AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2005
1933 ACT FILE NO. 333-______
1940 ACT FILE NO. 811-21462
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO. __
[ ] POST-EFFECTIVE AMENDMENT NO. __
AND
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 16
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
10801 MASTIN BOULEVARD, SUITE 222
OVERLAND PARK, KANSAS 66210
(913) 981-1020
AGENT FOR SERVICE
David J. Schulte
10801 Mastin Boulevard, Suite 222
Overland Park, Kansas 66210
COPIES OF COMMUNICATIONS TO:
Deborah Bielicke Eades, Esq. John R. Short, Esq. Anna T. Pinedo, Esq.
Vedder, Price, Kaufman & Kammholz, P.C. Blackwell Sanders Peper Martin LLP Morrison & Foerster LLP
222 N. LaSalle Street 720 Olive Street 1290 Avenue of the Americas
Chicago, IL 60601 St. Louis, MO 63101 New York, NY 10104
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 are offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. [ ] It is proposed that this filing will become
effective (check appropriate box)
[ ] when declared effective pursuant to section 8(c)
_______________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===============================================================================================================
PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED OFFERING PRICE PER UNIT PRICE(1) REGISTRATION FEE(2)
---------------------------------------------------------------------------------------------------------------
Tortoise Notes............ n/a n/a $1,000,000 $117.70
===============================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted to the Securities and Exchange Commission via Fed wire.
THE REGISTRANT INTENDS TO AMEND THIS REGISTRATION STATEMENT ON SUCH
LATER DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 27, 2005
[Tortoise Logo]
$
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
AUCTION RATE SENIOR NOTES ("TORTOISE NOTES")
$ SERIES C, DUE , 2045
$25,000 DENOMINATIONS
_______________
Tortoise Energy Infrastructure Corporation (the "Company") is a
nondiversified, closed-end management investment company that commenced
operations in February 2004. The Company's investment objective is to seek a
high level of total return with an emphasis on current distributions to
stockholders.
The Company is offering an aggregate principal amount of $___________
Series C Tortoise Notes in this Prospectus. The notes offered in this
Prospectus, together with Series A and Series B notes currently outstanding, are
referred to as "Tortoise Notes." Individual series of Tortoise Notes are
referred to as a "series." Except as otherwise described in this Prospectus, the
terms of this series and all other series are the same.
The Tortoise Notes will be issued without coupons in denominations of
$25,000 and any integral multiple thereof. The principal amount of the Series C
Tortoise Notes will be due and payable on , 2045 (the "Stated Maturity"). There
is no sinking fund with respect to the Tortoise Notes. The Tortoise Notes will
be unsecured obligations of the Company and, upon liquidation, dissolution or
winding up of the Company, will rank: (1) senior to all of the Company's
outstanding common stock and any outstanding preferred stock; (2) on a parity
with any unsecured creditors of the Company and any unsecured senior securities
representing indebtedness of the Company, including other series of Tortoise
Notes; and (3) junior to any secured creditors of the Company. The Company may
redeem the Tortoise Notes prior to their Stated Maturity in certain
circumstances described in this Prospectus.
Holders of Tortoise Notes will be entitled to receive cash interest
payments at an annual rate that may vary for each rate period. The initial rate
period for Series C Tortoise Notes is from the issue date through .........,
2005. The interest rate for the initial rate period from and including the issue
date through , 2005, will be ___% per year for the Series C Tortoise Notes. For
each subsequent rate period, the interest rate will be determined by an auction
conducted in accordance with the procedures described in this Prospectus.
Generally, following the initial rate period, each rate period will be
twenty-eight (28) days for the Series C Tortoise Notes.
(continued on next page)
_______________
INVESTING IN TORTOISE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE __ OF THIS PROSPECTUS.
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.
_______________
PER $25,000 PRINCIPAL
AMOUNT OF TORTOISE
NOTES TOTAL
---------------------- ----------
Public offering price....................... $25,000 $
Underwriting discounts and commissions...... $ $
Proceeds to the Company (before
expenses)(1)............................. $ $
------------------
(1) Does not include offering expenses payable by the Company, estimated to
be $ .
The underwriters expect to deliver the Series C Tortoise Notes in
book-entry form, through the facilities of The Depository Trust Company, to
broker-dealers on or about , 2005.
_______________
LEHMAN BROTHERS STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 2005
On July 15, 2004, the Company issued Series A and Series B of Tortoise
Notes due July 15, 2044, in an aggregate principal amount of $110,000,000. On
September 16, 2004 the Company issued 1,400 auction rate preferred shares
(denominated as Money Market Cumulative Preferred Shares or "MMP Shares"),
liquidation preference $25,000 per share ($35,000,000 aggregate liquidation
preference). The outstanding Tortoise Notes are rated "Aaa" and "AAA" by Moody's
Investors Service Inc. ("Moody's") and Fitch Ratings ("Fitch"), respectively.
The MMP Shares are rated "AA2" and "AA" by Moody's and Fitch respectively. The
Company may issue additional series of Tortoise Notes or MMP Shares in the
future. The MMP Shares and the Tortoise Notes are intended to increase funds
available for investment. This practice, which is known as leverage, is
speculative and involves significant risks.
The offering is conditioned upon the Series C Tortoise Notes receiving
a rating of "Aaa" from Moody's and "AAA" from Fitch.
Ratings.
Tortoise Notes will not be listed on any exchange or automated
quotation system. Generally, investors may only buy and sell Tortoise Notes
through an order placed at an auction with or through a broker-dealer that has
entered into an agreement with the auction agent or in a secondary market that
those broker-dealers may maintain. These broker-dealers are not required to
maintain a market in the Tortoise Notes, and a secondary market, if one
develops, may not provide investors with liquidity.
The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to stockholders. Under
normal circumstances, the Company invests at least 90% of total assets
(including assets obtained through leverage) in securities of energy
infrastructure companies, and invests at least 70% of total assets in equity
securities of master limited partnerships. Energy infrastructure companies
engage in the business of transporting, processing, storing, distributing or
marketing natural gas, natural gas liquids (primarily propane), coal, crude oil
or refined petroleum products, or exploring, developing, managing or producing
such commodities. There can be no assurance that the Company will achieve its
investment objective. Tortoise Capital Advisors, LLC serves as the Company's
investment adviser.
You should read this Prospectus, which contains important information
about the Company, before deciding whether to invest in the Tortoise Notes and
retain it for future reference. A Statement of Additional Information, dated ,
2005, and as it may be supplemented, containing additional information about the
Company, has been filed with the Securities and Exchange Commission (the
"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 (888) 728-8784 or by writing to the Company, or you may obtain a copy
(and other information regarding the Company) from the Commission's web site
(http://www.sec.gov). You also may e-mail requests for these documents to the
Commission at publicinfo@sec.gov or make a request in writing to the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
The Tortoise Notes do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution,
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
Copyright (C) 2004
_______________
TABLE OF CONTENTS
PAGE
Prospectus Summary............................................................1
Financial Highlights..........................................................16
Use of Proceeds...............................................................16
Capitalization................................................................17
The Company...................................................................18
Investment Objective and Principal Investment Strategies......................19
Risk Factors..................................................................27
Management of the Company.....................................................36
Rating Agency Guidelines......................................................39
Description of Tortoise Notes.................................................41
The Auction...................................................................51
Description of Capital Stock..................................................55
Certain Provisions in the Company's Charter and Bylaws........................56
Federal Income Tax Matters....................................................58
Administrator, Custodian, Transfer Agent, Paying Agent, Trustee
and Auction Agent........................................................61
Underwriting..................................................................61
Legal Opinions................................................................63
Intellectual Property Rights..................................................63
Available Information.........................................................63
Table of Contents for the Statement of Additional Information.................65
You should rely on the information contained in or incorporated by
reference in this Prospectus in making an investment decision. Neither the
Company nor the underwriters have authorized anyone to provide you with
different or inconsistent information. If anyone provides you with different or
inconsistent information, you should not rely on it. The Company is not, and the
underwriters are not, making an offer to sell these notes in any jurisdiction
where the offer or sale is not permitted. You should assume that the information
in this Prospectus is accurate only as of the date of this Prospectus, and that
the Company's business, financial condition and prospects may have changed since
this date. The Company will amend or supplement this Prospectus to reflect
material changes to the information contained in this Prospectus to the extent
required by applicable law.
i
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this Prospectus and in the Statement of Additional
Information, including the "Summary of Certain Provisions of the Indenture"
included in Appendix A to the Statement of Additional Information. Capitalized
terms used but not defined in this Prospectus shall have the meanings given to
such terms in Appendix A to the Statement of Additional Information.
The Company.................. Tortoise Energy Infrastructure Corporation
(the "Company") is a nondiversified,
closed-end management investment company
that commenced operations in February 2004.
The Company's common stock, $0.001 par value
per share, is traded on the New York Stock
Exchange (the "NYSE") under the symbol
"TYG." See "Description of Capital Stock."
As of January 31, 2005, the Company had
shares of common stock outstanding and net
assets applicable to shares of common stock
of $___ million.
The Adviser.................. Tortoise Capital Advisors, LLC (the
"Adviser") was formed in October 2002 to
provide portfolio management services to
institutional and high-net-worth investors
seeking professional management of their
master limited partnership ("MLP")
investments. The Adviser is controlled
equally by Fountain Capital Management,
L.L.C. ("Fountain Capital") and Kansas City
Equity Partners LC ("KCEP"). As of January
31, 2005, the Adviser had approximately $___
million of client assets under management.
The Adviser's investment committee is
comprised of five portfolio managers led by
David J. Schulte, CFA.
The principal business address of the
Adviser is 10801 Mastin Boulevard, Suite
222, Overland Park, Kansas 66210.
The Offering................. The Company is offering Series C of Tortoise
Notes in an aggregate principal amount of
$__________. Series C Tortoise Notes are
available in denominations of $25,000 and
any integral multiple thereof. The Series C
Tortoise Notes are being offered by Lehman
Brothers Inc. ("Lehman Brothers") and
Stifel, Nicolaus & Company, Incorporated
("Stifel Nicolaus") as underwriters. See
"Underwriting."
It is a condition of the underwriters'
obligation to purchase the Series C Tortoise
Notes that the notes receive a rating of
"Aaa" from Moody's and "AAA" from Fitch.
The issuance of the Series C Tortoise Notes
represents the leveraging of the Company's
common stock. See
"Risk Factors - General Risks of Investing
in the Company - Leverage Risk."
The Series C Tortoise Notes will be
unsecured obligations of the Company and,
upon liquidation, dissolution or winding up
of the Company, will rank: (1) senior to all
of the Company's outstanding common stock
and any outstanding preferred stock,
including MMP Shares; (2) on a parity with
any unsecured creditors of the Company and
any unsecured senior securities representing
indebtedness of the Company, including any
other series of Tortoise Notes; and (3)
junior to any secured creditors of the
Company.
Unsecured creditors of the Company may
include service providers to the Company,
including the Adviser, Custodian, Auction
Agent, Broker-Dealers and the Trustee, as
such parties are defined herein, pursuant to
the terms of various contracts with the
Company. Secured creditors of the Company
may include, without limitation, parties
entering into any interest rate swaps, floor
or cap transactions, forward rate
transactions, or other similar transactions
with the Company that create liens, pledges,
charges, security interests, security
agreements or other encumbrances on the
assets of the Company.
The interest rate for Series C Tortoise
Notes for the initial Rate Period from and
including the Original Issue Date through ,
2005, will be ___% per year. The first
Auction Date for the Series C Tortoise Notes
will be , 2005, and the initial Interest
Payment Date will be , 2005. Subsequent
Auctions generally will be held on every
fourth ____ (unless the then current Rate
Period is a Special Rate Period, the day
that normally would be the Auction Date is
not a Business Day or unforeseen events
preclude the holding of an Auction.)
Each Subsequent Rate Period normally will
begin on the Business Day following an
Auction Date.
Auction Procedures........... You may buy, sell or hold Tortoise Notes
through an Auction. Beneficial Owners and
Potential Beneficial Owners of Tortoise
Notes may participate in Auctions only by
submitting Orders through their
Broker-Dealers. In general, the types of
Orders that may be placed with a
Broker-Dealer include: Hold Orders, Sell
Orders, Bids to sell and Bids to purchase.
The following is a brief summary of the
Auction Procedures for both Beneficial
Owners and Potential Beneficial Owners. See
"The
2
Auction--Auction Procedures" for more
detailed information.
Beneficial Owners. Prior to the Submission
Deadline on each Auction Date for a series
of Tortoise Notes, each Beneficial Owner may
submit Orders with respect to Tortoise Notes
of such series to its Broker-Dealer as
follows:
o Hold Order - indicating its desire to hold
Tortoise Notes of such series without regard
to the Applicable Rate for Tortoise Notes of
such series for the next Rate Period.
o Bid - indicating its desire to sell the
principal amount of Outstanding Tortoise
Notes, if any, of such series held by such
Beneficial Owner if the Applicable Rate for
Tortoise Notes of such series for the next
succeeding Rate Period of Tortoise Notes of
such series shall be less than the rate per
annum specified by such Beneficial Owner
(also known as a hold at rate order).
o Sell Order - indicating its desire to sell
the principal amount of Outstanding Tortoise
Notes, if any, of such series held by such
Beneficial Owner without regard to the
Applicable Rate for Tortoise Notes of such
series for the next succeeding Rate Period
of Tortoise Notes of such series.
Orders submitted (or the failure to do so)
by Beneficial Owners under certain
circumstances will have the effects
described below:
o A Beneficial Owner of Tortoise Notes of
such series that submits a Bid with respect
to Tortoise Notes of such series to its
Broker-Dealer having a rate higher than the
Maximum Rate for Tortoise Notes of such
series on the Auction Date will be treated
as having submitted a Sell Order with
respect to such Tortoise Notes.
o A Beneficial Owner of Tortoise Notes of
such series that fails to submit an Order
with respect to such Tortoise Notes to its
Broker-Dealer will be deemed to have
submitted a Hold Order with respect to such
Tortoise Notes of such series; provided,
however, that if a Beneficial Owner of such
series fails to submit an Order with respect
to Tortoise Notes of such series to its
Broker-Dealer for an Auction relating to a
Special Rate Period of more than
twenty-eight (28) days, such Beneficial
Owner will be deemed to have submitted a
Sell Order with respect to such Tortoise
Notes.
3
Potential Beneficial Owners. A customer of a
Broker-Dealer that is not a Beneficial Owner
of a series of Tortoise Notes but that
wishes to purchase Tortoise Notes of such
series, or that is a Beneficial Owner of
Tortoise Notes of such series that wishes to
purchase additional Tortoise Notes of such
series (in each case, a "Potential
Beneficial Owner"), may submit Bids to its
Broker-Dealer in which it offers to purchase
such principal amount of Outstanding
Tortoise Notes of such series specified in
such bid if the Applicable Rate for Tortoise
Notes of such series determined on such
Auction Date shall be higher than the rate
specified in such Bid. A Bid placed by a
Potential Beneficial Owner of Tortoise Notes
of such series specifying a rate higher than
the Maximum Rate for Tortoise Notes of such
series on the Auction Date will not be
accepted.
The Auction Process. If Sufficient Clearing
Bids for a series of Tortoise Notes exist
(that is, the aggregate principal amount of
Outstanding Tortoise Notes of such series
subject to Submitted Bids of Potential
Beneficial Owners specifying one or more
rates between the Minimum Rate (for Standard
Rate Periods or less, only) and the Maximum
Rate (for all Rate Periods) for Tortoise
Notes of such series exceeds, or is equal
to, the sum of the aggregate principal
amount of Outstanding Tortoise Notes of such
series subject to Submitted Sell Orders),
the Applicable Rate for Tortoise Notes of
such series for the next succeeding Rate
Period will be the lowest rate specified in
the Submitted Bids which, taking into
account such rate and all lower rates bid by
Broker-Dealers as or on behalf of Beneficial
Owners and Potential Beneficial Owners,
would result in Beneficial Owners and
Potential Beneficial Owners owning the
aggregate principal amount of Tortoise Notes
of such series available for purchase in the
Auction. If Sufficient Clearing Bids for a
series of Tortoise Notes do not exist (other
than because all of the Outstanding Tortoise
Notes of such series are subject to
Submitted Hold Orders), then the Applicable
Rate for all Tortoise Notes of such series
for the next succeeding Rate Period will be
the Maximum Rate for Tortoise Notes of such
series.
The Auction Procedures include a pro rata
allocation of Tortoise Notes for purchase
and sale, which may result in a Beneficial
Owner continuing to hold or selling, or a
Potential Beneficial Owner purchasing, a
number of Tortoise Notes of a series of
Tortoise Notes that is less than the number
of Tortoise Notes of such series specified
in its Order. To the extent the allocation
4
procedures have that result, Broker-Dealers
will be required to make appropriate pro
rata allocations among their respective
customers.
Settlement of purchases and sales will be
made on the next Business Day (also an
Interest Payment Date) after the Auction
Date through the Securities Depository in
accordance with the Securities Depository's
normal procedures.
Interest and Rate Periods.... The initial Rate Period shall be ___ days
for the Series C Tortoise Notes. Subsequent
to the initial Rate Period, the Series C
Tortoise Notes will bear interest at an
annual rate that the Auction Agent advises
results from an Auction. Subsequent to the
initial Rate Period, each Rate Period
generally will be twenty-eight (28) days in
length (a "Standard Rate Period"). The
Applicable Rate for a particular Rate Period
usually will be determined by an Auction
conducted on the Business Day immediately
preceding the start of the Rate Period. In
most instances, interest also is payable
every twenty-eight (28) days, on the day
following the end of the Rate Period. A
Special Rate Period (any period other than a
Rate Period of 28 days) will not be
effective unless Sufficient Clearing Bids
exist at the Auction in respect of a Special
Rate Period. See "Description of Tortoise
Notes--Interest and Rate
Periods--Determination of Interest Rate" and
"The Auction."
Determination of
Applicable Rate.............. Except during a Default Period, the
Applicable Rate for any Rate Period for a
series of Tortoise Notes will not be more
than the Maximum Rate. The Maximum Rate will
depend on the credit rating assigned to that
series of Tortoise Notes and on the duration
of the Rate Period. The Maximum Rate will be
the Applicable Percentage of the Reference
Rate, subject to upward but not downward
adjustment in the discretion of the Board of
Directors after consultation with the
Broker-Dealers. The Applicable Percentage
will be determined based on the lower of the
credit ratings assigned on that date to each
series of Tortoise Notes by Moody's and
Fitch as follows:
MOODY'S FITCH APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or above AA- or above 200%
A3 to A1 A- to A+ 250%
Baa3 to Baa1 BBB- to BBB+ 275%
Below Baa3 Below BBB- 300%
5
For Standard Rate Periods or less only, the
Applicable Rate resulting from an Auction
will not be less than the Minimum Rate. The
Applicable Rate for any Rate Period
commencing during any Default Period, and
the Default Rate described under
"Description of Tortoise Notes-- Interest
and Rate Periods," initially will be 300% of
the Reference Rate. The Reference Rate is
the greater of:
(1) the applicable AA Composite Commercial
Paper Rate (for a Rate Period of fewer than
184 days) or the applicable Treasury Index
Rate (for a Rate Period of 184 days or
more), or
(2) the applicable London-Interbank Offered
Rate ("LIBOR").
Payment Restrictions on
Shares of the Company........ Tortoise Notes constitute senior securities
representing indebtedness under the
Investment Company Act of 1940, as amended
(the "1940 Act"). While any Tortoise Notes
are outstanding, the Company will not be
permitted to declare any dividend (except a
dividend payable in stock of the Company),
or declare any other distribution, upon any
outstanding common stock or declare any
distribution upon any preferred stock of the
Company, or purchase any such stock, unless,
in every such case, the Tortoise Notes have,
at the time of the declaration of any such
dividend or distribution or at the time of
any such purchase, an asset coverage of at
least 300% after deducting the amount of
such dividend, distribution or purchase
price, as the case may be. Dividends may,
however, be declared upon any preferred
stock provided the Tortoise Notes have an
asset coverage of at least 200% at the time
of declaration after deducting the amount of
such dividend. Dividends or other
distributions on, or redemptions or
purchases of, common stock and preferred
stock also would be prohibited at any time
that an event of default under the Tortoise
Notes (which includes a default in the
payment of interest on the Tortoise Notes,
when due) has occurred and is continuing.
See "Description of Tortoise Notes--Payment
Restrictions on Shares."
Asset Maintenance............ The Company must maintain Eligible Assets
having an aggregated Discounted Value at
least equal to the Tortoise Notes Basic
Maintenance Amount as of each Valuation
Date. The Company also must maintain asset
coverage for the Tortoise Notes on a
non-discounted basis of at least 300% as of
the last business day of each month. See
"Rating Agency Guidelines." The Discount
6
Factors and guidelines for calculating the
Discounted Value of the Company's portfolio
for purposes of determining whether the
Tortoise Notes Basic Maintenance Amount has
been satisfied have been established by
Moody's and Fitch in connection with the
Company's receipt from Moody's and Fitch of
the "Aaa" and "AAA" Credit Ratings,
respectively, with respect to the Tortoise
Notes on their Original Issue Date.
Redemption................... Although the Company ordinarily will not
redeem Tortoise Notes prior to their Stated
Maturity, it may be required to redeem
Tortoise Notes if, for example, the Company
does not meet an asset coverage ratio
required by law or in order to correct a
failure to meet Rating Agency Guidelines in
a timely manner. The Company may voluntarily
redeem Tortoise Notes in certain
circumstances. See "Description of Tortoise
Notes--Redemption."
Events of Default;
Remedies..................... With respect to each series of Tortoise
Notes any one of the following events
constitutes an "event of default" for that
series of Tortoise Notes under the
Indenture (as defined herein):
o default in the payment of any interest
upon a series of Tortoise Notes when it
becomes due and payable and the continuance
of such default for thirty (30) days;
o default in the payment of the principal
of, or any premium on, a series of Tortoise
Notes at its Stated Maturity;
o default in the performance, or breach, of
any covenant or warranty of the Company in
the Indenture, and continuance of such
default or breach for a period of ninety
(90) days after written notice has been
given to the Company by the Trustee;
o certain voluntary or involuntary
proceedings involving the Company and
relating to bankruptcy, insolvency or other
similar laws;
o if, on the last business day of each of
twenty-four (24) consecutive calendar
months, the 1940 Act Tortoise Notes Asset
Coverage is less than 100%; or
o any other "event of default" provided with
respect to a series, including a default in
the payment of any Redemption Price payable
on the Redemption Date.
7
Upon the occurrence and continuance of an
event of default with respect to a series,
the holders of a majority in principal
amount of that series of outstanding
Tortoise Notes or the Trustee may declare
the principal amount of Tortoise Notes of
that series immediately due and payable. A
default that relates only to one series of
Tortoise Notes will not affect any other
series. Upon an event of default relating to
bankruptcy, insolvency, or other similar
laws, acceleration of maturity occurs
automatically with respect to all series of
Tortoise Notes.
At any time after a declaration of
acceleration with respect to a series of
Tortoise Notes has been made and before a
judgment or decree for payment of the money
due has been obtained by the Trustee, the
holders of a majority in principal amount of
the outstanding Tortoise Notes of that
series, by written notice to the Company and
the Trustee, may rescind and annul such
declaration and its consequences if certain
conditions are met. See "Description of
Tortoise Notes--Events of Default and
Acceleration of Maturity; Remedies."
Investment Objective and
Principal Investment
Strategies................... The Company's investment objective is to
seek a high level of total return with an
emphasis on current distributions to
stockholders. There is no assurance that the
Company will attain its investment
objective. See "Investment Objective and
Principal Investment Strategies" and "Risk
Factors."
Under normal circumstances, the Company
invests at least 90% of its total assets
(including assets obtained through leverage)
in securities of energy infrastructure
companies, and invests at least 70% of its
total assets in equity securities of MLPs.
Energy infrastructure companies engage in
the business of transporting, processing,
storing, distributing or marketing natural
gas, natural gas liquids (primarily
propane), coal, crude oil or refined
petroleum products, or exploring,
developing, managing or producing such
commodities. The Company invests solely in
energy infrastructure companies organized in
the United States. All publicly traded
companies in which the Company invests have
an equity market capitalization greater than
$100 million.
MLP Securities. The Company invests
primarily in equity securities of MLPs,
which currently consist of the following
instruments: common units, convertible
subordinated units and I-Shares. As of the
date of this Prospectus, almost all MLP
common units and I-Shares in which the
Company invests are listed and traded on
8
the NYSE, American Stock Exchange ("AMEX")
or NASDAQ National Market. The Company also
may purchase MLP common units through direct
placements. MLP convertible subordinated
units are not listed or publicly traded and
typically are purchased in directly
negotiated transactions with MLP affiliates
or institutional holders of such shares.
MLP common unit holders have typical limited
partner rights, including limited management
and voting rights. MLP common units have
priority over convertible subordinated units
upon liquidation. Common unit holders are
entitled to minimum quarterly distributions
("MQD"), including arrearage rights, prior
to any distribution payments to convertible
subordinated unit holders or incentive
distribution payments to the general
partner. MLP convertible subordinated units
are convertible to common units on a
one-to-one basis after the passage of time
and/or achievement of specified financial
goals. MLP convertible subordinated units
are entitled to MQD after the payments to
holders of common units and before incentive
distributions to the general partner. MLP
convertible subordinated units do not have
arrearage rights. I-Shares have similar
features to common units except that
distributions are payable in additional
I-Shares rather than cash. The Company
invests in I-Shares only if it believes it
will have adequate cash to satisfy its
distribution targets.
Other Securities. Although the Company also
may invest in equity and debt securities of
energy infrastructure companies that are
organized and/or taxed as corporations, it
is likely that any such investments will be
in debt securities because the dividends
from equity securities of such corporations
typically do not meet the Company's
investment objective. The Company also may
invest in securities of general partners or
other affiliates of MLPs and private
companies operating energy infrastructure
assets.
Nonfundamental Policies. The Company has
adopted the following additional
nonfundamental investment policies:
o The Company may invest up to 30% of
its total assets in restricted
securities, primarily through
direct placements. Subject to this
policy, the Company may invest
without limitation in illiquid
securities. The types of direct
placements that the Company may
purchase consist of MLP convertible
subordinated units, MLP common
units and securities of private
energy infrastructure
9
companies (i.e., non-MLPs).
Investments in private companies
that do not have any publicly
traded shares or units outstanding
are limited to 5% of total assets.
o The Company may invest up to 25% of
its total assets in debt securities
of energy infrastructure companies,
including securities rated below
investment grade (commonly referred
to as "junk bonds"). Below
investment grade debt securities
will be rated at least B3 by
Moody's and at least B- by Standard
& Poor's Ratings Group ("S&P") at
the time of purchase, or comparably
rated by another statistical rating
organization or if unrated,
determined to be of comparable
quality by the Adviser.
o The Company will not invest more
than 10% of its total assets in any
single issuer.
o The Company will not engage in
short sales.
The Company may change its nonfundamental
investment policies without stockholder
approval and will provide notice to
stockholders of material changes (including
notice through stockholder reports);
provided, however, that a change in the
policy of investing at least 90% of its
total assets in energy infrastructure
companies requires 60 days' prior written
notice to stockholders. Unless otherwise
stated, all investment restrictions apply
only at the time of purchase and the Company
will not be required to reduce a position
due solely to market value fluctuations. The
term total assets includes assets obtained
through leverage for the purpose of each
investment restriction. The Company may
deviate temporarily from its investment
policies pending investment of the
additional offering of common stock
completed in December 2004 and January 2005
and leverage proceeds. Pending receipt of
the leverage proceeds, the Board of
Directors has approved an interim policy
permitting investments in a single issuer in
excess of 10% of total assets under limited
circumstances (but not exceeding 12%). The
interim policy will terminate upon the
receipt of the proceeds of the Series C
Tortoise Notes.
Under adverse market or economic conditions
or pending investment of offering or
leverage proceeds, the Company may invest up
to 100% of its total assets in securities
issued or guaranteed by the U.S. Government
or its instrumentalities or agencies,
short-term debt securities, certificates of
deposit, bankers' acceptances and other bank
obligations, commercial paper rated in
10
the highest category by a rating agency or
other fixed income securities deemed by the
Adviser to be consistent with a defensive
posture, or may hold cash. The Adviser also
may invest in such instruments to meet
working capital needs including, but not
limited to, for collateral in connection
with certain investment techniques, to hold
a reserve pending payment of distributions,
and to facilitate the payment of expenses
and settlement of trades. The yield on such
securities may be lower than the returns on
MLPs or yields on lower rated fixed income
securities. To the extent the Company uses
this strategy, it may not achieve its
investment objective.
Hedging Transactions......... The Company currently uses, and may in the
future use, interest rate transactions for
hedging purposes only, in an attempt to
reduce the interest rate risk arising from
the Company's leveraged capital structure.
The Company has entered into interest rate
swap transactions intended to hedge the
Company's interest payment obligations under
currently outstanding Tortoise Notes against
material increases in interest rates through
mid-July 2007. The Company's dividend
payment obligations under the MMP Shares
remain unhedged as of the date of this
Prospectus. The Company does not intend to
hedge interest rate risk of portfolio
holdings. Interest rate transactions that
the Company may use for hedging purposes
will expose the Company to certain risks
that differ from the risks associated with
its portfolio holdings. See "Investment
Objective and Principal Investment
Strategies--Hedging Transactions" and "Risk
Factors--General Risks of Investing in the
Company--Hedging Risk."
Use of Leverage.............. The Company intends to issue Series C
Tortoise Notes in an amount representing
approximately ___% of total assets, which
together with already outstanding Tortoise
Notes and MMP Shares, will represent
approximately ___% of its total assets. The
Company intends to use leverage proceeds
primarily for investment purposes. The
Company also may leverage through other
borrowings, including the issuance of
additional series of Tortoise Notes, the
issuance of additional series of MMP Shares
or commercial paper. The timing and terms of
any leverage transactions will be determined
by the Company's Board of Directors.
Throughout this Prospectus, Tortoise Notes,
commercial paper or other borrowings are
collectively referred to as "Borrowings."
Risks........................ The following discussion summarizes the
principal risks that you should consider
before investing in Tortoise
11
Notes and the Company. For additional
information about the risks associated with
Tortoise Notes and the Company, see "Risk
Factors."
Risks of Tortoise Notes. The primary risks
of investing in Tortoise Notes are as
follows:
Interest Rate Risk. Tortoise Notes pay
interest based on short-term interest rates.
If short-term interest rates rise, interest
rates on the Tortoise Notes may rise so that
the amount of interest payable to holders of
Tortoise Notes would exceed the amount of
income from the Company's portfolio
securities. This might require that the
Company sell portfolio securities at a time
when it would otherwise not do so, which may
affect adversely the Company's future
earnings ability. In addition, rising market
interest rates could impact negatively the
value of the Company's investment portfolio,
reducing the amount of assets serving as
asset coverage for the Tortoise Notes.
Auction Risk. You may not be able to sell
your Tortoise Notes at an Auction if the
Auction fails; that is, if there are more
Tortoise Notes offered for sale than there
are buyers for those Tortoise Notes. Also,
if you place hold orders (orders to retain
Tortoise Notes) at an Auction only at a
specified rate, and the bid rate exceeds the
rate set at the Auction, you will not retain
your Tortoise Notes. Finally, if you buy
Tortoise Notes or elect to retain Tortoise
Notes without specifying a rate below which
you would not wish to buy or continue to
hold those Tortoise Notes, and the Auction
sets a below-market rate, you may receive a
lower rate of return on your Tortoise Notes
than the market rate of interest. See
"Description of Tortoise Notes" and "The
Auction--Auction Procedures."
Secondary Market Risk. If you try to sell
your Tortoise Notes between Auctions, you
may not be able to sell any or all of your
Tortoise Notes, or you may not be able to
sell them in the $25,000 increments in which
they were purchased plus accrued and unpaid
interest. If the Company has designated a
Special Rate Period (a rate period other
than twenty-eight (28) days), changes in
interest rates could affect the price you
would receive if you sold your Tortoise
Notes in the secondary market. Lehman
Brothers, Stifel Nicolaus and broker-dealers
that maintain a secondary trading market for
Tortoise Notes are not required to maintain
this market and the Company has no control
over the establishment or maintenance of
this market. The Company is not
12
required to redeem Tortoise Notes if an
Auction or an attempted secondary market
sale fails. Tortoise Notes are not listed on
an exchange or automated quotation system.
If you sell your Tortoise Notes to a
broker-dealer between Auctions, you may
receive less than the price you paid for
them, especially when market interest rates
have risen since the last Auction.
Ratings and Asset Coverage Risk. While
Moody's and Fitch have assigned ratings of
"Aaa" and "AAA," respectively, to Tortoise
Notes, the ratings do not eliminate or
necessarily mitigate the risks of investing
in Tortoise Notes. A rating may not fully or
accurately reflect all of the credit and
market risks associated with a security. A
rating agency could downgrade Tortoise
Notes, which may make your securities less
liquid at an Auction or in the secondary
market, though probably with higher
resulting interest rates. If a rating agency
downgrades the ratings assigned to Tortoise
Notes, the Company may alter its portfolio
or redeem Tortoise Notes. The Company may
voluntarily redeem Tortoise Notes under
certain circumstances. See "Description of
Tortoise Notes--Redemption."
Inflation Risk. Inflation is the reduction
in the purchasing power of money resulting
from the increase in the price of goods and
services. Inflation risk is the risk that
the inflation adjusted (or "real") value of
your Tortoise Notes investment or the income
from that investment will be worth less in
the future. As inflation occurs, the real
value of the Tortoise Notes and the interest
on the Tortoise Notes declines. In an
inflationary period, however, it is expected
that, through the Auction process, interest
rates would increase, tending to offset this
risk. See "Risk Factors--Risks of Investing
in Tortoise Notes--Inflation Risk."
Company Risks. The Company's net asset
value, its ability to pay interest and
principal on Tortoise Notes, and its ability
to meet asset coverage requirements depends
on the performance of the Company's
investment portfolio. The performance of the
Company's investment portfolio is subject to
a number of risks, including the following:
Concentration Risk. The Company intends to
concentrate its investments in the energy
infrastructure sector, with an emphasis on
securities issued by MLPs. The primary risks
inherent in the energy infrastructure sector
include the following: (1) the performance
and level of distributions of MLPs can be
affected by direct and indirect commodity
price exposure, (2) a decrease in
13
market demand for natural gas or other
energy commodities could adversely affect
MLP revenues or cash flows, (3) energy
infrastructure assets deplete over time and
must be replaced, and (4) a rising interest
rate environment could increase an MLP's
cost of capital.
Nondiversification Risk. The Company is a
nondiversified investment company under the
1940 Act, and it is not a regulated
investment company under the U.S. Internal
Revenue Code of 1986, as amended (the
"Internal Revenue Code"). Accordingly, there
are no limits under the 1940 Act or Internal
Revenue Code with respect to the number or
size of issuers held by the Company.
Liquidity Risk. Certain MLP securities may
trade less frequently than those of other
companies due to their smaller
capitalizations. Investment in securities
that are less actively traded or over time
experience decreased trading volume may be
difficult to dispose of when the Company
believes it is desirable to do so, may
restrict the ability of the Company to take
advantage of other opportunities, and may be
more difficult to value.
Valuation Risk. The Company may invest up to
30% of total assets in restricted
securities, which are subject to
restrictions on resale. The value of such
investments ordinarily will be determined
based on fair valuations determined by the
Adviser pursuant to procedures adopted by
the Board of Directors. Restrictions on
resale or the absence of a liquid secondary
market may affect adversely the ability of
the Company to determine net asset value.
