash Flow available for distribution to common
stockholders. 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
the net asset value of the Common Shares. In addition, if the counterparty to an
interest rate transaction defaults, the Company would not be able to use the
anticipated net receipts under the interest rate transaction to offset the
Company's cost of financial leverage.
The Company has entered into an interest rate swap transaction that is
intended to hedge the Company's interest payment obligations under the Tortoise
Notes against material increases in interest rates through June 2007. The
Company's dividend payment obligations under the MMP Shares remain unhedged at
this time.
Delayed-Delivery Transactions. Securities may be bought and sold on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. Typically, no interest accrues to the purchaser until the
security is delivered. The Company 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 the
Company's investments. If the Company remains 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, the Company will set aside appropriate liquid assets in a
segregated custodial account to cover its purchase obligations. When the Company
has sold a security on a delayed-delivery basis, the Company does 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, the Company could miss a favorable price or yield opportunity or
suffer a loss.
Securities Lending. The Company may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the Company
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 the Adviser to be
of good credit and legal standing. Furthermore, loans of securities will only be
made if, in the Adviser's judgment, the consideration to be earned from such
loans would justify the risk.
The Adviser understands that it is the current view of the Commission
staff that the Company may engage in loan transactions only under the following
conditions: (1) the Company 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, the Company must be able to terminate the
loan at any time; (4) the Company 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) the Company may pay only
S-14
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.
Defensive and Temporary Investments. Under adverse market or economic
conditions or pending investment of offering or leverage proceeds, the Company
may invest up to 100% of its total assets in securities issued or guaranteed by
the U.S. Government or its instrumentalities or agencies, 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 deemed by the Adviser to be consistent with a
defensive posture, or may hold cash. The Adviser also may invest in such
instruments 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. 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 the Company uses this strategy, it may not achieve its investment
objective.
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The business and affairs of the Company are managed under the direction
of the Board of Directors. Accordingly, the Company's Board of Directors
provides broad supervision over the affairs of the Company, including
supervision of the duties performed by the Adviser. The officers of the Company
are responsible for the Company's day-to-day operations. The directors and
officers of the Company and 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 10801 Mastin Boulevard, Overland
Park, Kansas 66210.
POSITION(S) HELD
WITH COMPANY AND OTHER
LENGTH OF TIME PRINCIPAL OCCUPATION DURING PAST DIRECTORSHIPS
NAME AND AGE SERVED FIVE YEARS HELD BY DIRECTOR
------------ --------------- -------------------------------- ----------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello, 44 Director since 2003 Associate Professor of Risk None
Management and Insurance,
Robinson College of Business,
Georgia State University;
Director of Graduate Personal
Financial Planning (PFP)
Programs, Editor, "Financial
Services Review" (an academic
journal dedicated to the
study of individual financial
management); formerly,
faculty member, Pennsylvania
State University.
John R. Graham, 59 Director since 2003 Executive-in-Residence and Professor of Erie Indemnity
Finance, College of Business Company; Erie Family
Administration, Kansas State University Life Insurance
(has served as a professor or adjunct Company; Kansas State
professor since 1970); Chairman of the Bank
Board, President and CEO, Graham Capital
Management, Inc. and Owner of
S-15
POSITION(S) HELD
WITH COMPANY AND OTHER
LENGTH OF TIME PRINCIPAL OCCUPATION DURING PAST DIRECTORSHIPS
NAME AND AGE SERVED FIVE YEARS HELD BY DIRECTOR
------------ --------------- -------------------------------- ----------------
Graham Ventures; formerly, CEO, Kansas
Farm Bureau Financial Services, including
seven affiliated insurance or financial
service companies (1979-2000).
Charles E. Heath, 62 Director since 2003 Retired in 1999. Formerly, Chief None
Investment Officer, General Electric's
Employers Reinsurance Corporation
(1989-1999). CFA since 1974.
INTERESTED DIRECTORS AND OFFICERS(1)
H. Kevin Birzer, 45 Director and Partner/Senior Analyst, Fountain Capital None
Chairman of the (1990-present); Manager of the Adviser;
Board since formerly, Vice President, F. Martin Koenig
2003 & Co. (1983-1986); Vice President,
Corporate Finance Department, Drexel
Burnham Lambert (1986-1989).
Terry C. Matlack, 48 Director, Treasurer Managing Director, KCEP; Manager of the Trendstar Investment
and Chief Financial Adviser; formerly, President, Trust (open-end small
Officer since 2003; GreenStreet Capital. CFA since 1985. cap investment fund)
Chief Compliance
Officer since 2004
David J. Schulte, 43 President and Chief Managing Director, KCEP (1993-present); None
Executive Officer Manager of the Adviser. CFA since 1992;
since 2003 Member, Corporate Governance Task Force
of CFA Institute.
Zachary A. Hamel, 38 Secretary since 2003 Partner/Senior Analyst with Fountain None
Capital (1997-present); Manager of the
Adviser.
Kenneth P. Malvey, 39 Assistant Treasurer Partner/Senior Analyst, Fountain Capital None
since 2003 Management (2002-present); Manager of
the Adviser. Formerly, Investment Risk
Manager and member of the Global Office
of Investments, GE Capital's Employers
Reinsurance Corporation.
Andrew P. Chica, 29 Assistant Secretary Assistant Vice President, U.S. Bancorp None
since 2003 Fund Services, LLC (since 2004).
Assistant Vice President and Treasurer,
The Mexico Equity and Income Fund, Inc.;
Assistant Treasurer, Kinetics Mutual
Funds, Inc. and Kinetics Portfolio
Trust. Formerly, Compliance Officer,
U.S. Bancorp Fund Services, LLC
(2002-2003).
Kristina Hilson, 24 Assistant Secretary Administrator, U.S. Bancorp Fund None
since 2004 Services, LLC (since 2002); Assistant
Secretary, AIP Alternative Strategies
Funds.
S-16
------------------
(1) As a result of their respective positions held with the Adviser or its
affiliates, these individuals, other than Mr. Chica and Ms. Hilson, are
considered "interested persons" of the Adviser within the meaning of
the 1940 Act.
The Company has an audit committee that consists of three directors of
the Company (the "Audit Committee") who are not "interested persons" of the
Company within the meaning of the 1940 Act ("Independent Directors"). The Audit
Committee members are Charles E. Heath (Chairman), Conrad S. Ciccotello and John
R. Graham. The Audit Committee's function is to oversee the Company's accounting
policies, financial reporting and internal control system. The Audit Committee
makes recommendations regarding the selection of independent auditors of the
Company, 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 Company's accounting and financial reporting practices, and performs such
other tasks as the full Board deems necessary or appropriate. The Audit
Committee has held [2] meetings in the current fiscal year.
Directors and officers of the Company who are interested persons of the
Adviser or the Administrator will receive no salary or fees from the Company.
Each Independent Director receives from the Company an annual retainer of $4,000
($6,000 for the Chairman of the Audit Committee) and a fee of $2,000 (and
reimbursement for related expenses) for each meeting of the Board or committee
meeting he or she attends. Each Independent Director will also receive $500 for
each telephone committee meeting. No director or officer will be entitled to
receive pension or retirement benefits from the Company.
The table below sets forth the estimated compensation to be paid to the
directors by the Company for the current calendar year.
NAME AND POSITION WITH THE AGGREGATE COMPENSATION FROM
COMPANY THE COMPANY*
-------------------------- ---------------------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello.................. $18,000
John R. Graham........................ $18,000
Charles E. Heath...................... $20,000
INTERESTED DIRECTORS
H. Kevin Birzer....................... $ 0
Terry C. Matlack...................... $ 0
------------------
* Because the Company has not completed its first fiscal year,
compensation is estimated based upon payments to be made by the Company
during the current fiscal year.
The following table sets forth the dollar range of equity securities
beneficially owned by each director in the Company as of the date of this
statement of additional information.
S-17
AGGREGATE DOLLAR RANGE OF
COMPANY SECURITIES
BENEFICIALLY OWNED BY
NAME OF DIRECTOR DIRECTOR*
-------------------------------------- --------------------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello.................. $10,001-$50,000
John R. Graham........................ Over $100,000
Charles E. Heath...................... $10,001-$50,000
INTERESTED DIRECTORS
H. Kevin Birzer....................... Over $100,000
Terry C. Matlack...................... $50,000 - $100,000
------------------
* As of the date of this statement of additional information, the officers
and directors of the Company, as a group, own less than [1%] of the
Company's outstanding shares of common stock.
CONTROL PERSONS
As of October 31, 2004, the following persons owned of record or
beneficially more than 5% of the Company's common shares:
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. The
Charter contains such a provision which eliminates directors' and officers'
liability to the maximum extent permitted by Maryland law.
The Charter authorizes the Company, 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 of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or
trustee, from and against any claim or liability to which that person may become
subject or which that person may incur by reason of his or her status as a
present or former director or officer of the Company and to pay or reimburse his
or her reasonable expenses in advance of final disposition of a proceeding. The
Bylaws obligate the Company, to the maximum extent
S-18
permitted by Maryland law and the 1940 Act, to indemnify any present or former
director or officer or any individual who, while a director of the Company and
at the request of the Company, serves or has served another corporation, real
estate investment trust, partnership, joint venture, trust, employee benefit
plan or other enterprise as a director, officer, partner or trustee and who is
made a party to the proceeding by reason of his or her service in that capacity
from and against any claim or liability to which that person may become subject
or which that person may incur by reason of his or her status as a present or
former director or officer of the Company and to pay or reimburse his or her
reasonable expenses in advance of final disposition of a proceeding. The Charter
and Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and any employee or agent of the Company or a predecessor of the
Company.
Maryland law requires a corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful in the defense of any proceeding to which he is
made a party by reason of his service in that capacity. Maryland law permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, under Maryland law, a Maryland corporation may not indemnify
for an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, 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 corporation's 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 AND ACCOUNTING SERVICES PROVIDER
Tortoise Capital Advisors, L.L.C. (the "Adviser") serves as the
Company's investment adviser. The Adviser was formed by Fountain Capital
Management, L.L.C. ("Fountain Capital") and Kansas City Equity Partners, L.C.
("KCEP") in October 2002 to provide portfolio management services exclusively
with respect to energy infrastructure investments. The Adviser is controlled
equally by Fountain Capital and KCEP, each of which own half of all of the
voting shares of the Adviser.
Fountain Capital was formed in 1990 and is focused primarily on
providing investment advisory services to institutional investors with respect
to below investment grade debt. Atlantic Asset Management LLC ("Atlantic") is a
minority owner, and an affiliate, of Fountain Capital. Fountain Capital had $___
billion of client assets under management as of October 31, 2004.
KCEP was formed in 1993 and is focused solely on managing two private
equity funds, which have had combined committed capital of $110 million. KCEP
focuses on private equity investments in the consumer, telecom/media and natural
resource distribution and services industries.
Atlantic was formed in 1992 and provides, directly or through
affiliates, a variety of fixed-income investment advisory services including
investment grade bond and high-yield bond strategies, investment grade
collateralized debt obligations and mortgage hedge funds. Including Fountain
Capital, the Atlantic group had approximately $___ billion in assets under
management as of October 31, 2004.
S-19
The Adviser is located at 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210. The Adviser specializes in managing portfolios of MLPs and
other energy infrastructure companies. As of October 31, 2004, the Adviser and
its affiliates (including the Atlantic group) had approximately $____ million in
assets under management in the energy infrastructure industry.
Pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"), the Adviser shall, subject to overall supervision by the Board,
manage the investments of the Company. The Adviser will regularly provide the
Company with investment research advice and supervision and will furnish
continuously an investment program for the Company, consistent with the
investment objective and policies of the Company.
Day-to-day management of the Company's portfolio is the responsibility
of a team of investment analysts and portfolio managers led by David J. Schulte.
The Adviser has established a five-member Investment Committee. The members of
the Committee are David J. Schulte, H. Kevin Birzer, Terry C. Matlack, Zachary
A. Hamel and Kenneth Malvey. Each member of the committee, other than Mr.
Schulte, has significant responsibilities with respect to KCEP and/or Fountain
Capital. All members of the Investment Committee have undertaken to provide such
services as necessary to fulfill the obligations of the Adviser to the Company.
In addition, the Adviser is obligated to supply the Board and officers
of the Company 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, the Company pays to the Adviser quarterly, as
compensation for the services rendered and expenses paid by it, a fee equal on
an annual basis to 0.95% of the Company's average monthly Managed Assets.
Managed Assets means the total assets of the Company (including any assets
attributable to leverage that may be outstanding) minus accrued liabilities
other than (i) deferred taxes, (ii) debt entered into for the purpose of
leverage and (iii) the aggregate liquidation preference of any outstanding
shares of preferred stock.
The Adviser has contractually agreed to waive or reimburse the Company
for fees and expenses, including the investment advisory fee and other expenses
in the amount of 0.23% of average monthly Managed Assets for the first two years
of the Company's operations and 0.10% of average monthly Managed Assets in years
three through five.
