formn2a_061809.htm
As
filed with the Securities and Exchange Commission on June 23,
2009
Securities Act Registration
No. 333-145105
Investment Company Act
Registration No. 811-22106
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
N-2
R
|
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
|
R
|
PRE-EFFECTIVE
AMENDMENT NO. 3
|
£
|
POST-EFFECTIVE
AMENDMENT NO.
|
and/or
|
R
|
REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|
R
|
AMENDMENT
NO. 3
|
Tortoise
Power and Energy Infrastructure Fund, Inc.
11550
Ash Street, Suite 300
Leawood,
Kansas 66211
(913)
981-1020
AGENT
FOR SERVICE
David
J. Schulte
11550
Ash Street, Suite 300
Leawood,
Kansas 66211
Copies
of Communications to:
Steven
F. Carman, Esq.
|
Joseph
A. Hall, Esq.
|
Husch
Blackwell Sanders LLP
|
Davis
Polk & Wardwell
|
4801
Main Street, Suite 1000
|
450
Lexington Avenue
|
Kansas
City, MO 64112
|
New
York, NY 10017
|
(816)
983-8000
|
(212)
450-4000
|
Approximate Date of Proposed Public
Offering: As soon as practicable after the effective date of
this Registration Statement.
If any of
the securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. £
It is
proposed that this filing will become effective (check appropriate
box):
£ when
declared effective pursuant to Section 8(c).
CALCULATION
OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
|
|
Proposed
|
Proposed
Maximum
|
|
Title
of Securities
Being
Registered
|
Amount
to be
Registered(1)
|
Maximum
Offering
Price
Per Share(1)
|
Aggregate
Offering
Price (1)
|
Amount
of Registration Fee
|
Common
Stock
|
200,000
|
$20.00
|
$5,000,000
|
$153.50(2)
|
(1)
|
Estimated
solely for the purpose of calculating the registration
fee.
|
The Registrant hereby amends this
Registration Statement on such date or dates as may be necessary to delay
its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the Registration Statement shall become effective on such dates as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell nor
does it seek an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
SUBJECT TO COMPLETION,
DATED ,
2009
PRELIMINARY
PROSPECTUS
Common
Shares
Tortoise
Power and Energy Infrastructure Fund, Inc.
$20.00
per share
The Fund. Tortoise
Power and Energy Infrastructure Fund, Inc. (the “Fund,” “we,” “us” or “our”) is
a Maryland corporation registered as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940 (the “1940
Act”). We intend to elect to be treated and to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
“Code”). We will be managed by Tortoise Capital Advisors, L.L.C. (the
“Advisor”), an investment adviser specializing in managing portfolios of
securities of master limited partnerships and other energy
companies. As of May 31, 2009, our Advisor managed investments of
approximately $2.0 billion.
Investment
Objectives. Our primary investment objective is to provide a
high level of current income, with a secondary objective of capital
appreciation. There can be no assurance that we will achieve our
investment objectives.
Investment
Strategy. We seek to provide stockholders a vehicle to invest
in a portfolio consisting primarily of securities issued by power and energy
infrastructure companies. The securities in which we will invest include
income-producing fixed income and equity securities. Under normal
circumstances, we plan to invest at least 80% of our total assets (including any
assets obtained through leverage) in securities of companies that derive more
than 50% of their revenue from power or energy infrastructure operations.
Power infrastructure operations use asset systems to provide electric power
generation (including renewable energy), transmission and
distribution. Energy infrastructure operations use a network of
pipeline assets to transport, store, gather and/or process crude oil, refined
petroleum products (including biodiesel and ethanol), natural gas or natural gas
liquids. We will not invest more than 15% of our total assets in restricted
securities, all of which may be illiquid securities, with certain exceptions as
described more fully herein.
We
seek to invest in a portfolio of companies focused solely on the power and
energy infrastructure sectors. We believe this sector provides stable and
defensive characteristics throughout economic cycles. We anticipate
that a significant portion of our portfolio will initially include investment
grade fixed income securities, as well as dividend-paying equity
securities.
No Prior Trading
History. Prior to this offering,
there has been no public or private market for our common
shares. Shares of closed-end management investment companies
frequently trade at prices lower than their net asset value (often referred to
as a “discount”), which may increase investor risk of
loss. The risk of loss due to this discount may be greater for
initial investors expecting to sell their shares in a relatively short period
after completion of this initial public offering.
(continued on following
page)
Our
strategy of investing primarily in securities issued by power or energy
infrastructure companies, a portion of which may be restricted securities
as described more fully herein, involves a high degree of risk. You
could lose some or all of your investment. An investment in this fund
may be considered speculative. See "Risks" beginning on
page of this prospectus. You
should consider carefully these risks together with all of the other information
contained in this prospectus before making a decision to purchase our common
shares.
|
Per Share
|
Total(1)
|
Public
Offering
Price
|
$ 20.00
|
$
|
Sales
Load(2)
|
$
|
$
|
Proceeds,
before expenses, to the Fund(3)
|
$
|
$
|
(1)
|
The
underwriters named in this prospectus have the option to purchase up
to additional
common shares at the public offering price, less the sales load, within
45 days from the date of this prospectus to cover
over-allotments. If the over-allotment option is exercised in
full, the public offering price, sales load and proceeds, before expenses,
to us will
be , ,
and ,
respectively.
|
(2)
|
The
Advisor (not the Fund) has agreed to pay from its own assets a structuring
fee to Wachovia Capital Markets, LLC. See
"Underwriting."
|
(3)
|
In
addition to the sales load, the Fund will pay offering costs estimated at
approximately
$ ,
which represents approximately $ per
share.
|
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
underwriters expect to deliver the common shares to purchasers on or
about ,
2009.
Wells
Fargo
The date
of this prospectus
is ,
2009
(continued
from preceding page)
Exchange Listing. Our common shares are
expected to be listed on the New York Stock Exchange under the trading or
"ticker" symbol "TPZ."
Leverage. We may
incur leverage to the extent permitted by the 1940 Act. Under normal
market conditions, we will not employ leverage above 20% of our total assets at
time of incurrence. We anticipate that such leverage may initially
include, although not be limited to, revolving credit facilities or senior
notes. We may also issue preferred shares, however, we will not
utilize leverage in the form of what historically has been known as auction rate
preferred securities.
Leverage
creates an opportunity for increased income and capital appreciation for common
stockholders, but, at the same time, it gives rise to special risks that may
adversely affect common stockholders. If we utilize leverage, the
common shares sold in this offering will be junior in liquidation and
distribution rights to senior securities, such as preferred shares or debt
securities, that we may issue. Because our Advisor’s fee is based on
total assets (including any assets acquired with the proceeds of leverage), our
Advisor’s fee will be higher if we utilize leverage. There can be no
assurance that a leveraged strategy will be successful during any period in
which it is used. See “Leverage” and “Risks – Risks Related to Our
Operation – Leverage Risk.”
Our
common shares 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.
This
prospectus sets forth information about us that a prospective investor should
know before investing. You should read this prospectus and retain it
for future reference. A Statement of Additional Information,
dated ,
2009, containing additional information about us, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the
Statement of Additional Information, the table of contents of which is on
page __ of this prospectus, by calling toll-free 1-866-362-9331
or by writing to us at 11550 Ash Street, Suite 300, Leawood,
Kansas 66211. You can also obtain a copy of our Statement
of Additional Information and our future annual and semi-annual reports to
stockholders on our Advisor’s website (http://www.tortoiseadvisors.com). Information
included on our Advisor’s website is not incorporated into this
prospectus. You can review and copy documents we have filed at the
SEC’s Public Reference Room in Washington, D.C. Call 1-202-551-5850
for information. The SEC charges a fee for copies. You can
obtain the same information free from the SEC’s website (http://www.sec.gov)
on which you may view our Statement of Additional Information, all materials
incorporated by reference, and other information about us. You may
also e-mail requests for these documents to publicinfo@sec.gov or make a request
in writing to the SEC’s Public Reference Section, 100 F Street N.E., Room
1580, Washington, D.C. 20549.
Our
common shares 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.
You should
rely only on the information contained or incorporated by reference in this
prospectus. The Fund has not, and the underwriters have not,
authorized any other person to provide you with any different
information. If anyone provides you with different or inconsistent
information, you should not rely on it. The Fund is not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should
assume that the information appearing in this prospectus is accurate only as of
the date of this prospectus. The Fund’s business, financial condition
and prospects may have changed since that date. The Fund will amend
or supplement this prospectus to reflect material changes to the information
contained in this prospectus to the extent required by applicable
law.
_______________________________________________________
Until ,
2009 (25 days after the date of this prospectus) all dealers that buy, sell or
trade our common shares, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to each
dealer’s obligation to deliver a prospectus when acting as an underwriter and
with respect to its unsold allotments or subscriptions.
_______________________________________________________
This
section is only a summary. It is not complete and may not contain all of the
information you may want to consider before investing in our common
shares. You should review the more detailed information contained in
this prospectus, including under the heading "Risks" beginning on
page . Unless indicated otherwise in
this prospectus or the context requires otherwise, all references in this
prospectus to the "Fund," "we," "our" or "us" are to Tortoise Power and Energy
Infrastructure Fund, Inc.
The
Fund
We are a
Maryland corporation registered as a non-diversified, closed-end management
investment company under the 1940 Act. We intend to elect to be
treated and to qualify as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended (the "Code").
Investment
Objectives
Our
primary investment objective is to provide a high level of current income, with
a secondary objective of capital appreciation. There can be no
assurance that we will achieve our investment objectives.
Our
Advisor
We
will be managed by Tortoise Capital Advisors, L.L.C., an investment adviser
specializing in managing portfolios of securities of master limited partnerships
(“MLPs”) and other energy companies. As of May 31, 2009, our Advisor
managed investments of approximately $2.0 billion in the energy sector,
including the assets of four publicly traded closed-end management investment
companies. Each of our Advisor’s investment decisions will be
reviewed and approved for us by its investment committee of five managing
directors. The managing directors have an average of over
23 years of investment experience and three of the five managing directors
have significant experience in managing portfolios of fixed income securities
that include the securities of issuers in the power and energy infrastructure
sectors.
Investment
Strategy
We
seek to provide stockholders a vehicle to invest in a portfolio consisting
primarily of securities issued by power and energy infrastructure
companies. The securities in which we will invest include income-producing
fixed income and equity securities. Under normal circumstances, we
plan to invest at least 80% of our total assets (including any assets obtained
through leverage) in securities of companies that derive more than 50% of their
revenue from power or energy infrastructure operations. We define power
and energy infrastructure operations as follows:
·
|
Power Infrastructure –
The ownership and operation of asset systems that provide electric power
generation (including renewable energy), transmission and
distribution.
|
·
|
Energy Infrastructure –
The ownership and operation of a network of pipeline assets to transport,
store, gather and/or process crude oil, refined petroleum products
(including biodiesel and ethanol), natural gas or natural gas
liquids.
|
Market
Opportunity
We seek
to invest in a portfolio of companies focused solely on the power and energy
infrastructure sectors and that provide stable and defensive characteristics
throughout economic cycles. We believe that the current market
conditions provide a favorable entry point for our strategy, with yield spreads
above historical averages. Over time, we will seek to capitalize on relative
value opportunities, with the ability to invest across the capital structure
while minimizing risk.
We will
focus on minimizing risk and volatility using our Advisor’s disciplined
investment screening process, including proprietary risk and financial analysis.
We anticipate that a significant portion of our portfolio will initially include
investment grade fixed income securities, as well as dividend-paying equity
securities. We intend to build a portfolio with companies that generally (i)
have assets in diverse geographic locations across the U.S., (ii) transport,
process, or distribute diverse energy products, or (iii) serve different end
users. Among other things, under normal market conditions, our
non-fundamental policies (i) limit our
investment
in non-investment grade fixed income
securities to no more than 25% of our total assets, (ii) limit our ability to
incur leverage so that our leverage is not in excess of 20% of our total assets
at time of incurrence, and (iii) require that we maintain at least 60% of our
total assets in fixed income securities.
Targeted
Investment Characteristics
Our
investment strategy will be anchored in our Advisor’s fundamental principles of
yield, quality and growth. We anticipate that our targeted
investments will generally have the following characteristics:
·
|
Essential Infrastructure
Assets – Companies that operate critical tangible assets that
connect sources of energy supply to areas of energy demand. These
businesses are essential to economic productivity and experience
relatively inelastic demand.
|
·
|
High Current Yield –
Companies that generate a current cash return at the time of investment.
We do not intend to invest in start-up companies or companies with
speculative business plans.
|
·
|
Predictable Revenues –
Companies with stable and predictable revenue streams, often linked to
areas experiencing demographic growth and with low commodity price
risk.
|
·
|
Stable Cost Structures
– Companies with relatively low maintenance expenditures and economies of
scale due to operating leverage.
|
·
|
High Barriers to Entry
– Companies with operating assets that are difficult to replicate due to
regulation, natural monopolies, availability of land or high costs of new
development.
|
·
|
Long-Lived Assets –
Companies that operate tangible assets with long economic useful
lives.
|
·
|
Experienced,
Operations-Focused Management Teams – Companies with management
teams possessing successful track records and who have substantial
knowledge, experience, and focus in their particular segments of the power
and energy infrastructure sectors.
|
Power
and Energy Infrastructure Investment
We
believe that power and energy infrastructure companies will provide attractive
investment opportunities for the following reasons:
The
International Energy Administration ("IEA") projects that North American energy
and electricity consumption will increase annually by 0.6% and 1.1%,
respectively, from 2006 through 2030. This increase results in an overall energy
and electricity consumption increase of approximately 15% and 30%, respectively,
by 2030.
The power
and energy infrastructure sectors have a growing need for capital to update and
expand infrastructure assets. In particular, these companies need
capital to facilitate the construction of additional infrastructure assets, to
modernize or maintain existing infrastructure assets, and to finance industry
consolidation. Power infrastructure investment has fallen short of
demand growth for nearly 30 years, leading to inadequate capacity. The U.S.
Department of Energy ("DOE") estimates that 70% of transmission lines and power
transformers and 60% of circuit breakers are over 25 years old, which we
understand to be well into their useful lives. Companies in the energy
infrastructure sector expect to construct over 5,000 miles of natural gas
pipelines and 2,000 miles of crude oil pipelines to support new sources of
energy supply as well as replace and/or maintain existing infrastructure. The
Federal Energy Regulatory Commission ("FERC") has created incentives to spur
investment in power and energy infrastructure assets.
The IEA
estimates that $3.4 trillion will need to be invested in such power and energy
infrastructure internal growth projects from 2007 to 2030 in North
America. We expect such spending to finance upgrades and expansion of
electric power infrastructure; pipeline infrastructure projects to support
growing population centers; pipeline and storage terminal projects to increase
the movement of crude oil across North America; and natural gas projects to
develop infrastructure that efficiently connects new areas of supply to growing
areas of demand. This investment should help alleviate congestion, upgrade or
replace aged infrastructure and
meet
growing North American demand.
Experience
of the Advisor
·
|
Experience Across Power and
Energy Infrastructure Value Chain. Our Advisor has
significant expertise working with energy infrastructure companies and
managed investments of approximately $2.0 billion in the energy
sector as of May 31, 2009. The five members of our Advisor’s
investment committee have, on average, over 23 years of investment
experience. In addition to their experience at the Advisor,
three of the five members of our Advisor’s investment committee came from
Fountain Capital Management (“Fountain Capital”) and have significant
experience in managing portfolios of fixed income securities that included
the securities of issuers in the power and energy infrastructure
sectors. Fountain Capital was formed in 1990 and focuses
primarily on providing investment advisory services to institutional
investors in the non-investment grade rated fixed income
market. The Advisor's philosophy places extensive focus on
quality through proprietary models, including risk, valuation and
financial models.
|
·
|
Strong Reputation, Deep
Relationships and Access to Deal Flow. Our Advisor has
developed a strong reputation and deep relationships with issuers,
underwriters and sponsors that we believe will afford us competitive
advantages in evaluating, and managing investment
opportunities. Our Advisor, a pioneer in institutional direct
placements with MLPs and other energy infrastructure companies, has
participated in over 90 direct placements, private company
investments and initial public offerings in which it has invested over
$1.3 billion since 2002 through its publicly traded funds and other
specialty vehicles.
|
·
|
Capital Markets
Innovation. Our Advisor is a leader in providing investment,
financing and structuring opportunities for its publicly traded funds and
for its private funds. Our Advisor believes its innovation
includes the following highlights:
|
o
|
First
publicly traded, closed-end management investment company focused
primarily on investing in energy MLPs; |
o
|
Led
development of institutional MLP direct placements to fund acquisitions,
capital projects and sponsor liquidity; |
o
|
Completed
the first follow-on common stock offering in a decade for a closed-end,
management investment company; and
|
o
|
Established
one of the first registered closed-end fund universal shelf registration
statements and completed the first registered direct offering from a
universal shelf registration statement for a closed-end
fund.
|
These
highlights should not be read as indications of our future performance,
including whether our common shares will trade above, at or below our net asset
value ("NAV").
·
|
Disciplined Investment
Philosophy. Our Advisor’s senior investment professionals have
substantial experience in structuring investments that balance the needs
of power and energy infrastructure companies with appropriate risk
control. In making its investment decisions, our Advisor intends to
continue the disciplined investment approach that it has utilized since
its founding. That investment approach will emphasize current income, low
volatility and minimization of downside risk. Our Advisor’s
investment process involves an assessment of the overall attractiveness of
the specific segment in which a power or energy infrastructure company is
involved, the company’s specific competitive position within that segment,
potential commodity price risk, supply and demand, regulatory
considerations, the stability and potential growth of the company’s cash
flows, and the company’s management track
record.
|
Portfolio
Securities
Targeted
Investments. We may invest in a wide range of securities
expected to generate for us regularly recurring income. The securities in which
we invest will primarily include the following securities issued by power and
energy infrastructure companies:
|
o
|
Fixed
income (primarily rated investment
grade)
|
|
o
|
Dividend-paying
equity securities
|
Up to 25%
of the securities listed above may be securities issued by MLPs.
Temporary Investments and Defensive
Investments. Pending investment of the proceeds of this
offering, we expect to invest substantially all of the net offering proceeds in
cash, cash equivalents, securities issued or guaranteed by the U.S. government
or its
instrumentalities
or agencies, short-term money market instruments, short-term fixed income
securities, certificates of deposit, bankers’ acceptances and other bank
obligations, commercial paper or other liquid fixed income
securities. We may also invest in these instruments on a temporary
basis to meet working capital needs, including, but not limited to, holding a
reserve pending payment of distributions or facilitating the payment of expenses
and settlement of trades. In addition, although inconsistent with our
investment objectives, under adverse market or economic conditions, we may
invest 100% of our total assets in these securities. The yield on
these securities may be lower than the returns on the securities in which we
will otherwise invest or yields on lower-rated, fixed-income
securities. To the extent we invest in these securities on a
temporary basis or for defensive purposes, we may not achieve our investment
objectives.
Principal
Investment Strategies
As a
nonfundamental investment policy, under normal circumstances we plan to invest
at least 80% of our total assets (including assets we obtain through leverage)
in the securities of companies that derive more than 50% of their revenue from
power or energy infrastructure operations.
We have
adopted the following additional nonfundamental investment
policies:
|
•
|
We
will invest a minimum of 60% of our total assets in fixed income
securities.
|
|
•
|
Under
normal market conditions, we will not employ leverage above 20% of our
total assets at time of
incurrence.
|
|
•
|
We
will not invest more than 25% of our total assets in non-investment grade
rated fixed
income securities.
|
|
•
|
We
will not invest more than 15% of our total assets in restricted
securities, that are ineligible for resale under Rule 144A ("Rule 144A")
under the Securities Act of 1933 ("1933 Act"), all of which may be
illiquid securities.
|
|
•
|
We
may invest up to 10% of our total assets in securities issued by
non-U.S. issuers (including Canadian issuers).
|
|
|
|
|
• |
We
will not engage in short sales. |
As used
for the purpose of each nonfundamental investment policy above, the term "total
assets" includes any assets obtained through leverage. Our Board of
Directors may change our nonfundamental investment policies without stockholder
approval and will provide notice to stockholders of material changes in such
policies (including notice through stockholder reports). Any change
in the policy of investing under normal circumstances at least 80% of our total
assets (including assets we obtain through leverage) in the securities of
companies that derive more than 50% of their revenue from power or energy
infrastructure operations requires at least 60 days’ prior written notice to
stockholders. Unless otherwise stated, the investment restrictions
described above apply at the time of purchase, and we will not be required to
reduce a position due solely to market value fluctuations. See "The
Fund" for more detailed information.
In
addition, to comply with federal tax requirements for qualification as a RIC,
our investments will be limited so that at the close of each quarter of each
taxable year (i) at least 50% of the value of our total assets is represented by
cash and cash items, U.S. Government securities, the securities of other RICs
and other securities, with such other securities limited for purposes of such
calculation, in respect of any one issuer, to an amount not greater than 5% of
the value of our total assets and not more than 10% outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of our total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other RICs), the securities (other
than the securities of other RICs) of any two or more issuers that we control
and that are determined to be engaged in the same business or similar or related
trades or businesses, or the securities of one or more qualified publicly traded
partnerships (which includes MLPs). These tax-related limitations may
be changed by the Board of Directors to the extent appropriate in light of
changes to applicable tax requirements.
Leverage
Once
the proceeds of this offering have been fully invested in securities that meet
our investment objectives, we may fund continued investment activities through
the borrowing of money that represents the leveraging of our common
shares. The issuance of additional common shares will enable us to
increase the aggregate amount of our leverage. Under normal market
conditions, we
will
not employ leverage above 20% of our total assets at time of
incurrence. We anticipate that such leverage may initially
include, although not be limited to, revolving credit facilities or senior
notes. We may also issue preferred shares, however, will not utilize
leverage in the form of what historically has been known as auction rate
preferred securities.
The use
of leverage creates an opportunity for increased income and capital appreciation
for common stockholders, but at the same time creates special risks that may
adversely affect common stockholders. Because our Advisor’s fee is based upon a
percentage of our "Managed Assets," our Advisor’s fee will be higher when we are
leveraged. Managed Assets is defined as our total assets (including
any assets attributable to any leverage that may be outstanding) minus the sum
of accrued liabilities (other than debt representing financial leverage and the
aggregate liquidation preference of any outstanding preferred shares).
Therefore, our Advisor has a financial incentive to use leverage, which will
create a conflict of interest between our Advisor and our common stockholders,
who will bear the costs and risks 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 "Risks — Risks Related to Our Operations
— Leverage Risk."
We 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 may
expose us to certain risks that differ from the risks associated with our
portfolio holdings. See "Leverage — Hedging Transactions" and
"Risks — Risks Related to Our Operations — Hedging Strategy
Risk."
Conflicts
of Interest
Conflicts
of interest may arise from the fact that our Advisor and its affiliates carry on
substantial investment activities for other clients in which we have no
interest. Our Advisor or its affiliates may have financial incentives to favor
certain of these accounts over us. Any of their proprietary accounts or other
customer accounts may compete with us for specific trades. Our Advisor 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, although their investment objectives may be the same as, or
similar to, ours.
Our
Advisor has written allocation policies and procedures that it will follow in
addressing any conflicts. When two or more clients advised by our
Advisor or its affiliates seek to purchase or sell the same securities, the
securities actually purchased or sold will be allocated among the clients on a
good faith equitable basis by our Advisor in its discretion and in accordance
with each client’s investment objectives and our Advisor’s
procedures.
Situations
may occur when we could be disadvantaged because of the investment activities
conducted by our Advisor 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 their other accounts, thereby limiting the size of our position; (2) the
difficulty of liquidating an investment for us or their other accounts where the
market cannot absorb the sale of the combined position; or (3) limits on
co-investing in private placement securities under the 1940 Act. Our investment
opportunities may be limited by affiliations of our Advisor or its affiliates
with power and energy infrastructure companies. See "Management of the
Company – Conflicts of Interest."
Advisor
Information
The
offices of our Advisor are located at 11550 Ash Street, Suite 300, Leawood,
Kansas 66211. The telephone number for our Advisor is
(913) 981-1020 and our Advisor’s website is
www.tortoiseadvisors.com. Information posted to our Advisor’s website
should not be considered part of this prospectus.
Who
May Want to Invest
Investors
should consider their investment goals, time horizons and risk tolerance before
investing in the Fund. An investment in the Fund is not appropriate
for all investors, and the Fund is not intended to be a complete investment
program. The Fund is designed as a long-term investment and not as a
trading vehicle. The Fund may be an appropriate investment for
investors who are seeking:
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potential
high current income;
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a
fund focused primarily on the power and energy infrastructure
sectors;
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a
fund whose capital structure will not be significantly
leveraged;
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a
fund that will initially invest primarily in investment grade
securities; |
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a
fund that may be suitable for retirement or other tax exempt
accounts;
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professional
securities selection and active management by an experienced
advisor.
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An
investment in the Fund involves a high degree of
risk. Investors could lose some or all of their
investment.
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Common
Shares Offered
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of
our common shares,
excluding of
our common shares issuable pursuant to the overallotment option granted to
the underwriters.
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Price
Per Common Share |
$20.00 |
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Common
Shares Outstanding
After
the
Offering
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of
our common shares,
excluding of
our common shares issuable pursuant to the overallotment option granted to
the underwriters. |
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Listing
and
Symbol
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Our
common shares are expected to be listed on the New York Stock Exchange
under the trading or "ticker" symbol "TPZ."
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Use
of
Proceeds
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We
expect to use the net proceeds from the sale of our common shares to
invest in accordance with our investment objectives and policies and for
working capital purposes. Pending investment, we expect the net
proceeds of this offering will be invested in cash, cash equivalents,
securities issued or guaranteed by the U.S. government or its
instrumentalities or agencies, short-term money market instruments,
short-term fixed income securities, certificates of deposit,
bankers’ acceptances and other bank obligations, commercial paper or other
liquid fixed income securities. See "Use of
Proceeds."
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Fees
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Pursuant
to our investment advisory agreement, we will pay our Advisor a fee for
its investment management services equal to an annual rate of 0.95% of our
average monthly Managed Assets. The Advisor has agreed to a fee
waiver of 0.15% for year 1, 0.10% for year 2 and 0.05% for year 3, which
will become effective as of the close of this offering. The fee
will be calculated and accrued daily and paid quarterly in
arrears. See “Management of the Fund – Investment Advisory
Agreement – Management Fee.”
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Regulatory
Status
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We
are registered as a non-diversified, closed-end management investment
company under the 1940 Act. See "Closed-End Fund
Structure."
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Tax
Status
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We
intend to elect to be treated, and to qualify each year, as a RIC under
the Code. Assuming that we qualify as a RIC, we generally will
not be subject to U.S. federal income tax on income and gains that we
distribute each taxable year to stockholders if we meet certain minimum
distribution requirements. To qualify as a RIC, we will be
required to meet asset diversification tests and to meet an annual
qualifying income test. See "Certain U.S. Federal Income Tax
Considerations."
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Distributions
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We
intend to make monthly cash distributions of our investment company
taxable income to common stockholders. We expect to declare the initial
distribution approximately 45 to 60 days, and to pay such
distribution approximately 60 to 90 days, from the completion of this
offering, depending upon market conditions. In addition, on an
annual basis, we intend to distribute capital gains realized during the
fiscal year in the last fiscal quarter.
Various
factors will affect the level of our income, such as our asset
mix. We may not be able to make distributions in certain
circumstances. To
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permit
us to maintain a more stable distribution, our Board of Directors
may from time to time cause us to distribute less than the entire
amount of income earned in a particular period. The
undistributed income would be available to supplement future
distributions. As a result, the distributions paid by us for
any particular period may be more or less than the amount
of income
actually earned by us during that period. Undistributed income will add to
our net asset value, and, correspondingly, distributions from
undistributed income will deduct from our net asset
value. See "Distributions" and "Risks — Risks
Related to Our Operations — Performance
Risk."
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Dividend
Reinvestment
Plan
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We
intend to have a dividend reinvestment plan for our stockholders that will
be effective after completion of this offering. Our plan will
be an "opt out" dividend reinvestment plan. As a result, if we
declare a distribution after the plan is effective, a stockholder’s cash
distribution will be automatically reinvested in additional common shares,
unless the stockholder specifically "opts out" of the dividend
reinvestment plan so as to receive cash
distributions. Stockholders who receive distributions in the
form of common shares will generally be subject to the same federal, state
and local tax consequences as stockholders who elect to receive their
distributions in cash. See "Dividend Reinvestment Plan" and
"Certain U.S. Federal Income Tax Considerations."
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Risks
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Investing
in our common shares 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 our common
shares you should consider carefully the following risks. We
are designed primarily as a long-term investment vehicle, and our common
shares are not an appropriate investment for a short-term trading
strategy. An investment in our common shares 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
objectives.
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Risks
Related to Our Operations
No Operating
History. We are
a Maryland corporation registered as a non-diversified, closed-end management
investment company under the 1940 Act. We are subject to all of the business
risks and uncertainties associated with any new business, including the risk
that we will not achieve our investment objectives and that the value of an
investment in our common shares could decline substantially and cause you to
lose some or all of your investment.
General
Securities Risk. We expect to invest in securities that may be
subject to certain risks, including:
Issuer Risk. The value of the
securities may decline for a number of reasons that directly relate to the
issuer, such as management performance, financial leverage and reduced demand
for the issuer's products and services.
Credit Risk. Credit
risk is the risk that a security in our portfolio will decline in price or the
issuer will fail to make dividend, interest or principal payments when due
because the issuer of the security experiences a decline in its financial
status. We may invest up to 25% of our assets in fixed
income securities that are rated non-investment
grade. Securities rated non-investment grade are regarded as having
predominately speculative characteristics with respect to the issuer’s capacity
to pay interest and repay principal, and these bonds are commonly referred to as
"junk bonds." These securities are subject to a greater risk of
default.
Interest Rate Risk. Interest
rate risk is the risk that securities will decline in value because of changes
in market interest rates. When market interest rates rise, the market value of
certain income-generating securities generally will fall.
Reinvestment Risk. Reinvestment risk is the risk that income from our
portfolio will decline if we invest the proceeds from matured or traded
securities at market interest rates that are below our portfolio's current
earnings rate. A decline in income could affect the NAV of our common
shares or our overall return.
Call or Prepayment Risk.
During periods of declining interest rates, borrowers may exercise their option
to call or prepay principal earlier than scheduled, forcing us to reinvest in
lower yielding securities.
Valuation of Certain
Securities. Certain investments with limited secondary markets may be
difficult to value. Where market quotations are not readily available, valuation
may require more research than for more liquid investments. In addition,
elements of judgment may play a greater role in valuation in such cases than for
investments with a more active secondary market because there is less reliable
objective data available. Please see "–Valuation Risk."
Duration and Maturity
Risk. We have no set policy regarding the maturity or duration
of any or all of our securities. Holding long duration and long maturity
investments will magnify certain risks. These risks include interest rate risk,
credit risk and liquidity risks as discussed above.
Current Capital Markets Environment
Risk. Global financial markets and economic conditions have been, and
continue to be, volatile due to a variety of factors, including significant
write-offs in the financial services sector. The capital markets have
experienced periods of significant volatility since the latter half of 2007.
General market uncertainty has resulted in declines in valuation, greater
volatility and less liquidity for a variety of securities. During
times of increased market volatility, we may not be able to sell portfolio
securities readily at prices reflecting the values at which the securities are
carried on our books. Sales of large blocks of securities by market participants
that are seeking liquidity can further reduce prices in an illiquid
market.
These
market conditions have also resulted in widening credit spreads and a lack of
price transparency in a variety of credit instruments, including fixed income
securities. In such conditions, valuation of certain fixed income portfolio
securities may be uncertain and/or result in sudden and significant valuation
changes in our holdings. Illiquidity and volatility in the credit markets may
directly and adversely affect the setting of distribution rates on the common
shares.
The
cost of raising capital in the fixed income and equity capital markets has
increased substantially while the ability to raise capital from those markets
has diminished significantly. In particular, as a result of concerns about the
general stability of financial markets and specifically the solvency of lending
counterparties, the cost of raising capital from the credit markets generally
has increased as many lenders and institutional investors have increased
interest rates, enacted tighter lending standards, refused to refinance debt on
existing terms or at all and reduced, or in some cases ceased to provide,
funding to borrowers. In addition, lending counterparties under existing
revolving credit facilities and other fixed income instruments may be unwilling
or unable to meet their funding obligations. Due to these factors, companies may
be unable to obtain new fixed income or equity financing on acceptable terms. If
funding is not available when needed, or is available only on unfavorable terms,
companies may not be able to meet their obligations as they come due. Moreover,
without adequate funding, companies may be unable to execute their maintenance
and growth strategies, complete future acquisitions, take advantage of other
business opportunities or respond to competitive pressures, any of which could
have a material adverse effect on their revenues and results of
operations.
The
prolonged continuation or further deterioration of current market conditions
could adversely impact our portfolio.
Investment Grade
Fixed Income Securities Risk. We intend to invest a portion of
our assets in fixed income securities rated “investment grade” by nationally
recognized statistical rating organizations (“NRSROs”) or judged by our Advisor
to be of comparable credit quality. Although we do not intend to do
so, we may invest up to 100% in such securities. Investment grade
fixed income securities are rated Baa3 or higher by Moody’s Investors Service
(“Moody’s”), BBB- or higher by Standard & Poor’s Ratings Services
(“S&P”), or BBB- or higher by Fitch, Inc. (“Fitch”). Investment
grade fixed income securities generally pay yields above those of
otherwise-comparable U.S. government securities because they are subject to
greater risks than U.S. government securities, and yields that are below those
of non-investment grade fixed income securities, commonly referred to as “junk
bonds,” because they are considered to be subject to fewer risks than
non-investment grade fixed income securities. Despite being
considered to be subject to fewer risks than junk bonds, investment grade fixed
income securities are, in fact, subject to risks, including volatility, credit
risk and risk of default, sensitivity to general economic or industry
conditions, potential lack of resale opportunities (illiquidity), and additional
expenses to seek recovery from issuers who default. In addition,
ratings are relative and
subjective
and not absolute standards of quality, and ratings do not assess the risk of a
decline in market value. Securities ratings are based largely on an
issuer’s historical financial condition and the NRSRO’s analysis at the time of
rating. Consequently, the rating assigned to any particular fixed
income security or instrument is not necessarily a reflection of an issuer’s
current financial condition. In addition, NRSROs may make assumptions
when rating a fixed income security that turn out not to be correct, or may base
their ratings on information that is not correct, either of which can result in
a rating that is higher than would otherwise be the case. It is also
possible that NRSROs might not change their ratings of a particular fixed income
security to reflect subsequent events on a timely basis. Subsequent
to our purchase of a fixed income security that is rated investment grade, the
fixed income security may cease to be rated or its rating may be reduced,
resulting in investment grade fixed income securities becoming junk
bonds. None of these events will require our sale of such securities,
although our Advisor will consider these events in determining whether we should
continue to hold the securities.
MLP
Risks. An
investment in MLP securities involves some risks that differ from the risks
involved in an investment in the common stock of a corporation. Holders of MLP
units have limited control and voting rights on matters affecting the
partnership. Holders of units issued by an MLP are exposed to a remote
possibility of liability for all of the obligations of that MLP in the event
that a court determines that the rights of the holders of MLP units to vote to
remove or replace the general partner of that MLP, to approve amendments to that
MLP’s partnership agreement, or to take other action under the partnership
agreement of that MLP would constitute "control" of the business of that
MLP, or a court or governmental agency determines that the MLP is
conducting business in a state without complying with the partnership statute of
that state.
Holders
of MLP units are also exposed to the risk that they will be required to repay
amounts to the MLP that are wrongfully distributed to them. In addition, the
value of our investment in an MLP will depend largely on the MLP’s treatment as
a partnership for U.S. federal income tax purposes. If an MLP does not meet
current legal requirements to maintain partnership status, or if it is unable to
do so because of tax law changes, it would be treated as a corporation for U.S.
federal income tax purposes. In that case, the MLP would be obligated to pay
income tax at the entity level and distributions received by us generally would
be taxed as dividend income. As a result, there could be a material reduction in
our cash flow and there could be a material decrease in the value of our common
shares.
Restricted
Securities Risk. We will not invest more than 15% of our total assets in
restricted securities that are ineligible for resale under Rule 144A, all of
which may be illiquid securities. Restricted securities (including
restricted securities that are eligible for resale under Rule 144A) are less
liquid than freely tradable securities because of statutory and contractual
restrictions on resale. Such securities are, therefore, unlike freely tradable
securities, which can be expected to be sold immediately if the market is
adequate. The illiquidity of these investments may make it difficult for us to
sell such investments at advantageous times and prices or in a timely manner. In
addition, if for any reason we are required to liquidate all or a portion of our
portfolio quickly, we may realize significantly less than the fair value at
which we previously have recorded our investments. To enable us to sell our
holdings of a restricted security not registered under the 1933 Act, in limited
circumstances we may have the right to cause some of those securities to be
registered. If we have the right to cause such registration, the expenses of
registering restricted securities may not be determined at the time we buy the
securities. When we must arrange registration because we wish to sell the
security, a considerable period may elapse between the time the decision is made
to sell a 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.
Rule 144A
Securities Risk.
The Fund may purchase Rule 144A securities. Rule 144A provides an
exemption from the registration requirements of the 1933 Act for the resale of
certain restricted securities to qualified institutional buyers, such as the
Fund. Securities saleable among qualified institutional buyers pursuant to Rule
144A will not be counted towards the 15% limitation on restricted
securities.
An
insufficient number of qualified institutional buyers interested in purchasing
Rule 144A-eligible securities held by us, however, could affect adversely the
marketability of certain Rule 144A securities, and we might be unable to dispose
of such securities promptly or at reasonable prices. To the extent
that liquid Rule 144A securities that the Fund holds become illiquid, due
to the lack of sufficient qualified institutional buyers or market or other
conditions, the percentage of the Fund’s assets invested in illiquid assets
would increase and the fair value of such investments may become not readily
determinable. In addition, if for any reason we are required to liquidate all or
a portion of our portfolio quickly, we may realize significantly less than the
fair value at which we previously recorded these investments.
Tax
Risk. We intend to elect to be treated, and to qualify each
year, as a "regulated investment company" ("RIC") under the
Code. To maintain our qualification for federal income tax purposes
as a regulated investment company under the Code, we
must
meet
certain source-of-income, asset diversification and annual distribution
requirements, as discussed in detail below under "Certain U.S. Federal
Income Tax Considerations." If for any taxable year we fail to
qualify for the special federal income tax treatment afforded to regulated
investment companies, all of our taxable income will be subject to federal
income tax at regular corporate rates (without any deduction for distributions
to our stockholders) and our income available for distribution will be
reduced. For additional information on the requirements imposed on
regulated investment companies and the consequences of a failure to qualify, see
"Certain U.S. Federal Income Tax Considerations" below.
Equity Securities
Risk. Equity securities of
entities that operate in the power and energy infrastructure sectors can be
affected by macroeconomic and other factors affecting the stock market in
general, expectations about changes in interest rates, investor sentiment
towards such entities, changes in a particular issuer’s financial condition, or
unfavorable or unanticipated poor performance of a particular issuer (in the
case of MLPs, generally measured in terms of distributions). Prices of equity
securities of individual entities also can be affected by fundamentals unique to
the company or partnership, including earnings power and coverage
ratios.
Power and
energy infrastructure company equity prices are primarily influenced by
distribution growth rates and prospects for distribution growth. Any of the
foregoing risks could substantially impact the ability of such an entity to grow
its distributions.
Non-investment
Grade Fixed Income Securities Risk. We will not invest more than 25% of
our total assets in fixed income securities rated non-investment grade by NRSROs
or unrated securities of comparable quality. Non-investment grade
securities are rated Ba1 or lower by Moody’s, BB+ or lower by S&P or BB or
lower by Fitch or, if unrated are determined by our Advisor to be of comparable
credit quality. Non-investment grade securities, also sometimes
referred to as “junk bonds,” generally pay a premium above the yields of U.S.
government securities or fixed income securities of investment grade issuers
because they are subject to greater risks than these
securities. These risks, which reflect their speculative character,
include the following: greater volatility; greater credit risk and risk of
default; potentially greater sensitivity to general economic or industry
conditions; potential lack of attractive resale opportunities (illiquidity); and
additional expenses to seek recovery from issuers who default.
In
addition, the prices of these non-investment grade fixed income securities are
more sensitive to negative developments, such as a decline in the issuer’s
revenues or a general economic downturn, than are the prices of higher grade
securities. Non-investment grade securities tend to be less liquid
than investment grade securities. The market value of non-investment
grade securities may be more volatile than the market value of investment grade
securities and generally tends to reflect the market’s perception of the
creditworthiness of the issuer and short-term market developments to a greater
extent than investment grade securities, which primarily reflect fluctuations in
general levels of interest rates.
Securities
ratings are based largely on an issuer’s historical financial condition and the
NRSRO’s analysis at the time of rating. Consequently, the rating
assigned to any particular fixed income security or instrument is not
necessarily a reflection of an issuer’s current financial
condition. In addition, NRSROs may make assumptions when rating a
fixed income security that turn out not to be correct, or may base their ratings
on information that is not correct, either of which can result in a rating that
is higher than would otherwise be the case. It is also possible that
NRSROs might not change their ratings of a particular fixed income security to
reflect subsequent events on a timely basis. Subsequent to our
purchase of a fixed income security that is rated investment grade, the fixed
income security may cease to be rated or its rating may be reduced, resulting in
investment grade fixed income securities becoming junk bonds. None of
these events will require our sale of such securities, although our Advisor will
consider these events in determining whether we should continue to hold the
securities.
The
market for non-investment grade and comparable unrated securities has
experienced periods of significantly adverse prices and liquidity several times,
particularly at or around times of economic recession. Past market
recessions have adversely affected the value of such securities as well as the
ability of certain issuers of such securities to repay principal and to pay
interest thereon or to refinance such securities. The market for
these securities may react in a similar fashion in the future.
Non-U.S.
Securities Risk. We may invest up to 10% of our total assets
in securities issued by non-U.S. issuers (including Canadian issuers)
and that otherwise meet our investment objectives. This may
include investments in the securities of non-U.S. issuers that involve risks not
ordinarily associated with investments in securities and instruments of U.S.
issuers. For example, non-U.S. companies are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and companies may be subject to less government supervision and
regulation than exists in the U.S. Dividend and interest income may
be subject to withholding and other non-U.S. taxes, which may adversely affect
the net return on such investments. Because we do not intend to
invest more than 10% of our total assets in securities issued by
non-U.S. issuers (including Canadian issuers), we will not be able to pass
through to our
stockholders
any foreign income tax credits as a result of any foreign income taxes we pay.
There may be difficulty in obtaining or enforcing
a court judgment abroad. In addition, it may be difficult to effect
repatriation of capital invested in certain countries. In addition,
with respect to certain countries, there are risks of expropriation,
confiscatory taxation, political or social instability or diplomatic
developments that could affect our assets held in non-U.S.
countries. There may be less publicly available information about a
non-U.S. company than there is regarding a U.S. company. Non-U.S.
securities markets may have substantially less volume than U.S.
securities markets and some non-U.S. company securities are less liquid than
securities of otherwise comparable U.S. companies. Non-U.S. markets
also have different clearance and settlement procedures that could cause us
to encounter difficulties in purchasing and selling securities on such markets
and may result in our missing attractive investment opportunities or
experiencing a loss. In addition, a portfolio that includes non-U.S.
securities issued by non-U.S. issuers (including Canadian issuers) can
expect to have a higher expense ratio because of the increased transaction costs
in non-U.S. markets and the increased costs of maintaining the custody of such
non-U.S. securities.
When
investing in securities issued outside of the U.S. by non-U.S. issuers
(including Canadian issuers), there is also the risk that the value of such an
investment, measured in U.S. dollars, will decrease because of unfavorable
changes in currency exchange rates. We do not currently intend to
reduce or hedge our exposure to non-U.S. currencies. Such a decrease
in the value of our investments when leverage is outstanding may result in our
having to reduce the amount of leverage if our statutory or other asset coverage
ratios fall below required amounts. Such reduction of leverage may
cause us to recognize a loss on transactions undertaken to reduce our leverage,
resulting in a further decrease in our value.
Valuation
Risk. The fair value of certain of our investments may not be
readily determinable. The fair value of these securities will be
determined pursuant to methodologies established by our Board of
Directors. While the fair value of securities we acquire through
direct placements generally will be based on a discount from quoted market
prices, other factors may adversely affect our ability to determine the fair
value of such a security. Fair value pricing involves judgments that
are inherently subjective and inexact. Our determination of fair
value may differ materially from the values that would have been used if a ready
market for these securities had existed. As a result, we may not be
able to dispose of our holdings at a price equal to or greater than the fair
value, which could have a negative impact on our NAV.
Fair
value pricing involves judgments that are inherently subjective and
inexact. Our Advisor is subject to a conflict of interest in determining
the fair value of securities in our portfolio, as the management fees we pay our
Advisor are based on the value of our average monthly Managed
Assets. See "Management of the Fund – Conflicts of
Interest."
Quarterly Results
Risk. We could experience fluctuations in our operating results due to a
number of factors, including the return on our investments, the level of our
expenses, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in our
markets and general economic conditions. As a result of these factors, results
for any period should not be relied upon as being indicative of performance in
future periods.
Leverage
Risk. Our use of
leverage through borrowings or the issuance of preferred stock or fixed income
securities, and any other transactions involving indebtedness (other than for
temporary or emergency purposes) would be considered “senior securities” for
purposes of the 1940 Act. Under normal market conditions, we will not employ
leverage above 20% of our total assets at time of
incurrence.
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. Because our Advisor’s fee is based upon a percentage of our Managed
Assets, our Advisor’s fee is higher when we are leveraged. Therefore,
our Advisor has a financial incentive to use leverage, which will create a
conflict of interest between our Advisor and our common stockholders, who will
bear the costs of our leverage. Successful use of leverage depends on
our Advisor’s ability to predict or to 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.
We will
pay (and the holders of our common shares will bear) all costs and expenses
relating to the issuance and ongoing maintenance of the senior securities,
including higher advisory fees. Accordingly, we cannot assure you
that the issuance of senior securities will result in a higher yield or return
to the holders of our common shares. Costs of the offering of senior securities
will be borne immediately by our common stockholders and result in a reduction
of net asset value of our common shares. See "Leverage."
Hedging Strategy
Risk. We may in
the future use interest rate swap transactions, for hedging purposes only, in an
attempt to reduce the interest rate risk arising from our leveraged capital
structure. Interest rate swap transactions that we may use for hedging
purposes
will expose us to certain risks that differ from the risks associated with our
portfolio holdings. Economic costs of hedging are 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 interest rates. In addition, our success in using hedging
instruments is subject to our Advisor’s ability correctly to predict changes in
the relationships of such hedging instruments to our leverage risk, and there
can be no assurance that our Advisor’s judgment in this respect will be
accurate. Consequently, the use of hedging transactions
might result in reduced 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 swap
transactions could increase or decrease the cash available to us for payment of
dividends or interest, as the case may be. We will, however, accrue
the amount of our obligations under any interest rate transactions and designate
on our books and records with our custodian, an amount of cash or liquid high
grade securities having an aggregate net asset value at all times at least equal
to that amount. To the extent there is a decline in interest rates,
the value of interest rate swaps or caps could decline and result in a decline
in the NAV of our common shares. In addition, if the counterparty to an interest
rate swap 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.
Liquidity
Risk. Although some of the securities in which we invest may trade on the
New York Stock Exchange ("NYSE"), NYSE Alternext US and the NASDAQ Market,
certain of those securities may trade less frequently than those of larger
companies that have larger market capitalizations. Additionally, certain
securities may not trade on such exchanges (e.g., Rule 144A securities for
which there generally is a secondary market of qualified institutional buyers)
or may be unregistered and/or subject to lock-up periods (e.g., securities
purchased in direct placements). The potential illiquidity of these investments
may make it difficult for us to sell such investments at advantageous times and
prices or in a timely manner. In the event certain securities
experience limited trading volumes, the prices of such securities may display
abrupt or erratic movements at times. In addition, 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 sell at a favorable 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 sell those
securities. This also may affect adversely our ability to make required interest
payments on our fixed income securities and distributions on any of
our preferred stock, to redeem such securities, or to meet asset coverage
requirements.
Non-Diversification
Risk. We are registered as a non-diversified, closed-end management
investment company under the 1940 Act. Accordingly, there are no regulatory
limits under the 1940 Act on the number or size of securities that we hold, and
we may invest more assets in fewer issuers compared to a diversified fund.
However, in order to qualify as a RIC for federal income tax purposes, we must
diversify our holdings so that, at the end of each quarter (i) at least 50% of
the value of our total assets is represented by cash and cash items, U.S.
