e497
The
information in this prospectus supplement, which relates to an
effective Registration Statement under the Securities Act of
1933, as amended, is not complete and may be changed. We may not
sell these securities until we deliver a final prospectus
supplement. This prospectus supplement and the attached
prospectus do not constitute an offer to sell these securities
or a solicitation of an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
|
Filed
pursuant to Rule 497(c) under
the Securities Act of 1933, as amended,
File
No. 333-140457
Subject to
Completion
Preliminary Prospectus Supplement Dated May 22,
2007
PROSPECTUS SUPPLEMENT
(To prospectus dated March 14, 2007)
$70,000,000
Tortoise Energy Infrastructure
Corporation
Auction Rate Senior Notes
(Tortoise Notes)
$70,000,000 Series E,
Due ,
2047
$25,000 Denominations
Tortoise Energy Infrastructure Corporation (the
Company, we, us or
our) is a nondiversified, closed-end management
investment company. Our investment objective is to seek a high
level of total return with an emphasis on current distributions
to stockholders.
We are offering an aggregate principal amount of $70,000,000 of
our auction rate senior notes (Series E Tortoise
Notes) in this prospectus supplement. This prospectus
supplement is not complete and should be read in conjunction
with our prospectus dated March 14, 2007 (the
prospectus), which accompanies this prospectus
supplement. This prospectus supplement does not include all
information that you should consider before purchasing any
Series E Tortoise Notes. You should read this prospectus
supplement and the accompanying prospectus prior to purchasing
any Series E Tortoise Notes.
The Series E Tortoise Notes together with the
Series A, Series B, Series C and Series D
Tortoise Notes currently outstanding, are referred to as
Tortoise Notes. Individual series of Tortoise Notes
are referred to as a series. Except as otherwise
described in this prospectus supplement, the terms of the
Series E Tortoise Notes and all other series are the same.
Capitalized terms used but not defined in this prospectus
supplement shall have the meanings given to such terms in the
Supplemental Indenture, which is available from us upon request.
The Tortoise Notes will be issued without coupons in
denominations of $25,000 and any integral multiple thereof. The
principal amount of the Series E Tortoise Notes will be due
and payable
on ,
2047 (the Stated Maturity). There is no sinking fund
with respect to the Tortoise Notes. The Tortoise Notes will be
our unsecured obligations and, upon our liquidation, dissolution
or winding up, will rank: (1) senior to all of our
outstanding common stock and any outstanding preferred stock;
(2) on a parity with any of our unsecured creditors and any
unsecured senior securities representing our indebtedness,
including other series of Tortoise Notes; and (3) junior to
any of our secured creditors. We may redeem the Tortoise Notes
prior to their Stated Maturity in certain circumstances
described in this prospectus supplement.
Holders of the Tortoise Notes will be entitled to receive cash
interest payments at an annual rate that may vary for each rate
period. The initial rate period for the Series E Tortoise
Notes is from the issue date
through ,
2007. The interest rate for the initial rate period from and
including the issue date
through ,
2007, will be % per year for the Series E
Tortoise Notes. For each subsequent rate period, the interest
rate will be determined by an auction conducted in accordance
with the procedures described in this prospectus supplement.
Generally, following the initial rate period, each rate period
will be 28 days for the Series E Tortoise Notes.
The Tortoise Notes will not be listed on any exchange or
automated quotation system. Generally, you may only buy and sell
Tortoise Notes through an order placed at an auction with or
through a broker-dealer that has entered into an agreement with
the auction agent or in a secondary market that those
broker-dealers may maintain. These broker-dealers are not
required to maintain a market in the Tortoise Notes, and a
secondary market, if one develops, may not provide you with
liquidity. See The Auction Certain
Considerations Affecting Auction Rate Securities
Existing Holders Ability to Resell Auction Rate Securities
May Be Limited.
Investing in Tortoise Notes
involves certain risks. See Risk Factors beginning
on page 27 of the accompanying prospectus and The
Auction Auction Risk beginning on
page S-19
of this prospectus supplement.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Per $25,000 Principal
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Amount of Series E
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Tortoise Notes
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Total
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Public offering price
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$
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25,000
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$
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70,000,000
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Sales load
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$
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$
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Proceeds to us (before expenses)(1)
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$
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$
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(1)
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Does not include offering expenses
payable by us, estimated to be $196,187.
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The Underwriters expect to deliver the Series E Tortoise
Notes in book-entry form, through the facilities of The
Depository Trust Company, to Broker-Dealers on or about
May , 2007.
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Lehman
Brothers |
Merrill
Lynch & Co. |
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A.G.
Edwards
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Oppenheimer &
Co.
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Stifel
Nicolaus
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Wachovia
Securities
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,
2007
The offering is conditioned upon the Series E Tortoise
Notes receiving a rating of Aaa from Moodys
and AAA from Fitch.
This prospectus supplement has been filed with the Securities
and Exchange Commission (the SEC). Additional copies
of this prospectus supplement, the prospectus or the statement
of additional information dated March 14, 2007, as
supplemented from time to time, are available by calling
1-866-362-9331 or by writing to us, or you may obtain copies
(and other information regarding us) from the SECs web
site (http://www.sec.gov). You also may
e-mail
requests for these documents to the SEC at publicinfo@sec.gov or
make a request in writing to the SECs Public Reference
Section, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549.
This prospectus supplement, which describes the specific terms
of this offering, also adds to and updates information contained
in the accompanying prospectus and the documents incorporated by
reference in the prospectus. The prospectus gives more general
information, some of which may not apply to this offering.
If the description of this offering varies between this
prospectus supplement and the accompanying prospectus, you
should rely on the information contained in this prospectus
supplement; provided that if any statement in one of these
documents is inconsistent with a statement in another document
having a later date, the statement in the document having the
later date modifies or supersedes the earlier statement.
The Tortoise Notes do not represent a deposit or obligation of,
and are not guaranteed or endorsed by, any bank or other insured
depository institution, and are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency.
TABLE OF
CONTENTS
Prospectus
Supplement
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Page
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ii
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S-1
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S-4
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S-7
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S-8
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S-10
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S-11
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S-12
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S-19
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S-25
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S-27
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S-27
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Prospectus
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Cautionary Notice Regarding
Forward-Looking Statements
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ii
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Prospectus Summary
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1
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Summary of Company Expenses
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8
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Financial Highlights
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10
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Senior Securities
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12
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Market and Net Asset Value
Information
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13
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Use of Proceeds
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14
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The Company
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15
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Investment Objective and Principal
Investment Strategies
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15
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Leverage
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24
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Risk Factors
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27
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Management of the Company
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36
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Closed-End Company Structure
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38
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Certain Federal Income Tax Matters
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39
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Determination of Net Asset Value
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44
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Automatic Dividend Reinvestment
and Cash Purchase Plan
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44
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Description of Securities
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46
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Rating Agency Guidelines
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54
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Certain Provisions in the
Companys Charter and Bylaws
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55
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Selling Stockholders
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57
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Plan of Distribution
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57
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Administrator and Custodian
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60
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Legal Matters
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60
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Available Information
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60
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Table of Contents of the Statement
of Additional Information
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61
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You should rely on the information contained in or incorporated
by reference in this prospectus supplement in making an
investment decision. Neither we nor the underwriters have
authorized anyone to provide you with different or inconsistent
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the Underwriters are not, making an offer to sell these
notes in any jurisdiction where the offer or sale is not
permitted. You should assume that the information in this
prospectus supplement is accurate only as of the date of this
prospectus supplement, and that our business, financial
condition and prospects may have changed since this date. We
will amend or supplement this prospectus supplement to reflect
material changes to the information contained in this prospectus
supplement to the extent required by applicable law.
i
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the
statement of additional information contain
forward-looking statements. Forward-looking
statements can be identified by the words may,
will, intend, expect,
estimate, continue, plan,
anticipate, and similar terms and the negative of
such terms. Such forward-looking statements may be contained in
this prospectus supplement, as well as in the accompanying
prospectus. By their nature, all forward-looking statements
involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking
statements. Several factors that could materially affect our
actual results are the performance of the portfolio of
securities we hold, the conditions in the U.S. and international
financial, petroleum and other markets, the price at which our
shares will trade in the public markets and other factors
discussed in our periodic filings with the SEC.
Although we believe that the expectations expressed in our
forward-looking statements are reasonable, actual results could
differ materially from those projected or assumed in our
forward-looking statements. Our future financial condition and
results of operations, as well as any forward-looking
statements, are subject to change and are subject to inherent
risks and uncertainties, such as those disclosed in the
Risk Factors section of the prospectus accompanying
this prospectus supplement. All forward-looking statements
contained or incorporated by reference in this prospectus
supplement or the accompanying prospectus are made as of the
date of this prospectus supplement or the accompanying
prospectus, as the case may be. Except for our ongoing
obligations under the federal securities laws, we do not intend,
and we undertake no obligation, to update any forward-looking
statement. The forward-looking statements contained in this
prospectus supplement and the accompanying prospectus are
excluded from the safe harbor protection provided by
Section 27A of the Securities Act of 1933, as amended (the
1933 Act).
Currently known risk factors that could cause actual results to
differ materially from our expectations include, but are not
limited to, the factors described in the Risk
Factors section of the prospectus accompanying this
prospectus supplement as well as in Auction
Risk and Certain Considerations
Affecting Auction Rate Securities Existing
Holders Ability to Resell Auction Rate Securities May Be
Limited in The Auction section of this
prospectus supplement. We urge you to review carefully those
sections for a more detailed discussion of the risks of an
investment in the Tortoise Notes.
ii
PROSPECTUS
SUPPLEMENT SUMMARY
This summary contains basic information about us but does not
contain all of the information that is important to your
investment decision. You should read this summary together with
the more detailed information contained elsewhere in this
prospectus supplement and accompanying prospectus and in the
statement of additional information, especially the information
set forth under the heading Risk Factors beginning
on page 27 of the accompanying prospectus and The
Auction Auction Risk beginning on
page S-19
of this prospectus supplement.
The
Company
We seek to provide our stockholders with an efficient vehicle to
invest in a portfolio of publicly traded master limited
partnerships (MLPs) in the energy infrastructure
sector. Our investment objective is to seek a high level of
total return with an emphasis on current distributions paid to
stockholders. For purposes of our investment objective, total
return includes capital appreciation of, and all distributions
received from, securities in which we invest regardless of the
tax character of the distributions. Similar to the tax
characterization of distributions made by MLPs to unitholders, a
significant portion of our distributions to stockholders have
been and are expected to continue to be treated as a return of
capital to stockholders.
We are a nondiversified, closed-end management investment
company. We commenced operations in February 2004 following our
initial public offering. We were the first publicly traded
investment company offering access to a portfolio of MLPs. Since
that time, we completed four additional offerings of common
stock in December 2004, August 2006, December 2006 and March
2007. As of the date of this prospectus supplement, we have
three series of Money Market Cumulative Preferred
(MMP®)
Shares (MMP Shares) and four series of Tortoise
Notes outstanding. We may borrow from time to time using our
unsecured credit facility. We have a fiscal year ending
November 30.
Investment
Adviser
Tortoise Capital Advisors, L.L.C. (the Adviser)
serves as our investment adviser. The Adviser specializes in
managing portfolios of investments in 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. As of April 30, 2007, the Adviser had
approximately $2.9 billion of client assets under
management. The Advisers investment committee is comprised
of five portfolio managers. See Management of the
Company in the accompanying prospectus.
The Adviser also serves as the investment adviser to Tortoise
Energy Capital Corporation (TYY) and Tortoise North
American Energy Corporation (TYN), which are also
publicly traded, closed-end management investment companies.
TYY, which commenced operations on May 31, 2005, invests
primarily in equity securities of MLPs and their affiliates in
the energy infrastructure sector. TYN, which commenced
operations on October 31, 2005, invests primarily in equity
securities of companies in the energy sector whose primary
operations are in North America. The Adviser also serves as the
investment adviser to Tortoise Capital Resources Corporation
(TTO), a non-diversified closed-end management
investment company that has elected to be regulated as a
business development company (a BDC) under the
Investment Company Act of 1940 (the 1940 Act). TTO,
which commenced operations on December 8, 2005, invests
primarily in privately held and micro-cap public energy
companies operating in the midstream and downstream segments,
and to a lesser extent the upstream segment.
The principal business address of the Adviser is 10801 Mastin
Boulevard, Suite 222, Overland Park, Kansas 66210.
S-1
The
Offering
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Tortoise Notes offered by the Company |
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Series E Tortoise Notes in an aggregate principal amount of
$70,000,000. Series E Tortoise Notes will be sold in
denominations of $25,000 and any integral multiple thereof. The
Series E Tortoise Notes are being offered by Lehman
Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, A.G. Edwards & Sons, Inc.,
Oppenheimer & Co., Stifel, Nicolaus &
Company, Incorporated and Wachovia Capital Markets, LLC (the
Underwriters). See Underwriting. |
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Use of proceeds |
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We estimate that our net proceeds from this offering will be
approximately $69.1 million. We intend to use the net
proceeds to:
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retire our short-term debt of approximately
$55.4 million, which we incurred in connection with the
acquisition of equity portfolio securities and certain open
market purchases in pursuit of our investment objective and
policies and for working capital purposes, and
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invest in energy infrastructure companies in
accordance with our investment objective and policies, and for
working capital purposes.
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Trustee |
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BNY Midwest Trust Company |
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Auction Agent |
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The Bank of New York |
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Broker-Dealers |
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Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, A.G. Edwards & Sons, Inc.,
Oppenheimer & Co., Stifel, Nicolaus &
Company, Incorporated and Wachovia Capital Markets, LLC (the
Broker-Dealers). |
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Risk factors |
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See Risk Factors and other information included in
the accompanying prospectus, as well as
Auction Risk and
Certain Considerations Affecting Auction Rate
Securities Existing Holders Ability to Resell
Auction Rate Securities May Be Limited under The
Auction in this prospectus supplement, for a discussion of
factors you should carefully consider before deciding to invest
in the Series E Tortoise Notes. |
S-2
Recent
Developments
On March 22, 2007, we entered into an agreement
establishing a new unsecured credit facility that allows us to
borrow up to $150,000,000. The new credit facility replaces our
previous credit facility and the outstanding balance on our
previous credit facility was transferred to the new credit
facility. As of the date of this prospectus supplement, we had
approximately $55.4 million outstanding under our new
credit facility.
Under the terms of the new credit facility, U.S. Bank N.A.
serves as a lender and the lending syndicate agent on behalf of
other lenders participating in the credit facility. Outstanding
balances under the new credit facility generally will accrue
interest at a variable annual rate equal to the one-month LIBOR
rate plus 0.75%. The new credit facility will expire on
March 21, 2008 and we may draw on the credit facility from
time to time to invest in accordance with our investment
policies and for working capital purposes.
On March 27, 2007, we issued an aggregate principal amount
of $70,000,000 of our Series D Tortoise Notes (the
Series D Tortoise Notes). The Series D
Tortoise Notes were issued without coupons in denominations of
$25,000 and are due and payable on March 27, 2047. We used
all of the net proceeds (approximately $69.1 million) of
the issuance of the Series D Tortoise Notes to retire a
portion of the outstanding balance under our unsecured credit
facility.
On March 30, 2007, we issued 427,915 shares of our
common stock in a direct sale to certain purchasers. We used the
net proceeds (approximately $15.5 million) of the issuance
of the common stock to retire a portion of the outstanding
balance under our unsecured credit facility.
On April 5, 2007, we issued an aggregate liquidation
preference of $60,000,000 of an additional series
(Series III) of MMP Shares. The Series III
MMP Shares were issued with a liquidation preference of
$25,000 per share. We used the net proceeds (approximately
$59.4 million) of the issuance of the Series III MMP
Shares to retire a portion of our outstanding balance under our
unsecured credit facility.
On April 11, 2007, we entered into two interest rate swap
contracts to reduce our exposure to increasing interest and
dividend expense on the Series D Tortoise Notes and the
Series III MMP Shares resulting from increasing short-term
interest rates. Under the terms of these swap contracts, we are
obligated to pay a rate of 4.99% on one swap contract with a
notional amount of $60 million, and a rate of 5.03% on the
other swap contract with a notional amount of $60 million.
These swap contracts mature in 2012 and 2013, respectively.
On April 13, 2007, our stockholders approved a proposal
that allows us to sell shares of our common stock below our net
asset value (NAV) in accordance with certain
conditions. See Issuance of Common Stock Below NAV
in this prospectus supplement.
On May 14, 2007, we declared a quarterly dividend of
$0.545 per share to common stockholders of record on
May 24, 2007, which will be paid on June 1, 2007.
S-3
FINANCIAL
HIGHLIGHTS
Information contained in the table below under the heading
Per Common Share Data and Supplemental Data
and Ratios shows our per common share operating
performance. Except when noted, the information in this table is
derived from our financial statements audited by
Ernst & Young LLP, whose report on such financial
statements is contained in our 2006 Annual Report and
incorporated by reference into the statement of additional
information, both of which are available from us upon request.
The information for the period from December 1, 2006
through February 28, 2007 appears in our unaudited interim
financial statements as of February 28, 2007. See
Where You Can Find More Information in this
prospectus supplement.
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Period from
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Period from
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February 27,
2004(1)
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December 1, 2006
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Year Ended
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Year Ended
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through
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through
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November 30,
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November 30,
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November 30,
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February 28, 2007
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2006
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2005
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2004
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(Unaudited)
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Per Common Share
Data(2)
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Net Asset Value, beginning of period
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$
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31.82
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$
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27.12
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$
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26.53
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$
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Public offering price
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25.00
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Underwriting discounts and offering
costs on initial public offering
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(1.17
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Underwriting discounts and offering
costs on issuance of preferred shares
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(0.02
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(0.06
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Premiums less underwriting
discounts and offering costs on secondary
offering(3)
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Underwriting discounts and offering
costs on shelf offering of common
stock(4)
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(0.14
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Premiums less underwriting
discounts and offering costs on shelf offering of common
stock(5)
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0.08
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Income (loss) from Investment
Operations:
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Net investment
loss(6)
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(0.07
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(0.32
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(0.16
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(0.03
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Net realized and unrealized gain on
investments(6)
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3.59
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7.41
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2.67
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3.77
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Total increase from investment
operations
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3.52
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7.09
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2.51
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3.74
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Less Dividends to Preferred
Stockholders:
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Net investment income
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Return of capital
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(0.05
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(0.23
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)
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(0.11
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(0.01
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Total dividends to preferred
stockholders
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(0.05
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(0.23
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(0.11
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(0.01
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Less Dividends to Common
Stockholders:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
(0.54
|
)
|
|
|
(2.02
|
)
|
|
|
(1.79
|
)
|
|
|
(0.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends to common
stockholders
|
|
|
(0.54
|
)
|
|
|
(2.02
|
)
|
|
|
(1.79
|
)
|
|
|
(0.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, end of period
|
|
$
|
34.83
|
|
|
$
|
31.82
|
|
|
$
|
27.12
|
|
|
$
|
26.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share market value, end
of period
|
|
$
|
36.38
|
|
|
$
|
36.13
|
|
|
$
|
28.72
|
|
|
$
|
27.06
|
|
Total Investment Return Based on
Market
Value(7)
|
|
|
2.25
|
%
|
|
|
34.50
|
%
|
|
|
13.06
|
%
|
|
|
12.51
|
%
|
S-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
February 27,
2004(1)
|
|
|
|
December 1, 2006
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
|
through
|
|
|
November 30,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
February 28, 2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data and
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common
stockholders, end of period (000s)
|
|
$
|
635,044
|
|
|
$
|
532,433
|
|
|
$
|
404,274
|
|
|
$
|
336,553
|
|
Ratio of expenses (including
current and deferred income tax expense) to average net assets
before
waiver:(8)(9)(10)
|
|
|
31.26
|
%
|
|
|
20.03
|
%
|
|
|
9.10
|
%
|
|
|
15.20
|
%
|
Ratio of expenses (including
current and deferred income tax expense) to average net assets
after
waiver:(8)(9)(10)
|
|
|
31.09
|
%
|
|
|
19.81
|
%
|
|
|
8.73
|
%
|
|
|
14.92
|
%
|
Ratio of expenses (excluding
current and deferred income tax expense) to average net assets
before
waiver:(8)(9)(10)(11)
|
|
|
3.85
|
%
|
|
|
3.97
|
%
|
|
|
3.15
|
%
|
|
|
2.01
|
%
|
Ratio of expenses (excluding
current and deferred income tax expense) to average net assets
after
waiver:(8)(9)(10)(11)
|
|
|
3.68
|
%
|
|
|
3.75
|
%
|
|
|
2.78
|
%
|
|
|
1.73
|
%
|
Ratio of expenses (excluding
current and deferred income tax expense), without regard to
non-recurring organizational expenses, to average net assets
before
waiver:(8)(9)(10)(11)
|
|
|
3.85
|
%
|
|
|
3.97
|
%
|
|
|
3.15
|
%
|
|
|
1.90
|
%
|
Ratio of expenses (excluding
current and deferred income tax expense), without regard to
non-recurring organizational expenses, to average net assets
after
waiver:(8)(9)(10)(11)
|
|
|
3.68
|
%
|
|
|
3.75
|
%
|
|
|
2.78
|
%
|
|
|
1.62
|
%
|
Ratio of net investment loss to
average net assets before
waiver:(8)(9)(11)
|
|
|
(2.33
|
)%
|
|
|
(2.24
|
)%
|
|
|
(1.42
|
)%
|
|
|
(0.45
|
)%
|
Ratio of net investment loss to
average net assets after
waiver:(8)(9)(11)
|
|
|
(2.16
|
)%
|
|
|
(2.02
|
)%
|
|
|
(1.05
|
)%
|
|
|
(0.17
|
)%
|
Ratio of net investment loss to
average net assets after current and deferred income tax
expense, before
waiver:(8)(9)(10)
|
|
|
(29.74
|
)%
|
|
|
(18.31
|
)%
|
|
|
(7.37
|
)%
|
|
|
(13.37
|
)%
|
Ratio of net investment loss to
average net assets after current and deferred income tax
expense, after
waiver:(8)(9)(10)
|
|
|
(29.57
|
)%
|
|
|
(18.09
|
)%
|
|
|
(7.00
|
)%
|
|
|
(13.65
|
)%
|
Portfolio turnover rate
|
|
|
0.65
|
%
|
|
|
2.18
|
%
|
|
|
4.92
|
%
|
|
|
1.83
|
%
|
Tortoise Auction Rate Senior Notes,
end of period (000s)
|
|
$
|
165,000
|
|
|
$
|
165,000
|
|
|
$
|
165,000
|
|
|
$
|
110,000
|
|
Tortoise Preferred Shares, end of
period (000s)
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
|
$
|
35,000
|
|
Per common share amount of auction
rate senior notes outstanding at end of period
|
|
$
|
9.05
|
|
|
$
|
9.86
|
|
|
$
|
11.07
|
|
|
$
|
8.67
|
|
Per common share amount of net
assets, excluding auction rate senior notes, at end of period
|
|
$
|
43.88
|
|
|
$
|
41.68
|
|
|
$
|
38.19
|
|
|
$
|
35.21
|
|
Asset coverage, per $1,000 of
principal amount of auction rate senior notes and short-term
borrowings(12)
|
|
$
|
3,859
|
|
|
$
|
4,051
|
|
|
$
|
3,874
|
|
|
$
|
4,378
|
|
Asset coverage ratio of auction
rate senior notes and short-term
borrowings(12)
|
|
|
386
|
%
|
|
|
405
|
%
|
|
|
387
|
%
|
|
|
438
|
%
|
Asset coverage, per $25,000
liquidation value per share of preferred
shares(13)
|
|
$
|
251,801
|
|
|
$
|
215,155
|
|
|
$
|
169,383
|
|
|
$
|
265,395
|
|
Asset coverage, per $25,000
liquidation value per share of preferred
shares(14)
|
|
$
|
75,146
|
|
|
$
|
74,769
|
|
|
$
|
68,008
|
|
|
$
|
83,026
|
|
Asset coverage ratio of preferred
shares(14)
|
|
|
301
|
%
|
|
|
299
|
%
|
|
|
272
|
%
|
|
|
332
|
%
|
S-5
|
|
|
(1) |
|
Commencement of Operations. |
|
(2) |
|
Information presented relates to a share of common stock
outstanding for the entire period. |
|
(3) |
|
The amount is less than $0.01 per share, and represents the
premium on the secondary offering of $0.14 per share, less
the underwriting discounts and offering costs of $0.14 per
share for the year ended November 30, 2005. |
|
(4) |
|
Represents the dilution per common share from underwriting and
other offering costs. |
|
(5) |
|
Represents the premium on the shelf offering of $0.19 per
share, less the underwriting and offering costs of
$0.11 per share. |
|
(6) |
|
The per common share data for the periods ended
November 30, 2005 and 2004, do not reflect the change in
estimate of investment income and return of capital, for the
respective period. See Note 2C to the interim financial
statements as of February 28, 2007 for further disclosure. |
|
(7) |
|
Not annualized for periods less than a year. 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 (excluding
brokerage commissions). The calculation also assumes
reinvestment of dividends at actual prices pursuant to the
Companys dividend reinvestment plan. |
|
(8) |
|
Annualized for periods less than one full year. |
|
(9) |
|
The expense ratios and net investment loss ratios do not reflect
the effect of dividend payments to preferred stockholders. |
|
(10) |
|
The Company accrued $40,691,854, $71,661,802, $24,659,420 and
$30,330,018 for the quarter ended February 28, 2007, the
years ended November 30, 2006 and 2005 and for the period
from February 27, 2004 through November 30, 2004,
respectively, for current and deferred income tax expense. |
|
(11) |
|
The ratio excludes the impact of current and deferred income
taxes. |
|
(12) |
|
Represents value of total assets less all liabilities and
indebtedness not represented by auction rate senior notes,
short-term borrowings and preferred shares at the end of the
period divided by auction rate senior notes and short-term
borrowings outstanding at the end of the period. |
|
(13) |
|
Represents value of total assets less all liabilities and
indebtedness not represented by preferred shares at the end of
the period divided by preferred shares outstanding at the end of
the period, assuming the retirement of all auction rate senior
notes and short-term borrowings. |
|
(14) |
|
Represents value of total assets less all liabilities and
indebtedness not represented by auction rate senior notes,
short-term borrowings and preferred shares at the end of the
period divided by auction rate senior notes, short-term
borrowings and preferred shares outstanding at the end of the
period. |
S-6
USE OF
PROCEEDS
The net proceeds of the offering of Series E Tortoise Notes
will be approximately $69.1 million, after payment of the
underwriters discounts and commissions and estimated
offering costs.
We intend to use a portion of the net proceeds of this offering
to retire our outstanding balance under our unsecured credit
facility. Outstanding balances under the credit facility
generally accrue interest at a variable annual rate equal to the
one-month LIBOR rate plus 0.75%. As of the date of this
prospectus supplement, the current rate is 6.07%. The credit
facility remains in effect through March 21, 2008, and we
may draw on the facility from time to time to invest in
accordance with our investment policies and for working capital
purposes. As of the date of this prospectus supplement, we had
approximately $55.4 million outstanding under our credit
facility. We will use the remaining net proceeds of this
offering to make investments in energy infrastructure companies
in accordance with our investment objective and policies as
described under Investment Objective and Principal
Investment Strategies in the accompanying prospectus, and
for working capital purposes.
S-7
CAPITALIZATION
The following table sets forth our capitalization: (i) as
of February 28, 2007, (ii) pro forma to reflect
(a) the outstanding balance under our credit facility as of
May 22, 2007, (b) the issuance of 40,709 shares
of our common stock on March 1, 2007, pursuant to our
automatic dividend reinvestment plan, (c) the issuance of
$70,000,000 aggregate principal amount of Series D Tortoise
Notes on March 27, 2007 in an underwritten public offering,
(d) the issuance of 427,915 shares of our common stock
on March 30, 2007 in a direct sale to certain purchasers,
and (e) the issuance of an aggregate liquidation preference
of $60,000,000 Series III MMP Shares on April 5, 2007;
and (iii) pro forma as adjusted to give effect to the
issuance of the Series E Tortoise Notes offered hereby and
the retirement of the outstanding balance under our unsecured
credit facility with the proceeds of such offering. As indicated
below, common stockholders will bear the offering costs
associated with this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as Adjusted
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Short-Term Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured credit facility:
$150,000,000
available(1)
|
|
$
|
81,600,000
|
|
|
$
|
55,400,000
|
(2)
|
|
$
|
|
|
Long-Term Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tortoise Notes, denominations of
$25,000 or any multiple
thereof(3)
|
|
$
|
165,000,000
|
|
|
$
|
235,000,000
|
(4)
|
|
$
|
305,000,000
|
|
Preferred Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
MMP Shares, $0.001 per value
per share, $25,000 stated value per share at liquidation;
10,000,000 shares authorized; 2,800 (5,200 Pro Forma and
Pro Forma as Adjusted) shares
issued(3)
|
|
$
|
70,000,000
|
|
|
$
|
130,000,000
|
(5)
|
|
$
|
130,000,000
|
|
Common Stockholders
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $0.001 par value
per share; 100,000,000 shares authorized; 18,232,065
(18,700,689 Pro Forma and Pro Forma as Adjusted) shares
outstanding(3)
|
|
$
|
18,232
|
|
|
$
|
18,701
|
(6)
|
|
$
|
18,701
|
(6)
|
Additional paid-in capital
|
|
$
|
375,108,366
|
|
|
$
|
391,282,817
|
(7)
|
|
$
|
391,282,817
|
(7),(8)
|
Accumulated net investment loss,
net of deferred tax benefit
|
|
$
|
(10,748,115
|
)
|
|
$
|
(10,748,115
|
)
|
|
$
|
(10,748,115
|
)
|
Undistributed realized gain, net of
deferred tax expense
|
|
$
|
11,390,766
|
|
|
$
|
11,390,766
|
|
|
$
|
11,390,766
|
|
Net unrealized gain on investments
and interest rate swap contracts, net of deferred tax expense
|
|
$
|
259,274,758
|
|
|
$
|
259,274,758
|
|
|
$
|
259,274,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common
stockholders
|
|
$
|
635,044,007
|
|
|
$
|
651,218,927
|
|
|
$
|
651,218,927
|
|
|
|
|
(1) |
|
As of February 28, 2007, we had an unsecured credit
facility with U.S. Bank, N.A. which allowed us to borrow up
to $120,000,000. On March 22, 2007, we entered into an
agreement establishing a new unsecured credit facility with
U.S. Bank, N.A. and a lending syndicate which allows us to
borrow up to $150,000,000 and expires on March 21, 2008. |
|
(2) |
|
Reflects the application of the net proceeds from the issuance
of $70,000,000 aggregate principal amount of our Series D
Tortoise Notes on March 27, 2007, the issuance of
427,915 shares of our common stock on March 30, 2007
and the issuance of $60,000,000 aggregate liquidation preference
of our Series III MMP Shares on April 5, 2007.
Reflects the outstanding balance under our credit facility as of
May 22, 2007. |
|
(3) |
|
None of these outstanding shares/notes are held by us or for our
account. |
|
(4) |
|
Reflects the issuance of $70,000,000 aggregate principal amount
of Series D Tortoise Notes on March 27, 2007. |
|
(5) |
|
Reflects the issuance of $60,000,000 aggregate liquidation
preference of Series III MMP Shares on April 5, 2007. |
|
(6) |
|
Reflects the issuance of 40,709 shares of our common stock
(aggregate par value $41) on March 1, 2007 pursuant to our
automatic dividend reinvestment plan and the issuance of
427,915 shares of our common stock (aggregate par value
$428) on March 30, 2007 in a direct sale to certain
purchasers. |
S-8
|
|
|
(7) |
|
Reflects the issuance of 40,709 shares of our common stock
on March 1, 2007 ($1,417,910) less $0.001 par value
per share ($41), the issuance of 427,915 shares of our
common stock on March 30, 2007 ($15,547,742), less
$0.001 par value per share of common stock ($428), and the
underwriting commissions and the estimated offering expenses
($790,732) related to the issuance of the Series III MMP
Shares on April 5, 2007. |
|
(8) |
|
The sales load and estimated offering costs of the Series E
Tortoise Notes will be capitalized and amortized over the life
of the Series E Tortoise Notes. |
S-9
ISSUANCE
OF COMMON STOCK BELOW NAV
The provisions of the 1940 Act generally require that the public
offering price of common stock of a closed-end investment
company (less underwriting commissions and discounts) must equal
or exceed the NAV of such companys common stock
(calculated within 48 hours of pricing), unless such sale
is made with the consent of a majority of the companys
outstanding common stockholders. At our Annual Meeting of
Stockholders held on April 13, 2007, our stockholders
granted us the authority to sell shares of our common stock for
less than NAV, subject to the conditions listed below. We
believe that having the ability to issue and sell shares of
common stock below NAV benefits all stockholders in that it
allows us to quickly raise cash and capitalize on attractive
investment opportunities while remaining fully invested at all
times. We expect to sell shares of common stock below NAV only
when we have identified attractive near-term investment
opportunities. We may only sell shares of common stock below NAV
in accordance with the following conditions:
1. The per share offering price, before deduction of
underwriting fees, commissions and offering expenses, will not
be less than the NAV per share of our common stock, as
determined at any time within two business days prior to the
pricing of the common stock to be sold in the offering.
2. Immediately following each offering, after deducting
offering expenses and underwriting fees and commissions, the NAV
per share of our common stock, as determined at any time within
two business days prior to the pricing of the common stock to be
sold, would not have been diluted by greater than a total of 1%
of the NAV per share of all outstanding common stock as a result
of such offering. We will not be subject to a maximum number of
shares that can be sold, a defined minimum sales price per share
in any offering, or a maximum number of offerings we can make so
long as for each offering the number of shares offered and the
price at which such shares are sold together would not result in
dilution of the NAV per share of our common stock in excess of
the 1% limitation described above.
3. A majority of our independent directors makes a
determination, based on information and a recommendation from
the Adviser, that they reasonably expect that the investment(s)
to be made with the net proceeds of such issuance will lead to a
long-term increase in distribution growth.
S-10
ASSET
COVERAGE REQUIREMENTS
The 1940 Act and each Rating Agency imposes asset coverage
requirements which may limit our ability to engage in certain
types of transactions and may limit our ability to take certain
actions without confirming with each Rating Agency that such
action will not impair the ratings.
We are required to satisfy two separate asset maintenance
requirements with respect to outstanding Tortoise Notes:
(1) we must maintain assets in our portfolio that have a
value, discounted in accordance with guidelines set forth by
each Rating Agency, at least equal to the aggregate principal
amount of the Tortoise Notes, plus specified liabilities,
payment obligations and other amounts (the Tortoise
Notes Basic Maintenance Amount); and (2) we must
satisfy the 1940 Act asset coverage requirements (the 1940
Act Tortoise Notes Asset Coverage).
The Tortoise Notes Basic Maintenance Amount is defined in
the Rating Agency Guidelines. Each Rating Agency may amend the
definition of Tortoise Notes Basic Maintenance Amount from
time to time.
With respect to the 1940 Act Tortoise Notes Asset Coverage
requirement, we are required to maintain, with respect to
outstanding Tortoise Notes, asset coverage of at least 300%. We
estimate that based on the composition of our portfolio as of
February 28, 2007 (adjusted to reflect the issuance of:
(a) 40,709 and 427,915 shares of our common stock on
March 1, 2007 and March 30, 2007, respectively;
(b) the issuance of an aggregate principal amount of
$70,000,000 of our Series D Tortoise Notes on
March 27, 2007; (c) the issuance of an aggregate
liquidation preference of $60,000,000 of our Series III MMP
Shares on April 5, 2007; and (d) to reflect the
outstanding balance under our credit facility as of May 22,
2007), assuming the issuance of all Series E Tortoise Notes
offered hereby and the application of a portion of the net
proceeds received in this offering to retire our outstanding
balance under our credit facility, the 1940 Act Tortoise
Notes Asset Coverage would be:
|
|
|
|
|
|
|
|
|
Value of Company assets less all
liabilities and
indebtedness not represented by senior securities
|
|
|
|
$1,086,218,927
|
|
|
|
|
|
|
=
|
|
|
|
=
|
|
356%
|
Senior securities representing
indebtedness, including the
aggregate principal amount of Tortoise Notes
|
|
|
|
$ 305,000,000
|
|
|
|
|
A copy of the current Rating Agency Guidelines will be provided
to any holder of Tortoise Notes promptly upon written request by
such holder to the Company at 10801 Mastin Boulevard,
Suite 222, Overland Park, Kansas 66210. See Rating
Agency Guidelines in the accompanying prospectus for a
more detailed description of our asset maintenance requirements.
S-11
DESCRIPTION
OF TORTOISE NOTES
Tortoise Notes of each series will rank on a parity with any
other series of Tortoise Notes as to the payment of interest and
distribution of assets upon liquidation. All Tortoise Notes rank
senior to our common and preferred stock as to the payment of
interest and distribution of assets upon liquidation. Under the
1940 Act, we may only issue one class of senior securities
representing indebtedness.
The Series E Tortoise Notes will be issued pursuant to the
Original Indenture and a Supplemental Indenture dated as of
May , 2007 (referred to herein collectively
with the Original Indenture as the Indenture). The
following summaries of certain significant provisions of the
Series E Tortoise Notes and the Indenture are not complete
and are qualified in their entirety by the provisions of the
Indenture, a more detailed summary of which is contained in
Appendix A to the statement of additional information,
which is on file with the SEC. Whenever defined terms are used,
but not defined in this prospectus supplement, the terms have
the meaning given to them in the Supplemental Indenture.
General
The Board of Directors has authorized us to issue the
Series E Tortoise Notes representing indebtedness pursuant
to the terms of the Indenture. Currently, the Indenture provides
for the issuance of up to $70,000,000 aggregate principal amount
of Series E Tortoise Notes. The principal amount of the
Series E Tortoise Notes is due and payable
on ,
2047. The Series E Tortoise Notes, when issued and sold
pursuant to the terms of the Indenture, will be issued in fully
registered form without coupons and in denominations of $25,000
and any integral multiple thereof, unless otherwise provided in
the Indenture. The Series E Tortoise Notes, will be
unsecured obligations of ours and, upon our liquidation,
dissolution or winding up, will rank: (1) senior to our
outstanding common stock and any outstanding preferred stock,
including the MMP Shares; (2) on a parity with any of our
unsecured creditors, including any other series of Tortoise
Notes; and (3) junior to any of our secured creditors. The
Tortoise Notes are subject to optional and mandatory redemption
as described below under Redemption, and
acceleration of maturity, as described in the accompanying
prospectus under Description of Securities
Debt Securities Events of Default and Acceleration
of Maturity of Debt Securities; Remedies.
While serving as the Auction Agent in connection with the
Auction Procedures described below, the Auction Agent generally
will serve merely as our agent, acting in accordance with our
instructions.
We have the right (to the extent permitted by applicable law) to
purchase or otherwise acquire any Tortoise Notes outside of an
auction, so long as: (1) we are current in the payment of
interest on such Tortoise Notes and on any other series of
Tortoise Notes, (2) there is no arrearage in the mandatory
or optional redemption price respecting any Tortoise Notes for
which a Notice of Redemption has been given, and (3) we are
in compliance with the 1940 Act Tortoise Notes Asset
Coverage requirements and other applicable asset requirements.
See Redemption below.
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.
Unsecured
Investment
The Tortoise Notes represent our unsecured obligation to pay
interest and principal, when due. We cannot assure you that we
will have sufficient funds or that we will be able to arrange
for additional financing to pay interest on the Tortoise Notes
when due or to repay the Tortoise Notes at the Stated Maturity.
Our failure to pay interest on the Tortoise Notes when due or to
repay the Tortoise Notes upon the Stated Maturity would, subject
to the cure provisions under the Indenture, constitute an event
of default under the Indenture and could cause a default under
other agreements that we may enter into from time to time. There
is no sinking fund with respect to the Tortoise Notes, and at
the Stated Maturity, the entire outstanding principal amount of
the Tortoise Notes will become due and payable.
S-12
Securities
Depository
The nominee of the Securities Depository is expected to be the
sole record Holder of the Tortoise Notes. Accordingly, each
purchaser of Tortoise Notes must rely on (1) the procedures
of the Securities Depository and, if such purchaser is not a
member of the Securities Depository, such purchasers Agent
Member, to receive interest payments and notices and
(2) the records of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such
purchasers Agent Member, to evidence its ownership of the
Tortoise Notes.
Purchasers of Tortoise Notes will not receive certificates
representing their ownership interest in such securities. The
Depository Trust Company initially will act as Securities
Depository for the Agent Members with respect to the Tortoise
Notes.
Interest
and Rate Periods
General. Tortoise Notes will bear interest at
the Applicable Rate determined as set forth below under
Determination of Interest Rate. Interest
on the Tortoise Notes shall be payable when due as described
below. If we do not pay interest when due, it will trigger an
event of default under the Indenture (subject to the cure
provisions), and we will be restricted from declaring dividends
and making other distributions with respect to our common stock
and preferred stock.
On the Business Day next preceding each Interest Payment Date,
we are required to deposit with the Paying Agent sufficient
funds for the payment of interest. We do not intend to establish
any reserves for the payment of interest.
All moneys paid to the Paying Agent for the payment of interest
shall be held in trust for the payment of such interest to the
Holder. Interest will be paid by the Paying Agent to the Holder
as its name appears on our securities ledger or securities
records, which Holder is expected to be the nominee of the
Securities Depository. The Securities Depository will credit the
accounts of the Agent Members of the Beneficial Owners in
accordance with the Securities Depositorys normal
procedures. The Securities Depositorys current procedures
provide for it to distribute interest in
same-day
funds to Agent Members who are, in turn, expected to distribute
such interest to the persons for whom they are acting as agents.
The Agent Member of a Beneficial Owner will be responsible for
holding or disbursing such payments on the applicable Interest
Payment Date to such Beneficial Owner in accordance with the
instructions of such Beneficial Owner.
Interest in arrears for any past Rate Period may be subject to a
Default Rate of interest (described below) and may be paid at
any time, without reference to any regular Interest Payment
Date, to the Holder as its name appears on our securities ledger
or securities records on such date, not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board
of Directors. Any interest payment shall first be credited
against the earliest accrued but unpaid interest. No interest
will be payable in respect of any payment or payments which may
be in arrears. See Default Period below.
The amount of interest payable on each Interest Payment Date (or
in respect of interest on another date in connection with a
redemption during such Rate Period) shall be computed by
multiplying the Applicable Rate (or the Default Rate) for such
Rate Period (or a portion thereof) by a fraction, the numerator
of which will be the number of days in such Rate Period (or
portion thereof) that such Tortoise Notes were outstanding and
for which the Applicable Rate or the Default Rate was applicable
and the denominator of which will be 360, multiplying the amount
so obtained by the applicable principal amount, and rounding the
amount so obtained to the nearest cent.
Determination of Interest Rate. The interest
rate for the initial Rate Period for Series E Tortoise
Notes (i.e., the period from and including the Original Issue
Date to and including the initial Auction Date) and the initial
Auction Date are set forth on the cover page of this prospectus
supplement. After the initial Rate Period, subject to certain
exceptions, the Series E Tortoise Notes will bear interest
at the Applicable Rate that the Auction Agent advises us has
resulted from an Auction.
S-13
The initial Rate Period for the Series E Tortoise Notes
will be days. Rate Periods
after the initial Rate Period shall either be Standard Rate
Periods or, subject to certain conditions and with notice to the
Holder, Special Rate Periods.
A Special Rate Period will not be effective unless, among other
things, Sufficient Clearing Bids exist at the Auction in respect
of such Special Rate Period (that is, in general, the aggregate
amount of a series of Tortoise Notes subject to Buy Orders by
Potential Holders is at least equal to the aggregate amount of
that series of Tortoise Notes subject to Sell Orders by Existing
Holders).
Interest will accrue at the Applicable Rate from the Original
Issue Date and shall be payable on each Interest Payment Date
thereafter. For Rate Periods of less than 30 days, Interest
Payment Dates shall occur on the first Business Day following
such Rate Period and, if greater than 30 days, then on a
monthly basis on the first Business Day of each month within
such Rate Period, not including the initial Rate Period, and on
the Business Day following the last day of such Rate Period.
Interest will be paid through the Securities Depository on each
Interest Payment Date.
Except during a Default Period as described below, the
Applicable Rate resulting from an Auction will not be greater
than the Maximum Rate, which is equal to the Applicable
Percentage of the Reference Rate, subject to upward but not
downward adjustment in the discretion of the Board of Directors
after consultation with the Broker-Dealers. The Applicable
Percentage will be determined based on the lower of the credit
ratings assigned on that date to a series of Tortoise Notes by
Moodys and Fitch, as follows:
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Fitch Credit
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Applicable
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Moodys Credit Rating
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Rating
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Percentage
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Aa3 or above
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AA− or above
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200
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%
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A3 to A1
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A− to A+
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250
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%
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Baa3 to Baa1
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BBB− to BBB+
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275
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%
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Below Baa3
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Below BBB−
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300
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%
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The Reference Rate is the greater of (1) the applicable AA
Composite Commercial Paper Rate (for a Rate Period of fewer than
184 days) or the applicable Treasury Index Rate (for a Rate
Period of 184 days or more), or (2) the applicable
LIBOR. For Standard Rate Periods or shorter periods only, the
Applicable Rate resulting from an Auction will not be less than
the Minimum Rate, which is 70% of the applicable AA Composite
Commercial Paper Rate. No Minimum Rate is specified for Auctions
in respect to Rate Periods of more than the Standard Rate Period.
The Maximum Rate for a series of Tortoise Notes will apply
automatically following an Auction for the Tortoise Notes in
which Sufficient Clearing Bids have not been made (other than
because all Tortoise Notes were subject to Submitted Hold
Orders). If an Auction for any subsequent Rate Period is not
held for any reason, including because there is no Auction Agent
or Broker-Dealer, then the Interest Rate on a series of Tortoise
Notes for any such Rate Period shall be the Maximum Rate (except
for circumstances in which the Interest Rate is the Default
Rate, as described below).
The All Hold Rate will apply automatically following an Auction
in which all of the outstanding Tortoise Notes of a series are
subject to (or are deemed to be subject to) Submitted Hold
Orders. The All Hold Rate is 80% of the applicable AA Composite
Commercial Paper Rate.
Prior to each Auction, Broker-Dealers will notify Holders and
the Trustee of the term of the next succeeding Rate Period as
soon as practicable after the Broker-Dealers have been so
advised by us. After each Auction, on the Auction Date, the
Broker-Dealers will notify Holders of the Applicable Rate for
the next succeeding Rate Period and of the Auction Date of the
next succeeding Auction.
Notification of Rate Period. We will designate
the duration of subsequent Rate Periods for each series of the
Tortoise Notes; provided, however, that no such designation is
necessary for a Standard Rate Period and, provided further, that
any designation of a Special Rate Period shall be effective only
if (1) notice thereof shall have been given as provided
herein, (2) any failure to pay in a timely manner to the
Trustee the full amount of any interest on, or the redemption
price of, a series of Tortoise Notes shall have been cured as
provided above,
S-14
(3) Sufficient Clearing Bids shall have existed in an
Auction held on the Auction Date immediately preceding the first
day of such proposed Special Rate Period, (4) if we shall
have mailed a Notice of Redemption with respect to any Tortoise
Notes, the redemption price with respect to such Tortoise Notes
shall have been deposited with the Paying Agent, and (5) we
have confirmed that as of the Auction Date next preceding the
first day of such Special Rate Period, we have Eligible Assets
with an aggregate Discounted Value at least equal to the
Tortoise Notes Basic Maintenance Amount, and we have
consulted with the Broker-Dealers and have provided notice of
such designation and otherwise complied with the Rating Agency
Guidelines.
Designation of a Special Rate Period. If we
propose to designate any Special Rate Period, not fewer than
seven (7) (or two (2) Business Days in the event the
duration of the Rate Period prior to such Special Rate Period is
fewer than eight (8) days) nor more than 30 Business Days
prior to the first day of such Special Rate Period, notice shall
be (1) made by press release and (2) communicated by
us by telephonic or other means to the Trustee and confirmed in
writing promptly thereafter. Each such notice shall state
(A) that we propose to exercise our option to designate a
succeeding Special Rate Period, specifying the first and last
days thereof and (B) that we will by 3:00 p.m., New
York City time, on the second Business Day next preceding the
first day of such Special Rate Period, notify the Auction Agent
and the Trustee, who will promptly notify the Broker-Dealers, of
either (x) our determination, subject to certain
conditions, to proceed with such Special Rate Period, subject to
the terms of any Specific Redemption Provisions, or
(y) our determination not to proceed with such Special Rate
Period, in which latter event the succeeding Rate Period shall
be a Standard Rate Period.
No later than 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of any proposed
Special Rate Period, we will deliver to the Trustee and the
Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(1) a notice stating (A) that we have determined to
designate the next succeeding Rate Period as a Special Rate
Period, specifying the first and last days thereof and
(B) the terms of any Specific
Redemption Provisions; or
(2) a notice stating that we have determined not to
exercise our option to designate a Special Rate Period.
If we fail to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction
Agent and the Auction Agent is unable to make the confirmation
described above by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such
proposed Special Rate Period, we shall be deemed to have
delivered a notice to the Auction Agent with respect to such
Rate Period to the effect set forth in clause (2) above,
thereby resulting in a Standard Rate Period.
Default Period. Subject to cure provisions, a
Default Period with respect to a particular series
of Tortoise Notes will commence on any date on which, when
required to do so, we fail to deposit irrevocably in trust in
same-day
funds, with the Paying Agent by 12:00 noon, New York City time,
(A) the full amount of any accrued interest on that series
payable on the Interest Payment Date (an Interest
Default), or (B) the full amount of any redemption
price (the Redemption Price) payable on the
date fixed for redemption (the Redemption Date)
(a Redemption Default and together with an
Interest Default, hereinafter referred to as
Default).
Subject to cure provisions, a Default Period with respect to an
Interest Default or a Redemption Default shall end on the
Business Day on which, by 12:00 noon, New York City time, all
unpaid interest and any unpaid Redemption Price,
respectively, shall have been deposited irrevocably in trust in
same-day
funds with the Paying Agent. In the case of an Interest Default,
the Applicable Rate for each Rate Period commencing during a
Default Period will be equal to the Default Rate, and each
subsequent Rate Period commencing after the beginning of a
Default Period shall be a Standard Rate Period; provided,
however, that the commencement of a Default Period will not by
itself cause the commencement of a new Rate Period.
No Auction shall be held during a Default Period with respect to
an Interest Default applicable to that series of Tortoise Notes.
No Default Period with respect to an Interest Default or
Redemption Default shall be deemed to commence if the
amount of any interest or any Redemption Price due (if such
default is not solely
S-15
due to our willful failure) is deposited irrevocably in trust,
in same-day
funds with the Paying Agent by 12:00 noon, New York City time,
within three Business Days after the applicable Interest Payment
Date or Redemption Date, together with an amount equal to
the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by
360 for each series. The Default Rate shall be equal to the
Reference Rate multiplied by three.
Redemption
Optional Redemption. To the extent permitted
under the 1940 Act and Maryland law, we may, at our option,
redeem Tortoise Notes having a Rate Period of one year or less,
in whole or in part, out of funds legally available therefor, on
any Interest Payment Date, upon not less than 15 days
and not more than 40 days prior notice. This optional
redemption is not available during the initial Rate Period or
during other limited circumstances. The optional redemption
price shall be equal to the aggregate principal amount of the
Tortoise Notes to be redeemed, plus an amount equal to accrued
but unpaid interest to the date fixed for redemption. Tortoise
Notes having a Rate Period of more than one year are redeemable
at our option, in whole or in part, out of funds legally
available therefor, prior to the end of the relevant Rate
Period, upon not less than 15 days, and not more than
40 days, prior notice, subject to any Specific
Redemption Provisions, which may include the payment of
redemption premiums in the sole discretion of the Board of
Directors. We shall not effect any optional redemption unless
after giving effect thereto (1) we have available on such
date fixed for the redemption certain Deposit Securities with
maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the
amount (including any applicable premium) due to Holders of a
series of Tortoise Notes by reason of the redemption of a series
of Tortoise Notes and (2) we would have Eligible Assets
with an aggregate Discounted Value at least equal to the
Tortoise Notes Basic Maintenance Amount immediately
subsequent to such redemption. Although we ordinarily will not
redeem the Tortoise Notes prior to their Stated Maturity, we may
voluntarily redeem Tortoise Notes if, for example, the Board of
Directors determines that we could obtain more favorable
interest rates from an alternative source of financing.
Mandatory Redemption. If we fail to maintain
Eligible Assets with an aggregate Discounted Value at least
equal to the Tortoise Notes Basic Maintenance Amount as of
any Valuation Date or, fail to satisfy the 1940 Act Tortoise
Notes Asset Coverage as of the last Business Day of any
month, and such failure is not cured within ten
(10) Business Days following such Valuation Date, in the
case of a failure to maintain the Tortoise Notes Basic
Maintenance Amount, or on the last Business Day of the following
month, in the case of a failure to maintain the 1940 Act
Tortoise Notes Asset Coverage as of such last Business Day
(each an Asset Coverage Cure Date), the Tortoise
Notes will be subject to mandatory redemption out of funds
legally available therefor. See Rating Agency
Guidelines in the accompanying prospectus.
The principal amount of Tortoise Notes to be redeemed under
these circumstances will be equal to the lesser of (1) the
minimum principal amount of Tortoise Notes the redemption of
which, if deemed to have occurred immediately prior to the
opening of business on the relevant Asset Coverage Cure Date,
would result in our having Eligible Assets with an aggregated
Discounted Value at least equal to the Tortoise Notes Basic
Maintenance Amount or sufficient to satisfy the 1940 Act
Tortoise Notes Asset Coverage, as the case may be, in
either case as of the relevant Asset Coverage Cure Date
(provided that, if there is no such minimum principal amount of
Tortoise Notes the redemption of which would have such result,
all Tortoise Notes then outstanding will be redeemed), and
(2) the maximum principal amount of Tortoise Notes that can
be redeemed out of funds expected to be available therefor on
the Mandatory Redemption Date (as defined below) at the
Mandatory Redemption Price (as defined below).
Any redemption of less than all of the outstanding Tortoise
Notes of a series will be made from Tortoise Notes designated by
us. We shall designate Tortoise Notes to be redeemed on a pro
rata basis among the Holders in proportion to the principal
amount of Tortoise Notes they hold, by lot or such other method
as we shall deem equitable. No optional or mandatory redemption
of less than all outstanding Tortoise Notes of a series will be
made unless the aggregate principal amount of Tortoise Notes to
be redeemed is equal to $25,000 or integral multiples thereof.
Any redemption of less than all Tortoise Notes outstanding will
be made in such a manner that all Tortoise Notes outstanding
after such redemption are in authorized denominations.
S-16
We are required to effect such a mandatory redemption not later
than 40 days after the Asset Coverage Cure Date, as the
case may be (the Mandatory Redemption Date),
except that if we do not have funds legally available for the
redemption of, or are not otherwise legally permitted to redeem,
all of the outstanding Tortoise Notes of a series that are
subject to mandatory redemption, or we otherwise are unable to
effect such redemption on or prior to such Mandatory
Redemption Date, we will redeem those Tortoise Notes on the
earliest practicable date on which we will have such funds
available, upon notice to record owners of Tortoise Notes and
the Paying Agent. Our ability to make a mandatory redemption may
be limited by the provisions of the 1940 Act or Maryland law.
The redemption price per Tortoise Note in the event of any
mandatory redemption will be the principal amount, plus an
amount equal to accrued but unpaid interest to the date fixed
for redemption, plus (in the case of a Rate Period of more than
one year) a redemption premium, if any, determined by the Board
of Directors in its sole discretion after consultation with the
Broker-Dealers and set forth in any applicable Specific
Redemption Provisions (the Mandatory
Redemption Price).
Redemption Procedure. Pursuant to
Rule 23c-2
under the 1940 Act, we will file a notice of our intention to
redeem with the SEC so as to provide at least the minimum notice
required by such rule or any successor provision (notice
currently must be filed with the SEC generally at least
30 days prior to the redemption date). We shall deliver a
notice of redemption to the Auction Agent and the Trustee
containing the information described below one Business Day
prior to the giving of notice to Holders in the case of an
optional redemption and on or prior to the 30th day
preceding the Mandatory Redemption Date in the case of a
mandatory redemption. The Trustee will use its reasonable
efforts to provide notice to each Holder of Tortoise Notes
called for redemption by electronic means not later than the
close of business on the Business Day immediately following the
Business Day on which the Trustee determines the principal
amount of Tortoise Notes to be redeemed (or, during a Default
Period with respect to such Tortoise Notes, not later than the
close of business on the Business Day immediately following the
day on which the Trustee receives notice of redemption from us).
Such notice will be confirmed promptly by the Trustee in writing
not later than the close of business on the third Business Day
preceding the redemption date by providing the notice to each
Holder of record of Tortoise Notes called for redemption, the
Paying Agent (if different from the Trustee) and the Securities
Depository (Notice of Redemption). The Notice of
Redemption will be addressed to the registered owners of the
Tortoise Notes at their addresses appearing on our books or
records. Such notice will set forth (1) the redemption
date, (2) the principal amount and identity of Tortoise
Notes to be redeemed, (3) the redemption price (specifying
the amount of accrued interest to be included therein and the
amount of the redemption premium, if any), (4) that
interest on the Tortoise Notes to be redeemed will cease to
accrue on such redemption date, and (5) the 1940 Act
provision under which redemption shall be made. No defect in the
Notice of Redemption or in the transmittal or mailing thereof
will affect the validity of the redemption proceedings, except
as required by applicable law.
If less than all of the outstanding Tortoise Notes of a series
are redeemed on any date, the amount per Holder to be redeemed
on such date will be selected by us on a pro rata basis in
proportion to the principal amount of Tortoise Notes held by
such Holder, by lot or by such other method as is determined by
us to be fair and equitable, subject to the terms of any
Specific Redemption Provisions and subject to maintaining
authorized denominations as described above. Tortoise Notes may
be subject to mandatory redemption as described herein
notwithstanding the terms of any Specific
Redemption Provisions. The Auction Agent will give notice
to the Securities Depository, whose nominee will be the record
Holder of all of the Tortoise Notes, and the Securities
Depository will determine the Tortoise Notes to be redeemed from
the account of the Agent Member of each Beneficial Owner. Each
Agent Member will determine the principal amount of Tortoise
Notes to be redeemed from the account of each Beneficial Owner
for which it acts as agent. An Agent Member may select for
redemption Tortoise Notes from the accounts of some
Beneficial Owners without selecting for redemption any Tortoise
Notes from the accounts of other Beneficial Owners. In this
case, in selecting the Tortoise Notes to be redeemed, the Agent
Member will select by lot or by other fair and equitable method.
Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record Holder of all of the
Tortoise Notes, the particular principal amount to be redeemed
shall be selected by us by lot, on a pro rata basis between each
series or by such other method as we shall deem fair and
equitable, as contemplated above.
S-17
If Notice of Redemption has been given, then upon the deposit of
funds with the Paying Agent sufficient to effect such
redemption, interest on such Tortoise Notes will cease to accrue
and such Tortoise Notes will no longer be deemed to be
outstanding for any purpose and all rights of the holders of the
Tortoise Notes so called for redemption will cease and
terminate, except the right of the holders of such Tortoise
Notes to receive the redemption price, but without any interest
or additional amount. We shall be entitled to receive from the
Paying Agent, promptly after the date fixed for redemption, any
cash deposited with the Paying Agent in excess of (1) the
aggregate redemption price of the Tortoise Notes called for
redemption on such date and (2) such other amounts, if any,
to which owners of Tortoise Notes called for redemption may be
entitled. We will be entitled to receive, from time to time
after the date fixed for redemption, from the Paying Agent the
interest, if any, earned on such funds deposited with the Paying
Agent and the owners of Tortoise Notes so redeemed will have no
claim to any such interest. Any funds so deposited which are
unclaimed two years after such redemption date will be paid, to
the extent permitted by law, by the Paying Agent to us upon our
request. After such payment, Holders of Tortoise Notes called
for redemption may look only to us for payment.
So long as any Tortoise Notes are held of record by the nominee
of the Securities Depository, the redemption price for such
Tortoise Notes will be paid on the redemption date to the
nominee of the Securities Depository. The Securities
Depositorys normal procedures provide for it to distribute
the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for
whom they are acting as agent.
Notwithstanding the provisions for redemption described above,
no Tortoise Notes may be redeemed unless all interest in arrears
on the outstanding Tortoise Notes, and any of our indebtedness
ranking on a parity with the Tortoise Notes, have been or are
being contemporaneously paid or set aside for payment, except in
connection with our liquidation, in which case all Tortoise
Notes and all indebtedness ranking on a parity with the Tortoise
Notes must receive proportionate amounts. At any time we may
purchase or acquire all the outstanding Tortoise Notes pursuant
to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by,
Holders of all outstanding Tortoise Notes.
Except for the provisions described above, nothing contained in
the Indenture limits any legal right of ours to purchase or
otherwise acquire Tortoise Notes outside of an Auction at any
price, whether higher or lower than the price that would be paid
in connection with an optional or mandatory redemption, so long
as, at the time of any such purchase, there is no arrearage in
the payment of interest on, or the mandatory or optional
redemption price with respect to, any Tortoise Notes for which
Notice of Redemption has been given and we are in compliance
with the 1940 Act Tortoise Notes Asset Coverage and have
Eligible Assets with an aggregate Discounted Value at least
equal to the Tortoise Notes Basic Maintenance Amount after
giving effect to such purchase or acquisition on the date
thereof. If less than all outstanding Tortoise Notes are
redeemed or otherwise acquired by us, we shall give notice of
such transaction to the Auction Agent, in accordance with the
procedures agreed upon by the Board of Directors.
Payment
of Proceeds Upon Dissolution, Etc.
In the event of (a) any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization or
other similar case or proceeding in connection therewith,
relative to us or to our creditors, as such, or to our assets,
or (b) our liquidation, dissolution or other winding up,
whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) our assignment for the
benefit of creditors or any other marshalling of assets and
liabilities, then (after any payments with respect to our
secured creditor outstanding at such time) and in any such event
the holders of Tortoise Notes shall be entitled to receive
payment in full of all amounts due or to become due on or in
respect of all Tortoise Notes (including any interest accruing
thereon after the commencement of any such case or proceeding),
or provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders
of the Tortoise Notes, before the holders of any of our common
or preferred stock are entitled to receive any payment on
account of any redemption proceeds, liquidation preference or
dividends from such shares, and to that end the holders of
Tortoise Notes shall be entitled to receive, for application to
the payment thereof, any payment or distribution of any kind or
character, whether in cash, property or securities, including
any such
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payment or distribution which may be payable or deliverable by
reason of the payment of any of our other indebtedness being
subordinated to the payment of the Tortoise Notes, which may be
payable or deliverable in respect of the Tortoise Notes in any
such case, proceeding, dissolution, liquidation or other winding
up event.
Unsecured creditors of ours may include, without limitation,
service providers including the Adviser, Custodian, Auction
Agent, the Broker-Dealers and Trustee, pursuant to the terms of
various contracts with us. Secured creditors of ours may
include, without limitation, parties entering into any interest
rate swap, floor or cap transactions, or other similar
transactions with us that create liens, pledges, charges,
security interests, security agreements or other encumbrances on
our assets.
Our consolidation, reorganization or merger with or into any
other company, or a sale, lease or exchange of all or
substantially all of our assets of in consideration for the
issuance of equity securities of another company shall not be
deemed to be a liquidation, dissolution or winding up of the
Company.
THE
AUCTION
Role of
Auction Agent
Auction Agency Agreement. The Auction Agency
Agreement between us and the Auction Agent (currently, The Bank
of New York) (the Auction Agency Agreement)
provides, among other things, that the Auction Agent will follow
the Auction Procedures for purposes of determining the
Applicable Rate for the Series E Tortoise Notes so long as
the Applicable Rate for the Series E Tortoise Notes is to
be based on the results of an Auction. The Auction Agent acts as
a non-fiduciary agent for us in connection with Auctions. In the
absence of bad faith or gross negligence on its part, the
Auction Agent will not be liable for any action taken, suffered,
or omitted or for any error of judgment made by it in the
performance of its duties under the Auction Agency Agreement and
will not be liable for any error of judgment made in good faith
unless the Auction Agent will have been grossly negligent in
ascertaining the pertinent facts.
The Auction Agent may terminate the Auction Agency Agreement
upon notice to us on a date no earlier than 60 days after
the notice. If the Auction Agent should resign, we will use our
best efforts to enter into an agreement with a successor Auction
Agent containing substantially the same terms and conditions as
the Auction Agency Agreement. We may remove the Auction Agent
provided that prior to such removal we shall have entered into
such an agreement with a successor Auction Agent.
Auction
Risk
You may not be able to sell your Tortoise Notes at an Auction if
the Auction fails; that is, if there are more Tortoise Notes
offered for sale than there are buyers for those Tortoise Notes.
Also, if you place hold orders (orders to retain Tortoise Notes)
at an Auction only at a specified rate, and that bid rate
exceeds the rate set at the Auction, you will not retain your
Tortoise Notes. Finally, if you buy Tortoise Notes or elect to
retain Tortoise Notes without specifying a rate below which you
would not wish to buy or continue to hold those Tortoise Notes,
and the Auction sets a below-market rate, you may receive a
lower rate of return on your Tortoise Notes than the market rate.
Auction
Procedures
Beneficial Owners. Prior to the Broker-Dealer
Deadline on each Auction Date for a series of Tortoise Notes,
each customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of Tortoise Notes of such series (a Beneficial
Owner) may submit orders (Orders) with respect
to Tortoise Notes of such series to that Broker-Dealer as
follows:
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Hold Order indicating its desire to hold Tortoise
Notes of such series without regard to the Applicable Rate for
Tortoise Notes of such series for the next Rate Period thereof.
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Bid indicating its desire to sell the principal
amount of outstanding Tortoise Notes, if any, of such series
held by such Beneficial Owner which such Beneficial Owner offers
to sell if the Applicable Rate
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S-19
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for Tortoise Notes of such series for the next succeeding Rate
Period of Tortoise Notes of such series shall be less than the
rate per annum specified by such Beneficial Owner (also known as
a hold at rate order).
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Sell Order indicating its desire to sell the
principal amount of outstanding Tortoise Notes, if any, of such
series held by such Beneficial Owner which such Beneficial Owner
offers to sell without regard to the Applicable Rate for
Tortoise Notes of such series for the next succeeding Rate
Period of Tortoise Notes of such series.
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Orders submitted (or the failure to do so) by Beneficial Owners
under certain circumstances will have the effects described
below. A Beneficial Owner of Tortoise Notes of such series that
submits a Bid with respect to Tortoise Notes of such series to
its Broker-Dealer having a rate higher than the Maximum Rate for
Tortoise Notes of such series on the Auction Date therefore will
be treated as having submitted a Sell Order with respect to such
Tortoise Notes. A Beneficial Owner of Tortoise Notes of such
series that fails to submit an Order with respect to such
Tortoise Notes to its Broker-Dealer will be deemed to have
submitted a Hold Order with respect to such Tortoise Notes of
such series; provided, however, that if a Beneficial Owner of
Series E Tortoise Notes fails to submit an Order with
respect to Series E Tortoise Notes to its Broker-Dealer for
an Auction relating to a Special Rate Period of more than
28 days, such Beneficial Owner will be deemed to have
submitted a Sell Order with respect to such Tortoise Notes. A
Sell Order shall constitute an irrevocable offer to sell the
Tortoise Notes subject thereto. A Beneficial Owner that offers
to become the Beneficial Owner of additional Tortoise Notes is,
for purposes of such offer, a Potential Beneficial Owner as
discussed below.
Potential Beneficial Owners. A customer of a
Broker-Dealer that is not a Beneficial Owner of a series of
Tortoise Notes but that wishes to purchase Tortoise Notes of
such series, or that is a Beneficial Owner of Tortoise Notes of
such series that wishes to purchase additional Tortoise Notes of
such series (in each case, a Potential Beneficial
Owner), may submit Bids to its Broker-Dealer in which it
offers to purchase such principal amount of outstanding Tortoise
Notes of such series specified in such Bid if the Applicable
Rate for Tortoise Notes of such series determined on such
Auction Date shall be higher than the rate specified in such
Bid. A Bid placed by a Potential Beneficial Owner of Tortoise
Notes of such series specifying a rate higher than the Maximum
Rate for Tortoise Notes of such series on the Auction Date
therefor will not be accepted.
The Auction Process. Each Broker-Dealer shall
submit in writing, which shall include a writing delivered via
e-mail or
other electronic means, to the Auction Agent, prior to the
Submission Deadline on each Auction Date, all Orders for
Tortoise Notes of a series subject to an Auction on such Auction
Date accepted by such Broker-Dealer, designating itself (unless
otherwise permitted by us) as an Existing Holder in respect of
Tortoise Notes subject to Orders submitted or deemed submitted
to it by Beneficial Owners and as a Potential Holder in respect
of Tortoise Notes subject to Orders submitted to it by Potential
Beneficial Owners. However, neither we nor the Auction Agent
will be responsible for a Broker-Dealers failure to comply
with the foregoing. Any Order placed with the Auction Agent by a
Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order
placed with a Broker-Dealer by a Beneficial Owner or Potential
Beneficial Owner. Similarly, any failure by a Broker-Dealer to
submit to the Auction Agent an Order in respect of Tortoise
Notes held by it or customers who are Beneficial Owners will be
treated in the same manner as a Beneficial Owners failure
to submit to its Broker-Dealer an Order in respect of Tortoise
Notes held by it. A Broker-Dealer may also submit Orders to the
Auction Agent for its own account as an Existing Holder or
Potential Holder, provided it is not an affiliate of ours.
If Sufficient Clearing Bids for a series of Tortoise Notes exist
(that is, the aggregate principal amount of outstanding Tortoise
Notes of such series subject to Submitted Bids of Potential
Holders specifying one or more rates between the Minimum Rate
(for Standard Rate Periods or shorter periods, only) and the
Maximum Rate (for all Rate Periods) for Tortoise Notes of such
series exceeds or is equal to the sum of the aggregate principal
amount of outstanding Tortoise Notes of such series subject to
Submitted Sell Orders), the Applicable Rate for Tortoise Notes
of such series for the next succeeding Rate Period thereof will
be the lowest rate specified in the Submitted Bids which, taking
into account such rate and all lower rates bid by Broker-Dealers
as or on behalf of Existing Holders and Potential Holders, would
result in Existing Holders and Potential
S-20
Holders owning the aggregate principal amount of Tortoise Notes
of such series available for purchase in the Auction (such rate,
the Winning Bid Rate). If Sufficient Clearing Bids
for a series of Tortoise Notes do not exist (other than because
all of the outstanding Tortoise Notes of such series are subject
to Submitted Hold Orders), then the Applicable Rate for all
Tortoise Notes of such series for the next succeeding Rate
Period thereof will be equal to the Maximum Rate for Tortoise
Notes of such series. In such event, Holders of Tortoise Notes
of such series that have submitted or are deemed to have
submitted Sell Orders may not be able to sell in such Auction
all aggregate principal amount of Tortoise Notes of such series
subject to such Sell Orders. In any particular Auction, if all
outstanding Tortoise Notes of a series are the subject of
Submitted Hold Orders, the Applicable Rate for such series of
Tortoise Notes for the next succeeding Auction Period will be
the All Hold Rate (such a situation is called an All Hold
Auction).
The Auction Procedures include a pro rata allocation of Tortoise
Notes for purchase and sale, which may result in an Existing
Holder continuing to hold or selling, or a Potential Holder
purchasing, a number of Tortoise Notes that is less than the
number of Tortoise Notes specified in its Order. To the extent
the allocation procedures have that result, Broker-Dealers that
have designated themselves as Existing Holders or Potential
Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next
Business Day (also an Interest Payment Date) after the Auction
Date through the Securities Depository. Purchasers will make
payment through their Agent Members in
same-day
funds to the Securities Depository against delivery to their
respective Agent Members. The Securities Depository will make
payment to the sellers Agent Members in accordance with
the Securities Depositorys normal procedures, which now
provide for payment against delivery by their Agent Members in
same-day
funds.
Certain
Considerations Affecting Auction Rate Securities
Role of Broker-Dealers. Lehman Brothers Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
A.G. Edwards & Sons, Inc., Oppenheimer &
Co., Stifel, Nicolaus & Company, Incorporated and
Wachovia Capital Markets, LLC (the Broker-Dealers)
have been appointed by the issuers or obligors of various
auction rate securities to serve as a dealer in the auctions for
those securities and is paid by the issuers or obligors for its
services. The Broker-Dealers receive broker-dealer fees from
such issuers or obligors at an agreed upon annual rate that is
applied to the principal amount of securities sold or
successfully placed through them in such auctions.
The Broker-Dealers are designated in the Broker-Dealer
Agreements as the Broker-Dealers to contact Existing Holders and
Potential Holders and solicit Bids for the Tortoise Notes. The
Broker-Dealers will receive Broker-Dealer Fees from us with
respect to the Tortoise Notes sold or successfully placed
through it in Auctions. The Broker-Dealers may share a portion
of such fees with other dealers that submit Orders through it
that are filled in the Auction.
Bidding by Broker-Dealers. A Broker-Dealer is
permitted, but not obligated, to submit Orders in Auctions for
its own account either as a buyer or seller and routinely does
so in the auction rate securities market in its sole discretion.
If a Broker-Dealer submits an Order for its own account, it
would have an advantage over other Bidders because a
Broker-Dealer would have knowledge of the other Orders placed
through it in that Auction and thus could determine the rate and
size of its Order so as to increase the likelihood that
(i) its Order will be accepted in the Auction and
(ii) the Auction will clear at a particular rate. For this
reason, and because the Broker-Dealers are appointed and paid by
us to serve as a Broker-Dealer in the Auction, a
Broker-Dealers interests in serving as a Broker-Dealer in
an Auction may differ from those of Existing Holders and
Potential Holders who participate in Auctions. See
Role of Broker-Dealers. A Broker-Dealer
would not have knowledge of Orders submitted to the Auction
Agent by any other firm that is, or may in the future be,
appointed to accept Orders pursuant to a Broker-Dealer Agreement.