The sale price of securities that are
restricted or otherwise not readily
marketable may be higher or lower than the
Company's most recent valuations.
Leverage Risk. Subject to limits imposed by
the 1940 Act and the Rating Agency
Guidelines, the Company may increase its
leverage above the amount estimated after
issuance of the Series C Tortoise Notes. The
Company intends to use leverage primarily
for investment purposes. The Company's use
of leverage may result in risks and can
magnify the effect of any losses. There is
no assurance that a leveraging strategy will
be successful.
See "Risk Factors--General Risks of
Investing in the Company" for a more
detailed discussion of these risks and other
risks of investing in the Company.
14
Federal Income Tax Matters... Holders of Tortoise Notes will receive
interest payments from the Company and will
not receive any distributions to which
holders of common stock or preferred stock
of the Company are entitled. Interest
payments generally will be taxed as ordinary
income for federal income tax purposes and
will not be eligible for the reduced rates
of taxation available for "qualified
dividend income." See "Federal Income Tax
Matters."
Tax Status of the Company.... Unlike most investment companies, the
Company has not elected to be treated as a
regulated investment company under the
Internal Revenue Code. Therefore, the
Company is obligated to pay federal and
applicable state corporate taxes on its
taxable income. On the other hand, the
Company is not subject to the
diversification rules applicable to
regulated investment companies. Under
current federal income tax law, the
diversification rules limit the amount that
regulated investment companies may invest
directly in MLPs to 25% of the value of
their total assets. In addition, unlike
regulated investment companies, the Company
is not effectively required by the Internal
Revenue Code to distribute substantially all
of its income and capital gains.
Trading Market............... Tortoise Notes are not listed on an exchange
or automated quotation system. Instead, you
may buy or sell Tortoise Notes at an Auction
that normally is held every twenty-eight
(28) days by submitting orders to a
broker-dealer that has entered into an
agreement with the Auction Agent and the
Company (a "Broker-Dealer"), or to a
broker-dealer that has entered into a
separate agreement with a Broker-Dealer. In
addition to the Auctions, Broker-Dealers and
other broker-dealers may maintain a
secondary trading market in Tortoise Notes
outside of Auctions, but may discontinue
this activity at any time. There is no
assurance that a secondary market will
provide Tortoise Note holders with
liquidity. You may transfer Tortoise Notes
outside of Auctions only to or through a
Broker-Dealer, or a broker-dealer that has
entered into a separate agreement with a
Broker-Dealer or to the Company or any of
its affiliates, in certain cases.
Trustee and Auction Agent.... BNY Midwest Trust Company serves as the
Trustee under the Indenture and The Bank of
New York will serve as the Auction Agent
under the Auction Agency Agreement.
15
FINANCIAL HIGHLIGHTS
Information contained in the table below under the headings "Common
Stock Per Share Data" and "Supplemental Data and Ratios" shows the audited
operating performance of the Company's common stock from the commencement of the
Company's investment operations on February 27, 2004 through November 30, 2004,
and the unaudited operating performance of the Company through January 31, 2005.
Except when noted, the audited information in this table is covered by the
Report of Ernst & Young, LLP, which is contained in the Statement of Additional
Information and is available from the Company. The table covers approximately
eleven (11) months of operations. Accordingly, the information presented may not
provide a meaningful picture of the Company's operating performance.
PERIOD FROM PERIOD FROM
DECEMBER 1, 2004 THROUGH FEBRUARY 27, 2004 THROUGH
JANUARY 31, 2005 NOVEMBER 30, 2004
------------------------ -------------------------
[TO BE ADDED] (unaudited)
The following table sets forth information about the Company's
outstanding senior securities as of January 31, 2005:
ASSET COVERAGE
TOTAL PRINCIPAL PER SHARE AVERAGE FAIR
AMOUNT/LIQUIDATION ASSET COVERAGE ($25,000 VALUE PER $25,000
PREFERENCE PER $1,000 OF LIQUIDATION DENOMINATION OR
TITLE OF SECURITY OUTSTANDING PRINCIPAL AMOUNT PREFERENCE) PER SHARE AMOUNT*
----------------- ------------------ ---------------- --------------- ------------------
Tortoise Notes:
Series A......... $60,000,000 $ $25,000
Series B......... $50,000,000 $ $25,000
Money Market
Cumulative
Preferred Shares
(1,400 MMP
shares).......... $35,000,000 $ $25,000
------------------
* Fair value of the Series A and Series B Tortoise Notes and MMP Shares
approximates the principal amount and liquidation preference,
respectively, because interest and dividend rates payable on the Series
A and Series B Tortoise Notes and MMP Shares are determined at auctions
and fluctuate with changes in interest rates.
USE OF PROCEEDS
As of January 31, 2005, the Company had invested __% of its total
assets. The net proceeds of the offering of Series C Tortoise Notes will be
approximately $___________ after payment of the underwriting discounts and
commissions and estimated offering costs. The Company anticipates that it will
be able to invest the net proceeds of this offering in securities of energy
infrastructure companies that meet the Company's investment objective and
policies within approximately three months after the completion of the offering.
Whether the Company can meet this timeframe depends to a significant degree on
the availability of direct placement opportunities. Pending such investment, it
is anticipated that the proceeds will be invested in securities issued by the
U.S. government or its agencies or instrumentalities or in high quality,
short-term or long-term debt obligations.
16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 2005, and as adjusted to give effect to the issuance of the Series C
Tortoise Notes offered hereby. As indicated below, common stockholders will bear
the offering costs associated with this offering.
ACTUAL AS ADJUSTED
------------ ---------------
(UNAUDITED)
LONG-TERM DEBT:
Tortoise Notes, denominations of $25,000 or any multiple thereof*..... $110,000,000 $
PREFERRED SHARES OUTSTANDING:
MMP Shares, $.001 par value per share, $25,000 stated value per share
at liquidation; 10,000,000 shares authorized/1,400 shares issued*.. $ 35,000,000 $ 35,000,000
COMMON STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value per share; 100,000,000 shares
authorized; _________shares outstanding and __________ shares
outstanding as adjusted, respectively*............................. $
Additional paid-in capital............................................ $ **
Undistributed net investment income................................... --
Accumulated net investment loss, net of ($______) deferred tax benefit --
Accumulated net realized loss from investments, net of deferred tax
benefit:...........................................................
Net unrealized appreciation of investments............................
Net assets applicable to common stock................................. $
------------------
* None of these outstanding shares/notes are held by or for the account of
the Company.
** Underwriting discounts and commissions and estimated offering costs of
the Series C Tortoise Notes will be capitalized and amortized over the
life of the Series C Tortoise Notes.
17
THE COMPANY
The Company is a nondiversified, closed-end management investment
company registered under the 1940 Act that commenced operations on February 27,
2004. The Company was organized as a Maryland corporation on October 30, 2003,
pursuant to a charter (the "Charter") governed by the laws of the State of
Maryland. On February 27, 2004, the Company issued an aggregate of 11,000,000
shares of common stock, par value $0.001 per share, in an initial public
offering. On March 23, 2004 and April 8, 2004, the Company issued an additional
1,100,000 shares of common stock and 500,000 shares of common stock,
respectively, in connection with partial exercises by the underwriters of their
over-allotment option. On December 22, 2004, the Company issued an additional
1,755,027 shares of common stock in a registered offering to the public. On
January 25, 2005, the Company issued 263,254 additional shares of common stock
pursuant to the exercise by the underwriters of their over-allotment option. As
of January 31, 2005 the Company had net assets of $_________ attributable to the
Company's common stock. The Company's common stock is listed on the NYSE under
the symbol "TYG." The Company's principal office is located at 10801 Mastin
Boulevard, Suite 222, Overland Park, Kansas 66210 and its telephone number is
(913) 981-1020.
The following provides information about the Company's outstanding
securities as of January 31, 2005:
AMOUNT
HELD BY THE
COMPANY OR
AMOUNT FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
-------------- ---------- ------------ -----------
Tortoise Notes................................................
Series A................................................... 0 $60,000,000
Series B................................................... 0 $50,000,000
Preferred Stock (MMP Shares).................................. 10,000,000 0 1,400
Common Stock.................................................. 100,000,000 0
18
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE
The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to stockholders. For
purposes of the Company's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Company invests regardless of the tax character of the distributions. The
Company seeks to provide its stockholders with an efficient vehicle to invest in
a portfolio of MLPs. Similar to the tax characterization of cash distributions
made by MLPs to its unit holders, the Company believes that its common
stockholders will have relatively high levels of the deferred taxable income
associated with cash distributions made by the Company to stockholders.
ENERGY INFRASTRUCTURE INDUSTRY
The Company concentrates its investments in the energy infrastructure
sector. The Company pursues its objective by investing principally in a
portfolio of equity securities issued by MLPs. MLP common units historically
have generated higher average total returns than domestic common stock (as
measured by the S&P 500) and fixed income securities. A more detailed
description of investment policies and restrictions and more detailed
information about portfolio investments are contained in the Statement of
Additional Information.
Energy Infrastructure Companies. For purposes of the Company's policy
of investing 90% of total assets in securities of energy infrastructure
companies, an energy infrastructure company is one that derives each year at
least 50% of its revenues from "Qualifying Income" under Section 7704 of the
Internal Revenue Code or one that derives at least 50% of its revenues from the
provision of services directly related to the generation of Qualifying Income.
Qualifying Income is defined as including any income and gains from the
exploration, development, mining or production, processing, refining,
transportation (including pipelines transporting gas, oil or products thereof),
or the marketing of any mineral or natural resource (including fertilizer,
geothermal energy, and timber).
Energy infrastructure companies (other than most pipeline MLPs) do not
operate as "public utilities" or "local distribution companies," and therefore
are not subject to rate regulation by state or federal utility commissions.
However, energy infrastructure companies may be subject to greater competitive
factors than utility companies, including competitive pricing in the absence of
regulated tariff rates, which could cause a reduction in revenue and which could
adversely affect profitability. Most pipeline MLPs are subject to government
regulation concerning the construction, pricing and operation of pipelines.
Pipeline MLPs are able to set prices (rates or tariffs) to cover operating
costs, depreciation and taxes, and provide a return on investment. These rates
are monitored by the Federal Energy Regulatory Commission (FERC) which seeks to
ensure that consumers receive adequate and reliable supplies of energy at the
lowest possible price while providing energy suppliers and transporters a just
and reasonable return on capital investment and the opportunity to adjust to
changing market conditions.
Master Limited Partnerships. Under normal circumstances, the Company
invests at least 70% of its total assets in equity securities of MLPs that each
year derive at least 90% of their gross income from Qualifying Income and are
organized as partnerships, thereby eliminating federal income tax at the entity
level. An MLP generally has two classes of partners, the general partner, and
the limited partners. The general partner is usually a major energy company,
investment fund or the direct management of the MLP. The general partner
normally controls the MLP through a 2% equity interest plus units that are
subordinated to the common (publicly traded) units for at least the first five
years of the partnership's existence and then only converting to common if
certain financial tests are met.
19
As a motivation for the general partner to successfully manage the MLP
and increase cash flows, the terms of most MLPs typically provide that the
general partner receives a larger portion of the net income as distributions
reach higher target levels. As cash flow grows, the general partner receives a
greater interest in the incremental income compared to the interest of limited
partners. The general partner's incentive compensation typically increases up to
50% of incremental income. Nevertheless, the aggregate amount distributed to
limited partners will increase as MLP distributions reach higher target levels.
Given this incentive structure, the general partner has an incentive to
streamline operations and undertake acquisitions and growth projects in order to
increase distributions to all partners.
Energy infrastructure MLPs in which the Company invests generally can
be classified in the following categories:
Pipeline MLPs are common carrier transporters of natural gas,
natural gas liquids (primarily propane, ethane, butane and natural
gasoline), crude oil or refined petroleum products (gasoline, diesel
fuel and jet fuel). Pipeline MLPs also may operate ancillary businesses
such as storage and marketing of such products. Revenue is derived from
capacity and transportation fees. Historically, pipeline output has
been less exposed to cyclical economic forces due to its low cost
structure and government-regulated nature. In addition, pipeline MLPs
do not have direct commodity price exposure because they do not own the
product being shipped.
Processing MLPs are gatherers and processors of natural gas,
as well as providers of transportation, fractionation and storage of
natural gas liquids ("NGLs"). Revenue is derived from providing
services to natural gas producers, which require treatment or
processing before their natural gas commodity can be marketed to
utilities and other end user markets. Revenue for the processor is fee
based, although it is not uncommon to have some participation in the
prices of the natural gas and NGL commodities for a portion of revenue.
Propane MLPs are distributors of propane to homeowners for
space and water heating. Revenue is derived from the resale of the
commodity on a margin over wholesale cost. The ability to maintain
margin is a key to profitability. Propane serves approximately 3% of
the household energy needs in the United States, largely for homes
beyond the geographic reach of natural gas distribution pipelines.
Approximately 70% of annual cash flow is earned during the winter
heating season (October through March). Accordingly, volumes are
weather dependent, but have utility type functions similar to
electricity and natural gas.
Coal MLPs own, lease and manage coal reserves. Revenue is
derived from production and sale of coal, or from royalty payments
related to leases to coal producers. Electricity generation is the
primary use of coal in the United States. Demand for electricity and
supply of alternative fuels to generators are the primary drivers of
coal demand. Coal MLPs are subject to operating and production risks,
such as: the MLP or a lessee meeting necessary production volumes;
federal, state and local laws and regulations which may limit the
ability to produce coal; the MLP's ability to manage production costs
and pay mining reclamation costs; and the effect on demand that the
Clean Air Act standards have on coal-end users.
Although the Company also may invest in equity and debt securities of
energy infrastructure companies that are organized and/or taxed as corporations,
it is likely that any such investments will be in debt securities because the
equity dividends from such corporations typically do not meet the Company's
investment objective. The Company also may invest in securities of general
partners or other affiliates of MLPs and private companies operating energy
infrastructure assets.
20
INVESTMENT PROCESS
Under normal circumstances, the Company invests at least 90% of its
total assets (including assets obtained through leverage) in securities of
energy infrastructure companies. The Adviser seeks to invest in securities that
offer a combination of quality, growth and yield intended to result in superior
total returns over the long run. The Adviser's securities selection process
includes a comparison of quantitative, qualitative, and relative value factors.
Although the Adviser uses research provided by broker-dealers and investment
firms, primary emphasis is placed on proprietary analysis and valuation models
conducted and maintained by the Adviser's in-house investment analysts. To
determine whether a company meets its criteria, the Adviser generally looks for
a strong record of distribution growth, a solid ratio of debt to equity and
coverage ratio with respect to distributions to unit holders, and a proven track
record, incentive structure and management team. All of the public energy
infrastructure companies in which the Company invests have a market
capitalization greater than $100 million.
INVESTMENT POLICIES
The Company seeks to achieve its investment objective by investing
primarily in securities of MLPs that the Adviser believes offer attractive
distribution rates and capital appreciation potential. The Company also may
invest in other securities set forth below if the Adviser expects to achieve the
Company's objective with such investments.
The Company's policy of investing at least 90% of its total assets
(including assets obtained through leverage) in securities of energy
infrastructure companies is nonfundamental and may be changed by the Board of
Directors without stockholder approval, provided that stockholders receive at
least 60 days' prior written notice of any change.
The Company has adopted the following additional nonfundamental
policies:
o Under normal circumstances, the Company invests at least 70%
and up to 100% of its total assets in equity securities issued
by MLPs. Equity securities currently consist of common units,
convertible subordinated units, and pay-in-kind units.
o The Company may invest up to 30% of its total assets in
restricted securities, primarily through direct placements.
Subject to this policy, the Company may invest without
limitation in illiquid securities. The types of restricted
securities that the Company may purchase include MLP
convertible subordinated units, unregistered MLP common units
and securities of private companies (i.e., non-MLPs).
Investments in private companies that do not have any publicly
traded shares or units are limited to 5% of total assets.
o The Company may invest up to 25% of its total assets in debt
securities of energy infrastructure companies, including
certain securities rated below investment grade ("junk
bonds"). Below investment grade debt securities will be rated
at least B3 by Moody's and at least B- by S&P at the time of
purchase, or comparably rated by another statistical rating
organization or if unrated, determined to be of comparable
quality by the Adviser.
o The Company will not invest more than 10% of its total assets
in any single issuer.
o The Company will not engage in short sales.
Unless otherwise stated, all investment restrictions apply at the time
of purchase and the Company will not be required to reduce a position due solely
to market value fluctuations. The Company may deviate temporarily from its
investment policies pending investment of the additional offering of
21
common stock and leverage proceeds. Pending receipt of the leverage proceeds,
the Board of Directors has approved an interim policy permitting investments in
a single issuer in excess of 10% of total assets under limited circumstances
(but not exceeding 12%). The interim policy will terminate upon the receipt of
the proceeds of Series C Tortoise Notes.
INVESTMENT SECURITIES
The types of securities in which the Company may invest include, but
are not limited to, the following:
Equity Securities of MLPs. Consistent with its investment objective,
the Company may invest up to 100% of total assets in equity securities issued by
energy infrastructure MLPs, including common units, convertible subordinated
units and I-Shares. The table below summarizes the features of these securities,
and a further discussion of these securities follows.
22
CONVERTIBLE
COMMON UNITS SUBORDINATED UNITS
(FOR MLPs TAXED (FOR MLPs TAXED
AS PARTNERSHIPS) AS PARTNERSHIPS) I-SHARES
---------------- ------------------ --------
VOTING RIGHTS.............. Limited to certain Same as common units No direct MLP voting rights
significant decisions; no
annual election of
directors
DIVIDEND PRIORITY.......... First right to minimum Second right to MQD; no Equal in amount and
quarterly distribution arrearage rights priority to common units
("MQD") specified in but paid in additional
Partnership Agreement; I-Shares at current market
arrearage rights value of I-Shares
DIVIDEND RATE.............. Minimum set in Partnership Equal in amount to common Equal in amount to common units
Agreement; participate pro units; participate pro
rata with subordinated rata with common units
units after both MQDs are above the MQD
met
TRADING.................... Listed on NYSE, AMEX or Not publicly traded Listed on NYSE
NASDAQ National Market
FEDERAL INCOME
TAX TREATMENT.............. Ordinary income to the Same as common units Full distribution treated
extent of taxable income as return of capital;
allocated to holder; since distribution is in
tax-free return of capital shares, total basis is not
thereafter to extent of reduced
holder's basis; remainder
as capital gain
TYPE OF INVESTOR........... Retail; creates unrelated Same as common units Institutional; does not
business taxable income create unrelated business
for tax-exempt investor; taxable income; qualifying
investment by regulated income for regulated
investment companies investment companies
limited to 25% of assets
Intended to receive return Second right to return of Same as common units
LIQUIDITY PRIORITY......... of all capital first capital; pro rata with (indirect right through
common units thereafter I-share issuer)
CONVERSION RIGHTS.......... None One-to-one ratio into None
common units
MLP Common Units. MLP common units represent an equity ownership
interest in a partnership, providing limited voting rights and entitling the
holder to a share of the company's success through distributions and/or capital
appreciation. Unlike stockholders of a corporation, common unit holders do not
elect directors annually and generally have the right to vote only on certain
significant events, such as mergers, a sale of substantially all of the assets,
removal of the general partner or material amendments to the partnership
agreement. MLPs are required by their partnership agreements to distribute a
large percentage of their current operating earnings. Common unit holders
generally have first right to a MQD prior to distributions to the convertible
subordinated unit holders or the general partner (including incentive
distributions). Common unit holders typically have arrearage rights if the MQD
is not met. In the event of liquidation, MLP common unit holders have first
rights to the partnership's remaining assets
23
after bondholders, other debt holders, and preferred unit holders have been paid
in full. MLP common units trade on a national securities exchange or
over-the-counter.
MLP Convertible Subordinated Units. MLP convertible subordinated units
are typically issued by MLPs to founders, corporate general partners of MLPs,
entities that sell assets to the MLP, and institutional investors. The purpose
of the convertible subordinated units is to increase the likelihood that during
the subordination period there will be available cash to be distributed to
common unit holders. The Company expects to purchase convertible subordinated
units in direct placements from such persons. Convertible subordinated units
generally are not entitled to distributions until holders of common units have
received specified MQD, plus any arrearages, and may receive less in
distributions upon liquidation. Convertible subordinated unit holders generally
are entitled to MQD prior to the payment of incentive distributions to the
general partner, but are not entitled to arrearage rights. Therefore, they
generally entail greater risk than MLP common units. They are generally
convertible automatically into the senior common units of the same issuer at a
one-to-one ratio upon the passage of time or the satisfaction of certain
financial tests. These units do not trade on a national exchange or
over-the-counter, and there is no active market for convertible subordinated
units. The value of a convertible security is a function of its worth if
converted into the underlying common units. Convertible subordinated units
generally have similar voting rights to MLP common units.
MLP I-Shares. I-Shares represent an indirect investment in MLP I-units.
I-units are equity securities issued to affiliates of MLPs, typically a limited
liability company, that owns an interest in and manages the MLP. The issuer has
management rights but is not entitled to incentive distributions. The I-Share
issuer's assets consist exclusively of MLP I-units. Distributions by MLPs to
I-unit holders are made in the form of additional I-units, generally equal in
amount to the cash received by common unit holders of MLPs. Distributions to
I-Share holders are made in the form of additional I-Shares, generally equal in
amount to the I-units received by the I-Share issuer. The issuer of the I-Share
is taxed as a corporation for federal income tax purposes, however, the MLP does
not allocate income or loss to the I-Share issuer. Accordingly, investors
receive a Form 1099, are not allocated their proportionate share of income of
the MLPs and are not subject to state filing obligations.
Debt Securities. The Company may invest up to 25% of its assets in debt
securities of energy infrastructure companies, including securities rated below
investment grade. The Company's debt securities may have fixed or variable
principal payments and all types of interest rate and dividend payment and reset
terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features. To the extent that the Company
invests in below investment grade debt securities, such securities will be
rated, at the time of investment, at least B- by S&P or B3 by Moody's or a
comparable rating by at least one other rating agency or, if unrated, determined
by the Adviser to be of comparable quality. If a security satisfies the
Company's minimum rating criteria at the time of purchase and subsequently is
downgraded below such rating, the Company will not be required to dispose of
such security. If a downgrade occurs, the Adviser will consider what action,
including the sale of such security, is in the best interest of the Company and
its stockholders.
Because the risk of default is higher for below investment grade
securities than investment grade securities, the Adviser's research and credit
analysis is an especially important part of managing securities of this type.
The Adviser attempts to identify those issuers of below investment grade
securities whose financial condition the Adviser believes are adequate to meet
future obligations or have improved or are expected to improve in the future.
The Adviser's analysis focuses on relative values based on such factors as
interest or dividend coverage, asset coverage, earnings prospects and the
experience and managerial strength of the issuer.
24
Restricted Securities. The Company may invest up to 30% of its total
assets in restricted securities, primarily through direct placements. An issuer
may be willing to offer the purchaser more attractive features with respect to
securities issued in direct placements because it has avoided the expense and
delay involved in a public offering of securities. Adverse conditions in the
public securities markets also may preclude a public offering of securities. MLP
convertible subordinated units typically are purchased from affiliates of the
issuer or other existing holders of convertible units rather than directly from
the issuer.
Restricted securities obtained by means of direct placements are less
liquid than securities traded in the open market because of statutory and
contractual restrictions on resale. Such securities are, therefore, unlike
securities that are traded in the open market, which can be expected to be sold
immediately if the market is adequate. This lack of liquidity creates special
risks for the Company. However, the Company could sell such securities in
privately negotiated transactions with a limited number of purchasers or in
public offerings under the Securities Act of 1933, as amended (the "1933 Act").
MLP convertible subordinated units also convert to publicly traded common units
upon the passage of time and/or satisfaction of certain financial tests.
Defensive and Temporary Investments. Under adverse market or economic
conditions or pending investment of offering or leverage proceeds, the Company
may invest up to 100% of its total assets in securities issued or guaranteed by
the U.S. Government or its instrumentalities or agencies, short-term debt
securities, certificates of deposit, bankers' acceptances and other bank
obligations, commercial paper rated in the highest category by a rating agency
or other fixed income securities deemed by the Adviser to be consistent with a
defensive posture, or may hold cash. The Adviser also may invest in such
instruments to meet working capital needs including, but not limited to, for
collateral in connection with certain investment techniques, to hold a reserve
pending payment of distributions, and to facilitate the payments of expenses and
settlement of trades. The yield on such securities may be lower than the returns
on MLPs or yields on lower rated fixed income securities. To the extent the
Company uses this strategy, it may not achieve its investment objective.
USE OF LEVERAGE
The Company may borrow money, issue preferred stock, or issue other
senior securities to the extent permitted by the 1940 Act. These practices are
known as leverage. The Company has outstanding Tortoise Notes (not including the
Series C Tortoise Notes) and MMP Shares in an aggregate principal amount and
liquidation preference, respectively, representing ___% of total assets as of
January 31, 2005. The Company intends to issue Series C Tortoise Notes in an
aggregate principal amount representing approximately __% of the Company's total
assets. The Company employs financial leverage for investment purposes when the
Adviser believes that such use of proceeds will enhance the Company's ability to
achieve its investment objective. The timing and terms of any leverage
transactions will be determined by the Company's Board of Directors. The
principal, although not exclusive, factor used in making this determination is
whether the potential return is likely to exceed the cost of leverage. Before
issuing additional Tortoise Notes or MMP Shares, the Company must receive
confirmation from the Rating Agencies that the proposed issuance will not
adversely affect such Agency's then current rating of Tortoise Notes or MMP
Shares. The Company also may borrow up to an additional 5% of its total assets
(not including the amount so borrowed) for temporary purposes, including the
settlement and clearance of securities transactions, which otherwise might
require untimely dispositions of portfolio holdings. The amount of outstanding
financial leverage may vary with prevailing market or economic conditions.
Leverage entails special risks. See "Risk Factors--General Risks of Investing in
the Company--Leverage Risk." The management fee paid to the Adviser will be
calculated on the basis of the Company's Managed Assets (which includes the
proceeds of any financial leverage), so the fee will be higher when leverage is
used.
25
The Company reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or to issue other
senior securities in order to maintain or increase the Company's current level
of leverage to the extent permitted by the 1940 Act and existing agreements
between the Company and third parties.
HEDGING TRANSACTIONS
In an attempt to reduce the interest rate risk arising from the
Company's leveraged capital structure, the Company may, from time to time, enter
into interest rate transactions such as swaps, caps and floors. The use of
interest rate transactions is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio security transactions. In an interest rate swap, the Company would
agree to pay to the other party to the interest rate swap (which is known as the
"counterparty") a fixed rate payment in exchange for the counterparty agreeing
to pay to the Company a variable rate payment that is intended to approximate
the Company's variable rate payment obligation on any variable rate borrowings.
The payment obligations would be based on the notional amount of the swap. In an
interest rate cap, the Company would pay a premium to the counterparty up to the
interest rate cap and, to the extent that a specified variable rate index
exceeds a predetermined fixed rate, would receive from the counterparty payments
of the difference based on the notional amount of such cap. In an interest rate
floor, the Company would be entitled to receive, to the extent that a specified
index falls below a predetermined interest rate, payments of interest on a
notional principal amount from the party selling the interest rate floor. The
Company has entered into interest rate swap transactions intended to hedge
against the Company's interest payment obligations under the outstanding
Tortoise Notes against material increases in interest rates through mid-July
2007. The Company's dividend payment obligations under the MMP Shares remain
unhedged as of the date of this Prospectus. Depending on the state of interest
rates in general, the Company's use of interest rate transactions could affect
the Company's ability to make required interest payments on the Tortoise Notes.
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, the Company would not be able to use the anticipated net
receipts under the interest rate transaction to offset the Company's cost of
financial leverage.
CONFLICTS OF INTEREST
Conflicts of interest may arise from the fact that the Adviser and its
affiliates carry on substantial investment activities for other clients, in
which the Company has no interest. The Adviser or its affiliates may have
financial incentives to favor certain of such accounts over the Company. Any of
their proprietary accounts and other customer accounts may compete with the
Company for specific trades. The Adviser or its affiliates may give advice and
recommend securities to, or buy or sell securities for the Company which advice
or securities may differ from advice given to, or securities recommended or
bought or sold for, other accounts and customers, even though their investment
objectives may be the same as, or similar to, those of the Company.
The Adviser also serves as investment adviser to Tortoise North
American Energy Corporation ("TYN"), a recently organized, nondiversified,
closed-end investment management company. Once TYN commences operations, it
intends to invest primarily in publicly traded Canadian royalty trusts and
income trusts and publicly traded MLPs. To the extent certain MLP securities or
other energy infrastructure company securities meet the investment objectives of
both companies, the Company and TYN may compete for the same trades.
The Adviser will evaluate a variety of factors in determining whether a
particular investment opportunity or strategy is appropriate and feasible for
the relevant account at a particular time, including, but not limited to, the
following: (1) the nature of the investment opportunity taken in the context of
the other investments at the time; (2) the liquidity of the investment relative
to the needs of the particular
26
entity or account; (3) the availability of the opportunity (i.e., size of
obtainable position); (4) the transaction costs involved; and (5) the investment
or regulatory limitations applicable to the particular entity or account.
Because these considerations may differ when applied to the Company and relevant
accounts under management in the context of any particular investment
opportunity, the investment activities of the Company, on the one hand, and
other managed accounts, on the other hand, may differ considerably from time to
time. In addition, the fees and expenses of the Company will differ from those
of the other managed accounts. Accordingly, stockholders should be aware that
the future performance of the Company and other accounts of the Adviser may
vary.
Situations may occur when the Company could be disadvantaged because of
the investment activities conducted by the Adviser and its affiliates for its
other accounts. Such situations may be based on, among other things, the
following: (1) legal or internal restrictions on the combined size of positions
that may be taken for the Company or the other accounts, thereby limiting the
size of the Company's position; or (2) the difficulty of liquidating an
investment for the Company or the other accounts where the market cannot absorb
the sale of the combined position. The Company's investment opportunities may be
limited by affiliations of the Adviser or its affiliates with energy
infrastructure companies.
Under the 1940 Act, the Company and its affiliates may be precluded
from co-investing in negotiated private placements of securities. The Company
and the Adviser have applied to the SEC for exemptive relief to permit the
Company and its affiliates to make such investments. There is no guarantee that
the requested relief will be granted by SEC. Unless and until the Company and
the Adviser obtain an exemptive order, the Company will not co-invest with its
affiliates in negotiated private placement transactions. Until the Company and
the Adviser receive exemptive relief, the Advisor will observe a policy for
allocating negotiated private placement opportunities among its clients that
takes into account the amount of each client's available cash and its investment
objectives.
The Adviser and its principals, officers, employees, and affiliates may
buy and sell securities or other investments for their own accounts and may have
actual or potential conflicts of interest with respect to investments made on
behalf of the Company. As a result of differing trading and investment
strategies or constraints, positions may be taken by principals, officers,
employees, and affiliates of the Adviser that are the same as, different from,
or made at a different time than positions taken for the Company.
PORTFOLIO TURNOVER
The Company's annual portfolio turnover rate may vary greatly from year
to year. Although the Company cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 30% under normal circumstances. From
the commencement of operations through January 31, 2005, the Company's actual
portfolio turnover rate was ______________. However, portfolio turnover rate is
not considered a limiting factor in the execution of investment decisions for
the Company. A higher turnover rate results in correspondingly greater brokerage
commissions and other transactional expenses that are borne by the Company. High
portfolio turnover may result in the Company's recognition of gains that will
increase the Company's tax liability and thereby lower the amount of after-tax
cash available for the payment of interest on the Tortoise Notes.
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security, like the Tortoise Notes, 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 you should consider
carefully the following risks that you assume when you invest in Tortoise Notes.
27
RISKS OF INVESTING IN TORTOISE NOTES
Unsecured Investment. The Tortoise Notes represent an unsecured
obligation of the Company to pay interest and principal, when due. The Company
cannot assure you that it will have sufficient funds or that it will be able to
arrange for additional financing to pay interest on the Tortoise Notes when due
or to repay the Tortoise Notes at the Stated Maturity. The Company's failure to
pay interest on the Tortoise Notes when due or to repay the Tortoise Notes upon
the Stated Maturity would, subject to the cure provisions under the Indenture,
constitute an event of default under the Indenture and could cause a default
under other agreements that the Company may enter into from time to time. There
is no sinking fund with respect to the Tortoise Notes, and at the Stated
Maturity, the entire outstanding principal amount of the Tortoise Notes will
become due and payable. See "Description of Tortoise Notes--Events of Default
and Acceleration of Maturity; Remedies."
Interest Rate Risk. Tortoise Notes pay interest based on short-term
interest rates. If short-term interest rates rise, interest rates on the
Tortoise Notes may rise so that the amount of interest payable to holders of
Tortoise Notes would exceed the amount of income from the Company's portfolio
securities. This might require that the Company sell portfolio securities at a
time when it otherwise would not do so, which may affect adversely the Company's
future earnings ability. While the Company intends to manage this risk through
interest rate transactions, there is no guarantee these strategies will be
implemented or will be successful in reducing or eliminating interest rate risk.
In addition, rising market interest rates could impact negatively the value of
the Company's investment portfolio, reducing the amount of assets serving as
asset coverage for the Tortoise Notes.
Auction Risk. You may not be able to sell your Tortoise Notes at an
Auction if the Auction fails; that is, if there are more Tortoise Notes offered
for sale than there are buyers for those Tortoise Notes. Also, if you place hold
orders (orders to retain Tortoise Notes) at an Auction only at a specified rate,
and that bid rate exceeds the rate set at the Auction, you will not retain your
Tortoise Notes. Finally, if you buy Tortoise Notes or elect to retain Tortoise
Notes without specifying a rate below which you would not wish to buy or
continue to hold those Tortoise Notes, and the Auction sets a below-market rate,
you may receive a lower rate of return on your Tortoise Notes than the market
rate. See "Description of Tortoise Notes" and "The Auction--Auction Procedures."
Secondary Market Risk. If you try to sell your Tortoise Notes between
Auctions, you may not be able to sell any or all of your Tortoise Notes, or you
may not be able to sell them in the $25,000 increments for which they were
purchased or $25,000 increments for which they were purchased plus accrued and
unpaid interest. If the Company has designated a Special Rate Period (a rate
period other than twenty-eight (28) days), changes in interest rates could
affect the price you would receive if you sold your Tortoise Notes in the
secondary market. Lehman Brothers, Stifel Nicolaus and broker-dealers that
maintain a secondary trading market for Tortoise Notes are not required to
maintain this market and the Company has no control over the establishment or
maintenance of this market. The Company is not required to redeem Tortoise Notes
if an Auction or an attempted secondary market sale fails. Tortoise Notes are
not listed on an exchange or automated quotation system. If you sell your
Tortoise Notes to a broker-dealer between Auctions, you may receive less than
the price you paid for them, especially when market interest rates have risen
since the last Auction.
Ratings and Asset Coverage Risk. While Moody's and Fitch have assigned
ratings of _____ and _____, respectively, to the Series C Tortoise Notes, the
ratings do not eliminate or necessarily mitigate the risks of investing in
Tortoise Notes. A rating agency could downgrade Tortoise Notes, which may make
your securities less liquid at an Auction or in the secondary market, though
probably with higher resulting interest rates. If a rating agency downgrades the
ratings assigned to Tortoise Notes, the Company may alter its portfolio or
redeem Tortoise Notes. The Company may voluntarily redeem
28
Tortoise Notes under certain circumstances. See "Rating Agency Guidelines" for a
description of the asset maintenance tests and other requirements the Company
must meet.