Government securities, the securities of other RICs and other securities, with
such other securities limited for purposes of such calculation, in respect of
any one issuer, to an amount not greater than 5% of the value of our total
assets and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of our total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other RICs), the securities (other than the securities of
other RICs) of any two or more issuers that we control and that are engaged in
the same trade or business or similar or related trades or businesses, or the
securities of one or more qualified publicly traded partnerships (which includes
MLPs). An inherent risk associated with any investment concentration
is that we may be adversely affected if one or two of our investments perform
poorly. Financial difficulty on the part of any single portfolio company would
then expose us to a greater risk of loss than would be the case if we were a
"diversified" company holding numerous investments.
Given
our contemplated investments in MLPs and other entities that are treated as
partnerships for U.S. federal income tax purposes, compliance with the
qualifying income and asset diversification tests applicable to RICs presents
unusual challenges and will require careful, ongoing monitoring. The
Advisor has experience monitoring such investments and will apply that
experience to our investment portfolio. There can be no assurance,
however, that the Advisor will succeed under all circumstances in ensuring that
we meet the requirements for RIC status, particularly given that certain
determinations, such as whether a security in which we invest
constitutes fixed income or equity for tax purposes, may not be free
from doubt.
Unidentified
Investments Risk. We have not entered into definitive agreements for any
specific investments in which we will invest the net proceeds of this offering.
As a result, you will not be able to evaluate the economic merits of investments
we make with the net proceeds of this offering prior to your purchase of common
shares in this offering. We will have significant flexibility in investing the
net proceeds of this offering and may make investments with which you do not
agree or do not believe are
consistent with
our targeted investment characteristics.
Competition Risk.
There are a number of alternatives to us as vehicles for investment in a
portfolio of companies operating primarily in the power and energy
infrastructure sectors, including publicly traded investment companies and
private equity funds. In addition, recent tax law changes have increased the
ability of RICs or other institutions to invest in MLPs. These competitive
conditions may adversely impact our ability to meet our investment objectives,
which in turn could adversely impact our ability to make
interest or distribution payments on any securities we may issue. Some of our
competitors may have a lower cost of borrowing funds than we have, greater
access to funding sources not available to us, or a less stringent set of
regulatory constraints than those applicable to us.
Performance Risk.
We intend to make regular cash distributions, no less than monthly, of
all or substantially all of our investment income (other than long-term capital
gains) to common stockholders. We intend to pay common stockholders,
at least annually, all or substantially all of our long-term capital gains. We
may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, the 1940 Act may limit our ability
to make distributions in certain circumstances. See "Distributions."
Restrictions and provisions in any future credit facilities and fixed income
securities may also limit our ability to make distributions. For federal income
tax purposes, we are required to distribute substantially all of our net
investment income each year both to reduce our federal income tax liability and
to avoid a potential excise tax. If our ability to make distributions
on our common shares is limited, such limitations could, under certain
circumstances, impair our ability to maintain our qualification for taxation as
a RIC, which would have adverse consequences for our
stockholders. See "Certain U.S. Federal Income Tax Considerations."
We cannot assure you that you will receive distributions at a particular level
or at all. The equity securities in which we invest may not appreciate or may
decline in value. The fixed income or preferred equity securities in which
we invest may not make all required payments. Any gains that we do
realize on the disposition of any securities may not be sufficient to offset
losses on other securities. A significant decline in the value of the securities
in which we invest may negatively impact our ability to pay distributions or
cause you to lose all or a part of your investment.
Legal and
Regulatory Change Risks. The regulatory environment for closed-end
companies is evolving, and changes in the regulation of closed-end companies may
adversely affect the value of our investments, our ability to obtain the
leverage that we might otherwise obtain, or to pursue our trading strategy. In
addition, the securities markets are subject to comprehensive statutes and
regulations. The Securities and Exchange Commission ("SEC"), other regulators
and self-regulatory organizations and exchanges are authorized to take
extraordinary actions in the event of market emergencies. The effect
of any future regulatory change on us could be substantial and
adverse.
Management
Risk. Our Advisor was formed in October 2002 to provide portfolio
management services to institutional and high-net worth investors seeking
professional management of their MLP investments. Our Advisor has been managing
investments in portfolios of MLPs and other energy infrastructure companies
since that time, including management of the investments of four publicly traded
closed-end management investment companies, one of which has elected to be
regulated as a BDC under the 1940 Act, and the management of the investments of
two privately-held funds. Our investments and those of the other
funds managed by our Advisor are managed by our Advisor’s investment committee
and we share many of the same officers as those funds.
Concentration
Risk. The Fund’s strategy of concentrating in power and energy
infrastructure investments means that the performance of the Fund will be
closely tied to the performance of these particular market
sectors. The Fund’s concentrations in these investments may present
more risk than if it were broadly diversified over numerous industries and
sectors of the economy. A downturn in these investments would have a
greater impact on the Fund than on a fund that does not concentrate in such
investments. At times, the performance of these investments may lag
the performance of other industries or the market as a whole.
Conflicts
Risk. Conflicts of interest
may arise because our Advisor and its affiliates generally will be carrying on
substantial investment activities for other clients in which we will have no
interest. Our Advisor may have financial incentives to favor certain of such
accounts over us. Any of its proprietary accounts and other customer accounts
may compete with us for specific trades. Our Advisor may buy or sell securities
for us that differ from securities bought or sold for other accounts and
customers, although their investment objectives and policies may be similar to
ours. Situations may occur in which we could be disadvantaged because of the
investment activities conducted by our Advisor for its other accounts. Such
situations may be based on, among other things, legal or internal restrictions
on the combined size of positions that may be taken for us and the other
accounts, thereby limiting the size of our position, or the difficulty of
liquidating an investment for us and the other accounts where the market cannot
absorb the sale of the combined position. Our Advisor may also have
an incentive to make investments in one fund, having the effect of increasing
the value of a security in the same issuer held by another fund, which in turn
may result in an incentive fee being paid to our
Advisor
by that other fund.
Our
investment opportunities may be limited by affiliations of our Advisor or its
affiliates with power or energy infrastructure companies. In addition, to the
extent our Advisor sources, contemplates, structures, or makes private
investments in power or energy infrastructure companies, certain employees of
our Advisor may become aware of actions planned by such companies, such as
acquisitions, that may not be announced to the public. It is possible that we
could be precluded from investing in a power or energy infrastructure
company about which our Advisor has material nonpublic
information.
Our
investment opportunities may be limited by investment opportunities in companies
that our Advisor is evaluating for other clients. To the extent a potential
investment is appropriate for us and one or more other clients, our Advisor will
need to fairly allocate that investment to us or the other client, or both,
depending on its allocation procedures and applicable law related to combined or
joint transactions. There may arise an attractive limited investment opportunity
suitable for us in which we cannot invest under the particular allocation method
being used for that investment.
Under the
1940 Act, we and our affiliated companies are generally precluded from
co-investing in negotiated private placements of securities. Except as permitted
by law, our Advisor will not co-invest its other clients’ assets in negotiated
private transactions in which we invest. To the extent we are precluded from
co-investing, our Advisor will allocate private investment opportunities among
its clients, including but not limited to us and our affiliated companies, based
on allocation policies that take into account several suitability factors,
including the size of the investment opportunity, the amount each client has
available for investment and the client’s investment objectives. These
allocation policies may result in the allocation of investment opportunities to
an affiliated company rather than to us.
The
Advisor 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 Advisor that are the same as, different from, or made at a
different time than positions taken for us. Further, the Advisor may
at some time in the future, manage other investment funds with the same
investment objective as ours.
Risks
Related to Investing in the Power and Energy Infrastructure Sectors
Under
normal circumstances we plan to invest at least 80% of our total assets
(including assets we obtain through leverage) in the securities of companies
that derive more than 50% of their revenue from power or energy infrastructure
operations. Our focus on the power and energy infrastructure sectors
may present more risks than if it were broadly diversified over numerous sectors
of the economy. Therefore, a downturn in the power and energy
infrastructure sectors would have a larger impact on us than on an investment
company that does not concentrate in these sectors. Specific risks of
investing in the power and energy infrastructure sectors include the
following:
Interest Rate
Risk. A rising interest rate environment could adversely impact the
performance of companies in the power and energy infrastructure sectors. Rising
interest rates may increase the cost of capital for companies operating in these
sectors. A higher cost of capital could limit growth from acquisition
or expansion projects, limit the ability of such entities to make or grow
distributions or meet debt obligations, and adversely affect the prices of their
securities.
Credit Rating
Downgrade Risk. Power and energy
infrastructure companies rely on access to capital markets as a source of
liquidity for capital requirements not satisfied by operating cash
flows. Credit downgrades in the companies in which we invest may
impact their ability to raise capital on favorable terms and increase their
borrowing costs.
Terrorism and
Natural Disasters Risk. Power and energy
infrastructure companies, and the market for their securities, are subject to
disruption as a result of terrorist activities, such as the terrorist attacks on
the World Trade Center on September 11, 2001; war, such as the war in Iraq
and its aftermath; and other geopolitical events, including upheaval in the
Middle East or other energy producing regions. The U.S. government has
issued warnings that energy assets, specifically those related to pipeline
infrastructure, production facilities, and transmission and distribution
facilities, might be specific targets of terrorist activity. Such events have
led, and in the future may lead, to short-term market volatility and may have
long-term effects on the power and energy infrastructure sectors and markets.
Such events may also adversely affect our business and financial
condition.
Natural
risks, such as earthquakes, flood, lighting, hurricane and wind, are inherent
risks in power and energy infrastructure
company
operations. For example, extreme weather patterns, such as Hurricane Ivan in
2004 and Hurricanes Katrina and Rita in 2005, or the threat thereof, could
result in substantial damage to the facilities of certain companies located in
the affected areas and significant volatility in the supply of power and energy
and could adversely impact the prices of the securities in which we invest. This
volatility may create fluctuations in commodity prices and earnings of companies
in the power and energy infrastructure sectors.
Power
Infrastructure Company Risk. Companies operating in the power
infrastructure sector also are subject to additional risks, including those
discussed below. To the extent that any of these risks materialize
for a company whose securities are in our portfolio, the value of these
securities could decline and our net asset value and share price could be
adversely affected.
Operating Risk. The operation
of asset systems that provide electric power generation (including renewable
energy), transmission and distribution involves many risks,
including:
· |
Equipment
failure causing outages;
|
· |
Transmission
or transportation constraints, inoperability or
inefficiencies;
|
· |
Dependence on
a specified fuel source, including the transportation of
fuel;
|
· |
Changes in
electricity and fuel usage;
|
· |
Availability
of competitively priced alternative energy sources;
|
· |
Changes in
generation efficiency and market heat rates;
|
· |
Lack of
sufficient capital to maintain facilities;
|
· |
Seasonality;
|
· |
Changes in
supply and demand for energy commodities;
|
· |
Catastrophic
events such as fires, explosions, floods, earthquakes, hurricanes and
similar occurrences;
|
· |
Structural,
maintenance, impairment and safety problems and storage, handling,
disposal and decommissioning costs associated with operating nuclear
generating facilities; and
|
· |
Environmental
compliance. |
Any of
these risks could have an adverse effect on a company with power infrastructure
operations and its securities. Additionally, older generating
equipment may require significant capital expenditures to keep them operating at
peak efficiency. This equipment is more likely to require periodic
upgrading and improvement. Breakdown or failure of an operating
facility may prevent the facility from performing under applicable power sales
agreements, which in certain situations, could result in termination of the
agreement or incurring a liability for liquidated damages. A
company’s ability to successfully and timely complete capital improvements to
existing facilities or other capital projects is contingent upon many variables.
Should any such efforts be unsuccessful, a power infrastructure company could be
subject to additional costs and / or the write-off of its investment in the
project or improvement. Any of these costs could adversely affect the
value of securities in our portfolio.
As a
result of the above risks and other potential hazards associated with the power
infrastructure sector, certain companies may become exposed to significant
liabilities for which they may not have adequate insurance
coverage.
Regulatory Risk. Issuers in
the power infrastructure sector may be subject to regulation by various
governmental authorities in various jurisdictions and may be affected by the
imposition of special tariffs and changes in tax laws, regulatory policies and
accounting standards. Power infrastructure companies’ inability to predict,
influence or respond appropriately to changes in law or regulatory schemes,
including any inability to obtain expected or contracted increases in
electricity tariff rates or tariff adjustments for increased expenses, could
adversely impact their results of operations. Furthermore, changes in laws or
regulations or changes in the application or interpretation of regulatory
provisions in jurisdictions where power infrastructure
company
operations. For example, extreme weather patterns, such as Hurricane Ivan
in 2004 and Hurricanes Katrina and Rita in 2005, or the threat thereof, could
result in substantial damage to the facilities of certain companies located in
the affected areas and significant volatility in the supply of power and energy
and could adversely impact the prices of the securities in which we invest. This
volatility may create fluctuations in commodity prices and earnings of companies
in the power and energy infrastructure sectors.
· changes in the
determination, definition or classification of costs to be included as
reimbursable or pass-through costs;
· changes in the
definition or determination of controllable or non-controllable
costs;
· changes in the
definition of events which may or may not qualify as changes in economic
equilibrium;
· changes in the
timing of tariff increases; or
· other changes
in the regulatory determinations under the relevant concessions.
Any of
the above events may result in lower margins for the affected businesses, which
can adversely affect the operations of a power infrastructure company and hence
the value of securities in our portfolio.
Prices
for certain power infrastructure companies are regulated in the U.S. with the
intention of protecting the public while ensuring that the rate of return earned
by such companies is sufficient to allow them to attract capital in order to
grow and continue to provide appropriate services. The rates assessed for these
rate-regulated power infrastructure companies by state and certain city
regulators are generally subject to cost-of-service regulation and annual
earnings oversight. This regulatory treatment does not provide any assurance as
to achievement of earnings levels. Such rates are generally regulated based on
an analysis of a company’s costs and capital structure, as reviewed and approved
in a regulatory proceeding. While rate regulation is premised on the full
recovery of prudently incurred costs and a reasonable rate of return on invested
capital, there can be no assurance that the regulators will judge all of a power
infrastructure company’s costs to have been prudently incurred, that the
regulators will not reduce the amount of invested capital included in
the capital structure that the power infrastructure company’s rates are based
upon or that the regulatory process in which rates are determined will always
result in rates that will produce full recovery of a power infrastructure
company’s costs, including regulatory assets reported in the balance sheet, and
the return on invested capital allowed by the regulators.
Federal Energy Regulatory Commission
Risk. FERC ruled in 2008 that it has
jurisdiction under the Federal Power Act ("FPA") over the acquisition of certain
power infrastructure company securities by investment advisers that are
themselves public utility holding companies as defined under the Public Utility
Holding Company Act of 2005 ("PUHCA 2005"). The Fund could become
subject to FERC’s jurisdiction if it is deemed to be a holding company of a
public utility company or of a holding company of a public utility company, and
the Fund may be required to aggregate securities held by the Fund or other funds
and accounts managed by our Advisor and its affiliates. A company is a holding
company within the meaning of PUHCA 2005 and the FPA if it directly or
indirectly owns, controls, or holds, with power to vote, 10 percent or more of
the outstanding voting securities of a public utility company or of a holding
company of any public utility company. In general, a holding company
under the FPA may not purchase, acquire or take a security or securities valued
in excess of $10 million of any other public utility company or of a public
utility holding company unless FERC has approved the transaction or an exemption
or waiver is available. Accordingly, the Fund may be prohibited from
buying securities of a public utility company or of a holding company of any
public utility company or may be forced to divest itself of such securities
because of other holdings by the Fund or other funds or accounts managed by our
Advisor and its affiliates.
Environmental Risk. Power
infrastructure company activities are subject to stringent environmental laws
and regulation by many federal, state, local authorities, international treaties
and foreign governmental authorities. These regulations generally involve
emissions into the air, effluents into the water, use of water, wetlands
preservation, waste disposal, endangered species and noise regulation, among
others. Failure to comply with such laws and regulations or to obtain any
necessary environmental permits pursuant to such laws and regulations could
result in fines or other sanctions. Environmental laws and regulations affecting
power generation and distribution are complex and have tended to become more
stringent over time. Congress and other domestic and foreign governmental
authorities have either considered or implemented various laws and regulations
to restrict or tax certain emissions, particularly those involving air and water
emissions. Existing environmental regulations could be revised or
reinterpreted, new laws and regulations could be adopted or become applicable,
and future changes in environmental laws and regulations could occur, including
potential regulatory and enforcement developments related to air
emissions.
These
laws and regulations have imposed, and proposed laws and regulations could
impose in the future, additional costs on the operation of power plants. Power
infrastructure companies have made and will likely continue to make significant
capital and other expenditures to comply with these and other environmental laws
and regulations. Changes in, or new, environmental restrictions may force power
infrastructure companies to incur significant expenses or expenses that may
exceed their estimates. There can be no assurance that such companies would be
able to recover all or any increased environmental costs from their customers
or that their business, financial condition or results of operations would not
be materially and adversely affected by such expenditures or any changes in
domestic or foreign environmental laws and regulations, in which case the value
of these companies’ securities in our portfolio could be adversely
affected.
Power
infrastructure companies may not be able to obtain or maintain all required
environmental regulatory approvals. If there is a delay in obtaining any
required environmental regulatory approvals or if a power infrastructure company
fails to obtain, maintain or comply with any such approval, the operation of its
facilities could be stopped or become subject to additional costs. In addition,
a power infrastructure company may be responsible for any on-site liabilities
associated with the environmental condition of facilities that it has acquired,
leased or developed, regardless of when the liabilities arose and whether they
are known or unknown.
Competition Risk. The power
infrastructure sector is characterized by numerous strong and capable
competitors, many of which may have extensive and diversified developmental or
operating experience (including both domestic and international experience) and
financial resources. Further, in recent years, the power infrastructure sector
has been characterized by strong and increasing competition with respect to both
obtaining power sales agreements and acquiring existing power generation assets.
In certain markets these factors have caused reductions in prices contained in
new power sales agreements and, in many cases, have caused higher acquisition
prices for existing assets through competitive bidding practices. The evolution
of competitive electricity markets and the development of highly efficient
gas-fired power plants have also caused, or are anticipated to cause, price
pressure in certain power markets.
Energy
Infrastructure Company Risk. Companies operating in the energy
infrastructure sector also are subject to additional risks, including those
described below. To the extent that any of these risks materialize
for a company whose securities are in our portfolio, the value of these
securities could decline and our net asset value and share price would be
adversely affected.
Pipeline Company
Risk. Pipeline companies are subject to many risks, including
varying demand for crude oil, natural gas, natural gas liquids or refined
products in the markets served by the pipeline; changes in the availability of
products for gathering, transportation, processing or sale due to natural
declines in reserves and production in the supply areas serviced by the
companies’ facilities; 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.
Gathering and Processing Company
Risk. Gathering and processing companies are subject to many
risks, including declines in production of crude oil and natural gas fields,
which utilize their gathering and 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 and refined petroleum products, resulting in lower
processing margins.
Propane Company
Risk. Propane companies are subject to many risks, including
earnings variability based upon weather patterns in the locations where the
company operates and the wholesale cost of propane sold to end customers.
Midstream propane companies’ unit prices are largely based on safety in
distribution coverage ratios, the interest rate environment and, to a lesser
extent, distribution growth. In addition, propane companies are facing increased
competition due to the growing availability of natural gas, fuel oil and
alternative energy sources for residential heating.
Supply & Demand Risk. A
decrease in the production of natural gas, natural gas liquids, crude oil, coal,
refined petroleum products or other energy commodities, or a decrease in the
volume of such commodities available for transportation, processing, storage or
distribution, may adversely impact the financial performance of companies in the
energy infrastructure sector. Production declines and volume decreases could be
caused by various factors, including
catastrophic
events affecting production, depletion of resources, labor difficulties,
political events, OPEC actions, environmental proceedings, increased
regulations, equipment failures and unexpected maintenance problems, failure to
obtain
necessary permits, unscheduled outages, unanticipated expenses, inability to
successfully carry out new construction or acquisitions, import supply
disruption, increased competition from alternative energy sources or related
commodity prices. Alternatively, a sustained decline in demand for such
commodities could also adversely affect the financial performance of companies
in the energy infrastructure sector. Factors that could lead to a decline in
demand include economic recession or other adverse economic conditions, higher
fuel taxes or governmental regulations, increases in fuel economy,
consumer shifts to the use of alternative fuel sources, changes in commodity
prices or weather. The length and severity of the current
recession and its impact on companies in the energy infrastructure sector,
cannot be determined.
The
profitability of companies engaged in processing and pipeline activities 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 such entities.
Price Volatility
Risk. The volatility of energy commodity prices can indirectly
affect certain entities that operate in the midstream segment of the energy
infrastructure sector due to the impact of prices on the volume of commodities
transported, processed, stored or distributed. Most energy infrastructure
entities are not subject to direct commodity price exposure because they do not
own the underlying energy commodity. Nonetheless, the price of an energy
infrastructure security can be adversely affected by the perception that the
performance of all such entities is directly tied to commodity
prices.
Competition Risk. Even if
reserves exist in areas accessed by the facilities of transporting and
processing energy infrastructure companies, they may not be chosen by producers
to gather, transport, process, fractionate, store or otherwise handle the
natural gas, natural gas liquids, crude oil, refined petroleum products or coal
that are produced. They compete with others on the basis of many
factors, including but not limited to geographic proximity to the production,
costs of connection, available capacity, rates and access to
markets.
Regulatory Risk.
Energy infrastructure companies are subject to significant federal, state and
local government regulation in virtually every aspect of their operations,
including how facilities are constructed, maintained and operated, environmental
and safety controls, and the prices they may charge for the products and
services they provide. Various governmental authorities have the power to
enforce compliance with these regulations and the permits issued under them, and
violators are subject to administrative, civil and criminal penalties, including
fines, injunctions or both. Stricter laws, regulations or enforcement policies
could be enacted in the future which would likely increase compliance costs and
may adversely affect the financial performance of energy infrastructure
companies.
Energy
infrastructure companies engaged in interstate pipeline transportation of
natural gas, refined petroleum products and other products are subject to
regulation by the FERC with respect to tariff rates these companies may charge
for pipeline transportation services. An adverse determination by the FERC with
respect to the tariff rates of an energy infrastructure company could have a
material adverse effect on its business, financial condition, results of
operations and cash flows and its ability to make cash distributions to its
equity owners. In May 2005, FERC issued a policy statement that pipelines,
including those organized as partnerships, can include in computing their cost
of service a tax allowance to reflect actual or potential tax liability on their
public utility income attributable to all entities or individuals owning public
utility assets, if the pipeline establishes that the entities or individuals
have an actual or potential income tax liability on such income. Whether a
pipeline’s owners have such actual or potential income tax liability will be
reviewed by FERC on a case-by-case basis. If an MLP is unable to establish that
its unitholders are subject to U.S. federal income taxation on the income
generated by the MLP, FERC could disallow a substantial portion of the MLP’s
income tax allowance. If FERC were to disallow a substantial portion of the
MLP’s income tax allowance, the level of maximum tariff rates the MLP could
lawfully charge could be lower than the MLP had been charging prior to such
ruling or could be lower than the MLP’s actual costs to operate the pipeline. In
either case, the MLP would be adversely affected.
Risks
Related to this Offering
Share Price
Volatility Risk. The trading price of our common shares following this
offering may fluctuate substantially. The
price of
the common shares that will prevail in the market after this offering may be
higher or lower than the price you pay and the liquidity of our common shares
may be limited, in each case depending on many factors, some of which are beyond
our control and may not
be directly related to our operating performance. These factors
include the following:
• changes in
the value of our portfolio of investments;
• price and
volume fluctuations in the overall stock market from time to time;
• significant
volatility in the market price and trading volume of securities of similar
investment companies;
• our
dependence on the power and energy infrastructure sectors;
• our inability
to deploy or invest our capital;
• fluctuations
in interest rates;
• any shortfall
in revenue or net income or any increase in losses from levels expected by
investors or securities analysts;
• operating
performance of companies comparable to us;
• changes in
regulatory policies with respect to investment companies;
• our ability
to borrow money or obtain additional capital;
• losing RIC
status under the Code;
• actual or
anticipated changes in our earnings or fluctuations in our operating results or
changes in the expectations of securities analysts;
• general
economic conditions and trends; or
• departures of
key personnel.
Market Risk.
Before this offering, there was no public trading market for our common
shares. We cannot predict the prices at which our common shares will
trade. The initial public offering ("IPO") price for our common
shares will be determined through our negotiations with the underwriters and may
not bear any relationship to the market price at which it will trade after this
offering or to any other established criteria of our value. Shares of
companies offered in an IPO often trade at a discount to the IPO price due to
sales load (underwriting discount) and related offering expenses.
In
addition, shares of closed-end investment companies have in the past frequently
traded at discounts to their NAV and our stock may also be discounted in the
market. This characteristic is a risk separate and distinct from the
risk that our NAV could decrease as a result of our investment activities and
may be greater for investors expecting to sell their shares in a relatively
short period following completion of this offering. We cannot assure
you whether our common shares will trade above, at or below our
NAV. Whether investors will realize gains or losses upon the sale of
our common shares will depend entirely upon whether the market price of our
common shares at the time of sale is above or below the investor’s purchase
price for our common shares. Because the market price of our common
shares is affected by factors such as NAV, dividend levels (which are dependant,
in part, on expenses), supply of and demand for our common shares, stability of
dividends, trading volume of our common shares, general market and economic
conditions, and other factors beyond our control, we cannot predict whether our
common shares will trade at, below or above NAV or at, below or above the
offering price. In addition, if our common shares trade below their
NAV, we will generally not be able to issue additional common shares at their
market price without first obtaining the approval of our stockholders and our
independent directors to such issuance.
Dilution Risk.
If you purchase our common shares in this offering, the price that you
pay will be greater than the NAV per common share immediately following this
offering. This is in large part due to the expenses incurred by us in
connection with the consummation of this offering. 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.
We are
seeking approval from the Fund’s initial stockholders (i.e., the stockholders of
the Fund prior to this offering) for the authority
to sell common shares for less than NAV, subject to certain conditions listed in
"Description of Capital Stock – Common Shares – Issuance of Additional
Shares." All investors who purchase common shares in this offering
will be bound by such approval. As a result, during the first year of
the Fund’s operations, there will be no stockholder approval necessary or sought
prior to any such issuance of common shares below NAV. After the
first year of the Fund’s operations, we intend to seek such approval from
stockholders at each annual meeting of stockholders. The issuance of
additional shares of the Fund at below NAV will dilute the interest in the
Fund’s assets, income and relative voting power of existing stockholders,
including those who purchase common shares
in this offering.
Takeover
Risk. The Maryland General Corporation Law and our charter and bylaws
contain provisions that may have the effect of discouraging, delaying or making
difficult a change in control of the Fund or the removal of our incumbent
directors. We will be covered by the Business Combination Act of the Maryland
General Corporation Law to the extent that such statute is not superseded by
applicable requirements of the 1940 Act. However, our Board of Directors has
adopted a resolution exempting us from the Business Combination Act for any
business combination between us and any person to the extent that such business
combination receives the prior approval of our Board of Directors, including a
majority of our directors who are not interested persons as defined in the 1940
Act.
Under our
charter, our Board of Directors is divided into three classes serving staggered
terms, which will make it more difficult for a hostile bidder to acquire control
of us. In addition, our Board of Directors may, without stockholder action,
authorize the issuance of shares of stock in one or more classes or series,
including preferred stock. See "Description of Capital Stock." Subject to
compliance with the 1940 Act, our Board of Directors may, without stockholder
action, amend our charter to increase the number of shares of stock of any class
or series that we have authority to issue. The existence of these provisions,
among others, may have a negative impact on the price of our common shares and
may discourage third-party bids for ownership of our Fund. These provisions may
prevent any premiums being offered to you for our common
shares.
FORWARD-LOOKING STATEMENTS
The
matters discussed in this prospectus, as well as in future oral and written
statements by our management, that are forward-looking statements are based on
current management expectations that involve substantial risks and uncertainties
that could cause actual results to differ materially from the results expressed
in, or implied by, these forward-looking statements. Forward-looking statements
relate to future events or our future financial performance. We generally
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "could," "intends," "targets,"
"projects," "contemplates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of these terms or other similar words. Important
assumptions include our ability to originate new investments, achieve certain
levels of return, the availability to us of additional capital and the ability
to maintain certain debt to asset ratios. In light of these and other
uncertainties, the inclusion of a forward-looking statement in this prospectus
should not be regarded as a representation by us that our plans or objectives
will be achieved. The forward-looking statements contained in this prospectus
include statements as to:
-
|
our
future operating results;
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our
business prospects and the prospects of our prospective
investments;
|
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the
impact of investments that we expect to make;
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the
timing of distribution payments;
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our
informal relationships with third parties;
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the
dependence of our future success on the general economy and its impact on
power and energy infrastructure companies;
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the
ability of our investments to achieve their objectives;
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our
expected financings and investments;
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our
regulatory structure and tax status;
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our
ability to operate as an investment company;
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the
adequacy of our cash resources and working capital;
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the
timing of cash flows, if any, from the operations of our investments;
and
|
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the
size or growth prospects of all companies with power and energy
infrastructure operations. |
For a
discussion of factors that could cause our actual results to differ from
forward-looking statements contained in this prospectus, please see the
discussion under the heading "Risks." You should not place undue reliance on
these forward-looking statements. The forward-looking statements made in this
prospectus relate only to events as of the date on which the statements are
made. 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 are excluded from the safe harbor protection provided by
Section 27A of the 1933 Act.
The
purpose of the table and example below is to assist you in understanding the
various costs and expenses that an investor in this offering will bear directly
or indirectly. The following table shows the Fund’s expenses as a percentage of
net assets attributable to common shares. We caution you that certain of the
indicated percentages in the table below indicating annual expenses are
estimates and may
vary.
Stockholder
Transaction Expense (as a percentage of offering price):
Sales
Load
|
%1
|
Offering
Expenses Borne by the Fund
|
|
Dividend
Reinvestment Plan Expenses3
|
None
|
Total
stockholder transaction expenses paid
|
%
|
|
|
Annual
Expenses (as a percentage of net assets attributable to common
shares)4:
|
|
Management
Fee (payable under investment advisory agreement)
5
|
1.19%
|
Interest
Payments on Borrowed Funds6
|
1.13%
|
Other
Expenses7
|
0.37%
|
Total
annual expenses8
|
2.69%
|
Less
Fee and Expense Reimbursement9 |
(0.19)%
|
Net
Annual Expenses |
2.50%
|
Example
The
following example demonstrates the projected dollar amount of total cumulative
expenses that would be incurred over various periods with respect to a
hypothetical investment in our common shares. These amounts are based upon
assumed offering expenses of
% and
our payment of annual operating expenses at the levels set forth in the table
above.
|
1 Year
|
3 Years
|
5 Years
|
10 Years
|
You
would pay the following expenses on a $1,000 investment, assuming a 5%
annual return
|
$ 71
|
$ 123
|
$ 179
|
$
331
|
The example and the expenses in the
tables above should not be considered a representation of our future
expenses, and actual expenses may be greater or less than those shown. Moreover,
while the example assumes, as required by the applicable rules of the SEC, a 5%
annual return, our performance will vary and may result in a return greater or
less than 5%. In addition, while the example assumes reinvestment of all
distributions at net asset value, participants in our dividend reinvestment plan
may receive common shares valued at the market price in effect at that time.
This price may be at, above or below net asset value. See “Dividend Reinvestment
Plan” for additional information regarding our dividend reinvestment
plan.
1 For
a description of the sales load and of other compensation paid to the
underwriters by the Fund, see "Underwriting." The Advisor (not the
Fund) has agreed to pay from its own assets a structuring fee to Wachovia
Capital Markets, LLC. See "Underwriting".
2 The
percentage reflects estimated offering expenses of approximately
$ .
3 The
expenses associated with the administration of our dividend reinvestment plan
are included in "Other Expenses." The participants in our dividend reinvestment
plan will pay a pro rata share of brokerage commissions incurred with respect to
open market purchases, if any, made by the plan agent under the plan. For more
details about the plan, see "Dividend Reinvestment Plan."
4 Assumes
leverage of approximately $48 million determined using the
assumptions set forth in footnote (6) below.
5 Although
our management fee is 0.95% (annualized) of our average monthly Managed Assets,
the table above reflects expenses as a percentage of net assets. Managed Assets
means our total assets (including any assets purchased with any borrowed funds)
minus the sum of accrued liabilities other than debt entered into for the
purpose of leverage and the aggregate liquidation preference of any outstanding
preferred shares. Net assets is defined as Managed Assets minus debt entered
into for the purposes of leverage and the aggregate liquidation preference of
any outstanding preferred shares. See "Management of the Fund — Investment
Advisory Agreement — Management Fee."
6 We
may borrow money or issue debt securities and/or preferred stock 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. The table above assumes we borrow for investment
purposes approximately $48 million, which reflects leverage in an
amount representing 20% of our total assets (including such borrowed funds)
assuming an annual interest rate of 4.5% on the amount borrowed and
assuming we issue 10 million common shares.
7 "Other
Expenses" includes our estimated overhead expenses, including payments to our
transfer agent, our administrator and legal and accounting
expenses. The holders of our common shares indirectly bear the cost
associated with such other expenses.
8 The table presented above
estimates what our annual expenses would be, stated as a percentage of our net
assets attributable to our common shares. The table presented below, unlike the
table presented above, estimates what our annual expenses would be stated as a
percentage of our Managed Assets. As a result, our estimated total
annual expenses would be as follows:
Management
fee
|
0.95%
|
Interest
Payments on Borrowed Funds
|
0.90%
|
Other
expenses
|
0.30%
|
Total
annual expenses
|
2.15%
|
Less
Fee and Expense Reimbursement |
(0.15)%
|
Net
Annual Expenses |
2.00% |
9
The
Advisor has agreed to a fee waiver of 0.15% for year 1, 0.10% for year 2 and
0.05% for year 3, which will become effective as of the close of this
offering.
As of the
date of this Prospectus, the Fund has not commenced investment
operations. The "Other Expenses" shown in the table and related
footnote above are based on estimated amounts for the Fund’s first year of
operation unless otherwise indicated and assume that the Fund issues
approximately 10 million common shares. If the Fund issues fewer
common shares, all other things being equal, certain of these percentages would
increase. For additional information with respect to the Fund’s
expenses, see "Management of the Fund" and "Dividend Reinvestment
Plan."
The
net proceeds of this offering will be approximately
$ after
deducting both the sales load (underwriting discount) and estimated offering
expenses of approximately
$ paid
by us. We expect to use the net proceeds from this offering to invest in
accordance with our investment objectives and strategies and for working capital
purposes. We currently anticipate that we will be able to invest
substantially all of the net proceeds in accordance with our investment
objectives and policies by approximately three months after the completion of
the offering, depending on market conditions. Pending investment as
described under the heading "The Fund," we expect the net proceeds of this
offering will be invested in cash, cash equivalents, securities issued or
guaranteed by the U.S. government or its instrumentalities or agencies,
short-term money market instruments, short-term fixed
income securities, certificates of deposit, bankers’ acceptances and other
bank obligations, commercial paper or other liquid fixed
income securities. Until we are fully invested, the return on our common
shares is expected to be lower than that realized after full investment in
accordance with our investment objectives.
We are
registered as a non-diversified, closed-end management investment company under
the 1940 Act. Although we were organized as a corporation on July 5, 2007 under
the laws of the State of Maryland, we have not commenced operations and intend
to commence operations immediately following the closing of this offering. We
seek to provide our stockholders a vehicle to invest in a portfolio consisting
primarily of securities issued by power and energy infrastructure companies. We
intend to elect to be treated and to qualify as a RIC under the
Code.
Our
primary investment objective is to provide a high level of current income, with
a secondary objective of capital appreciation. There can be no
assurance that we will achieve our investment objectives.
Investment
Strategy
We
seek to provide stockholders a vehicle to invest in a portfolio consisting
primarily of securities issued by power and energy infrastructure
companies. The securities in which we will invest include
income-producing fixed income and equity
securities. Under normal circumstances, we plan to invest at least
80% of our total assets (including any assets obtained through leverage) in
securities of companies that derive more than 50% of their revenue from power or
energy infrastructure operations. We define power and energy
infrastructure operations as follows:
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·
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Power Infrastructure –
The ownership and operation of asset systems that provide electric power
generation (including renewable energy), transmission and
distribution.
|
|
·
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Energy Infrastructure –
The ownership and operation of a network of pipeline assets to transport,
store, gather and/or process crude oil, refined petroleum products
(including biodiesel and ethanol), natural gas or natural gas
liquids.
|
Market
Opportunity
We seek
to invest in a portfolio of companies focused solely on the power and energy
infrastructure sectors and that provide stable and defensive characteristics
throughout economic cycles. We believe that the current market
conditions provide a favorable entry point for our strategy, with yield spreads
above historical averages. Over time, we will seek to capitalize on relative
value opportunities, with the ability to invest across the capital structure
while minimizing risk.
We will
focus on minimizing risk and volatility using our Advisor’s disciplined
investment screening process, including proprietary risk and financial analysis.
We anticipate that a significant portion of our portfolio will initially include
investment grade fixed income securities, as well as dividend-paying equity
securities. We intend to build a portfolio with companies that generally (i)
have assets in diverse geographic locations across the U.S., (ii) transport,
process, or distribute diverse energy products, or (iii) serve different end
users. Among other things, under normal market conditions, our
non-fundamental policies (i) limit our investment in non-investment grade rated
fixed income securities to no more than 25% of our total assets, (ii) limit our
ability to incur leverage so that our leverage is not in excess of 20% of our
total assets at time of incurrence, and (iii) require that we maintain at least
60% of our assets in fixed income securities.
Targeted
Investment Characteristics
Our
investment strategy will be anchored in our Advisor’s fundamental principles of
yield, quality and growth. We anticipate that our targeted
investments will generally have the following characteristics:
|
·
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Essential Infrastructure
Assets – Companies that operate critical tangible assets that
connect sources of energy supply to areas of energy demand. These
businesses are essential to economic productivity and experience
relatively inelastic demand.
|
|
·
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High Current Yield –
Companies that generate a current cash return at the time of investment.
We do not intend to invest in start-up companies or companies with
speculative business plans.
|
|
·
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Predictable Revenues –
Companies with stable and predictable revenue streams, often linked to
areas experiencing demographic growth and with low commodity price
risk.
|
|
·
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Stable Cost Structures
– Companies with relatively low maintenance expenditures and economies of
scale due to operating leverage.
|
|
·
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High Barriers to Entry
– Companies with operating assets that are difficult to replicate due to
regulation, natural monopolies, availability of land or high costs of new
development.
|
|
·
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Long-Lived Assets –
Companies that operate tangible assets with long economic useful
lives.
|
|
·
|
Experienced,
Operations-Focused Management Teams – Companies with management
teams possessing successful track records and who have substantial
knowledge, experience, and focus in their particular segments of the power
and energy infrastructure sectors.
|
Power
and Energy Infrastructure Investment
We
believe that power and energy infrastructure companies will provide attractive
investment opportunities for the following reasons:
The
International Energy Administration ("IEA") projects that North American energy
and electricity consumption will increase annually by 0.6% and 1.1%,
respectively, from 2006 through 2030. This increase results in an overall energy
and electricity consumption increase of approximately 15% and 30%, respectively
by 2030.
The power
and energy infrastructure sectors have a growing need for capital to update and
expand infrastructure assets. In particular, these companies need
financing to facilitate the construction of additional infrastructure assets, to
modernize or maintain existing infrastructure assets, and to finance industry
consolidation. Power infrastructure investment has fallen short of
demand growth for nearly 30 years, leading to inadequate capacity. The U.S.
Department of Energy ("DOE") estimates that 70% of transmission lines and power
transformers and 60% of circuit breakers are over 25 years old, which we
understand to be well into their useful lives. Companies in the energy
infrastructure sector expect to construct over 5,000 miles of natural gas
pipelines and 2,000 miles of crude oil pipelines to support new sources of
energy supply as well as replace and/or maintain existing
infrastructure. FERC has created incentives to spur investment in power and
energy infrastructure assets.
The IEA
estimates that $3.4 trillion will need to be invested in such power and energy
infrastructure internal growth projects from 2007 to 2030 in North
America. We expect such spending to finance upgrades and expansion of
electric power infrastructure; pipeline infrastructure projects to support
growing population centers; pipeline and storage terminal projects to increase
the movement of crude oil across North America; and natural gas projects to
develop infrastructure that efficiently connects new areas of supply to growing
areas of demand. This investment should help alleviate congestion, upgrade or
replace aged infrastructure and meet growing North American demand.
Experience
of the Advisor
|
·
|
Experience Across Energy and
Power Infrastructure Value Chain. Our Advisor has
significant expertise working with energy infrastructure companies and
managed investments of approximately $2.0 billion in the energy
sector as of May 31, 2009. The five members of our Advisor’s
investment committee have, on average, over 23 years of investment
experience. In addition to their experience at the Advisor,
three of the five members of our Advisor’s investment committee came from
Fountain Capital and have significant experience in managing portfolios of
fixed income securities that included the securities of issuers in the
power and energy infrastructure sectors. Fountain Capital was
formed in 1990 and focuses primarily on providing investment advisory
services to institutional investors in the non-investment grade rated
fixed income market. The Advisor's philosophy places extensive
focus on quality through proprietary models, including risk, valuation and
financial models.
|
|
·
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Strong Reputation, Deep
Relationships and Access to Deal Flow. Our Advisor has
developed a strong reputation and deep relationships with issuers,
underwriters and sponsors that we believe will afford us competitive
advantages in evaluating and managing investment
opportunities. Our Advisor, a pioneer in institutional direct
placements with MLPs and other energy infrastructure companies, has
participated in over 90 direct placements, private company
investments and initial public offerings in which it has invested over
$1.3 billion since 2002 through its publicly traded funds and other
specialty vehicles.
|
|
·
|
Capital Markets
Innovation. Our Advisor is a leader in providing investment,
financing and structuring opportunities for its publicly traded funds and
for its private funds. Our Advisor believes its innovation
includes the following highlights:
|
|
o |
First
publicly traded, closed-end management investment company focused
primarily on investing in energy MLPs; |
|
o |
Led
development of institutional MLP direct placements to fund acquisitions,
capital projects and sponsor liquidity; |
|
o
|
Completed
the first follow-on common stock offering in a decade for a closed-end,
management investment company;
and
|
|
|
Established
one of the first registered closed-end fund universal shelf registration
statements and completed the first registered direct offering from a
universal shelf registration statement for a closed-end
fund.
|
These
highlights should not be read as indications of our future performance,
including whether our common shares will trade above, at or below our
NAV.
|
·
|
Disciplined Investment
Philosophy. Our Advisor’s senior investment professionals have
substantial experience in structuring investments that balance the needs
of power and energy infrastructure companies with appropriate risk
control. In making its investment decisions, our Advisor intends to
continue the disciplined investment approach that it has utilized since
its founding. That investment approach will emphasize current income, low
volatility and minimization of downside risk. Our Advisor’s
investment process involves an assessment of the overall attractiveness of
the specific segment in which a power or energy infrastructure company is
involved, the company’s specific competitive position within that segment,
potential commodity price risk, supply and demand, regulatory
considerations, the stability and potential growth of the company’s cash
flows and the company’s management track
record.
|
Portfolio
Securities
We will
seek to achieve our investment objectives by investing in the following
categories of securities:
Targeted
Investments. We may invest in a wide range of securities that
generate income, including, but not limited to, fixed income securities and
dividend-paying equity securities. Up to 25% of these securities may
be securities issued by MLPs. Securities that generate income in
which we may invest include, but are not limited to, the following types of
securities:
Power and Energy Infrastructure Fixed
Income Securities. We may invest in fixed income securities,
including bonds, debentures or other fixed income instruments, which are
expected to provide a high level of current income. Our investments
in securities that generate income may have fixed or variable principal payments
and various interest rate and dividend payment and reset terms, including fixed
rate, floating rate, adjustable rate, and payment in kind
features. Our investments may have extended or no
maturities. Securities that generate income also may be subject to
call features and redemption provisions. We may invest in securities
that generate income of any credit quality, including up to 25% of our total
assets in fixed income securities rated non-investment grade (commonly referred
to as “junk bonds”), that are considered speculative as to the issuer’s capacity
to pay interest and repay principal. Please
see “Risks —Non-investment Grade Fixed Income Securities
Risk.”
These
securities may be senior or junior positions in the capital structure of a
borrower, may be secured (with specific collateral or have a claim on the assets
and/or stock of the borrower that is senior to that held by subordinated debt
holders and stockholders of the borrower) or unsecured, and may be used to
finance leveraged buy-outs, recapitalizations, mergers, acquisitions, stock
repurchases or internal growth of the borrower. These loans may have
fixed rates of interest or variable rates of interest that are reset either
daily, monthly, quarterly or semi-annually by reference to a base lending rate,
plus a premium. The base lending rate may be the London Inter-Bank
Offer Rate (“LIBOR”), the prime rate offered by one or more major U.S. banks or
some other base rate varying over time. Certain of the bonds in which
we may invest may have an extended or no maturity or may be zero coupon
bonds. We may invest in fixed income securities that are not rated or
securities that are non-investment grade. Certain of these securities
may be securities issued by MLPs.
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·
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Investment Grade
Securities. We
may invest in a wide variety of income-generating securities that are
rated or determined by the Advisor to be investment grade quality and that
are issued by corporations and other non-governmental entities and
issuers. Investment grade quality securities are those that, at
the time of investment, are either rated by one of the NRSROs that rate
such securities within the four highest letter grades (including BBB- or
higher by S&P or Fitch or Baa3 or higher by Moody's), or if unrated
are determined by the Advisor to be of comparable quality to the
securities in which the Fund may otherwise invest. Investment
grade securities may include securities that, at the time of investment,
are rated non-investment
|
grade by
S&P, Moody's or Fitch, so long as at least one NRSRO rates such securities
within the four highest grades (such securities are commonly referred to as
split-rated securities).
Investment
grade securities that generate income are subject to market and credit risk.
Investment grade securities that generate income have varying levels of
sensitivity to changes in interest rates and varying degrees of credit
quality. The values of investment grade income-generating securities
may be affected by changes in the credit rating or financial condition of an
issuer.
|
Non-Investment Grade
Securities. We may invest up to 25% of our total assets
in fixed income securities rated non-investment grade securities by NRSROS
or unrated of comparable quality. Non-investment grade
securities are rated below Ba1 or lower by Moody’s, BB+ or lower by
S&P, BB or lower by Fitch or, if unrated, determined by the Advisor to
be of comparable quality. The ratings of Moody’s, S&P and
Fitch represent their opinions as to the quality of the obligations which
they undertake to rate. Ratings are relative and subjective and, although
ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of such obligations.
Although these ratings may be an initial criterion for selection of
portfolio investments, the Advisor also will independently evaluate these
securities and the ability of the issuers of such securities to pay
interest and principal.
|
Securities
rated non-investment grade are regarded as having predominately speculative
characteristics with respect to the issuer’s capacity to pay interest and repay
principal, and are commonly referred to as "junk bonds" or "high-yield bonds."
The credit quality of most non-investment grade securities reflects a
greater-than-average possibility that adverse changes in the financial condition
of an issuer, or in general economic conditions, or both, may impair the ability
of the issuer to make payments of interest and principal. The inability (or
perceived inability) of issuers to make timely payments of interest and
principal would likely make the values of non-investment grade securities held
by us more volatile and could limit our ability to sell such securities at
favorable prices. In the absence of a liquid trading market for non-investment
grade securities, we may have difficulties determining the fair market value of
such investments. To the extent we invest in unrated securities, our
ability to achieve our investment objectives will be more dependent on our
Advisor’s credit analysis than would be the case when we invest in rated
securities.
Because
the risk of default is higher for non-investment grade securities than for
investment grade securities, our Advisor’s research and credit analysis is an
especially important part of managing securities of this type. Our Advisor will
attempt to identify those issuers of non-investment grade securities whose
financial condition our Advisor believes are adequate to meet future obligations
or have improved or are expected to improve in the future. Our Advisor’s
analysis will focus 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.
Power and Energy
Infrastructure Equity Securities. We may invest in a
wide range of equity securities issued by power and energy infrastructure
companies that are expected to pay dividends on a current
basis.
We expect
that such equity investments will primarily include MLP common units, MLP
I-Shares and common stock. However, such equity investments may also
include limited partner interests, limited liability company interests, general
partner interests, convertible securities, preferred equity, warrants and
depository receipts of companies that are organized as corporations, limited
partnerships or limited liability companies. Equity investments
generally represent an equity ownership interest in an issuer. An
adverse event, such as unfavorable earnings report, may depress the value of a
particular equity investment we hold. Also, prices of equity
investments are sensitive to general movements in the stock market and a drop in
the stock market may depress the price of equity investments we
own. Equity investment prices fluctuate for several reasons,
including changes in investors’ perceptions of the financial condition of an
issuer or rising interest rates, which increases borrowing costs and the costs
of capital.