Because the management fees paid to the Adviser are based upon a
percentage of the Company's Managed Assets, fees paid to the Adviser are higher
when the Company is leveraged; thus, the Adviser has an incentive to leverage
the Company. Because the fee reimbursement agreement is based on Managed Assets,
to the extent the Company is engaged in leverage, the gross dollar amount of the
Adviser's fee reimbursement obligations to the Company will increase. The
Adviser intends to leverage the Company only when it believes it will serve the
best interests of the stockholders. The Company's 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.
The Advisory Agreement provides that the Company will pay all expenses
other than those expressly stated to be payable by the Adviser, which expenses
payable by the Company shall include, without implied limitation: (1) expenses
of maintaining the Company and continuing its existence, (2) registration of the
Company 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 behalf of the Company, (4) auditing, accounting and
legal expenses, (5) taxes and interest, (6) governmental fees, (7) expenses of
listing shares of the Company with a stock exchange, and expenses of issue,
sale, repurchase and
S-20
redemption (if any) of interests in the Company, including expenses of
conducting tender offers for the purpose of repurchasing Company interests, (8)
expenses of registering and qualifying the Company and its shares under federal
and state securities laws and of preparing and filing registration statements
and amendments for such purposes, (9) expenses of reports and 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 the Company
(including without limitation safekeeping of funds, securities and other
investments, keeping of books, accounts and records, and determination of net
asset values), (14) fees, expenses and disbursements of transfer agents,
dividend and interest paying agents, stockholder servicing agents and registrars
for all services to the Company, (15) compensation and expenses of directors of
the Company who are not members of the Adviser's organization, (16) pricing and
valuation services employed by the Company, (17) all expenses incurred in
connection with leveraging of the Company's assets through a line of credit,
indebtedness or issuing and maintaining preferred stock, (18) all expenses
incurred in connection with the organization of the Company and the initial
public offering of the Company's common stock and this offering of common stock,
and (19) such nonrecurring items as may arise, including expenses incurred in
connection with litigation, proceedings and claims and the obligation of the
Company to indemnify its directors, officers and stockholders with respect
thereto.
The Advisory Agreement provides that the Adviser will not be liable in
any way for any default, failure or defect in any of the securities comprising
the Company's portfolio if it has satisfied the duties and the standard of care,
diligence and skill set forth in the Advisory Agreement. However, the Adviser
shall be liable to the Company for any loss, damage, claim, cost, charge,
expense or liability resulting from the Adviser's willful misconduct, bad faith
or gross negligence or disregard by the Adviser of the Adviser's duties or
standard of care, diligence and skill set forth in the Agreement or a material
breach or default of the Adviser's obligations under the Advisory Agreement.
The Advisory Agreement will continue in force until December 31, 2005,
and from year to year thereafter, provided such continuance is approved by a
majority of the Board or by vote of the holders of a majority of the outstanding
voting securities of the Company. Additionally, the Advisory Agreement must be
approved annually by vote of a majority of the Independent Directors. The
Advisory Agreement may be terminated by the Adviser or the Company, without
penalty, on sixty (60) days' written notice to the other. The Advisory Agreement
will terminate automatically in the event of its assignment.
The Advisory Agreement was considered and approved by the Board of
Directors, including a majority of the Independent Directors, at the
organizational meeting of the Company held on December 12, 2003. In considering
the Advisory Agreement, the Board, including a majority of the Independent
Directors, determined that the terms of the agreement are fair and reasonable
and that approval of the Advisory Agreement on behalf of the Company is in the
best interests of the Company. In evaluating the Advisory Agreement, the Board
reviewed materials furnished by the Adviser and met with senior advisory
personnel. The Board also specifically considered the following as relevant to
its determination to approve the Advisory Agreement: (1) the history,
reputation, qualification and background of the Adviser and the team of analysts
and portfolio managers responsible for the Company's investment program; (2) the
Adviser's reliance on the personnel and resources of affiliates; (3) the unique
nature of the product and the specialized expertise of the Adviser in a niche
market (MLPs); (4) that the fee and expense ratios of the Company are reasonable
given the quality of services expected to be provided and are comparable to the
fee and expense ratios of similar closed-end funds with similar investment
objectives and policies; and (5) other factors deemed relevant by the Board. The
Board noted and approved that the fee rate would be applicable to all assets
under management, including amounts attributable to leverage, and the potential
conflict of the Adviser in determining the amount of leverage.
S-21
The Adviser and its affiliates manage other accounts and portfolios
with investment strategies similar to those of the Company. Securities
frequently meet the investment objectives of the Company and such other accounts
and the Company may compete against other accounts for the same trade the
Company might otherwise make, including the priority of the trading order.
It is possible that at times identical securities will be held by the
Company and other accounts. However, positions in the same issuer may vary and
the length of time that the Company or other accounts may choose to hold their
investment in the same issuer may likewise vary. To the extent that one or more
of the accounts managed by the Adviser seeks to acquire the same security at
about the same time, the Company may not be able to acquire as large a position
in such security as it desires or it may have to pay a higher price for the
security. Similarly, the Company may not be able to obtain as large an execution
of an order to sell or as high a price for any particular portfolio security if
the Adviser decides to sell on behalf of another account the same portfolio
security at the same time. On the other hand, if the same securities are bought
or sold at the same time by the Company and other accounts, the resulting
participation in volume transactions could produce better executions for the
Company. In the event more than one account purchases or sells the same security
as the Company on a given date, the purchases and sales will normally be
allocated as nearly as practicable on a pro rata basis in proportion to the
amounts desired to be purchased or sold by each account and the Company. Other
factors considered in the allocation of securities include cash balances, risk
tolerances and other guideline restrictions. Although the other accounts may
have the same or similar investment objectives and policies as the Company,
their portfolios may not necessarily consist of the same investments as the
Company or each other, and their performance results are likely to differ from
those of the Company.
Under the 1940 Act, the Company and its affiliates may be precluded
from co-investing in negotiated private placements of securities. The Company
may apply to the SEC for exemptive relief to permit the Company and its
affiliates to make such investments. Unless and until the Company obtains an
exemptive order, the Company will not co-invest with its affiliates in
negotiated private placement transactions.
CODE OF ETHICS
The Company and the Adviser each have adopted a Code of Ethics under
Rule 17j-1 of the 1940 Act, which is applicable to officers, directors and
designated employees of the Company and the Adviser (the "Code"). Subject to
certain limitations, the Code permits covered persons to invest in securities,
including securities that may be purchased or held by the Company. The Code
contains 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 the Company. Among
other things, the Code prohibits 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 Code may be granted in
particular circumstances after review by appropriate personnel.
The Code of the Company can be reviewed and copied at the Securities
and Exchange Commission's Public Reference Room in Washington, D.C. Information
on the operation of the Public Reference Room may be obtained by calling the
Securities and Exchange Commission at (202) 942-8090. The Code of the Company is
also available on the EDGAR Database on the Securities and Exchange Commission's
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 Securities and Exchange Commission's Public Reference Section,
Washington, D.C. 20549-0102.
S-22
PORTFOLIO TRANSACTIONS
EXECUTION OF PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for
the Company, broker-dealer selection, and negotiation of brokerage commission
rates. The Adviser's primary consideration in effecting a security transaction
will be to obtain best execution. In selecting a broker-dealer to execute each
particular transaction, the Adviser will take the following into consideration:
the best net price available; the reliability, integrity and financial condition
of the broker-dealer; the size of and the difficulty in executing the order; and
the value of the expected contribution of the broker-dealer to the investment
performance of the Company on a continuing basis. Accordingly, the price to the
Company 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 the Company's 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,
the Company may, from time to time, enter into arrangements with placement
agents in connection with direct placement transactions.
In evaluating placement agent proposals, the Company considers each
broker's access to issuers of MLP securities and experience in the MLP market,
particularly the direct placement market. In addition to these factors, the
Company considers whether the proposed services are customary, whether the
proposed fee schedules are within the range of customary rates, whether any
proposal would obligate the Company 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. The Company
entered into a direct placement agreement with Lehman Brothers Inc. ("Lehman")
which expired on November 26, 2004. The agreement provided that the Company
would not enter into direct placement transactions with specified issuers unless
Lehman served as placement agent for the transactions and received customary
fees from MLP issuers. The Company believes that the agreement provided it with
greater access to direct placement opportunities than would have been the case
absent the agreement and that services were provided on competitive terms for
the MLP market. Determinative factors in the approval of the agreement included
(1) Lehman's superior access to MLP issuers, (2) the overall competitiveness of
Lehman's proposal and fees, based on a competitive bidding process, and (3) the
fact that Lehman's proposal did not require a specified volume of business. The
Company also considered that it had no obligation to enter into any transaction
if the officers of the Company did not determine that the overall terms of each
transaction, including purchase price and any fees, were in the best interests
of the Company.
Subject to such policies as the Board may from time to time determine,
the Adviser shall not be deemed to have acted unlawfully or to have breached any
duty solely by reason of its having caused the Company to pay a broker or dealer
that provides brokerage and research services to the Adviser an amount of
commission for effecting a Company investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the 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 the Adviser's overall responsibilities with respect to
the Company and to other clients of the Adviser as to which the Adviser
exercises investment discretion. The Adviser is further authorized to allocate
the orders placed by it on behalf of the Company to such brokers and dealers who
also provide research or statistical material or other services to the Company
or the Adviser. Such allocation shall be in such amounts and proportions as the
Adviser shall determine and the Adviser will
S-23
report on said allocations regularly to the Board indicating the brokers to whom
such allocations have been made and the basis therefor.
PORTFOLIO TURNOVER
The Company's annual portfolio turnover rate may vary greatly from year
to year. Although the Company cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 30% under normal circumstances. From
the commencement of operations through October 31, 2004, the Company's actual
portfolio turnover rate was less than 1%. However, portfolio turnover rate is
not considered a limiting factor in the execution of investment decisions for
the Company. A higher turnover rate results in correspondingly greater brokerage
commissions and other transactional expenses that are borne by the Company. High
portfolio turnover may result in the Company's recognition of gains that will
increase the Company's current and accumulated earnings and profits, resulting
in a greater portion of the Company's distributions being treated as taxable
dividends for Federal income tax purposes. See "Certain Federal Income Tax
Matters."
NET ASSET VALUE
The Company computes its net asset value for its 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. The Company makes its net asset value
available for publication monthly. For purposes of determining the net asset
value of a share of the Company's common stock, the net asset value of the
Company will equal the value of the total assets of the Company (the value of
the securities the Company holds plus cash or other assets, including interest
accrued but not yet received) less (i) all of its liabilities (including accrued
expenses and taxes, including both current and deferred income taxes); (ii)
accumulated and unpaid interest payments and dividends on any outstanding debt
or preferred stock, respectively; (iii) the aggregate liquidation value of any
outstanding preferred stock, including MMP Shares; (iv) the aggregate principal
amount of any outstanding senior notes, including Tortoise Notes; and (v) any
distributions payable on the common stock. The net asset value per share of the
Company's common stock will equal the net asset value of the Company 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 the
assets in the Company's portfolio in accordance with Valuation Procedures
adopted by the Board. The Accounting Services Provider will obtain securities
market quotations from independent pricing services approved by the Adviser and
ratified by the Board. Securities for which market quotations are readily
available shall be valued at "market value." Any other securities shall be
valued at "fair value."
Valuation of certain assets at market value will be as follows. For
equity securities, the Accounting Services Provider will first use readily
available market quotations and will obtain direct written broker-dealer
quotations if a security is not traded on an exchange or quotations are not
available from an approved pricing service. For fixed income securities, the
Accounting Services Provider will use readily available market quotations based
upon the last updated sale price or 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 OTC market, the
Accounting Services Provider will use the calculated mean based on bid and asked
prices obtained from the primary exchange or OTC market. 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 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; otherwise approval of the Board shall be
sought promptly. The Valuation Procedures provide for two preapproved
metholodologies. First, direct placements of securities of private companies
(i.e., companies with no outstanding public securities) ordinarily will be
valued at cost initially. Second, securities that are convertible into publicly
traded securities (i.e., convertible subordinated units) ordinarily will be
valued at the market value of the publicly traded security less a discount
initially determined with respect to each security based on the discount
negotiated at the time of purchase. The foregoing methods for valuing privately
placed securities may be used only as long as the Adviser believes they continue
to represent fair value.
In computing net asset value, the Company 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
the Company to its 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 as recognized for federal income tax
purposes. It is anticipated that cash distributions from MLPs in which the
Company invests will not equal the amount of taxable income allocable to the
Company primarily as a result of depreciation and amortization recorded by MLPs.
This may result in a portion of the cash distribution received not being treated
as income for federal tax purposes. The relative portion of such distributions
not treated as income for tax purposes will vary among the MLPs, and will also
vary year by year for each 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.