Inflation Risk. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of your Tortoise
Notes investment or the income from that investment will be worth less in the
future. As inflation occurs, the real value of the Tortoise Notes and interest
declines. In an inflationary period, however, it is expected that, through the
Auction process, Tortoise Notes interest rates would increase, tending to offset
this risk.
Decline in Net Asset Value Risk. A material decline in the Company's
net asset value may impair the Company's ability to maintain required levels of
asset coverage for Tortoise Notes. For a description of risks affecting the
Company, please see "--General Risks of Investing in the Company" below.
GENERAL RISKS OF INVESTING IN THE COMPANY
Limited Operating History. The Company is a nondiversified, closed-end
management investment company that commenced operations in February 2004. There
is no assurance that the Company will continue to meet its investment objective.
Delay in Use of Proceeds. Although the Company currently intends to
invest the proceeds of Series C Tortoise Notes within three months following the
closing of this offering, such investments may be delayed if suitable
investments are unavailable at the time or for other reasons or if the Company
is unable to secure firm commitments for direct placements. Due to the trading
market and trading volumes for MLPs, it may take the Company some time to
accumulate positions in certain securities. Because the market for the MLP
securities may, at times, be less liquid than the market for many other
securities, the Company may be unable to obtain such securities within the time,
and in the amount, it currently anticipates. As a result, the proceeds from this
offering may be invested in cash, cash equivalents, high-quality debt
instruments, or other securities pending investment in MLPs or securities of
energy infrastructure companies. A delay in the anticipated use of proceeds
could lower returns and reduce the amount of cash available to make interest
payments on the Tortoise Notes.
Energy Infrastructure Sector. Under normal circumstances, the Company
concentrates its investments in the energy infrastructure sector, with an
emphasis on securities issued by MLPs. Certain risks inherent in the energy
infrastructure business of these types of MLPs include the following:
o Processing and coal MLPs may be directly affected by energy
commodity prices. The volatility of commodity prices can
indirectly affect certain other MLPs due to the impact of
prices on volume of commodities transported, processed, stored
or distributed. Pipeline MLPs are not subject to direct
commodity price exposure because they do not own the
underlying energy commodity. While propane MLPs do own the
underlying energy commodity, the Adviser seeks high quality
MLPs that are able to mitigate or manage direct margin
exposure to commodity price levels. The MLP sector can be hurt
by market perception that MLPs performance and distributions
are directly tied to commodity prices.
o The profitability of MLPs, particularly processing and
pipeline MLPs, may be materially impacted by the volume of
natural gas or other energy commodities available for
transporting, processing, storing or distributing. A
significant decrease in the production of natural gas, oil,
coal or other energy commodities, due to the decline of
production from existing facilities, import supply disruption,
depressed commodity prices or otherwise, would reduce revenue
and operating income of MLPs and, therefore, the ability of
MLPs to make distributions to partners.
29
o A sustained decline in demand for crude oil, natural gas and
refined petroleum products could adversely affect MLP revenues
and cash flows. Factors that could lead to a decrease in
market demand include a recession or other adverse economic
conditions, an increase in the market price of the underlying
commodity, higher taxes or other regulatory actions that
increase costs, or a shift in consumer demand for such
products.
o A portion of any one MLP's assets may be dedicated to natural
gas reserves and other commodities that naturally deplete over
time, which could have a materially adverse impact on an MLP's
ability to make distributions. Often the MLPs are dependent
upon exploration and development activities by third parties.
MLPs employ a variety of means of increasing cash flow,
including increasing utilization of existing facilities,
expanding operations through new construction, expanding
operations through acquisitions, or securing additional
long-term contracts. Thus, some MLPs may be subject to
construction risk, acquisition risk or other risk factors
arising from their specific business strategies. A significant
slowdown in large energy companies' disposition of energy
infrastructure assets and other merger and acquisition
activity in the energy MLP industry could reduce the growth
rate of cash flows received by the Company from MLPs that grow
through acquisitions.
o The profitability of MLPs could be adversely affected by
changes in the regulatory environment. Most MLPs' assets are
heavily regulated by federal and state governments in diverse
matters such as the way in which certain MLP assets are
constructed, maintained and operated and the prices MLPs may
charge for their services. Such regulation can change over
time in scope and intensity. For example, a particular
byproduct of an MLP process may be declared hazardous by a
regulatory agency and unexpectedly increase production costs.
Moreover, many state and federal environmental laws provide
for civil as well as regulatory remediation, thus adding to
the potential exposure an MLP may face.
o A rising interest rate environment could adversely impact the
performance of MLPs. Rising interest rates could limit the
capital appreciation of equity units of MLPs as a result of
the increased availability of alternative investments at
competitive yields with MLPs. Rising interest rates may also
increase an MLP's cost of capital. A higher cost of capital
could limit growth from acquisition/expansion projects and
limit MLP distribution growth rates.
o Since the September 11th attacks, the U.S. government has
issued public warnings indicating that energy assets,
specifically those related to pipeline infrastructure,
production facilities and transmission and distribution
facilities, might be specific targets of terrorist activity.
The continued threat of terrorism and related military
activity will likely increase volatility for prices in natural
gas and oil and could affect the market for products of MLPs.
o Holders of MLP units are subject to certain risks inherent in
the partnership structure of MLPs including (1) tax risks
(described below), (2) limited ability to elect or remove
management, (3) limited voting rights, except with respect to
extraordinary transactions, and (4) conflicts of interest of
the general partner, including those arising from incentive
distribution payments.
Industry Specific Risk. Energy infrastructure companies are also
subject to risks that are specific to the industry they serve.
Pipeline MLPs are subject to demand for crude oil or refined
products in the markets served by the pipeline, sharp decreases in
crude oil or natural gas prices that cause producers to curtail
production or reduce capital spending for exploration activities, and
environmental
30
regulation. Demand for gasoline, which accounts for a substantial
portion of refined product transportation, depends on price, prevailing
economic conditions in the markets served, and demographic and seasonal
factors. Pipeline MLP unit prices are primarily driven by distribution
growth rates and prospects for distribution growth.
Processing MLPs are subject to declines in production of
natural gas fields, which utilize the processing facilities as a way to
market the gas, prolonged depression in the price of natural gas or
crude oil refining, which curtails production due to lack of drilling
activity and declines in the prices of NGL products and natural gas
prices, resulting in lower processing margins.
Propane MLPs are subject to earnings variability based upon
weather patterns in the locations where the company operates and the
wholesale cost of propane sold to end customers. Propane MLP unit
prices are based on safety in distribution coverage ratios, interest
rate environment and, to a lesser extent, distribution growth.
Coal MLPs are subject to demand variability based on favorable
weather conditions, strong or weak domestic economy, the level of coal
stockpiles in the customer base, and the general level of prices of
competing sources of fuel for electric generation. They also are
subject to supply variability based on the geological conditions that
reduce productivity of mining operations, regulatory permits for mining
activities and the availability of coal that meets Clean Air Act
standards.
Cash Flow Risk. The Company derives substantially all of its cash flow
from investments in equity securities of MLPs. The amount of cash that the
Company has available to distribute to holders of Tortoise Notes and
stockholders depends entirely on the ability of MLPs held by the Company to make
distributions to its partners and the tax character of those distributions. The
Company has no control over the actions of underlying MLPs. The amount of cash
that each individual MLP can distribute to its partners will depend on the
amount of cash it generates from operations, which will vary from quarter to
quarter depending on factors affecting the energy infrastructure market
generally and on factors affecting the particular business lines of the MLP.
Available cash will also depend on the MLPs' level of operating costs (including
incentive distributions to the general partner), level of capital expenditures,
debt service requirements, acquisition costs (if any), fluctuations in working
capital needs and other factors.
Tax Risk of MLPs. The Company's ability to meet its investment
objective will depend on the level of taxable income and distributions and
dividends it receives from the MLPs and other securities of energy
infrastructure companies in which the Company invests, a factor over which the
Company has no control. The benefit the Company derives from its investment in
MLPs depends largely on the MLPs being treated as partnerships for federal
income tax purposes. As a partnership, an MLP has no federal income tax
liability at the entity level. If, as a result of a change in current law or a
change in an MLP's business, an MLP were treated as a corporation for federal
income tax purposes, the MLP would be obligated to pay federal income tax on its
income at the corporate tax rate. If an MLP were classified as a corporation for
federal income tax purposes, the amount of cash available for distribution would
be reduced and the distributions the Company receives would be taxed entirely as
dividend income. Therefore, treatment of one or more MLPs as a corporation for
federal income tax purposes could affect the Company's ability to meet its
investment objective.
Deferred Tax Risks of MLPs. As a limited partner in the MLPs in which
the Company invests, it will receive a pro rata share of income, gains, losses
and deductions from those MLPs. Historically, a significant portion of income
from such MLPs has been offset by tax deductions. The Company will incur a
current tax liability on that portion of an MLP's income and gains that is not
offset by tax deductions and losses. The percentage of an MLP's income and gains
which is offset by tax deductions and losses will fluctuate over time for
various reasons. A significant slowdown in acquisition activity by MLPs held
31
in the Company's portfolio could result in a reduction of accelerated
depreciation generated by new acquisitions, which may result in increased
current income tax liability to the Company.
The Company will accrue deferred income taxes for its future tax
liability associated with that portion of MLP distributions considered to be a
tax-deferred return of capital as well as capital appreciation of its
investments. Upon the Company's sale of an MLP security, the Company may be
liable for previously deferred taxes. The Company will rely to some extent on
information provided by the MLPs, which is not necessarily timely, to estimate
deferred tax liability for purposes of financial statement reporting and
determining its net asset value. From time to time the Company will modify its
estimates or assumptions regarding its deferred tax liability as new information
becomes available.
Equity Securities Risk. MLP common units and other equity securities
can be affected by macro economic and other factors affecting the stock market
in general, expectations of interest rates, investor sentiment towards MLPs or
the energy sector, changes in a particular issuer's financial condition, or
unfavorable or unanticipated poor performance of a particular issuer (in the
case of MLPs, generally measured in terms of distributable cash flow). Prices of
common units of individual MLPs and other equity securities can also be affected
by fundamentals unique to the partnership or company, including earnings power
and coverage ratios.
Investing in securities of smaller companies may involve greater risk
than is associated with investing in more established companies. Smaller
capitalization companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than larger more established
companies.
Because convertible subordinated units generally convert to common
units on a one-to-one ratio, the price that the Company can be expected to pay
upon purchase or to realize upon resale is generally tied to the common unit
price less a discount. The size of the discount varies depending on a variety of
factors including the likelihood of conversion, and the length of time remaining
to conversion, and the size of the block purchased.
The price of I-Shares and their volatility tend to be correlated to the
price of common units, although the price correlation is not precise.
Leverage Risk. The outstanding Tortoise Notes and MMP Shares along with
the issuance of Series C Tortoise Notes offered in this Prospectus, and any
additional Borrowings or other transactions involving Company indebtedness
(other than for temporary or emergency purposes) are or would be considered
"senior securities" for purposes of the 1940 Act and constitute or would
constitute leverage. 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 the Company to lose money. Successful use of leverage
depends on the Adviser's ability to predict or hedge correctly interest rates
and market movements, and there is no assurance that the use of a leveraging
strategy will be successful during any period in which it is used.
The Company intends to use financial leverage in an amount currently
anticipated to represent approximately 33% of its total assets, including, the
issuance of the Series C Tortoise Notes, which the Company currently expects to
represent approximately ___% of its total assets. The Company may leverage
through Borrowings, including the issuance of commercial paper or additional
Tortoise Notes or MMP Shares. In addition, the Company also may borrow funds in
an amount up to 5% of its total assets for temporary purposes only. In the event
of a default under any secured Borrowings, the lenders may have the right to
cause a liquidation of the collateral (i.e., sell portfolio securities) and if
any such default is not cured, the lenders may be able to control the
liquidation as well.
32
Tortoise Notes constitute senior securities representing indebtedness
under the requirements of the 1940 Act. While any Tortoise Notes are
outstanding, the value of the Company's total assets, less all liabilities and
indebtedness of the Company not represented by senior securities, must be at
least equal to 300% of the aggregate value of the Tortoise Notes and any other
senior securities representing indebtedness.
In order to maintain the ratings of Tortoise Notes and MMP Shares, the
Rating Agencies impose asset coverage and portfolio composition requirements in
addition to and more stringent than those required by the 1940 Act in connection
with the issuance of such a rating. See "Rating Agency Guidelines." In addition,
the Rating Agencies impose restrictions on certain investment practices in which
the Company may otherwise engage.
The Company reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt to maintain or
increase its current level of leverage to the extent permitted by the 1940 Act,
Rating Agency Guidelines and existing agreements between the Company and third
parties.
Because the fee paid to the Adviser will be calculated on the basis of
Managed Assets, the fee will be higher when leverage is utilized, giving the
Adviser an incentive to utilize leverage.
Hedging Strategy Risk. The Company currently uses, and may in the
future use, interest rate transactions for hedging purposes only, in an attempt
to reduce the interest rate risk arising from the Company's leveraged capital
structure. Interest rate transactions that the Company may use for hedging
purposes expose the Company to certain risks that differ from the risks
associated with its portfolio holdings. There are economic costs of hedging
reflected in the price of interest rate swaps, floors, caps and similar
techniques, the costs of which can be significant, particularly when long-term
interest rates are substantially above short-term rates. In addition, the
Company's success in using hedging instruments is subject to the Adviser's
ability to predict correctly changes in the relationships of such hedging
instruments to the Company's leverage risk, and there can be no assurance that
the Adviser's judgment in this respect will be accurate. Consequently, the use
of hedging transactions might result in a poorer overall performance for the
Company, whether or not adjusted for risk, than if the Company had not engaged
in such transactions.
Depending on the state of interest rates in general, the Company's use
of interest rate transactions could enhance or decrease the cash available to
holders of common stock and/or the net assets available for coverage of Tortoise
Notes. 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 net assets
available for coverage of the Tortoise Notes. In addition, if the counterparty
to an interest rate swap or cap defaults, the Company would not be able to use
the anticipated net receipts under the interest rate swap or cap to offset the
Company's cost of financial leverage.
Competition Risk. At the time the Company completed its initial public
offering in February 2004, it was the only publicly traded investment company
offering access to a portfolio of energy infrastructure MLPs. Since that time a
limited number of other alternatives to the Company as a vehicle for investment
in a portfolio of energy infrastructure MLPs, including other publicly traded
investment companies and private funds, have emerged. In addition, recent tax
law changes have increased, and future tax law changes may again increase, the
ability of regulated investment companies or other institutions to invest in
MLPs. These competitive conditions may adversely impact the Company's ability to
make investments in the MLP market and could adversely impact the Company's
ability to make interest payments.
Restricted Security Risk. The Company may invest up to 30% of its total
assets in restricted securities, primarily through direct placements. Restricted
securities are less liquid than securities traded
33
in the open market because of statutory and contractual restrictions on resale.
Such securities are, therefore, unlike securities that are traded in the open
market, which can be expected to be sold immediately if the market is adequate.
As discussed further below, this lack of liquidity creates special risks for the
Company. However, the Company could sell such securities in privately negotiated
transactions with a limited number of purchasers or in public offerings under
the 1933 Act. MLP convertible subordinated units also convert to publicly traded
common units upon the passage of time and/or satisfaction of certain financial
tests.
Restricted securities are subject to statutory and contractual
restrictions on their public resale, which may make it more difficult to value
them, may limit the Company's ability to dispose of them and may lower the
amount the Company could realize upon their sale. To enable the Company to sell
its holdings of a restricted security not registered under the 1933 Act, the
Company may have to cause those securities to be registered. The expenses of
registering restricted securities may be negotiated by the Company with the
issuer at the time the Company buys the securities. When the Company must
arrange registration because the Company wishes to sell the security, a
considerable period may elapse between the time the decision is made to sell the
security and the time the security is registered so that the Company could sell
it. The Company would bear the risks of any downward price fluctuation during
that period.
Liquidity Risk. Although common units of MLPs trade on the NYSE, AMEX,
and the NASDAQ National Market, certain MLP securities may trade less frequently
than those of larger companies due to their smaller capitalizations. In the
event certain MLP securities experience limited trading volumes, the prices of
such MLPs may display abrupt or erratic movements at times. Additionally, it may
be more difficult for the Company to buy and sell significant amounts of such
securities without an unfavorable impact on prevailing market prices. As a
result, these securities may be difficult to dispose of at a fair price at the
times when the Company believes it is desirable to do so. These securities also
are more difficult to value, and the Adviser's judgment as to value will often
be given greater weight than market quotations, if any exist. Investment of the
Company's capital in securities that are less actively traded or over time
experience decreased trading volume may restrict the Company's ability to take
advantage of other market opportunities or to dispose of securities in order to
make required payments of interest on the Tortoise Notes or to redeem such
notes.
Valuation Risk. Market prices generally will not be available for MLP
convertible subordinated units, or securities of private companies, and the
value of such investments ordinarily will be determined based on fair valuations
determined by the Adviser pursuant to procedures adopted by the Board of
Directors. Similarly, common units acquired through direct placements will be
valued based on fair value determinations because of their restricted nature;
however, the Adviser expects that such values will be based on a discount from
publicly available market prices. Restrictions on resale or the absence of a
liquid secondary market may adversely affect the ability of the Company to
determine its net asset value. The sale price of securities that are not readily
marketable may be lower or higher than the Company's most recent determination
of their fair value. Additionally, the value of these securities typically
requires more reliance on the judgment of the Adviser than that required for
securities for which there is an active trading market. Due to the difficulty in
valuing these securities and the absence of an active trading market for these
investments, the Company may not be able to realize these securities' true
value, or may have to delay their sale in order to do so. This may affect
adversely the Company's ability to make required payments of interest on the
Tortoise Notes or redemption payments on such notes.
Interest Rate Risk. Generally, when market interest rates rise, the
values of debt securities decline, and vice versa. The Company's investment in
such securities means that the net asset value and market price of the Company's
common stock will tend to decline if market interest rates rise. During periods
of declining interest rates, the issuer of a security may exercise its option to
prepay principal
34
earlier than scheduled, forcing the Company to reinvest in lower yielding
securities. This is known as call or prepayment risk. Lower grade securities
frequently have call features that allow the issuer to repurchase the security
prior to its stated maturity. An issuer may redeem a lower grade obligation if
the issuer can refinance the debt at a lower cost due to declining interest
rates or an improvement in the credit standing of the issuer.
Below Investment Grade Securities Risk. Investing in lower grade debt
instruments involves additional risks than investment grade securities. Adverse
changes in economic conditions are more likely to lead to a weakened capacity of
a below investment grade issuer to make principal payments and interest payments
than an investment grade issuer. An economic downturn could adversely affect the
ability of highly leveraged issuers to service their obligations or to repay
their obligations upon maturity. Similarly, downturns in profitability in the
energy infrastructure industry could adversely affect the ability of below
investment grade issuers in that industry to meet their obligations. The market
values of lower quality securities tend to reflect individual developments of
the issuer to a greater extent than do higher quality securities, which react
primarily to fluctuations in the general level of interest rates.
The secondary market for below investment grade securities may not be
as liquid as the secondary market for more highly rated securities. There are
fewer dealers in the market for below investment grade securities than
investment grade obligations. The prices quoted by different dealers may vary
significantly, and the spread between the bid and asked price is generally much
larger than for higher quality instruments. Under adverse market or economic
conditions, the secondary market for below investment grade securities could
contract further, independent of any specific adverse change in the condition of
a particular issuer, and these instruments may become illiquid. As a result, the
Company could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if such securities were widely
traded. This may affect adversely the Company's ability to make required
payments of interest on the Tortoise Notes or redemption payments on such notes.
Prices realized upon the sale of such lower-rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the
Company's net asset value.
Because investors generally perceive that there are greater risks
associated with lower quality securities of the type in which the Company may
invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the debt securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
Factors having an adverse impact on the market value of below
investment grade securities may have an adverse effect on the Company's net
asset value and the market value of its common stock. In addition, the Company
may incur additional expenses to the extent it is required to seek recovery upon
a default in payment of principal or interest on its portfolio holdings. In
certain circumstances, the Company may be required to foreclose on an issuer's
assets and take possession of its property or operations. In such circumstances,
the Company would incur additional costs in disposing of such assets and
potential liabilities from operating any business acquired.
Management Risk. The Adviser was formed in October 2002 to provide
portfolio management services to institutional and high-net worth investors
seeking professional management of their MLP investments. The Adviser has been
managing the Company since it began operations in February 2004. The Adviser
relies on the officers, employees, and resources of Fountain Capital, KCEP and
their affiliates for certain functions. Three of the five members of the
investment committee are affiliates of, but not employees of, the Adviser, and
each have other significant responsibilities with such affiliated entities.
Fountain Capital, KCEP and their affiliates conduct businesses and activities of
their own in
35
which the Adviser has no economic interest. If these separate activities become
significantly greater than the Adviser's activities, there could be material
competition for the efforts of key personnel.
Nondiversification Risk. The Company is a nondiversified, closed-end
management investment company under the 1940 Act and will not be treated as a
regulated investment company under the Internal Revenue Code. Accordingly, there
are no regulatory limits under the 1940 Act or the Internal Revenue Code on the
number or size of securities held by the Company. There currently are
approximately forty-seven companies presently organized as MLPs and only a
limited number of those companies operate energy infrastructure assets. The
Company selects MLP investments from this small pool of issuers. The Company may
invest in non-MLP securities issued by energy infrastructure companies to a
lesser degree, consistent with its investment objective and policies.
Counterparty Risk. The Company may be subject to credit risk with
respect to the counterparties to certain derivative agreements entered into by
the Company. If a counterparty becomes bankrupt or otherwise fails to perform
its obligations under a derivative contract due to financial difficulties, the
Company may experience significant delays in obtaining any recovery under the
derivative contract in a bankruptcy or other reorganization proceeding. The
Company may obtain only a limited recovery or may obtain no recovery in such
circumstances.
Effects of Terrorism. The U.S. securities markets are subject to
disruption as a result of terrorist activities, such as the terrorist attacks on
the World Trade Center on September 11, 2001; war, such as the war in Iraq and
its aftermath; and other geopolitical events. Such events have led, and in the
future may lead, to short-term market volatility and may have long-term effects
on the U.S. economy and markets.
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The business and affairs of the Company are managed under the direction
of the Board of Directors. Accordingly, the Company's Board of Directors
provides broad supervision over the affairs of the Company, including
supervision of the duties performed by the Adviser. The officers of the Company
are responsible for the Company's day-to-day operations. The names and business
addresses of the directors and officers of the Company, together with their
principal occupations and other affiliations during the past five years, are set
forth in the Statement of Additional Information. The Board of Directors of the
Company consists of a majority of directors who are not interested persons (as
defined in the 1940 Act) of the Adviser or its affiliates.
INVESTMENT ADVISER
Pursuant to an Advisory Agreement, the Adviser provides the Company
with investment research and advice and furnishes the Company with an investment
program consistent with the Company's investment objective and policies, subject
to the supervision of the Board. The Adviser determines which portfolio
securities will be purchased or sold, arranges for the placing of orders for the
purchase or sale of portfolio securities, selects brokers or dealers to place
those orders, maintains books and records with respect to the Company's
securities transactions and reports to the Board on the Company's investments
and performance.
The Adviser is located at 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210. The Adviser specializes in managing portfolios of MLPs and
other energy infrastructure companies. The Adviser was formed in October 2002 to
provide portfolio management services to institutional and high net worth
investors seeking professional management of their MLP investments. As of
January 31, 2005,
36
the Adviser had approximately $___ million of client assets under management.
The Adviser's investment committee is comprised of five seasoned portfolio
managers led by David J. Schulte, CFA.
The Adviser is controlled equally by Fountain Capital Management,
L.L.C. ("Fountain Capital") and Kansas City Equity Partners LC ("KCEP").
Fountain Capital was formed in 1990 and is focused primarily on providing
investment advisory services to institutional investors with respect to below
investment grade debt. Atlantic Asset Management LLC ("Atlantic") is a minority
owner, and an affiliate, of Fountain Capital. Atlantic was formed in 1992 and
provides, directly or through affiliates, a variety of fixed-income investment
advisory services including investment grade bond and high-yield bond
strategies, investment grade collateralized debt obligations and mortgage hedge
funds. KCEP was formed in 1993 and is focused solely on managing two private
equity funds. KCEP focuses on private equity investments in the consumer,
telecom/media and natural resource distribution and services industries.
The Adviser relies on the officers, employees, and resources of
Fountain Capital, KCEP and their affiliates for certain functions. Three of the
five members of the investment committee of the Adviser are affiliates of, but
not employees of, the Adviser. Each member of the investment committee has other
significant responsibilities with such affiliated entities. The affiliated
entities conduct businesses and activities of their own in which the Adviser has
no economic interest. If these separate activities become significantly greater
than the Adviser's activities, there could be material competition for the
efforts of key personnel.
The investment management of the Company's portfolio is the
responsibility of a team of portfolio managers consisting of David J. Schulte,
H. Kevin Birzer, Zachary A. Hamel, Kenneth P. Malvey, and Terry C. Matlack. Each
team member has been a portfolio manager since the commencement of the Company's
operations in February 2004.
David J. Schulte. Mr. Schulte is a Managing Director of KCEP
and a Manager of the Adviser. Mr. Schulte focuses on acquisition
financings primarily for natural resource distribution and service
companies. Prior to joining KCEP in 1993, Mr. Schulte had over five
years of experience completing acquisition and public equity financings
as an investment banker at the predecessor of Oppenheimer & Co, Inc.
From 1986 to 1989, he was a securities law attorney. Mr. Schulte holds
a Bachelor of Science degree in Business Administration from Drake
University and a Juris Doctorate degree from the University of Iowa. He
earned his CFA designation in 1992, and is a member of the Corporate
Governance Task Force of the CFA Institute.
H. Kevin Birzer. Mr. Birzer is a Partner/Senior Analyst with
Fountain Capital and a Manager of the Adviser. Mr. Birzer, who has 20
years of investment experience including 16 in high-yield securities,
began his career with Peat Marwick. His subsequent experience includes
three years working as a Vice President for F. Martin Koenig & Co.,
focusing on equity and option investments, and three years at Drexel
Burnham Lambert, where he was a Vice President in the Corporate Finance
Department. Mr. Birzer graduated magna cum laude with a Bachelor of
Business Administration degree from the University of Notre Dame and
holds a Master of Business Administration degree from New York
University. He earned his CFA designation in 1988.
Zachary A. Hamel. Mr. Hamel is a Partner/Senior Analyst with
Fountain Capital and a Manager of the Adviser. Mr. Hamel joined
Fountain in 1997. He covers energy, chemicals and utilities. Prior to
joining Fountain, Mr. Hamel worked for the Federal Deposit Insurance
Corporation for eight years as a Bank Examiner and a Regional Capital
Markets Specialist. Mr. Hamel graduated from Kansas State University
with a Bachelor of Science in Business
37
Administration. He also attained a Master in Business Administration
from the University of Kansas School of Business. He earned his CFA
designation in 1998.
Kenneth P. Malvey. Mr. Malvey joined Fountain Capital as an
Investment Analyst in 2002 and is a Manager of the Adviser. Prior to
joining Fountain Capital, Mr. Malvey was one of three members of the
Global Office of Investments for GE Capital's Employers Reinsurance
Corporation. Most recently he was the Global Investment Risk Manager
for a portfolio of approximately $24 billion of fixed-income, public
equity and alternative investment assets. Prior to joining GE in 1996,
Mr. Malvey was a Bank Examiner and Regional Capital Markets Specialist
with the FDIC for nine years. Mr. Malvey graduated magna cum laude with
a Bachelor of Science degree in Finance from Winona State University,
Winona, Minnesota. He received his CFA designation in 1996.
Terry C. Matlack. Mr. Matlack is a Managing Director of KCEP
and Manager of the Adviser. Prior to joining KCEP in 2001, Mr. Matlack
was President of GreenStreet Capital and its affiliates in the
telecommunications service industry. Prior to 1995, he was Executive
Vice President and a member of the board of directors of W. K.
Communications, Inc., a cable television acquisition company, and Chief
Operating Officer of W. K. Cellular, a cellular rural service area
operator. He also has served as a specialist in corporate finance with
George K. Baum & Company, and as Executive Vice President of Corporate
Finance at B.C. Christopher Securities Company. Mr. Matlack graduated
with a Bachelor of Science in Business Administration from Kansas State
University and holds a Masters of Business Administration and a Juris
Doctorate from the University of Kansas. He earned his CFA designation
in 1985.
COMPENSATION AND EXPENSES
Under the Advisory Agreement, the Company pays to the Adviser
quarterly, as compensation for the services rendered by it, a fee equal on an
annual basis to 0.95% of the Company's average monthly Managed Assets. Managed
Assets means the total assets of the Company (including any assets attributable
to leverage that may be outstanding) minus accrued liabilities other than (1)
deferred taxes, (2) debt entered into for the purpose of leverage and (3) the
aggregate liquidation preference of any outstanding preferred stock. Because the
fee paid to the Adviser is determined on the basis of the Company's Managed
Assets, the Adviser's interest in determining whether to leverage the Company
may conflict with the interests of the Company. The Company's average monthly
Managed Assets are determined for the purpose of calculating the management fee
by taking the average of the monthly determinations of Managed Assets during a
given calendar quarter. The fees are payable for each calendar quarter within
five days after the end of that quarter. The Adviser has contractually agreed to
waive or reimburse the Company for fees and expenses, including the investment
advisory fee and other expenses in the amount of 0.23% of average monthly
Managed Assets for the first two years of the Company's operations and 0.10% of
average monthly Managed Assets in years three through five.
The Company bears all expenses not specifically assumed by the Adviser
incurred in the Company's operations and will bear the expenses of the offering
of its Tortoise Notes. Expenses borne by the Company include, but are not
limited to, the following: (1) expenses of maintaining the Company and
continuing its existence, (2) registration of the Company under the 1940 Act,
(3) commissions, spreads, fees and other expenses connected with the
acquisition, holding and disposition of securities and other investments,
including placement and similar fees in connection with direct placements
entered into on behalf of the Company, (4) auditing, accounting and legal
expenses, (5) taxes and interest, (6) governmental fees, (7) expenses of listing
shares of the Company with a stock exchange, and expenses of the issue, sale,
repurchase and redemption (if any) of interests in the Company, including
expenses of conducting tender offers for the purpose of repurchasing Company
interests, (8) expenses of registering
38
and qualifying the Company and its shares under federal and state securities
laws and of preparing and filing registration statements and amendments for such
purposes, (9) expenses of reports and notices to stockholders and of meetings of
stockholders and proxy solicitations therefor, (10) expenses of reports to
governmental officers and commissions, (11) insurance expenses, (12) association
membership dues, (13) fees, expenses and disbursements of custodians and
subcustodians for all services to the Company (including without limitation
safekeeping of funds, securities and other investments, keeping of books,
accounts and records, and determination of net asset values), (14) fees,
expenses and disbursements of transfer agents, dividend paying agents,
stockholder servicing agents and registrars for all services to the Company,
(15) compensation and expenses of directors of the Company who are not members
of the Adviser's organization, (16) pricing and valuation services employed by
the Company, (17) all expenses incurred in connection with leveraging of the
Company's assets through a line of credit, or issuing and maintaining notes or
preferred stock, (18) all expenses incurred in connection with the organization
of the Company and offerings of the Company's common stock, and (19) such
non-recurring items as may arise, including expenses incurred in connection with
litigation, proceedings and claims and the obligation of the Company to
indemnify its directors, officers and stockholders with respect thereto.
RATING AGENCY GUIDELINES
The Ratings Agencies impose asset coverage requirements, which may
limit the Company's ability to engage in certain types of transactions and may
limit the Company's ability to take certain actions without confirming that such
action will not impair the ratings.
The Company may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by any Rating Agency. Failure to
adopt any modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any Rating
Agency may, at any time, change or withdraw any rating. The Board may, without
stockholder approval, amend, alter or repeal certain of the definitions and
related provisions which have been adopted by the Company pursuant to the Rating
Agency Guidelines only in the event the Company receives written confirmation
from the Rating Agency or Agencies that any amendment, alteration or repeal
would not impair the ratings then assigned to the Tortoise Notes.
Tortoise Notes Basic Maintenance Amount. The Company must maintain, as
of each Valuation Date on which any Tortoise Notes are outstanding, Eligible
Assets having an aggregate Discounted Value at least equal to the Tortoise Notes
Basic Maintenance Amount, which is calculated separately for each Rating Agency
that is then rating the Tortoise Notes and so requires. If the Company fails to
maintain Eligible Assets having an aggregated Discounted Value at least equal to
the Tortoise Notes Basic Maintenance Amount as of any Valuation Date and such
failure is not cured on or before the related Asset Coverage Cure Date, the
Company will be required in certain circumstances to redeem certain of the
Tortoise Notes. See "--Redemption--Mandatory Redemption."
The Tortoise Notes Basic Maintenance Amount as of any Valuation Date is
currently defined in the Rating Agency Guidelines as the dollar amount equal to:
(1) the sum of
(A) the product resulting from multiplying the number
of outstanding Tortoise Notes of each series on such date by
$25,000 plus any redemption premium;
(B) the aggregate amount of accrued interest at the
Applicable Rate to and including the first Interest Payment
Date that follows such Valuation Date (or to the 30th
39
day after such Valuation Date, if such 30th day occurs before
the first following Interest Payment Date);
(C) the amount of anticipated Company non-interest
expenses for the 90 days subsequent to such Valuation Date;
(D) the amount of the current outstanding balances of
any indebtedness senior to the Tortoise Notes plus interest
actually accrued together with 30 days' additional interest on
the current outstanding balances calculated at the current
rate; and
(E) any current liabilities, payable during the 30
days subsequent to such Valuation Date, including, without
limitation, indebtedness due within one year and any
redemption premium due with respect to Tortoise Notes for
which a Notice of Redemption has been given, as of such
Valuation Date, to the extent not reflected in any of (i)(A)
through (i)(D); less
(2) any cash plus the value of any of the Company's assets
irrevocably deposited by the Company for the payment of any (1)(B)
through (1)(E) ("value," for purposes of this clause (2), means the
Discounted Value of the security, except that if the security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated at least P-1 by Moody's,
it will be valued at its face value).
Each Rating Agency may amend the definition of Tortoise Notes Basic Maintenance
Amount from time to time.
The Market Value of the Company's portfolio securities (used in
calculating the Discounted Value of Eligible Assets) is calculated using readily
available market quotations when appropriate, and in any event, consistent with
the Company's Valuation Procedures. For the purpose of calculating the Tortoise
Notes Basic Maintenance Amount, portfolio securities are valued in the same
manner as the Company calculates its net asset value. See "Net Asset Value" in
the Statement of Additional Information.
Each Rating Agency's Discount Factors, the criteria used to determine
whether the assets held in the Company's portfolio are Eligible Assets, and the
guidelines for determining the Discounted Value of the Company's portfolio
holdings for purposes of determining compliance with the Tortoise Notes Basic
Maintenance Amount are based on Rating Agency Guidelines established in
connection with assigning a rating to the Tortoise Notes. The Discount Factor
relating to any asset of the Company, the Tortoise Notes Basic Maintenance
Amount, the assets eligible for inclusion in the calculation of the Discounted
Value of the Company's portfolio and certain definitions and methods of
calculation relating thereto may be changed from time to time by the applicable
Rating Agency, without the approval of the Company, Board of Directors or
stockholders.
A Rating Agency's Guidelines will apply to Tortoise Notes only so long
as such Rating Agency is rating such Tortoise Notes. The Company will pay
certain fees to Moody's and Fitch and any Other Rating Agency that may provide a
rating for the Tortoise Notes. The ratings assigned to Tortoise Notes are not
recommendations to buy, sell or hold Tortoise Notes. Such ratings may be subject
to revision or withdrawal by the assigning Rating Agency at any time.