When
we acquire these securities in unregistered transactions, we also may obtain
registration rights that may include demand and “piggyback” registration
rights. We may receive warrants or other non-income producing equity
securities. We may retain such securities, including equity shares
received upon conversion of convertible securities, until we determine it is
appropriate in light of current market conditions to effect a disposition of
such securities.
The
following is a more detailed description of each such
security.
|
o
|
MLP Common
Units. MLP common units represent a limited partner
interest in a limited partnership that entitles the holder to an equity
ownership share of the company’s success through distributions and/or
capital appreciation. In the event of liquidation, MLP common
unitholders have first rights to the partnership’s remaining assets after
bondholders, other debt holders, and preferred unitholders have been paid
in full. MLPs are typically managed by a general partner, and
holders of MLP common units generally do not have the right to vote upon
the election of directors of the general partner. MLP common
units trade on a national securities exchange or
over-the-counter.
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|
o
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MLP
I-Shares. I-Shares represent an indirect investment in
MLP I-units. I-units are equity securities issued to an affiliate of an
MLP, typically an LLC, that owns an interest in and manages the MLP. The
I-Shares issuer has management rights but is not entitled to incentive
distributions. The I-Share issuer’s assets consist exclusively of MLP
I-units. Distributions by MLPs to I-unitholders are made in the form of
additional I-units, generally equal in amount to the cash received by
common unitholders 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 and such shares are generally freely
tradeable in the open market. The issuer of the I-Shares is
taxed as a corporation. However, the MLP does not allocate
income or loss to the I-Share issuer. Accordingly, investors receive a
Form 1099, are not allocated their proportionate share of income of the
MLPs and are not subject to state filing
obligations.
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o
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Common
Stock. Common stock represents an ownership interest in
the profits and losses of a corporation, after payment of amounts owed to
bondholders, other debt holders, and holders of preferred
stock. Holders of common stock generally have voting rights,
but we do not expect to have voting control in any of the companies in
which we invest. The common stock in which we invest will
generally be traded on a national securities
exchange.
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Restricted
Securities. We may invest up
to 15% of our total assets in restricted securities that are ineligible for
resale under Rule 144A, all of which may be illiquid
securities. Restricted securities (including Rule 144A securities)
are less liquid than freely tradable securities because of statutory and/or
contractual restrictions on resale. Such securities are not freely
tradeable in the open market. This lack of liquidity creates special
risks for us. However, we could sell such securities in private
transactions with a limited number of purchasers or in public offerings under
the 1933 Act if we have registration rights for the resale of such
securities. Certain restricted securities generally become freely
tradable upon the passage of time and satisfaction of other applicable
conditions.
Rule 144A Securities. The Fund may purchase Rule 144A securities,
which are generally traded on a secondary market accessible to certain qualified
institutional buyers. Rule 144A provides an exemption from the
registration requirements of the 1933 Act for the resale of certain restricted
securities to qualified institutional buyers, such as the Fund. There is no
limit to our investment in Rule 144A securities and Rule 144A securities
will not be counted towards the Fund’s 15% limitation on investing in restricted
securities.
Institutional
markets for securities that exist or may develop as a result of Rule 144A may
provide both readily ascertainable fair values for those Rule 144A securities as
well as the ability to liquidate investments in those securities. An
insufficient number of qualified institutional buyers interested in purchasing
Rule 144A-eligible securities held by us, however, could affect adversely the
marketability of certain Rule 144A securities, and we might be unable to dispose
of such securities promptly or at reasonable prices. To the extent
that liquid Rule 144A securities that the Fund holds become illiquid, due
to the lack of sufficient qualified institutional buyers or market or other
conditions, the percentage of the Fund’s assets invested in illiquid assets
would increase.
Non-U.S.
Securities. We may invest up
to 10% of our total assets in securities issued by non-U.S. issuers
(including Canadian issuers). These securities may be issued by
companies organized and/or having securities traded on an exchange outside the
U.S. or may be securities of U.S. companies that are denominated in the currency
of a different country. See "Risks – Risks Related to Our Operations
– Non-U.S. Securities Risk."
Temporary Investments and Defensive
Investments. Pending investment of the proceeds of this
offering, we expect to invest substantially all of the net offering proceeds in
cash, cash equivalents, securities issued or guaranteed by the U.S. government
or its instrumentalities or agencies, short-term money market instruments,
short-term fixed income securities, certificates of deposit, bankers’
acceptances and other bank obligations, commercial paper or other
liquid fixed income securities. We may also invest in these
instruments on a temporary basis to meet working capital needs, including, but
not limited to, holding a reserve pending payment of distributions or
facilitating the payment of expenses and settlement of trades.
In
addition, and although inconsistent with our investment objectives, under
adverse market or economic conditions, we may invest 100% of our total assets in
these securities. The yield on these securities may be lower than the
returns on the securities in
which we will otherwise invest or yields on
lower-rated, fixed-income securities. To the extent we invest in
these securities on a temporary basis or for defensive purposes, we may not
achieve our investment objectives.
Investment
Process
Our
Advisor’s securities selection process includes a comparison of quantitative,
qualitative, and relative value factors. Although our Advisor uses
research provided by broker dealers and investment firms when available, primary
emphasis is placed on proprietary analysis and risk, financial and valuation
models conducted and maintained by our Advisor’s in-house investment
professionals. To determine whether a company meets its investment
criteria, our Advisor will generally look for the targeted investment
characteristics as described herein.
All
decisions to invest in a company must be approved by the unanimous decision of
our Advisor’s investment committee.
Investment
Policies
We
seek to achieve our investment objectives by investing in
income-producing fixed income and equity securities of companies that
our Advisor believes offer attractive distribution rates.
The
following are our fundamental investment limitations set forth in their
entirety. We may not:
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•
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issue
senior securities, except as permitted by the 1940 Act and the rules and
interpretive positions of the SEC
thereunder;
|
|
•
|
borrow
money, except as permitted by the 1940 Act and the rules and interpretive
positions of the SEC thereunder;
|
|
•
|
make
loans, except by the purchase of debt obligations, by entering into
repurchase agreements or through the lending of portfolio securities and
as otherwise permitted by the 1940 Act and the rules and interpretive
positions of the SEC thereunder;
|
|
•
|
invest
25% or more of our total assets in any particular industry, except that we
will concentrate our assets in the group of industries constituting the
power and energy infrastructure
sectors;
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•
|
underwrite
securities issued by others, except to the extent that we may be
considered an underwriter within the meaning of the 1933 Act in the
disposition of restricted securities held in our
portfolio;
|
|
•
|
purchase
or sell real estate unless acquired as a result of ownership of securities
or other instruments, except that we may invest in securities or other
instruments backed by real estate or securities of companies that invest
in real estate or interests
therein; and
|
|
•
|
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.
|
As a
nonfundamental investment policy, under normal circumstances, we will invest at
least 80% of our total assets (including assets we obtain through leverage) in
the securities of companies that derive more than 50% of their revenue from
power or energy infrastructure operations.
We also
have adopted the following additional nonfundamental policies:
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•
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We
will invest a minimum of 60% of our total assets in fixed income
securities.
|
|
•
|
Under
normal market conditions, we will not employ leverage above 20% of our
total assets at time of
incurrence.
|
|
•
|
We
will not invest more than 25% of our total assets in non-investment grade
rated fixed income
securities.
|
|
•
|
We
will not invest more than 15% of our total assets in restricted securities
that are ineligible for resale pursuant to Rule 144A, all of which may be
illiquid securities.
|
|
•
|
We
may invest up to 10% of our total assets in securities issued by non-U.S.
issuers (including Canadian
issuers).
|
• We
will not engage in short sales.
As used
for the purpose of each nonfundamental investment policy above, the term "total
assets" includes any assets obtained through leverage. Our Board of
Directors may change our nonfundamental investment policies without stockholder
approval and will provide notice to stockholders of material changes
in such policies (including notice through stockholder reports). Any
change in the policy of investing under normal circumstances at least 80% of our
total assets (including assets obtained through leverage) in the securities of
companies that derive more than 50% of their revenue from power or energy
infrastructure operations 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.
In
addition, to comply with federal tax requirements for qualification as a RIC,
our investments will be limited so that at the close of each quarter of each
taxable year (i) at least 50% of the value of our total assets is represented by
cash and cash items, U.S. Government securities, the securities of other RICs
and other securities, with such other securities limited for purposes of such
calculation, in respect of any one issuer, to an amount not greater than 5% of
the value of our total assets and not more than 10% outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of our total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other RICs), the securities (other
than the securities of other RICs) of any two or more issuers that we control
and that are determined to be engaged in the same business or similar or related
trades or businesses, or the securities of one or more qualified publicly traded
partnerships (which includes MLPs). These tax-related limitations may
be changed by the Board of Directors to the extent appropriate in light of
changes to applicable tax requirements.
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. 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 we bear.
Brokerage
Allocation and Other Practices
Subject
to policies established by our Advisor and approved by our Board of Directors,
we do not expect to execute transactions through any particular broker or
dealer, but we will seek to obtain the best net results for us, taking into
account such factors as price (including the applicable brokerage commission or
dealer spread), size of order, difficulty of execution and operational
facilities of the firm and the firm’s risk and skill in positioning blocks of
securities. While we will generally seek reasonably competitive trade execution
costs, we will not necessarily pay the lowest spread or commission available.
Subject to applicable legal requirements, we may select a broker based partly on
brokerage or research services provided to us. In return for such services, we
may pay a higher commission than other brokers would charge if our Advisor
determines in good faith that such commission is reasonable in relation to the
services provided.
Proxy
Voting Policies
We, along
with our Advisor, have adopted proxy voting policies and procedures ("Proxy
Policy") that we believe are reasonably designed to ensure that proxies are
voted in our best interests and the best interests of our stockholders. Subject
to its oversight, our Board of Directors has delegated responsibility for
implementing the Proxy Policy to our Advisor.
In the
event requests for proxies are received to vote equity securities on routine
matters, such as election of directors or ratification of auditors, the proxies
usually will be voted in accordance with the recommendation of the company’s
management unless our Advisor determines it has a conflict or our Advisor
determines there are other reasons not to vote in accordance with the
recommendation of the company’s management. On non-routine matters, such as
amendments to governing instruments, proposals relating to compensation and
equity compensation plans, corporate governance proposals and stockholder
proposals, our Advisor 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 fixed income securities, our Advisor will vote on a
case-by-case basis in a manner it believes to be in the best economic interest
of our stockholders.
Our Chief
Executive Officer will be responsible for monitoring our actions and ensuring
that (i) proxies are received and forwarded to the appropriate
decisionmakers, and (ii) proxies are voted in a timely manner upon receipt
of voting instructions. We are not responsible for voting proxies we do not
receive, but we will make reasonable efforts to obtain missing proxies. Our
Chief Executive Officer will implement procedures to identify and monitor
potential conflicts of interest that could affect the proxy
voting
process,
including (i) significant client relationships, (ii) other potential
material business relationships, and (iii) material personal and family
relationships. All decisions regarding proxy voting will be determined by our
Advisor’s investment committee and will be executed by our Chief Executive
Officer. Every effort will be made to consult with the portfolio manager and/or
analyst covering the security. We may determine not to vote a particular proxy
if the costs and burdens exceed the benefits of voting (e.g., when securities
are subject to loan or to share blocking restrictions).
If a
request for proxy presents a conflict of interest between our stockholders, on
one hand, and our Advisor, the underwriters, or any affiliated persons of ours,
on the other hand, our management may (i) disclose the potential conflict
to the Board of Directors and obtain consent, or (ii) establish an ethical
wall or other informational barrier between the persons involved in the conflict
and the persons making the voting decisions.
Staffing
We do not
currently have, nor do we expect in the future to have, any employees. Services
necessary for our business will be provided by individuals who are employees of
our Advisor, pursuant to the terms of the investment advisory agreement. See
"Management of the Fund — Investment Advisory Agreement."
Properties
Our
office is located at 11550 Ash Street, Suite 300, Leawood, Kansas
66211.
Legal
Proceedings
Neither
we nor our Advisor are currently subject to any material legal
proceedings.
Use
of Leverage
Under
normal market conditions, we will not employ leverage above 20% of our total
assets at time of incurrence. We anticipate that such leverage may
initially include, although not be limited to, revolving credit facilities or
senior notes. We may also issue preferred shares, however, we will
not utilize leverage in the form of what historically has been known as auction
rate preferred securities.
The
borrowing of money and the issuance of such securities represent the leveraging
of our common stock. We generally will not use leverage unless our
Board of Directors believes 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 do not
anticipate using leverage where the estimated costs of using 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. However, in making the
determination whether to use 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, and actual returns vary depending on many
factors. Our Board of Directors will also consider other factors, including
whether the current investment opportunities will help us achieve our investment
objectives and strategies.
Leverage
creates a greater risk of loss, as well as potential for more gain, for our
common shares than if leverage is not used. Leverage capital would have complete
priority upon distribution of assets over common shares. We expect to invest the
net proceeds derived from any use or issuance of leverage capital according to
the investment objectives and strategies described in this prospectus. As long
as our portfolio is invested in securities that provide a higher rate of return
than the dividend rate or interest rate of the leverage capital after taking its
related expenses into consideration, the leverage will cause our common
stockholders to receive a higher rate of income than if we were not leveraged.
Conversely, if the return derived from such securities is less than the cost of
leverage (including increased expenses to us), our total return will be less
than if leverage had not been used, and, therefore, the amount available for
distribution to our common stockholders will be reduced. In the latter case, our
Advisor in its best judgment nevertheless may determine to maintain our
leveraged position if it expects that the long term benefits to our common
stockholders of so doing will outweigh the current reduced return. There is no
assurance that we will utilize leverage capital or, if leverage capital is
utilized, that those instruments will be successful in enhancing the level of
our total return. The NAV of our common shares will be reduced by the fees and
issuance costs of any leverage capital. We do not intend to use leverage capital
until the proceeds of this offering are fully invested in accordance with our
investment objectives.
There is
no assurance that outstanding amounts we borrow may be prepayable by us prior to
final maturity without significant penalty, but we do not expect any sinking
fund or mandatory retirement provisions. Outstanding amounts would be payable at
maturity or such earlier times as we may agree. We may be required to prepay
outstanding amounts or incur a penalty rate of interest in the event of the
occurrence of certain events of default. We may be expected to indemnify our
lenders, particularly any banks, against liabilities they may incur related to
their loan to us. We may also be required to secure any amounts borrowed from a
bank by pledging our investments as collateral.
Leverage
creates risk for holders of our common shares, including the likelihood of
greater volatility of our NAV and the value of our shares, and the risk of
fluctuations in interest rates on leverage capital, which may affect the return
to the holders of our common shares or cause fluctuations in the distributions
paid on our common shares. The fee paid to our Advisor will be calculated on the
basis of our Managed Assets, including proceeds from leverage capital. During
periods in which we use leverage, the fee payable to our Advisor will be higher
than if we did not use leverage. Consequently, we and our Advisor may have
differing interests in determining whether to leverage our assets. Our Board of
Directors will monitor our use of leverage and this potential
conflict.
Under the
1940 Act, we are not permitted to issue preferred stock unless immediately after
such issuance, the value of our total assets (including the proceeds of such
issuance) less all liabilities and indebtedness not represented by senior
securities is at least equal to 200% of the total of the aggregate amount of
senior securities representing indebtedness plus the aggregate liquidation value
of the outstanding preferred stock. Stated another way, we may not issue
preferred stock that, together with outstanding preferred stock and fixed income
securities, has a total aggregate liquidation value and outstanding principal
amount of more than 50% of the amount of our total assets, including the
proceeds of such issuance, less liabilities and indebtedness not represented by
senior securities. In addition, we are not permitted to declare any cash
dividend or other distribution on our common stock, or purchase any of our
shares of common stock (through tender offers or otherwise), unless we would
satisfy this 200% asset coverage after deducting the amount of such dividend,
distribution or share purchase price, as the case may be. We may, as a result of
market conditions or otherwise, be required to purchase or redeem preferred
stock, or sell a portion of our investments when it may be disadvantageous to do
so, in order to
maintain the required asset coverage. Common stockholders would
bear the costs of issuing 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.
Under the
1940 Act, we are not permitted to issue debt securities or incur other
indebtedness constituting senior securities unless immediately thereafter, the
value of our total assets (including the proceeds of the indebtedness) less all
liabilities and indebtedness not represented by senior securities is at least
equal to 300% of the amount of the outstanding indebtedness. Stated another way,
we may not issue debt securities in a principal amount of more than 33.33% of
the amount of our total assets, including the amount borrowed, less all
liabilities and indebtedness not represented by senior securities. We also must
maintain this 300% asset coverage for as long as the indebtedness is
outstanding. The 1940 Act provides that we may not declare any cash dividend or
other distribution on common or preferred stock, or purchase any of our shares
of stock (through tender offers or otherwise), unless we would satisfy this 300%
asset coverage after deducting the amount of the dividend, other distribution or
share purchase price, as the case may be. If the asset coverage for indebtedness
declines to less than 300% as a result of market fluctuations or otherwise, we
may be required to redeem debt securities, or sell a portion of our investments
when it may be disadvantageous to do so. Under the 1940 Act, we may only issue
one class of senior securities representing indebtedness.
Effects
of Leverage
The
following table is designed to illustrate the effect of leverage on the return
to a holder of our common shares in the amount of approximately 20% of our total
assets, assuming hypothetical annual returns of our portfolio of minus 10% to
plus 10%. As the table shows, leverage generally increases the return to holders
of common shares when portfolio return is positive and greater than the cost of
leverage and decreases the return when the portfolio return is negative or less
than the cost of leverage. The figures appearing in the table are hypothetical
and actual returns may be greater or less than those appearing in the table. See
"Risks – Risks Related to Our Operations – Leverage."
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Assumed Portfolio Return (net of
expenses)
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|
(10)%
|
(5)%
|
0%
|
5%
|
10%
|
Corresponding
Common Shares Return
|
(14.3 )%
|
(8.3 )%
|
(2.4 )%
|
3.6%
|
9.5%
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Hedging
Transactions
In an
attempt to reduce the interest rate risk arising from our leveraged capital
structure, we may use interest rate transactions such as swaps, caps and floors.
The use of interest rate transactions is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. In an interest rate swap, we would
agree to pay to the other party to the interest rate swap (known as the
"counterparty") a fixed rate payment in exchange for the counterparty agreeing
to pay to us a variable rate payment intended to approximate our variable rate
payment 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 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 any
outstanding fixed income securities or preferred stock. We will,
however, accrue the amount of our obligations under any interest rate
transactions and designate on our books and records with our custodian, an
amount of cash or liquid high grade securities having an aggregate net asset
value at all times at least equal to that amount. 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. See "Risks – Risks Related
to Our Operations – Hedging Strategy Risk."
Directors
and Executive Officers
Our
business and affairs are managed under the direction of our Board of Directors.
Accordingly, our Board of Directors provides broad supervision over our affairs,
including supervision of the duties performed by our Advisor. Certain employees
of our Advisor are responsible for our day-to-day operations. The names and ages
of our directors and executive officers, together with their principal
occupations and other affiliations during the past five years, are set forth
below. Each director and executive officer will hold office for the term to
which he is elected and until his successor is duly elected and qualifies, or
until he resigns or is removed in the manner provided by law. Unless otherwise
indicated, the address of each director and executive officer is 11550 Ash
Street, Suite 300, Leawood, Kansas 66211. Our Board of Directors consists of a
majority of directors who are not "interested persons" (as defined in the 1940
Act) of our Advisor or its affiliates ("Independent Directors"). The directors
who are "interested persons" (as defined in the 1940 Act) are referred to as
"Interested Directors." Under our Articles of Incorporation (the "Charter"), the
Board of Directors is divided into three classes. Each class of directors will
hold office for a three-year term. However, the initial members of the three
classes have initial terms of one, two and three years, respectively. At each
annual meeting of our stockholders, the successors to the class of directors
whose terms expire at such meeting will be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election and until their successors are duly elected and
qualify.
Name and
Age
|
Position(s)
Held
with
Fund,
Term
of Office
and
Length of
Time Served
|
Principal
Occupation
During Past Five Years
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director(1)
|
Other
Public Company Directorships
Held by Director/Officer
|
Independent
Directors
|
|
|
|
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Conrad
S. Ciccotello
(Born
1960)
|
Class II
Director,
Director since
inception
|
Tenured
Associate Professor of Risk Management and Insurance, Robinson College of
Business, Georgia State University (faculty member since 1999); Director
of Graduate Personal Financial Planning Programs; formerly, Editor,
"Financial Services Review," (2001-2007) (an academic journal dedicated to
the study of individual financial management); formerly, faculty member,
Pennsylvania State University (1997-1999). Published several
academic and professional journal articles about energy infrastructure and
oil and gas MLPs.
|
7
|
None
|
John
R. Graham
(Born
1945)
|
Class I
Director,
Director since
inception
|
Executive-in-Residence
and Professor of Finance (part-time), College of Business Administration,
Kansas State University (has served as a professor or adjunct professor
since 1970); Chairman of the Board, President and CEO, Graham Capital
Management, Inc. (primarily a real estate development, investment and
venture capital company); Owner of Graham Ventures (a business services
and venture capital firm); Part-time Vice President Investments, FB
Capital Management, Inc. (a registered investment adviser), since 2007.
Formerly, CEO, Kansas Farm Bureau Financial Services, including seven
affiliated insurance or financial service companies
(1979-2000).
|
7
|
Kansas
State
Bank
|
Charles
E. Heath
(Born
1944)
|
Class III
Director,
Director since
inception
|
Retired
in 1999. Formerly, Chief Investment Officer, GE Capital’s Employers
Reinsurance Corporation (1989-1999); Chartered Financial Analyst ("CFA")
designation since 1974.
|
7
|
None
|
Name and
Age
|
Position(s)
Held
with
Fund,
Term
of Office
and
Length of
Time Served
|
Principal
Occupation
During Past Five Years
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director(1)
|
Other
Public Company Directorships
Held by
Director/Officer
|
Interested
Directors and Officers(2)
|
|
|
|
|
H.
Kevin Birzer
(Born
1959)
|
Class I
Director,
Director and
Chairman of the Board since inception
|
Managing
Director of the Advisor since 2002; Member, Fountain Capital Management
("Fountain Capital") (1990-June 2009); Director and Chairman of the Board
of each of TYG, TYY, TYN, TTO and the two private investment companies
managed by the Advisor since its inception; formerly, Vice President,
Corporate Finance Department, Drexel Burnham Lambert (1986-1989);
formerly, Vice President, F. Martin Koenig & Co., an investment
management firm (1983-1986); CFA designation since
1988.
|
7
|
None
|
Terry
C. Matlack
(Born
1956)
|
Class III
Director,
Director and
Chief Financial Officer since inception
|
Managing
Director of the Advisor since 2002; Full-time Managing Director, Kansas
City Equity Partners, L.C. ("KCEP") (2001-2002); formerly, President,
GreenStreet Capital, a private investment firm (1998-2001); Director and
Chief Financial Officer of each of TYG, TYY, TYN, TTO and the two
privately held investment companies managed by the Advisor since its
inception; Chief Compliance Officer of TYG from 2004 through May 2006
and of each of TYY and TYN from their inception through May 2006;
Treasurer of each of TYG, TYY and TYN from their inception to
November 2005; Assistant Treasurer of TYG, TYY and TYN from November
2005 to April 2008, of TTO and one of the two private investment
companies from their inception to April 2008, and of the other private
investment company since its inception; CFA designation since
1985.
|
7
|
None
|
David
J. Schulte
(Born
1961)
|
President
and Chief Executive Officer since inception
|
Managing
Director of the Advisor since 2002; Full-time Managing Director, KCEP
(1993-2002); President and Chief Executive Officer of TYG since 2003 and
of TYY since 2005; Chief Executive Officer of TYN since 2005 and President
of TYN from 2005 to September 2008; Chief Executive Officer of TTO
since 2005 and President of TTO from 2005 to April 2007; President of one
of the two private investment companies since 2007 and of the other
private investment company from 2007 to June 2008; Chief Executive Officer
of one of the two private investment companies since 2007 and of the other
private investment company from 2007 to December 2008; CFA designation
since 1992.
|
N/A
|
None
|
Zachary
A. Hamel
(Born
1965)
|
Senior
Vice President since inception
|
Managing
Director of the Advisor since 2002; Partner, Fountain Capital
(1997-present); Senior Vice President of TYY and TTO since 2005 and of
TYG, TYN and the two private investment companies since 2007; Secretary of
each of TYG, TYY, TYN and TTO from
|
N/A
|
None
|
Name and
Age
|
Position(s)
Held
with
Fund,
Term
of Office
and
Length of
Time Served
|
Principal
Occupation
During Past Five Years
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director(1)
|
Other
Public Company Directorships
Held by
Director/Officer
|
|
|
their
inception to April 2007; CFA designation since 1998. |
|
|
|
|
|
|
|
Kenneth
P. Malvey
(Born
1965)
|
Senior
Vice President and Treasurer since inception
|
Managing
Director of the Advisor since 2002; Partner, Fountain Capital
(2002-present); formerly, Investment Risk Manager and member of the Global
Office of Investments, GE Capital’s Employers Reinsurance Corporation
(1996-2002); Treasurer of TYG, TYY and TYN since November 2005, of
TTO since September 2005, and of the two private investment companies
since 2007; Senior Vice President of TYY and TTO since 2005, and of TYG,
TYN and the two private investment companies since 2007; Assistant
Treasurer of TYG, TYY and TYN from their inception to November 2005;
Chief Executive Officer of one of the private investment companies since
December 2008; CFA designation since 1996.
|
N/A
|
None
|
__________
(1)
|
This
number includes four publicly traded closed-end funds (Tortoise Energy
Infrastructure Corporation ("TYG"), Tortoise Energy Capital Corporation
("TYY"), Tortoise North American Energy Corporation ("TYN") and Tortoise
Capital Resources Corporation ("TTO"), two privately-held closed-end funds
and the Fund. Our Advisor also serves as the investment adviser to these
funds.
|
|
|
(2)
|
As
a result of their respective positions held with the Advisor or its
affiliates, these individuals are considered "interested persons" within
the meaning of the 1940 Act.
|
Other
Senior Investment Professionals
Rob
Thummel joined the Advisor in 2004 as an Investment Analyst. In September 2008,
he was appointed President of TYN. Previously, Mr. Thummel was Director of
Finance at KLT Inc., a subsidiary of Great Plains Energy from 1998 to 2004 and a
Senior Auditor at Ernst & Young from 1995 to 1998. Mr. Thummel earned a
master of Business Administration from the University of Kansas and a Bachelor
of Science in Accounting from Kansas State University.
Bernard
Colson joined the Advisor in 2007 as an Investment Analyst. Previously,
Mr. Colson was an Investment Analyst at Waddell & Reed from 2004 to 2006
where he covered the electric utilities and media industries. Prior to
Waddell & Reed, Mr. Colson was an Investment Analyst at Citigroup Asset
Management from 2001 to 2004, where he covered the electric utilities and was a
member of the Large Cap Core portfolio management team. He received a
Bachelor of Arts degree in Sociology from Yale University and a Master of
Business Administration from the University of Michigan Business School.
Mr. Colson received his CFA destination in 2002.
Audit
and Valuation Committee
Our Board
of Directors has a standing Audit and Valuation Committee that consists of three
Independent Directors of the Fund: Mr. Ciccotello (Chairman),
Mr. Graham, and Mr. Heath. The Audit and Valuation
Committee’s function is to select an independent registered public accounting
firm to conduct the annual audit of our financial statements, review with the
independent registered public accounting firm the outline, scope and results of
this annual audit, review the investment valuations proposed by our Advisor’s
investment committee and review the performance and approval of all fees charged
by the independent registered public accounting firm for audit, audit-related
and other professional services. In addition, the Audit and Valuation Committee
meets with the independent registered public accounting firm and representatives
of management to review accounting activities and areas of financial reporting
and control. The Audit and Valuation Committee has at least one member who is
deemed to be a financial expert and operates under a written charter approved by
the Board of Directors. The Audit and Valuation Committee meets periodically, as
necessary.
Nominating
and Governance Committee
We have a
Nominating and Governance Committee that consists exclusively of our three
Independent Directors: Conrad S. Ciccotello, John R. Graham (Chairman) and
Charles E. Heath. The Nominating and Governance Committee’s function
is to: (1) identify individuals qualified to become Board members,
consistent with criteria approved by our Board of Directors, and to recommend to
the Board of Directors the director nominees for the next annual meeting of
stockholders and to fill any vacancies; (2) monitor the structure and
membership of Board committees; (3) review issues and developments related
to corporate governance issues and develop and recommend to the Board of
Directors corporate governance guidelines and procedures to the extent necessary
or desirable; (4) evaluate and make recommendations to the Board of
Directors regarding director compensation; and (5) oversee the evaluation
of the Board of Directors. The Nominating and Governance Committee will consider
stockholder recommendations for nominees for membership to the Board of
Directors so long as such recommendations are made in accordance with our
Bylaws.
Compliance
Committee
We have a
Compliance Committee that consists exclusively of our three Independent
Directors: Conrad S. Ciccotello, John R. Graham and Charles E. Heath
(Chairman). The Compliance Committee’s function is to review and
assess management’s compliance with applicable securities laws, rules and
regulations, monitor compliance with our Code of Ethics, and handle other
matters as the Board of Directors or committee chair deems
appropriate.
Board
Compensation
Our
directors and officers who are interested persons will receive no salary or fees
from us. Each Independent Director will receive from us a fee of $2,000 (and
reimbursement for related expenses) for each meeting of the Board of Directors
or Audit and Valuation Committee he or she attends in person (or $1,000 for each
Board of Directors or Audit and Valuation Committee meeting attended
telephonically, or for each Audit and Valuation Committee meeting attended in
person that is held on the same day as a Board of Directors meeting).
Independent Directors also receive $1,000 for each other committee meeting
attended in person or telephonically (other than Audit and Valuation Committee
meetings). The annual retainer of each Independent Director and for the chairman
of the Audit and Valuation Committee and other Committee Chairmen will be
determined by the Board of Directors after completion of this
offering.
We do not
compensate our officers. No director or officer is entitled to receive pension
or retirement benefits from us and no director receives any compensation from us
other than in cash.
Our
Advisor
We
have entered into an investment advisory agreement with Tortoise Capital
Advisors, L.L.C., a registered investment adviser, pursuant to which it will
serve as our investment adviser (the “Initial Investment Advisory
Agreement”). The Initial Investment Advisory Agreement will become
effective upon the closing of this offering. Our Advisor was formed
in October 2002 and has been managing assets in portfolios of MLPs and other
energy infrastructure companies since that time. Our Advisor also manages the
investments of four publicly traded funds and two privately-held funds, all of
which are non-diversified, closed-end management investment companies and one of
which has elected to be regulated as a BDC under the 1940
Act.
Our
Advisor is controlled equally by FCM Tortoise, L.L.C. ("FCM"), an affiliate of
Fountain Capital and Kansas City Equity Partners, L.C. ("KCEP"). KCEP
has no operations and is a holding company. FCM has no operations and
serves as a holding company. Fountain
Capital’s ownership in our Advisor was transferred to FCM, an entity with the
same principals as Fountain Capital, effective as of August 2,
2007. The transfer did not result in a change in control of our
Advisor.
|
•
|
Our
Advisor was formed in 2002 by Fountain Capital and KCEP to provide
portfolio management services exclusively with respect to energy
infrastructure investments.
|
|
•
|
Fountain
Capital was formed in 1990 and focuses primarily on providing investment
advisory services to institutional investors with respect to
non-investment grade rated debt.
|
|
•
|
KCEP
was formed in 1993 and 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 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 Administration ("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.
|
On
June 3, 2009, our Advisor announced that senior management of our Advisor
entered into a definitive agreement to acquire, along with Mariner Holdings, LLC
(“Mariner”), all of the ownership interests in our Advisor. As part
of the transaction, Mariner will purchase a majority stake in our Advisor, with
the intention to provide growth capital and resources, and serve as a
complementary strategic partner in the asset management business (the “Proposed
Transaction”). Mariner is an independent investment firm with affiliates focused
on wealth and asset management. Mariner was founded in 2006 by former A.G.
Edwards investment professionals and management staff led by Marty Bicknell, and
has grown to more than 50 employees with $1.3 billion of assets under management
as of April 30, 2009.
The
portfolio management, investment objectives and policies, and investment
processes of the Fund will not change as a result of the Proposed Transaction or
entering into the proposed new investment advisory agreement (the “New
Investment Advisory Agreement”) with our Advisor, as discussed
below. The current Managing Directors of our Advisor will continue to
serve as the Investment Committee of our Advisor responsible for the investment
management of the Fund’s portfolio. The Advisor will retain its name
and will remain located at 11550 Ash Street, Suite 300, Leawood, Kansas
66211.
The
business and affairs of our Advisor are currently managed by David J.
Schulte, Chief Executive Officer and President of the Fund; Terry Matlack, a
director and the Chief Financial Officer of the Fund; H. Kevin Birzer, director
and Chairman of the Board of the Fund, Zachary A. Hamel, Senior Vice President
of the Fund, and Kenneth P. Malvey, Senior Vice President and Treasurer of the
Fund. Each of Messrs. Schulte, Matlack, Birzer, Hamel and Malvey will
continue to serve as Managing Directors of our Advisor and will continue to own
a portion of the Advisor following the Proposed Transaction.
Our
Advisor has 33 full-time employees, with a 20 member investment team, including
five members of the investment committee of our Advisor.
Investment
Committee
Management of
our portfolio is the responsibility of our Advisor. Each of our Advisor’s
investment decisions will be reviewed and approved for us by its investment
committee, which also acts as the investment committee for the four publicly
held funds, and the two privately-held funds managed by our
Advisor. Our Advisor’s investment committee is comprised of its five
Managing Directors: H. Kevin Birzer, Zachary A. Hamel, Kenneth P. Malvey,
Terry C. Matlack and David J. Schulte. The members of our Advisor’s investment
committee have an average of over 23 years of investment experience. All
decisions to invest in a portfolio company must be approved by the unanimous
decision of our Advisor’s investment committee, and any one member of our
Advisor’s investment committee can require our Advisor to sell a security.
Biographical information about each member of our Advisor’s investment committee
is set forth below.
Kevin
Birzer
Kevin
Birzer has been a Managing Director of TCA since 2002
.. Mr. Birzer has 28 years of investment experience, and began
his career in 1981 at KPMG 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. In 1990, Mr. Birzer co-founded Fountain Capital, a high
yield bond management firm, where he remained a part owner until June
2009. He earned his CFA designation in 1988.
Zachary
Hamel
Zachary
Hamel has been a Managing Director of our Advisor since 2002 and is also a
Partner with Fountain Capital. Mr. Hamel also serves as Senior Vice
President of the four publicly traded funds and the two privately-held funds
managed by our Advisor. Mr. Hamel joined Fountain Capital in
1997 and covered the energy, chemicals and utilities sectors. Prior to joining
Fountain Capital, Mr. Hamel worked for the Federal Deposit Insurance Corp.
("FDIC") for eight years as a Bank Examiner and a Regional Capital Markets
Specialist. He earned his CFA designation in 1998.
Ken
Malvey
Ken
Malvey has been a Managing Director of TCA since 2002 and is also Partner with
Fountain Capital. Mr. Malvey also serves as Senior Vice President and
Treasurer of the four publicly traded funds and the two privately held funds
managed by our Advisor and as the Chief Executive Officer of one of the
privately held funds. Prior to joining Fountain Capital in 2002, Mr.
Malvey was one of three members of the Global Office of Investments for GE
Capital’s Employers Reinsurance Corporation. Most recently, he was
the Global Investment Risk Manger for a portfolio of approximately $24 billion
of fixed-income, public equity and alternative investment assets. Before
joining GE Capital in 1996, he was a Bank Examiner and Regional Capital Markets
Specialist with the FDIC for nine years. He earned his CFA
designation in 1996.
Terry
Matlack
Terry
Matlack has been a Managing Director of our Advisor since 2002 and serves as
Chief Financial Officer and Director of the four publicly traded funds and the
two privately-held funds managed by our Advisor. From 2001 to 2002,
Mr. Matlack was a full-time Managing Director at KCEP. Prior to joining
KCEP, Mr. Matlack was President of GreenStreet Capital and its affiliates
in the telecommunications service industry. Mr. Matlack has also served as
the Executive Vice President and a board member 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 earned his CFA designation
in 1985.
David
Schulte
David
Schulte has been a Managing Director of our Advisor since 2002 and serves as
Chief Executive Officer and President of two of the publicly traded funds, and
as Chief Executive Officer of the other two publicly traded funds and one of the
privately-held funds managed by our Advisor, and as President of the other
privately-held fund. Previously, Mr. Schulte was a full-time
Managing Director at KCEP from 1993 to 2002, where he led private financing for
two growth MLPs. Mr. Schulte served on the Board of Directors of Inergy,
LP, a propane gas MLP, from 2001 to 2004. Before joining KCEP, he spent five
years as an investment banker at the predecessor of Oppenheimer & Co.,
Inc. He is a certified public accountant ("CPA") and also earned his
CFA designation in 1992.
The
following table provides information about the other accounts managed on a
day-to-day basis by each member of our Advisor’s investment committee as of
December 31, 2008:
|
|
Number
of
Accounts
|
|
|
Total
Assets of
Accounts
|
|
|
Number
of
Accounts
Paying a
Performance
Fee
|
|
|
Total Assets
of Accounts
Paying a
Performance
Fee
|
|
H.
Kevin Birzer
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other
pooled investment vehicles
|
|
|
4
|
|
|
$ |
157,970,377 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other
accounts
|
|
|
213
|
|
|
$ |
1,462,563,20 |
|
|
|
0
|
|
|
$ |
0 |
|
|
|
Number
of
Accounts
|
|
|
Total
Assets of
Accounts
|
|
|
Number
of
Accounts
Paying a
Performance
Fee
|
|
|
Total Assets
of Accounts
Paying a
Performance
Fee
|
Zachary
A. Hamel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other
pooled investment vehicles
|
|
|
4
|
|
|
$ |
157,970,377 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other
accounts
|
|
|
213
|
|
|
$ |
1,462,563,20 |
|
|
|
0
|
|
|
$ |
0 |
|
Kenneth
P. Malvey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other
pooled investment vehicles
|
|
|
4
|
|
|
$ |
157,970,377 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other
accounts
|
|
|
213
|
|
|
$ |
1,462,563,20 |
|
|
|
0
|
|
|
$ |
0 |
|
Terry
C. Matlack
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other
pooled investment vehicles
|
|
|
1
|
|
|
$ |
102,958,967 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other
accounts
|
|
|
200
|
|
|
$ |
227,767,796 |
|
|
|
0
|
|
|
$ |
0 |
|
David
J. Schulte
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered
investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other
pooled investment vehicles
|
|
|
1
|
|
|
$ |
102,958,967 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other
accounts
|
|
|
200
|
|
|
$ |
227,767,796 |
|
|
|
0
|
|
|
$ |
0 |
|
Messrs. Birzer,
Hamel, Malvey, Matlack and Schulte will not receive any direct compensation from
us or any other of the managed accounts reflected in the table above. All such
accounts are managed by our Advisor or Fountain Capital. All members of our
Advisor’s investment committee are full-time employees of our Advisor and
receive a fixed salary for the services they provide. Each of
Messrs. Birzer, Hamel, Malvey, Matlack and Schulte own an equity interest
in either KCEP or FCM Tortoise, L.L.C., the two entities that control our
Advisor, and each thus benefits from increases in the net income of our
Advisor.
Conflicts
of Interest
Our
Advisor has a conflict of interest in allocating potentially more favorable
investment opportunities to other funds and clients that pay our Advisor an
incentive or performance fee. Performance and incentive fees also create the
incentive to allocate potentially riskier, but potentially better performing,
investments to such funds and other clients in an effort to increase the
incentive fee. Our Advisor may also have an incentive to make investments in one
fund, having the effect of increasing the value of a security in the same issuer
held by another fund, which in turn may result in an incentive fee being paid to
our Advisor by that other fund. Our Advisor has written allocation policies and
procedures that it will follow in addressing any conflicts. When two or more
clients advised by our Advisor or its affiliates seek to purchase or sell the
same securities, the securities actually purchased or sold will be allocated
among the clients on a good faith equitable basis by our Advisor in its
discretion and in accordance with each client’s investment objectives and our
Advisor’s 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 large volume transactions may produce better execution for
us.
Our
Advisor also serves as investment adviser for four other publicly traded and two
privately held closed-end management investment companies, all of which invest
in the energy sector. See "Management of the Fund – Our
Advisor."
Our
Advisor will evaluate a variety of factors in determining whether a particular
investment opportunity or strategy is appropriate and feasible for a relevant
client account at a particular time, including, but not limited to, the
following: (i) the nature of the investment opportunity taken in the
context of the other investments at the time; (ii) the liquidity of the
investment relative to the needs of the particular entity or account;
(iii) the availability of the opportunity (i.e., size of obtainable
position); (iv) the transaction costs involved; and (v) the investment
or regulatory limitations applicable to the particular entity or account.
Because these considerations may differ when applied to us and other relevant
client accounts in the context of any particular investment opportunity, our
investment activities may differ considerably from those of other clients of our
Advisor.
Situations
may occur when we could be disadvantaged because of the investment activities
conducted by our Advisor and its affiliates for their other accounts. Such
situations may be based on, among other things, the following: (1) legal or
internal restrictions on the combined size of positions that may be taken for us
or the other accounts, thereby limiting the size of our position; (2) the
difficulty of liquidating an investment for us or the other accounts where the
market cannot absorb the sale of the combined position; or (3) limits on
co-investing in private placement securities under the 1940 Act. Our investment
opportunities may be limited by affiliations of our Advisor or its affiliates
with power and energy infrastructure companies.
Under the
1940 Act, we and our affiliated companies are generally precluded from
co-investing in negotiated private placements of securities. Except as permitted
by law, our Advisor will not co-invest its other clients’ assets in negotiated
private transactions in which we invest. To the extent we are precluded from
such co-investing, our Advisor will allocate non-negotiated private placement
investment opportunities among its clients, including but not limited to us and
our affiliated companies, based on allocation policies that take into account
several suitability factors, including the size of the investment opportunity,
the amount each client has available for investment and the client’s investment
objectives. These allocation policies may result in the allocation of investment
opportunities to an affiliated company rather than to us.
The fair
value of certain securities will be determined pursuant to methodologies
established by our Board of Directors. Fair value pricing involves judgments
that are inherently subjective and inexact. Our Advisor is subject to a conflict
of interest in determining the fair value of securities in our portfolio, as the
management fees we pay our Advisor are based on the value of our average monthly
Managed Assets.
Investment
Advisory Agreement
The
Proposed Transaction described above is subject to the receipt of certain
approvals and the fulfillment of certain other conditions. The Proposed
Transaction will result in a change in control of the Advisor and will,
therefore, constitute an “assignment” of the Initial Investment Advisory
Agreement within the meaning of the Investment Company Act of 1940, as amended
(the “1940 Act”). An investment advisory agreement automatically terminates upon
its “assignment” under the applicable provisions of the 1940 Act. As
of the closing date of the Proposed Transaction, which is expected to be
completed in the third calendar quarter of 2009, the Initial Investment Advisory
Agreement will terminate.
The
terms of the New Investment Advisory Agreement are identical to the terms of the
Initial Investment Advisory Agreement, except for the effective and termination
dates, and would simply continue the relationship between the Fund and our
Advisor. The services provided by the Advisor and the amount of the
advisory fee paid to the Advisor by the Fund will not change.
In
anticipation of the assignment and termination of the Initial Investment
Advisory Agreement, the New Investment Advisory Agreement has been reviewed and
approved by our Board of Directors, see “—Board Approval of the Investment
Advisory Agreements,” and our existing stockholders and will become effective
upon completion of the Proposed Transaction and will continue in effect for an
initial period that runs through December 31, 2010. Thereafter, the
New Investment Advisory Agreement will continue annually, provided that its
continuance is approved by the Board of Directors, including a majority of the
Directors who are not parties to the New Investment Advisory Agreement or
“interested persons” (as defined in the 1940 Act) of any such party (the
“Independent Directors”), at a meeting called for that purpose, or by vote of a
majority of the outstanding shares of the Fund.
Management
Services
Pursuant
to each investment advisory agreement, our Advisor will be subject to the
overall supervision and review of our Board of Directors, will provide us with
investment research, advice and supervision and will furnish us continuously
with an investment program, consistent with our investment objectives and
strategies. Our Advisor also will determine from time to time what securities we
purchase, what securities will be held or sold, and what portions of our assets
will be held uninvested as cash, short-duration securities or in other liquid
assets, will maintain books and records with respect to all of our transactions,
and will report to our Board of Directors on our investments and
performance.
Our Advisor’s
services to us under each investment advisory agreement will not be
exclusive, and our Advisor is free to furnish the same or similar services to
other entities, including businesses that may directly or indirectly compete
with us, so long as our Advisor’s services to us are not impaired by the
provision of such services to others .
Management
Fee
For the
services, payments and facilities to be furnished by our Advisor, we will pay
our Advisor annual compensation in an amount determined by reference to the
average monthly value of our “Managed Assets.” “Managed Assets” means
our total assets (including any assets attributable to any leverage that may be
outstanding) minus the sum of accrued liabilities (other than debt representing
financial leverage and the aggregate liquidation preference of any outstanding
preferred shares). Accrued liabilities are expenses incurred in the normal
course of our operations. The compensation owed to our Advisor
following each calendar quarter will be determined by multiplying the Managed
Assets by 0.2375% (to provide an annualized fee of 0.95%). Such
compensation will
be
calculated and accrued daily and paid quarterly within five (5) days of the
end of each calendar quarter. The Advisor has agreed to a fee waiver
of 0.15% for year 1, 0.10% for year 2 and 0.05% for year 3, which will become
effective as of the close of this offering.
If either
investment advisory agreement is initiated or terminated during any month, the
fee for that month will be reduced proportionately on the basis of the number of
calendar days during which that agreement is in effect and the fee will be
computed based on the average Managed Assets for the business days that
agreement is in effect for that month.
Payment of Our Expenses
We will
bear all expenses not specifically assumed by our Advisor and incurred in our
operations, and we will bear the expenses related to our formation and this
offering. The compensation and allocable routine overhead expenses of all
investment professionals of our Advisor and its staff, when and to the extent
engaged in providing us investment advisory services, will be provided and paid
for by our Advisor and not us. The compensation and expenses borne by us
include, but are not limited to, the following:
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other
than as provided in the paragraph above, expenses of maintaining and
continuing our existence and related overhead, including, to the extent
such services are provided by personnel of our Advisor or its affiliates,
office space and facilities and personnel compensation, training and
benefits,
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commissions,
spreads, fees and other expenses connected with the acquisition, holding
and disposition of securities and other investments, including placement
and similar fees in connection with direct placements entered into on our
behalf,
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auditing,
accounting, tax and legal services
expenses,
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expenses
of listing our shares with a stock exchange, and expenses of the issue,
sale, repurchase and redemption (if any) of our
securities,
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expenses
of registering and qualifying us and our securities under federal and
state securities laws and of preparing and filing registration statements
and amendments for such purposes,
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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,
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expenses
of reports to governmental officers and
commissions,
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association
membership dues,
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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),
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fees,
expenses and disbursements of transfer agents, dividend and interest
paying agents, stockholder servicing agents, registrars and administrator
for all services to us, |
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compensation
and expenses of our directors who are not members of our Advisor’s
organization,
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pricing,
valuation and other consulting or analytical services employed in
considering and valuing our actual or prospective
investments,
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all
expenses incurred in leveraging our assets through a line of credit or
other indebtedness or issuing and maintaining preferred shares or
notes,
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all
expenses incurred in connection with our organization and the offering of
our common shares, including this offering, but not including the
structuring fee to be paid by our Advisor to Wachovia Capital Markets,
LLC, and
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such
non-recurring items as may arise, including expenses incurred in
litigation, proceedings and claims and our obligation to indemnify our
directors, officers and stockholders with respect
thereto.
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Duration and
Termination
The
Initial Investment Advisory Agreement was approved by our Board of Directors on
May 22, 2009. The Initial Investment Advisory Agreement will become
effective as of the close of this offering. Unless terminated earlier
as described below, it will continue in effect for a period of two years from
the effective date and will remain in effect from year to year thereafter if
approved annually by our Board of Directors or by the affirmative vote of the
holders of a majority of our outstanding voting securities, and, in either case,
upon approval by a majority of our directors who are not interested persons or
parties to the investment advisory agreement. As discussed above, the
Initial Investment Advisory Agreement will terminate, and the New Investment
Advisory Agreement will become effective, upon the closing of the Proposed
Transaction.