The Broker-Dealers are the only Broker-Dealers appointed by us
to serve as a Broker-Dealer in the Auction, and as long as that
remains the case, they will be the only Broker-Dealers that
submit Orders to the Auction Agent in that Auction. As a result,
in such circumstances, the Broker-Dealers may discern the
clearing
S-21
rate before the Orders are submitted to the Auction Agent and
set the clearing rate with their respective Orders.
A Broker-Dealer may place one or more Bids in an Auction for its
own account to acquire securities for its inventory, to prevent
an Auction Failure (which occurs if there are insufficient
clearing bids and results in the auction rate being set at the
Maximum Rate) or to prevent Auctions from clearing at a rate
that the Broker-Dealer believes does not reflect the market for
the Tortoise Notes. A Broker-Dealer may place such Bids even
after obtaining knowledge of some or all of the other Orders
submitted through it. When bidding in an Auction for its own
account, a Broker-Dealer also may Bid inside or outside the
range of rates that it posts in its Price Talk (as defined
herein). See Price Talk.
A Broker-Dealer also may encourage bidding by others in
Auctions, including to prevent an Auction Failure or to prevent
an Auction from clearing at a rate that a Broker-Dealer believes
does not reflect the market for the Tortoise Notes. A
Broker-Dealer may encourage such Bids even after obtaining
knowledge of some or all of the other Orders submitted through
it.
Bids by a Broker-Dealer or by those it may encourage to place
Bids are likely to affect (i) the Applicable
Rate including preventing the Applicable Rate from
being set at the Maximum Rate or otherwise causing Potential
Beneficial Owners to receive a lower rate than they might have
received had a Broker-Dealer not Bid (or not encouraged others
to Bid) and (ii) the allocation of the Tortoise Notes being
auctioned, including displacing some Potential Beneficial Owners
who may have their Bids rejected or receive fewer Tortoise Notes
than they would have received if a Broker-Dealer had not Bid (or
encouraged others to Bid). Because of these practices, the fact
that an Auction clears successfully does not mean that an
investment in the Tortoise Notes involves no significant
liquidity or credit risk. A Broker-Dealer is not obligated to
continue to place such Bids (or to continue to encourage other
Bidders to do so) in any particular Auction to prevent an
Auction Failure or an Auction from clearing at a rate a
Broker-Dealer believes does not reflect the market for the
Tortoise Notes. Investors should not assume that a Broker-Dealer
will place Bids or encourage others to do so or that Auction
Failures will not occur. Investors should also be aware that
Bids by a Broker-Dealer (or by those it may encourage to place
Bids) may cause lower Applicable Rates to occur.
The statements herein regarding Bidding by a Broker-Dealer apply
only to a Broker-Dealers auction desk and any other
business units of a Broker-Dealer that are not separated from
the auction desk by an information barrier designed to limit
inappropriate dissemination of bidding information.
In any particular Auction, an All Hold Auction will result if
all outstanding Tortoise Notes of a series are the subject of
Submitted Hold Orders, the Applicable Rate for the next
succeeding Auction Period will be the All Hold Rate. If a
Broker-Dealer holds any Tortoise Notes of a series for its own
account on an Auction Date, a Broker-Dealer may, but is not
obligated to submit a Sell Order into the Auction with respect
to such Tortoise Notes, which would prevent that Auction from
being an All Hold Auction. A Broker-Dealer may, but is not
obligated to, submit Bids for its own account in that same
Auction, as set forth above.
Price Talk. Before the start of an Auction, a
Broker-Dealer, in its discretion, may make available to its
customers who are Existing Holders and Potential Holders a
Broker-Dealers good faith judgment of the range of likely
clearing rates for the Auction based on market and other
information. This is known as Price Talk. Price Talk
is not a guaranty that the Applicable Rate established through
the Auction will be within the Price Talk, and Existing Holders
and Potential Holders are free to use it or ignore it. A
Broker-Dealer occasionally may update and change the Price Talk
based on changes in our credit quality or macroeconomic factors
that are likely to result in a change in interest rate levels,
such as an announcement by the Federal Reserve Board of a change
in the Federal Funds rate or an announcement by the Bureau of
Labor Statistics of unemployment numbers. Potential Holders
should confirm with a Broker-Dealer the manner by which such
Broker-Dealer will communicate Price Talk and any changes to
Price Talk.
All-or-Nothing
Bids. The Broker-Dealers will not accept
all-or-nothing
Bids (i.e., Bids whereby the bidder proposes to reject an
allocation smaller than the entire quantity Bid) or any other
type of Bid that allows the bidder to avoid Auction Procedures
that require the pro rata allocation of Tortoise Notes of a
series where there are not sufficient Sell Orders to fill all
Bids at the Winning Bid Rate.
S-22
No Assurances Regarding Auction Outcomes. The
Broker-Dealers provide no assurance as to the outcome of any
Auction. The Broker-Dealers also do not provide any assurance
that any Bid will be successful, in whole or in part, or that
the Auction will clear at a rate that a bidder considers
acceptable. Bids may be only partially filled, or not filled at
all, and the Applicable Rate on any Tortoise Notes purchased or
retained in the Auction may be lower than the market rate for
similar investments.
The Broker-Dealers will not agree before an Auction to buy
Tortoise Notes of any series from, or sell Tortoise Notes of any
series to, a customer after the Auction.
Deadlines. Each particular Auction has a
formal deadline by which all Bids must be submitted by the
Broker-Dealers to the Auction Agent. This deadline is called the
Submission Deadline. To provide sufficient time to
process and submit customer Bids to the Auction Agent before the
Submission Deadline, each Broker-Dealer imposes an earlier
deadline for all customers, called the Broker-Dealer
Deadline, by which bidders must submit Bids to a
Broker-Dealer. The Broker-Dealer Deadline is subject to change
by a Broker-Dealer. Potential Beneficial Owners should consult
with their Broker-Dealer as to its Broker-Dealer Deadline. A
Broker-Dealer may allow for correction of clerical errors after
the Broker-Dealer Deadline and prior to the Submission Deadline.
A Broker-Dealer may submit Bids for its own account at any time
until the Submission Deadline and may change Bids it has
submitted for its own account at any time until the Submission
Deadline. The Auction Procedures provide that until one hour
after the Auction Agent completes the dissemination of the
results of an Auction, new Orders can be submitted to the
Auction Agent if such Orders were received by a Broker-Dealer or
generated by a Broker-Dealer for its own account prior to the
Submission Deadline and the failure to submit such Orders prior
to the Submission Deadline was the result of force majeure, a
technological failure or a clerical error. In addition until one
hour after the Auction Agent completes dissemination of the
results of an Auction, a Broker-Dealer may modify or withdraw an
Order submitted to the Auction Agent prior to the Submission
Deadline if a Broker-Dealer determines that such Order contained
a clerical error. In the event of such a submission,
modification or withdrawal the Auction Agent will rerun the
Auction, if necessary, taking into account such submission,
modification or withdrawal.
Existing Holders Ability to Resell Auction Rate
Securities May Be Limited. An Existing Holder may
sell, transfer or dispose of a Tortoise Note of a series
(i) in an Auction, only pursuant to a Bid or Sell Order in
accordance with the Auction Procedures, or (ii) outside an
Auction, only to or through a Broker-Dealer.
Existing Holders will be able to sell all of the Tortoise Notes
of a series that are the subject of their Submitted Sell Orders
only if there are bidders willing to purchase all those Tortoise
Notes in the Auction. If Sufficient Clearing Bids have not been
made, Existing Holders that have submitted Sell Orders will not
be able to sell in the Auction all, and may not be able to sell
any, of the Tortoise Notes of such series subject to such
Submitted Sell Orders. As discussed above (See
Bidding by Broker-Dealers), a
Broker-Dealer may submit a Bid in an Auction to avoid an Auction
Failure, but it is not obligated to do so. There may not always
be enough bidders to prevent an Auction Failure in the absence
of bidding by a Broker-Dealer in the Auction for its own account
or encouraging others to Bid. Therefore, Auction Failures are
possible, especially if our credit were to deteriorate, if a
market disruption were to occur or if, for any reason, a
Broker-Dealer were unable or unwilling to Bid.
Between Auctions, there can be no assurance that a secondary
market for the Tortoise Notes of any series will develop or, if
it does develop, that it will provide Existing Holders the
ability to resell the Tortoise Notes of such series on the terms
or at the times desired by an Existing Holder. A Broker-Dealer,
in its own discretion, may decide to buy or sell the Tortoise
Notes of a series in the secondary market for its own account
from or to investors at any time and at any price, including at
prices equivalent to, below, or above par for the Tortoise Notes
of such series. However, a Broker-Dealer is not obligated to
make a market in the Tortoise Notes of a series and may
discontinue trading in the Tortoise Notes of such series without
notice for any reason at any time. Existing Holders who resell
between Auctions may receive an amount less than par, depending
on market conditions.
If an Existing Holder purchased Tortoise Notes through a dealer
which is not a Broker-Dealer for the securities, such Existing
Holders ability to sell its securities may be affected by
the continued ability of its dealer to transact trades for the
Tortoise Notes through a Broker-Dealer.
S-23
The ability to resell the Tortoise Notes of any series will
depend on various factors affecting the market for the Tortoise
Notes, including news relating to us, the attractiveness of
alternative investments, investor demand for short term
securities, the perceived risk of owning the Tortoise Notes
(whether related to credit, liquidity or any other risk), the
tax or accounting treatment accorded the Tortoise Notes
(including U.S. generally accepted accounting principles as
they apply to the accounting treatment of auction rate
securities), reactions of market participants to regulatory
actions (such as those described in Securities
and Exchange Commission Settlements below) or press
reports, financial reporting cycles and market conditions
generally. Demand for the Tortoise Notes may change without
warning, and declines in demand may be short-lived or continue
for longer periods.
Resignation of the Auction Agent or a Broker-Dealer Could
Impact the Ability to Hold Auctions. The Auction
Agent Agreement provides that the Auction Agent may resign from
its duties as Auction Agent by giving us at least
60 days notice and does not require, as a condition
to the effectiveness of such resignation, that a replacement
Auction Agent be in place. The Broker-Dealer Agreement provides
that a Broker-Dealer thereunder may resign upon five days
notice and does not require, as a condition to the effectiveness
of such resignation, that a replacement Broker-Dealer be in
place. For any Auction Period during which there is no duly
appointed Auction Agent or Broker-Dealer, it will not be
possible to hold Auctions for the Tortoise Notes, with the
result that the dividend rate on the Tortoise Notes will be
determined as described in the supplemental indenture.
Securities and Exchange Commission
Settlements. On May 31, 2006, the SEC
announced that it had settled its investigation of 15 firms,
including Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, A.G. Edwards &
Sons, Inc. and Wachovia Capital Markets, LLC (the Settling
Broker-Dealers), that participate in the auction rate
securities market regarding their respective practices and
procedures in this market. The SEC alleged in the settlement
that the firms had managed auctions for auction rate securities
in which they participated in ways that were not adequately
disclosed or that did not conform to disclosed auction
procedures. As part of the settlement, the Settling
Broker-Dealers agreed to pay a civil penalty. In addition, the
Settling Broker-Dealers, without admitting or denying the
SECs allegations, agreed to provide to customers written
descriptions of its material auction practices and procedures,
and to implement procedures reasonably designed to detect and
prevent any failures by the Settling Broker-Dealers to conduct
the auction process in accordance with disclosed procedures. No
assurance can be provided as to how the settlement may affect
the market for auction rate securities or the Tortoise Notes.
The SECs investigation is continuing as to other entities
that participate in the auction rate securities market.
In addition, on January 9, 2007, the SEC announced that it
had settled its investigation of three banks, including The Bank
of New York (the Settling Auction Agents), that
participate as auction agents in the auction rate securities
market, regarding their respective practices and procedures in
this market. The SEC alleged in the settlement that the Settling
Auction Agents allowed broker-dealers in auctions to submit bids
or revise bids after the submission deadlines and allowed
broker-dealers to intervene in auctions in ways that affected
the rates paid on the auction rate securities. As part of the
settlement, the Settling Auction Agents agreed to pay civil
penalties. In addition, each Settling Auction Agent, without
admitting or denying the SECs allegations, agreed to
provide to broker-dealers and issuers written descriptions of
its material auction practices and procedures and to implement
procedures reasonably designed to detect and prevent any
failures by that Settling Auction Agent to conduct the auction
process in accordance with disclosed procedures. No assurance
can be offered as to how the settlement may affect the market
for auction rate securities or the Tortoise Notes.
S-24
UNDERWRITING
The underwriters named below (the Underwriters),
acting through their representative, Lehman Brothers Inc., are
acting as underwriters in this offering. Subject to the terms
and conditions contained in the underwriting agreement by and
among the Underwriters, the Adviser and us, dated the date of
this prospectus supplement, the Underwriters have agreed to
purchase from us, and we have agreed to sell to the
Underwriters, the principal amount of Series E Tortoise
Notes set forth opposite their names below.
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Principal Amount of
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Underwriter
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Series E Tortoise Notes
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Lehman Brothers Inc.
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Merrill Lynch, Pierce,
Fenner & Smith
Incorporated
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A.G. Edwards & Sons,
Inc.
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Oppenheimer & Co.
Inc.
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Stifel, Nicolaus &
Company, Incorporated
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Wachovia Capital Markets, LLC
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Total
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$
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70,000,000
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The underwriting agreement provides that the Underwriters are
obligated to purchase, subject to certain conditions, all of the
Series E Tortoise Notes being offered. The conditions
contained in the underwriting agreement include requirements
that (1) the representations and warranties made by us and
the Adviser to the Underwriters are true, (2) there has
been no material change in the financial markets, and
(3) we and the Adviser deliver customary closing documents
to the Underwriters.
After the first Auction that includes Series E Tortoise
Notes issued pursuant to this prospectus supplement, payment by
each purchaser of Series E Tortoise Notes sold through the
Auction will be made in accordance with the procedures described
under The Auction.
Sales
Load
The Underwriters have advised us that they propose to offer the
Series E Tortoise Notes directly to the public at the
public offering price presented on the cover page of this
prospectus supplement less an underwriting discount and
commission equal to $ per
$25,000 principal amount of Series E Tortoise Notes which
is equal to % of the initial offering price.
Investors must pay for any Series E Tortoise Notes
purchased on or before May , 2007. After the
offering, the Underwriters may change the price at which they
re-offer the notes to dealers and other selling terms.
Indemnification
We and the Adviser have agreed to indemnify the Underwriters
against certain liabilities relating to this offering, including
liabilities under the 1933 Act and to contribute to
payments that the Underwriters may be required to make for those
liabilities; provided that such indemnification shall not extend
to any liability or action resulting directly from the gross
negligence, willful misconduct or reckless disregard of
applicable obligations and duties of the Underwriters.
Listing
The Tortoise Notes, which have no history of public trading,
will not be listed on an exchange or automated quotation system.
Broker-Dealers may maintain a secondary trading market in the
Tortoise Notes outside of Auctions; however, they have no
obligation to do so, and there can be no assurance that a
secondary market for the Tortoise Notes will develop or, if it
does develop, that it will provide holders with a liquid trading
market (i.e., trading will depend on the presence of willing
buyers and sellers and the trading price will be subject to
variables to be determined at the time of the trade by such
Broker-Dealers). The Underwriters are not obligated to make a
market in the Tortoise Notes between Auctions and the market
making may be discontinued at any time at their sole discretion.
S-25
Electronic
Distribution
The prospectus supplement and the accompanying prospectus in
electronic format may be made available on the Internet sites or
through other online services maintained by the Underwriters or
their affiliates. In those cases, prospective investors may view
offering terms online and prospective investors may be allowed
to place orders online. The Underwriters may allocate a specific
principal amount of Series E Tortoise Notes for sale to
online brokerage account holders. Any such allocation for online
distributions will be made by the representative on the same
basis as other allocations.
Other than the prospectus supplement and the accompanying
prospectus in electronic format, the information on the
Underwriters web sites and any information contained in
any other web site maintained by the Underwriters are not part
of the prospectus supplement and the accompanying prospectus or
the registration statement of which this prospectus supplement
and the accompanying prospectus form a part, has not been
approved
and/or
endorsed by us and should not be relied upon by investors.
Certain
Relationships and Fees
To the extent permitted under the 1940 Act and the rules and
regulations promulgated thereunder, we anticipate that the
Underwriters may from time to time act as a broker or dealer and
receive fees in connection with the execution of our portfolio
transactions after an Underwriter has ceased to be an
Underwriter and, subject to certain restrictions, may act as a
broker while it is an Underwriter. We anticipate that an
Underwriter or one of its affiliates may from time to time act
in Auctions as a Broker-Dealer or dealer and receive fees as
described under The Auction Certain
Considerations Affecting Auction Rate Securities.
Addresses
Lehman Brothers Inc.s principal office is located at 745
Seventh Avenue, New York, New York 10019.
Merrill Lynch, Pierce, Fenner & Smith
Incorporateds principal office is located at
4 World Financial Center, 250 Vesey Street, New
York, New York 10080.
A.G. Edwards & Sons, Inc.s principal office is
located at One North Jefferson, St. Louis, Missouri 63103.
Oppenheimer & Co. Inc.s principal office is
located at 125 Broad Street, New York, New York 10004.
Stifel, Nicolaus & Company, Incorporateds
principal office is located at 501 North Broadway,
St. Louis, Missouri 63103.
Wachovia Capital Markets, LLCs principal office is located
at 301 South College Street, Charlotte, North Carolina 28288.
S-26
WHERE YOU
CAN FIND MORE INFORMATION
We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the
1934 Act) and the 1940 Act and are required to
file reports, including annual and semi-annual reports, proxy
statements and other information with the SEC. We voluntarily
file quarterly shareholder reports. Our most recent shareholder
report filed with the SEC is for the period ended
February 28, 2007 and is hereby incorporated by reference
into the statement of additional information. You may request a
free copy of our statement of additional information, our
annual, semi-annual and quarterly reports, request other
information or make stockholder inquiries, by calling toll-free
1-866-362-9331 or by writing to us at 10801 Mastin Boulevard,
Suite 222, Overland Park, Kansas 66210. These documents are
also available on the SECs EDGAR system and can be
inspected and copied for a fee at the SECs public
reference room, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Additional information about the
operation of the public reference room facilities may be
obtained by calling the SEC at
(202) 551-5850.
This prospectus supplement and the accompanying prospectus do
not contain all of the information in our registration
statement, including amendments, exhibits, and schedules.
Statements in this prospectus supplement and the accompanying
prospectus about the contents of any contract or other document
are not necessarily complete and in each instance reference is
made to the copy of the contract or other document filed as an
exhibit to the registration statement, each such statement being
qualified in all respects by this reference.
Additional information about us can be found on our
Advisers website at www.tortoiseadvisors.com and in
our registration statement (including amendments, exhibits, and
schedules) on
Form N-2
filed with the SEC. Information included on our Advisers
website does not form part of this prospectus supplement. The
SEC maintains a web site (http://www.sec.gov) that contains our
registration statement, other documents incorporated by
reference, and other information we have filed electronically
with the SEC, including proxy statements and reports filed under
the 1934 Act.
LEGAL
MATTERS
Blackwell Sanders Peper Martin, L.L.P. (Blackwell),
Kansas City, Missouri, serves as our counsel. Vedder, Price,
Kaufman & Kammholz, P.C. (Vedder
Price), Chicago, Illinois, is serving as our special
counsel in connection with the offering under this prospectus
supplement and accompanying prospectus. Certain legal matters in
connection with the securities offered hereby will be passed
upon for us by Vedder Price. Vedder Price may rely on the
opinion of Venable LLP, Baltimore, Maryland, on certain matters
of Maryland law. Morrison & Foerster LLP, New York,
New York, is serving as counsel to the Underwriters.
S-27
Base
Prospectus
$350,000,000
Tortoise Energy Infrastructure
Corporation
Common Stock
Preferred Stock
Debt Securities
Tortoise Energy Infrastructure Corporation (the
Company, we or our) is a
nondiversified, closed-end management investment company. Our
investment objective is to seek a high level of total return
with an emphasis on current distributions paid to stockholders.
We seek to provide our stockholders with an efficient vehicle to
invest in a portfolio of publicly traded master limited
partnerships (MLPs) in the energy infrastructure
sector. Under normal circumstances, we invest at least 90% of
our total assets (including assets obtained through leverage) in
securities of energy infrastructure companies and invest at
least 70% of our total assets in equity securities of MLPs. We
cannot assure you that we will achieve our investment objective.
Unlike most investment companies, we have not elected to be
treated as a regulated investment company under the Internal
Revenue Code.
We may offer, on an immediate, continuous or delayed basis, up
to $350,000,000 aggregate initial offering price of our common
stock ($0.001 par value per share), preferred stock
($0.001 par value per share) or debt securities, which we
refer to in this prospectus collectively as our securities, in
one or more offerings. We may offer our common stock, preferred
stock and debt securities separately or together, in amounts, at
prices and on terms set forth in a prospectus supplement to this
prospectus. In addition, from time to time, certain of our
stockholders may offer our common stock in one or more
offerings. The sale of such stock by certain of our stockholders
may involve shares of common stock that were issued to the
stockholders in one or more private transactions and will be
registered by us for resale. The identity of any selling
stockholder, the number of shares of our common stock to be
offered by such selling stockholder, the price and terms upon
which our shares of common stock are to be sold from time to
time by such selling stockholder, and the percentage of common
stock held by any selling stockholder after the offering, will
be set forth in a prospectus supplement to this prospectus. You
should read this prospectus and the related prospectus
supplement carefully before you decide to invest in any of our
securities.
We may offer our securities, or certain of our stockholders may
offer our common stock, directly to one or more purchasers,
through agents that we or they designate from time to time, or
to or through underwriters or dealers. The prospectus supplement
relating to the particular offering will identify any agents or
underwriters involved in the sale of our securities, and will
set forth any applicable purchase price, fee, commission or
discount arrangement between us or any selling stockholder and
such agents or underwriters or among the underwriters or the
basis upon which such amount may be calculated. For more
information about the manner in which we may offer our
securities, or a selling stockholder may offer our common stock,
see Plan of Distribution and Selling
Stockholders. Our securities may not be sold through
agents, underwriters or dealers without delivery of a prospectus
supplement.
Our common stock is listed on the New York Stock Exchange under
the symbol TYG. As of March 14, 2007, the last
reported sale price for our common stock was $36.77.
Investing in our securities involves certain
risks. You could lose some or all of your investment.
See Risk Factors beginning on page 27 of this
prospectus. You should consider carefully these risks together
with all of the other information contained in this prospectus
and any prospectus supplement before making a decision to
purchase our securities.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Prospectus dated March 14, 2007
This prospectus, together with any prospectus supplement, sets
forth concisely the information that you should know before
investing. You should read the prospectus and prospectus
supplement, which contain important information, before deciding
whether to invest in our securities. You should retain the
prospectus and prospectus supplement for future reference. A
statement of additional information, dated March 14, 2007,
as supplemented from time to time, containing additional
information, has been filed with the Securities and Exchange
Commission (SEC) and is incorporated by reference in
its entirety into this prospectus. You may request a free copy
of the statement of additional information, the table of
contents of which is on page 61 of this prospectus, request
a free copy of our annual, semi-annual and quarterly reports,
request other information or make stockholder inquiries, by
calling toll-free 1-866-362-9331 or by writing to us at 10801
Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.
Our annual, semi-annual and quarterly reports and the statement
of additional information also are available on our investment
advisers website at www.tortoiseadvisors.com.
Information included on our website does not form part of this
prospectus. You can review and copy documents we have filed at
the SECs Public Reference Room in Washington, D.C.
Call
1-202-551-5850
for information. The SEC charges a fee for copies. You can get
the same information free from the SECs website
(http://www.sec.gov). You may also
e-mail
requests for these documents to publicinfo@sec.gov or make a
request in writing to the SECs Public Reference Section,
100 F. Street, N.E., Room 1580, Washington, D.C. 20549.
Our securities do not represent a deposit or obligation of,
and are not guaranteed or endorsed by, any bank or other insured
depository institution and is not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency.
TABLE OF
CONTENTS
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You should rely only on the information contained or
incorporated by reference in this prospectus and any related
prospectus supplement in making your investment decisions. We
have not authorized any other person to provide you with
different or inconsistent information. If anyone provides you
with different or inconsistent information, you should not rely
on it. This prospectus and any prospectus supplement do not
constitute an offer to sell or solicitation of an offer to buy
any securities in any jurisdiction where the offer or sale is
not permitted. The information appearing in this prospectus and
in any prospectus supplement is accurate only as of the dates on
their covers. Our business, financial condition and prospects
may have changed since such dates. We will advise investors of
any material changes to the extent required by applicable
law.
i
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, any accompanying prospectus supplement and the
statement of additional information contain
forward-looking statements. Forward-looking
statements can be identified by the words may,
will, intend, expect,
estimate, continue, plan,
anticipate, and similar terms and the negative of
such terms. Such forward-looking statements may be contained in
this prospectus as well as in any accompanying prospectus
supplement. By their nature, all forward-looking statements
involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking
statements. Several factors that could materially affect our
actual results are the performance of the portfolio of
securities we hold, the conditions in the U.S. and international
financial, petroleum and other markets, the price at which our
shares will trade in the public markets and other factors
discussed in our periodic filings with the Securities and
Exchange Commission (the SEC).
Although we believe that the expectations expressed in our
forward-looking statements are reasonable, actual results could
differ materially from those projected or assumed in our
forward-looking statements. Our future financial condition and
results of operations, as well as any forward-looking
statements, are subject to change and are subject to inherent
risks and uncertainties, such as those disclosed in the
Risk Factors section of this prospectus. All
forward-looking statements contained or incorporated by
reference in this prospectus or any accompanying prospectus
supplement are made as of the date of this prospectus or the
accompanying prospectus supplement, as the case may be. Except
for our ongoing obligations under the federal securities laws,
we do not intend, and we undertake no obligation, to update any
forward-looking statement. The forward-looking statements
contained in this prospectus and any accompanying prospectus
supplement are excluded from the safe harbor protection provided
by Section 27A of the Securities Act of 1933, as amended
(the 1933 Act).
Currently known risk factors that could cause actual results to
differ materially from our expectations include, but are not
limited to, the factors described in the Risk
Factors section of this prospectus. We urge you to review
carefully that section for a more detailed discussion of the
risks of an investment in our securities.
ii
PROSPECTUS
SUMMARY
The following summary contains basic information about us and
our securities. It is not complete and may not contain all of
the information you may want to consider. You should review the
more detailed information contained in this prospectus and in
any related prospectus supplement and in the statement of
additional information, especially the information set forth
under the heading Risk Factors beginning on
page 27 of this prospectus.
The
Company
We seek to provide our stockholders with an efficient vehicle to
invest in a portfolio of publicly traded master limited
partnerships (MLPs) in the energy infrastructure
sector. Our investment objective is to seek a high level of
total return with an emphasis on current distributions paid to
stockholders. For purposes of our investment objective, total
return includes capital appreciation of, and all distributions
received from, securities in which we invest regardless of the
tax character of the distributions. Similar to the tax
characterization of distributions made by MLPs to unitholders, a
significant portion of our distributions have been and are
expected to continue to be treated as a return of capital to
stockholders.
We are a nondiversified, closed-end management investment
company. We commenced operations in February 2004 following our
initial public offering. We were the first publicly traded
investment company offering access to a portfolio of MLPs. Since
that time, we completed three additional offerings of common
stock in December 2004, August 2006 and December 2006. As of the
date of this prospectus, we have $70 million of Money
Market Cumulative Preferred
(MMP®)
Shares (MMP Shares) and $165 million of Auction
Rate Senior Notes (Tortoise Notes) outstanding and
have entered into an unsecured revolving credit facility with
U.S. Bank N.A., which currently allows us to borrow up to
$120,000,000. Our fiscal year ends on November 30.
Investment
Adviser
Tortoise Capital Advisors, L.L.C. (the Adviser)
serves as our investment adviser. The Adviser specializes in
managing portfolios of investments in 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. As of November 30, 2006, the Adviser had
approximately $2.0 billion of client assets under
management. The Advisers investment committee is comprised
of five portfolio managers. See Management of the
Company.
The Adviser also serves as the investment adviser to Tortoise
Energy Capital Corporation (TYY) and Tortoise North
American Energy Corporation (TYN), which are also
publicly traded, closed-end management investment companies.
TYY, which commenced operations on May 31, 2005, invests
primarily in equity securities of MLPs and their affiliates in
the energy infrastructure sector. TYN, which commenced
operations on October 31, 2005, invests primarily in equity
securities of companies in the energy sector whose primary
operations are in North America. The Adviser also serves as the
investment adviser to Tortoise Capital Resources Corporation
(TTO), a non-diversified closed-end management
investment company that has elected to be regulated as a
business development company (a BDC) under the
Investment Company Act of 1940 (the 1940 Act). TTO,
which commenced operations on December 8, 2005, invests
primarily in privately held and micro-cap public energy
companies operating in the midstream and downstream segments,
and to a lesser extent the upstream segment.
The principal business address of the Adviser is 10801 Mastin
Boulevard, Suite 222, Overland Park, Kansas 66210.
The
Offering
We may offer, on an immediate, continuous or delayed basis, up
to $350,000,000 of our securities, or certain of our
stockholders who purchased shares from us in private placement
transactions may offer our common stock, on terms to be
determined at the time of the offering. Our securities will be
offered at prices and on terms to be set forth in one or more
prospectus supplements to this prospectus. Subject to certain
conditions, we may offer our common stock at prices below our
net asset value (NAV). Preferred stock and debt
securities (collectively, senior securities) may be
auction rate securities, in which case the senior securities
will not be listed on any exchange or
1
automated quotation system. Rather, investors generally may only
buy and sell senior securities through an auction conducted by
an auction agent and participating broker-dealers.
While the number and amount of securities we may issue pursuant
to this registration statement is limited to $350,000,000 of
securities, our board of directors (the Board of
Directors or the Board) may, without any
action by the stockholders, amend our Charter from time to time
to increase or decrease the aggregate number of shares of stock
or the number of shares of stock of any class or series that we
have authority to issue under our Charter or the 1940 Act.
We may offer our securities, or certain of our stockholders may
offer our common stock, directly to one or more purchasers,
through agents that we or they designate from time to time, or
to or through underwriters or dealers. The prospectus supplement
relating to the offering will identify any agents or
underwriters involved in the sale of our securities, and will
set forth any applicable purchase price, fee, commission or
discount arrangement between us or any selling stockholder and
such agents or underwriters or among underwriters or the basis
upon which such amount may be calculated. See Plan of
Distribution and Selling Stockholders. Our
securities may not be sold through agents, underwriters or
dealers without delivery of a prospectus supplement describing
the method and terms of the offering of our securities.
Use of
Proceeds
Unless otherwise specified in a prospectus supplement, we intend
to use the net proceeds from the sale of our securities
primarily to invest in energy infrastructure companies in
accordance with our investment objective and policies within
approximately three months of receipt of such proceeds. We also
may use sale proceeds to retire all or a portion of any
short-term debt, and for working capital purposes, including the
payment of distributions, interest and operating expenses,
although there is currently no intent to issue securities
primarily for this purpose. We will not receive any of the
proceeds from a sale of our common stock by any selling
stockholder.
Tax
Status of Company
Unlike most investment companies, we have not elected to be
treated as a regulated investment company under the
U.S. Internal Revenue Code of 1986, as amended (the
Internal Revenue Code). Therefore, we are obligated
to pay federal and applicable state corporate taxes on our
taxable income. On the other hand, we are not subject to the
Internal Revenue Codes diversification rules limiting the
assets in which regulated investment companies can invest. Under
current federal income tax law, these rules limit the amount
that regulated investment companies may invest directly in the
securities of MLPs to 25% of the value of their total assets. We
invest a substantial portion of our assets in MLPs. Although
MLPs generate taxable income to us, we expect the MLPs to pay
cash distributions in excess of the taxable income reportable by
us. Similarly, we expect to distribute substantially all of our
distributable cash flow (DCF) to our common
stockholders. DCF is the amount we receive as cash or
paid-in-kind
distributions from MLPs or affiliates of MLPs in which we
invest, and interest payments received on debt securities owned
by us, less current or anticipated operating expenses, taxes on
our taxable income, and leverage costs paid by us (including
leverage costs of the Tortoise Notes and MMP Shares and
borrowings under our unsecured credit facility). However, unlike
regulated investment companies, we are not effectively required
by the Internal Revenue Code to distribute substantially all of
our income and capital gains. See Certain Federal Income
Tax Matters.
Distributions
We expect to distribute substantially all of our DCF to holders
of common stock through quarterly distributions. Our Board of
Directors adopted a policy to target distributions to common
stockholders in an amount of at least 95% of DCF on an annual
basis. We will pay distributions on our common stock each fiscal
quarter out of DCF, if any. As of the date of this prospectus,
we have paid distributions every quarter since the completion of
our first full fiscal quarter ended on May 31, 2004, most
of which have been characterized as returns of capital for
federal income tax purposes. There is no assurance that we will
continue to make regular distributions. If distributions paid to
holders of our common and preferred stock exceed the current and
accumulated earnings and profit allocated to the particular
shares held by a stockholder, the excess of such distribution
will constitute a tax-free return of capital to the extent of
the stockholders basis and capital gain thereafter. A
return of capital reduces the basis of the shares
2
held by a stockholder, which may increase the amount of gain
recognized upon the sale of such shares. Our preferred stock and
debt securities will pay dividends and interest, respectively,
in accordance with their terms. So long as we have preferred
stock and debt securities outstanding, we may not declare
dividends on common or preferred stock unless we meet applicable
asset coverage tests.
Principal
Investment Policies
Under normal circumstances, we invest at least 90% of our total
assets (including assets we obtain through leverage) in
securities of energy infrastructure companies and invest at
least 70% of our 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. We invest
solely in energy infrastructure companies organized in the
United States. All publicly traded companies in which we invest
have an equity market capitalization greater than
$100 million.
Although we 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 our investment
objective. We also may invest in securities of general partners
or other affiliates of MLPs and private companies operating
energy infrastructure assets.
We have adopted the following additional nonfundamental
investment policies:
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We may invest up to 30% of our total assets in restricted
securities, primarily through direct placements. Subject to this
policy, we may invest without limitation in illiquid securities.
The types of restricted securities that we may purchase include
securities of private energy infrastructure companies and
privately issued securities of publicly traded energy
infrastructure companies. Restricted securities, whether issued
by public companies or private companies, are generally
considered illiquid. Investments in private companies that do
not have any publicly traded shares or units are limited to 5%
of total assets.
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We may invest up to 25% of our 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 Moodys Investors Service, Inc.
(Moodys) and at least B- by
Standard & Poors 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.
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We will not invest more than 10% of total assets in any single
issuer.
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We may change our nonfundamental investment policies without
stockholder approval and will provide notice to stockholders of
material changes (including notice through stockholder reports);
provided, however, that a change in the policy of investing at
least 90% of our total assets in energy infrastructure companies
requires at least 60 days prior written notice to
stockholders. Unless otherwise stated, these investment
restrictions apply at the time of purchase and we will not be
required to reduce a position due solely to market value
fluctuations. The term total assets includes assets obtained
through leverage for the purpose of each investment restriction.
Under adverse market or economic conditions, we may invest up to
100% of our 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
liquid fixed income securities deemed by the Adviser to be
consistent with a defensive posture (collectively,
short-term securities), or we may hold cash. To the
extent we invest in short-term securities or cash for defensive
purposes, such investments are inconsistent with, and may result
in us not achieving, our investment objective.
We also may invest in short-term securities or cash pending
investment of offering proceeds to meet working capital needs
including, but not limited to, for collateral in connection with
certain investment techniques, to hold a
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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.
Use of
Leverage by the Company
The borrowing of money and the issuance of preferred stock and
debt securities represents the leveraging of our common stock.
The issuance of additional common stock will enable us to
increase the aggregate amount of our leverage. Currently, we are
using leverage and anticipate continuing to use leverage to
represent approximately 33% of our total assets, including the
proceeds of such leverage. However, we reserve the right at any
time, if we believe that market conditions are appropriate, to
use financial leverage to the extent permitted by the 1940 Act
(50% of total assets for preferred stock and
331/3%
of total assets for debt). On July 24, 2006, our Board of
Directors approved a policy permitting temporary increases in
the amount of leverage we may use from 33% of our total assets
to up to 38% of our total assets at the time of incurrence,
provided that (i) such leverage is consistent with the
limits set forth in the 1940 Act, and (ii) such increased
leverage is reduced over time in an orderly fashion. The timing
and terms of any leverage transactions will be determined by our
Board of Directors.
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 Advisers fee is based
upon a percentage of our Managed Assets (as defined below), the
Advisers fee is higher when we are leveraged. Therefore,
the Adviser has a financial incentive to use leverage, which
will create a conflict of interest between the Adviser and our
common stockholders, who will bear the costs of our leverage.
There can be no assurance that a leveraging strategy will be
successful during any period in which it is used. The use of
leverage involves risks, which can be significant. See
Leverage and Risk Factors
Additional Risks to Common Stockholders Leverage
Risk.
We currently use, and may in the future use, interest rate
transactions for hedging purposes only, in an attempt to reduce
the interest rate risk arising from our leveraged capital
structure. We do not intend to hedge the interest rate risk of
our portfolio holdings. Interest rate transactions that we may
use for hedging purposes may expose us to certain risks that
differ from the risks associated with our portfolio holdings.
See Leverage Hedging Transactions and
Risk Factors Company Risks Hedging
Strategy Risk.
Conflicts
of Interest
Conflicts of interest may arise from the fact that the Adviser
and its affiliates carry on substantial investment activities
for other clients, in which we have no interest. The Adviser or
its affiliates may have financial incentives to favor certain of
these accounts over us. Any of their proprietary accounts or
other customer accounts may compete with us for specific trades.
The Adviser or its affiliates may give advice and recommend
securities to, or buy or sell securities for, other accounts and
customers, which advice or securities recommended may differ
from advice given to, or securities recommended or bought or
sold for, us, even though their investment objectives may be the
same as, or similar to, our objectives.
Situations may occur when we could be disadvantaged because of
the investment activities conducted by the Adviser and its
affiliates for their other accounts. Such situations may be
based on, among other things, the following: (1) legal or
internal restrictions on the combined size of positions that may
be taken for us or the other accounts, thereby limiting the size
of our position; (2) the difficulty of liquidating an
investment for us or the other accounts where the market cannot
absorb the sale of the combined position; or (3) limits on
co-investing in private placement securities under the 1940 Act.
Our investment opportunities may be limited by affiliations of
the Adviser
4
or its affiliates with energy infrastructure companies. See
Investment Objective and Principal Investment
Strategies Conflicts of Interest.
Company
Risks
Our NAV, our ability to make distributions, our ability to
service debt securities and preferred stock, and our ability to
meet asset coverage requirements depends on the performance of
our investment portfolio. The performance of our investment
portfolio is subject to a number of risks, including the
following:
Concentration Risk. Under normal
circumstances, we concentrate our investments in the energy
infrastructure sector, with an emphasis on securities issued by
MLPs. The primary risks inherent in the energy infrastructure
industry include the following: (1) the performance and
level of distributions of MLPs can be affected by direct and
indirect commodity price exposure, (2) a decrease in market
demand for natural gas or other energy commodities could
adversely affect MLP revenues or cash flows, (3) energy
infrastructure assets deplete over time and must be replaced,
and (4) a rising interest rate environment could increase
an MLPs cost of capital.
Industry Specific Risk. Energy infrastructure
companies also are subject to risks specific to the industry
they serve. For risks specific to the pipeline, processing,
propane and coal industries, see Risk Factors
Company Risks Industry Specific Risk.
MLP Risk. We invest primarily in equity
securities of MLPs. As a result, we are subject to the risks
associated with an investment in MLPs, including cash flow risk
and tax risk. Cash flow risk is the risk that MLPs will not make
distributions to holders (including us) at anticipated levels or
that such distributions will not have the expected tax
character. MLPs also are subject to tax risk, which is the risk
that MLPs might lose their partnership status for tax purposes.
Equity Securities Risk. MLP common units and
other equity securities can be affected by macro-economic and
other factors affecting the stock market in general,
expectations of interest rates, investor sentiment toward MLPs
or the energy sector, changes in a particular issuers
financial condition, or unfavorable or unanticipated poor
performance of a particular issuer (in the case of MLPs,
generally measured in terms of DCF). Prices of common units of
individual MLPs and other equity securities also can be affected
by fundamentals unique to the partnership or company, including
size, earnings power, coverage ratios and characteristics and
features of different classes of securities. See Risk
Factors Company Risks Equity Securities
Risk.
Hedging Strategy Risk. We currently use, and
may in the future use, interest rate transactions for hedging
purposes only, in an attempt to reduce the interest rate risk
arising from our leveraged capital structure. Interest rate
transactions that we may use for hedging purposes, such as
swaps, caps and floors, will expose us to certain risks that
differ from the risks associated with our portfolio holdings.
See Risk Factors Company Risks
Hedging Strategy Risk.
Competition Risk. At the time we completed our
initial public offering in February 2004, we were the only
publicly traded investment company offering access to a
portfolio of energy infrastructure MLPs. Since that time a
number of alternative vehicles for investment in a portfolio of
energy infrastructure MLPs, including other publicly traded
investment companies and private funds, have emerged. In
addition, tax law changes have increased the ability of
regulated investment companies or other institutions to invest
in MLPs. These competitive conditions may adversely impact our
ability to meet our investment objective, which in turn could
adversely impact our ability to make interest or dividend
payments.
Restricted Security Risk. We 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. This lack of liquidity creates special risks for us.
See Risk Factors Company Risks
Restricted Security Risk.
5
Liquidity Risk. Certain MLP securities may
trade less frequently than those of other companies due to their
smaller capitalizations. Investments in securities that are less
actively traded or over time experience decreased trading volume
may be difficult to dispose of when we believe it is desirable
to do so, may restrict our ability to take advantage of other
opportunities, and may be more difficult to value.
Valuation Risk. We may invest up to 30% of
total assets in restricted securities, which are subject to
restrictions on resale. The value of such investments ordinarily
will be based on fair valuations determined by the Adviser
pursuant to procedures adopted by the Board of Directors.
Restrictions on resale or the absence of a liquid secondary
market may affect adversely our ability to determine NAV. The
sale price of securities that are restricted or otherwise are
not readily marketable may be higher or lower than our most
recent valuations.
Nondiversification Risk. We are a
nondiversified investment company under the 1940 Act and we are
not a regulated investment company under the Internal Revenue
Code. Accordingly, there are no limits under the 1940 Act or
Internal Revenue Code with respect to the number or size of
issuers held by us and we may invest more assets in fewer
issuers as compared to a diversified fund.
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 our portfolio since we began operations in February
2004. The Adviser relies in part on the officers, employees, and
resources of its affiliate, Fountain Capital Management, L.L.C.
(Fountain Capital), for certain functions. These
services are provided pursuant to an informal arrangement
between the parties.
See Risk Factors Company Risks for a
more detailed discussion of these and other risks of investing
in our securities.
Additional
Risks to Common Stockholders
Leverage Risk. We are currently leveraged and
intend to continue to use leverage primarily for investment
purposes. Leverage, which is a speculative technique, could
cause us to lose money and can magnify the effect of any losses.
There is no assurance that a leveraging strategy will be
successful. Currently, we anticipate using leverage to represent
approximately 33% of our total assets, including the proceeds
from such leverage. However, we reserve the right at any time,
if we believe that market conditions are appropriate, to use
financial leverage to the extent permitted by the 1940 Act (50%
for preferred stock and
331/3%
for debt). Common stockholders bear the cost of leverage. On
July 24, 2006, our Board of Directors approved a policy
permitting temporary increases in the amount of leverage we may
use from 33% of our total assets to up to 38% of our total
assets at the time of incurrence, provided that (i) such
leverage is consistent with the limits set forth in the 1940
Act, and (ii) such increased leverage is reduced over time
in an orderly fashion.
Market Impact Risk. The sale of our common
stock (or the perception that such sales may occur) may have an
adverse effect on prices in the secondary market for our common
stock by increasing the number of shares available, which may
put downward pressure on the market price for our common stock.
Our ability to sell shares of common stock below NAV may
increase this pressure. These sales also might make it more
difficult for us to sell additional equity securities in the
future at a time and price we deem appropriate.
Dilution Risk. The voting power of current
stockholders will be diluted to the extent that such
stockholders do not purchase shares in any future common stock
offerings or do not purchase sufficient shares to maintain their
percentage interest. In addition, if we sell shares of common
stock below NAV, our NAV will fall immediately after such
issuance. See Description of Securities Common
Stock Issuance of Additional Shares which
includes a table reflecting the dilutive effect of selling our
common stock below NAV.
If we are unable to invest the proceeds of such offering as
intended, our per share distribution may decrease and we may not
participate in market advances to the same extent as if such
proceeds were fully invested as planned.
Market Discount Risk. Our common stock has a
limited trading history and has traded both at a premium and at
a discount in relation to NAV. We cannot predict whether our
shares will trade in the future at a premium or discount to NAV.
6
See Risk Factors Additional Risks to Common
Stockholders for a more detailed discussion of these risks.
Additional
Risks to Senior Security Holders
Additional risks of investing in senior securities, which
will likely be auction rate securities, include the
following:
Interest Rate Risk. To the extent that senior
securities trade through an auction, such securities pay
dividends or interest based on short-term interest rates. If
short-term interest rates rise, dividends or interest on the
auction rate senior securities may rise so that the amount of
dividends or interest due to holders of auction rate senior
securities would exceed the cash flow generated by our portfolio
securities. This might require that we sell portfolio securities
at a time when we would otherwise not do so, which may affect
adversely our future ability to generate cash flow. In addition,
rising market interest rates could impact negatively the value
of our investment portfolio, reducing the amount of assets
serving as asset coverage for the senior securities.
Senior Leverage Risk. Our preferred stock will
be junior in liquidation and with respect to distribution rights
to our debt securities and any other borrowings. Senior
securities representing indebtedness may constitute a
substantial lien and burden on preferred stock by reason of
their prior claim against our income and against our net assets
in liquidation. We may not be permitted to declare dividends or
other distributions with respect to any series of our preferred
stock unless at such time we meet applicable asset coverage
requirements and the payment of principal or interest is not in
default with respect to the Tortoise Notes or any other
borrowings.
Ratings and Asset Coverage Risk. To the extent
that senior securities are rated, a rating does not eliminate or
necessarily mitigate the risks of investing in our senior
securities, and a rating may not fully or accurately reflect all
of the credit and market risks associated with that senior
security. A rating agency could downgrade the rating of our
shares of preferred stock or debt securities, which may make
such securities less liquid at an auction or in the secondary
market, though probably with higher resulting interest rates. If
a rating agency downgrades the rating assigned to a senior
security, we may alter our portfolio or redeem the senior
security. We may voluntarily redeem a senior security under
certain circumstances.
Inflation Risk. Inflation is the reduction in
the purchasing power of money resulting from an increase in the
price of goods and services. Inflation risk is the risk that the
inflation adjusted or real value of an investment in
preferred stock or debt securities or the income from that
investment will be worth less in the future. As inflation
occurs, the real value of the preferred stock or debt securities
and the dividend payable to holders of preferred stock or debt
securities declines.
Auction Risk. To the extent that senior
securities trade through an auction, there are certain risks
associated with participating in an auction and certain risks if
you try to sell senior securities outside of an auction in the
secondary market. These risks will be described in more detail
in an applicable prospectus supplement if we issue senior
securities pursuant to this registration statement.
Decline in Net Asset Value Risk. A material
decline in our NAV may impair our ability to maintain required
levels of asset coverage for our preferred stock or debt
securities.
See Risk Factors Additional Risks to Senior
Security Holders for a more detailed discussion of these
risks.
7
SUMMARY
OF COMPANY EXPENSES
The following table and example contain information about the
costs and expenses that common stockholders will bear directly
or indirectly. In accordance with SEC requirements, the table
below shows our expenses, including leverage costs, as a
percentage of our net assets as of November 30, 2006, and
not as a percentage of gross assets or Managed Assets. By
showing expenses as a percentage of net assets, expenses are not
expressed as a percentage of all of the assets we invest. The
table and example are based on our capital structure as of
November 30, 2006. As of that date, we had
$235 million in senior securities outstanding (MMP Shares
with an aggregate liquidation preference of $70 million and
Tortoise Notes in an aggregate principal amount of
$165 million) and approximately $32.45 million
outstanding under our unsecured credit facility. Such senior
securities and borrowings under our unsecured credit facility
represent 28.8% of total assets as of November 30, 2006.
Stockholder
Transaction Expense
|
|
|
|
|
Sales Load (as a percentage of
offering price)
|
|
|
(1
|
)
|
Offering Expenses Borne by the
Company (as a percentage of offering price)
|
|
|
(1
|
)
|
Dividend Reinvestment and Cash
Purchase Plan
Fees(2)
|
|
|
None
|
|
|
|
|
|
|
|
|
Percentage of Net
|
|
|
|
Assets
|
|
|
|
Attributable to
|
|
|
|
Common
|
|
Annual Expenses
|
|
Stockholders
|
|
|
Management Fee
|
|
|
1.65
|
%
|
Leverage
Costs(3)
|
|
|
2.82
|
%
|
Other
Expenses(4)
|
|
|
0.26
|
%
|
|
|
|
|
|
Total Annual Expenses (excluding
current and deferred income tax
expenses)(5)
|
|
|
4.73
|
%
|
|
|
|
|
|
Less Fee and Expense Reimbursement
(through
2/28/09)(6)
|
|
|
(0.17
|
)%
|
Net Annual Expenses (excluding
current and deferred income tax expenses)
|
|
|
4.56
|
%
|
|
|
|
|
|
Current Income Tax Expense
|
|
|
0.09
|
%
|
Deferred Income Tax
Expense(7)
|
|
|
13.37
|
%
|
|
|
|
|
|
Net Annual Expenses (including
current and deferred income tax
expenses)(7)
|
|
|
18.02
|
%
|
|
|
|
|
|
Example:
The following example illustrates the expenses that common
stockholders would pay on a $1,000 investment in common stock,
assuming (1) net annual expenses (excluding current and
deferred income tax expenses) of 4.56% of net assets
attributable to common shares in years 1 and 2 and increasing to
4.73% in years 3 through 10; (2) a 5% annual return; and
(iii) all distributions are reinvested at
NAV:(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
|
Total Expenses Paid by Common
Stockholders(9)
|
|
$
|
46
|
|
|
$
|
140
|
|
|
$
|
236
|
|
|
$
|
478
|
|
The example should not be considered a representation of
future expenses. Actual expenses may be greater or less than
those assumed. Moreover, our actual rate of return may be
greater or less than the hypothetical 5% return shown in the
example.
|
|
|
(1)
|
|
If the securities to which this
prospectus relates are sold to or through underwriters, the
prospectus supplement will set forth any applicable sales load
and the estimated offering expenses borne by us.
|
|
(2)
|
|
Stockholders will pay a transaction
fee plus brokerage charges if they direct the Plan Agent to sell
common stock held in a Plan account. See Automatic
Dividend Reinvestment and Cash Purchase Plan.
|
|
(3)
|
|
Leverage Costs in the table reflect
the weighted average cost of dividends payable on MMP Shares and
the interest payable on Tortoise Notes and borrowings under our
unsecured credit facility, expressed as a percentage of net
assets. However, Tortoise Notes and MMP Shares were fully hedged
under swap agreements as of November 30, 2006, which, as of
that date, effectively reduced our Leverage Costs to 2.38%. In
|
8
|
|
|
|
|
the future, our use of swap
agreements may effectively reduce, increase or have no effect
on, our Leverage Costs. For a more detailed discussion of our
use of swap agreements, see Leverage Hedging
Transactions and Effects of
Leverage.
|
|
(4)
|
|
Other Expenses are based on
estimated amounts for the current fiscal year.
|
|
(5)
|
|
The table presented in this
footnote presents certain of our annual expenses as a percentage
of Managed Assets as of November 30, 2006, and takes into
account the effect of interest rate swap agreements.
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Managed
|
|
Annual Expenses
|
|
Assets
|
|
|
Management Fee
|
|
|
0.95
|
%
|
Leverage
Costs(a)
|
|
|
1.36
|
%
|
Other Expenses (excluding current
and deferred income tax
expenses)(b)
|
|
|
0.15
|
%
|
|
|
|
|
|
Total Annual Expenses (excluding
current and deferred income tax expenses)
|
|
|
2.46
|
%
|
Less Fee and Expense Reimbursement
(through
2/28/09)(c)
|
|
|
(0.10
|
)%
|
|
|
|
|
|
Net Annual Expenses (excluding
current and deferred income tax expenses)
|
|
|
2.36
|
%
|
|
|
|
|
|
|
|
|
(a)
|
|
Leverage Costs are calculated as
described in Note 3 above except that they are based on the
swap rates in effect as of November 30, 2006.
|
|
(b)
|
|
Other Expenses are based on
estimated amounts for the current fiscal year.
|
|
(c)
|
|
Through February 28, 2009, the
Adviser has contractually agreed to reimburse us for expenses in
an amount equal to 0.10% of our average monthly Managed Assets.
|
|
|
|
(6)
|
|
Through February 28, 2009, the
Adviser has contractually agreed to reimburse us for expenses in
an amount equal to 0.10% of our average monthly Managed Assets,
which represents 0.17% of our net assets as of November 30,
2006. The management fee and reimbursement are expressed as a
percentage of net assets in the table. Because holders of
preferred stock and debt securities do not bear management fees
and other expenses, the cost to common stockholders increases as
leverage increases.
|
|
(7)
|
|
For our fiscal year ended
November 30, 2006, we accrued $71,190,049 in net deferred
tax expense related to our net investment loss and realized and
unrealized gains. Deferred income tax expense represents an
estimate of our potential tax liability if we were to recognize
the unrealized appreciation of our portfolio assets accumulated
during our fiscal year ended November 30, 2006, based on
the market value and tax basis of our assets as of
November 30, 2006. Actual income tax expense (if any) will
be incurred over many years, depending on if and when investment
gains are realized, the then-current tax basis of assets, the
level of net loss carryforwards and other factors.
|
|
(8)
|
|
The example does not include the
potential impact of current and deferred income tax expense. For
the fiscal years ended November 30, 2006, 2005 and 2004, we
accrued current and deferred income tax expense of $71,661,802,
$24,659,420 and $30,330,018, respectively, which represented
$4.28, $1.65 and $2.39 per outstanding share of common
stock as of the respective fiscal year end.
|
|
(9)
|
|
The example does not include sales
load or estimated offering costs.
|
The purpose of the table and the example above is to help
investors understand the fees and expenses that they, as common
stockholders, would bear directly or indirectly. For additional
information with respect to our expenses, see Management
of the Company.
9
FINANCIAL
HIGHLIGHTS
Information contained in the table below under the heading
Per Common Share Data and Supplemental Data
and Ratios shows our per common share operating
performance. The information in this table is derived from our
financial statements audited by Ernst & Young LLP,
whose report on such financial statements is contained in our
2006 Annual Report and incorporated by reference into the
statement of additional information, both of which are available
from us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
February 27,
2004(1)
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
|
November 30, 2006
|
|
|
November 30, 2005
|
|
|
November 30, 2004
|
|
|
Per Common Share
Data(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, beginning of
period
|
|
$
|
27.12
|
|
|
$
|
26.53
|
|
|
$
|
|
|
Public offering price
|
|
|
|
|
|
|
|
|
|
|
25.00
|
|
Underwriting discounts and
offering costs on initial public offering
|
|
|
|
|
|
|
|
|
|
|
(1.17
|
)
|
Underwriting discounts and
offering costs on issuance of preferred shares
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.06
|
)
|
Premiums less underwriting
discounts and offering costs on secondary
offering(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and
offering costs on shelf offering of common
stock(4)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
Income (loss) from Investment
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
loss(5)
|
|
|
(0.32
|
)
|
|
|
(0.16
|
)
|
|
|
(0.03
|
)
|
Net realized and unrealized gain
on
investments(5)
|
|
|
7.41
|
|
|
|
2.67
|
|
|
|
3.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase from investment
operations
|
|
|
7.09
|
|
|
|
2.51
|
|
|
|
3.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Dividends to Preferred
Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
(0.23
|
)
|
|
|
(0.11
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends to preferred
stockholders
|
|
|
(0.23
|
)
|
|
|
(0.11
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Dividends to Common
Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
(2.02
|
)
|
|
|
(1.79
|
)
|
|
|
(0.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends to common
stockholders
|
|
|
(2.02
|
)
|
|
|
(1.79
|
)
|
|
|
(0.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, end of period
|
|
$
|
31.82
|
|
|
$
|
27.12
|
|
|
$
|
26.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share market value, end
of period
|
|
$
|
36.13
|
|
|
$
|
28.72
|
|
|
$
|
27.06
|
|
Total Investment Return Based on
Market
Value(6)
|
|
|
34.50
|
%
|
|
|
13.06
|
%
|
|
|
12.51
|
%
|
Supplemental Data and
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common
stockholders, end of period (000s)
|
|
$
|
532,433
|
|
|
$
|
404,274
|
|
|
$
|
336,553
|
|
Ratio of expenses (including
current and deferred income tax expense) to average net assets
before
waiver:(7)(8)(9)
|
|
|
20.03
|
%
|
|
|
9.10
|
%
|
|
|
15.20
|
%
|
Ratio of expenses (including
current and deferred income tax expense) to average net assets
after
waiver:(7)(8)(9)
|
|
|
19.81
|
%
|
|
|
8.73
|
%
|
|
|
14.92
|
%
|
Ratio of expenses (excluding
current and deferred income tax expense) to average net assets
before
waiver:(7)(8)(9)(10)
|
|
|
3.97
|
%
|
|
|
3.15
|
%
|
|
|
2.01
|
%
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
February 27,
2004(1)
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
through
|
|
|
|
November 30, 2006
|
|
|
November 30, 2005
|
|
|
November 30, 2004
|
|
|
Ratio of expenses (excluding
current and deferred income tax expense) to average net assets
after
waiver:(7)(8)(9)(10)
|
|
|
3.75
|
%
|
|
|
2.78
|
%
|
|
|
1.73
|
%
|
Ratio of expenses (excluding
current and deferred income tax expense), without regard to
non-recurring organizational expenses, to average net assets
before
waiver:(7)(8)(9)(10)
|
|
|
3.97
|
%
|
|
|
3.15
|
%
|
|
|
1.90
|
%
|
Ratio of expenses (excluding
current and deferred income tax expense), without regard to
non-recurring organizational expenses, to average net assets
after
waiver:(7)(8)(9)(10)
|
|
|
3.75
|
%
|
|
|
2.78
|
%
|
|
|
1.62
|
%
|
Ratio of net investment loss to
average net assets before
waiver:(7)(8)(10)
|
|
|
(2.24
|
)%
|
|
|
(1.42
|
)%
|
|
|
(0.45
|
)%
|
Ratio of net investment loss to
average net assets after
waiver:(7)(8)(10)
|
|
|
(2.02
|
)%
|
|
|
(1.05
|
)%
|
|
|
(0.17
|
)%
|
Ratio of net investment loss to
average net assets after current and deferred income tax
expense, before
waiver:(7)(8)(9)
|
|
|
(18.31
|
)%
|
|
|
(7.37
|
)%
|
|
|
(13.37
|
)%
|
Ratio of net investment loss to
average net assets after current and deferred income tax
expense, after
waiver:(7)(8)(9)
|
|
|
(18.09
|
)%
|
|
|
(7.00
|
)%
|
|
|
(13.65
|
)%
|
Portfolio turnover
rate(7)
|
|
|
2.18
|
%
|
|
|
4.92
|
%
|
|
|
1.83
|
%
|
Tortoise Auction Rate Senior
Notes, end of period (000s)
|
|
$
|
165,000
|
|
|
$
|
165,000
|
|
|
$
|
110,000
|
|
Tortoise Preferred Shares, end of
period (000s)
|
|
$
|
70,000
|
|
|
$
|
70,000
|
|
|
$
|
35,000
|
|
Per common share amount of auction
rate senior notes outstanding at end of period
|
|
$
|
9.86
|
|
|
$
|
11.07
|
|
|
$
|
8.67
|
|
Per common share amount of net
assets, excluding auction rate senior notes, at end of period
|
|
$
|
41.68
|
|
|
$
|
38.19
|
|
|
$
|
35.21
|
|
Asset coverage, per $1,000 of
principal amount of auction rate senior notes and short-term
borrowings(11)
|
|
$
|
4,051
|
|
|
$
|
3,874
|
|
|
$
|
4,378
|
|
Asset coverage ratio of auction
rate senior notes and short-term
borrowings(11)
|
|
|
405
|
%
|
|
|
387
|
%
|
|
|
438
|
%
|
Asset coverage, per $25,000
liquidation value per share of preferred
shares(12)
|
|
$
|
215,155
|
|
|
$
|
169,383
|
|
|
$
|
265,395
|
|
Asset coverage ratio of preferred
shares(13)
|
|
|
299
|
%
|
|
|
272
|
%
|
|
|
332
|
%
|
|
|
|
(1)
|
|
Commencement of Operations.
|
|
(2)
|
|
Information presented relates to a
share of common stock outstanding for the entire period.
|
|
(3)
|
|
The amount is less than
$0.01 per share, and represents the premium on the
secondary offering of $0.14 per share, less the
underwriting discounts and offering costs of $0.14 per
share for the year ended November 30, 2005.
|
|
(4)
|
|
Represents the dilution per common
share from underwriting and other offering costs.
|
|
(5)
|
|
The per common share data for the
periods ended November 30, 2005 and 2004, do not reflect
the change in estimate of investment income and return of
capital, for the respective period. See Note 2C to the
financial statements for further disclosure.
|
|
(6)
|
|
Not annualized for periods less
than a year. 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 Companys
dividend reinvestment plan. Total investment return does not
reflect brokerage commissions.
|
|
(7)
|
|
Annualized for periods less than
one full year.
|
11
|
|
|
(8)
|
|
The expense ratios and net
investment loss ratios do not reflect the effect of dividend
payments to preferred stockholders.
|
|
(9)
|
|
The Company accrued $71,661,802,
$24,659,420 and $30,330,018 for years ended November 30,
2006 and 2005 and for the period from February 27, 2004
through November 30, 2004, respectively, for current and
deferred income tax expense.
|
|
(10)
|
|
The ratio excludes the impact of
current and deferred income taxes.
|
|
(11)
|
|
Represents value of total assets
less all liabilities and indebtedness not represented by auction
rate senior notes, short-term borrowings and preferred shares at
the end of the period divided by auction rate senior notes and
short-term borrowings outstanding at the end of the period.
|
|
(12)
|
|
Represents value of total assets
less all liabilities and indebtedness not represented by
preferred shares at the end of the period divided by preferred
shares outstanding at the end of the period, assuming the
retirement of all auction rate senior notes and short-term
borrowings.
|
|
(13)
|
|
Represents value of total assets
less all liabilities and indebtedness not represented by auction
rate senior notes, short-term borrowings and preferred shares at
the end of the period divided by auction rate senior notes,
short-term borrowings and preferred shares outstanding at the
end of the period.
|
SENIOR
SECURITIES
The following table sets forth information about our outstanding
senior securities as of each fiscal year ended November 30
since our inception:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Average Fair
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Coverage
|
|
|
Value Per
|
|
|
|
|
|
|
Total Principal
|
|
|
Coverage
|
|
|
Per Share
|
|
|
$25,000
|
|
|
|
|
|
|
Amount/Liquidation
|
|
|
Per $1,000
|
|
|
($25,000
|
|
|
Denomination
|
|
|
|
|
|
|
Preference
|
|
|
of Principal
|
|
|
Liquidation
|
|
|
or Per Share
|
|
Year
|
|
|
Title of Security
|
|
Outstanding
|
|
|
Amount
|
|
|
Preference)
|
|
|
Amount(1)
|
|
|
|
2004
|
|
|
Tortoise Notes Series A
and B
|
|
$
|
110,000,000
|
|
|
$
|
4,378
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
MMP Shares Series I
(1,400 shares)
|
|
$
|
35,000,000
|
|
|
|
|
|
|
$
|
83,026
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
Tortoise Notes (Series A, B
and C)
|
|
$
|
165,000,000
|
|
|
$
|
3,874
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
MMP Shares (Series I and II)
(2,800 shares)
|
|
$
|
70,000,000
|
|
|
|
|
|
|
$
|
68,008
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
235,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
Tortoise Notes Series A,
B and C
|
|
$
|
165,000,000
|
|
|
$
|
4,051
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
MMP Shares Series I and
II (2,800 shares)
|
|
$
|
70,000,000
|
|
|
|
|
|
|
$
|
74,769
|
|
|
$
|
25,000
|
|
|
|
|
|
Borrowings Unsecured Revolving
Credit
Facility(2)
|
|
$
|
32,450,000
|
|
|
$
|
4,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
267,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Fair value of the Tortoise Notes
and MMP Shares approximates the principal amount and liquidation
preference, respectively, because the interest and dividend
rates payable on Tortoise Notes and MMP Shares are determined at
auctions and fluctuate with changes in prevailing market
interest rates.
|
|
(2)
|
|
We have an unsecured credit
facility with U.S. Bank N.A which, as of November 30,
2006, allowed us to borrow up to $60,000,000. Effective
February 27, 2007, we may borrow up to $120,000,000 under
the credit facility. The credit facility expires on
June 13, 2007.
|
12
MARKET
AND NET ASSET VALUE INFORMATION
Our common stock is listed on the New York Stock Exchange
(NYSE) under the symbol TYG. Shares of
our common stock commenced trading on the NYSE on
February 25, 2004.
Our common stock has a limited trading history and has traded
both at a premium and at a discount in relation to NAV. We
cannot predict whether our shares will trade in the future at a
premium or discount to NAV. The provisions of the 1940 Act
generally require that the public offering price of common stock
(less any underwriting commissions and discounts) must equal or
exceed the NAV per share of a companys common stock
(calculated within 48 hours of pricing). However, at our
Annual Meeting of Stockholders held on April 15, 2005, our
common stockholders granted to us the authority to sell a
limited number of shares of our common stock for less than NAV,
subject to certain conditions. We expect to resubmit the matter
for stockholder approval at our Annual Meeting of Stockholders
scheduled for April 13, 2007. Our issuance of common stock
may have an adverse effect on prices in the secondary market for
our common stock by increasing the number of shares of common
stock available, which may put downward pressure on the market
price for our common stock. The continued development of
alternatives as vehicles for investing in a portfolio of energy
infrastructure MLPs, including other publicly traded investment
companies and private funds, may reduce or eliminate any
tendency of our shares of common stock to trade at a premium in
the future. Shares of common stock of closed-end investment
companies frequently trade at a discount from NAV. See
Risk Factors Additional Risks to Common
Stockholders Market Discount Risk.
The following table sets forth for each of the periods indicated
the high and low closing market prices for our shares of common
stock on the NYSE, the NAV per share and the premium or discount
to NAV per share at which our shares of common stock were
trading. NAV is generally determined on the last business day of
each calendar month. See Determination of Net Asset
Value for information as to the determination of our NAV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium/
|
|
|
|
Market
Price(1)
|
|
|
Net Asset
|
|
|
(Discount) to Net Asset
Value(3)
|
|
Month Ended
|
|
High
|
|
|
Low
|
|
|
Value(2)
|
|
|
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
|
|
|
27.70
|
|
|
|
25.39
|
|
|
|
25.54
|
|
|
|
8.5
|
%
|
|
|
−0.6
|
%
|
December 31, 2004
|
|
|
27.53
|
|
|
|
26.56
|
|
|
|
26.53
|
|
|
|
3.8
|
%
|
|
|
0.1
|
%
|
January 31, 2005
|
|
|
28.57
|
|
|
|
27.10
|
|
|
|
27.17
|
|
|
|
5.2
|
%
|
|
|
−0.3
|
%
|
February 28, 2005
|
|
|
31.05
|
|
|
|
28.55
|
|
|
|
28.56
|
|
|
|
8.7
|
%
|
|
|
0.0
|
%
|
March 31, 2005
|
|
|
30.91
|
|
|
|
28.54
|
|
|
|
28.37
|
|
|
|
9.0
|
%
|
|
|
0.6
|
%
|
April 30, 2005
|
|
|
30.00
|
|
|
|
28.40
|
|
|
|
27.61
|
|
|
|
8.7
|
%
|
|
|
2.9
|
%
|
May 31, 2005
|
|
|
29.15
|
|
|
|
28.19
|
|
|
|
28.61
|
|
|
|
1.9
|
%
|
|
|
−1.5
|
%
|
June 30, 2005
|
|
|
31.50
|
|
|
|
28.30
|
|
|
|
27.75
|
|
|
|
13.5
|
%
|
|
|
2.0
|
%
|
July 31, 2005
|
|
|
33.25
|
|
|
|
31.10
|
|
|
|
28.69
|
|
|
|
15.9
|
%
|
|
|
8.4
|
%
|
August 31, 2005
|
|
|
33.19
|
|
|
|
31.10
|
|
|
|
30.32
|
|
|
|
9.5
|
%
|
|
|
2.6
|
%
|
September 30, 2005
|
|
|
32.01
|
|
|
|
30.32
|
|
|
|
29.16
|
|
|
|
9.8
|
%
|
|
|
4.0
|
%
|
October 31, 2005
|
|
|
31.20
|
|
|
|
28.10
|
|
|
|
29.09
|
|
|
|
7.3
|
%
|
|
|
−3.4
|
%
|
November 30, 2005
|
|
|
30.75
|
|
|
|
28.25
|
|
|
|
28.70
|
|
|
|
7.1
|
%
|
|
|
−1.6
|
%
|
December 31, 2005
|
|
|
28.60
|
|
|
|
26.60
|
|
|
|
27.12
|
|
|
|
5.5
|
%
|
|
|
−1.9
|
%
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium/
|
|
|
|
Market
Price(1)
|
|
|
Net Asset
|
|
|
(Discount) to Net Asset
Value(3)
|
|
Month Ended
|
|
High
|
|
|
Low
|
|
|
Value(2)
|
|
|
High
|
|
|
Low
|
|
|
January 31, 2006
|
|
|
29.95
|
|
|
|
27.92
|
|
|
|
26.65
|
|
|
|
12.4
|
%
|
|
|
4.8
|
%
|
February 28, 2006
|
|
|
29.48
|
|
|
|
28.35
|
|
|
|
28.17
|
|
|
|
4.7
|
%
|
|
|
0.6
|
%
|
March 31, 2006
|
|
|
29.58
|
|
|
|
27.91
|
|
|
|
27.55
|
|
|
|
7.4
|
%
|
|
|
1.3
|
%
|
April 30, 2006
|
|
|
28.95
|
|
|
|
27.56
|
|
|
|
28.12
|
|
|
|
3.0
|
%
|
|
|
−2.0
|
%
|
May 31, 2006
|
|
|
29.89
|
|
|
|
28.52
|
|
|
|
28.58
|
|
|
|
4.6
|
%
|
|
|
−0.2
|
%
|
June 30, 2006
|
|
|
30.01
|
|
|
|
27.85
|
|
|
|
28.91
|
|
|
|
3.8
|
%
|
|
|
−3.7
|
%
|
July 31, 2006
|
|
|
30.47
|
|
|
|
28.06
|
|
|
|
28.32
|
|
|
|
7.6
|
%
|
|
|
−0.9
|
%
|
August 31, 2006
|
|
|
30.70
|
|
|
|
29.10
|
|
|
|
29.46
|
|
|
|
4.2
|
%
|
|
|
−1.2
|
%
|
September 30, 2006
|
|
|
31.60
|
|
|
|
30.49
|
|
|
|
29.59
|
|
|
|
6.8
|
%
|
|
|
3.0
|
%
|
October 31, 2006
|
|
|
32.80
|
|
|
|
31.14
|
|
|
|
29.34
|
|
|
|
11.8
|
%
|
|
|
6.1
|
%
|
November 30, 2006
|
|
|
36.13
|
|
|
|
31.85
|
|
|
|
31.01
|
|
|
|
16.5
|
%
|
|
|
2.7
|
%
|
December 31, 2006
|
|
|
36.31
|
|
|
|
33.48
|
|
|
|
31.82
|
|
|
|
14.1
|
%
|
|
|
5.2
|
%
|
January 31, 2007
|
|
|
35.50
|
|
|
|
34.13
|
|
|
|
32.62
|
|
|
|
8.8
|
%
|
|
|
4.6
|
%
|
February 28, 2007
|
|
|
36.64
|
|
|
|
35.15
|
|
|
|
34.27
|
|
|
|
6.9
|
%
|
|
|
2.6
|
%
|
Source: Bloomberg Financial and Fund Accounting Records.
|
|
|
(1)
|
|
Based on high and low closing
market price for the respective month.
|
|
(2)
|
|
Based on the NAV calculated on the
close of business on the last business day of each prior
calendar month.
|
|
(3)
|
|
Calculated based on the information
presented. Percentages are rounded.
|
The last reported sale price, NAV per share and percentage
premium to NAV per share of our common stock on March 14,
2007 were $36.77, $35.55 and 3.4%, respectively. As of
March 14, 2007, we had 18,272,774 shares of our common
stock outstanding and net assets of approximately $649,632,310.
USE OF
PROCEEDS
Unless otherwise specified in a prospectus supplement, we will
invest the net proceeds of any sales of securities in accordance
with our investment objective and policies as described under
Investment Objective and Principal Investment
Strategies within approximately 3 months of receipt
of such proceeds. We may also use proceeds from the sale of our
securities to retire all or a portion of any short-term debt we
incur in pursuit of our investment objective and policies, and
for working capital purposes, including the payment of
distributions, interest and operating expenses, although there
is currently no intent to issue securities primarily for this
purpose. Our investments may be delayed if suitable investments
are unavailable at the time or for other reasons. Such
investments may be delayed if suitable investments are
unavailable at the time or for other reasons. Pending such
investment, we anticipate that we will invest the proceeds in
securities issued by the U.S. Government or its 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, reduce our distribution to common
stockholders and reduce the amount of cash available to make
dividend and interest payments on preferred stock and debt
securities, respectively. We will not receive any of the
proceeds from a sale of our common stock by any selling
stockholder.