1940 Act Tortoise Notes Asset Coverage. The Company also is required to
maintain, with respect to Tortoise Notes, as of the last Business Day on any
month in which any Tortoise Notes are outstanding, asset coverage of at least
300% (or such other percentage as may in the future be specified in or under the
1940 Act as the minimum asset coverage for senior securities representing
indebtedness of a closed-end
40
investment company as a condition of declaring dividends on its common shares)
("1940 Act Tortoise Notes Asset Coverage"). If the Company fails to maintain the
1940 Act Tortoise Notes Asset Coverage as of the last Business Day of any month
and such failure is not cured as of the last business day of the following month
(the "Asset Coverage Cure Date"), the Company will be required to redeem certain
Tortoise Notes. See "Description of Tortoise Notes--Redemption--Mandatory
Redemption."
The Company estimates that based on the composition of its portfolio as
of January 31, 2005, assuming the issuance of all Series C Tortoise Notes
offered hereby and giving effect to the deduction of underwriting discounts and
sales commissions and estimated offering costs related thereto estimated at
$_________, the 1940 Act Tortoise Notes Asset Coverage would be:
Value of Company assets less all liabilities and
indebtedness not represented by senior securities $
---------------------------------------------------------- = ------------- = %
Senior securities representing indebtedness, including the $
aggregate principal amount of Tortoise Notes
Notices. Under the current Rating Agency Guidelines, after the Original
Issue Date and in certain other circumstances, the Company is required to
deliver to any Rating Agency which is then rating the Tortoise Notes (i) a
certificate with respect to the calculation of the Tortoise Notes Basic
Maintenance Amount; (ii) a certificate with respect to the calculation of the
1940 Act Tortoise Notes Asset Coverage and the value of the portfolio holdings
of the Company; and (iii) a letter prepared by the Company's independent
accountants regarding the accuracy of such calculations.
Notwithstanding anything herein to the contrary, the Rating Agency
Guidelines, as they may be amended from time to time by each Rating Agency, will
be reflected in a written document and may be amended by each Rating Agency
without the vote, consent or approval of the Company, the Board of Directors and
any holder of Tortoise Notes, or any stockholder of the Company.
A copy of the current Rating Agency Guidelines will be provided to any
holder of Tortoise Notes promptly upon written request by such holder to the
Company at 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.
DESCRIPTION OF TORTOISE NOTES
Tortoise Notes of each series will rank on a parity with any other
series of Tortoise Notes as to the payment of interest and distribution of
assets upon liquidation. All Tortoise Notes rank senior to the Company's common
and preferred stock as to the payment of interest and distribution of assets
upon liquidation. Under the 1940 Act, the Company may only issue one class of
senior securities representing indebtedness.
On July 15, 2004, the Company issued two series of Tortoise Notes,
Series A and Series B, pursuant to the terms of an Original Indenture and a
Supplemental Indenture, each dated as of July 13, 2004 between the Company and
BNY Midwest Trust Company, as Trustee (the "Trustee"). The Series C Tortoise
Notes will be issued pursuant to the Original Indenture and a Supplemental
Indenture dated as of ___________, 2005 (referred to herein collectively with
the Original Indenture as the "Indenture"). The following summaries of certain
significant provisions of the Indenture are not complete and are qualified in
their entirety by the provisions of the Indenture, a more detailed summary of
which is contained in Appendix A to the Statement of Additional Information,
which is on file with the Commission and is incorporated herein by reference.
Whenever defined terms are used, but not defined in this Prospectus, the terms
have the meaning given to them in Appendix A to the Statement of Additional
Information.
41
GENERAL
The Board of Directors has authorized the Company to issue the Series C
Tortoise Notes representing indebtedness pursuant to the terms of the Indenture.
Currently, the Indenture provides for the issuance of up to $__________
aggregate principal amount of Series C Tortoise Notes. The principal amount of
the Series C Tortoise Notes is due and payable on _______, 2045. The Series C
Tortoise Notes, when issued and sold pursuant to the terms of the Indenture,
will be issued in fully registered form without coupons and in denominations of
$25,000 and any integral multiple thereof, unless otherwise provided in the
Indenture. The Series C Tortoise Notes will be unsecured obligations of the
Company and, upon liquidation, dissolution or winding up of the Company, will
rank: (1) senior to the Company's outstanding common stock and any outstanding
preferred stock, including the MMP Shares; (2) on a parity with any unsecured
creditors of the Company, including any other series of Tortoise Notes; and (3)
junior to any secured creditors of the Company. The Tortoise Notes are subject
to optional and mandatory redemption as described below under "--Redemption,"
and acceleration of maturity, as described below under "--Events of Default and
Acceleration of Maturity; Remedies."
While serving as the Auction Agent in connection with the Auction
Procedures described below, the Auction Agent generally will serve merely as the
agent of the Company, acting in accordance with the Company's instructions.
The Company has the right (to the extent permitted by applicable law)
to purchase or otherwise acquire any Tortoise Notes, so long as the Company is
current in the payment of interest on the Tortoise Notes and on any other notes
of the Company ranking on a parity with the Tortoise Notes with respect to the
payment of interest.
The Tortoise Notes have no voting rights, except to the extent required
by law or as otherwise provided in the Indenture relating to the acceleration of
maturity upon the occurrence and continuance of an event of default.
SECURITIES DEPOSITORY
The nominee of the Securities Depository is expected to be the sole
record Holder of the Tortoise Notes. Accordingly, each purchaser of Tortoise
Notes must rely on (1) the procedures of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such purchaser's Agent
Member, to receive interest payments and notices and (2) the records of the
Securities Depository and, if such purchaser is not a member of the Securities
Depository, such purchaser's Agent Member, to evidence its ownership of the
Tortoise Notes.
Purchasers of Tortoise Notes will not receive certificates representing
their ownership interest in such securities. DTC initially will act as
Securities Depository for the Agent Members with respect to the Tortoise Notes.
INTEREST AND RATE PERIODS
General. Tortoise Notes will bear interest at the Applicable Rate
determined as set forth below under "--Determination of Interest Rate." Interest
on the Tortoise Notes shall be payable when due as described below. If the
Company does not pay interest when due, it will trigger an event of default
under the Indenture (subject to the cure provisions), and the Company will be
restricted from declaring dividends and making other distributions with respect
to its common stock and preferred stock.
42
On the Business Day next preceding each Interest Payment Date, the
Company is required to deposit with the Paying Agent sufficient funds for the
payment of interest. The Company does not intend to establish any reserves for
the payment of interest.
All moneys paid to the Paying Agent for the payment of interest shall
be held in trust for the payment of such interest to the Holder. Interest will
be paid by the Paying Agent to the Holder as its name appears on the securities
ledger or securities records of the Company, which Holder is expected to be the
nominee of the Securities Depository. The Securities Depository will credit the
accounts of the Agent Members of the Beneficial Owners in accordance with the
Securities Depository's normal procedures. The Securities Depository's current
procedures provide for it to distribute interest in same-day funds to Agent
Members who are, in turn, expected to distribute such interest to the persons
for whom they are acting as agents. The Agent Member of a Beneficial Owner will
be responsible for holding or disbursing such payments on the applicable
Interest Payment Date to such Beneficial Owner in accordance with the
instructions of such Beneficial Owner.
Interest in arrears for any past Rate Period may be subject to a
Default Rate of interest (described below) and may be paid at any time, without
reference to any regular Interest Payment Date, to the Holder as its name
appears on the securities ledger or securities records of the Company on such
date, not exceeding fifteen (15) days preceding the payment date thereof, as may
be fixed by the Board of Directors. Any interest payment shall first be credited
against the earliest accrued but unpaid interest. No interest will be payable in
respect of any payment or payments which may be in arrears. See "--Default
Period" below.
The amount of interest payable on each Interest Payment Date (or in
respect of interest on another date in connection with a redemption during such
Rate Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Rate Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Rate Period (or portion
thereof) that such Tortoise Notes were outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be
360, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent.
Determination of Interest Rate. The interest rate for the initial Rate
Period for Series C Tortoise Notes (i.e., the period from and including the
Original Issue Date to and including the initial Auction Date) and the initial
Auction Date are set forth on the cover page of the Prospectus. After the
initial Rate Period, subject to certain exceptions, the Tortoise Notes will bear
interest at the Applicable Rate that the Auction Agent advises the Company has
resulted from an Auction.
The initial Rate Period for the Series C Tortoise Notes will be __
days. Rate Periods after the initial Rate Period shall either be Standard Rate
Periods or, subject to certain conditions and with notice to the Holder, Special
Rate Periods.
A Special Rate Period will not be effective unless, among other things,
Sufficient Clearing Bids exist at the Auction in respect of such Special Rate
Period (that is, in general, the aggregate amount of a series of Tortoise Notes
subject to Buy Orders by Potential Holders is at least equal to the aggregate
amount of that series of Tortoise Notes subject to Sell Orders by Existing
Holders).
Interest will accrue at the Applicable Rate from the Original Issue
Date and shall be payable on each Interest Payment Date thereafter. For Rate
Periods of less than 30 days, Interest Payment Dates shall occur on the first
Business Day following such Rate Period and, if greater than 30 days, then on a
monthly basis on the first Business Day of each month within such Rate Period,
not including the initial Rate Period, and on the Business Day following the
last day of such Rate Period. Interest will be paid through the Securities
Depository on each Interest Payment Date.
43
Except during a Default Period as described below, the Applicable Rate
resulting from an Auction will not be greater than the Maximum Rate, which is
equal to the Applicable Percentage of the Reference Rate, subject to upward but
not downward adjustment in the discretion of the Board of Directors after
consultation with the Broker-Dealers. The Applicable Percentage will be
determined based on the lower of the credit ratings assigned on that date to a
series of Tortoise Notes by Moody's and Fitch, as follows:
MOODY'S FITCH APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or above AA- or above 200%
A3 to A1 A- to A+ 250%
Baa3 to Baa1 BBB- to BBB+ 275%
Below Baa3 Below BBB- 300%
The Reference Rate is the greater of (1) the applicable AA Composite
Commercial Paper Rate (for a Rate Period of fewer than 184 days) or the
applicable Treasury Index Rate (for a Rate Period of 184 days or more), or (2)
the applicable LIBOR. For Standard Rate Periods or less only, the Applicable
Rate resulting from an Auction will not be less than the Minimum Rate, which is
70% of the applicable AA Composite Commercial Paper Rate. No Minimum Rate is
specified for Auctions in respect to Rate Periods of more than the Standard Rate
Period.
The Maximum Rate for a series of Tortoise Notes will apply
automatically following an Auction for the notes in which Sufficient Clearing
Bids have not been made (other than because all Tortoise Notes were subject to
Submitted Hold Orders). If an Auction for any subsequent Rate Period is not held
for any reason, including because there is no Auction Agent or Broker-Dealer,
then the Interest Rate on a series of Tortoise Notes for any such Rate Period
shall be the Maximum Rate (except for circumstances in which the Interest Rate
is the Default Rate, as described below).
The All Hold Rate will apply automatically following an Auction in
which all of the outstanding Tortoise Notes of a series are subject to (or are
deemed to be subject to) Submitted Hold Orders. The All Hold Rate is 80% of the
applicable AA Composite Commercial Paper Rate.
Prior to each Auction, Broker-Dealers will notify Holders and the
Trustee of the term of the next succeeding Rate Period as soon as practicable
after the Broker-Dealers have been so advised by the Company. After each
Auction, on the Auction Date, Broker-Dealers will notify Holders of the
Applicable Rate for the next succeeding Rate Period and of the Auction Date of
the next succeeding Auction.
Notification of Rate Period. The Company will designate the duration of
subsequent Rate Periods for each series of the Tortoise Notes; provided,
however, that no such designation is necessary for a Standard Rate Period and,
provided further, that any designation of a Special Rate Period shall be
effective only if (1) notice thereof shall have been given as provided herein,
(2) any failure to pay in a timely manner to the Trustee the full amount of any
interest on, or the redemption price of, a series of Tortoise Notes shall have
been cured as provided above, (3) Sufficient Clearing Bids shall have existed in
an Auction held on the Auction Date immediately preceding the first day of such
proposed Special Rate Period, (4) if the Company shall have mailed a Notice of
Redemption with respect to any Tortoise Notes, the redemption price with respect
to such Tortoise Notes shall have been deposited with the Paying Agent, and (5)
the Company has confirmed that as of the Auction Date next preceding the first
day of such Special Rate Period, it has Eligible Assets with an aggregate
Discounted Value at least equal to the Tortoise Notes Basic Maintenance Amount,
and the Company has consulted with the Broker-Dealers and has provided notice of
such designation and otherwise complied with the Rating Agency Guidelines.
44
Designation of a Special Rate Period. If the Company proposes to
designate any Special Rate Period, not fewer than seven (7) (or two (2) Business
Days in the event the duration of the Rate Period prior to such Special Rate
Period is fewer than eight (8) days) nor more than thirty (30) Business Days
prior to the first day of such Special Rate Period, notice shall be (1) made by
press release and (2) communicated by the Company by telephonic or other means
to the Trustee and confirmed in writing promptly thereafter. Each such notice
shall state (A) that the Company proposes to exercise its option to designate a
succeeding Special Rate Period, specifying the first and last days thereof and
(B) that the Company will by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of such Special Rate Period, notify
the Auction Agent and the Trustee, who will promptly notify the Broker-Dealers,
of either (x) its determination, subject to certain conditions, to proceed with
such Special Rate Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Rate
Period, in which latter event the succeeding Rate Period shall be a Standard
Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Company
shall deliver to the Trustee and the Auction Agent, who will promptly deliver to
the Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Company has determined to
designate the next succeeding Rate Period as a Special Rate Period,
specifying the first and last days thereof and (B) the terms of any
Specific Redemption Provisions; or
(ii) a notice stating that the Company has determined not to
exercise its option to designate a Special Rate Period.
If the Company fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent and the
Auction Agent is unable to make the confirmation described above by 3:00 p.m.,
New York City time, on the second Business Day next preceding the first day of
such proposed Special Rate Period, the Company shall be deemed to have delivered
a notice to the Auction Agent with respect to such Rate Period to the effect set
forth in clause (ii) above, thereby resulting in a Standard Rate Period.
Default Period. Subject to cure provisions, a Default Period with
respect to a particular series of Tortoise Notes will commence on any date the
Company fails to deposit irrevocably in trust in same-day funds, with the Paying
Agent by 12:00 noon, New York City time,
(A) the full amount of any accrued interest on that series
payable on the Interest Payment Date (an "Interest Default"), or
(B) the full amount of any redemption price (the "Redemption
Price") payable on the date fixed for redemption (the "Redemption
Date") (a "Redemption Default" and together with an Interest Default,
hereinafter referred to as "Default").
Subject to cure provisions, a Default Period with respect to an
Interest Default or a Redemption Default shall end on the Business Day on which,
by 12:00 noon, New York City time, all unpaid interest and any unpaid Redemption
Price shall have been deposited irrevocably in trust in same-day funds with the
Paying Agent. In the case of an Interest Default, the Applicable Rate for each
Rate Period commencing during a Default Period will be equal to the Default
Rate, and each subsequent Rate Period commencing after the beginning of a
Default Period shall be a Standard Rate Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of a
new Rate Period.
45
No Auction shall be held during a Default Period with respect to an
Interest Default applicable to that series of Tortoise Notes. No Default Period
with respect to an Interest Default or Redemption Default shall be deemed to
commence if the amount of any interest or any Redemption Price due (if such
default is not solely due to the willful failure of the Company) is deposited
irrevocably in trust, in same-day funds with the Paying Agent by 12:00 noon, New
York City time within three Business Days after the applicable Interest Payment
Date or Redemption Date, together with an amount equal to the Default Rate
applied to the amount of such non-payment based on the actual number of days
comprising such period divided by 360 for each series. The Default Rate shall be
equal to the Reference Rate multiplied by three.
EVENTS OF DEFAULT AND ACCELERATION OF MATURITY; REMEDIES
With respect to each series of Tortoise Notes any one of the following
events constitutes an "event of default" for that series of Tortoise Notes under
the Indenture:
o default in the payment of any interest upon a series of
Tortoise Notes when it becomes due and payable and the
continuance of such default for 30 days;
o default in the payment of the principal of, or premium on, a
series of Tortoise Notes at its Stated Maturity;
o default in the performance, or breach, of any covenant or
warranty of the Company in the Indenture, and continuance of
such default or breach for a period of 90 days after written
notice has been given to the Company by the Trustee;
o certain voluntary or involuntary proceedings involving the
Company and relating to bankruptcy, insolvency or other
similar laws;
o if, on the last business day of each of twenty-four
consecutive calendar months, the Tortoise Notes have an 1940
Act Tortoise Notes Asset Coverage of less than 100%; or
o any other "event of default" provided with respect to a
series, including a default in the payment of any Redemption
Price payable on the Redemption Date.
Upon the occurrence and continuance of an event of default, the holders
of a majority in principal amount of a series of outstanding Tortoise Notes or
the Trustee may declare the principal amount of that series of Tortoise Notes
immediately due and payable upon written notice to the Company. A default that
relates only to one series of Tortoise Notes does not affect any other series.
Upon an event of default relating to bankruptcy, insolvency or other similar
laws, acceleration of maturity occurs automatically with respect to all series.
At any time after a declaration of acceleration with respect to a series of
Tortoise Notes has been made, and before a judgment or decree for payment of the
money due has been obtained, the holders of a majority in principal amount of
the outstanding Tortoise Notes of that series, by written notice to the Company
and the Trustee, may rescind and annul the declaration of acceleration and its
consequences if all events of default with respect to that series of Tortoise
Notes, other than the non-payment of the principal of that series of Tortoise
Notes which has become due solely by such declaration of acceleration, have been
cured or waived and other conditions have been met.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and
Maryland law, the Company at its option may redeem Tortoise Notes having a Rate
Period of one year or less, in whole or in part, out of funds legally available
therefor, on the Interest Payment Date upon not less than 15 days' and not more
than 40 days' prior notice. This optional redemption is not available during the
initial Rate
46
Period or during other limited circumstances. The optional redemption price
shall be equal to the aggregate principal amount of the Tortoise Notes to be
redeemed, plus an amount equal to accrued interest to the date fixed for
redemption. Tortoise Notes having a Rate Period of more than one year are
redeemable at the option of the Company, in whole or in part, out of funds
legally available therefor, prior to the end of the relevant Rate Period, upon
not less than 15 days, and not more than 40 days, prior notice, subject to any
Specific Redemption Provisions, which may include the payment of redemption
premiums in the sole discretion of the Board of Directors. The Company shall not
effect any optional redemption unless after giving effect thereto (1) the
Company has available on such date fixed for the redemption certain Deposit
Securities with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of a series of Tortoise Notes
by reason of the redemption of a series of Tortoise Notes and (2) the Company
would have Eligible Assets with an aggregate Discounted Value at least equal to
the Tortoise Notes Basic Maintenance Amount immediately subsequent to such
redemption.
Mandatory Redemption. If the Company fails to maintain Eligible Assets
with an aggregate Discounted Value at least equal to the Tortoise Notes Basic
Maintenance Amount as of any Valuation Date or, fails to satisfy the 1940 Act
Tortoise Notes Asset Coverage as of the last Business Day of any month, and such
failure is not cured within ten Business Days following such Valuation Date in
the case of a failure to maintain the Tortoise Notes Basic Maintenance Amount or
on the last Business Day of the following month in the case of a failure to
maintain the 1940 Act Tortoise Notes Asset Coverage as of such last Business Day
(each an "Asset Coverage Cure Date"), the Tortoise Notes will be subject to
mandatory redemption out of funds legally available therefor. See "Rating Agency
Guidelines."
The principal amount of Tortoise Notes to be redeemed in such
circumstances will be equal to the lesser of (1) the minimum principal amount of
Tortoise Notes the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Company having Eligible Assets with an aggregated Discounted Value
at least equal to the Tortoise Notes Basic Maintenance Amount or sufficient to
satisfy the 1940 Act Tortoise Notes Asset Coverage, as the case may be, in
either case as of the relevant Asset Coverage Cure Date (provided that, if there
is no such minimum principal amount of Tortoise Notes the redemption of which
would have such result, all Tortoise Notes then outstanding will be redeemed),
and (2) the maximum principal amount of Tortoise Notes that can be redeemed out
of funds expected to be available therefor on the Mandatory Redemption Date (as
defined below) at the Mandatory Redemption Price (as defined below).
Any redemption of less than all of the outstanding Tortoise Notes of a
series will be made from Tortoise Notes designated by the Company. The Company
shall designate Tortoise Notes to be redeemed on a pro rata basis among the
Holders in proportion to the principal amount of Tortoise Notes they hold, by
lot or such other method as the Company shall deem equitable. No optional or
mandatory redemption of less than all outstanding Tortoise Notes of a series
will be made unless the aggregate principal amount of Tortoise Notes to be
redeemed is equal to $25,000 or integral multiples thereof. Any redemption of
less than all Tortoise Notes outstanding will be made in such a manner that all
Tortoise Notes outstanding after such redemption are in authorized
denominations.
The Company is required to effect such a mandatory redemption not later
than 40 days after the Asset Coverage Cure Date, as the case may be (the
"Mandatory Redemption Date"), except that if the Company does not have funds
legally available for the redemption of, or is not otherwise legally permitted
to redeem, all of the outstanding Tortoise Notes of a series, which are subject
to mandatory redemption, or the Company otherwise is unable to effect such
redemption on or prior to such Mandatory Redemption Date, the Company will
redeem those Tortoise Notes on the earliest practicable date on which the
Company will have such funds available, upon notice to record owners of Tortoise
Notes and the Paying Agent. The Company's ability to make a mandatory redemption
may be limited by the
47
provisions of the 1940 Act or Maryland law. The redemption price per Tortoise
Note in the event of any mandatory redemption will be the principal amount, plus
an amount equal to accrued but unpaid interest to the date fixed for redemption,
plus (in the case of a Rate Period of more than one year) a redemption premium,
if any, determined by the Board of Directors in its sole discretion after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions (the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the
Company will file a notice of its intention to redeem with the Commission so as
to provide at least the minimum notice required by such Rule or any successor
provision (notice currently must be filed with the Commission generally at least
30 days prior to the redemption date). The Company shall deliver a notice of
redemption to the Auction Agent and the Trustee containing the information
described below one Business Day prior to the giving of notice to Holders in the
case of an optional redemption and on or prior to the 30th day preceding the
Mandatory Redemption Date in the case of a mandatory redemption. The Trustee
will use its reasonable efforts to provide notice to each Holder of Tortoise
Notes called for redemption by electronic means not later than the close of
business on the Business Day immediately following the Business Day on which the
Trustee determines the principal amount of Tortoise Notes to be redeemed (or,
during a Default Period with respect to such Tortoise Notes, not later than the
close of business on the Business Day immediately following the day on which the
Trustee receives notice of redemption from the Company). Such notice will be
confirmed promptly by the Trustee in writing not later than the close of
business on the third Business Day preceding the redemption date by providing
the notice to each Holder of record of Tortoise Notes called for redemption, the
Paying Agent (if different from the Trustee) and the Securities Depository
("Notice of Redemption"). The Notice of Redemption will be addressed to the
registered owners of the Tortoise Notes at their addresses appearing on the
books or share records of the Company. Such notice will set forth (1) the
redemption date, (2) the principal amount and identity of Tortoise Notes to be
redeemed, (3) the redemption price (specifying the amount of accrued interest to
be included therein and the amount of the redemption premium, if any), (4) that
interest on the Tortoise Notes to be redeemed will cease to accrue on such
redemption date, and (5) the 1940 Act provision under which redemption shall be
made. No defect in the Notice of Redemption or in the transmittal or mailing
thereof will affect the validity of the redemption proceedings, except as
required by applicable law.
If less than all of the outstanding Tortoise Notes of a series are
redeemed on any date, the amount per Holder to be redeemed on such date will be
selected by the Company on a pro rata basis in proportion to the principal
amount of Tortoise Notes held by such Holder, by lot or by such other method as
is determined by the Company to be fair and equitable, subject to the terms of
any Specific Redemption Provisions and subject to maintaining authorized
denominations as described above. Tortoise Notes may be subject to mandatory
redemption as described herein notwithstanding the terms of any Specific
Redemption Provisions. The Auction Agent will give notice to the Securities
Depository, whose nominee will be the record Holder of all of the Tortoise
Notes, and the Securities Depository will determine the Tortoise Notes to be
redeemed from the account of the Agent Member of each Beneficial Owner. Each
Agent Member will determine the principal amount of Tortoise Notes to be
redeemed from the account of each Beneficial Owner for which it acts as agent.
An Agent Member may select for redemption Tortoise Notes from the accounts of
some Beneficial Owners without selecting for redemption any Tortoise Notes from
the accounts of other Beneficial Owners. In this case, in selecting the Tortoise
Notes to be redeemed, the Agent Member will select by lot or by other fair and
equitable method. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record Holder of all of the Tortoise Notes,
the particular principal amount to be redeemed shall be selected by the Company
by lot, on a pro rata basis between each series or by such other method as the
Company shall deem fair and equitable, as contemplated above.
48
If Notice of Redemption has been given, then upon the deposit of funds
with the Paying Agent sufficient to effect such redemption, interest on such
Tortoise Notes will cease to accrue and such Tortoise Notes will no longer be
deemed to be outstanding for any purpose and all rights of the holders of the
Tortoise Notes so called for redemption will cease and terminate, except the
right of the holders of such Tortoise Notes to receive the redemption price, but
without any interest or additional amount. The Company shall be entitled to
receive from the Paying Agent, promptly after the date fixed for redemption, any
cash deposited with the Paying Agent in excess of (1) the aggregate redemption
price of the Tortoise Notes called for redemption on such date and (2) such
other amounts, if any, to which owners of Tortoise Notes called for redemption
may be entitled. The Company will be entitled to receive, from time to time
after the date fixed for redemption, from the Paying Agent the interest, if any,
earned on such funds deposited with the Paying Agent and the owners of Tortoise
Notes so redeemed will have no claim to any such interest. Any funds so
deposited which are unclaimed two years after such redemption date will be paid,
to the extent permitted by law, by the Paying Agent to the Company upon its
request. After such payment, Holders of Tortoise Notes called for redemption may
look only to the Company for payment.
So long as any Tortoise Notes are held of record by the nominee of the
Securities Depository, the redemption price for such Tortoise Notes will be paid
on the redemption date to the nominee of the Securities Depository. The
Securities Depository's normal procedures provide for it to distribute the
amount of the redemption price to Agent Members who, in turn, are expected to
distribute such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no
Tortoise Notes may be redeemed unless all interest in arrears on the Outstanding
Tortoise Notes, and any indebtedness of the Company ranking on a parity with the
Tortoise Notes, have been or are being contemporaneously paid or set aside for
payment, except in connection with the liquidation of the Company in which case
all Tortoise Notes and all indebtedness ranking on a parity with the Tortoise
Notes must receive proportionate amounts and that the foregoing shall not
prevent the purchase or acquisition of all the Outstanding Tortoise Notes
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, Holders of all
Outstanding Tortoise Notes.
Except for the provisions described above, nothing contained in the
Indenture limits any legal right of the Company to purchase or otherwise acquire
Tortoise Notes outside of an Auction at any price, whether higher or lower than
the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of interest on or the mandatory or optional redemption price with
respect to, any Tortoise Notes for which Notice of Redemption has been given,
and the Company is in compliance with the 1940 Act Tortoise Notes Asset Coverage
and has Eligible Assets with an aggregate Discounted Value at least equal to the
Tortoise Notes Basic Maintenance Amount after giving effect to such purchase or
acquisition on the date thereof. If less than all outstanding Tortoise Notes are
redeemed or otherwise acquired by the Company, the Company shall give notice of
such transaction to the Auction Agent, in accordance with the procedures agreed
upon by the Board of Directors.
PAYMENT OF PROCEEDS UPON DISSOLUTION, ETC.
In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, or (b) any liquidation, dissolution or other winding
up of the Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or
any other marshalling of assets and liabilities of the Company, then (after any
payments with respect to any secured creditor of the Company outstanding at such
time) and in any such event the holders of Tortoise Notes shall be entitled to
receive
49
payment in full of all amounts due or to become due on or in respect of all
Tortoise Notes (including any interest accruing thereon after the commencement
of any such case or proceeding), or provision shall be made for such payment in
cash or cash equivalents or otherwise in a manner satisfactory to the holders of
the Tortoise Notes, before the holders of any common or preferred stock of the
Company are entitled to receive any payment on account of any redemption
proceeds, liquidation preference or dividends from such shares, and to that end
the holders of Tortoise Notes shall be entitled to receive, for application to
the payment thereof, any payment or distribution of any kind or character,
whether in cash, property or securities, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Tortoise Notes, which may be payable or deliverable in respect of the Tortoise
Notes in any such case, proceeding, dissolution, liquidation or other winding up
event.
Unsecured creditors of the Company may include, without limitation,
service providers to the Company including the Adviser, Custodian, Auction
Agent, Broker-Dealers and the Trustee, pursuant to the terms of various
contracts with the Company. Secured creditors of the Company may include without
limitation parties entering into any interest rate swap, floor or cap
transactions, or other similar transactions with the Company that create liens,
pledges, charges, security interests, security agreements or other encumbrances
on the assets of the Company.
A consolidation, reorganization or merger of the Company with or into
any other company, or a sale, lease or exchange of all or substantially all of
the assets of the Company in consideration for the issuance of equity securities
of another company shall not be deemed to be a liquidation, dissolution or
winding up of the Company.
PAYMENT RESTRICTIONS ON SHARES
Under the 1940 Act, the Company may not declare any dividend on common
stock or make any distribution with respect to the common stock or any preferred
stock of the Company or purchase or redeem any common or preferred stock if, at
the time of such declaration (and after giving effect thereto), asset coverage
with respect to the Tortoise Notes and any other senior securities representing
indebtedness (as defined in the 1940 Act), would be less than 300% (or such
other percentage as may in the future be specified in or under the 1940 Act as
the minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of declaring distributions,
purchases or redemptions of shares of its common or preferred stock). Dividends
may be declared upon preferred stock, provided, however, that the Tortoise Notes
and any other senior securities representing indebtedness have an asset coverage
of at least 200% at the time of declaration after deducting the amount of such
dividend.
"Senior securities representing indebtedness" generally means any bond,
debenture, note or similar obligation or instrument constituting a security
(other than shares of beneficial interest) and evidencing indebtedness and could
include the Company's obligations under any Borrowings. For purposes of
determining asset coverage for senior securities representing indebtedness in
connection with the payment of dividends or other distributions on or purchases
or redemptions of stock, the term "senior security" does not include any
promissory note or other evidence of indebtedness issued in consideration of any
loan, extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed. The term "senior
security" also does not include any such promissory note or other evidence of
indebtedness in any case where such a loan is for temporary purposes only and in
an amount not exceeding 5% of the value of the total assets of the Company at
the time when the loan is made; a loan is presumed under the 1940 Act to be for
temporary purposes if it is repaid within 60 days and is not extended or
renewed; otherwise it is presumed not to be for temporary purposes. For purposes
of determining whether the 200% and 300% asset coverage requirements described
above apply in
50
connection with interest payments or distributions on or purchases or
redemptions of stock, such asset coverage may be calculated on the basis of
values calculated as of a time within 48 hours (not including Sundays or
holidays) next preceding the time of the applicable determination.
In addition, a declaration of a dividend or other distribution on or
purchase or redemption of common or preferred stock is prohibited (1) at any
time that an event of default under the Tortoise Notes or any other Borrowings
has occurred and is continuing; or (2) if, after giving effect to such
declaration, the Company would not have eligible portfolio holdings with an
aggregated Discounted Value at least equal to any asset coverage requirements
associated with such Tortoise Notes or other Borrowings; or (3) the Company has
not redeemed the full amount of Tortoise Notes or other Borrowings, if any,
required to be redeemed by any provision for mandatory redemption.
THE AUCTION
GENERAL
Auction Agency Agreement. The Company has entered into an Auction
Agency Agreement (the "Auction Agency Agreement") with the Auction Agent
(currently, The Bank of New York) which provides, among other things, that the
Auction Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for the Series C Tortoise Notes so long as the Applicable Rate
for the Series C Tortoise Notes is to be based on the results of an Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Company on a date no earlier than 60 days after the notice. If the
Auction Agent should resign, the Company will use its best efforts to enter into
an agreement with a successor Auction Agent containing substantially the same
terms and conditions as the Auction Agency Agreement. The Company may remove the
Auction Agent provided that prior to such removal the Company shall have entered
into such an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Company, which provide for the participation of those
Broker-Dealers in Auctions for the Series C Tortoise Notes.
After each Auction for Tortoise Notes the Auction Agent will pay to
each Broker-Dealer, from funds provided by the Company, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Company and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of Tortoise Notes placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
Tortoise Notes will be placed by a Broker-Dealer if such Tortoise Notes were
(a) the subject of Hold Orders deemed to have been submitted to the Auction
Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (1) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such Tortoise Notes as a result of the Auction or
(2) a Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such Tortoise Notes as a result of the Auction or (3) a valid Hold
Order.
The Company may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
51
AUCTION PROCEDURES
Beneficial Owners. Prior to the Submission Deadline on each Auction
Date for a series of Tortoise Notes, each customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer (or, if applicable, the Auction
Agent) as a holder of Tortoise Notes of such series (a "Beneficial Owner") may
submit orders ("Orders") with respect to Tortoise Notes of such series to that
Broker-Dealer as follows:
o Hold Order - indicating its desire to hold Tortoise Notes of
such series without regard to the Applicable Rate for Tortoise
Notes of such series for the next Rate Period thereof.
o Bid - indicating its desire to sell the principal amount of
Outstanding Tortoise Notes, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to
sell if the Applicable Rate for Tortoise Notes of such series
for the next succeeding Rate Period of Tortoise Notes of such
series shall be less than the rate per annum specified by such
Beneficial Owner (also known as a hold at rate order).
o Sell Order - indicating its desire to sell the principal
amount of Outstanding Tortoise Notes, if any, of such series
held by such Beneficial Owner which such Beneficial Owner
offers to sell without regard to the Applicable Rate for
Tortoise Notes of such series for the next succeeding Rate
Period of Tortoise Notes of such series.
Orders submitted (or the failure to do so) by Beneficial Owners under
certain circumstances will have the effects described below. A Beneficial Owner
of Tortoise Notes of such series that submits a Bid with respect to Tortoise
Notes of such series to its Broker-Dealer having a rate higher than the Maximum
Rate for Tortoise Notes of such series on the Auction Date therefore will be
treated as having submitted a Sell Order with respect to such Tortoise Notes. A
Beneficial Owner of Tortoise Notes of such series that fails to submit an Order
with respect to such Tortoise Notes to its Broker-Dealer will be deemed to have
submitted a Hold Order with respect to such Tortoise Notes of such series;
provided, however, that if a Beneficial Owner of Tortoise Notes of such series
fails to submit an Order with respect to Tortoise Notes of such series to its
Broker-Dealer for an Auction relating to a Special Rate Period of more than
twenty-eight (28) days, such Beneficial Owner will be deemed to have submitted a
Sell Order with respect to such Tortoise Notes. A Sell Order shall constitute an
irrevocable offer to sell the Tortoise Notes subject thereto. A Beneficial Owner
that offers to become the Beneficial Owner of additional Tortoise Notes is, for
purposes of such offer, a Potential Beneficial Owner as discussed below.