The
Initial Investment Advisory Agreement and the New Investment Advisory Agreement
provide that they may be terminated by us at any time, without the payment of
any penalty, by our Board of Directors or by the vote of the holders of a
majority of the outstanding shares of the Fund on 60 days written notice to the
Advisor. The Initial Investment Advisory Agreement and the New Investment
Advisory Agreement provide that they may be terminated by the Advisor at any
time, without the payment of any penalty, upon 60 days written notice to the
Fund. The Initial Investment Advisory Agreement and the New Investment Advisory
Agreement also provide that they will automatically terminate in the event of an
“assignment” (as defined in the 1940 Act), such as the Proposed
Transaction.
Liability
of Advisor
Both
the Initial Investment Advisory Agreement and the New Investment Advisory
Agreement provide that our Advisor will not be liable to us 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 each investment advisory agreement. However, our Advisor will be liable
to us for any loss, damage, claim, cost, charge, expense or liability resulting
from our Advisor’s willful misconduct, bad faith or gross negligence or
disregard by our Advisor of its duties or standard of care, diligence and skill
set forth in each investment advisory agreement or a material breach or default
of our Advisor’s obligations under that agreement.
Board
Approval of the Investment Advisory Agreements
Our
Board of Directors, including a majority of the Independent Directors, reviewed
and approved the Initial Investment Advisory Agreement on May 22,
2009. The Board of Directors, including a majority of the Independent
Directors, reviewed and approved the New Investment Advisory Agreement on June
2, 2009.
Prior
to our Board of Directors’ approval of the New Investment Advisory Agreement,
the Independent Directors, with the assistance of counsel independent of the
Advisor (hereinafter “independent legal counsel”), requested and evaluated
extensive materials about the Proposed Transaction and Mariner provided by the
Advisor and Mariner, which also included information from independent,
third-party sources, regarding the factors considered in their
evaluation.
Our
Independent Directors first learned of the potential Proposed Transaction in
January 2009. Prior to conducting due diligence of the Proposed
Transaction and of Mariner, each Independent Director had a personal meeting
with key officials of Mariner. In February 2009, the Independent
Directors consulted with independent legal counsel regarding the role of the
Independent Directors in the Proposed Transaction. Also in February
2009, the Independent Directors, in conjunction with independent legal counsel,
prepared and
submitted their own due diligence request list to Mariner, so that the
Independent Directors could better understand the effect the change of control
would have on our Advisor. In March 2009, the Independent Directors,
in conjunction with independent legal counsel reviewed the written materials
provided by Mariner. In April and May 2009, the Independent Directors
asked for supplemental written due diligence information and were given such
follow-up information about Mariner and the Proposed
Transaction.
In May
2009, our Independent Directors interviewed key Mariner personnel and asked
follow-up questions after having completed a review of all documents provided in
response to formal due diligence requests. In particular, the
follow-up questions focused on (i) the expected continuity of management and
employees at our Advisor, (ii) compliance and regulatory experience of our
Advisor, (iii) plans to maintain our Advisor’s compliance and regulatory
personnel and (iv) benefit and incentive plans used to maintain our Advisor’s
current personnel. On May 22, 2009, our Independent Directors and
Mariner officials met to discuss the Proposed Transaction. Our
Independent Directors also met in person with Mariner officials in May in the
interest of better getting to know key personnel at Mariner. Our
Independent Directors also discussed the Proposed Transaction and the findings
of the Mariner diligence investigation with independent legal counsel in private
sessions.
In
approving the Initial Investment Advisory Agreement and the New Investment
Advisory Agreement, our Independent Directors requested and received extensive
data and information from our Advisor concerning the Fund and the anticipated
services to be provided to it by our Advisor. The extensive data and
information reviewed, in conjunction with the results of the diligence
investigation of the Proposed Transaction and Mariner, form the basis of the
conclusions reached below.
Our
Board of Directors, including the Independent Directors, considered and
evaluated all the information provided by our Advisor. The
Independent Directors did not identify any single factor as being all-important
or controlling, and each Director may have attributed different levels of
importance to different factors. In deciding to approve the Initial Investment
Advisory Agreement and the New Investment Advisory Agreement, the Independent
Directors’ decision was based on the following factors and what, if any, impact
the Proposed Transaction would have on such factors.
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Services. Our
Board of Directors reviewed the nature, extent and quality of the
investment advisory and administrative services proposed to be provided to
us by our Advisor and found them sufficient to encompass the range of
services necessary for our operation. Our Independent Directors
considered information regarding the history, qualification and background
of our Advisor and the individuals responsible for our Advisor’s
investment program, the adequacy of the number of the Advisor personnel
and other Advisor resources and plans for growth, use of affiliates of our
Advisor, and the particular expertise with respect to power and energy
infrastructure companies, MLP markets and financing (including private
financing). The Independent Directors concluded that the unique nature of
the Fund and the specialized expertise of the Advisor in the niche market
of MLPs made it uniquely qualified to serve as the advisor. Further, the
Independent Directors recognized that the Advisor’s commitment to a
long-term investment horizon correlated well to the investment strategy of
the Fund.
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Comparison of
Management Fee to
Other Firms Management Fees. Our Board of Directors
reviewed and considered, to the extent publicly available, the management
fee arrangements of various groups of companies with business models that
are similar to different aspects of our investment
strategy. Our Independent Directors reviewed and evaluated
information regarding the performance of the other Advisor accounts
(including other investment companies), and information regarding the
nature of the markets during the performance period, with a particular
focus on the MLP sector. The Independent Directors
considered and evaluated information regarding fees charged to, and
services provided to, other investment companies advised by our Advisor
(including the impact of any fee waiver or reimbursement arrangements and
any expense reimbursement arrangements), fees charged to separate
institutional accounts by our Advisor, and comparisons of fees of
closed-end funds with similar investment objectives and strategies,
including other MLP investment companies, to the Fund. The Independent
Directors concluded that the fees and expenses that the Fund will pay
under the initial and New Investment Advisory Agreements are reasonable
given the quality of services to be provided under the initial and New
Investment Advisory Agreements and that such fees and expenses are
comparable to, and in many cases lower than, the fees charged by advisors
to comparable funds.
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Experience of Management Team
and Personnel. Our Board of Directors considered the
extensive experience of the members of our Advisor’s investment committee
with respect to the specific types of investments we propose to make and
their past experience with similar kinds of investments. Our Board of
Directors discussed numerous aspects of our investment strategy with
members of our Advisor’s investment committee and also considered the
potential flow of
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investment
opportunities resulting from the numerous relationships of our Advisor’s
investment committee and investment professionals within the investment
community.
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Provisions of Investment
Advisory Agreement. Our Board of Directors considered
the extent to which the provisions of the investment advisory agreement
were comparable to the investment advisory agreements of various groups of
companies with business models that are similar to different aspects of
our investment strategy, including peer group companies, and concluded
that its terms were satisfactory and in line with market norms. In
addition, our Board of
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Directors concluded that the services to
be provided under the investment advisory agreement were reasonably necessary
for our operations, the services to be provided were at least equal to the
nature and quality of those provided by others, and the payment terms were fair
and reasonable in light of usual and customary charges.
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Payment of
Expenses. Our Board of Directors considered the manner
in which our Advisor would be reimbursed for its expenses at cost and the
other expenses for which it would be reimbursed under the investment
advisory agreement. Our Board of Directors discussed how this structure
was comparable to that of various groups of companies with business models
that are similar to different aspects of our investment
strategy.
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Economies of Scale. Our
Board of Directors considered information from our Advisor concerning
whether economies of scale would be realized as the Fund grows, and
whether fee levels reflect any economies of scale for the benefit of the
Fund’s stockholders. Our Board of Directors concluded that economies of
scale are difficult to measure and predict overall. Accordingly, our
Independent Directors reviewed other information, such as year-over-year
profitability of the Advisor generally and the fees of competitive funds
not managed by our Advisor over a range of asset sizes. The Independent
Directors concluded our Advisor is appropriately sharing any economies of
scale through its competitive fee structure and through reinvestment in
its business to provide stockholders additional content and
services.
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Collateral Benefits Derived by
our Advisor. Our Board of Directors reviewed information from our
Advisor concerning collateral benefits it receives as a result of its
relationship with the Fund. They concluded that our Advisor generally will
not use the Fund’s or stockholder information to generate profits in other
lines of business, and therefore will not derive any significant
collateral benefits from them.
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The
Independent Directors did not, with respect to their deliberations concerning
their approval of the Initial Investment Advisory Agreement or the New
Investment Advisory Agreement, consider the benefits our Advisor may derive from
relationships our Advisor may have with brokers through soft dollar arrangements
because our Advisor will not employ any such arrangements in rendering its
advisory services to the Fund. Although our Advisor may receive research from
brokers with whom it places trades on behalf of clients, our Advisor does not
have soft dollar arrangements or understandings with such brokers regarding
receipt of research in return for commissions.
Based
on the information reviewed and the discussions among the members of our Board
of Directors, our Board of Directors, including all of our Independent
Directors, approved the Initial Investment Advisory Agreement and concluded that
the management fee to be paid to our Advisor was reasonable in relation to the
services to be provided.
Our
Board of Directors, including the Independent Directors, assisted by the advice
of legal counsel that is independent of our Advisor, taking into account all of
the factors discussed above and the information provided by our Advisor,
unanimously concluded that the New Investment Advisory Agreement between the
Fund and our Advisor is fair and reasonable in light of the services provided
and should be approved.
Section 15(f)
of the 1940 Act
Section 15(f)
of the 1940 Act provides that when a sale of an interest in an investment
adviser of a registered investment company occurs that results in an assignment
of an investment advisory agreement, the investment adviser or any of its
affiliated persons may receive any amount or benefit in connection with the sale
so long as two conditions are satisfied. The first condition of
Section 15(f) is that during the three-year period following the completion
of the transaction, at least 75% of the investment company’s board of directors
must not be “interested persons” (as defined in the 1940 Act) of the investment
adviser or predecessor advisor. In order to meet this test it is expected that
Terry Matlack, one of the five members of our Advisor’s Investment Committee,
will resign from our Board of Directors upon completion of the Proposed
Transaction. Second, an “unfair burden” (as defined in the 1940 Act)
must not be imposed on the investment company as a result of the transaction
relating to the sale of such interest, or any express or implied terms,
conditions or understandings applicable thereto. The term “unfair burden”
includes any arrangement during the two-year period after the transaction
whereby the investment adviser (or predecessor or successor advisor), or any
“interested person”
(as defined in the 1940 Act) of such an advisor, receives or is entitled to
receive any compensation, directly or indirectly, from the investment company or
its security holders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than bona fide ordinary compensation as principal underwriter for the
investment company). Our Board of Directors has determined that the
Proposed Transaction will not impose an “unfair burden” on the Fund and that the
Advisor will not receive any compensation that will result in an “unfair burden”
under the 1940 Act definition
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License
Agreement
Pursuant to
the investment advisory agreement, our Advisor has consented to our use on a
non-exclusive, royalty-free basis, of the name “Tortoise” in our name. We will
have the right to use the “Tortoise” name so long as our Advisor or one of its
approved affiliates remains our investment adviser. Other than with respect to
this limited right, we will have no legal right to the “Tortoise” name. This
right will remain in effect for so long as the investment advisory agreement
with our Advisor is in effect and will automatically terminate if the investment
advisory agreement were to terminate for any reason, including upon its
assignment.
Investing
in our common shares 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 our common shares you should
consider carefully the following risks. We are designed primarily as
a long-term investment vehicle, and our common shares are not an appropriate
investment for a short-term trading strategy. An investment in our
common shares 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
objectives.
Risks
Related to Our Operations
No
Operating History.
We are a Maryland corporation registered as a non-diversified, closed-end
management investment company under the 1940 Act. We are subject to all of the
business risks and uncertainties associated with any new business, including the
risk that we will not achieve our investment objectives and that the value of an
investment in our common shares could decline substantially and cause you to
lose some or all of your investment.
General Securities Risk. We
expect to invest in securities that may be subject to certain risks,
including:
Issuer Risk.
The value of the securities may decline for a number of reasons that
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's products and
services.
Credit
Risk. Credit risk is the risk that a security in our portfolio will
decline in price or the issuer will fail to make dividend, interest or principal
payments when due because the issuer of the security experiences a decline in
its financial status. We may invest up to 25% of our assets
in fixed income securities that are rated non-investment
grade. Securities rated non-investment grade are regarded as having
predominately speculative characteristics with respect to the issuer’s capacity
to pay interest and repay principal, and these bonds are commonly referred to as
"junk bonds." These securities are subject to a greater risk of
default .
Interest Rate
Risk. Interest rate risk is the risk that securities will decline in
value because of changes in market interest rates. When market interest rates
rise, the market value of certain income-generating securities generally will
fall.
Reinvestment
Risk. Reinvestment risk is the risk that income from our portfolio will
decline if we invest the proceeds from matured or traded securities at market
interest rates that are below our portfolio's current earnings rate. A decline
in income could affect the NAV of our common shares or our overall
return.
Call or
Prepayment Risk. During periods of declining interest rates, borrowers
may exercise their option to call or prepay principal earlier than scheduled,
forcing us to reinvest in lower yielding
securities.
Valuation of
Certain Securities. Certain investments with limited secondary markets
may be difficult to value. Where market quotations are not readily available,
valuation may require more research than for more liquid investments. In
addition, elements of judgment may play a greater role in valuation in such
cases than for investments with a more active secondary market because there is
less reliable objective data available. Please see "–Valuation
Risk."
Duration and
Maturity Risk. We have no set policy regarding the maturity or
duration of any or all of our securities. Holding long duration and long
maturity investments will magnify certain risks. These risks include interest
rate risk, credit risk and liquidity risks as discussed
above.
Current Capital Markets Environment
Risk. Global financial markets and economic conditions have been, and
continue to be, volatile due to a variety of factors, including significant
write-offs in the financial services sector. The capital markets have
experienced periods of significant volatility since the latter half of 2007.
General market uncertainty has resulted in declines in valuation, greater
volatility and less liquidity for a variety of securities. During
times of increased market volatility, we may not be able to sell portfolio
securities readily at prices reflecting the values at which the securities are
carried on our books. Sales of large blocks of securities by market participants
that are seeking liquidity can further reduce prices in an illiquid
market.
These
market conditions have also resulted in widening credit spreads and a lack of
price transparency in a variety of credit instruments, including fixed income
securities. In such conditions, valuation of certain fixed income portfolio
securities may be
uncertain
and/or result in sudden and significant valuation changes in our holdings.
Illiquidity and volatility in the credit markets may directly and adversely
affect the setting of distribution rates on the common
shares.
The
cost of raising capital in the fixed income and equity capital markets
has increased substantially while the ability to raise capital from those
markets has diminished significantly. In particular, as a result of concerns
about the general stability of financial markets and specifically the solvency
of lending counterparties, the cost of raising capital from the credit markets
generally has increased as many lenders and institutional investors have
increased interest rates, enacted tighter lending standards, refused to
refinance debt on existing terms or at all and reduced, or in some cases ceased
to provide, funding to borrowers. In addition, lending counterparties under
existing revolving credit facilities and other debt instruments may be unwilling
or unable to meet their funding obligations. Due to these factors, companies may
be unable to obtain new debt or equity financing on acceptable terms. If funding
is not available when needed, or is available only on unfavorable terms,
companies may not be able to meet their obligations as they come due. Moreover,
without adequate funding, companies may be unable to execute their maintenance
and growth strategies, complete future acquisitions, take advantage of other
business opportunities or respond to competitive pressures, any of which could
have a material adverse effect on their revenues and results of
operations.
The
prolonged continuation or further deterioration of current market conditions
could adversely impact our portfolio.
Investment Grade
Fixed Income Securities Risk. We intend to invest a
portion of our assets in fixed income securities rated “investment grade” by
NRSROs or judged by our Advisor to be of comparable credit
quality. Although we do not intend to do so, we may invest up to 100%
in such securities. Investment grade fixed income securities are
rated Baa3 or higher by Moody’s, BBB- or higher by S&P, or BBB- or higher by
Fitch. Investment grade fixed income securities generally pay yields
above those of otherwise-comparable U.S. government securities because they are
subject to greater risks than U.S. government securities, and yields that are
below those of non-investment grade fixed income securities, commonly referred
to as “junk bonds,” because they are considered to be subject to fewer risks
than non-investment grade fixed income securities. Despite being
considered to be subject to fewer risks than junk bonds, investment grade fixed
income securities are, in fact, subject to risks, including volatility, credit
risk and risk of default, sensitivity to general economic or industry
conditions, potential lack of resale opportunities (illiquidity), and additional
expenses to seek recovery from issuers who default. In addition,
ratings are relative and subjective and not absolute standards of quality, and
ratings do not assess the risk of a decline in market
value. Securities ratings are based largely on an issuer’s historical
financial condition and the NRSRO’s analysis at the time of
rating. Consequently, the rating assigned to any particular fixed
income security or instrument is not necessarily a reflection of an issuer’s
current financial condition. In addition, NRSROs may make assumptions
when rating a fixed income security that turn out not to be correct, or may base
their ratings on information that is not correct, either of which can result in
a rating that is higher than would otherwise be the case. It is also
possible that NRSROs might not change their ratings of a particular fixed income
security to reflect subsequent events on a timely basis. Subsequent
to our purchase of a fixed income security that is rated investment grade, the
fixed income security may cease to be rated or its rating may be reduced,
resulting in investment grade fixed income securities becoming junk
bonds. None of these events will require our sale of such securities,
although our Advisor will consider these events in determining whether we should
continue to hold the securities.
MLP
Risks. An
investment in MLP securities involves some risks that differ from the risks
involved in an investment in the common stock of a corporation. Holders of MLP
units have limited control and voting rights on matters affecting the
partnership. Holders of units issued by an MLP are exposed to a remote
possibility of liability for all of the obligations of that MLP in the event
that a court determines that the rights of the holders of MLP units to vote to
remove or replace the general partner of that MLP, to approve amendments to that
MLP’s partnership agreement, or to take other action under the partnership
agreement of that MLP would constitute "control" of the business of that
MLP, or a court or governmental agency determines that the MLP is
conducting business in a state without complying with the partnership statute of
that state.
Holders
of MLP units are also exposed to the risk that they will be required to repay
amounts to the MLP that are wrongfully distributed to them. In addition, the
value of our investment in an MLP will depend largely on the MLP’s treatment as
a partnership for U.S. federal income tax purposes. If an MLP does not meet
current legal requirements to maintain partnership status, or if it is unable to
do so because of tax law changes, it would be treated as a corporation for U.S.
federal income tax purposes. In that case, the MLP would be obligated to pay
income tax at the entity level and distributions received by us generally would
be taxed as dividend income. As a result, there could be a material reduction in
our cash flow and there could be a material decrease in the value of our common
shares.
Restricted Securities Risk. We will not
invest more than 15% of our total assets in restricted securities that are
ineligible for resale under Rule 144A, all of which may be illiquid
securities. Restricted securities (including Rule 144A securities) are
less liquid than freely tradable securities because of statutory and contractual
restrictions on resale. Such securities are, therefore, unlike freely
tradable securities,
which can be expected to be sold immediately if the market is adequate. The
illiquidity of these investments may make it difficult for us to sell such
investments at advantageous times and prices or in a timely manner. In addition,
if for any reason we are required to liquidate all or a portion of our portfolio
quickly, we may realize significantly less than the fair value at which we
previously have recorded our investments. To enable us to sell our holdings of a
restricted security not registered under the 1933 Act, in limited circumstances
we may have the right to cause some of those securities to be registered. If we
have the right to cause such registration, the expenses of registering
restricted securities may not be determined at the time we buy the securities.
When we must arrange registration because we wish to sell the security, a
considerable period may elapse between the time the decision is made to sell a
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.
Rule
144A Securities Risk.
The Fund may purchase Rule 144A securities. Rule 144A provides
an exemption from the registration requirements of the 1933 Act for the resale
of certain restricted securities to qualified institutional buyers, such as the
Fund. Securities saleable among qualified institutional buyers pursuant to Rule
144A under the 1933 Act will not be counted towards the 15% limitation on
restricted securities.
An
insufficient number of qualified institutional buyers interested in purchasing
Rule 144A-eligible securities held by us, however, could affect adversely the
marketability of certain Rule 144A securities, and we might be unable to dispose
of such securities promptly or at reasonable prices. To the extent
that liquid Rule 144A securities that the Fund holds become illiquid, due
to the lack of sufficient qualified institutional buyers or market or other
conditions, the percentage of the Fund’s assets invested in illiquid assets
would increase and the fair value of such investments may become not readily
determinable. In addition, if for any reason we are required to liquidate all or
a portion of our portfolio quickly, we may realize significantly less than the
fair value at which we previously recorded these investments.
Tax Risk. We intend to elect
to be treated, and to qualify each year, as a "regulated investment company"
under the Code. To maintain our qualification for federal income tax
purposes as a regulated investment company under the Code, we must meet certain
source-of-income, asset diversification and annual distribution requirements, as
discussed in detail below under "Certain U.S. Federal Income Tax
Considerations." If for any taxable year we fail to qualify for the
special federal income tax treatment afforded to regulated investment companies,
all of our taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to our stockholders)
and our income available for distribution will be reduced. For
additional information on the requirements imposed on regulated investment
companies and the consequences of a failure to qualify, see "Certain
U.S. Federal Income Tax Considerations"
below.
Equity Securities Risk. Equity
securities of entities that operate in the power and energy infrastructure
sectors can be affected by macroeconomic and other factors affecting the stock
market in general, expectations about changes in interest rates, investor
sentiment towards such entities, changes in a particular issuer’s financial
condition, or unfavorable or unanticipated poor performance of a particular
issuer (in the case of MLPs, generally measured in terms of distributions).
Prices of equity securities of individual entities also can be affected by
fundamentals unique to the company or partnership, including earnings power and
coverage ratios.
Power
and energy infrastructure company equity prices are primarily influenced by
distribution growth rates and prospects for distribution growth. Any of the
foregoing risks could substantially impact the ability of such an entity to grow
its distributions.
Non-investment
Grade Fixed Income Securities Risk. We will not invest more than 25% of
our total assets in fixed income securities rated non-investment grade by NRSROs
or unrated securities of comparable quality. Non-investment grade
securities are rated Ba1 or lower by Moody’s, BB+ or lower by S&P or BB or
lower by Fitch or, if unrated are determined by our Advisor to be of comparable
credit quality. Non-investment grade securities, also sometimes
referred to as “junk bonds,” generally pay a premium above the yields of U.S.
government securities or fixed income securities of investment grade issuers
because they are subject to greater risks than these
securities. These risks, which reflect their speculative character,
include the following: greater volatility; greater credit risk and risk of
default; potentially greater sensitivity to general economic or industry
conditions; potential lack of attractive resale opportunities (illiquidity); and
additional expenses to seek recovery from issuers who default.
In
addition, the prices of these non-investment grade fixed
incomke securities are more sensitive to negative developments, such as a
decline in the issuer’s revenues or a general economic downturn, than are the
prices of higher grade securities. Non-investment grade securities
tend to be less liquid than investment grade securities. The market
value of non-investment grade securities may be more volatile than the market
value of investment grade securities and generally tends to reflect the market’s
perception of the
creditworthiness of the issuer and short-term market
developments to a greater extent than investment grade securities, which
primarily reflect fluctuations in general levels of interest rates.
Secu rities
ratings are based largely on an issuer’s historical financial condition and the
NRSRO’s analysis at the time of rating. Consequently, the rating
assigned to any particular fixed income security or instrument is not
necessarily a reflection of an issuer’s current financial
condition. In addition, NRSROs may make assumptions when rating a
fixed income security that turn out not to be correct, or may base their ratings
on information that is not correct, either of which can result in a rating that
is higher than would otherwise be the case. It is also possible that
NRSROs might not change their ratings of a particular fixed income security to
reflect subsequent events on a timely basis. Subsequent to our
purchase of a fixed income security that is rated investment grade, the fixed
income security may cease to be rated or its rating may be reduced, resulting in
investment grade fixed income securities becoming junk bonds. None of
these events will require our sale of such securities, although our Advisor will
consider these events in determining whether we should continue to hold the
securities.
The
market for non-investment grade and comparable unrated securities has
experienced periods of significantly adverse price and liquidity several times,
particularly at or around times of economic recession. Past market
recessions have adversely affected the value of such securities as well as the
ability of certain issuers of such securities to repay principal and to pay
interest thereon or to refinance such securities. The market for
these securities may react in a similar fashion in the future.
Non-U.S. Securities Risk. We
may invest up to 10% of our total assets in securities issued by non-U.S.
issuers (including Canadian issuers) and that otherwise meet our investment
objectives. This may include investments in the securities of
non-U.S. issuers that involve risks not ordinarily associated with investments
in securities and instruments of U.S. issuers. For example, non-U.S.
companies are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. Non-U.S. securities exchanges, brokers and companies may
be subject to less government supervision and regulation than exists in the
U.S. Dividend and interest income may be subject to withholding and
other non-U.S. taxes, which may adversely affect the net return on such
investments. Because we do not intend to invest more than 10% of our
total assets in securities issued by non-U.S. issuers (including Canadian
issuers) we will not be able to pass through to our stockholders any
foreign income tax credits as a result of any foreign income taxes we pay. There
may be difficulty in obtaining or enforcing a court judgment
abroad. In addition, it may be difficult to effect repatriation of
capital invested in certain countries. In addition, with respect to
certain countries, there are risks of expropriation, confiscatory taxation,
political or social instability or diplomatic developments that could affect our
assets held in non-U.S. countries. There may be less publicly
available information about a non-U.S. company than there is regarding a U.S.
company. Non-U.S. securities markets may have substantially less
volume than U.S. securities markets and some non-U.S. company securities are
less liquid than securities of otherwise comparable U.S.
companies. Non-U.S. markets also have different clearance and
settlement procedures that could cause us to encounter difficulties in
purchasing and selling securities on such markets and may result in our missing
attractive investment opportunities or experiencing a loss. In
addition, a portfolio that includes securities issued by non-U.S. issuers
(including Canadian issuers) can expect to have a higher expense ratio because
of the increased transaction costs in non-U.S. markets and the increased costs
of maintaining the custody of such non-U.S.
securities.
When
investing in securities issued by non-U.S. issuers (including Canadian
issuers), there is also the risk that the value of such an investment, measured
in U.S. dollars, will decrease because of unfavorable changes in currency
exchange rates. We do not currently intend to reduce or hedge our
exposure to non-U.S. currencies. Such a decrease in the value of our
investments when leverage is outstanding may result in our having to reduce the
amount of leverage if our statutory or other asset coverage ratios fall below
required amounts. Such reduction of leverage may cause us to
recognize a loss on transactions undertaken to reduce our leverage, resulting in
a further decrease in our value.
Valuation Risk. The fair
value of certain of our investments may not be readily
determinable. The fair value of these securities will be determined
pursuant to methodologies established by our Board of
Directors. While the fair value of securities we acquire through
direct placements generally will be based on a discount from quoted market
prices, other factors may adversely affect our ability to determine the fair
value of such a security. Fair value pricing involves judgments that
are inherently subjective and inexact. Our determination of fair
value may differ materially from the values that would have been used if a ready
market for these securities had existed. As a result, we may not be
able to dispose of our holdings at a price equal to or greater than the fair
value, which could have a negative impact on our
NAV.
Fair
value pricing involves judgments that are inherently subjective and
inexact. Our Advisor is subject to a conflict of interest in determining
the fair value of securities in our portfolio, as the management fees we pay our
Advisor are based on the value of our average monthly Managed
Assets. See "Management of the Fund – Conflicts of
Interest."
Quarterly Results Risk. We could
experience fluctuations in our operating results due to a number of factors,
including the return on our investments, the level of our expenses, variations
in and the timing of the recognition of realized and unrealized gains or losses,
the degree to which
we encounter competition in our markets and general economic conditions. As a
result of these factors, results for any period should not be relied upon as
being indicative of performance in future
periods.
Leverage
Risk. Our use
of leverage through borrowings or the issuance of preferred stock or fixed
income securities, and any other transactions involving indebtedness (other than
for temporary or emergency purposes) would be considered “senior securities” for
purposes of the 1940 Act. Under normal market conditions, we will not employ
leverage above 20% of our total assets at time of
incurrence.
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. Because our Advisor’s fee is based upon a percentage of our Managed
Assets, our Advisor’s fee is higher when we are leveraged. Therefore,
our Advisor has a financial incentive to use leverage, which will create a
conflict of interest between our Advisor and our common stockholders, who will
bear the costs of our leverage. Successful use of leverage depends on
our Advisor’s ability to predict or to 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.
We
will pay (and the holders of our common shares will bear) all costs and expenses
relating to the issuance and ongoing maintenance of the senior securities,
including higher advisory fees. Accordingly, we cannot assure you
that the issuance of senior securities will result in a higher yield or return
to the holders of our common shares. Costs of the offering of senior securities
will be borne immediately by our common stockholders and result in a reduction
of net asset value of our common shares. See "Leverage."
Hedging
Strategy Risk.
We may in the future use interest rate swap transactions, for hedging purposes
only, in an attempt to reduce the interest rate risk arising from our leveraged
capital structure. Interest rate swap transactions that we may use for hedging
purposes will expose us to certain risks that differ from the risks associated
with our portfolio holdings. Economic costs of hedging are 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 interest rates. In addition, our success in using
hedging instruments is subject to our Advisor’s ability correctly to predict
changes in the relationships of such hedging instruments to our leverage risk,
and there can be no assurance that our Advisor’s judgment in this respect will
be accurate. Consequently, the use of hedging transactions might result in
reduced 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 swap
transactions could increase or decrease the cash available to us for payment of
dividends or interest, as the case may be. We will, however, accrue
the amount of our obligations under any interest rate transactions and designate
on our books and records with our custodian, an amount of cash or liquid high
grade securities having an aggregate net asset value at all times at least equal
to that amount. To the extent there is a decline in interest rates,
the value of interest rate swaps or caps could decline and result in a decline
in the NAV of our common shares. In addition, if the counterparty to an interest
rate swap 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.
Liquidity Risk. Although some of the
securities in which we invest may trade on the NYSE, NYSE Alternext US and the
NASDAQ Market, certain of those securities may trade less frequently than those
of larger companies that have larger market capitalizations. Additionally,
certain securities may not trade on such exchanges (e.g., Rule 144A
securities for which there generally is a secondary market of qualified
institutional buyers) or may be unregistered and/or subject to lock-up periods
(e.g., securities purchased in direct placements). The potential illiquidity of
these investments may make it difficult for us to sell such investments at
advantageous times and prices or in a timely manner. In the event
certain securities experience limited trading volumes, the prices of such
securities may display abrupt or erratic movements at times. In addition, 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 sell at a favorable 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 sell
those securities. This also may affect adversely our ability to make required
interest payments on our debt securities and distributions on any of our
preferred stock, to redeem such securities, or to meet asset coverage
requirements.
Non-Diversification Risk. We are
registered as a non-diversified, closed-end management investment company under
the 1940 Act. Accordingly, there are no regulatory limits under the 1940 Act on
the number or size of securities that we hold, and we may invest more assets in
fewer issuers compared to a diversified fund. However, in order to qualify as a
RIC for federal income tax
purposes, we must
diversify our holdings so that, at the end of each quarter (i) at least 50% of
the value of our total assets is represented by cash and cash items, U.S.
Government securities, the securities of other RICs and other securities, with
such other securities limited for purposes of such calculation, in
respect of any one issuer, to an amount not greater than 5% of the value of our
total assets and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of our total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other RICs), the securities (other than the securities of
other RICs) of any two or more issuers that we control and that are engaged in
the same trade or business or similar or related trades or businesses, or the
securities of one or more qualified publicly traded partnerships (which includes
MLPs). An inherent risk associated with any investment concentration
is that we may be adversely affected if one or two of our investments perform
poorly. Financial difficulty on the part of any single portfolio company would
then expose us to a greater risk of loss than would be the case if we were a
"diversified" company holding numerous
investments.
Given
our contemplated investments in MLPs and other entities that are treated as
partnerships for U.S. federal income tax purposes, compliance with the
qualifying income and asset diversification tests applicable to RICs presents
unusual challenges and will require careful, ongoing monitoring. The
Advisor has experience monitoring such investments and will apply that
experience to our investment portfolio. There can be no assurance,
however, that the Advisor will succeed under all circumstances in ensuring that
we meet the requirements for RIC status, particularly given that certain
determinations, such as whether a security in which we invest constitutes debt
or equity for tax purposes, may not be free from doubt.
Unidentified Investments Risk. We have
not entered into definitive agreements for any specific investments in which we
will invest the net proceeds of this offering. As a result, you will not be able
to evaluate the economic merits of investments we make with the net proceeds of
this offering prior to your purchase of common shares in this offering. We will
have significant flexibility in investing the net proceeds of this offering and
may make investments with which you do not agree or do not believe are
consistent with our targeted investment
characteristics.
Competition Risk. There are a number of
alternatives to us as vehicles for investment in a portfolio of companies
operating primarily in the power and energy infrastructure sectors, including
publicly traded investment companies and private equity funds. In addition,
recent tax law changes have increased the ability of RICs or other institutions
to invest in MLPs. These competitive conditions may adversely impact our ability
to meet our investment objectives, which in turn could adversely impact our
ability to make interest or distribution payments on any securities we may
issue. Some of our competitors may have a lower cost of borrowing funds than we
have, greater access to funding sources not available to us, or a less stringent
set of regulatory constraints than those applicable to
us.
Performance Risk.
We intend to make regular cash distributions, no less than monthly, of
all or substantially all of our investment income (other than long-term capital
gains) to common stockholders. We intend to pay common stockholders,
at least annually, all or substantially all of our long-term capital gains. We
may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, the 1940 Act may limit our ability
to make distributions in certain circumstances. See "Distributions."
Restrictions and provisions in any future credit facilities and fixed income
securities may also limit our ability to make distributions. For federal income
tax purposes, we are required to distribute substantially all of our net
investment income each year both to reduce our federal income tax liability and
to avoid a potential excise tax. If our ability to make distributions
on our common shares is limited, such limitations could, under certain
circumstances, impair our ability to maintain our qualification for taxation as
a RIC, which would have adverse consequences for our
stockholders. See "Certain U.S. Federal Income Tax Considerations."
We cannot assure you that you will receive distributions at a particular level
or at all. The equity securities in which we invest may not appreciate or may
decline in value. The fixed income or preferred equity securities in which
we invest may not make all required payments. Any gains that we do
realize on the disposition of any securities may not be sufficient to offset
losses on other securities. A significant decline in the value of the securities
in which we invest may negatively impact our ability to pay distributions or
cause you to lose all or a part of your investment.
Legal and Regulatory Change Risks. The
regulatory environment for closed-end companies is evolving, and changes in the
regulation of closed-end companies may adversely affect the value of our
investments, our ability to obtain the leverage that we might otherwise obtain,
or to pursue our trading strategy. In addition, the securities markets are
subject to comprehensive statutes and regulations. The SEC, other regulators and
self-regulatory organizations and exchanges are authorized to take extraordinary
actions in the event of market emergencies. The effect of any future
regulatory change on us could be substantial and
adverse.
Management Risk. Our Advisor was formed
in October 2002 to provide portfolio management services to institutional and
high-net worth investors seeking professional management of their MLP
investments. Our Advisor has been managing investments in portfolios of MLPs and
other energy infrastructure companies since that time, including management of
the investments of four
publicly traded
closed-end management investment companies, one of which has elected to be
regulated as a BDC under the 1940 Act, and the management of the
investments of two privately-held funds. Our investments and those of
the other funds managed by our Advisor are managed by our Advisor’s investment
committee and we share many of the same officers as those
funds.
Concentration
Risk. The Fund’s strategy of concentrating in power and energy
infrastructure investments means that the performance of the Fund will be
closely tied to the performance of these particular market
sectors. The Fund’s concentrations in these investments may present
more risk than if it were broadly diversified over numerous industries and
sectors of the economy. A downturn in these investments would have a
greater impact on the Fund than on a fund that does not concentrate in such
investments. At times, the performance of these investments may lag
the performance of other industries or the market as a
whole.
Conflicts Risk. Conflicts
of interest may arise because our Advisor and its affiliates generally will be
carrying on substantial investment activities for other clients in which we will
have no interest. Our Advisor may have financial incentives to favor certain of
such accounts over us. Any of its proprietary accounts and other customer
accounts may compete with us for specific trades. Our Advisor may buy or sell
securities for us that differ from securities bought or sold for other accounts
and customers, although their investment objectives and policies may be similar
to ours. Situations may occur in which we could be disadvantaged because of the
investment activities conducted by our Advisor for its other accounts. Such
situations may be based on, among other things, legal or internal restrictions
on the combined size of positions that may be taken for us and the other
accounts, thereby limiting the size of our position, or the difficulty of
liquidating an investment for us and the other accounts where the market cannot
absorb the sale of the combined position. Our Advisor may also have
an incentive to make investments in one fund, having the effect of increasing
the value of a security in the same issuer held by another fund, which in turn
may result in an incentive fee being paid to our Advisor by that other
fund.
Our
investment opportunities may be limited by affiliations of our Advisor or its
affiliates with power or energy infrastructure companies. In addition, to the
extent our Advisor sources, contemplates, structures, or makes private
investments in power or energy infrastructure companies, certain employees of
our Advisor may become aware of actions planned by such companies, such as
acquisitions, that may not be announced to the public. It is possible that we
could be precluded from investing in a power or energy infrastructure company
about which our Advisor has material nonpublic information.
Our
investment opportunities may be limited by investment opportunities in companies
that our Advisor is evaluating for other clients. To the extent a potential
investment is appropriate for us and one or more other clients, our Advisor will
need to fairly allocate that investment to us or the other client, or both,
depending on its allocation procedures and applicable law related to combined or
joint transactions. There may arise an attractive limited investment opportunity
suitable for us in which we cannot invest under the particular allocation method
being used for that investment.
Under
the 1940 Act, we and our affiliated companies are generally precluded from
co-investing in negotiated private placements of securities. Except as permitted
by law, our Advisor will not co-invest its other clients’ assets in negotiated
private transactions in which we invest. To the extent we are precluded from
co-investing, our Advisor will allocate private investment opportunities among
its clients, including but not limited to us and our affiliated companies, based
on allocation policies that take into account several suitability factors,
including the size of the investment opportunity, the amount each client has
available for investment and the client’s investment objectives. These
allocation policies may result in the allocation of investment opportunities to
an affiliated company rather than to us.
The
Advisor 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 Advisor that are the same as, different from, or made at a
different time than positions taken for us. Further, the Advisor may
at some time in the future, manage other investment funds with the same
investment objective as ours.
Risks
Related to Investing in the Power and Energy Infrastructure Sectors
Under
normal circumstances we plan to invest at least 80% of our total assets
(including assets we obtain through leverage) in the securities of companies
that derive more than 50% of their revenue from power or energy infrastructure
operations. Our focus on the power and energy infrastructure sectors
may present more risks than if it were broadly diversified over numerous sectors
of the economy. Therefore, a downturn in the power and energy
infrastructure sectors would have a larger impact on us than on an investment
company that does not concentrate in these sectors. Specific risks of
investing in the power and energy infrastructure sectors include the
following:
Interest Rate
Risk. A rising interest rate
environment could adversely impact the performance of companies in the power and
energy infrastructure sectors. Rising interest rates may increase the cost of
capital for companies operating in these sectors. A higher cost of
capital could limit growth from acquisition or expansion projects, limit the
ability of such entities to make or grow distributions or meet debt obligations,
and adversely affect the prices of their
securities.
Credit Rating
Downgrade Risk. Power and energy infrastructure companies rely on
access to capital markets as a source of liquidity for capital requirements not
satisfied by operating cash flows. Credit downgrades in the companies
in which we invest may impact their ability to raise capital on favorable terms
and increase their borrowing costs.
Terrorism and
Natural Disasters Risk. Power and energy infrastructure companies, and the
market for their securities, are subject to disruption as a result of terrorist
activities, such as the terrorist attacks on the World Trade Center on
September 11, 2001; war, such as the war in Iraq and its aftermath; and
other geopolitical events, including upheaval in the Middle East or other energy
producing regions. The U.S. government has issued warnings that energy
assets, specifically those related to pipeline infrastructure, production
facilities, and transmission and distribution facilities, might be specific
targets of terrorist activity. Such events have led, and in the future may lead,
to short-term market volatility and may have long-term effects on the power and
energy infrastructure sectors and markets. Such events may also adversely affect
our business and financial condition.
Natural
risks, such as earthquakes, flood, lighting, hurricane and wind, are inherent
risks in power and energy infrastructure company operations. For example,
extreme weather patterns, such as Hurricane Ivan in 2004 and Hurricanes Katrina
and Rita in 2005, or the threat thereof, could result in substantial damage to
the facilities of certain companies located in the affected areas and
significant volatility in the supply of power and energy and could adversely
impact the prices of the securities in which we invest. This volatility may
create fluctuations in commodity prices and earnings of companies in the power
and energy infrastructure sectors.
Power
Infrastructure Company Risk. Companies
operating in the power infrastructure sector also are subject to additional
risks, including those discussed below. To the extent that any of
these risks materialize for a company whose securities are in our portfolio, the
value of these securities could decline and our net asset value and share price
could be adversely affected.
Operating Risk. The operation of asset systems that provide electric
power generation (including renewable energy), transmission and distribution
involves many risks, including:
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Equipment
failure causing outages;
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Transmission
or transportation constraints, inoperability or
inefficiencies;
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Dependence
on a specified fuel source, including the transportation of
fuel;
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Changes
in electricity and fuel usage;
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Availability
of competitively priced alternative energy
sources;
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Changes
in generation efficiency and market heat
rates;
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Lack
of sufficient capital to maintain
facilities;
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Changes
in supply and demand for energy
commodities;
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Catastrophic
events such as fires, explosions, floods, earthquakes, hurricanes and
similar occurrences;
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Structural,
maintenance, impairment and safety problems and storage, handling,
disposal and decommissioning costs associated with operating nuclear
generating facilities; and
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Environmental
compliance.
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Any
of these risks could have an adverse effect on a company with power
infrastructure operations and its securities. Additionally, older
generating equipment may require significant capital expenditures to keep them
operating at peak efficiency.
This
equipment is more likely to require periodic upgrading and
improvement. Breakdown or failure of an operating facility may
prevent the facility from performing under applicable power sales agreements,
which in certain situations, could result in termination of the agreement or
incurring a liability for liquidated damages. A company’s ability to
successfully and timely complete capital improvements to existing facilities or
other capital projects is contingent upon many variables. Should any such
efforts be unsuccessful, a power infrastructure company could be subject to
additional costs and / or the write-off of its investment in the project or
improvement. Any of these costs could adversely affect the value of
securities in our portfolio.
As
a result of the above risks and other potential hazards associated with the
power infrastructure sector, certain companies may become exposed to significant
liabilities for which they may not have adequate insurance
coverage.
Regulatory
Risk. Issuers in the power infrastructure sector may be subject to
regulation by various governmental authorities in various jurisdictions and may
be affected by the imposition of special tariffs and changes in tax laws,
regulatory policies and accounting standards. Power infrastructure companies’
inability to predict, influence or respond appropriately to changes in law or
regulatory schemes, including any inability to obtain expected or contracted
increases in electricity tariff rates or tariff adjustments for increased
expenses, could adversely impact their results of operations. Furthermore,
changes in laws or regulations or changes in the application or interpretation
of regulatory provisions in jurisdictions where power infrastructure companies
operate, particularly utilities where electricity tariffs are subject to
regulatory review or approval, could adversely affect their business, including,
but not limited to:
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changes
in the determination, definition or classification of costs to be included
as reimbursable or pass-through
costs;
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changes
in the definition or determination of controllable or non-controllable
costs;
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changes
in the definition of events which may or may not qualify as changes in
economic equilibrium;
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changes
in the timing of tariff increases;
or
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other
changes in the regulatory determinations under the relevant
concessions.
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Any
of the above events may result in lower margins for the affected businesses,
which can adversely affect the operations of a power infrastructure company and
hence the value of securities in our portfolio.
Prices
for certain power infrastructure companies are regulated in the U.S. with the
intention of protecting the public while ensuring that the rate of return earned
by such companies is sufficient to allow them to attract capital in order to
grow and continue to provide appropriate services. The rates assessed for these
rate-regulated power infrastructure companies by state and certain city
regulators are generally subject to cost-of-service regulation and annual
earnings oversight. This regulatory treatment does not provide any assurance as
to achievement of earnings levels. Such rates are generally regulated based on
an analysis of a company’s costs and capital structure, as reviewed and approved
in a regulatory proceeding. While rate regulation is premised on the full
recovery of prudently incurred costs and a reasonable rate of return on invested
capital, there can be no assurance that the regulators will judge all of a power
infrastructure company’s costs to have been prudently incurred, that the
regulators will not reduce the amount of invested capital included in
the capital structure that the power infrastructure company’s rates are based
upon or that the regulatory process in which rates are determined will always
result in rates that will produce full recovery of a power infrastructure
company’s costs, including regulatory assets reported in the balance sheet, and
the return on invested capital allowed by the regulators.
Federal Energy Regulatory Commission
Risk. FERC ruled in 2008 that
it has jurisdiction under the FPA over the acquisition of certain power
infrastructure company securities by investment advisers that are themselves
public utility holding companies as defined under PUHCA 2005. The
Fund could become subject to FERC’s jurisdiction if it is deemed to be a holding
company of a public utility company or of a holding company of a public utility
company, and the Fund may be required to aggregate securities held by the Fund
or other funds and accounts managed by our Advisor and its affiliates. A company
is a holding company within the meaning of PUHCA 2005 and the FPA if it directly
or indirectly owns, controls, or holds, with power to vote, 10 percent or more
of the outstanding voting securities of a public utility company or of a holding
company of any public utility company. In general, a holding company
under the FPA may not purchase, acquire or take a security or securities valued
in excess of $10 million of any other public utility company or of a public
utility holding company unless FERC has approved the transaction or
an
exemption or waiver is available. Accordingly, the Fund
may be prohibited from buying securities of a public utility company or of a
holding company of any public utility company or may be forced to divest itself
of such securities because of other holdings by the Fund or other funds or
accounts managed by our Advisor and its affiliates.
Environmental
Risk. Power infrastructure company activities are subject to stringent
environmental laws and regulation by many federal, state, local authorities,
international treaties and foreign governmental authorities. These regulations
generally involve emissions into the air, effluents into the water, use of
water, wetlands preservation, waste disposal, endangered species and noise
regulation, among others. Failure to comply with such laws and regulations or to
obtain any necessary environmental permits pursuant to such laws and regulations
could result in fines or other sanctions. Environmental laws and regulations
affecting power generation and distribution are complex and have tended to
become more stringent over time. Congress and other domestic and foreign
governmental authorities have either considered or implemented various laws and
regulations to restrict or tax certain emissions, particularly those involving
air and water emissions. Existing environmental regulations could be
revised or reinterpreted, new laws and regulations could be adopted or become
applicable, and future changes in environmental laws and regulations could
occur, including potential regulatory and enforcement developments related to
air emissions.
These
laws and regulations have imposed, and proposed laws and regulations could
impose in the future, additional costs on the operation of power plants. Power
infrastructure companies have made and will likely continue to make significant
capital and other expenditures to comply with these and other environmental laws
and regulations. Changes in, or new, environmental restrictions may force power
infrastructure companies to incur significant expenses or expenses that may
exceed their estimates. There can be no assurance that such companies would be
able to recover all or any increased environmental costs from their customers or
that their business, financial condition or results of operations would not be
materially and adversely affected by such expenditures or any changes in
domestic or foreign environmental laws and regulations, in which case the value
of these companies’ securities in our portfolio could be adversely
affected.
Power
infrastructure companies may not be able to obtain or maintain all required
environmental regulatory approvals. If there is a delay in obtaining any
required environmental regulatory approvals or if a power infrastructure company
fails to obtain, maintain or comply with any such approval, the operation of its
facilities could be stopped or become subject to additional costs. In addition,
a power infrastructure company may be responsible for any on-site liabilities
associated with the environmental condition of facilities that it has acquired,
leased or developed, regardless of when the liabilities arose and whether they
are known or unknown.
Competition
Risk. The power infrastructure sector is characterized by numerous strong
and capable competitors, many of which may have extensive and diversified
developmental or operating experience (including both domestic and international
experience) and financial resources. Further, in recent years, the power
infrastructure sector has been characterized by strong and increasing
competition with respect to both obtaining power sales agreements and acquiring
existing power generation assets. In certain markets these factors have caused
reductions in prices contained in new power sales agreements and, in many cases,
have caused higher acquisition prices for existing assets through competitive
bidding practices. The evolution of competitive electricity markets and the
development of highly efficient gas-fired power plants have also caused, or are
anticipated to cause, price pressure in certain power
markets.
Energy
Infrastructure Company Risk. Companies
operating in the energy infrastructure sector also are subject to additional
risks, including those described below. To the extent that any of
these risks materialize for a company whose securities are in our portfolio, the
value of these securities could decline and our net asset value and share price
would be adversely affected.