14
THE
COMPANY
We are a nondiversified, closed-end management investment
company registered under the 1940 Act. We were organized as a
corporation on October 30, 2003, pursuant to a charter (the
Charter) governed by the laws of the State of
Maryland. Our fiscal year ends on November 30. In our
initial public offering on February 27, 2004, and the
exercise of subsequent overallotment options, we raised
aggregate gross proceeds of $315,000,000. We completed three
additional offerings of common stock in December 2004, August
2006 and December 2006. As of February 28, 2007, we had net
assets of approximately $635,000,000 attributable to our common
stock. Our common stock is listed on the NYSE under the symbol
TYG. As of the date of this prospectus, we have
issued three series of Tortoise Notes and two series of MMP
Shares. The outstanding Tortoise Notes are rated Aaa
and AAA by Moodys Investors Service Inc.
(Moodys) and Fitch Ratings
(Fitch), respectively. The outstanding MMP Shares
are rated Aa2 and AA by Moodys and
Fitch, respectively.
The following table provides information about our outstanding
securities as of February 28, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Held
|
|
|
|
|
|
|
|
|
|
by the Company
|
|
|
|
|
|
|
Amount
|
|
|
or for its
|
|
|
Amount
|
|
Title of Class
|
|
Authorized
|
|
|
Account
|
|
|
Outstanding
|
|
|
Common Stock
|
|
|
100,000,000
|
|
|
|
0
|
|
|
|
18,232,065
|
|
Tortoise Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
$
|
60,000,000
|
|
|
|
0
|
|
|
$
|
60,000,000
|
|
Series B
|
|
$
|
50,000,000
|
|
|
|
0
|
|
|
$
|
50,000,000
|
|
Series C
|
|
$
|
55,000,000
|
|
|
|
0
|
|
|
$
|
55,000,000
|
|
Preferred Stock
|
|
|
10,000,000
|
(1)
|
|
|
|
|
|
|
|
|
Series I MMP Shares
|
|
|
1,400
|
(2)
|
|
|
0
|
|
|
|
1,400
|
|
Series II MMP Shares
|
|
|
1,400
|
(2)
|
|
|
0
|
|
|
|
1,400
|
|
|
|
|
(1)
|
|
Includes 2,800 shares of
preferred stock designated as MMP Shares as set forth below.
|
|
(2)
|
|
Each share has a liquidation
preference of $25,000 ($35,000,000 in the aggregate for each of
Series I and Series II MMP Shares).
|
INVESTMENT
OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
Investment
Objective
Our investment objective is to seek a high level of total return
with an emphasis on current distributions paid to stockholders.
For purposes of our investment objective, total return includes
capital appreciation of, and all distributions received from,
securities in which we invest regardless of the tax character of
the distributions. We seek to provide our stockholders with an
efficient vehicle to invest in a portfolio of publicly traded
MLPs in the energy infrastructure sector. Similar to the federal
income tax characterization of cash distributions made by MLPs
to its unit holders, we believe that our common stockholders
will have relatively high levels of return of capital associated
with cash distributions made by us to stockholders.
Energy
Infrastructure Industry
We concentrate our investments in the energy infrastructure
sector. We pursue our 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 our policy of investing 90% of total assets in securities of
energy infrastructure companies, an energy infrastructure
company is one that derives each year 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
15
Income. Qualifying Income is defined as including any income and
gains from the exploration, development, mining or production,
processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of
any mineral or natural resource (including fertilizer,
geothermal energy, and timber).
Energy infrastructure companies (other than most pipeline MLPs)
do not operate as public utilities or local
distribution companies, and therefore are 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, we invest at least 70% of our total assets in
equity securities of MLPs that each year derive at least 90% of
their gross income from Qualifying Income and are organized as
partnerships, thereby eliminating federal income tax at the
entity level. An MLP generally has two classes of partners, the
general partner, and the limited partners. The general partner
is usually a major energy company, investment fund or the direct
management of the MLP. The general partner normally controls the
MLP through a 2% equity interest plus units that are
subordinated to the common (publicly traded) units for at least
the first five years of the partnerships existence and
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 MLP
partnership agreements typically provide that the general
partner receives a larger portion of the net income as
distributions reach higher target levels. As cash flow grows,
the general partner receives a greater interest in the
incremental income compared to the interest of limited partners.
The general partners incentive compensation typically
increases to up to 50% of incremental income. Nevertheless, the
aggregate amount of distributions 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 we invest generally can 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, pipeline MLPs do not have direct commodity price
exposure because they do not own the product being shipped.
|
|
|
|
Processing MLPs. Processing MLPs are
gatherers and processors of natural gas, as well as providers of
transportation, fractionation and storage of natural gas liquids
(NGLs). Revenue is derived from providing services
to natural gas producers, which require treatment or processing
before their natural gas commodity can be marketed to utilities
and other end user markets. Revenue for the processor is fee
based, although it is not uncommon to have some participation in
the prices of the natural gas and NGL commodities for a
portion of revenue.
|
|
|
|
Propane MLPs. Propane MLPs are
distributors of propane to homeowners for space and water
heating. Revenue is derived from the resale of the commodity 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
|
16
|
|
|
|
|
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.
|
|
|
|
Marine Shipping MLPs. Marine shipping
MLPs are primarily marine transporters of natural gas, crude oil
or refined petroleum products. Marine shipping MLPs derive
revenue from charging customers for the transportation of these
products utilizing the MLPs vessels. Transportation
services are typically provided pursuant to a charter or
contract, the terms of which vary depending on, for example, the
length of use of a particular vessel, the amount of cargo
transported, the number of voyages made, the parties operating a
vessel or other factors.
|
Although we 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 our investment objective. We
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, we invest at least 90% of our 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 Advisers 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 Advisers 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
we invest have a market capitalization greater than
$100 million.
Investment
Policies
We seek to achieve our investment objective by investing
primarily in securities of MLPs that the Adviser believes offer
attractive distribution rates and capital appreciation
potential. We also may invest in other securities set forth
below if the Adviser expects to achieve our objective with such
investments.
Our policy of investing at least 90% of our 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.
We have adopted the following additional nonfundamental policies:
|
|
|
|
|
Under normal circumstances, we invest at least 70% and up to
100% of our total assets in equity securities issued by MLPs.
Equity securities currently consist of common units, convertible
subordinated units, and
pay-in-kind
units.
|
|
|
|
We may invest up to 30% of our total assets in restricted
securities, primarily through direct placements. Subject to this
policy, we may invest without limitation in illiquid securities.
The types of restricted
|
17
|
|
|
|
|
securities that we may purchase include securities of private
energy infrastructure companies and privately issued securities
of publicly traded energy infrastructure companies. Restricted
securities, whether issued by public companies or private
companies, are generally considered illiquid. Investments in
private companies that do not have any publicly traded shares or
units are limited to 5% of total assets.
|
|
|
|
|
|
We may invest up to 25% of our 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
Moodys and at least B by S&P at the time
of purchase, or comparably rated by another statistical rating
organization or if unrated, determined to be of comparable
quality by the Adviser.
|
|
|
|
We will not invest more than 10% of our total assets in any
single issuer.
|
|
|
|
We will not engage in short sales.
|
Unless otherwise stated, these investment restrictions apply at
the time of purchase and we will not be required to reduce a
position due solely to market value fluctuations.
Investment
Securities
The types of securities in which we may invest include, but are
not limited to, the following:
Equity Securities of MLPs. Consistent with our
investment objective, we may invest up to 100% of total assets
in equity securities issued by energy infrastructure MLPs,
including common units, convertible subordinated units,
pay-in-kind
units (typically, I-Shares) and common units,
subordinated units and preferred units of limited liability
companies (LLCs) (that are treated as MLPs for
federal income tax purposes). The table below summarizes the
features of these securities, and a further discussion of these
securities follows.
18
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
Common Units
|
|
Subordinated Units
|
|
|
|
|
(for MLPs taxed as
|
|
(for MLPs taxed as
|
|
|
|
|
partnerships)(1)
|
|
partnerships)
|
|
I-Shares
|
|
Voting Rights
|
|
Limited to certain significant
decisions; no annual election of directors
|
|
Same as common units
|
|
No direct MLP voting rights
|
Dividend Priority
|
|
First right to minimum quarterly
distribution (MQD) specified in Partnership
Agreement; arrearage rights
|
|
Second right to MQD; no
arrearage rights; may be paid in additional units
|
|
Equal in priority to common units
but paid in additional I-Shares at current market value of
I-Shares
|
Dividend Rate
|
|
Minimum set in partnership
agreement; participate pro rata with subordinated units after
both MQDs are met
|
|
Equal in amount to common units;
participate pro rata with common units above the MQD
|
|
Equal in amount to common units
|
Trading
|
|
Listed on NYSE, AMEX or NASDAQ
National Market
|
|
Not publicly traded
|
|
Listed on NYSE
|
Federal Income Tax
Treatment
|
|
Generally, ordinary income to the
extent of taxable income allocated to holder; distributions are
tax-free return of capital to extent of holders basis;
remainder as capital gain
|
|
Same as common units
|
|
Full distribution treated as
return of capital; since distribution is in shares, total basis
is not reduced
|
Type of Investor
|
|
Retail; creates unrelated business
taxable income for tax-exempt investor; investment by regulated
investment companies limited to 25% of total assets
|
|
Same as common units
|
|
Retail and Institutional; does not
create unrelated business taxable income; qualifying income for
regulated investment companies
|
Liquidity Priority
|
|
Intended to receive return of all
capital first
|
|
Second right to return of capital;
pro rata with common units thereafter
|
|
Same as common units (indirect
right through I-Share issuer)
|
Conversion Rights
|
|
None
|
|
One-to-one
ratio into common units
|
|
None
|
|
|
|
(1)
|
|
Some energy infrastructure
companies in which we may invest have been organized as LLCs.
Such companies are generally treated in the same manner as MLPs
for federal income tax purposes. Common units of LLCs have
similar characteristics as those of MLP common units, except
that LLC common units typically have voting rights with respect
to the LLC and LLC common units held by management are not
entitled to increased percentages of cash distributions as
increased levels of cash distributions are received by the LLC.
The characteristics of LLCs and their common units are more
fully discussed below.
|
MLP Common Units. MLP common units represent
an equity ownership interest in a partnership, providing limited
voting rights and entitling the holder to a share of the
companys success through distributions
and/or
capital appreciation. Unlike stockholders of a corporation,
common unit holders do not elect directors annually and
generally have the right to vote only on certain significant
events, such as 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
19
have arrearage rights if the MQD is not met. In the event of
liquidation, MLP common unit holders have first rights to the
partnerships remaining assets after bondholders, other
debt holders, and preferred unit holders have been paid in full.
MLP common units trade on a national securities exchange or
over-the-counter.
Limited Liability Company Common Units. Some
energy infrastructure companies in which we may invest have been
organized as LLCs. Such LLCs are generally treated in the same
manner as MLPs for federal income tax purposes. Consistent with
our investment objective and policies, we may invest in common
units or other securities of such LLCs including preferred
units, subordinated units and debt securities. LLC common units
represent an equity ownership interest in an LLC, entitling the
holder to a share of the LLCs success through
distributions
and/or
capital appreciation. Similar to MLPs, LLCs typically do not pay
federal income tax at the entity level and are required by their
operating agreements to distribute a large percentage of their
current operating earnings. LLC common unit holders generally
have first right to a MQD prior to distributions to subordinated
unit holders and typically have arrearage rights if the MQD is
not met. In the event of liquidation, LLC common unit holders
have a right to the LLCs remaining assets after bond
holders, other debt holders and preferred unit holders, if any,
have been paid in full. LLC common units may trade on a national
securities exchange or
over-the-counter.
In contrast to MLPs, LLCs have no general partner and there are
no incentives that entitle management or other unit holders to
increased percentages of cash distributions as distributions
reach higher target levels. In addition, LLC common unit holders
typically have voting rights with respect to the LLC, whereas
MLP common units have limited voting rights.
MLP Convertible Subordinated Units. MLP
convertible subordinated units are typically issued by
MLPs to founders, corporate general partners of MLPs,
entities that sell assets to MLPs, and institutional investors.
The purpose of the convertible subordinated units is to increase
the likelihood that during the subordination period there will
be available cash to be distributed to common unit holders. We
expect to purchase convertible 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 generally 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 to MLP
common units. Distributions may be paid in cash or in-kind.
MLP I-Shares. I-Shares represent an indirect
investment in MLP
I-units.
I-units are
equity securities issued to affiliates of MLPs, typically a
limited liability company, that owns an interest in and manages
the MLP. The I-Share issuer has management rights but is not
entitled to incentive distributions. The I-Share issuers
assets consist exclusively of MLP
I-units;
however, the MLP does not allocate income or loss to the I-Share
issuer. 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 for federal income tax purposes.
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. We may invest up to 25% of
our total assets in debt securities of energy infrastructure
companies, including securities rated below investment grade.
These 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 we invest 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 Moodys 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 our minimum rating
criteria at the time of purchase and subsequently is downgraded
below such rating, we will not be required to dispose of such
security. If a
20
downgrade occurs, the Adviser will consider what action,
including the sale of such security, is in the best interest of
us and our stockholders.
Because the risk of default is higher for below investment grade
securities than investment grade securities, the Advisers
research and credit analysis is an especially important part of
managing securities of this type. The Adviser attempts to
identify those issuers of below investment grade securities
whose financial condition the Adviser believes are adequate to
meet future obligations or have improved or are expected to
improve in the future. The Advisers analysis focuses on
relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects and the experience
and managerial strength of the issuer.
Restricted Securities. We may invest up to 30%
of our 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 also may preclude a
public offering of securities. MLP convertible subordinated
units typically are purchased in private placements and do not
trade on a national exchange or
over-the-counter,
and there is no active market for convertible subordinated
units. MLP convertible subordinated units typically are
purchased from affiliates of the issuer or other existing
holders of convertible units rather than directly from the
issuer.
Restricted securities obtained by means of direct placements are
less liquid than securities traded in the open market because of
statutory and contractual restrictions on resale. Such
securities are, therefore, unlike securities that are traded in
the open market, which are likely to be sold immediately if the
market is adequate. This lack of liquidity creates special
risks. However, we 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.
Temporary and Defensive Investments. Pending
investment of offering or leverage proceeds, we may invest such
proceeds 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
liquid fixed income securities deemed by the Adviser to be of
similar quality (collectively, short-term
securities), or in cash or cash equivalents, all of which
are expected to provide a lower yield than the securities of
energy infrastructure companies. We also may invest in
short-term securities or cash on a temporary basis to meet
working capital needs including, but not limited to, for
collateral in connection with certain investment techniques, to
hold a reserve pending payment of distributions, and to
facilitate the payment of expenses and settlement of trades.
Under adverse market or economic conditions, we may invest up to
100% of our total assets in short-term securities or cash. The
yield on short-term securities or cash may be lower than the
returns on MLPs or yields on lower rated fixed income
securities. To the extent we invest in short-term securities or
cash for defensive purposes, such investments are inconsistent
with, and may result in us not achieving, our investment
objective.
Portfolio
Turnover
Our annual portfolio turnover rate may vary greatly from year to
year. Although we cannot accurately predict our annual portfolio
turnover rate, it is not expected to exceed 30% under normal
circumstances. For the fiscal years ended November 30, 2006
and 2005, our actual portfolio turnover rate was 2.18% and
4.92%, respectively. Portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions for us.
A higher turnover rate results in correspondingly greater
brokerage commissions and other transactional expenses that the
Company bears. High portfolio turnover may result in our
recognition of gains that will increase our tax liability and
thereby lower the amount of our after-tax distributions. In
addition, high portfolio turnover may increase our current and
accumulated earnings and profits, resulting in a greater portion
of our distributions being treated as taxable dividends for
federal income tax purposes. See Certain Federal Income
Tax Matters.
21
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 we have no interest, some of which
may have similar investment strategies as us. The Adviser or its
affiliates may have financial incentives to favor certain of
such accounts over us. Any of their proprietary accounts and
other customer accounts may compete with us for specific trades.
The Adviser or its affiliates may give advice and recommend
securities to, or buy or sell securities for, us which advice or
securities may differ from advice given to, or securities
recommended or bought or sold for, other accounts and customers,
even though their investment objectives may be the same as, or
similar to, our objectives. When two or more clients advised by
the Adviser or its affiliates seek to purchase or sell the same
publicly traded securities, the securities actually purchased or
sold will be allocated among the clients on a good faith
equitable basis by the Adviser in its discretion and in
accordance with the clients various investment objectives
and the Advisers procedures. In some cases, this system
may adversely affect the price or size of the position we may
obtain or sell. In other cases, our ability to participate in
volume transactions may produce better execution for us.
The Adviser also serves as investment adviser to Tortoise Energy
Capital Corporation (TYY) and Tortoise North
American Energy Corporation (TYN), which are
nondiversified, closed-end investment management companies, and
managed accounts that invest in MLPs. TYY, which commenced
operations on May 31, 2005, invests primarily in equity
securities of MLPs and their affiliates in the energy
infrastructure sector. TYN, which commenced operations on
October 31, 2005, invests primarily in equity securities of
companies in the energy sector whose primary operations are in
North America. The Adviser also serves as the investment adviser
to Tortoise Capital Resources Corporation (TTO), a
non-diversified closed-end management investment company that
has elected to be regulated as a business development company
under the 1940 Act. TTO, which commenced operations on
December 8, 2005, invests primarily in privately held and
micro-cap public energy companies operating in the midstream and
downstream segments, and to a lesser extent the upstream
segment. To the extent certain MLP securities or other energy
infrastructure company securities meet our investment objective
and the objectives of other investment companies or accounts
managed by the Adviser, we may compete with such companies or
accounts for the same investment opportunities.
The Adviser will evaluate a variety of factors in determining
whether a particular investment opportunity or strategy is
appropriate and feasible for the relevant account at a
particular time, including, but not limited to, the following:
(1) the nature of the investment opportunity taken in the
context of the other investments at the time; (2) the
liquidity of the investment relative to the needs of the
particular entity or account; (3) the availability of the
opportunity (i.e., size of obtainable position); (4) the
transaction costs involved; and (5) the investment or
regulatory limitations applicable to the particular entity or
account. Because these considerations may differ when applied to
us and relevant accounts under management in the context of any
particular investment opportunity, our investment activities, on
the one hand, and other managed accounts, on the other hand, may
differ considerably from time to time. In addition, our fees and
expenses will differ from those of the other managed accounts.
Accordingly, investors should be aware that our future
performance and future performance of other accounts of the
Adviser may vary.
Situations may occur when we could be disadvantaged because of
the investment activities conducted by the Adviser and its
affiliates for its other funds or accounts. Such situations may
be based on, among other things, the following: (1) legal
or internal restrictions on the combined size of positions that
may be taken for us or the other accounts, thereby limiting the
size of our position; (2) the difficulty of liquidating an
investment for us or the other accounts where the market cannot
absorb the sale of the combined position; or (3) limits on
co-investing in negotiated transactions under the 1940 Act, as
discussed further below.
Under the 1940 Act, we may be precluded from co-investing in
negotiated private placements of securities with our affiliates,
including other funds managed by the Adviser. We and the Adviser
have applied to the SEC for exemptive relief to permit us and
our affiliates to make such investments. There is no guarantee
that the requested relief will be granted by SEC. Unless and
until we obtain an exemptive order, we will not co-invest with
our affiliates in negotiated private placement transactions.
Unless we receive exemptive relief, the Adviser will observe a
policy for allocating negotiated private placement opportunities
among its clients that takes into account the amount of each
clients available cash and its investment objectives.
22
To the extent that the Adviser sources and structures private
investments in MLPs, certain employees of the Adviser may become
aware of actions planned by MLPs, such as acquisitions, that may
not be announced to the public. It is possible that we could be
precluded from investing in or selling securities of an MLP
about which the Adviser has material, non-public information;
however, it is the Advisers intention to ensure that any
material, non-public information available to certain employees
of the Adviser is not shared with the employees responsible for
the purchase and sale of publicly traded MLP securities. Our
investment opportunities also may be limited by affiliations of
the Adviser or its affiliates with energy infrastructure
companies.
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 our behalf. 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 us. Further, the Adviser may at some time in the future,
manage other investment funds with the same investment objective
as ours.
23
LEVERAGE
Use of
Leverage
We currently engage in leverage and intend to borrow money or
issue additional debt securities,
and/or issue
additional preferred stock, which may be auction rate
securities, to provide us with additional funds to invest. The
borrowing of money and the issuance of preferred stock and debt
securities represent the leveraging of our common stock.
Currently, we anticipate using leverage to represent
approximately 33% of our total assets, including the proceeds
from such leverage. However, we reserve the right at any time,
if we believe that market conditions are appropriate, to use
financial leverage to the extent permitted by the 1940 Act (50%
for preferred stock and
331/3%
for debt). On July 24, 2006, our Board of Directors
approved a policy permitting temporary increases in the amount
of leverage we may use from 33% of our total assets to up to 38%
of our total assets at the time of incurrence, provided that
(i) such leverage is consistent with the limits set forth
in the 1940 Act, and (ii) such increased leverage is
reduced over time in an orderly fashion. We generally will not
use leverage unless we believe that leverage will serve the best
interests of our stockholders. The principal factor used in
making this determination is whether the potential return is
likely to exceed the cost of leverage. We will not issue
additional leverage where the estimated costs of issuing such
leverage and the on-going cost of servicing the payment
obligations on such leverage exceed the estimated return on the
proceeds of such leverage. We note, however, that in making the
determination of whether to issue leverage, we must rely on
estimates of leverage costs and expected returns. Actual costs
of leverage vary over time depending on interest rates and other
factors. Actual returns vary, of course, depending on many
factors. Our Board also will consider other factors, including
whether the current investment opportunities will help us
achieve our investment objective and strategies.
We have established an unsecured credit facility with
U.S. Bank N.A., which currently allows us to borrow up to
$120,000,000. Outstanding balances under the credit facility
accrue interest at a variable annual rate equal to the one-month
LIBOR rate plus 0.75%. As of November 30, 2006, the current
rate was 6.07%. The credit facility remains in effect through
June 13, 2007 and we may draw on the facility from time to
time in accordance with our investment policies. As of
November 30, 2006, we had approximately $32.45 million
outstanding on our credit facility.
We also may borrow up to an additional 5% of our total assets
(not including the amount so borrowed) for temporary purposes,
including the settlement and clearance of securities
transactions, which otherwise might require untimely
dispositions of portfolio holdings.
Under the 1940 Act, we are not permitted to issue preferred
stock unless immediately after such issuance we have total
assets (including the proceeds of such issuance) at least equal
to 200% of the liquidation value of the outstanding preferred
stock. Stated another way, we may not issue preferred stock
that, together with outstanding preferred stock, has an
aggregate liquidation value of more than 50% of our total assets
(less liabilities and indebtedness), including the amount
leveraged. In addition, we are not permitted to declare any cash
dividend or other distribution on our 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. We may, as a result of market conditions or otherwise, be
required to purchase or redeem preferred stock, or sell a
portion of our investments when it may be disadvantageous to do
so, in order to maintain the required asset coverage. Common
stockholders would bear the costs of issuing additional
preferred stock, which may include offering expenses and the
ongoing payment of dividends. Under the 1940 Act, we may only
issue one class of preferred stock. So long as MMP Shares are
outstanding, any preferred stock offered pursuant to this
prospectus and any related prospectus supplement will rank on
parity with any outstanding MMP Shares.
Under the 1940 Act, we are not permitted to issue debt
securities or incur other indebtedness constituting senior
securities unless immediately thereafter we have total assets
(including the proceeds of the indebtedness) at least equal to
300% of the amount of the outstanding indebtedness. Stated
another way, we may not borrow for investment purposes more than
331/3%
of our total assets, including the amount borrowed. We also must
maintain this 300% asset coverage for as long as the
indebtedness is outstanding. The 1940 Act provides that we may
not declare any cash dividend or other distribution on common or
preferred stock, or purchase any of our shares of stock (through
tender offers or otherwise), unless we would satisfy this 300%
asset coverage after deducting the amount
24
of the dividend, other distribution or share purchase price, as
the case may be. If the asset coverage for indebtedness declines
to less than 300% as a result of market fluctuations or
otherwise, we may be required to sell a portion of our
investments when it may be disadvantageous to do so. Under the
1940 Act, we may only issue one class of senior securities
representing indebtedness. So long as Tortoise Notes are
outstanding, any debt securities offered pursuant to this
prospectus and any related prospectus supplement will be ranked
on parity with any outstanding Tortoise Notes.
Hedging
Transactions
In an attempt to reduce the interest rate risk arising from our
leveraged capital structure, we currently use, and may in the
future use, 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, we 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 us a variable
rate payment intended to approximate our variable rate payment
obligation on any variable rate borrowings, such as Tortoise
Notes and variable rate preferred shares, such as
MMP Shares. The payment obligations would be based on the
notional amount of the swap. In an interest rate cap, we would
pay a premium to the counterparty up to the interest rate cap
and, to the extent that a specified variable rate index exceeds
a predetermined fixed rate of interest, would receive from the
counterparty payments equal to the difference based on the
notional amount of such cap. In an interest rate floor, we would
be entitled to receive, to the extent that a specified index
falls below a predetermined interest rate, payments of interest
on a notional principal amount from the party selling the
interest rate floor. Depending on the state of interest rates in
general, our use of interest rate transactions could affect our
ability to make required interest payments on the Tortoise Notes
or dividend payments on MMP Shares. To the extent there is a
decline in interest rates, the value of the interest rate
transactions could decline. If the counterparty to an interest
rate transaction defaults, we would not be able to use the
anticipated net receipts under the interest rate transaction to
offset our cost of financial leverage.
We have entered into interest rate swap transactions intended to
hedge our interest and dividend payment obligations under the
currently outstanding Tortoise Notes and MMP Shares,
respectively, against material increases in interest rates. See
Risk Factors Company Risks Hedging
Strategy Risk.
Effects
of Leverage
As of November 30, 2006, we were obligated to pay a rate of
5.57% on $35 million aggregate liquidation preference for
Series I MMP Shares and $35 million aggregate
liquidation preference for Series II MMP Shares,
respectively. These rates include commissions paid to the
auction agent in the amount of 0.25%. However, we have entered
into interest rate swap agreements to protect ourselves from
increasing dividend expense on MMP Shares resulting from
increasing short-term interest rates. Under the terms of
outstanding swap agreements as of November 30, 2006, we
were instead obligated to pay a rate of 5.20% and 5.21%,
respectively, on a notional amount of $35 million for
Series I MMP Shares and a notional amount of
$35 million for Series II MMP Shares.
As of November 30, 2006, we were obligated to pay a rate of
5.53%, 5.52% and 5.49% on a principal amount of $60 million
for Series A Tortoise Notes, $50 million principal
amount for Series B Tortoise Notes and $55 million
principal amount for Series C Tortoise Notes, respectively.
These rates include commissions paid to the auction agent in the
amount of 0.25%. However, we have entered into interest rate
swap agreements to protect ourselves from increasing interest
expense on Tortoise Notes resulting from increasing short-term
interest rates. Under the terms of outstanding swap agreements
as of November 30, 2006, we were instead obligated to pay a
rate of 3.54%, 3.56% and 4.54% on a notional amount of
$60 million for Series A Tortoise Notes,
$50 million notional amount for Series B Tortoise
Notes and $55 million notional amount for Series C
Tortoise Notes, respectively.
Assuming that the dividend rates payable on the MMP Shares and
the interest rates payable on the Tortoise Notes and borrowings
under our unsecured credit facility remain as described above
(an average annual cost of 5.62%, based on the amount of
leverage outstanding at November 30, 2006), the annual
return that our portfolio must experience (net of expenses) in
order to cover leverage costs would be 2.63%.
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The following table is designed to illustrate the effect of the
foregoing level of leverage on the return to a common
stockholder, assuming hypothetical annual returns (net of
expenses) of our portfolio of -10% to 10%. As the table shows,
the leverage generally increases the return to common
stockholders when portfolio return is positive or greater than
the cost of leverage and decreases the return when the portfolio
return is negative or less than the cost of leverage. The
figures appearing in the table are hypothetical, and actual
returns may be greater or less than those appearing in the table.
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Assumed Portfolio Return (net of
expenses)
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10
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%
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5
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%
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0
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%
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5
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%
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10
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%
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Corresponding Common Share Return
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19.4
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%
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11.7
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%
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4.0
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%
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3.7
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%
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11.3
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%
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While we use leverage, the amount of the fees paid to the
Adviser for investment advisory and management services are
higher than if we did not use leverage because the fees paid are
calculated based on our Managed Assets, which include assets
purchased with leverage. Therefore, the Adviser has a financial
incentive to use leverage, which will create a conflict of
interest between the Adviser and our common stockholders.
Because payments on any leverage would be paid by us at a
specified rate, only our common stockholders would bear
management fees and other expenses we incur.
We cannot fully achieve the benefits of leverage until we have
invested the proceeds resulting from the use of leverage in
accordance with our investment objective and policies. For
further information about leverage, see Risk
Factors Additional Risks to Common
Stockholders Leverage Risk.
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RISK
FACTORS
Investing in any of our securities involves risk, including
the risk that you may receive little or no return on your
investment or even that you may lose part or all of your
investment. Therefore, before investing in any of our securities
you should consider carefully the following risks, as well as
any risk factors included in the applicable prospectus
supplement.
Company
Risks
We are a nondiversified, closed-end management investment
company designed primarily as a long-term investment vehicle and
not as a trading tool. An investment in our securities should
not constitute a complete investment program for any investor
and involves a high degree of risk. Due to the uncertainty in
all investments, there can be no assurance that we will achieve
our investment objective.
The following are the general risks of investing in our
securities that affect our ability to achieve our investment
objective. The risks below could lower the returns and
distributions on common stock and reduce the amount of cash and
net assets available to make dividend payments on preferred
stock and interest payments on debt securities.
Concentration Risk. Under normal
circumstances, we concentrate our investments in the energy
infrastructure sector, with an emphasis on securities issued by
MLPs. Risks inherent in the energy infrastructure business of
these types of MLPs include the following:
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Processing and coal MLPs may be directly affected by energy
commodity prices. The volatility of commodity prices can
indirectly affect certain other MLPs due to the impact of prices
on volume of commodities transported, processed, stored or
distributed. Pipeline MLPs are not subject to direct commodity
price exposure because they do not own the underlying energy
commodity. While propane MLPs do own the underlying energy
commodity, 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.
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The profitability of MLPs, particularly processing and pipeline
MLPs, may be materially impacted by the volume of natural gas or
other energy commodities available for transporting, processing,
storing or distributing. A significant decrease in the
production of natural gas, oil, coal or other energy
commodities, due to a decline in production from existing
facilities, import supply disruption, depressed commodity prices
or otherwise, would reduce revenue and operating income of MLPs
and, therefore, the ability of MLPs to make distributions to
partners.
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A sustained decline in demand for crude oil, natural gas and
refined petroleum products could adversely affect MLP revenues
and cash flows. Factors that could lead to a decrease in market
demand include a recession or other adverse economic conditions,
an increase in the market price of the underlying commodity,
higher taxes or other regulatory actions that increase costs, or
a shift in consumer demand for such products. Demand may also be
adversely impacted by consumer sentiment with respect to global
warming
and/or by
any state or federal legislation intended to promote the use of
alternative energy sources, such as bio-fuels.
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A portion of any one MLPs assets may be dedicated to
natural gas reserves and other commodities that naturally
deplete over time, which could have a materially adverse impact
on an MLPs ability to make distributions. Often the MLPs
depend upon exploration and development activities by third
parties.
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MLPs employ a variety of means of increasing cash flow,
including increasing utilization of existing facilities,
expanding operations through new construction, expanding
operations through acquisitions, or securing additional
long-term contracts. Thus, some MLPs may be subject to
construction risk, acquisition risk or other risk factors
arising from their specific business strategies. A significant
slowdown in large energy companies disposition of energy
infrastructure assets and other merger and acquisition activity
in the energy MLP industry could reduce the growth rate of cash
flows we receive from MLPs that grow through acquisitions.
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The profitability of MLPs could be adversely affected by changes
in the regulatory environment. Most MLPs assets are
heavily regulated by federal and state governments in diverse
matters, such as the way in which certain MLP assets are
constructed, maintained and operated and the prices MLPs may
charge for their services. Such regulation can change over time
in scope and intensity. For example, a particular byproduct of
an MLP process may be declared hazardous by a regulatory agency
and unexpectedly increase production costs. Moreover, many state
and federal environmental laws provide for civil as well as
regulatory remediation, thus adding to the potential exposure an
MLP may face.
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Extreme weather patterns, such as hurricane Ivan in 2004 and
hurricane Katrina in 2005, could result in significant
volatility in the supply of energy and power and could adversely
impact the value of the securities in which we invest. This
volatility may create fluctuations in commodity prices and
earnings of companies in the energy infrastructure industry.
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A rising interest rate environment could adversely impact the
performance of MLPs. Rising interest rates could limit the
capital appreciation of equity units of MLPs as a result of the
increased availability of alternative investments at competitive
yields with MLPs. Rising interest rates also may increase an
MLPs cost of capital. A higher cost of capital could limit
growth from acquisition/expansion projects and limit MLP
distribution growth rates.
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Since the September 11, 2001 attacks, the
U.S. Government has issued public warnings indicating that
energy assets, specifically those related to pipeline
infrastructure, production facilities and transmission and
distribution facilities, might be specific targets of terrorist
activity. The continued threat of terrorism and related military
activity likely will increase volatility for prices in natural
gas and oil and could affect the market for products of MLPs.
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Holders of MLP units are subject to certain risks inherent in
the partnership structure of MLPs including (1) tax risks
(described below), (2) limited ability to elect or remove
management, (3) limited voting rights, except with respect
to extraordinary transactions, and (4) conflicts of
interest of the general partner, including those arising from
incentive distribution payments.
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Industry Specific Risk. Energy infrastructure
companies also are subject to risks specific to the industry
they serve.
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Pipeline MLPs are subject to demand for crude oil or refined
products in the markets served by the pipeline, sharp decreases
in crude oil or natural gas prices that cause producers to
curtail production or reduce capital spending for exploration
activities, and environmental regulation. Demand for gasoline,
which accounts for a substantial portion of refined product
transportation, depends on price, prevailing economic conditions
in the markets served, and demographic and seasonal factors.
Pipeline MLP unit prices are primarily driven by distribution
growth rates and prospects for distribution growth. Pipeline
MLPs are subject to regulation by FERC with respect to tariff
rates these companies may charge for pipeline transportation
services. An adverse determination by FERC with respect to the
tariff rates of a pipeline MLP could have a material adverse
effect on the business, financial condition, results of
operations and cash flows of that pipeline MLP and its ability
to make cash distributions to its equity owners.
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Processing MLPs are subject to declines in production of natural
gas fields, which utilize the processing facilities as a way to
market the gas, prolonged depression in the price of natural gas
or crude oil refining, which curtails production due to lack of
drilling activity and declines in the prices of natural gas
liquids products and natural gas prices, resulting in lower
processing margins.
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Propane MLPs are subject to earnings variability based upon
weather patterns in the locations where the company operates and
the wholesale cost of propane sold to end customers. Propane MLP
unit prices are based on safety in distribution coverage ratios,
interest rate environment and, to a lesser extent, distribution
growth.
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Coal MLPs are subject to demand variability based on favorable
weather conditions, strong or weak domestic economy, the level
of coal stockpiles in the customer base, and the general level
of prices of
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competing sources of fuel for electric generation. They also are
subject to supply variability based on the geological conditions
that reduce productivity of mining operations, regulatory
permits for mining activities and the availability of coal that
meets Clean Air Act standards. Demand and prices for coal may
also be impacted by current and proposed laws, regulations
and/or
trends, at the federal, state or local levels, to impose
limitations on chemical emissions from coal-fired power plants
and other coal end-users. Any such limitations may reduce the
demand for coal produced, transported or delivered by coal MLPs.
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Marine shipping MLPs are subject to the demand for, and the
level of consumption of, refined petroleum products, crude oil
or natural gas in the markets served by the marine shipping
MLPs, which in turn could affect the demand for tank vessel
capacity and charter rates. These MLPs vessels and their
cargoes are also subject to the risks of being damaged or lost
due to marine disasters, bad weather, mechanical failures,
grounding, fire, explosions and collisions, human error, piracy,
and war and terrorism.
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MLP Risk. We invest primarily in equity
securities of MLPs. As a result, we are subject to the risks
associated with an investment in MLPs, including cash flow risk,
tax risk and deferred tax risk, as described in more detail
below.
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Cash Flow Risk. We derive substantially
all of our cash flow from investments in equity securities of
MLPs. The amount of cash that we have available to pay or
distribute to holders of our securities depends entirely on the
ability of MLPs held by us to make distributions to their
partners and the tax character of those distributions. We have
no control over the actions of underlying MLPs. The amount of
cash that each individual MLP can distribute to its partners
will depend on the amount of cash it generates from operations,
which will vary from quarter to quarter depending on factors
affecting the energy infrastructure market generally and on
factors affecting the particular business lines of the MLP.
Available cash will also depend on the MLPs level of
operating costs (including incentive distributions to the
general partner), level of capital expenditures, debt service
requirements, acquisition costs (if any), fluctuations in
working capital needs and other factors.
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Tax Risk of MLPs. Our ability to meet
our investment objective will depend on the level of taxable
income, dividends and distributions we receive from the MLPs and
other securities of energy infrastructure companies in which we
invest, a factor over which we have no control. The benefit we
derive from our investment in MLPs depends largely on the MLPs
being treated as partnerships for federal income tax purposes.
As a partnership, an MLP has no federal income tax liability at
the entity level. If, as a result of a change in current law or
a change in an MLPs business, an MLP were treated as a
corporation for federal income tax purposes, the MLP would be
obligated to pay federal income tax on its income at the
corporate tax rate. If an MLP were classified as a corporation
for federal income tax purposes, the amount of cash available
for distribution would be reduced and the distributions we
receive might be taxed entirely as dividend income. Therefore,
treatment of one or more MLPs as a corporation for federal
income tax purposes could affect our ability to meet our
investment objective and would reduce the amount of cash
available to pay or distribute to holders of our securities.
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Deferred Tax Risks of MLPs. As a
limited partner in the MLPs in which we invest, we will receive
a pro rata share of income, gains, losses and deductions from
those MLPs. Historically, a significant portion of income from
such MLPs has been offset by tax deductions. We will incur a
current tax liability on that portion of an MLPs income
and gains that is not offset by tax deductions and losses. The
percentage of an MLPs income and gains which is offset by
tax deductions and losses will fluctuate over time for various
reasons. A significant slowdown in acquisition activity by MLPs
held in our portfolio could result in a reduction of accelerated
depreciation generated by new acquisitions, which may result in
increased current income tax liability to us.
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We will accrue deferred income taxes for any future tax
liability associated with that portion of MLP distributions
considered to be a tax-deferred return of capital as well as
capital appreciation of our investments. Upon the sale of an MLP
security, we may be liable for previously deferred taxes. We
will rely to some extent on information provided by the MLPs,
which is not necessarily timely, to estimate deferred tax
liability for purposes of
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financial statement reporting and determining our NAV. From time
to time we will modify our estimates or assumptions regarding
our deferred tax liability as new information becomes available.
Equity Securities Risk. MLP common units and
other equity securities can be affected by macro economic and
other factors affecting the stock market in general,
expectations of interest rates, investor sentiment towards MLPs
or the energy sector, changes in a particular issuers
financial condition, or unfavorable or unanticipated poor
performance of a particular issuer (in the case of MLPs,
generally measured in terms of distributable cash flow). Prices
of common units of individual MLPs and other equity securities
also can be affected by fundamentals unique to the partnership
or company, including earnings power and coverage ratios.
Investing in securities of smaller companies may involve greater
risk than is associated with investing in more established
companies. Companies with smaller capitalization may have
limited product lines, markets or financial resources; may lack
management depth or experience; and may be more vulnerable to
adverse general market or economic developments than larger more
established companies.
Because MLP convertible subordinated units generally convert to
common units on a
one-to-one
ratio, the price that we can be expected to pay upon purchase or
to realize upon resale is generally tied to the common unit
price less a discount. The size of the discount varies depending
on a variety of factors including the likelihood of conversion,
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.
Hedging Strategy Risk. We currently use, and
may in the future use, interest rate transactions for hedging
purposes only, in an attempt to reduce the interest rate risk
arising from our leveraged capital structure. Interest rate
transactions that we may use for hedging purposes will expose us
to certain risks that differ from the risks associated with our
portfolio holdings. There are economic costs of hedging
reflected in the price of interest rate swaps, floors, caps and
similar techniques, the costs of which can be significant,
particularly when long-term interest rates are substantially
above short-term rates. In addition, our success in using
hedging instruments is subject to the Advisers ability to
predict correctly changes in the relationships of such hedging
instruments to our leverage risk, and there can be no assurance
that the Advisers judgment in this respect will be
accurate. Consequently, the use of hedging transactions might
result in a poorer overall performance, whether or not adjusted
for risk, than if we had not engaged in such transactions.
Depending on the state of interest rates in general, our use of
interest rate transactions could enhance or decrease the cash
available to us for payment of distributions, dividends or
interest, as the case may be. To the extent there is a decline
in interest rates, the value of interest rate swaps or caps
could decline, and result in a decline in our net assets. In
addition, if the counterparty to an interest rate transaction
defaults, we would not be able to use the anticipated net
receipts under the interest rate swap or cap to offset our cost
of financial leverage.
Competition Risk. At the time we completed our
initial public offering in February 2004, we were the only
publicly traded investment company offering access to a
portfolio of energy infrastructure MLPs. Since that time a
number of alternatives to us as vehicles for investment in a
portfolio of energy infrastructure MLPs, including other
publicly traded investment companies and private funds, have
emerged. In addition, tax law changes have increased the ability
of regulated investment companies or other institutions to
invest in MLPs. These competitive conditions may adversely
impact our ability to meet our investment objective, which in
turn could adversely impact our ability to make interest or
dividend payments.
Restricted Security Risk. We 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 us. However, we 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.
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Restricted securities are subject to statutory and contractual
restrictions on their public resale, which may make it more
difficult to value them, may limit our ability to dispose of
them and may lower the amount we could realize upon their sale.
To enable us to sell our holdings of a restricted security not
registered under the 1933 Act, we may have to cause those
securities to be registered. The expenses of registering
restricted securities may be negotiated by us with the issuer at
the time we buy the securities. When we must arrange
registration because we wish to sell the security, a
considerable period may elapse between the time the decision is
made to sell the security and the time the security is
registered so that we could sell it. We would bear the risks of
any downward price fluctuation during that period.
Liquidity Risk. Although common units of MLPs
trade on the NYSE, AMEX, and the NASDAQ National Market, certain
MLP securities may trade less frequently than those of larger
companies due to their smaller capitalizations. In the event
certain MLP securities experience limited trading volumes, the
prices of such MLPs may display abrupt or erratic movements at
times. Additionally, it may be more difficult for us to buy and
sell significant amounts of such securities without an
unfavorable impact on prevailing market prices. As a result,
these securities may be difficult to dispose of at a fair price
at the times when we believe it is desirable to do so.
Investment of our capital in securities that are less actively
traded or over time experience decreased trading volume may
restrict our ability to take advantage of other market
opportunities or to dispose of securities. This also may affect
adversely our ability to make required interest payments on the
debt securities and dividend distributions on the preferred
stock, to redeem such securities, or to meet asset coverage
requirements.
Valuation Risk. Market prices generally will
not be available for MLP convertible subordinated units, or
securities of private companies, and the value of such
investments ordinarily will be determined based on fair
valuations determined by the Adviser pursuant to procedures
adopted by the Board of Directors. Similarly, common units
acquired through direct placements will be valued based on fair
value determinations because of their restricted nature;
however, 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 our ability to determine our NAV. The sale price of
securities that are not readily marketable may be lower or
higher than our most recent determination of their fair value.
Additionally, the value of these securities typically requires
more reliance on the judgment of 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, we may not be
able to realize these securities true value, or may have
to delay their sale in order to do so. This may affect adversely
our ability to make required interest payments on the debt
securities and dividend distributions on the preferred stock, to
redeem such securities, or to meet asset coverage requirements.
Nondiversification Risk. We are a
nondiversified, closed-end management investment company under
the 1940 Act and are not treated as a regulated investment
company under the Internal Revenue Code. Accordingly, there are
no regulatory limits under the 1940 Act or the Internal Revenue
Code on the number or size of securities that we hold and we may
invest more assets in fewer issuers as compared to a diversified
fund. There currently are approximately 54 companies
presently organized as MLPs and only a limited number of those
companies operate energy infrastructure assets. We select MLP
investments from this small pool of issuers. We may invest in
non-MLP securities issued by energy infrastructure companies to
a lesser degree, consistent with our investment objective and
policies.
Interest Rate Risk. Generally, when market
interest rates rise, the values of debt securities decline, and
vice versa. Our investment in such securities means that the NAV
and market price of our common stock will tend to decline if
market interest rates rise. During periods of declining interest
rates, the issuer of a security may exercise its option to
prepay principal earlier than scheduled, forcing us to reinvest
in lower yielding securities. This is known as call or
prepayment risk. Lower grade securities frequently have call
features that allow the issuer to repurchase the security prior
to its stated maturity. An issuer may redeem a lower grade
obligation if the issuer can refinance the debt at a lower cost
due to declining interest rates or an improvement in the credit
standing of the issuer.
Below Investment Grade Securities
Risk. Investing in lower grade debt instruments
involves additional risks than investment grade securities.
Adverse changes in economic conditions are more likely to lead
to a weakened capacity of a below investment grade issuer to
make principal payments and interest payments than an
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investment grade issuer. An economic downturn could adversely
affect the ability of highly leveraged issuers to service their
obligations or to repay their obligations upon maturity.
Similarly, downturns in profitability in the energy
infrastructure industry could adversely affect the ability of
below investment grade issuers in that industry to meet their
obligations. The market values of lower quality securities tend
to reflect individual developments of the issuer to a greater
extent than do higher quality securities, which react primarily
to fluctuations in the general level of interest rates.
The secondary market for below investment grade securities may
not be as liquid as the secondary market for more highly rated
securities. There are fewer dealers in the market for below
investment grade securities than investment grade obligations.
The prices quoted by different dealers may vary significantly,
and the spread between the bid and asked price is generally much
larger than for higher quality instruments. Under adverse market
or economic conditions, the secondary market for below
investment grade securities could contract further, independent
of any specific adverse change in the condition of a particular
issuer, and these instruments may become illiquid. As a result,
it may be more difficult to sell these securities or we may be
able to sell the securities only at prices lower than if such
securities were widely traded. This may affect adversely our
ability to make required dividend or interest payments on our
outstanding senior securities. Prices realized upon the sale of
such lower-rated or unrated securities, under these
circumstances, may be less than the prices used in calculating
our NAV.
Because investors generally perceive that there are greater
risks associated with lower quality securities of the type in
which we may invest a portion of our assets, the yields and
prices of such securities may tend to fluctuate more than those
for higher rated securities. In the lower quality segments of
the debt securities market, changes in perceptions of
issuers creditworthiness tend to occur more frequently and
in a more pronounced manner than do changes in higher quality
segments of the debt securities market, resulting in greater
yield and price volatility.
Factors having an adverse impact on the market value of below
investment grade securities may have an adverse effect on our
NAV and the market value of our common stock. In addition, we
may incur additional expenses to the extent we are required to
seek recovery upon a default in payment of principal or interest
on our portfolio holdings. In certain circumstances, we may be
required to foreclose on an issuers assets and take
possession of its property or operations. In such circumstances,
we would incur additional costs in disposing of such assets and
potential liabilities from operating any business acquired.
Counterparty Risk. We may be subject to credit
risk with respect to the counterparties to certain derivative
agreements entered into by us. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a
derivative contract due to financial difficulties, we may
experience significant delays in obtaining any recovery under
the derivative contract in a bankruptcy or other reorganization
proceeding. We may obtain only a limited recovery or may obtain
no recovery in such circumstances.
Effects of Terrorism. The U.S. securities
markets are subject to disruption as a result of terrorist
activities, such as the terrorist attacks on the World Trade
Center on September 11, 2001; the war in Iraq and its
aftermath; other hostilities; and other geopolitical events.
Such events have led, and in the future may lead, to short-term
market volatility and may have long-term effects on the
U.S. economy and markets.
Anti-Takeover Provisions. Our Charter and
Bylaws include provisions that could delay, defer or prevent
other entities or persons from acquiring control of us, causing
us to engage in certain transactions or modifying our structure.
These provisions may be regarded as anti-takeover
provisions. Such provisions could limit the ability of common
stockholders to sell their shares at a premium over the then-
current market prices by discouraging a third party from seeking
to obtain control of us. See Certain Provisions in the
Companys Charter and Bylaws.
Management Risk. The Adviser was formed in
October 2002 to provide portfolio management to institutional
and high-net
worth investors seeking professional management of their MLP
investments. The Adviser has been managing investments in
portfolios of MLP investments since that time, including since
February 2004, management of our investments, and management of
the investments of TYY since May 2005 and of TYN since October
2005. TYY is a non-diversified, closed-end management investment
company that commenced operations on May 31, 2005 and
invests primarily in MLPs and their affiliates in the energy
infrastructure sector. TYN is a non-diversified, closed-end
management investment company, that commenced operations on
October 31, 2005 and invests primarily in Canadian royalty
trusts and income trusts and publicly traded United States MLPs.
The Adviser
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also serves as the investment adviser to TTO, a non-diversified
closed-end management investment company that has elected to be
regulated as a business development company under the 1940 Act.
TTO, which commenced operations on December 8, 2005,
invests primarily in privately held and micro-cap public energy
companies operating in the midstream and downstream segments,
and to a lesser extent the upstream segment. Our investments and
those of TYY, TYN and TTO are managed by the Advisers
investment committee. We share the same officers as TYY, TYN and
TTO. As of November 30, 2006, the Adviser had client assets
under management of approximately $2.0 billion, including
our assets and those of TYY, TYN and TTO. The Adviser relies in
part on the officers, employees, and resources of Fountain
Capital for certain functions. These services are provided
pursuant to an informal arrangement between the parties. To the
extent that the Advisers assets under management continue
to grow, the Adviser may have to hire additional personnel and
to the extent it is unable to hire qualified individuals its
operations may be adversely affected. Three (of the five)
members of the investment committee are affiliates of, but not
employees of, the Adviser, and have other significant
responsibilities with Fountain Capital. Fountain Capital
conducts business and activities of its own in which the Adviser
has no economic interest. If these separate activities become
significantly greater than the Advisers activities, there
could be material competition for the efforts of key personnel.
Additional
Risks to Common Stockholders
Leverage Risk. Our use of leverage through the
issuance of MMP Shares and Tortoise Notes along with the
issuance of any additional preferred stock or debt securities,
and any additional borrowings or other transactions involving
indebtedness (other than for temporary or emergency purposes)
are or would be considered senior securities for
purposes of the 1940 Act and create risks. Leverage is a
speculative technique that may adversely affect common
stockholders. If the return on securities acquired with borrowed
funds or other leverage proceeds does not exceed the cost of the
leverage, the use of leverage could cause us to lose money.
Successful use of leverage depends on the Advisers ability
to predict or hedge correctly interest rates and market
movements, and there is no assurance that the use of a
leveraging strategy will be successful during any period in
which it is used. Because the fee paid to the Adviser will be
calculated on the basis of Managed Assets, the fees will
increase when leverage is utilized, giving the Adviser an
incentive to utilize leverage.
Our issuance of senior securities involves offering expenses and
other costs, including interest payments, which are borne
indirectly by our common stockholders. Fluctuations in interest
rates could increase interest or dividend payments on our senior
securities, and could reduce cash available for dividends on
common stock. Increased operating costs, including the financing
cost associated with any leverage, may reduce our total return
to common stockholders.
The 1940 Act
and/or the
rating agency guidelines applicable to senior securities impose
asset coverage requirements, dividend limitations, voting right
requirements (in the case of the senior equity securities), and
restrictions on our portfolio composition and our use of certain
investment techniques and strategies. The terms of any senior
securities or other borrowings may impose additional
requirements, restrictions and limitations that are more
stringent than those currently required by the 1940 Act, and the
guidelines of the rating agencies that rate outstanding senior
securities. These requirements may have an adverse effect on us
and may affect our ability to pay distributions on common stock
and preferred stock. To the extent necessary, we intend to
redeem our senior securities to maintain the required asset
coverage. Doing so may require that we liquidate portfolio
securities at a time when it would not otherwise be desirable to
do so. Nevertheless, it is not anticipated that the 1940 Act
requirements, the terms of any senior securities or the rating
agency guidelines will impede the Adviser in managing our
portfolio in accordance with our investment objective and
policies. See Leverage Use of Leverage.
Market Impact Risk. The sale of our common
stock (or the perception that such sales may occur) may have an
adverse effect on prices in the secondary market for our common
stock. An increase in the number of common shares available may
put downward pressure on the market price for our common stock.
Our ability to sell shares of common stock below NAV may
increase this pressure. These sales also might make it more
difficult for us to sell additional equity securities in the
future at a time and price we deem appropriate.
Dilution Risk. The voting power of current
stockholders will be diluted to the extent that current
stockholders do not purchase shares in any future common stock
offerings or do not purchase sufficient shares to
33
maintain their percentage interest. In addition, if we sell
shares of common stock below NAV, our NAV will fall immediately
after such issuance. See Description of
Securities Common Stock Issuance of
Additional Shares which includes a table reflecting the
dilutive effect of selling our common stock below NAV.
If we are unable to invest the proceeds of such offering as
intended, our per share distribution may decrease and we may not
participate in market advances to the same extent as if such
proceeds were fully invested as planned.
Market Discount Risk. Our common stock has a
limited trading history and has traded both at a premium and at
a discount in relation to NAV. We cannot predict whether our
shares will trade in the future at a premium or discount to NAV.
Shares of closed-end investment companies frequently trade at a
discount from NAV, but in some cases have traded above NAV.
Continued development of alternatives as a vehicle for
investment in MLP securities may contribute to reducing or
eliminating any premium or may result in our shares trading at a
discount. The risk of the shares of common stock trading at a
discount is a risk separate from the risk of a decline in our
NAV as a result of investment activities. Our NAV will be
reduced immediately following an offering of our common or
preferred stock, due to the offering costs for such stock, which
are borne entirely by us. Although we also bear the offering
costs of debt securities, such costs are amortized over time and
therefore do not impact our NAV immediately following an
offering.
Whether stockholders will realize a gain or loss upon the sale
of our common stock depends upon whether the market value of the
common shares at the time of sale is above or below the price
the stockholder paid, taking into account transaction costs for
the common shares, and is not directly dependent upon our NAV.
Because the market value of our common stock will be determined
by factors such as the relative demand for and supply of the
shares in the market, general market conditions and other
factors beyond our control, we cannot predict whether our common
stock will trade at, below or above NAV, or at, below or above
the public offering price for common stock.
Additional
Risks to Senior Security Holders
Generally, an investment in preferred stock or debt securities
(collectively, senior securities) is subject to the
following risks:
Interest Rate Risk. Auction rate senior
securities pay dividends or interest based on short-term
interest rates. If short-term interest rates rise, dividends or
interest on the auction rate senior securities may rise so that
the amount of dividends or interest due to holders of auction
rate senior securities would exceed the cash flow generated by
our portfolio securities. This might require us to sell
portfolio securities at a time when we would otherwise not do
so, which may affect adversely our future ability to generate
cash flow. In addition, rising market interest rates could
impact negatively the value of our investment portfolio,
reducing the amount of assets serving as asset coverage for the
senior securities.
Senior Leverage Risk. Preferred stock will be
junior in liquidation and with respect to distribution rights to
debt securities and any other borrowings. Senior securities
representing indebtedness may constitute a substantial lien and
burden on preferred stock by reason of their prior claim against
our income and against our net assets in liquidation. We may not
be permitted to declare dividends or other distributions with
respect to any series of preferred stock unless at such time we
meet applicable asset coverage requirements and the payment of
principal or interest is not in default with respect to the
Tortoise Notes or any other borrowings.
Ratings and Asset Coverage Risk. To the extent
that senior securities are rated, a rating does not eliminate or
necessarily mitigate the risks of investing in our senior
securities, and a rating may not fully or accurately reflect all
of the credit and market risks associated with a security. A
rating agency could downgrade the rating of our shares of
preferred stock or debt securities, which may make such
securities less liquid at an auction or in the secondary market,
though probably with higher resulting interest rates. If a
rating agency downgrades the rating assigned to a senior
security, we may alter our portfolio or redeem the senior
security. We may voluntarily redeem a senior security under
certain circumstances.
Inflation Risk. Inflation is the reduction in
the purchasing power of money resulting from an increase in the
price of goods and services. Inflation risk is the risk that the
inflation adjusted or real value of an investment in
preferred stock or debt securities or the income from that
investment will be worth less in the future. As inflation
occurs, the real value of the preferred stock or debt securities
and the dividend payable to
34
holders of preferred stock or interest payable to holders of
debt securities declines. In an inflationary period, however, it
is expected that, through the auction process, dividend or
interest rates would increase, tending to offset this risk.
Auction Risk. To the extent that senior
securities trade through an auction, there are certain risks
associated with participating in an auction and certain risks if
you try to sell senior securities outside of an auction in the
secondary market. These risks will be described in more detail
in an applicable prospectus supplement if we issue senior
securities pursuant to this registration statement.
Decline in Net Asset Value Risk. A material
decline in our NAV may impair our ability to maintain required
levels of asset coverage for our preferred stock or debt
securities.
35
MANAGEMENT
OF THE COMPANY
Directors
and Officers
Our business and affairs are managed under the direction of our
Board of Directors. Accordingly, our Board of Directors provides
broad supervision over our affairs, including supervision of the
duties performed by the Adviser. Our officers are responsible
for our
day-to-day
operations. The names and business addresses of our directors
and officers, 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
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 us with
investment research and advice and furnishes us with an
investment program consistent with our investment objective and
policies, subject to the supervision of the Board. 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 our
securities transactions and reports to the Board on our
investments and performance.
The Adviser is located at 10801 Mastin Boulevard,
Suite 222, Overland Park, Kansas 66210. The Adviser
specializes in managing portfolios of investments in 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. As of November 30,
2006, the Adviser had approximately $2.0 billion of client
assets under management. The Advisers investment committee
is comprised of five seasoned portfolio managers.
Fountain Capital and Kansas City Equity Partners LC
(KCEP) control our Advisor through their equity
ownership and management rights in our Advisor. 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
approximately $1.7 billion of client assets under
management as of November 30, 2006, of which approximately
$237 million was in energy industry investments. KCEP was
formed in 1993 and until recently, managed KCEP
Ventures II, L.P. (KCEP II), a private
equity fund with committed capital of $55 million invested
in a variety of companies in diverse industries. KCEP II
wound up its operations in late 2006, has no remaining portfolio
investments and has distributed proceeds to its partners. KCEP
Ventures I, L.P. (KCEP I), a
start-up and
early-stage venture capital fund launched in 1994 and previously
managed by KCEP, also recently completed the process of winding
down. As a part of that process, KCEP I entered into a
consensual order of receivership, which was necessary to allow
KCEP I to distribute its remaining $1.3 million of assets
to creditors and the Small Business Association
(SBA). The consensual order acknowledged a capital
impairment condition and the resulting nonperformance by KCEP I
of its agreement with the SBA, both of which were violations of
the provisions requiring repayment of capital under the Small
Business Investment Act of 1958 and the regulations thereunder.
The Adviser relies in part on the officers, employees and
resources of its affiliate, Fountain Capital, for certain
functions. These services are provided pursuant to an informal
arrangement between the parties. Three of the five members of
the investment committee of the Adviser are affiliates of, but
not employees of, the Adviser, and have other significant
responsibilities with Fountain Capital. Fountain Capital
conducts business and activities of its own in which the Adviser
has no economic interest. If these separate activities are
significantly greater than the Advisers activities, there
could be material competition for the efforts of key personnel.
The investment management of our portfolio is the responsibility
of the Advisers investment committee. The investment
committees members are H. Kevin Birzer, Zachary A. Hamel,
Kenneth P. Malvey, Terry C. Matlack and David J. Schulte, all of
whom share responsibility for such investment management. It is
the policy of the investment committee that any one member can
require the Adviser to sell a security and any one member can
veto the committees decision to invest in a security. Each
committee member has been a portfolio manager since we commenced
operations in February 2004.
36
H. Kevin Birzer. Mr. Birzer has
been a Managing Director of the Adviser since 2002 and also is a
Partner with Fountain Capital. Mr. Birzer is also a
Director of TYY, TYN and TTO. Mr. Birzer, who joined
Fountain Capital in 1990, has 22 years of investment
experience including 19 in high-yield securities.
Mr. Birzer began his career with Peat Marwick. His
subsequent experience includes three years working as a Vice
President for F. Martin Koenig & Co., focusing on
equity and option investments, and three years at Drexel Burnham
Lambert, where he was a Vice President in the Corporate Finance
Department. Mr. Birzer graduated with a Bachelor of
Business Administration degree from the University of Notre Dame
and holds a Master of Business Administration degree from New
York University. He earned his CFA designation in 1988.
Zachary A. Hamel. Mr. Hamel has
been a Managing Director of the Adviser since 2002 and also is a
Partner with Fountain Capital. Mr. Hamel joined Fountain
Capital in 1997. He covers energy, chemicals and utilities.
Prior to joining Fountain Capital, Mr. Hamel worked for the
Federal Deposit Insurance Corporation (FDIC) for
eight years as a Bank Examiner and a Regional Capital Markets
Specialist. Mr. Hamel graduated from Kansas State
University with a Bachelor of Science in Business
Administration. He also attained a Master in Business
Administration from the University of Kansas School of Business.
He earned his CFA designation in 1998.
Kenneth P. Malvey. Mr. Malvey has
been a Managing Director of the Adviser since 2002 and also is a
Partner with Fountain Capital. Prior to joining Fountain Capital
in 2002, Mr. Malvey was one of three members of the Global
Office of Investments for GE Capitals Employers
Reinsurance Corporation. Most recently he was the Global
Investment Risk Manager for a portfolio of approximately
$24 billion of fixed-income, public equity and alternative
investment assets. Prior to joining GE Capital in 1996,
Mr. Malvey was a Bank Examiner and Regional Capital Markets
Specialist with the FDIC for nine years. Mr. Malvey
graduated with a Bachelor of Science degree in Finance from
Winona State University, Winona, Minnesota. He earned his CFA
designation in 1996.
Terry C. Matlack. Mr. Matlack has
been a Managing Director of the Adviser since 2002 and also is a
Managing Director of KCEP. Mr. Matlack is also a Director
of TYY, TYN and TTO. 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.
David J. Schulte. Mr. Schulte has
been a Managing Director of the Adviser since 2002 and also is a
Managing Director of KCEP. While a Managing Director of KCEP, he
led private financing for two growth MLPs in the energy
infrastructure sector. Since February 2004, Mr. Schulte has
been an employee of the Adviser. Prior to joining KCEP in 1993,
Mr. Schulte had over five years of experience completing
acquisition and public equity financings as an investment banker
at the predecessor of Oppenheimer & Co, Inc. From 1986
to 1989, he was a securities law attorney. Mr. Schulte
holds a Bachelor of Science degree in Business Administration
from Drake University and a Juris Doctorate degree from the
University of Iowa. He passed the CPA examination in 1983,
earned his CFA designation in 1992.
The statement of additional information provides additional
information about the compensation structure of, the other
accounts managed by, and the ownership of our securities by the
portfolio managers listed above.
Compensation
and Expenses
Under the advisory agreement, we pay the Adviser quarterly, as
compensation for the services rendered by it, a fee equal on an
annual basis to 0.95% of our average monthly Managed Assets.
Managed Assets means our total assets (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 our Managed Assets, the Advisers interest in
determining whether we should incur additional leverage will
conflict with our
37
interests. Our average monthly Managed Assets are determined for
the purpose of calculating the management fee by taking the
average of the monthly determinations of Managed Assets during a
given calendar quarter. The fees are payable for each calendar
quarter within five days after the end of that quarter. The
Adviser has contractually agreed to reimburse us for fees and
expenses, including the investment advisory fee and other
expenses in the amount of 0.10% of average monthly Managed
Assets through February 28, 2009.
The advisory agreement has a term ending on December 31st
of each year. The advisory agreement was most recently approved
by the Board of Directors in November 2006. A discussion
regarding the basis of the Board of Directors decision to
approve the renewal of the advisory agreement is available in
our Annual Report to stockholders for the fiscal year ended
November 30, 2006.
We bear all expenses not specifically assumed by the Adviser
incurred in our operations and will bear the expenses of all
future offerings. Expenses we bear include, but are not limited
to, the following: (1) expenses of maintaining and
continuing our existence and related overhead, including, to the
extent services are provided by personnel of the Adviser or its
affiliates, office space and facilities and personnel
compensation, training and benefits; (2) registration under
the 1940 Act; (3) commissions, spreads, fees and other
expenses connected with the acquisition, holding and disposition
of securities and other investments, including placement and
similar fees in connection with direct placements in which we
participate; (4) auditing, accounting and legal expenses;
(5) taxes and interest; (6) governmental fees;
(7) expenses of listing our shares with a stock exchange,
and expenses of the issue, sale, repurchase and redemption (if
any) of our interests, including expenses of conducting tender
offers for the purpose of repurchasing our interests;
(8) expenses of registering and qualifying us and our
shares under federal and state securities laws and of preparing
and filing registration statements and amendments for such
purposes; (9) expenses of communicating with stockholders,
including website expenses and the expenses of preparing,
printing and mailing press releases, reports and other notices
to stockholders and of meetings of stockholders and proxy
solicitations therefor; (10) expenses of reports to
governmental officers and commissions; (11) insurance
expenses; (12) association membership dues; (13) fees,
expenses and disbursements of custodians and subcustodians for
all services to us (including without limitation safekeeping of
funds, securities and other investments, keeping of books,
accounts and records, and determination of NAV); (14) fees,
expenses and disbursements of transfer agents, dividend paying
agents, stockholder servicing agents and registrars for all
services to us; (15) compensation and expenses of our
directors who are not members of the Advisers
organization; (16) pricing and valuation services employed
by us; (17) all expenses incurred in connection with
leveraging of our assets through a line of credit, or issuing
and maintaining notes or preferred stock; (18) all expenses
incurred in connection with the offerings of our common and
preferred stock and debt securities; and (19) such
non-recurring items as may arise, including expenses incurred in
connection with litigation, proceedings and claims and our
obligation to indemnify our directors, officers and stockholders
with respect thereto.
CLOSED-END
COMPANY STRUCTURE
We are a nondiversified closed-end management investment company
and as such our stockholders will not have the right to cause us
to redeem their shares. Instead, our common stock will trade in
the open market at a price that will be a function of several
factors, including dividend levels (which are in turn affected
by expenses), NAV, call protection, dividend stability,
portfolio credit quality, relative demand for and supply of such
shares in the market, general market and economic conditions and
other factors.
Shares of common stock of closed-end companies frequently trade
at a discount to their NAV. This characteristic of shares of
closed-end management investment companies is a risk separate
and distinct from the risk that our NAV may decrease as a result
of investment activities. To the extent that our common stock
does trade at a discount, the Board of Directors may from time
to time engage in open-market repurchases or tender offers for
shares after balancing the benefit to stockholders of the
increase in the NAV per share resulting from such purchases
against the decrease in our assets and potential increase in the
expense ratio of our expenses to assets and the decrease in
asset coverage with respect to any outstanding senior
securities. 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 Board
of Directors will decide to engage in any of these actions.
There is also no guarantee or
38
assurance that such actions, if undertaken, would result in the
shares trading at a price equal or close to NAV per share. Any
stock repurchases or tender offers will be made in accordance
with the requirements of the Securities Exchange Act of 1934, as
amended (the Exchange Act), the 1940 Act and the
principal stock exchange on which the common stock is traded.
Conversion to an open-end mutual fund is extremely unlikely and
would require stockholder approval of an amendment to our
Charter.
CERTAIN
FEDERAL INCOME TAX MATTERS
The following is a general summary of certain federal income tax
considerations affecting us and our security holders. This
discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to
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, certain tax-deferred accounts, and foreign investors.
Tax matters are very complicated, and the tax consequences of an
investment in and holding of our securities will depend on the
particular facts of each investors situation. Investors
are advised to consult their own tax advisors with respect to
the application to their own circumstances of the general
federal income taxation rules described below and with respect
to other federal, state, local or foreign tax consequences to
them before making an investment in our securities. Unless
otherwise noted, this discussion assumes that the investors are
U.S. persons and hold our securities as capital assets.
More detailed information regarding the federal income tax
consequences of investing in our securities is in the Statement
of Additional Information.
Pursuant to U.S. Treasury Department Circular 230, we are
informing you that (1) this discussion is not intended to
be used, was not written to be used, and cannot be used, by any
taxpayer for the purpose of avoiding penalties under the
U.S. federal tax laws, (2) this discussion was written
by us in connection with the registration of our securities and
our promotion or marketing, and (3) each taxpayer should
seek advice based on his, her or its particular circumstances
from an independent tax advisor.
Company
Federal Income Taxation
We are treated as a corporation for federal and state income tax
purposes. Thus, we are obligated to pay federal and state income
tax on our taxable income. We invest our assets primarily in
MLPs, which generally are treated as partnerships for federal
income tax purposes. As a partner in the MLPs, we must report
our allocable share of the MLPs taxable income in
computing our taxable income regardless of whether the MLPs make
any distributions. Based upon our review of the historic results
of the type of MLPs in which we invest, we expect that the cash
flow received by us with respect to our MLP investments will
exceed the taxable income allocated to us. There is no assurance
that our expectation regarding the tax character of MLP
distributions will be realized. If this expectation is not
realized, there will be greater tax expense borne by us and less
cash available to distribute to stockholders or to pay to
creditors. In addition, we will take into account in determining
our taxable income the amounts of gain or loss recognized on the
sale of MLP interests. Currently, the maximum regular federal
income tax rate for a corporation is 35 percent. We may be
subject to a 20 percent federal alternative minimum tax on
our alternative minimum taxable income to the extent that the
alternative minimum tax exceeds our regular federal income tax.
We are not treated as a regulated investment company under the
Internal Revenue Code. The Internal Revenue Code generally
provides that a regulated investment company does not pay an
entity level income tax, provided that it distributes all or
substantially all of its income. Our assets do not, and are not
expected to, meet current tests for qualification as a regulated
investment company for federal income tax purposes. The
regulated investment company taxation rules therefore have no
application to us or to our stockholders. Although changes to
the federal tax laws permit regulated investment companies to
invest up to 25% of their total assets in securities of MLPs,
such changes still would not allow us to pursue our objective.
Accordingly, we do not intend to change our tax status as a
result of such legislation.
39
Federal
Income Taxation of Common and Preferred Stock
Federal Income Tax Treatment of Holders of Common
Stock. Unlike a holder of a direct interest in
MLPs, a stockholder will not include its allocable share of our
income, gains, losses or deductions in computing its own taxable
income. Instead, since we are of the opinion that, under present
law, the common stock will constitute equity, distributions with
respect to such shares (other than distributions in redemption
of shares subject to Section 302(b) of the Internal Revenue
Code) will generally constitute dividends to the extent of our
allocable current or accumulated earnings and profits, as
calculated for federal income tax purposes. Generally, a
corporations earnings and profits are computed based upon
taxable income, with certain specified adjustments. As explained
above, based upon the historic performance of the MLPs, we
anticipate that the distributed cash from the MLPs will exceed
our share of the MLPs income and our gain on the sale of
MLP interests. In addition, earnings and profits are treated
generally, for federal income tax purposes, as first being used
to pay distributions on preferred stock, and then to the extent
remaining, if any, to pay distributions on the common stock.
Thus, we anticipate that only a portion of the distributions of
DCF will be treated as dividend income to common stockholders.
To the extent that distributions to a stockholder exceed our
current and accumulated earnings and profits, the
stockholders basis in shares of stock with respect to
which the distribution is made will be reduced, which may
increase the amount of gain realized upon the sale of such
shares. If a stockholder has no further basis in its shares, the
stockholder will report any excess as capital gain if the
stockholder holds such shares as a capital asset.
Dividends of current or accumulated earnings and profits
generally will be taxable as ordinary income to holders but are
expected to be treated as qualified dividend income
that is generally subject to reduced rates of federal income
taxation for noncorporate investors and are also expected to be
eligible for the dividends received deduction available to
corporate stockholders under Section 243 of the Internal
Revenue Code. Under federal income tax law, qualified dividend
income received by individual and other noncorporate
stockholders is taxed at long-term capital gain rates, which
currently reach a maximum of 15%. Qualified dividend income
generally includes dividends from domestic corporations and
dividends from
non-U.S. corporations
that meet certain criteria. To be treated as qualified dividend
income, the stockholder must hold the shares paying otherwise
qualifying dividend income more than 60 days during the
121-day
period beginning 60 days before the ex-dividend date (or
more than 90 days during the
181-day
period beginning 90 days before the ex-dividend date in the
case of certain preferred stock dividends). A stockholders
holding period may be reduced for purposes of this rule if the
stockholder engages in certain risk reduction transactions with
respect to the common or preferred stock. The provisions of the
Internal Revenue Code applicable to qualified dividend income
are effective through 2010. Thereafter, higher tax rates will
apply unless further legislative action is taken.
Corporate holders should be aware that certain limitations apply
to the availability of the dividends received deduction,
including limitations on the aggregate amount of the deduction
that may be claimed and limitations based on the holding period
of the shares of common or preferred stock on which the dividend
is paid, which holding period may be reduced if the holder
engages in risk reduction transactions with respect to its
shares. Corporate holders should consult their own tax advisors
regarding the application of these limitations to their
particular situation.