LEVERAGE
The Company may borrow money, issue preferred stock, or issue other
senior securities to the extent permitted by the 1940 Act. These practices are
known as leverage. The Company has Tortoise Notes and MMP Shares outstanding in
an aggregate principal amount and liquidation preference representing 29.5% of
total assets as of October 31, 2004. The Company generally will not use leverage
unless it believes that leverage will serve the best interests of its
stockholders. The principal, although not exclusive, factor used in making this
determination is whether the potential return is likely to exceed the cost of
leverage. The Company also may borrow up to an additional 5% of its 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, the Company is not permitted to incur indebtedness
constituting senior securities unless immediately thereafter the Company has
total assets (including the proceeds of the indebtedness) at least equal to 300%
of the amount of the indebtedness. Stated another way, the Company may not
borrow for investment purposes more than 33 1/3% of its total assets, including
the amount borrowed. The aggregate principal amount of the Company's outstanding
Tortoise Notes (which represent indebtedness) represents 22.4% of its total
assets as of October 31, 2004. The Company
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also must maintain this 300% "asset coverage" for as long as the indebtedness is
outstanding. As of October 31, 2004, the Company had an asset coverage of 395%
with respect to its Tortoise Notes. The 1940 Act provides that the Company may
not declare any cash distribution on its shares, or purchase any of its shares
of capital stock (through tender offers or otherwise), unless it would satisfy
this 300% asset coverage 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, the
Company may be required to sell a portion of its investments when it may be
disadvantageous to do so. Under the 1940 Act, the Company may only issue one
class of senior securities representing indebtedness. So long as Tortoise Notes
are outstanding, additional senior securities representing indebtedness must
rank on a parity with Tortoise Notes.
Under the 1940 Act, the Company is not permitted to issue preferred
stock unless immediately after such issuance the total assets are at least 200%
of the liquidation preference of the outstanding preferred stock. Stated another
way, the Company may not issue preferred stock that has an aggregate liquidation
preference of more than 50% of its total assets (less liabilities and
indebtedness), including the amount leveraged. The aggregate liquidation
preference of the Company's outstanding MMP Shares represents 7.1% of its total
assets and had asset coverage of 323% as of October 31, 2004. In addition, the
Company is not permitted to declare any cash distribution on its common stock
unless, at the time of such declaration, the total assets less liabilities and
indebtedness (determined after deducting the amount of such distribution) is at
least 200% of such liquidation value. The Company may, as a result of market
conditions or otherwise, be required to purchase or redeem MMP shares, or sell a
portion of its investments when it may be disadvantageous to do so, in order
maintain asset coverage for MMP Shares or any other preferred stock of at least
200%. Common stockholders would bear the costs of an additional preferred stock
offering which would include offering expenses and the ongoing payment of
dividends. Under the 1940 Act, the Company may only issue one class of senior
securities representing equity. So long as MMP Shares are outstanding,
additional senior equity securities must rank on a parity with MMP Shares.
The Company may, but is not required to, hedge general interest rate
exposure arising from its use of leverage by entering into interest rate
transactions. Interest rate transactions are hedging transactions such as
interest rate swaps and the purchase of interest rate caps and floors. Interest
rate swaps involve the exchange by the Company with another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed payments). The purchase of an interest rate cap entitles
the purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate floor. The Company
uses interest rate transactions solely for the purpose of hedging its leveraged
capital structure. 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.
The Company has entered into an interest rate swap transaction that is
intended to hedge the Company's interest payment obligations under the Tortoise
Notes against material increases in interest rates through June 2007. The
Company's dividend payment obligations under the MMP Shares remain unhedged at
this time.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue up to 100,000,000 shares of common
stock, $.001 par value per share ("common stock"), and up to 10,000,000 shares
of preferred stock, $.001 par value per share
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("preferred stock"). As of October 31, 2004, the Company had 12,684,154 shares
of common stock outstanding and 1,400 shares of preferred stock outstanding. The
Board of Directors may, without any action by the stockholders, amend the
Company's 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
the Company has authority to issue. Additionally, the Charter authorizes the
Board of Directors, without any action by the stockholders, to classify and
reclassify any unissued common stock and preferred stock into other classes or
series of stock from time to time by setting or changing the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each class or series. Although there is no present intention of
doing so, the Company could issue a class or series of stock that could delay,
defer or prevent a transaction or a change in control of the Company that might
otherwise be in the shareholders' best interests. Under Maryland law,
stockholders generally are not liable for Company debts or obligations.
COMMON STOCK
All Common Shares offered by this prospectus will be duly authorized,
fully paid and nonassessable. Holders of shares of common stock, including
Common Shares, are entitled to receive distributions when authorized by the
Board of Directors and declared 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 the Company's securities. All shares of common
stock have equal distribution, liquidation and other rights.
Limitations on Distributions. So long as Tortoise Notes or other senior
securities representing indebtedness are outstanding, holders of shares of
common stock will not be entitled to receive any distributions from the Company
unless all accrued interest on such senior indebtedness has been paid, 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.
So long as MMP Shares or other shares of preferred stock are
outstanding, holders of shares of common stock will not be entitled to receive
any distributions from the Company unless all accumulated dividends on preferred
stock have been paid, 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."
Distribution Rights. Holders of shares of common stock 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 Tortoise Notes or other borrowings and any interest accrued thereon.
These rights are subject to the preferential rights of any other class or series
of the Company's capital stock, including the MMP 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. The 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 capital 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 capital stock will be able to elect all
of the successors of the class of directors whose terms expire at that meeting.
Pursuant to the Charter and Bylaws, the Board of Directors may amend the Bylaws
to alter the vote required to elect directors.
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The Charter provides for approval of certain extraordinary transactions
by the stockholders entitled to cast at least a majority of the votes entitled
to be cast on the matter. The Charter also provides that any proposal to convert
the Company from a closed-end investment company to an open-end investment
company or any proposal to liquidate or dissolve the Company requires the
approval of the stockholders entitled to cast at least 80 percent of the votes
entitled to be cast on such matter. However, if such a proposal is approved by
at least two-thirds of the continuing directors (in addition to approval by the
full Board of Directors), such proposal may be approved by a majority of the
votes entitled to be cast on such matter. The "continuing directors" are defined
in the Charter as the current directors 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 continuing directors then on the
Board of Directors.
Under the rules of the NYSE applicable to listed companies, the Company
normally will be required to hold an annual meeting of stockholders in each
fiscal year. If the Company is 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),
the Company may decide not to hold annual meetings of stockholders.
Addtional offerings of common stock, if made, will require approval of
the Board of Directors and will be subject to the requirement of the 1940 Act
that common stock may not be sold at a price below the then-current net asset
value, exclusive of underwriting discounts and commissions.
PREFERRED STOCK
The Company has 1,400 MMP Shares with an aggregate liquidation
preference of $35,000,000 outstanding. The MMP Shares pay cash dividends at
dividend rates that vary based on auctions normally held every twenty-eight (28)
days. The MMP Shares rank junior to the Tortoise Notes and any other borrowings,
on par with other preferred stock of the Company, if any, and senior to all
common stock. Under the 1940 Act, the Company may only issue one class of
preferred stock. So long as MMP Shares are outstanding, additional issuances of
preferred stock must be of the same class as MMP Shares and will have no
preference or priority over the MMP Shares upon the distribution of assets of
the Company. It is expected that any additional issuance of preferred stock
would be additional series of MMP Shares. The MMP Shares are not convertible
into shares of common stock or other stock of the Company, have no preemptive
rights, and are not subject to any sinking fund. The MMP Shares are subject to
optional and mandatory redemption under certain circumstances. Any redemption or
purchase of preferred stock by the Company will reduce the leverage applicable
to the common stock, while any resale of shares by the Company will increase
that leverage.
Distribution Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of preferred
stock would be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per share plus
accumulated and unpaid dividends, whether or not declared, before any
distribution of assets is made to holders of common stock. After payment of the
full amount of the liquidating distribution to which they are entitled, the
holders of preferred stock will not be entitled to any further participation in
any distribution of assets by the Company.
Voting Rights. Except as otherwise indicated in the Charter or Bylaws,
or as otherwise required by applicable law, holders of MMP Shares 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
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prior rights, if any, of the holders of any other class of senior securities
outstanding, the holders of any shares of preferred stock have the right to
elect a majority of the directors at any time two years' accumulated dividends
on any preferred stock are unpaid. The 1940 Act also requires that, in addition
to any approval by stockholders that might otherwise be required, the approval
of the holders of a majority of shares of any outstanding preferred stock,
voting separately as a class, would be required to (i) adopt any plan of
reorganization that would adversely affect the preferred stock, and (ii) take
any action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, changes in the Company's subclassification
as a closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Company's Charter and Bylaws." As a
result of these voting rights, the Company's ability to take any such actions
may be impeded to the extent that any shares of its 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.
Except in an auction in which the MMP Shares are traded, the Company
will have the right (to the extent permitted by applicable law) to purchase or
otherwise acquire any MMP Share, so long as the Company is current in the
payment of dividends on the MMP Shares and on any other shares of the Company
ranking on a parity with the MMP Shares with respect to the payment of dividends
or upon liquidation.
The information contained under this heading is subject to the
provisions contained in the Company's Charter and Bylaws and the laws of the
State of Maryland.
DESCRIPTION OF TORTOISE NOTES AND BORROWINGS
The Charter authorizes the Company, without prior approval of holders
of common and preferred stock, to borrow money. The Company may issue additional
Tortoise Notes, other 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 the Company's assets to
the extent permitted by the 1940 Act or rating agency guidelines. Any
borrowings, including without limitation the Tortoise Notes discussed below,
will rank senior to the MMP Shares and the common stock.
On July 15, 2004, the Company issued two series of Tortoise Notes in an
aggregate principal amount of $110,000,000 pursuant to the provisions of an
indenture. BNY Midwest Trust Company serves as trustee and transfer agent and
BONY serves as transfer agent for the Tortoise Notes. The Tortoise Notes pay
interest at rates that vary based on auctions normally held every twenty-eight
(28) days. The Tortoise Notes rank senior to the Company's common and preferred
stock. Under the 1940 Act, the Company may only issue one class of senior
securities representing indebtedness. So long as Tortoise Notes are outstanding,
additional senior debt securities must rank on a parity with Tortoise Notes. The
Tortoise Notes may be redeemed prior to their maturity at the option of the
Company, in whole or in part, under certain circumstances and are subject to
mandatory redemption upon failure of the Company to maintain asset coverage
requirements with respect to the Tortoise Notes.
Limitations. Under the requirements of the 1940 Act, immediately after
issuing any senior securities representing indebtedness, including Tortoise
Notes, the Company must have an asset coverage of at least 300%. With respect to
any Tortoise Notes or other senior securities representing indebtedness,
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asset coverage means the ratio which the value of the total assets of the
Company, less all liabilities and indebtedness not represented by senior
securities, bears to the aggregate amount of senior securities representing
indebtedness. The Company is subject to certain restrictions imposed by
guidelines of one or more rating agencies that issued ratings for the Tortoise
Notes, including restrictions related to asset coverage and portfolio
composition. Such restrictions may be more stringent than those imposed by the
1940 Act. Other types of borrowings also may result in the Company being subject
to similar covenants in credit agreements.
Distribution Preference. A declaration of a distribution on or purchase
or redemption of common or preferred stock, is restricted: (i) at any time that
an event of default under the Tortoise Notes or any other Borrowings has
occurred and is continuing; or (ii) if after giving effect to such declaration,
the Company would not have eligible portfolio holdings with an aggregated
Discounted Value at least equal to any asset coverage requirements associated
with such Tortoise Notes or other Borrowings; or (iii) if the Company has not
redeemed the full amount of Tortoise Notes or other Borrowings, if any, required
to be redeemed by any provision for mandatory redemption. In addition, the terms
of any other Borrowings may contain provisions that limit certain activities of
the Company, including the payment of distributions or dividend to holders of
common and preferred stock, in certain circumstances.
Voting Rights. The Tortoise Notes have no voting rights, except to the
extent required by law or as otherwise provided in the indenture relating to the
acceleration of maturity upon the occurrence and continuance of an event of
default. In connection with any other Borrowings (if any), the 1940 Act does (in
certain circumstances) grant to the lenders to the Company certain voting rights
in the event of default in the payment of interest on or repayment of principal.
RATING AGENCY GUIDELINES
The Tortoise Notes are currently rated "Aaa" and "AAA" by Moody's
Investors Service Inc. ("Moody's") and Fitch Ratings ("Fitch"), respectively.
The MMP Shares are currently rated "Aa2" and "AA" by Moody's and Fitch,
respectively. Moody's and Fitch, and any other agency that may rate the Tortoise
Notes or MMP Shares in the future, are collectively referred to as the "Rating
Agencies." For purposes of this section only, the Tortoise Notes and MMP Shares
are collectively referred to as "Senior Securities." The Rating Agencies impose
asset coverage requirements, which may limit the Company's ability to engage in
certain types of transactions and may limit the Company's ability to take
certain actions without confirming that such action will not impair the ratings.
The Company may, but is not required to, adopt any modifications 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 by the Company pursuant to each
Rating Agencies' guidelines ("Rating Agency Guidelines") only in the event the
Company receives 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.