Potential Beneficial Owners. A customer of a Broker-Dealer that is not
a Beneficial Owner of a series of Tortoise Notes but that wishes to purchase
Tortoise Notes of such series, or that is a Beneficial Owner of Tortoise Notes
of such series that wishes to purchase additional Tortoise Notes of such series
(in each case, a "Potential Beneficial Owner"), may submit Bids to its
Broker-Dealer in which it offers to purchase such principal amount of
Outstanding Tortoise Notes of such series specified in such Bid if the
Applicable Rate for Tortoise Notes of such series determined on such Auction
Date shall be higher than the rate specified in such Bid. A Bid placed by a
Potential Beneficial Owner of Tortoise Notes of such series specifying a rate
higher than the Maximum Rate for Tortoise Notes of such series on the Auction
Date therefor will not be accepted.
The Auction Process. Each Broker-Dealer shall submit in writing, which
shall include a writing delivered via e-mail or other electronic means, to the
Auction Agent, prior to the Submission Deadline or prior to the Submission
Processing Deadline (if certain conditions are satisfied) on each Auction Date,
all Orders for Tortoise Notes of a series subject to an Auction on such Auction
Date obtained by such Broker-Dealer, designating itself (unless otherwise
permitted by the Company) as an Existing Holder in respect of Tortoise Notes
subject to Orders submitted or deemed submitted to it by Beneficial Owners and
52
as a Potential Holder in respect of Tortoise Notes subject to Orders submitted
to it by Potential Beneficial Owners. However, neither the Company nor the
Auction Agent will be responsible for a Broker-Dealer's failure to comply with
the foregoing. Any Order placed with the Auction Agent by a Broker-Dealer as or
on behalf of an Existing Holder or a Potential Holder will be treated in the
same manner as an Order placed with a Broker-Dealer by a Beneficial Owner or
Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit
to the Auction Agent an Order in respect of Tortoise Notes held by it or
customers who are Beneficial Owners will be treated in the same manner as a
Beneficial Owner's failure to submit to its Broker-Dealer an Order in respect of
Tortoise Notes held by it. A Broker-Dealer may also submit Orders to the Auction
Agent for its own account as an Existing Holder or Potential Holder, provided it
is not an affiliate of the Company.
If Sufficient Clearing Bids for a series of Tortoise Notes exist (that
is, the aggregate principal amount of Outstanding Tortoise Notes of such series
subject to Submitted Bids of Potential Holders specifying one or more rates
between the Minimum Rate (for Standard Rate Periods or less, only) and the
Maximum Rate (for all Rate Periods) for Tortoise Notes of such series exceeds or
is equal to the sum of the aggregate principal amount of Outstanding Tortoise
Notes of such series subject to Submitted Sell Orders), the Applicable Rate for
Tortoise Notes of such series for the next succeeding Rate Period thereof will
be the lowest rate specified in the Submitted Bids which, taking into account
such rate and all lower rates bid by Broker-Dealers as or on behalf of Existing
Holders and Potential Holders, would result in Existing Holders and Potential
Holders owning the aggregate principal amount of Tortoise Notes of such series
available for purchase in the Auction. If Sufficient Clearing Bids for a series
of Tortoise Notes do not exist (other than because all of the Outstanding
Tortoise Notes of such series are subject to Submitted Hold Orders), then the
Applicable Rate for all Tortoise Notes of such series for the next succeeding
Rate Period thereof will be equal to the Maximum Rate for Tortoise Notes of such
series. In such event, Holders of Tortoise Notes of such series that have
submitted or are deemed to have submitted Sell Orders may not be able to sell in
such Auction all aggregate principal amount of Tortoise Notes of such series
subject to such Sell Orders. If Broker-Dealers submit or are deemed to have
submitted to the Auction Agent Hold Orders with respect to all Existing Holders
of a series of Tortoise Notes, the Applicable Rate for all Tortoise Notes of
such series for the next succeeding Rate Period will be the All Hold Rate.
The Auction Procedures include a pro rata allocation of Tortoise Notes
for purchase and sale, which may result in an Existing Holder continuing to hold
or selling, or a Potential Holder purchasing, a number of Tortoise Notes that is
less than the number of Tortoise Notes specified in its Order. To the extent the
allocation procedures have that result, Broker-Dealers that have designated
themselves as Existing Holders or Potential Holders in respect of customer
Orders will be required to make appropriate pro rata allocations among their
respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also an Interest Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
BROKER-DEALERS
The Broker-Dealer agreements each provide that a Broker-Dealer may
submit Orders in Auctions for its own account. Any Broker-Dealer submitting an
Order for its own account in any Auction could have an advantage over other
Potential Holders in that it would have knowledge of other Orders placed through
it in that Auction. A Broker Dealer would not, however, have knowledge of Orders
submitted by other Broker-Dealers, if any. As a result of bidding by a
Broker-Dealer in an Auction, the Auction Rate
53
may be higher or lower than the rate that would have prevailed had the
Broker-Dealer not bid. A Broker-Dealer may also bid in an Auction in order to
prevent what would otherwise be (a) a failed Auction, (b) an "all-hold" Auction,
or (c) the implementation of an Interest Rate that the Broker-Dealer believes,
in its sole judgment, does not reflect the market for such securities at the
time of the Auction. A Broker-Dealer may also encourage additional or revised
investor bidding in order to prevent an "all-hold" Auction. In the Broker-Dealer
agreements, each Broker-Dealer agrees to handle customers' orders in accordance
with its duties under applicable securities laws and rules.
According to published news reports, the Securities and Exchange
Commission (the "Commission") has requested information from a number of
broker-dealers regarding certain of their practices in connection with auction
rate securities, such as the practices described in the preceding paragraph.
Lehman Brothers has advised the Company that it, as a participant in the auction
rate securities markets, has received a letter from the Commission requesting
that it voluntarily conduct an investigation regarding certain of its practices
and procedures in connection with those markets. Lehman Brothers is cooperating
with the Commission in providing the requested information. No assurance can be
given as to whether the results of this process will affect the market for the
notes or the auctions therefor.
SECONDARY MARKET TRADING AND TRANSFER OF TORTOISE NOTES
The Broker-Dealers may maintain a secondary trading market of Tortoise
Notes outside of Auctions, but are not obligated to do so, and may discontinue
such activity at any time. There can be no assurance that such secondary trading
market of Tortoise Notes will provide owners with liquidity of investment.
Tortoise Notes are not listed on any exchange or automated quotation system.
Investors who purchase Tortoise Notes in an Auction for a Special Rate Period
should note that because the interest rate on such Tortoise Notes will be fixed
for the length of such Rate Period, the value of the Tortoise Notes may
fluctuate in response to changes in interest rates, and may be more or less than
their original cost if sold on the open market in advance of the next Auction,
depending upon market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of an aggregate principal amount of Tortoise Notes only in
$25,000 increments and only as follows:
(1) pursuant to a Bid or Sell Order placed with the Auction Agent
in accordance with the Auction Procedures,
(2) to or through a Broker-Dealer, or
(3) to the Company or any affiliate; provided, however, that (a) a
sale, transfer or other disposition of an aggregate principal
amount of Tortoise Notes from a customer of a Broker-Dealer
who is listed on the records of that Broker-Dealer as the
holder of such Tortoise Notes to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a
sale, transfer or other disposition for purposes of the
foregoing if such Broker-Dealer remains the Existing Holder of
the Tortoise Notes so sold, transferred or disposed of
immediately after such sale, transfer or disposition and
(b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other person, if permitted by
the Company) to whom such transfer is made shall advise the
Auction Agent of such transfer.
54
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company's Charter authorizes the issuance of 100,000,000 shares of
common stock, par value $0.001 per share ("common stock"). As of January 31,
2005, the Company had ________ shares of common stock outstanding. The Board of
Directors may, without any action by the stockholders, amend the Company's
charter from time to time to increase or decrease the aggregate number of shares
of stock or the number of shares of stock of any class or series that the
Company has the authority to issue. All shares of common stock have equal rights
to the payment of dividends and the distribution of assets upon liquidation.
Shares of common stock will, when issued, be fully paid and, subject to matters
discussed in "Certain Provisions in the Company's Charter and Bylaws,"
non-assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting. At any time when Tortoise Notes are outstanding, common
stockholders will not be entitled to receive any cash distributions from the
Company unless all accrued interest on Tortoise Notes has been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to Tortoise Notes would
be at least 300% after giving effect to the distributions. At any time when MMP
Shares are outstanding, common stockholders will not be entitled to receive any
cash distributions from the Company unless all accrued dividends on MMP Shares
have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to MMP Shares would be at least 200% after giving effect to the
distributions.
The common stock is listed on the NYSE. The Company intends to hold
annual meetings of stockholders so long as the common stock is listed on a
national securities exchange and such meetings are required as a condition to
such listing.
PREFERRED STOCK
The Company's Charter authorizes the issuance of 10,000,000 shares of
preferred stock, par value $.001 per share, with such preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption, as
determined by the Board of Directors, by action of the Board of Directors
without the approval of the common stockholders. As of January 31, 2005, the
Company had 1,400 MMP Shares outstanding with an aggregate liquidation
preference of $35,000,000.
The MMP Shares rank junior to the Tortoise Notes and any other
Borrowings, on par with other preferred stock of the Company, if any, and senior
to all common stock. Under the 1940 Act, the Company may only issue one class of
senior equity securities. So long as MMP Shares are outstanding, additional
issuances of preferred stock must be of the same class as MMP Shares and will
have no preference or priority over the MMP Shares upon the distribution of
assets of the Company. It is expected that any additional issuance of preferred
stock would be additional series of MMP Shares. The MMP Shares are not
convertible into shares of common stock or other stock of the Company, have no
preemptive rights, and are not subject to any sinking fund. The MMP Shares are
subject to optional and mandatory redemption under certain circumstances. Any
redemption or purchase of preferred stock by the Company will reduce the
leverage applicable to the common stock, while any resale of preferred stock by
the Company will increase that leverage.
Distribution Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of preferred
stock would be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per share plus
accumulated and unpaid dividends, whether or not declared, before any
distribution of assets is made to holders of common stock. After payment of the
full amount of the liquidating distribution to which they are entitled,
55
the holders of preferred stock will not be entitled to any further participation
in any distribution of assets by the Company.
Voting Rights. Except as otherwise indicated in the Charter or Bylaws,
or as otherwise required by applicable law, holders of preferred stock have one
vote per share and vote together with holders of common stock as a single class.
The 1940 Act requires that the holders of any preferred stock, voting
separately as a single class, have the right to elect at least two directors at
all times. The remaining directors will be elected by holders of common stock
and preferred stock, voting together as a single class. In addition, subject to
the prior rights, if any, of the holders of any other class of senior securities
outstanding, the holders of any shares of preferred stock have the right to
elect a majority of the directors at any time two years' accumulated dividends
on any preferred stock are unpaid. The 1940 Act also requires that, in addition
to any approval by stockholders that might otherwise be required, the approval
of the holders of a majority of shares of any outstanding preferred stock,
voting separately as a class, would be required to (i) adopt any plan of
reorganization that would adversely affect the preferred stock, and (ii) take
any action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, changes in the Company's subclassification
as a closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Company's Charter and Bylaws." As a
result of these voting rights, the Company's ability to take any such actions
may be impeded to the extent that any shares of its preferred stock are
outstanding.
The affirmative vote of the holders of a majority of the outstanding
preferred stock, voting as a separate class, will be required to amend, alter or
repeal any of the preferences, rights or powers of holders of preferred stock so
as to affect materially and adversely such preferences, rights or powers. The
class vote of holders of preferred stock described above will in each case be in
addition to any other vote required to authorize the action in question.
Except in an auction in which the MMP Shares are traded, the Company
will have the right (to the extent permitted by applicable law) to purchase or
otherwise acquire any MMP Share, so long as the Company is current in the
payment of dividends on the MMP Shares and on any other shares of the Company
ranking on a parity with the MMP Shares with respect to the payment of dividends
or upon liquidation.
CERTAIN PROVISIONS IN THE COMPANY'S CHARTER AND BYLAWS
The following description of certain provisions of the Charter and
Bylaws is only a summary. For a complete description, please refer to the
Charter and Bylaws, which have been filed as exhibits to the Company's
registration statement.
The Charter and Bylaws include provisions that could delay, defer or
prevent other entities or persons from acquiring control of the Company, causing
it to engage in certain transactions or modifying its structure. These
provisions may be regarded as "anti-takeover" provisions. The holders of
Tortoise Notes have no voting rights, except to the extent required by law or as
otherwise provided in the Indenture relating to the acceleration of maturity
upon the occurrence and continuance of an event of default.
CLASSIFICATION OF THE BOARD OF DIRECTORS; ELECTION OF DIRECTORS
The Charter provides that the number of directors may be established
only by the Board of Directors pursuant to the Bylaws, but may not be less than
one. The Bylaws provide that the number of
56
directors may not be greater than nine. Subject to any applicable limitations of
the 1940 Act, any vacancy may be filled, at any regular meeting or at any
special meeting of stockholders called for that purpose, only by a majority of
the remaining directors, even if those remaining directors do not constitute a
quorum. Pursuant to the Charter, the Board of Directors is divided into three
classes: Class I, Class II and Class III. The initial terms of Class I, Class II
and Class III directors will expire in 2005, 2006 and 2007, respectively.
Beginning in 2005, upon the expiration of their current terms, directors of each
class will be elected to serve for three-year terms and until their successors
are duly elected and qualified. Holders of Tortoise Notes do not have any right
with respect to the election of directors. Beginning in 2006 and each year
thereafter, only one class of directors will be elected by the stockholders. The
classification of the Board of Directors should help to assure the continuity
and stability of the Company's strategies and policies as determined by the
Board of Directors.
The classified Board provision could have the effect of making the
replacement of incumbent directors more time-consuming and difficult. At least
two annual meetings of stockholders, instead of one, generally will be required
to effect a change in a majority of the Board of Directors. Thus, the classified
Board provision could increase the likelihood that incumbent directors will
retain their positions. The staggered terms of directors may delay, defer or
prevent a change in control of the Board, even though a change in control might
be in the best interests of the stockholders.
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed only for cause and
only by the affirmative vote of at least two-thirds of the votes entitled to be
cast in the election of directors. This provision, when coupled with the
provision in the Bylaws authorizing only the Board of Directors to fill vacant
directorships, precludes stockholders from removing incumbent directors, except
for cause and by a substantial affirmative vote, and filling the vacancies
created by the removal with nominees of stockholders.
AMENDMENT TO THE CHARTER AND BYLAWS
The Charter provides that amendments to the Charter must be declared
advisable by the Board of Directors and generally approved by the affirmative
vote of stockholders entitled to cast at least a majority of the votes entitled
to be cast on the matter. Certain provisions of the Charter, including its
provisions on classification of the Board of Directors, election and removal of
directors and conversion of the Company to an open-end investment company, may
be amended only by the affirmative vote of the stockholders entitled to cast at
least 80 percent of the votes entitled to be cast on the matter. However, if
such a proposal is approved by at least two-thirds of the continuing directors
(in addition to approval by the full Board of Directors), such proposal may be
approved by a majority of the votes entitled to be cast on such matter. The
Board of Directors has the exclusive power to adopt, alter or repeal any
provision of the Bylaws and to make new Bylaws.
DISSOLUTION OF THE COMPANY
The Charter provides that any proposal to liquidate or dissolve the
Company requires the approval of the stockholders entitled to cast at least 80
percent of the votes entitled to be cast on such matter. However, if such a
proposal is approved by at least two-thirds of the continuing directors (in
addition to approval by the full Board), such proposal may be approved by a
majority of the votes entitled to be cast on such matter.
57
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only
(1) pursuant to notice of the meeting, (2) by the Board of Directors or (3) by a
stockholder who is entitled to vote at the meeting and who has complied with the
advance notice procedures of the Bylaws. With respect to special meetings of
stockholders, only the business specified in the Company's notice of the meeting
may be brought before the meeting. Nominations of persons for election to the
Board of Directors at a special meeting may be made only (1) pursuant to notice
of the meeting by the Company, (2) by the Board of Directors, or (3) provided
that the Board of Directors has determined that Directors will be elected at the
meeting, by a stockholder who is entitled to vote at the meeting and who has
complied with the advance notice provisions of the Bylaws.
FEDERAL INCOME TAX MATTERS
The following is a general summary of certain federal income tax
considerations affecting the Company and Beneficial Owners of Tortoise Notes.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to Beneficial Owners in light of
their particular circumstances or who are subject to special rules, such as
banks, thrift institutions and certain other financial institutions, real estate
investment trusts, regulated investment companies, insurance companies, brokers
and dealers in securities or currencies, certain securities traders, tax-exempt
investors, individual retirement accounts, certain tax-deferred accounts, and
foreign investors. Unless otherwise noted, this discussion assumes that
Beneficial Owners are U.S. persons and hold Tortoise Notes as capital assets.
More detailed information regarding the federal income tax consequences of
investing in the Company is in the Statement of Additional Information.
FEDERAL INCOME TAX TREATMENT OF THE COMPANY
The Company will be treated as a corporation for federal and state
income tax purposes. Thus, the Company will be obligated to pay federal and
state income tax on its taxable income. The Company intends to invest its assets
primarily in MLPs, which generally are treated as partnerships for federal
income tax purposes. As a partner in the MLPs, the Company will have to report
its allocable share of the MLP's taxable income in computing its taxable income.
Based upon the Company's review of the historic results of the type of MLPs in
which the Company intends to invest, the Company expects that the cash flow
received by the Company with respect to its MLP investments will exceed the
taxable income allocated to the Company. There is no assurance that the
Company's expectation regarding the tax character of MLP distributions will be
realized. If this expectation is not realized, there will be greater tax expense
borne by the Company and less cash available to make required interest,
principal and redemption payments to Beneficial Owners of Tortoise Notes. In
addition, the Company will take into account in its taxable income amounts of
gain or loss recognized on the sale of MLP interests. Currently, the maximum
regular federal income tax rate for a corporation is 35%. The Company may be
subject to a 20% federal alternative minimum tax on its alternative minimum
taxable income to the extent that the alternative minimum tax exceeds the
Company's regular federal income tax.
The Company will not be treated as a regulated investment company under
the Internal Revenue Code. The Internal Revenue Code generally provides that a
regulated investment company does not pay an entity level income tax, provided
that it distributes all or substantially all of its income and capital gains.
The regulated investment company taxation rules have no application to the
Company or to stockholders of the Company.
58
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TORTOISE NOTES
Under present law, the Company is of the opinion that Tortoise Notes
will constitute indebtedness of the Company for federal income tax purposes,
which the below discussion assumes. The Company intends to treat all payments
made with respect to the Tortoise Notes consistent with this characterization.
Taxation of Interest. Payments or accruals of interest on Tortoise
Notes generally will be taxable to you as ordinary interest income at the time
such interest is received (actually or constructively) or accrued, in accordance
with your regular method of accounting for federal income tax purposes.
Purchase, Sale and Redemption of Tortoise Notes. Initially, your tax
basis in Tortoise Notes acquired generally will be equal to your cost to acquire
such Tortoise Notes. This basis will increase by the amounts, if any, that you
are required to include in income under the rules governing market discount, and
will decrease by the amount of any amortized premium on such Tortoise Notes, as
discussed below. When you sell or exchange any of your Tortoise Notes, or if any
of your Tortoise Notes are redeemed, you generally will recognize gain or loss
equal to the difference between the amount you realize on the transaction (less
any accrued and unpaid interest, which will be subject to tax in the manner
described above under "Taxation of Interest") and your tax basis in the Tortoise
Notes relinquished.
Except as discussed below with respect to market discount, the gain or
loss that you recognize on the sale, exchange or redemption of any of your
Tortoise Notes generally will be capital gain or loss. Such gain or loss will
generally be long-term capital gain or loss if the disposed Tortoise Notes were
held for more than one year and will be short-term capital gain or loss if the
disposed Tortoise Notes were held for one year or less. Net long-term capital
gain recognized by a noncorporate U.S. holder generally will be subject to tax
at a lower rate (currently a maximum rate of 15% although this rate will
increase to 20% after 2008) than net short-term capital gain or ordinary income
(currently a maximum rate of 35%). A holder's ability to deduct capital losses
may be limited.
Amortizable Premium. If you purchase Tortoise Notes at a cost greater
than their stated principal amount, plus accrued interest, you will be
considered to have purchased the Tortoise Notes at a premium, and you generally
may elect to amortize this premium as an offset to interest income, using a
constant yield method, over the remaining term of the Tortoise Notes. If you
make the election to amortize the premium, it generally will apply to all debt
instruments that you hold at the time of the election, as well as any debt
instruments that you subsequently acquire. In addition, you may not revoke the
election without the consent of the Internal Revenue Service ("IRS"). If you
elect to amortize the premium, you will be required to reduce your tax basis in
the Tortoise Notes by the amount of the premium amortized during your holding
period. If you do not elect to amortize premium, the amount of premium will be
included in your tax basis in the Tortoise Notes. Therefore, if you do not elect
to amortize the premium and you hold the Tortoise Notes to maturity, you
generally will be required to treat the premium as a capital loss when the
Tortoise Notes are redeemed.
Market Discount. If you purchase Tortoise Notes at a price that
reflects a "market discount," any principal payments on, or any gain that you
realize on the disposition of the Tortoise Notes generally will be treated as
ordinary interest income to the extent of the market discount that accrued on
the Tortoise Notes during the time you held such Tortoise Notes. "Market
discount" is defined under the Internal Revenue Code as, in general, the excess
of the stated redemption price at maturity over the purchase price of the note,
except that if the market discount is less than 0.25% of the stated redemption
price at maturity multiplied by the number of complete years to maturity, the
market discount is considered to be zero. In addition, you may be required to
defer the deduction of all or a portion of any interest paid on any indebtedness
that you incurred or continued to purchase or carry the Tortoise Notes that were
acquired at a market discount. In general, market discount will be treated as
accruing ratably over the term of the Tortoise Notes, or, at your election,
under a constant yield method.
59
You may elect to include market discount in gross income currently as
it accrues (on either a ratable or constant yield basis), in lieu of treating a
portion of any gain realized on a sale of the Tortoise Notes as ordinary income.
If you elect to include market discount on a current basis, the interest
deduction deferral rule described above will not apply. If you do make such an
election, it will apply to all market discount debt instruments that you acquire
on or after the first day of the first taxable year to which the election
applies. This election may not be revoked without the consent of the IRS.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments
of principal, interest, and premium, if any, paid on Tortoise Notes and to the
proceeds of the sale of Tortoise Notes paid to U.S. holders other than certain
exempt recipients (such as certain corporations). Information reporting
generally will apply to payments of interest on the Tortoise Notes to non-U.S.
Holders and the amount of tax, if any, withheld with respect to such payments.
Copies of the information returns reporting such interest payments and any
withholding may also be made available to the tax authorities in the country in
which the non-U.S. Holder resides under the provisions of an applicable income
tax treaty. In addition, for non-U.S. Holders, information reporting will apply
to the proceeds of the sale of Tortoise Notes within the United States or
conducted through United States-related financial intermediaries unless the
certification requirements described below have been complied with and the
statement described below in "Taxation of Non-U.S. Holders" has been received
(and the payor does not have actual knowledge or reason to know that the holder
is a United States person) or the holder otherwise establishes an exemption.
The Company may be required to withhold, for U.S. federal income tax
purposes, a portion of all taxable payments (including redemption proceeds)
payable to holders of Tortoise Notes who fail to provide the Company with their
correct taxpayer identification number, who fail to make required certifications
or who have been notified by the IRS that they are subject to backup withholding
(or if the Company has been so notified). Certain corporate and other
shareholders specified in the Internal Revenue Code and the regulations
thereunder are exempt from backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the holder's U.S.
federal income tax liability provided the appropriate information is furnished
to the IRS. If you are a non-U.S. Holder, you may have to comply with
certification procedures to establish your non-U.S. status in order to avoid
backup withholding tax requirements. The certification procedures required to
claim the exemption from withholding tax on interest income described below will
satisfy these requirements.
TAXATION OF NON-U.S. HOLDERS
If you are a non-resident alien individual or a foreign corporation (a
"non-U.S. Holder"), the payment of interest on the Tortoise Notes generally will
be considered "portfolio interest" and thus generally will be exempt from United
States federal withholding tax. This exemption will apply to you provided that
(i) interest paid on the Tortoise Notes is not effectively connected with your
conduct of a trade or business in the United States, (ii) you are not a bank
whose receipt of interest on the Tortoise Notes is described in Section
881(c)(3)(A) of the Internal Revenue Code, (iii) you do not actually or
constructively own 10 percent or more of the combined voting power of all
classes of the Company's stock entitled to vote, (iv) you are not a controlled
foreign corporation that is related, directly or indirectly to the Company
through stock ownership, and (v) you satisfy the certification requirements
described below.
To satisfy the certification requirements, either (1) the holder of any
Tortoise Notes must certify, under penalties of perjury, that such holder is a
non-U.S. person and must provide such owner's name, address and taxpayer
identification number, if any, on IRS Form W-8BEN, or (2) a securities clearing
organization, bank or other financial institution that holds customer securities
in the ordinary course of its
60
trade or business and holds the Tortoise Notes on behalf of the holder thereof
must certify, under penalties of perjury, that it has received a valid and
properly executed IRS Form W-8BEN from the beneficial holder and comply with
certain other requirements. Special certification rules apply for Tortoise Notes
held by a foreign partnership and other intermediaries.
Interest on Tortoise Notes received by a non-U.S. Holder which is not
excluded from U.S. federal withholding tax under the portfolio interest
exemption as described above generally will be subject to withholding at a 30%
rate, except where a non-U.S. Holder can claim the benefits of an applicable tax
treaty to reduce or eliminate such withholding tax and such non-U.S. Holder
provides the Company with a properly executed IRS Form W-8BEN claiming such
exemption or reduction.
Any capital gain that a non-U.S. Holder realizes on a sale, exchange or
other disposition of Tortoise Notes generally will be exempt from United States
federal income tax, including withholding tax. This exemption will not apply to
you if your gain is effectively connected with your conduct of a trade or
business in the U.S. or you are an individual holder and are present in the U.S.
for 183 days or more in the taxable year of the disposition and either your gain
is attributable to an office or other fixed place of business that you maintain
in the U.S. or you have a tax home in the United States.
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT,
PAYING AGENT, TRUSTEE AND AUCTION AGENT
The Company has engaged U.S. Bancorp Fund Services, LLC to serve as the
Company's administrator. The Company will pay the administrator a monthly fee
computed at an annual rate of 0.07% of the first $300 million of the Company's
Managed Assets, 0.06% on the next $500 million of Managed Assets and 0.04% on
the balance of the Company's Managed Assets, subject to a minimum annual fee of
$45,000.
Computershare Investor Services, LLC serves as the Company's transfer
agent and dividend paying agent of common shares.
U.S. Bank N.A. serves as the Company's custodian. The Company will pay
the custodian a monthly fee computed at an annual rate of 0.015% on the first
$100 million of the Company's Managed Assets and 0.01% on the balance of the
Company's Managed Assets, subject to a minimum annual fee of $4,800.
BNY Midwest Trust Company is the Trustee under the Indenture and acts
as transfer agent, registrar, paying agent and redemption agent with respect to
the Tortoise Notes. The Bank of New York serves as the Auction Agent with
respect to the Tortoise Notes.
UNDERWRITING
Lehman Brothers Inc. and Stifel, Nicolaus & Company, Incorporated are
acting as underwriters in this offering (the "Underwriters"). Subject to the
terms and conditions contained in the underwriting agreement by and among the
Underwriters, the Adviser and the Company, dated the date of this Prospectus (a
copy of which is filed as an exhibit to the registration statement of which this
Prospectus is a part), the Underwriters have agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the principal
amount of Series C Tortoise Notes offered hereby.
The underwriting agreement provides that the Underwriters are obligated
to purchase, subject to certain conditions, all of the Series C Tortoise Notes
being offered if any are purchased. The conditions
61
contained in the underwriting agreement include requirements that (1) the
representations and warranties made by the Company and the Adviser to the
Underwriters are true, (2) there has been no material change in the financial
markets, and (3) the Company and the Adviser deliver customary closing documents
to the Underwriters.
After the first Auction that includes Series C Tortoise Notes issued
pursuant to this Prospectus, payment by each purchaser of Series C Tortoise
Notes sold through the Auction will be made in accordance with the procedures
described under "The Auction."
DISCOUNTS AND COMMISSIONS
The Underwriters have advised the Company that they propose to offer
the Series C Tortoise Notes directly to the public at the public offering price
presented on the cover page of this Prospectus less a selling concession equal
to $____ per note which is equal to _% of the initial offering price. Investors
must pay for any Tortoise Notes purchased on or before __________, 2005. After
the offering, the Underwriters may change the price at which they re-offer the
notes to dealers and other selling terms.
INDEMNIFICATION
The Company and the Adviser have agreed to indemnify the Underwriters
against certain liabilities relating to this offering, including liabilities
under the 1933 Act and liabilities arising from breaches of the representations
and warranties contained in the underwriting agreement and to contribute to
payments that the Underwriters may be required to make for those liabilities;
provided that such indemnification shall not extend to any liability or action
resulting directly from the gross negligence or willful misconduct of the
Underwriters.
LISTING
The Tortoise Notes will not be listed on an exchange or automated
quotation system. Broker-Dealers may maintain a secondary trading market in the
Tortoise Notes outside of Auctions; however, they have no obligation to do so,
and there can be no assurance that a secondary market for the Tortoise Notes
will develop or, if it does develop, that it will provide holders with a liquid
trading market (i.e., trading will depend on the presence of willing buyers and
sellers and the trading price will be subject to variables to be determined at
the time of the trade by such Broker-Dealers). The Underwriters are not
obligated to make a market in the Tortoise Notes between Auctions and the market
making may be discontinued at any time at their sole discretion.
ELECTRONIC DISTRIBUTION
A Prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by the Underwriters or their
affiliates. In those cases, prospective investors may view offering terms online
and prospective investors may be allowed to place orders online. The
Underwriters may allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the representative on the same basis as other allocations.
Other than the Prospectus in electronic format, the information on the
Underwriters' web sites and any information contained in any other web site
maintained by the Underwriters is not part of the Prospectus or the registration
statement of which this Prospectus forms a part, has not been approved and/or
endorsed by the Company and should not be relied upon by investors.
62
CERTAIN RELATIONSHIPS AND FEES
To the extent permitted under the 1940 Act and the rules and
regulations promulgated thereunder, the Company anticipates that the
Underwriters may from time to time act as a broker or dealer and receive fees in
connection with the execution of the Company's portfolio transactions after the
Underwriters have ceased to be the Underwriters and, subject to certain
restrictions, each may act as a broker while it is an Underwriter. The Company
anticipates that the Underwriters or one of their affiliates may from time to
time act in Auctions as a Broker-Dealer or dealer and receive fees as described
under "Description of the Tortoise Notes."
ADDRESS
Lehman Brothers Inc.'s principal office is located at 745 Seventh
Avenue, New York, New York 10019.
Stifel, Nicolaus & Company, Incorporated's principal office is located
at 501 North Broadway, St. Louis, Missouri 63102.
LEGAL OPINIONS
Certain legal matters in connection with the Tortoise Notes offered
hereby will be passed upon for the Company by Vedder, Price, Kaufman & Kammholz,
P.C., Chicago, Illinois, and for the Underwriters by Morrison & Foerster LLP,
New York, New York. Vedder, Price, Kaufman & Kammholz, P.C. and Morrison &
Foerster LLP may rely as to certain matters of Maryland law on the opinion of
Venable LLP, Baltimore, Maryland.
INTELLECTUAL PROPERTY RIGHTS
A patent application has been filed with the United States Patent and
Trademark Office describing the Adviser's systems and methods for managing a
portfolio of MLPs. There is no assurance that the patent will ultimately be
granted. The scope of the patent, if granted, is not known at this time and will
not necessarily preclude other firms from developing and operating a portfolio
of MLPs.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act and is required to file
reports, proxy statements and other information with the Commission. These
documents can be inspected and copied for a fee at the Commission's public
reference room, 450 Fifth Street, N.W., Washington, D.C. 20549. Reports, proxy
statements, and other information about the Company can be inspected at the
offices of the Commission.
This Prospectus does not contain all of the information in the
Company's registration statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Company and Tortoise Notes can be
found in the Company's Registration Statement (including amendments, exhibits,
and schedules) on Form N-2 filed with the Commission. The Commission maintains a
web site (http://www.sec.gov) that contains the Company's Registration
Statement, other documents incorporated by reference, and other information the
Company
63
has filed electronically with the Commission, including proxy statements
and reports filed under the Securities Exchange Act of 1934.
64
TABLE OF CONTENTS
FOR THE STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds..............................................................S-1
Investment Limitations.......................................................S-1
Investment Objective and Principal Investment Strategies.....................S-3
Management of the Company...................................................S-15
Net Asset Value.............................................................S-23
Portfolio Transactions......................................................S-25
Additional Information Concerning the Auction...............................S-26
Certain Federal Income Tax Matters..........................................S-27
Proxy Voting Policies.......................................................S-32
Independent Registered Public Accounting Firm...............................S-33
Custodian...................................................................S-33
Additional Information......................................................S-34
Report of Independent Auditors...............................................F-1
Financial Statements.........................................................F-1
Appendix A - Summary of Certain Provisions of the Indenture..................A-1
Appendix B - Tortoise Notes Auction Procedures...............................B-1
Appendix C - Rating of Investments...........................................C-1
65
================================================================================
$
TORTOISE ENERGY
INFRASTRUCTURE CORPORATION
AUCTION RATE SENIOR NOTES ("TORTOISE NOTES")
$ , SERIES C, DUE , 2045
____________________
PROSPECTUS
, 2005
____________________
LEHMAN BROTHERS
STIFEL, NICOLAUS & COMPANY
INCORPORATED
(TORTOISE LOGO)
SUBJECT TO COMPLETION, DATED JANUARY 27, 2005
The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF ADDITIONAL INFORMATION
Tortoise Energy Infrastructure Corporation, a Maryland corporation (the
"Company"), is a nondiversified, closed-end management investment company that
commenced operations in February 2004.
This Statement of Additional Information relates to the Company's
offering of Series C. Series C notes, together with Series A and Series B notes
previously offered, are referred to as "Tortoise Notes." Individual series of
Tortoise Notes are referred to as a "series." Except as described herein, the
Series C Tortoise Notes are offered on the same terms as previously offered
series. This Statement of Additional Information does not constitute a
prospectus, but should be read in conjunction with the Company's Prospectus
relating thereto dated , 2005. This Statement of Additional Information does not
include all information that a prospective investor should consider before
purchasing Tortoise Notes. Investors should obtain and read the Company's
Prospectus prior to purchasing Tortoise Notes. A copy of the Company's
Prospectus may be obtained without charge by calling (888) 728-8784. You also
may obtain a copy of the Company's Prospectus on the Securities and Exchange
Commission's web site (http://www.sec.gov). Capitalized terms used but not
defined in this Statement of Additional Information have the meanings ascribed
to them in the Prospectus. This Statement of Additional Information is dated ,
2005.