Pipeline
Company Risk. Pipeline companies are subject to many risks,
including varying demand for crude oil, natural gas, natural gas liquids or
refined products in the markets served by the pipeline; changes in the
availability of products for gathering, transportation, processing or sale due
to natural declines in reserves and production in the supply areas serviced by
the companies’ facilities; 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.
Gathering and
Processing Company Risk. Gathering and processing companies
are subject to many risks, including declines in production of crude oil and
natural gas fields, which utilize their gathering and 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 and refined petroleum
products, resulting in lower processing
margins.
Propane Company
Risk. Propane companies are subject to many risks, including
earnings variability based upon weather patterns in the locations where the
company operates and the wholesale cost of propane sold to end customers.
Midstream propane companies’ unit prices are largely based on safety in
distribution coverage ratios, the interest rate environment and, to a lesser
extent, distribution growth. In addition, propane companies are facing increased
competition due to the growing availability of natural gas, fuel oil and
alternative energy sources for residential
heating.
Supply &
Demand Risk. A decrease in the production of natural gas, natural gas
liquids, crude oil, coal, refined petroleum products or other energy
commodities, or a decrease in the volume of such commodities available for
transportation, processing, storage or distribution, may adversely impact the
financial performance of companies in the energy infrastructure sector.
Production declines and volume decreases could be caused by various factors,
including catastrophic events affecting production, depletion of resources,
labor difficulties, political events, OPEC actions, environmental proceedings,
increased regulations, equipment failures and unexpected maintenance problems,
failure to obtain necessary permits, unscheduled outages, unanticipated
expenses, inability to successfully carry out new construction or acquisitions,
import supply disruption, increased competition from alternative energy sources
or related commodity prices. Alternatively, a sustained decline in demand for
such commodities could also adversely affect the financial performance of
companies in the energy infrastructure sector. Factors that could lead to a
decline in demand include economic recession or other adverse economic
conditions, higher fuel taxes or governmental regulations, increases in fuel
economy, consumer shifts to the use of alternative fuel sources, changes in
commodity prices or weather. The length and severity of the current
recession and its impact on companies in the energy infrastructure sector,
cannot be determined.
The
profitability of companies engaged in processing and pipeline activities 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 such entities.
Price
Volatility Risk. The volatility of energy commodity prices can
indirectly affect certain entities that operate in the midstream segment of the
energy infrastructure sector due to the impact of prices on the volume of
commodities transported, processed, stored or distributed. Most energy
infrastructure entities are not subject to direct commodity price exposure
because they do not own the underlying energy commodity. Nonetheless, the price
of an energy infrastructure security can be adversely affected by the perception
that the performance of all such entities is directly tied to commodity
prices.
Competition
Risk. Even if reserves exist in areas accessed by the facilities of
transporting and processing energy infrastructure companies, they may not be
chosen by producers to gather, transport, process, fractionate, store or
otherwise handle the natural gas, natural gas liquids, crude oil, refined
petroleum products or coal that are produced. They compete with
others on the basis of many factors, including but not limited to geographic
proximity to the production, costs of connection, available capacity, rates and
access to markets.
Regulatory
Risk. Energy infrastructure companies are subject to significant
federal, state and local government regulation in virtually every aspect of
their operations, including how facilities are constructed, maintained and
operated, environmental and safety controls, and the prices they may charge for
the products and services they provide. Various governmental authorities have
the power to enforce compliance with these regulations and the permits issued
under them, and violators are subject to administrative, civil and criminal
penalties, including fines, injunctions or both. Stricter laws, regulations or
enforcement policies could be enacted in the future which would likely increase
compliance costs and may adversely affect the financial performance of energy
infrastructure companies.
Energy
infrastructure companies engaged in interstate pipeline transportation of
natural gas, refined petroleum products and other products are subject to
regulation by the FERC with respect to tariff rates these companies may charge
for pipeline transportation services. An adverse determination by the FERC with
respect to the tariff rates of an energy infrastructure company could have a
material adverse effect on its business, financial condition, results of
operations and cash flows and its ability to make cash distributions to its
equity owners. In May 2005, FERC issued a policy statement that pipelines,
including those organized as partnerships, can include in computing their cost
of service a tax allowance to reflect actual or potential tax liability on their
public utility income attributable to all entities or individuals owning public
utility assets, if the pipeline
establishes
that the entities or individuals have an actual or potential income tax
liability on such income. Whether a pipeline’s owners have such actual or
potential income tax liability will be reviewed by FERC on a case-by-case basis.
If an MLP is unable to establish that its unitholders are subject to U.S.
federal income taxation on the income generated by the MLP, FERC could disallow
a substantial portion of the MLP’s income tax allowance. If FERC were to
disallow a substantial portion of the MLP’s income tax allowance, the level of
maximum tariff rates the MLP could lawfully charge could be lower than the MLP
had been charging prior to such ruling or could be lower than the MLP’s actual
costs to operate the pipeline. In either case, the MLP would be adversely
affected.
Risks
Related to this Offering
Share Price
Volatility Risk. The trading price of our common shares following this
offering may fluctuate substantially. The price of the common shares
that will prevail in the market after this offering may be higher or lower than
the price you pay and the liquidity of our common shares may be limited, in each
case depending on many factors, some of which are beyond our control and may not
be directly related to our operating performance. These factors
include the following:
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changes
in the value of our portfolio of
investments;
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price
and volume fluctuations in the overall stock market from time to
time;
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significant
volatility in the market price and trading volume of securities of similar
investment companies;
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our
dependence on the power and energy infrastructure
sectors;
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our
inability to deploy or invest our
capital;
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fluctuations
in interest rates;
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any
shortfall in revenue or net income or any increase in losses from levels
expected by investors or securities
analysts;
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operating
performance of companies comparable to
us;
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changes
in regulatory policies with respect to investment
companies;
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our
ability to borrow money or obtain additional
capital;
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losing
RIC status under the Code;
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actual
or anticipated changes in our earnings or fluctuations in our operating
results or changes in the expectations of securities
analysts;
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general
economic conditions and trends; or
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departures
of key personnel.
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Market Risk.
Before this offering, there was no public trading market for our common
shares. We cannot predict the prices at which our common shares will
trade. The IPO price for our common shares will be determined through
our negotiations with the underwriters and may not bear any relationship to the
market price at which it will trade after this offering or to any other
established criteria of our value. Shares of companies offered in an
IPO often trade at a discount to the IPO price due to sales load (underwriting
discount) and related offering expenses.
In
addition, shares of closed-end investment companies have in the past frequently
traded at discounts to their NAV and our stock may also be discounted in the
market. This characteristic is a risk separate and distinct from the
risk that our NAV could decrease as a result of our investment activities and
may be greater for investors expecting to sell their shares in a relatively
short period following completion of this offering. We cannot assure
you whether our common shares will trade above, at or below our
NAV. Whether investors will realize gains or losses upon the sale of
our common shares will depend entirely upon whether the market price of our
common shares at the time of sale is above or below the investor’s purchase
price for our common shares. Because the market price of our common
shares is affected by factors such as NAV, dividend levels (which are dependant,
in part, on expenses), supply of and demand for our common shares, stability of
dividends, trading volume of our common shares, general market and economic
conditions,
and other factors beyond our control, we cannot predict whether our common
shares will trade at, below or above NAV or at, below or above the offering
price. In addition, if our common shares trade below their NAV, we
will generally not be able to issue additional common shares at their market
price without first obtaining the approval of our stockholders and our
independent directors to such issuance.
Dilution Risk.
If you purchase our common shares in this offering, the price that you
pay will be greater than the NAV per common share immediately following this
offering. This is in large part due to the expenses incurred by us in
connection with the consummation of this offering. 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.
We are
seeking approval from the Fund’s initial stockholders (i.e., the stockholders of
the Fund prior to this offering) for the authority to sell common shares for
less than NAV, subject to certain conditions listed in "Description of Capital
Stock – Common Shares – Issuance of Additional Shares." All investors
who purchase common shares in this offering will be bound by such
approval. As a result, during the first year of the Fund’s
operations, there will be no stockholder approval necessary or sought prior to
any such issuance of common shares below NAV. After the first year of
the Fund’s operations, we intend to seek such approval from stockholders at each
annual meeting of stockholders. The issuance of additional shares of
the Fund at below NAV will dilute the interest in the Fund’s assets, income and
relative voting power of existing stockholders, including those who purchase
common shares in this offering.
Takeover
Risk. The Maryland General Corporation Law and our charter and bylaws
contain provisions that may have the effect of discouraging, delaying or making
difficult a change in control of the Fund or the removal of our incumbent
directors. We will be covered by the Business Combination Act of the Maryland
General Corporation Law to the extent that such statute is not superseded by
applicable requirements of the 1940 Act. However, our Board of Directors has
adopted a resolution exempting us from the Business Combination Act for any
business combination between us and any person to the extent that such business
combination receives the prior approval of our Board of Directors, including a
majority of our directors who are not interested persons as defined in the 1940
Act.
Under our
charter, our Board of Directors is divided into three classes serving staggered
terms, which will make it more difficult for a hostile bidder to acquire control
of us. In addition, our Board of Directors may, without stockholder action,
authorize the issuance of shares of stock in one or more classes or series,
including preferred stock. See "Description of Capital Stock." Subject to
compliance with the 1940 Act, our Board of Directors may, without stockholder
action, amend our charter to increase the number of shares of stock of any class
or series that we have authority to issue. The existence of these provisions,
among others, may have a negative impact on the price of our common shares and
may discourage third-party bids for ownership of our Fund. These provisions may
prevent any premiums being offered to you for our common shares.
We will
determine and publish the NAV of our common shares on at least a monthly basis
and at such other times as our Board of Directors may determine. The
NAV per common share equals our NAV divided by the number of outstanding common
shares. 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); (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.
We will
determine fair value of our assets and liabilities in accordance with valuation
procedures adopted by our Board of Directors. Securities for which
market quotations are readily available shall be valued at "market
value." If a market value cannot be obtained or if our Advisor
determines that the value of a security as so obtained does not represent a fair
value as of the measurement date (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 methodologies established by our Board of
Directors.
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The
fair value for equity securities and equity-related securities is
determined by using readily available market quotations from the principal
market. For equity and equity-related securities that are freely tradable
and listed on a securities exchange or over the counter market, fair value
is determined using the last sale price on that exchange or
over-the-counter market on the measurement date. If the security is listed
on more than one exchange, we will use the price of the exchange that we
consider to be the principal exchange on which the security is traded. If
a security is traded on the measurement date, then the last reported sale
price on the exchange or over-the-counter ("OTC") market on which the
security is principally traded, up to the time of valuation, is
used. If there were no reported sales on the security's
principal exchange or OTC market on the measurement date, then the average
between the last bid price and last asked price, as reported by the
pricing service, shall be used. We 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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An
equity security of a publicly traded company acquired in a private
placement transaction without registration is subject to restrictions on
resale that can affect the security’s liquidity and fair value. Such
securities that are convertible into publicly traded common shares or
securities that may be sold pursuant to Rule 144, shall generally be
valued based on the fair value of the freely tradable common share
counterpart less an applicable discount. Generally, the discount will
initially be equal to the discount at which we purchased the securities.
To the extent that such securities are convertible or otherwise become
freely tradable within a time frame that may be reasonably determined, an
amortization schedule may be determined for the
discount.
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Fixed
income securities (other than the short-term securities as described
below) are valued by (i) using readily available market quotations based
upon the last updated sale price or a market value from an approved
pricing service generated by a pricing matrix based upon yield data for
securities with similar characteristics or (ii) by obtaining a direct
written broker-dealer quotation from a dealer who has made a market in the
security.
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A fixed
income security acquired in a private placement transaction without
registration is subject to restrictions on resale that can affect the
security’s liquidity and fair value. Among the various factors
that can affect the value of a privately placed security are (i) whether
the issuing company has freely trading fixed income securities
of the same maturity and interest rate (either through an initial public
offering or otherwise); (ii) whether the company has an effective
registration statement in place for the securities; and (iii) whether a
market is made in the securities. The securities normally will
be valued at amortized cost unless the portfolio company’s condition or
other factors lead to a determination of fair value at a different
amount.
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Short-term
securities, including bonds, notes, debentures and other fixed income
securities, and money market instruments such as certificates of deposit,
commercial paper, bankers’ acceptances and obligations of domestic and
foreign banks, with remaining maturities of 60 days or less, for which
reliable market quotations are readily available are valued on an
amortized cost basis at current market quotations as provided by an
independent pricing service or principal market
maker.
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Other
assets will be valued at market value pursuant to written valuation
procedures adopted by our Board of Directors, or if a market value cannot
be obtained or if our Advisor determines that the value of a security as
so obtained does not represent a
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fair
value as of the measurement date (due to a significant development
subsequent to the time its price is determined or otherwise), fair value
shall be determined pursuant to the methodologies established by our Board
of Directors.
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Valuations
of public company securities determined pursuant to fair value methodologies
will be presented to our Board of Directors or a designated committee thereof
for approval at the next regularly scheduled board meeting. See
"Management of the Fund – Conflicts of Interest."
Once
we are fully invested and to the extent we receive income, we intend to make
monthly cash distributions of our investment company taxable income to common
stockholders. We expect to declare the initial distribution
approximately 45 to 60 days, and to pay such distribution approximately 60 to 90
days, from the completion of this offering, depending upon market
conditions. In addition, on an annual basis, we intend to distribute
capital gains realized during the fiscal year in the last fiscal
quarter. Investment company taxable income includes, among other
items, dividends, interest and the excess of any net short-term capital gains
over net long-term capital losses, reduced by deductible
expenses. For federal income tax purposes, we are required to
distribute substantially all of our net investment income each year both to
avoid federal income tax on our distributed income and to avoid a potential
excise tax. If our ability to make distributions on our common shares
is limited, such limitations could, under certain circumstances, impair our
ability to maintain our qualification for taxation as a RIC, which would have
adverse consequences for our stockholders. See “Certain U.S. Federal
Income Tax Considerations.” We intend to pay common stockholders at
least annually all or substantially all of our investment company taxable
income.
Various
factors will affect the level of our income, such as our asset
mix. To permit us to maintain a more stable distribution, we may from
time to time distribute less than the entire amount of income earned in a
particular period. The undistributed income would be available to
supplement future distributions. As a result, the distributions paid
by us for any particular period may be more or less than the amount of income
actually earned by us during that period. Undistributed income will
add to our NAV and, correspondingly, distributions from undistributed income
will deduct from our NAV. If a stockholder’s common shares are
registered directly with us or with a brokerage firm that participates in our
Automatic Dividend Reinvestment Plan, distributions will be automatically
reinvested in additional common stock under the Automatic Dividend Reinvestment
Plan unless a stockholder elects to receive distributions in cash. If
a stockholder elects to receive distributions in cash, payment will be made by
check. See "Dividend Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN
If a
stockholder’s shares are registered directly with us or with a brokerage firm
that participates in our Automatic Dividend Reinvestment Plan ("Plan") through
the facilities of the Depository Trust Company ("DTC") and such stockholder’s
account is coded dividend reinvestment by such brokerage firm, all distributions
are automatically reinvested for stockholders by the Plan Agent, Computershare
Trust Company, N.A. in additional common shares (unless a stockholder is
ineligible or elects otherwise). If a stockholder’s shares are
registered with a brokerage firm that participates in the Plan through the
facilities of DTC, but such stockholder’s account is not coded dividend
reinvestment by such brokerage firm or if a stockholder’s shares are registered
with a brokerage firm that does not participate in the Plan through the
facilities of DTC, a stockholder will need to ask their investment executive to
determine what arrangements can be made to set up their account to participate
in the Plan. In either case, until such arrangements are made, a
stockholder will receive distributions in cash.
Stockholders
who elect not to participate in the Plan will receive all distributions payable
in cash paid by check mailed directly to the stockholder of record (or, if the
shares are held in street or other nominee name, then to such nominee) by
Computershare,
Inc., as dividend paying agent. Participation in the Plan is
completely voluntary and may be terminated or resumed at any time without
penalty by giving notice in writing to, or by calling, the Plan Agent; such
termination will be effective with respect to a particular distribution if
notice is received prior to the record date for the next dividend.
Whenever
we declare a distribution payable in cash, non-participants in the Plan will
receive cash, and participants in the Plan will receive the equivalent in common
shares.
We
will use primarily newly-issued common shares to implement the Plan, whether our
shares are trading at a premium or at a discount to net asset
value. However, we reserve the right to instruct the Plan Agent to
purchase shares in the open market in connection with its obligations under the
Plan. The number of shares to be issued to a stockholder will be
determined by dividing the total dollar amount of the distribution payable to
such stockholder by the market price per share of our common stock at the close
of regular trading on the NYSE on the distribution payment
date. Market price per share on that date will be the closing price
for such shares on the NYSE or, if no sale is reported for such day, at the
average of their reported bid and asked prices. If distributions are
reinvested in shares purchased on the open market, then the number of shares
received by a stockholder will be determined by dividing the total dollar amount
of the distribution payable to such stockholder by the weighted average price
per share (including brokerage commissions and other related costs) for all
shares purchased by the Plan Agent on the open-market in connection with such
distribution .
The Plan
Agent maintains all stockholders’ accounts in the Plan and furnishes written
confirmation of each acquisition made for the participant’s account as soon as
practicable, but in no event later than 60 days after the date
thereof. Shares in the account of each Plan participant will be held
by the Plan Agent in non-certificated form in the Plan Agent’s name or that of
its nominee, and each stockholder’s proxy will include those shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares held pursuant
to the Plan first in accordance with the instructions of the participants then
with respect to any proxies not returned by such participant, in the same
proportion as the Plan Agent votes the proxies returned by the
participants.
There
will be no brokerage charges with respect to shares issued directly by us as a
result of distributions payable in shares. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent’s open-market purchases in connection with the reinvestment of
distributions. If the participant elects to have the Plan Agent sell
part or all of his or her common shares and remit the proceeds, such participant
will be charged his or her pro rate share of brokerage commissions on the shares
sold plus a $15.00 transaction fee. The automatic reinvestment of
distributions will not relieve participants of any federal, state or local
income tax that may be payable (or required to be withheld) on such
distributions. See "Certain U.S. Federal Income Tax
Considerations."
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 common
share at the then current market value of the common shares to be delivered to
him or her. If preferred, a participant may request the sale of all
of the common shares held by the Plan Agent in his or her Plan account in order
to terminate participation in the Plan. If such participant elects in
advance of such termination to have the Plan Agent sell part or all of his or
her shares, the Plan Agent is authorized to deduct from the proceeds a $15.00
fee plus the brokerage commissions incurred for
the
transaction. If a participant has terminated his or her participation
in the Plan but continues to have common shares 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 us at any time, except when necessary or
appropriate to comply with applicable law or the rules or policies of the SEC or
any other regulatory authority, only by mailing to each participant appropriate
written notice at least 30 days prior to the effective date
thereof. The amendment shall be deemed to be accepted by each
participant unless, prior to the effective date thereof, the Plan Agent receives
notice of the termination of the participant’s account under the
Plan. Any such amendment may include an appointment by the Plan Agent
of a successor Plan Agent, subject to the prior written approval of the
successor Plan Agent by us.
All
correspondence concerning the Plan should be directed to Computershare Trust
Company, N.A. c/o Computershare, Inc., P.O. Box 43078, Providence, Rhode Island
02940-3078.
DESCRIPTION OF CAPITAL STOCK
We are
authorized to issue up to 100,000,000 shares of common stock,
$0.001 par value per share, and up to 10,000,000 shares of preferred
stock, $0.001 par value per share. Upon completion of this offering, we
will
have of
our common shares issued and outstanding. Our Board of Directors may, without
any action by our stockholders, amend our Charter from time to time to increase
or decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that we have authority to issue. In addition, our
Charter authorizes our Board of Directors, without any action by our
stockholders, to classify and reclassify any unissued common shares and
preferred shares into other classes or series of stock from time to time by
setting or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends and 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 that might otherwise be in our stockholders’ best interests. Under
Maryland law, our stockholders are generally not liable for our debts or
obligations.
The
following table provides information about our outstanding capital stock upon
completion of this offering (assuming the underwriter’s overallotment option is
not exercised):
Title of Class
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Number
of
Shares
Authorized
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Number
of Shares
Held by the
Fund or for
its Account
|
Number
of
Shares
Outstanding
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Common
Stock
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100,000,000
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0
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Preferred
Stock
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10,000,000
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0
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0
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Common
Shares
All
common shares offered by this prospectus will be duly authorized, fully paid and
nonassessable. Our stockholders are entitled to receive distributions if and
when authorized by our Board of Directors and declared by us out of assets
legally available for the payment of distributions. Our stockholders are also
entitled to share ratably in the assets legally available for distribution to
our stockholders in the event of liquidation, dissolution or winding up, after
payment of or adequate provision for all known debts and liabilities. These
rights are subject to the preferential rights of any other class or series of
our capital stock.
In the
event that we have preferred shares outstanding, and so long as we remain
subject to the 1940 Act, holders of our common shares will not be entitled to
receive any net income of, or other distributions from, us unless all
accumulated dividends on preferred shares have been paid and the asset coverage
(as defined in the 1940 Act) with respect to preferred shares and any
outstanding debt is at least 200% after giving effect to such
distributions.
Each
outstanding common share entitles the holder to one vote on all matters
submitted to a vote of our stockholders, including the election of directors.
The presence of the holders of shares of our stock entitled to cast a majority
of the votes entitled to be cast shall constitute a quorum at a meeting of our
stockholders. Our Charter provides that, except as otherwise provided in our
Bylaws, each director shall be elected by the affirmative vote of the holders of
a majority of the shares of stock outstanding and entitled to vote thereon. Our
Bylaws provide that each director shall be 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 our stockholders, the holders of a
majority of the outstanding shares of capital stock entitled to vote will be
able to elect all of the successors of the class of directors whose terms expire
at that meeting. Pursuant to our Charter and Bylaws, our Board of Directors may
amend the Bylaws to alter the vote required to elect directors.
Holders
of our common shares have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any of our securities. All of our common shares will have equal dividend,
liquidation and other rights.
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 company’s common stock (calculated within 48 hours of pricing), unless
such sale is made with the consent of a majority of the company’s outstanding
common stockholders. We are seeking approval from the Fund’s initial
stockholders (i.e., the stockholders of the Fund prior to this offering) for the
authority to sell common shares for a price that is less than NAV per share,
subject to certain conditions listed below. All investors who
purchase common shares in this offering will be bound by such
approval. As a result, during the first
year of
the Fund’s operations, there will be no stockholder approval sought prior to any
issuance of common shares at a price that is less than NAV per
share. After the first year of the Fund’s operations, we intend to
seek such approval from stockholders at each annual meeting of
stockholders. The issuance of additional shares of the Fund at below
NAV will dilute the interest in the Fund’s assets, income and relative voting
power of existing stockholders, including those who purchase common shares in
this offering.
The
number of shares that we may sell at a price below NAV per share in one or more
public or private offerings may not exceed twenty-five percent (25%) of our then
outstanding common stock. We believe that having the ability to issue
and sell shares of common stock at a price below NAV per share benefits all
stockholders in that it allows us to quickly raise cash and capitalize on
attractive investment opportunities while remaining fully invested at all
times. When considering an offering of common stock, we calculate our
NAV on a more frequent basis, generally daily, to the extent necessary to comply
with the provisions of the 1940 Act. We expect to sell shares of
common stock below NAV only when we have identified attractive near-term
investment opportunities. If our initial stockholders approve the
proposal, the Fund will only issue shares of its common stock at a price below
NAV per share pursuant to this stockholder proposal if the following conditions
are met:
|
·
|
a
majority of the Fund’s directors who have no financial interest in the
transaction and a majority of the Fund’s independent directors have
determined that any such sale would be in the best interests of the Fund
and its stockholders;
|
|
·
|
a
majority of the Fund’s directors who have no financial interest in the
transaction and a majority of the Fund’s independent directors, in
consultation with the underwriter or underwriters of the offering if it is
to be underwritten, have determined in good faith, and as of a time
immediately prior to the first solicitation by or on behalf of the Fund of
firm commitments to purchase such common stock or immediately prior to the
issuance of such common stock, that the price at which such shares of
common stock are to be sold is not less than a price which closely
approximates the market value of those shares of common stock, less any
distributing commission or
discount;
|
|
·
|
if
the net proceeds of any such sale are to be used to make investments, a
majority of the Fund’s directors who have no financial interest in the
transaction and a majority of the Fund’s independent directors, have made
a determination, based on information and a recommendation from the
Advisor, that they reasonably expect that the investment(s) to be made
will lead to a long-term increase in distribution growth;
and
|
|
·
|
the
price per common share in any such sale, after deducting offering expenses
and commissions, reflects a discount to NAV, as determined at any time
within two business days prior to the pricing of the common stock to be
sold, of no more than 10%.
|
The
table below sets forth the pro forma maximum dilutive effect on our NAV if we
were to issue shares below our NAV immediately following this offering. The
table assumes that we issue 10,000,000 shares in this offering and subsequently
issue 2,500,000 shares, which would represent approximately twenty-five percent
(25%) of our then outstanding common stock, at a net sale price to us after
deducting all expenses of issuance, including underwriting discounts and
commissions, equal to $17.16 which is approximately 90% of the estimated NAV of
our common shares immediately following this offering.
Pro Forma Maximum Impact of Below
NAV Issuances of Common Shares
|
|
|
|
|
Common
shares assumed outstanding
|
|
|
10,000,000
|
|
Common
shares that may be issued below NAV
|
|
|
2,500,000
|
|
Total
common shares outstanding if all permissible shares are issued below
NAV
|
|
|
12,500,000
|
|
Estimated
NAV per share immediately following this offering
|
|
$
|
19.06
|
|
Aggregate
NAV of all currently outstanding common shares immediately following this
offering
|
|
$
|
190,600,000 |
|
Aggregate
net proceeds to the Company (assuming the Company sold all permissible
shares and received net proceeds equal to $17.16 per share (approximately
90% of the NAV immediately following this offering.))
|
|
$
|
42,900,000
|
|
Expected
aggregate NAV of the Company after dilutive issuance
|
|
$
|
233,500,000
|
|
NAV
per share after issuance
|
|
$
|
18.68
|
|
Percentage
dilution to pre-issuance NAV
|
|
|
(1.99)
|
%
|
In
addition to the foregoing conditions and although we believe it is unlikely to
occur, we are required pursuant to interpretations of the staff of the
Commission, to file a registration statement before commencing a below NAV
offering if the cumulative dilution
from
the then current offering (as calculated in the table above) together with
previous below NAV offerings since the last stockholder approval for below NAV
offerings was obtained, exceeds 15%. We also must file a registration
statement before commencing an offering of shares pursuant to the issuance to
our common stockholders of transferable rights to subscribe for shares below
NAV.
Because
our Advisor’s management fee is based upon our average monthly Managed Assets,
our Advisor’s interest in recommending the issuance and sale of common stock
below NAV may conflict with our interests and those of our
stockholders.
Preferred
Shares
We may, but
are not required to, issue preferred shares. We will not issue what
historically has been known as auction rate preferred securities. As
long as we remain subject to the 1940 Act at the time of a preferred share
offering, we will be subject to the 1940 Act restriction that currently limits
the aggregate liquidation preference of all outstanding preferred stock to 50%
of the value of our total assets less our liabilities and indebtedness. We also
believe the liquidation preference, voting rights and redemption provisions of
the preferred shares will be similar to those stated
below.
As long as we
are subject to the 1940 Act, the holders of any preferred shares, voting
separately as a single class, will have the right to elect at least two members
of our Board of Directors at all times. The remaining directors will be elected
by holders of common shares and preferred stock, voting together as a single
class. In addition, subject to the prior rights, if any, of the holders of any
other class of senior securities outstanding, the holders of any preferred stock
will have the right to elect a majority of the directors at any time accumulated
dividends on any preferred stock have not been paid for at least two years. 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 any
outstanding preferred stock, voting separately as a class, would be required to
adopt any plan of reorganization that would adversely affect the preferred
stock. See "Certain Provisions of Our Charter and Bylaws and the Maryland
General Corporation Law." As a result of these voting rights, our ability to
take any such actions may be impeded to the extent that any of our preferred
shares are outstanding.
The
affirmative vote of the holders of a majority of the outstanding preferred
shares, voting as a separate class, will be required to amend, alter or repeal
any of the preferences, rights or powers of holders of preferred shares so as to
affect materially and adversely such preferences, rights or powers. The class
vote of holders of preferred shares described above will in each case be in
addition to any other vote required to authorize the action in
question.
The terms of
the preferred shares, if issued, are expected to provide that (i) they are
redeemable in whole or in part at the original purchase price per share plus
accrued dividends per share, (ii) we may tender for or repurchase our
preferred shares and (iii) we may subsequently resell any shares so
tendered for or repurchased by us. Any redemption or purchase of our preferred
shares will reduce the leverage applicable to our common shares, while any
resale of our preferred shares will increase that leverage.
The
discussion above describes the possible offering of our preferred shares. If our
Board of Directors determines to proceed with such an offering, the terms of our
preferred shares may be the same as, or different from, the terms described
above, subject to applicable law and our Charter. Our Board of Directors,
without the approval of the holders of our common shares, may authorize an
offering of preferred shares or may determine not to authorize such an offering
and may fix the terms of our preferred shares to be offered.
The
information contained under this heading is subject to the provisions contained
in our Charter and Bylaws and the laws of the State of Maryland.
CERTAIN PROVISIONS OF OUR CHARTER AND BYLAWS
AND
THE
MARYLAND GENERAL CORPORATION LAW
The
following description of certain provisions of our Charter and Bylaws is only a
summary. For a complete description, please refer to our Charter and Bylaws that
have been filed as exhibits to our registration statement.
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, all of which
are summarized below, may be regarded as "anti-takeover" provisions. Such
provisions could limit the ability of our 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. In addition to these provisions, we are
incorporated in Maryland and therefore expect to be subject to the Maryland
Control Share Acquisition Act and the Maryland General Corporation Law. In
addition, certain provisions of the 1940 Act may serve to discourage a third
party from seeking to obtain control of us.
Number
and Classification of our Board of Directors; Election of Directors
Our
Charter and Bylaws provide that the number of directors may be established only
by our Board of Directors pursuant to the Bylaws, but may not be less than one.
Our Bylaws provide that the number of directors may not be greater than nine.
Pursuant to our Charter, our Board of Directors is divided into three classes:
Class I, Class II and Class III. The term of each class of
directors expires in a different successive year. Upon the expiration of their
term, directors of each class are elected to serve for three-year terms and
until their successors are duly elected and qualified. Each year, only one class
of directors will be elected by the stockholders. The classification of our
Board of Directors should help to assure the continuity and stability of our
strategies and policies as determined by our Board of Directors.
Our
classified board could have the effect of making the replacement of incumbent
directors more time-consuming and difficult. At least two annual meetings of our
stockholders, instead of one, will generally be required to effect a change in a
majority of our Board of Directors. Thus, the classification of our Board of
Directors could increase the likelihood that incumbent directors will retain
their positions and may delay, defer or prevent a change in control of our Board
of Directors, even though a change in control might be in the best interests of
our stockholders.
Vacancies
on Board of Directors; Removal of Directors
Our
Charter provides that we have elected to be subject to the provision of
Subtitle 8 of Title 3 of the Maryland General Corporation Law
regarding the filling of vacancies on our Board of Directors. Accordingly,
except as may be provided by our Board of Directors in setting the terms of any
class or series of preferred shares, any and all vacancies on our Board of
Directors may be filled only by the affirmative vote of a majority of the
remaining directors in office, even if the remaining directors do not constitute
a quorum, and any director elected to fill a vacancy shall serve for the
remainder of the full term of the directorship in which the vacancy occurred and
until a successor is elected and qualified, subject to any applicable
requirements of the 1940 Act.
The
Charter provides that, subject to the rights of holders of one or more classes
of our preferred stock, a director may be removed only for cause and only by the
affirmative vote of at least two-thirds of the votes entitled to be cast in the
election of our directors. This provision, when coupled with the provisions in
our Charter and Bylaws regarding the filling of vacancies on our Board of
Directors, precludes our 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 our 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 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 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 and
Bylaws provide that the Board of Directors will have the exclusive power to
make, alter, amend or repeal any provision of our Bylaws.
Advance
Notice of Director Nominations and New Business
Our
Bylaws provide that with respect to an annual meeting of our stockholders,
nominations of persons for election to our Board of Directors and the proposal
of business to be considered by our stockholders may be made only
(i) pursuant to our notice of the meeting, (ii) by or at the direction
of our Board of Directors or (iii) by a stockholder who is entitled to vote
at the meeting and who has complied with the advance notice procedures of our
Bylaws. With respect to special meetings of our stockholders, only the business
specified in our notice of the meeting may be brought before the meeting.
Nominations of persons for election to our Board of Directors at a special
meeting may be made only (i) pursuant to our notice of the meeting,
(ii) by or at the direction of our Board of Directors, or (iii) by a
stockholder who is entitled to vote at the meeting and who has complied with the
advance notice provisions of our Bylaws, provided that our Board of Directors
has determined that directors will be elected at such special
meeting.
Limitation
of Liability of Directors and Officers; Indemnification and Advancement of
Expenses
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
(i) actual receipt of an improper benefit or profit in money, property or
services or (ii) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. Our Charter contains such a
provision which eliminates directors’ and officers’ liability to the maximum
extent permitted by Maryland law, subject to the requirements of the 1940
Act.
Our
Charter authorizes us, and our Bylaws obligate us, to the maximum extent
permitted by Maryland law and subject to the requirements of the 1940 Act, to
indemnify any present or former director or officer or any individual who, while
a director or officer and at our request, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or
trustee and who is made, or threatened to be made, a party to the proceeding by
reason of his or her service in any such 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 service in any such capacity and to pay or reimburse
their reasonable expenses in advance of final disposition of a proceeding. Our
obligation to indemnify any director, officer or other individual, however, is
limited by the 1940 Act and Investment Company Act Release No. 11330,
which, among other things, prohibit 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 and require us to set forth reasonable and fair means for
determining whether indemnification shall be made.
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 (i) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (1) was committed in bad faith or (2) was
the result of active and deliberate dishonesty, (ii) the director or
officer actually received an improper personal benefit in money, property or
services or (iii) 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 a personal benefit was improperly
received, unless in either case a court orders indemnification, and then only
for expenses. In addition, Maryland law permits a corporation to advance
reasonable expenses to a director or officer upon the corporation’s receipt of
(i) 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 (ii) 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.
These
provisions do not limit or eliminate our rights or the rights of any of our
stockholders to seek nonmonetary relief such as an injunction or rescission in
the event any of our directors or officers breaches his or her duties. These
provisions will not alter the liability of our directors or officers under
federal securities laws.
Control
Share Acquisitions
We are
covered by the Maryland Control Share Acquisition Act (the "Control Share Act"),
which provides that control shares of a Maryland corporation acquired in a
control share acquisition have no voting rights except to the extent approved by
a vote of two-
thirds of
the votes entitled to be cast on the matter. Shares owned by the acquirer, and
by officers or by directors who are employees of the corporation are excluded
from shares entitled to vote on the matter. Control shares are voting shares of
stock that, if aggregated with all other shares of stock owned by the acquirer
or in respect of which the acquirer is able to exercise or direct the exercise
of voting power (except solely by virtue of a revocable proxy), would entitle
the acquirer to exercise voting power in electing directors within one of the
following ranges of voting power:
|
•
|
one-tenth
or more but less than one-third;
|
|
•
|
one-third
or more but less than a
majority; or
|
|
•
|
a
majority or more of all voting
power.
|
The
requisite stockholder approval must be obtained each time an acquirer crosses
one of the thresholds of voting power set forth above. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A control share acquisition
means the acquisition of control shares, subject to certain
exceptions.
A person
who has made or proposes to make a control share acquisition may compel the
board of directors of the corporation to call a special meeting of stockholders
to be held within 50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is subject to the
satisfaction of certain conditions, including an undertaking to pay the expenses
of the meeting. If no request for a meeting is made, the corporation may present
the question at any stockholders meeting.
If voting
rights are not approved at the meeting or if the acquiring person does not
deliver an acquiring person statement as required by the statute, then the
corporation may repurchase for fair value any or all of the control shares,
except those for which voting rights have previously been approved. The right to
repurchase control shares is subject to certain conditions and limitations. Fair
value is determined, without regard to the absence of voting rights for the
control shares, as of the date of the last control share acquisition by the
acquirer or of any meeting of stockholders at which the voting rights of the
shares are considered and not approved. If voting rights for control shares are
approved at a stockholders meeting and the acquirer becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
appraisal rights may not be less than the highest price per share paid by the
acquirer in the control share acquisition.
The
Control Share Act does not apply (i) to shares acquired in a merger,
consolidation or share exchange if we are a party to the transaction or
(ii) to acquisitions approved or exempted by our Charter or
Bylaws.
Our
Bylaws contain a provision exempting from the Control Share Act any and all
acquisitions by any person of our shares of stock. There can be no assurance
that such provision will not be otherwise amended or eliminated at any time in
the future. However, we will amend our Bylaws to be subject to the Control Share
Act only if our Board of Directors determines that it would be in our best
interests and if the staff of the SEC does not object to our determination that
our being subject to the Control Share Act does not conflict with the 1940
Act.
Business
Combinations
We are
covered by the Maryland Business Combination Act (the "Business Combination
Act"), which provides that "business combinations" between a Maryland
corporation and an interested stockholder or an affiliate of an interested
stockholder are prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange or, in
circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities. An interested stockholder is defined
as:
|
•
|
any
person who beneficially owns 10% or more of the voting power of the
corporation’s shares; or
|
|
•
|
an
affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then-outstanding voting stock of
the corporation.
|
A person
is not an interested stockholder under this statute if the board of directors
approved in advance the transaction by which such stockholder otherwise would
have become an interested stockholder. However, in approving a transaction, the
board of directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the
board of directors.
After the
five-year prohibition, any business combination between the Maryland corporation
and an interested stockholder generally must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at
least:
|
•
|
80%
of the votes entitled to be cast by holders of outstanding shares of
voting stock of the
corporation; and
|
|
•
|
two-thirds
of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the interested stockholder with whom
or with whose affiliate the business combination is to be effected or held
by an affiliate or associate of the interested
stockholder.
|
These
super-majority vote requirements do not apply if the corporation’s common
stockholders receive a minimum price, as defined under Maryland law, for their
shares in the form of cash or other consideration in the same form as previously
paid by the interested stockholder for its shares.
The
Business Combination Act permits various exemptions from its provisions,
including business combinations that are exempted by the board of directors
before the time that the interested stockholder becomes an interested
stockholder. Our Board of Directors has adopted a resolution exempting any
business combination between us and any other person from the provisions of the
Business Combination Act, provided that the business combination is first
approved by our Board of Directors, including a majority of the directors who
are not interested persons as defined in the 1940 Act. This resolution, however,
may be altered or repealed in whole or in part at any time. If this resolution
is repealed, or our Board of Directors does not otherwise approve a business
combination, the statute may discourage others from trying to acquire control of
us and increase the difficulty of consummating any offer.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The
following discussion is a summary of certain U.S. federal income tax
considerations affecting the Fund and its stockholders. The
discussion reflects applicable U.S. federal income tax laws of the U.S. as of
the date of this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service (the "IRS"),
possibly with retroactive effect. No attempt is made to present a
detailed explanation of all U.S. federal, state, local and foreign tax concerns
affecting the Fund and its stockholders (including stockholders owning large
positions in the Fund). The discussion set forth herein does not
constitute tax advice. Investors are urged to consult their own tax
advisors to determine the tax consequences to them of investing in the
Fund.
In
addition, no attempt is made to address tax concerns applicable to an investor
with a special tax status, such as a financial institution, "real estate
investment trust", insurance company, RIC, individual retirement account, other
tax-exempt entity, dealer in securities or non-U.S.
investor. Furthermore, this discussion does not reflect possible
application of the alternative minimum tax. Unless otherwise noted,
this discussion assumes the common shares are held by U.S. persons and that such
shares are held as capital assets.
The
Fund intends to elect to be treated as, and to qualify each year for the special
tax treatment afforded, a RIC under Subchapter M of the Code. As long as the
Fund meets certain requirements that govern the Fund’s source of income,
diversification of assets and distribution of earnings to stockholders, the Fund
will not be subject to U.S. federal income tax on income distributed (or treated
as distributed, as described below) to its stockholders. With respect to the
source of income requirement, the Fund must derive in each taxable year at least
90% of its gross income (including tax-exempt interest) from (i) dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in such shares,
securities or currencies and (ii) net income derived from interests
in qualified publicly traded partnerships. A qualified publicly
traded partnership is generally defined as a publicly traded partnership under
Section 7704 of the Code, but does not include a publicly traded partnership if
90% or more of its income is described in (i) above. For purposes of
the income test, the Fund will be treated as receiving directly its share of the
income of any partnership that is not a qualified publicly traded
partnership.
With
respect to the diversification of assets requirement, the Fund must diversify
its holdings so that, at the end of each quarter of each taxable year, (i) at
least 50% of the value of the Fund’s total assets is represented by cash and
cash items, U.S. Government securities, the securities of other RICs and other
securities, with such other securities limited for purposes of such calculation,
in respect of any one issuer, to an amount not greater than 5% of the value of
the Fund’s total assets and not more than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of the Fund’s
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other RICs), the securities (other
than the securities of other RICs) of any two or more issuers that the Fund
controls and that are determined to be engaged in the same, similar or related
trades or businesses, or the securities of one or more qualified publicly traded
partnerships.
If the
Fund qualifies as a RIC and distributes to its stockholders at least 90% of the
sum of (i) its "investment company taxable income," as that term is defined in
the Code (which includes, among other items, dividends, taxable interest and the
excess of any net short-term capital gains over net long-term capital losses, as
reduced by certain deductible expenses) without regard to the deduction for
dividends paid and (ii) the excess of its gross tax-exempt interest, if any,
over certain deductions attributable to such interest that are otherwise
disallowed, the Fund will be relieved of U.S. federal income tax on any income
of the Fund, including long-term capital gains, distributed to
stockholders. However, if the Fund retains any investment company
taxable income or "net capital gain" (i.e., the excess of net long-term capital
gain over net short-term capital loss), it will be subject to U.S. federal
income tax at regular corporate federal income tax rates (currently at a maximum
rate of 35%) on the amount retained. The Fund intends to distribute
at least annually substantially all of its investment company taxable income,
net tax-exempt interest, and net capital gain. Under the Code, the
Fund will generally be subject to a nondeductible 4% federal excise tax on the
undistributed portion of its ordinary income and capital gains if it fails to
meet certain distribution requirements with respect to each calendar
year. In order to avoid the 4% federal excise tax, the required
minimum distribution is generally equal to the sum of 98% of the Fund’s ordinary
income (computed on a calendar year basis), plus 98% of the Fund’s capital gain
net income (generally computed for the one-year period ending on October
31). The Fund generally intends to make distributions in a timely
manner in an amount at least equal to the required minimum distribution and
therefore, under normal market conditions, does not expect to be subject to this
excise tax.
If the
Fund is unable to satisfy the 90% distribution requirement or otherwise fails to
qualify as a RIC in any year, it will be taxed in the same manner as an ordinary
corporation and distributions to the Fund’s stockholders will not be deductible
by the Fund in computing its taxable income. In such event, the
Fund’s distributions, to the extent derived from the Fund’s current or
accumulated earnings and profits, would constitute dividends, which would
generally be eligible for the dividends received deduction available to
corporate stockholders, and non-corporate stockholders would generally be able
to treat such distributions as "qualified dividend
income"
eligible for reduced rates of U.S. federal income taxation in taxable years
beginning on or before December 31, 2010, provided in each case that certain
holding period and other requirements are satisfied.
The
Fund intends to invest a portion of its assets in MLPs. Net income
derived from an interest in a qualified publicly traded partnership, which
generally includes MLPs, is included in the sources of income from which a RIC
must derive 90% of its gross income. However, not more than 25% of the value
of a RIC’s total assets can be invested in the securities of qualified
publicly traded partnerships. The Fund intends to invest only in MLPs that will
constitute qualified publicly traded partnerships for purposes of the RIC
rules, not more than 25% of the value of the Fund’s total assets will be
invested in the securities of publicly traded partnerships.
Distributions
paid to you by the Fund from its investment company taxable income will
generally be taxable to you as ordinary income. A portion of such distributions
(if designated by the Fund) may qualify (i) in the case of corporate
stockholders, for the dividends received deduction under Section 243 of the Code
to the extent that the Fund’s income consists of dividend income from U.S.
corporations, excluding distributions from certain entities such as REITs, or
(ii) in the case of individual stockholders for taxable years beginning on or
prior to December 31, 2010, as qualified dividend income eligible to be taxed at
reduced rates under Section 1(h)(11) of the Code (which generally provides for a
maximum rate of 15%) to the extent that the Fund receives qualified dividend
income, and provided in each case that certain holding period and other
requirements are met. Qualified dividend income is, in general,
dividend income from taxable domestic corporations and qualified foreign
corporations (e.g., generally, if the issuer is incorporated in a possession of
the United States or in a country with a qualified comprehensive income tax
treaty with the United States, or if the stock with respect to which such
dividend is paid is readily tradable on an established securities market in the
United States). A qualified foreign corporation generally excludes any foreign
corporation that, for the taxable year of the corporation in which the dividend
was paid or the preceding taxable year, is a passive foreign investment company.
Distributions made to you from an excess of net long-term capital gain over net
short-term capital losses ("capital gain dividends"), including capital gain
dividends credited to you but retained by the Fund, will be taxable to you
as long-term capital gain if they have been properly designated by the Fund,
regardless of the length of time you have owned our common shares. The maximum
tax rate on capital gain dividends received by individuals is generally 15% for
such gain realized before January 1, 2011. Distributions in excess of the Fund’s
earnings and profits will be treated by you, first, as a tax-free return of
capital, which is applied against and will reduce the adjusted tax basis of your
shares and, after such adjusted tax basis is reduced to zero, will generally
constitute capital gain to you. Under current law, the maximum
15% tax rate on long-term capital gains and qualified dividend income will cease
to apply for taxable years beginning after December 31, 2010; beginning in 2011,
the maximum rate on long-term capital gains is scheduled to revert to 20%, and
all ordinary dividends (including amounts treated as qualified dividends under
the law currently in effect) will be taxed as ordinary
income. Generally, not later than 60 days after the close of its
taxable year, the Fund will provide you with a written notice designating the
amount of any qualified dividend income or capital gain dividends and other
distributions.
Sales
and other dispositions of the Fund’s common shares generally are taxable
events. You should consult your own tax adviser with reference to
your individual circumstances to determine whether any particular transaction in
the Fund’s common shares is properly treated as a sale or exchange for federal
income tax purposes and the tax treatment of any gains or losses recognized in
such transactions. The sale or other disposition of shares of the
Fund will generally result in capital gain or loss to you equal to the
difference between the amount realized and your adjusted tax basis in the common
shares sold or exchanged, and will be long-term capital gain or loss if your
holding period for the shares is more than one year at the time of sale. Any
loss upon the sale or exchange of common shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain dividends
you received (including amounts credited as an undistributed capital gain
dividend) with respect to such shares. A loss you realize on a
sale or exchange of shares of the Fund generally will be disallowed if you
acquire other substantially identical common shares within a 61-day period
beginning 30 days before and ending 30 days after the date that
you dispose of the shares. In such case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Present law taxes both
long-term and short-term capital gain of corporations at the rates applicable to
ordinary income of corporations. For non-corporate taxpayers, short-term capital
gain will currently be taxed at the rate applicable to ordinary income,
currently a maximum rate of 35%, while long-term capital gain realized before
January 1, 2011 generally will be taxed at a maximum rate of 15%. Capital losses
are subject to certain limitations.
The Fund
may be subject to withholding and other taxes imposed by foreign countries,
including taxes on interest, dividends and capital gains with respect to its
investments in those countries, which would, if imposed, reduce the yield on or
return from those investments. Tax treaties between certain countries
and the United States may reduce or eliminate such taxes in some
cases. The Fund does not expect to satisfy the requirements for
passing through to its stockholders their pro rata shares of qualified foreign
taxes paid by
the Fund, with the result that stockholders will not be entitled to a tax
deduction or credit for such taxes on their own US federal income tax
returns.
If the
Fund pays you a dividend in January that was declared in the previous October,
November or December to stockholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by you on December 31 of the year in which the dividend
was declared. A stockholder may elect not to have all dividends and
distributions automatically reinvested in shares of common shares of the Fund
pursuant to the Plan. If a stockholder elects not to participate in
the Plan, such stockholder will receive distributions in cash. For
taxpayers subject to U.S. federal income tax, all dividends will generally be
taxable, as discussed above, regardless of whether a stockholder takes them in
cash or they are reinvested pursuant to the Plan in additional shares of the
Fund.