The Company is required to satisfy two separate asset maintenance
requirements with respect to the Tortoise Notes and with respect to the MMP
Shares: (1) the Company must maintain assets in its 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 Tortoise Notes/MMP Shares, respectively, plus specified liabilities,
payment obligations and other amounts (the "Basic Maintenance Amount"); and (2)
the Company must satisfy the 1940 Act Asset Coverage requirements.
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Basic Maintenance Amounts. The Company 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, which is calculated separately for the Tortoise Notes and
the MMP Shares for each Rating Agency that is then rating the Senior Securities
and so requires. If the Company fails to maintain eligible assets having an
aggregated discounted value at least equal to the applicable Basic Maintenance
Amount as of any valuation date and such failure is not cured, the Company will
be required in certain circumstances to redeem certain of the Senior Securities.
The applicable Basic Maintenance Amount is defined in the Rating
Agencies' Guidelines. Each Rating Agency may amend the definition of the
applicable Basic Maintenance Amount from time to time.
The market value of the Company's 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
the Company's Valuation Procedures. For the purpose of calculating the
applicable Basic Maintenance Amount, portfolio securities are valued in the same
manner as the Company calculates its net asset value. See "Net Asset Value."
Each Rating Agency's discount factors, the criteria used to determine
whether the assets held in the Company's portfolio are eligible assets, and the
guidelines for determining the discounted value of the Company's 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 of the Company, the applicable Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the discounted value of the
Company's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the applicable Rating Agency,
without the approval of the Company, Board of Directors or stockholders.
A Rating Agency's Guidelines will apply to the Senior Securities only
so long as that Rating Agency is rating such securities. The Company will pay
certain fees to Moody's, 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. The Company is 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% and 200%
for Tortoise Notes and MMP Shares, respectively (or such other percentage as may
in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities representing shares of a closed-end investment
company as a condition of declaring dividends on its common stock). If the
Company fails to maintain the applicable 1940 Act Asset Coverage as of the last
Business Day of any month and such failure is not cured as of the last business
day of the following month (the "Asset Coverage Cure Date"), the Company will be
required to redeem certain Senior Securities.
Notices. Under the current Rating Agency Guidelines, in certain
circumstances, the Company is 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 the portfolio holdings of the Company; and (3) a letter prepared by the
Company's 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
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amended by each Rating Agency without the vote, consent or approval of the
Company, the Board of Directors or any stockholder of the Company.
A copy of the current Rating Agency Guidelines will be provided to any
holder of Senior Securities promptly upon request made by such holder to the
Company by writing the Company at 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210.
CERTAIN FEDERAL INCOME TAX MATTERS
Set forth below is a discussion of the material U.S. federal income tax
aspects concerning the Company and the purchase, ownership and disposition of
common stock. This discussion does not purport to be complete or to deal with
all aspects of federal income taxation that may be relevant to stockholders 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 and certain
tax-deferred accounts, and foreign investors. Unless otherwise noted, this
discussion assumes that you are a U.S. person and hold your common stock as a
capital asset. This discussion is based on present provisions of the Internal
Revenue Code and the regulations promulgated thereunder and existing judicial
decisions and administrative pronouncements, all of which are subject to change
or differing interpretations (possibly with retroactive effect). Prospective
investors should consult their own tax advisers with regard to the federal
income tax consequences of the purchase, ownership or disposition of common
stock, as well as the tax consequences arising under the laws of any state,
locality, foreign country or other taxing jurisdiction.
TAXATION OF THE COMPANY
The Company is treated as a regular C corporation for federal and state
income tax purposes. The Company computes and pays federal and state income tax
on its taxable income. Thus, the Company is subject to federal income tax on its
taxable income at tax rates up to 35%. Additionally, in certain instances the
Company could be subject to the alternative minimum tax of 20% on its
alternative minimum taxable income to the extent that the alternative minimum
tax exceeds its regular federal income tax.
As indicated above, the Company generally invests its 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 partnership's partners must report as their income their proportionate share
of partnership income. Thus, as a partner in MLPs, the Company will report its
proportionate share of the MLPs' income in computing its federal taxable income,
irrespective of whether any cash distributions are made by the MLP to the
Company. The Company will also take into account in computing its taxable income
any other items of Company income, gain, deduction or loss. The Company
anticipates that these may include interest income earned on the Company's
investment in debt securities, deductions for Company operating expenses and
gain or loss recognized by the Company on the sale of MLP interests or any other
security.
As explained below, based upon the historic performance of MLPs, the
Company anticipates initially that its proportionate share of the MLPs' taxable
income will be significantly less than the amount of cash distributions received
by the Company from the MLPs. In such case, the Company anticipates that it will
not incur federal income tax on a significant portion of its cash flow,
particularly after taking into account the Company's current operational
expenses. If the MLPs' taxable income is a significantly greater portion of the
MLPs' cash distributions, the Company will incur additional current federal
income tax liability, possibly in excess of the cash distributions it receives.
S-32
The Company anticipates that each year it will turn over a certain
portion of its investment assets. The Company will recognize gain or loss on the
disposition of all or a portion of its interest in MLPs in an amount equal to
the difference between the sales price and the Company's basis in the MLP
interests sold. To the extent the Company receives MLP cash distributions in
excess of the taxable income reportable by the Company with respect to each
respective MLP interest, the Company's basis in the MLP interest will be reduced
and the Company's gain on the sale of an MLP interest likewise will be
increased.
The Company is not treated as a regulated investment company under the
federal income tax rules. The federal income tax rules generally provide that a
regulated investment company does not pay an entity level income tax, provided
that it distributes all or substantially all of its income. The Company's assets
and expected income 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 the
Company or stockholders of the Company. Recent changes to the federal tax laws
could likely enable investment companies and other institutions to invest in
MLPs to a greater degree.
TAXATION OF THE STOCKHOLDERS
Distributions. The Company expects to distribute to the holders of
common stock an amount equal to 95% of the distributable cash flow ("DCF") on an
annual basis. The Company's distribution of its DCF will be treated as a
dividend-type distribution. A dividend-type distribution is treated as a taxable
dividend to the stockholder to the extent of the distributing corporation's
current or accumulated earnings and profits allocated to the particular shares
held by a stockholder. If the distribution exceeds the distributing
corporation's current or accumulated earnings and profits, the distribution is
treated as a return of capital to the stockholder, to the extent of the
stockholder's basis in the common stock, and then as capital gain.
Generally, a corporation's earnings and profits are computed based upon
taxable income, with certain specified adjustments. As explained above, based
upon the historic performance of MLPs, the Company anticipates that the
distributed cash from the MLPs will exceed the Company's proportionate share of
the MLP income and the Company's gain on its sale of MLP interests. Thus, the
Company anticipates that only a portion of its distributions will be treated as
dividend income to its stockholders. In addition, earnings and profits are
treated generally, for federal income tax purposes, as first being used to pay
dividends on the MMP Shares, and then to the extent remaining, if any, to pay
distributions on its common stock. To the extent that distributions to a
stockholder exceed the proportionate share of the Company's earnings and
profits, a stockholder's basis in the common stock will be reduced and, if a
stockholder has no further basis in its shares, a stockholder will report any
excess as capital gain.
The Jobs Growth and Tax Relief Reconciliation Act of 2003 amended the
federal income tax law generally to reduce the maximum federal income tax rate
of qualifying dividend income to the rate applicable to long-term capital gains,
which is generally fifteen percent. The portion of the Company's distributions
of DCF treated as a dividend for federal income tax purposes should be treated
as a qualifying dividend for federal income tax purposes. This rate of tax on
dividends is currently scheduled to increase back to ordinary income rates after
December 31, 2008.
If a stockholder participates in the Company's automatic dividend
reinvestment plan, such stockholder will be taxed upon the amount received as if
such amount is received by the participating stockholder and the participating
stockholder reinvested such amount in additional shares of the Company's common
stock.
The Company will notify stockholders annually as to the federal income
tax status of Company distributions to them.
S-33
Sale of Common Stock. Upon the sale of shares of common stock, a
stockholder generally will recognize capital gain or loss measured by the
difference between the sales proceeds received and the stockholder's federal
income tax basis of the shares of common stock sold. Generally such capital gain
or loss will be long-term capital gain or loss if the shares of common stock
were held as a capital asset for more than twelve months.
Backup Withholding and Information Reporting. The Company may be
required to withhold and remit to the U.S. Treasury a portion (except as noted
below) of all distributions (including Capital Gain Dividends) and redemption or
repurchase proceeds otherwise payable to any individual or certain other
non-corporate stockholders who fail to properly furnish the Company with a
correct taxpayer identification number. Withholding at that rate also is
required from all distributions otherwise payable to such a stockholder who has
underreported dividend or interest income or who fails to certify to the Company
that he or she is not otherwise subject to that withholding (together with the
withholding described in the preceding sentence, "backup withholding"). The
backup withholding rate will increase to 31% for amounts paid after December 31,
2010, unless Congress enacts tax legislation providing otherwise. Backup
withholding is not an additional tax, and any amounts withheld with respect to a
stockholder may be credited against the stockholder's federal income tax
liability.
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
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 may 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 is treated for
federal income tax purposes as a pass-through entity. No federal income tax is
paid at the partnership level. A partnership's 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 or her share of the partnership
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 individual partner.
The Internal Revenue Code generally requires all publicly-traded
partnerships to be treated as a corporation for federal income tax purposes.
However, if the publicly-traded partnership satisfies certain requirements, the
publicly-traded partnership will be taxed as partnership for federal income tax
purposes, referred to herein as an MLP. Under these requirements, an MLP must
receive 90 percent of its income from specified sources of Qualifying Income.
Qualifying Income for MLPs includes interest, dividends, real estate
rents, gain from the sale or disposition of real property, income and gain from
commodities or commodity futures, and income and gain from mineral or natural
resources activities. Mineral or natural resources activities that generate
Qualifying Income include exploration, development, production, mining,
refining, transportation (including pipelines) or the marketing of any mineral
or natural resource. 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 payment from the MLP. MLPs generally
S-34
make quarterly cash distributions. Although they resemble corporate dividends,
MLP distributions are treated differently. The MLP distribution is treated as a
return of capital to the extent of the investor's basis in his MLP interest and,
to the extent the distribution exceeds the investor's basis in the MLP, capital
gain. The investor's 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 income.
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 from the
partnership. The tax is based not on money 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 tax owed.
When the units are sold, the difference between the sales price and the
investor's adjusted basis equals taxable gain. The partner will not be taxed 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.
At tax filing season an MLP investor will receive a K-1 form showing
his share of each item of partnership income, gain, loss, deductions and
credits. The investor will use that information to figure the investor's 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 individual tax rate. If
there is a net loss derived from the MLP, it is 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 the Company is a corporation, the Company, and not its
stockholders, will report the income or loss of the MLPs. Thus, the Company's
stockholders will not have to deal with any K-1 reporting by the MLP.
Stockholders, instead, will receive a Form 1099 from the Company. In addition,
due to the Company's broad public ownership, the Company will not be subject to
the passive activity loss limitation rules mentioned in the preceding paragraph.
OTHER TAXATION
Non-U.S. 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.
Investors are advised to consult their own tax advisors with respect to
the application of the above-described general federal income tax rules to their
own circumstances and with respect to other federal, state, local or foreign tax
consequences to them before making an investment in the Company's common stock.
PROXY VOTING POLICIES
The Company and the Adviser have adopted proxy voting policies and
procedures ("Proxy Policy"), which they believe are reasonably designed to
ensure that proxies are voted in the best interests of the Company and its
stockholders. Subject to the oversight of the Board of Directors, the Board has
delegated responsibility for implementing the Proxy Policy to the Adviser.
Because of the unique nature of MLPs in which the Company primarily invests, the
Adviser shall evaluate each proxy on a case-by-case basis. Because proxies of
MLPs are expected to relate only to extraordinary measures, the Company does not
believe it is prudent to adopt pre-established voting guidelines.
S-35
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 the Adviser determines it has a conflict or the
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, the 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 the Company's
stockholders. In the event requests for proxies are received with respect to
debt securities, the Adviser will vote on a case by case basis in a manner it
believes to be in the best economic interest of the Company's stockholders.
The Chief Executive officer is responsible for monitoring Company
actions and ensuring that (i) proxies are received and forwarded to the
appropriate decision makers; and (ii) proxies are voted in a timely manner upon
receipt of voting instructions. The Company is not responsible for voting
proxies it does 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 (i) significant client relationships; (ii) other potential
material business relationships; and (iii) material personal and family
relationships. All decisions regarding proxy voting shall be determined by the
Investment Committee of the Adviser and shall be executed by the Chief Executive
Officer. Every effort shall be made to consult with the portfolio manager and/or
analyst covering the security. The Company 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 the
Company's stockholders on one hand, and the Adviser, the principal underwriters,
or any affiliated persons of the Company, on the other hand, Company management
may (i) disclose the potential conflict to the Board of Directors and obtain
consent; or (ii) 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 the Company voted proxies for the period from
the commencement of operations through June 30, 2004, is available by calling
the Company at 1-888-728-8784. You may also access this information on the
Securities and Exchange Commission's website at http:\\www.sec.gov. The
Company's website at 222.tortoiseenergy.com provides a link to all of its
reports on the Commission's website.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
__________ serves as the independent registered public accounting firm
for the Company. __________ provides audit services, tax return preparation and
assistance and consultation in connection with review of the Company's filings
with the Commission.