If a common stockholder participates in our Automatic Dividend
Reinvestment Plan, such stockholder will be treated as receiving
the amount of the distributions made by the Company, which
amount generally will be either equal to the amount of the cash
distribution the stockholder would have received if the
stockholder had elected to receive cash or, for shares issued by
the Company, the fair market value of the shares issued to the
stockholder.
Federal Income Tax Treatment of Holders of Preferred
Stock. Under present law, we are of the opinion
that preferred stock will constitute equity, and thus
distributions with respect to preferred stock (other than
distributions in redemption of preferred stock subject to
Section 302(b) of the Internal Revenue Code) will generally
constitute dividends to the extent of our current or accumulated
earnings and profits, as calculated for federal income tax
purposes. Such dividends generally will be taxable as ordinary
income to holders but are expected to be treated as
qualified dividend income that is generally subject
to reduced rates of federal income taxation for noncorporate
investors and are also expected to be eligible for the dividends
received deduction available to corporate stockholders under
Section 243 of the Internal Revenue Code. Please see the
discussion above on qualified dividend income and dividends
received deductions.
40
Earnings and profits are generally treated, for federal income
tax purposes, as first being used to pay distributions on the
preferred stock, and then to the extent remaining, if any, to
pay distributions on the common stock. Distributions in excess
of the Companys earnings and profits, if any, will first
reduce a stockholders adjusted tax basis in his or her
preferred stock and, after the adjusted tax basis is reduced to
zero, will constitute capital gains to a stockholder who holds
such shares as a capital asset.
Sale of Shares. The sale of shares of common
or preferred stock by holders will generally be a taxable
transaction for federal income tax purposes. Holders of shares
of stock who sell such shares will generally recognize gain or
loss in an amount equal to the difference between the net
proceeds of the sale and their adjusted tax basis in the shares
sold. If the shares are held as a capital asset at the time of
the sale, the gain or loss will generally be a capital gain or
loss. Similarly, a redemption by us (including a redemption
resulting from our liquidation), if any, of all the shares
actually and constructively held by a stockholder generally will
give rise to capital gain or loss under Section 302(b) of
the Internal Revenue Code, provided that the redemption proceeds
do not represent declared but unpaid dividends. Other
redemptions may also give rise to capital gain or loss, but
certain conditions imposed by Section 302(b) of the
Internal Revenue Code must be satisfied to achieve such
treatment.
Capital gain or loss will generally be long-term capital gain or
loss if the shares were held for more than one year and will be
short-term capital gain or loss if the disposed shares were held
for one year or less. Net long-term capital gain recognized by a
noncorporate U.S. holder generally will be subject to
federal income tax at a lower rate (currently a maximum rate of
15%) than net short-term capital gain or ordinary income
(currently a maximum rate of 35%). Under current law, the
maximum federal income tax rate on capital gain for noncorporate
holders is scheduled to increase to 20% for taxable years after
2010. For corporate holders, capital gain is generally taxed at
the same rate as ordinary income, that is, currently at a
maximum rate of 35%. A holders ability to deduct capital
losses may be limited.
Investment by Tax-Exempt Investors and Regulated Investment
Companies. Employee benefit plans, other
tax-exempt organizations and regulated investment companies may
want to invest in our securities. Employee benefit plans and
most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement
plans, are subject to federal income tax on unrelated business
taxable income (UBTI). Because we are a corporation
for federal income tax purposes, an owner of shares of common
stock will not report on its federal income tax return any of
our items of income, gain, loss and deduction. Therefore, a
tax-exempt investor generally will not have UBTI attributable to
its ownership or sale of our common or preferred stock unless
its ownership of the stock is debt-financed. In general, stock
would be debt-financed if the tax-exempt owner of stock incurs
debt to acquire the stock or otherwise incurs or maintains debt
that would not have been incurred or maintained if the stock had
not been acquired.
For federal income tax purposes, a regulated investment company
or mutual fund, may not have more than 25% of the
value of its total assets, at the close of any quarter, invested
in the securities of one or more qualified publicly traded
partnerships, which will include most MLPs. Shares of our common
stock are not securities of a qualified publicly traded
partnership and will not be treated as such for purposes of
calculating the limitation imposed upon regulated investment
companies.
Backup Withholding. We may be required to
withhold, for U.S. federal income tax purposes, a portion
of all taxable distributions (including redemption proceeds)
payable to stockholders who fail to provide us with their
correct taxpayer identification number, who fail to make
required certifications or who have been notified by the
Internal Revenue Service (IRS) that they are subject
to backup withholding (or if we have been so notified). Certain
corporate and other stockholders specified in the Internal
Revenue Code and the regulations thereunder are exempt from
backup withholding. Backup withholding is not an additional tax.
Any amounts withheld may be credited against the
stockholders U.S. federal income tax liability
provided the appropriate information is furnished to the IRS in
a timely manner.
Other Taxation. Foreign stockholders,
including stockholders who are nonresident alien individuals,
may be subject to U.S. withholding tax on certain
distributions at a rate of 30% or such lower rates as may be
prescribed by any applicable treaty. Our distributions also may
be subject to state and local taxes.
41
Federal
Income Taxation of Debt Securities
Federal Income Tax Treatment of Holders of Debt
Securities. Under present law, we are of the
opinion that the debt securities will constitute indebtedness of
the Company for federal income tax purposes, which the
discussion below assumes. We intend to treat all payments made
with respect to the debt securities consistent with this
characterization.
Taxation of Interest. Payments or accruals of
interest on debt securities generally will be taxable to you as
ordinary interest income at the time such interest is received
(actually or constructively) or accrued, in accordance with your
regular method of accounting for federal income tax purposes.
Purchase, Sale and Redemption of Debt
Securities. Initially, your tax basis in debt
securities acquired generally will be equal to your cost to
acquire such debt securities. This basis will increase by the
amounts, if any, that you include in income under the rules
governing market discount, and will decrease by the amount of
any amortized premium on such debt securities, as discussed
below. When you sell or exchange any of your debt securities, or
if any of your debt securities are redeemed, you generally will
recognize gain or loss equal to the difference between the
amount you realize on the transaction (less any accrued and
unpaid interest, which will be subject to tax as interest in the
manner described above) and your tax basis in the debt
securities relinquished.
Except as discussed below with respect to market discount, the
gain or loss that you recognize on the sale, exchange or
redemption of any of your debt securities generally will be
capital gain or loss. Such gain or loss will generally be
long-term capital gain or loss if the disposed debt securities
were held for more than one year and will be short-term capital
gain or loss if the disposed debt securities were held for one
year or less. Net long-term capital gain recognized by a
noncorporate U.S. holder generally will be subject to
federal income tax at a lower rate (currently a maximum rate of
15%, although this rate will increase to 20% after
2010) than net short-term capital gain or ordinary income
(currently a maximum rate of 35%). For corporate holders,
capital gain is generally taxed as ordinary income, that is,
currently at a maximum rate of 35%. A holders ability to
deduct capital losses may be limited.
Amortizable Premium. If you purchase debt
securities at a cost greater than their stated principal amount,
plus accrued interest, you will be considered to have purchased
the debt securities at a premium, and you generally may elect to
amortize this premium as an offset to interest income, using a
constant yield method, over the remaining term of the debt
securities. If you make the election to amortize the premium, it
generally will apply to all debt instruments that you hold at
the time of the election, as well as any debt instruments that
you subsequently acquire. In addition, you may not revoke the
election without the consent of the IRS. If you elect to
amortize the premium, you will be required to reduce your tax
basis in the debt securities by the amount of the premium
amortized during your holding period. If you do not elect to
amortize premium, the amount of premium will be included in your
tax basis in the debt securities. Therefore, if you do not elect
to amortize the premium and you hold the debt securities to
maturity, you generally will be required to treat the premium as
a capital loss when the debt securities are redeemed.
Market Discount. If you purchase debt
securities at a price that reflects a market
discount, any principal payments on, or any gain that you
realize on the disposition of the debt securities generally will
be treated as ordinary interest income to the extent of the
market discount that accrued on the debt securities during the
time you held such debt securities. Market discount
is defined under the Internal Revenue Code as, in general, the
excess of the stated redemption price at maturity over the
purchase price of the debt security, except that if the market
discount is less than 0.25% of the stated redemption price at
maturity multiplied by the number of complete years to maturity,
the market discount is considered to be zero. In addition, you
may be required to defer the deduction of all or a portion of
any interest paid on any indebtedness that you incurred or
continued to purchase or carry the debt securities that were
acquired at a market discount. In general, market discount will
be treated as accruing ratably over the term of the debt
securities, or, at your election, under a constant yield method.
You may elect to include market discount in gross income
currently as it accrues (on either a ratable or constant yield
basis), in lieu of treating a portion of any gain realized on a
sale of the debt securities as ordinary income. If you elect to
include market discount on a current basis, the interest
deduction deferral rule described above will not apply and you
will increase your basis in the debt security by the amount of
market discount you include in gross income. If you do make such
an election, it will apply to all market discount debt
instruments that you acquire on or after the first day of the
first taxable year to which the election applies. This election
may not be revoked without the consent of the IRS.
42
Information Reporting and Backup
Withholding. In general, information reporting
requirements will apply to payments of principal, interest, and
premium, if any, paid on debt securities and to the proceeds of
the sale of debt securities paid to U.S. holders other than
certain exempt recipients (such as certain corporations).
Information reporting generally will apply to payments of
interest on the debt securities to
non-U.S. Holders
(as defined below) and the amount of tax, if any, withheld with
respect to such payments. Copies of the information returns
reporting such interest payments and any withholding may also be
made available to the tax authorities in the country in which
the
non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
In addition, for
non-U.S. Holders,
information reporting will apply to the proceeds of the sale of
debt securities within the United States or conducted through
United States-related financial intermediaries unless the
certification requirements described below have been complied
with and the statement described below in Taxation of
Non-U.S. Holders
has been received (and the payor does not have actual knowledge
or reason to know that the holder is a United States person) or
the holder otherwise establishes an exemption.
We may be required to withhold, for U.S. federal income tax
purposes, a portion of all taxable payments (including
redemption proceeds) payable to holders of debt securities who
fail to provide us with their correct taxpayer identification
number, who fail to make required certifications or who have
been notified by the IRS that they are subject to backup
withholding (or if we have been so notified). Certain corporate
and other shareholders specified in the Internal Revenue Code
and the regulations thereunder are exempt from backup
withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the holders
U.S. federal income tax liability provided the appropriate
information is furnished to the IRS. If you are a
non-U.S. Holder,
you may have to comply with certification procedures to
establish your
non-U.S. status
in order to avoid backup withholding tax requirements. The
certification procedures required to claim the exemption from
withholding tax on interest income described below will satisfy
these requirements.
Taxation of
Non-U.S. Holders. If
you are a non-resident alien individual or a foreign corporation
(a
non-U.S. Holder),
the payment of interest on the debt securities generally will be
considered portfolio interest and thus generally
will be exempt from United States federal withholding tax. This
exemption will apply to you provided that (1) interest paid
on the debt securities is not effectively connected with your
conduct of a trade or business in the United States,
(2) you are not a bank whose receipt of interest on the
debt securities is described in Section 881(c)(3)(A) of the
Internal Revenue Code, (3) you do not actually or
constructively own 10 percent or more of the combined
voting power of all classes of the Companys stock entitled
to vote, (4) you are not a controlled foreign corporation
that is related, directly or indirectly to the Company through
stock ownership, and (5) you satisfy the certification
requirements described below.
To satisfy the certification requirements, either (1) the
holder of any debt securities must certify, under penalties of
perjury, that such holder is a
non-U.S. person
and must provide such owners name, address and taxpayer
identification number, if any, on IRS
Form W-8BEN,
or (2) a securities clearing organization, bank or other
financial institution that holds customer securities in the
ordinary course of its trade or business and holds the debt
securities on behalf of the holder thereof must certify, under
penalties of perjury, that it has received a valid and properly
executed IRS
Form W-8BEN
from the beneficial holder and comply with certain other
requirements. Special certification rules apply for debt
securities held by a foreign partnership and other
intermediaries.
Interest on debt securities received by a
non-U.S. Holder
that is not excluded from U.S. federal withholding tax
under the portfolio interest exemption as described above
generally will be subject to withholding at a 30% rate, except
where a
non-U.S. Holder
can claim the benefits of an applicable tax treaty to reduce or
eliminate such withholding tax and such
non-U.S. Holder
provides the Company with a properly executed IRS
Form W-8BEN
claiming such exemption or reduction.
Any capital gain that a
non-U.S. Holder
realizes on a sale, exchange or other disposition of debt
securities generally will be exempt from United States federal
income tax, including withholding tax. This exemption will not
apply to you if your gain is effectively connected with your
conduct of a trade or business in the U.S. or you are an
individual holder and are present in the U.S. for
183 days or more in the taxable year of the disposition and
either your gain is attributable to an office or other fixed
place of business that you maintain in the U.S. or you have
a tax home in the United States.
43
DETERMINATION
OF NET ASSET VALUE
We compute the NAV of our common stock as of the close of
trading of the NYSE (normally 4:00 p.m. Eastern time) no
less frequently than the last business day of each calendar
month and at such other times as the Board may determine. We
make our NAV available for publication monthly. The NAV per
share of common stock equals our NAV divided by the number of
outstanding shares of common stock. Our NAV equals the value of
our total assets (the value of the securities held plus cash or
other assets, including interest accrued but not yet received)
less (i) all of our liabilities (including accrued expenses
and both current and deferred income taxes),
(ii) accumulated and unpaid dividends on any outstanding
preferred stock, (iii) the aggregate liquidation preference
of any outstanding preferred stock, (iv) accrued and unpaid
interest payments on any outstanding indebtedness, (v) the
aggregate principal amount of any outstanding indebtedness, and
(vi) any distributions payable on our common stock.
Pursuant to an agreement with U.S. Bancorp
Fund Services, LLC (the Accounting Services
Provider), the Accounting Services Provider values our
assets in accordance with valuation procedures adopted by the
Board of Directors. The Accounting Services 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:
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for equity securities, the Accounting Services Provider will
first use readily available market quotations and will obtain
direct written broker-dealer quotations if a security is not
traded on an exchange or quotations are not available from an
approved pricing service;
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for fixed income securities, the Accounting Services Provider
will use readily available market quotations based upon the last
sale price of a security on the day we value our assets or a
market value from a pricing service or by obtaining a direct
written broker-dealer quotation from a dealer who has made a
market in the security; and
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other assets will be valued at market value pursuant to the
valuation procedures.
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If the Accounting Services Provider cannot obtain a market value
or 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 for approval at the next
regularly scheduled board meeting.
AUTOMATIC
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Our Automatic Dividend Reinvestment and Cash Purchase Plan (the
Plan) allows participating common stockholders to
reinvest distributions including dividends, capital gains and
return of capital in additional shares of our common stock and
allows participants to purchase additional shares of our common
stock through additional optional cash investments in amounts
from a minimum of $100 to a maximum of $5,000 per month.
Shares of common stock will be issued by us under the Plan when
our common stock is trading at a premium to NAV. If our common
stock is trading at a discount to NAV, shares distributed under
the Plan will be purchased on the open market at market price.
Shares of common stock issued directly from us under the Plan
will be acquired at the greater of (1) NAV at the close of
business on the payment date of the distribution or on the day
preceding the relevant cash purchase investment date or
(2) 95% of the market price per common share on the
distribution payment date or on the day preceding the relevant
cash purchase investment date. See below for more details about
the Plan.
Automatic
Dividend Reinvestment
If a stockholders shares are registered directly with us
or with a brokerage firm that participates in our Plan, all
distributions are automatically reinvested for stockholders by
Computershare Trust Company, N.A. (the
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Plan Agent), in additional shares of our common
stock (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
the Plan Agent, as dividend paying agent. Such stockholders may
elect not to participate in the Plan and to receive all
distributions in cash by sending written, telephone or Internet
instructions to the Plan Agent, 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 the record date for
such distribution.
Whenever we declare a distribution payable either in shares or
in cash, non-participants in the Plan will receive cash, and
participants in the Plan will receive the amount set forth below
in shares of common stock. The shares are acquired by the Plan
Agent for the participants account, depending upon the
circumstances described below, either (i) through receipt
of additional common stock directly from us (Additional
Common Stock) or (ii) by purchase of outstanding
common stock on the open market (open-market
purchases) on the NYSE or elsewhere. If, on the payment
date, the NAV per share of our common stock is equal to or less
than the market price per share of common stock plus estimated
brokerage commissions (such condition being referred to herein
as market premium), the Plan Agent will receive
Additional Common Stock from us for each participants
account. The number of shares of Additional Common Stock to be
credited to the participants account will be determined by
dividing the dollar amount of the distribution by the greater of
(i) the NAV per share of common stock on the payment date,
or (ii) 95% of the market price per share of common stock
on the payment date.
If, on the payment date, the NAV per share of common stock
exceeds the market price plus estimated brokerage commissions
(such condition being referred to herein as market
discount), the Plan Agent will invest the distribution
amount in shares acquired in open-market purchases as soon as
practicable but not later than thirty (30) days following
the payment date. We expect to declare and pay quarterly
distributions. The weighted average price (including brokerage
commissions) of all common stock purchased by the Plan Agent as
Plan Agent will be the price per share of common stock allocable
to each participant.
The Plan Agent maintains all stockholders accounts in the
Plan and furnishes written confirmation of each acquisition made
for the participants account as soon as practicable, but
in no event later than 60 days after the date thereof.
Shares in the account of each Plan participant may be held by
the Plan Agent in non-certificated form in the Plan Agents
name or that of its nominee, and each stockholders proxy
will include those shares purchased or received pursuant to the
Plan. The Plan Agent will forward all proxy solicitation
materials to participants and vote proxies for shares held
pursuant to the Plan first in accordance with the instructions
of the participants, and then with respect to any proxies not
returned by such participant, in the same proportion as the Plan
Agent votes the proxies returned by the participants.
There are no brokerage charges with respect to shares issued
directly by us as a result of distributions payable either in
shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan
Agents open-market purchases in connection with the
reinvestment of distributions. If a participant elects to have
the Plan Agent sell part or all of his or her common stock and
remit the proceeds, such participant will be charged a
transaction fee plus 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 Certain Federal Income Tax Matters.
Stockholders participating in the Plan may receive benefits not
available to stockholders not participating in the Plan. If the
market price plus commissions of our shares of common stock is
higher than the NAV, participants in the Plan will receive
shares of our common stock at less than they could otherwise
purchase such shares and will have shares with a cash value
greater than the value of any cash distribution they would have
received on their shares. If the market price plus commissions
is below the NAV, participants will receive distributions of
shares of common stock with a NAV greater than the value of any
cash distribution they would have received on their shares.
However, there may be insufficient shares available in the
market to make distributions in shares at prices below the
45
NAV. Also, because we do not redeem our common stock, the price
on resale may be more or less than the NAV. See Certain
Federal Income Tax Matters for a discussion of the federal
income tax consequences of the Plan.
Cash
Purchase Option
Participants in the Plan may elect to purchase additional shares
of common stock through optional cash investments in amounts
ranging from $100 to $5,000 per month unless a request for
waiver has been granted. Optional cash investments may be
delivered to the Plan Agent by personal check, by automatic or
electronic bank account transfer or by online access at
www.computershare.com. We reserve the right to reject any
purchase order. We do not accept cash, travelers checks, third
party checks, money orders and checks drawn on non-US banks.
In order for participants to participate in the cash investment
option in any given month, the Plan Agent must receive from the
participant any optional cash investment no later than two
business days prior to the monthly investment date (the
payment date) for purchase of common shares on the
next succeeding purchase date. All optional cash investments
received on or prior to the payment date will be applied by the
Plan Agent to purchase shares on the next succeeding purchase
date. Participants may obtain a schedule of relevant dates on
our website at www.tortoiseadvisors.com or by calling
1-866-362-9331.
Common stock purchased pursuant to this option will be issued by
us when our shares are trading at a premium to net asset value.
If our common stock is trading at a discount to net asset value,
shares of common stock will be purchased in the open market by
the Plan Agent as described above with respect to reinvestments
of distributions.
General
Experience under the Plan may indicate that changes are
desirable. Accordingly, we reserve the right to amend or
terminate the Plan if in the judgment of the Board of Directors
such a change is warranted. The Plan may be terminated by the
Plan Agent or us upon notice in writing mailed to each
participant at least 60 days prior to the effective date of
the termination. Upon any termination, the Plan Agent will cause
a certificate or certificates to be issued for the full shares
held by each participant under the Plan and cash adjustment for
any fraction of a share of common stock at the then current
market value of 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 transaction
fee plus a $0.05 fee per share for the transaction. If a
participant has terminated his or her participation in the Plan
but continues to have common stock registered in his or her
name, he or she may re-enroll in the Plan at any time by
notifying the Plan Agent in writing at the address below. The
terms and conditions of the Plan may be amended by the Plan
Agent or by us at any time. Any such amendments to the Plan may
be made by mailing to each participant appropriate written
notice at least 30 days prior to the effective date of the
amendment, except, when necessary or appropriate to comply with
applicable law or the rules or policies of the SEC or any other
regulatory authority, such prior notice does not apply. The
amendment shall be deemed to be accepted by each participant
unless, prior to the effective date thereof, the Plan Agent
receives notice of the termination of the participants
account under the Plan. Any such amendment may include an
appointment by the Plan Agent of a successor Plan Agent, subject
to our prior written approval of the successor Plan Agent.
All correspondence concerning the Plan should be directed to
Computershare Trust Company, N.A., P.O. Box 43078,
Providence, RI 02940.
DESCRIPTION
OF SECURITIES
The information contained under this heading is only a summary
and is subject to the provisions contained in our Charter and
Bylaws and the laws of the State of Maryland.
46
Common
Stock
General. Our Charter authorizes us to issue up
to 100,000,000 shares of common stock, $0.001 par
value per share. The Board of Directors may, without any action
by the stockholders, amend our Charter from time to time to
increase or decrease the aggregate number of shares of stock or
the number of shares of stock of any class or series that we
have authority to issue under our Charter and the 1940 Act.
Additionally, the Charter authorizes our Board of Directors,
without any action by our stockholders, to classify and
reclassify any unissued common stock and preferred stock into
other classes or series of stock from time to time by setting or
changing the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or
other distributions, qualifications and terms or conditions of
redemption for each class or series. Although there is no
present intention of doing so, we could issue a class or series
of stock that could delay, defer or prevent a transaction or a
change in control of us that might otherwise be in the
stockholders best interests. Under Maryland law,
stockholders generally are not liable for our debts or
obligations.
All common stock offered pursuant to this prospectus and any
related prospectus supplement will be, upon issuance, duly
authorized, fully paid and nonassessable. All outstanding common
stock offered pursuant to this prospectus and any related
prospectus supplement will be of the same class and will have
identical rights, as described below. Holders of shares of
common stock are entitled to receive distributions when
authorized by the Board of Directors and declared by us out of
assets legally available for the payment of distributions.
Holders of common stock have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any of our securities. All
shares of common stock have equal distribution, liquidation and
other rights.
Distributions. We intend to pay out
substantially all of our DCF to holders of common stock through
quarterly distributions. DCF is the amount we receive as cash or
paid-in-kind
distributions from MLPs or affiliates of MLPs in which we
invest, and interest payments received on debt securities we
own, less current or anticipated operating expenses, taxes on
our taxable income, and leverage costs we pay (including costs
related to Tortoise Notes, MMP Shares and short-term borrowings
under our credit facility). Our Board of Directors has adopted a
policy to target distributions to common stockholders in an
amount equal to at least 95% of DCF on an annual basis. It is
expected that we will declare and pay a distribution to holders
of common stock at the end of each fiscal quarter. There is no
assurance that we will continue to make regular distributions.
All realized capital gains, if any, net of applicable taxes,
will be retained by us.
If a stockholders shares are registered directly with us
or with a brokerage firm that participates in the Plan,
distributions will be automatically reinvested in additional
common stock under the Plan unless a stockholder elects to
receive distributions in cash. If a stockholder elects to
receive distributions in cash, payment will be made by check.
The federal income tax treatment of distributions is the same
whether they are reinvested in our shares or received in cash.
See Automatic Dividend Reinvestment and Cash Purchase
Plan.
The yield on our common stock will likely vary from period to
period depending on factors including the following:
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market conditions;
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the timing of our investments in portfolio securities;
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the securities comprising our portfolio;
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changes in interest rates (including changes in the relationship
between short-term rates and long-term rates);
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the amount and timing of the use of borrowings and other
leverage by us;
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the effects of leverage on our common stock (discussed above
under Leverage);
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the timing of the investment of offering proceeds and leverage
proceeds in portfolio securities; and
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our net assets and operating expenses.
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Consequently, we cannot guarantee any particular yield on our
common stock, and the yield for any given period is not an
indication or representation of future yields on the common
stock.
Limitations on Distributions. So long as
shares of preferred stock are outstanding, holders of shares of
common stock will not be entitled to receive any distributions
from us unless we have paid all accumulated dividends on
preferred stock, and unless asset coverage (as defined in the
1940 Act) with respect to preferred stock would be at least 200%
after giving effect to such distributions. See
Leverage.
So long as senior securities representing indebtedness are
outstanding, holders of shares of common stock will not be
entitled to receive any distributions from us unless we have
paid all accrued interest on such senior indebtedness, and
unless asset coverage (as defined in the 1940 Act) with respect
to any outstanding senior indebtedness would be at least 300%
after giving effect to such distributions. See
Leverage.
Liquidation Rights. Common stockholders are
entitled to share ratably in the assets legally available for
distribution to stockholders in the event of liquidation,
dissolution or winding up, after payment of or adequate
provision for all known debts and liabilities, including any
outstanding debt securities or other borrowings and any interest
accrued thereon. These rights are subject to the preferential
rights of any other class or series of our stock, including the
preferred stock. The rights of common stockholders upon
liquidation, dissolution or winding up are subordinated to the
rights of holders of Tortoise Notes and 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 stock outstanding and
entitled to vote thereon. The Bylaws provide that directors are
elected by a plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present. There
is no cumulative voting in the election of directors.
Consequently, at each annual meeting of stockholders, the
holders of a majority of the outstanding shares of stock
entitled to vote will be able to elect all of the successors of
the class of directors whose terms expire at that meeting
provided that holders of preferred stock have the right to elect
two directors at all times. Pursuant to the Charter and Bylaws,
the Board of Directors may amend the Bylaws to alter the vote
required to elect directors.
Under the rules of the NYSE applicable to listed companies, we
normally will be required to hold an annual meeting of
stockholders in each fiscal year. If we are converted to an
open-end company or if for any other reason the shares are no
longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of
stockholders), we may amend our Bylaws so that we are not
otherwise required to hold annual meetings of stockholders.
Issuance of Additional Shares. The provisions
of the 1940 Act generally require that the public offering price
of common stock of a closed-end investment company (less
underwriting commissions and discounts) must equal or exceed the
NAV of such companys common stock (calculated within
48 hours of pricing), unless such sale is made with the
consent of a majority of the companys outstanding common
stockholders. At our Annual Meeting of Stockholders held on
April 15, 2005, our stockholders granted us the authority
to sell a limited number of shares of our common stock for less
than NAV, subject to the conditions listed below. We expect to
resubmit the matter for stockholder approval at our Annual
Meeting of Stockholders scheduled for April 13, 2007. If
approved by stockholders in April 2007, such authorization to
issue shares below NAV will expire after one year unless
re-approved by stockholders. We believe that having the ability
to issue and sell a limited number of shares of common stock
below NAV benefits all stockholders in that it allows us to
quickly raise cash and capitalize on attractive investment
opportunities while remaining fully invested at all times. We
expect to sell shares of common stock below NAV only when we
have identified attractive near-term investment opportunities.
Currently, we may only sell shares of common stock below NAV in
accordance with the following conditions:
1. the aggregate number of shares issued below NAV will not
exceed more than 20% of our outstanding common stock as of any
offering date;
48
2. we will not sell our shares at a net sale price, after
deduction of all offering expenses and underwriting fees and
commissions, that represents a discount of more than 5% of the
NAV, as determined at any time within 48 hours of pricing
of the shares of common stock to be sold below NAV; and
3. we will only issue shares below NAV if a majority of the
independent directors makes a determination that they reasonably
expect that the investment(s) to be made with the net proceeds
of such issuance will increase stockholder distributions.
The table below sets forth the pro forma maximum dilutive effect
on our NAV if we were to have issued shares below our NAV as of
December 31, 2006. The table assumes that we issue
1,636,353 shares, which represents all of the shares we are
currently authorized to issue, at a net sale price to us after
deducting all expenses of issuance, including underwriting
discounts and commissions, equal to $30.99, which is 95% of the
NAV of our common shares as of December 31, 2006.
Maximum
Impact of Below NAV Issuances of Common Shares
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Common shares currently outstanding
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18,232,065
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Common shares that currently may
be issued below NAV
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1,636,353
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Total common shares outstanding if
all authorized are issued below NAV
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19,868,418
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Net asset value per share as of
December 31, 2006
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$
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32.62
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Aggregate net asset value of all
currently outstanding common shares based on NAV as of
December 31, 2006
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594,713,856
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Aggregate net proceeds to the
Company (assuming the Company sold all authorized shares and
received net proceeds equal to $30.99 per share (95% of the
NAV as of December 31, 2006))
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50,710,579
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Expected aggregate net asset value
of the Company after issuance
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645,424,435
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NAV per share after issuance
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$
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32.48
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Because the Advisers management fee is based upon our
average monthly Managed Assets, the Advisers interest in
recommending the issuance and sale of common stock below NAV
will conflict with our interests and those of our stockholders.
Market. Our common stock trades on the NYSE
under the ticker symbol TYG. Common stock issued
pursuant to this prospectus and related prospectus supplement
will trade on the NYSE.
Transfer Agent, Dividend Paying Agent and Automatic Dividend
Reinvestment and Cash Purchase Plan
Agent. Computershare Trust Company, N.A., P.O.
Box 43078, Providence, Rhode Island
02940-3078,
serves as the transfer agent, the Automatic Dividend
Reinvestment and Cash Purchase Plan agent and the dividend
paying agent for our common stock.
Preferred
Stock
General. Our Charter authorizes the issuance
of up to 10,000,000 shares of preferred stock, with
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions or
redemption as determined by the Board of Directors.
The Board of Directors may, without any action by the
stockholders, amend our Charter from time to time to increase or
decrease the aggregate number of shares of stock or the number
of shares of stock of any class or series that we have authority
to issue. Additionally, the Charter authorizes the Board of
Directors, without any action by the stockholders, to classify
and reclassify any unissued preferred stock into other classes
or series of stock from time to time by setting or changing the
terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of
redemption for each class or series.
Preferred stock (including outstanding MMP Shares) ranks junior
to our debt securities (including Tortoise Notes), and senior to
all common stock. Under the 1940 Act, we may only issue one
class of senior equity securities, which in the aggregate may
represent no more than 50% of our total assets. So long as MMP
Shares are outstanding, additional issuances of preferred stock
must be considered to be of the same class as MMP Shares under
the 1940
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Act and interpretations thereunder and must rank on a parity
with the MMP Shares with respect to the payment of dividends and
upon the distribution of our assets. It is expected that any
issuance of preferred stock would be additional MMP Shares or
additional series of MMP Shares. Unless otherwise stated in a
prospectus supplement, any preferred stock will be issued
pursuant to articles supplementary (a form of which is attached
as Appendix B to the statement of additional information)
in substantially the same form as outstanding preferred stock
and will be subject to the provisions therein. The terms to be
stated in a prospectus supplement will include the following:
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the form and title of the security;
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the aggregate liquidation preference of preferred stock;
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the dividend rate of the preferred stock;
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the frequency with which auctions will be held;
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any optional or mandatory redemption provisions;
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any changes in auction agents, paying agents or security
registrar; and
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any other terms of the preferred stock.
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Dividends. Holders of preferred stock will be
entitled to receive cash dividends, when, as and if authorized
by the Board of Directors and declared by us, out of funds
legally available therefor. Unless the prospectus supplement
states otherwise, dividend rates will generally be determined by
the results of an auction for such shares, as more fully
described in the related prospectus supplement. Dividends so
declared and payable shall be paid to the extent permitted under
Maryland law and to the extent available and in preference to
and priority over any distribution declared and payable on the
common stock. Because of our emphasis on investments in MLPs,
which are expected to generate cash in excess of the taxable
income allocated to holders, it is possible that dividends
payable on preferred stock could exceed our earnings and
profits, which would be treated as a tax-free return of capital
to the extent of the basis of the shares on which the dividend
is paid and thereafter as gain from the sale or exchange of the
preferred stock.
Limitations on Dividends. So long as any debt
securities (including Tortoise Notes) are outstanding, holders
of preferred stock will not be entitled to receive any dividends
from us unless asset coverage (as defined in the 1940 Act) with
respect to outstanding debt securities and preferred stock would
be at least 200% after giving effect to such dividends. See
Leverage.
Liquidation Rights. In the event of any
voluntary or our involuntary liquidation, dissolution or winding
up, the holders of preferred stock would be entitled to receive
a preferential liquidating distribution, which is expected to
equal the original purchase price per share plus accumulated and
unpaid dividends, whether or not declared, before any
distribution of assets is made to holders of common stock. After
payment of the full amount of the liquidating distribution to
which they are entitled, the holders of preferred stock will not
be entitled to any further participation in any distribution of
our assets. Preferred stock ranks junior to our debt securities
upon liquidation, dissolution or winding up.
Voting Rights. Except as otherwise indicated
in the Charter or Bylaws, or as otherwise required by applicable
law, holders of preferred stock have one vote per share and vote
together with holders of common stock as a single class.
The 1940 Act requires that the holders of any preferred stock,
voting separately as a single class, have the right to elect at
least two directors at all times. The remaining directors will
be elected by holders of common stock and preferred stock,
voting together as a single class. In addition, subject to the
prior rights, if any, of the holders of any other class of
senior securities outstanding (including Tortoise Notes), the
holders of any shares of preferred stock have the right to elect
a majority of the directors at any time two years
accumulated dividends on any preferred stock are unpaid. The
1940 Act also requires that, in addition to any approval by
stockholders that might otherwise be required, the approval of
the holders of a majority of shares of any outstanding preferred
stock, voting separately as a class, would be required to
(i) adopt any plan of reorganization that would adversely
affect the preferred stock, and (ii) take any action
requiring a vote of security holders under Section 13(a) of
the 1940 Act, including, among other things, changes in our
subclassification as a closed-end investment company or changes
in
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its fundamental investment restrictions. See Certain
Provisions in the Companys Charter and Bylaws. As a
result of these voting rights, our ability to take any such
actions may be impeded to the extent that any shares of 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.
We will have the right (to the extent permitted by applicable
law) to purchase or otherwise acquire any preferred stock, so
long as we are current in the payment of dividends on the
preferred stock and on any other of our shares ranking on a
parity with the preferred stock with respect to the payment of
dividends or upon liquidation.
Market. Unless otherwise stated in a
prospectus supplement, our preferred stock may be bought or sold
at an auction that normally will be held periodically (every
twenty-eight (28) days for outstanding MMP Shares) by
submitting orders through a broker-dealer who has entered into
an agreement with us (a broker-dealer). Our
preferred stock is not listed on an exchange or automated
quotation system. Preferred stock may be transferred outside of
an auction through a broker-dealer, but we cannot assure you
that any such secondary market will exist or whether it will
provide preferred stockholders with liquidity. The details of
the auction process will be further described in the related
prospectus supplement.
Book-Entry, Delivery and Form. Unless
otherwise indicated in the related prospectus supplement,
preferred stock will be issued in book-entry form and will be
represented by one or more share certificates in registered
global form. The global certificates will be held by The
Depository Trust Company (DTC) and registered in the
name of Cede & Co., as nominee of DTC. DTC will
maintain the certificates in specified denominations per share
through its book-entry facilities.
We may treat the persons in whose names any global certificates
are registered as the owners thereof for the purpose of
receiving payments and for any and all other purposes
whatsoever. Therefore, so long as DTC or its nominee is the
registered owner of the global certificates, DTC or such nominee
will be considered the sole holder of outstanding preferred
stock.
A global certificate may not be transferred except as a whole by
DTC, its successors or their respective nominees, subject to the
provisions restricting transfers of shares contained in the
related articles supplementary.
Auction Agent, Transfer Agent, Registrar, Dividend Paying
Agent and Redemption Agent. Unless otherwise
stated in a prospectus supplement, The Bank of New York, 101
Barclay Street, New York, New York, serves as the auction agent,
transfer agent, registrar, dividend paying agent and redemption
agent with respect to our preferred stock.
Debt
Securities
General. Under Maryland law and our Charter,
we may borrow money, without prior approval of holders of common
and preferred stock. We may issue debt securities, including
additional Tortoise Notes, or other evidence of indebtedness
(including bank borrowings or commercial paper) and may secure
any such notes or borrowings by mortgaging, pledging or
otherwise subjecting as security our assets to the extent
permitted by the 1940 Act or rating agency guidelines. Any
borrowings, including without limitation the Tortoise Notes,
will rank senior to the preferred stock and the common stock.
Under the 1940 Act, we may only issue one class of senior
securities representing indebtedness, which in the aggregate,
may represent no more than
331/3%
of our total assets. So long as Tortoise Notes are outstanding,
additional debt securities must rank on a parity with Tortoise
Notes with respect to the payment of interest and upon the
distribution of our assets. It is expected that any issuance of
debt securities would be additional Tortoise Notes or additional
series of Tortoise Notes. Unless otherwise stated in a
prospectus supplement, any additional debt securities will be
issued pursuant to the indenture dated as of July 14, 2004
(the Indenture) and will be subject to the
provisions therein. A prospectus supplement and a supplemental
indenture (a summary of which is attached as
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Appendix A to the statement of additional information)
relating to any additional debt securities will include specific
terms relating to the offering. These terms will include the
following:
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the form and title of the security;
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the aggregate principal amount of the securities;
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the interest rate of the securities;
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the maturity dates on which the principal of the securities will
be payable;
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the frequency with which auctions will be held;
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any changes to or additional events of default or covenants;
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any optional or mandatory redemption provisions;
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any changes in trustees, auction agents, paying agents or
security registrar; and
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any other terms of the securities.
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Interest. Unless otherwise stated in a
prospectus supplement, debt securities will bear interest as
generally determined by the results of an auction for such
securities
and/or by
the Board of Directors, as more fully described in the related
prospectus supplement. Interest on debt securities shall be
payable when due as described in the related prospectus
supplement. If we do not pay interest when due, it will trigger
an event of default and we will be restricted from declaring
dividends and making other distributions with respect to our
common stock and preferred stock.
Limitations. Under the requirements of the
1940 Act, immediately after issuing any senior securities
representing indebtedness, we must have an asset coverage of at
least 300%. Asset coverage means the ratio which the value of
our total assets, less all liabilities and indebtedness not
represented by senior securities, bears to the aggregate amount
of senior securities representing indebtedness. We currently are
subject to certain restrictions imposed by guidelines of one or
more rating agencies that have issued ratings for outstanding
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 our being subject to similar
covenants in credit agreements.
Events of Default and Acceleration of Maturity of Debt
Securities; Remedies. Unless stated otherwise in
the related prospectus supplement, any one of the following
events will constitute an event of default for that
series under the Indenture:
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default in the payment of any interest upon a series of debt
securities when it becomes due and payable and the continuance
of such default for 30 days;
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default in the payment of the principal of, or premium on, a
series of debt securities at its stated maturity;
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default in the performance, or breach, of any covenant or
warranty of ours in the Indenture, and continuance of such
default or breach for a period of 90 days after written
notice has been given to us by the trustee;
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certain voluntary or involuntary proceedings involving us and
relating to bankruptcy, insolvency or other similar laws;
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if, on the last business day of each of twenty-four consecutive
calendar months, the debt securities have a 1940 Act asset
coverage of less than 100%; or
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any other event of default provided with respect to
a series, including a default in the payment of any redemption
price payable on the redemption date.
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Upon the occurrence and continuance of an event of default, the
holders of a majority in principal amount of a series of
outstanding debt securities or the trustee may declare the
principal amount of that series of debt securities immediately
due and payable upon written notice to us. A default that
relates only to one series of debt
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securities does not affect any other series and the holders of
such other series of debt securities are not entitled to receive
notice of such a default under the Indenture. Upon an event of
default relating to bankruptcy, insolvency or other similar
laws, acceleration of maturity occurs automatically with respect
to all series. At any time after a declaration of acceleration
with respect to a series of debt securities has been made, and
before a judgment or decree for payment of the money due has
been obtained, the holders of a majority in principal amount of
the outstanding debt securities of that series, by written
notice to us and the trustee, may rescind and annul the
declaration of acceleration and its consequences if all events
of default with respect to that series of debt securities, other
than the non-payment of the principal of that series of debt
securities which has become due solely by such declaration of
acceleration, have been cured or waived and other conditions
have been met.
Liquidation Rights. In the event of
(a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case
or proceeding in connection therewith, relative to us or to our
creditors, as such, or to our assets, or (b) any
liquidation, dissolution or other winding up of the Company,
whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the
benefit of creditors or any other marshalling of assets and
liabilities of ours, then (after any payments with respect to
any secured creditor of ours outstanding at such time) and in
any such event the holders of debt securities shall be entitled
to receive payment in full of all amounts due or to become due
on or in respect of all debt securities (including any interest
accruing thereon after the commencement of any such case or
proceeding), or provision shall be made for such payment in cash
or cash equivalents or otherwise in a manner satisfactory to the
holders of the debt securities, before the holders of any common
or preferred stock of the Company are entitled to receive any
payment on account of any redemption proceeds, liquidation
preference or dividends from such shares. The holders of debt
securities shall be entitled to receive, for application to the
payment thereof, any payment or distribution of any kind or
character, whether in cash, property or securities, including
any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness
of ours being subordinated to the payment of the debt
securities, which may be payable or deliverable in respect of
the debt securities in any such case, proceeding, dissolution,
liquidation or other winding up event.
Unsecured creditors of ours may include, without limitation,
service providers including the Adviser, custodian,
administrator, auction agent, broker-dealers and the trustee,
pursuant to the terms of various contracts with us. Secured
creditors of ours may include without limitation parties
entering into any interest rate swap, floor or cap transactions,
or other similar transactions with us that create liens,
pledges, charges, security interests, security agreements or
other encumbrances on our assets.
A consolidation, reorganization or merger of the Company with or
into any other company, or a sale, lease or exchange of all or
substantially all of our assets in consideration for the
issuance of equity securities of another company shall not be
deemed to be a liquidation, dissolution or winding up of the
Company.
Voting Rights. Debt securities have no voting
rights, except to the extent required by law or as otherwise
provided in the Indenture relating to the acceleration of
maturity upon the occurrence and continuance of an event of
default. In connection with any other borrowings (if any), the
1940 Act does in certain circumstances grant to the lenders
certain voting rights in the event of default in the payment of
interest on or repayment of principal.
Market. Unless otherwise stated in a
prospectus supplement, our debt securities may be bought or sold
at an auction held periodically (every seven (7) or
twenty-eight (28) days for outstanding Tortoise Notes), by
submitting orders through a broker-dealer who has entered into
an agreement with us (a broker-dealer). Our debt
securities are not listed on an exchange or automated quotation
system. Debt securities may be transferred outside of an auction
through a broker-dealer, but we cannot assure you that any such
secondary market will exist or whether it will provide holders
of debt securities with liquidity. The details of the auction
process are further described in the related prospectus
supplement.
Book-Entry, Delivery and Form. Unless
otherwise stated in the related prospectus supplement, the debt
securities will be issued in book-entry form and will be
represented by one or more notes in registered global form. The
global notes will be deposited with the trustee as custodian for
DTC and registered in the name of Cede & Co., as
nominee of DTC. DTC will maintain the notes in designated
denominations through its book-entry facilities.
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Under the terms of the Indenture, we and the trustee may treat
the persons in whose names any notes, including the global
notes, are registered as the owners thereof for the purpose of
receiving payments and for any and all other purposes
whatsoever. Therefore, so long as DTC or its nominee is the
registered owner of the global notes, DTC or such nominee will
be considered the sole holder of outstanding notes under the
Indenture. We or the trustee may give effect to any written
certification, proxy or other authorization furnished by DTC or
its nominee.
A global note may not be transferred except as a whole by DTC,
its successors or their respective nominees. Interests of
beneficial owners in the global note may be transferred or
exchanged for definitive securities in accordance with the rules
and procedures of DTC. In addition, a global note may be
exchangeable for notes in definitive form if:
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DTC notifies us that it is unwilling or unable to continue as a
depository and we do not appoint a successor within 60 days;
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we, at our option, notify the trustee in writing that we elect
to cause the issuance of notes in definitive form under the
Indenture; or
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an event of default has occurred and is continuing.
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In each instance, upon surrender by DTC or its nominee of the
global note, notes in definitive form will be issued to each
person that DTC or its nominee identifies as being the
beneficial owner of the related notes.
Under the Indenture, the holder of any global note may grant
proxies and otherwise authorize any person, including its
participants and persons who may hold interests through DTC
participants, to take any action which a holder is entitled to
take under the Indenture.
Trustee, Transfer Agent, Registrar, Paying Agent,
Redemption Agent and Auction Agent. Unless
otherwise stated in a prospectus supplement, BNY Midwest Trust
Company, 2 North LaSalle Street, Chicago, Illinois, serves as
the trustee under the Indenture and acts as transfer agent,
registrar, paying agent and redemption agent with respect to our
debt securities. The Bank of New York serves as the auction
agent with respect to our debt securities.
RATING
AGENCY GUIDELINES
The Rating Agencies, which assign ratings to our senior
securities, impose asset coverage requirements, which may limit
our ability to engage in certain types of transactions and may
limit our ability to take certain actions without confirming
that such action will not impair the ratings. The Tortoise Notes
are currently rated Aaa and AAA by
Moodys Investors Service Inc. (Moodys)
and Fitch Ratings (Fitch), respectively. The MMP
Shares are currently rated Aa2 and AA by
Moodys and Fitch, respectively. Moodys and Fitch,
and any other agency that may rate our debt securities
(including Tortoise Notes) or preferred stock (including MMP
Shares) in the future, are collectively referred to as the
Rating Agencies.
We may, but are not required to, adopt any modification to the
guidelines that may hereafter be established by any Rating
Agency. Failure to adopt any modifications, however, may result
in a change in the ratings described above or a withdrawal of
ratings altogether. In addition, any Rating Agency may, at any
time, change or withdraw any rating. The Board may, without
stockholder approval, modify, alter or repeal certain of the
definitions and related provisions which have been adopted
pursuant to each Rating Agencys guidelines (Rating
Agency Guidelines) only in the event we receive written
confirmation from the Rating Agency or Agencies that any
amendment, alteration or repeal would not impair the ratings
then assigned to the senior securities.
We are required to satisfy two separate asset maintenance
requirements with respect to outstanding debt securities and
with respect to outstanding preferred stock: (1) we must
maintain assets in our portfolio that have a value, discounted
in accordance with guidelines set forth by each Rating Agency,
at least equal to the aggregate principal amount/aggregate
liquidation preference of the debt securities/preferred stock,
respectively, plus specified liabilities, payment obligations
and other amounts (the Basic Maintenance Amount);
and (2) we must satisfy the 1940 Act asset coverage
requirements.
Basic Maintenance Amounts. We must maintain,
as of each valuation date on which senior securities are
outstanding, eligible assets having an aggregate discounted
value at least equal to the applicable Basic Maintenance
54
Amount, which is calculated separately for debt securities and
preferred stock for each Rating Agency that is then rating the
senior securities and so requires. If we fail to maintain
eligible assets having an aggregated discounted value at least
equal to the applicable Basic Maintenance Amount as of any
valuation date and such failure is not cured, we will be
required in certain circumstances to redeem certain of the
senior securities.
The applicable Basic Maintenance Amount is defined in the Rating
Agency Guidelines. Each Rating Agency may amend the definition
of the applicable Basic Maintenance Amount from time to time.
The market value of our portfolio securities (used in
calculating the discounted value of eligible assets) is
calculated using readily available market quotations when
appropriate, and in any event, consistent with our valuation
procedures. For the purpose of calculating the applicable Basic
Maintenance Amount, portfolio securities are valued in the same
manner as we calculate our NAV. See Determination of Net
Asset Value.
Each Rating Agencys discount factors, the criteria used to
determine whether the assets held in our portfolio are eligible
assets, and the guidelines for determining the discounted value
of our portfolio holdings for purposes of determining compliance
with the applicable Basic Maintenance Amount are based on Rating
Agency Guidelines established in connection with rating the
senior securities. The discount factor relating to any asset,
the applicable basic maintenance amount requirement, the assets
eligible for inclusion in the calculation of the discounted
value of our portfolio and certain definitions and methods of
calculation relating thereto may be changed from time to time by
the applicable Rating Agency, without our approval, or the
approval of our Board of Directors or stockholders.
A Rating Agencys Guidelines will apply to the senior
securities only so long as that Rating Agency is rating such
securities. We will pay certain fees to Moodys, Fitch and
any other Rating Agency that may provide a rating for the senior
securities. The ratings assigned to the senior securities are
not recommendations to buy, sell or hold the senior securities.
Such ratings may be subject to revision or withdrawal by the
assigning Rating Agency at any time.
1940 Act Asset Coverage. We are also required
to maintain, with respect to senior securities, as of the last
business day on any month in which any senior securities are
outstanding, asset coverage of at least 300% for debt securities
and 200% for preferred stock (or such other percentage as may in
the future be specified in or under the 1940 Act as the minimum
asset coverage for senior securities representing shares of a
closed-end investment company as a condition of declaring
dividends on its common stock). If we fail to maintain the
applicable 1940 Act asset coverage as of the last business day
of any month and such failure is not cured as of the last
business day of the following month, we will be required to
redeem certain senior securities.
Notices. Under the current Rating Agency
Guidelines, in certain circumstances, we are required to deliver
to any Rating Agency which is then rating the senior securities
(1) a certificate with respect to the calculation of the
applicable Basic Maintenance Amount; (2) a certificate with
respect to the calculation of the applicable 1940 Act asset
coverage and the value of our portfolio holdings; and (3) a
letter prepared by our independent accountants regarding the
accuracy of such calculations.
Notwithstanding anything herein to the contrary, the Rating
Agency Guidelines, as they may be amended from time to time by
each Rating Agency will be reflected in a written document and
may be amended by each Rating Agency without the vote, consent
or approval of 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
PROVISIONS IN THE COMPANYS 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 our registration statement on
Form N-2,
of which this prospectus forms a part.
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Our Charter and Bylaws include provisions that could delay,
defer or prevent other entities or persons from acquiring
control of us, causing us to engage in certain transactions or
modifying our structure. 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 us.
Classification
of the Board of Directors; Election of Directors
Our Charter provides that the number of directors may be
established only by the Board of Directors pursuant to the
Bylaws, but may not be less than one. The Bylaws provide that,
unless the Bylaws are amended, 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. Directors of
each class will be elected to serve for three-year terms and
until their successors are duly elected and qualify. Each year
only one class of directors will be elected by the stockholders.
The classification of the Board of Directors should help to
assure the continuity and stability of our strategies and
policies as determined by the Board of Directors.
The classified Board provision could have the effect of making
the replacement of incumbent directors more time-consuming and
difficult. At least two annual meetings of stockholders, instead
of one, generally will 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.
Approval
of Extraordinary Corporate Action; Amendment of Charter and
Bylaws
Under Maryland law, a Maryland corporation generally cannot
dissolve, amend its charter, merge, sell all or substantially
all of its assets, engage in a share exchange or engage in
similar transactions outside the ordinary course of business,
unless declared advisable by the Board of Directors and approved
by the affirmative vote of stockholders entitled to cast at
least two-thirds of the votes entitled to be cast on the matter.
However, a Maryland corporation may provide in its charter for
stockholder approval of these matters by a lesser percentage,
but not less than a majority of all of the votes entitled to be
cast on the matter. Our Charter generally provides for approval
of Charter amendments and extraordinary transactions by the
stockholders entitled to cast at least a majority of the votes
entitled to be cast on the matter. Our Charter also provides
that certain Charter amendments and any proposal for our
conversion, whether by merger or otherwise, from a closed-end
company to an open-end company or any proposal for our
liquidation or dissolution requires the approval of stockholders
entitled to cast at least 80 percent of the votes entitled
to be cast on such matter. However, if such amendment or
proposal is approved by at least two-thirds of our continuing
directors (in addition to the approval by our Board of Directors
otherwise required), such amendment or proposal may be approved
by stockholders entitled to cast a majority of the votes
entitled to be cast on such a matter. The continuing
directors are defined in our Charter as the directors
named in our Charter as well as those directors whose nomination
for election by the stockholders or whose election by the
directors to fill vacancies is approved by a majority of the
continuing directors then on the Board of Directors.
Our Charter and Bylaws provide that the Board of Directors will
have the exclusive power to make, alter, amend or repeal any
provision of our Bylaws.
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Advance
Notice of Director Nominations and New Business
The Bylaws provide that with respect to an annual meeting of
stockholders, nominations of persons for election to the Board
of Directors and the proposal of business to be considered by
stockholders may be made only (1) pursuant to notice of the
meeting, (2) by or at the direction of the Board of
Directors or (3) by a stockholder who is entitled to vote
at the meeting and who has complied with the advance notice
procedures of the Bylaws. With respect to special meetings of
stockholders, only the business specified in the Companys
notice of the meeting may be brought before the meeting.
Nominations of persons for election to the Board of Directors at
a special meeting may be made only (1) pursuant to notice
of the meeting by the Company, (2) by or at the direction
of the Board of Directors, or (3) provided that the Board
of Directors has determined that Directors will be elected at
the meeting, by a stockholder who is entitled to vote at the
meeting and who has complied with the advance notice provisions
of the Bylaws.
SELLING
STOCKHOLDERS
An unspecified number of shares of our common stock may be
offered and sold for resale from time to time under this
prospectus by certain of our stockholders; provided, however,
that no stockholder will be authorized to use this prospectus
for an offering of our common stock without first obtaining our
consent. We may consent to the use of this prospectus by certain
of our stockholders for a limited period of time and subject to
certain limitations and conditions depending on the terms of any
agreements between us and such stockholders. The identity of any
selling stockholder, including any material relationship between
us and our affiliates and such selling stockholder, the
percentage of our common stock owned by such selling stockholder
prior to the offering, the number of shares of our common stock
to be offered by such selling stockholder, the percentage of our
common stock to be owned (if greater than one percent) by such
selling stockholder following the offering, and the price and
terms upon which our shares of common stock are to be sold by
such selling stockholder will be set forth in a prospectus
supplement to this prospectus.
PLAN OF
DISTRIBUTION
We may sell our common stock, preferred stock and debt
securities, and certain of our stockholders may sell our common
stock, on an immediate, continuous or delayed basis, in one or
more offerings under this prospectus and any related prospectus
supplement. The aggregate amount of securities that may be
offered by us and any selling stockholders is limited to
$350,000,000. We may offer our common stock, preferred stock and
debt securities: (1) directly to one or more purchasers;
(2) through agents; (3) through underwriters;
(4) through dealers; or (5) pursuant to our Automatic
Dividend Reinvestment and Cash Purchase Plan. Any selling
stockholders may offer our common stock: (1) directly to
one or more purchasers; (2) through agents;
(3) through underwriters; or (4) through dealers. Each
prospectus supplement relating to an offering of securities will
state the terms of the offering, including as applicable:
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the names of any agents, underwriters or dealers;
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any sales loads or other items constituting underwriters
compensation;
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any discounts, commissions, or fees allowed or paid to dealers
or agents;
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the public offering or purchase price of the offered securities
and the net proceeds we will receive from the sale; provided,
however, that we will not receive any of the proceeds from a
sale of our common stock by any selling stockholder; and
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any securities exchange on which the offered securities may be
listed.
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Direct
Sales
We may sell our common stock, preferred stock and debt
securities, or certain of our stockholders may sell our common
stock, directly to, and solicit offers from, institutional
investors or others who may be deemed to be underwriters as
defined in the 1933 Act for any resales of the securities.
In this case, no underwriters or agents
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would be involved. We, or any selling stockholder, may use
electronic media, including the Internet, to sell offered
securities directly. The terms of any of those sales will be
described in a prospectus supplement.
By
Agents
We may offer our common stock, preferred stock and debt
securities, or certain of our stockholders may sell our common
stock, through agents that we or they designate. Any agent
involved in the offer and sale will be named and any commissions
payable by us, or any selling stockholder, will be described in
the prospectus supplement. Unless otherwise indicated in the
prospectus supplement, the agents will be acting on a best
efforts basis for the period of their appointment.
By
Underwriters
We may offer and sell securities, or certain of our stockholders
may offer our common stock, from time to time to one or more
underwriters who would purchase the securities as principal for
resale to the public, either on a firm commitment or best
efforts basis. If we sell securities, or a selling stockholder
offers our common stock, to underwriters, we and such selling
stockholder will execute an underwriting agreement with them at
the time of the sale and will name them in the prospectus
supplement. In connection with these sales, the underwriters may
be deemed to have received compensation from us or such selling
stockholder in the form of underwriting discounts and
commissions. The underwriters also may receive commissions from
purchasers of securities for whom they may act as agent. Unless
otherwise stated in the prospectus supplement, the underwriters
will not be obligated to purchase the securities unless the
conditions set forth in the underwriting agreement are
satisfied, and if the underwriters purchase any of the
securities, they will be required to purchase all of the offered
securities. The underwriters may sell the offered securities to
or through dealers, and those dealers may receive discounts,
concessions or commissions from the underwriters as well as from
the purchasers for whom they may act as agent. Any public
offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If a prospectus supplement so indicates, we may grant the
underwriters an option to purchase additional shares of common
stock at the public offering price, less the underwriting
discounts and commissions, within 45 days from the date of
the prospectus supplement, to cover any overallotments.
By
Dealers
We may offer and sell securities, or certain of our stockholders
may offer our common stock, from time to time to one or more
dealers who would purchase the securities as principal. The
dealers then may resell the offered securities to the public at
fixed or varying prices to be determined by those dealers at the
time of resale. The names of the dealers and the terms of the
transaction will be set forth in the prospectus supplement.
General
Information
Agents, underwriters, or dealers participating in an offering of
securities may be deemed to be underwriters, and any discounts
and commission received by them and any profit realized by them
on resale of the offered securities for whom they act as agent,
may be deemed to be underwriting discounts and commissions under
the 1933 Act.
We may offer to sell securities, or certain of our stockholders
may offer our common stock, either at a fixed price or at prices
that may vary, at market prices prevailing at the time of sale,
at prices related to prevailing market prices, or at negotiated
prices.
Ordinarily, each series of offered securities will be a new
issue of securities and will have no established trading market.
To facilitate an offering of common stock in an underwritten
transaction and in accordance with industry practice, the
underwriters may engage in transactions that stabilize,
maintain, or otherwise affect the market price of the common
stock or any other security. Those transactions may include
overallotment, entering stabilizing bids, effecting syndicate
covering transactions, and reclaiming selling concessions
allowed to an underwriter or a dealer.
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An overallotment in connection with an offering creates a short
position in the common stock for the underwriters own
account.
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An underwriter may place a stabilizing bid to purchase the
common stock for the purpose of pegging, fixing, or maintaining
the price of the common stock.
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Underwriters may engage in syndicate covering transactions to
cover overallotments or to stabilize the price of the common
stock by bidding for, and purchasing, the common stock or any
other securities in the open market in order to reduce a short
position created in connection with the offering.
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The managing underwriter may impose a penalty bid on a syndicate
member to reclaim a selling concession in connection with an
offering when the common stock originally sold by the syndicate
member is purchased in syndicate covering transactions or
otherwise.
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Any of these activities may stabilize or maintain the market
price of the securities above independent market levels. The
underwriters are not required to engage in these activities, and
may end any of these activities at any time.
Any underwriters to whom the offered securities are sold for
offering and sale may make a market in the offered securities,
but the underwriters will not be obligated to do so and may
discontinue any market-making at any time without notice. The
offered securities may or may not be listed on a securities
exchange. We cannot assure you that there will be a liquid
trading market for the offered securities.
Under agreements entered into with us, underwriters and agents
may be entitled to indemnification by us against certain civil
liabilities, including liabilities under the 1933 Act, or
to contribution for payments the underwriters or agents may be
required to make.
The underwriters, agents, and their affiliates may engage in
financial or other business transactions with us and our
subsidiaries in the ordinary course of business.
The maximum commission or discount to be received by any member
of the National Association of Securities Dealers, Inc. or
independent broker-dealer will not be greater than eight percent
of the initial gross proceeds from the sale of any security
being sold.
The aggregate offering price specified on the cover of this
prospectus relates to the offering of the securities not yet
issued as of the date of this prospectus.
To the extent permitted under the 1940 Act and the rules and
regulations promulgated thereunder, the underwriters may from
time to time act as a broker or dealer and receive fees in
connection with the execution of our portfolio transactions
after the underwriters have ceased to be underwriters and,
subject to certain restrictions, each may act as a broker while
it is an underwriter.
A prospectus and accompanying prospectus supplement in
electronic form may be made available on the websites maintained
by underwriters. The underwriters may agree to allocate a number
of securities for sale to their online brokerage account
holders. Such allocations of securities for internet
distributions will be made on the same basis as other
allocations. In addition, securities may be sold by the
underwriters to securities dealers who resell securities to
online brokerage account holders.
Automatic
Dividend Reinvestment and Cash Purchase Plan
We may issue and sell shares of common stock pursuant to our
Automatic Dividend Reinvestment and Cash Purchase Plan.
59
ADMINISTRATOR
AND CUSTODIAN
U.S. Bancorp Fund Services, LLC, 615 East Michigan
Street, Milwaukee, Wisconsin, serves as our administrator. We
pay the administrator a monthly fee computed at an annual rate
of 0.07% of the first $300 million of our Managed Assets,
0.06% on the next $500 million of our Managed Assets and
0.04% on the balance of our Managed Assets, subject to a minimum
annual fee of $45,000.
U.S. Bank N.A., 1555 North Rivercenter Drive,
Suite 302, Milwaukee, Wisconsin, serves as our custodian.
We pay the custodian a monthly fee computed at an annual rate of
0.015% on the first $100 million of our portfolio assets
and 0.01% on the balance of our portfolio assets, subject to a
minimum annual fee of $4,800.
LEGAL
MATTERS
Blackwell Sanders Peper Martin, L.L.P., Kansas City, Missouri,
serves as our counsel. Vedder, Price, Kaufman &
Kammholz, P.C. (Vedder Price), Chicago,
Illinois, is serving as our special counsel in connection with
the offerings under this prospectus and related prospectus
supplements. Certain legal matters in connection with the
securities offered hereby will be passed upon for us by Vedder
Price. Vedder Price may rely on the opinion of Venable LLP,
Baltimore, Maryland, on certain matters of Maryland law. If
certain legal matters in connection with an offering of
securities are passed upon by counsel for the underwriters of
such offering, such matters will be passed upon by
Morrison & Foerster LLP, New York, New York with
respect to any offerings by us of our preferred stock or debt
securities and by Kaye Scholer, LLP, New York, New York with
respect to offerings of our common stock by us or by such other
counsel to the underwriters as named in a prospectus supplement.
AVAILABLE
INFORMATION
We are subject to the informational requirements of the Exchange
Act and the 1940 Act and are required to file reports, including
annual and semi-annual reports, proxy statements and other
information with the SEC. We voluntarily file quarterly
shareholder reports. Our most recent shareholder report filed
with the SEC is for the period ended November 30, 2006.
These documents are available on the SECs EDGAR system and
can be inspected and copied for a fee at the SECs public
reference room, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Additional information about the
operation of the public reference room facilities may be
obtained by calling the SEC at
(202) 551-5850.
This prospectus does not contain all of the information in our
registration statement, including amendments, exhibits, and
schedules. Statements in this prospectus about the contents of
any contract or other document are not necessarily complete and
in each instance reference is made to the copy of the contract
or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects
by this reference.
Additional information about us can be found in our Registration
Statement (including amendments, exhibits, and schedules) on
Form N-2
filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains our Registration Statement,
other documents incorporated by reference, and other information
we have filed electronically with the SEC, including proxy
statements and reports filed under the Exchange Act.
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TABLE OF
CONTENTS
OF THE
STATEMENT OF ADDITIONAL INFORMATION
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Investment Limitations
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Investment Objective and Principal
Investment Strategies
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Management of the Company
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Net Asset Value
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Portfolio Transactions
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Certain Federal Income Tax Matters
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Proxy Voting Policies
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Independent Registered Public
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Internal Accountant
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Additional Information
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Financial Statements
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Appendix A
Summary of Certain Provisions of the Indenture and Form of
Supplemental Indenture
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Appendix B Form
of Articles Supplementary
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Appendix C Rating
of Investments
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61
$70,000,000
Tortoise Energy
Infrastructure
Corporation
Auction Rate Senior Notes
(Tortoise Notes)
$70,000,000 Series E,
Due ,
2047
$25,000 Denominations
PROSPECTUS SUPPLEMENT
,
2007
Lehman
Brothers
Merrill
Lynch & Co.
A.G.
Edwards
Oppenheimer &
Co.
Stifel
Nicolaus
Wachovia
Securities
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
MARCH 14, 2007
STATEMENT OF ADDITIONAL INFORMATION
Tortoise Energy Infrastructure Corporation, a Maryland corporation (the Company, we or
our), is a nondiversified, closed-end management investment company that commenced operations in
February 2004.
This Statement of Additional Information relates to the offering, on an immediate, continuous
or delayed basis, of up to $350,000,000 aggregate initial offering price of our common stock,
preferred stock and debt securities in one or more offerings. This Statement of Additional
Information does not constitute a prospectus, but should be read in conjunction with our prospectus
dated March 14, 2007 and any related prospectus supplement. This Statement of Additional
Information does not include all information that you should consider before purchasing any of our
securities. You should obtain and read our prospectus and any related prospectus supplements prior
to purchasing any of our securities. A copy of our prospectus and any related prospectus
supplement may be obtained without charge by calling (866) 362-9331. You also may obtain a copy of
our prospectus and any related prospectus supplement on the SECs web site (http://www.sec.gov).
Capitalized terms used but not defined in this Statement of Additional Information have the
meanings ascribed to them in the prospectus and any related prospectus supplement. This Statement
of Additional Information is dated March 14, 2007.
TABLE OF CONTENTS
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i
INVESTMENT LIMITATIONS
This section supplements the disclosure in the prospectus and provides additional information
on our investment limitations. Investment limitations identified as fundamental may not be changed
without the approval of the holders of a majority of our outstanding voting securities (which for
this purpose and under the Investment Company Act of 1940, as amended (the 1940 Act), means the
lesser of (1) 67% of the shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (2) more than 50% of the outstanding shares).
Investment limitations stated as a maximum percentage of our assets are only applied
immediately after, and because of, an investment or a transaction by us to which the limitation is
applicable (other than the limitations on borrowing). Accordingly, any later increase or decrease
resulting from a change in values, net assets or other circumstances will not be considered in
determining whether the investment complies with our investment limitations. All limitations that
are based on a percentage of total assets include assets obtained through leverage.
Fundamental Investment Limitations
The following are our fundamental investment limitations set forth in their entirety. We may
not:
(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) our investments in any particular
industry, except that we will concentrate our assets in the group of industries constituting
the energy infrastructure sector;
(5) underwrite securities issued by others, except to the extent that we may be
considered an underwriter within the meaning of the Securities Act of 1933, as amended (the
1933 Act), in the disposition of restricted securities held in our portfolio;
(6) purchase or sell real estate unless acquired as a result of ownership of securities
or other instruments, except that we may invest in securities or other instruments backed by
real estate or securities of companies that invest in real estate or interests therein; and
(7) purchase or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except that we may purchase or sell options and futures
contracts or invest in securities or other instruments backed by physical commodities.
All other investment policies are considered nonfundamental and may be changed by the Board of
Directors of the Company (the Board) without prior approval of our outstanding voting securities.
S-1
Nonfundamental Investment Policies
We have adopted the following nonfundamental policies:
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Under normal circumstances, we will invest at least 90% of our total assets in
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Under normal circumstances, we will invest at least 70% of our total assets in
equity securities issued by master limited partnerships (MLPs). |
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We may invest up to 30% of our total assets in restricted securities, primarily
through direct placements. Subject to this policy, we may invest without limitation in
illiquid securities. The types of restricted securities that we may purchase include
securities of private energy infrastructure companies and privately issued securities
of publicly traded energy infrastructure companies. Restricted securities, whether
issued by public companies or private companies, are generally considered illiquid.
Investments in private companies that do not have any publicly traded shares or units
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We may invest up to 25% of our 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 Moodys Investors Service, Inc. (Moodys) and at least B- by Standard &
Poors 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
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We will not invest more than 10% of our total assets in any single issuer. |
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We will not engage in short sales. |
For purposes of restrictions (3)-(5), during the periods in which we anticipate receiving
proceeds from an offering of securities pursuant to this registration statement, we include the
amount of the anticipated proceeds in our calculation of total assets. Accordingly, holdings in
the specified securities may temporarily exceed the amounts shown.
Currently under the 1940 Act, we are not permitted to incur indebtedness unless immediately
after such borrowing we have asset coverage of at least 300% of the aggregate outstanding principal
balance of indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the value of our total
assets). Additionally, currently under the 1940 Act, we may not declare any dividend or other
distribution upon our common or preferred stock, or purchase any such stock, unless our aggregate
indebtedness has, at the time of the declaration of any such dividend or distribution or at the
time of any such purchase, an asset coverage of at least 300% after deducting the amount of such
dividend, distribution, or purchase price, as the case may be. Currently under the 1940 Act, we
are not permitted to issue preferred stock unless immediately after such issuance we have asset
coverage of at least 200% of the liquidation value of the outstanding preferred stock (i.e., such
liquidation value may not exceed 50% of the value of our total assets). In addition, currently
under the 1940 Act, we are not permitted to declare any cash dividend or other distribution on our
common stock unless, at the time of such declaration, our total assets less liabilities and
indebtedness not represented by senior securities (determined after deducting the amount of such
dividend or distribution) are 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
S-2
value of the total assets of the issuer at the time the loan is made. A loan is presumed to
be for temporary purposes if it is repaid within sixty days and is not extended or renewed. Both
transactions involving indebtedness and any preferred stock issued by us would be considered senior
securities under the 1940 Act, and as such, are subject to the asset coverage requirements
discussed above.
Currently under the 1940 Act, we are not permitted to lend money or property to any person,
directly or indirectly, if such person controls or is under common control with us, except for a
loan from us to a company which owns all of our outstanding securities. Currently, under
interpretative positions of the staff of the SEC, we may not have on loan at any given time
securities representing more than one-third of our total assets.
We interpret our policies with respect to borrowing and lending to permit such activities as
may be lawful, to the full extent permitted by the 1940 Act or by exemption from the provisions
therefrom pursuant to an exemptive order of the SEC.
We interpret our policy with respect to concentration to include energy infrastructure
companies, as defined in the prospectus and below. See Investment Objective and Principal
Investment Strategies.
Under the 1940 Act, we may, but do not intend to, invest up to 10% of our total assets in the
aggregate in shares of other investment companies and up to 5% of our total assets in any one
investment company, provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a shareholder in any
investment company, we will bear our ratable share of that investment companys expenses, and would
remain subject to payment of our advisory fees and other expenses with respect to assets so
invested. Holders of common stock would therefore be subject to duplicative expenses to the extent
we invest in other investment companies. In addition, the securities of other investment companies
also may be leveraged and will therefore be subject to the same leverage risks described herein and
in the prospectus. The net asset value and market value of leveraged shares will be more volatile
and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged
shares. A material decline in net asset value may impair our ability to maintain asset coverage on
preferred stock and debt securities, including any interest and principal for debt securities.
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The prospectus presents our investment objective and the principal investment strategies and
risks. This section supplements the disclosure in the prospectus and provides additional
information on our investment policies, strategies and risks. Restrictions or policies stated as a
maximum percentage of our assets are only applied immediately after a portfolio investment to which
the policy or restriction is applicable (other than the limitations on borrowing). Accordingly,
any later increase or decrease resulting from a change in values, net assets or other circumstances
will not be considered in determining whether the investment complies with our restrictions and
policies.
Our investment objective is to seek a high level of total return with an emphasis on current
distributions paid to stockholders. For purposes of our investment objective, total return
includes capital appreciation of, and all distributions received from, securities in which we
invest regardless of the tax character of the distribution. There is no assurance that we will
achieve our objective. Our investment objective and the investment policies discussed below are
nonfundamental. Our 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, we will
not be treated as a regulated investment company under the
S-3
U.S. Internal Revenue Code of 1986, as amended (the Internal Revenue Code). Therefore, we
will be taxed as a C corporation and will be subject to federal and applicable state corporate
income taxes.
Under normal circumstances, we invest at least 90% of 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 also are considered energy infrastructure
companies, if they derive at least 50% of revenues from the provision of energy-related services to
such companies. We invest at least 70% of our 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, pay-in-kind units or I-Shares
(I-Shares) and limited liability company common units. We also may invest in other securities,
consistent with our investment objective and fundamental and nonfundamental policies.
The following pages contain more detailed information about the types of issuers and
instruments in which we may invest, strategies the Adviser may employ in pursuit of our 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 us achieve our objective.
Energy Infrastructure Companies
For purposes of our policy of investing 90% of our total assets in securities of energy
infrastructure companies, an energy infrastructure company is one that derives each year at least
50% of its gross income 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 including any income and
gains from the exploration, development, mining or production, processing, refining, transportation
(including pipelines transporting gas, oil or products thereof), or the marketing of any mineral or
natural resource (including fertilizer, geothermal energy, and timber).
MLPs are limited partnerships that derive each year at least 90% of their gross income from
Qualifying Income and are taxed as partnerships for federal income tax purposes, 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 seeks 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 MLPs 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 therefore are 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
S-4
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.
Energy infrastructure MLPs in which we will invest generally can 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
or other laws, regulations or trends have on coal end-users.
Marine Shipping MLPs. Marine shipping MLPs are primarily marine transporters of
natural gas, crude oil or refined petroleum products. Marine shipping MLPs derive revenue
from charging customers for the transportation of these products utilizing the MLPs
vessels. Transportation services are typically provided pursuant to a charter or contract,
the terms of which vary depending on, for example, the length of use of a particular vessel,
the amount of cargo transported, the number of voyages made, the parties operating a vessel
or other factors.