If a
stockholder’s distributions are automatically reinvested pursuant to the Plan,
for U.S. federal income tax purposes, the stockholder will generally be treated
as having received a taxable distribution in the amount of the cash dividend
that the stockholder would have received if the stockholder had elected to
receive cash. Under certain circcumstances, however, if a stockholder’s
distributions are automatically reinvested pursuant to the Plan and the Plan
Agent invests the distribution in newly issued shares of the Fund, the
stockholder may be treated as receiving a taxable distribution equal to the
fair market value of the stock the stockholder receives.
The Fund
intends to distribute all realized capital gains, if any, at least
annually. If, however, the Fund were to retain any net capital gain,
the Fund may designate the retained amount as undistributed capital gains in a
notice to stockholders who, if subject to U.S. federal income tax on long-term
capital gains, (i) will be required to include in income as long-term capital
gain, their proportionate shares of such undistributed amount and (ii) will be
entitled to credit their proportionate shares of the federal income tax paid by
the Fund on the undistributed amount against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. If such an event occurs, the tax basis of shares owned
by a stockholder of the Fund will, for U.S. federal income tax purposes,
generally be increased by the difference between the amount of undistributed net
capital gain included in the stockholder’s gross income and the tax deemed paid
by the stockholders.
The Fund
is required in certain circumstances to backup withhold at a current rate of 28%
on taxable dividends and certain other payments paid to non-corporate holders of
the Fund’s shares who do not furnish the Fund with their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld from payments
made to you may be refunded or credited against your U.S. federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
The
foregoing is a general and abbreviated summary of the provisions of the Code and
the treasury regulations in effect as they directly govern the taxation of the
Fund and its stockholders. These provisions are subject to change by legislative
and administrative action, and any such change may be retroactive. A more
complete discussion of the tax rules applicable to the Fund and its stockholders
can be found in the Statement of Additional Information that is incorporated by
reference into this prospectus. Stockholders are urged to consult
their tax advisors regarding specific questions as to U.S. federal, foreign,
state, local income or other taxes.
CLOSED-END FUND STRUCTURE
We are
registered as a non-diversified, closed-end management investment company
(commonly referred to as a closed-end fund) under the 1940 Act. Closed-end funds
differ from open-end funds (which are generally referred to as mutual funds) in
that closed-end funds generally list their shares for trading on a stock
exchange and do not redeem their shares at the request of the stockholder. This
means that if a stockholder wishes to sell shares of such a closed-end fund, he
or she must trade them on the market like any other stock at the prevailing
market price at that time. In a mutual fund, if the stockholder
wishes to sell shares of the company, the mutual fund will redeem or buy back
the shares at net asset value. Mutual funds also generally offer new shares on a
continuous basis to new investors and closed-end companies generally do not. The
continuous inflows and outflows of assets in a mutual fund can make it difficult
to manage the company’s investments. By comparison, closed-end funds are
generally able to stay more fully invested in securities that are consistent
with their investment objectives and also have greater flexibility to make
certain types of investments and to use certain investment strategies, such as
financial leverage and investments in illiquid securities.
When
shares of closed-end funds are traded, they frequently trade at a discount to
their NAV. This characteristic of shares of closed-end funds is a risk separate
and distinct from the risk that the closed-end fund’s net asset value may
decrease as a result of investment activities. Our conversion to an open-end
mutual fund would require an amendment to our Charter. Our shares of common
stock are expected to be listed on the NYSE under the trading or "ticker" symbol
"TPZ."
Wachovia
Capital Markets, LLC is acting as the representative of the underwriters named
below. Subject to the terms and conditions stated in the underwriting agreement
dated the date of the final prospectus, each underwriter named below has agreed
to purchase, and we have agreed to sell to that underwriter, the number of
common shares of beneficial interest set forth opposite the underwriter’s
name.
Underwriter
|
Number
of Common Shares
|
Wachovia
Capital Markets, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Wells
Fargo Securities is used herein as a trade name for Wachovia Capital Markets,
LLC
The
underwriting agreement provides that the obligations of the underwriters to
purchase the common shares included in this offering are subject to approval of
legal matters by counsel and to other conditions. The underwriters are obligated
to purchase all the common shares (other than those covered by the
over-allotment option described below) shown in the table above if any of the
common shares are purchased.
The
underwriters propose to offer some of the common shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the common shares to dealers at the public offering price less a
concession not to exceed $ per share. The
sales load we will pay of $ per share is
equal to of the
initial public offering price. The underwriters may allow, and dealers may
reallow, a concession not to exceed $ per
share on sales to other dealers. If all of the common shares are not sold at the
initial public offering price, the representative may change the public offering
price and other selling terms. Investors must pay for any common
shares purchased on or
before , 2009. The
representative has advised us that the underwriters do not intend to confirm any
sales to any accounts over which they exercise discretionary
authority.
Additional
Compensation. The Advisor (and not the Fund) has agreed to pay to
Wachovia Capital Markets, LLC, from its own assets, a structuring fee for advice
relating to the structure, design and organization of the Fund as well as
services related to the sale and distribution of the Fund’s common shares in the
amount
of
.. If the over-allotment option is not exercised, the structuring fee
paid to Wachovia Capital Markets, LLC will not
exceed % of the gross
offering proceeds.
As
part of the Fund’s payment of the Fund’s offering expenses, the Fund has agreed
to pay expenses related to the filing fees incident to, and the reasonable fees
and disbursements of counsel to the underwriters in connection with, the review
by Financial Industry Regulatory Authority, Inc. (“FINRA”) of the terms of the
sale of the common shares and the transportation and other expenses incurred in
connection with presentations to prospective purchasers of the common
shares. The total amount of such expenses paid by the Fund will not
exceed % of the gross offering
proceeds.
The total
amount of the underwriters’ additional compensation payments by the Advisor and,
in the case of the expenses described above, the Fund, will not
exceed % of the gross
offering proceeds. The sum total of all compensation to the underwriters in
connection with this public offering of common shares, including sales load and
all forms of additional compensation or structuring or sales incentive fee
payments to the underwriters and other expenses, will not
exceed % of
the gross offering proceeds.
We have
granted to the underwriters an option, exercisable for 45 days from the date of
this prospectus, to purchase up to
additional common shares at the
public offering price less the sales load. The underwriters may exercise the
option solely for the purpose of covering over-allotments, if any, in connection
with this offering. To the extent such option is exercised, each underwriter
must purchase a number of additional common shares approximately proportionate
to that underwriter’s initial purchase commitment.
We have
agreed that, for a period of 180 days from the date of this prospectus, we will
not, without the prior written consent of Wachovia Capital Markets, LLC, on
behalf of the underwriters, dispose of or hedge any common shares or any
securities convertible
into or
exchangeable for common shares. Wachovia Capital Markets, LLC, in its sole
discretion, may release any of the securities subject to these agreements at any
time without notice.
The
underwriters have undertaken to sell common shares to a minimum of 2,000
beneficial owners in lots of 100 or more shares to meet the New York Stock
Exchange distribution requirements for trading. The common shares are expected
to be listed on the New York Stock Exchange under the symbol "TPZ".
The
following table shows the sales load that we will pay to the underwriters in
connection with this offering. These amounts are shown assuming both no exercise
and full exercise of the underwriters’ option to purchase additional common
shares.
|
Paid
by Fund
|
|
No
Exercise
|
Full
Exercise
|
Per
Share
|
$
|
$
|
Total
|
$
|
$
|
We and
our Advisor have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the 1933 Act, or to contribute to
payments the underwriters may be required to make because of any of those
liabilities.
Certain
underwriters may make a market in the common shares after trading in the common
shares has commenced on the New York Stock Exchange. No underwriter, however, is
obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion of the
underwriter. No assurance can be given as to the liquidity of, or the trading
market for, the common shares as a result of any market-making activities
undertaken by any underwriter. This prospectus is to be used by any underwriter
in connection with the offering and, during the period in which a prospectus
must be delivered, with offers and sales of the common shares in market-making
transactions in the over-the-counter market at negotiated prices related to
prevailing market prices at the time of the sale.
In
connection with the offering, Wachovia Capital Markets, LLC, on behalf of itself
and the other underwriters, may purchase and sell common shares in the open
market. These transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve syndicate sales
of common shares in excess of the number of common shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
"Covered" short sales are sales of common shares made in an amount up to the
number of common shares represented by the underwriters’ over-allotment option.
In determining the source of common shares to close out the covered syndicate
short position, the underwriters will consider, among other things, the price of
common shares available for purchase in the open market as compared to the price
at which they may purchase common shares through the over-allotment
option.
Transactions
to close out the covered syndicate short position involve either purchases of
common shares in the open market after the distribution has been completed or
the exercise of the over-allotment option. The underwriters may also make
"naked" short sales of common shares in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing common shares
in the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
common shares in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of bids
for or purchases of common shares in the open market while the offering is in
progress.
The
underwriters may impose a penalty bid. Penalty bids allow the underwriting
syndicate to reclaim selling concessions allowed to an underwriter or a dealer
for distributing common shares in this offering if the syndicate repurchases
common shares to cover syndicate short positions or to stabilize the purchase
price of the common shares.
Any of
these activities may have the effect of preventing or retarding a decline in the
market price of common shares. They may also cause the price of common shares to
be higher than the price that would otherwise exist in the open market in the
absence of these transactions. The underwriters may conduct these transactions
on the NYSE or in the over-the-counter market, or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at any
time.
A
prospectus in electronic format may be made available on the websites maintained
by one or more of the underwriters. Other than the prospectus in electronic
format, the information on any such underwriter’s website is not part of this
prospectus. The representative may agree to allocate a number of common shares
to underwriters for sale to their online brokerage account holders. The
representative will allocate common shares to underwriters that may make
Internet distributions on the same basis as other
allocations.
In addition, common shares may be sold by the underwriters to securities dealers
who resell common shares to online brokerage account holders.
Prior to
this offering, there has been no public or private market for our common shares
or any other of our securities. Consequently, the offering price for
the common shares was determined by negotiation among us, our Advisor and the
representative. There can be no assurance, however, that the price at which the
common shares trade after this offering will not be lower than the price at
which they are sold by the underwriters or that an active trading market in the
common shares will develop and continue after this offering.
We
anticipate that, from time to time, certain underwriters may act as brokers or
dealers in connection with the execution of our portfolio transactions after
they have ceased to be underwriters and, subject to certain restrictions, may
act as brokers while they are underwriters.
Certain
underwriters may, from time to time, engage in transactions with or perform
services for the Advisor and its affiliates in the ordinary course of
business.
Prior to
the initial public offering of common shares, common shares from the Fund were
purchased in an amount satisfying the net worth requirements of Section 14(a) of
the 1940 Act.
The
principal business address of Wachovia Capital Markets, LLC is 375 Park Avenue,
New York, New York 10152.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The financial
statements of Tortoise Power and Energy Infrastructure Fund, Inc. (formerly
Tortoise Power and Energy Income Company) at May 5, 2009, and for the period
from July 5, 2007 (the date of incorporation) through May 5, 2009, appearing in
this Registration Statement and Statement of Additional Information have been
audited by Ernst & Young LLP, independent registered public accounting firm,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
ADMINISTRATOR, CUSTODIAN, TRANSFER AND DIVIDEND PAYING
AGENT AND REGISTRAR
serves
as our administrator. We pay the administrator a fee computed at
.
serves
as our custodian. We pay the custodian a fee computed
at .
The
transfer agent and registrar for our common shares is Computershare Trust
Company, N.A. and its affiliate, Computershare, Inc., serves as our dividend
paying agent.
The
validity of the common shares offered hereby will be passed upon for us by Husch
Blackwell Sanders LLP, Kansas City, Missouri. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Davis
Polk & Wardwell, New York, New York.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION
|
Page
|
Use
of Proceeds
|
S-1
|
Investment
Policies and Techniques
|
S-1
|
Management
of the Fund
|
S-8
|
Portfolio
Transactions and Brokerage
|
S-19
|
Description
of Capital Stock
|
S-20
|
Certain
Provisions of our Charter and Bylaws and the Maryland General Corporation
Law
|
S-23
|
Net
Asset Value
|
S-26
|
Certain
U.S. Federal Income Tax Considerations
|
S-28
|
Proxy
Voting Policies
|
S-31
|
Independent
Registered Public Accounting Firm
|
S-32
|
Administrator,
Custodian, Transfer and Dividend Paying Agent and
Registrar
|
S-32
|
Additional
Information
|
S-32
|
Index
to Financial Statements |
F-1
|
Until ,
2009 (25 days after the date of this prospectus) all dealers that buy, sell or
trade the common shares, whether or not participating in this offering, may be
required to deliver a Prospectus. This is in addition to each
dealer’s obligation to deliver a prospectus when acting as an underwriter and
with respect to its unsold allotments or subscriptions.
Tortoise
Power and Energy Infrastructure Fund, Inc.
Common
Shares
_______________
PROSPECTUS
,
2009
_______________
Wells
Fargo Securities
TORTOISE
POWER AND ENERGY INFRASTRUCTURE FUND, INC.
STATEMENT
OF ADDITIONAL INFORMATION
,
2009
Tortoise
Power and Energy Infrastructure Fund, Inc., a Maryland corporation (the "Fund"),
is a nondiversified, closed-end management investment company.
This
Statement of Additional Information, relating to the Fund’s common shares, does
not constitute a prospectus, but should be read in conjunction with the Fund’s
prospectus relating thereto
dated ,
2009. This Statement of Additional Information does not include all information
that a prospective investor should consider before purchasing common shares, and
investors should obtain and read the Fund’s prospectus prior to purchasing
common shares. A copy of the prospectus may be obtained without charge from the
Fund by calling 1-866-362-9331. You also may obtain a copy of the Fund’s
prospectus on the Securities and Exchange Commission’s web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the prospectus.
This Statement of Additional Information is dated
, 2009.
No person
has been authorized to give any information or to make any representations not
contained in the prospectus or in this Statement of Additional Information in
connection with the offering made by the prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Fund. The prospectus and this Statement of Additional Information do not
constitute an offering by the Fund in any jurisdiction in which such offering
may not lawfully be made. Capitalized terms not defined herein are
used as defined in the prospectus.
SUBJECT
TO COMPLETION
PRELIMINARY
STATEMENT OF ADDITIONAL INFORMATION
DATED
________ ____, 2009
TABLE
OF CONTENTS
The net
proceeds of this offering will be approximately
$ after
deducting both the sales load (underwriting discount) and estimated offering
expenses of approximately
$ paid
by us. We expect to use the net proceeds from this offering to invest in
accordance with our investment objectives and strategies and for working capital
purposes. We currently anticipate that we will be able to invest substantially
all of the net proceeds in accordance with our investment objectives and
policies by approximately three months after the completion of the offering,
depending on market conditions. Pending investment as described in
the prospectus under the heading "The Fund," we expect the net proceeds of this
offering will be invested in cash, cash equivalents, securities issued or
guaranteed by the U.S. government or its instrumentalities or agencies,
short-term money market instruments, short-term fixed
income securities , certificates of deposit, bankers’ acceptances and
other bank obligations, commercial paper or other liquid fixed
income securities. Until we are fully invested, the return on our common
shares is expected to be lower than that realized after full investment in
accordance with our investment objectives.
INVESTMENT POLICIES AND TECHNIQUES
The
Fund’s primary investment objective is to provide a high level of current income
consistent with a secondary objective of capital appreciation. The Fund seeks to
provide its stockholders a vehicle to invest in a portfolio consisting primarily
of securities issued by power and energy infrastructure companies.
Under
normal circumstances, the Fund will invest at least 80% of its total assets
(including assets obtained through leverage) in securities of companies that
derive more than 50% of their revenue from power or energy infrastructure
operations. Power infrastructure operations use asset systems to provide
electric power generation (including renewable energy), transmission and
distribution. Energy infrastructure operations use a network of pipeline assets
to transport, store, gather and/or process crude oil, refined petroleum products
(including biodiesel and ethanol), natural gas or natural gas
liquids.
The
following information supplements the discussion of the Fund’s investment
objectives, policies and techniques that are described in the prospectus and
contains more detailed information about the types of instruments in which the
Fund may invest, strategies the Advisor may employ in pursuit of the Fund’s
investment objectives and a discussion of related risks.
Principal
Investment Strategies
As a
nonfundamental investment policy, under normal circumstances we plan to invest
at least 80% of our total assets (including assets obtained through leverage) in
the securities of companies that derive more than 50% of their revenue from
power or energy infrastructure operations.
We also
have adopted the following additional nonfundamental policies:
|
•
|
We
will invest a minimum of 60% of our total assets in fixed income
securities.
|
|
•
|
Under
normal market conditions, we will not employ leverage above 20% of our
total assets at time of
incurrence.
|
|
•
|
We
will not invest more than 25% of our total assets in non-investment grade
rated fixed income securities.
|
|
•
|
We
will not invest more than 15% of our total assets in restricted securities
that are ineligible for resale pursuant to Rule 144A (“Rule 144A”) under
the Securities Act of 1933 (“1933 Act”), all of which may be illiquid
securities.
|
|
•
|
We
may invest up to 10% of our total assets in securities issued by non-U.S.
issuers (including Canadian
issuers).
|
• We
will not engage in short sales.
In
addition, to comply with federal tax requirements for qualification as a
regulated investment company ("RIC"), our investments will be limited so that at
the close of each quarter of each taxable year (i) at least 50% of the value of
our total assets is represented by cash and cash items, U.S. Government
securities, the securities of other RICs and other securities, with such other
securities limited for purposes of such calculation, in respect of any one
issuer, to an amount not greater than 5% of the value of our total assets and
not more than 10% outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of our total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
RICs), the securities (other than the securities of other RICs) of any two or
more issuers that we control and that are determined to be engaged in the same
business or similar or related trades or businesses, or the securities of one or
more qualified publicly traded partnerships (which includes MLPs).
These tax-related limitations may be changed by the Board of Directors to
the extent appropriate in light of changes to applicable tax requirements.
As used
for the purpose of each nonfundamental investment policy above, the term "total
assets" includes any assets we obtain through leverage. Our Board of
Directors may change our nonfundamental investment policies without stockholder
approval and will provide notice to stockholders of material changes in such
policies (including notice through stockholder reports). Any change
in the policy of investing under normal circumstances at least 80% of our total
assets (including assets we obtain through leverage) in the securities of
companies that derive more than 50% of their revenues from power or energy
infrastructure operations 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.
Leverage
Once
the proceeds of this offering have been fully invested in securities that meet
our investment objectives, we may fund continued investment activities through
the borrowing of money that represents the leveraging of our common shares. The
issuance of additional common shares will enable us to increase the aggregate
amount of our leverage. Under normal market conditions, we will not
employ leverage above 20% of our total assets at time of
incurrence. We anticipate that such leverage may initially include,
although not be limited to, revolving credit facilities or senior
notes. We may also issue preferred shares, however, we will not
utilize leverage in the form of what historically has been known as auction rate
preferred securities.
The use
of leverage creates an opportunity for increased income and capital appreciation
for common stockholders, but at the same time creates special risks that may
adversely affect common stockholders. Because our Advisor’s fee is based upon a
percentage of our "Managed Assets", our Advisor’s fee will be higher when we are
leveraged. Managed Assets is defined as our total assets (including
any assets attributable to any leverage that may be outstanding) minus the sum
of accrued liabilities (other than debt representing financial leverage and the
aggregate liquidation preference of any outstanding preferred
shares). Therefore, our Advisor has a financial incentive to use
leverage, which will create a conflict of interest between our Advisor and our
common stockholders, who will bear the costs and risks 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.
We 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 may
expose us to certain risks that differ from the risks associated with our
portfolio holdings.
Portfolio
Securities
We will
seek to achieve our investment objectives by investing in the following
categories of securities:
Targeted
Investments. We may invest in a wide range of securities
that generate income, including, but not limited to, fixed income securities and
dividend-paying equity securities. Up to 25% of these securities may
be securities issued by MLPs. Securities that generate income in
which we may invest include, but are not limited to, the following types of
securities:
Power and Energy Infrastructure
Fixed Income Securities.
We may
invest in fixed income securities, including bonds, debentures or other debt
instruments, which are expected to provide a high level of current
income. Our investments in securities that generate income may have
fixed or variable principal payments and various interest rate and dividend
payment and reset terms, including fixed rate, floating rate, adjustable rate,
and payment in kind features. Our investments may have extended or no
maturities. Securities that generate income also may be subject to
call features and redemption provisions. We may invest in securities
that generate income of any credit quality, including up to 25% of our total
assets in fixed income securities rated non-investment grade (commonly referred
to as “junk bonds”), that are considered speculative as to the issuer’s capacity
to pay interest and repay principal. Please see “Risks
—Non-investment Grade Fixed Income Securities Risk.”
These
securities may be senior or junior positions in the capital structure of a
borrower, may be secured (with specific collateral or have a claim on the assets
and/or stock of the borrower that is senior to that held by subordinated debt
holders and stockholders of the borrower) or unsecured, and may be used to
finance leveraged buy-outs, recapitalizations, mergers, acquisitions, stock
repurchases or internal growth of the borrower. These loans may have
fixed rates of interest or variable rates of interest that are reset either
daily, monthly, quarterly or semi-annually by reference to a base lending rate,
plus a premium. The base lending rate may be the London Inter-Bank
Offer Rate (“LIBOR”), the prime rate offered by one or more major U.S. banks or
some other base rate varying over time. Certain of the bonds in which
we may invest may have an extended or no maturity or may be zero coupon
bonds. We may invest in fixed income securities that are not rated or
securities that are non-investment grade. Certain of these securities
may be securities issued by MLPs.
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Investment Grade
Securities. We may invest in a wide variety of
income-generating securities that are rated or determined by the Advisor
to be investment grade quality and that are issued by corporations and
other non-governmental entities and issuers. Investment grade
quality securities are those that, at the time of investment, are either
rated by one of the NRSROs that rate such securities within the four
highest letter grades (including BBB- or higher by S&P or Fitch or
Baa3 or higher by Moody's), or if unrated are determined by the Advisor to
be of comparable quality to the securities in which the Fund may otherwise
invest. Investment grade securities may include securities
that, at the time of investment, are rated non-investment grade by
S&P, Moody's or Fitch, so long as at least one NRSRO rates such
securities within the four highest grades (such securities are commonly
referred to as split-rated securities).
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Investment
grade securities that generate income are subject to market and credit
risk. Investment grade securities that generate income have varying levels
of sensitivity to changes in interest rates and varying degrees of credit
quality. The values of investment grade income-generating
securities may be affected by changes in the credit rating or financial
condition of an issuer. |
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Non-Investment Grade
Securities. We may invest up to 25% of our total assets
in fixed income securities rated non-investment grade securities by NRSROS
or unrated of comparable quality. Non-investment grade
securities are rated below Ba1 or lower by Moody’s Investors Service, Inc.
(“Moody’s”), BB+ or lower by Standard & Poor’s Ratings Services
(“S&P”), BB or lower by Fitch, Inc. (“Fitch”) or, if unrated,
determined by the Advisor to be of comparable quality. The
ratings of Moody’s, S&P and Fitch represent their opinions as to the
quality of the obligations which they undertake to rate. Ratings are
relative and subjective and, although ratings may be useful in evaluating
the safety of interest and principal payments, they do not evaluate the
market value risk of such obligations. Although these ratings may be an
initial criterion for selection of portfolio investments, the Advisor also
will independently evaluate these securities and the ability of the
issuers of such securities to pay interest and
principal.
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Securities
rated non-investment grade are regarded as having predominately speculative
characteristics with respect to the issuer’s capacity to pay interest and repay
principal, and are commonly referred to as “junk bonds” or “high-yield bonds.”
The credit quality of most non-investment grade securities reflects a
greater-than-average possibility that adverse changes in the financial condition
of an issuer, or in general economic conditions, or both, may impair the ability
of the issuer to make payments of interest and principal. The inability (or
perceived inability) of issuers to make timely payments of interest and
principal would likely make the values of non-investment grade securities held
by us more volatile and could limit our ability to sell such securities at
favorable prices. In the absence of a liquid trading market for non-investment
grade securities, we may have difficulties determining the fair market value of
such investments. To the extent we invest in unrated securities, our
ability to achieve our investment objectives will be more dependent on our
Advisor’s credit analysis than would be the case when we invest in rated
securities.
Because
the risk of default is higher for non-investment grade securities than for
investment grade securities, our Advisor’s research and credit analysis is an
especially important part of managing securities of this type. Our Advisor will
attempt to identify those issuers of non-investment grade securities whose
financial condition our Advisor believes are adequate to meet future obligations
or have improved or are expected to improve in the future. Our Advisor’s
analysis will focus 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.
Power and Energy Infrastructure
Equity Securities. We may invest in a
wide range of equity securities issued by power and energy infrastructure
companies that are expected to pay dividends on a current
basis.
We
expect that such equity investments will primarily include MLP common units, MLP
I-Shares and common stock. However, such equity investments may also
include limited partner interests, limited liability company interests, general
partner interests, convertible securities, preferred equity, warrants and
depository receipts of companies that are organized as corporations, limited
partnerships or limited liability companies. Equity investments
generally represent an equity ownership interest in an issuer. An
adverse event, such as unfavorable earnings report, may depress the value of a
particular equity investment we hold. Also, prices of equity
investments are sensitive to general movements in the stock market and a drop in
the stock market may depress the price of equity investments we
own. Equity investment prices fluctuate for several reasons,
including changes in investors’ perceptions of the financial condition of an
issuer or rising interest rates, which increases borrowing costs and the costs
of capital.
When
we acquire these securities in unregistered transactions, we also may obtain
registration rights that may include demand and “piggyback” registration
rights. We may receive warrants or other non-income producing equity
securities. We may retain such securities, including equity shares
received upon conversion of convertible securities, until we determine it is
appropriate in light of current market conditions to effect a disposition of
such securities.
The
following is a more detailed description of each such security.
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MLP Common
Units. MLP common units represent a limited partner
interest in a limited partnership that entitles the holder to an equity
ownership share of the company’s success through distributions and/or
capital appreciation. In the event of liquidation, MLP common
unitholders have first rights to the partnership’s remaining assets after
bondholders, other debt holders, and preferred unitholders have been paid
in full. MLPs are typically managed by a general partner, and
holders of MLP common units generally do not have the right to vote upon
the election of directors of the general partner. MLP common
units trade on a national securities exchange or
over-the-counter.
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MLP
I-Shares. I-Shares represent an indirect investment in
MLP I-units. I-units are equity securities issued to an affiliate of an
MLP, typically an LLC, that owns an interest in and manages the MLP. The
I-Shares issuer has management rights but is not entitled to incentive
distributions. The I-Share issuer’s assets consist exclusively of MLP
I-units. Distributions by MLPs to I-unitholders are made in the form of
additional I-units, generally equal in amount to the cash received by
common unitholders 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 and such shares are generally freely
tradeable in the open market. The issuer of the I-Shares is
taxed as a corporation. However, the MLP does not allocate
income or loss to the I-Share issuer. Accordingly, investors receive a
Form 1099, are not allocated their proportionate share of income of the
MLPs and are not subject to state filing
obligations.
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Common
Stock. Common stock represents an ownership interest in
the profits and losses of a corporation, after payment of amounts owed to
bondholders, other debt holders, and holders of preferred
stock. Holders of common stock generally have voting rights,
but we do not expect to have voting control in any of the companies in
which we invest. The common stock in which we invest will
generally be traded on a national securities
exchange. |
Restricted
Securities. We may
invest up to 15% of our total assets in restricted securities that are
ineligible for resale under Rule 144A under the 1933 Act, all of which may be
illiquid securities. Restricted securities (including restricted
securities that are eligible for resale under Rule 144A) are less liquid than
freely tradable securities because of statutory and/or contractual restrictions
on resale. Such securities are not freely tradeable in the open
market. This lack of liquidity creates special risks for
us. However, we could sell such securities in private transactions
with a limited number of purchasers or in public offerings under the 1933 Act if
we have registration rights for the resale of such
securities. Certain restricted securities generally become freely
tradable upon the passage of time and satisfaction of other applicable
conditions.
Restricted
securities generally can be sold in private transactions, pursuant to an
exemption from registration under the 1933 Act, or in a registered public
offering. To enable us to sell our holdings of a restricted security
not registered under the 1933 Act, we may have to cause those securities to be
registered. When we must arrange registration because we wish to sell the
security, a considerable period may elapse between the time the decision is made
to sell the security and the time the security is registered so that we can sell
it. We would bear the risks of any downward price fluctuation during that
period.
In recent
years, a large institutional market has developed for certain securities that
are not registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
either themselves exempt from registration or were sold in transactions not
requiring registration, such as Rule 144A transactions. Institutional
investors generally may not seek to sell these instruments to the general
public, but instead will often depend on an institutional market in which such
unregistered securities can be resold or on an issuer's ability to honor a
demand for repayment. Therefore, the fact that there are contractual or legal
restrictions on resale to the general public or certain institutions is not
dispositive of the liquidity of such investments.
We may
also invest in securities that may not be restricted, but are thinly-traded.
Although securities of certain MLPs trade on the New York Stock Exchange
("NYSE"), the NASDAQ National Market or other securities exchanges or markets,
such securities may have a lower trading volume less than those of larger
companies due to their relatively smaller capitalizations. Such securities may
be difficult to dispose of at a favorable price during times when we believe it
is desirable to do so. Investment of capital in thinly-traded
securities may restrict our ability to take advantage of market opportunities.
The risks associated with thinly-traded securities may be particularly acute in
situations in which our operations require cash and could result in us borrowing
to meet our short term needs or incurring losses on the sale of thinly-traded
securities.
Rule 144A Securities. The Fund may purchase
Rule 144A securities, which are securities generally traded on a secondary
market accessible to certain qualified institutional
buyers. Rule 144A provides an exemption from the registration
requirements of the 1933 Act for the resale of certain restricted securities to
qualified institutional buyers, such as the Fund. There is no limit to our
investment
in Rule
144A securities and Rule 144A securities will not be counted towards the
Fund’s 15% limitation on investing in restricted securities.
Institutional
markets for securities that exist or may develop as a result of Rule 144A may
provide both readily ascertainable fair values for those Rule 144A securities as
well as the ability to liquidate investments in those securities. An
insufficient number of qualified institutional buyers interested in purchasing
Rule 144A-eligible securities held by us, however, could affect adversely the
marketability of certain Rule 144A securities, and we might be unable to dispose
of such securities promptly or at reasonable prices. To the extent
that liquid Rule 144A securities that the Fund holds become illiquid, due
to the lack of sufficient qualified institutional buyers or market or other
conditions, the percentage of the Fund’s assets invested in illiquid assets
would increase.
Non-U.S.
Securities. We may
invest up to 10% of our total assets in securities issued by non-U.S.
issuers (including Canadian issuers). These securities may be issued
by companies organized and/or having securities traded on an exchange outside
the U.S. or may be securities of U.S. companies that are denominated in the
currency of a different country.
Temporary Investments and Defensive
Investments. Pending investment of the proceeds of this
offering, we expect to invest substantially all of the net offering proceeds in
cash, cash equivalents, securities issued or guaranteed by the U.S. government
or its instrumentalities or agencies, short-term money market instruments,
short-term fixed income securities, certificates of deposit, bankers’
acceptances and other bank obligations, commercial paper or other
liquid fixed income securities. We may also invest in these
instruments on a temporary basis to meet working capital needs, including, but
not limited to, holding a reserve pending payment of distributions or
facilitating the payment of expenses and settlement of trades.
In
addition, and although inconsistent with our investment objectives, under
adverse market or economic conditions, we may invest 100% of our total assets in
these securities. The yield on these securities may be lower than the
returns on the securities in which we will otherwise invest or yields on
lower-rated, fixed-income securities. To the extent we invest in
these securities on a temporary basis or for defensive purposes, we may not
achieve our investment objectives.
Investment
Process
Our
Advisor’s securities selection process includes a comparison of quantitative,
qualitative, and relative value factors. Although our Advisor uses
research provided by broker dealers and investment firms when available, primary
emphasis is placed on proprietary analysis and risk, financial and valuation
models conducted and maintained by our Advisor’s in-house investment
professionals. To determine whether a company meets its investment
criteria, our Advisor will generally look for the targeted investment
characteristics as described herein.
All
decisions to invest in a company must be approved by the unanimous decision of
our Advisor’s investment committee.
Investment
Policies
We
seek to achieve our investment objectives by investing in
income-producing fixed income and equity securities of companies that
our Advisor believes offer attractive distribution rates.
The
following are our fundamental investment limitations set forth in their
entirety. We may not:
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issue
senior securities, except as permitted by the 1940 Act and the rules and
interpretive positions of the SEC
thereunder;
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borrow
money, except as permitted by the 1940 Act and the rules and interpretive
positions of the SEC thereunder;
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make
loans, except by the purchase of debt obligations, by entering into
repurchase agreements or through the lending of portfolio securities and
as otherwise permitted by the 1940 Act and the rules and interpretive
positions of the SEC thereunder;
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invest
25% or more of our total assets in any particular industry, except that we
will concentrate our assets in the group of industries constituting the
power and energy infrastructure
sectors;
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underwrite
securities issued by others, except to the extent that we may be
considered an underwriter within the meaning of the 1933 Act in the
disposition of restricted securities held in our
portfolio;
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purchase
or sell real estate unless acquired as a result of ownership of securities
or other instruments, except that we may invest in securities or other
instruments backed by real estate or securities of companies that invest
in real estate or interests
therein; and
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purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except that we may purchase or sell
options and futures contracts or invest in securities or other instruments
backed by physical commodities.
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As a
nonfundamental investment policy, under normal circumstances, we will invest at
least 80% of our total assets (including assets we obtain through leverage) in
the securities of companies that derive more than 50% of their revenue from
power or energy infrastructure operations.
We also
have adopted the following additional nonfundamental policies:
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We
will invest a minimum of 60% of our total assets in fixed income
securities.
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Under
normal market conditions, we will not employ leverage above 20% of our
total assets at time of
incurrence.
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We
will not invest more than 25% of our total assets in non-investment grade
rated fixed income securities.
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We
will not invest more than 15% of our total assets in restricted securities
that are ineligible for resale pursuant to Rule 144A, all of which may be
illiquid securities.
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We
may invest up to 10% of our total assets in securities issued by
non-U.S. issuers (including Canadian
issuers).
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We
will not engage in short sales. |
As used for
the purpose of each nonfundamental investment policy above, the term "total
assets" includes any assets obtained through leverage. Our Board of
Directors may change our nonfundamental investment policies without stockholder
approval and will provide notice to stockholders of material changes in such
policies (including notice through stockholder reports). Any change
in the policy of investing under normal circumstances at least 80% of our total
assets (including assets obtained through leverage) in the securities of
companies that derive more than 50% of their revenue from power or energy
infrastructure operations 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.
In
addition, to comply with federal tax requirements for qualification as a RIC,
our investments will be limited so that at the close of each quarter of each
taxable year (i) at least 50% of the value of our total assets is represented by
cash and cash items, U.S. Government securities, the securities of other RICs
and other securities, with such other securities limited for purposes of such
calculation, in respect of any one issuer, to an amount not greater than 5% of
the value of our total assets and not more than 10% outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of our total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other RICs), the securities (other
than the securities of other RICs) of any two or more issuers that we control
and that are determined to be engaged in the same business or similar or related
trades or businesses, or the securities of one or more qualified publicly traded
partnerships (which includes MLPs). These tax-related limitations may
be changed by the Board of Directors to the extent appropriate in light of
changes to applicable tax requirements.
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. 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 we bear.
Brokerage
Allocation and Other Practices
Subject
to policies established by our Advisor and approved by our Board of Directors,
we do not expect to execute transactions through any particular broker or
dealer, but we will seek to obtain the best net results for us, taking into
account such factors as price (including the applicable brokerage commission or
dealer spread), size of order, difficulty of execution and operational
facilities of the firm and the firm’s risk and skill in positioning blocks of
securities. While we will generally seek reasonably competitive trade
execution
costs, we will not necessarily pay the lowest spread or commission available.
Subject to applicable legal requirements, we may select a broker based partly on
brokerage or research services provided to us. In return for such services, we
may pay a higher commission than other brokers would charge if our Advisor
determines in good faith that such commission is reasonable in relation to the
services provided.
Directors
and Executive Officers
Our
business and affairs are managed under the direction of our Board of Directors.
Accordingly, our Board of Directors provides broad supervision over our affairs,
including supervision of the duties performed by our Advisor. Certain employees
of our Advisor are responsible for our day-to-day operations. The names and ages
of our directors and executive officers, together with their principal
occupations and other affiliations during the past five years, are set forth
below. Each director and executive officer will hold office for the term to
which he is elected and until his successor is duly elected and qualifies, or
until he resigns or is removed in the manner provided by law. Unless otherwise
indicated, the address of each director and executive officer is 11550 Ash
Street, Suite 300, Leawood,
Kansas 66211. Our Board of Directors consists of a majority of directors who are
not "interested persons" (as defined in the 1940 Act) of our Advisor or its
affiliates ("Independent Directors"). The directors who are "interested persons"
(as defined in the 1940 Act) are referred to as "Interested Directors." Under
our Articles of Incorporation (the "Charter"), the Board of Directors is divided
into three classes. Each class of directors will hold office for a three-year
term. However, the initial members of the three classes have initial terms of
one, two and three years, respectively. At each annual meeting of our
stockholders, the successors to the class of directors whose terms expire at
such meeting will be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election and until their successors are duly elected and
qualify.
Name and
Age
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Position(s)
Held
with
Fund,
Term
of Office
and
Length of
Time Served
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Principal
Occupation
During Past Five
Years
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director(1)
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Other
Public Company Directorships
Held by
Director/Officer
|
Independent
Directors
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Conrad
S. Ciccotello
(Born
1960)
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Class II
Director,
Director since
inception
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Tenured
Associate Professor of Risk Management and Insurance, Robinson College of
Business, Georgia State University (faculty member since 1999); Director
of Graduate Personal Financial Planning Programs; formerly, Editor,
“Financial Services Review,” (2001-2007) (an academic journal dedicated to
the study of individual financial management); formerly, faculty member,
Pennsylvania State University (1997-1999). Published several
academic and professional journal articles about energy infrastructure and
oil and gas MLPs.
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7
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None
|
John
R. Graham
(Born
1945)
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Class I
Director,
Director since
inception
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Executive-in-Residence
and Professor of Finance (part-time), College of Business Administration,
Kansas State University (has served as a professor or adjunct professor
since 1970); Chairman of the Board, President and CEO, Graham Capital
Management, Inc. (primarily a real estate development, investment and
venture capital company); Owner of Graham Ventures (a business services
and venture capital firm); Part-time Vice President Investments, FB
Capital Management, Inc. (a registered investment adviser), since 2007.
Formerly, CEO, Kansas Farm Bureau Financial Services, including seven
affiliated insurance or financial service companies
(1979-2000)
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7
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Kansas
State
Bank
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Charles
E. Heath
(Born
1944)
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Class III
Director,
Director since
inception
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Retired
in 1999. Formerly, Chief Investment Officer, GE Capital’s Employers
Reinsurance Corporation (1989-1999); Chartered Financial Analyst (“CFA”)
designation since 1974.
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7
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None
|
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Name and
Age
|
Position(s)
Held
with
Fund,
Term
of Office
and
Length of
Time Served
|
Principal
Occupation
During Past Five
Years
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director(1)
|
Other
Public Company Directorships
Held by
Director/Officer
|
Interested
Directors and Officers(2)
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H.
Kevin Birzer
(Born
1959)
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Class I
Director,
Director and
Chairman of the Board since inception
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Managing
Director of the Advisor since 2002; Member, Fountain Capital Management
("Fountain Capital") (1990-June 2009); Director and Chairman of the Board
of each of TYG, TYY, TYN, TTO and the two private investment companies
managed by the Advisor since its inception; formerly, Vice President,
Corporate Finance Department, Drexel Burnham Lambert (1986-1989);
formerly, Vice President, F. Martin Koenig & Co., an investment
management firm (1983-1986); CFA designation since
1988.
|
7
|
None
|
Terry
C. Matlack
(Born
1956)
|
Class III
Director,
Director
and Chief Financial Officer since inception
|
Managing
Director of the Advisor since 2002; Full-time Managing Director, Kansas
City Equity Partners, L.C. ("KCEP") (2001-2002); formerly, President,
GreenStreet Capital, a private investment firm (1998-2001); Director and
Chief Financial Officer of each of TYG, TYY, TYN, TTO and the two
privately held investment companies managed by the Advisor since its
inception; Chief Compliance Officer of TYG from 2004 through May 2006
and of each of TYY and TYN from their inception through May 2006;
Treasurer of each of TYG, TYY and TYN from their inception to
November 2005; Assistant Treasurer of TYG, TYY and TYN from November
2005 to April 2008, of TTO and one of the two private investment
companies from their inception to April 2008, and of the other private
investment company since its inception; CFA designation since
1985.
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7
|
None
|
David
J. Schulte
(Born
1961)
|
President
and Chief Executive Officer since inception
|
Managing
Director of the Advisor since 2002; Full-time Managing Director, KCEP
(1993-2002); President and Chief Executive Officer of TYG since 2003 and
of TYY since 2005; Chief Executive Officer of TYN since 2005 and President
of TYN from 2005 to September 2008; Chief Executive Officer of TTO
since 2005 and President of TTO from 2005 to April 2007; President of one
of the two private investment companies since 2007 and of the other
private investment company from 2007 to June 2008; Chief Executive Officer
of one of the two private investment companies since 2007 and of the other
private investment company from 2007 to December 2008; CFA designation
since 1992.
|
N/A
|
None
|
Zachary
A. Hamel
(Born
1965)
|
Senior
Vice President since inception
|
Managing
Director of the Advisor since 2002; Partner, Fountain Capital
(1997-present); Senior Vice President of TYY and TTO since 2005 and of
TYG, TYN and the two private investment companies since 2007; Secretary of
each of TYG, TYY, TYN and TTO from their inception to April 2007; CFA
designation since 1998.
|
N/A
|
None
|
Kenneth
P. Malvey
(Born
1965)
|
Senior
Vice President and Treasurer since inception
|
Managing
Director of the Advisor since 2002; Partner, Fountain Capital
(2002-present); formerly, Investment Risk Manager and member of the Global
Office of Investments, GE Capital’s Employers Reinsurance Corporation
(1996-2002); Treasurer of TYG,
|
N/A
|
None
|
_________
Name and
Age
|
Position(s)
Held
with
Fund,
Term
of Office
and
Length of
Time Served
|
Principal
Occupation
During Past Five Years
|
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Director(1)
|
Other
Public Company Directorships
Held by
Director/Officer
|
|
|
TYY
and TYN since November 2005, of TTO since September 2005, and of
the two private investment companies since 2007; Senior Vice President of
TYY and TTO since 2005, and of TYG, TYN and the two private investment
companies since 2007; Assistant Treasurer of TYG, TYY and TYN from their
inception to November 2005; Chief Executive Officer of one of the
private investment companies since December 2008; CFA designation since
1996. |
|
|
(1)
|
This
number includes four publicly traded closed-end funds (Tortoise Energy
Infrastructure Corporation ("TYG"), Tortoise Energy Capital Corporation
("TYY"), Tortoise North American Energy Corporation ("TYN") and Tortoise
Capital Resources Corporation ("TTO"), two privately-held closed-end funds
and the Fund. Our Advisor also serves as the investment adviser to these
funds.
|
|
|
(2)
|
As
a result of their respective positions held with the Advisor or its
affiliates, these individuals are considered "interested persons" within
the meaning of the 1940
Act.
|
Other
Senior Investment Professionals
Rob
Thummel joined the Advisor in 2004 as an Investment Analyst. In September 2008,
he was appointed President of TYN. Previously, Mr. Thummel was Director of
Finance at KLT Inc., a subsidiary of Great Plains Energy from 1998 to 2004 and a
Senior Auditor
at Ernst & Young from 1995 to 1998. Mr. Thummel earned a master of Business
Administration from the University of Kansas and a Bachelor of Science in
Accounting from Kansas State University.
Bernard
Colson joined the Advisor in 2007 as an Investment Analyst. Previously,
Mr. Colson was an Investment Analyst at Waddell & Reed from 2004 to 2006
where he covered the electric utilities and media industries. Prior to
Waddell & Reed, Mr. Colson was an Investment Analyst at Citigroup Asset
Management from 2001 to 2004, where he covered the electric utilities and was a
member of the Large Cap Core portfolio management team. He received a
Bachelor of Arts degree in Sociology from Yale University and a Master of
Business Administration from the University of Michigan Business School.
Mr. Colson received his CFA designation in 2002.
Audit
and Valuation Committee
Our Board
of Directors has a standing Audit and Valuation Committee that consists of three
Independent Directors of the Fund: Mr. Ciccotello (Chairman),
Mr. Graham, and Mr. Heath. The Audit and Valuation
Committee’s function is to select an independent registered public accounting
firm to conduct the annual audit of our financial statements, review with the
independent registered public accounting firm the outline, scope and results of
this annual audit, review the investment valuations proposed by our Advisor’s
investment committee and review the performance and approval of all fees charged
by the independent registered public accounting firm for audit, audit-related
and other professional services. In addition, the Audit and Valuation Committee
meets with the independent registered public accounting firm and representatives
of management to review accounting activities and areas of financial reporting
and control. The Audit and Valuation Committee has at least one member who is
deemed to be a financial expert and operates under a written charter approved by
the Board of Directors. The Audit and Valuation Committee meets periodically, as
necessary.
Nominating
and Governance Committee
We have a
Nominating and Governance Committee that consists exclusively of our three
Independent Directors: Conrad S. Ciccotello, John R. Graham (Chairman) and
Charles E. Heath. The Nominating and Governance Committee’s function
is to: (1) identify individuals qualified to become Board members,
consistent with criteria approved by our Board of Directors, and to recommend to
the Board of Directors the director nominees for the next annual meeting of
stockholders and to fill any vacancies; (2) monitor the structure and
membership of Board committees; (3) review issues and developments related
to corporate governance issues and develop and recommend to the Board of
Directors corporate governance guidelines and procedures to the extent necessary
or desirable; (4) evaluate and make recommendations to the Board of
Directors regarding director compensation; and (5) oversee the evaluation
of the Board of Directors. The Nominating and Governance Committee will consider
stockholder recommendations for nominees for membership to the Board of
Directors so long as such recommendations are made in accordance with our
Bylaws.
Compliance
Committee
We have a
Compliance Committee that consists exclusively of our three Independent
Directors: Conrad S. Ciccotello, John R. Graham and Charles E. Heath
(Chairman). The Compliance Committee’s function is to review and
assess management’s compliance with applicable securities laws, rules and
regulations, monitor compliance with our Code of Ethics, and handle other
matters as the Board of Directors or committee chair deems
appropriate.
Board
Compensation
Our
directors and officers who are interested persons will receive no salary or fees
from us. Each Independent Director will receive from us a fee of $2,000 (and
reimbursement for related expenses) for each meeting of the Board of Directors
or Audit and Valuation Committee he or she attends in person (or $1,000 for each
Board of Directors or Audit and Valuation Committee meeting attended
telephonically, or for each Audit and Valuation Committee meeting attended in
person that is held on the same day as a Board of Directors
meeting). Independent Directors also receive $1,000 for each other committee
meeting attended in person or telephonically (other than Audit and Valuation
Committee meetings). The annual retainer of each Independent Director and for
the chairman of the Audit and Valuation Committee and other Committee Chairmen
will be determined by the Board of Directors after completion of this
offering.
We do not
compensate our officers. No director or officer is entitled to receive pension
or retirement benefits from us and no director receives any compensation from us
other than in cash.
Our
Advisor
We
have entered into an investment advisory agreement with Tortoise Capital
Advisors, L.L.C., a registered investment adviser, pursuant to which it will
serve as our investment adviser (the “Initial Investment Advisory
Agreement”). The Initial Investment Advisory Agreement will become
effective upon the closing of this offering. Our Advisor was formed
in October 2002 and has been managing assets in portfolios of MLPs and other
energy infrastructure companies since that time. Our Advisor also manages the
investments of four publicly traded funds and two privately-held funds, all of
which are non-diversified, closed-end management investment companies and one of
which has elected to be regulated as a BDC under the 1940 Act.