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT
U.S. Bancorp Fund Services, LLC serves as the Company's administrator.
The Company pays the administrator a monthly fee computed at an annual rate of
0.07% of the first $300 million of the Company's Managed Assets, 0.06% on the
next $500 million of Managed Assets and 0.04% on the balance of the Company's
Managed Assets, subject to a minimum annual fee of $45,000.
S-36
Computershare Investor Services, LLC serves as the Company's transfer
agent, dividend paying agent, and agent for the automatic dividend reinvestment
plan.
U.S. Bank N.A. serves as the Company's custodian. The Company pays the
custodian a monthly fee computed at an annual rate of 0.015% on the first $100
million of the Company's Managed Assets and 0.01% on the balance of the
Company's Managed Assets, subject to a minimum annual fee of $4,800.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the Common Shares offered hereby, has been filed by the Company with
the Commission. The Company's prospectus 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. For further information
with respect to the Company and the Common Shares offered hereby, please refer
to the Registration Statement. Statements contained in the Company's prospectus
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 the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Commission
upon the payment of certain fees prescribed by the Commission.
S-37
[TO BE UPDATED AS OF OCTOBER 31, 2004]
FINANCIAL STATEMENTS
UNAUDITED FINANCIAL STATEMENTS AS OF
AUGUST 31, 2004
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
SCHEDULE OF INVESTMENTS (UNAUDITED)
AUGUST 31, 2004
MASTER LIMITED PARTNERSHIPS - 131.20% SHARES VALUE
------------------------------------- ------ -----
COAL - 3.29%
Natural Resource Partners L.P. 253,700 $ 10,135,315
------------
CRUDE/REFINED PRODUCTS PIPELINES - 82.23%
Enbridge Energy Partners, L.P. 357,300 17,368,353
Holly Energy Partners, L.P.* 427,070 12,299,616
Kaneb Pipe Line Partners, L.P. 388,500 19,230,750
Kinder Morgan Energy Partners, L.P. 118,400 5,271,168
Kinder Morgan Management, LLC # 804,467 31,269,632
K-Sea Transportation Partners L.P. 65,600 1,880,752
Magellan Midstream Partners, L.P. 796,217 41,642,149
Pacific Energy Partners, L.P. 565,800 16,006,482
Plains All American Pipeline, L.P. 728,335 24,260,839
Plains All American Pipeline, L.P. - Unregistered ^ 486,855 15,243,430
Sunoco Logistics Partners L.P. 838,200 32,279,082
TEPPCO Partners, L.P. 538,500 21,480,765
Valero L.P. 287,100 15,316,785
------------
253,549,803
------------
NATURAL GAS/NGL PIPELINES - 13.19%
Enterprise Products Partners L.P. 1,092,200 24,345,138
GulfTerra Energy Partners, L.P. 406,995 16,344,919
------------
40,690,057
------------
NATURAL GAS GATHERING/PROCESSING - 22.14%
Energy Transfer Partners, L.P. 907,244 39,356,245
Markwest Energy Partners, L.P. 126,100 5,550,922
Markwest Energy Partners, L.P. - Unregistered ^ 579,710 23,350,719
------------
68,257,886
------------
PROPANE DISTRIBUTION - 10.35%
Inergy, L.P. 1,300,000 31,928,000
------------
TOTAL MASTER LIMITED PARTNERSHIPS (Cost $379,862,712) 404,561,061
------------
F-1
PROMISSORY NOTES - 2.60% PRINCIPAL AMOUNT
------------------------ ----------------
K-Sea Transportation Partners L.P. - Unregistered, 8.000%, Due
03/31/2009 (Cost $8,021,504) ^ @ $ 8,137,500 8,021,504
-----------
INVESTMENT COMPANIES - 6.95% SHARES
---------------------------- ------
First American Prime Obligations Fund - Class Z 10,709,914 10,709,914
First American Treasury Obligations Fund - Class Z 10,709,914 10,709,914
------------
(Cost $21,419,828) 21,419,828
------------
TOTAL INVESTMENTS - 140.75% (COST $409,304,044) 434,002,393
INTEREST RATE SWAP CONTRACTS - (0.48%)
$60,000,000 notional, Due 7/10/2007 - Unrealized Depreciation (811,992)
$50,000,000 notional, Due 7/17/2007 - Unrealized Depreciation (673,195)
------------
(1,485,187)
------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (40.27%) (124,169,925)
------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS - 100.00% $308,347,281
============
------------------
Footnotes and Abbreviations
* Non-Income producing security.
^ Fair valued securities represent a total market value of $46,615,653
which represents 15.12% of net assets.
# Security distributions are paid in kind.
@ Security is a variable rate instrument. Interest rate is as of August
31, 2004.
See Accompanying Notes to the Financial Statements.
F-2
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF ASSETS & LIABILITIES (UNAUDITED)
AS OF AUGUST 31, 2004
---------------------
ASSETS:
Investments at value (cost $409,304,044) $434,002,393
Interest receivable 45,292
Prepaid expenses and other assets 1,542,615
------------
Total assets 435,590,300
------------
LIABILITIES:
Dividend payable 4,299,260
Payable for securities purchased 1,725,416
Payable to Adviser 471,732
Accrued expenses and other liabilities 206,233
Unrealized depreciation on interest rate swap contracts 1,485,187
Deferred tax liability 9,055,191
Auction rate senior notes payable:
Series A, Due July 15, 2044 60,000,000
Series B, Due July 15, 2044 50,000,000
------------
Total liabilities 127,243,019
------------
Net assets applicable to common shareholders $308,347,281
============
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Capital stock, $0.001 par value; 12,644,882 shares issued and outstanding
(100,000,000 shares authorized) $ 12,645
Additional paid-in capital 294,168,448
Accumulated realized gain, net of income taxes 4,741
Net unrealized gain on investments and interest rate swap contracts, net
of income taxes 14,161,447
------------
Net assets applicable to common shareholders $308,347,281
============
Net Asset Value per common share $ 24.39
============
See Accompanying Notes to the Financial Statements.
F-3
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF OPERATIONS (UNAUDITED)
PERIOD FROM FEBRUARY 27, 2004(1)
THROUGH AUGUST 31, 2004
--------------------------------
INVESTMENT INCOME:
Dividends and distributions $ 1,269,404
Interest 796,091
------------
TOTAL INVESTMENT INCOME 2,065,495
------------
EXPENSES:
Advisory fees 1,546,049
Organizational expenses 239,018
Professional fees 102,831
Administrator fees 110,601
Interest expense on auction rate senior notes 232,049
Reports to shareholders 30,960
Custodian fees and expenses 27,070
Directors' fees 29,805
Fund accounting fees 27,387
Registration fees 19,560
Stock transfer agent fees 7,266
Other expenses 67,451
------------
TOTAL EXPENSES 2,440,047
------------
Less, expense reimbursement by Adviser (375,693)
------------
NET EXPENSES 2,064,354
------------
NET INVESTMENT INCOME, BEFORE DEFERRED TAX EXPENSE 1,141
------------
DEFERRED TAX EXPENSE (445)
------------
NET INVESTMENT INCOME 696
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments, before deferred tax expense 7,772
Deferred tax expense (3,031)
------------
Net realized gain on investments 4,741 Net change in unrealized
appreciation (depreciation) of:
Investments 24,698,349
Interest rate swap contracts (1,485,187)
------------
Net change in unrealized appreciation of investments and interest
rate swap contracts, before deferred tax expense 23,213,162
Deferred tax expense (9,051,715)
------------
Net change in unrealized appreciation of investments and interest rate
swap contracts 14,161,447
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 14,166,188
------------
F-4
PERIOD FROM FEBRUARY 27, 2004(1)
THROUGH AUGUST 31, 2004
--------------------------------
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS RESULTING
FROM OPERATIONS $ 14,166,884
============
------------------
(1) Commencement of Operations.
See Accompanying Notes to the Financial Statements.
F-5
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
PERIOD FROM FEBRUARY 27, 2004(1)
THROUGH AUGUST 31, 2004
--------------------------------
OPERATIONS:
Net investment income $ 696
Net realized gain on investments 4,741
Net change in unrealized appreciation of investments and interest rate
swap contracts 14,161,447
------------
Net increase in net assets applicable to common shareholders
resulting from operations 14,166,884
------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
Net investment income (696)
Return of capital (6,823,175)
------------
Total distributions to common shareholders (6,823,871)
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from initial public offering of 11,000,000 common shares 275,000,000
Proceeds from issuance of 1,600,000 common shares in connection with
exercising an overallotment option granted to underwriters of the
initial public offering 40,000,000
Underwriting discounts and offering expenses associated with the
issuance of common shares (14,859,814)
Issuance of 21,835 common shares from reinvestment of dividend
distributions to shareholders 495,660
------------
Net increase in net assets, applicable to common shareholders from
capital share transactions 300,635,846
------------
Total increase in net assets applicable to common shareholders 307,978,859
NET ASSETS:
Beginning of period 368,422
End of period $308,347,281
============
Undistributed net investment income at August 31, 2004 $ --
============
------------------
(1) Commencement of Operations.
See Accompanying Notes to the Financial Statements.
F-6
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF CASH FLOWS (UNAUDITED)
PERIOD FROM FEBRUARY 27, 2004(1)
THROUGH AUGUST 31, 2004
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Distributions received from master limited partnerships $ 7,030,919
Interest income received 744,355
Purchases of long term investments (392,468,311)
Proceeds from sale of investments 562,500
Net purchases of short term investments (21,420,116)
Interest expense paid (142,944)
Operating expenses paid (1,350,560)
-------------
Net cash used in operating activities (407,044,157)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 315,000,000
Issuance of auction rate senior notes payable 110,000,000
Common stock issuance costs (14,859,814)
Debt issuance costs (1,435,500)
Dividends paid to shareholders (2,028,951)
-------------
Net cash provided by financing activities 406,675,735
-------------
Net decrease in cash (368,422)
Cash--beginning of period 368,422
-------------
Cash--end of period $ --
=============
Reconciliation of net increase in net assets resulting from operations to
net cash used in operating activities:
Net increase in net assets, applicable to common shareholders,
resulting from operations $ 14,166,884
Adjustments to reconcile net increase in net assets, applicable to
common shareholders, resulting from operations to net cash used in
operating activities:
Purchases of long-term investments (386,706,796)
Proceeds from sales of investments 562,500
Net purchases of short term investments (21,420,116)
Deferred income taxes 9,055,191
Net change in unrealized appreciation on investments and interest
rate swap contracts (23,213,162)
Realized gains on sale of investments and interest rate swap
contracts (7,772)
Accretion of discount on investments (6,444)
Amortization of debt issuance costs 4,716
Changes in operating assets and liabilities:
Increase in interest receivable (45,292)
Increase in prepaid expenses and other assets (111,831)
Increase in advisory fee payable 471,732
Increase in accrued expenses and other liabilities 206,233
-------------
Total adjustments (421,211,041)
-------------
Net cash used in operating activities $(407,044,157)
=============
F-7
PERIOD FROM FEBRUARY 27, 2004(1)
THROUGH AUGUST 31, 2004
--------------------------------
NON-CASH FINANCING ACTIVITIES:
Reinvestment of dividend distributions $ 495,660
------------------
(1) Commencement of Operations.
See Accompanying Notes to the Financial Statements.
F-8
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
FINANCIAL HIGHLIGHTS (UNAUDITED)
PERIOD FROM FEBRUARY 27, 2004(1)
THROUGH AUGUST 31, 2004
-------------------------------
PER COMMON SHARE DATA (2)
Net Asset Value, beginning of period
Public offering price $ 25.00
Underwriting discounts and offering costs (1.18)
Income from Investment Operations:
Net investment loss (5) --
Net realized and unrealized gain on investments 1.11
---------
Total gain from investment operations 1.11
---------
Less Dividends to Common Shareholders:
Net investment income --
Return of capital (0.54)
---------
Total dividends to common shareholders (0.54)
---------
Net Asset Value, end of period $ 24.39
=========
Per common share market value, end of period $ 25.06
Total Investment Return Based on Market Value (3) 2.53%
SUPPLEMENTAL DATA AND RATIOS (4)
Net assets applicable to common shareholders, end of period (000's) $ 308,347
Ratio of expenses to average net assets before waiver: 1.64%
Ratio of expenses to average net assets after waiver: 1.39%
Ratio of expenses, without regard to non-recurring organizational
expenses, to average net assets before waiver: 1.48%
Ratio of expenses, without regard to non-recurring organizational
expenses, to average net assets after waiver: 1.23%
Ratio of investment income to average net assets before waiver: (0.25)%
Ratio of investment income to average net assets after waiver: --
Portfolio turnover rate 0.30%
Tortoise Auction Rate Senior Notes (000's) $ 110,000
Per share amount of Senior Notes outstanding at end of period $ 8.70
Per share amount of net assets, excluding Senior Notes, at end of period $ 33.08
Asset coverage, per $1,000 of principal amount
Series A $ 3,800
Series B $ 3,800
Asset coverage ratio of auction rate senior notes (5) 380%
------------------
(1) Commencement of Operations.