S-5
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 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
affect adversely 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 liquified natural gas facility construction; issuing certificates of need for
companies intending to provide energy services or constructing and operating interstate pipeline
and storage facilities; and certain other matters. FERC also regulates the interstate
transportation of crude oil, including: regulation of rates and practices of oil pipeline
companies; establishing equal service conditions to provide shippers with equal access to pipeline
transportation; and establishment of reasonable rates for transporting petroleum and petroleum
products by pipeline.
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, consumer sentiment with respect to global warming, 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.
Non-MLPs. Although we emphasize investments in MLPs, we 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 as corporations or limited liability companies
rather than in partnership form. Generally, the partnership form is more suitable for companies
that operate assets which generate more stable cash flows. Companies that operate midstream
assets (e.g., transporting, processing, storing, distributing and marketing) tend to generate more
stable cash flows than
S-6
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 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 of 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.
Master Limited Partnerships
Under normal circumstances we invest at least 70% of our 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 typically 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
income 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 the tax consequences make 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.
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MLPs tend to pay relatively higher distributions than other types of companies, and we intend
to use these MLP distributions in an effort to meet our investment objective.
As a motivation for the general partner to successfully manage the MLP and increase cash
flows, the terms of MLP partnership agreements typically provide that the general partner receives
a larger portion of the net income as distributions reach higher target levels. As cash flow
grows, the general partner receives a greater interest in the incremental income compared to the
interest of limited partners. Although the percentages vary among MLPs, the general partners
marginal interest in distributions generally increases from 2% to 15% at the first designated
distribution target level moving to up to 25% and ultimately to 50% as pre-established distribution
per unit thresholds are met. Nevertheless, the aggregate amount of distributions 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 or other distributions
from the MLP. An MLP typically makes quarterly cash distributions. Although they resemble
corporate dividends, MLP distributions are treated differently for federal income tax purposes.
The MLP distribution is treated as a return of capital to the extent of the investors basis in his
MLP interest and, to the extent the distribution exceeds the investors basis in the MLP interest,
capital gain. The investors original basis is the price paid for the units. The basis is
adjusted downwards with each distribution and allocation of deductions (such as depreciation) and
losses, and upwards with each allocation of income and gain.
The partner generally will not incur federal income tax on distributions until (1) he sells
his MLP units and pays tax on his gain, which gain is increased due to the basis decrease resulting
from prior distributions; or (2) his basis reaches zero. When the units are sold, the difference
between the sales price and the investors adjusted basis is gain or loss for federal income tax
purposes.
For a further discussion and a description of MLP federal income tax matters, see the section
entitled Certain Federal Income Tax MattersFederal Income Taxation of MLPs.
The Companys Investments
The types of securities in which we may invest include, but are not limited to, the following:
Equity Securities. Consistent with our investment objective, we may invest up to 100% of our
total assets in equity securities issued by energy infrastructure MLPs, including common units,
convertible subordinated units, I-Shares and common units, and subordinated units and preferred
units of limited liability companies (that are treated as MLPs for federal income tax purposes)
(LLCs) (each discussed below). We also may 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 our net asset value per share, which will
fluctuate as the value of the securities held by us change. Not all stock prices change uniformly
or at the same time, and not all stock markets move in the same direction at the same time. Other
factors affect a particular stocks prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental regulations
affecting an industry. Adverse news affecting one company can sometimes depress the stock prices
of all companies in the same industry. Not all factors can be predicted.
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Investing in securities of smaller companies may involve greater risk than is associated with
investing in more established companies. Smaller capitalization companies may have limited product
lines, markets or financial resources; may lack management depth or experience; and may be more
vulnerable to adverse general market or economic developments than larger, more established
companies.
MLP Common Units. MLP common units represent an equity ownership interest in a partnership,
providing limited voting rights and entitling the holder to a share of the companys success
through distributions and/or capital appreciation. Unlike stockholders of a corporation, common
unit holders do not elect directors annually and generally have the right to vote only on certain
significant events, such as mergers, a sale of substantially all of the assets, removal of the
general partner or material amendments to the partnership agreement. MLPs are required by their
partnership agreements to distribute a large percentage of their current operating earnings.
Common unit holders generally have first right to a minimum quarterly distribution (MQD) prior to
distributions to the convertible subordinated unit holders or the general partner (including
incentive distributions). Common unit holders typically have arrearage rights if the MQD is not
met. In the event of liquidation, MLP common unit holders have first rights to the partnerships
remaining assets after bondholders, other debt holders, and preferred unit holders have been paid
in full. MLP common units trade on a national securities exchange or over-the-counter.
Limited Liability Company Common Units. Some energy infrastructure companies in which we may
invest have been organized as LLCs. Such LLCs are generally treated in the same manner as MLPs for
federal income tax purposes and, unless otherwise noted, the term MLP includes all entities that
are treated in the same manner as MLPs for federal income tax purposes, regardless of their form of
organization. Consistent with our investment objective and policies, we may invest in common units
or other securities of such LLCs including preferred and subordinated units and debt securities.
LLC common units represent an equity ownership interest in an LLC, entitling the holders to a share
of the LLCs success through distributions and/or capital appreciation. Similar to MLPs, LLCs
typically do not pay federal income tax at the entity level and are required by their operating
agreements to distribute a large percentage of their current operating earnings. LLC common unit
holders generally have first right to a MQD prior to distributions to subordinated unit holders and
typically have arrearage rights if the MQD is not met. In the event of liquidation, LLC common
unit holders have a right to the LLCs remaining assets after bondholders, other debt holders and
preferred unit holders, if any, have been paid in full. LLC common units typically trade on a
national securities exchange or over-the-counter.
In contrast to MLPs, LLCs have no general partner and there are no incentives that entitle
management or other unit holders to increased percentages of cash distributions as distributions
reach higher target levels. In addition, LLC common unit holders typically have voting rights with
respect to the LLC, whereas MLP common units have limited voting rights.
MLP Convertible Subordinated Units. MLP convertible subordinated units typically are issued
by MLPs to founders, corporate general partners of MLPs, entities that sell assets to MLPs, and
institutional investors. The purpose of the convertible subordinated units is to increase the
likelihood that during the subordination period there will be available cash to be distributed to
common unit holders. We expect to purchase convertible 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 generally do not trade on a national exchange or over-the-counter, and there is no active
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market for convertible subordinated units. The value of a convertible security is a function
of its worth if it were converted into the underlying common units. Convertible subordinated units
generally have similar voting rights to MLP common units. Distributions may be paid in cash or
in-kind.
MLP I-Shares. I-Shares represent an indirect investment in MLP I-units. I-units are equity
securities issued to affiliates of MLPs, typically a limited liability company, that owns an
interest in and manages the MLP. The issuer has management rights but is not entitled to incentive
distributions. The I-Share issuers assets consist exclusively of MLP 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 the MLP. 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 for federal income tax purposes.
Accordingly, investors receive a Form 1099, are not allocated their proportionate share of income
of the MLPs and are not subject to state income tax filing obligations solely as a result of
holding such I-Shares.
Debt Securities. We may invest up to 25% of our total assets in debt securities of energy
infrastructure companies, including certain securities rated below investment grade (junk bonds).
The debt securities we invest in 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
our minimum rating criteria at the time of purchase and is subsequently downgraded below such
rating, we will not be required to dispose of such security. If a downgrade occurs, the Adviser
will consider what action, including the sale of such security, is in our best interest and our
stockholders best interests.
Below Investment Grade Debt Securities. We may invest up to 25% of our assets in below
investment grade securities. The below investment grade debt securities in which we invest are
rated from B3 to Ba1 by Moodys, from B- to BB+ by S&Ps, are comparably rated by another
nationally recognized rating agency or are unrated but determined by 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 issuers ability to pay
interest and principal and are susceptible to default or decline in market value due to adverse
economic and business developments. The market values for high yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt securities. For these
reasons, investment in below investment grade securities is subject to the following specific
risks:
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increased price sensitivity to changing interest rates and to a deteriorating
economic environment; |
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greater risk of loss due to default or declining credit quality; |
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adverse company specific events are more likely to render the issuer unable to make
interest and/or principal payments; and |
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if a negative perception of the below investment grade debt market develops, the
price and liquidity of below investment grade debt securities may be depressed. This
negative perception could last for a significant period of time. |
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
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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 affect severely 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 we own may have an adverse
effect on our net asset value and the market value of our common stock. In addition, we may incur
additional expenses to the extent we are required to seek recovery upon a default in payment of
principal or interest on our portfolio holdings. In certain circumstances, we may be required to
foreclose on an issuers assets and take possession of its property or operations. In such
circumstances, we would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for below investment grade securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an adverse effect on our
ability to dispose of a particular security when necessary to meet our 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, we could find it more difficult to
sell these securities or may be able to sell the securities only at prices lower than if such
securities were widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in calculating our net
asset value.
Because investors generally perceive that there are greater risks associated with lower
quality debt securities of the type in which we may invest a portion of our assets, the yields and
prices of such securities may tend to fluctuate more than those for higher rated securities. In
the lower quality segments of the debt securities market, changes in perceptions of issuers
creditworthiness tend to occur more frequently and in a more pronounced manner than do changes in
higher quality segments of the debt securities market, resulting in greater yield and price
volatility.
We will not invest in distressed, below investment grade securities (those that are in default
or the issuers of which are in bankruptcy). If a debt security becomes distressed while held by
us, we may be required to bear extraordinary expenses in order to protect and recover our
investment if it is recoverable at all.
See Appendix C to this Statement of Additional Information for a description of ratings of
Moodys, Fitch Ratings (Fitch) and S&P.
Restricted, Illiquid and Thinly-Traded Securities. We may invest up to 30% of our total
assets in restricted securities, primarily through direct placements of MLP securities. Restricted
securities obtained by means of direct placement are less liquid than securities traded in the open
market; therefore, we may not be able to readily sell such securities. Investments currently
considered by the Adviser to be illiquid because of such restrictions include convertible
subordinated 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
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marketable may be lower or higher than our most recent determination of their fair value.
Additionally, the value of these securities typically requires more reliance on the judgment of 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, we may not be able to realize these securities true value, or may have to delay their
sale in order to do so.
Restricted securities generally can be sold in 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 us to sell our holdings of a
restricted security not registered under the 1933 Act, we may have to cause those securities to be
registered. When we must arrange registration because we wish to sell the security, a considerable
period may elapse between the time the decision is made to sell the security and the time the
security is registered so that we could sell it. We 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 issuers ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain institutions is
not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration requirements of
the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional
markets for restricted securities that exist or may develop as a result of Rule 144A may provide
both readily ascertainable values for restricted securities and the ability to liquidate an
investment. An insufficient number of qualified institutional buyers interested in purchasing Rule
144A-eligible securities held by us, however, could affect adversely the marketability of such
portfolio securities and we might not be able to dispose of such securities promptly or at
reasonable prices.
We 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
to their relatively smaller capitalizations. Such securities may be difficult to dispose of at a
fair price during times when we believe it is desirable to do so. Thinly-traded securities are
also more difficult to value, and the Advisers judgment as to value will often be given greater
weight than market quotations, if any exist. If market quotations are not available, thinly-traded
securities will be valued in accordance with procedures established by the Board. Investment of
our capital in thinly-traded securities may restrict our ability to take advantage of market
opportunities. The risks associated with thinly-traded securities may be particularly acute in
situations in which our operations require cash and could result in us borrowing to meet our short
term needs or incurring losses on the sale of thinly-traded securities.
Commercial Paper. We may invest in commercial paper. Commercial paper is a debt obligation
usually issued by corporations and may be unsecured or secured by letters of credit or a surety
bond. Commercial paper usually is 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.
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Asset-backed commercial paper is a debt obligation generally issued by a corporate-sponsored
special purpose entity to which the corporation has contributed cash-flowing receivables like
credit card receivables, auto and equipment leases, and other receivables. Investment in
asset-backed commercial paper is subject to the risk that insufficient proceeds from the projected
cash flows of the contributed receivables are available to repay the commercial paper.
U.S. Government Securities. We may invest in U.S. Government Securities. There are two broad
categories of U.S. Government-related debt instruments: (a) direct obligations of the U.S.
Treasury, and (b) securities issued or guaranteed by U.S. Government agencies.
Examples of direct obligations of the U.S. Treasury are Treasury bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These instruments are backed by the full faith and
credit of the United States. They differ primarily in interest rates, the length of maturities
and the dates of issuance. Treasury bills have original maturities of one year or less. Treasury
notes have original maturities of one to ten years, and Treasury bonds generally have original
maturities of greater than ten years.
Some agency securities are backed by the full faith and credit of the United States, and
others are backed only by the rights of the issuer to borrow from the U.S. Treasury (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. We may enter into repurchase agreements backed by U.S. Government
Securities. A repurchase agreement arises when we purchase a security and simultaneously agree to
resell it to the vendor at an agreed upon future date. The resale price is greater than the
purchase price, reflecting an agreed upon market rate of return that is effective for the period of
time we hold the security and that is not related to the coupon rate on the purchased security.
Such agreements generally have maturities of no more than seven days and could be used to permit us
to earn interest on assets awaiting long term investment. We require continuous maintenance by our
custodian for our account in the Federal Reserve/Treasury Book-Entry System of collateral in an
amount equal to, or in excess of, the market value of the securities that are the subject of a
repurchase agreement. Repurchase agreements maturing in more than seven days are considered
illiquid securities. In the event of a bankruptcy or other default of a seller of a repurchase
agreement, we could experience both delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying security during the period while we
seek to enforce our rights thereto; (b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing our rights.
Reverse Repurchase Agreements. We may enter into reverse repurchase agreements for temporary
purposes with banks and securities dealers if the creditworthiness of the bank or securities dealer
has been determined by the Adviser to be satisfactory. A reverse repurchase agreement is a
repurchase agreement in which we are the seller of, rather than the investor in, securities and
agree to repurchase them at an agreed-upon time and price. Use of a reverse repurchase agreement
may be preferable to a regular sale and later repurchase of securities because it avoids certain
market risks and transaction costs.
At the time when we enter into a reverse repurchase agreement, liquid assets (cash, U.S.
Government Securities or other high-grade debt obligations) having a value at least as great as
the purchase price of the securities to be purchased will be segregated on our books and held by
our custodian throughout the period of the obligation. The use of reverse repurchase agreements
creates leverage which
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increases our investment risk. If the income and gains on securities purchased with the
proceeds of these transactions exceed the cost, our earnings or net asset value will increase
faster than otherwise would be the case; conversely, if the income and gains fail to exceed the
cost, earnings or net asset value would decline faster than otherwise would be the case. We intend
to enter into reverse repurchase agreements only if the income from the investment of the proceeds
is greater than the expense of the transaction, because the proceeds are invested for a period no
longer than the term of the reverse repurchase agreement.
Margin Borrowing. Although we do not currently intend to, we may in the future use margin
borrowing of up to 33 1/3% of total assets for investment purposes when the Adviser believes it
will enhance returns. Margin borrowings 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 we have borrowed increase their maintenance margin requirements (i.e., reduce
the percentage of a position that can be financed), then we could be subject to a margin call,
pursuant to which we must either deposit additional funds with the broker or suffer mandatory
liquidation of the pledged securities to compensate for the decline in value. In the event of a
precipitous drop in the value of our assets, we might not be able to liquidate assets quickly
enough to pay off the margin debt and might suffer mandatory liquidation of positions in a
declining market at relatively low prices, thereby incurring substantial losses. For these
reasons, the use of borrowings for investment purposes is considered a speculative investment
practice. Any use of margin borrowing by us would be subject to the limitations of the 1940 Act,
including the prohibition from us issuing more than one class of senior securities, and the asset
coverage requirements discussed earlier in this Statement of Additional Information. See
Investment Limitations.
Interest Rate Transactions. In an attempt to reduce the interest rate risk arising from our
leveraged capital structure, we currently use, and may in the future use, 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, we 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 us a variable rate payment that is
intended to approximate our variable rate payment obligation on any variable rate borrowings. The
payment obligations would be based on the notional amount of the swap. In an interest rate cap, we
would pay a premium to the counterparty to the interest rate cap and, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, would receive from the
counterparty payments of the difference based on the notional amount of such cap. In an interest
rate floor, we would be entitled to receive, to the extent that a specified index falls below a
predetermined interest rate, payments of interest on a notional principal amount from the party
selling the interest rate floor. Depending on the state of interest rates in general, our use of
interest rate transactions could enhance or decrease distributable cash flow (generally, cash from
operations less certain operating expenses and reserves) available to the shares of our common
stock. 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 shares of
our common stock. In addition, if the counterparty to an interest rate transaction defaults, we
would not be able to use the anticipated net receipts under the interest rate transaction to offset
our cost of financial leverage. When interest rate swap transactions are outstanding, we will
segregate liquid assets with our custodian in an amount equal to our net payment obligation under
the swap.
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
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period for that type of security. Typically, no interest accrues to the purchaser until the
security is delivered. We may receive fees or price concessions for entering into delayed-delivery
transactions.
When purchasing securities on a delayed-delivery basis, the purchaser assumes the rights and
risks of ownership, including the risks of price and yield fluctuations and the risk that the
security will not be issued as anticipated. Because payment for the securities is not required
until the delivery date, these risks are in addition to the risks associated with our investments.
If we remain substantially fully invested at a time when delayed-delivery purchases are
outstanding, the delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, we will segregate appropriate liquid assets with our
custodian to cover the purchase obligations. When we have sold a security on a delayed-delivery
basis, we do not participate in further gains or losses with respect to the security. If the other
party to a delayed-delivery transaction fails to deliver or pay for the securities, we could miss a
favorable price or yield opportunity or suffer a loss.
Securities Lending. We may lend securities to parties such as broker-dealers or institutional
investors. Securities lending allows us to retain ownership of the securities loaned and, at the
same time, to earn additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower fail financially,
loans will be made only to parties deemed by the Adviser to be of good credit and legal standing.
Furthermore, loans of securities will only be made if, in the Advisers judgment, the consideration
to be earned from such loans would justify the risk.
The Adviser understands that it is the current view of the SEC staff that we may engage in
loan transactions only under the following conditions: (1) we must receive 100% collateral in the
form of cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the securities loaned
(determined on a daily basis) rises above the value of the collateral; (3) after giving notice, we
must be able to terminate the loan at any time; (4) we must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any dividends, interest, or other
distributions on the securities loaned and to any increase in market value; (5) we may pay only
reasonable custodian fees in connection with the loan; and (6) the Board must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering into an alternative
arrangement with the borrower.
Temporary and Defensive Investments. Pending investment of offering or leverage proceeds, we
may invest such proceeds 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 liquid fixed income securities deemed by the Adviser to be of similar quality
(collectively, short-term securities), or we may invest in cash or cash equivalents, all of which
are expected to provide a lower yield than the securities of energy infrastructure companies. We
also may invest in short-term securities or cash on a temporary basis to meet working capital needs
including, but not limited to, for collateral in connection with certain investment techniques, to
hold a reserve pending payment of distributions, and to facilitate the payment of expenses and
settlement of trades.
Under adverse market or economic conditions, we may invest up to 100% of our total assets in
short-term securities or cash. The yield on short-term securities or cash may be lower than the
returns on MLPs or yields on lower rated fixed income securities. To the extent we invest in
short-term securities or cash for defensive purposes, such investments are inconsistent with, and
may result in us not achieving, our investment objective.
S-15
MANAGEMENT OF THE COMPANY
Directors and Officers
Our business and affairs are managed under the direction of the Board of Directors.
Accordingly, the Board of Directors provides broad supervision over our affairs, including
supervision of the duties performed by the Adviser. Our officers are responsible for our
day-to-day operations. Our directors and officers 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 qualifies, or until he resigns or is removed in the
manner provided by law. The Board of Directors is divided into three classes. Directors of each
class are elected to serve three year terms and until their successors are duly elected and
qualify. Each year only one class of directors is elected by the stockholders. Unless otherwise
indicated, the address of each director and officer is 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210. The Board of Directors consists of a majority of directors who are not
interested persons (as defined in the 1940 Act) of the Adviser or its affiliates.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
Position(s) |
|
|
|
Portfolios in |
|
Other Public |
|
|
Held With |
|
|
|
Fund |
|
Company |
|
|
Company and |
|
|
|
Complex |
|
Directorships |
|
|
Length of |
|
Principal Occupation During Past |
|
Overseen by |
|
Held by |
Name and Age |
|
Time Served |
|
Five Years |
|
Director2 |
|
Director |
Independent
Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conrad S.
Ciccotello, 46
|
|
Director since 2003
|
|
Tenured Associate
Professor of Risk
Management and
Insurance, Robinson
College of
Business, Georgia
State University
(faculty member
since 1999);
Director of
Graduate Personal
Financial Planning
(PFP) Programs,
Editor, Financial
Services Review,
(an academic
journal dedicated
to the study of
individual
financial
management);
formerly, faculty
member,
Pennsylvania State
University
(1997-1999).
|
|
|
4 |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
John R. Graham, 61
|
|
Director since 2003
|
|
Executive-in-Residence and Professor of
Finance, College of
Business
Administration,
Kansas State
University (has
served as a
professor or
adjunct professor
since 1970);
Chairman of the
Board, President
and CEO, Graham
Capital Management,
Inc., primarily a
real estate
development and
investment company
and a venture
capital company;
and Owner of Graham
Ventures, a
business services
and venture capital
firm; formerly,
CEO, Kansas Farm
Bureau Financial
Services, including
seven affiliated
insurance or
financial service
companies
(1979-2000).
|
|
|
4 |
|
|
Erie Indemnity
Company; Kansas
State Bank |
S-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
Position(s) |
|
|
|
Portfolios in |
|
Other Public |
|
|
Held With |
|
|
|
Fund |
|
Company |
|
|
Company and |
|
|
|
Complex |
|
Directorships |
|
|
Length of |
|
Principal Occupation During Past |
|
Overseen by |
|
Held by |
Name and Age |
|
Time Served |
|
Five Years |
|
Director2 |
|
Director |
Charles E. Heath, 64
|
|
Director since 2003
|
|
Retired in 1999.
Formerly, Chief
Investment Officer,
GE Capitals
Employers
Reinsurance
Corporation
(1989-1999).
Chartered Financial
Analyst (CFA)
since 1974.
|
|
|
4 |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
Interested Directors
and
Officers1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H. Kevin Birzer, 47
|
|
Director and
Chairman of the
Board since 2003
|
|
Managing Director
of the Adviser
since 2002;
Partner, Fountain
Capital
(1990-present);
formerly, Vice
President,
Corporate Finance
Department, Drexel
Burnham Lambert
(1986-1989); Vice
President, F.
Martin Koenig &
Co., an investment
management firm
(1983-1986).
|
|
|
4 |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
Terry C. Matlack, 51
|
|
Director and Chief
Financial Officer
since 2003, Chief
Compliance Officer
from 2004 through
May 2006; Assistant
Treasurer since
November 2005;
Treasurer from 2003
to November 2005
|
|
Managing Director
of the Adviser
since 2002;
Managing Director,
KCEP
(2001-present);
formerly,
President,
GreenStreet
Capital, a private
investment firm
(1998-2001).
|
|
|
4 |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
David J. Schulte, 45
|
|
President and Chief
Executive Officer
since 2003
|
|
Managing Director
of the Adviser
since 2002;
Managing Director,
KCEP
(1993-present); CFA
since 1992.
|
|
|
N/A |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
Zachary A. Hamel, 41
|
|
Secretary since 2003
|
|
Managing Director
of the Adviser
since 2002;
Partner, Fountain
Capital Management
(1997-present).
|
|
|
N/A |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
Kenneth P. Malvey,
41
|
|
Treasurer since
November 2005;
Assistant Treasurer
from 2003 to
November 2005
|
|
Managing Director
of the Adviser
since 2002;
Partner, Fountain
Capital Management
(2002-present);
formerly,
Investment Risk
Manager and member
of the Global
Office of
Investments, GE
Capitals Employers
Reinsurance
Corporation
(1996-2002).
|
|
|
N/A |
|
|
None |
|
|
|
(1) |
|
As a result of their respective positions held with the Adviser or its affiliates, these
individuals are considered our interested persons within the meaning of the 1940 Act. |
S-17
|
|
|
(2) |
|
This number includes Tortoise North American Energy Corporation (TYN), Tortoise Energy
Capital Corporation (TYY) and Tortoise Capital Resources Corporation (TTO). The Adviser
also serves as investment adviser to TYN, TYY and TTO. |
The following individuals who are included in the table above hold the following
positions with TYN, TYY and TTO: Messrs. Ciccotello, Graham and Heath are directors; Mr. Birzer is
a director and the Chairman of the Board; Mr. Matlack is a director and the Chief Financial
Officer; Mr. Schulte is the President and Chief Executive Officer; Mr. Hamel is the Secretary; and
Mr. Malvey is the Treasurer.
We have an audit committee that consists of three directors (the Audit Committee) who are
not interested persons within the meaning of the 1940 Act (Independent Directors). The Audit
Committee members are Conrad S. Ciccotello (Chairman), Charles E. Heath and John R. Graham. The
Audit Committees function is to oversee our accounting policies, financial reporting and internal
control system. The Audit Committee makes recommendations regarding the selection of our
independent auditors, 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 our accounting and
financial reporting practices, and performs such other tasks as the full Board deems necessary or
appropriate. The Audit Committee held 2 meetings in the fiscal year ended November 30, 2006.
We also have a Nominating and Governance Committee (formerly the Nominating Committee) that
consists exclusively of three Independent Directors. The Nominating and Governance Committees
function is to (i) identify individuals qualified to become Board members and recommend to the
Board the director nominees for the next annual meeting of stockholders and to fill any vacancies;
(ii) monitor the structure and membership of Board committees; recommend to the Board director
nominees for each committee; (iii) review issues and developments related to corporate governance
issues and develop and recommend to the Board corporate governance guidelines and procedures, to
the extent necessary or desirable; and (iv) actively seek individuals who meet the standards for
directors set forth in our Bylaws, who meet the requirements of any applicable laws or exchange
requirements and who are otherwise qualified to become board members for recommendation to the
Board. The Nominating and Governance Committee will consider shareholder recommendations for
nominees for membership to the Board so long as such recommendations are made in accordance with
our Bylaws. The Nominating and Governance Committee members are Conrad S. Ciccotello, John R.
Graham (Chairman), and Charles E. Heath. The Nominating Committee (which became the Nominating and
Governance Committee in December 2005) held 1 meeting in the fiscal year ended November 30, 2006.
We also have a Compliance Committee formed in December 2005 that consists exclusively of three
Independent Directors. The Compliance Committees function is to review and assess managements
compliance with applicable securities laws, rules and regulations, monitor compliance with our Code
of Ethics, and handle other matters as the Board or committee chair deems appropriate. The
Compliance Committee members are Conrad S. Ciccotello, John R. Graham and Charles E. Heath
(Chairman). The Compliance Committee held 1 meeting in the fiscal year ended November 30, 2006.
Directors and officers who are interested persons of the Company or the Administrator will
receive no salary or fees from us. For the current fiscal year, each Independent Director receives
from us an annual retainer of $15,000 (plus an additional $6,000 for the Chairman of the Audit
Committee and an additional $1,000 for each other committee Chairman) and a fee of $2,000 (and
reimbursement for related expenses) for each meeting of the Board or Audit Committee attended in
person (or $1,000 for each Board or Audit Committee meeting attended telephonically, or for each
Audit Committee meeting attended in person that is held on the same day as a Board meeting), and an
additional $1,000 for each other committee meeting attended in person or telephonically. No
director or officer will be entitled to receive pension or retirement benefits from us.
S-18
The table below sets forth the compensation paid to the directors by us for the fiscal year
ended November 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
Aggregate Compensation From |
Name and Position With |
|
Compensation From |
|
the Company and Fund Complex |
the Company |
|
the Company |
|
Paid to Directors (4 Companies) |
Independent Directors |
|
|
|
|
|
|
|
|
Conrad S. Ciccotello |
|
$ |
40,480 |
|
|
$ |
125,500 |
|
John R. Graham |
|
$ |
36,480 |
|
|
$ |
113,500 |
|
Charles E. Heath |
|
$ |
35,480 |
|
|
$ |
109,500 |
|
|
|
|
|
|
|
|
|
|
Interested Directors |
|
|
|
|
|
|
|
|
H. Kevin Birzer |
|
$ |
0 |
|
|
$ |
0 |
|
Terry C. Matlack |
|
$ |
0 |
|
|
$ |
0 |
|
The following table sets forth the dollar range of equity securities beneficially owned
by each director of the Company as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of |
|
|
|
|
|
|
Equity Securities in all |
|
|
|
|
|
|
Registered Investment |
|
|
|
|
|
|
Companies Overseen by |
|
|
Aggregate Dollar Range of |
|
Director in Family of |
|
|
Company Securities Beneficially |
|
Investment Companies |
Name of Director |
|
Owned By Director* |
|
(4 Companies) |
Independent Directors |
|
|
|
|
|
|
|
|
Conrad S. Ciccotello |
|
$ |
50,001-$100,000 |
|
|
Over $100,000 |
John R. Graham |
|
Over $100,000 |
|
Over $100,000 |
Charles E. Heath |
|
Over $100,000 |
|
Over $100,000 |
|
|
|
|
|
|
|
|
|
Interested Directors |
|
|
|
|
|
|
|
|
H. Kevin Birzer |
|
Over $100,000 |
|
Over $100,000 |
Terry C. Matlack |
|
Over $100,000 |
|
Over $100,000 |
|
|
|
* |
|
As of December 31, 2006, the officers and directors of the Company, as a group, own less
than 1% of any class of the Companys outstanding shares of stock. |
Control Persons
As of February 28, 2007, the following persons owned of record or beneficially more than 5% of
our common shares:
|
|
|
|
|
Merrill Lynch Safekeeping |
|
|
17.06 |
% |
4 Corporate Place
Piscataway, NJ 08854 |
|
|
|
|
|
Charles Schwab & Co., Inc. |
|
|
9.23 |
% |
101 Montgomery St.
San Francisco, CA 94104 |
|
|
|
|
S-19
|
|
|
|
|
Stifel, Nicolaus & Company Inc. |
|
|
8.57 |
% |
501 North Broadway
St. Louis, MO 63102 |
|
|
|
|
|
RBC Dain Rauscher Inc. |
|
|
6.44 |
% |
1221 Avenue of the Americas
New York, NY 10036 |
|
|
|
|
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 and
the 1940 Act.
The Charter authorizes us, 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 or
officer of ours and at our request, serves or has served another corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a
director, officer, partner or trustee, from and against any claim or liability to which that person
may become subject or which that person may incur by reason of his or her status as a present or
former director or officer of ours and to pay or reimburse his or her reasonable expenses in
advance of final disposition of a proceeding. The Bylaws obligate us, 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 ours and at our request, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan
or other enterprise as a director, officer, partner or trustee and who is made a party to the
proceeding by reason of his or her service in that capacity from and against any claim or liability
to which that person may become subject or which that person may incur by reason of his or her
status as a present or former director or officer of ours and to pay or reimburse his or her
reasonable expenses in advance of final disposition of a proceeding. The Charter and Bylaws also
permit us to indemnify and advance expenses to any person who served a predecessor of ours in any
of the capacities described above and any employee or agent of ours or a predecessor of ours. The
1940 Act prohibits us from indemnifying any director, officer or other individual from any
liability resulting directly from the willful misconduct, bad faith, gross negligence in the
performance of duties or reckless disregard of applicable obligations and duties of the directors,
officers or other individuals.
Maryland law requires a corporation (unless its charter provides otherwise, which our Charter
does not) to indemnify a director or officer who has been successful in the defense of any
proceeding to which he or she is made, or threatened to be made, a party by reason of his or her
service in that capacity. Maryland law permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding to which they may
be made, or threatened to be made, a party by reason of their service in those or other capacities
unless it is established that (a) the act or omission of the director or officer was material to
the matter giving rise to the proceeding and (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
S-20
improperly received, unless in either case a court orders indemnification and then only for
expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a
director or officer upon the corporations receipt of (a) a written affirmation by the director or
officer of his 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.
Investment Adviser
Tortoise Capital Advisors, L.L.C. (the Adviser) serves as our investment adviser. The
Adviser specializes in managing portfolios of investments in MLPs and other energy infrastructure
companies. 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, L.L.C. (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.
KCEP was formed in 1993 and until recently, managed KCEP Ventures II, L.P. (KCEP II), a
private equity fund with committed capital of $55 million invested in a variety of companies in
diverse industries. KCEP II wound up its operations in late 2006, has no remaining portfolio
investments and has distributed proceeds to its partners. KCEP Ventures I, L.P. (KCEP I), a
start-up and early-stage venture capital fund launched in 1994 and previously managed by KCEP, also
recently completed the process of winding down. As a part of that process, KCEP I entered into a
consensual order of receivership, which was necessary to allow KCEP I to distribute its remaining
$1.3 million of assets to creditors and the SBA. The consensual order acknowledged a capital
impairment condition and the resulting nonperformance by KCEP I of its agreement with the SBA, both
of which were violations of the provisions requiring repayment of capital under the Small Business
Investment Act of 1958 and the regulations thereunder.
The Adviser is located at 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210. As
of November 30, 2006, the Adviser had approximately $2.0 billion in assets under management in the
energy infrastructure industry.
Pursuant to an Investment Advisory Agreement (the Advisory Agreement), the Adviser, subject
to overall supervision by the Board, manages our investments. The Adviser regularly provides us
with investment research advice and supervision and will furnish continuously an investment program
for us, consistent with our investment objective and policies.
The investment management of our portfolio is the responsibility of a team of portfolio
managers consisting of David J. Schulte, H. Kevin Birzer, Zachary A. Hamel, Kenneth P. Malvey, and
Terry C. Matlack, all of whom are Managers of the Adviser and share responsibility for such
investment management. It is the policy of the investment committee, that any one member can
require the Adviser to sell a security and any one member can veto the committees decision to
invest in a security. Messrs. Matlack and Schulte are full-time employees of the Adviser. The
other members of the investment committee are affiliates of, but not employees of, the Adviser, and
have significant responsibilities with 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.
S-21
The following table provides information about the number of and total assets in other
accounts managed on a day-to-day basis by each of the portfolio managers as of November 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
Total Assets of |
|
|
|
|
|
|
|
|
|
|
Accounts |
|
Accounts |
|
|
|
|
|
|
|
|
|
|
Paying a |
|
Paying a |
|
|
Number of |
|
Total Assets of |
|
Performance |
|
Performance |
Name of Manager |
|
Accounts |
|
Accounts |
|
Fee |
|
Fee |
H. Kevin Birzer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
|
2 |
|
|
$ |
879,812,575 |
|
|
|
0 |
|
|
|
|
|
Other pooled investment vehicles |
|
|
5 |
|
|
$ |
1,928,523,567 |
|
|
|
1 |
|
|
$ |
42,933,012 |
|
Other accounts |
|
|
182 |
|
|
$ |
1,965,319,994 |
|
|
|
0 |
|
|
|
|
|
Zachary A. Hamel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
|
2 |
|
|
$ |
879,812,575 |
|
|
|
0 |
|
|
|
|
|
Other pooled investment vehicles |
|
|
5 |
|
|
$ |
1,928,523,567 |
|
|
|
1 |
|
|
$ |
42,933,012 |
|
Other accounts |
|
|
182 |
|
|
$ |
1,965,319,994 |
|
|
|
0 |
|
|
|
|
|
Kenneth P. Malvey |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
|
2 |
|
|
$ |
879,812,575 |
|
|
|
0 |
|
|
|
|
|
Other pooled investment vehicles |
|
|
5 |
|
|
$ |
1,928,523,567 |
|
|
|
1 |
|
|
$ |
42,933,012 |
|
Other accounts |
|
|
182 |
|
|
$ |
1,965,319,994 |
|
|
|
0 |
|
|
|
|
|
Terry C. Matlack |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
|
2 |
|
|
$ |
879,812,575 |
|
|
|
0 |
|
|
|
|
|
Other pooled investment vehicles |
|
|
2 |
|
|
$ |
69,933,012 |
|
|
|
2 |
|
|
$ |
69,933,012 |
|
Other accounts |
|
|
160 |
|
|
$ |
185,779,727 |
|
|
|
0 |
|
|
|
|
|
David J. Schulte |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
|
2 |
|
|
$ |
879,812,575 |
|
|
|
0 |
|
|
|
|
|
Other pooled investment vehicles |
|
|
2 |
|
|
$ |
69,933,012 |
|
|
|
2 |
|
|
$ |
69,933,012 |
|
Other accounts |
|
|
160 |
|
|
$ |
185,779,727 |
|
|
|
0 |
|
|
|
|
|
None of Messrs. Schulte, Matlack, Birzer, Hamel or Malvey receive any direct compensation
from the Company or any other of the managed accounts reflected in the table above. All such
accounts are managed by the Adviser, Fountain Capital or KCEP. Messrs. Schulte and Matlack are
full-time employees of the Adviser and receive a fixed salary for the services they provide.
Messrs. Birzer, Hamel and Malvey are employees of Fountain Capital and receive a fixed salary for
the services they provide. Fountain Capital is paid a fixed monthly fee, subject to adjustment,
for the services of Messrs. Birzer, Hamel and Malvey. Each of Messrs. Schulte, Matlack, Birzer,
Hamel and Malvey own an equity interest in either KCEP or Fountain Capital, the two entities that
control the Adviser, and each thus benefits from increases in the net income of the Adviser, KCEP
or Fountain Capital.
The following table sets forth the dollar range of our equity securities beneficially owned by
each of the portfolio managers as of November 30, 2006.
|
|
|
|
|
Aggregate Dollar Range of Company |
|
|
Securities Beneficially Owned by |
Name of Manager |
|
Manager |
H. Kevin Birzer |
|
Over $100,000 |
Zachary A. Hamel |
|
Over $100,000 |
Kenneth P. Malvey |
|
Over $100,000 |
Terry C. Matlack |
|
Over $100,000 |
David J. Schulte |
|
Over $100,000 |
In addition to portfolio management services, the Adviser is obligated to supply our
Board and officers with certain statistical information and reports, to oversee the maintenance of
various books and
S-22
records and to arrange for the preservation of records in accordance with applicable federal
law and regulations. Under the Advisory Agreement, we pay 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 our 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.
The Adviser has agreed contractually to reimburse us for expenses, including the investment
advisory fee and other expenses in the amount of 0.10% of average monthly Managed Assets through
February 28, 2009.
Because the management fees paid to the Adviser are based upon a percentage of our Managed
Assets, fees paid to the Adviser will be higher if we are leveraged; thus, the Adviser will have an
incentive to use leverage. Because the fee reimbursement agreement is based on Managed Assets, to
the extent we are engaged in leverage, the gross dollar amount of the Advisers fee reimbursement
obligations to us will increase. The Adviser intends to use leverage only when it believes it will
serve the best interests of our stockholders. Our average monthly Managed Assets are determined
for the purpose of calculating the management fee by taking the average of the monthly
determinations of Managed Assets during a given calendar quarter. The fees are payable for each
calendar quarter within five days of the end of that quarter.
For our initial fiscal year beginning February 27, 2004 and ending November 30, 2004, the
Adviser received $2,006,155 as compensation for advisory services, net of $640,855, in reimbursed
fees and expenses. For our fiscal year ending November 30, 2005, the Adviser received $4,804,810
as compensation for advisory services, net of $1,534,870, in reimbursed fees and expenses. For our
fiscal year ending November 30, 2006, the Adviser received $6,253,972 as compensation for advisory
services, net of $987,587, in reimbursed fees and expenses.
The Advisory Agreement provides that we will pay all expenses other than those expressly
stated to be payable by the Adviser, which expenses payable by us shall include, without implied
limitation: (1) expenses of maintaining the Company and continuing our existence and related
overhead, including, to the extent services are provided by personnel of the Adviser or its
affiliates, office space and facilities and personnel compensation, training and benefits; (2)
registration under the 1940 Act; (3) commissions, spreads, fees and other expenses connected with
the acquisition, holding and disposition of securities and other investments including placement
and similar fees in connection with direct placements in which we participate; (4) auditing,
accounting and legal expenses; (5) taxes and interest; (6) governmental fees; (7) expenses of
listing our shares with a stock exchange, and expenses of issuance, sale, repurchase and redemption
(if any) of our interests, including expenses of conducting tender offers for the purpose of
repurchasing our interests; (8) expenses of registering and qualifying us and our shares under
federal and state securities laws and of preparing and filing registration statements and
amendments for such purposes; (9) expenses of communicating with stockholders; including website
expenses and the expenses of preparing, printing and mailing press releases, reports and other
notices to stockholders and of meetings of stockholders and proxy solicitations therefor; (10)
expenses of reports to governmental officers and commissions; (11) insurance expenses; (12)
association membership dues; (13) fees, expenses and disbursements of custodians and subcustodians
for all services to us (including without limitation safekeeping of funds, securities and other
investments, keeping of books, accounts and records, and determination of net asset values); (14)
fees, expenses and disbursements of transfer agents, dividend paying agents, stockholder servicing
agents and registrars for all services to us; (15) compensation and expenses of our directors who
are not members of the Advisers organization; (16) pricing and valuation services employed by us;
(17) all expenses incurred in connection with leveraging of our assets through a
S-23
line of credit, or issuing and maintaining preferred stock or instruments evidencing
indebtedness of the Company; (18) all expenses incurred in connection with the offering of our
common and preferred stock and debt securities; and (19) such non-recurring items as may arise,
including expenses incurred in connection with litigation, proceedings and claims and our
obligation to indemnify our directors, officers and stockholders with respect thereto.
The Advisory Agreement provides that the Adviser will not be liable in any way for any
default, failure or defect in any of the securities comprising our 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 us for any loss, damage, claim, cost, charge, expense or
liability resulting from the Advisers willful misconduct, bad faith or gross negligence or
disregard by the Adviser of the Advisers duties or standard of care, diligence and skill set forth
in the Advisory Agreement or a material breach or default of the Advisers obligations under the
Advisory Agreement.
The Advisory Agreement has a term ending on December 31st of each year and is submitted to the
Board of Directors for renewal each year. A discussion regarding the basis of the Board of
Directors decision to approve the renewal of the Advisory Agreement is available in our Annual
Report to stockholders for the fiscal year ended November 30, 2006. The Advisory Agreement will
continue from year to year, provided such continuance is approved by a majority of the Board or by
vote of the holders of a majority of our outstanding voting securities. Additionally, the Advisory
Agreement must be approved annually by vote of a majority of the Independent Directors. The
Advisory Agreement may be terminated by the Adviser or us, without penalty, on sixty (60) days
written notice to the other. The Advisory Agreement will terminate automatically in the event of
its assignment.
Code of Ethics
We and the Adviser have each adopted a Code of Ethics under Rule 17j-1 of the 1940 Act, which
is applicable to officers, directors and designated employees of ours and the Adviser
(collectively, the Codes). Subject to certain limitations, the Codes permit covered persons to
invest in securities, including securities that may be purchased or held by us. The Codes contain
provisions and requirements designed to identify and address certain conflicts of interest between
personal investment activities of covered persons and the interests of investment advisory clients
such as us. Among other things, the Codes prohibit certain types of transactions absent prior
approval, impose time periods during which personal transactions may not be made in certain
securities, and require submission of duplicate broker confirmations and statements and quarterly
reporting of securities transactions. Exceptions to these and other provisions of the Codes may be
granted in particular circumstances after review by appropriate personnel.
Our Code of Ethics can be reviewed and copied at the Securities and Exchange Commissions
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) 551-5850. Our Code
of Ethics is also available on the EDGAR Database on the Securities and Exchange Commissions
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
Commissions Public Reference Section, Washington, D.C. 20549-0102.
NET ASSET VALUE
We will compute our net asset value for our shares of common stock as of the close of trading
on the NYSE (normally 4:00 p.m. Eastern time) no less frequently than the last business day of each
calendar month and at such other times as the Board may determine. We make our net asset value
available for
S-24
publication monthly. Our investment transactions are generally recorded on a trade date plus
one day basis, other than for quarterly and annual reporting purposes. For purposes of determining
the net asset value of a share of common stock, our net asset value will equal the value of our
total assets (the value of the securities we hold, plus cash or other assets, including interest
accrued but not yet received) less (1) all of its liabilities (including without limitation accrued
expenses and both current and deferred income taxes), (2) accumulated and unpaid interest payments
and dividends on any outstanding debt or preferred stock, respectively, (3) the aggregate
liquidation value of any outstanding preferred stock, (4) the aggregate principal amount of any
outstanding senior notes, including any series of Tortoise Notes, and (5) any distributions payable
on the common stock. The net asset value per share of our common stock will equal our net asset
value divided by the number of outstanding shares of common stock.
Pursuant to an agreement with U.S. Bancorp Fund Services, LLC (the Accounting Services
Provider), the Accounting Services Provider will value our assets in accordance with Valuation
Procedures adopted by the Board of Directors. The Accounting Services Provider will obtain
securities market quotations from independent pricing services approved by the Adviser and ratified
by the Board. Securities for which market quotations are readily available shall be valued at
market value. Any other securities shall be valued at fair value.
Valuation of certain assets at market value will be as follows. For equity securities, the
Accounting Services Provider will first use readily available market quotations and will obtain
direct written broker-dealer quotations if a security is not traded on an exchange or quotations
are not available from an approved pricing service. For fixed income securities, the Accounting
Services Provider will use readily available market quotations based upon the last sale price of a
security on the day we value our assets or a market value from a pricing service or by obtaining a
direct written broker-dealer quotation from a dealer who has made a market in the security. For
options, futures contracts and options on futures contracts, the Accounting Services Provider will
use readily available market quotations. If no sales are reported on any exchange or
over-the-counter (OTC) market for an option, futures contract or option on futures contracts, the
Accounting Services Provider will use the calculated mean based on bid and asked prices obtained
from the primary exchange or OTC market.
If the Accounting Services Provider cannot obtain a market value or the Adviser determines
that the value of a security as so obtained does not represent a fair value as of the valuation
time (due to a significant development subsequent to the time its price is determined or
otherwise), fair value for the security shall be determined pursuant to the Valuation Procedures
adopted by the Board. The Valuation Procedures provide that the Adviser will consider a variety of
factors with respect to the individual issuer and security in determining and monitoring the
continued appropriateness of fair value, including, without limitation, financial statements and
fundamental data with respect to the issuer, cost, the amount of any discount, restrictions on
transfer and registration rights and other information deemed relevant. A report of any prices
determined pursuant to certain preapproved methodologies will be presented to the Board or a
designated committee thereof for approval no less frequently than quarterly. The Valuation
Procedures currently provide for methodologies to be used to fair value equity securities, debt
securities and control securities. With respect to equity securities, among the factors used to
fair value a security subject to restrictions on resale is whether the security has a common share
counterpart trading in a public market. If a security does not have a common share counterpart,
the security shall be valued initially and thereafter by the Adviser based on all relevant factors,
including, but not limited to, cost, and such valuation will be presented to the Board for review
and ratification. If a security has a common share counterpart trading in a public market or is
convertible into publicly-traded common shares, the Adviser shall determine an appropriate
percentage discount for the security in light of its resale restrictions and other factors.
S-25
With respect to debt securities, among the various factors that can affect the value of such
securities are (i) whether the issuing company has freely trading debt securities of the same
maturity and interest rate; (ii) whether the issuing company has an effective registration
statement in place for the securities; and whether a market is made in the securities. Subject to
the particular considerations of an issue, debt securities generally will be valued at amortized
cost.
With respect to control securities (equity securities of an issuer that is deemed to be an
affiliate of ours due to our ownership or the beneficial ownership of our Adviser of 10% or more of
the outstanding shares of the same class of such issuer), if the class of security continues to
trade in a public market or is covered by a currently effective registration statement, the
security ordinarily will be valued at the common share market price. If the class of the security
ceases to trade in a public market or is otherwise not tradeable, the security shall be valued by
the Adviser based on all relevant factors, including, but not limited to, cost, and such valuation
will be presented to the our Board for review and ratification.
The foregoing methods for fair valuing securities may be used only as long as the Adviser
believes they continue to represent fair value and the discussion above is qualified in its
entirety by our Valuation Procedures.
In computing net asset value, we will review the valuation of the obligation for income taxes
separately for current taxes and deferred taxes due to the differing impact of each on (i) the
anticipated timing of required tax payments and (ii) the impact of each on the treatment of
distributions by us to our stockholders.
The allocation between current and deferred income taxes is determined based upon the value of
assets reported for book purposes compared to the respective net tax bases of assets for federal
income tax purposes. It is anticipated that cash distributions from MLPs in which we invest will
not equal the amount of taxable income allocable to us primarily as a result of depreciation and
amortization deductions recorded by the MLPs. This may result, in effect, in a portion of the cash
distribution received by us not being treated as income for federal income tax purposes. The
relative portion of such distributions not treated as income for tax purposes will vary among the
MLPs, and also will vary year by year for each MLP, but in each case will reduce our remaining tax
basis, if any, in the particular MLP. The Adviser will be able to directly confirm the portion of
each distribution recognized as taxable income when it receives annual tax reporting information
from each MLP.
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 Advisers primary
consideration in effecting a security transaction will be to obtain the best execution. In
selecting a broker-dealer to execute each particular transaction, 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 our investment performance on a
continuing basis. Accordingly, our price in any transaction may be less favorable than that
available from another broker-dealer if the difference is reasonably justified by other aspects of
the execution services offered.
The ability to invest in direct placements of MLP securities is critical to our ability to
meet our investment objective because of the limited number of MLP issuers available for investment
and, in some
S-26
cases, the relative small trading volumes of certain securities. Accordingly, we may from
time to time enter into arrangements with placement agents in connection with direct placement
transactions.
In evaluating placement agent proposals, we consider each brokers access to issuers of MLP
securities and experience in the MLP market, particularly the direct placement market. In addition
to these factors, we consider whether the proposed services are customary, whether the proposed fee
schedules are within the range of customary rates, whether any proposal would obligate us to enter
into transactions involving a minimum fee, dollar amount or volume of securities, or into any
transaction whatsoever, and other terms such as indemnification provisions.
Subject to such policies as the Board may from time to time determine, the Adviser shall not
be deemed to have acted unlawfully or to have breached any duty solely by reason of its having
caused us to pay a broker or dealer that provides brokerage and research services to the Adviser an
amount of commission for effecting a portfolio 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 Advisers overall responsibilities with respect to us 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 our behalf to such brokers and dealers
who also provide research or statistical material or other services to us or the Adviser. Such
allocation shall be in such amounts and proportions as the Adviser shall determine and the Adviser
will report on said allocations regularly to the Board indicating the brokers to whom such
allocations have been made and the basis therefor. For the period beginning February 27, 2004
through November 30, 2004 and for the fiscal years ended November 30, 2005 and November 30, 2006,
we paid aggregate brokerage commissions of $114,532, $18,465 and $20,190, respectively, and direct
placement fees of $1,668,861, $80,000 and $0, respectively.
Portfolio Turnover
Our annual portfolio turnover rate may vary greatly from year to year. Although we cannot
accurately predict our annual portfolio turnover rate, it is not expected to exceed 30% under
normal circumstances. For the fiscal years ended November 30, 2006 and 2005 the portfolio turnover
rate was 2.18% and 4.92%, respectively. However, portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions for us. A higher turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses that are borne by
us. High portfolio turnover also may result in recognition of gains that will increase our taxable
income, possibly resulting in an increased tax liability, as well as increasing our current and
accumulated earnings and profits resulting in a greater portion of the distributions on our stock
being treated as taxable dividends for federal income tax purposes. See Certain Federal Income
Tax Matters.
CERTAIN FEDERAL INCOME TAX MATTERS
The following is a summary of certain material U.S. federal income tax considerations relating
to us and our investments in MLPs and to the purchase, ownership and disposition of our securities.
The discussion generally applies only to holders of securities that are U.S. holders. You will be
a U.S. holder if you are an individual who is a citizen or resident of the United States, a U.S.
domestic corporation, or any other person that is subject to U.S. federal income tax on a net
income basis in respect of an investment in our securities. This summary deals only with U.S.
holders that hold our securities as capital assets and who purchase the securities in connection
with the offering(s) herein. It does not address considerations that may be relevant to you if you
are an investor that is subject to special tax rules, such as a financial institution, insurance
company, regulated investment company, real estate investment trust,
S-27
investor in pass-through entities, U.S. holder of securities whose functional currency is
not the United States dollar, tax-exempt organization, dealer in securities or currencies, trader
in securities or commodities that elects mark to market treatment, a person who holds the
securities in a qualified tax deferred account such as an IRA, or a person who will hold the
securities as a position in a straddle, hedge or as part of a constructive sale for federal
income tax purposes. In addition, this discussion does not address the possible application of the
U.S. federal alternative minimum tax.
This summary is based on the provisions of the Internal Revenue Code, the applicable Treasury
regulations promulgated thereunder, judicial authority and current administrative rulings, as in
effect on the date of this Statement of Additional Information, all of which may change. Any
change could apply retroactively and could affect the continued validity of this summary.
As stated above, this discussion does not discuss all aspects of U.S. federal income taxation
that may be relevant to a particular holder of our securities in light of such holders particular
circumstances and income tax situation. Prospective holders should consult their own tax advisors
as to the specific tax consequences to them of the purchase, ownership and disposition of the
securities, including the application and the effect of state, local, foreign and other tax laws
and the possible effects of changes in U.S. or other tax laws.
Taxation of the Company
We are treated as a C corporation for federal and state income tax purposes. We compute and
pay federal and state income tax on our taxable income. Thus, we are subject to federal income tax
on our taxable income at tax rates up to 35%. Additionally, in certain instances we could be
subject to the federal alternative minimum tax of 20% on our alternative minimum taxable income to
the extent that the alternative minimum tax exceeds our regular federal income tax.
As indicated above, we generally invest our assets primarily in MLPs. MLPs generally are
treated as partnerships for federal income tax purposes. Since partnerships are generally not
subject to federal income tax, the partnerships partners must report as their income their
proportionate share of the partnerships income. Thus, as a partner in MLPs, we will report our
proportionate share of the MLPs income in computing our federal taxable income, irrespective of
whether any cash or other distributions are made by the MLPs to us. We will also take into account
in computing our taxable income any other items of our income, gain, deduction or loss. We
anticipate that these may include interest income earned on our investment in debt securities,
deductions for our operating expenses and gain or loss recognized by us on the sale of MLP
interests or any other security.
As explained below, based upon the historic performance of MLPs, we anticipate initially that
our proportionate share of the MLPs taxable income will be significantly less than the amount of
cash distributions we receive from the MLPs. In such case, we anticipate that we will not incur
federal income tax on a significant portion of our cash flow, particularly after taking into
account our current operational expenses. If the MLPs taxable income is a significantly greater
portion of the MLPs cash distributions, we will incur additional current federal income tax
liability, possibly in excess of the cash distributions we receive.
We anticipate that each year we will turn over a certain portion of our investment assets. We
will recognize gain or loss on the disposition of all or a portion of our interests in MLPs in an
amount equal to the difference between the sales price and our basis in the MLP interests sold. To
the extent we receive MLP cash distributions in excess of the taxable income reportable by us with
respect to such MLP interest, our basis in the MLP interest will be reduced and our gain on the
sale of the MLP interest likewise will be increased.
S-28
We are not treated as a regulated investment company under the federal income tax laws. The
Internal Revenue Code generally provides that a regulated investment company does not pay an entity
level income tax, provided that it distributes all or substantially all of its income. Our assets
do not, and are not expected to, meet current tests for qualification as a regulated investment
company for federal income tax purposes. The regulated investment company taxation rules have no
application to us or our stockholders. Although changes to the federal tax laws permit regulated
investment companies to invest up to 25% of the value of their total assets in securities of MLPs,
such changes still would not allow us to pursue our objective. Accordingly, we do not intend to
change our tax status as a result of such legislation.
Federal Income Taxation of MLPs
MLPs are similar to corporations in many respects, but differ in others, especially in the way
they are taxed for federal income tax purposes. A corporation is a distinct legal entity, separate
from its stockholders and employees and is treated as a separate entity for federal income tax
purposes as well. Like individual taxpayers, a corporation must pay a federal income tax on its
income. To the extent the corporation distributes its income to its stockholders in the form of
dividends, the stockholders must pay federal income tax on the dividends they receive. For this
reason, it is said that corporate income is double-taxed, or taxed at two levels.
An MLP that satisfies the Qualifying Income rules described below, and does not elect
otherwise, is treated for federal income tax purposes as a pass-through entity. No federal income
tax is paid at the partnership level. A partnerships income is considered earned by all the
partners; it is allocated among all the partners in proportion to their interests in the
partnership (generally as provided in the partnership agreement), and each partner pays tax on his,
her or its share of the partnerships income. All the other items that go into determining taxable
income and tax owed are passed through to the partners as well capital gains and losses,
deductions, credits, etc. Partnership income is thus said to be single-taxed or taxed only at one
level that of the partner.
The Internal Revenue Code generally requires publicly-traded partnerships to be treated as
corporations for federal income tax purposes. However, if the publicly-traded partnership
satisfies certain requirements and does not elect otherwise, the publicly-traded partnership will
be taxed as a partnership for federal income tax purposes, referred to herein as an MLP. Under
these requirements, an MLP must derive each year at least 90% of its gross income from Qualifying
Income.
Qualifying Income for MLPs includes interest, dividends, real estate rents, gain from the sale
or disposition of real property, certain income and gain from commodities or commodity futures, and
income and gain from certain mineral or natural resources activities. Mineral or natural resources
activities that generate Qualifying Income include income and gains from the exploration,
development, mining or production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of any mineral or natural resource
(including fertilizer, geothermal energy, and timber). This means that most MLPs today are in
energy, timber, or real estate related businesses.
Because the MLP itself does not pay federal income tax, its income or loss is allocated to its
investors, irrespective of whether the investors receive any cash or other payment from the MLP.
It is important to note that an MLP investor is taxed on his share of partnership income whether or
not he actually receives any cash or other property from the partnership. The tax is based not on
money or other property he actually receives, but his proportionate share of what the partnership
earns. However, most MLPs make it a policy to make quarterly distributions to their partners that
will comfortably exceed any income tax owed. Although they resemble corporate dividends, MLP
distributions are treated differently. The MLP distribution is treated as a return of capital to
the extent of the investors basis in his MLP
S-29
interest and, to the extent the distribution exceeds the investors basis in the MLP interest,
capital gain. The investors original basis is generally the price paid for the units. The basis
is adjusted downward with each distribution and allocation of deductions (such as depreciation) and
losses, and upwards with each allocation of income and gain.
The partner generally will not be taxed on MLP distributions until (1) he sells his MLP units
and pays tax on his gain, which gain is increased due to the basis decrease resulting from prior
distributions; or (2) his basis reaches zero. When the units are sold, the difference between the
sales price and the investors adjusted basis is the gain or loss for federal income tax purposes.
At tax filing season an MLP investor will receive a Schedule K-1 form showing the investors
share of each item of the partnerships income, gain, loss, deductions and credits. The investor
will use that information to figure the investors taxable income (MLPs generally provide their
investors with material that walks them through all the steps). If there is net income derived
from the MLP, the investor pays federal income tax at his, her or its tax rate. If there is a net
loss derived from the MLP, it is generally considered a passive loss under the Internal Revenue
Code and generally may not be used to offset income from other sources, but must be carried
forward.
Because we are a corporation, we, and not our stockholders, will report the income or loss of
the MLPs. Thus, our stockholders will not have to deal with any Schedules K-1 reporting income and
loss items of the MLPs. Stockholders, instead, will receive a Form 1099 from us. In addition, due
to our broad public ownership, we do not expect to be subject to the passive loss limitation rules
mentioned in the preceding paragraph.
Common and Preferred Stock
Federal Income Tax Treatment of Common Stock Distributions. Unlike a holder of a direct
interest in MLPs, a stockholder will not include its allocable share of our income, gains, losses
or deductions in computing its own taxable income. Instead, since we are of the opinion that,
under present law, our shares of common stock will constitute equity, distributions with respect to
such shares (other than distributions in redemption of shares subject to Section 302(b) of the
Internal Revenue Code) will generally constitute dividends to the extent of our allocable current
or accumulated earnings and profits, as calculated for federal income tax purposes. Generally, a
corporations earnings and profits are computed based upon taxable income, with certain specified
adjustments. As explained above, based upon the historic performance of the MLPs, we anticipate
that the distributed cash from the MLPs will exceed our share of the MLPs income. In addition,
earnings and profits are treated generally, for federal income tax purposes, as first being used to
pay distributions on preferred stock, and then to the extent remaining, if any, to pay
distributions on the common stock. Thus, we anticipate that only a portion of the distributions of
distributable cash flow (DCF) will be treated as dividend income to common stockholders. To the
extent that distributions to a stockholder exceed our current and accumulated earnings and profits,
such distributions will be treated as a return of capital and the stockholders basis in shares of
stock with respect to which the distributions are made will be reduced and, if a stockholder has no
further basis in the shares, the stockholder will report any excess as capital gain if the
stockholder holds such shares as a capital asset.
Dividends of current or accumulated earnings and profits generally will be taxable as ordinary
income to holders but are expected to be treated as qualified dividend income that is generally
subject to reduced rates of federal income taxation for noncorporate investors and are also
expected to be eligible for the dividends received deduction available to corporate stockholders
under Section 243 of the Internal Revenue Code. Under federal income tax law, qualified dividend
income received by individual and other noncorporate stockholders is taxed at long-term capital
gain rates, which currently reach a maximum of 15%. Qualified dividend income generally includes
dividends from domestic corporations
S-30
and dividends from non-U.S. corporations that meet certain criteria. To be treated as
qualified dividend income, the stockholder must hold the shares paying otherwise qualifying
dividend income more than 60 days during the 121-day period beginning 60 days before the
ex-dividend date (or more than 90 days during the 181-day period beginning 90 days before the
ex-dividend date in the case of certain preferred stock dividends). A stockholders holding period
may be reduced for purposes of this rule if the stockholder engages in certain risk reduction
transactions with respect to the common or preferred stock. The provisions of the Internal Revenue
Code applicable to qualified dividend income are effective through 2010. Thereafter, higher tax
rates will apply unless further legislative action is taken.
Corporate holders should be aware that certain limitations apply to the availability of the
dividends received deduction, including limitations on the aggregate amount of the deduction that
may be claimed and limitations based on the holding period of the shares on which the dividend is
paid, which holding period may be reduced if the holder engages in risk reduction transactions with
respect to its shares. Corporate holders should consult their own tax advisors regarding the
application of these limitations to their particular situation.
If a common stockholder participates in our Automatic Dividend Reinvestment Plan, such
stockholder will be treated as receiving the amount of the distributions made by the Company, which
amount generally will be either equal to the amount of cash distribution the stockholder would have
received if the stockholder had elected to receive cash or, for shares issued by the Company, the
fair market value of the shares issued to the stockholder.
Federal Income Tax Treatment of Preferred Stock Distributions. Under present law, we believe
that our preferred stock will constitute equity for federal income tax purposes, and thus
distributions with respect to the preferred stock (other than distributions in redemption of
preferred stock subject to Section 302(b) of the Internal Revenue Code) will generally constitute
dividends to the extent of our current or accumulated earnings and profits allocable to such
shares, as calculated for federal income tax purposes. Earnings and profits are generally treated,
for federal income tax purposes, as first being allocable to distributions on the preferred stock
and then to the extent remaining, if any, to distributions on our common stock. Dividends
generally will be taxable as ordinary income to holders, but are expected to be treated as
qualified dividend income that is generally subject to reduced rates of federal income taxation
for noncorporate investors, as described above. In the case of corporate holders of preferred
stock, subject to applicable requirements and limitations, dividends may be eligible for the
dividends received deduction available to corporations under Section 243 of the Internal Revenue
Code (see discussion above). Distributions in excess of our earnings and profits allocable to
preferred stock, if any, will first reduce a shareholders adjusted tax basis in his or her shares
and, after the adjusted tax basis is reduced to zero, will constitute capital gains to a holder who
holds such shares as a capital asset. Because we have elected not to be treated as a regulated
investment company under the Internal Revenue Code, we are not entitled to designate any dividends
made with respect to our stock as capital gain distributions.
Sale of Shares. The sale of shares of common or preferred stock by holders will generally be
a taxable transaction for federal income tax purposes. Holders of shares who sell such shares will
generally recognize gain or loss in an amount equal to the difference between the net proceeds of
the sale and their adjusted tax basis in the shares sold. If the shares are held as a capital
asset at the time of the sale, the gain or loss will generally be a capital gain or loss.
Similarly, a redemption by us (including a redemption resulting from our liquidation), if any, of
all the shares actually and constructively held by a stockholder generally will give rise to
capital gain or loss under Section 302(b) of the Internal Revenue Code, provided that the
redemption proceeds do not represent declared but unpaid dividends. Other redemptions may also
give rise to capital gain or loss, but certain conditions imposed by Section 302(b) of the Internal
Revenue Code must be satisfied to achieve such treatment.
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Capital gain or loss will generally be long-term capital gain or loss if the shares were held
for more than one year and will be short-term capital gain or loss if the disposed shares were held
for one year or less. Net long-term capital gain recognized by a noncorporate U.S. holder
generally will be subject to federal income tax at a lower rate (currently a maximum rate of 15%)
than net short-term capital gain or ordinary income (currently a maximum rate of 35%). Under
current law, the maximum federal income tax rate on capital gain for noncorporate holders is
scheduled to increase to 20% for taxable years after 2010. For corporate holders, capital gain is
generally taxed at the same rate as ordinary income, that is, currently at a maximum rate of 35%.
A holders ability to deduct capital losses may be limited.
Investment by Tax-Exempt Investors and Regulated Investment Companies. Employee benefit
plans, other tax-exempt organizations and regulated investment companies may want to invest in our
securities. Employee benefit plans and most other organizations exempt from federal income tax,
including individual retirement accounts and other retirement plans, are subject to federal income
tax on unrelated business taxable income (UBTI). Because we are a corporation for federal income
tax purposes, an owner of shares will not report on its federal income tax return any of our items
of income, gain, loss and deduction. Therefore, a tax-exempt investor generally will not have UBTI
attributable to its ownership or sale of our stock unless its ownership of the stock is
debt-financed. In general, stock would be debt-financed if the tax-exempt owner of stock incurs
debt to acquire the stock or otherwise incurs or maintains debt that would not have been incurred
or maintained if the stock had not been acquired.
For federal income tax purposes, a regulated investment company, or mutual fund, may not
have more than 25% of the value of its total assets, at the close of any fiscal quarter, invested
in the securities of one or more qualified publicly traded partnerships, which will include most
MLPs. Shares of our stock are not securities of a qualified publicly traded partnership and will
not be treated as such for purposes of calculating the limitation imposed upon regulated investment
companies.
Backup Withholding. We may be required to withhold, for U.S. federal income tax purposes, a
portion of all taxable distributions (including redemption proceeds) payable to stockholders who
fail to provide us with their correct taxpayer identification number, who fail to make required
certifications or who have been notified by the Internal Revenue Service (IRS) that they are
subject to backup withholding (or if we have been so notified). Certain corporate and other
stockholders specified in the Internal Revenue Code and the regulations thereunder are exempt from
backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be
credited against the stockholders U.S. federal income tax liability provided the appropriate
information is furnished to the IRS in a timely manner.
Other Taxation. Foreign stockholders, including stockholders who are nonresident alien
individuals, may be subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rates as may be prescribed by any applicable treaty. Our distributions also may be
subject to state and local taxes.
Debt Securities
Federal Income Tax Treatment of Holders of Debt Securities. Under present law, we are of the
opinion that our debt securities will constitute indebtedness for federal income tax purposes,
which the discussion below assumes. We intend to treat all payments made with respect to the debt
securities consistent with this characterization.
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Taxation of Interest. Payments or accruals of interest on debt securities generally will be
taxable to you as ordinary interest income at the time such interest is received (actually or
constructively) or accrued, in accordance with your regular method of accounting for federal income
tax purposes.
Purchase, Sale and Redemption of Debt Securities. Initially, your tax basis in debt
securities acquired generally will be equal to your cost to acquire such debt securities. This
basis will increase by the amounts, if any, that you include in income under the rules governing
market discount, and will decrease by the amount of any amortized premium on such debt securities,
as discussed below. When you sell or exchange any of your debt securities, or if any of your debt
securities are redeemed, you generally will recognize gain or loss equal to the difference between
the amount you realize on the transaction (less any accrued and unpaid interest, which will be
subject to tax as interest in the manner described above) and your tax basis in the debt securities
relinquished.
Except as discussed below with respect to market discount, the gain or loss that you recognize
on the sale, exchange or redemption of any of your debt securities generally will be capital gain
or loss. Such gain or loss will generally be long-term capital gain or loss if the disposed debt
securities were held for more than one year and will be short-term capital gain or loss if the
disposed debt securities were held for one year or less. Net long-term capital gain recognized by
a noncorporate U.S. holder generally will be subject to federal income tax at a lower rate
(currently a maximum rate of 15%, although this rate will increase to 20% after 2010) than net
short-term capital gain or ordinary income (currently a maximum rate of 35%). For corporate
holders, capital gain is generally taxed at the same rate as ordinary income, that is, currently at
a maximum rate of 35%. A holders ability to deduct capital losses may be limited.
Amortizable Premium. If you purchase debt securities at a cost greater than their stated
principal amount, plus accrued interest, you will be considered to have purchased the debt
securities at a premium, and you generally may elect to amortize this premium as an offset to
interest income, using a constant yield method, over the remaining term of the debt securities. If
you make the election to amortize the premium, it generally will apply to all debt instruments that
you hold at the time of the election, as well as any debt instruments that you subsequently
acquire. In addition, you may not revoke the election without the consent of the IRS. If you
elect to amortize the premium, you will be required to reduce your tax basis in the debt securities
by the amount of the premium amortized during your holding period. If you do not elect to amortize
premium, the amount of premium will be included in your tax basis in the debt securities.
Therefore, if you do not elect to amortize the premium and you hold the debt securities to
maturity, you generally will be required to treat the premium as a capital loss when the debt
securities are redeemed.
Market Discount. If you purchase debt securities at a price that reflects a market
discount, any principal payments on, or any gain that you realize on the disposition of, the debt
securities generally will be treated as ordinary interest income to the extent of the market
discount that accrued on the debt securities during the time you held such debt securities.
Market discount is defined under the Internal Revenue Code as, in general, the excess of the
stated redemption price at maturity over the purchase price of the debt security, except that if
the market discount is less than 0.25% of the stated redemption price at maturity multiplied by the
number of complete years to maturity, the market discount is considered to be zero. In addition,
you may be required to defer the deduction of all or a portion of any interest paid on any
indebtedness that you incurred or continued to purchase or carry the debt securities that were
acquired at a market discount. In general, market discount will be treated as accruing ratably
over the term of the debt securities, or, at your election, under a constant yield method.
You may elect to include market discount in gross income currently as it accrues (on either a
ratable or constant yield basis), in lieu of treating a portion of any gain realized on a sale of
the debt securities as ordinary income. If you elect to include market discount on a current
basis, the interest
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deduction deferral rule described above will not apply and you will increase your basis in the
debt security by the amount of market discount you include in gross income. If you do make such an
election, it will apply to all market discount debt instruments that you acquire on or after the
first day of the first taxable year to which the election applies. This election may not be
revoked without the consent of the IRS.
Information Reporting and Backup Withholding. In general, information reporting requirements
will apply to payments of principal, interest, and premium, if any, paid on debt securities and to
the proceeds of the sale of debt securities paid to U.S. holders other than certain exempt
recipients (such as certain corporations). Information reporting generally will apply to payments
of interest on the debt securities to non-U.S. Holders (as defined below) and the amount of tax, if
any, withheld with respect to such payments. Copies of the information returns reporting such
interest payments and any withholding may also be made available to the tax authorities in the
country in which the non-U.S. Holder resides under the provisions of an applicable income tax
treaty. In addition, for non-U.S. Holders, information reporting will apply to the proceeds of the
sale of debt securities within the United States or conducted through United States-related
financial intermediaries unless the certification requirements described below have been complied
with and the statement described below in Taxation of Non-U.S. Holders has been received (and the
payor does not have actual knowledge or reason to know that the holder is a United States person)
or the holder otherwise establishes an exemption.
We may be required to withhold, for U.S. federal income tax purposes, a portion of all taxable
payments (including redemption proceeds) payable to holders of debt securities who fail to provide
us with their correct taxpayer identification number, who fail to make required certifications or
who have been notified by the IRS that they are subject to backup withholding (or if we have been
so notified). Certain corporate and other shareholders specified in the Internal Revenue Code and
the regulations thereunder are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the holders U.S. federal income tax
liability provided the appropriate information is furnished to the IRS. If you are a non-U.S.
Holder, you may have to comply with certification procedures to establish your non-U.S. status in
order to avoid backup withholding tax requirements. The certification procedures required to claim
the exemption from withholding tax on interest income described below will satisfy these
requirements.
Taxation of Non-U.S. Holders. If you are a non-resident alien individual or a foreign
corporation (a non-U.S. Holder), the payment of interest on the debt securities generally will be
considered portfolio interest and thus generally will be exempt from United States federal
withholding tax. This exemption will apply to you provided that (1) interest paid on the debt
securities is not effectively connected with your conduct of a trade or business in the United
States, (2) you are not a bank whose receipt of interest on the debt securities is described in
Section 881(c)(3)(A) of the Internal Revenue Code, (3) you do not actually or constructively own 10
percent or more of the combined voting power of all classes of our stock entitled to vote, (4) you
are not a controlled foreign corporation that is related, directly or indirectly to us through
stock ownership, and (5) you satisfy the certification requirements described below.
To satisfy the certification requirements, either (1) the holder of any debt securities must
certify, under penalties of perjury, that such holder is a non-U.S. person and must provide such
owners name, address and taxpayer identification number, if any, on IRS Form W-8BEN, or (2) a
securities clearing organization, bank or other financial institution that holds customer
securities in the ordinary course of its trade or business and holds the debt securities on behalf
of the holder thereof must certify, under penalties of perjury, that it has received a valid and
properly executed IRS Form W-8BEN from the beneficial holder and comply with certain other
requirements. Special certification rules apply for debt securities held by a foreign partnership
and other intermediaries.