Our
Advisor is controlled equally by FCM Tortoise, L.L.C. (“FCM”), an affiliate of
Fountain Capital and KCEP. KCEP has no operations and is a holding
company. FCM has no operations and serves as a holding
company. Fountain Capital’s ownership in our Advisor was transferred
to FCM, an entity with the same principals as Fountain Capital, effective as of
August 2, 2007. The transfer did not result in a change in control of
our Advisor.
|
•
|
Our
Advisor was formed in 2002 by Fountain Capital and KCEP to provide
portfolio management services exclusively with respect to energy
infrastructure investments.
|
|
•
|
Fountain
Capital was formed in 1990 and focuses primarily on providing investment
advisory services to institutional investors with respect to
non-investment grade rated debt.
|
|
•
|
KCEP
was formed in 1993 and 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 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 Administration (“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.
|
On
June 3, 2009, our Advisor announced that senior management of our Advisor have
entered into a definitive agreement to acquire, along with Mariner Holdings, LLC
(“Mariner”), all of the ownership interests in our Advisor. As part
of the transaction, Mariner will purchase a majority stake in our Advisor, with
the intention to provide growth capital and resources, and serve as a
complementary strategic partner in the asset management business (the “Proposed
Transaction”). Mariner is an independent investment firm with affiliates focused
on wealth and asset management. Mariner was founded in 2006 by former A.G.
Edwards investment professionals and management staff led by Marty Bicknell, and
has grown to more than 50 employees with $1.3 billion of assets under management
as of April 30, 2009.
The
portfolio management, investment objectives and policies, and investment
processes of the Fund will not change as a result of the Proposed Transaction or
entering into the proposed new investment advisory agreement (the “New
Investment Advisory Agreement”) with our Advisor, as discussed
below. The current Managing Directors of our Advisor will continue to
serve as the Investment Committee of our Advisor responsible for the investment
management of the Fund’s portfolio. The Advisor will retain its name
and will remain located at 11550 Ash Street, Suite 300, Leawood, Kansas
66211.
The
business and affairs of our Advisor are currently managed by David J.
Schulte, Chief Executive Officer and President of the Fund; Terry Matlack, a
director and the Chief Financial Officer of the Fund; H. Kevin Birzer, director
and Chairman of the Board of the Fund, Zachary A. Hamel, Senior Vice President
of the Fund, and Kenneth P. Malvey, Senior Vice President and Treasurer of the
Fund. Each of Messrs. Schulte, Matlack, Birzer, Hamel and Malvey will
continue to serve as Managing Directors of our Advisor and will continue to own
a portion of the Advisor following the Proposed Transaction.
Our
Advisor has 33 full-time employees, with a 20 member investment team, including
five members of the investment committee of our Advisor.
Investment
Committee
Management
of our portfolio is the responsibility of our Advisor. Each of our Advisor’s
investment decisions will be reviewed and approved for us by its investment
committee, which also acts as the investment committee for the four publicly
held funds, and the two privately-held funds managed by our
Advisor. Our Advisor’s investment committee is comprised of its five
Managing Directors: H. Kevin Birzer, Zachary A. Hamel, Kenneth P. Malvey,
Terry C. Matlack and David J. Schulte. The members of our Advisor’s investment
committee have an average of over 23 years of investment
experience . All decisions to invest in a portfolio company must be approved
by the unanimous decision of our Advisor’s investment committee, and any one
member of our Advisor’s investment committee can require our Advisor to sell a
security. Biographical information about each member of our Advisor’s investment
committee is set forth below.
Kevin
Birzer
Kevin
Birzer has been a Managing Director of TCA since
2002. Mr. Birzer has 28 years of investment experience, and
began his career in 1981 at KPMG 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. In 1990, Mr. Birzer co-founded Fountain Capital, a high
yield bond management firm, where he remained a part owner until June
2009. He earned his CFA designation in 1988.
Zachary
Hamel
Zachary
Hamel has been a Managing Director of our Advisor since 2002 and is also a
Partner with Fountain Capital. Mr. Hamel also serves as Senior Vice
President of the four publicly traded funds and the two privately-held funds
managed by our Advisor. Mr. Hamel joined Fountain Capital in
1997 and covered the energy, chemicals and utilities sectors. Prior to joining
Fountain Capital, Mr. Hamel worked for the Federal Deposit Insurance Corp.
(“FDIC”) for eight years as a Bank Examiner and a Regional Capital Markets
Specialist. He earned his CFA designation in 1998.
Ken
Malvey
Ken
Malvey has been a Managing Director of TCA since 2002 and is also Partner with
Fountain Capital. Mr. Malvey also serves as Senior Vice President and
Treasurer of the four publicly traded funds and the two privately held funds
managed by our Advisor and as the Chief Executive Officer of one of the
privately held funds. Prior to joining Fountain Capital in 2002,
Mr. Malvey was one of three members of the Global Office of Investments for GE
Capital’s Employers Reinsurance Corporation. Most recently, he was
the Global Investment Risk Manger for a portfolio of approximately $24 billion
of fixed-income, public equity and alternative investment
assets. Before joining GE Capital in 1996, he was a Bank Examiner and
Regional Capital Markets Specialist with the FDIC for nine years. He
earned his CFA designation in 1996.
Terry
Matlack
Terry
Matlack has been a Managing Director of our Advisor since 2002 and serves as
Chief Financial Officer and Director of the four publicly traded funds and the
two privately-held funds managed by our Advisor. From 2001 to 2002,
Mr. Matlack was a full-time Managing Director at KCEP. Prior to joining
KCEP, Mr. Matlack was President of GreenStreet Capital and its affiliates
in the telecommunications service industry. Mr. Matlack has also served as
the Executive Vice President and a board member 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 earned his CFA
designation in 1985.
David
Schulte
David
Schulte has been a Managing Director of our Advisor since 2002 and serves as
Chief Executive Officer and President of two of the publicly traded funds, and
as Chief Executive Officer of the other two publicly traded funds and one of the
privately-held funds managed by our Advisor, and as President of the other
privately-held fund. Previously, Mr. Schulte was a full-time
Managing Director at KCEP from 1993 to 2002, where he led private financing for
two growth MLPs. Mr. Schulte served on the Board of Directors of Inergy,
LP, a propane gas MLP, from 2001 to 2004. Before joining KCEP, he spent five
years as an investment banker at the predecessor of Oppenheimer & Co.,
Inc. He is a certified public accountant (“CPA”) and also earned his
CFA designation in 1992.
The following
table provides information about the other accounts managed on a day-to-day
basis by each member of our Advisor’s investment committee as of December 31,
2008:
|
|
Number
of
Accounts
|
|
|
Total
Assets
of
Accounts
|
|
|
Number
of
Accounts
Paying a
Performance
Fee
|
|
|
Total Assets
of Accounts
Paying a
Performance
Fee
|
|
H.
Kevin Birzer
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$ |
157,970,377 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other accounts
|
|
|
213
|
|
|
$ |
1,462,563,20 |
|
|
|
0
|
|
|
$ |
0 |
|
Zachary
A. Hamel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$ |
157,970,377 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other accounts
|
|
|
213
|
|
|
$ |
1,462,563,20 |
|
|
|
0
|
|
|
$ |
0 |
|
Kenneth
P. Malvey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$ |
157,970,377 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other accounts
|
|
|
213
|
|
|
$ |
1,462,563,20 |
|
|
|
0
|
|
|
$ |
0 |
|
Terry
C. Matlack
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other pooled investment vehicles
|
|
|
1
|
|
|
$ |
102,958,967 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other accounts
|
|
|
200
|
|
|
$ |
227,767,796 |
|
|
|
0
|
|
|
$ |
0 |
|
David
J. Schulte |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
|
5
|
|
|
$ |
1,109,317,225 |
|
|
|
0
|
|
|
$ |
0 |
|
Other pooled investment vehicles |
|
|
|
|
|
$ |
102,958,967 |
|
|
|
1
|
|
|
$ |
102,958,967 |
|
Other accounts |
|
|
200
|
|
|
$ |
227,767,796 |
|
|
|
0
|
|
|
$ |
0 |
|
Messrs. Birzer,
Hamel, Malvey, Matlack and Schulte will not receive any direct compensation from
us or any other of the managed accounts reflected in the table above. All such
accounts are managed by our Advisor or Fountain Capital. All members of our
Advisor’s
investment committee are full-time employees of our Advisor and receive a fixed
salary for the services they provide. Each of Messrs. Birzer, Hamel,
Malvey, Matlack and Schulte own an equity interest in either KCEP or FCM
Tortoise, L.L.C., the two entities that control our Advisor, and each thus
benefits from increases in the net income of our Advisor.
Conflicts
of Interest
Our
Advisor has a conflict of interest in allocating potentially more favorable
investment opportunities to other funds and clients that pay our Advisor an
incentive or performance fee. Performance and incentive fees also create the
incentive to allocate potentially riskier, but potentially better performing,
investments to such funds and other clients in an effort to increase the
incentive fee. Our Advisor may also have an incentive to make investments in one
fund, having the effect of increasing the value of a security in the same issuer
held by another fund, which in turn may result in an incentive fee being paid to
our Advisor by that other fund. Our Advisor has written allocation policies and
procedures that it will follow in addressing any conflicts. When two or more
clients advised by our Advisor or its affiliates seek to purchase or sell the
same securities, the securities actually purchased or sold will be allocated
among the clients on a good faith equitable basis by our Advisor in its
discretion and in accordance with each client’s investment objectives and our
Advisor’s 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 large volume transactions may produce better execution for
us.
Our
Advisor also serves as investment adviser for four other publicly traded and two
privately held closed-end management investment companies, all of which invest
in the energy sector. See "Management of the Fund – Our
Advisor."
Our
Advisor will evaluate a variety of factors in determining whether a particular
investment opportunity or strategy is appropriate and feasible for a relevant
client account at a particular time, including, but not limited to, the
following: (i) the nature of the investment opportunity taken in the
context of the other investments at the time; (ii) the liquidity of the
investment relative to the needs of the particular entity or account;
(iii) the availability of the opportunity (i.e., size of obtainable
position); (iv) the transaction costs involved; and (v) the investment
or regulatory limitations applicable to the particular entity or account.
Because these considerations may differ when applied to us and other relevant
client accounts in the context of any particular investment opportunity, our
investment activities may differ considerably from those of other clients of our
Advisor.
Situations
may occur when we could be disadvantaged because of the investment activities
conducted by our Advisor and its affiliates for their other accounts. Such
situations may be based on, among other things, the following: (1) legal or
internal restrictions on the combined size of positions that may be taken for us
or the other accounts, thereby limiting the size of our position;
(2) the difficulty of liquidating an investment for us or the other
accounts where the market cannot absorb the sale of the combined
position; or (3) limits on co-investing in private placement
securities under the 1940 Act. Our investment opportunities may be limited by
affiliations of our Advisor or its affiliates with power and energy
infrastructure companies.
Under
the 1940 Act, we and our affiliated companies are generally precluded from
co-investing in negotiated private placements of securities. Except as permitted
by law, our Advisor will not co-invest its other clients’ assets in negotiated
private transactions in which we invest. To the extent we are precluded from
such co-investing, our Advisor will allocate non-negotiated private
placement investment opportunities among its clients, including but not
limited to us and our affiliated companies, based on allocation policies that
take into account several suitability factors, including the size of the
investment opportunity, the amount each client has available for investment and
the client’s investment objectives. These allocation policies may result in the
allocation of investment opportunities to an affiliated company rather than to
us.
The fair
value of certain securities will be determined pursuant to methodologies
established by our Board of Directors. Fair value pricing involves judgments
that are inherently subjective and inexact. Our Advisor is subject to a conflict
of interest in determining the fair value of securities in our portfolio, as the
management fees we pay our Advisor are based on the value of our average monthly
Managed Assets.
Investment
Advisory Agreement
The
Proposed Transaction described above is subject to the receipt of certain
approvals and the fulfillment of certain other conditions. The Proposed
Transaction will result in a change in control of the Advisor and will,
therefore, constitute an “assignment” of the Initial Investment Advisory
Agreement within the meaning of the Investment Company Act of 1940, as amended
(the “1940 Act”). An investment advisory agreement automatically terminates upon
its “assignment” under the applicable provisions of the 1940
Act. As of the closing date of the Proposed Transaction, which
is expected to be completed in the third calendar quarter of 2009, the Initial
Investment Advisory Agreement will terminate.
The
terms of the New Investment Advisory Agreement are identical to the terms of the
Initial Investment Advisory Agreement, except for the effective and termination
dates, and would simply continue the relationship between the Fund and our
Advisor. The services provided by the Advisor and the amount of the
advisory fee paid to the Advisor by the Fund will not change.
In
anticipation of the assignment and termination of the Initial Investment
Advisory Agreement, the New Investment Advisory Agreement has been reviewed and
approved by our Board of Directors, see “—Board Approval of the Investment
Advisory Agreements,” and our existing stockholders and will become effective
upon completion of the Proposed Transaction and will continue in effect for an
initial period that runs through December 31, 2010. Thereafter, the
New Investment Advisory Agreement will continue annually, provided that its
continuance is approved by the Board of Directors, including a majority of the
Directors who are not parties to the New Investment Advisory Agreement or
“interested persons” (as defined in the 1940 Act) of any such party (the
“Independent Directors”), at a meeting called for that purpose, or by vote of a
majority of the outstanding shares of the Fund.
Management
Services
Pursuant
to each investment advisory agreement , our Advisor will be subject to
the overall supervision and review of our Board of Directors, will provide us
with investment research, advice and supervision and will furnish us
continuously with an investment program, consistent with our investment
objectives and strategies. Our Advisor also will determine from time to time
what securities we purchase, what securities will be held or sold, and what
portions of our assets will be held uninvested as cash, short-duration
securities
or in other liquid assets, will maintain books and records with respect to all
of our transactions, and will report to our Board of Directors on our
investments and performance.
Our
Advisor’s services to us under each investment advisory agreement
will not be exclusive, and our Advisor is free to furnish the same or similar
services to other entities, including businesses that may directly or indirectly
compete with us, so long as our Advisor’s services to us are not impaired by the
provision of such services to others.
Management
Fee
For
the services, payments and facilities to be furnished by our Advisor, we will
pay our Advisor annual compensation in an amount determined by reference to the
average monthly value of our “Managed Assets.” “Managed Assets” means
our total assets (including any assets attributable to any leverage that may be
outstanding) minus the sum of accrued liabilities (other than debt representing
financial leverage and the aggregate liquidation preference of any outstanding
preferred shares). Accrued liabilities are expenses incurred in the normal
course of our operations. The compensation owed to our Advisor
following each calendar quarter will be determined by multiplying the Managed
Assets by 0.2375% (to provide an annualized fee of 0.95%). Such
compensation will be calculated and accrued daily and paid quarterly within five
(5) days of the end of each calendar quarter. The Advisor has
agreed to a fee waiver of 0.15% for year 1, 0.10% for year 2 and 0.05% for year
3, which will become effective as of the close of this
offering.
If
either investment advisory agreement is initiated or terminated during any
month, the fee for that month will be reduced proportionately on the basis of
the number of calendar days during which that agreement is in effect and the fee
will be computed based on the average Managed Assets for the business days that
agreement is in effect for that month.
Payment
of Our Expenses
We will
bear all expenses not specifically assumed by our Advisor and incurred in our
operations, and we will bear the expenses related to our formation and this
offering. The compensation and allocable routine overhead expenses of all
investment professionals of our Advisor and its staff, when and to the extent
engaged in providing us investment advisory services, will be provided and paid
for by our Advisor and not us. The compensation and expenses borne by us
include, but are not limited to, the following:
|
•
|
other
than as provided in the paragraph above, expenses of maintaining and
continuing our existence and related overhead, including, to the extent
such services are provided by personnel of our Advisor or its affiliates,
office space and facilities and personnel compensation, training and
benefits,
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•
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commissions,
spreads, fees and other expenses connected with the acquisition, holding
and disposition of securities and other investments, including placement
and similar fees in connection with direct placements entered into on our
behalf,
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•
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auditing,
accounting, tax and legal services
expenses,
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•
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expenses
of listing our shares with a stock exchange, and expenses of the issue,
sale, repurchase and redemption (if any) of our
securities,
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•
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expenses
of registering and qualifying us and our securities under federal and
state securities laws and of preparing and filing registration statements
and amendments for such purposes,
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•
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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,
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•
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expenses
of reports to governmental officers and
commissions,
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•
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association
membership dues,
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•
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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),
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•
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fees,
expenses and disbursements of transfer agents, dividend and interest
paying agents, stockholder servicing agents, registrars and administrator
for all services to us,
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• |
compensation
and expenses of our directors who are not members of our Advisor’s
organization, |
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•
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pricing,
valuation and other consulting or analytical services employed in
considering and valuing our actual or prospective
investments,
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•
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all
expenses incurred in leveraging our assets through a line of credit or
other indebtedness or issuing and maintaining preferred shares or
notes,
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•
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all
expenses incurred in connection with our organization and the offering of
our common shares, including this offering, but not including the
structuring fee to be paid by our Advisor to Wachovia Capital Markets,
LLC, and
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•
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such
non-recurring items as may arise, including expenses incurred in
litigation, proceedings and claims and our obligation to indemnify our
directors, officers and stockholders with respect
thereto.
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Duration
and Termination
The
Initial Investment Advisory Agreement was approved by our Board of Directors on
May 22, 2009. The Initial Investment Advisory Agreement will become
effective as of the close of this offering. Unless terminated earlier
as described below, it will continue in effect for a period of two years from
the effective date and will remain in effect from year to year thereafter if
approved annually by our Board of Directors or by the affirmative vote of the
holders of a majority of our outstanding voting securities, and, in either case,
upon approval by a majority of our directors who are not interested persons or
parties to the investment advisory agreement. As discussed above, the
Initial Investment Advisory Agreement will terminate, and the New Investment
Advisory Agreement will become effective, upon the closing of the Proposed
Transaction.
The
Initial Investment Advisory Agreement and the New Investment Advisory Agreement
provide that they may be terminated by us at any time, without the payment of
any penalty, by our Board of Directors or by the vote of the holders of a
majority of the outstanding shares of the Fund on 60 days written notice to the
Advisor. The Initial Investment Advisory Agreement and the New Investment
Advisory Agreement provide that they may be terminated by the Advisor at any
time, without the payment of any penalty, upon 60 days written notice to the
Fund. The Initial Investment Advisory Agreement and the New Investment Advisory
Agreement also provide that they will automatically terminate in the event of an
“assignment” (as defined in the 1940 Act), such as the Proposed
Transaction.
Liability
of Advisor
Both
the Initial Investment Advisory Agreement and the New Investment Advisory
Agreement provide that our Advisor will not be liable to us 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 each investment advisory agreement. However, our Advisor will be liable
to us for any loss, damage, claim, cost, charge, expense or liability resulting
from our Advisor’s willful misconduct, bad faith or gross negligence or
disregard by our Advisor of its duties or standard of care, diligence and skill
set forth in each investment advisory agreement or a material breach or default
of our Advisor’s obligations under that agreement.
Board
Approval of the Investment Advisory Agreements
Our
Board of Directors, including a majority of the Independent Directors, reviewed
and approved the Initial Investment Advisory Agreement on May 22,
2009. The Board of Directors, including a majority of the Independent
Directors, reviewed and approved the New Investment Advisory Agreement on June
2, 2009.
Prior
to our Board of Directors’ approval of the New Investment Advisory Agreement,
the Independent Directors, with the assistance of counsel independent of the
Advisor (hereinafter “independent legal counsel”), requested and evaluated
extensive materials about the Proposed Transaction and Mariner provided by the
Advisor and Mariner, which also included information from independent,
third-party sources, regarding the factors considered in their
evaluation.
Our
Independent Directors first learned of the potential Proposed Transaction in
January 2009. Prior to conducting due diligence of the Proposed
Transaction and of Mariner, each Independent Director had a personal meeting
with key officials of Mariner. In February 2009, the Independent
Directors consulted with independent legal counsel regarding the role of the
Independent Directors in the Proposed Transaction. Also in February
2009, the Independent Directors, in conjunction with independent legal counsel,
prepared and submitted their own due diligence request list to Mariner, so that
the Independent Directors could better understand the effect the change of
control would have on our Advisor. In March 2009, the Independent
Directors, in conjunction with independent legal counsel reviewed the written
materials provided by Mariner. In April and May 2009, the Independent
Directors asked for supplemental written due diligence information and were
given such follow-up information about Mariner and the Proposed
Transaction.
In May
2009, our Independent Directors interviewed key Mariner personnel and asked
follow-up questions after having completed a review of all documents provided in
response to formal due diligence requests. In particular, the
follow-up questions focused on (i) the expected continuity of management and
employees at our Advisor, (ii) compliance and regulatory experience of our
Advisor, (iii) plans to maintain our Advisor’s compliance and regulatory
personnel and (iv) benefit and incentive plans used to maintain our Advisor’s
current personnel. On May 22, 2009, our Independent Directors and
Mariner officials met to discuss the Proposed Transaction. Our
Independent Directors also met in person with Mariner officials in May in the
interest of better getting to know key personnel at Mariner. Our
Independent Directors also discussed the Proposed Transaction and the findings
of the Mariner diligence investigation with independent legal counsel in private
sessions.
In
approving the Initial Investment Advisory Agreement and the New Investment
Advisory Agreement, our Independent Directors requested and received extensive
data and information from our Advisor concerning the Fund and the anticipated
services to be provided to it by our Advisor. The extensive data and
information reviewed, in conjunction with the results of the diligence
investigation of the Proposed Transaction and Mariner, form the basis of the
conclusions reached below.
Our
Board of Directors, including the Independent Directors, considered and
evaluated all the information provided by our Advisor. The
Independent Directors did not identify any single factor as being all-important
or controlling, and each Director may have attributed different levels of
importance to different factors. In deciding to approve the Initial Investment
Advisory Agreement and the New Investment Advisory Agreement, the Independent
Directors’ decision was based on the following factors and what, if any, impact
the Proposed Transaction would have on such factors.
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•
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Services. Our
Board of Directors reviewed the nature, extent and quality of the
investment advisory and administrative services proposed to be provided to
us by our Advisor and found them sufficient to encompass the range of
services necessary for our operation. Our Independent Directors
considered information regarding the history, qualification and background
of our Advisor and the individuals responsible for our Advisor’s
investment program, the adequacy of the number of the Advisor personnel
and other Advisor resources and plans for growth, use of affiliates of our
Advisor, and the particular expertise with respect to power and energy
infrastructure companies, MLP markets and financing (including private
financing). The Independent Directors concluded that the unique nature of
the Fund and the specialized expertise of the Advisor in the niche market
of MLPs made it uniquely qualified to serve as the advisor. Further, the
Independent Directors recognized that the Advisor’s commitment to a
long-term investment horizon correlated well to the investment strategy of
the Fund.
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•
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Comparison of
Management Fee to
Other Firms' Management Fees. Our Board of Directors
reviewed and considered, to the extent publicly available, the management
fee arrangements of various groups of companies with business models that
are similar to different aspects of our investment
strategy. Our Independent Directors reviewed and evaluated
information regarding the performance of the other Advisor accounts
(including other investment companies), and information regarding the
nature of the markets during the performance period, with a particular
focus on the MLP sector. The Independent Directors
considered and evaluated information regarding fees charged to, and
services provided to, other investment companies advised by our Advisor
(including the impact of any fee waiver or reimbursement arrangements and
any expense reimbursement arrangements), fees charged to separate
institutional accounts by our Advisor, and comparisons of fees of
closed-end funds with similar investment objectives and strategies,
including other MLP investment companies, to the Fund. The Independent
Directors concluded that the fees and expenses that the Fund will pay
under the initial and New Investment Advisory Agreements are reasonable
given the quality of services to be provided under the initial and New
Investment Advisory Agreements and that such fees and expenses are
comparable to, and in many cases lower than, the fees charged by advisors
to comparable funds.
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•
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Experience of Management Team
and Personnel. Our Board of Directors considered the
extensive experience of the members of our Advisor’s investment committee
with respect to the specific types of investments we propose to make and
their past experience with similar kinds of investments. Our Board of
Directors discussed numerous aspects of our investment strategy with
members of our Advisor’s investment committee and also considered the
potential flow of
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•
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investment
opportunities resulting from the numerous relationships of our Advisor’s
investment committee and investment professionals within the investment
community.
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•
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Provisions of Investment
Advisory Agreement. Our Board of Directors considered
the extent to which the provisions of the investment advisory agreement
were comparable to the investment advisory agreements of various groups of
companies with business models that are similar to different aspects of
our investment strategy, including peer group companies, and concluded
that its terms were satisfactory and in line with market norms. In
addition, our Board of Directors concluded that the services to be
provided under the investment advisory agreement were reasonably necessary
for our operations, the services to be provided were at least equal to the
nature and quality of those provided by others, and the payment terms were
fair and reasonable in light of usual and customary
charges.
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•
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Payment of
Expenses. Our Board of Directors considered the manner
in which our Advisor would be reimbursed for its expenses at cost and the
other expenses for which it would be reimbursed under the investment
advisory agreement. Our Board of Directors discussed how this structure
was comparable to that of various groups of companies with business models
that are similar to different aspects of our investment
strategy.
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•
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Economies of Scale. Our
Board of Directors considered information from our Advisor concerning
whether economies of scale would be realized as the Fund grows, and
whether fee levels reflect any economies of scale for the benefit of the
Fund’s stockholders. Our Board of Directors concluded that economies of
scale are difficult to measure and predict overall. Accordingly, our
Independent Directors reviewed other information, such as year-over-year
profitability of the Advisor generally and the fees of competitive funds
not managed by our Advisor over a range of asset sizes. The Independent
Directors concluded our Advisor is appropriately sharing any economies of
scale through its competitive fee structure and through reinvestment in
its business to provide stockholders additional content and
services.
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•
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Collateral Benefits Derived by
our Advisor. Our Board of Directors reviewed information from our
Advisor concerning collateral benefits it receives as a result of its
relationship with the Fund. They concluded that our Advisor generally will
not use the Fund’s or stockholder information to generate profits in other
lines of business, and therefore will not derive any significant
collateral benefits from them.
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The
Independent Directors did not, with respect to their deliberations concerning
their approval of the Initial Investment Advisory Agreement or the New
Investment Advisory Agreement, consider the benefits our Advisor may derive from
relationships our Advisor may have with brokers through soft dollar arrangements
because our Advisor will not employ any such arrangements in rendering its
advisory services to the Fund. Although our Advisor may receive research from
brokers with whom it places trades on behalf of clients, our Advisor does not
have soft dollar arrangements or understandings with such brokers regarding
receipt of research in return for commissions.
Based on
the information reviewed and the discussions among the members of our Board of
Directors, our Board of Directors, including all of our Independent Directors,
approved the Initial Investment Advisory Agreement and concluded that the
management fee to be paid to our Advisor was reasonable in relation to the
services to be provided.
Our
Board of Directors, including the Independent Directors, assisted by the advice
of legal counsel that is independent of our Advisor, taking into account all of
the factors discussed above and the information provided by our Advisor,
unanimously concluded that the New Investment Advisory Agreement between the
Fund and our Advisor is fair and reasonable in light of the services provided
and should be approved.
Section 15(f)
of the 1940 Act
Section 15(f)
of the 1940 Act provides that when a sale of an interest in an investment
adviser of a registered investment company occurs that results in an assignment
of an investment advisory agreement, the investment adviser or any of its
affiliated persons may receive any amount or benefit in connection with the sale
so long as two conditions are satisfied. The first condition of
Section 15(f) is that during the three-year period following the completion
of the transaction, at least 75% of the investment company’s board of directors
must not be “interested persons” (as defined in the 1940 Act) of the investment
adviser or predecessor advisor. In order to meet this test it is expected that
Terry Matlack, one of the five members of our Advisor’s Investment Committee,
will resign from our Board of Directors upon completion of the Proposed
Transaction. Second, an “unfair burden” (as defined in the 1940 Act)
must not be imposed on the investment company as a result of the transaction
relating to the sale of such interest, or any express or implied terms,
conditions or understandings applicable thereto. The term “unfair burden”
includes any arrangement during the two-year period after the transaction
whereby the investment adviser (or predecessor or successor advisor), or any
“interested person” (as defined in the 1940 Act) of such an advisor, receives or
is entitled to receive any compensation, directly or indirectly, from the
investment company or its security holders (other than fees for bona fide
investment advisory or other services) or from any person in
connection
with
the purchase or sale of securities or other property to, from or on behalf of
the investment company (other than bona fide ordinary compensation as principal
underwriter for the investment company). Our Board of Directors has
determined that the Proposed Transaction will not impose an “unfair burden” on
the Fund and that the Advisor will not receive any compensation that will result
in an “unfair burden” under the 1940 Act definition.
License
Agreement
Pursuant
to the investment advisory agreement, our Advisor has consented to our use on a
non-exclusive, royalty-free basis, of the name “Tortoise” in our name. We will
have the right to use the “Tortoise” name so long as our Advisor or one of its
approved affiliates remains our investment adviser. Other than with respect to
this limited right, we will have no legal right to the “Tortoise” name. This
right will remain in effect for so long as the investment advisory agreement
with our Advisor is in effect and will automatically terminate if the investment
advisory agreement were to terminate for any reason, including upon its
assignment.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The
Advisor is responsible for decisions to buy and sell securities for the Fund,
the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions. When the Fund purchases
securities listed on a stock exchange, those transactions will be effected
through brokers who charge a commission for their services. The Fund also may
invest in securities that are traded principally in the over-the-counter market.
In the over-the-counter market, securities generally are traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of such securities usually includes a mark-up to
the dealer. Securities purchased in underwritten offerings generally include, in
the price, a fixed amount of compensation for the manager(s), underwriter(s) and
dealer(s). The Fund will also purchase securities including fixed
income securities directly from an issuer, in which case no commissions or
discounts will be paid.
Payments
of commissions to brokers who are affiliated persons of the Fund (or affiliated
persons of such persons) will be made in accordance with Rule 17e-1 under the
1940 Act. Commissions paid on such transactions would be commensurate with the
rate of commissions paid on similar transactions to brokers that are not so
affiliated.
The
Advisor may, consistent with the interests of the Fund, select brokers on the
basis of the research, statistical and pricing services they provide to the Fund
and the Advisor’s other clients. Such research, statistical and pricing services
must provide lawful and appropriate assistance to the Advisor’s investment
decision-making process in order for such research, statistical and pricing
services to be considered by the Advisor in selecting a broker. These research
services may include information on securities markets, the economy, individual
companies, pricing information, research products and services and such other
services as may be permitted from time to time by Section 28(e) of the Exchange
Act. Information and research received from such brokers will be in addition to,
and not in lieu of, the services required to be performed by the Advisor under
its contract. A commission paid to such brokers may be higher
than that which another qualified broker would have charged for effecting the
same transaction, provided that the Advisor determines in good faith that such
commission is reasonable in terms either of the transaction or the overall
responsibility of the Advisor to the Fund and its other clients and that the
total commissions paid by the Fund will be reasonable in relation to the
benefits to the Fund over the long-term. The advisory fees that the Fund pays to
the Advisor will not be reduced as a consequence of the Advisor’s receipt of
brokerage and research services. To the extent that portfolio transactions are
used to obtain such services, the brokerage commissions paid by the Fund will
exceed those that might otherwise be paid by an amount which cannot be presently
determined. Such services generally may be useful and of value to the Advisor in
serving one or more of its other clients and, conversely, such services obtained
by the placement of brokerage business of other clients generally would be
useful to the Advisor in carrying out its obligations to the Fund. While such
services are not expected to reduce the expenses of the Advisor, the Advisor
would, through use of the services, avoid the additional expenses that would be
incurred if it should attempt to develop comparable information through their
own staff.
One or
more of the other investment companies or accounts that the Advisor manages may
own from time to time some of the same investments as the Fund. Investment
decisions for the Fund are made independently from those of other investment
companies or accounts; however, from time to time, the same investment decision
may be made for more than one company or account. When two or more companies or
accounts seek to purchase or sell the same securities, the securities actually
purchased or sold will be allocated among the companies and accounts on a good
faith equitable basis by the Advisor in its discretion in accordance with the
accounts’ various investment objectives. In some cases, this system may
adversely affect the price or size of the position obtainable for the Fund. In
other cases, however, the ability of the Fund to participate in volume
transactions may produce better execution for the Fund. It is the opinion of the
Fund’s Board of Directors that this advantage, when combined with the other
benefits available due to the Advisor’s organization, outweigh any disadvantages
that may be said to exist from exposure to simultaneous
transactions.
It is not
the Fund’s policy to engage in transactions with the objective of seeking
profits from short-term trading. It is expected that the annual portfolio
turnover rate of the Fund will be less than 30%. Because it is difficult to
predict accurately portfolio turnover
rates,
actual turnover may be higher or lower. Higher portfolio turnover results in
increased costs, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on the reinvestment in other
securities.
DESCRIPTION OF CAPITAL STOCK
We are
authorized to issue up to 100,000,000 shares of common stock,
$0.001 par value per share, and up to 10,000,000 shares of preferred
stock, $0.001 par value per share. Upon completion of this offering, we
will
have of
our common shares issued and outstanding. Our Board of Directors may, without
any action by our stockholders, amend our Charter from time to time to increase
or decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that we have authority to issue. In addition, our
Charter authorizes our Board of Directors, without any action by our
stockholders, to classify and reclassify any unissued common shares and
preferred shares into other classes or series of stock from time to time by
setting or changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends and 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 that might otherwise be in our stockholders’ best
interests. Under Maryland law, our stockholders are generally not liable for our
debts or obligations.
The
following table provides information about our outstanding capital stock upon
completion of this offering (assuming the underwriter’s overallotment option is
not exercised):
Title of Class
|
Number
of
Shares
Authorized
|
Number
of Shares
Held
by the
Fund
or for
its Account
|
Number
of
Shares
Outstanding
|
Common
Stock
|
100,000,000
|
0
|
|
Preferred
Stock
|
10,000,000
|
0
|
0
|
Common
Shares
All
common shares offered by this prospectus will be duly authorized, fully paid and
nonassessable. Our stockholders are entitled to receive distributions if and
when authorized by our Board of Directors and declared by us out of assets
legally available for the payment of distributions. Our stockholders are also
entitled to share ratably in the assets legally available for distribution to
our stockholders in the event of liquidation, dissolution or winding up, after
payment of or adequate provision for all known debts and liabilities. These
rights are subject to the preferential rights of any other class or series of
our capital stock.
In the
event that we have preferred shares outstanding, and so long as we remain
subject to the 1940 Act, holders of our common shares will not be entitled to
receive any net income of, or other distributions from, us unless all
accumulated dividends on preferred shares have been paid and the asset coverage
(as defined in the 1940 Act) with respect to preferred shares and any
outstanding debt is at least 200% after giving effect to such
distributions.
Each
outstanding common share entitles the holder to one vote on all matters
submitted to a vote of our stockholders, including the election of directors.
The presence of the holders of shares of our stock entitled to cast a majority
of the votes entitled to be cast shall constitute a quorum at a meeting of our
stockholders. Our Charter provides that, except as otherwise provided in our
Bylaws, each director shall be elected by the affirmative vote of the holders of
a majority of the shares of stock outstanding and entitled to vote thereon. Our
Bylaws provide that each director shall be 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 our stockholders, the holders of a
majority of the outstanding shares of capital stock entitled to vote will be
able to elect all of the
successors of the class of directors whose terms expire at that meeting.
Pursuant to our Charter and Bylaws, our Board of Directors may amend the Bylaws
to alter the vote required to elect directors.
Holders
of our common shares have no preference, conversion, exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any of our securities. All of our common shares will have equal dividend,
liquidation and other rights. Holders of common shares are entitled
to share ratably in the assets legally available for distribution to
stockholders in the event of liquidation, dissolution or winding up of the Fund,
after payment of or adequate provision for all known debts and liabilities.
These rights are subject to the preferential rights of any other class or series
of the Fund’s capital stock.
The
Charter provides for approval of certain extraordinary transactions by the
stockholders entitled to cast at least a majority of the votes entitled to be
cast on the matter. The Charter also provides that any proposal to convert the
Fund from a closed-end investment company to an open-end investment company or
any proposal to liquidate or dissolve the Fund requires the approval of the
stockholders entitled to cast at least 80 percent of the votes entitled to
be cast on such matter. However, if such a proposal is approved by at least
two-thirds of the continuing directors (in addition to approval by the full
Board of Directors), such proposal may be
approved
by a majority of the votes entitled to be cast on such matter, each voting as a
separate class. The "continuing directors" are defined in the Charter as the
current directors as well as those directors whose nomination for election by
the stockholders or whose election by the directors to fill vacancies is
approved by a majority of continuing directors then on the Board of
Directors.
Under the rules of the NYSE applicable to listed companies, the Fund normally
will be required to hold an annual meeting of stockholders in each fiscal year.
If the Fund is converted to an open-end company or if for any other reason the
shares are no longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of stockholders), the Fund
may decide not to hold annual meetings of
stockholders.
Issuance of Additional
Shares. The Fund has no present intention of offering
additional common shares, except as described herein and under the Dividend
Reinvestment Plan, as amended from time to time. Other offerings of common
shares, if made, will require approval of the Board of Directors. 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 company’s common
stock (calculated within 48 hours of pricing), unless such sale is made
with the consent of a majority of the company’s outstanding common
stockholders. We are seeking approval from the Fund’s initial
stockholders (i.e., the stockholders of the Fund prior to this offering) for the
authority to sell common shares for a price that is less than NAV per share,
subject to certain conditions listed below. All investors who
purchase common shares in this offering will be bound by such
approval. As a result, during the first year of the Fund’s operation,
there will be no stockholder approval sought prior to any issuance of common
shares at a price that is less than NAV per share. After the first
year of the Fund’s operations, we intend to seek such approval from stockholders
at each annual meeting of stockholders. The issuance of additional
shares of the Fund at below NAV will dilute the interest in the Fund’s assets,
income and relative voting power of existing stockholders, including those who
purchase common shares in this offering.
The
number of shares that we may sell below NAV in one or more public or private
offerings may not exceed twenty-five percent (25%) of our then outstanding
common stock. We believe that having the ability to issue and sell
shares of common stock below NAV benefits all stockholders in that it allows us
to quickly raise cash and capitalize on attractive investment opportunities
while remaining fully invested at all times. When considering an
offering of common stock, we calculate our NAV on a more frequent basis,
generally daily, to the extent necessary to comply with the provisions of the
1940 Act. We expect to sell shares of common stock below NAV only
when we have identified attractive near-term investment
opportunities. If our initial stockholders approve the proposal, the
Fund will only issue shares of its common stock at a price below NAV pursuant to
this stockholder proposal if the following conditions are
met:
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·
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a
majority of the Fund’s directors who have no financial interest in the
transaction and a majority of the Fund’s independent directors have
determined that any such sale would be in the best interests of the Fund
and its stockholders;
|
|
·
|
a
majority of the Fund’s directors who have no financial interest in the
transaction and a majority of the Fund’s independent directors, in
consultation with the underwriter or underwriters of the offering if it is
to be underwritten, have determined in good faith, and as of a time
immediately prior to the first solicitation by or on behalf of the Fund of
firm commitments to purchase such common stock or immediately prior to the
issuance of such common stock, that the price at which such shares of
common stock are to be sold is not less than a price which closely
approximates the market value of those shares of common stock, less any
distributing commission or
discount;
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|
·
|
if
the net proceeds of any such sale are to be used to make investments, a
majority of the Fund’s directors who have no financial interest in the
transaction and a majority of the Fund’s independent directors, have made
a determination, based on
information and a recommendation from the Advisor, that they reasonably
expect that the investment(s) to be made will lead to a long-term increase
in distribution growth;
and
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|
·
|
the
price per common share in any such sale, after deducting offering expenses
and commissions, reflects a discount to NAV, as determined at any time
within two business days prior to the pricing of the common stock to be
sold, of no more than 10%.
|
The
table below sets forth the pro forma maximum dilutive effect on our NAV if we
were to issue shares below our NAV immediately following this offering. The
table assumes that we issue 10,000,000 shares in this offering and subsequently
issue 2,500,000 shares, which would represent approximately twenty-five percent
(25%) of our then outstanding common stock, at a net sale price to us after
deducting all expenses of issuance, including underwriting discounts and
commissions, equal to $ 17.16, which is approximately 90% of the estimated NAV
of our common shares immediately following this
offering.
Pro Forma Maximum Impact of Below
NAV Issuances of Common Shares
|
|
|
|
|
Common
shares assumed outstanding
|
|
|
10,000,000
|
|
Common
shares that may be issued below NAV
|
|
|
2,500,000
|
|
Total
common shares outstanding if all permissible shares are issued below
NAV
|
|
|
12,500,000
|
|
Estimated
NAV per share immediately following this offering
|
|
$
|
19.06
|
|
Aggregate
NAV of all currently outstanding common shares immediately following this
offering
|
|
$
|
190,600,000 |
|
Aggregate
net proceeds to the Company (assuming the Company sold all permissible
shares and received net proceeds equal to $17.16 per share (approximately
90% of the NAV immediately following this offering.))
|
|
$
|
42,900,000
|
|
Expected
aggregate NAV of the Company after dilutive issuance
|
|
$
|
233,500,000
|
|
NAV
per share after issuance
|
|
$
|
18.68
|
|
Percentage
dilution to pre-issuance NAV
|
|
|
(1.99)
|
%
|
In
addition to the foregoing conditions and although we believe it is unlikely to
occur, we are required pursuant to interpretations of the staff of the
Commission, to file a registration statement before commencing a below NAV
offering if the cumulative dilution from the
then current offering (as calculated in the table above) together with previous
below NAV offerings since the last stockholder approval for below NAV offerings
was obtained, exceeds 15%. We also must file a registration statement
before commencing an offering of shares pursuant to the issuance to our common
stockholders of transferable rights to subscribe for shares below
NAV.
Because
our Advisor’s management fee is based upon our average monthly Managed Assets,
our Advisor’s interest in recommending the issuance and sale of common stock
below NAV may conflict with our interests and those of our
stockholders.
In
addition to the foregoing conditions and although we believe it is unlikely to
occur, we are required pursuant to interpretations of the staff of the
Commission, to file a registration statement before commencing a below NAV
offering if the cumulative dilution from the then current offering (as
calculated in the table above) together with previous below NAV offerings since
the last stockholder approval for below NAV offerings was obtained, exceeds
15%. We also must file a registration statement before commencing an
offering of shares pursuant to the issuance to our common stockholders of
transferable rights to subscribe for shares below NAV.
Because our
Advisor’s management fee is based upon our average monthly Managed Assets, our
Advisor’s interest in recommending the issuance and sale of common stock below
NAV will conflict with our interests and those of our
stockholders.
Preferred
Shares
We may, but
are not required to, issue preferred shares. We will not issue what has
historically been known as auction rate preferred securities. As long
as we remain subject to the 1940 Act at the time of a preferred share offering,
we will be subject to the 1940 Act restriction that currently limits the
aggregate liquidation preference of all outstanding preferred stock to 50% of
the value of our total assets less our liabilities and indebtedness. We also
believe the liquidation preference, voting rights and redemption provisions of
the preferred shares will be similar to those stated below.
As long
as we are subject to the 1940 Act, the holders of any preferred shares, voting
separately as a single class, will have the right to elect at least two members
of our Board of Directors at all times. The remaining directors will be elected
by holders of common shares and preferred stock, voting together as a single
class. In addition, subject to the prior rights, if any, of the holders of any
other class of senior securities outstanding, the holders of any preferred stock
will have the right to elect a majority of the directors at any time accumulated
dividends on any preferred stock have not been paid for at least two years. 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 any
outstanding preferred stock, voting separately as a class, would be required to
adopt any plan of reorganization that would adversely affect the preferred
stock. See "Certain Provisions of Our Charter and Bylaws and the Maryland
General Corporation Law." As a result of these voting rights, our ability to
take any such actions may be impeded to the extent that any of our preferred
shares are outstanding.
The
affirmative vote of the holders of a majority of the outstanding preferred
shares, voting as a separate class, will be required to amend, alter or repeal
any of the preferences, rights or powers of holders of preferred shares so as to
affect materially and adversely such preferences, rights or powers. The class
vote of holders of preferred shares described above will in each case be in
addition to any other vote required to authorize the action in
question.
The terms
of the preferred shares, if issued, are expected to provide that (i) they
are redeemable in whole or in part at the original purchase price per share plus
accrued dividends per share, (ii) we may tender for or repurchase our
preferred shares and (iii) we may subsequently resell any shares so
tendered for or repurchased by us. Any redemption or purchase of our preferred
shares will reduce the leverage applicable to our common shares, while any
resale of our preferred shares will increase that leverage.
The
discussion above describes the possible offering of our preferred shares. If our
Board of Directors determines to proceed with such an offering, the terms of our
preferred shares may be the same as, or different from, the terms described
above, subject to applicable law and our Charter. Our Board of Directors,
without the approval of the holders of our common shares, may authorize an
offering of preferred shares or may determine not to authorize such an offering
and may fix the terms of our preferred shares to be offered.
The
information contained under this heading is subject to the provisions contained
in our Charter and Bylaws and the laws of the State of Maryland.
CERTAIN PROVISIONS OF OUR CHARTER AND BYLAWS
AND
THE
MARYLAND GENERAL CORPORATION LAW
The
following description of certain provisions of our Charter and Bylaws is only a
summary. For a complete description, please refer to our Charter and Bylaws that
have been filed as exhibits to our registration statement.
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, all of which
are summarized below, may be regarded as "anti-takeover" provisions. Such
provisions could limit the ability of our 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. In addition to these provisions, we are
incorporated in Maryland and therefore expect to be subject to the Maryland
Control Share Acquisition Act and the Maryland General
Corporation Law. In addition, certain provisions of the 1940 Act may serve to
discourage a third party from seeking to obtain control of us.
Number
and Classification of our Board of Directors; Election of Directors
Our
Charter and Bylaws provide that the number of directors may be established only
by our Board of Directors pursuant to the Bylaws, but may not be less than one.
Our Bylaws provide that the number of directors may not be greater than nine.
Pursuant to our Charter, our Board of Directors is divided into three classes:
Class I, Class II and Class III. The term of each class of
directors expires in a different successive year. Upon the expiration of their
term, directors of each class are elected to serve for three-year terms and
until their successors are duly elected and qualified. Each year, only one class
of directors will be elected by the stockholders. The classification of our
Board of Directors should help to assure the continuity and stability of our
strategies and policies as determined by our Board of Directors.
Our
classified board could have the effect of making the replacement of incumbent
directors more time-consuming and difficult. At least two annual meetings of our
stockholders, instead of one, will generally be required to effect a change in a
majority of our Board of Directors. Thus, the classification of our Board of
Directors could increase the likelihood that incumbent directors will retain
their positions and may delay, defer or prevent a change in control of our Board
of Directors, even though a change in control might be in the best interests of
our stockholders.
Vacancies
on Board of Directors; Removal of Directors
Our
Charter provides that we have elected to be subject to the provision of
Subtitle 8 of Title 3 of the Maryland General Corporation Law
regarding the filling of vacancies on our Board of Directors. Accordingly,
except as may be provided by our Board of Directors in setting the terms of any
class or series of preferred shares, any and all vacancies on our Board of
Directors may be filled only by the affirmative vote of a majority of the
remaining directors in office, even if the remaining directors do not constitute
a quorum, and any director elected to fill a vacancy shall serve for the
remainder of the full term of the directorship in which the vacancy occurred and
until a successor is elected and qualified, subject to any applicable
requirements of the 1940 Act.
The
Charter provides that, subject to the rights of holders of one or more classes
of our preferred stock, a director may be removed only for cause and only by the
affirmative vote of at least two-thirds of the votes entitled to be cast in the
election of our directors. This provision, when coupled with the provisions in
our Charter and Bylaws regarding the filling of vacancies on our Board of
Directors, precludes our 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 our 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 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 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 and Bylaws provide that the Board of Directors will have the exclusive
power to make, alter, amend or repeal any provision of our Bylaws.
Advance
Notice of Director Nominations and New Business
Our
Bylaws provide that with respect to an annual meeting of our stockholders,
nominations of persons for election to our Board of Directors and the proposal
of business to be considered by our stockholders may be made only
(i) pursuant to our notice of the meeting, (ii) by or at the direction
of our Board of Directors or (iii) by a stockholder who is entitled to vote
at the meeting and who has complied with the advance notice procedures of our
Bylaws. With respect to special meetings of our stockholders, only the business
specified in our notice of the meeting may be brought before the meeting.
Nominations of persons for election to our Board of Directors at a special
meeting may be made only (i) pursuant to our notice of the meeting,
(ii) by or at the direction of our Board of Directors,
or (iii) by a stockholder who is entitled to vote at the meeting and who
has complied with the advance notice provisions of our Bylaws, provided that our
Board of Directors has determined that directors will be elected at such special
meeting.
Limitation
of Liability of Directors and Officers; Indemnification and Advancement of
Expenses
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
(i) actual receipt of an improper benefit or profit in money, property or
services or (ii) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. Our Charter contains such a
provision which eliminates directors’ and officers’ liability to the maximum
extent permitted by Maryland law, subject to the requirements of the 1940
Act.