F-9
(2) Information presented relates to a share of common stock outstanding
for the entire period.
(3) Not Annualized. Total investment return is calculated assuming a
purchase of common stock at the market price on the first day and a
sale at the current market price on the last day of the period
reported. The calculation also assumes reinvestment of dividends at
actual prices pursuant to the Company's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions.
(4) Information is annualized for periods less than one full year.
(5) Amount is less than 0.01 per share.
(6) Represents value of total assets less all liabilities and indebtedness
not represented by Senior Notes at the end of the period dividend by
Senior Notes outstanding at the end of the period.
See Accompanying Notes to the Financial Statements.
F-10
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
NOTES TO FINANCIAL STATEMENTS UNAUDITED
AUGUST 31, 2004
1. ORGANIZATION
Tortoise Energy Infrastructure Corporation (the "Company") was organized as a
Maryland corporation on October 29, 2003, and is a non-diversified, closed-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Company's investment objective is to seek a high
level of total return with an emphasis on current distributions paid to
shareholders. The Company seeks to provide its shareholders with an efficient
vehicle to invest in the energy infrastructure sector. The Company commenced
operations on February 27, 2004. The Company's shares are listed on the New York
Stock Exchange under the symbol "TYG".
2. SIGNIFICANT ACCOUNTING POLICIES
A. Use of Estimates--The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
B. Investment Valuation--The Company primarily owns securities that are listed
on a securities exchange. The Company values those securities at their last sale
price on that exchange on the valuation date. If the security is listed on more
than one exchange, the Company will use the price of the exchange that it
generally considers to be the principal exchange on which the security is
traded. Securities listed on the NASDAQ Stock Market, Inc. ("NASDAQ") will be
valued at the NASDAQ Official Closing Price, which may not necessarily represent
the last sale price. If there has been no sale on such exchange or NASDAQ on
such day, the security will be valued at the closing bid price on such day.
The Company may invest up to 30% of its total assets in restricted securities.
Restricted securities may be subject to statutory and contractual restrictions
on their public resale, which may make it more difficult to obtain a valuation
and may limit the Company's ability to dispose of them. Investments in private
placement securities and other securities for which market quotations are not
readily available will be valued in good faith by using fair value procedures
approved by the Board of Directors. Such fair value procedures consider factors
such as securities with similar yields, quality, type of issue, coupon, duration
and rating.
The Company generally values short-term debt securities at prices based on
market quotations for such securities, except those securities purchased with 60
days or less to maturity are valued on the basis of amortized cost, which
approximates market value. If events occur that will affect the value of the
Company's portfolio securities before the net asset value has been calculated (a
"significant event"), the portfolio securities so affected will generally be
priced using a fair value procedure.
The Company generally values its interest rate swap contracts by discounting the
future cash flows from the stated terms of the interest rate swap agreement by
using interest rates currently available in the market, or based on dealer
quotations, if available.
C. Security Transactions and Investment Income--Security transactions are
accounted for on the date the securities are purchased or sold (trade date).
Realized gains and losses are reported on an identified cost basis. Dividend and
distribution income is recorded on the ex-dividend date. Distributions received
from
F-11
the Company's investments in master limited partnerships ("MLPs"),
generally are comprised of income and return of capital from the MLP. The
Company records investment income and return of capital based on estimates made
at the time such distributions are received. Such estimates are based on
historical information available from each MLP and other industry sources. These
estimates may subsequently be revised based on information received from MLPs
after their tax reporting periods are concluded. Interest income is recognized
on the accrual basis, including amortization of premiums and accretion of
discounts.
D. Dividends to Shareholders--Dividends to shareholders are recorded on the
ex-dividend date. The character of dividends made during the year may differ
from their ultimate characterization for federal income tax purposes. The
Company's dividend, for book purposes, is comprised of return of capital and
ordinary income, which is based on the operating results of the Company. For tax
purposes, the Company estimates the current dividend is comprised of 100% return
of capital for the current fiscal year. The Company is unable to make final
determinations as to the character of the dividend until after the end of the
calendar year. The Company will inform shareholders of the final character of
the dividend during January 2005.
E. Federal Income Taxation--The Company, as a corporation, is obligated to pay
federal and state income tax on its taxable income. The Company invests its
assets primarily in MLPs, which generally are treated as partnerships for
federal income tax purposes. As a limited partner in the MLPs, the Company
reports its allocable share of the MLPs taxable income in computing its own
taxable income. The Company's tax expense or benefit will be included in the
Statement of Operations based on the component of income or gains (losses) to
which such expense or benefit relates. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. To the extent the Company has a net deferred tax asset, a valuation
allowance is recognized if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred income tax asset
will not be realized. Future realization of deferred income tax assets
ultimately depends on the existence of sufficient taxable income of the
appropriate character in either the carryback or carryforward period under the
tax law.
F. Organization Expenses, Offering and Debt Issuance Costs--The Company is
responsible for paying all organization expenses, which are expensed as
incurred. Offering costs related to the issuance of common stock are charged to
additional paid-in capital when the shares are issued. Debt issuance costs
related to the auction rate senior notes payable are capitalized and amortized
over the period the notes are outstanding.
G. Derivative Financial Instruments--The Company uses derivative financial
instruments (principally interest rate swap contracts) to manage interest rate
risk. The Company has established policies and procedures for risk assessment
and the approval, reporting and monitoring of derivative financial instrument
activities. The Company does not hold or issue derivative financial instruments
for speculative purposes. All derivative financial instruments are recorded at
fair value with changes in value reflected in net unrealized appreciation or
depreciation of investments during the reporting period.
H. Indemnifications--Under the Company's organizational documents, its Officers
and Directors are indemnified against certain liabilities arising out of the
performance of their duties to the Company. In addition, in the normal course of
business, the Company enters into contracts that provide general indemnification
to other parties. The Company's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Company that have not yet occurred, and may not occur. However, the Company has
not had prior claims or losses pursuant to these contracts and expects the risk
of loss to be remote.
F-12
3. CONCENTRATION OF RISK
The Company's investment objective is to seek a high level of total return with
an emphasis on current distributions paid to its shareholders. Under normal
circumstances, the Company intends to invest at least 90% of its total assets in
securities of domestic energy infrastructure companies, and will invest at least
70% of its total assets in equity securities of MLPs. The Company may invest up
to 25% of its assets in debt securities, which may include below investment
grade securities. The Company may, for defensive purposes, temporarily invest
all or a significant portion of its assets in investment grade securities,
short-term debt securities and cash or cash equivalents. To the extent the
Company uses this strategy, it may not achieve its investment objectives.
4. AGREEMENTS
The Company has entered into an Investment Advisory Agreement with Tortoise
Capital Advisors, LLC (the "Adviser"). Under the terms of the agreement, the
Company will pay the Adviser a fee equal to an annual rate of 0.95% of the
Company's average monthly total assets (including any assets attributable to
leverage) minus the sum of accrued liabilities (other than deferred income
taxes, debt entered into for purposes of leverage and the aggregate liquidation
preference of outstanding preferred shares, if any) ("Managed Assets"), in
exchange for the investment advisory services provided. For the period following
the commencement of the Company's operations through January 31, 2006, the
Adviser has agreed to waive or reimburse the Company for fees and expenses in an
amount equal to 0.23% of the average monthly Managed Assets of the Company. For
years ending January 31, 2007, 2008 and 2009, the Adviser has agreed to waive or
reimburse the Company for fees and expenses in an amount equal to 0.10% of the
average monthly Managed Assets of the Company.
The Company has engaged U.S. Bancorp Fund Services, LLC to serve as the
Company's administrator. The Company will pay the administrator a monthly fee
computed at an annual rate of 0.07% of the first $300 million of the Company's
Managed Assets, 0.06% on the next $500 million of Managed Assets and 0.04% on
the balance of the Company's Managed Assets, subject to a minimum annual fee of
$45,000.
U.S. Bank N.A. will serve as the Company's custodian. The Company will pay the
custodian a monthly fee computed at an annual rate of 0.015% on the first $100
million of the Company's Managed Assets and 0.01% on the balance of the
Company's Managed Assets, subject to a minimum annual fee of $4,800.
5. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
and tax purposes. Components of the Company's deferred tax assets and
liabilities as of August 31, 2004 are as follows:
Deferred tax assets: $ 83,819
Organization costs 407,773
------------
Net operating loss carryforwards 491,592
------------
Deferred tax liabilities:
Unrealized gains on investment securities 9,051,715
Distributions received from MLPs 495,068
------------
9,546,783
------------
Total net deferred tax liability $ 9,055,191
============
F-13
The components of income tax expense include $8,125,006 and $930,185 for
deferred federal and state income taxes, respectively. For the period ended
August 31, 2004, the Company had a net operating loss for federal income tax
purposes of approximately $1,045,573. This net operating loss may be carried
forward for 20 years, and accordingly would expire after the year ended November
30, 2024.
Total income taxes differ from the amount computed by applying the federal
statutory income tax rate of 35% to net investment income and realized and
unrealized gains on investments and interest rate swap contracts before taxes as
follows:
Application of statutory income tax rate $ 8,125,006
State income taxes, net 930,185
-----------
Total $ 9,055,191
===========
At August 31, 2004 the cost basis of investments for federal income tax purposes
was $408,034,640. At August 31, 2004, gross unrealized appreciation and
depreciation of investments for federal income tax purposes were as follows:
Gross unrealized appreciation $ 25,967,753
Gross unrealized depreciation --
------------
Net unrealized appreciation $ 25,967,753
============
6. INVESTMENT TRANSACTIONS
For the period ended August 31, 2004, the Company purchased and sold securities
in the amount of $394,193,727 and $562,500 (excluding short-term debt securities
and interest rate swaps), respectively.
7. AUCTION RATE SENIOR NOTES
The Company has $60,000,000 and $50,000,000 aggregate principal amount of
auction rate senior notes Series A and Series B, respectively (collectively, the
"Notes"). The Notes were issued in denominations of $25,000. The principal
amount of the Notes will be due and payable on July 15, 2044. Fair value of the
notes approximates carrying amount because the interest rate fluctuates with
changes in interest rates available in the current market.
Holders of the Notes are entitled to receive cash interest payments at an annual
rate that may vary for each rate period. Interest rates for Series A and Series
B as of August 31, 2004 were 1.65% and 1.68%, respectively. The weighted average
interest rate for Series A and Series B for the period ended August 31, 2004
were 1.60% and 1.62%, respectively. For each subsequent rate period, the
interest rate will be determined by an auction conducted in accordance with the
procedures described in the Notes' prospectus. Generally, each rate period will
be twenty-eight (28) days. The Notes will not be listed on any exchange or
automated quotation system.
The Notes are redeemable in certain circumstances at the option of the Company.
The Notes are also subject to a mandatory redemption if the Company fails to
meet an asset coverage ratio required by law, or fails to correct rating agency
guidelines in a timely manner.
The Notes are unsecured obligations of the Company and, upon liquidation,
dissolution or winding up of the Company, will rank: (1) senior to all of the
Company's outstanding common shares; (2) on a parity with any unsecured
creditors of the Company and any unsecured senior securities representing
indebtedness of the Company; and (3) junior to any secured creditors of the
Company.
F-14
8. INTEREST RATE SWAP CONTRACTS
The Company has entered into interest rate swap contracts to protect itself from
increasing interest expense on its leverage resulting from increasing short-term
interest rates. A decline in interest rates may result in a decline in the value
of the swap contracts, which may result in a decline in the net assets of the
Company. In addition, if the counterparty to the interest rate swap contracts
default, the Company would not be able to use the anticipated receipts under the
swap contracts to offset the interest payments on the Company's leverage. At the
time the interest rate swap contracts reach their scheduled termination, there
is a risk that the Company would not be able to obtain a replacement transaction
or that the terms of the replacement would not be as favorable as on the
expiring transaction. In addition, if the Company is required to terminate any
swap contract early due to the Company failing to maintain a required 300% asset
coverage of the liquidation value of the outstanding auction rate senior notes
or if the Company loses its credit rating on its auction rate senior notes, then
the Company could be required to make a termination payment, in addition to
redeeming all or some of the auction rate senior notes. Details of the interest
rate swap contracts outstanding as of August 31, 2004, were as follows:
TERMINATION NOTIONAL UNREALIZED
COUNTERPARTY DATE AMOUNT FIXED RATE FLOATING RATE (DEPRECIATION)
------------ ----------- ----------- ---------- ------------- --------------
U.S. Bank, N.A. 07/10/2007 $60,000,000 3.54% 1 month U.S.
Dollar LIBOR $ (811,992)
U.S. Bank, N.A. 07/17/2007 50,000,000 3.56% 1 month U.S.