TABLE OF CONTENTS
PAGE
Use of Proceeds..............................................................S-1
Investment Limitations.......................................................S-1
Investment Objective and Principal Investment Strategies.....................S-3
Management of the Company...................................................S-15
Net Asset Value.............................................................S-23
Portfolio Transactions......................................................S-25
Additional Information Concerning the Auction...............................S-26
Certain Federal Income Tax Matters..........................................S-27
Proxy Voting Policies.......................................................S-32
Independent Registered Public Accounting Firm...............................S-33
Custodian...................................................................S-33
Additional Information......................................................S-34
Report of Independent Auditors...............................................F-1
Financial Statements.........................................................F-1
Appendix A - Summary of Certain Provisions of the Indenture..................A-1
Appendix B - Tortoise Notes Auction Procedures...............................B-1
Appendix C - Rating of Investments...........................................C-1
i
USE OF PROCEEDS
The net proceeds of the offering of the Series C Tortoise Notes (the
"Offering") will be approximately $___________ after payment of the underwriting
discounts and commissions and estimated offering costs. The Company anticipates
that it will be able to invest substantially all of the net proceeds in
securities that meet its investment objective and policies within three months
after completion of the Offering. Pending such investment, the Company
anticipates that the proceeds will be invested in short-term securities issued
by the U.S. government or its agencies or instrumentalities or in high quality,
short-term money market instruments.
INVESTMENT LIMITATIONS
This section supplements the disclosure in the Prospectus and provides
additional information on the Company's investment limitations. Investment
limitations identified as fundamental may not be changed without the approval of
the holders of a majority of the Company's outstanding voting securities (which
for this purpose and under the Investment Company Act of 1940, as amended (the
"1940 Act"), means the lesser of (1) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (2) more
than 50% of the outstanding shares).
Investment limitations stated as a maximum percentage of the Company's
assets are only applied immediately after, and because of, an investment or a
transaction by the Company to which the limitation is applicable (other than the
limitations on borrowing). Accordingly, any later increase or decrease resulting
from a change in values, net assets or other circumstances will not be
considered in determining whether the investment complies with the Company's
investment limitations. All limitations that are based on a percentage of total
assets include assets obtained through leverage.
FUNDAMENTAL INVESTMENT LIMITATIONS
The following are the Company's fundamental investment limitations set
forth in their entirety. The Company may not:
(1) issue senior securities, except as permitted by the 1940
Act and the rules and interpretive positions of the SEC thereunder;
(2) borrow money, except as permitted by the 1940 Act and the
rules and interpretive positions of the SEC thereunder;
(3) make loans, except by the purchase of debt obligations, by
entering into repurchase agreements or through the lending of portfolio
securities and as otherwise permitted by the 1940 Act and the rules and
interpretive positions of the SEC thereunder;
(4) concentrate (invest 25% or more of total assets) its
investments in any particular industry, except that the Company will
concentrate its assets in the group of industries constituting the
energy infrastructure sector;
(5) underwrite securities issued by others, except to the
extent that the Company may be considered an underwriter within the
meaning of the Securities Act of 1933, as amended (the "1933 Act"), in
the disposition of restricted securities held in its portfolio;
S-1
(6) purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments, except that the
Company may invest in securities or other instruments backed by real
estate or securities of companies that invest in real estate or
interests therein; and
(7) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments, except that the
Company may purchase or sell options and futures contracts or invest in
securities or other instruments backed by physical commodities.
All other investment policies of the Company are considered
nonfundamental and may be changed by the Board of Directors of the Company (the
"Board") without prior approval of the Company's outstanding voting shares.
NONFUNDAMENTAL INVESTMENT POLICIES
The Company has adopted the following nonfundamental policies:
(1) Under normal circumstances, the Company will invest at least
90% of its total assets in securities of energy infrastructure
companies.
(2) Under normal circumstances, the Company will invest at least
70% of its total assets in equity securities issued by master
limited partnerships ("MLPs").
(3) The Company may invest up to 30% of its total assets in
restricted securities, primarily through direct placements.
Subject to this policy, the Company may invest without
limitation in illiquid securities. The types of direct
placements that the Company may purchase include MLP
convertible subordinated units, MLP common units and
securities of private energy infrastructure companies (i.e.,
non-MLPs). Investments in private companies that do not have
any publicly traded shares or units are limited to 5% of the
Company's total assets.
(4) The Company may invest up to 25% of its total assets in debt
securities of energy infrastructure companies, including
securities rated below investment grade (commonly referred to
as "junk bonds"). Below investment grade debt securities will
be rated at least B3 by Moody's Investors Service, Inc.
("Moody's") and at least B- by Standard & Poor's Ratings Group
("S&P") at the time of purchase, or comparably rated by
another statistical rating organization or if unrated,
determined to be of comparable quality by the Adviser.
(5) The Company will not invest more than 10% of its total assets
in any single issuer.
(6) The Company will not engage in short sales.
Currently under the 1940 Act, the Company is not permitted to incur
indebtedness unless immediately after such borrowing the Company has asset
coverage of at least 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the value of the
Company's total assets). Additionally, currently under the 1940 Act, the Company
may not declare any dividend or other distribution upon its common or preferred
stock, or purchase any such stock, unless the aggregate indebtedness of the
Company has, at the time of the declaration of any such dividend or distribution
or at the time of any such purchase, an asset coverage of at least 300% after
deducting the amount of such dividend, distribution, or purchase price, as the
case may be. Currently under the 1940 Act, the Company is not permitted to issue
preferred stock unless immediately after such issuance the Company has asset
coverage of at least 200% of the liquidation value of the outstanding
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preferred stock (i.e., such liquidation value may not exceed 50% of the value of
the Company's total assets). In addition, currently under the 1940 Act, the
Company is not permitted to declare any cash dividend or other distribution on
its common stock unless, at the time of such declaration, the Company's total
assets less liabilities and indebtedness not represented by senior securities
(determined after deducting the amount of such dividend or distribution) are at
least 200% of such liquidation value.
Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes if
it is repaid within sixty days and is not extended or renewed. Both transactions
involving indebtedness and any preferred stock issued by the Company would be
considered senior securities under the 1940 Act, and as such, are subject to the
asset coverage requirements discussed above.
Currently under the 1940 Act, the Company is not permitted to lend
money or property to any person, directly or indirectly, if such person controls
or is under common control with the Company, except for a loan from the Company
to a company which owns all of the outstanding securities of the Company.
Currently, under interpretative positions of the staff of the SEC, the Company
may not have on loan at any given time securities representing more than
one-third of its total assets.
The Company interprets its policies with respect to borrowing and
lending to permit such activities as may be lawful for the Company, to the full
extent permitted by the 1940 Act or by exemption from the provisions therefrom
pursuant to an exemptive order of the SEC.
The Company interprets its policy with respect to concentration to
include energy infrastructure companies, as defined in the Prospectus and below.
See "Investment Objective and Principal Investment Strategies."
Under the 1940 Act, the Company may, but does not intend to, invest up
to 10% of its total assets in the aggregate in shares of other investment
companies and up to 5% of its total assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a
shareholder in any investment company, the Company will bear its ratable share
of that investment company's expenses, and would remain subject to payment of
the Company's advisory fees and other expenses with respect to assets so
invested. Holders of common stock would therefore be subject to duplicative
expenses to the extent the Company invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein and in the
Prospectus. The net asset value and market value of leveraged shares will be
more volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares. A material decline in net asset value may
impair the Company's ability to maintain asset coverage on Tortoise Notes or to
make interest or principal payments thereon.
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The Prospectus presents the investment objective and the principal
investment strategies and risks of the Company. This section supplements the
disclosure in the Company's Prospectus and provides additional information on
the Company's investment policies, strategies and risks. Restrictions or
policies stated as a maximum percentage of the Company's assets are only applied
immediately after a portfolio investment to which the policy or restriction is
applicable (other than the limitations on borrowing). Accordingly, any later
increase or decrease resulting from a change in values, net assets or other
circumstances will not be considered in determining whether the investment
complies with the Company's restrictions and policies.
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The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to stockholders. For
purposes of the Company's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Company will invest regardless of the tax character of the distribution. There
is no assurance that the Company will achieve its objective. The investment
objective and the investment policies discussed below are nonfundamental. The
Board of the Company may change the investment objective, or any policy or
limitation that is not fundamental, without a stockholder vote. Stockholders
will receive at least 60 days' prior written notice of any change to the
nonfundamental investment policy of investing at least 90% of total assets in
energy infrastructure companies. Unlike most other investment companies, the
Company will not be treated as a regulated investment company under the U.S.
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").
Therefore, the Company will be taxed as a regular "C" corporation and will be
subject to federal and applicable state corporate income taxes.
Under normal circumstances, the Company invests at least 90% of total
assets (including assets obtained through leverage) in securities of energy
infrastructure companies. Energy infrastructure companies engage in the business
of transporting, processing, storing, distributing or marketing natural gas,
natural gas liquids (primarily propane), coal, crude oil or refined petroleum
products, or exploring, developing, managing or producing such commodities.
Companies that provide energy-related services to the foregoing businesses also
are considered energy infrastructure companies, if they derive at least 50% of
revenues from the provision of energy-related services to such companies. The
Company invests at least 70% of its total assets in a portfolio of equity
securities of energy infrastructure companies that are MLPs that the Adviser
believes offer attractive distribution rates and capital appreciation potential.
MLP equity securities (known as "units") currently consist of common units,
convertible subordinated units and pay-in-kind units or I-Shares ("I-Shares").
The Company also may invest in other securities, consistent with its investment
objective and fundamental and nonfundamental policies.
The following pages contain more detailed information about the types
of issuers and instruments in which the Company may invest, strategies the
Adviser may employ in pursuit of the Company's investment objective and a
discussion of related risks. The Adviser may not buy these instruments or use
these techniques unless it believes that doing so will help the Company achieve
its objective.
ENERGY INFRASTRUCTURE COMPANIES
For purposes of the Company's policy of investing 90% of its total
assets in securities of energy infrastructure companies, an energy
infrastructure company is one that derives each year at least 50% of its gross
income from "Qualifying Income" under Section 7704 of the Internal Revenue Code
or one that derives at least 50% of its revenues from the provision of services
directly related to the generation of Qualifying Income. Qualifying Income is
defined as any income and gains from the exploration, development, mining or
production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of any mineral or
natural resource (including fertilizer, geothermal energy, and timber).
Energy infrastructure MLPs are limited partnerships that derive each
year at least 90% of their gross income from Qualifying Income and are taxed as
partnerships, thereby, eliminating federal income tax at the entity level. The
business of energy infrastructure MLPs is affected by supply and demand for
energy commodities because most MLPs derive revenue and income based upon the
volume of the underlying commodity transported, processed, distributed, and/or
marketed. Specifically, processing and coal MLPs may be directly affected by
energy commodity prices. Propane MLPs own the underlying energy commodity, and
therefore have direct exposure to energy commodity prices, although the Adviser
seeks high quality MLPs that are able to mitigate or manage direct margin
exposure to commodity prices. Pipeline MLPs have indirect commodity exposure to
oil and gas price volatility because although they do
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not own the underlying energy commodity, the general level of commodity prices
may affect the volume of the commodity the MLP delivers to its customers and the
cost of providing services such as distributing natural gas liquids. The MLP
sector in general could be hurt by market perception that MLP's performance and
valuation are directly tied to commodity prices.
Energy infrastructure companies (other than most pipeline MLPs) do not
operate as "public utilities" or "local distribution companies," and therefore
are not subject to rate regulation by state or federal utility commissions.
However, energy infrastructure companies may be subject to greater competitive
factors than utility companies, including competitive pricing in the absence of
regulated tariff rates, which could cause a reduction in revenue and which could
affect adversely profitability. Most pipeline MLPs are subject to government
regulation concerning the construction, pricing and operation of pipelines.
Pipeline MLPs are able to set prices (rates or tariffs) to cover operating
costs, depreciation and taxes, and provide a return on investment. These rates
are monitored by the Federal Energy Regulatory Commission (FERC) which seeks to
ensure that consumers receive adequate and reliable supplies of energy at the
lowest possible price while providing energy suppliers and transporters a just
and reasonable return on capital investment and the opportunity to adjust to
changing market conditions.
Energy infrastructure MLPs in which the Company will invest generally
can be classified in the following categories:
Pipeline MLPs. Pipeline MLPs are common carrier transporters
of natural gas, natural gas liquids (primarily propane, ethane, butane
and natural gasoline), crude oil or refined petroleum products
(gasoline, diesel fuel and jet fuel). Pipeline MLPs also may operate
ancillary businesses such as storage and marketing of such products.
Revenue is derived from capacity and transportation fees. Historically,
pipeline output has been less exposed to cyclical economic forces due
to its low cost structure and government-regulated nature. In addition,
most pipeline MLPs have limited direct commodity price exposure because
they do not own the product being shipped.
Processing MLPs. Processing MLPs are gatherers and processors
of natural gas as well as providers of transportation, fractionation
and storage of natural gas liquids ("NGLs"). Revenue is derived from
providing services to natural gas producers, which require treatment or
processing before their natural gas commodity can be marketed to
utilities and other end user markets. Revenue for the processor is fee
based, although it is not uncommon to have some participation in the
prices of the natural gas and NGL commodities for a portion of revenue.
Propane MLPs. Propane MLPs are distributors of propane to
homeowners for space and water heating. Revenue is derived from the
resale of the commodity on a margin over wholesale cost. The ability to
maintain margin is a key to profitability. Propane serves approximately
3% of the household energy needs in the United States, largely for
homes beyond the geographic reach of natural gas distribution
pipelines. Approximately 70% of annual cash flow is earned during the
winter heating season (October through March). Accordingly, volumes are
weather dependent, but have utility type functions similar to
electricity and natural gas.
Coal MLPs. Coal MLPs own, lease and manage coal reserves.
Revenue is derived from production and sale of coal, or from royalty
payments related to leases to coal producers. Electricity generation is
the primary use of coal in the United States. Demand for electricity
and supply of alternative fuels to generators are the primary drivers
of coal demand. Coal MLPs are subject to operating and production
risks, such as: the MLP or a lessee meeting necessary production
volumes; federal, state and local laws and regulations which may limit
the ability to produce coal; the MLP's ability to manage production
costs and pay mining reclamation costs; and the effect on demand that
the Clean Air Act standards have on coal-end users.
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MLPs typically achieve distribution growth by internal and external
means. MLPs achieve growth internally by experiencing higher commodity volume
driven by the economy and population, and through the expansion of existing
operations including increasing the use of underutilized capacity, pursuing
projects that can leverage and gain synergies with existing infrastructure and
pursuing so called "greenfield projects." External growth is achieved by making
accretive acquisitions. While opportunities for growth by acquisition appear
abundant based on current market conditions, especially for smaller MLPs, the
Adviser expects MLPs to grow primarily through internal means.
MLPs are subject to various federal, state and local environmental laws
and health and safety laws as well as laws and regulations specific to their
particular activities. Such laws and regulations address: health and safety
standards for the operation of facilities, transportation systems and the
handling of materials; air and water pollution requirements and standards; solid
waste disposal requirements; land reclamation requirements; and requirements
relating to the handling and disposition of hazardous materials. Energy
infrastructure MLPs are subject to the costs of compliance with such laws
applicable to them, and changes in such laws and regulations may affect
adversely their results of operations.
MLPs operating interstate pipelines and storage facilities are subject
to substantial regulation by FERC, which regulates interstate transportation
rates, services and other matters regarding natural gas pipelines including: the
establishment of rates for service; regulation of pipeline storage and liquefied
natural gas facility construction; issuing certificates of need for companies
intending to provide energy services or constructing and operating interstate
pipeline and storage facilities; and certain other matters. FERC also regulates
the interstate transportation of crude oil, including: regulation of rates and
practices of oil pipeline companies; establishing equal service conditions to
provide shippers with equal access to pipeline transportation; and establishment
of reasonable rates for transporting petroleum and petroleum products by
pipeline.
Energy infrastructure MLPs may be subject to liability relating to the
release of substances into the environment, including liability under federal
"SuperFund" and similar state laws for investigation and remediation of releases
and threatened releases of hazardous materials, as well as liability for injury
and property damage for accidental events, such as explosions or discharges of
materials causing personal injury and damage to property. Such potential
liabilities could have a material adverse effect upon the financial condition
and results of operations of energy infrastructure MLPs.
Energy infrastructure MLPs are subject to numerous business related
risks, including: deterioration of business fundamentals reducing profitability
due to development of alternative energy sources, changing demographics in the
markets served, unexpectedly prolonged and precipitous changes in commodity
prices and increased competition which takes market share; the lack of growth of
markets requiring growth through acquisitions; disruptions in transportation
systems; the dependence of certain MLPs upon the energy exploration and
development activities of unrelated third parties; availability of capital for
expansion and construction of needed facilities; a significant decrease in
natural gas production due to depressed commodity prices or otherwise; the
inability of MLPs to successfully integrate recent or future acquisitions; and
the general level of the economy.
Although the Company emphasizes investments in MLPs, it also may invest
in energy infrastructure companies that are not organized as MLPs. Non-MLP
companies may include companies that operate energy assets but which are
organized in corporate rather than in partnership form. Generally, the
partnership form is more suitable for companies that operate assets which
generate more stable cash flows. Companies that operate "midstream" assets
(e.g., transporting, processing, storing, distributing and marketing) tend to
generate more stable cash flows than those that engage in exploration and
development or delivery of products to the end consumer. Non-MLP companies also
may include
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companies that provide services directly related to the generation of income
from energy-related assets, such as oil drilling services, pipeline construction
and maintenance, and compression services.
The energy industry and particular energy infrastructure companies may
be affected adversely by possible terrorist attacks, such as the attacks that
occurred on September 11, 2001. It is possible that facilities of energy
infrastructure companies, due to the critical nature of their energy businesses
to the United States, could be direct targets of terrorist attacks or be
affected indirectly by attacks on others. They may incur significant additional
costs in the future to safeguard their assets. In addition, changes in the
insurance markets after September 11, 2001 may make certain types of insurance
more difficult to obtain or obtainable only at significant additional cost. To
the extent terrorism results in a lower level economic activity, energy
consumption could be adversely affected, which would reduce revenues and impede
growth. Terrorist or war related disruption of the capital markets could also
affect the ability of energy infrastructure companies to raise needed capital.
MASTER LIMITED PARTNERSHIPS
Under normal circumstances the Company invests at least 70% of its
total assets in equity securities of MLPs. An MLP is an entity that is taxed as
a partnership and that derives each year at least 90% of its gross income from
Qualifying Income. An MLP is a limited partnership the interests in which (known
as units) are traded on securities exchanges or over-the-counter. Organization
as a partnership and compliance with the Qualifying Income rules eliminates
federal income tax at the entity level.
An MLP has one or more general partners (who may be individuals,
corporations, or other partnerships) which manage the partnership, and limited
partners, which provide capital to the partnership but have no role in its
management. Typically, the general partner is owned by company management or
another publicly traded sponsoring corporation. When an investor buys units in a
MLP, he or she becomes a limited partner.
MLPs are formed in several ways. A nontraded partnership may decide to
go public. Several nontraded partnerships may roll up into a single MLP. A
corporation may spin-off a group of assets or part of its business into a MLP of
which it is the general partner, to realize the assets' full value on the
marketplace by selling the assets and using the cash proceeds received from the
MLP to address debt obligations or to invest in higher growth opportunities,
while retaining control of the MLP. A corporation may fully convert to a MLP,
although since 1986 the tax consequences have made this an unappealing option
for most corporations. Also, a newly formed company may operate as a MLP from
its inception.
The sponsor or general partner of an MLP, other energy companies, and
utilities may sell assets to MLPs in order to generate cash to fund expansion
projects or repay debt. The MLP structure essentially transfers cash flows
generated from these acquired assets directly to MLP limited partner unit
holders.
In the case of an MLP buying assets from its sponsor or general partner
the transaction is intended to be based upon comparable terms in the acquisition
market for similar assets. To help insure that appropriate protections are in
place, the board of the MLP generally creates an independent committee to review
and approve the terms of the transaction. The committee often obtains a fairness
opinion and can retain counsel or other experts to assist its evaluation. Since
both parties normally have a significant equity stake in the MLP, both parties
are aligned to see that the transaction is accretive and fair to the MLP.
MLPs tend to pay relatively higher distributions than other types of
companies and the Company intends to use these MLP distributions in an effort to
meet its investment objective.
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As a motivation for the general partner to successfully manage the MLP
and increase cash flows, the terms of MLPs typically provide that the general
partner receives a larger portion of the net income as distributions reach
higher target levels. As cash flow grows, the general partner receives a greater
interest in the incremental income compared to the interest of limited partners.
Although the percentages vary among MLPs, the general partner's marginal
interest in distributions generally increases from 2% to 15% at the first
designated distribution target level moving up to 25% and ultimately 50% as
pre-established distribution per unit thresholds are met. Nevertheless, the
aggregate amount distributed to limited partners will increase as MLP
distributions reach higher target levels. Given this incentive structure, the
general partner has an incentive to streamline operations and undertake
acquisitions and growth projects in order to increase distributions to all
partners.
Because the MLP itself does not pay federal income tax, its income or
loss is allocated to its investors, irrespective of whether the investors
receive any cash payment or other distributions from the MLP. An MLP typically
makes quarterly cash distributions. Although they resemble corporate dividends,
MLP distributions are treated differently for federal income tax purposes. The
MLP distribution is treated as a return of capital to the extent of the
investor's basis in his MLP interest and, to the extent the distribution exceeds
the investor's basis in the MLP, capital gain. The investor's original basis is
the price paid for the units. The basis is adjusted downwards with each
distribution and allocation of deductions (such as depreciation) and losses, and
upwards with each allocation of income and again.
The partner generally will not incur federal income tax on
distributions until (1) he sells his MLP units and pays tax on his gain, which
gain is increased due to the basis decrease resulting from prior distributions;
or (2) his basis reaches zero. When the units are sold, the difference between
the sales price and the investor's adjusted basis is gain or loss for federal
income tax purposes.
For a further discussion and a description of MLP federal income tax
matters, see the section entitled "Certain Federal Income Tax Matters."
THE COMPANY'S INVESTMENTS
The types of securities in which the Company may invest include, but
are not limited to, the following:
Equity Securities. Consistent with its investment objective, the
Company may invest up to 100% of its total assets in equity securities issued by
energy infrastructure MLPs, including common units, convertible subordinated
units and I-Shares (each discussed below). The Company also may invest up to 30%
of total assets in equity securities of non-MLPs.
The value of equity securities will be affected by changes in the stock
markets, which may be the result of domestic or international political or
economic news, changes in interest rates or changing investor sentiment. At
times, stock markets can be volatile and stock prices can change substantially.
Equity securities risk will affect the Company's net asset value per share,
which will fluctuate as the value of the securities held by the Company change.
Not all stock prices change uniformly or at the same time, and not all stock
markets move in the same direction at the same time. Other factors affect a
particular stock's prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.
Investing in securities of smaller companies may involve greater risk
than is associated with investing in more established companies. Smaller
capitalization companies may have limited product
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lines, markets or financial resources; may lack management depth or experience;
and may be more vulnerable to adverse general market or economic developments
than larger more established companies.
MLP Common Units. MLP common units represent an equity ownership
interest in a partnership, providing limited voting rights and entitling the
holder to a share of the company's success through distributions and/or capital
appreciation. Unlike shareholders of a corporation, common unit holders do not
elect directors annually and generally have the right to vote only on certain
significant events, such as mergers, a sale of substantially all of the assets,
removal of the general partner or material amendments to the partnership
agreement. MLPs are required by their partnership agreements to distribute a
large percentage of their current operating earnings. Common unit holders
generally have first right to a minimum quarterly distribution ("MQD") prior to
distributions to the convertible subordinated unit holders or the general
partner (including incentive distributions). Common unit holders typically have
arrearage rights if the MQD is not met. In the event of liquidation, MLP common
unit holders have first rights to the partnership's remaining assets after
bondholders, other debt holders, and preferred unit holders have been paid in
full. MLP common units trade on a national securities exchange or
over-the-counter.
MLP Convertible Subordinated Units. MLP convertible subordinated units
typically are issued by MLPs to founders, corporate general partners of MLPs,
entities that sell assets to the MLP, and institutional investors. The purpose
of the convertible subordinated units is to increase the likelihood that during
the subordination period there will be available cash to be distributed to
common unit holders. The Company expects to purchase subordinated units in
direct placements from such persons. Convertible subordinated units generally
are not entitled to distributions until holders of common units have received
specified MQD, plus any arrearages, and may receive less in distributions upon
liquidation. Convertible subordinated unit holders generally are entitled to MQD
prior to the payment of incentive distributions to the general partner, but are
not entitled to arrearage rights. Therefore, they generally entail greater risk
than MLP common units. They are generally convertible automatically into the
senior common units of the same issuer at a one-to-one ratio upon the passage of
time or the satisfaction of certain financial tests. These units do not trade on
a national exchange or over-the-counter, and there is no active market for
convertible subordinated units. The value of a convertible security is a
function of its worth if it were converted into the underlying common units.
Convertible subordinated units generally have similar voting rights to MLP
common units.
MLP I-Shares. I-Shares represent an indirect investment in MLP common
units. I-Shares are equity securities issued by affiliates of MLPs, typically a
limited liability company, that owns an interest in and manages the MLP. The
issuer has management rights but is not entitled to incentive distributions. The
I-Share issuer's assets consist exclusively of MLP common units. Distributions
to I-Share holders are made in the form of additional I-Shares, generally equal
in amount to the cash distribution received by common unit holders of the MLP.
Distributions to I-Share holders in the form of additional I-Shares are
generally equal in amount to the I-Units received by the I-Share issuer. The
issuer of the I-Share is taxed as a corporation, however, the MLP does not
allocate income or loss to the I-Share issuer. Accordingly, investors receive a
Form 1099, are not allocated their proportionate share of income of the MLP and
are not subject to state income tax filing obligations solely as a result of
holding such I-Shares. Distributions of I-Shares generally do not generate
unrelated business taxable income for federal income tax purposes and are
qualifying income for mutual fund investors.
Debt Securities. The Company may invest up to 25% of its total assets
in debt securities of energy infrastructure companies, including certain
securities rated below investment grade ("junk bonds"). The Company's debt
securities may have fixed or variable principal payments and all types of
interest rate and dividend payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and auction
rate features. If a security satisfies the Company's
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minimum rating criteria at the time of purchase and is subsequently downgraded
below such rating, the Company will not be required to dispose of such security.
If a downgrade occurs, the Adviser will consider what action, including the sale
of such security, is in the best interest of the Company and its stockholders.
Below Investment Grade Debt Securities. The Company may invest up to
25% of the Company's assets in below investment grade securities. The below
investment grade debt securities in which the Company invests are rated from B3
to Ba1 by Moody's, from B- to BB+ by S&P's, are comparably rated by another
nationally recognized rating agency or are unrated but determined by the Adviser
to be of comparable quality.
Investment in below investment grade securities involves substantial
risk of loss. Below investment grade debt securities or comparable unrated
securities are commonly referred to as "junk bonds" and are considered
predominantly speculative with respect to the issuer's ability to pay interest
and principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities. For these reasons, investment in the Company
is subject to the following specific risks:
o increased price sensitivity to changing interest rates and to
a deteriorating economic environment;
o greater risk of loss due to default or declining credit
quality;
o adverse company specific events are more likely to render the
issuer unable to make interest and/or principal payments; and
o if a negative perception of the below investment grade debt
market develops, the price and liquidity of below investment
grade debt securities may be depressed. This negative
perception could last for a significant period of time.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a below investment grade debt issuer to make principal
payments and interest payments than an investment grade issuer. The principal
amount of below investment grade securities outstanding has proliferated in the
past decade as an increasing number of issuers have used below investment grade
securities for corporate financing. An economic downturn could affect severely
the ability of highly leveraged issuers to service their debt obligations or to
repay their obligations upon maturity. Similarly, down-turns in profitability in
specific industries, such as the energy infrastructure industry, could adversely
affect the ability of below investment grade debt issuers in that industry to
meet their obligations. The market values of lower quality debt securities tend
to reflect individual developments of the issuer to a greater extent than do
higher quality securities, which react primarily to fluctuations in the general
level of interest rates. Factors having an adverse impact on the market value of
lower quality securities may have an adverse effect on the Company's net asset
value and the market value of its common stock. In addition, the Company may
incur additional expenses to the extent it is required to seek recovery upon a
default in payment of principal or interest on its portfolio holdings. In
certain circumstances, the Company may be required to foreclose on an issuer's
assets and take possession of its property or operations. In such circumstances,
the Company would incur additional costs in disposing of such assets and
potential liabilities from operating any business acquired.
The secondary market for below investment grade securities may not be
as liquid as the secondary market for more highly rated securities, a factor
which may have an adverse effect on the Company's ability to dispose of a
particular security when necessary to meet its liquidity needs. There
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are fewer dealers in the market for below investment grade securities than
investment grade obligations. The prices quoted by different dealers may vary
significantly and the spread between the bid and asked price is generally much
larger than higher quality instruments. Under adverse market or economic
conditions, the secondary market for below investment grade securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer, and these instruments may become illiquid. As a result,
the Company could find it more difficult to sell these securities or may be able
to sell the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated securities,
under these circumstances, may be less than the prices used in calculating the
Company's net asset value.
Because investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the Company
may invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the debt securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
The Company will not invest in distressed, below investment grade
securities (those that are in default or the issuers of which are in
bankruptcy). If a debt security becomes distressed while held by the Company,
the Company may be required to bear extraordinary expenses in order to protect
and recover its investment if it is recoverable at all.
See Appendix C to this Statement of Additional Information for a
description of Moody's, Fitch Ratings ("Fitch")'s and S&P's ratings.
Restricted, Illiquid and Thinly-Traded Securities. The Company may
invest up to 30% of its total assets in restricted securities, primarily through
direct placements of MLP securities. Restricted securities obtained by means of
direct placement are less liquid than securities traded in the open market,
therefore, the Company may not be able to readily sell such securities.
Investments currently considered by the Adviser to be illiquid because of such
restrictions include convertible subordinated units and certain direct
placements of common units. Such securities are unlike securities that are
traded in the open market and which can be expected to be sold immediately if
the market is adequate. The sale price of securities that are not readily
marketable may be lower or higher than the Company's most recent determination
of their fair value. Additionally, the value of these securities typically
requires more reliance on the judgment of the Adviser than that required for
securities for which there is an active trading market. Due to the difficulty in
valuing these securities and the absence of an active trading market for these
investments, the Company may not be able to realize these securities' true
value, or may have to delay their sale in order to do so.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. The Adviser has the ability to deem restricted
securities as liquid. To enable the Company to sell its holdings of a restricted
security not registered under the 1933 Act, the Company may have to cause those
securities to be registered. When the Company must arrange registration because
the Company wishes to sell the security, a considerable period may elapse
between the time the decision is made to sell the security and the time the
security is registered so that the Company could sell it. The Company would bear
the risks of any downward price fluctuation during that period.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring
S-11
registration, such as Rule 144A transactions. Institutional investors generally
will not seek to sell these instruments to the general public, but instead will
often depend on an efficient institutional market in which such unregistered
securities can be readily resold or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not dispositive of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that exist or may develop as a result of Rule 144A may provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment. An insufficient number of qualified institutional buyers interested
in purchasing Rule 144A-eligible securities held by the Company, however, could
affect adversely the marketability of such portfolio securities and the Company
might not be able to dispose of such securities promptly or at reasonable
prices.
The Company also may invest in securities that may not be restricted,
but are thinly-traded. Although securities of certain MLPs trade on the NYSE,
the AMEX, the Nasdaq National Market or other securities exchanges or markets,
such securities may trade less than those of larger companies due to their
relatively smaller capitalizations. Such securities may be difficult to dispose
of at a fair price during times when the Company believes it is desirable to do
so. Thinly-traded securities are also more difficult to value and the Adviser's
judgment as to value will often be given greater weight than market quotations,
if any exist. If market quotations are not available, thinly-traded securities
will be valued in accordance with procedures established by the Board.
Investment of the Company's capital in thinly-traded securities may restrict the
Company's ability to take advantage of market opportunities. The risks
associated with thinly-traded securities may be particularly acute in situations
in which the Company's operations require cash and could result in the Company
borrowing to meet its short term needs or incurring losses on the sale of
thinly-traded securities.
Commercial Paper. The Company may invest in commercial paper.
Commercial paper is a debt obligation usually issued by corporations and may be
unsecured or secured by letters of credit or a surety bond. Commercial paper
usually is repaid at maturity by the issuer from the proceeds of the issuance of
new commercial paper. As a result, investment in commercial paper is subject to
the risk that the issuer cannot issue enough new commercial paper to satisfy its
outstanding commercial paper, also known as rollover risk.
Asset-backed commercial paper is a debt obligation generally issued by
a corporate-sponsored special purpose entity to which the corporation has
contributed cash-flowing receivables like credit card receivables, auto and
equipment leases, and other receivables. Investment in asset-backed commercial
paper is subject to the risk that insufficient proceeds from the projected cash
flows of the contributed receivables are available to repay the commercial
paper.
U.S. Government Securities. The Company may invest in U.S. Government
Securities. There are two broad categories of U.S. Government-related debt
instruments: (a) direct obligations of the U.S. Treasury, and (b) securities
issued or guaranteed by U.S. Government agencies.
Examples of direct obligations of the U.S. Treasury are Treasury bills,
notes, bonds and other debt securities issued by the U.S. Treasury. These
instruments are backed by the "full faith and credit" of the United States. They
differ primarily in interest rates, the length of maturities and the dates of
issuance. Treasury bills have original maturities of one year or less. Treasury
notes have original maturities of one to ten years and Treasury bonds generally
have original maturities of greater than ten years.
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Some agency securities are backed by the full faith and credit of the
United States and others are backed only by the rights of the issuer to borrow
from the U.S. Treasury (such as Federal Home Loan Bank Bonds and Federal
National Mortgage Association Bonds), while still others, such as the securities
of the Federal Farm Credit Bank, are supported only by the credit of the issuer.
With respect to securities supported only by the credit of the issuing agency or
by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies and such
securities may involve risk of loss of principal and interest.
Repurchase Agreements. The Company may enter into "repurchase
agreements" backed by U.S. Government Securities. A repurchase agreement arises
when the Company purchases a security and simultaneously agrees to resell it to
the vendor at an agreed upon future date. The resale price is greater than the
purchase price, reflecting an agreed upon market rate of return that is
effective for the period of time the Company holds the security and that is not
related to the coupon rate on the purchased security. Such agreements generally
have maturities of no more than seven days and could be used to permit the
Company to earn interest on assets awaiting long term investment. The Company
requires continuous maintenance by the custodian for the Company's account in
the Federal Reserve/Treasury Book-Entry System of collateral in an amount equal
to, or in excess of, the market value of the securities that are the subject of
a repurchase agreement. Repurchase agreements maturing in more than seven days
are considered illiquid securities. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Company could experience both
delays in liquidating the underlying security and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Company seeks to enforce its rights thereto; (b) possible subnormal levels
of income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
Reverse Repurchase Agreements. The Company may enter into reverse
repurchase agreements for temporary purposes with banks and securities dealers
if the creditworthiness of the bank or securities dealer has been determined by
the Adviser to be satisfactory. A reverse repurchase agreement is a repurchase
agreement in which the Company is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed-upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of securities because it avoids certain market risks and transaction
costs.
At the time when the Company enters into a reverse repurchase
agreement, liquid assets (cash, U.S. Government Securities or other "high-grade"
debt obligations) of the Company having a value at least as great as the
purchase price of the securities to be purchased will be segregated on the books
of the Company and held by the custodian throughout the period of the
obligation. The use of reverse repurchase agreements by the Company creates
leverage which increases the Company's investment risk. If the income and gains
on securities purchased with the proceeds of these transactions exceed the cost,
the Company's earnings or net asset value will increase faster than otherwise
would be the case; conversely, if the income and gains fail to exceed the cost,
earnings or net asset value would decline faster than otherwise would be the
case. The Company intends to enter into reverse repurchase agreements only if
the income from the investment of the proceeds is greater than the expense of
the transaction, because the proceeds are invested for a period no longer than
the term of the reverse repurchase agreement.