Our
Charter authorizes us, and our Bylaws obligate us, to the maximum extent
permitted by Maryland law and subject to the requirements of the 1940 Act, to
indemnify any present or former director or officer or any individual who, while
a director or officer and at our request, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or
trustee and who is made, or threatened to be made, a party to the proceeding by
reason of his or her service in any such 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 service in any such capacity and to pay or reimburse
their reasonable expenses in advance of final disposition of a proceeding. Our
obligation to indemnify any director, officer or other individual, however, is
limited by the 1940 Act and Investment Company Act Release No. 11330,
which, among other things, prohibit 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 and require us to set forth reasonable and fair means for
determining whether indemnification shall be made.
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 (i) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (1) was committed in bad faith or (2) was
the result of active and deliberate dishonesty, (ii) the director or
officer actually received an improper personal benefit in money, property or
services or (iii) 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 a personal benefit
was improperly received, unless in either case a court orders indemnification,
and then only for expenses. In addition, Maryland law permits a corporation to
advance reasonable expenses to a director or officer upon the corporation’s
receipt of (i) 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 (ii) 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.
These
provisions do not limit or eliminate our rights or the rights of any of our
stockholders to seek nonmonetary relief such as an injunction or rescission in
the event any of our directors or officers breaches his or her duties. These
provisions will not alter the liability of our directors or officers under
federal securities laws.
Control
Share Acquisitions
We are
covered by the Maryland Control Share Acquisition Act (the "Control Share Act"),
which provides that control shares of a Maryland corporation acquired in a
control share acquisition have no voting rights except to the extent approved by
a vote of two-thirds of the votes entitled to be cast on the matter. Shares
owned by the acquirer, and by officers or by directors who are employees of the
corporation are excluded from shares entitled to vote on the matter. Control
shares are voting shares of stock that, if aggregated with all other shares of
stock owned by the acquirer or in respect of which the acquirer is able to
exercise or direct the exercise of
voting
power (except solely by virtue of a revocable proxy), would entitle the acquirer
to exercise voting power in electing directors within one of the following
ranges of voting power:
|
•
|
one-tenth
or more but less than one-third;
|
|
•
|
one-third
or more but less than a
majority; or
|
|
•
|
a
majority or more of all voting
power.
|
The
requisite stockholder approval must be obtained each time an acquirer crosses
one of the thresholds of voting power set forth above. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A control share acquisition
means the acquisition of control shares, subject to certain
exceptions.
A person
who has made or proposes to make a control share acquisition may compel the
board of directors of the corporation to call a special meeting of stockholders
to be held within 50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is subject to the
satisfaction of certain conditions, including an undertaking to pay the expenses
of the meeting. If no request for a meeting is made, the corporation may present
the question at any stockholders meeting.
If voting
rights are not approved at the meeting or if the acquiring person does not
deliver an acquiring person statement as required by the statute, then the
corporation may repurchase for fair value any or all of the control shares,
except those for which voting rights have previously been approved. The right to
repurchase control shares is subject to certain conditions and limitations. Fair
value is determined, without regard to the absence of voting rights for the
control shares, as of the date of the last control share acquisition by the
acquirer or of any meeting of stockholders at which the voting rights of the
shares are considered and not approved. If voting rights for control shares are
approved at a stockholders meeting and the acquirer becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
appraisal rights may not be less than the highest price per share paid by the
acquirer in the control share acquisition.
The
Control Share Act does not apply (i) to shares acquired in a merger,
consolidation or share exchange if we are a party to the transaction or
(ii) to acquisitions approved or exempted by our Charter or
Bylaws.
Our
Bylaws contain a provision exempting from the Control Share Act any and all
acquisitions by any person of our shares of stock. There can be no assurance
that such provision will not be otherwise amended or eliminated at any time in
the future. However, we will amend our Bylaws to be subject to the Control Share
Act only if our Board of Directors determines that it would be in our best
interests and if the staff of the SEC does not object to our determination that
our being subject to the Control Share Act does not conflict with the 1940
Act.
Business
Combinations
We are
covered by the Maryland Business Combination Act (the "Business Combination
Act"), which provides that "business combinations" between a Maryland
corporation and an interested stockholder or an affiliate of an interested
stockholder are prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange or, in
circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities. An interested stockholder is defined
as:
|
•
|
any
person who beneficially owns 10% or more of the voting power of the
corporation’s shares; or
|
|
•
|
an
affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then-outstanding voting stock of
the corporation.
|
A person
is not an interested stockholder under this statute if the board of directors
approved in advance the transaction by which such stockholder otherwise would
have become an interested stockholder. However, in approving a transaction, the
board of directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the
board of directors.
After the
five-year prohibition, any business combination between the Maryland corporation
and an interested stockholder generally must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at
least:
|
•
|
80%
of the votes entitled to be cast by holders of outstanding shares of
voting stock of the
corporation; and
|
|
•
|
two-thirds
of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the interested stockholder with whom
or with whose affiliate the business combination is to be effected or held
by an affiliate or associate of the interested
stockholder.
|
These
super-majority vote requirements do not apply if the corporation’s common
stockholders receive a minimum price, as defined under Maryland law, for their
shares in the form of cash or other consideration in the same form as previously
paid by the interested stockholder for its shares.
The
Business Combination Act permits various exemptions from its provisions,
including business combinations that are exempted by the board of directors
before the time that the interested stockholder becomes an interested
stockholder. Our Board of Directors has adopted a resolution exempting any
business combination between us and any other person from the provisions of the
Business Combination Act, provided that the business combination is first
approved by our Board of Directors, including a majority of the directors who
are not interested persons as defined in the 1940 Act. This resolution, however,
may be altered or repealed in whole or in part at any time. If this resolution
is repealed, or our Board of Directors does not otherwise approve a business
combination, the statute may discourage others from trying to acquire control of
us and increase the difficulty of consummating any offer.
We will
determine and publish the NAV of our common shares on at least a monthly basis
and at such other times as our Board of Directors may determine. The NAV per
common share equals our NAV divided by the number of outstanding common shares.
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);
(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.
We will
determine fair value of our assets and liabilities in accordance with valuation
procedures adopted by our Board of Directors. Securities for which
market quotations are readily available shall be valued at "market
value." If a market value cannot be obtained or if our Advisor
determines that the value of a security as so obtained does not represent a fair
value as of the measurement date (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 methodologies established by our Board of
Directors.
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·
|
The
fair value for equity securities and equity-related securities is
determined by using readily available market quotations from the principal
market. For equity and equity-related securities that are freely tradable
and listed on a securities exchange or over the counter market, fair value
is determined using the last sale price on that exchange or
over-the-counter market on the measurement date. If the security is listed
on more than one exchange, we will use the price of the exchange that we
consider to be the principal exchange on which the security is traded. If
a security is traded on the measurement date, then the last reported sale
price on the exchange or over-the-counter ("OTC") market on which the
security is principally traded, up to the time of valuation, is
used. If there were no reported sales on the security's
principal exchange or OTC market on the measurement date, then the
average between the last bid price and last asked price, as reported by
the pricing service, shall be used. We 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.
|
|
·
|
An
equity security of a publicly traded company acquired in a private
placement transaction without registration is subject to restrictions on
resale that can affect the security’s liquidity and fair value. Such
securities that are convertible into publicly traded common shares or
securities that may be sold pursuant to Rule 144, shall generally be
valued based on the fair value of the freely tradable common share
counterpart less an applicable discount. Generally, the discount will
initially be equal to the discount at which we purchased the securities.
To the extent that such securities are convertible or otherwise become
freely tradable within a time frame that may be reasonably determined, an
amortization schedule may be determined for the
discount.
|
|
·
|
Fixed
income securities (other than the short-term securities as described
below) are valued by (i) using readily available market quotations based
upon the last updated sale price or a market value from an approved
pricing service generated by a pricing matrix based upon yield data for
securities with similar characteristics or (ii) by obtaining a direct
written broker-dealer quotation from a dealer who has made a market in the
security.
|
|
·
|
A fixed
income security acquired in a private placement transaction without
registration is subject to restrictions on resale that can affect the
security’s liquidity and fair value. Among the various factors
that can affect the value of a privately
placed
|
|
|
security
are (i) whether the issuing company has freely trading fixed
income securities of the same maturity and interest rate (either
through an initial public offering or otherwise); (ii) whether the company
has an effective registration statement in place for the securities; and
(iii) whether a market is made in the securities. The
securities normally will be valued at amortized cost unless the portfolio
company’s condition or other factors lead to a determination of fair value
at a different amount.
|
|
·
|
Short-term
securities, including bonds, notes, debentures and other fixed
income securities, and money market instruments such as certificates
of deposit, commercial paper, bankers’ acceptances and obligations of
domestic and foreign banks, with remaining maturities of 60 days or less,
for which reliable market quotations are readily available are valued on
an amortized cost basis at current market quotations as provided by an
independent pricing service or principal market
maker.
|
|
·
|
Other
assets will be valued at market value pursuant to written valuation
procedures adopted by our Board of Directors, or if a market value cannot
be obtained or if our Advisor determines that the value of a security as
so obtained does not represent a fair value as of the measurement date
(due to a significant development subsequent to the time its price is
determined or otherwise), fair value shall be determined pursuant to the
methodologies established by our Board of
Directors.
|
Valuations
of public company securities determined pursuant to fair value methodologies
will be presented to our Board of Directors or a designated committee thereof
for approval at the next regularly scheduled board meeting. See
"Management of the Fund - Conflicts of Interest."
CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS
The
following discussion is a summary of certain U.S. federal income tax
considerations affecting the Fund and its stockholders. The
discussion reflects applicable federal income tax laws of the U.S. as of the
date of this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service (the "IRS"),
possibly with retroactive effect. No attempt is made to present a
detailed explanation of all U.S. federal, state, local and foreign tax concerns
affecting the Fund and its stockholders (including stockholders owning large
positions in the Fund). The discussion set forth herein does not
constitute tax advice. Investors are urged to consult their own tax
advisors to determine the tax consequences to them of investing in the
Fund.
In
addition, no attempt is made to address tax concerns applicable to an investor
with a special tax status, such as a financial institution, "real estate
investment trust", insurance company, RIC, individual retirement account, other
tax-exempt entity, dealer in securities or non-U.S.
investor. Furthermore, this discussion does not reflect possible
application of the alternative minimum tax. Unless otherwise noted,
this discussion assumes the common shares are held by U.S. persons and that such
shares are held as capital assets.
The
Fund intends to elect to be treated as, and to qualify each year for the special
tax treatment afforded, a RIC under Subchapter M of the Code. As long as the
Fund meets certain requirements that govern the Fund’s source of income,
diversification of assets and distribution of earnings to stockholders, the Fund
will not be subject to U.S. federal income tax on income distributed (or treated
as distributed, as described below) to its stockholders. With respect to the
source of income requirement, the Fund must derive in each taxable year at least
90% of its gross income (including tax-exempt interest) from (i) dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in such shares,
securities or currencies and (ii) net income derived from interests
in qualified publicly traded partnerships. A qualified publicly
traded partnership is generally defined as a publicly traded partnership under
Section 7704 of the Code, but does not include a publicly traded partnership if
90% or more of its income is described in (i) above. For purposes of
the income test, the Fund will be treated as receiving directly its share of the
income of any partnership that is not a qualified publicly traded
partnership.
With
respect to the diversification of assets requirement, the Fund must diversify
its holdings so that, at the end of each quarter of each taxable year, (i) at
least 50% of the value of the Fund’s total assets is represented by cash and
cash items, U.S. Government securities, the securities of other RICs and other
securities, with such other securities limited for purposes of such calculation,
in respect of any one issuer, to an amount not greater than 5% of the value of
the Fund’s total assets and not more than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of the Fund’s
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other RICs), the securities (other
than the securities of other RICs) of any two or more issuers that the Fund
controls and that are determined to be engaged in the same, similar or related
trades or businesses, or the securities of one or more qualified publicly traded
partnerships.
If the
Fund qualifies as a RIC and distributes to its stockholders at least 90% of the
sum of (i) its "investment company taxable income," as that term is defined in
the Code (which includes, among other items, dividends, taxable interest and the
excess of any net short-term capital gains over net long-term capital losses, as
reduced by certain deductible expenses) without regard to the deduction for
dividends paid and (ii) the excess of its gross tax-exempt interest, if any,
over certain deductions attributable to such interest that are otherwise
disallowed, the Fund will be relieved of U.S. federal income tax on any income
of the Fund, including long-term capital gains, distributed to
stockholders. However, if the Fund retains any investment company
taxable income or "net capital gain" (i.e., the excess of net long-term capital
gain over net short-term capital loss), it will be subject to U.S. federal
income tax at regular corporate federal income tax rates (currently at a maximum
rate of 35%) on the amount retained. The Fund intends to distribute
at least annually substantially all of its investment company taxable income,
net tax-exempt interest, and net capital gain. Under the Code, the
Fund will generally be subject to a nondeductible 4% federal excise tax on the
undistributed portion of its ordinary income and capital gains if it fails to
meet certain distribution requirements with respect to each calendar
year. In order to avoid the 4% federal excise tax, the required
minimum distribution is generally equal to the sum of 98% of the Fund’s ordinary
income (computed on a calendar year basis), plus 98% of the Fund’s capital gain
net income (generally computed for the one-year period ending on October
31). The Fund generally intends to make distributions in a timely
manner in an amount at least equal to the required minimum distribution and
therefore, under normal market conditions, does not expect to be subject to this
excise tax.
If the
Fund is unable to satisfy the 90% distribution requirement or otherwise fails to
qualify as a RIC in any year, it will be taxed in the same manner as an ordinary
corporation and distributions to the Fund’s stockholders will not be deductible
by the Fund in computing its taxable income. In such event, the
Fund’s distributions, to the extent derived from the Fund’s current or
accumulated earnings and profits, would constitute dividends, which would
generally be eligible for the dividends received deduction available to
corporate stockholders, and non-corporate stockholders would generally be able
to treat such distributions as "qualified dividend income" eligible for reduced
rates of U.S. federal income taxation in taxable years beginning on or before
December 31, 2010, provided in each case that certain holding period and other
requirements are satisfied.
The
Fund intends to invest a portion of its assets in MLPs. Net income
derived from an interest in a qualified publicly traded partnership, which
generally includes MLPs, is included in the sources of income from which a RIC
must derive 90% of its gross income. However, not more than 25% of the value
of a RIC’s total assets can be invested in the securities of qualified
publicly traded partnerships. The Fund intends to invest only in MLPs that will
constitute qualified publicly traded partnerships for purposes of the RIC
rules, not more than 25% of the value of the Fund’s total assets will be
invested in the securities of publicly traded partnerships.
Distributions
paid to you by the Fund from its investment company taxable income will
generally be taxable to you as ordinary income. A portion of such distributions
(if designated by the Fund) may qualify (i) in the case of corporate
stockholders, for the dividends received deduction under Section 243 of the Code
to the extent that the Fund’s income consists of dividend income from U.S.
corporations, excluding distributions from certain entities such as REITs, or
(ii) in the case of individual stockholders for taxable years beginning on or
prior to December 31, 2010, as qualified dividend income eligible to be taxed at
reduced rates under Section 1(h)(11) of the Code (which generally provides for a
maximum rate of 15%) to the extent that the Fund receives qualified dividend
income, and provided in each case that certain holding period and other
requirements are met. Qualified dividend income is, in general,
dividend income from taxable domestic corporations and qualified foreign
corporations (e.g., generally, if the issuer is incorporated in a possession of
the United States or in a country with a qualified comprehensive income tax
treaty with the United States, or if the stock with respect to which such
dividend is paid is readily tradable on an established securities market in the
United States). A qualified foreign corporation generally excludes any foreign
corporation that, for the taxable year of the corporation in which the dividend
was paid or the preceding taxable year, is a passive foreign investment company.
Distributions made to you from an excess of net long-term capital gain over net
short-term capital losses ("capital gain dividends"), including capital gain
dividends credited to you but retained by the Fund, will be taxable to you
as long-term capital gain if they have been properly designated by the Fund,
regardless of the length of time you have owned our common shares. The maximum
tax rate on capital gain dividends received by individuals is generally 15% for
such gain realized before January 1, 2011. Distributions in excess of the Fund’s
earnings and profits will be treated by you, first, as a tax-free return of
capital, which is applied against and will reduce the adjusted tax basis of your
shares and, after such adjusted tax basis is reduced to zero, will generally
constitute capital gain to you. Under current law, the maximum
15% tax rate on long-term capital gains and qualified dividend income will cease
to apply for taxable years beginning after December 31, 2010; beginning in 2011,
the maximum rate on long-term capital gains is scheduled to revert to 20%, and
all ordinary dividends (including amounts treated as qualified dividends under
the law currently in effect) will be taxed as ordinary
income. Generally, not later than 60 days after the close of its
taxable year, the Fund will provide you with a written notice designating the
amount of any qualified dividend income or capital gain dividends and other
distributions.
Sales
and other dispositions of the Fund’s common shares generally are taxable
events. You should consult your own tax adviser with reference to
your individual circumstances to determine whether any particular transaction in
the Fund’s common shares is properly treated as a sale or exchange for federal
income tax purposes and the tax treatment of any gains or losses recognized in
such transactions. The sale or other disposition of shares of the
Fund will generally result in capital gain or loss to you equal to the
difference between the amount realized and your adjusted tax basis in the common
shares sold or exchanged, and will be long-term capital gain or loss if your
holding period for the shares is more than one year at the time of sale. Any
loss upon the sale or exchange of common shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain dividends
you received (including amounts credited as an undistributed capital gain
dividend) with respect to such shares. A loss you realize on a
sale or exchange of shares of the Fund generally will be disallowed if you
acquire other substantially identical common shares within a 61-day period
beginning 30 days before and ending 30 days after the date that
you dispose of the shares. In such case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Present law taxes both
long-term and short-term capital gain of corporations at the rates applicable to
ordinary income of corporations. For non-corporate taxpayers, short-term capital
gain will currently be taxed at the rate applicable to ordinary income,
currently a maximum rate of 35%, while long-term capital gain realized before
January 1, 2011 generally will be taxed at a maximum rate of 15%. Capital losses
are subject to certain limitations.
The Fund
may be subject to withholding and other taxes imposed by foreign countries,
including taxes on interest, dividends and capital gains with respect to its
investments in those countries, which would, if imposed, reduce the yield on or
return from those investments. Tax treaties between certain countries
and the United States may reduce or eliminate such taxes in some
cases. The Fund does not expect to satisfy the requirements for
passing through to its stockholders their pro rata shares of qualified foreign
taxes paid by the Fund, with the result that stockholders will not be entitled
to a tax deduction or credit for such taxes on their own US federal income tax
returns.
If the
Fund pays you a dividend in January that was declared in the previous October,
November or December to stockholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by you on December 31 of the year in which the dividend
was declared. A stockholder may elect not to have all dividends and
distributions automatically reinvested in shares of common shares of the Fund
pursuant to the Plan. If a stockholder elects not to participate in
the Plan, such stockholder will receive distributions in cash. For
taxpayers subject to U.S. federal income tax, all
dividends
will generally be taxable, as discussed above, regardless of whether a
stockholder takes them in cash or they are reinvested pursuant to the Plan in
additional shares of the Fund.
If a
stockholder’s distributions are automatically reinvested pursuant to the Plan,
for U.S. federal income tax purposes, the stockholder will generally be treated
as having received a taxable distribution in the amount of the cash dividend
that the stockholder would have received if the stockholder had elected to
receive cash. Under certain circcumstances, however, if a stockholder’s
distributions are automatically reinvested pursuant to the Plan and the Plan
Agent invests the distribution in newly issued shares of the Fund, the
stockholder may be treated as receiving a taxable distribution equal to the
fair market value of the stock the stockholder receives.
The Fund
intends to distribute all realized capital gains, if any, at least
annually. If, however, the Fund were to retain any net capital gain,
the Fund may designate the retained amount as undistributed capital gains in a
notice to stockholders who, if subject to U.S. federal income tax on long-term
capital gains, (i) will be required to include in income as long-term capital
gain, their proportionate shares of such undistributed amount and (ii) will be
entitled to credit their proportionate shares of the federal income tax paid by
the Fund on the undistributed amount against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. If such an event occurs, the tax basis of shares owned
by a stockholder of the Fund will, for U.S. federal income tax purposes,
generally be increased by the difference between the amount of undistributed net
capital gain included in the stockholder’s gross income and the tax deemed paid
by the stockholders.
The Fund
is required in certain circumstances to backup withhold at a current rate of 28%
on taxable dividends and certain other payments paid to non-corporate holders of
the Fund’s shares who do not furnish the Fund with their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld from payments
made to you may be refunded or credited against your U.S. federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
U.S.
Federal Income Tax Considerations for Non-U.S. Stockholders
The
following discussion is a general summary of the material U.S. federal income
tax considerations applicable to a Non-U.S. stockholder. A Non-U.S.
stockholder is a beneficial owner of shares of the Fund’s common stock other
than a U.S. stockholder. A U.S. stockholder is a beneficial owner of
shares of the Fund’s common stock that is for U.S. federal income tax
purposes:
• a
citizen or individual resident of the United States;
• a
corporation or other entity treated as a corporation for U.S. federal income tax
purposes, created or organized in or under the laws of the United States or any
state thereof or the District of Columbia;
• a
trust or an estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
• a
trust with respect to which a court within the United States is able to exercise
primary supervision over its administration and one or more U.S. stockholders
have the authority to control all of its substantial decisions.
If an
entity that is classified as a partnership for U.S. federal income tax purposes
holds common shares of the Company, the U.S. federal income tax treatment of a
partner will generally depend on the status of the partner and the activities of
the partnership. Partnerships holding common shares of the Company
and partners in such partnerships should consult their tax advisers as to the
particular U.S. federal income tax consequences of an investment in the
Company’s common shares.
This
summary does not purport to be a complete description of the income tax
considerations for a Non-U.S stockholder. For example, the following
does not describe income tax consequences that are assumed to be generally known
by investors or certain considerations that may be relevant to certain types of
holders subject to special treatment under U.S. federal income tax
laws. This summary does not discuss any aspects of U.S. estate or
gift tax or state or local tax. In addition, this summary does not
address (i) any Non-U.S. Stockholder that holds, at any time, more than 5 per
cent of the Company’s common stock, directly or under ownership attribution
rules applicable for purposes of Section 897 of the Code, or (ii) any Non-U.S.
Stockholder whose ownership of common shares of the Company is effectively
connected with the conduct of a trade or business in the United
States.
As
indicated above, the Fund intends to elect to be treated, and to qualify each
year, as a RIC for U.S. Federal income tax purposes. This summary is
based on the assumption that the Company will qualify as a RIC in each of its
taxable years. Distributions of the Fund’s investment company taxable
income to Non-U.S. stockholders will, except as discussed below, be subject to
withholding of U.S. federal income tax at a 30% rate (or lower rate provided by
an applicable income tax treaty) to the extent of the Fund's
current
and accumulated earnings and profits. In order to obtain a reduced
rate of withholding, a Non-U.S. stockholder will be required to provide an
Internal Revenue Service Form W-8BEN certifying its entitlement to benefits
under a treaty. Distributions made out of "qualified interest income"
or net short-term capital gain in any taxable year of the Company beginning
before January 1, 2010 will generally not be subject to this withholding
tax. If, however, a Non-U.S. stockholder who is an individual has
been present in the United States for 183 days or more during the taxable year
and meets certain other conditions, any such distribution of net short-term
capital gain will be subject to U.S. federal income tax at a rate of 30% (or
lower rate provided by an applicable income tax treaty).
Actual
or deemed distributions of the Fund’s net capital gains to a Non-U.S.
stockholder, and gains realized by a Non-U.S. stockholder upon the sale of the
Fund’s common stock, will not be subject to withholding of U.S. federal income
tax and generally will not be subject to U.S. federal income tax unless the
Non-U.S. stockholder is an individual, has been present in the United States for
183 days or more during the taxable year, and certain other conditions are
satisfied.
If the
Fund distributes its net capital gains in the form of deemed rather than actual
distributions (which the Fund may do in the future), a Non-U.S. stockholder may
be entitled to a federal income tax credit or tax refund equal to the
stockholder’s allocable share of the tax the Fund paid on the capital gains
deemed to have been distributed. In order to obtain the refund, the
Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file
a federal income tax return even if the Non-U.S. stockholder would not otherwise
be required to obtain a U.S. taxpayer identification number or file a federal
income tax return.
A
Non-U.S. stockholder who is a non-resident alien individual, and who is
otherwise subject to withholding of federal income tax, may be subject to
information reporting and backup withholding of federal income tax on dividends
unless the Non-U.S. stockholder provides us or the dividend paying agent with an
IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets
documentary evidence requirements for establishing that it is a Non-U.S.
stockholder or otherwise establishes an exemption from backup
withholding. The amount of any backup withholding from a payment to a
Non-U.S. stockholder will be allowed as a credit against such Non-U.S.
stockholder’s United States federal income tax liability and may entitle such
holder to a refund, provided that the required information is furnished to the
Internal Revenue Service.
Non-U.S.
persons should consult their own tax advisers with respect to the U.S. federal
income tax and withholding tax, and state, local and foreign tax consequences of
an investment in the shares.
The
foregoing is a general and abbreviated summary of the provisions of the Code and
the treasury regulations in effect as they directly govern the taxation of the
Fund and its stockholders. These provisions are subject to change by legislative
and administrative action, and any such change may be retroactive. Stockholders
are urged to consult their tax advisors regarding specific questions as to U.S.
federal, foreign, state, local income or other taxes.
We, along
with our Advisor, have adopted proxy voting policies and procedures ("Proxy
Policy") that we believe are reasonably designed to ensure that proxies are
voted in our best interests and the best interests of our stockholders. Subject
to its oversight, our Board of Directors has delegated responsibility for
implementing the Proxy Policy to our Advisor.
In the
event requests for proxies are received to vote equity securities on routine
matters, such as election of directors or ratification of auditors, the proxies
usually will be voted in accordance with the recommendation of the Fund’s
management unless our Advisor determines it has a conflict or our Advisor
determines there are other reasons not to vote in accordance with the
recommendation of the Fund’s management. On non-routine matters, such as
amendments to governing instruments, proposals relating to compensation and
equity compensation plans, corporate governance proposals and stockholder
proposals, our Advisor 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 fixed income securities, our Advisor will vote on a
case-by-case basis in a manner it believes to be in the best economic interest
of our stockholders.
Our Chief
Executive Officer will be responsible for monitoring our actions and ensuring
that (i) proxies are received and forwarded to the appropriate
decisionmakers, and (ii) proxies are voted in a timely manner upon receipt
of voting instructions. We are not responsible for voting proxies we do not
receive, but we will make reasonable efforts to obtain missing proxies. Our
Chief Executive Officer will implement procedures to identify and monitor
potential conflicts of interest that could affect the proxy voting process,
including (i) significant client relationships, (ii) other potential
material business relationships, and (iii) material personal and family
relationships. All decisions regarding proxy voting will be determined by our
Advisor’s investment committee and will be executed by our Chief Executive
Officer. Every effort will 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).
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
financial statements of Tortoise Power and Energy Infrastructure Fund, Inc.
(formerly Tortoise Power and Energy Income Company) at May 5, 2009, and for the
period from July 5, 2007 (the date of incorporation) through May 5, 2009,
appearing in this Registration Statement and Statement of Additional Information
have been audited by Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
ADMINISTRATOR, CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT
AND REGISTRAR
,
serves as our administrator. We pay the administrator a fee computed
at .
serves
as our custodian. We pay the custodian a fee computed at
The
transfer agent and registrar for our common shares is Computershare Trust
Company, N.A. and its affiliate, Computershare, Inc., serves as our dividend
paying agent.
A
Registration Statement on Form N-2, including amendments thereto, relating to
the common shares offered hereby, has been filed by the Fund with the SEC. The
Fund’s prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement, including any
exhibits and schedules thereto. Please refer to the Registration Statement for
further information with respect to the Fund and the offering of the common
shares. Statements contained in the Fund’s prospectus and this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to 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 SEC’s 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.
INDEX TO FINANCIAL STATEMENTS
|
|
Audited
Financial Statements
|
|
|
|
|
|
|
|
Rep ort of Independent Registered Public
Accounting Firm
The
Shareholders and Board of Directors
Tortoise
Power and Energy Income Company
We
have audited the accompanying statement of assets and liabilities of Tortoise
Power and Energy Income Company (“the Company”) as of May 5, 2009, and the
related statement of operations for the period from July 5, 2007 (date of
incorporation) through May 5, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Company’s internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Tortoise Power and Energy Income
Company at May 5, 2009, and the results of its operations for the period from
July 5, 2007 through May 5, 2009, in conformity with U.S. generally accepted
accounting principles.
/s/
Ernst & Young LLP
Kansas
City, Missouri
May 7,
2009
TORTOISE
POWER AND ENERGY INCOME COMPANY
Statement
of Asse ts and
Liabilities
May 5,
2009
Assets:
|
|
|
|
Cash
|
|
$ |
145,000 |
|
Deferred
offering costs
|
|
|
78,655 |
|
Total
assets
|
|
|
223,655 |
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accrued
offering costs
|
|
|
78,655 |
|
Accrued
registration fees
|
|
|
840 |
|
Payable
to Adviser for organization costs
|
|
|
26,245 |
|
Payable
for organization costs
|
|
|
9,000 |
|
Total
liabilities
|
|
|
114,740 |
|
|
|
|
|
|
Preferred
Shares:
|
|
|
|
|
Preferred
shares, $0.001 par value; none
outstanding (10,000,000
shares authorized)
|
|
|
- |
|
|
|
|
|
|
Net
assets applicable to common stockholders
|
|
$ |
108,915 |
|
|
|
|
|
|
Net
Assets Applicable to Common Stockholders Consist of:
|
|
|
|
|
Capital
stock, $0.001 par value; 6,073 shares issued and outstanding (100,000,000
shares authorized)
|
|
$ |
6 |
|
Additional
paid-in capital
|
|
|
144,994 |
|
Accumulated
net investment loss
|
|
|
(36,085 |
) |
Net
assets applicable to common stockholders
|
|
$ |
108,915 |
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value per common share outstanding (net assets applicable to common
stock, divided by common shares outstanding)
|
|
$ |
17.93 |
|
|
|
|
|
|
The
accompanying notes are an integral part of the financial
statements.
TORTOISE
POWER AND ENERGY INCOME COMPANY
Period
from July 5, 2007 (date of incorporation) through May 5, 2009
Investment
Income
|
|
$ |
- |
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Organization
costs
|
|
|
35,245 |
|
Registration expenses
|
|
|
840 |
|
Total
Expenses
|
|
|
36,085 |
|
|
|
|
|
|
Net
Investment Loss
|
|
$ |
(36,085 |
) |
The
accompanying notes are an integral part of the financial
statements.
TORTOISE
POWER AND ENERGY INCOME COMPANY
No tes to Financial
Statements
May 5,
2009
Tortoise
Power and Energy Income Company (the "Company") was organized as a Maryland
corporation on July 5, 2007, and is a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Company has had no operations other than the sale of 6,073
shares to the aggregate Subscribers for $145,000 on May 5, 2009. The Company
seeks to provide its stockholders with a vehicle to invest in a portfolio
consisting primarily of securities issued by power and energy infrastructure
companies. The Company is planning a public offering of its
common stock as soon as practicable after the effective date of its registration
statement.
2.
|
Significant
Accounting Policies
|
The
following is a listing of the significant accounting policies that the Company
will implement upon the commencement of its operations:
A.
Use of Estimates – The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
B.
Investment Valuation –
The Company plans to primarily own securities that are listed on a securities
exchange or over-the-counter market. The Company will value those securities at
their last sale price on that exchange or over-the-counter market on the
valuation date. If the security is listed on more than one exchange,
the Company will use the price of the exchange that it considers to be the
principal exchange on which the security is traded. Securities listed on the
NASDAQ will be valued at the NASDAQ Official Closing Price, which may not
necessarily represent the last sale price. If there has been no sale
on such exchange or over-the-counter market on such day, the security will be
valued at the mean between the bid and ask price on such day.
The
Company may invest in restricted securities. Restricted securities
are subject to statutory or contractual restrictions on their public resale,
which may make it more difficult to obtain a valuation and may limit the
Company’s ability to dispose of them. Investments in private placement
securities and other securities for which market quotations are not readily
available will be valued in good faith by using fair value procedures approved
by the Board of Directors. Such fair value procedures consider factors such as
discounts to publicly traded issues, time until conversion date, securities with
similar yields, quality, type of issue, coupon, duration and rating. If events
occur that will affect the value of the Company’s portfolio securities before
the net asset value has been calculated (a “significant event”), the portfolio
securities so affected will generally be priced using a fair value
procedure.
An
equity security of a publicly traded company acquired in a direct placement
transaction may be subject to restrictions on resale that can affect the
security’s liquidity and fair value. Such securities that are
convertible into, or otherwise will become, a freely tradable security will be
valued based on the market value of the freely tradable security less an
applicable discount. Generally, the discount will initially be equal
to the discount at which the Company purchased the securities. To the
extent that such securities are convertible or otherwise become freely tradable
within a time frame that may be reasonably determined, an amortization schedule
may be used to determine the discount.
The
Company will generally value short-term debt securities at prices based on
market quotations for such securities, except those securities purchased with 60
days or less to maturity will be valued on the basis of amortized cost, which
approximates market value.
Effective December 1, 2007, the Company adopted Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value in accordance with U.S. generally accepted accounting
principles and expands disclosures about fair value
measurements. SFAS 157 is applicable in conjunction with other
accounting pronouncements that require or permit fair value
measurements,
but does not expand the use of fair value to any new
circumstances. More specifically, SFAS 157 emphasizes that fair value
is a market based measurement, not an entity-specific measurement, and sets out
a fair value hierarchy with the highest priority given to quoted prices in
active markets and the lowest priority to unobservable inputs.
C.
Security Transactions and
Investment Income – Security transactions will be accounted for on the
date the securities are purchased or sold (trade date). Realized
gains and losses will be reported on an identified cost
basis. Dividend and distribution income will be recorded on the
ex-dividend date. Distributions received from the Company’s investments in
master limited partnerships generally will be comprised of income and return of
capital. The Company will record investment income and returns of
capital based on estimates made at the time such distributions are
received. Such estimates are based on historical information
available from each MLP and other industry sources. These estimates
may subsequently be revised based on information received from the MLPs after
their tax reporting periods are concluded. Interest income will be
recognized on the accrual basis, including amortization of premiums and
accretion of discounts.
D.
Distributions to
Shareholders – The Company anticipates that it may take three to six
months to invest substantially all of the net proceeds from an initial public
offering in securities meeting its investment objectives. Once the
Company is fully invested and to the extent it receives income, the Company
intends to make monthly cash distributions of its investment company income to
common stockholders. In addition, on an annual basis, the Company
intends to distribute capital gains realized during the fiscal year in the last
fiscal quarter. The amount of any distributions will be determined by
the Board of Directors. Distributions to stockholders will be recorded on the
ex-dividend date. The character of distributions made during the year may differ
from their ultimate characterization for federal income tax
purposes.
E.
Federal Income Taxation
– The Company intends to elect to be treated and to qualify each year as a
regulated investment company (“RIC”) under the U.S. Internal Revenue Code of
1986, as amended (the “Code”). As a result, the Company generally
will not be subject to U.S. federal income tax on income and gains that it
distributes each taxable year to shareholders if it meets certain minimum
distribution requirements. To qualify as a RIC, the Company will be
required to distribute substantially all of its income, in addition to other
asset diversification requirements. The Company will be subject to a
4 percent non-deductible U.S. federal excise tax on certain undistributed income
unless the Company makes sufficient distributions to satisfy the excise tax
avoidance requirement.
On
December 1, 2007, the Company adopted the provisions of the Financial Accounting
Standards Board Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes. FIN 48 provides guidance for how uncertain tax
positions should be recognized, measured, presented and disclosed in the
financial statements. The Company has analyzed the tax positions it
has taken and has concluded that no provision is required under FIN 48 for any
open tax year (2007-2008). The Company’s policy is to record interest
and penalties on uncertain tax positions, if any, as part of tax
expense.
F.
Organization Expenses and
Offering Costs - The Company is
responsible for paying all organizational expenses and offering costs. Deferred
offering costs paid will be charged as a reduction of paid-in capital at the
completion of the Company’s initial public offering. Organizational expenses are
expensed as incurred, and are reported in the accompanying Statement of
Operations.
G. Indemnifications - Under the
Company’s organizational documents, its officers and directors are indemnified
against certain liabilities arising out of the performance of their duties to
the Company. In addition, in the normal course of business, the Company may
enter into contracts that provide general indemnification to other parties. The
Company’s maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Company that have not
yet occurred, and may not occur. However, the Company has not had prior claims
or losses pursuant to these contracts and expects the risk of loss to be
remote.
The
Company’s investment objective is to provide stockholders with a high level of
current income, with a secondary objective of capital appreciation. The
Company anticipates investing at least 80 percent of total assets (including
assets obtained through potential leverage) in equity securities of companies
that derive more than 50 percent of their revenue from power or energy
operations.
4.
|
Agreements
and Affiliations
|
The
Company intends to enter into an Investment Advisory Agreement with Tortoise
Capital Advisors, L.L.C. (the “Adviser”). No management fees will be charged
until the Company commences operations.
As of
May 5, 2009, the Company owes the Adviser $26,245 for costs incurred in
connection with the Company’s organizational expenses. This amount is payable to
the Adviser upon the closing of the initial offering of common
shares.
Computershare
Trust Company, N.A. will serve as the Company's transfer agent, dividend paying
agent, and agent for the automatic dividend reinvestment plan.
The
Company has authorized the issuance of 10,000,000 preferred
shares. Currently, there are no shares issued or
outstanding.
TORTOISE
POWER AND ENERGY INFRASTRUCTURE FUND, INC.
____________________________
STATEMENT
OF ADDITIONAL INFORMATION
____________________________
,
2009
Part
C — Other Information
Item
25. Financial Statements and
Exhibits
|
1.
|
Financial
Statements:
The Registrant’s financial statements
dated May 5, 2009, notes to the financial statements and report of
independent registered public accounting firm thereon are filed
herein.
|
Exhibit
No.
|
Description of Document
|
a.1.
|
Articles
of Incorporation(1)
|
b.
|
Bylaws(3)
|
c.
|
Inapplicable
|
d.
|
Form
of Stock Certificate(3)
|
e.
|
Dividend
Reinvestment Plan(3)
|
f.
|
Inapplicable
|
g.1.
|
Investment
Advisory Agreement with Tortoise Capital Advisors, L.L.C. dated May 22,
2009(3)
|
g.2. |
Fee
Waiver Agreement with Tortoise Capital Advisors, L.L.C. dated May 22,
2009(3)
|
h.1.
|
Form
of Underwriting Agreement (2)
|
h.2.
|
Form
of Structuring Fee Agreement (2)
|
i.
|
Inapplicable
|
j.
|
Custody
Agreement with
dated
,
2009(2)
|
k.1.
|
Stock
Transfer Agency Agreement with Computershare Trust Company,
N.A dated August 21, 2007(3)
|
k.2.
|
Administration
Agreement with
dated
,
2009(2)
|
l.
|
Opinion
of
(2)
|
m.
|
Inapplicable
|
n.
|
Consent
of Independent Registered Public Accounting Firm(2)
|
o.
|
Inapplicable
|
p.
|
Inapplicable
|
q.
|
Inapplicable
|
r.1.
|
Code
of Ethics of the Fund(3)
|
r.2.
|
Code
of Ethics of the Tortoise Capital Advisors,
L.L.C.(3)
|
____________
(1)
|
Incorporated
by reference to the Registrant’s Registration Statement on Form N-2, filed
August 3, 2007 (File Nos. 333-145105 and 811-22106).
|
(2)
|
To
be filed by amendment.
|
(3) |
Filed
herewith. |
Item
26. Marketing
Arrangements
Reference
is made to the form of underwriting agreement as Exhibit h hereto.
Item
27. Other Expenses and
Distribution
The
following table sets forth the estimated expenses to be incurred in connection
with the offering described in this Registration Statement:
FINRA
filing fee
|
|
|
|
Securities
and Exchange Commission fees
|
|
$ |
|
* |
New
York Stock Exchange listing fee
|
|
$ |
|
* |
Directors’
fees and expenses
|
|
$ |
|
* |
Accounting
fees and expenses
|
|
$ |
|
* |
Legal
fees and expenses
|
|
$ |
|
* |
Printing
expenses
|
|
$ |
|
* |
Transfer
Agent’s fees
|
|
$ |
|
* |
Miscellaneous
|
|
$ |
|
* |
Total
|
|
$ |
|
* |
____________
* To
be filed by amendment
Item
28. Persons Controlled by or
Under Common Control
None.
Item
29. Number of Holders of
Securities
As
of May 11, 2009, the number of record holders of each class of
securities of the Registrant was:
Title of Class
|
Number of
Record Holders
|
Common
Stock ($0.001 par value)
|
3
|
Item
30. Indemnification
Maryland
law permits a Maryland corporation to include in its charter a provision
limiting the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty which is established by a final judgment as
being material to the cause of action. The 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 the Fund, to the maximum extent permitted by Maryland law and
the 1940 Act, to obligate itself to indemnify any present or former director or
officer or any individual who, while a director or officer of the Fund and at
the request of the Fund, serves or has served another corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise as a director, officer, partner or trustee, from and against
any claim or liability to which that person may become subject or which that
person may incur by reason of his or her status as a present or former director
or officer of the Fund or as a present or former director, officer, partner or
trustee of another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise, and to pay or
reimburse his or her reasonable expenses in advance of final disposition of a
proceeding. The Bylaws obligate the Fund, to the maximum extent permitted by
Maryland law and the 1940 Act, to indemnify any present or former director or
officer or any individual who, while a director of the Fund and at the request
of the Fund, serves or has served another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or other
enterprise as a director, officer, partner or trustee and who is made, or
threatened to be made, a party to the proceeding by reason of his or her service
in that capacity from and against any claim or liability to which that person
may become subject or which that person may incur by reason of his or her status
as a present or former director or officer of the Fund and to pay or reimburse
his or her reasonable expenses in advance of final disposition of a proceeding.
The Charter and Bylaws also permit the Fund to indemnify and advance expenses to
any person who served a predecessor of the Fund in any of the capacities
described above and any employee or agent of the Fund or a predecessor of the
Fund.
Maryland
law requires a corporation (unless its charter provides otherwise, which the
Fund’s Charter does not) to indemnify a director or officer who has been
successful in the defense of any proceeding to which he is made, or threatened
to be made, a party by
reason of
his service in that capacity. Maryland law permits a corporation to indemnify
its present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made, or threatened to be
made, a party by reason of their service in those or other capacities unless it
is established that (a) the act or omission of the director or officer was
material to the matter giving rise to the proceeding and (1) was committed in
bad faith or (2) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, under Maryland law, a Maryland corporation may not indemnify
for an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, Maryland law permits a corporation to advance reasonable
expenses to a director or officer upon the corporation’s receipt of (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (b) a written undertaking by him or on his behalf to repay the amount paid
or reimbursed by the corporation if it is ultimately determined that the
standard of conduct was not met.
Item
31. Business and Other
Connections of Investment Advisor
The
information in the Statement of Additional Information under the caption
"Management of the Fund — Directors and Officers" and the information in the
prospectus under the caption "Management of the Fund — Investment Advisor" is
hereby incorporated by reference.
Item
32. Location of Accounts and
Records
The
Registrant’s accounts, books, and other documents are maintained at the offices
of the Registrant, at the offices of the Registrant’s investment adviser,
Tortoise Capital Advisors, L.L.C., 11550 Ash Street, Suite 300, Leawood, Kansas
66211, at the offices of the custodian,
,
,
at the offices of the transfer agent, Computershare Trust Company, N.A., 250
Royall Street MS 3B, Canton, MA 02021 or at the offices of the administrator,
,
.
Item
33. Management
Services
Not
applicable.
Item
34. Undertakings
1. The
Registrant undertakes to suspend the offering of the common shares until the
Prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of the registration statement or
(2) the net asset value increases to an amount greater than its net proceeds as
state in the Prospectus.
2. Not
applicable.
3. Not applicable.
4. Not applicable.
5.
The Registrant is filing this Registration Statement pursuant to Rule 430A under
the 1933 Act and undertakes that: (a) for the purposes of determining any
liability under the 1933 Act, the information omitted from the form of
Prospectus filed as part of a registration statement in reliance upon Rule 430A
and contained in the form of Prospectus filed by the Registrant under Rule
497(h) under the 1933 Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective; (b) for the purpose of
determining any liability under the 1933 Act, each post-effective amendment that
contains a form of Prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering
thereof.
6. The
Registrant undertakes to send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of an oral
or written request, its Statement of Additional Information.
7. The Registrant undertakes to:
(a) file
a registration statement containing a prospectus pursuant to the Securities Act
prior to any offering by the Registrant of transferable rights to subscribe for
shares of common stock below net asset value;
(b) file
a registration statement containing a prospectus pursuant to the Securities Act
prior to any offering of common stock below net asset value if the net dilutive
effect of such offering (as calculated in the manner set forth in the dilution
table contained in the prospectus), together with the net dilutive effect of any
prior offerings (as calculated in the manner set forth in the dilution table
contained in the prospectus), exceeds fifteen percent (15%);
(c)
suspend any offers or sales pursuant to an effective registration statement
until a post-effective amendment thereto has been declared effective under the
1933 Act, in the event the shares of Registrant are trading below net asset
value and either (i) Registrant receives, or has been advised by its
independent registered accounting firm that it will receive, an audit report
reflecting substantial doubt regarding the Registrant’s ability to continue as a
going concern or (ii) Registrant has concluded that a material adverse
change has occurred in its financial position or results of operations that has
caused the financial statements and other disclosures on the basis of which the
offering would be made to be materially misleading.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in this City of Leawood and State of
Kansas on the 22th day
of June, 2009.
|
Tortoise
Power and Energy Infrastructure Fund, Inc. |
|
|
|
|
|
|
By:
|
/s/ David
J. Schulte |
|
|
|
David
J. Schulte, |
|
|
|
President
& CEO |
|
|
|
|
|
Pursuant
to the requirements of the Securities Act of 1933 and the Investment Company Act
of 1940, this registration statement has been signed by the following persons in
the capacities and on the date indicated.
Name
|
Title
|
Date
|
|
|
|
/s/
Terry C. Matlack
|
Chief
Financial Officer and Director
|
|
Terry
C. Matlack
|
(Principal
Financial and Accounting Officer)
|
June
22, 2009
|
|
|
|
/s/
David J. Schulte
|
Chief
Executive Officer
|
|
David
J. Schulte
|
(Principal
Executive Officer)
|
|
|
|
|
/s/
Conrad S. Ciccotello*
|
Director
|
|
Conrad
S. Ciccotello
|
|
|
|
|
|
/s/
John R. Graham*
|
Director
|
|
John
R. Graham
|
|
|
|
|
|
/s/
Charles E. Heath*
|
Director
|
|
Charles
E. Heath
|
|
|
|
|
|
/s/
H. Kevin Birzer*
|
Director
|
|
H.
Kevin Birzer
|
|
|
*By David
J. Schulte pursuant to power of attorney filed on August 3, 2007 with the
Registrant’s Registration Statement on Form N-2 (File Nos. 811-22106 and
333-145105).
Exhibit
Index
Exhibit
No.
|
Description of Document
|
a.1.
|
Articles
of Incorporation(1)
|
b.
|
Bylaws(3)
|
c.
|
Inapplicable
|
d.
|
Form
of Stock Certificate(3)
|
e.
|
Dividend
Reinvestment Plan(3)
|
f.
|
Inapplicable
|
g.1.
|
Investment
Advisory Agreement with Tortoise Capital Advisors, L.L.C. dated May 22,
2009(3)
|
g.2. |
Fee
Waiver Agreement with Tortoise Capital Advisors, L.L.C. dated May 22,
2009(3)
|
h.1.
|
Form
of Underwriting Agreement (2)
|
h.2.
|
Form
of Structuring Fee Agreement (2)
|
i.
|
Inapplicable
|
j.
|
Custody
Agreement with
dated
,
2009(2)
|
k.1.
|
Stock
Transfer Agency Agreement with Computershare Trust Company, N.A dated
August 21, 2007(3)
|
k.2.
|
Administration
Agreement with
dated
,
2009(2)
|
l.
|
Opinion
of
(2)
|
m.
|
Inapplicable
|
n.
|
Consent
of Independent Registered Public Accounting Firm(3)
|
o.
|
Inapplicable
|
p.
|
Inapplicable
|
q.
|
Inapplicable
|
r.1.
|
Code
of Ethics of the Fund(3)
|
r.2.
|
Code
of Ethics of the Tortoise Capital Advisors,
L.L.C.(3)
|
____________
(1)
|
Incorporated
by reference to the Registrant’s Registration Statement on Form N-2, filed
August 3, 2007 (File Nos. 333-145105 and 811-22106).
|
(2)
|
To
be filed by amendment.
|
(3) |
Filed
herewith. |