Dollar LIBOR (673,195)
------------
$ (1,485,187)
9. COMMON STOCK
There are 100,000,000 shares of common stock authorized and 12,644,882
shares outstanding at August 31, 2004. Transactions in common shares for the
period February 27, 2004 through August 31, 2004, were as follows:
Beginning shares 23,047
Shares sold through initial public offering and exercise
of over allotment option 12,600,000
Shares issued through reinvestment of dividends 21,835
-----------
Ending shares 12,644,882
10. SUBSEQUENT EVENTS
The Company's Board of Directors has authorized an issuance of $35,000,000 of
Money Market Cumulative Preferred Shares, which occurred on September 16, 2004.
On September 1, 2004 the Company paid a dividend in the amount of $0.34 per
share. The dividend resulted in $957,444 being reinvested into the Company.
F-15
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 6, 2004
ASSETS:
Cash.................................................................... $ 550,250
Deferred Offering Costs................................................. 386,649
----------
TOTAL ASSETS............................................................ 936,899
LIABILITIES:
Accrued Offering Costs.................................................. 386,649
Payable to Adviser...................................................... 31,967
Payable for Organization Costs.......................................... 134,379
Payable to Transfer Agent............................................... 400
----------
TOTAL LIABILITIES....................................................... 553,395
----------
NET ASSETS APPLICABLE TO COMMON SHARES.................................. $383,504
==========
NET ASSETS APPLICABLE TO COMMON SHARES REPRESENT:
Common Shares, $.001 par value; 100,000,000 shares authorized,
23,047 shares outstanding............................................ $ 23
Additional Paid-In Capital.............................................. 550,227
Retained Deficit........................................................ (166,746)
----------
TOTAL................................................................... $383,504
==========
NET ASSET VALUE PER COMMON SHARE OUTSTANDING ($383,504 divided by
23,047 common shares outstanding).................................... $ 16.64
==========
The accompanying notes are an integral part of the financial
statements.
F-16
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF OPERATIONS
PERIOD FROM OCTOBER 29, 2003 (DATE OF ORGANIZATION)
THROUGH FEBRUARY 6, 2004
Investment Income........................... $ --
-------------
Expenses:
Organization Costs....................... $ 166,346
Transfer Agent Fees...................... 400
-------------
Total Expenses.............................. 166,746
-------------
Net Investment Loss Before Taxes............ (166,746)
-------------
Income taxes................................ --
-------------
Net investment loss......................... $ (166,746)
=============
The accompanying notes are an integral part of the financial
statements.
F-17
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 6, 2004
1. Organization
Tortoise Energy Infrastructure Corporation (the "Company") was
organized as a Maryland corporation on October 29, 2003, and is a
non-diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Company has had no
operations other than the sale of 23,047 shares to the aggregate Subscribers for
$550,250 on January 22, 2004. The Company is planning a public offering of its
common stock as soon as practicable after the effective date of its registration
statement.
2. Significant Accounting Policies
The following is a listing of the significant accounting policies that
the Company will implement upon the commencement of its operations:
A. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
B. Investment Valuation - The Company intends to own securities that
are listed on a securities exchange. The Company will value those securities at
their last sale price on that exchange on the valuation date. If the security is
listed on more than one exchange, the Company will use the price of that
exchange that it generally considers to be the principal exchange on which the
stock is traded. Securities listed on the NASDAQ Stock Market, Inc. ("NASDAQ")
will be valued at the NASDAQ Official Closing Price, which may not necessarily
represent the last sale price. If there has been no sale on such exchange or
NASDAQ on such day, the security will be valued at the mean between the bid and
ask price on such day.
The Company may invest up to 30% of its total assets in direct private
placement securities. Direct private placement securities are subject to
statutory and contractual restrictions on their public resale, which may make it
more difficult to obtain a valuation and may limit the Company's ability to
dispose of them. Investments in private placement securities and other
securities for which market quotations are not readily available will be valued
in good faith by using fair value procedures approved by the Board of Directors.
Such fair value procedures consider factors such as securities with similar
yields, quality, type of issue, coupon, duration and rating.
The Company generally will value short-term debt securities at prices
based on market quotations for such securities, except those securities
purchased with 60 days or less to maturity are valued on the basis of amortized
cost, which approximates market value. If events occur that will affect the
value of the Company's portfolio securities before the net asset value has been
calculated (a "significant event"), the portfolio securities so affected will
generally be priced using a fair value procedure.
C. Security Transaction and Investment Income - Security transactions
will be accounted for on the date the securities are purchased or sold (trade
date). Realized gains and losses will be reported on an identified cost basis.
Dividend and distribution income will be recorded on the ex-dividend date.
F-18
Interest income will be recognized on the accrual basis, including amortization
of premiums and accretion of discounts.
D. Distributions to Shareholders - Distributions to shareholders will
be recorded on the ex-dividend date. The character of distributions made during
the year from net investment income or net realized gains may differ from their
ultimate characterization for federal income tax purposes.
E. Federal Income Taxation - The Company is treated as a corporation
for federal and state income tax purposes. Thus, the Company will be obligated
to pay federal and state income tax on its taxable income. The Company intends
to invest its assets primarily in Master Limited Partnerships ("MLPs"), which
generally are treated as partnerships for federal income tax purposes. As a
partner in the MLPs, the Company will report its allocable share of the MLP's
taxable income in computing its own taxable income. The Company's tax expense or
benefit will be included in the Statement of Operations based on the component
of income or gains (losses) to which such expense or benefit relates. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is recognized
if, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred income tax asset will not be realized.
Future realization of deferred income tax assets ultimately depends on the
existence of sufficient taxable income of the appropriate character in either
the carryback or carryforward period under the tax law.
F. Organization Expenses and Offering Costs - The Company is
responsible for paying all organization and offering expenses. Offering costs
paid by the Company will be charged as a reduction of paid-in capital at the
completion of the Company's initial public offering. Organization costs are
expensed as incurred, and are reported in the accompanying statement of
operations.
3. Concentration of Risk
The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to its shareholders. Under
normal circumstances, the Company intends to invest at least 90% of its total
assets in securities of energy infrastructure companies, and will invest at
least 70% of its total assets in equity securities of MLPs. The Company may
invest up to 25% of its assets in debt securities, which may include below
investment grade securities. The Company may, for defensive purposes,
temporarily invest all or a significant portion of its assets in investment
grade securities, short-term debt securities and cash or cash equivalents. To
the extent the Company uses this strategy, it may not achieve its investment
objectives.
4. Agreements
The Company has entered into an Investment Advisory Agreement with
Tortoise Capital Advisors, LLC (the "Adviser"). Under the terms of the
agreement, the Company will pay the Adviser a fee equal to an annual rate of
0.95% of the Company's average monthly total assets (including any assets
attributable to leverage) minus the sum of accrued liabilities other than
deferred income taxes, debt entered into for purposes of leverage and the
aggregate liquidation preference of outstanding preferred shares, if any,
("Managed Assets") in exchange for the investment advisory services provided.
For the period following the commencement of the Company's operations through
January 31, 2006, the Adviser has agreed to waive or reimburse the Company for
fees and expenses in an amount equal to 0.23% of the average monthly Managed
Assets of the Company. For years ending January 31, 2007, 2008 and 2009, the
Adviser has agreed to waive or reimburse the Company for fees and expenses in an
amount equal to 0.10% of the average monthly Managed Assets of the Company.
F-19
As of February 6, 2004, the Company owes the Adviser $31,967 for costs
incurred in connection with the registration statement and organization of the
Company. This amount is payable to the Adviser upon the closing date of the
public offering.
The Company has engaged U.S. Bancorp Fund Services, LLC to serve as the
Company's administrator. The Company will pay the administrator a monthly fee
computed at an annual rate of 0.07% of the first $300 million of the Company's
Managed Assets, 0.06% on the next $500 million of Managed Assets and 0.04% on
the balance of the Company's Managed Assets, subject to a minimum annual fee of
$45,000.
Computershare Investor Services, LLC will serve as the Company's
transfer agent, dividend paying agent, and agent for the automatic dividend
reinvestment plan.
U.S. Bank N.A. will serve as the Company's custodian. The Company will
pay the custodian a monthly fee computed at an annual rate of 0.015% on the
first $100 million of the Company's Managed Assets and 0.01% on the balance of
the Company's Managed Assets, subject to a minimum annual fee of $4,800.
5. Income Taxes
As of February 6, 2004, the Company has a deferred income tax asset in
the amount of approximately $61,000 related to organization costs incurred by
the Company, which cannot be deducted for income tax purposes. However, the
Company has an equal and offsetting valuation allowance against its deferred
income tax asset, since the Company has not developed a history of taxable
income, based on available evidence.
F-20
APPENDIX A--RATING OF INVESTMENTS
MOODY'S INVESTORS SERVICE, INC.
Moody's long-term obligation ratings are opinions of the relative
credit risk of fixed-income obligations with an original maturity of one year or
more. They address the possibility that a financial obligation will not be
honored as promised. Such ratings reflect both the likelihood of default and any
financial loss suffered in the event of default.
"Aaa" Obligations rated Aaa are judged to be of the highest quality,
with minimal credit risk.
"Aa" Obligations rated Aa are judged to be of high quality and are
subject to very low credit risk.
"A" Obligations rated A are considered upper-medium grade and are
subject to low credit risk.
"Baa" Obligations rated Baa are subject to moderate credit risk. They
are considered medium-grade and as such may possess certain speculative
characteristics.
"Ba" Obligations rated Ba are judged to have speculative elements and
are subject to substantial credit risk.
"B" Obligations rated B are considered speculative and are subject to
high credit risk.
"Caa" Obligations rated Caa are judged to be of poor standing and are
subject to very high credit risk.
"Ca" Obligations rated Ca are highly speculative and are likely in, or
very near, default, with some prospect of recovery of principal and interest.
"C" Obligations rated C are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal and
interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range; and the modifier 3 indicates a ranking in the lower end
of that generic rating category.
US MUNICIPAL AND TAX-EXEMPT RATINGS
Municipal ratings are based upon the analysis of four primary factors
relating to municipal finance: economy, debt, finances, and
administration/management strategies. Each of the factors is evaluated
individually and for its effect on the other factors in the context of the
municipality's ability to repay its debt.
"Aaa" Issuers or issues rated Aaa demonstrate the strongest
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"Aa" Issuers or issues rated Aa demonstrate very strong
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"A" Issuers or issues rated A present above average creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
A-1
"Baa" Issuers or issues rated Baa represent average creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"Ba" Issuers or issues rated Ba demonstrate below-average
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"B" Issuers or issues rated B demonstrate weak creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"Caa" Issuers or issues rated Caa demonstrate very weak
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"Ca" Issuers or issues rated Ca demonstrate extremely weak
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"C" Issuers or issues rated C demonstrate the weakest creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating category from Aa through Caa. The modifier 1 indicates that the
issuer or obligation ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that generic rating
category.
DESCRIPTION OF MOODY'S HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES AND
OTHER SHORT-TERM LOANS
Moody's ratings for state and municipal notes and other short-term
loans are designated "Moody's Investment Grade" ("MIG" or, for variable or
floating rate obligations, "VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings. Symbols used will be as follows:
"MIG-1" This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
"MIG-2" This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
"MIG-3" This designation denotes acceptable credit quality. Liquidity
and cash-flow protection may be narrow, and market access for refinancing is
likely to be less well-established.
"SG" This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection. Demand
features rated in this category may be supported by a liquidity provider that
does not have an investment grade short-term rating or may lack the structural
and/or legal protections necessary to ensure the timely payment of purchase
price upon demand.
"VMIG 1" This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
A-2
"VMIG 2" This designation denotes strong credit quality. Good
protection is afforded by the strong short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
"VMIG 3" This designation denotes acceptable credit quality. Adequate
protection is afforded by the satisfactory short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
DESCRIPTION OF MOODY'S SHORT TERM RATINGS
Moody's short-term ratings are opinions of the ability of issuers to
honor short-term financial obligations. Ratings may be assigned to issuers,
short-term programs or to individual short-term debt instruments. Such
obligations generally have an original maturity not exceeding thirteen months,
unless explicitly noted.
"P-1" Issuers (or supporting institutions) rated Prime-1 have a
superior ability to repay short-term debt obligations.
"P-2" Issuers (or supporting institutions) rated Prime-2 have a strong
ability to repay short-term debt obligations.
"P-3" Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability to repay short-term obligations.
"NP" Issuers (or supporting institutions) rated Not Prime do not fall
within any of the Prime rating categories.
FITCH RATINGS
A brief description of the applicable Fitch Ratings ("Fitch") ratings
symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
"AAA" -- Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This capacity is
highly unlikely to be affected adversely by foreseeable events.
"AA" -- Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
"A" -- High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for higher
ratings.
"BBB" -- Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
A-3
SPECULATIVE GRADE
"BB" -- Speculative. `BB' ratings indicate that there is a possibility
of credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
"B" -- Highly speculative. `B' ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
"CCC", "CC", "C" -- High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates that
default of some kind appears probable. ` C' ratings signal imminent default.