Margin Borrowing. Although it does not currently intend to, the Company
may in the future use margin borrowing of up to 33 1/3% of total assets for
investment purposes when the Adviser believes it will enhance returns. Any use
of margin borrowing by the Company would be subject to the asset leverage
requirements discussed earlier in this Statement of Additional Information. See
"Investment Limitations." Margin borrowings by the Company create certain
additional risks. For example, should the securities that are pledged to brokers
to secure margin accounts decline in value, or should brokers from which the
Company has borrowed increase their maintenance margin requirements (i.e.,
reduce the
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percentage of a position that can be financed), then the Company could be
subject to a "margin call," pursuant to which it must either deposit additional
funds with the broker or suffer mandatory liquidation of the pledged securities
to compensate for the decline in value. In the event of a precipitous drop in
the value of the assets of the Company, it might not be able to liquidate assets
quickly enough to pay off the margin debt and might suffer mandatory liquidation
of positions in a declining market at relatively low prices, thereby incurring
substantial losses. For these reasons, the use of borrowings for investment
purposes is considered a speculative investment practice.
Interest Rate Transactions. In an attempt to reduce the interest rate
risk arising from the Company's leveraged capital structure, the Company may
enter into interest rate transactions such as swaps, caps and floors. The use of
interest rate transactions is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio security transactions. In an interest rate swap, the Company would
agree to pay to the other party to the interest rate swap (which is known as the
"counterparty") a fixed rate payment in exchange for the counterparty agreeing
to pay to the Company a variable rate payment that is intended to approximate
the Company's variable rate payment obligation on any variable rate borrowings.
The payment obligations would be based on the notional amount of the swap. In an
interest rate cap, the Company would pay a premium to the counterparty to the
interest rate cap and, to the extent that a specified variable rate index
exceeds a predetermined fixed rate, would receive from the counterparty payments
of the difference based on the notional amount of such cap. In an interest rate
floor, the Company would be entitled to receive, to the extent that a specified
index falls below a predetermined interest rate, payments of interest on a
notional principal amount from the party selling the interest rate floor.
Depending on the state of interest rates in general, the Company's use of
interest rate transactions could enhance or decrease Distributable Cash Flow
available to the shares of common stock. To the extent there is a decline in
interest rates, the value of the interest rate transactions could decline, and
could result in a decline in the net asset value of the shares of the common
stock. In addition, if the counterparty to an interest rate transaction
defaults, the Company would not be able to use the anticipated net receipts
under the interest rate transaction to offset the Company's cost of financial
leverage.
The Company has entered into interest rate swap transactions intended
to hedge the Company's interest payment obligations under the currently
outstanding Tortoise Notes (Series A and Series B) against material increases in
interest rates through mid-July 2007. The Company's dividend payment obligations
under the MMP Shares remain unhedged as of the date of this Statement of
Additional Information.
Delayed-Delivery Transactions. Securities may be bought and sold on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. Typically, no interest accrues to the purchaser until the
security is delivered. The Company may receive fees or price concessions for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the purchaser
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations and the risk that the security will not be issued as
anticipated. Because payment for the securities is not required until the
delivery date, these risks are in addition to the risks associated with the
Company's investments. If the Company remains substantially fully invested at a
time when delayed-delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases are
outstanding, the Company will set aside appropriate liquid assets in a
segregated custodial account to cover the purchase obligations. When the Company
has sold a security on a delayed-delivery basis, the Company does not
participate in further gains or losses with respect to the security. If the
other party to a delayed-
S-14
delivery transaction fails to deliver or pay for the securities, the Company
could miss a favorable price or yield opportunity or suffer a loss.
Securities Lending. The Company may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the Company
to retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by the Adviser to be
of good credit and legal standing. Furthermore, loans of securities will only be
made if, in the Adviser's judgment, the consideration to be earned from such
loans would justify the risk.
The Adviser understands that it is the current view of the Commission
staff that the Company may engage in loan transactions only under the following
conditions: (1) the Company must receive 100% collateral in the form of cash or
cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Company must be able to terminate the
loan at any time; (4) the Company must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any dividends,
interest, or other distributions on the securities loaned and to any increase in
market value; (5) the Company may pay only reasonable custodian fees in
connection with the loan; and (6) the Board must be able to vote proxies on the
securities loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower.
Defensive and Temporary Investments. Under adverse market or economic
conditions or pending investment of offering or leverage proceeds, the Company
may invest up to 100% of its total assets in securities issued or guaranteed by
the U.S. Government or its instrumentalities or agencies, short-term debt
securities, certificates of deposit, bankers' acceptances and other bank
obligations, commercial paper rated in the highest category by a rating agency
or other fixed income securities deemed by the Adviser to be consistent with a
defensive posture, or may hold cash. The Adviser also may invest in such
instruments to meet working capital needs including, but not limited to, the
need for collateral in connection with certain investment techniques, to hold a
reserve pending payment of dividends, and to facilitate the payments of expenses
and settlement of trades. The yield on such securities may be lower than the
returns on MLP securities or yields on lower rated fixed income securities. To
the extent the Company uses this strategy, it may not achieve its investment
objective.
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The business and affairs of the Company are managed under the direction
of the Board of Directors. Accordingly, the Company's Board of Directors
provides broad supervision over the affairs of the Company, including
supervision of the duties performed by the Adviser. The officers of the Company
are responsible for the Company's day-to-day operations. The directors and
officers of the Company and their principal occupations and other affiliations
during the past five years are set forth below. Each director and officer will
hold office until his successor is duly elected and qualified, or until he
resigns or is removed in the manner provided by law. Unless otherwise indicated,
the address of each director and officer is 10801 Mastin Boulevard, Overland
Park, Kansas 66210.
S-15
POSITION(S) HELD
WITH COMPANY AND OTHER
LENGTH OF TIME PRINCIPAL OCCUPATION DURING PAST DIRECTORSHIPS
NAME AND AGE SERVED FIVE YEARS HELD BY DIRECTOR
------------ --------------- -------------------------------- ----------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello, 44 Director since 2003 Associate Professor Tortoise North American
of Risk Management Energy Corporation
and Insurance, (closed-end investment
Robinson College of company)2
Business, Georgia
State University;
Director of
Graduate Personal
Financial Planning
(PFP) Programs,
Editor, "Financial
Services Review,"
(an academic
journal dedicated
to the study of
individual
financial management);
formerly, faculty member,
Pennsylvania State
University.
John R. Graham, 59 Director since 2003 Executive-in-Residence and Erie Indemnity Company;
Professor of Finance, Erie Family Life Insurance
College of Business Company; Kansas State
Administration, Kansas Bank; Tortoise North
State University (has American Energy
served as a professor or Corporation (closed-end
adjunct professor since investment company)2
1970); Chairman of the
Board, President and CEO,
Graham Capital Management,
Inc. and Owner of Graham
Ventures; formerly, CEO,
Kansas Farm Bureau
Financial Services,
including seven affiliated
insurance or financial
service companies
(1979-2000).
Charles E. Heath, 62 Director since 2003 Retired in 1999. Tortoise North American
Formerly, Chief Investment Energy Corporation
Officer, General (closed-end investment
Electric's Employers company)2
Reinsurance Corporation
(1989-1999). CFA since
1974.
INTERESTED DIRECTORS AND OFFICERS(1)
H. Kevin Birzer, 45 Director and Chairman of Partner/Senior Analyst, Tortoise North American
the Board since 2003 Fountain Capital Energy Corporation
(1990-present); Manager of (closed-end investment
the Adviser; formerly, company)2
Vice President, F. Martin
Koenig & Co. (1983-1986);
Vice President, Corporate
Finance Department, Drexel
Burnham Lambert (1986-1989).
Terry C. Matlack, 48 Director, Treasurer and Managing Director, KCEP Trendstar Investment Trust
Chief Financial Officer (2001-present); Manager of (open-end small cap
since 2003 the Adviser; formerly, investment fund); Tortoise
President, GreenStreet Capital North American Energy
(1998-2001). Corporation (closed-end
investment company)2
S-16
POSITION(S) HELD
WITH COMPANY AND OTHER
LENGTH OF TIME PRINCIPAL OCCUPATION DURING PAST DIRECTORSHIPS
NAME AND AGE SERVED FIVE YEARS HELD BY DIRECTOR
------------ --------------- -------------------------------- ----------------
David J. Schulte, 43 President and Chief Managing Director, KCEP None
Executive Officer (1993-present); Manager of
since 2003 the Adviser. CFA since
1992; Member, Corporate
Governance Task Force of
CFA Institute.
Zachary A. Hamel, 38 Secretary since 2003 Partner/Senior Analyst None
with Fountain Capital
(1997-present); Manager of
the Adviser.
Kenneth P. Malvey, 39 Assistant Treasurer since Partner/Senior Analyst, None
2003 Fountain Capital
Management (2002-present);
Manager of the Adviser.
Formerly, Investment Risk
Manager and member of the
Global Office of
Investments, GE Capital's
Employers Reinsurance
Corporation (1996-2002).
Andrew P. Chica, 29 Assistant Secretary since Assistant Vice President, None
2003 U.S. Bancorp Fund
Services, LLC (since
2004). Assistant Vice
President and Treasurer,
The Mexico Equity and
Income Fund, Inc.;
Assistant Treasurer,
Kinetics Mutual Funds,
Inc. and Kinetics
Portfolio Trust. Formerly
Compliance Officer, U.S.
Bancorp Fund Services, LLC
(2002-2003).
Kristina Hilson, 24 Assistant Secretary since Administrator, U.S. None
2004 Bancorp Fund Services, LLC
(since 2002); Assistant
Secretary, AIP Alternative
Strategies Funds.
------------------
(1) As a result of their respective positions held with the Adviser or its
affiliates, these individuals, other than Mr. Chica and Ms. Hilson, are
considered "interested persons" of the Company within the meaning of
the 1940 Act.
(2) The Adviser also serves as investment advisor to Tortoise North American
Energy Corporation.
The Company has an audit committee that consists of three directors of
the Company (the "Audit Committee") who are not "interested persons" of the
Company within the meaning of the 1940 Act ("Independent Directors"). The Audit
Committee members are Charles E. Heath (Chairman), Conrad S. Ciccotello and John
R. Graham. The Audit Committee's function is to oversee the Company's accounting
policies, financial reporting and internal control system. The Audit Committee
makes recommendations regarding the selection of independent auditors of the
Company, reviews the independence of such firm, reviews the scope of the audit
and internal controls, considers and reports to the Board on matters relating to
the Company's accounting and financial reporting practices, and performs such
other tasks as the full Board deems necessary or appropriate. The Audit
Committee held 4 meetings in the fiscal year ended November 30, 2004.
Directors and officers of the Company who are interested persons of the
Company will receive no salary or fees from the Company. For the current fiscal
year, each Independent Director receives from the Company an annual retainer of
$15,000 ($6,000 for the Chairman of the Audit Committee) and a fee of $2,000
(and reimbursement for related expenses) for each meeting of the Board or
committee meeting (or
S-17
$1,000 for each committee meeting that is held on the same day as a Board
meeting) he or she attends. Each Independent Director also receives $1,000 for
each telephone committee meeting. No director or officer will be entitled to
receive pension or retirement benefits from the Company.
The table below sets forth the compensation paid to the directors by
the Company for the fiscal year ended November 30, 2004.
AGGREGATE COMPENSATION
FROM THE COMPANY AND
NAME AND POSITION WITH THE AGGREGATE COMPENSATION FROM FUND COMPLEX PAID TO
COMPANY THE COMPANY* DIRECTORS (2 COMPANIES)
-------------------------------------- --------------------------- -----------------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello.................. $18,000 $18,000
John R. Graham........................ $18,000 $18,000
Charles E. Heath...................... $20,000 $20,000
INTERESTED DIRECTORS
H. Kevin Birzer....................... $ 0 $ 0
Terry C. Matlack...................... $ 0 $ 0
The following table sets forth the dollar range of equity securities
beneficially owned by each director in the Company as of the date of this
Statement of Additional Information.
AGGREGATE DOLLAR
RANGE OF
SECURITIES OF
AGGREGATE DOLLAR RANGE OF COMPANIES OVERSEEN
COMPANY SECURITIES BY DIRECTOR IN
BENEFICIALLY OWNED BY FUND COMPLEX
NAME OF DIRECTOR DIRECTOR* (2 COMPANIES)
-------------------------------------- -------------------------- -------------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello.................. $10,001-$50,000 $10,001-$50,000
John R. Graham........................ Over $100,000 Over $100,000
Charles E. Heath...................... $10,001 - $100,000 $10,001 - $100,000
INTERESTED DIRECTORS
H. Kevin Birzer....................... Over $100,000 Over $100,000
Terry C. Matlack...................... $50,001 - $100,000 $50,001 - $100,000
------------------
* [As of the date of this Statement of Additional Information, the
officers and directors of the Company, as a group, own less than 1% of
the Company's outstanding shares of common stock.]
CONTROL PERSONS
As of January 31, 2005, the following persons owned of record more than
5% of the Company's common stock:
Lehman Brothers Inc.......................... %
745 Seventh Avenue
New York, NY 10019
Stifel, Nicolaus & Company Incorporated...... %
501 North Broadway
St. Louis, MO 63102
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Oppenheimer & Co. Inc........................ %
125 Broad Street
New York, NY 10004
RBC Dain Rauscher Inc........................ %
1211 Avenue of the Americas
New York, NY 10036
Wunderlich Securities, Inc................... %
6305 Humphrey Blvd.
Memphis, TN 38120
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty which is
established by a final judgment as being material to the cause of action. The
Charter contains such a provision which eliminates directors' and officers'
liability to the maximum extent permitted by Maryland law.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law and the 1940 Act, to obligate itself to indemnify any present or
former director or officer or any individual who, while a director or officer of
the Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or
trustee, from and against any claim or liability to which that person may become
subject or which that person may incur by reason of his or her status as a
present or former director or officer of the Company and to pay or reimburse his
or her reasonable expenses in advance of final disposition of a proceeding. The
Bylaws obligate the Company, to the maximum extent permitted by Maryland law and
the 1940 Act, to indemnify any present or former director or officer or any
individual who, while a director of the Company and at the request of the
Company, serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise as
a director, officer, partner or trustee and who is made a party to the
proceeding by reason of his or her service in that capacity from and against any
claim or liability to which that person may become subject or which that person
may incur by reason of his or her status as a present or former director or
officer of the Company and to pay or reimburse his or her reasonable expenses in
advance of final disposition of a proceeding. The Charter and Bylaws also permit
the Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and any
employee or agent of the Company or a predecessor of the Company.
Maryland law requires a corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful in the defense of any proceeding to which he is
made, or threatened to be made, a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made, or threatened to be made, a party by
reason of their service in those or other capacities unless it is established
that (a) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad faith or (ii)
was the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services or
(c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under Maryland law, a Maryland corporation may not indemnify for an adverse
judgment in a
S-19
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 or her good faith belief that he or she has met the
standard of conduct necessary for indemnification by the corporation and (b) a
written undertaking by him or her or on his or her behalf to repay the amount
paid or reimbursed by the corporation if it is ultimately determined that the
standard of conduct was not met.
INVESTMENT ADVISER
Tortoise Capital Advisers, L.L.C. (the "Adviser") serves as the
Company's investment adviser. The Adviser was formed by Fountain Capital
Management, L.L.C. ("Fountain Capital") and Kansas City Equity Partners, L.C.
("KCEP") in October 2002 to provide portfolio management services exclusively
with respect to energy infrastructure investments. The Adviser is controlled
equally by Fountain Capital and KCEP, each of which own half of all of the
voting shares of the Adviser.
Fountain Capital was formed in 1990 and is focused primarily on
providing investment advisory services to institutional investors with respect
to below investment grade debt. Atlantic Asset Management LLC ("Atlantic") is a
minority owner, and an affiliate, of Fountain Capital. Atlantic was formed in
1992 and provides, directly or through affiliates, a variety of fixed-income
investment advisory services including investment grade bond and high-yield bond
strategies, investment grade collateralized debt obligations and mortgage hedge
funds.
KCEP was formed in 1993 and is focused solely on managing two private
equity funds. KCEP focuses on private equity investments in the consumer,
telecom/media and natural resource distribution and services industries.
The Adviser is located at 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210. The Adviser specializes in managing portfolios of MLPs and
other energy infrastructure companies. As of January 31, 2005, the Adviser had
approximately $____ million in assets under management in the energy
infrastructure industry.
Pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"), the Adviser, subject to overall supervision by the Board, manages
the investments of the Company. The Adviser regularly provides the Company with
investment research advice and supervision and furnishes continuously an
investment program for the Company, consistent with the investment objective and
policies of the Company.
Day-to-day management of the Company's portfolio is the responsibility
of a team of investment analysts and portfolio managers led by David J.
Schulte. The Adviser has a five member Investment Committee. The members of the
Committee are David J. Schulte, H. Kevin Birzer, Terry C. Matlack, Zachary A.
Hamel and Kenneth P. Malvey. Each member of the committee has responsibilities
with respect to KCEP and/or Fountain Capital. All members of the Investment
Committee have undertaken to provide such services as necessary to fulfill the
obligations of the Adviser to the Company.
In addition, the Adviser is obligated to supply the Board and officers
of the Company with certain statistical information and reports, to oversee the
maintenance of various books and records and to arrange for the preservation of
records in accordance with applicable federal law and regulations. Under the
Advisory Agreement, the Company pays to the Adviser quarterly, as compensation
for the services rendered and expenses paid by it, a fee equal on an annual
basis to 0.95% of the Company's average monthly Managed Assets. Managed Assets
means the total assets of the Company (including any assets attributable to
leverage that may be outstanding) minus accrued liabilities other than (i)
deferred taxes,
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(ii) debt entered into for the purpose of leverage and (iii) the aggregate
liquidation preference of any outstanding preferred stock.
The Adviser has agreed contractually to waive or reimburse the Company
for fees and expenses, including the investment advisory fee and other expenses
in the amount of 0.23% of average monthly Managed Assets through February 28,
2006 and 0.10% of average monthly Managed Assets through February 28, 2009.
Because the management fees paid to the Adviser are based upon a
percentage of the Company's Managed Assets, fees paid to the Adviser are higher
when the Company is leveraged; thus, the Adviser will have an incentive to
leverage the Company. Because the fee reimbursement agreement is based on
Managed Assets, to the extent the Company is engaged in leverage, the gross
dollar amount of the Adviser's fee reimbursement obligations to the Company will
increase. The Adviser intends to leverage the Company only when it believes it
will serve the best interests of the stockholders. The Company's average monthly
Managed Assets are determined for the purpose of calculating the management fee
by taking the average of the monthly determinations of Managed Assets during a
given calendar quarter. The fees are payable for each calendar quarter within 5
days of the end of that quarter.
For the Company's initial fiscal year beginning February 27, 2004 and
ending November 30, 2004, the Advisor received $_____ as compensation for
advisory services and waived $_____.
The Advisory Agreement provides that the Company will pay all expenses
other than those expressly stated to be payable by the Adviser, which expenses
payable by the Company shall include, without implied limitation: (1) expenses
of maintaining the Company and continuing its existence, (2) registration of the
Company under the 1940 Act, (3) commissions, spreads, fees and other expenses
connected with the acquisition, holding and disposition of securities and other
investments including placement and similar fees in connection with direct
placements entered into on behalf of the Company, (4) auditing, accounting and
legal expenses, (5) taxes and interest, (6) governmental fees, (7) expenses of
listing shares of the Company with a stock exchange, and expenses of issue,
sale, repurchase and redemption (if any) of interests in the Company, including
expenses of conducting tender offers for the purpose of repurchasing Company
interests, (8) expenses of registering and qualifying the Company and its shares
under federal and state securities laws and of preparing and filing registration
statements and amendments for such purposes, (9) expenses of reports and notices
to stockholders and of meetings of stockholders and proxy solicitations
therefore, (10) expenses of reports to governmental officers and commissions,
(11) insurance expenses, (12) association membership dues, (13) fees, expenses
and disbursements of custodians and subcustodians for all services to the
Company (including without limitation safekeeping of funds, securities and other
investments, keeping of books, accounts and records, and determination of net
asset values), (14) fees, expenses and disbursements of transfer agents,
dividend paying agents, stockholder servicing agents and registrars for all
services to the Company, (15) compensation and expenses of directors of the
Company who are not members of the Adviser's organization, (16) pricing and
valuation services employed by the Company, (17) all expenses incurred in
connection with leveraging of the Company's assets through a line of credit, or
issuing and maintaining preferred stock or instruments evidencing indebtedness
of the Company, (18) all expenses incurred in connection with the organization
of the Company and offerings of the Company's common stock, and (19) such
non-recurring items as may arise, including expenses incurred in connection with
litigation, proceedings and claims and the obligation of the Company to
indemnify its directors, officers and stockholders with respect thereto.
The Advisory Agreement provides that the Adviser will not be liable in
any way for any default, failure or defect in any of the securities comprising
the Company's portfolio if it has satisfied the duties and the standard of care,
diligence and skill set forth in the Advisory Agreement. However, the Adviser
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shall be liable to the Company for any loss, damage, claim, cost, charge,
expense or liability resulting from the Adviser's willful misconduct, bad faith
or gross negligence or disregard by the Adviser of the Adviser's duties or
standard of care, diligence and skill set forth in the Agreement or a material
breach or default of the Adviser's obligations under the Advisory Agreement.
The Advisory Agreement will continue in force until December 31, 2005,
and from year to year thereafter, provided such continuance is approved by a
majority of the Board or by vote of the holders of a majority of the outstanding
voting securities of the Company. Additionally, the Advisory Agreement must be
approved annually by vote of a majority of the Independent Directors. The
Advisory Agreement may be terminated by the Adviser or the Company, without
penalty, on sixty (60) days' written notice to the other. The Advisory Agreement
will terminate automatically in the event of its assignment.
The Advisory Agreement was considered and approved by the Board,
including a majority of the Independent Directors, at the organizational meeting
of the Company held on December 12, 2003. In considering the Advisory Agreement,
the Board, including a majority of the Independent Directors, determined that
the terms of the agreement are fair and reasonable and that approval of the
Advisory Agreement on behalf of the Company is in the best interests of the
Company. In evaluating the Advisory Agreement, the Board reviewed materials
furnished by the Adviser and met with senior advisory personnel. The Board also
specifically considered the following as relevant to its determination to
approve the Advisory Agreement: (1) the history, reputation, qualification and
background of the Adviser and the team of analysts and portfolio managers
responsible for the Company's investment program; (2) the Adviser's reliance on
the personnel and resources of affiliates; (3) the unique nature of the product
and the specialized expertise of the Adviser in a niche market (MLPs); (4) that
the fee and expense ratios of the Company are reasonable given the quality of
services expected to be provided and are comparable to the fee and expense
ratios of similar closed-end funds with similar investment objectives and
policies; and (5) other factors deemed relevant by the Board. The Board noted
and approved that the fee rate would be applicable to all assets under
management, including amounts attributable to leverage, and the potential
conflict of the Adviser in determining the amount of leverage.
POTENTIAL CONFLICTS OF INTEREST
The Adviser and its affiliates manage other accounts and portfolios
with investment strategies similar to those of the Company. Securities
frequently meet the investment objectives of the Company and such other accounts
and the Company may compete against other accounts for the same trade the
Company might otherwise make, including the priority of the trading order.
The Adviser also serves as investment adviser to Tortoise North
American Energy Corporation ("TYN"), a recently organized, nondiversified,
closed-end investment management company. Once TYN commences operations, it
intends to invest primarily in publicly traded Canadian royalty trusts and
income trusts and publicly traded MLPs. To the extent certain MLP securities or
other energy infrastructure company securities meet the investment objectives of
both companies, the Company and TYN may compete for the same trades.
It is possible that at times identical securities will be held by the
Company and other accounts. However, positions in the same issuer may vary and
the length of time that the Company or other accounts may choose to hold their
investment in the same issuer may likewise vary. To the extent that one or more
of the accounts managed by the Adviser seeks to acquire the same security at
about the same time, the Company may not be able to acquire as large a position
in such security as it desires or it may have to pay a higher price for the
security. Similarly, the Company may not be able to obtain as large an execution
of an order to sell or as high a price for any particular portfolio security if
the Adviser decides to sell on behalf of another account the same portfolio
security at the same time. On the other hand, if the same securities are bought
or sold at the same time by the Company and other accounts, the resulting
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participation in volume transactions could produce better executions for the
Company. In the event more than one account purchases or sells the same security
as the Company on a given date, the purchases and sales will normally be
allocated as nearly as practicable on a pro rata basis in proportion to the
amounts desired to be purchased or sold by each account and the Company. Other
factors considered in the allocation of securities include cash balances, risk
tolerances and other guideline restrictions. Although the other accounts may
have the same or similar investment objectives and policies as the Company,
their portfolios may not necessarily consist of the same investments as the
Company or each other, and their performance results are likely to differ from
those of the Company.
CODE OF ETHICS
The Company and the Adviser have adopted a Code of Ethics under Rule
17j-1 of the 1940 Act, which is applicable to officers, directors and designated
employees of the Company and the Adviser (the "Code"). Subject to certain
limitations, the Code permits covered persons to invest in securities, including
securities that may be purchased or held by the Company. The Code contains
provisions and requirements designed to identify and address certain conflicts
of interest between personal investment activities of covered persons and the
interests of investment advisory clients such as the Company. Among other
things, the Code prohibits certain types of transactions absent prior approval,
imposes time periods during which personal transactions may not be made in
certain securities, and requires submission of duplicate broker confirmations
and statements and quarterly reporting of securities transactions. Exceptions to
these and other provisions of the Code may be granted in particular
circumstances after review by appropriate personnel.
The Code of Ethics of the Company can be reviewed and copied at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling the Securities and Exchange Commission at (202) 942-8090. The Code of
the Company is also available on the EDGAR Database on the Securities and
Exchange Commission's Internet site at http://www.sec.gov, and, upon payment of
a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov or by writing the Securities and Exchange Commission's Public
Reference Section, Washington, D.C. 20549-0102.
NET ASSET VALUE
The Company will compute its net asset value for its shares of common
stock as of the close of trading on the NYSE (normally 4:00 p.m. Eastern time)
no less frequently than the last business day of each calendar month and at such
other times as the Board may determine. The Company makes its net asset value
available for publication monthly. For purposes of determining the net asset
value of a common share, the net asset value of the Company will equal the value
of the total assets of the Company (the value of the securities the Company
holds, plus cash or other assets, including interest accrued but not yet
received) less (1) all of its liabilities (including without limitation accrued
expenses and both current and deferred income taxes), (2) accumulated and unpaid
interest payments and dividends on any outstanding debt or preferred stock,
respectively, (3) the aggregate liquidation value of any outstanding preferred
stock, (4) the aggregate principal amount of any outstanding senior notes,
including any series of Tortoise Notes, and (5) any distributions payable on the
common stock. The net asset value per common share of the Company will equal the
net asset value of the Company divided by the number of outstanding shares of
common stock.
Pursuant to an agreement with U.S. Bancorp Fund Services, LLC (the
"Accounting Services Provider"), the Accounting Services Provider will value the
assets in the Company's portfolio in accordance with Valuation Procedures
adopted by the Board of Directors. The Accounting Services Provider will obtain
securities market quotations from independent pricing services approved by the
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Adviser and ratified by the Board. Securities for which market quotations are
readily available shall be valued at "market value." Any other securities shall
be valued at "fair value."
Valuation of certain assets at market value will be as follows. For
equity securities, the Accounting Services Provider will first use readily
available market quotations and will obtain direct written broker-dealer
quotations if a security is not traded on an exchange or quotations are not
available from an approved pricing service. For fixed income securities, the
Accounting Services Provider will use readily available market quotations based
upon the last updated sale price or market value from a pricing service or by
obtaining a direct written broker-dealer quotation from a dealer who has made a
market in the security. For options, futures contracts and options on futures
contracts, the Accounting Services Provider will use readily available market
quotations. If no sales are reported on any exchange or OTC market, the
Accounting Services Provider will use the calculated mean based on bid and asked
prices obtained from the primary exchange or OTC market. Other assets will be
valued at market value pursuant to the Valuation Procedures.
If the Accounting Services Provider cannot obtain a market value or the
Adviser determines that the value of a security as so obtained does not
represent a fair value as of the valuation time (due to a significant
development subsequent to the time its price is determined or otherwise), fair
value for the security shall be determined pursuant to the Valuation Procedures
adopted by the Board. The Valuation Procedures provide that the Adviser will
consider a variety of factors with respect to the individual issuer and security
in determining and monitoring the continued appropriateness of fair value,
including, without limitation, financial statements and fundamental data with
respect to the issuer, cost, the amount of any discount, restrictions on
transfer and registration rights and other information deemed relevant. A report
of any prices determined pursuant to certain preapproved methodologies will be
presented to the Board or a designated committee thereof for approval at the
next regularly scheduled Board meeting; otherwise approval of the Board shall be
sought promptly. The Valuation Procedures provide for two preapproved
methodologies. First, direct placements of securities of private companies
(i.e., companies with no outstanding public securities) ordinarily will be
valued at cost initially. Second, securities that are convertible into publicly
traded securities (i.e., convertible subordinated units) ordinarily will be
valued at the market value of the publicly traded security less a discount
initially determined with respect to each security based on the discount
negotiated at the time of purchase. The foregoing methods for valuing privately
placed securities may be used only as long as the Adviser believes they continue
to represent fair value.
In computing net asset value, the Company will review the valuation of
the obligation for income taxes separately for current taxes and deferred taxes
due to the differing impact of each on (i) the anticipated timing of required
tax payments and (ii) the impact of each on the treatment of distributions by
the Company to its stockholders.
The allocation between current and deferred income taxes is determined
based upon the value of assets reported for book purposes compared to the
respective net tax bases of assets as recognized for federal income tax
purposes. It is anticipated that cash distributions from MLPs in which the
Company invests will not equal the amount of taxable income allocable to the
Company primarily as a result of depreciation and amortization deductions
recorded by the MLPs. This may result, in effect, in a portion of the cash
distribution received by the Company not being treated as income for federal
income tax purposes. The relative portion of such distributions not treated as
income for tax purposes will vary among the MLPs, and also will vary year by
year for each MLP. The Adviser will be able to directly confirm the portion of
each distribution recognized as taxable income when it receives annual tax
reporting information from each MLP.
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PORTFOLIO TRANSACTIONS
EXECUTION OF PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for
the Company, broker-dealer selection, and negotiation of brokerage commission
rates. The Adviser's primary consideration in effecting a security transaction
will be to obtain the best execution. In selecting a broker-dealer to execute
each particular transaction, the Adviser will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and the difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Company on a continuing
basis. Accordingly, the price to the Company in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the execution services offered.
The ability to invest in direct placements of MLP securities is
critical to the Company's ability to meet its investment objective because of
the limited number of MLP issuers available for investment and, in some cases,
the relative small trading volumes of certain securities. Accordingly, the
Company may from time to time enter into arrangements with placement agents in
connection with direct placement transactions.
In evaluating placement agent proposals, the Company considers each
broker's access to issuers of MLP securities and experience in the MLP market,
particularly the direct placement market. In addition to these factors, the
Company considers whether the proposed services are customary, whether the
proposed fee schedules are within the range of customary rates, whether any
proposal would obligate the Company to enter into transactions involving a
minimum fee, dollar amount or volume of securities, or into any transaction
whatsoever, and other terms such as indemnification provisions.
Subject to such policies as the Board may from time to time determine,
the Adviser shall not be deemed to have acted unlawfully or to have breached any
duty solely by reason of its having caused the Company to pay a broker or dealer
that provides brokerage and research services to the Adviser an amount of
commission for effecting a Company investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Company and to other clients of the Adviser as to which the Adviser
exercises investment discretion. The Adviser is further authorized to allocate
the orders placed by it on behalf of the Company to such brokers and dealers who
also provide research or statistical material or other services to the Company
or the Adviser. Such allocation shall be in such amounts and proportions as the
Adviser shall determine and the Adviser will report on said allocations
regularly to the Board indicating the brokers to whom such allocations have been
made and the basis therefor.
PORTFOLIO TURNOVER
The Company's annual portfolio turnover rate may vary greatly from year
to year. Although the Company cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 30% under normal circumstances. From
the commencement of operations through January 31, 2005, the Company's actual
portfolio turnover rate was ______%. However, portfolio turnover rate is not
considered a limiting factor in the execution of investment decisions for the
Company. A higher turnover rate results in correspondingly greater brokerage
commissions and other transactional expenses that are borne by the Company. High
portfolio turnover also may result in the Company's recognition of gains that
will increase the Company's taxable income, possibly resulting in an increased
tax liability, as well as
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increasing the Company's current and accumulated earnings and profits resulting
in a greater portion of the Company's distributions on its stock being treated
as taxable dividends for federal income tax purposes. See "Certain Federal
Income Tax Matters."
ADDITIONAL INFORMATION CONCERNING THE AUCTION
GENERAL
Auction Agency Agreement. The Company has entered into an Auction
Agency Agreement (the "Auction Agency Agreement") with the Auction Agent
(currently, The Bank of New York) which provides, among other things, that the
Auction Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for each series of Tortoise Notes so long as the Applicable Rate
for Tortoise Notes of such series is to be based on the results of an Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Company, which provide for the participation of those
Broker-Dealers in Auctions for Tortoise Notes. See "Broker-Dealers" below.
Securities Depository. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members with respect to each series of
Tortoise Notes. One certificate for each series of Tortoise Notes will be
registered in the name of Cede & Co., as nominee of the Securities Depository.
Such certificate will bear a legend to the effect that such certificate is
issued subject to the provisions restricting transfers of Tortoise Notes
contained in the Indenture. The Company also will issue stop-transfer
instructions to the transfer agent for each series of Tortoise Notes. Cede & Co.
will be the Holder of record of each series of all Tortoise Notes and owners of
such Tortoise Notes will not be entitled to receive certificates representing
their ownership interest in such Tortoise Notes.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in Tortoise Notes, whether for its own account
or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as non-fiduciary agent for the Company in
connection with Auctions. In the absence of bad faith or gross negligence on its
part, the Auction Agent will not be liable for any action taken, suffered, or
omitted or for any error of judgment made by it in the performance of its duties
under the Auction Agency Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been grossly
negligent in ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of Tortoise Notes, the Auction Agent's registry of Existing
Holders, the results of Auctions and notices from any Broker-Dealer (or other
Person, if permitted by the Company) with respect to transfers described under
"The Auction" in the Prospectus and notices from the Company. The Auction Agent
is not required to accept any such notice for an Auction unless it is received
by the Auction Agent by 3:00 p.m., New York City time, on the Business Day
preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Company on a date no earlier than 60 days after such notice. If
the Auction Agent should resign, the Company will use its best efforts to enter
into an agreement with a successor Auction Agent containing substantially the
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same terms and conditions as the Auction Agency Agreement. The Company may
remove the Auction Agent provided that prior to such removal the Company shall
have entered into such an agreement with a successor Auction Agent.
BROKER-DEALERS
After each Auction for Tortoise Notes, the Auction Agent will pay to
each Broker-Dealer, from funds provided by the Company, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Company and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of Tortoise Notes placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
Tortoise Notes will be placed by a Broker-Dealer if such Tortoise Notes were (a)
the subject of Hold Orders deemed to have been submitted to the Auction Agent by
the Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial Owners
or (b) the subject of an Order submitted by such Broker-Dealer that is (i) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such Tortoise Notes as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such Tortoise Notes as a result of the Auction or (iii) a valid Hold
Order.
The Company may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Company) may participate in Auctions for its own account.