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Interest on debt securities received by a non-U.S. Holder that is not excluded from U.S.
federal withholding tax under the portfolio interest exemption as described above generally will be
subject to withholding at a 30% rate, except where a non-U.S. Holder can claim the benefits of an
applicable tax treaty to reduce or eliminate such withholding tax and such non-U.S. Holder provides
us with a properly executed IRS Form W-8BEN claiming such exemption or reduction.
Any capital gain that a non-U.S. Holder realizes on a sale, exchange or other disposition of
debt securities generally will be exempt from United States federal income tax, including
withholding tax. This exemption will not apply to you if your gain is effectively connected with
your conduct of a trade or business in the U.S. or you are an individual holder and are present in
the U.S. for 183 days or more in the taxable year of the disposition and either your gain is
attributable to an office or other fixed place of business that you maintain in the U.S. or you
have a tax home in the United States.
PROXY VOTING POLICIES
We and the Adviser have adopted proxy voting policies and procedures (Proxy Policy), which
we believe are reasonably designed to ensure that proxies are voted in our best interests and our
stockholders best interests. Subject to the oversight of the Board, the Board has delegated
responsibility for implementing the Proxy Policy to the Adviser. Because of the unique nature of
MLPs in which we primarily invest, the Adviser shall evaluate each proxy on a case-by-case basis.
Because proxies of MLPs are expected to relate only to extraordinary measures, we do not believe it
is prudent to adopt pre-established voting guidelines.
In the event requests for proxies are received with respect to the voting of equity securities
other than MLP equity units, on routine matters, such as election of directors or approval of
auditors, the proxies usually will be voted with management unless 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 our 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 our
stockholders.
The Chief Executive Officer is responsible for monitoring corporate actions and ensuring that
(1) proxies are received and forwarded to the appropriate decision makers; and (2) proxies are
voted in a timely manner upon receipt of voting instructions. We are not responsible for voting
proxies we do not receive, but will make reasonable efforts to obtain missing proxies. The Chief
Executive Officer shall implement procedures to identify and monitor potential conflicts of
interest that could affect the proxy voting process, including (1) significant client
relationships; (2) other potential material business relationships; and (3) material personal and
family relationships. All decisions regarding proxy voting shall be determined by the Investment
Committee of the Adviser, or a Manager of the Adviser designated by the Investment Committee, and
shall be executed by the Chief Executive Officer or, if the proxy may be voted electronically,
electronically voted by the Chief Executive Officer or his designee. Every effort shall be made to
consult with the portfolio manager and/or analyst covering the security. We may determine not to
vote a particular proxy, if the costs and burdens exceed the benefits of voting (e.g., when
securities are subject to loan or to share blocking restrictions).
If a request for proxy presents a conflict of interest between our stockholders on the one
hand, and the Adviser, the principal underwriters, or any affiliated persons of us, on the other
hand, management may (i) disclose the potential conflict to the Board of Directors and obtain
consent; or
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(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 we voted proxies for the period from our commencement of operations
through June 30, 2006, is available without charge by calling us at 1-866-362-9331. You also may
access this information on the SECs website at http://www.sec.gov. The Advisers website at
www.tortoiseadvisors.com provides a link to all of our reports filed with the SEC.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, 1200 Main Street, Kansas City, Missouri, serves as our independent
registered public accounting firm. Ernst & Young LLP provides audit and audit-related services,
tax return preparation and assistance and consultation in connection with review of our filings
with the SEC.
INTERNAL ACCOUNTANT
U.S. Bancorp Fund Services, LLC (U.S. Bancorp) serves as our internal accountant. For its
services, we pay U.S. Bancorp a fee computed at $24,500 for the first $50 million of our net
assets, 0.0125% on the next $200 million of net assets and 0.0075% on the balance of our net
assets. For the period beginning February 27, 2004 through November 30, 2004, we paid U.S. Bancorp
$40,061 for internal accounting services. For the fiscal years ended November 30, 2006 and 2005,
we paid U.S. Bancorp $67,856 and $60,831, respectively, for internal accounting services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to the common
stock, preferred stock and debt securities offered hereby, has been filed by us with the SEC. The
prospectus, prospectus supplement, and this Statement of Additional Information do not contain all
of the information set forth in the Registration Statement, including any exhibits and schedules
thereto. Please refer to the Registration Statement for further information with respect to us and
the offering of our securities. Statements contained in the prospectus, prospectus supplement, and
this Statement of Additional Information as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to a Registration Statement, each such statement
being qualified in all respects by such reference. Copies of the Registration Statement may be
inspected without charge at the SECs principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the SEC upon the payment of certain fees prescribed by the
SEC.
FINANCIAL STATEMENTS
Our 2006 Annual Report, which contains our financial statements as of November 30, 2006, notes
thereto, and other information about us, has been filed with the SEC, and is hereby incorporated by
reference into, and shall accompany, this Statement of Additional Information. Our 2006 Annual
Report includes supplemental financial information which presents selected ratios as a percentage
of our total investment portfolio and a calculation of our distributable cash flow (DCF) and
related information. You may request a free copy of the Statement of Additional Information, our
annual, semi-annual and quarterly reports, or make other requests for information about us, by
calling toll-free 1-866-362-9331, or by writing to us at 10801 Mastin Boulevard, Suite 222,
Overland Park, Kansas 66210.
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APPENDIX A
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
AND FORM OF SUPPLEMENTAL INDENTURE
The following is a summary of certain provisions of the indenture dated July 13, 2004 (the
Original Indenture) and the form of Supplemental Indenture dated ___. This summary does
not purport to be complete and is qualified in its entirety by reference to the Indenture, a copy
of which is on file with the SEC.
DEFINITIONS
AA Composite Commercial Paper Rate on any date means (i) the interest equivalent of (1)
the 7-day rate, in the case of a Rate Period which is 7 days or shorter, (2) the 30-day rate, in
the case of a Rate Period which is a Standard Rate Period greater than 7 days but fewer than or
equal to 31 days, or (3) the 180-day rate, in the case of all other Rate Periods, on financial
commercial paper on behalf of issuers whose corporate bonds are rated AA by S&P, or the
equivalent of such rating by another nationally recognized rating agency, as announced by the
Federal Reserve Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not make available such a
rate, then the arithmetic average of the interest equivalent of such rates on financial commercial
paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by the
Commercial Paper Dealers to the Auction Agent for the close of business on the Business Day
immediately preceding such date (rounded to the next highest .001 of 1%). If any Commercial Paper
Dealer does not quote a rate required to determine the AA Composite Commercial Paper Rate, such
rate shall be determined on the basis of the quotations (or quotation) furnished by the remaining
Commercial Paper Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers, by
a nationally recognized dealer in commercial paper of such issues then making such quotations
selected by the Company. For purposes of this definition, (A) Commercial Paper Dealers shall
mean (1) Citigroup Global Markets Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman Sachs & Co.; (2) in lieu of any thereof, its respective Affiliate or
successor; and (3) in the event that any of the foregoing shall cease to quote rates for financial
commercial paper of issuers of the sort described above, in substitution therefor, a nationally
recognized dealer in financial commercial paper of such issuers then making such quotations
selected by the Company, and (B) interest equivalent of a rate stated on a discount basis for
financial commercial paper of a given number of days maturity shall mean a number equal to the
quotient (rounded upward to the next higher one-thousandth of 1%) of (1) such rate expressed as a
decimal, divided by (2) the difference between (x) 1.00 and (y) a fraction, the numerator of which
shall be the product of such rate expressed as a decimal, multiplied by the number of days in which
such financial commercial paper shall mature and the denominator of which shall be 360.
Affiliate means any person controlled by, in control of or under common control with the
Company; provided that no Broker-Dealer controlled by, in control of or under common control with
the Company shall be deemed to be an Affiliate nor shall any corporation or any person controlled
by, in control of or under common control with such corporation one of the directors or executive
officers of which also is a Director of the Company be deemed to be an Affiliate solely because
such director or executive officer also is a Director of the Company.
Agent Member means a member of or participant in the Securities Depository that will act on
behalf of a Bidder.
All Hold Rate means 80% of the AA Composite Commercial Paper Rate.
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Applicable Rate means the rate determined in accordance with the procedures in paragraph
(c)(i) of Interest in this Appendix A.
Auction means each periodic implementation of the Auction Procedures.
Auction Agent means The Bank of New York unless and until another commercial bank, trust
company, or other financial institution appointed by a resolution of the Board of Directors enters
into an agreement with the Company to follow the Auction Procedures for the purpose of determining
the Applicable Rate.
Auction Agreement means the agreement between the Auction Agent and the Company pursuant to
which the Auction Agent agrees to the follow the procedures specified in Part II of these terms of
the Tortoise Notes, as such agreement may from time to time be amended or supplemented.
Auction Date means the first Business Day next preceding the first day of a Rate Period for
each series of Tortoise Notes.
Auction Period means with respect to the Tortoise Notes, either a Standard Auction Period or
a Special Auction Period, as applicable.
Auction Procedures means the procedures for conducting Auctions set forth in Appendix A-I
hereto.
Authorized Denomination means $25,000 and any integral multiple thereof.
Available Tortoise Notes means for each series of Tortoise Notes on each Auction Date, the
aggregate principal amount of Tortoise Notes of such series that are not the subject of Submitted
Hold Orders.
Beneficial Owner, with respect to each series of Tortoise Notes, means a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer (or, if applicable, the Auction
Agent) as a holder of such series of Tortoise Notes.
Bid shall have the meaning specified in Appendix A-ITortoise Notes Auction Procedures.
Bidder means each Beneficial Owner, Potential Beneficial Owner and Broker Dealer who places
an Order.
Board of Directors or Board means the Board of Directors of the Company or any duly
authorized committee thereof as permitted by applicable law.
Broker-Dealer means any broker-dealer or broker-dealers, or other entity permitted by law to
perform the functions required of a Broker-Dealer by the Auction Procedures, that has been selected
by the Company and has entered into a Broker-Dealer Agreement that remains effective.
Broker-Dealer Agreement means an agreement between the Auction Agent and a Broker-Dealer,
pursuant to which such Broker-Dealer agrees to follow the Auction Procedures.
Business Day means a day on which the New York Stock Exchange is open for trading and which
is not a Saturday, Sunday or other day on which banks in the City of New York, New York are
authorized or obligated by law to close.
Code means the Internal Revenue Code of 1986, as amended.
A-2
Commercial Paper Dealers has the meaning set forth in the definition of AA Composite
Commercial Paper Rate.
Commission means the Securities and Exchange Commission.
Default Rate means the Reference Rate multiplied by three (3).
Deposit Securities means cash and any obligations or securities, including short term money
market instruments that are Eligible Assets, rated at least AAA, A-2 or SP-2 by Fitch, except that
such obligations or securities shall be considered Deposit Securities only if they are also rated
at least P-2 by Moodys.
Discount Factor means the Moodys Discount Factor (if Moodys is then rating the Tortoise
Notes), Fitch Discount Factor (if Fitch is then rating the Tortoise Notes) or an Other Rating
Agency Discount Factor, whichever is applicable.
Discounted Value means the quotient of the Market Value of an Eligible Asset divided by the
applicable Discount Factor, provided that with respect to an Eligible Asset that is currently
callable, Discounted Value will be equal to the quotient as calculated above or the call price,
whichever is lower, and that with respect to an Eligible Asset that is prepayable, Discounted Value
will be equal to the quotient as calculated above or the par value, whichever is lower.
Eligible Assets means Moodys Eligible Assets or Fitchs Eligible Assets (if Moodys or
Fitch are then rating the Tortoise Notes) and/or Other Rating Agency Eligible Assets, whichever is
applicable.
Error Correction Deadline means one hour after the Auction Agent completes the dissemination
of the results of the Auction to Broker-Dealers without regard to the time of receipt of such
results by any Broker-Dealer; provided, however, in no event shall the Error Correction Deadline
extend past 4:00 p.m., New York City time unless the Auction Agent experiences technological
failure or force majeure in disseminating the Auction results which causes a delay in dissemination
past 3:00 p.m., New York City time.
Existing Holder, with respect to Tortoise Notes of a series, shall mean a Broker-Dealer (or
any such other Person as may be permitted by the Company) that is listed on the records of the
Auction Agent as a holder of Tortoise Notes of such series.
Fitch means Fitch Ratings and its successors at law.
Fitch Discount Factor means the discount factors set forth in the Fitch Guidelines for use
in calculating the Discounted Value of the Companys assets in connection with Fitchs ratings of
Tortoise Notes.
Fitch Eligible Asset means assets of the Company set forth in the Fitch Guidelines as
eligible for inclusion in calculating the Discounted Value of the Companys assets in connection
with Fitchs ratings of Tortoise Notes.
Fitch Guidelines mean the guidelines provided by Fitch, as may be amended from time to time,
in connection with Fitchs ratings of Tortoise Notes.
Hold Order shall have the meaning specified in Appendix A-ITortoise Notes Auction
Procedures or an Order deemed to have been submitted as provided in paragraph (c) of Section 1 of
Appendix A-ITortoise Notes Auction Procedures.
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Holder means, with respect to Tortoise Notes, the registered holder of Tortoise Notes of
each series as the same appears on the books or records of the Company.
Interest Payment Date, when used with respect to any Tortoise Notes, means the date on which
an installment of interest on such Tortoise Notes shall be due and payable which generally shall be
the business day next following the last Auction Date.
LIBOR means, for purposes of determining the Reference Rate, (i) the rate for deposits in
U.S. dollars for the designated Rate Period, which appears on display page 3750 of Moneylines
Telerate Service (Telerate Page 3750) (or such other page as may replace that page on that
service, or such other service as may be selected by Lehman Brothers Inc. or its successors) as of
11:00 a.m., London time, on the day that is the Business Day on the Auction Date or, if the Auction
Date is not a Business Day, the Business Day preceding the Auction Date (the LIBOR Determination
Date), or (ii) if such rate does not appear on Telerate Page 3750 or such other page as may
replace such Telerate Page 3750, (A) Lehman Brothers Inc. shall determine the arithmetic mean of
the offered quotations of the reference banks to leading banks in the London interbank market for
deposits in U.S. dollars for the designated Rate Period in an amount determined by Lehman Brothers
Inc. by reference to requests for quotations as of approximately 11:00 a.m. (London time) on such
date made by Lehman Brothers Inc. to the reference banks, (B) if at least two of the reference
banks provide such quotations, LIBOR shall equal such arithmetic mean of such quotations, (C) if
only one or none of the reference banks provide such quotations, LIBOR shall be deemed to be the
arithmetic mean of the offered quotations that leading banks in The City of New York, New York
selected by Lehman Brothers Inc. (after obtaining the Issuers approval) are quoting on the
relevant LIBOR Determination Date for deposits in U.S. dollars for the designated Rate Period in an
amount determined by Lehman Brothers Inc. (after obtaining the Issuers approval) that is
representative of a single transaction in such market at such time by reference to the principal
London office of leading banks in the London interbank market; provided, however, that if Lehman
Brothers Inc. is not a Broker-Dealer or does not quote a rate required to determine LIBOR, LIBOR
will be determined on the basis of the quotation or quotations furnished by any other Broker-Dealer
selected by the Issuer to provide such rate or rates not being supplied by Lehman Brothers Inc.;
provided further, that if Lehman Brothers Inc. and/or a substitute Broker-Dealer are required but
unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR
shall be the most recently determinable LIBOR. If the number of Rate Period days shall be (i) 7 or
more but fewer than 21 days, such rate shall be the seven-day LIBOR rate; (ii) more than 21 but
fewer than 49 days, such rate shall be one-month LIBOR rate; (iii) 49 or more but fewer than 77
days, such rate shall be the two-month LIBOR rate; (iv) 77 or more but fewer than 112 days, such
rate shall be the three-month LIBOR rate; (v) 112 or more but fewer than 140 days, such rate shall
be the four-month LIBOR rate; (vi) 140 or more but fewer than 168 days, such rate shall be the
five-month LIBOR rate; (vii) 168 or more but fewer 189 days, such rate shall be the six-month LIBOR
rate; (viii) 189 or more but fewer than 217 days, such rate shall be the seven-month LIBOR rate;
(ix) 217 or more but fewer than 252 days, such rate shall be the eight-month LIBOR rate; (x) 252 or
more but fewer than 287 days, such rate shall be the nine-month LIBOR rate; (xi) 287 or more but
fewer than 315 days, such rate shall be the ten-month LIBOR rate; (xii) 315 or more but fewer than
343 days, such rate shall be the eleven-month LIBOR rate; and (xiii) 343 or more days but fewer
than 365 days, such rate shall be the twelve-month LIBOR rate.
Market Value means the market value of an asset of the Company determined as follows: For
equity securities, the value obtained from readily available market quotations. If an equity
security is not traded on an exchange or not available from a Board-approved pricing service, the
value obtained from written broker-dealer quotations. For fixed-income securities, the value
obtained from readily available market quotations based on the last sale price of a security on the
day the Company values its assets or the market value obtained from a pricing service or the value
obtained from a direct written broker-dealer quotation from a dealer who has made a market in the
security. Market Value for other securities will
A-4
mean the value obtained pursuant to the Companys valuation procedures. If the market value
of a security cannot be obtained, or the Companys investment adviser determines that the value of
a security as so obtained does not represent the fair value of a security, fair value for that
security shall be determined pursuant to the valuation procedures adopted by the Board of
Directors.
Maximum Rate means, on any date on which the Applicable Rate is determined, the rate equal
to the applicable percentage of the Reference Rate, subject to upward but not downward adjustment
in the discretion of the Board of Directors after consultation with the Broker-Dealers, provided
that immediately following any such increase the Company would be in compliance with the Tortoise
Notes Basic Maintenance Amount.
Minimum Rate means, on any Auction Date with respect to a Rate Period of ___days or fewer,
70% of the AA Composite Commercial Paper Rate at the close of business on the Business Day next
preceding such Auction Date. There shall be no Minimum Rate on any Auction Date with respect to a
Rate Period of more than the Standard Rate Period.
Moodys means Moodys Investors Service, Inc., a Delaware corporation, and its successors at
law.
Moodys Discount Factor means the discount factors set forth in the Moodys Guidelines for
use in calculating the Discounted Value of the Companys assets in connection with Moodys ratings
of Tortoise Notes.
Moodys Eligible Assets means assets of the Company set forth in the Moodys Guidelines as
eligible for inclusion in calculating the Discounted Value of the Companys assets in connection
with Moodys ratings of Tortoise Notes.
Moodys Guidelines mean the guidelines provided by Moodys, as may be amended from time to
time, in connection with Moodys ratings of Tortoise Notes.
1940 Act Tortoise Notes Asset Coverage means asset coverage, as determined in accordance
with Section 18(h) of the 1940 Act, of at least 300% with respect to all outstanding senior
securities representing indebtedness of the Company, including all Outstanding Tortoise Notes (or
such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum
asset coverage for senior securities representing indebtedness of a closed-end investment company
as a condition of declaring dividends on its common stock), determined on the basis of values
calculated as of a time within 48 hours next preceding the time of such determination.
Notes means securities of the Company ranking on a parity with the Tortoise Notes that may
be issued from time to time pursuant to the Indenture.
Order means a Hold Order, Bid or Sell Order.
Original Issue Date means, with respect to Series ___ Tortoise Notes, ___.
Other Rating Agency means each rating agency, if any, other than Moodys or Fitch then
providing a rating for the Tortoise Notes pursuant to the request of the Company.
Other Rating Agency Discount Factor means the discount factors set forth in the Other Rating
Agency Guidelines of each Other Rating Agency for use in calculating the Discounted Value of the
Companys assets in connection with the Other Rating Agencys rating of Tortoise Notes.
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Other Rating Agency Eligible Assets means assets of the Company set forth in the Other
Rating Agency Guidelines of each Other Rating Agency as eligible for inclusion in calculating the
Discounted Value of the Companys assets in connection with the Other Rating Agencys rating of
Tortoise Notes.
Other Rating Agency Guidelines mean the guidelines provided by each Other Rating Agency, as
may be amended from time to time, in connection with the Other Rating Agencys rating of Tortoise
Notes.
Outstanding or outstanding means, as of any date, Tortoise Notes theretofore issued by the
Company except, without duplication, (i) any Tortoise Notes theretofore canceled, redeemed or
repurchased by the Company, or delivered to the Trustee for cancellation or with respect to which
the Company has given notice of redemption and irrevocably deposited with the Paying Agent
sufficient funds to redeem such Tortoise Notes and (ii) any Tortoise Notes represented by any
certificate in lieu of which a new certificate has been executed and delivered by the Company.
Notwithstanding the foregoing, (A) in connection with any Auction, any series of Tortoise Notes as
to which the Company or any person known to the Auction Agent to be an Affiliate of the Company
shall be the Existing Holder thereof shall be disregarded and deemed not to be Outstanding; and (B)
for purposes of determining the Tortoise Notes Basic Maintenance Amount, Tortoise Notes held by the
Company shall be disregarded and not deemed Outstanding but Tortoise Notes held by any Affiliate of
the Company shall be deemed Outstanding.
Paying Agent means BNY Midwest Trust Company unless and until another entity appointed by a
resolution of the Board of Directors enters into an agreement with the Company to serve as paying
agent, transfer agent, registrar, and redemption agent with respect to the Tortoise Notes, which
Paying Agent may be the same as the Trustee or the Auction Agent.
Person or person means and includes an individual, a partnership, a trust, a company, an
unincorporated association, a joint venture or other entity or a government or any agency or
political subdivision thereof.
Potential Beneficial Owner, with respect to a series of Tortoise Notes, shall mean a
customer of a Broker-Dealer that is not a Beneficial Owner of Tortoise Notes of such series but
that wishes to purchase Tortoise Notes of such series, or that is a Beneficial Owner of Tortoise
Notes of such series that wishes to purchase additional Tortoise Notes of such series.
Potential Holder, with respect to Tortoise Notes of such series, shall mean a Broker-Dealer
(or any such other person as may be permitted by the Company) that is not an Existing Holder of
Tortoise Notes of such series or that is an Existing Holder of Tortoise Notes of such series that
wishes to become the Existing Holder of additional Tortoise Notes of such series.
Rate Period means, with respect to a series of Tortoise Notes, the period commencing on the
Original Issue Date thereof and ending on the date specified for such series on the Original Issue
Date thereof and thereafter, as to such series, the period commencing on the day following each
Rate Period for such series and ending on the day established for such series by the Company.
Rating Agency means each of Fitch (if Fitch is then rating Tortoise Notes), Moodys (if
Moodys is then rating Tortoise Notes) and any Other Rating Agency.
Rating Agency Guidelines mean Fitch Guidelines (if Fitch is then rating Tortoise Notes),
Moodys Guidelines (if Moodys is then rating Tortoise Notes) and any Other Rating Agency
Guidelines.
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Redemption Date, when used with respect to any Tortoise Note to be redeemed, means the date
fixed for such redemption by or pursuant to the Indenture.
Redemption Price, when used with respect to any Tortoise Note to be redeemed, means the
price at which it is to be redeemed pursuant to the Indenture.
Reference Rate means, with respect to the determination of the Maximum Rate and Default
Rate, the greater of (1) the applicable AA Composite Commercial Paper Rate (for a Rate Period of
fewer than 184 days) or the applicable Treasury Index Rate (for a Rate Period of 184 days or more),
or (2) the applicable LIBOR Rate.
Securities Act means the Securities Act of 1933, as amended from time to time.
Securities Depository means The Depository Trust Company and its successors and assigns or
any successor securities depository selected by the Company that agrees to follow the procedures
required to be followed by such securities depository in connection with the Tortoise Notes Series
___.
Sell Order shall have the meaning specified in Appendix A-ITortoise Notes Auction
Procedures.
Special Auction Period means an Auction Period that is not a Standard Auction Period.
Special Rate Period means a Rate Period that is not a Standard Rate Period.
Specific Redemption Provisions means, with respect to any Special Rate Period of more than
one year, either, or any combination of a period (a Non-Call Period) determined by the Board of
Directors after consultation with the Broker-Dealers, during which the Tortoise Notes subject to
such Special Rate Period are not subject to redemption at the option of the Company consisting of a
number of whole years as determined by the Board of Directors after consultation with the
Broker-Dealers, during each year of which the Tortoise Notes subject to such Special Rate Period
shall be redeemable at the Companys option and/or in connection with any mandatory redemption at a
price equal to the principal amount plus accumulated but unpaid interest plus a premium expressed
as a percentage or percentages of $25,000 or expressed as a formula using specified variables as
determined by the Board of Directors after consultation with the Broker-Dealers.
Standard Auction Period means an Auction Period of ___ days.
Standard Rate Period means a Rate Period of ___ days.
Stated Maturity, with respect to Tortoise Notes Series ___, shall mean ___.
Submission Deadline means 1:00 p.m., New York City time, on any Auction Date or such other
time on such date as shall be specified by the Auction Agent from time to time pursuant to the
Auction Agreement as the time by which the Broker-Dealers are required to submit Orders to the
Auction Agent. Notwithstanding the foregoing, the Auction Agent will follow the Securities
Industry and Financial Markets Associations Early Market Close Recommendations for shortened
trading days for the bond markets (the SIFMA Recommendation) unless the Auction Agent is
instructed otherwise in writing by the Company. In the event of a SIFMA Recommendation with
respect to an Auction Date, the Submission Deadline will be 11:30 a.m., instead of 1:00 p.m., New
York City time.
Submitted Bid shall have the meaning specified in Appendix A-ITortoise Notes Auction
Procedures.
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Submitted Hold Order shall have the meaning specified in Appendix A-ITortoise Notes Auction
Procedures.
Submitted Order shall have the meaning specified in Appendix A-ITortoise Notes Auction
Procedures.
Submitted Sell Order shall have the meaning specified in Appendix A-ITortoise Notes Auction
Procedures.
Sufficient Clearing Bids means for each series of Tortoise Notes, an auction for which the
aggregate principal amount of Tortoise Notes of the series that are the subject of Submitted Bids
by Potential Beneficial Owners specifying one or more rates not higher than the Maximum Rate is not
less than the aggregate principal amount of Tortoise Notes of such series that are the subject of
Submitted Sell Orders and of Submitted Bids by Existing Holders specifying rates higher than the
Maximum Rate.
Tortoise Notes Basic Maintenance Amount as of any Valuation Date has the meaning set forth
in the Rating Agency Guidelines.
Tortoise Notes Series ___ means the Series ___Tortoise Notes or any other Notes designated
under the Indenture as Series ___ Tortoise Notes.
Treasury Index Rate means the average yield to maturity for actively traded marketable U.S.
Treasury fixed interest rate securities having the same number of 30-day periods to maturity as the
length of the applicable Rate Period, determined, to the extent necessary, by linear interpolation
based upon the yield for such securities having the next shorter and next longer number of 30-day
periods to maturity treating all Rate Periods with a length greater than the longest maturity for
such securities as having a length equal to such longest maturity, in all cases based upon data set
forth in the most recent weekly statistical release published by the Board of Governors of the
Federal Reserve System (currently in H.15(519)); provided, however, if the most recent such
statistical release shall not have been published during the 15 days preceding the date of
computation, the foregoing computations shall be based upon the average of comparable data as
quoted to the Company by at least three recognized dealers in U.S. Government securities selected
by the Company.
Trustee means BNY Midwest Trust Company or such other person who is named as a trustee
pursuant to the terms of the Indenture.
Valuation Date means every Friday, or, if such day is not a Business Day, the next preceding
Business Day; provided, however, that the first Valuation Date may occur on any other date
established by the Company; provided, further, however, that such first Valuation Date shall be not
more than one week from the date on which Tortoise Notes Series ___ initially are issued.
Winning Bid Rate means for each series of Tortoise Notes, the lowest rate specified in any
Submitted Bid for such series of Tortoise Notes which if selected by the Auction Agent as the
Applicable Rate would cause the aggregate principal amount of Tortoise Notes of such series that
are the subject of Submitted Bids specifying a rate not greater than such rate to be not less than
the aggregate principal amount of Available Tortoise Notes of such series.
A-8
NOTE DETAILS, FORM OF NOTES AND REDEMPTION OF NOTES
Interest
(a) The Holders of any series of Tortoise Notes shall be entitled to receive interest payments
on their Tortoise Notes at the Applicable Rate, determined as set forth in paragraph (c) below, and
no more, payable on the respective dates determined as set forth in paragraph (b) below. Interest
on the Outstanding Tortoise Notes of any series issued on the Original Issue Date shall accumulate
from the Original Issue Date.
(b)(i) Interest shall be payable, subject to subparagraph (b)(ii) below, on each series of
Tortoise Notes, with respect to any Rate Period on the first Business Day following the last day of
such Rate Period; provided, however, if the Rate Period is greater than 30 days then on a monthly
basis on the first Business Day of each month within such Rate Period, not including the initial
Rate Period, and on the Business Day following the last day of such Rate Period.
(ii) If a day for payment of interest resulting from the application of subparagraph
(b)(i) above is not a Business Day, then the Interest Payment Date shall be the first
Business Day following such day for payment of interest in the case of a series of Tortoise
Notes designated as Series ___.
(iii) The Company shall pay to the Paying Agent not later than 3:00 p.m., New York City
time, on the Business Day next preceding each Interest Payment Date for each series of
Tortoise Notes, an aggregate amount of funds available on the next Business Day in the City
of New York, New York, equal to the interest to be paid to all Holders of such Tortoise
Notes on such Interest Payment Date. The Company shall not be required to establish any
reserves for the payment of interest.
(iv) All moneys paid to the Paying Agent for the payment of interest shall be held in
trust for the payment of such interest by the Paying Agent for the benefit of the Holders
specified in subparagraph (b)(v) below. Any moneys paid to the Paying Agent in accordance
with the foregoing but not applied by the Paying Agent to the payment of interest, including
interest earned on such moneys, will, to the extent permitted by law, be repaid to the
Company at the end of 90 days from the date on which such moneys were to have been so
applied.
(v) Each interest payment on a series of Tortoise Notes shall be paid on the Interest
Payment Date therefor to the Holders of that series as their names appear on the security
ledger or security records of the Company on the Business Day next preceding such Interest
Payment Date. Interest in arrears for any past Rate Period may be declared and paid at any
time, without reference to any regular Interest Payment Date, to the Holders as their names
appear on the books or records of the Company on such date, not exceeding 15 days preceding
the payment date thereof, as may be fixed by the Board of Directors. No interest will be
payable in respect of any Interest Payment or payments which may be in arrears.
(c)(i) The interest rate on Outstanding Tortoise Notes of each series during the period from
and after the Original Issue Date to and including the last day of the initial Rate Period therefor
shall be equal to ___%. For each subsequent Rate Period with respect to the Tortoise Notes
Outstanding thereafter, the interest rate shall be equal to the rate per annum that results from an
Auction; provided, however, that if an Auction for any subsequent Rate Period of a series of
Tortoise Notes is not held for any reason or if Sufficient Clearing Bids have not been made in an
Auction (other than as a result of all series of Tortoise Notes being the subject of Submitted Hold
Orders), then the interest rate on a series of Tortoise Notes for
A-9
any such Rate Period shall be the Maximum Rate (except during a Default Period when the
interest rate shall be the Default Rate, as set forth in (c)(ii) below). The All Hold Rate will
apply automatically following an Auction in which all of the Outstanding series of Tortoise Notes
are subject (or are deemed to be subject) to Hold Orders. The rate per annum at which interest is
payable on a series of Tortoise Notes as determined pursuant to this paragraph (c)(i) shall be the
Applicable Rate. For Standard Rate Periods or shorter periods only, the Applicable Rate
resulting from an Auction will not be less than the Minimum Rate.
(ii) Subject to the cure provisions below, a Default Period with respect to a
particular series will commence on any date the Company fails to deposit irrevocably in
trust in same-day funds, with the Paying Agent by 12:00 noon, New York City time, (A) the
full amount of any declared interest on that series payable on the Interest Payment Date (an
Interest Default) or (B) the full amount of any redemption price (the Redemption Price)
payable on the date fixed for redemption (the Redemption Date) (a Redemption Default)
and together with an Interest Default, hereinafter referred to as Default). Subject to
the cure provisions of (c)(iii) below, a Default Period with respect to an Interest Default
or a Redemption Default shall end on the Business Day on which, by 12:00 noon, New York City
time, all unpaid interest and any unpaid Redemption Price shall have been deposited
irrevocably in trust in same-day funds with the Paying Agent. In the case of an Interest
Default, the Applicable Rate for each Rate Period commencing during a Default Period will be
equal to the Default Rate, and each subsequent Rate Period commencing after the beginning of
a Default Period shall be a Standard Rate Period; provided, however, that the commencement
of a Default Period will not by itself cause the commencement of a new Rate Period. No
Auction shall be held during a Default Period with respect to an Interest Default applicable
to that series of Tortoise Notes.
(iii) No Default Period with respect to an Interest Default or Redemption Default shall
be deemed to commence if the amount of any interest or any Redemption Price due (if such
default is not solely due to the willful failure of the Company) is deposited irrevocably in
trust, in same-day funds with the Paying Agent by 12:00 noon, New York City time within
three Business Days after the applicable Interest Payment Date or Redemption Date, together
with an amount equal to the Default Rate applied to the amount of such non-payment based on
the actual number of days comprising such period divided by 360 for each series. The
Default Rate shall be equal to the Reference Rate multiplied by three (3).
(iv) The amount of interest payable on each Interest Payment Date of each Rate Period
of less than one (1) year (or in respect of interest on another date in connection with a
redemption during such Rate Period) shall be computed by multiplying the Applicable Rate (or
the Default Rate) for such Rate Period (or a portion thereof) by a fraction, the numerator
of which will be the number of days in such Rate Period (or portion thereof) that such
Tortoise Notes were outstanding and for which the Applicable Rate or the Default Rate was
applicable and the denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent. During any Rate Period of
one (1) year or more, the amount of interest per Tortoise Note payable on any Interest
Payment Date (or in respect of interest on another date in connection with a redemption
during such Rate Period) shall be computed as described in the preceding sentence.
(d) Any Interest Payment made on any series of Tortoise Notes shall first be credited against
the earliest accrued but unpaid interest due with respect to such series.
A-10
Redemption
(a)(i) After the initial Rate Period, subject to the provisions of the Indenture and to the
extent permitted under the 1940 Act, the Company may, at its option, redeem in whole or in part out
of funds legally available therefor a series of Tortoise Notes designated in the Indenture as (A)
having a Rate Period of one year or less, on the Business Day after the last day of such Rate
Period by delivering a notice of redemption not less than 15 days and not more than 40 days prior
to the date fixed for such redemption, at a redemption price equal to the aggregate principal
amount, plus an amount equal to accrued but unpaid interest thereon (whether or not earned) to the
date fixed for redemption (Redemption Price), or (B) having a Rate Period of more than one year,
on any Business Day prior to the end of the relevant Rate Period by delivering a notice of
redemption not less than 15 days and not more than 40 days prior to the date fixed for such
redemption, at the Redemption Price, plus a redemption premium, if any, determined by the Board of
Directors after consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions at the time of the designation of such Rate Period as set forth in the
Indenture; provided, however, that during a Rate Period of more than one year no series of Tortoise
Notes will be subject to optional redemption except in accordance with any Specific Redemption
Provisions approved by the Board of Directors after consultation with the Broker-Dealers at the
time of the designation of such Rate Period. Notwithstanding the foregoing, the Company shall not
give a notice of or effect any redemption pursuant to this paragraph (a)(i) unless, on the date on
which the Company intends to give such notice and on the date of redemption (a) the Company has
available certain Deposit Securities with maturity or tender dates not later than the day preceding
the applicable redemption date and having a value not less than the amount (including any
applicable premium) due to Holders of a series of Tortoise Notes by reason of the redemption of
such Tortoise Notes on such date fixed for the redemption and (b) the Company would have Eligible
Assets with an aggregate Discounted Value at least equal the Tortoise Notes Basic Maintenance
Amount immediately subsequent to such redemption, if such redemption were to occur on such date, it
being understood that the provisions of paragraph (d) below shall be applicable in such
circumstances in the event the Company makes the deposit and takes the other action required
thereby.
(ii) If the Company fails to maintain, as of any Valuation Date, Eligible Assets with
an aggregate Discounted Value at least equal to 115 percent of the Tortoise Notes Basic
Maintenance Amount or, as of the last Business Day of any month, the 1940 Act Tortoise Notes
Asset Coverage, and such failure is not cured within ten Business Days following such
Valuation Date in the case of a failure to maintain the Tortoise Notes Basic Maintenance
Amount or on the last Business Day of the following month in the case of a failure to
maintain the 1940 Act Tortoise Notes Asset Coverage as of such last Business Day (each an
Asset Coverage Cure Date), the Tortoise Notes will be subject to mandatory redemption out
of funds legally available therefor. The principal amount of Tortoise Notes to be redeemed
in such circumstances will be equal to the lesser of (A) the minimum principal amount of
Tortoise Notes the redemption of which, if deemed to have occurred immediately prior to the
opening of business on the relevant Asset Coverage Cure Date, would result in the Company
having Eligible Assets with an aggregate Discounted Value at least equal to 115 percent of
the Tortoise Notes Basic Maintenance Amount, or sufficient to satisfy 1940 Act Tortoise
Notes Asset Coverage, as the case may be, in either case as of the relevant Asset Coverage
Cure Date (provided that, if there is no such minimum principal amount of Tortoise Notes the
redemption of which would have such result, all Tortoise Notes then Outstanding will be
redeemed), and (B) the maximum principal amount of Tortoise Notes that can be redeemed out
of funds expected to be available therefor on the Mandatory Redemption Date at the Mandatory
Redemption Price set forth in subparagraph (a)(iii) below.
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(iii) In determining the Tortoise Notes required to be redeemed in accordance with the
foregoing subparagraph (a)(ii), the Company shall allocate the principal amount of Tortoise
Notes required to be redeemed to satisfy the Tortoise Notes Basic Maintenance Amount or the
1940 Act Tortoise Notes Asset Coverage, as the case may be, pro rata among the Holders of
Tortoise Notes in proportion to the principal amount of Tortoise Notes they hold, by lot or
such other method as the Company shall deem equitable, subject to the further provisions of
this subparagraph (iii). The Company shall effect any required mandatory redemption
pursuant to subparagraph (a)(ii) above no later than 40 days after the Asset Coverage Cure
Date (the Mandatory Redemption Date), except that if the Company does not have funds
legally available for the redemption of, or is not otherwise legally permitted to redeem,
the principal amount of Tortoise Notes which would be required to be redeemed by the Company
under clause (A) of subparagraph (a)(ii) above if sufficient funds were available, or the
Company otherwise is unable to effect such redemption on or prior to such Mandatory
Redemption Date, the Company shall redeem those Tortoise Notes, and other Notes, on the
earliest practicable date on which the Company will have such funds available, upon notice
pursuant to paragraph (b) below to record owners of the Tortoise Notes to be redeemed and
the Paying Agent. The Company will deposit with the Paying Agent funds sufficient to redeem
the specified principal amount of Tortoise Notes with respect to a redemption required under
subparagraph (a)(ii) above, by 1:00 p.m., New York City time, of the Business Day
immediately preceding the Mandatory Redemption Date. If fewer than all of the Outstanding
Tortoise Notes are to be redeemed pursuant to this subparagraph (iii), the principal amount
of Tortoise Notes to be redeemed shall be redeemed pro rata from the Holders of such
Tortoise Notes in proportion to the principal amount of such Tortoise Note held by such
Holders, by lot or by such other method as the Company shall deem fair and equitable,
subject, however, to the terms of any applicable Specific Redemption Provisions. Mandatory
Redemption Price means the Redemption Price plus (in the case of a Rate Period of one year
or more only) a redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealers and set forth in any applicable Specific Redemption
Provisions.
(b) In the event of a redemption pursuant to paragraph (a) above, the Company will file a
notice of its intention to redeem with the Commission so as to provide at least the minimum notice
required under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the Company
shall deliver a notice of redemption to the Auction Agent and the Trustee (the Notice of
Redemption) containing the information set forth below (i) in the case of an optional redemption
pursuant to subparagraph (a)(i) above, at least three Business Days prior to the giving of notice
to the Holders and (ii) in the case of a mandatory redemption pursuant to subparagraph (a)(ii)
above, on or prior to the 30th day preceding the Mandatory Redemption Date. The Trustee will use
its reasonable efforts to provide notice to each Holder of Tortoise Notes called for redemption by
electronic or other reasonable means not later than the close of business on the Business Day
immediately following the day on which the Trustee determines the Tortoise Notes to be redeemed
(or, during a Default Period with respect to such Tortoise Notes, not later than the close of
business on the Business Day immediately following the day on which the Trustee receives Notice of
Redemption from the Company). The Trustee shall confirm such notice in writing not later than the
close of business on the third Business Day preceding the date fixed for redemption by providing
the Notice of Redemption to each Holder of Tortoise Notes called for redemption, the Paying Agent
(if different from the Trustee) and the Securities Depository. Notice of Redemption will be
addressed to the registered owners of each series of Tortoise Notes at their addresses appearing on
the books or records of the Company. Such Notice of Redemption will set forth (i) the date fixed
for redemption, (ii) the principal amount and identity of Tortoise Notes to be redeemed, (iii) the
redemption price (specifying the amount of accrued interest to be included therein), (iv) that
interest on the Tortoise Notes to be redeemed will cease to accrue on such date fixed for
redemption, (v) the applicable CUSIP number(s) and (vi) the 1940 Act provision under which
redemption shall be made. No defect in the Notice of Redemption or in the transmittal or mailing
thereof will affect the validity of the
A-12
redemption proceedings, except as required by applicable law. If fewer than all Tortoise
Notes held by any Holder are to be redeemed, the Notice of Redemption mailed to such Holder shall
also specify the principal amount of Tortoise Notes to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) above, no Tortoise Notes may be redeemed
unless all interest on the Outstanding Tortoise Notes and all Notes of the Company ranking on a
parity with the Tortoise Notes, have been or are being contemporaneously paid or set aside for
payment; provided, however, that the foregoing shall not prevent the purchase or acquisition of all
Outstanding Tortoise Notes pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, Holders of all Outstanding Tortoise
Notes.
(d) Upon the deposit of funds sufficient to redeem any Tortoise Notes with the Paying Agent
and the giving of the Notice of Redemption to the Trustee under paragraph (b) above, interest on
such Tortoise Notes shall cease to accrue and such Tortoise Notes shall no longer be deemed to be
Outstanding for any purpose (including, without limitation, for purposes of calculating whether the
Company has maintained the requisite Tortoise Notes Basic Maintenance Amount or the 1940 Act
Tortoise Notes Asset Coverage), and all rights of the Holder of the Tortoise Notes so called for
redemption shall cease and terminate, except the right of such Holder to receive the redemption
price specified in the Indenture, but without any interest or other additional amount. Such
redemption price shall be paid by the Paying Agent to the nominee of the Securities Depository.
The Company shall be entitled to receive from the Paying Agent, promptly after the date fixed for
redemption, any cash deposited with the Paying Agent in excess of (i) the aggregate redemption
price of the Tortoise Notes called for redemption on such date and (ii) such other amounts, if any,
to which Holders of the Tortoise Notes called for redemption may be entitled. Any funds so
deposited that are unclaimed at the end of two years from such redemption date shall, to the extent
permitted by law, be paid to the Company, after which time the Holders of Tortoise Notes so called
for redemption may look only to the Company for payment of the redemption price and all other
amounts, if any, to which they may be entitled. The Company shall be entitled to receive, from
time to time after the date fixed for redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption has been given is not
made by reason of the absence of legally available funds therefor, or is otherwise prohibited, such
redemption shall be made as soon as practicable to the extent such funds become legally available
or such redemption is no longer otherwise prohibited. Failure to redeem any series of Tortoise
Notes shall be deemed to exist at any time after the date specified for redemption in a Notice of
Redemption when the Company shall have failed, for any reason whatsoever, to deposit in trust with
the Paying Agent the redemption price with respect to any Tortoise Notes for which such Notice of
Redemption has been given. Notwithstanding the fact that the Company may not have redeemed any
Tortoise Notes for which a Notice of Redemption has been given, interest may be paid on a series of
Tortoise Notes and shall include those Tortoise Notes for which Notice of Redemption has been given
but for which deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption price of any Tortoise
Notes called for redemption shall be held in trust by the Paying Agent for the benefit of Holders
of Tortoise Notes to be redeemed.
(g) So long as any Tortoise Notes are held of record by the nominee of the Securities
Depository, the redemption price for such Tortoise Notes will be paid on the date fixed for
redemption to the nominee of the Securities Depository for distribution to Agent Members for
distribution to the persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing contained in the Indenture limits any
right of the Company to purchase or otherwise acquire any Tortoise Notes outside of an Auction at
any
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price, whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase, there is no
arrearage in the payment of interest on, or the mandatory or optional redemption price with respect
to, any series of Tortoise Notes for which Notice of Redemption has been given and the Company is
in compliance with the 1940 Act Tortoise Notes Asset Coverage and has Eligible Assets with an
aggregate Discounted Value at least equal to 115 percent of the Tortoise Notes Basic Maintenance
Amount after giving effect to such purchase or acquisition on the date thereof. If less than all
the Outstanding Tortoise Notes of any series are redeemed or otherwise acquired by the Company, the
Company shall give notice of such transaction to the Trustee, in accordance with the procedures
agreed upon by the Board of Directors.
(i) The Board of Directors may, without further consent of the holders of the Tortoise Notes
or the holders of shares of capital stock of the Company, authorize, create or issue any class or
series of notes, including other series of Tortoise Notes, ranking prior to or on a parity with the
Tortoise Notes to the extent permitted by the 1940 Act, if, upon issuance, either (A) the net
proceeds from the sale of such Notes (or such portion thereof needed to redeem or repurchase the
Outstanding Tortoise Notes) are deposited with the Trustee in accordance with paragraph (d) above,
Notice of Redemption as contemplated by paragraph (b) above has been delivered prior thereto or is
sent promptly thereafter, and such proceeds are used to redeem all Outstanding Tortoise Notes or
(B) the Company would meet the 1940 Act Tortoise Notes Asset Coverage, the Tortoise Notes Basic
Maintenance Amount and the requirements set forth below in Certain Other Restrictions.
(j) If any Tortoise Notes are to be redeemed and such Tortoise Notes are held by the
Securities Depository, the Company shall include in the notice of redemption delivered to the
Securities Depository: (i) under an item entitled Publication Date for Securities Depository
Purposes, the Interest Payment Date prior to the Redemption Date, and (ii) an instruction to the
Securities Depository to (x) determine on such Publication Date after the Auction held on the
immediately preceding Auction Date has settled, the Depository participants whose Securities
Depository positions will be redeemed and the principal amount of such Tortoise Notes to be
redeemed from each such position (the Securities Depository Redemption Information), and (y)
notify the Auction Agent immediately after such determination of (A) the positions of the
Depository Participants in such Tortoise Notes immediately prior to such Auction settlement, (B)
the positions of the Depository Participants in such Tortoise Notes immediately following such
Auction settlement and (C) the Securities Depository Redemption Information. Publication Date
shall mean three Business Days after the Auction Date next preceding such Redemption Date.
Designation of Rate Period
The initial Rate Period for Tortoise Notes Series ___ shall be ___ (___) days. The Company
will designate the duration of subsequent Rate Periods of each series of Tortoise Notes; provided,
however, that no such designation is necessary for a Standard Rate Period and, provided further,
that any designation of a Special Rate Period shall be effective only if (i) notice thereof shall
have been given as provided in the Indenture, (ii) any failure to pay in a timely manner to the
Trustee the full amount of any interest on, or the redemption price of, Tortoise Notes shall have
been cured as provided above, (iii) Sufficient Clearing Bids shall have existed in an Auction held
on the Auction Date immediately preceding the first day of such proposed Special Rate Period, (iv)
if the Company shall have mailed a Notice of Redemption with respect to any Tortoise Notes, the
redemption price with respect to such Tortoise Notes shall have been deposited with the Paying
Agent, and (v) in the case of the designation of a Special Rate Period, the Company has confirmed
that as of the Auction Date next preceding the first day of such Special Rate Period, it has
Eligible Assets with an aggregate Discounted Value at least equal to the Tortoise Notes Basic
Maintenance Amount, and the Company has consulted with the Broker-
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Dealers and has provided notice of such designation and otherwise complied with the Rating
Agency Guidelines.
If the Company proposes to designate any Special Rate Period, not fewer than 7 (or two
Business Days in the event the duration of the Rate Period prior to such Special Rate Period is
fewer than 8 days) nor more than 30 Business Days prior to the first day of such Special Rate
Period, notice shall be (i) made by press release and (ii) communicated by the Company by
telephonic or other means to the Trustee and confirmed in writing promptly thereafter. Each such
notice shall state (A) that the Company proposes to exercise its option to designate a succeeding
Special Rate Period, specifying the first and last days thereof and (B) that the Company will by
3:00 p.m., New York City time, on the second Business Day next preceding the first day of such
Special Rate Period, notify the Auction Agent and Trustee, who will promptly notify the
Broker-Dealers, of either (x) its determination, subject to certain conditions, to proceed with
such Special Rate Period, subject to the terms of any Specific Redemption Provisions, or (y) its
determination not to proceed with such Special Rate Period, in which latter event the succeeding
Rate Period shall be a Standard Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of any proposed Special Rate Period, the Company shall deliver to the Auction Agent and
Trustee, who will promptly deliver to the Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Company has determined to designate the next
succeeding Rate Period as a Special Rate Period, specifying the first and last days thereof
and (B) the terms of any Specific Redemption Provisions; or
(ii) a notice stating that the Company has determined not to exercise its option to
designate a Special Rate Period.
If the Company fails to deliver either such notice with respect to any designation of any proposed
Special Rate Period to the Auction Agent or is unable to make the confirmation described above by
3:00 p.m., New York City time, on the second Business Day next preceding the first day of such
proposed Special Rate Period, the Company shall be deemed to have delivered a notice to the Auction
Agent with respect to such Rate Period to the effect set forth in clause (ii) above, thereby
resulting in a Standard Rate Period.
Restrictions on Transfer
Tortoise Notes may be transferred only (a) pursuant to an order placed in an Auction, (b) to
or through a Broker-Dealer or (c) to the Company or any Affiliate. Notwithstanding the foregoing,
a transfer other than pursuant to an Auction will not be effective unless the selling Existing
Holder or the Agent Member of such Existing Holder, in the case of an Existing Holder whose
Tortoise Notes are listed in its own name on the books of the Auction Agent, or the Broker-Dealer
or Agent Member of such Broker-Dealer, in the case of a transfer between persons holding Tortoise
Notes through different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the Tortoise Notes issued to the Securities Depository will bear legends
with respect to the restrictions described above and stop-transfer instructions will be issued to
the Transfer Agent and/or Registrar.
1940 Act Tortoise Notes Asset Coverage
The Company shall maintain, as of the last Business Day of each month in which any Tortoise
Notes are Outstanding, asset coverage with respect to the Tortoise Notes which is equal to or
greater than the 1940 Act Tortoise Notes Asset Coverage; provided, however, that subparagraph
(a)(ii) of Redemption above shall be the sole remedy in the event the Company fails to do so.
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Tortoise Notes Basic Maintenance Amount
So long as the Tortoise Notes are Outstanding and any Rating Agency is then rating the
Tortoise Notes, the Company shall maintain, as of each Valuation Date, Eligible Assets having an
aggregate Discounted Value equal to or greater than 115 percent of the Tortoise Notes Basic
Maintenance Amount; provided, however, that subparagraph (a)(ii) of Redemption above shall be the
sole remedy in the event the Company fails to do so.
Certain Other Restrictions
For so long as any Tortoise Notes are Outstanding and any Rating Agency is then rating the
Tortoise Notes, the Company will not engage in certain proscribed transactions set forth in the
Rating Agency Guidelines, unless it has received written confirmation from each such Rating Agency
that proscribes the applicable transaction in its Rating Agency Guidelines that any such action
would not impair the rating then assigned by such Rating Agency to a series of Tortoise Notes.
For so long as any Tortoise Notes are Outstanding, the Company will not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or distribution paid in
shares of, or options, warrants or rights to subscribe for or purchase, common shares or other
shares of capital stock of the Company) upon any class of shares of capital stock of the Company,
unless, in every such case, immediately after such transaction, the 1940 Act Tortoise Notes Asset
Coverage would be achieved after deducting the amount of such dividend, distribution, or purchase
price, as the case may be; provided, however, that dividends may be declared upon any preferred
shares of capital stock of the Company if the Tortoise Notes and any other senior securities
representing indebtedness of the Company have an asset coverage of at least 200% at the time of
declaration thereof, after deducting the amount of such dividend.
Compliance Procedures For Asset Maintenance Tests
For so long as any Tortoise Notes are Outstanding and any Rating Agency is then rating such
Tortoise Notes:
(a) As of each Valuation Date, the Company shall determine in accordance with the procedures
specified in the Indenture (i) the Market Value of each Eligible Asset owned by the Company on that
date, (ii) the Discounted Value of each such Eligible Asset using the Discount Factors, (iii)
whether the Tortoise Notes Basic Maintenance Amount is met as of that date, (iv) the value of the
total assets of the Company, less all liabilities, and (v) whether the 1940 Act Tortoise Notes
Asset Coverage is met as of that date.
(b) Upon any failure to maintain the required Tortoise Notes Basic Maintenance Amount or 1940
Act Tortoise Notes Asset Coverage on any Valuation Date, the Company may use reasonable commercial
efforts (including, without limitation, altering the composition of its portfolio, purchasing
Tortoise Notes outside of an Auction or in the event of a failure to file a Rating Agency
Certificate (as defined below) on a timely basis, submitting the requisite Rating Agency
Certificate) to re-attain (or certify in the case of a failure to file on a timely basis, as the
case may be) the required Tortoise Notes Basic Maintenance Amount or 1940 Act Tortoise Notes Asset
Coverage on or prior to the Asset Coverage Cure Date.
(c) Compliance with the Tortoise Notes Basic Maintenance Amount and 1940 Act Tortoise Notes
Asset Coverage tests shall be determined with reference to those Tortoise Notes which are deemed to
be Outstanding.
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(d) The Company shall deliver to each Rating Agency which is then rating Tortoise Notes and
any other party specified in the Rating Agency Guidelines all certificates that are set forth in
the respective Rating Agency Guidelines regarding 1940 Act Tortoise Notes Asset Coverage, Tortoise
Notes Basic Maintenance Amount and/or related calculations at such times and containing such
information as set forth in the respective Rating Agency Guidelines (each, a Rating Agency
Certificate).
(e) In the event that any Rating Agency Certificate is not delivered within the time periods
set forth in the Rating Agency Guidelines, the Company shall be deemed to have failed to maintain
the Tortoise Notes Basic Maintenance Amount or the 1940 Act Tortoise Notes Asset Coverage, as the
case may be, on such Valuation Date for purposes of paragraph (b) above. In the event that any
Rating Agency Certificate with respect to an applicable Asset Coverage Cure Date is not delivered
within the time periods set forth in the Rating Agency Guidelines, the Company shall be deemed to
have failed to have Eligible Assets with an aggregate Discounted Value at least equal to the
Tortoise Notes Basic Maintenance Amount or to meet the 1940 Tortoise Notes Asset Coverage, as the
case may be, as of the related Valuation Date, and such failure shall be deemed not to have been
cured as of such Asset Coverage Cure Date for purposes of the mandatory redemption provisions.
Delivery of Notes
Upon the execution and delivery of the Indenture, the Company shall execute and deliver to the
Trustee, and the Trustee shall authenticate, the Tortoise Notes and deliver them to The Depository
Trust Company as provided in the Indenture.
Prior to the delivery by the Trustee of any of the Tortoise Notes, there shall have been filed
with or delivered to the Trustee the following:
(a) A resolution duly adopted by the Company, certified by the Secretary or other Authorized
Officer thereof, authorizing the execution and delivery of the Supplemental Indenture and the
issuance of the Tortoise Notes;
(b) Duly executed copies of the Supplemental Indenture and a copy of the Indenture;
(c) Rating letters from each Rating Agency rating the Tortoise Notes; and
(d) An opinion of counsel and an officers certificate pursuant to the requirements of the
Indenture.
Trustees Authentication Certificate
The Trustees authentication certificate upon the Tortoise Notes shall be substantially in the
form provided. No Tortoise Note shall be secured hereby or entitled to the benefit hereof, or
shall be valid or obligatory for any purpose, unless a certificate of authentication, substantially
in such form, has been duly executed by the Trustee; and such certificate of the Trustee upon any
Tortoise Note shall be conclusive evidence and the only competent evidence that such Bond has been
authenticated and delivered. The Trustees certificate of authentication shall be deemed to have
been duly executed by it if manually signed by an authorized officer of the Trustee, but it shall
not be necessary that the same person sign the certificate of authentication on all of the Tortoise
Notes issued.
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EVENTS OF DEFAULT; REMEDIES
Events of Default
An Event of Default means any one of the following events set forth below (whatever the
reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(a) default in the payment of any interest upon a series of Tortoise Notes when it becomes due
and payable and the continuance of such default for thirty (30) days; or
(b) default in the payment of the principal of, or any premium on, a series of Tortoise Notes
at its Stated Maturity; or
(c) default in the performance, or breach, of any covenant or warranty of the Company in the
Indenture, and continuance of such default or breach for a period of ninety (90) days after there
has been given, by registered or certified mail, to the Company by the Trustee a written notice
specifying such default or breach and requiring it to be remedied and stating that such notice is a
Notice of Default; or
(d) the entry by a court having jurisdiction in the premises of (A) a decree or order for
relief in respect of the Company in an involuntary case or proceeding under any applicable Federal
or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order
adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of the Company under any
applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and the continuance of any such
decree or order for relief or any such other decree or order unstayed and in effect for a period of
60 consecutive days; or
(e) the commencement by the Company of a voluntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case
or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree or order for relief in respect of the Company in an involuntary case or proceeding under any
applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of
a petition or answer or consent seeking reorganization or relief under any applicable Federal or
State law, or the consent by it to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or of any substantial part of its property, or the making by it of an
assignment for the benefit of creditors, or the admission by it in writing of its inability to pay
its debts generally as they become due, or the taking of corporate action by the Company in
furtherance of any such action; or
(f) if, pursuant to Section 18(a)(1)(c)(ii) of the 1940 Act on the last business day of each
of twenty-four (24) consecutive calendar months, the 1940 Act Tortoise Notes Asset Coverage is less
than 100%; or
(g) any other Event of Default provided with respect to a series of Tortoise Notes, including
a default in the payment of any Redemption Price payable on the date fixed for redemption.
Unless otherwise noted, an Event of Default that relates only to one series of Tortoise Notes
will not affect any other series.
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Acceleration of Maturity; Rescission and Annulment
If an Event of Default with respect to Tortoise Notes of a series at the time Outstanding
occurs and is continuing, then in every such case the Trustee or the holders of not less than a
majority in principal amount of the Outstanding Tortoise Notes of that series may declare the
principal amount of all the Tortoise Notes of that series to be due and payable immediately, by a
notice in writing to the Company (and to the Trustee if given by holders), and upon any such
declaration such principal amount (or specified amount) shall become immediately due and payable.
If an Event of Default specified in paragraphs (d) and (e) above with respect to Tortoise Notes of
any series at the time Outstanding occurs, the principal amount of all the Tortoise Notes of that
series shall automatically, and without any declaration or other action on the part of the Trustee
or any holder, become immediately due and payable.
At any time after such a declaration of acceleration with respect to Tortoise Notes of any
series has been made and before a judgment or decree for payment of the money due has been obtained
by the Trustee, the holders of a majority in principal amount of the Outstanding Tortoise Notes of
that series, by written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if:
(a) the Company has paid or deposited with the Trustee a sum sufficient to pay
(i) all overdue interest on all Tortoise Notes of that series,
(ii) the principal of (and premium, if any, on) any Tortoise Notes of that series which
have become due otherwise than by such declaration of acceleration and any interest thereon
at the rate or rates prescribed therefor in such Tortoise Notes,
(iii) to the extent that payment of such interest is lawful, interest upon overdue
interest at the rate or rates prescribed therefor in such Tortoise Notes,
(iv) all sums paid or advanced by the Trustee and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(b) all Events of Default with respect to Tortoise Notes of that series, other than the
non-payment of the principal of Tortoise Notes of that series which have become due solely by such
declaration of acceleration, have been cured or waived.
No such rescission shall affect any subsequent default or impair any right consequent thereon.
Collection of Indebtedness and Suits for Enforcement by Trustee
The Company covenants that if:
(a) default is made in the payment of any interest on any Tortoise Notes when such interest
becomes due and payable and such default continues for a period of 90 days, or
(b) default is made in the payment of the principal of (or premium, if any, on) any Tortoise
Notes at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the
benefit of the holders of such Tortoise Notes, the whole amount then due and payable on such
Tortoise Notes for principal and any premium and interest and, to the extent that payment of such
interest shall be legally enforceable, interest on any overdue principal and premium and on any
overdue interest, at the rate or rates prescribed therefor in such Tortoise Notes, and, in addition
thereto, such further amount as shall be
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sufficient to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.
If an Event of Default with respect to Tortoise Notes of any series occurs and is continuing,
the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the
holders of Tortoise Notes of such series by such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in the Indenture or in aid of the exercise of any power
granted in the Indenture, or to enforce any other proper remedy.
Application of Money Collected
Any money collected by the Trustee pursuant to the provisions of the Indenture relating to an
Event of Default shall be applied in the following order, at the date or dates fixed by the Trustee
and, in case of the distribution of such money on account of principal or any premium or interest,
upon presentation of the Tortoise Notes and the notation thereon of the payment if only partially
paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under the Indenture;
and
SECOND: To the payment of the amounts then due and unpaid for principal of and any premium
and interest on the Tortoise Notes in respect of which or for the benefit of which such money has
been collected, ratably, without preference or priority of any kind, according to the amounts due
and payable on such Tortoise Notes for principal and any premium and interest, respectively.
Limitation On Suits
No holder of any Tortoise Notes of any series shall have any right to institute any
proceeding, judicial or otherwise, with respect to the Indenture, or for the appointment of a
receiver or trustee, or for any other remedy hereunder, unless
(a) such holder has previously given written notice to the Trustee of a continuing Event of
Default with respect to the Tortoise Notes of that series;
(b) the holders of not less than a majority in principal amount of the Outstanding Tortoise
Notes of that series shall have made written request to the Trustee to institute proceedings in
respect of such Event of Default in its own name as Trustee hereunder;
(c) such holder or holders have offered to the Trustee indemnity reasonably satisfactory to it
against the costs, expenses and liabilities to be incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity
has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been given to the Trustee during
such 60-day period by the holders of a majority in principal amount of the Outstanding Tortoise
Notes of that series;
it being understood and intended that no one or more of such holders shall have any right in any
manner whatever by virtue of, or by availing of, any provision of the Indenture to affect, disturb
or prejudice the
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rights of any other of such holders, or to obtain or to seek to obtain priority or preference over
any other of such holders or to enforce any right under the Indenture, except in the manner
provided and for the equal and ratable benefit of all of such holders.
Unconditional Right of Holders to Receive Principal, Premium and Interest
Notwithstanding any other provision in the Indenture, the holder of any Tortoise Notes shall
have the right, which is absolute and unconditional, to receive payment of the principal of and any
premium and (subject to the provisions of any supplemental indenture) interest on such Tortoise
Notes on the respective Stated Maturities expressed in such Tortoise Notes (or, in the case of
redemption, on the Redemption Date), and to institute suit for the enforcement of any such payment
and such rights shall not be impaired without the consent of such holder.
Restoration of Rights and Remedies
If the Trustee or any holder has instituted any proceeding to enforce any right or remedy
under the Indenture and such proceeding has been discontinued or abandoned for any reason, or has
been determined adversely to the Trustee or to such holder, then and in every such case, subject to
any determination in such proceeding, the Company, the Trustee and the holders shall be restored
severally and respectively to their former positions and thereafter all rights and remedies of the
Trustee and the holders shall continue as though no such proceeding had been instituted.
Rights and Remedies Cumulative
Except as otherwise provided with respect to the replacement or payment of mutilated,
destroyed, lost or stolen Tortoise Notes, no right or remedy conferred upon or reserved to the
Trustee or to the holders is intended to be exclusive of any other right or remedy, and every right
and remedy shall, to the extent permitted by law, be cumulative and in addition to every other
right and remedy given or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
Control By Holders
The holders of not less than a majority in principal amount of the Outstanding Tortoise Notes
of any series shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee, with respect to the Tortoise Notes of such series, provided that
(1) such direction shall not be in conflict with any rule of law or with the Indenture, and
(2) the Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction.
Waiver of Past Defaults
The holders of not less than a majority in principal amount of the Outstanding Tortoise Notes
of any series may on behalf of the holders of all the Tortoise Notes of such series waive any past
default hereunder with respect to such series and its consequences, except a default
(1) in the payment of the principal of or any premium or interest on any Tortoise Notes of
such series, or
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(2) in respect of a covenant or provision which cannot be modified or amended without the
consent of the holder of each Outstanding Tortoise Notes of such series affected.
Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom
shall be deemed to have been cured, for every purpose of the Indenture; but no such waiver shall
extend to any subsequent or other default or impair any right consequent thereon.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture shall upon request of the Company cease to be of further effect (except as to
any surviving rights of registration of transfer or exchange of any Tortoise Notes expressly
provided for herein or in the terms of such security), and the Trustee, at the expense of the
Company, shall execute proper instruments acknowledging satisfaction and discharge of the
Indenture, when
(a) Either:
(i) all Tortoise Notes theretofore authenticated and delivered (other than (1)
securities which have been destroyed, lost or stolen and which have been replaced or paid as
provided in the Indenture; and (2) Tortoise Notes for whose payment money has theretofore
been deposited in trust or segregated and held in trust by the Company and thereafter repaid
to the Company or discharged from such trust, as provided in the Indenture) have been
delivered to the Trustee for cancellation; or
(ii) all such Tortoise Notes not theretofore delivered to the Trustee for cancellation
have become due and payable, or will become due and payable at their Stated Maturity within
one year, or are to be called for redemption within one year under arrangements satisfactory
to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company, and the Company, in the case of this subsection (ii) has deposited
or caused to be deposited with the Trustee as trust funds in trust money in an amount
sufficient to pay and discharge the entire indebtedness on such securities not theretofore
delivered to the Trustee for cancellation, for principal and any premium and interest to the
date of such deposit (in the case of Securities which have become due and payable) or to the
Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums payable hereunder by the Trust;
and
(c) the Company has delivered to the Trustee an Officers Certificate and an Opinion of
Counsel, each stating that all conditions precedent herein provided for relating to the
satisfaction and discharge of the Indenture have been complied with.
Notwithstanding the satisfaction and discharge of the Indenture, the obligations of the Company to
the Trustee under the Indenture and, if money shall have been deposited with the Trustee pursuant
to subparagraph (ii) of paragraph (a) above, the obligations of the Trustee under certain
provisions of the Indenture shall survive.
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THE TRUSTEE
Certain Duties and Responsibilities
(1) Except during the continuance of an Event of Default,
(A) the Trustee undertakes to perform such duties and only such duties as are
specifically set forth in the Indenture and as required by the Trust Indenture Act, and no
implied covenants or obligations shall be read into the Indenture against the Trustee; and
(B) in the absence of bad faith on its part, the Trustee may conclusively rely, as to
the truth of the statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Trustee and conforming to the requirements of the
Indenture; but in the case of any such certificates or opinions which by any provision of
the Indenture are specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform to the
requirements of the Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein).
(2) In case an Event of Default has occurred and is continuing, the Trustee shall exercise
such of the rights and powers vested in it by the Indenture, and use the same degree of care and
skill in their exercise, as a prudent person would exercise or use under the circumstances in the
conduct of his or her own affairs.
(3) In no event shall the Trustee be responsible or liable for special, indirect, or
consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit)
irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and
regardless of the form of action.
(4) In no event shall the Trustee be responsible or liable for any failure or delay in the
performance of its obligations arising out of or caused by, directly or indirectly, forces beyond
its control, including, without limitation, strikes, work stoppages, accidents, acts of war or
terrorism, civil or military disturbances, nuclear or natural catastrophes or acts of God, and
interruptions, loss or malfunctions of utilities, communications or computer (software and
hardware) services; it being understood that the Trustee shall use reasonable efforts which are
consistent with accepted practices in the banking industry to resume performance as soon as
practicable under the circumstances.
(5) No provision of the Indenture shall be construed to relieve the Trustee from liability for
its own negligent action, its own negligent failure to act, or its own willful misconduct, except
that:
(A) this Subsection shall not be construed to limit the effect of Subsection (1)(A) of
this Section;
(B) the Trustee shall not be liable for any error of judgment made in good faith by a
Responsible Officer, unless it shall be proved that the Trustee was negligent in
ascertaining the pertinent facts;
(C) the Trustee shall not be liable with respect to any action taken or omitted to be
taken by it in good faith in accordance with the direction of the holders of a majority in
principal amount of the Outstanding securities of any series, determined as provided in the
Indenture, relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred upon the
Trustee, under the Indenture with respect to the Securities of such series; and
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(D) no provision of the Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of its duties, or
in the exercise of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk or liability
is not reasonably assured to it.
Notice of Defaults
If a default occurs hereunder with respect to Tortoise Notes of any series, the Trustee shall
give the Holders of Tortoise Notes of such series notice of such default as and to the extent
provided by the Trust Indenture Act; provided, however, that in the case of any default with
respect to Tortoise Notes of such series, no such notice to Holders shall be given until at least
90 days after the occurrence thereof. For the purpose hereof, the term default means any event
which is, or after notice or lapse of time or both would become, an Event of Default with respect
to Tortoise Notes of such series.
Certain Rights of Trustee
Subject to the provisions under Certain Duties and Responsibilities above:
(a) the Trustee may conclusively rely and shall be protected in acting or refraining from
acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented by the proper party or
parties;
(b) any request or direction of the Company shall be sufficiently evidenced by a Company
Request or Company Order, and any resolution of the Board of Directors shall be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of the Indenture the Trustee shall deem it desirable that a
matter be proved or established prior to taking, suffering or omitting any action hereunder, the
Trustee may, in the absence of bad faith on its part, rely upon an Officers Certificate;
(d) the Trustee may consult with counsel of its selection and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by it in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in
it by the Indenture at the request or direction of any of the holders pursuant to the Indenture,
unless such holders shall have offered to the Trustee security or indemnity reasonably satisfactory
to it against the costs, expenses and liabilities which might be incurred by it in compliance with
such request or direction;
(f) the Trustee shall not be bound to make any investigation into the facts or matters stated
in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document,
but the Trustee, in its discretion, may make such further inquiry or investigation into such facts
or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises of the Company,
personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers or perform any duties hereunder either
directly or by or through agents or attorneys and the Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with due care by it
hereunder;
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(h) the Trustee shall not be liable for any action taken, suffered or omitted to be taken by
it in good faith and reasonably believed by it to be authorized or within the discretion or rights
or powers conferred upon it by the Indenture;
(i) the Trustee shall not be deemed to have notice of any default or Event of Default unless a
Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any
event which is in fact such a default is received by the Trustee at the Corporate Trust Office of
the Trustee, and such notice references the Tortoise Notes and the Indenture;
(j) the rights, privileges, protections, immunities and benefits given to the Trustee,
including its rights to be indemnified, are extended to, and shall be enforceable by, the Trustee
in each of its capacities hereunder; and
(k) the Trustee may request that the Company deliver an Officers Certificate setting forth
the names of individuals and/or titles of officers authorized at such time to take specified
actions pursuant to the Indenture, which Officers Certificate may be signed by any person
authorized to sign an Officers Certificate, including any person specified as so authorized in any
such certificate previously delivered and not superceded.
Compensation and Reimbursement
The Company agrees:
(a) to pay to the Trustee from time to time such compensation as shall be agreed in writing
between the parties for all services rendered by it (which compensation shall not be limited by any
provision of law in regard to the compensation of a trustee of an express trust);
(b) except as otherwise expressly provided, to reimburse the Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with
any provision of the Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement or advance as may
be attributable to its negligence or bad faith; and
(c) to indemnify each of the Trustee or any predecessor Trustee for, and to hold it harmless
against, any and all losses, liabilities, damages, claims or expenses including taxes (other than
taxes imposed on the income of the Trustee) incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of the trust or trusts
hereunder, including the costs and expenses of defending itself against any claim (whether asserted
by the Company, a holder or any other Person) or liability in connection with the exercise or
performance of any of its powers or duties hereunder.
When the Trustee incurs expenses or renders services in connection with an Event of Default,
the expenses (including the reasonable charges and expenses of its counsel) and the compensation
for the services are intended to constitute expenses of administration under any applicable Federal
or State bankruptcy, insolvency or other similar law.
The provisions hereof shall survive the termination of the Indenture.
Conflicting Interests
If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust
Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the
manner provided by,
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and subject to the provisions of, the Trust Indenture Act and the Indenture. To the extent
not prohibited by the Trust Indenture Act, the Trustee shall not be deemed to have a conflicting
interest by virtue of being a trustee under the Indenture with respect to Tortoise Notes of more
than one series.
Resignation and Removal; Appointment of Successor
No resignation or removal of the Trustee and no appointment of a successor Trustee shall
become effective until the acceptance of appointment by the successor Trustee in accordance with
the applicable requirements.
The Trustee may resign at any time with respect to the Tortoise Notes of one or more series by
giving written notice thereof to the Company. If the instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 60 days after the giving of such notice
of resignation, the resigning Trustee may petition, at the expense of the Company, any court of
competent jurisdiction for the appointment of a successor Trustee with respect to the Tortoise
Notes of such series.
The Trustee may be removed at any time with respect to the Tortoise Notes of any series by Act
of the holders of a majority in principal amount of the Outstanding Tortoise Notes of such series,
delivered to the Trustee and to the Company. If the instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 days after the giving of a notice of
removal pursuant to this paragraph, the Trustee being removed may petition, at the expense of the
Company, any court of competent jurisdiction for the appointment of a successor Trustee with
respect to the Tortoise Notes of such series.