"DDD", "DD", And "D" Default -- The ratings of obligations in this
category are based on their prospects for achieving partial or full recovery in
a reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the following
serve as general guidelines. `DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. `DD'
indicates potential recoveries in the range of 50%-90%, and `D' the lowest
recovery potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities rated `DDD' have the
highest prospect for resumption of performance or continued operation with or
without a formal reorganization process. Entities rated `DD' and `D' are
generally undergoing a formal reorganization or liquidation process; those rated
`DD' are likely to satisfy a higher portion of their outstanding obligations,
while entities rated `D' have a poor prospect for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
"F1" -- Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
"F2" -- Good credit quality. A satisfactory capacity for timely payment
of financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
"F3" -- Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade. B Speculative. Minimal capacity
for timely payment of financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
"B" -- Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" -- High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
"D" -- Default. Denotes actual or imminent payment default.
A-4
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' Long-term
rating category, to categories below `CCC', or to Short-term ratings other than
`F1'.
"NR" indicates that Fitch Ratings does not rate the issuer or issue in
question.
"Withdrawn" -- A rating is withdrawn when Fitch Ratings deems the
amount of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
"Rating Watch" -- Ratings are placed on Rating Watch to notify
investors that there is a reasonable probability of a rating change and the
likely direction of such change. These are designated as "Positive", indicating
a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch typically is resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are `stable' could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch Ratings may be unable to identify
the fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
STANDARD & POOR'S CORPORATION
A brief description of the applicable Standard & Poor's Corporation, a division
of The McGraw-Hill Companies ("Standard & Poor's" or "S&P"), rating symbols and
their meanings (as published by S&P) follows:
A Standard & Poor's 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 & Poor's from other sources it considers
reliable. Standard & Poor's 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.
A-5
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms of
the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights. The issue ratings
definitions are expressed in terms of default risk. As such, they pertain to
senior obligations of an entity. Junior obligations are typically rated lower
than senior obligations, to reflect the lower priority in bankruptcy, as noted
above.
"AAA" -- An obligation rated `AAA' has the highest rating assigned by
Standard & Poor's. The obligor's 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 obligor's 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 obligor's capacity to meet
its financial commitment on the obligation is still strong.
BBB -- An obligation rated `BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB, B, CCC, CC, and C -- Obligations rated `BB', `B', `CCC', `CC', and
`C' are regarded as having significant speculative characteristics. `BB'
indicates the least degree of speculation and `C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB -- An obligation rated `BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to the obligor's 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 obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated `CCC' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated `CC' is currently highly vulnerable to
nonpayment.
C -- The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
A-6
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 & Poor's
believes that such payments will be made during such grace period. The `D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
"+/-" -- Plus (+) or minus (-). The ratings from `AA' to `CCC' may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"c" -- The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"P" -- The letter `p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
"*" -- Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" -- The `r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. -- Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS
Under present commercial bank regulations issued by the Comptroller of
the Currency, bonds rated in the top four categories (`AAA', `AA', `A', `BBB',
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A Standard & Poor's note ratings reflect the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
A-7
Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
"SP-1" -- Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a plus
(+) designation.
"SP-2" -- Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes over the term of
the notes.
"SP-3" -- Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from `A-1' for the
highest quality obligations to `D' for the lowest. These categories are as
follows:
"A-1" -- A short-term obligation rated `A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations is
extremely strong.
"A-2" -- A short-term obligation rated `A-2' is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is satisfactory.
"A-3" -- A short-term obligation rated `A-3' exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.
"B" -- A short-term obligation rated `B' is regarded as having
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"C" -- A short-term obligation rated `C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
A-8
"D" -- A short-term obligation rated `D' is in payment default. The `D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
`D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
A-9
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
-----------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------------------------
____________, 2004
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
The Registrant's audited financial statements dated February 6, 2004,
and unaudited financial statements dated August 31, 2004 and notes to the
financial statements are filed herein and appear in the statement of additional
information.
2. Exhibits:
a.1. Articles of Incorporation.1
a.2. Articles of Amendment and Restatement.2
a.3. Articles Supplementary.5
b.1. By-laws.1
b.2. Amended and Restated Bylaws.2
c. None.
d. Form of Common Stock Certificate.*
e. Terms and Conditions of the Dividend Reinvestment
Plan.3
f. Not applicable.
g.1. Investment Advisory Agreement with Tortoise Capital
Advisors, L.L.C.3
g.2. Reimbursement Agreement.3
h.1. Form of Underwriting Agreement.**
h.2. Form of Master Agreement Among Underwriters.**
h.3. Form of Master Selected Dealers Agreement.**
i. None.
j. Custody Agreement.3
k.1 Stock Transfer Agency Agreement.2
k.2 Administration Agreement.3
k.3 Fund Accounting Agreement.3
l. Opinion of Venable LLP**
m. Not applicable.
n.1. Consent of Auditors.**
n.2. Opinion of Blackwell Sanders Peper Martin, L.L.P.
related to tax matters.4
n.3. Opinion of Blackwell Sanders Peper Martin, L.L.P.
related to U.B.T.I. Tax Matters.4
o. Not applicable.
p. Subscription Agreement.3
q. None.
r.1 Amended Code of Ethics for the Registrant.*
r.2 Amended Code of Ethics for the Adviser.*
s. Powers of Attorney.2
* Filed herewith.
** To be filed by amendment.
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 31, 2003 (File Nos. 333-110143 and
811-21462).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on January 30,
2004 (File Nos. 333-110143 and 811-21462).
C-1
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on June 28, 2004
(File Nos. 333-114545 and 811-21462).
(4) Incorporated by reference to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-2, filed on February 20,
2004 (File Nos. 333-110143 and 811-21462).
(5) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 15, 2004 (File Nos. 333-119784 and
811-21462).
ITEM 25: MARKETING ARRANGEMENTS
Reference is made to the form of underwriting agreement for the
Registrant's common stock, to be filed by amendment to the Registrant's
Registration Statement.
ITEM 26: OTHER EXPENSES AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Securities and Exchange Commission Fees........... $ 27,000
NYSE Listing Fees................................. 49,000
Directors' Fees and Expenses...................... 5,000
Printing (other than certificates)................ 75,000
Accounting fees and expenses...................... 5,000
Legal fees and expenses........................... 375,000
NASD Fees......................................... 20,000
Miscellaneous..................................... 44,000
--------
Total.......................................... $600,000
========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of October 31, 2004, the number of record holders of each class of
securities of the Registrant was:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
----------------------------------------- ------------------------
Common Stock ($0.001 par value).......... 46
Preferred Stock (Liquidation Preference
$25,000 per share).................... 1
Long-term Debt ($110,000,000 aggregate
principal amount)..................... 1
C-2
ITEM 29. INDEMNIFICATION
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty which is
established by a final judgment as being material to the cause of action. The
Registrant's charter contains such a provision which eliminates directors' and
officers' liability to the maximum extent permitted by Maryland law.
The Registrant's charter authorizes it, to the maximum extent permitted by
Maryland law and the Investment Company Act of 1940, as amended (the "1940
Act"), to obligate itself to indemnify any present or former director or officer
or any individual who, while a director of the Registrant and at the request of
the Registrant, serves or has served another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or other
enterprise as a director, officer, partner or trustee, from and against any
claim or liability to which that person may become subject or which that person
may incur by reason of his or her status as a present or former director or
officer of the Registrant and to pay or reimburse his or her reasonable expenses
in advance of final disposition of a proceeding. The Registrant's Bylaws
obligate it, to the maximum extent permitted by Maryland law and the 1940 Act,
to indemnify any present or former director or officer or any individual who,
while a director of the Registrant and at the request of the Registrant, serves
or has served another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or other enterprise as a director,
officer, partner or trustee and who is made a party to the proceeding by reason
of his service in that capacity from and against any claim or liability to which
that person may become subject or which that person may incur by reason of his
or her status as a present or former director or officer of the Registrant and
to pay or reimburse his or her reasonable expenses in advance of final
disposition of a proceeding. The charter and Bylaws also permit the Registrant
to indemnify and advance expenses to any person who served as a predecessor of
the Registrant in any of the capacities described above and any employee or
agent of the Registrant or a predecessor of the Registrant.
Maryland law requires a corporation (unless its charter provides otherwise,
which the Registrant's charter does not) to indemnify a director or officer who
has been successful in the defense of any proceeding to which he is made a party
by reason of his service in that capacity. Maryland law permits a corporation to
indemnify its present and former directors and officers, among others, against
judgements, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. However,
under Maryland law, a Maryland corporation may not indemnify for an adverse
judgement in a suit by or in the right of the corporation or for a judgement 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 corporation's receipt of (a) a written affirmation
by the director or officer of his or her good faith belief that he or she has
met the standard of conduct necessary for indemnification by the corporation and
(b) a written undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately determined that
the standard of conduct was not met.
The provisions set forth above apply insofar as they are consistent with Section
17(h) of the 1940 Act, which prohibits indemnification of any director or
officer of the Registrant against any liability to the
C-3
Registrant or its stockholders to which such director or officer otherwise would
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended ("1933 Act"), may be provided to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding or payment pursuant to any insurance policy)
is asserted against the Registrant by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The information in the statement of additional information under the
caption "Management of the Company--Directors and Officers" is hereby
incorporated by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All such accounts, books, and other documents are maintained at the
offices of the Registrant, at the offices of the Registrant's investment
adviser, Tortoise Capital Advisors, L.L.C., 10801 Mastin Boulevard, Suite 222,
Overland Park, Kansas 66210, at the offices of the custodian, U.S. Bank National
Association, 425 Walnut Street, M.L. CN-OH-W6TC, Cincinnati, Ohio 45202, at the
offices of the transfer agent, Computershare Investor Services, LLC, Two North
LaSalle Street, Chicago, Illinois 60602, or at the offices of the administrator,
U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee, WI 53202.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the offering of shares
until the Prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of the registration statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the Prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. (a) For the purposes of determining any liability under
the 1933 Act, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A
C-4
and contained in the form of prospectus filed by the Registrant under Rule
497(h) under the 1933 Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under
the 1933 Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prominent delivery within two business days of
receipt of a written or oral request the Registrant's statement of additional
information.
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Overland Park and State of Kansas, on the 24th day
of November, 2004.
Tortoise Energy Infrastructure Corporation
By: /s/ David J. Schulte
--------------------------------------
David J. Schulte, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
/s/ Terry C. Matlack* Director and Treasurer (Principal
----------------------------- Financial and Accounting Officer) November 24, 2004
Terry C. Matlack
/s/ Conrad S. Ciccotello* Director November 24, 2004
-----------------------------
Conrad S. Ciccotello
/s/ John R. Graham* Director November 24, 2004
-----------------------------
John R. Graham
/s/ Charles E. Heath* Director November 24, 2004
-----------------------------
Charles E. Heath
/s/ H. Kevin Birzer* Director November 24, 2004
-----------------------------
H. Kevin Birzer
/s/ David J. Schulte President and Chief
----------------------------- Executive Officer
David J. Schulte (Principal Executive Officer) November 24, 2004
* By David J. Schulte pursuant to power of attorney, filed on January 30, 2004
in connection with Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-2, filed on January 30, 2004 (File Nos. 333-110143 and
811-21462) and is hereby incorporated by reference.
EXHIBIT INDEX
a.1. Articles of Incorporation.1
a.2. Articles of Amendment and Restatement.2
a.3. Articles Supplementary.5
b.1. By-laws.1
b.2. Amended and Restated Bylaws.2
c. None.
d. Form of Common Stock Certificate.*
e. Terms and Conditions of the Dividend Reinvestment
Plan.3
f. Not applicable.
g.1. Investment Advisory Agreement with Tortoise Capital
Advisors, L.L.C.3
g.2. Reimbursement Agreement.3
h.1. Form of Underwriting Agreement.**
h.2. Form of Master Agreement Among Underwriters.**
h.3. Form of Master Selected Dealers Agreement.**
i. None.
j. Custody Agreement.3
k.1 Stock Transfer Agency Agreement.2
k.2 Administration Agreement.3
k.3 Fund Accounting Agreement.3
l. Opinion of Venable LLP**
m. Not applicable.
n.1. Consent of Auditors.**
n.2. Opinion of Blackwell Sanders Peper Martin, L.L.P.
related to tax matters.4
n.3. Opinion of Blackwell Sanders Peper Martin, L.L.P.
related to U.B.T.I. Tax Matters.4
o. Not applicable.
p. Subscription Agreement.3
q. None.
r.1 Amended Code of Ethics for the Registrant.*
r.2 Amended Code of Ethics for the Adviser.*
s. Powers of Attorney.2
* Filed herewith.
** To be filed by amendment.
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 31, 2003 (File Nos. 333-110143 and
811-21462).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on January 30,
2004 (File Nos. 333-110143 and 811-21462).
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on June 28, 2004
(File Nos. 333-114545 and 811-21462).
(4) Incorporated by reference to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-2, filed on February 20,
2004 (File Nos. 333-110143 and 811-21462).
(5) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 15, 2004 (File Nos. 333-119784 and
811-21462).