If at any time:
(a) the Trustee shall fail to comply after written request therefor by the Company or by any
holder who has been a bona fide holder of Tortoise Notes for at least six months, or
(b) the Trustee shall cease to be eligible and shall fail to resign after written request
therefor by the Company or by any such holder, or
(c) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent
or a receiver of the Trustee or of its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, then, in any such case, (i) the Company by a Board Resolution may
remove the Trustee with respect to all Tortoise Notes, or (ii) any holder who has been a bona fide
holder of Tortoise Notes for at least six months may, on behalf of himself and all others similarly
situated, petition any court of competent jurisdiction for the removal of the Trustee with respect
to all Tortoise Notes and the appointment of a successor Trustee or Trustees.
If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall
occur in the office of Trustee for any cause, with respect to the Tortoise Notes of one or more
series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees
with respect to the Tortoise Notes of that or those series (it being understood that any such
successor Trustee may be appointed with respect to the Tortoise Notes of one or more or all of such
series and that at any time there shall be only one Trustee with respect to the Tortoise Notes of
any particular series) and shall comply with the applicable requirements. If, within one year
after such resignation, removal or incapability, or the occurrence of such vacancy, a successor
Trustee with respect to the Tortoise Notes of any series shall be appointed by Act of the holders
of a majority in principal amount of the Outstanding Tortoise Notes of such series delivered to the
Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its
acceptance of such appointment in accordance with the applicable requirements,
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become the successor Trustee with respect to the Tortoise Notes of such series and to that
extent supersede the successor Trustee appointed by the Company.
If no successor Trustee with respect to the Tortoise Notes of any series shall have been so
appointed by the Company or the holders and accepted appointment in the manner required, any holder
who has been a bona fide holder of Tortoise Notes of such series for at least six months may, on
behalf of himself and all others similarly situated, petition any court of competent jurisdiction
for the appointment of a successor Trustee with respect to the Tortoise Notes of such series.
The Company shall give notice of each resignation and each removal of the Trustee with respect
to the Tortoise Notes of any series and each appointment of a successor Trustee with respect to the
Tortoise Notes of any series to all holders of Tortoise Notes of such series in the manner
provided. Each notice shall include the name of the successor Trustee with respect to the Tortoise
Notes of such series and the address of its Corporate Trust Office.
Acceptance of Appointment by Successor
In case of the appointment hereunder of a successor Trustee with respect to all Tortoise
Notes, every such successor Trustee so appointed shall execute, acknowledge and deliver to the
Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the rights, powers,
trusts and duties of the retiring Trustee; but, on the request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an
instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring
Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and
money held by such retiring Trustee hereunder.
In case of the appointment hereunder of a successor Trustee with respect to the Tortoise Notes
of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee
with respect to the Tortoise Notes of one or more series shall execute and deliver a supplemental
indenture wherein each successor Trustee shall accept such appointment and which (1) shall contain
such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each
successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to
the Tortoise Notes of that or those series to which the appointment of such successor Trustee
relates, (2) if the retiring Trustee is not retiring with respect to all Tortoise Notes, shall
contain such provisions as shall be deemed necessary or desirable to confirm that all the rights,
powers, trusts and duties of the retiring Trustee with respect to the Tortoise Notes of that or
those series as to which the retiring Trustee is not retiring shall continue to be vested in the
retiring Trustee, and (3) shall add to or change any of the provisions of the Indenture as shall be
necessary to provide for or facilitate the administration of the trusts hereunder by more than one
Trustee, it being understood that nothing in the Indenture shall constitute such Trustees
co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts
hereunder separate and apart from any trust or trusts hereunder administered by any other such
Trustee; and upon the execution and delivery of such supplemental indenture the resignation or
removal of the retiring Trustee shall become effective to the extent provided therein and each such
successor Trustee, without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee with respect to the Tortoise Notes of
that or those series to which the appointment of such successor Trustee relates; but, on request of
the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver
to such successor Trustee all property and money held by such retiring Trustee hereunder with
respect to the Tortoise Notes of that or those series to which the appointment of such successor
Trustee relates.
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Upon request of any such successor Trustee, the Company shall execute any and all instruments
for more fully and certainly vesting in and confirming to such successor Trustee all such rights,
powers and trusts referred to in the first or second preceding paragraph, as the case may be.
No successor Trustee shall accept its appointment unless at the time of such acceptance such
successor Trustee shall be qualified and eligible.
Merger, Conversion, Consolidation or Succession to Business
Any corporation into which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or consolidation to which
the Trustee shall be a party, or any corporation succeeding to all or substantially all the
corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided
such corporation shall be otherwise qualified and eligible, without the execution or filing of any
paper or any further act on the part of any of the parties hereto. In case any Tortoise Notes
shall have been authenticated, but not delivered, by the Trustee then in office, any successor by
merger, conversion or consolidation to such authenticating Trustee may adopt such authentication
and deliver the Tortoise Notes so authenticated with the same effect as if such successor Trustee
had itself authenticated such Tortoise Notes.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Company May Consolidate, Etc., Only On Certain Terms
The Company shall not consolidate with or merge into any other Person or convey, transfer or
lease its properties and assets substantially as an entirety to any Person, and the Company shall
not permit any Person to consolidate with or merge into the Company, unless:
(a) in case the Company shall consolidate with or merge into another Person or convey,
transfer or lease its properties and assets substantially as an entirety to any Person, the Person
formed by such consolidation or into which the Company is merged or the Person which acquires by
conveyance or transfer, or which leases, the properties and assets of the Company substantially as
an entirety shall be a corporation, partnership or trust, shall be organized and validly existing
under the laws of any domestic or foreign jurisdiction and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee,
the due and punctual payment of the principal of and any premium and interest on all the Tortoise
Notes and the performance or observance of every covenant of the Indenture on the part of the
Company to be performed or observed;
(b) immediately after giving effect to such transaction and treating any indebtedness which
becomes an obligation of the Company or any subsidiary as a result of such transaction as having
been incurred by the Company or such Subsidiary at the time of such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would become an Event of
Default, shall have happened and be continuing;
(c) the Company has delivered to the Trustee an Officers Certificate and an Opinion of
Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction, such supplemental indenture
comply and that all conditions precedent in the Indenture provided for relating to such transaction
have been complied with.
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Successor Substituted
Upon any consolidation of the Company with, or merger of the Company into, any other Person or
any conveyance, transfer or lease of the properties and assets of the Company substantially as an
entirety, the successor Person formed by such consolidation or into which the Company is merged or
to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the same effect as if
such successor Person had been named as the Company in the Indenture, and thereafter, except in the
case of a lease, the predecessor Person shall be relieved of all obligations and covenants under
the Indenture and the Tortoise Notes.
DEFEASANCE AND COVENANT DEFEASANCE
Defeasance and Discharge
Upon the Companys exercise of its option (if any) to have the provisions of the Indenture
relating to Defeasance applied to any Tortoise Notes or any series of Tortoise Notes, as the case
may be, the Company shall be deemed to have been discharged from its obligations, with respect to
such Tortoise Notes as provided in the Indenture on and after the date the conditions set forth are
satisfied (hereinafter called Defeasance). For this purpose, such Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness represented by such
Tortoise Notes and to have satisfied all its other obligations under such Tortoise Notes and the
Indenture insofar as such Tortoise Notes are concerned (and the Trustee, at the expense of the
Company, shall execute proper instruments acknowledging the same), subject to the following which
shall survive until otherwise terminated or discharged hereunder: (1) the rights of holders of
such Tortoise Notes to receive, solely from the trust fund, payments in respect of the principal of
and any premium and interest on such Tortoise Notes when payments are due, (2) the Companys
obligations with respect to such Tortoise Notes, (3) the rights, powers, trusts, duties and
immunities of the Trustee.
Covenant Defeasance
Upon the Companys exercise of its option (if any) to have provisions of the Indenture
relating to Covenant Defeasance applied to any Tortoise Notes or any series of Tortoise Notes, as
the case may be, (1) the Company shall be released from its obligations under certain provisions of
the Indenture for the benefit of the holders of such Tortoise Notes and (2) the occurrence of any
event specified in the Indenture, and any such covenants provided pursuant to certain provisions of
the Indenture shall be deemed not to be or result in an Event of Default, in each case with respect
to such Tortoise Notes as provided in the Indenture on and after the date the conditions are
satisfied (hereinafter called Covenant Defeasance). For this purpose, such Covenant Defeasance
means that, with respect to such Tortoise Notes, the Company may omit to comply with and shall have
no liability in respect of any term, condition or limitation set forth in any such specified
section of the Indenture, whether directly or indirectly by reason of any reference elsewhere in
the Indenture, or by reason of any reference in any such section or article of the Indenture to any
other provision in the Indenture or in any other document, but the remainder of the Indenture and
such Tortoise Notes shall be unaffected thereby.
Conditions to Defeasance or Covenant Defeasance
(a) The Company shall irrevocably have deposited or caused to be deposited with the Trustee
(or another trustee which satisfies the requirements and agrees to comply with the provisions of
the relevant Article of the Indenture applicable to it) as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and dedicated solely to, the
benefits of the
A-29
holders of such Tortoise Notes, (i) money in an amount, or (ii) U.S. Government Obligations
which through the scheduled payment of principal and interest in respect thereof in accordance with
their terms will provide, not later than one day before the due date of any payment, money in an
amount, or (iii) such other obligations or arrangements as may be specified with respect to such
Tortoise Notes, or (iv) a combination thereof, in each case sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee
(or any such other qualifying trustee) to pay and discharge, the principal of and any premium and
interest on such Tortoise Notes on the respective Stated Maturities, in accordance with the terms
of the Indenture and such Tortoise Notes. As used in the Indenture, U.S. Government Obligation
means (x) any security which is (i) a direct obligation of the United States of America for the
payment of which the full faith and credit of the United States of America is pledged or (ii) an
obligation of a Person controlled or supervised by and acting as an agency or instrumentality of
the United States of America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case (i) or (ii), is not
callable or redeemable at the option of the Company thereof, and (y) any depositary receipt issued
by a bank (as defined in Section 3(a)(2) of the Tortoise Notes Act) as custodian with respect to
any U.S. Government Obligation which is specified in Clause (x) above and held by such bank for the
account of the holder of such depositary receipt, or with respect to any specific payment of
principal of or interest on any U.S. Government Obligation which is so specified and held, provided
that (except as required by law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depositary receipt from any amount received by the custodian
in respect of the U.S. Government Obligation or the specific payment of principal or interest
evidenced by such depositary receipt.
(b) In the event of an election to have Defeasance and Discharge apply to any Tortoise Notes
or any series of Tortoise Notes, as the case may be, the Company shall have delivered to the
Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (ii) since the date of this instrument,
there has been a change in the applicable Federal income tax law, in either case (i) or (ii) to the
effect that, and based thereon such opinion shall confirm that, the holders of such Tortoise Notes
will not recognize gain or loss for Federal income tax purposes as a result of the deposit,
Defeasance and discharge to be effected with respect to such Tortoise Notes and will be subject to
Federal income tax on the same amount, in the same manner and at the same times as would be the
case if such deposit, Defeasance and discharge were not to occur.
(c) In the event of an election to have Covenant Defeasance apply to any Tortoise Notes or any
series of Tortoise Notes, as the case may be, the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that the holders of such Tortoise Notes will not recognize gain or
loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be
effected with respect to such Tortoise Notes and will be subject to Federal income tax on the same
amount, in the same manner and at the same times as would be the case if such deposit and Covenant
Defeasance were not to occur.
(d) The Company shall have delivered to the Trustee an Officers Certificate to the effect
that neither such Tortoise Notes nor any other Tortoise Notes of the same series, if then listed on
any Tortoise Notes exchange, will be delisted as a result of such deposit.
(e) No event which is, or after notice or lapse of time or both would become, an Event of
Default with respect to such Tortoise Notes or any other Tortoise Notes shall have occurred and be
continuing at the time of such deposit or, with regard to any such event specified, at any time on
or prior to the 90th day after the date of such deposit (it being understood that this condition
shall not be deemed satisfied until after such 90th day).
A-30
(f) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting
interest within the meaning of the Trust Indenture Act (assuming all Tortoise Notes are in default
within the meaning of such Act).
(g) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the Company is a party or by
which it is bound.
(h) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such
deposit constituting an investment company within the meaning of the Investment Company Act unless
such trust shall be registered under the Investment Company Act or exempt from registration
thereunder.
(i) No event or condition shall exist that would prevent the Company from making payments of
the principal of (and any premium) or interest on the Tortoise Notes of such series on the date of
such deposit or at any time on or prior to the 90th day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until after such 90th day).
(j) The Company shall have delivered to the Trustee an Officers Certificate and an Opinion of
Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant
Defeasance have been complied with.
(k) The Company shall have delivered to the Trustee an Opinion of Counsel substantially to the
effect that (i) the trust funds deposited pursuant hereto will not be subject to any rights of any
holders of indebtedness or equity of the Company, and (ii) after the 90th day following the
deposit, the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors rights generally, except that if a
court were to rule under any such law in any case or proceeding that the trust funds remained
property of the Company, no opinion is given as to the effect of such laws on the trust funds
except the following: (A) assuming such trust funds remained in the possession of the trustee with
whom such funds were deposited prior to such court ruling to the extent not paid to holders of such
Tortoise Notes, such trustee would hold, for the benefit of such holders, a valid and perfected
security interest in such trust funds that is not avoidable in bankruptcy or otherwise and (B) such
holders would be entitled to receive adequate protection of their interests in such trust funds if
such trust funds were used.
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APPENDIX A-I
TORTOISE NOTES AUCTION PROCEDURES
1. Orders by Existing Holders and Potential Beneficial Owners. (a) Prior to the
Submission Deadline on each Auction Date:
(i) each Existing Holder may submit to a Broker-Dealer, in writing or by such other
method as shall be reasonably acceptable to such Broker-Dealer, one or more Orders as to:
(A) the principal amount of Outstanding Tortoise Notes, if any, of the series
held by the Existing Holder which the Existing Holder commits to continue to hold
for the next succeeding Rate Period without regard to the Applicable Rate of the
Tortoise Notes;
(B) the principal amount of Outstanding Tortoise Notes, if any, of the series
held by the Existing Holder which the Existing Holder commits to continue to hold
for the next succeeding Rate Period if the Applicable Rate for Tortoise Notes for
the next succeeding Rate Period is not less than the rate per annum specified in
such Bid (and if the Auction Rate is less than such specified rate, the effect of
the Order shall be as set forth in paragraph (b)(i)(A) of this Section); and/or
(C) the principal amount of Outstanding Tortoise Notes, if any, of the series
held by the Existing Holder which the Existing Holder offers to sell on the next
succeeding Interest Payment Date without regard to the Applicable Rate for Tortoise
Notes for the next succeeding Rate Period; and
(ii) each Potential Beneficial Owner may submit to a Broker-Dealer, in writing or by
such other method as shall be reasonably acceptable to such Broker-Dealer, an Order as to
the principal amount of outstanding Tortoise Notes of a series which each such Potential
Beneficial Owner offers to purchase if the Applicable Rate for the Tortoise Notes of such
series for the next succeeding Rate Period is not less than the rate per annum then
specified by such Potential Beneficial Owner.
For the purposes of these Auction Procedures, an Order containing the information referred to
in clause (i)(A) of this paragraph (a) is referred to as a Hold Order, an Order containing the
information referred to in clause (i)(B) or (ii) of this paragraph (a) is referred to as a Bid,
and an Order containing the information referred to in clause (i)(C) of this paragraph (a) is
referred to as a Sell Order. No Auction Desk of a Broker-Dealer shall accept a Bid or Sell Order
which is conditioned on being filled in whole or which does not specify a specific rate. Auction
Desk means the business unit of a Broker-Dealer that fulfills the responsibilities of a
Broker-Dealer, including soliciting Bids for Tortoise Notes of a series while they bear interest at
the Applicable Rate.
(b) (i) A Bid by an Existing Holder shall constitute an offer to sell on the next succeeding
Auction Date:
(A) the principal amount of outstanding Tortoise Notes specified in the Bid if
the Applicable Rate determined on the Auction Date for the next succeeding Auction
Period shall be less than the rate specified in such Bid; or
(B) the principal amount or a lesser principal amount of outstanding Tortoise
Notes to be determined as described in clause (v) of paragraph (a) of Section 5
A-I-1
of this Appendix A-I if the Applicable Rate determined on the Auction Date for
the next succeeding Auction Period shall be equal to such specified rate; or
(C) a lesser principal amount of outstanding Tortoise Notes to be determined as
described in clause (iv) of paragraph (b) of Section 5 of this Appendix A-I if the
rate specified therein shall be higher than the Maximum Rate and Sufficient Clearing
Bids do not exist.
(ii) A Sell Order by an Existing Holder of Tortoise Notes of a series subject to an
Auction on any Auction Date shall constitute an offer to sell:
(A) the principal amount of outstanding Tortoise Notes of the series specified
in the Sell Order; or
(B) the principal amount or a lesser principal amount of outstanding Tortoise
Notes of the series as set forth in clause (iv) of paragraph (b) of Section 5 of
this Appendix A-I if Sufficient Clearing Bids for Tortoise Notes of the series do
not exist;
(iii) A Bid by an Existing Holder or a Potential Holder of Tortoise Notes of a series
subject to an Auction on any Auction Date shall constitute an offer to purchase:
(A) the principal amount of outstanding Tortoise Notes of the series specified
in the Bid if the Applicable Rate for the Tortoise Notes determined on the Auction
Date for the next succeeding Auction Period shall be higher than the rate specified
therein; or
(B) the principal amount or a lesser principal amount of outstanding Tortoise
Notes of the series as set forth in clause (vi) of paragraph (a) of Section 5 of
this Appendix A-I if the Applicable Rate for the Tortoise Notes determined on the
Auction Date shall be equal to the rate specified therein.
(C) Anything herein to the contrary notwithstanding:
(1) if an Order or Orders covering all of the outstanding Tortoise
Notes of the series held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline, the Auction Agent shall deem
a Hold Order to have been submitted by or on behalf of the Existing Holder
covering the principal amount of outstanding Tortoise Notes of the series
held by the Existing Holder and not subject to Orders submitted to the
Auction Agent; provided, however, that if an Order or Orders covering all of
the outstanding Tortoise Notes of the series held by any Existing Holder is
not submitted to the Auction Agent prior to the Submission Deadline for an
Auction relating to a Special Auction Period consisting of more than
Standard Auction Period, the Auction Agent shall deem a Sell Order to have
been submitted by or on behalf of the Existing Holder covering the principal
amount of outstanding Tortoise Notes of the series held by the Existing
Holder and not subject to Orders submitted to the Auction Agent;
(2) for purposes of any Auction, any Order by an Existing Holder or
Potential Holder shall be revocable until the Submission Deadline, and after
the Submission Deadline all Orders shall be irrevocable; and
A-I-2
(3) for purposes of any Auction, any Tortoise Notes sold or purchased
pursuant to clauses (i), (ii) or (iii) of paragraph (b) of this Section 1
shall be sold or purchased at a price equal to 100% of the aggregate
thereof.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit to the Auction Agent in writing, through the Auction
Agents auction processing system or by such other electronic means, as shall be reasonably
acceptable to the Auction Agent, prior to the Submission Deadline on each Auction Date, all Orders
obtained by such Broker-Dealer, and specifying with respect to each Order or aggregation of Orders
pursuant to paragraph (e) of this Section 2:
(i) the principal amount of the Bidders placing Orders;
(ii) the aggregate principal amount of Tortoise Notes of the series, if any, that are
the subject of the Order;
(iii) to the extent that the Bidder is an Existing Holder of Tortoise Notes of the
series:
(A) the principal amount of Tortoise Notes, if any, of the series subject to
any Hold Order placed by the Existing Holder;
(B) the principal amount of Tortoise Notes, if any, of the series subject to
any Bid placed by the Existing Holder and the rate specified in the Bid; and
(C) the principal amount of Tortoise Notes, if any, of the series subject to
any Sell Order placed by the Existing Holder; and
(iv) to the extent the Bidder is a Potential Holder of Tortoise Notes of the series,
the rate specified in such Bid.
(b) If more than one Bid is submitted on behalf of any Potential Beneficial Owner, each Bid
submitted with the same rate shall be aggregated and considered a single Bid and each Bid submitted
with a different rate shall be considered a separate Bid with the rate and the principal amount of
Tortoise Notes of the series specified therein.
A Broker Dealer may aggregate the Orders of different Potential Beneficial Owners on whose behalf
such Broker-Dealer is submitting Orders; provided, however, Bids may only be aggregated if the
rates on the Bids are the same when rounded pursuant to the provisions of paragraph (b) of Section
3 of this Appendix A-I. Notwithstanding the foregoing, the Auction Agent may at any time request
that such Orders be separate for each different Potential Beneficial Owner.
(c) None of the Company or the Auction Agent shall be responsible for the failure of any
Broker-Dealer to submit an Order to the Auction Agent on behalf of any Beneficial Owner, Potential
Beneficial Owner, Existing Holder or Potential Holder.
(d) Nothing contained herein shall preclude a Broker-Dealer from placing an Order for some or
all of the Tortoise Notes of a series for its own account.
(e) Until the Submission Deadline, a Broker-Dealer may, for any reason, withdraw or modify any
Order previously submitted to the Auction Agent.
A-I-3
(f) After the Submission Deadline, and prior to the Error Correction Deadline, a Broker-Dealer
may:
(i) submit to the Auction Agent an Order received from a Beneficial Owner or Potential
Beneficial Owner or generated from its own account by the Broker-Dealer, in either case
prior to the Submission Deadline and not submitted to the Auction Agent prior to the
Submission Deadline as a result of (A) an event of force majeure or a technological failure
which made delivery prior to the Submission Deadline impossible or (B) a clerical error on
the part of the Broker-Dealer; or
(ii) modify or withdraw an Order received or generated for its own account by the
Broker-Dealer and submitted to the Auction Agent prior to the Submission Deadline, if the
Broker-Dealer determines that such Order contained a clerical error on the part of the
Broker-Dealer.
In the event a Broker-Dealer makes such a submission, modification or withdrawal and the Auction
Agent has already run the Auction, the Auction Agent shall rerun the Auction, taking into account
such submission, modification or withdrawal. Such a submission, modification or withdrawal shall
be deemed to constitute a representation by the Broker-Dealer that, in the case of a newly
submitted Order, the failure to submit such Order prior to the Submission Deadline resulted from an
event described in clause (i) above and such Order was received from an Beneficial Owner or
Potential Beneficial Owner prior to the Submission Deadline or generated internally by the
Broker-Dealer for its own account prior to the Submission Deadline and, in the case of a modified
or withdrawn Order, that the Order as originally submitted contained a clerical error on the part
of the Broker-Dealer. The Auction Agent shall be entitled to rely conclusively (and shall be fully
protected in so relying) for any and all purposes of the Auction Procedures on any Order submitted
to, modified or withdrawn from, the Auction Agent after the Submission Deadline and prior to the
Error Correction Deadline as having been submitted, modified or withdrawn in compliance with the
Auction Procedures.
(g) If after the Auction Agent announces the results of an Auction a Broker-Dealer becomes
aware that an error was made by the Auction Agent, the Broker-Dealer may communicate its concern to
the Auction Agent prior to the Error Correction Deadline. If the Auction Agent determines there
has been such an error (as a result of either a communication from a Broker-Dealer or its own
internal review) prior to the final settlement of transfers with respect to such Auction at the
Securities Depository, the Auction Agent shall correct the error and notify each Broker-Dealer that
submitted Bids or held a position in the Tortoise Notes of the series subject to such Auction of
the corrected results. If an error by the Auction Agent is discovered after such final settlement,
the Auction Agent may make the change and post new results if the Auction Agent receives consent
(which may be oral) from each Broker-Dealer that submitted a Bid or held a position in the Auction.
(h) Nothing contained herein shall preclude the Auction Agent from:
(i) advising a Broker-Dealer prior to the Submission Deadline that it has not received
Sufficient Clearing Bids for Tortoise Notes of the series, provided, however, that if the
Auction Agent so advises any Broker-Dealer, it shall so advise all Broker-Dealers;
(ii) verifying the Orders of a Broker-Dealer prior to the Submission Deadline,
provided, however, that if the Auction Agent verifies the Orders of any Broker-Dealer, it
shall verify the Orders of all Broker-Dealers requesting such verification; or
(iii) contacting a Broker-Dealer who has submitted an Order that does not conform to
the requirements of these Auction Procedures and requesting that such Broker-Dealer
A-I-4
resubmit such Order so that it conforms to the requirements of these Auction
Procedures; provided, however, that if the Auction Agent has not received a corrected
conforming Order within one hour of the Submission Deadline, the Auction Agent shall, to the
extent possible, adjust such Order in conformity with the provisions of these Auction
Procedures, and, if the Auction Agent is unable to so adjust such Order, the Auction Agent
shall reject such Order.
3. Treatment of Orders by the Auction Agent. Anything herein to the contrary
notwithstanding:
(a) If the Auction Agent receives an Order which does not conform to the requirements of these
Auction Procedures, the Auction Agent may contact the Broker-Dealer submitting such Order for a
period of up to one hour after the Submission Deadline and request that such Broker-Dealer resubmit
such Order so that it conforms to the requirements of these Auction Procedures. If the Auction
Agent has not received a corrected conforming Order within one hour of the Submission Deadline, the
Auction Agent shall, to the extent possible, adjust such Order in conformity with the provisions of
these Auction Procedures and, if the Auction Agent is unable to so adjust such Order, the Auction
Agent shall reject such Order.
(b) If any rate specified in any Bid contains more than three figures to the right of the
decimal point, the Auction Agent shall round the rate up to the next highest one thousandth (.001)
of 1%.
(c) If one or more Orders covering in the aggregate more than the principal amount of
outstanding Tortoise Notes of the series subject to an Auction held by any Existing Holder is
submitted to the Auction Agent, such Orders shall be considered valid as follows:
(i) all Hold Orders for Tortoise Notes of a series shall be considered Hold Orders, but
only up to and including in the aggregate the principal amount of outstanding Tortoise Notes
of the series held by such Existing Holder;
(ii) (A) any Bid of an Existing Holder shall be considered valid as a Bid of an
Existing Holder up to and including the excess of the principal amount of outstanding
Tortoise Notes of a series held by the Existing Holder over the principal amount of Tortoise
Notes of the series subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), all Bids of any Existing Holder with the same
rate shall be aggregated and considered a single Bid of an Existing Holder up to and
including the excess of the principal amount of outstanding Tortoise Notes of the
series held by the Existing Holder over the principal amount of Tortoise Notes of
the series subject to any Hold Orders referred to in clause (i) above;
(C) subject to subclause (A), if more than one Bid with different rates is
submitted on behalf of such Existing Holder, such Bids shall be considered Bids of
an Existing Holder in the ascending order of their respective rates up to the amount
of excess of the principal amount of outstanding Tortoise Notes of the series held
by the Existing Holder over the principal amount of Tortoise Notes of the series
subject to any Hold Orders referred to in clause (i) above;
(D) the principal amount, if any, of outstanding Tortoise Notes of the series
subject to Bids not considered to be Bids of an Existing Holder under this clause
(ii) shall be treated as the subject of a Bid for Tortoise Notes of the series by a
Potential Holder; and
A-I-5
(iii) all Sell Orders shall be considered Sell Orders, but only up to and including a
principal amount of Tortoise Notes of the series equal to the excess of the principal amount
of outstanding Tortoise Notes of the series held by such Existing Holder over the sum of the
principal amount of Tortoise Notes of such series subject to Hold Orders referred to in
clause (i) above and the principal amount of Tortoise Notes of such series considered to be
subject to Bids of such Existing Holder pursuant to clause (ii) above.
(d) If an Order specifies Tortoise Notes of a series to be held, purchased or sold in a
principal amount which is not an Authorized Denomination, the Auction Agent shall round the amount
down to the nearest Authorized Denomination, and the Auction Agent shall conduct the Auction
Procedures as if such Order had been submitted in such lower amount.
(e) If any portion of an Order of an Existing Holder relates to a Tortoise Note of a series
that has been called for redemption on or prior to the Interest Payment Date next succeeding such
Auction, the Order shall be invalid with respect to such portion and the Auction Agent shall
conduct the Auction Procedures as if such portion of such Order had not been submitted.
(f) No Tortoise Note of a series which has been called for redemption on or prior to the
Interest Payment Date next succeeding such Auction shall be included in the calculation of
Available Tortoise Notes for such Auction.
4. Determination of Applicable Rate. (a) Promptly after the Submission Deadline for
the Tortoise Notes of a series on each Auction Date, the Auction Agent shall assemble all Orders
submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to as a Submitted Hold Order, a
Submitted Bid or a Submitted Sell Order, as the case may be, and collectively as a Submitted
Order) and shall determine (i) the Available Tortoise Notes, (ii) whether there are Sufficient
Clearing Bids, and (iii) the Applicable Rate.
(b) Promptly after the Auction Agent has made such determination, it shall advise the Company
of the Applicable Rate for the next succeeding Rate Period.
5. Allocation of Tortoise Notes. (a) In the event of Sufficient Clearing Bids for the
Tortoise Notes of a series subject to the further provisions of paragraphs (c) and (d) of this
Section 5. Submitted Orders for Tortoise Notes of the series shall be accepted or rejected as
follows in the following order of priority:
(i) the Submitted Hold Order of each Existing Holder shall be accepted, thus requiring
each such Existing Holder to continue to hold the Tortoise Notes that are the subject of
such Submitted Hold Order;
(ii) the Submitted Sell Order of each Existing Holder shall be accepted and the
Submitted Bids of each Existing Holder specifying any rate that is higher than the Winning
Bid Rate shall be accepted, thus requiring each Existing Holder to sell the Tortoise Notes
that are the subject of such Submitted Sell Order or Submitted Bid;
(iii) the Submitted Bid of each Existing Holder specifying any rate that is lower than
the Winning Bid Rate shall be rejected, thus requiring each such Existing Holder to continue
to hold the Tortoise Notes that are the subject of the Submitted Bid;
(iv) the Submitted Bid of each Potential Holder specifying any rate that is lower than
the Winning Bid Rate for Tortoise Notes of the series shall be accepted, thus requiring
A-I-6
each such Potential Holder to purchase the Tortoise Notes that are the subject of the
Submitted Bid;
(v) the Submitted Bid of each Existing Holder specifying a rate that is equal to the
Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to continue to
hold the Tortoise Notes of the series that are the subject of the Submitted Bid, but only up
to and including the principal amount of Tortoise Notes of such series obtained by
multiplying (A) the principal amount of Outstanding Tortoise Notes which are not the subject
of Submitted Hold Orders described in clause (i) of this paragraph (a) or of Submitted Bids
described in clauses (iii) and (iv) of this paragraph (a) by (B) a fraction, the numerator
of which shall be the principal amount of Outstanding Tortoise Notes held by such Existing
Holder subject to such Submitted Bid and the denominator of which shall be the aggregate
principal amount of Outstanding Tortoise Notes subject to such Submitted Bids made by all
such Existing Holders that specified a rate equal to the Winning Bid Rate, and the
remainder, if any, of such Submitted Bid shall be rejected, thus requiring each such
Existing Holder to sell any excess amount of Tortoise Notes;
(vi) the Submitted Bid of each Potential Holder specifying a rate that is equal to the
Winning Bid Rate shall be accepted, thus requiring each such Potential Holder to purchase
the Tortoise Notes of the series that are the subject of such Submitted Bid, but only in an
amount equal to the principal amount of Tortoise Notes of such series obtained by
multiplying (A) the aggregate principal amount of Outstanding Tortoise Notes which are not
the subject of Submitted Hold Orders described in clause (i) of this paragraph (a) or of
Submitted Bids described in clauses (iii), (iv) or (v) of this paragraph (a) by (B) a
fraction, the numerator of which shall be the principal amount of Outstanding Tortoise Notes
subject to such Submitted Bid and the denominator of which shall be the sum of the
Outstanding Tortoise Notes subject to such Submitted Bids made by all such Potential Holders
that specified a rate equal to the Winning Bid Rate, and the remainder of such Submitted Bid
shall be rejected; and
(vii) the Submitted Bid of each Potential Holder specifying any rate that is higher
than the Winning Bid Rate shall be rejected.
(b) In the event there are not Sufficient Clearing Bids for the Tortoise Notes of the series
subject to the provisions of paragraphs (c) and (d) of this Section 5, Submitted Orders for the
Tortoise Notes of the series shall be accepted or rejected as follows in the following order of
priority:
(i) the Submitted Hold Order of each Existing Holder shall be accepted, thus requiring
each such Existing Holder to continue to hold the Tortoise Notes that are the subject of
such Submitted Hold Order;
(ii) the Submitted Bid of each Existing Holder specifying any rate that is not higher
than the Maximum Rate shall be accepted, thus requiring each such Existing Holder to
continue to hold the Tortoise Notes that are the subject of such Submitted Bid;
(iii) the Submitted Bids specifying any rate that is not higher than the Maximum Rate
for the Tortoise Notes shall be accepted, thus requiring each such Potential Holder to
purchase the Tortoise Notes that are the subject of such Submitted Bid; and
(iv) the Submitted Sell Orders of each Existing Holder shall be accepted as Submitted
Sell Orders and the Submitted Bids of each such Existing Holder specifying any rate that is
higher than the Maximum Rate shall be deemed to be and shall be accepted as Submitted Sell
Orders, in both cases only up to and including the principal amount of Tortoise Notes of
such series obtained by multiplying (A) the principal amount of Tortoise Notes subject to
Submitted
A-I-7
Bids described in clause (iii) of this paragraph (b) by (B) a fraction, the numerator
of which shall be the principal amount of Outstanding Tortoise Notes held by such Existing
Holder subject to such Submitted Sell Order or such Submitted Bid deemed to be a Submitted
Sell Order and the denominator of which shall be the principal amount of Outstanding
Tortoise Notes subject to all such Submitted Sell Orders and such Submitted Bids deemed to
be Submitted Sell Orders, and the remainder of each such Submitted Sell Order or Submitted
Bid shall be deemed to be and shall be accepted as a Hold Order and each such Existing
Holder shall be required to continue to hold such excess amount of Tortoise Notes; and
(v) the Submitted Bid of each Potential Holder specifying any rate that is higher than
the Maximum Rate shall be rejected.
(c) If, as a result of the procedures described in paragraphs (a) or (b) of this Section 5,
any Existing Holder or any Potential Holder would be required to purchase or sell an aggregate
principal amount of Tortoise Notes of a series that is not an Authorized Denomination on any
Auction Date, the Auction Agent shall by lot, in such manner as it shall determine in its sole
discretion, round up or down the principal amount of Tortoise Notes of such series to be purchased
or sold by any Existing Holder or Potential Holder on such Auction Date as a result of such
procedures so that the principal amount of Tortoise Notes so purchased or sold by each Existing
Holder or Potential Holder on the Auction Date shall be an Authorized Denomination of Tortoise
Notes, even if such allocation results in one or more of such Existing Holders or Potential Holders
not purchasing or selling any Tortoise Notes on such Auction Date.
(d) If, as a result of the procedures described in paragraph (a) of this Section 5, any
Potential Holder would be required to purchase less than the minimum Authorized Denomination of
Tortoise Notes of a series that is not an Authorized Denomination on any Auction Date, the Auction
Agent shall by lot, in such manner as it shall determine in its sole discretion, allocate Tortoise
Notes of that series for purchase among Potential Holders so that the principal amount of Tortoise
Notes of such series purchased on the Auction Date by any Potential Holder shall be an Authorized
Denomination, even if the allocation results in one or more Potential Holders not purchasing
Tortoise Notes of such series on the Auction Date.
6. Notice of Applicable Rate. (a) On each Auction Date, the Auction Agent shall
notify each Broker-Dealer that participated in the Auction held on such Auction Date by electronic
means acceptable to the Auction Agent and the applicable Broker-Dealer of the following, with
respect to the Tortoise Notes of a series for which an Auction was held on such Auction Date:
(i) the Applicable Rate determined on such Auction Date for the succeeding Rate Period;
(ii) whether Sufficient Clearing Bids existed for the determination of the Winning Bid
Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order on behalf of an Existing
Holder, whether such Bid or Sell Order was accepted or rejected and the principal amount of
Tortoise Notes of the series, if any, to be sold by such Existing Holder;
(iv) if such Broker-Dealer submitted a Bid on behalf of a Potential Holder, whether
such Bid was accepted or rejected and the principal amount of Tortoise Notes of the series,
if any, to be purchased by such Potential Holder;
A-I-8
(v) if the principal amount of Tortoise Notes of a series to be sold by all Existing
Holders on whose behalf such Broker-Dealer submitted Bids or Sell Orders is different from
the principal amount of Tortoise Notes of such series to be purchased by all Potential
Holders on whose behalf such Broker-Dealer submitted a Bid, the name or names of one or more
Broker-Dealers (and the Agent Member, if any, of each such other Broker-Dealer) and the
principal amount of Tortoise Notes of such series to be (A) purchased from one or more
Existing Holders on whose behalf such other Broker-Dealers submitted Bids or Sell Orders or
(B) sold to one or more Potential Holders on whose behalf such Broker-Dealer submitted Bids;
and
(vi) the immediately succeeding Auction Date.
(b) On each Auction Date, with respect to each series of Tortoise Notes for which an Auction
was held on such Auction Date, each Broker-Dealer that submitted an Order on behalf of any Existing
Holder or Potential Holder shall, if requested: (i) advise each Existing Holder and Potential
Holder on whose behalf such Broker-Dealer submitted an Order as to (A) the Applicable Rate
determined on such Auction Date, (B) whether any Bid or Sell Order submitted on behalf of each such
Owner was accepted or rejected and (C) the immediately succeeding Auction Date; (ii) instruct each
Potential Holder on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or
in part, to instruct such Potential Holders Agent Member to pay to such Broker-Dealer (or its
Agent Member) through the Securities Depository the amount necessary to purchase the principal
amount of Tortoise Notes of such series to be purchased pursuant to such Bid against receipt of
such Tortoise Notes; and (iii) instruct each Existing Holder on whose behalf such Broker-Dealer
submitted a Sell Order that was accepted or a Bid that was rejected in whole or in part, to
instruct such Existing Holders Agent Member to deliver to such Broker-Dealer (or its Agent Member)
through the Securities Depository the principal amount of Tortoise Notes of the series to be sold
pursuant to such Bid or Sell Order against payment therefor.
7. Miscellaneous Provisions Regarding Auctions. (a) In this Appendix A-I, each
reference to the purchase, sale or holding of Tortoise Notes shall refer to beneficial interests in
Tortoise Notes, unless the context clearly requires otherwise.
(b) During an auction Rate Period with respect to each series of Tortoise Notes, the
provisions of the Indenture and the definitions contained therein and described in this Appendix
A-I, including without limitation the definitions of All Hold Rate, Interest Payment Date, Maximum
Rate, and Applicable Rate, may be amended pursuant to the Indenture by obtaining the consent of the
majority of the owners of the affected Outstanding Tortoise Notes of a series bearing interest at
the Applicable Rate as follows. If on the first Auction Date occurring at least 20 days after the
date on which the Trustee mailed notice of such proposed amendment to the registered owners of the
affected Outstanding Tortoise Notes of the series, (i) the Applicable Rate which is determined on
such date is the Winning Bid Rate or the All Hold Rate and (ii) there is delivered to the Company
and the Trustee an opinion of counsel to the effect that such amendment shall not adversely affect
the validity of the Tortoise Notes of the series or any exemption from federal income tax to which
the interest on the Tortoise Notes of the series would otherwise be entitled, the proposed
amendment shall be deemed to have been consented to by the owners of all affected Outstanding
Tortoise Notes of the series bearing interest at the Applicable Rate.
(c) If the Securities Depository notifies the Company that it is unwilling or unable to
continue as registered owner of the Tortoise Notes of a series or if at any time the Securities
Depository shall no longer be registered or in good standing under the Securities Exchange Act of
1934, as amended, or other applicable statute or regulation and a successor to the Securities
Depository is not appointed by the Company within 90 days after the Company receives notice or
becomes aware of such condition, as the case may be, the company shall execute and the Trustee
shall authenticate and deliver certificates representing the Tortoise Notes of the series. Such
Tortoise Notes shall be registered in such names and
A-I-9
Authorized Denominations as the Securities Depository, pursuant to instructions from the Agent
Members or otherwise, shall instruct the Company and the Trustee.
(d) During an Auction Rate Period, so long as the ownership of the Tortoise Notes of a series
is maintained in book-entry form by the Securities Depository, an Existing Holder or a Beneficial
Owner may sell, transfer or otherwise dispose of a Tortoise Note only pursuant to a Bid or Sell
Order in accordance with the Auction Procedures or to or through a Broker-Dealer, provided that (i)
in the case of all transfers other than pursuant to Auctions such Existing Holder or its
Broker-Dealer or its Agent Member advises the Auction Agent of such transfer and (ii) a sale,
transfer or other disposition of Tortoise Notes of the series from a customer of a Broker-Dealer
who is listed on the records of that Broker-Dealer as the holder of such Tortoise Notes to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to be a sale, transfer
or other disposition for purposes of this paragraph if such Broker-Dealer remains the Existing
Holder of the Tortoise Notes so sold, transferred or disposed or immediately after such sale,
transfer or disposition.
8. Changes in Auction Period or Auction Date.
(a) Changes in Auction Period. (i) During any Auction Period, the Company, may, from time to
time on the Interest Payment Date immediately following the end of any Auction Period, change the
length of the Auction Period with respect to all of the Tortoise Notes of a series in order to
accommodate economic and financial factors that may affect or be relevant to the length of the
Auction Period and the rate of Tortoise Notes of such series. The Company shall initiate the
change in the length of the Auction Period by giving written notice to the Trustee, Auction Agent,
the Broker-Dealers and the Securities Depository that the Auction Period shall change if the
conditions described herein are satisfied and the proposed effective date of the change, at least
10 Business Days prior to the Auction Date for such Auction Period.
(i) Any such changed Auction Period shall be for a period of one day, seven-days,
28-days, 35-days, three months, six months and shall be for all of the Tortoise Notes of a
series in an Auction Period.
(ii) The change in the length of the Auction Period shall not be allowed unless
Sufficient Clearing Bids existed at the Auction immediately preceding the proposed change.
(iii) The change in length of the Auction Period shall take effect only if Sufficient
Clearing Bids exist at the Auction on the Auction Date for such first Auction Period. For
purposes of the Auction for such first Auction Period only, each Existing Holder shall be
deemed to have submitted Sell Orders with respect to all of its Tortoise Notes of a series
except to the extent such Existing Holder submits an Order with respect to such notes.
(b) Changes in Auction Date. The Auction Agent, at the direction of the Company, may specify
an earlier Auction Date (but in no event more than five Business Days earlier) than the Auction
Date that would otherwise be determined in accordance with the definition of Auction Date in
order to conform with then current market practice with respect to similar securities or to
accommodate economic and financial factors that may affect or be relevant to the day of the week
constituting an Auction Date and the rate of the Tortoise Notes of the series. The Auction Agent
shall provide notice of the Companys direction to specify an earlier Auction Date for an Auction
Period by means of a written notice delivered at least 45 days prior to the proposed changed
Auction Date to the Company, the Broker-Dealers and the Securities Depository. In the event that
Auction Agent is instructed to specify an earlier Auction Date, the days of the week on which an
Auction Period begins and ends and the Interest Payment Date shall be adjusted accordingly.
A-I-10
APPENDIX B FORM OF ARTICLES SUPPLEMENTARY
SERIES ___ MONEY MARKET CUMULATIVE PREFERRED SHARES
Tortoise Energy Infrastructure Corporation (the Company), a Maryland corporation, certifies
to the State Department of Assessments and Taxation of Maryland that:
FIRST: Under a power contained in Article V, of the charter of the Company (the Charter),
the Board of Directors by duly adopted resolutions classified and designated ___ shares of
authorized but unissued Preferred Stock (as defined in the Charter) as shares of Series ___ Money
Market Cumulative Preferred Shares, liquidation preference $ per share, with the following
preferences, rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption, which, upon any restatement
of the Charter, shall become part of Article V of the Charter, with any necessary or appropriate
renumbering or relettering of the sections or subsections hereof.
MONEY MARKET CUMULATIVE PREFERRED SHARES
DESIGNATION
MMP Shares: ___shares of Preferred Stock are classified and designated as Series ___ Money
Market Cumulative Preferred Shares, liquidation preference $ per share (Series ___ MMP Shares). The initial Dividend Period for the MMP Shares shall be the period from and including
the Original Issue Date thereof to but excluding ___, 200_. Each MMP Share shall have an
Applicable Rate for its initial Dividend Period equal to ___% per annum and an initial Dividend
Payment Date of ___, 200_. Each MMP Share shall have such other preferences, rights,
voting powers, restrictions, limitations as to dividends and other distributions, qualifications
and terms and conditions of redemption, in addition to those required by applicable law or set
forth in the Charter applicable to shares of Preferred Stock (Preferred Shares), as are set forth
in Part I and Part II of these terms of the MMP Shares. The MMP Shares shall constitute a separate
series of Preferred Shares.
Subject to the provisions of Section 11 of Part I hereof, the Board of Directors of the
Company may, in the future, authorize the issuance of additional MMP Shares with the same
preferences, rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption and other terms herein
described, except that the initial Dividend Period, the Applicable Rate for the initial Dividend
Period and the initial Dividend Payment Date shall be as set forth in an Articles Supplementary
relating to such additional MMP Shares.
As used in Part I and Part II of these terms of the MMP Shares, capitalized terms shall have
the meanings provided in Section 17 of Part I.
PART I. MMP SHARES TERMS
1. Number of Shares; Ranking. (a) The initial number of authorized MMP Shares is
___ shares. No fractional MMP Shares shall be issued.
(b) Any MMP Shares which at any time have been redeemed or purchased by the Company shall,
after redemption or purchase, be returned to the status of authorized but unissued Preferred
Shares, without further designation as to series.
(c) The MMP Shares shall rank on a parity with shares of any other series of Preferred Shares
(including any other MMP Shares) as to the payment of dividends to which the shares
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are entitled and the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Company.
(d) No Holder of MMP Shares shall have, solely by reason of being a Holder, any preemptive
right, or, unless otherwise determined by the Directors, other right to acquire, purchase or
subscribe for any MMP Shares, shares of common stock of the Company (Common Shares) or other
securities of the Company which it may hereafter issue or sell.
(e) No Holder of MMP Shares shall be entitled to exercise the rights of an objecting
stockholder under Title 3, Subtitle 2 of the Maryland General Corporation Law (the MGCL) or any
successor provision.
2. Dividends. (a) The Holders of MMP Shares shall be entitled to receive cash
dividends, when, as and if authorized by the Board of Directors and declared by the Company, out of
funds legally available therefor, at the rate per annum equal to the Applicable Rate, determined as
set forth in paragraph (c) of this Section 2, and no more, payable on the respective dates
determined as set forth in paragraph (b) of this Section 2. Dividends on Outstanding MMP Shares
issued on the Original Issue Date shall accumulate from the Original Issue Date.
(b) (i) Dividends shall be payable when, as and if authorized by the Board of Directors and
declared by the Company following the initial Dividend Payment Date, subject to subparagraph
(b)(ii) of this Section 2, on MMP Shares, with respect to any Dividend Period on the first Business
Day following the last day of the Dividend Period; provided, however, if the Dividend Period is
greater than 30 days, then on a monthly basis on the first Business Day of each month within the
Dividend Period and on the Business Day following the last day of the Dividend Period.
(ii) If a day for payment of dividends resulting from the application of subparagraph
(b)(i) above is not a Business Day, then the Dividend Payment Date shall be the first
Business Day that falls after such day for payment of dividends.
(iii) The Company shall pay to the Paying Agent not later than 3:00 p.m., New York City
time, on the Business Day next preceding each Dividend Payment Date for the MMP Shares, an
aggregate amount of federal funds or similar same day funds, equal to the dividends to be
paid to all Holders of such shares on such Dividend Payment Date. The Company shall not be
required to establish any reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of dividends shall be held in
trust for the payment of such dividends by the Paying Agent for the benefit of the Holders
specified in subparagraph (b)(v) of this Section 2. Any moneys paid to the Paying Agent in
accordance with the foregoing but not applied by the Paying Agent to the payment of
dividends, will, to the extent permitted by law, be repaid to the Company at the end of 90
days from the date on which such moneys were to have been so applied.
(v) Each dividend on MMP Shares shall be paid on the Dividend Payment Date therefor to
the Holders as their names appear on the share ledger or share records of the Company on the
Business Day next preceding such Dividend Payment Date. Dividends in arrears for any past
Dividend Period may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders as their names appear on the share ledger or share
records of the Company on such date, not exceeding 15 days preceding the payment date
thereof, as may be fixed by the Board of Directors. No interest will be payable in respect
of any dividend payment or payments which may be in arrears.
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(c) (i) The dividend rate on Outstanding MMP Shares during the period from and after the
Original Issue Date to and including the last day of the initial Dividend Period therefor shall be
equal to the rate per annum set forth under Designation above. For each subsequent Dividend
Period with respect to the MMP Shares Outstanding thereafter, the dividend rate shall be equal to
the rate per annum that results from an Auction; provided, however, that if Sufficient Clearing
Bids have not been made in an Auction (other than as a result of all MMP Shares being the subject
of Submitted Hold Orders), then the dividend rate on the MMP Shares for any such Dividend Period
shall be the Maximum Rate (except during a Default Period when the dividend rate shall be the
Default Rate). If an Auction for any subsequent Dividend Period is not held for any reason,
including because there is no Auction Agent or Broker-Dealer, then the dividend rate on the MMP
Shares for such Dividend Period shall be the Maximum Rate (except during a Default Period when the
dividend rate shall be the Default Rate (as set forth in Section 2(c)(ii) below)).
The All Hold Rate will apply automatically following an Auction in which all of the
Outstanding MMP Shares are subject (or are deemed to be subject) to Hold Orders. The rate per
annum at which dividends are payable on MMP Shares as determined pursuant to this Section 2(c)(i)
shall be the Applicable Rate.
(ii) Subject to the cure provisions below, a Default Period will commence on any
Dividend Payment Date or any date fixed for redemption, as applicable, if the Company fails
to deposit irrevocably in trust federal funds or similar same-day funds, with the Paying
Agent by 12:00 noon, New York City time, (A) the full amount of any declared dividend
payable on the Dividend Payment Date (a Dividend Default) or (B) the full amount of any
Redemption Price payable on the date fixed for redemption (the Redemption Date) (a
Redemption Default, and together with a Dividend Default, hereinafter referred to as
Default). Subject to the cure provisions of Section 2(c)(iii) below, a Default Period
with respect to a Dividend Default or a Redemption Default shall end on the Business Day on
which, by 12:00 noon, New York City time, all unpaid dividends and any unpaid Redemption
Price shall have been deposited irrevocably in trust in same-day funds with the Paying
Agent. In the case of a Dividend Default, the Applicable Rate for each Dividend Period
commencing during a Default Period will be equal to the Default Rate, and each subsequent
Dividend Period commencing after the beginning of a Default Period shall be a Standard
Dividend Period; provided, however, that the commencement of a Default Period will not by
itself cause the commencement of a new Dividend Period. No Auction shall be held during a
Default Period.
(iii) No Default Period with respect to a Dividend Default or Redemption Default shall
be deemed to commence if the amount of any dividend or any Redemption Price due (if such
default is not solely due to the willful failure of the Company) is deposited irrevocably in
trust, in same-day funds with the Paying Agent by 12:00 noon, New York City time within
three Business Days after the applicable Dividend Payment Date or Redemption Date, together
with an amount equal to the Default Rate applied to the amount of such non-payment based on
the actual number of days comprising such period divided by 360.
(iv) The amount of dividends per share payable (if declared) on each Dividend Payment
Date of each Dividend Period (or in respect of dividends on another date in connection with
a redemption during such Dividend Period) shall be computed by multiplying the Applicable
Rate (or the Default Rate) for such Dividend Period (or a portion thereof) by a fraction,
the numerator of which will be the number of days in such Dividend Period (or portion
thereof) that such share was Outstanding and for which the Applicable Rate or the Default
Rate was applicable and the denominator of which will be 360, multiplying the amount so
obtained by the liquidation preference per share, and rounding the amount so obtained to the
nearest cent.
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(d) Any dividend payment made on MMP Shares shall first be credited against the earliest
accumulated but unpaid dividends due with respect to such MMP Shares.
(e) For so long as the MMP Shares are Outstanding, except as contemplated by Part I of these
terms of the MMP Shares, the Company will not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, Common Shares or other shares of capital stock, if any,
ranking junior to the MMP Shares as to dividends or upon liquidation) with respect to Common Shares
or any other shares of the Company ranking junior to or on a parity with the MMP Shares as to
dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by conversion into or
exchange for shares of the Company ranking junior to the MMP Shares as to dividends and upon
liquidation) or any such parity shares (except by conversion into or exchange for shares of the
Company ranking junior to or on a parity with the MMP Shares as to dividends and upon liquidation),
unless (1) there is no event of default under any Borrowings (including the Tortoise Notes) that is
continuing; (2) immediately after such transaction, the Company would have Eligible Assets with an
aggregate Discounted Value at least equal to the MMP Shares Basic Maintenance Amount and the 1940
Act MMP Shares Asset Coverage would be achieved, (3) immediately after the transaction, the Company
would have eligible portfolio holdings with an aggregated discounted value at least equal to the
asset coverage requirements, if any, under any borrowings, (4) full cumulative dividends on the MMP
Shares due on or prior to the date of the transaction have been declared and paid and (5) the
Company has redeemed the full number of MMP Shares required to be redeemed by any provision for
mandatory redemption contained in Section 3(a)(ii).
3. Redemption. (a) (i) After the initial Dividend Period, subject to the provisions
of this Section 3 and to the extent permitted under the 1940 Act and Maryland law, the Company may,
at its option, redeem in whole or in part out of funds legally available therefor MMP Shares herein
designated as (A) having a Dividend Period of one year or less, on the Business Day after the last
day of such Dividend Period by delivering a notice of redemption to the Auction Agent not less than
15 calendar days and not more than 40 calendar days prior to the date fixed for such redemption, at
a redemption price per share equal to $___, plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date fixed for redemption (Redemption
Price), or (B) having a Dividend Period of more than one year, on any Business Day prior to the
end of the relevant Dividend Period by delivering a notice of redemption to the Auction Agent not
less than 15 calendar days and not more than 40 calendar days prior to the date fixed for such
redemption, at the Redemption Price, plus a redemption premium, if any, determined solely by the
Board of Directors and set forth in any applicable Specific Redemption Provisions at the time of
the designation of such Dividend Period as set forth in Section 4 of these terms of the MMP Shares;
provided, however, that during a Dividend Period of more than one year no MMP Shares will be
subject to optional redemption except in accordance with any Specific Redemption Provisions
approved by the Board of Directors after consultation with the Broker-Dealers at the time of the
designation of such Dividend Period. Notwithstanding the foregoing, the Company shall not give a
notice of or effect any redemption pursuant to this Section 3(a)(i) unless, on the date on which
the Company intends to give such notice and on the date of redemption (1) the Company has available
certain Deposit Securities with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount (including any applicable
premium) due to Holders of MMP Shares by reason of the redemption of such MMP Shares on such date
fixed for the redemption and (2) the Company would have Eligible Assets with an aggregate
Discounted Value at least equal to the MMP Shares Basic Maintenance Amount immediately subsequent
to such redemption, if such redemption were to occur on such date.
(ii) If the Company fails to maintain, as of any Valuation Date, Eligible Assets with an
aggregate Discounted Value at least equal to the MMP Shares Basic Maintenance
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Amount or, as of the last Business Day of any month, the 1940 Act MMP Shares Asset
Coverage, and such failure is not cured within ten Business Days following such Valuation
Date in the case of a failure to maintain the MMP Shares Basic Maintenance Amount or on the
last Business Day of the following month in the case of a failure to maintain the 1940 Act
MMP Shares Asset Coverage (each an Asset Coverage Cure Date), the MMP Shares will be
subject to mandatory redemption out of funds legally available therefor. The number of MMP
Shares to be redeemed in such circumstances will be equal to the lesser of (1) the minimum
number of MMP Shares the redemption of which, if deemed to have occurred immediately prior
to the opening of business on the relevant Asset Coverage Cure Date, would result in the
Company having Eligible Assets with an aggregate Discounted Value at least equal to the MMP
Shares Basic Maintenance Amount, or sufficient to satisfy the 1940 Act MMP Shares Asset
Coverage, as the case may be, in either case as of the relevant Asset Coverage Cure Date
(provided that, if there is no such minimum number of MMP Shares the redemption of which
would have such result, all MMP Shares then Outstanding will be redeemed), and (2) the
maximum number of MMP Shares that can be redeemed out of funds expected to be available
therefor on the Mandatory Redemption Date at the Mandatory Redemption Price set forth in
subparagraph (a)(iii) of this Section 3.
(iii) In determining the MMP Shares required to be redeemed in accordance with the
foregoing Section 3(a)(ii), the Company shall allocate the number of shares required to be
redeemed to satisfy the MMP Shares Basic Maintenance Amount or the 1940 Act MMP Shares Asset
Coverage, as the case may be, pro rata among the Holders of MMP Shares in proportion to the
number of shares they hold by lot or by such other method as the Company shall deem fair and
equitable, subject to any mandatory redemption provisions, subject to the further provisions
of this subparagraph (iii). The Company shall effect any required mandatory redemption
pursuant to subparagraph (a)(ii) of this Section 3 no later than 40 calendar days after the
Asset Coverage Cure Date (the Mandatory Redemption Date), except that if the Company does
not have funds legally available for the redemption of, or is not otherwise legally
permitted to redeem, the number of MMP Shares which would be required to be redeemed by the
Company under subparagraph (a)(ii) of this Section 3 if sufficient funds were available,
together with shares of other Preferred Shares which are subject to mandatory redemption
under provisions similar to those contained in this Section 3, or the Company otherwise is
unable to effect such redemption on or prior to such Mandatory Redemption Date, the Company
shall redeem those MMP Shares, and shares of other Preferred Shares which it was unable to
redeem, on the earliest practicable date on which the Company will have such funds
available, upon notice pursuant to Section 3(b) to record owners of the MMP Shares to be
redeemed and the Paying Agent. The Company will deposit with the Paying Agent funds
sufficient to redeem the specified number of MMP Shares with respect to a redemption
required under subparagraph (a)(ii) of this Section 3, by 12:00 p.m., New York City time, on
the Mandatory Redemption Date. If fewer than all of the Outstanding MMP Shares are to be
redeemed pursuant to this Section 3(a)(iii), the number of shares to be redeemed shall be
redeemed pro rata from the Holders of such shares in proportion to the number of such shares
held by such Holders, by lot or by such other method as the Company shall deem fair and
equitable, subject, however, to the terms of any applicable Specific Redemption Provisions.
Mandatory Redemption Price means the Redemption Price plus (in the case of a Dividend
Period of one year or more only) a redemption premium, if any, determined by the Board of
Directors after consultation with the Broker-Dealers and set forth in any applicable
Specific Redemption Provisions.
(b) In the event of a redemption pursuant to Section 3(a), the Company will file a notice of
its intention to redeem with the Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the Company shall
deliver a notice of redemption to the Auction Agent (the Notice of Redemption) containing the
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information set forth below (1) in the case of an optional redemption pursuant to subparagraph
(a)(i) above, one Business Day prior to the giving of notice to the Holders, and (2) in the case of
a mandatory redemption pursuant to subparagraph (a)(ii) above, on or prior to the 30th day
preceding the Mandatory Redemption Date. The Auction Agent will use its reasonable efforts to
provide notice to each Holder of MMP Shares called for redemption by electronic or other reasonable
means not later than the close of business on the Business Day immediately following the day on
which the Auction Agent determines the shares to be redeemed (or, during a Default Period with
respect to such shares, not later than the close of business on the Business Day immediately
following the day on which the Auction Agent receives Notice of Redemption from the Company). The
Auction Agent shall confirm such notice in writing not later than the close of business on the
third Business Day preceding the date fixed for redemption by providing the Notice of Redemption to
each Holder of shares called for redemption, the Paying Agent (if different from the Auction Agent)
and the Securities Depository. Notice of Redemption will be addressed to the registered owners of
MMP Shares at their addresses appearing on the share records of the Company. Such Notice of
Redemption will set forth (1) the date fixed for redemption, (2) the number and identity of MMP
Shares to be redeemed, (3) the redemption price (specifying the amount of accumulated dividends to
be included therein and the amount of the redemption premium, if any), (4) that dividends on the
shares to be redeemed will cease to accumulate on such date fixed for redemption, and (5) the
provision under which redemption shall be made. No defect in the Notice of Redemption or in the
transmittal or mailing thereof will affect the validity of the redemption proceedings, except as
required by applicable law. If fewer than all shares held by any Holder are to be redeemed, the
Notice of Redemption mailed to such Holder shall also specify the number of shares to be redeemed
from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section 3, but subject to Section
7(f), no MMP Shares may be redeemed unless all dividends in arrears on the Outstanding MMP Shares
and all shares of capital stock of the Company ranking on a parity with the MMP Shares with respect
to payment of dividends or upon liquidation, have been or are being contemporaneously paid or set
aside for payment; provided, however, that the foregoing shall not prevent the purchase or
acquisition of all Outstanding MMP Shares pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by, Holders of all
Outstanding MMP Shares.
(d) Upon the deposit of funds sufficient to redeem MMP Shares with the Paying Agent on the
date fixed for redemption and the giving of the Notice of Redemption to the Auction Agent under
paragraph (b) of this Section 3, dividends on such shares shall cease to accumulate and such shares
shall no longer be deemed to be Outstanding for any purpose (including, without limitation, for
purposes of calculating whether the Company has maintained the requisite MMP Shares Basic
Maintenance Amount or the 1940 Act MMP Shares Asset Coverage), and all rights of the Holder of the
shares so called for redemption shall cease and terminate, except the right of such Holder to
receive the redemption price specified herein, but without any interest or other additional amount.
Such redemption price shall be paid by the Paying Agent to the nominee of the Securities
Depository. Upon written request, the Company shall be entitled to receive from the Paying Agent,
promptly after the date fixed for redemption, any cash deposited with the Paying Agent in excess of
(1) the aggregate redemption price of the MMP Shares called for redemption on such date and (2)
such other amounts, if any, to which Holders of MMP Shares called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of two years from such redemption date shall,
to the extent permitted by law, be paid to the Company upon its written request, after which time
the Holders of MMP Shares so called for redemption may look only to the Company for payment of the
redemption price and all other amounts, if any, to which they may be entitled.
(e) To the extent that any redemption for which a Notice of Redemption has been given is not
made by reason of the absence of legally available funds therefor, or is otherwise prohibited, such
redemption shall be made as soon as practicable to the extent such funds become legally available
or
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such redemption is no longer otherwise prohibited. Failure to redeem MMP Shares shall be
deemed to exist when the Company shall have failed, for any reason whatsoever, to deposit in trust
with the Paying Agent the redemption price with respect to any shares for which such Notice of
Redemption has been given in accordance with Section 2(c)(ii) of this Appendix B. Notwithstanding
the fact that the Company may not have redeemed MMP Shares for which a Notice of Redemption has
been given, dividends may be declared and paid on MMP Shares and shall include those MMP Shares for
which Notice of Redemption has been given but for which deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption price of MMP Shares
called for redemption shall be held in trust by the Paying Agent for the benefit of Holders of
shares so to be redeemed.
(g) So long as any MMP Shares are held of record by the nominee of the Securities Depository,
the redemption price for such shares will be paid on the date fixed for redemption to the nominee
of the Securities Depository for distribution to Agent Members for distribution to the persons for
whom they are acting as agent.
(h) Except for the provisions described above, nothing contained in these terms of the MMP
Shares limits any right of the Company to purchase or otherwise acquire any MMP Shares outside of
an Auction at any price, whether higher or lower than the price that would be paid in connection
with an optional or mandatory redemption, so long as, at the time of any such purchase, there is no
arrearage in the payment of dividends on, or the mandatory or optional redemption price with
respect to, any MMP Shares for which Notice of Redemption has been given and the Company is in
compliance with the 1940 Act MMP Shares Asset Coverage and has Eligible Assets with an aggregate
Discounted Value at least equal to the MMP Shares Basic Maintenance Amount after giving effect to
such purchase or acquisition on the date thereof. If fewer than all the Outstanding MMP Shares are
redeemed or otherwise acquired by the Company, the Company shall give notice of such transaction to
the Auction Agent, in accordance with the procedures agreed upon by the Board of Directors.
(i) In the case of any redemption pursuant to this Section 3, only whole MMP Shares shall be
redeemed, and in the event that any provision of the Charter would require redemption of a
fractional share, the Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
(j) Notwithstanding anything herein to the contrary, including, without limitation, Sections
2(e) and 6(f) hereof, the Board of Directors may authorize, create or issue any class or series of
shares of capital stock, including other series of MMP Shares, ranking prior to or on a parity with
the MMP Shares with respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Company, to the extent permitted by
the 1940 Act, as amended, if, upon issuance, the Company would meet the 1940 Act MMP Shares Asset
Coverage, the MMP Shares Basic Maintenance Amount and the requirements of Section 11 of Part I
hereof.
4. Designation of Dividend Period. (a) The initial Dividend Period for the MMP Shares
is as set forth under Designation above. The Company will designate the duration of subsequent
Dividend Periods of MMP Shares; provided, however, that no such designation is necessary for a
Standard Dividend Period and, provided further, that any designation of a Special Dividend Period
shall be effective only if (1) notice thereof shall have been given as provided herein, (2) any
failure to pay in a timely manner to the Auction Agent the full amount of any dividend on, or the
redemption price of, MMP Shares shall have been cured as provided above, (3) Sufficient Clearing
Bids shall have existed in an Auction held on the Auction Date immediately preceding the first day
of such proposed Special Dividend Period, (4) if the Company shall have mailed a Notice of
Redemption with respect to any shares, the redemption price with respect to such shares shall have
been deposited with the Paying Agent, and (5) in
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the case of the designation of a Special Dividend Period, the Company has confirmed that as of
the Auction Date next preceding the first day of such Special Dividend Period, it has Eligible
Assets with an aggregate Discounted Value at least equal to the MMP Shares Basic Maintenance
Amount, and the Company has consulted with the Broker-Dealers and has provided notice of such
designation and a MMP Shares Basic Maintenance Report to Moodys (if Moodys is then rating the MMP
Shares), Fitch (if Fitch is then rating the MMP Shares) and any Other Rating Agency which is then
rating the MMP Shares and so requires.
(b) If the Company proposes to designate any Special Dividend Period, not fewer than seven (or
two Business Days in the event the duration of the Dividend Period prior to such Special Dividend
Period is fewer than eight days) nor more than 30 Business Days prior to the first day of such
Special Dividend Period, notice shall be (1) made by press release and (2) communicated by the
Company by telephonic or other means to the Auction Agent and confirmed in writing promptly
thereafter. Each such notice shall state (A) that the Company proposes to exercise its option to
designate a succeeding Special Dividend Period, specifying the first and last days thereof and (B)
that the Company will by 3:00 p.m., New York City time, on the second Business Day next preceding
the first day of such Special Dividend Period, notify the Auction Agent, who will promptly notify
the Broker-Dealers and the Existing Holders, of either (x) its determination, subject to certain
conditions, to proceed with such Special Dividend Period, subject to the terms of any Specific
Redemption Provisions, or (y) its determination not to proceed with such Special Dividend Period,
in which latter event the succeeding Dividend Period shall be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of any proposed Special Dividend Period, the Company shall deliver to the Auction Agent,
who will promptly deliver to the Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Company has determined to designate the next
succeeding Dividend Period as a Special Dividend Period, specifying the first and last days
thereof and (B) the terms of any Specific Redemption Provisions; or
(ii) a notice stating that the Company has determined not to exercise its option to
designate a Special Dividend Period.
If the Company fails to deliver either such notice with respect to any designation of
any proposed Special Dividend Period to the Auction Agent or is unable to make the
confirmation provided in clause (v) of paragraph (a) of this Section 4 by 3:00 p.m., New
York City time, on the second Business Day next preceding the first day of such proposed
Special Dividend Period, the Company shall be deemed to have delivered a notice to the
Auction Agent with respect to such Dividend Period to the effect set forth in clause (ii)
above, thereby resulting in a Standard Dividend Period.
5. Restrictions on Transfer. MMP Shares may be transferred only (a) pursuant to an
order placed in an Auction, (b) to or through a Broker-Dealer or (c) to the Company or any
Affiliate. Notwithstanding the foregoing, a transfer other than pursuant to an Auction will not be
effective unless the selling Existing Holder or the Agent Member of such Existing Holder, in the
case of an Existing Holder whose shares are listed in its own name on the books of the Auction
Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a transfer
between persons holding MMP Shares through different Broker-Dealers, advises the Auction Agent of
such transfer. The certificate representing the MMP Shares issued to the Securities Depository
will bear legends with respect to the restrictions described above and stop-transfer instructions
will be issued to the Transfer Agent and/or Registrar.
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6. Voting Rights. (a) Except for matters which do not require the vote of holders of
Preferred Shares under the 1940 Act and except as otherwise provided in the Charter or Bylaws,
herein or as otherwise required by applicable law, (1) each holder of MMP Shares shall be entitled
to one vote for each MMP Share held on each matter submitted to a vote of stockholders of the
Company, and (2) the holders of Outstanding Preferred Shares, including the MMP Shares, and Common
Shares shall vote together as a single class on all matters submitted to stockholders; provided,
however, that the holders of Outstanding Preferred Shares, including the MMP Shares, shall be
entitled, as a class, to the exclusion of the holders of shares of all other classes of stock of
the Company, to elect two Directors of the Company at all times. The identity and class (if the
Board of Directors is then classified) of the nominees for such Directors may be fixed by the Board
of Directors. Subject to paragraph (b) of this Section 6, the holders of outstanding Common Shares
and Preferred Shares, including the MMP Shares, voting together as a single class, shall elect the
balance of the Directors.
(b) During any period in which any one or more of the conditions described below shall exist
(such period being referred to herein as a Voting Period), the number of Directors constituting
the Board of Directors shall automatically increase by the smallest number that, when added to the
two Directors elected exclusively by the holders of Preferred Shares, including the MMP Shares,
would constitute a majority of the Board of Directors as so increased by such smallest number; and
the holders of Preferred Shares, including the MMP Shares, shall be entitled, voting as a class on
a one-vote-per-share basis (to the exclusion of the holders of all other securities and classes of
shares of the Company), to elect such smallest number of additional Directors, together with the
two Directors that such holders are in any event entitled to elect. A Voting Period shall
commence:
(i) if at the close of business on any Dividend Payment Date accumulated dividends
(whether or not earned or declared) on Preferred Shares equal to at least two full years
dividends shall be due and unpaid; or
(ii) if at any time holders of any Preferred Shares are entitled under the 1940 Act to
elect a majority of the Directors of the Company.
Upon the termination of a Voting Period, the voting rights described in this paragraph
(b) of Section 6 shall cease, subject always, however, to the revesting of such voting
rights in the holders of Preferred Shares, including the MMP Shares, upon the further
occurrence of any of the events described in this paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of the holders of Preferred Shares,
including the MMP Shares, to elect additional Directors as described in paragraph (b) of this
Section 6, the Company shall notify the Auction Agent, and the Auction Agent shall instruct the
Directors to call a special meeting of such holders, and mail a notice of such special meeting to
such holders, such meeting to be held not less than 10 nor more than 30 calendar days after the
date of mailing of such notice. If the Company fails to send such notice to the Auction Agent or
if a special meeting is not called, it may be called by any such holder on like notice. The record
date for determining the holders entitled to notice of and to vote at such special meeting shall be
the close of business on the fifth Business Day preceding the day on which such notice is mailed.
At any such special meeting and at each meeting of holders of Preferred Shares, including the MMP
Shares, held during a Voting Period at which Directors are to be elected, such holders, voting
together as a class (to the exclusion of the holders of all other securities and classes of capital
stock of the Company), shall be entitled to elect the number of Directors prescribed in paragraph
(b) of this Section 6 on a one-vote-per-share basis.
(d) The terms of office of all persons who are Directors of the Company at the time of a
special meeting of holders of the MMP Shares and holders of other Preferred Shares to elect
B-9
Directors shall continue, notwithstanding the election at such meeting by the holders MMP
Shares and such holders of other Preferred Shares of the number of Directors that they are entitled
to elect, and the persons so elected by such holders, together with the two incumbent Directors
elected by such holders and the remaining incumbent Directors, shall constitute the duly elected
Directors of the Company.
(e) Simultaneously with the termination of a Voting Period, the terms of office of the
additional Directors elected by the holders of the MMP Shares and holders of other Preferred Shares
pursuant to paragraph (b) of this Section 6 shall terminate, the number of Directors constituting
the Board of Directors shall decrease accordingly, the remaining Directors shall constitute the
Directors of the Company and the voting rights of such holders to elect additional Directors
pursuant to paragraph (b) of this Section 6 shall cease, subject to the provisions of the last
sentence of paragraph (b) of this Section 6.
(f) So long as any of the shares of Preferred Shares, including the MMP Shares, are
Outstanding, the Company will not, without the affirmative vote of the holders of a majority of the
outstanding Preferred Shares determined with reference to a majority of outstanding voting
securities as that term is defined in Section 2(a)(42) of the 1940 Act (a 1940 Act Majority),
voting as a separate class:
(i) amend, alter or repeal any of the preferences, rights or powers of such class of
Preferred Shares so as to affect materially and adversely such preferences, rights or powers
as defined in Section 6(h) below;
(ii) create, authorize or issue shares of any class of capital stock ranking senior to
or on a parity with the Preferred Shares with respect to the payment of dividends or the
distribution of assets, or any securities convertible into, or warrants, options or similar
rights to purchase, acquire or receive, such shares of capital stock ranking senior to or on
a parity with the Preferred Shares or reclassify any authorized shares of capital stock of
the Company into any shares ranking senior to or on a parity with the Preferred Shares
(except that, notwithstanding the foregoing, but subject to the provisions of either Section
3(j) or 11, as applicable, the Board of Directors, without the vote or consent of the
holders of the Preferred Shares, including the MMP Shares, may from time to time authorize,
create and classify, and the Company may from time to time issue, shares or series of
Preferred Shares, including other series of MMP Shares, ranking on a parity with the MMP
Shares with respect to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up to the affairs of the Company, and may authorize,
reclassify and/or issue any additional MMP Shares, including shares previously purchased or
redeemed by the Company, subject to continuing compliance by the Company with 1940 Act MMP
Shares Asset Coverage and MMP Shares Basic Maintenance Amount requirements);
(iii) institute any proceedings to be adjudicated bankrupt or insolvent, or consent to
the institution of bankruptcy or insolvency proceedings against it, or file a petition
seeking or consenting to reorganization or relief under any applicable federal or state law
relating to bankruptcy or insolvency, or consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or a
substantial part of its property, or make any assignment for the benefit of creditors, or,
except as may be required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in furtherance of any such action;
(iv) create, incur or suffer to exist, or agree to create, incur or suffer to exist, or
consent to cause or permit in the future (upon the happening of a contingency or otherwise)
the creation, incurrence or existence of any material lien, mortgage, pledge, charge,
security interest, security agreement, conditional sale or trust receipt or other material
encumbrance of any kind
B-10
upon any of the Companys assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes that are not
then due and payable or that can be paid thereafter without penalty, (C) liens, pledges,
charges, security interests, security agreements or other encumbrances arising in connection
with any indebtedness senior to the MMP Shares or arising in connection with any futures
contracts or options thereon, interest rate swap or cap transactions, forward rate
transactions, put or call options, short sales of securities or other similar transactions;
(D) liens, pledges, charges, security interests, security agreements or other encumbrances
arising in connection with any indebtedness permitted under clause (vi) below and (E) liens
to secure payment for services rendered including, without limitation, services rendered by
the Companys custodian and the Auction Agent; or
(v) create, authorize, issue, incur or suffer to exist any indebtedness for borrowed
money or any direct or indirect guarantee of such indebtedness for borrowed money or any
direct or indirect guarantee of such indebtedness, except the Company may borrow and issue
senior securities as may be permitted by the Companys investment restrictions; provided,
however, that transfers of assets by the Company subject to an obligation to repurchase
shall not be deemed to be indebtedness for purposes of this provision to the extent that
after any such transaction the Company has Eligible Assets with an aggregate Discounted
Value at least equal to the MMP Shares Basic Maintenance Amount as of the immediately
preceding Valuation Date.
(g) The affirmative vote of the holders of a 1940 Act Majority of the Outstanding Preferred
Shares, including the MMP Shares, voting as a separate class, shall be required to approve any plan
of reorganization (as such term is used in the 1940 Act) adversely affecting such shares or any
action requiring a vote of security holders of the Company under Section 13(a) of the 1940 Act.
(h) The affirmative vote of the holders of a 1940 Act Majority of the Outstanding shares of
any series of Preferred Shares, including the MMP Shares, voting separately from any other series,
shall be required with respect to any matter that materially and adversely affects the rights,
preferences, or powers of that series in a manner different from that of other series of classes of
the Companys shares of capital stock. For purposes of the foregoing, no matter shall be deemed to
adversely affect any right, preference or power unless such matter (i) alters or abolishes any
preferential right of such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters (other than to abolish) any restriction on
transfer applicable to such series. The vote of holders of any shares described in this Section
6(h) will in each case be in addition to a separate vote of the requisite percentage of Common
Shares and/or Preferred Shares, if any, necessary to authorize the action in question.
(i) The rights of the MMP Shares or the Holders thereof, including, without limitation, the
interpretation or applicability of any or all covenants or other obligations of the Company
contained herein or of the definitions of the terms contained herein, all such covenants,
obligations and definitions having been adopted pursuant to Rating Agency Guidelines, may from time
to time be modified, altered or repealed by the Board of Directors in its sole discretion, based on
a determination by the Board of Directors that such action is necessary or appropriate in
connection with obtaining or maintaining the rating of any Rating Agency with respect to the MMP
Shares or revising the Companys investment restrictions or policies consistent with guidelines of
any Rating Agency, and any such modification, alteration or repeal will not be deemed to affect the
preferences, rights or powers of MMP Shares or the Holders thereof, provided that the Board of
Directors receives written confirmation from each relevant Rating Agency (with such confirmation in
no event being required to be obtained from a particular Rating Agency with respect to definitions
or other provisions relevant only to and adopted in connection with another Rating Agencys rating
of the MMP Shares) that any such modification, alteration or repeal would not adversely affect the
rating then assigned by such Rating Agency.
B-11
The terms of the MMP Shares are subject to the Rating Agency Guidelines, as reflected
in a written document and as amended from time to time by the respective Rating Agency, for
so long as the MMP Shares are then rated by the applicable Rating Agency. Such Rating
Agency Guidelines may be amended by the respective Rating Agency without the vote, consent
or approval of the Company, the Board of Directors and any holder of shares of Preferred
Shares, including any series of MMP Shares, or any other stockholder of the Company.
In addition, subject to compliance with applicable law, the Board of Directors may
modify the definition of Maximum Rate to increase the percentage amount by which the
Reference Rate is multiplied to determine the Maximum Rate shown therein without the vote or
consent of the holders of the Preferred Shares, including the MMP Shares, or any other
stockholder of the Company, and without receiving any confirmation from any rating agency
after consultation with the Broker-Dealers, provided that immediately following any such
increase the Company would be in compliance with the MMP Shares Basic Maintenance Amount.
(j) Unless otherwise required by law, Holders of MMP Shares shall not have any relative rights
or preferences or other special rights other than those specifically set forth herein. The Holders
of MMP Shares shall have no rights to cumulative voting. If the Company fails to pay any dividends
on the MMP Shares, the exclusive remedy of the Holders shall be the right to vote for Directors
pursuant to the provisions of this Section 6.
(k) The foregoing voting provisions will not apply with respect to the MMP Shares if, at or
prior to the time when a vote is required, such shares have been (i) redeemed or (ii) called for
redemption and sufficient funds shall have been deposited in trust to effect such redemption.
7. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the
affairs of the Company, whether voluntary or involuntary, the Holders of MMP Shares then
outstanding, together with holders of shares of any class of shares ranking on a parity with the
MMP Shares upon dissolution, liquidation or winding up, shall be entitled to receive and to be paid
out of the assets of the Company (or the proceeds thereof) available for distribution to its
stockholders after satisfaction of claims of creditors of the Company an amount equal to the
liquidation preference with respect to such shares. The liquidation preference for MMP Shares
shall be $ per share, plus an amount equal to all accumulated dividends thereon (whether or
not earned or declared but without interest) to the date payment of such distribution is made in
full or a sum sufficient for the payment thereof is set apart with the Paying Agent. No redemption
premium shall be paid upon any liquidation even if such redemption premium would be paid upon
optional or mandatory redemption of the relevant shares. In determining whether a distribution
(other than upon voluntary or involuntary liquidation), by dividend, redemption or otherwise, is
permitted under the MGCL, amounts that would be needed, if the Company were to be dissolved at the
time of distribution, to satisfy the liquidation preference of the MMP Shares will not be added to
the Companys total liabilities.
(b) If, upon any liquidation, dissolution or winding up of the affairs of the Company, whether
voluntary or involuntary, the assets of the Company available for distribution among the holders of
all outstanding Preferred Shares, including the MMP Shares, shall be insufficient to permit the
payment in full to holders of the amounts to which they are entitled, then the available assets
shall be distributed among the holders of all outstanding Preferred Shares, including the MMP
Shares, ratably in any distribution of assets according to the respective amounts which would be
payable on all the shares if all amounts thereon were paid in full.
B-12
(c) Upon the dissolution, liquidation or winding up of the affairs of the Company, whether
voluntary or involuntary, until payment in full is made to the holders of MMP Shares of the
liquidation distribution to which they are entitled, (1) no dividend or other distribution shall be
made to the holders of Common Shares or any other class of shares of capital stock of the Company
ranking junior to MMP Shares upon dissolution, liquidation or winding up and (2) no purchase,
redemption or other acquisition for any consideration by the Company shall be made in respect of
the Common Shares or any other class of shares of capital stock of the Company ranking junior to
MMP Shares upon dissolution, liquidation or winding up.
(d) A consolidation, reorganization or merger of the Company with or into any other trust or
company, or a sale, lease or exchange of all or substantially all of the assets of the Company in
consideration for the issuance of equity securities of another trust or company shall not be deemed
to be a liquidation, dissolution or winding up, whether voluntary or involuntary, for the purposes
of this Section 7.
(e) After the payment to the holders of Preferred Shares, including MMP Shares, of the full
preferential amounts provided for in this Section 7, the holders of Preferred Shares, including MMP
Shares, as such shall have no right or claim to any of the remaining assets of the Company.
(f) If the assets of the Company or proceeds thereof available for distribution to the Holders
of MMP Shares, upon any dissolution, liquidation or winding up of the affairs of the Company,
whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled pursuant to paragraph (a) of this Section 7, no such distribution shall be
made on account of any shares of any other class or series of Preferred Shares ranking on a parity
with MMP Shares unless proportionate distributive amounts shall be paid on account of the MMP
Shares, ratably, in proportion to the full distributable amounts to which holders of all such
parity shares are entitled upon such dissolution, liquidation or winding up.
(g) Subject to the rights of the holders of shares of any series or class or classes of stock
ranking on a parity with MMP Shares with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Company, after payment shall have been made in full
to the holders of the MMP Shares as provided in paragraph (a) of this Section 7, but not prior
thereto, any other series or class or classes of stock ranking junior to MMP Shares with respect to
the distribution of assets upon dissolution, liquidation or winding up of the affairs of the
Company shall, subject to any respective terms and provisions (if any) applying thereto, be
entitled to receive any and all assets remaining to be paid or distributed, and the holders of the
MMP Shares shall not be entitled to share therein.
8. Auction Agent. For so long as any MMP Shares are Outstanding, the Auction Agent,
duly appointed by the Company to so act, shall be in each case a commercial bank, trust company or
other financial institution independent of the Company and its Affiliates (which, however, may
engage or have engaged in business transactions with the Company or its Affiliates) and at no time
shall the Company or any of its Affiliates act as the Auction Agent in connection with the Auction
Procedures. If the Auction Agent resigns or for any reason its appointment is terminated during
any period that any MMP Shares are outstanding, the Company shall use its best efforts promptly
thereafter to appoint another qualified commercial bank, trust company or financial institution to
act as the Auction Agent.
9. 1940 Act MMP Shares Asset Coverage. The Company shall maintain, as of the last
Business Day of each month in which any shares of the MMP Shares are Outstanding, asset coverage
with respect to the MMP Shares which is equal to or greater than the 1940 Act MMP Shares Asset
Coverage; provided, however, that Section 3(a)(ii) shall be the sole remedy if the Company fails to
do so.
B-13
10. MMP Shares Basic Maintenance Amount. So long as the MMP Shares are Outstanding
and Moodys, Fitch or any Other Rating Agency which so requires is then rating the shares of the
MMP Shares, the Company shall maintain, as of each Valuation Date, Moodys Eligible Assets (if
Moodys is then rating the MMP Shares), Fitch Eligible Assets (if Fitch is then rating the MMP
Shares) and (if applicable) Other Rating Agency Eligible Assets having an aggregate Discounted
Value equal to or greater than the MMP Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) shall be the sole remedy in the event the Company fails to do so.
11. Certain Other Restrictions. For so long as any MMP Shares are Outstanding and any
Rating Agency is then rating such shares, the Company will not, unless it has received written
confirmation from each such rating agency that any such action would not impair the rating then
assigned by such Rating Agency to such shares, engage in certain proscribed transactions set forth
in the Rating Agency Guidelines.
12. Compliance Procedures for Asset Maintenance Tests. For so long as any MMP Shares
are Outstanding and Moodys, Fitch or any Other Rating Agency which so requires is then rating such
shares, the Company shall deliver to each rating agency which is then rating MMP Shares and any
other party specified in the Rating Agency Guidelines all certificates that are set forth in the
respective Rating Agency Guidelines regarding 1940 Act MMP Shares Asset Coverage, MMP Shares Basic
Maintenance Amount and/or related calculations at such times and containing such information as set
forth in the respective Rating Agency Guidelines.
13. Notice. All notices or communications hereunder, unless otherwise specified in
these terms of the MMP Shares, shall be sufficiently given if in writing and delivered in person,
by telecopier, by electronic means or mailed by first-class mail, postage prepaid. Notices
delivered pursuant to this Section 13 shall be deemed given on the earlier of the date received or
the date five days after which such notice is mailed, except as otherwise provided in these terms
of the MMP Shares or by the MGCL for notices of Stockholders meetings.
14. Waiver. To the extent permitted by Maryland law, holders of a 1940 Act Majority
of the Outstanding Preferred Shares, including the MMP Shares, acting collectively or voting
separately from any other series, may by affirmative vote waive any provision hereof intended for
their respective benefit in accordance with such procedures as may from time to time be established
by the Board of Directors.
15. Termination. If no MMP Shares are outstanding, all rights and preferences of such
shares established and designated hereunder shall cease and terminate, and all obligations of the
Company under these terms of the MMP Shares, shall terminate.
16. Facts Ascertainable Outside Charter. Subject to the provisions of these terms of
the MMP Shares, the Board of Directors may, by resolution duly adopted, without stockholder
approval (except as otherwise provided by these terms of the MMP Shares or required by applicable
law), modify these terms of the MMP Shares to reflect any modification hereto which the Board of
Directors is entitled to adopt pursuant to the terms of Section 6(i) hereof or otherwise without
stockholder approval. To the extent permitted by applicable law, the Board of Directors may
interpret, modify or adjust the provisions of these terms of the MMP Shares to resolve any
inconsistency or ambiguity or to remedy any defect.
17. Definitions. As used in Part I and Part II of these terms of the MMP Shares, the
following terms shall have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context otherwise requires:
(a) AA Composite Commercial Paper Rate on any date means (i) the interest equivalent of the
30-day rate, in the case of a Dividend Period which is a Standard Dividend Period or
B-14
shorter, or the 180-day rate, in the case of all other Dividend Periods, on commercial paper
on behalf of issuers whose corporate bonds are rated AA by S&P, or the equivalent of such rating
by another nationally recognized rating agency, as announced by the Federal Reserve Bank of New
York for the close of business on the Business Day immediately preceding such date; or (ii) if the
Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average
of the interest equivalent of such rates on financial commercial paper placed on behalf of such
issuers, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Auction
Agent for the close of business on the Business Day immediately preceding such date (rounded to the
next highest .001 of 1%). If any Commercial Paper Dealer does not quote a rate required to
determine the AA Composite Commercial Paper Rate, such rate shall be determined on the basis of
the quotations (or quotation) furnished by the remaining Commercial Paper Dealers (or Dealer), if
any, or, if there are no such Commercial Paper Dealers, by a nationally recognized dealer in
commercial paper of such issuers then making such quotations selected by the Company. For purposes
of this definition, (A) Commercial Paper Dealers shall mean (1) Citigroup Global Markets Inc.,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.;
(2) in lieu of any thereof, its respective Affiliate or successor; and (3) if any of the foregoing
shall cease to quote rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper of such issuers then
making such quotations selected by the Company, and (B) interest equivalent of a rate stated on a
discount basis for commercial paper of a given number of days maturity shall mean a number equal
to the quotient (rounded upward to the next higher one-thousandth of 1%) of (1) such rate expressed
as a decimal, divided by (2) the difference between (x) 1.00 and (y) a fraction, the numerator of
which shall be the product of such rate expressed as a decimal, multiplied by the number of days in
which such commercial paper shall mature and the denominator of which shall be 360.
(b) Affiliate or affiliate means any person controlled by, in control of or under common
control with the Company; provided that no Broker-Dealer controlled by, in control of or under
common control with the Company shall be deemed to be an Affiliate nor shall any corporation or any
person controlled by, in control of or under common control with such corporation, one of the
directors, directors or executive officers of which also is a Director of the Company be deemed to
be an Affiliate solely because such Director, director or executive officer also is a Director of
the Company.
(c) Agent Member means a member of, or participant in, the Securities Depository who shall
act on behalf of a Bidder.
(d) All Hold Rate means 80% of the AA Composite Commercial Paper Rate.
(e) Applicable Percentage means the percentage associated with the lower of the credit
ratings assigned to the MMP Shares by Moodys or Fitch, as follows:
|
|
|
|
|
Moodys |
|
Fitch |
|
Applicable |
Credit Rating |
|
Credit Rating |
|
Percentage |
Aa3 or above |
|
AA- or above |
|
200% |
A3 to A1 |
|
A- to A+ |
|
250% |
Baa3 to Baa1 |
|
BBB- to BBB+ |
|
275% |
Below Baa3 |
|
Below BBB- |
|
300% |
(f) Applicable Rate means, with respect to the MMP Shares for each Auction Period (i) if
Sufficient Clearing Bids exist for the Auction in respect thereof, the Winning Bid Rate, (ii) if
Sufficient Clearing Bids do not exist for the Auction in respect thereof, the Maximum Rate, (iii)
in the case where all the MMP Shares are the subject of Hold Orders for the Auction in respect
thereof, the All
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Hold Rate, and (iv) if an Auction is not held for any reason (including the circumstance where
there is no Auction Agent or Broker-Dealer), the Maximum Rate.
(g) Asset Coverage Cure Date has the meaning set forth in Section 3(a)(ii).
(h) Auction means each periodic implementation of the Auction Procedures.
(i) Auction Agent means The Bank of New York unless and until another commercial bank, trust
company, or other financial institution appointed by a resolution of the Board of Directors enters
into an agreement with the Company to follow the Auction Procedures for the purpose of determining
the Applicable Rate.
(j) Auction Agreement means the agreement between the Auction Agent and the Company pursuant
to which the Auction Agent agrees to follow the procedures specified in Part II of these terms of
the MMP Shares, as such agreement may from time to time be amended or supplemented.
(k) Auction Date means the first Business Day next preceding the first day of a Dividend
Period.
(l) Auction Period means with respect to the MMP Shares, either a Standard Auction Period or
a Special Auction Period, as applicable.
(m) Auction Procedures means the procedures for conducting Auctions set forth in Part II
hereof.
(n) Available MMP Shares means for each series of MMP Shares on each Auction Date, the
number of Outstanding MMP Shares of the series that are not the subject of Submitted Hold Orders.
(o) Beneficial Owner, with respect to the MMP Shares, means a customer of a Broker-Dealer
who is listed on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of the series.
(p) Bid shall have the meaning specified in paragraph (a) of Section 1 of Part II of these
terms of the MMP Shares.
(q) Bidder means each Beneficial Owner, Potential Beneficial Owner and Broker Dealer who
places an Order.
(r) Board of Directors or Board means the Board of Directors of the Company or any duly
authorized committee thereof as permitted by applicable law.
(s) Broker-Dealer means any broker-dealer or broker-dealers, or other entity permitted by
law to perform the functions required of a Broker-Dealer by the Auction Procedures, that has been
selected by the Company and has entered into a Broker-Dealer Agreement that remains effective.
(t) Broker-Dealer Agreement means an agreement between the Auction Agent and a
Broker-Dealer, pursuant to which the Broker-Dealer agrees to follow the Auction Procedures.
(u) Business Day means a day on which the New York Stock Exchange is open for trading and
which is not a Saturday, Sunday or other day on which banks in the City of New York, New York are
authorized or obligated by law to close.
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(v) Commercial Paper Dealers has the meaning set forth in the definition of AA Composite
Commercial Paper Rate.
(w) Commission means the Securities and Exchange Commission.
(x) Common Shares means the shares of common stock, par value $.001 per share, of the
Company.
(y) Default has the meaning set forth in Section 2(c)(ii) of this Part I.
(z) Default Period has the meaning set forth in Section 2(c)(ii) of this Part I.
(aa) Default Rate means the Reference Rate multiplied by three (3).
(bb) Deposit Securities means cash and any obligations or securities, including short-term
money market instruments that are Eligible Assets, rated at least AAA, A-1 or SP-1 by S&P, except
that, for purposes of section 3(a)(i) of this Part I, such obligations or securities shall be
considered Deposit Securities only if they are also rated at least P-2 by Moodys.
(cc) Discount Factor means the Fitch Discount Factor (if Fitch is then rating the MMP
Shares), the Moodys Discount Factor (if Moodys is then rating the MMP Shares) or any Other Rating
Agency Discount Factor (if any Other Rating Agency is then rating the MMP Shares), whichever is
applicable.
(dd) Discounted Value has the meaning set forth in the Rating Agency Guidelines.
(ee) Dividend Default has the meaning set forth in Section 2(c)(ii) of this Part I.
(ff) Dividend Payment Date with respect to the MMP Shares means any date on which dividends
are payable pursuant to Section 2(b) of this Part I.
(gg) Dividend Period means, with respect to the MMP Shares, the period commencing on the
Original Issue Date thereof and ending on the date specified for such series on the Original Issue
Date thereof and thereafter, as to such series, the period commencing on the day following each
Dividend Period for such series and ending on the day established for such series by the Company.
(hh) Eligible Assets means Fitchs Eligible Assets or Moodys Eligible Assets (if Moodys or
Fitch are then rating the MMP Shares) and/or Other Rating Agency Eligible Assets (if any Other
Rating Agency is then rating the MMP Shares), whichever is applicable.
(ii) Error Correction Deadline means one hour after the Auction Agent completes the
dissemination of the results of the Auction to Broker-Dealers without regard to the time of receipt
of such results by any Broker-Dealer; provided, however, in no event shall the Error Correction
Deadline extend past 4:00 p.m., New York City time unless the Auction Agent experiences
technological failure or force majeure in disseminating the Auction results which causes a delay in
dissemination past 3:00 p.m., New York City time.
(jj) Existing Holder, with respect to the MMP Shares, shall mean a Broker-Dealer (or any
such other Person as may be permitted by the Company) that is listed on the records of the Auction
Agent as a holder of shares of such series.
(kk) Fitch means Fitch Ratings and its successors at law.
B-17
(ll) Fitch Discount Factor means the discount factors set forth in the Fitch Guidelines for
use in calculating the Discounted Value of the Companys assets in connection with Fitchs ratings
of MMP Shares.
(mm) Fitch Eligible Assets means the assets of the Company set forth in the Fitch Guidelines
as eligible for inclusion in calculating the Discounted Value of the Companys assets in connection
with Fitchs ratings of MMP Shares.
(nn) Fitch Guidelines mean the guidelines provided by Fitch, as may be amended from time to
time, in connection with Fitchs ratings of MMP Shares.
(oo) Holder means, with respect to MMP Shares, the registered holder of MMP Shares as the
same appears on the share ledger or share records of the Company.
(pp) Hold Order shall have the meaning specified in paragraph (a) of Section 1 of Part II of
these terms of the MMP Shares or an Order deemed to have been submitted as provided in paragraph
(c) of Section 1 of Part II of these terms of the MMP Shares.
(qq) LIBOR on any Auction Date, means (i) the rate for deposits in U.S. dollars for the
designated Dividend Period, which appears on display page 3750 of Moneylines Telerate Service
(Telerate Page 3750) (or such other page as may replace that page on that service, or such other
service as may be selected by Lehman Brothers Inc. or its successors) as of 11:00 a.m., London
time, on the day that is the London Business Day on the Auction Date or, if the Auction Date is not
a London Business Day, the London Business Day preceding the Auction Date (the LIBOR Determination
Date), or (ii) if such rate does not appear on Telerate Page 3750 or such other page as may
replace such Telerate Page 3750, (A) Lehman Brothers Inc. shall determine the arithmetic mean of
the offered quotations of the reference banks to leading banks in the London interbank market for
deposits in U.S. dollars for the designated Dividend Period in an amount determined by Lehman
Brothers Inc. by reference to requests for quotations as of approximately 11:00 a.m. (London time)
on such date made by Lehman Brothers Inc. to the reference banks, (B) if at least two of the
reference banks provide such quotations, LIBOR shall equal such arithmetic mean of such quotations,
(C) if only one or none of the reference banks provide such quotations, LIBOR shall be deemed to be
the arithmetic mean of the offered quotations that leading banks in The City of New York selected
by Lehman Brothers Inc. (after obtaining the Companys approval) are quoting on the relevant LIBOR
Determination Date for deposits in U.S. dollars for the designated Dividend Period in an amount
determined by Lehman Brothers Inc. (after obtaining the Companys approval) that is representative
of a single transaction in such market at such time by reference to the principal London offices of
leading banks in the London interbank market; provided, however, that if Lehman Brothers Inc. is
not a Broker-Dealer or does not quote a rate required to determine the LIBOR, the LIBOR will be
determined on the basis of the quotation or quotations furnished by any other Broker-Dealer
selected by the Company to provide such rate or rates not being supplied by Lehman Brothers Inc.;
provided further, that if Lehman Brothers Inc. and/or a substitute Broker-Dealer are required but
unable to determine a rate in accordance with at least one of the procedures provided above, the
LIBOR shall be the most recently determinable LIBOR. If the number of Dividend Period days shall
be (i) 7 or more but fewer than 21 days, such rate shall be the seven-day LIBOR rate; (ii) more
than 21 but fewer than 49 days, such rate shall be one-month LIBOR rate; (iii) 49 or more but fewer
than 77 days, such rate shall be the two-month LIBOR rate; (iv) 77 or more but fewer than 112 days,
such rate shall be the three-month LIBOR rate; (v) 112 or more but fewer than 140 days, such rate
shall be the four-month LIBOR rate; (vi) 140 or more but fewer that 168 days, such rate shall be
the five-month LIBOR rate; (vii) 168 or more but fewer 189 days, such rate shall be the six-month
LIBOR rate; (viii) 189 or more but fewer than 217 days, such rate shall be the seven-month LIBOR
rate; (ix) 217 or more but fewer than 252 days, such rate shall be the eight-month LIBOR rate; (x)
252 or more but fewer than 287 days,
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such rate shall be the nine-month LIBOR rate; (xi) 287 or more but fewer than 315 days, such
rate shall be the ten-month LIBOR rate; (xii) 315 or more but fewer than 343 days, such rate shall
be the eleven-month LIBOR rate; and (xiii) 343 or more days but fewer than 365 days, such rate
shall be the twelve-month LIBOR rate.
(rr) London Business Day means any day on which commercial banks are generally open for
business in London.
(ss) MMP Shares means Money Market Cumulative Preferred Shares, liquidation preference
$25,000 per share.
(tt) MMP Shares Basic Maintenance Amount as of any Valuation Date has the meaning set forth
in the Rating Agency Guidelines.
(uu) Mandatory Redemption Date has the meaning set forth in Section 3(a)(iii) of this Part
I.
(vv) Mandatory Redemption Price has the meaning set forth in Section 3(a)(iii) of this Part
I.
(ww) Market Value means the market value of an asset of the Company determined as follows:
For equity securities, the value obtained from readily available market quotations. If an equity
security is not traded on an exchange or not available from a Board-approved pricing service, the
value obtained from written broker-dealer quotations. For fixed-income securities, the value
obtained from readily available market quotations based on the last sale price of a security on the
day the Company values its assets or the market value obtained from a pricing service or the value
obtained from a direct written broker-dealer quotation from a dealer who has made a market in the
security. Market Value for other securities will mean the value obtained pursuant to the
Companys valuation procedures. If the market value of a security cannot be obtained, or the
Companys investment adviser determines that the value of a security as so obtained does not
represent the fair value of a security, fair value for that security shall be determined pursuant
to the valuation procedures adopted by the Board of Directors.
(xx) Maximum Rate means, on any date on which the Applicable Rate is determined, the rate
equal to the Applicable Percentage of the Reference Rate, subject to upward but not downward
adjustment in the discretion of the Board of Directors after consultation with the Broker-Dealers,
provided that immediately following any such increase the Company would be in compliance with the
MMP Shares Basic Maintenance Amount.
(yy) Minimum Rate means, on any Auction Date with respect to an Auction Period of 30 days or
fewer, 70% of the AA Composite Commercial Paper Rate at the close of business on the Business Day
next preceding such Auction Date. There shall be no Minimum Rate on any Auction Date with respect
to an Auction Period of more than the Standard Auction Period.
(zz) Moodys means Moodys Investors Service, Inc. or its successors.
(aaa) Moodys Discount Factor means the discount factors set forth in the Moodys Guidelines
as eligible for use in calculating the Discounted Value of the Companys assets in connection with
Moodys ratings of MMP Shares.
(bbb) Moodys Eligible Assets means assets of the Company set forth in the Moodys
Guidelines as eligible for inclusion in calculating the Discounted Value of the Companys assets in
connection with Moodys ratings of MMP Shares.
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(ccc) Moodys Guidelines mean the guidelines provided by Moodys, as may be amended from
time to time, in connection with Moodys ratings of MMP Shares.
(ddd) 1940 Act means the Investment Company Act of 1940, as amended from time to time.
(eee) 1940 Act Majority has the meaning set forth in Section 6(f) of this Part I.
(fff) 1940 Act MMP Shares Asset Coverage means asset coverage, as determined in accordance
with Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior
securities of the Company which are stock, including all outstanding MMP Shares (or such other
asset coverage as may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are stock of a closed-end investment company as a condition of
declaring dividends on its common stock), determined on the basis of values calculated as of a time
within 48 hours next preceding the time of such determination.
(ggg) Notice of Redemption means any notice with respect to the redemption of MMP Shares
pursuant to Section 3.
(hhh) Order means a Hold Order, Bid or Sell Order.
(iii) Original Issue Date means, with respect to the MMP Shares, ___, 200_.
(jjj) Other Rating Agency means any rating agency other than Fitch or Moodys then providing
a rating for the MMP Shares pursuant to the request of the Company.
(kkk) Other Rating Agency Discount Factor means the discount factors set forth in the Other
Rating Agency Guidelines as eligible for use in calculating the Discounted Value of the Companys
assets in connection with such Other Rating Agencys ratings of MMP Shares.
(lll) Other Rating Agency Eligible Assets means assets of the Company designated by any
Other Rating Agency as eligible for inclusion in calculating the Discounted Value of the Companys
assets in connection with such Other Rating Agencys rating of MMP Shares.
(mmm) Other Rating Agency Guidelines means the guidelines provided by each Other Rating
Agency, as may be amended from time to time, in connection with the Other Rating Agencys rating of
MMP Shares.
(nnn) Outstanding or outstanding means, as of any date, MMP Shares theretofore issued by
the Company except, without duplication, (i) any MMP Shares theretofore canceled, redeemed or
repurchased by the Company, or delivered to the Auction Agent for cancellation or with respect to
which the Company has given notice of redemption and irrevocably deposited with the Paying Agent
sufficient funds to redeem such MMP Shares and (ii) any MMP Shares represented by any certificate
in lieu of which a new certificate has been executed and delivered by the Company. Notwithstanding
the foregoing, (A) for purposes of voting rights (including the determination of the number of
shares required to constitute a quorum), any of the MMP Shares to which the Company or any
Affiliate of the Company shall be the Existing Holder shall be disregarded and not deemed
outstanding; (B) in connection with any Auction, any MMP Shares as to which the Company or any
person known to the Auction Agent to be an Affiliate of the Company shall be the Existing Holder
thereof shall be disregarded and deemed not to be outstanding; and (C) for purposes of determining
the MMP Shares Basic Maintenance Amount, MMP Shares held by the Company shall be disregarded and
not deemed outstanding but shares held by any Affiliate of the Company shall be deemed outstanding.
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(ooo) Paying Agent means The Bank of New York unless and until another entity appointed by a
resolution of the Board of Directors enters into an agreement with the Company to serve as paying
agent.
(ppp) Person or person means and includes an individual, a corporation, a partnership, a
trust, a company, an unincorporated association, a joint venture or other entity or a government or
any agency or political subdivision thereof.
(qqq) Potential Beneficial Owner, with respect to shares of a series of MMP Shares, shall
mean a customer of a Broker-Dealer that is not a Beneficial Owner of shares of such series but that
wishes to purchase shares of such series, or that is a Beneficial Owner of shares of such series
that wishes to purchase additional shares of such series.
(rrr) Potential Holder, with respect to shares of MMP Shares, shall mean a Broker-Dealer (or
any such other person as may be permitted by the Company) that is not an Existing Holder of MMP
Shares of such series or that is an Existing Holder of MMP Shares of such series that wishes to
become the Existing Holder of additional MMP Shares of such series.
(sss) Preferred Shares means the shares of preferred stock, par value $.001 per share,
including the MMP Shares, of the Company from time to time.
(ttt) Rating Agency means each of Fitch (if Fitch is then rating MMP Shares), Moodys (if
Moodys is then rating MMP Shares), and any Other Rating Agency.
(uuu) Rating Agency Guidelines mean Fitch Guidelines (if Fitch is then rating MMP Shares),
Moodys Guidelines (if Moodys is then rating MMP Shares) and any Other Rating Agency Guidelines
(if any Other Rating Agency is then rating MMP Shares), whichever is applicable.
(vvv) Redemption Default has the meaning set forth in Section 2(c)(ii) of this Part I.
(www) Redemption Price has the meaning set forth in Section 3(a)(i) of this Part I.
(xxx) Reference Rate means, with respect to the determination of the Maximum Rate and
Default Rate, the greater of (1) the applicable AA Composite Commercial Paper Rate (for a
Dividend Period of fewer than 184 days) or the applicable Treasury Index Rate (for a Dividend
Period of 184 days or more), or (2) the applicable LIBOR.
(yyy) Securities Act means the Securities Act of 1933, as amended from time to time.
(zzz) Securities Depository means The Depository Trust Company and its successors and
assigns or any successor securities depository selected by the Company that agrees to follow the
procedures required to be followed by such securities depository in connection with the MMP Shares.
(aaaa) Sell Order shall have the meaning specified in paragraph (a) of Section 1 of Part II
of these terms of the MMP Shares.
(bbbb) Special Auction Period means an Auction Period that is not a Standard Auction Period.
(cccc) Special Dividend Period means a Dividend Period that is not a Standard Dividend
Period.
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(dddd) Specific Redemption Provisions means, with respect to any Special Dividend Period of
more than one year, either, or any combination of (i) a period (a Non-Call Period) determined by
the Board of Directors after consultation with the Broker-Dealers, during which the shares subject
to such Special Dividend Period are not subject to redemption at the option of the Company pursuant
to Section 3(a)(ii) and (ii) a period (a Premium Call Period), consisting of a number of whole
years as determined by the Board of Directors after consultation with the Broker-Dealers, during
each year of which the shares subject to such Special Dividend Period shall be redeemable at the
Companys option pursuant to Section 3(a)(i) and/or in connection with any mandatory redemption
pursuant to Section 3(a)(ii) at a price per share equal to $25,000 plus accumulated but unpaid
dividends plus a premium expressed as a percentage or percentages of $25,000 or expressed as a
formula using specified variables as determined by the Board of Directors after consultation with
the Broker-Dealers.
(eeee) Standard Auction Period means an Auction Period of ___ days.
(ffff) Standard Dividend Period means a Dividend Period of ___ days.
(gggg) Submission Deadline means 1:00 p.m., New York City time, on any Auction Date or such
other time on such date as shall be specified by the Auction Agent from time to time pursuant to
the Auction Agreement as the time by which the Broker-Dealers are required to submit Orders to the
Auction Agent. Notwithstanding the foregoing, the Auction Agent will follow the Securities
Industry and Financial Markets Associations Early Market Close Recommendations for shortened
trading days for the bond markets (the SIFMA Recommendation) unless the Auction Agent is
instructed otherwise in writing by the Company. In the event of a SIFMA Recommendation with
respect to an Auction Date, the Submission Deadline will be 11:30 a.m., instead of 1:00 p.m., New
York City time.
(hhhh) Submitted Bid shall have the meaning specified in paragraph (a) of Section 3 of Part
II of these terms of the MMP Shares.
(iiii) Submitted Hold Order shall have the meaning specified in paragraph (a) of Section 3
of Part II of these terms of the MMP Shares.
(jjjj) Submitted Order shall have the meaning specified in paragraph (a) of Section 3 of
Part II of these terms of the MMP Shares.
(kkkk) Submitted Sell Order shall have the meaning specified in paragraph (a) of Section 3
of Part II of these terms of the MMP Shares.
(llll) Sufficient Clearing Bids means for each series of MMP Shares, an Auction for which
the number of outstanding MMP Shares subject to Submitted Bids by Potential Beneficial Owners
specifying one or more rates not higher than the Maximum Rate is not less than the number of
outstanding MMP Shares subject to Submitted Sell Orders and of Submitted Bids by Existing Holders
specifying rates higher than the Maximum Rate.
(mmmm) Tortoise Notes shall mean the $___ in principal amount of the Companys
currently outstanding Auction Rate Senior Notes Series A, B and C, and any additional series of
such notes which may be issued from time to time by the Company.
(nnnn) Treasury Index Rate means the average yield to maturity for actively traded
marketable U.S. Treasury fixed interest rate securities having the same number of 30-day periods to
maturity as the length of the applicable Dividend Period, determined, to the extent necessary, by
linear interpolation based upon the yield for such securities having the next shorter and next
longer number of
B-22
30-day periods to maturity treating all Dividend Periods with a length greater than the
longest maturity for such securities as having a length equal to such longest maturity, in all
cases based upon data set forth in the most recent weekly statistical release published by the
Board of Governors of the Federal Reserve System (currently in H.15(519)); provided, however, if
the most recent such statistical release shall not have been published during the 15 days preceding
the date of computation, the foregoing computations shall be based upon the average of comparable
data as quoted to the Company by at least three recognized dealers in U.S. Government securities
selected by the Company.
(oooo) Valuation Date has the meaning set forth in the Rating Agency Guidelines.
(pppp) Winning Bid Rate means for the MMP Shares of a series, the lowest rate specified in
any Submitted Bid of the MMP Shares, which if selected by the Auction Agent as the Applicable Rate
would cause the number of MMP Shares of such series that are the subject of Submitted Bids
specifying a rate not greater than such rate to be not less than the number of Available MMP
Shares.
18. Interpretation. References to sections, subsections, clauses, sub-clauses,
paragraphs and subparagraphs are to such sections, subsections, clauses, sub-clauses, paragraphs
and subparagraphs contained in this Part I or Part II hereof, as the case may be, unless
specifically identified otherwise.
PART II: AUCTION PROCEDURES
1. Orders by Existing Holders and Potential Beneficial Owners. (a) Prior to the
Submission Deadline on each Auction Date for Series ___MMP Shares:
(i) each Existing Holder may submit to a Broker-Dealer, in writing or by such other
method as shall be reasonably acceptable to such Broker-Dealer, one or more Orders as to:
(A) the number of Outstanding MMP Shares, if any, of the series held by the
Existing Holder which the Existing Holder commits to continue to hold for the next
succeeding Dividend Period without regard to the Applicable Rate of the shares;
(B) the number of Outstanding MMP Shares, if any, of the series held by the
Existing Holder which the Existing Holder commits to continue to hold for the next
succeeding Dividend Period if the Applicable Rate for MMP Shares for the next
succeeding Dividend Period is not less than the rate per annum specified in such Bid
(and if the Auction Rate is less than such specified rate, the effect of the Order
shall be as set forth in paragraph (b)(i)(A) of this Section); and/or
(C) the number of Outstanding MMP Shares, if any, of the series held by the
Existing Holder which the Existing Holder offers to sell on the next succeeding
Dividend Payment Date without regard to the Applicable Rate for MMP Shares for the
next succeeding Dividend Period; and
(ii) each Potential Beneficial Owner may submit to a Broker-Dealer, in writing or by
such other method as shall be reasonably acceptable to such Broker-Dealer, an Order as to
the number of outstanding MMP Shares of a series which each such Potential Beneficial Owner
offers to purchase if the Applicable Rate for the MMP Shares of a series for the next
succeeding Dividend Period is not less than the rate per annum then specified by such
Potential Beneficial Owner.
B-23
For the purposes of these Auction Procedures, an Order containing the information
referred to in clause (i)(A) of this paragraph (a) is referred to as a Hold Order, an Order
containing the information referred to in clause (i)(B) or (ii) of this paragraph (a) is referred
to as a Bid, and an Order containing the information referred to in clause (i)(C) of this
paragraph (a) is referred to as a Sell Order. No Auction Desk of a Broker-Dealer shall accept a
Bid or Sell Order which is conditioned on being filled in whole or which does not specify a
specific rate. Auction Desk means the business unit of a Broker-Dealer that fulfills the
responsibilities of a Broker-Dealer, including soliciting Bids for shares of a series while they
bear dividends at the Applicable Rate.
(b) (i) A Bid by an Existing Holder shall constitute an offer to sell on the next succeeding
Dividend Payment Date:
(A) the number of outstanding Series ___ MMP Shares specified in the Bid if the
Applicable Rate determined on the Auction Date for the next succeeding Auction
Period shall be less than the rate specified in such Bid; or
(B) the number or a lesser number of outstanding Series ___ MMP Shares to be
determined as described in clause (v) of paragraph (a) of Section 5 of this Part II
if the Applicable Rate determined on the Auction Date for the next succeeding
Auction Period shall be equal to such specified rate; or
(C) a lesser number of outstanding Series ___ MMP Shares to be determined as
described in clause (iv) of paragraph (b) of Section 5 of this Part II if the rate
specified therein shall be higher than the Maximum Rate for shares of the series and
Sufficient Clearing Bids for shares of the series do not exist.
(ii) A Sell Order by an Existing Holder of MMP Shares of a series subject to an Auction
on any Auction Date shall constitute an offer to sell:
(A) the number of outstanding MMP Shares of the series specified in the Sell
Order; or
(B) the number or a lesser number of outstanding MMP Shares of the series as
set forth in clause (iv) of paragraph (b) of Section 5 of this Part II if Sufficient
Clearing Bids for MMP Shares of the series do not exist;
(iii) A Bid by an Existing Holder or a Potential Holder of MMP Shares of a series
subject to an Auction on any Auction Date shall constitute an offer to purchase:
(A) the number of outstanding MMP Shares of the series specified in the Bid if
the Applicable Rate for the MMP Shares determined on the Auction Date for the next
succeeding Auction Period shall be higher than the rate specified therein; or
(B) the number or a lesser number of outstanding MMP Shares of the series as
set forth in clause (vi) of paragraph (a) of Section 5 of this Part II if the
Applicable Rate for the MMP Shares determined on the Auction Date shall be equal to
the rate specified therein.
(C) Anything herein to the contrary notwithstanding:
(1) if an Order or Orders covering all of the outstanding MMP Shares of
the series held by any Existing Holder is not submitted to the
B-24
Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Hold Order to have been submitted by or on behalf of the Existing
Holder covering the number of outstanding MMP Shares of the series held by
the Existing Holder and not subject to Orders submitted to the Auction
Agent; provided, however, that if an Order or Orders covering all of the
outstanding MMP Shares of the series held by any Existing Holder is not
submitted to the Auction Agent prior to the Submission Deadline for an
Auction relating to a Special Dividend Period consisting of more than
Standard Dividend Period, the Auction Agent shall deem a Sell Order to have
been submitted by or on behalf of the Existing Holder covering the number of
outstanding MMP Shares of the series held by the Existing Holder and not
subject to Orders submitted to the Auction Agent;
(2) for purposes of any Auction, any Order by an Existing Holder or
Potential Holder shall be revocable until the Submission Deadline, and after
the Submission Deadline all Orders shall be irrevocable; and
(3) for purposes of any Auction, any MMP Shares sold or purchased
pursuant to clauses (i), (ii) or (iii) of paragraph (b) of this Section 1
shall be sold or purchased at a price equal to 100% of the aggregate
liquidation preference thereof.
2. Submission of Orders by Broker-Dealers to Auction Agent. (a) Each Broker-Dealer
shall submit to the Auction Agent in writing, through the Auction Agents auction processing system
or by such other electronic means, as shall be reasonably acceptable to the Auction Agent, prior to
the Submission Deadline on each Auction Date, all Orders obtained by such Broker-Dealer and
specifying with respect to each Order or aggregation of Orders pursuant to paragraph (e) of this
Section 2:
(i) the number of the Bidders placing Orders;
(ii) the aggregate number of MMP Shares of the series, if any, that are the subject of
the Order;
(iii) to the extent that the Bidder is an Existing Holder of MMP Shares of the series:
(A) the number of MMP Shares, if any, of the series subject to any Hold Order
placed by the Existing Holder;
(B) the number of MMP Shares, if any, of the series subject to any Bid placed
by the Existing Holder and the rate specified in the Bid; and
(C) the number of MMP Shares, if any, of the series subject to any Sell Order
placed by the Existing Holder; and
(iv) to the extent the Bidder is a Potential Holder of MMP Shares of the series, the
rate specified in such Bid.
(b) If more than on Bid is submitted on behalf of any Potential Beneficial Owner, each Bid
submitted with the same rate shall be aggregated and considered a single Bid and each Bid submitted
with a different rate shall be considered a separate Bid with the rate and the number of MMP Shares
of the series specified therein.
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A Broker Dealer may aggregate the Orders of different Potential Beneficial Owners on whose
behalf such Broker-Dealer is submitting Orders; provided, however, Bids may only be aggregated if
the rates on the Bids are the same when rounded pursuant to the provisions of paragraph (b) of
Section 3 of this Part II. Notwithstanding the foregoing, the Auction Agent may at any time
request that such Orders be separate for each different Potential Beneficial Owner.
(c) None of the Company or the Auction Agent shall be responsible for the failure of any
Broker-Dealer to submit an Order to the Auction Agent on behalf of any Beneficial Owner, Potential
Beneficial Owner, Existing Holder or Potential Holder.
(d) Nothing contained herein shall preclude a Broker-Dealer from placing an Order for some or
all of the MMP Shares of a series for its own account.
(e) Until the Submission Deadline, a Broker-Dealer may, for any reason, withdraw or modify any
Order previously submitted to the Auction Agent.
(f) After the Submission Deadline, and prior to the Error Correction Deadline, a Broker-Dealer
may:
(i) submit to the Auction Agent an Order received from a Beneficial Owner or Potential
Beneficial Owner or generated from its own account by the Broker-Dealer, in either case
prior to the Submission Deadline and not submitted to the Auction Agent prior to the
Submission Deadline as a result of (A) an event of force majeure or a technological failure
which made delivery prior to the Submission Deadline impossible or (B) a clerical error on
the part of the Broker-Dealer; or
(ii) modify or withdraw an Order received or generated for its own account by the
Broker-Dealer and submitted to the Auction Agent prior to the Submission Deadline, if the
Broker-Dealer determines that such Order contained a clerical error on the part of the
Broker-Dealer.
In the event a Broker-Dealer makes such a submission, modification or withdrawal and the
Auction Agent has already run the Auction, the Auction Agent shall rerun the Auction, taking into
account such submission, modification or withdrawal. Such a submission, modification or withdrawal
shall be deemed to constitute a representation by the Broker-Dealer that, in the case of a newly
submitted Order, the failure to submit such Order prior to the Submission Deadline resulted from an
event described in clause (i) above and such Order was received from an Beneficial Owner or
Potential Beneficial Owner prior to the Submission Deadline or generated internally by the
Broker-Dealer for its own account prior to the Submission Deadline and, in the case of a modified
or withdrawn Order, that the Order as originally submitted contained a clerical error on the part
of the Broker-Dealer. The Auction Agent shall be entitled to rely conclusively (and shall be fully
protected in so relying) for any and all purposes of the Auction Procedures on any Order submitted
to, modified or withdrawn from, the Auction Agent after the Submission Deadline and prior to the
Error Correction Deadline as having been submitted, modified or withdrawn in compliance with the
Auction Procedures.
(g) If after the Auction Agent announces the results of an Auction a Broker-Dealer becomes
aware that an error was made by the Auction Agent, the Broker-Dealer may communicate its concern to
the Auction Agent prior to the Error Correction Deadline. If the Auction Agent determines there
has been such an error (as a result of either a communication from a Broker-Dealer or its own
internal review) prior to the final settlement of transfers with respect to such Auction at the
Securities Depository, the Auction Agent shall correct the error and notify each Broker-Dealer that
submitted Bids or held a position in the MMP Shares of the series subject to such Auction of the
corrected results. If an
B-26
error by the Auction Agent is discovered after such final settlement, the Auction Agent may
make the change and post new results if the Auction Agent receives consent (which may be oral) from
each Broker-Dealer that submitted a Bid or held a position in the Auction.
(h) Nothing contained herein shall preclude the Auction Agent from:
(i) advising a Broker-Dealer prior to the Submission Deadline that it has not received
Sufficient Clearing Bids for MMP Shares of the series, provided, however, that if the
Auction Agent so advises any Broker-Dealer, it shall so advise all Broker-Dealers;
(ii) verifying the Orders of a Broker-Dealer prior to the Submission Deadline,
provided, however, that if the Auction Agent verifies the Orders of any Broker-Dealer, it
shall verify the Orders of all Broker-Dealers requesting such verification; or
(iii) contacting a Broker-Dealer who has submitted an Order that does not conform to
the requirements of these Auction Procedures and requesting that such Broker-Dealer
resubmit such Order so that it conforms to the requirements of these Auction Procedures;
provided, however, that if the Auction Agent has not received a corrected conforming Order
within one hour of the Submission Deadline, the Auction Agent shall, to the extent possible,
adjust such Order in conformity with the provisions of these Auction Procedures, and, if the
Auction Agent is unable to so adjust such Order, the Auction Agent shall reject such Order.
3. Treatment of Orders by the Auction Agent. Anything herein to the contrary
notwithstanding:
(a) If the Auction Agent receives an Order which does not conform to the requirements of these
Auction Procedures, the Auction Agent may contact the Broker-Dealer submitting such Order for a
period of up to one hour after the Submission Deadline and request that such Broker-Dealer resubmit
such Order so that it conforms to the requirements of these Auction Procedures. If the Auction
Agent has not received a corrected conforming Order within one hour of the Submission Deadline, the
Auction Agent shall, to the extent possible, adjust such Order in conformity with the provisions of
these Auction Procedures and, if the Auction Agent is unable to so adjust such Order, the Auction
Agent shall reject such Order.
(b) If any rate specified in any Bid contains more than three figures to the right of the
decimal point, the Auction Agent shall round the rate up to the next highest one thousandth (.001)
of 1%.
(c) If one or more Orders covering in the aggregate more than the number of outstanding MMP
Shares of the series subject to an Auction held by any Existing Holder is submitted to the Auction
Agent, such Orders shall be considered valid as follows:
(i) all Hold Orders for MMP Shares of a series shall be considered Hold Orders, but
only up to and including in the aggregate the number of outstanding MMP Shares of the series
held by such Existing Holder;
(ii) (A) any Bid of an Existing Holder shall be considered valid as a Bid of an
Existing Holder up to and including the excess of the number of outstanding MMP Shares of a
series held by the Existing Holder over the number of MMP Shares of the series subject to
any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), all Bids of any Existing Holder with the same
rate shall be aggregated and considered a single Bid of an Existing Holder up to and
B-27
including the excess of the number of outstanding MMP Shares of the series held
by the Existing Holder over the number of MMP Shares of the series subject to any
Hold Orders referred to in clause (i) above;
(C) subject to subclause (A), if more than one Bid with different rates is
submitted on behalf of such Existing Holder, such Bids shall be considered Bids of
an Existing Holder in the ascending order of their respective rates up to the amount
of excess of the number of outstanding MMP Shares of the series held by the Existing
Holder over the number of MMP Shares of the series subject to any Hold Orders
referred to in clause (i) above;
(D) the number, if any, of outstanding MMP Shares of the series subject to Bids
not considered to be Bids of an Existing Holder under this clause (ii) shall be
treated as the subject of a Bid for MMP Shares of the series by a Potential Holder;
and
(iii) all Sell Orders shall be considered Sell Orders, but only up to and including a
number of MMP Shares of the series equal to the excess of the number of outstanding MMP
Shares of the series held by such Existing Holder over the sum of the number of MMP Shares
of such series subject to Hold Orders referred to in clause (i) above and the number of MMP
Shares of such series considered to be subject to Bids of such Existing Holder pursuant to
clause (ii) above.
(d) If any Order specifies a number of MMP Shares of a series that includes a fraction of an
MMP Share to be held, purchased or sold, the Auction Agent shall round the number down so that the
number of MMP Shares so held, purchased or sold shall be whole shares of MMP Shares, and the
Auction Agent shall conduct the Auction Procedures as if such Order had been submitted in such
lower amount.
(e) If any portion of an Order of an Existing Holder relates to an MMP Share of a series that
has been called for redemption on or prior to the Dividend Payment Date next succeeding such
Auction, the Order shall be invalid with respect to such portion and the Auction Agent shall
conduct the Auction Procedures as if such portion of such Order had not been submitted.
(f) No MMP Share of a series which has been called for redemption on or prior to the Dividend
Payment Date next succeeding such Auction shall be included in the calculation of Available MMP
Shares for such Auction.
4. Determination of Applicable Rate. (a) Promptly after the Submission Deadline for
the MMP Shares of a series on each Auction Date, the Auction Agent shall assemble all Orders
submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to as a Submitted Hold Order, a
Submitted Bid or a Submitted Sell Order, as the case may be, and collectively as a Submitted
Order) and shall determine (i) the Available MMP Shares, (ii) whether there are Sufficient
Clearing Bids, and (iii) the Applicable Rate.
(b) Promptly after the Auction Agent has made such determination, it shall advise the Company
of the Applicable Rate for the next succeeding Dividend Period.
5. Allocation of Shares. (a) In the event of Sufficient Clearing Bids for the MMP
Shares of a series subject to the further provisions of paragraphs (c) and (d) of this Section 5.
Submitted Orders for shares of the series shall be accepted or rejected as follows in the following
order of priority:
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(i) the Submitted Hold Order of each Existing Holder shall be accepted, thus requiring
each such Existing Holder to continue to hold the MMP Shares that are the subject of such
Submitted Hold Order;
(ii) the Submitted Sell Order of each Existing Holder shall be accepted and the
Submitted Bids of each Existing Holder specifying any rate that is higher than the Winning
Bid Rate shall be accepted, thus requiring each Existing Holder to sell the MMP Shares that
are the subject of such Submitted Sell Order or Submitted Bid;
(iii) the Submitted Bid of each Existing Holder specifying any rate that is lower than
the Winning Bid Rate shall be rejected, thus requiring each such Existing Holder to continue
to hold the MMP Shares that are the subject of the Submitted Bid;
(iv) the Submitted Bid of each Potential Holder specifying any rate that is lower than
the Winning Bid Rate for shares of the series shall be accepted, thus requiring each such
Potential Holder to purchase the MMP Shares that are the subject of the Submitted Bid;
(v) the Submitted Bid of each Existing Holder specifying a rate that is equal to the
Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to continue to
hold the MMP Shares of the series that are the subject of the Submitted Bid, but only up to
and including the number of MMP Shares of such series obtained by multiplying (A) the number
of Outstanding MMP Shares which are not the subject of Submitted Hold Orders described in
clause (i) of this paragraph (a) or of Submitted Bids described in clauses (iii) and (iv) of
this paragraph (a) by (B) a fraction, the numerator of which shall be the principal amount
of Outstanding MMP Shares held by such Existing Holder subject to such Submitted Bid and the
denominator of which shall be the aggregate principal amount of Outstanding MMP Shares
subject to such Submitted Bids made by all such Existing Holders that specified a rate equal
to the Winning Bid Rate, and the remainder, if any, of such Submitted Bid shall be rejected,
thus requiring each such Existing Holder to sell any excess amount of MMP Shares;
(vi) the Submitted Bid of each Potential Holder specifying a rate that is equal to the
Winning Bid Rate shall be accepted, thus requiring each such Potential Holder to purchase
the MMP Shares of the series that are the subject of such Submitted Bid, but only in an
amount equal to the number of MMP Shares of such series obtained by multiplying (A) the
number of Outstanding MMP Shares which are not the subject of Submitted Hold Orders
described in clause (i) of this paragraph (a) or of Submitted Bids described in clauses
(iii), (iv) or (v) of this paragraph (a) by (B) a fraction, the numerator of which shall be
the Outstanding MMP Shares subject to such Submitted Bid and the denominator of which shall
be the sum of the Outstanding MMP Shares subject to such Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning Bid Rate, and the remainder of
such Submitted Bid shall be rejected; and
(vii) the Submitted Bid of each Potential Holder specifying any rate that is higher
than the Winning Bid Rate shall be rejected.
(b) In the event there are not Sufficient Clearing Bids for the MMP Shares of the series
subject to the provisions of paragraphs (c) and (d) of this Section 5, Submitted Orders for the MMP
Shares of the series shall be accepted or rejected as follows in the following order of priority:
(i) the Submitted Hold Order of each Existing Holder shall be accepted, thus requiring
each such Existing Holder to continue to hold the MMP Shares that are the subject of such
Submitted Hold Order;
B-29
(ii) the Submitted Bid of each Existing Holder specifying any rate that is not higher
than the Maximum Rate shall be accepted, thus requiring each such Existing Holder to
continue to hold the MMP Shares that are the subject of such Submitted Bid;
(iii) the Submitted Bids specifying any rate that is not higher than the Maximum Rate
for the MMP Shares shall be accepted, thus requiring each such Potential Holder to purchase
the MMP Shares that are the subject of such Submitted Bid; and
(iv) the Submitted Sell Orders of each Existing Holder shall be accepted as Submitted
Sell Orders and the Submitted Bids of each Existing Holder specifying any rate that is
higher than the Maximum Rate shall be deemed to be and shall be accepted as Submitted Sell
Orders, in both cases only up to and including the number of MMP Shares of such series
obtained by multiplying (A) the number of MMP Shares subject to Submitted Bids described in
clause (iii) of this paragraph (b) by (B) a fraction, the numerator of which shall be the
Outstanding MMP Shares held by such Existing Holder subject to such Submitted Sell Order or
such Submitted Bid deemed to be a Submitted Sell Order and the denominator of which shall be
the aggregate number of Outstanding MMP Shares subject to all such Submitted Sell Orders and
such Submitted Bids deemed to be Submitted Sell Orders, and the remainder of each such
Submitted Sell Order or Submitted Bid shall be deemed to be and shall be accepted as a Hold
Order and each such Existing Holder shall be required to continue to hold such excess amount
of MMP Shares; and
(v) the Submitted Bid of each Potential Holder specifying any rate that is higher than
the Maximum Rate shall be rejected.
(c) If, as a result of the procedures described in paragraphs (a) or (b) of this Section 5,
any Existing Holder or any Potential Holder would be required to purchase or sell a fraction of an
MMP Share of a series on any Auction Date, the Auction Agent shall by lot, in such manner as it
shall determine in its sole discretion, round up or down the number of MMP Shares of the series to
be purchased or sold by any Existing Holder or Potential Holder on the Auction Date so that the
number of MMP Shares so purchased or sold by each Existing Holder or Potential Holder on the
Auction Date shall be whole MMP Shares, even if such allocation results in one or more of such
Existing Holders or Potential Holders not purchasing or selling any MMP Shares on such Auction
Date.
(d) If, as a result of the procedures described in paragraph (a) of this Section 5, any
Potential Holder would be required to purchase less than a whole MMP Share of a series on any
Auction Date, the Auction Agent shall by lot, in such manner as it shall determine in its sole
discretion, allocate MMP Shares of a series for purchase among Potential Holders so that only whole
MMP Shares of the series are purchased by any Potential Holder on the Auction Date as a result of
such procedures, even if the allocation results in one or more Potential Holders not purchasing MMP
Shares on the Auction Date.
6. Notice of Applicable Rate. (a) On each Auction Date, the Auction Agent shall
notify each Broker-Dealer that participated in the Auction held on such Auction Date by electronic
means acceptable to the Auction Agent and the applicable Broker-Dealer of the following, with
respect to the MMP Shares of a series for which an Auction was held on such Auction Date:
(i) the Applicable Rate determined on such Auction Date for the succeeding Dividend
Period;
(ii) whether Sufficient Clearing Bids existed for the determination of the Winning Bid
Rate;
B-30
(iii) if such Broker-Dealer submitted a Bid or a Sell Order on behalf of an Existing
Holder, whether such Bid or Sell Order was accepted or rejected and the number of MMP Shares
of the series, if any, to be sold by such Existing Holder;
(iv) if such Broker-Dealer submitted a Bid on behalf of a Potential Holder, whether
such Bid was accepted or rejected and the number of MMP Shares of the series, if any, to be
purchased by such Potential Holder;
(v) if the number of MMP Shares of a series to be sold by all Existing Holders on whose
behalf such Broker-Dealer submitted Bids or Sell Orders is different from the number of MMP
Shares of such series to be purchased by all Potential Holders on whose behalf such
Broker-Dealer submitted a Bid, the name or names of one or more Broker-Dealers (and the
Agent Member, if any, of each such other Broker-Dealer) and the number of MMP Shares of such
series to be (A) purchased from one or more Existing Holders on whose behalf such other
Broker-Dealers submitted Bids or Sell Orders or (B) sold to one or more Potential Holders on
whose behalf such Broker-Dealer submitted Bids; and
(vi) the immediately succeeding Auction Date.
(b) On each Auction Date, with respect to each series of MMP Shares for which an Auction was
held on such Auction Date, each Broker-Dealer that submitted an Order on behalf of any Existing
Holder or Potential Holder shall, if requested: (i) advise each Existing Holder and Potential
Holder on whose behalf such Broker-Dealer submitted an Order as to (A) the Applicable Rate
determined on such Auction Date, (B) whether any Bid or Sell Order submitted on behalf of each such
Owner was accepted or rejected and (C) the immediately succeeding Auction Date; (ii) instruct each
Potential Holder on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or
in part, to instruct such Potential Holders Agent Member to pay to such Broker-Dealer (or its
Agent Member) through the Securities Depository the amount necessary to purchase the number of MMP
Shares of such series to be purchased pursuant to such Bid against receipt of such shares; and
(iii) instruct each Existing Holder on whose behalf such Broker-Dealer submitted a Sell Order that
was accepted or a Bid that was rejected in whole or in part, to instruct such Existing Holders
Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities
Depository the number of MMP Shares of the series to be sold pursuant to such Bid or Sell Order
against payment therefor.
7. Changes in Auction Period or Auction Date.
(a) Changes in Auction Period. (i) During any Auction Period, the Company, may, from time to
time on the Dividend Payment Date immediately following the end of any Auction Period, change the
length of the Auction Period with respect to all of the MMP Shares of a series in order to
accommodate economic and financial factors that may affect or be relevant to the length of the
Auction Period and the rate applicable to MMP Shares of such series. The Company shall initiate
the change in the length of the Auction Period by giving written notice to the Auction Agent, the
Broker-Dealers and the Securities Depository that the Auction Period shall change if the conditions
described herein are satisfied and the proposed effective date of the change, at least 10 Business
Days prior to the Auction Date for such Auction Period.
(ii) Any such changed Auction Period shall be for a period of one day, seven-days,
28-days, 35-days, three months, six months and shall be for all of the shares of a series of
MMP Shares in an Auction Period.
B-31
(iii) The change in the length of the Auction Period shall not be allowed unless
Sufficient Clearing Bids existed at the Auction immediately preceding the proposed change.
(iv) The change in length of the Auction Period shall take effect only if Sufficient
Clearing Bids exist at the Auction on the Auction Date for such first Auction Period. For
purposes of the Auction for such first Auction Period only, each Existing Holder shall be
deemed to have submitted Sell Orders with respect to all of its shares of a series MMP
Shares except to the extent such Existing Holder submits an Order with respect to such shares.
(b) Changes in Auction Date. The Auction Agent, at the direction of the Company, may specify
an earlier Auction Date (but in no event more than five Business Days earlier) than the Auction
Date that would otherwise be determined in accordance with the definition of Auction Date in
order to conform with then current market practice with respect to similar securities or to
accommodate economic and financial factors that may affect or be relevant to the day of the week
constituting an Auction Date and the rate of the shares of the series of MMP Shares. The Auction
Agent shall provide notice of the Companys direction to specify an earlier Auction Date for an
Auction Period by means of a written notice delivered at least 45 days prior to the proposed
changed Auction Date to the Company, the Broker-Dealers and the Securities Depository. In the
event that Auction Agent is instructed to specify an earlier Auction Date, the days of the week on
which an Auction Period begins and ends and the Dividend Payment Date shall be adjusted
accordingly.
SECOND: The Money Market Cumulative Preferred Shares have been classified and designated by
the Board of Directors under the authority contained in the charter.
THIRD: These Articles Supplementary have been approved by the Board of Directors in the
manner and by the vote required by law.
FOURTH: The undersigned President of the Company acknowledges these Articles Supplementary to
be the corporate act of the Company and, as to all matters or facts required to be verified under
oath, the undersigned President acknowledges that, to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this statement is made
under the penalties for perjury.
[SIGNATURE PAGE FOLLOWS]
B-32
IN WITNESS WHEREOF, the Company has caused these Articles Supplementary to be signed in its
name and on its behalf by its President and attested to by its Secretary on this ___day of
, 200_.
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ATTEST:
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TORTOISE ENERGY INFRASTRUCTURE CORPORATION |
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David J. Schulte
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Secretary
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President |
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B-33
APPENDIX C RATING OF INVESTMENTS
MOODYS INVESTORS SERVICE, INC.
Moodys long-term obligation ratings are opinions of the relative credit risk of fixed-income
obligations with an original maturity of one year or more. They address the possibility that a
financial obligation will not be honored as promised. Such ratings reflect both the likelihood of
default and any financial loss suffered in the even of default.
Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit
risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to very low credit
risk.
A Obligations rated A are considered upper-medium grade and are subject to low credit risk.
Baa Obligations rated Baa are subject to moderate credit risk. They are considered
medium-grade and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged to have speculative elements and are subject to
substantial credit risk.
B Obligations rated B are considered speculative and are subject to high credit risk.
Caa Obligations rated Caa are judged to be of poor standing and are subject to very high
credit risk.
Ca Obligations rated Ca are highly speculative and are likely in, or very near, default,
with some prospect of recovery of principal and interest.
C Obligations rated C are the lowest rated class of bonds and are typically in default,
with little prospect for recovery of principal and interest.
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
US Municipal and Tax-Exempt Ratings
Municipal ratings are based upon the analysis of four primary factors relating to municipal
finance: economy, debt, finances, and administration/management strategies. Each of the factors
is evaluated individually and for its effect on the other factors in the context of the
municipalitys ability to repay its debt.
Aaa Issuers or issues rated Aaa demonstrate the strongest creditworthiness relative to other
US municipal or tax-exempt issuers or issues.
Aa Issuers or issues rated Aa demonstrate very strong creditworthiness relative to other US
municipal or tax-exempt issuers or issues.
A Issuers or issues rated A present above average creditworthiness relative to other US
municipal or tax-exempt issuers or issues.
C-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: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating category from Aa
through Caa. The modifier 1 indicates that the issuer or obligation ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
a ranking in the lower end of that generic rating category.
Description of Moodys Highest Ratings of State and Municipal Notes and Other Short-Term
Loans
Moodys ratings for state and municipal notes and other short-term loans are designated
Moodys Investment Grade (MIG or, for variable or floating rate obligations, VMIG). Such
ratings recognize the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are critical in short-term
ratings. Symbols used will be as follows:
MIG-1 This designation denotes superior credit quality. Excellent protection is afforded
by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to
the market for refinancing.
MIG-2 This designation denotes strong credit quality. Margins of protection are ample,
although not as large as in the preceding group.
MIG-3 This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt instruments in this
category may lack sufficient margins of protection. Demand features rated in this category may be
supported by a liquidity provider that does not have an investment grade short-term rating or may
lack the structural and/or legal protections necessary to ensure the timely payment of purchase
price upon demand.
VMIG 1 This designation denotes superior credit quality. Excellent protection is afforded
by the superior short-term credit strength of the liquidity provider and structural and legal
protections that ensure the timely payment of purchase price upon demand.
C-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 Moodys Short Term Ratings
Moodys short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs or to individual
short-term debt instruments. Such obligations generally have an original maturity not exceeding
thirteen months, unless explicitly noted.
P-1 Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay
short-term debt obligations.
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.
C-3
FITCH RATINGS
A brief description of the applicable Fitch Ratings (Fitch) ratings symbols and meanings (as
published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit risk.
They are assigned only in case of exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be affected adversely by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial commitments. This capacity is
not significantly vulnerable to foreseeable events.
A High credit quality. A ratings denote a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered strong. This capacity may, nevertheless,
be more vulnerable to changes in circumstances or in economic conditions than is the case for
higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low expectation
of credit risk. The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time; however, business or
financial alternatives may be available to allow financial commitments to be met. Securities rated
in this category are not investment grade.
B Highly speculative. B ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met; however, capacity
for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or economic
developments. A CC rating indicates that default of some kind appears probable. C ratings
signal imminent default.
DDD, DD, And D Default The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor.
While expected recovery values are highly speculative and cannot be estimated with any precision,
the following serve as general guidelines. DDD obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. DD indicates potential
recoveries in the range of 50%-90%, and D the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated
DDD have the highest prospect for resumption of performance or continued operation with or
without a formal reorganization process. Entities rated DD and D are generally undergoing a
formal reorganization or liquidation process; those rated DD are likely to satisfy a higher
portion of their outstanding obligations, while entities rated D have a poor prospect for
repaying all obligations.
C-4
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.
C High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon a sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA Long-term rating category, to categories
below CCC, or to Short-term ratings other than F1.
NR indicates that Fitch Ratings does not rate the issuer or issue in question.
Withdrawn A rating is withdrawn when Fitch Ratings deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures, is called, or
refinanced.
Rating Watch Ratings are placed on Rating Watch to notify investors that there is a
reasonable probability of a rating change and the likely direction of such change. These are
designated as Positive, indicating a potential upgrade, Negative, for a potential downgrade, or
Evolving, if ratings may be raised, lowered or maintained. Rating Watch typically is resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over a one to two year
period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does
not imply a rating change is inevitable. Similarly, ratings for which outlooks are `stable could
be downgraded before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch Ratings may be unable to identify the fundamental trend. In these
cases, the Rating Outlook may be described as evolving.
C-5
STANDARD & POORS CORPORATION
A brief description of the applicable Standard & Poors Corporation, a division of The McGraw-Hill
Companies (Standard & Poors or S&P), rating symbols and their meanings (as published by S&P)
follows:
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of financial obligations,
or a specific financial program (including ratings on medium term note programs and commercial
paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment
as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by
Standard & Poors from other sources it considers reliable. Standard & Poors does not perform an
audit in connection with any credit rating and may, on occasion, rely on unaudited financial
information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally
assigned to those obligations considered short-term in the relevant market. In the U.S., for
example, that means obligations with an original maturity of no more than 365 days including
commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor with respect
to put features on long-term obligations. The result is a dual rating, in which the short-term
ratings address the put feature, in addition to the usual long-term rating. Medium-term notes are
assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based in varying degrees, on the following considerations:
1. Likelihood of payment capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors rights. The issue ratings definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior obligations are typically rated
lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA An obligation rated AAA has the highest rating assigned by Standard & Poors. The
obligors capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in small
degree. The obligors capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher-rated categories. However, the
obligors capacity to meet its financial commitment on the obligation is still strong.
C-6
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 obligors inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse
business, financial, or economic conditions will likely impair the obligors capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has been filed
or similar action has been taken, but payments on this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poors believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of
a similar action if payments on an obligation are jeopardized.
+/- Plus (+) or minus (-). The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating categories.
c The c subscript is used to provide additional information to investors that the bank
may terminate its obligation to purchase tendered bonds if the long-term credit rating of the
issuer is below an investment-grade level and/or the issuers bonds are deemed taxable.
P The letter p indicates that the rating is provisional. A provisional rating assumes
the successful completion of the project financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely dependent upon the successful, timely
completion of the project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with respect to such
likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poors receipt of an executed
copy of the escrow agreement or closing documentation confirming investments and cash flows.
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r The r highlights derivative, hybrid, and certain other obligations that Standard &
Poors believes may experience high volatility or high variability in expected returns as a result
of noncredit risks. Examples of such obligations are securities with principal or interest return
indexed to equities, commodities, or currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an r symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are rated on the
same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of
the obligor but do not take into account currency exchange and related uncertainties.
Bond Investment Quality Standards
Under present commercial bank regulations issued by the Comptroller of the Currency, bonds
rated in the top four categories (AAA, AA, A, BBB, commonly known as investment-grade
ratings) generally are regarded as eligible for bank investment. Also, the laws of various states
governing legal investments impose certain rating or other standards for obligations eligible for
investment by savings banks, trust companies, insurance companies, and fiduciaries in general.
Short-Term Issue Credit Ratings
Notes
Standard & Poors note ratings reflects the liquidity factors and market access risks unique
to notes. Notes due in three years or less will likely receive a note rating. Notes maturing
beyond three years will most likely receive a long-term debt rating. The following criteria will
be used in making that assessment:
Amortization schedule the larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
Source of payment the more dependent the issue is on the market for its refinancing, the
more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security inasmuch as it
does not comment as to market price or suitability for a particular investor. The ratings are
based on current information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable.
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S&P does not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result
of changes in or unavailability of such information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded into several
categories, ranging from A-1 for the highest quality obligations to D for the lowest. These
categories are as follows:
A-1 A short-term obligation rated A-1 is rated in the highest category by Standard &
Poors. The obligors capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+). This indicates that
the obligors capacity to meet its financial commitment on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligors capacity to meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which could lead to the obligors
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic conditions for the obligor to meet its financial
commitment on the obligation.
D A short-term obligation rated D is in payment default. The D rating category is
used when payments on an obligation are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poors believes that such payments will be made during
such grace period. The D rating also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold a security inasmuch as
it does not comment as to market price or suitability for a particular investor. The ratings are
based on current information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable.
S&P does not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result
of changes in or unavailability of such information or based on other circumstances.
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Tortoise Energy Infrastructure Corporation
STATEMENT OF ADDITIONAL INFORMATION
March 14, 2007