However, the Company, by notice to all Broker-Dealers, may prohibit all
Broker-Dealers from submitting Bids in Auctions for their own accounts, provided
that they may continue to submit Hold Orders and Sell Orders for their own
accounts. Any Broker-Dealer that is an affiliate of the Company may submit
orders in Auctions, but only if such Orders are not for its own account. If a
Broker-Dealer submits an Order for its own account in any Auction, it might have
an advantage over other Bidders because it would have knowledge of all Orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that Auction.
CERTAIN FEDERAL INCOME TAX MATTERS
The following is a summary of certain material U.S. federal income tax
considerations relating to the purchase, ownership and disposition of Tortoise
Notes. Except as discussed under "Taxation of Non-U.S. Holders" and "Information
Reporting and Backup Withholding," the discussion generally applies only to
holders of Tortoise Notes that are U.S. holders. You will be a U.S. holder if
you are an individual who is a citizen or resident of the United States, a U.S.
domestic corporation, or any other person that is subject to U.S. federal income
tax on a net income basis in respect of an investment in Tortoise Notes. This
summary deals only with U.S. holders that hold Tortoise Notes as capital assets
and who purchase Tortoise Notes in connection with this offering. It does not
address considerations that may be relevant to you if you are an investor that
is subject to special tax rules, such as a financial institution, insurance
company, regulated investment company, real estate investment trust, investor in
pass-through entities, U.S. holder of Tortoise Notes whose "functional currency"
is not the United States dollar, tax-exempt organization, dealer in securities
or currencies, trader in securities or commodities that elects mark to market
treatment, a person who holds Tortoise Notes in a qualified tax deferred account
such as an IRA, or a person who will hold Tortoise Notes as a position in a
"straddle," "hedge" or as part of a
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"constructive sale" for federal income tax purposes. In addition, this
discussion does not address the possible application of the U.S. federal
alternative minimum tax.
This summary is based on the provisions of the Internal Revenue Code,
the applicable Treasury regulations promulgated thereunder, judicial authority
and current administrative rulings, as in effect on the date of this Statement
of Additional Information, all of which may change. Any change could apply
retroactively and could affect the continued validity of this summary.
As stated above, this discussion does not discuss all aspects of U.S.
federal income taxation that may be relevant to a particular holder of Tortoise
Notes in light of such holder's particular circumstances and income tax
situation. Prospective holders should consult their own tax advisors as to the
specific tax consequences to them of the purchase, ownership and disposition of
Tortoise Notes, including without limitation the application and the effect of
state, local, foreign and other tax laws and the possible effects of changes in
U.S. or other tax laws.
FEDERAL INCOME TAX TREATMENT OF THE COMPANY
The Company is treated as a regular C corporation for federal and state
income tax purposes. The Company computes and pays federal and state income tax
on its taxable income. Thus, the Company is subject to federal income tax on its
taxable income at tax rates up to 35%. Additionally, in certain instances the
Company could be subject to the federal alternative minimum tax of 20% on its
alternative minimum taxable income to the extent that the alternative minimum
tax exceeds its regular federal income tax.
As indicated above, the Company invests its assets primarily in MLPs.
MLPs generally are treated as partnerships for federal income tax purposes.
Since partnerships are generally not subject to federal income tax, the
partnership's partners must report as their income, their proportionate share of
partnership income. Thus, as a partner in MLPs, the Company will report its
proportionate share of the MLPs' income in computing its federal taxable income,
irrespective of whether any cash or other distributions are made by the MLP to
the Company. Distributions by such MLPs will not be eligible for the dividends
received deduction when received by the Company. The Company also takes into
account in computing its taxable income any other items of Company income, gain,
deduction or loss. The Company anticipates that these may include interest
income earned on the Company's investment in debt securities, deductions for
Company operating expenses and gain or loss recognized by the Company on the
sale of MLP interests or any other security.
As explained below, based upon the historic performance of MLPs, the
Company anticipates initially that its proportionate share of the MLPs' taxable
income will be significantly less than the amount of cash distributions received
by the Company from the MLPs. In such case, the Company anticipates that it will
not incur a current federal income tax on a significant portion of its cash
flow, particularly after taking into account the Company's current operating
expenses. If the MLPs' taxable income is greater than the MLPs' cash
distributions, the Company will incur current federal income tax liability,
possibly in excess of the cash distributions it receives.
The Company anticipates that each year it will turn over a certain
portion of its investment assets. The Company will recognize gain or loss on the
disposition of all or a portion of its interest in MLPs in an amount equal to
the difference between the sales price and the Company's basis in the MLP
interests sold. To the extent the Company received MLP cash distributions in
excess of the taxable income reportable by the Company with respect to the
respective MLP interest, the Company's basis in the MLP interest will be reduced
and the Company's gain on the sale of such MLP interest likewise will be
increased.
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The Company has not elected to be treated as a regulated investment
company under the federal income tax laws. The federal income tax laws generally
provide that a regulated investment company does not pay an entity level income
tax, provided that it distributes all or substantially all of its income and
capital gains to its stockholders. The regulated investment company taxation
rules have no application to the Company or stockholders of the Company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TORTOISE NOTES
Under present law, the Company believes that Tortoise Notes will
constitute indebtedness of the Company for federal income tax purposes, which
the below discussion assumes. The Company intends to treat all payments made
with respect to the Tortoise Notes consistent with this characterization.
Taxation of Interest. Payments or accruals of interest on Tortoise
Notes generally will be taxable to you as ordinary interest income at the time
such interest is received (actually or constructively) or accrued, in accordance
with your regular method of accounting for federal income tax purposes.
Purchase, Sale and Redemption of Tortoise Notes. Initially, your tax
basis in Tortoise Notes acquired generally will be equal to your cost to acquire
such Tortoise Notes. This basis will increase by the amounts, if any, that you
are required, or elect, to include in income under the rules governing market
discount, and will decrease by the amount of any amortized premium on such
Tortoise Notes, as discussed below. When you sell or exchange any of your
Tortoise Notes, or if any of your Tortoise Notes are redeemed, you generally
will recognize gain or loss equal to the difference between the amount you
realize on the transaction (less any accrued and unpaid interest, which will be
subject to tax in the manner described above under "Taxation of Interest") and
your tax basis in the Tortoise Notes relinquished.
Except as discussed below with respect to market discount, the gain or
loss that you recognize on the sale, exchange or redemption of any of your
Tortoise Notes generally will be capital gain or loss. Such gain or loss will be
long-term capital gain or loss if the disposed Tortoise Notes were held for more
than one year and will be short-term capital gain or loss if the disposed
Tortoise Notes were held for one year or less. Net long-term capital gain
recognized by a noncorporate U.S. holder generally will be subject to tax at a
lower rate (currently a maximum rate of 15%, although this rate will increase to
20% for taxable years beginning after 2008) than net short-term capital gain or
ordinary income (currently a maximum rate of 35%). A holder's ability to deduct
capital losses may be limited.
Amortizable Premium. If you purchase Tortoise Notes at a cost greater
than the Tortoise Notes' stated principal amount, plus accrued interest, you
will be considered to have purchased the Tortoise Notes at a premium, and you
generally may elect to amortize this premium as an offset to interest income,
using a constant yield method, over the remaining term of the Tortoise Notes. If
you make the election to amortize the premium, it generally will apply to all
debt instruments that you hold at the time of the election, as well as any debt
instruments that you subsequently acquire. In addition, you may not revoke the
election without the consent of the Internal Revenue Service ("IRS"). If you
elect to amortize the premium, you will be required to reduce your tax basis in
the Tortoise Notes by the amount of the premium amortized during your holding
period. If you do not elect to amortize premium, the amount of premium will be
included in your tax basis in the Tortoise Notes. Therefore, if you do not elect
to amortize the premium and you hold the Tortoise Notes to maturity, you
generally will be required to treat the premium as a capital loss when the
Tortoise Notes are redeemed.
Market Discount. If you purchase Tortoise Notes at a price that
reflects a "market discount," any principal payments on, or any gain that you
realize on the disposition of the Tortoise Notes generally will be treated as
ordinary interest income to the extent of the market discount that accrued on
the Tortoise Notes during the time you held such Tortoise Notes. "Market
discount" is defined under the Internal Revenue Code as, in general, the excess
of the stated redemption price at maturity over the purchase price
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of the note, except that if the market discount is less than 0.25% of the stated
redemption price at maturity multiplied by the number of complete years to
maturity, the market discount is considered to be zero. In addition, you may be
required to defer the deduction of all or a portion of any interest paid on any
indebtedness that you incurred or continued to purchase or carry the Tortoise
Notes that were acquired at a market discount. In general, market discount will
be treated as accruing ratably over the term of the Tortoise Notes, or, at your
election, under a constant yield method.
You may elect to include market discount in gross income currently as
it accrues (on either a ratable or constant yield basis), in lieu of treating a
portion of any gain realized on a sale of the Tortoise Notes as ordinary income.
If you elect to include market discount on a current basis, the interest
deduction deferral rule described above will not apply. If you do make such an
election, it will apply to all market discount debt instruments that you acquire
on or after the first day of the first taxable year to which the election
applies. This election may not be revoked without the consent of the IRS.
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
Federal Income Taxation of MLPs. MLPs are similar to corporations in
many respects, but differ in others, especially in the way they are taxed for
federal income tax purposes. A corporation is a distinct legal entity, separate
from its stockholders and employees and is treated as a separate entity for
federal income tax purposes as well. Like individual taxpayers, a corporation
must pay a federal income tax on its income. To the extent the corporation
distributes its income to its stockholders in the form of dividends, the
stockholders must pay federal income tax on the dividends they receive. For this
reason, it is said that corporate income is double-taxed, or taxed at two
levels.
An MLP that satisfies the Qualifying Income rules, and does not elect
otherwise, is treated for federal income tax purposes as a pass-through entity.
No federal income tax is paid at the partnership level. A partnership's income
is considered earned by all the partners; it is allocated among all the partners
in proportion to their interests in the partnership (generally as provided in
the partnership agreement), and each partner pays tax on his, her or its share
of the partnership income. All the other items that go into determining taxable
income and tax owed are passed through to the partners as well - capital gains
and losses, deductions, credits, etc. Partnership income is thus said to be
single-taxed or taxed only at one level - that of the partner.
The Internal Revenue Code generally requires "publicly-traded
partnerships" to be treated as corporations for federal income tax purposes.
However, if the publicly-traded partnership satisfies certain requirements and
does not elect otherwise, the publicly-traded partnership will be taxed as a
partnership for federal income tax purposes, referred to herein as an MLP. Under
these requirements, an MLP must receive 90% of its income from specified sources
of Qualifying Income.
Qualifying Income for MLPs includes interest, dividends, real estate
rents, gain from the sale or disposition of real property, certain income and
gain from commodities or commodity futures, and income and gain from certain
mineral or natural resources activities. Mineral or natural resources activities
that generate Qualifying Income include income and gains from the exploration,
development, mining or production, processing, refining, transportation
(including pipelines transporting gas, oil or products thereof), or the
marketing of any mineral or natural resource (including fertilizer, geothermal
energy, and timber). This means that most MLPs today are in energy, timber, or
real estate related businesses.
Because the MLP itself does not pay federal income tax, its income or
loss is allocated to its investors, irrespective of whether the investors
receive any cash or other payment from the MLP. MLPs generally make quarterly
cash distributions. Although they resemble corporate dividends, MLP
distributions are treated differently. The MLP distribution is treated as a
return of capital to the extent of
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the investor's basis in his MLP interest and, to the extent the distribution
exceeds the investor's basis in the MLP interest, capital gain. The investor's
original basis is generally the price paid for the units. The basis is adjusted
downward with each distribution and allocation of deductions (such as
depreciation) and losses, and upwards with each allocation of income and gain.
It is important to note that an MLP investor is taxed on his share of
partnership income whether or not he actually receives any cash or other
property from the partnership. The tax is based not on money or other property
he actually receives, but his proportionate share of what the partnership earns.
However, most MLPs make it a policy to make quarterly distributions to their
partners that will comfortably exceed any income tax owed.
The partner generally will not be taxed on distributions until (1) he
sells his MLP units and pays tax on his gain, which gain is increased due to the
basis decrease resulting from prior distributions; or (2) his basis reaches
zero. When the units are sold, the difference between the sales price and the
investor's adjusted basis is the gain or loss for federal income tax purposes.
At tax filing season an MLP investor will receive a Schedule K-1 form
showing the investor's share of each item of partnership income, gain, loss,
deductions and credits. The investor will use that information to figure the
investor's taxable income (MLPs generally provide their investors with material
that walks them through all the steps). If there is net income derived from the
MLP, the investor pays federal income tax at his, her or its tax rate. If there
is a net loss derived from the MLP, it is generally considered a "passive loss"
under the Internal Revenue Code and generally may not be used to offset income
from other sources, but must be carried forward.
Because the Company is a corporation, the Company, and not its
stockholders, will report the income or loss of the MLPs. Thus, the Company's
stockholders will not have to deal with any Schedule K-1 reporting income and
loss items of the MLPs. Stockholders, instead, will receive a Form 1099 from the
Company. In addition, due to the Company's anticipated broad public ownership,
the Company does not expect to be subject to the passive activity loss
limitation rules mentioned in the preceding paragraph.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments
of principal, interest, and premium paid, if any, on Tortoise Notes (including
redemption proceeds) and to the proceeds of the sale of Tortoise Notes paid to
U.S. holders other than certain exempt recipients (such as certain
corporations). Information reporting will generally apply to payments of
interest on the Tortoise Notes to non-U.S. holders and the amount of tax, if
any, withheld with respect to such payments. Copies of the information returns
reporting such interest payments and any withholding may also be made available
to the tax authorities in the country in which the non-U.S. holder resides under
the provisions of an applicable income tax treaty. In addition, for non-U.S.
holders, information reporting will apply to the proceeds of the sale of
Tortoise Notes within the United States or conducted through United
States-related financial intermediaries unless the certification requirements
described below have been complied with and the statement described below in
"Taxation of Non-U.S. Holders" has been received (and the payor does not have
actual knowledge or reason to know that the beneficial owner is a United States
person) or the holder otherwise establishes an exemption.
The Company may be required to withhold, for U.S. federal income tax
purposes, a portion of all taxable payments (including redemption proceeds)
payable to holders of Tortoise Notes who fail to provide the Company with their
correct taxpayer identification number, who fail to make required certifications
or who have been notified by the IRS that they are subject to backup withholding
(or if the Company has been so notified). Certain corporate and other
stockholders specified in the Internal Revenue Code and the regulations
thereunder are exempt from backup withholding. Backup withholding
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is not an additional tax. Any amounts withheld may be credited against the
holder's U.S. federal income tax liability provided the appropriate information
is furnished to the IRS. If you are a non-U.S. Holder, you may have to comply
with certification procedures to establish your non-U.S. status in order to
avoid backup withholding tax requirements. The certification procedures required
to claim the exemption from withholding tax on interest income described below
will satisfy these requirements.
TAXATION OF NON-U.S. HOLDERS
If you are a non-resident alien individual or a foreign corporation (a
"non-U.S. Holder"), the payment of interest on the Tortoise Notes generally will
be considered "portfolio interest" and thus generally will be exempt from United
States federal withholding tax. This exemption will apply to you provided that
(i) interest paid on the Tortoise Notes is not effectively connected with your
conduct of a trade or business in the United States, (ii) you are not a bank
whose receipt of interest on the Tortoise Notes is described in Section
881(c)(3)(A) of the Internal Revenue Code, (iii) you do not actually or
constructively own 10 percent or more of the combined voting power of all
classes of the Company's stock entitled to vote, (iv) you are not a controlled
foreign corporation that is related, directly or indirectly to the Company
through stock ownership, and (v) you satisfy the certification requirements
described below.
To satisfy the certification requirements, either (1) the holder of any
Tortoise Notes must certify, under penalties of perjury, that such holder is a
non-U.S. person and must provide such owner's name, address and taxpayer
identification number, if any, on IRS Form W-8BEN, or (2) a securities clearing
organization, bank or other financial institution that holds customer securities
in the ordinary course of its trade or business and holds the Tortoise Notes on
behalf of the holder thereof must certify, under penalties of perjury, that it
has received a valid and properly executed IRS Form W-8BEN from the beneficial
holder and comply with certain other requirements. Special certification rules
apply for Tortoise Notes held by a foreign partnership and other intermediaries.
Interest on Tortoise Notes received by a non-U.S. Holder which is not
excluded from U.S. federal withholding tax under the portfolio interest
exemption as described above generally will be subject to withholding at a 30%
rate, except where a non-U.S. Holder can claim the benefits of an applicable tax
treaty to reduce or eliminate such withholding tax and such non-U.S. Holder
provides the Company with a properly executed IRS Form W-8BEN claiming such
exemption or reduction.
Any capital gain that a non-U.S. Holder realizes on a sale, exchange or
other disposition of Tortoise Notes generally will be exempt from United States
federal income tax, including withholding tax. This exemption will not apply to
you if your gain is effectively connected with your conduct of a trade or
business in the U.S. or you are an individual holder and are present in the U.S.
for 183 days or more in the taxable year of the disposition and either your gain
is attributable to an office or other fixed place of business that you maintain
in the U.S. or you have a tax home in the United States.
PROXY VOTING POLICIES
The Company and the Adviser have adopted proxy voting policies and
procedures ("Proxy Policy"), which they believe are reasonably designed to
ensure that proxies are voted in the best interests of the Company and its
stockholders. Subject to the oversight of the Board, the Board has delegated
responsibility for implementing the Proxy Policy to the Adviser. Because of the
unique nature of MLPs in which the Company primarily invests, the Adviser shall
evaluate each proxy on a case-by-case basis. Because proxies of MLPs are
expected to relate only to extraordinary measures, the Company does not believe
it is prudent to adopt pre-established voting guidelines.
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In the event requests for proxies are received with respect to the
voting of equity securities other than MLP equity units, on routine matters,
such as election of directors or approval of auditors, the proxies usually will
be voted with management unless the Adviser determines it has a conflict or the
Adviser determines there are other reasons not to vote with management. On
non-routine matters, such as amendments to governing instruments, proposals
relating to compensation and stock option and equity compensation plans,
corporate governance proposals and stockholder proposals, the Adviser will vote,
or abstain from voting if deemed appropriate, on a case by case basis in a
manner it believes to be in the best economic interest of the Company's
stockholders. In the event requests for proxies are received with respect to
debt securities, the Adviser will vote on a case by case basis in a manner it
believes to be in the best economic interest of the Company's stockholders.
The Chief Executive Officer is responsible for monitoring Company
actions and ensuring that (1) proxies are received and forwarded to the
appropriate decision makers; and (2) proxies are voted in a timely manner upon
receipt of voting instructions. The Company is not responsible for voting
proxies it does not receive, but will make reasonable efforts to obtain missing
proxies. The Chief Executive Officer shall implement procedures to identify and
monitor potential conflicts of interest that could affect the proxy voting
process, including (1) significant client relationships; (2) other potential
material business relationships; and (3) material personal and family
relationships. All decisions regarding proxy voting shall be determined by the
Investment Committee of the Adviser and shall be executed by the Chief Executive
Officer. Every effort shall be made to consult with the portfolio manager and/or
analyst covering the security. The Company may determine not to vote a
particular proxy, if the costs and burdens exceed the benefits of voting (e.g.,
when securities are subject to loan or to share blocking restrictions).
If a request for proxy presents a conflict of interest between the
Company's stockholders on one hand, and the Adviser, the principal underwriters,
or any affiliated persons of the Company, on the other hand, Company management
may (i) disclose the potential conflict to the Board of Directors and obtain
consent; or (ii) establish an ethical wall or other informational barrier
between the persons involved in the conflict and the persons making the voting
decisions.
Information regarding how the Company voted proxies for the period from
its commencement of operations through June 30, 2004, is available by calling
the Company at 1-888-728-8784. You may also access this information on the
Securities and Exchange Commission's website at http://www.sec.gov. The
Company's website at www.tortoiseenergy.com provides a link to all of its
reports on the Commission's website.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young, LLP serves as the independent registered public
accounting firm for the Company. Ernst & Young, LLP provides audit services, tax
return preparation and assistance and consultation in connection with review of
the Company's filings with the Commission.
CUSTODIAN
U.S. Bank National Association, 425 Walnut Street, Cincinnati, OH 45202
serves as the custodian of the Company's cash and investment securities. The
Company pays the custodian a monthly fee computed at an annual rate of 0.015% on
the first $100 million of the Company's Managed Assets and 0.01% on the balance
of the Company's Managed Assets, subject to a minimum annual fee of $4,800.
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ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the Tortoise Notes offered hereby, has been filed by the Company
with the Commission. The Company's Prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. Please refer to the
Registration Statement for further information with respect to the Company and
the offering of the Tortoise Notes. Statements contained in the Company's
Prospectus and this Statement of Additional Information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to 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 Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
REPORT OF INDEPENDENT AUDITORS
FINANCIAL STATEMENTS
[AUDITED, AS OF NOVEMBER 30, 2004 - TO COME]
[UNAUDITED, AS OF JANUARY 31, 2005 - TO COME]
F-1
APPENDIX A-
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
The following is a summary of certain provisions of the indenture dated
July 13, 2004 (the "Original Indenture") and the Supplemental Indenture dated
________, 2005. This summary does not purport to be complete and is qualified in
its entirety by reference to the Indenture, a copy of which is on file with the
Commission.
DEFINITIONS
"'AA' COMPOSITE COMMERCIAL PAPER RATE" on any date means (i) the
interest equivalent of the 30-day rate, in the case of a Rate Period which is a
Standard Rate Period or shorter, or the 180-day rate, in the case of all other
Rate Periods on commercial paper on behalf of issuers whose corporate bonds are
rated "AA" by S&P, or the equivalent of such rating by another nationally
recognized rating agency, as announced by the Federal Reserve Bank of New York
for the close of business on the Business Day immediately preceding such date;
or (ii) if the Federal Reserve Bank of New York does not make available such a
rate, then the arithmetic average of the interest equivalent of such rates on
commercial paper placed on behalf of such issuers, as quoted on a discount basis
or otherwise by the Commercial Paper Dealers to the Auction Agent for the close
of business on the Business Day immediately preceding such date (rounded to the
next highest .001 of 1%). If any Commercial Paper Dealer does not quote a rate
required to determine the "AA" Composite Commercial Paper Rate, such rate shall
be determined on the basis of the quotations (or quotation) furnished by the
remaining Commercial Paper Dealers (or Dealer), if any, or, if there are no such
Commercial Paper Dealers, by the Auction Agent. For purposes of this definition,
(A) "Commercial Paper Dealers" shall mean (1) Citigroup Global Markets Inc.,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Goldman Sachs & Co.; (2) in lieu of any thereof, its respective Affiliate or
successor; and (3) in the event that any of the foregoing shall cease to quote
rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper of
such issuers then making such quotations selected by the Corporation, and (B)
"interest equivalent" of a rate stated on a discount basis for commercial paper
of a given number of days' maturity shall mean a number equal to the quotient
(rounded upward to the next higher one-thousandth of 1%) of (1) such rate
expressed as a decimal, divided by (2) the difference between (x) 1.00 and (y) a
fraction, the numerator of which shall be the product of such rate expressed as
a decimal, multiplied by the number of days in which such commercial paper shall
mature and the denominator of which shall be 360.
"AFFILIATE" means any person controlled by, in control of or under
common control with the Company; provided that no Broker-Dealer controlled by,
in control of or under common control with the Company shall be deemed to be an
Affiliate nor shall any corporation or any person controlled by, in control of
or under common control with such corporation one of the directors or executive
officers of which also is a Director of the Company be deemed to be an Affiliate
solely because such director or executive officer also is a Director of the
Company.
"AGENT MEMBER" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"ALL HOLD RATE" means 80% of the "AA" Composite Commercial Paper Rate.
"APPLICABLE RATE" means, with respect to each series of Tortoise Notes
for each Rate Period (i) if Sufficient Clearing Orders exist for the Auction in
respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not
exist for the Auction in respect thereof, the Maximum Rate, (iii) in the case
where all the Tortoise Notes of a series are the subject of Hold Orders for the
Auction in respect thereof, the All Hold Rate, and (iv) if an Auction is not
held for any reason (including the circumstance where there is no Auction Agent
or Broker-Dealer), the Maximum Rate.
A-1
"AUCTION" means each periodic operation of the procedures set forth in
Appendix B--Auction Procedures.
"AUCTION AGENT" means The Bank of New York unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Directors enters into an agreement with the Company
to follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"AUCTION DATE" means the first Business Day next preceding the first
day of a Rate Period for each series of Tortoise Notes.
"AUCTION PROCEDURES" means the procedures for conducting Auctions set
forth in Appendix B hereto.
"AUTHORIZED DENOMINATIONS" means $25,000 and any integral multiple
thereof.
"BENEFICIAL OWNER," with respect to each series of Tortoise Notes,
means a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of such series
of Tortoise Notes.
"BID" shall have the meaning specified in Appendix B--Auction
Procedures.
"BIDDER" shall have the meaning in Appendix B--Auction Procedures;
provided, however, that neither the Company nor any affiliate thereof shall be
permitted to be a Bidder in an Auction, except that any Broker-Dealer that is an
affiliate of the Company may be a Bidder in an Auction, but only if the Orders
placed by such Broker-Dealer are not for its own account.
"BOARD OF DIRECTORS" or "BOARD" means the Board of Directors of the
Company or any duly authorized committee thereof as permitted by applicable law.
"BROKER-DEALER" means any broker-dealer or broker-dealers, or other
entity permitted by law to perform the functions required of a Broker-Dealer by
the Auction Procedures, that has been selected by the Company and has entered
into a Broker-Dealer Agreement that remains effective.
"BROKER-DEALER AGREEMENT" means an agreement among the Auction Agent
and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"BUSINESS DAY" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
the City of New York, New York are authorized or obligated by law to close.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMERCIAL PAPER DEALERS" has the meaning set forth in the definition
of AA Composite Commercial Paper Rate.
"COMMISSION" means the Securities and Exchange Commission.
"DEFAULT RATE" means the Reference Rate multiplied by three (3).
"DEPOSIT SECURITIES" means cash and any obligations or securities,
including short term money market instruments that are Eligible Assets, rated at
least AAA, A-2 or SP-2 by Fitch, except that such
A-2
obligations or securities shall be considered "Deposit Securities" only if they
are also rated at least P-2 by Moody's.
"DISCOUNT FACTOR" means the Moody's Discount Factor (if Moody's is then
rating the Tortoise Notes), Fitch Discount Factor (if Fitch is then rating the
Tortoise Notes) or an Other Rating Agency Discount Factor, whichever is
applicable.
"DISCOUNTED VALUE" means the quotient of the Market Value of an
Eligible Asset divided by the applicable Discount Factor, provided that with
respect to an Eligible Asset that is currently callable, Discounted Value will
be equal to the quotient as calculated above or the call price, whichever is
lower, and that with respect to an Eligible Asset that is prepayable, Discounted
Value will be equal to the quotient as calculated above or the par value,
whichever is lower.
"ELIGIBLE ASSETS" means Moody's Eligible Assets or Fitch's Eligible
Assets (if Moody's or Fitch are then rating the Tortoise Notes) and/or Other
Rating Agency Eligible Assets, whichever is applicable.
"EXISTING HOLDER," with respect to Tortoise Notes of a series, shall
mean a Broker-Dealer (or any such other Person as may be permitted by the
Company) that is listed on the records of the Auction Agent as a holder of
Tortoise Notes of such series.
"FITCH" means Fitch Ratings and its successors at law.
"FITCH DISCOUNT FACTOR" means the discount factors set forth in the
Fitch Guidelines for use in calculating the Discounted Value of the Company's
assets in connection with Fitch's ratings of Tortoise Notes.
"FITCH ELIGIBLE ASSET" means assets of the Company set forth in the
Fitch Guidelines as eligible for inclusion in calculating the Discounted Value
of the Company's assets in connection with Fitch's ratings of Tortoise Notes.
"FITCH GUIDELINES" mean the guidelines provided by Fitch, as may be
amended from time to time, in connection with Fitch's ratings of Tortoise Notes.
"HOLD ORDER" shall have the meaning specified in Appendix B--Auction
Procedures.
"HOLDER" means, with respect to Tortoise Notes, the registered holder
of notes of each series of Tortoise Notes as the same appears on the books or
records of the Company.
"MARKET VALUE" means the market value of an asset of the Company as
determined as follows:
For equity securities, the value obtained from readily available market
quotations. If an equity security is not traded on an exchange or not available
from a Board-approved pricing service, the value obtained from written
broker-dealer quotations. For fixed-income securities, the value obtained from
readily available market quotations based on the last updated sale price or the
value obtained from a pricing service or the value obtained from a written
broker-dealer quotation from a dealer who has made a market in the security.
Market value for other securities will mean the value obtained pursuant to the
Company's Valuation Procedures. If the market value of a security cannot be
obtained, or the Company's investment adviser determines that the value of a
security as so obtained does not represent the fair value of a security, fair
value for that security shall be determined pursuant to methodologies
established by the Board of Directors.
A-3
"MAXIMUM RATE" means, on any date on which the Applicable Rate is
determined, the rate equal to the applicable percentage of the Reference Rate,
subject to upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers, provided that immediately
following any such increase the Company would be in compliance with the Tortoise
Notes Basic Maintenance Amount.
"MINIMUM RATE" means, on any Auction Date with respect to a Rate Period
of 28 days or fewer, 70% of the AA Composite Commercial Paper Rate at the close
of business on the Business Day next preceding such Auction Date. There shall be
no Minimum Rate on any Auction Date with respect to a Rate Period of more than
the Standard Rate Period.
"MOODY'S" means Moody's Investors Service, Inc., a Delaware
corporation, and its successors at law.
"MOODY'S DISCOUNT FACTOR" means the discount factors set forth in the
Moody's Guidelines for use in calculating the Discounted Value of the Company's
assets in connection with Moody's ratings of Tortoise Notes.
"MOODY'S ELIGIBLE ASSETS" means assets of the Company set forth in the
Moody's Guidelines as eligible for inclusion in calculating the Discounted Value
of the Company's assets in connection with Moody's ratings of Tortoise Notes.
"MOODY'S GUIDELINES" mean the guidelines provided by Moody's, as may be
amended from time to time, in connection with Moody's ratings of Tortoise Notes.
"1940 ACT TORTOISE NOTES ASSET COVERAGE" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 300%
with respect to all outstanding senior securities representing indebtedness of
the Company, including all Outstanding Tortoise Notes (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of declaring dividends on its
common stock), determined on the basis of values calculated as of a time within
48 hours next preceding the time of such determination.
"NOTES" means Securities of the Company ranking on a parity with the
Tortoise Notes that may be issued from time to time pursuant to the Indenture.
"ORDER" shall have the meaning specified in Appendix B--Auction
Procedures.
"ORIGINAL ISSUE DATE" means, with respect to Series C of Tortoise
Notes, , 2005.
"OTHER RATING AGENCY" means each rating agency, if any, other than
Moody's or Fitch then providing a rating for the Tortoise Notes pursuant to the
request of the Company.
"OTHER RATING AGENCY DISCOUNT FACTOR" means the discount factors set
forth in the Other Rating Agency Guidelines of each Other Rating Agency for use
in calculating the Discounted Value of the Company's assets in connection with
the Other Rating Agency's rating of Tortoise Notes.
"OTHER RATING AGENCY ELIGIBLE ASSETS" means assets of the Company set
forth in the Other Rating Agency Guidelines of each Other Rating Agency as
eligible for inclusion in calculating the Discounted Value of the Company's
assets in connection with the Other Rating Agency's rating of Tortoise Notes.
A-4
"OTHER RATING AGENCY GUIDELINES" mean the guidelines provided by each
Other Rating Agency, as may be amended from time to time, in connection with the
Other Rating Agency's rating of Tortoise Notes.
"OUTSTANDING" or "OUTSTANDING" means, as of any date, Tortoise Notes
theretofore issued by the Company except, without duplication, (i) any Tortoise
Notes theretofore canceled, redeemed or repurchased by the Company, or delivered
to the Trustee for cancellation or with respect to which the Company has given
notice of redemption and irrevocably deposited with the Paying Agent sufficient
funds to redeem such Tortoise Notes and (ii) any Tortoise Notes represented by
any certificate in lieu of which a new certificate has been executed and
delivered by the Company. Notwithstanding the foregoing, (A) in connection with
any Auction, any series of Tortoise Notes as to which the Company or any person
known to the Auction Agent to be an Affiliate of the Company shall be the
Existing Holder thereof shall be disregarded and deemed not to be Outstanding;
and (B) for purposes of determining the Tortoise Notes Basic Maintenance Amount,
Tortoise Notes held by the Company shall be disregarded and not deemed
Outstanding but Tortoise Notes held by any Affiliate of the Company shall be
deemed Outstanding.
"PAYING AGENT" means BNY Midwest Trust Company, N.A. unless and until
another entity appointed by a resolution of the Board of Directors enters into
an agreement with the Company to serve as paying agent, which paying agent may
be the same as the Trustee or the Auction Agent.
"PERSON" or "PERSON" means and includes an individual, a partnership, a
trust, a company, an unincorporated association, a joint venture or other entity
or a government or any agency or political subdivision thereof.
"POTENTIAL BENEFICIAL OWNER," with respect to a series of Tortoise
Notes, shall mean a customer of a Broker-Dealer that is not a Beneficial Owner
of Tortoise Notes of such series but that wishes to purchase Tortoise Notes of
such series, or that is a Beneficial Owner of Tortoise Notes of such series that
wishes to purchase additional Tortoise Notes of such series.
"POTENTIAL HOLDER," with respect to Tortoise Notes of such series,
shall mean a Broker-Dealer (or any such other person as may be permitted by the
Company) that is not an Existing Holder of Tortoise Notes of such series or that
is an Existing Holder of Tortoise Notes of such series that wishes to become the
Existing Holder of additional Tortoise Notes of such series.
"RATE PERIOD" means, with respect to a series of Tortoise Notes, the
period commencing on the Original Issue Date thereof and ending on the date
specified for such series on the Original Issue Date thereof and thereafter, as
to such series, the period commencing on the day following each Rate Period for
such series and ending on the day established for such series by the Company.
"RATING AGENCY" means each of Fitch (if Fitch is then rating Tortoise
Notes), Moody's (if Moody's is then rating Tortoise Notes) and any Other Rating
Agency.
"RATING AGENCY GUIDELINES" mean Fitch Guidelines (if Fitch is then
rating Tortoise Notes), Moody's Guidelines (if Moody's is then rating Tortoise
Notes) and any Other Rating Agency Guidelines.
"REFERENCE RATE" means, with respect to the determination of the
Maximum Rate and Default Rate, the greater of (1) applicable AA Composite
Commercial Paper Rate (for a Rate Period of fewer than 184 days) or the
applicable Treasury Index Rate (for a Rate Period of 184 days or more), or (2)
the applicable LIBOR Rate.
"SECURITIES ACT" means the Securities Act of 1933, as amended from time
to time.
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"SECURITIES DEPOSITORY" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Company that agrees to follow the procedures required to be followed by such
securities depository in connection with the Tortoise Notes Series C.
"SELL ORDER" shall have the meaning specified in Appendix B--Auction
Procedures.
"SPECIAL RATE PERIOD" means a Rate Period that is not a Standard Rate
Period.
"SPECIFIC REDEMPTION PROVISIONS" means, with respect to any Special
Rate Period of more than one year, either, or any combination of a period (a
"Non-Call Period") determined by the Board of Directors after consultation with
the Broker-Dealers, during which the Tortoise Notes subject to such Special Rate
Period are not subject to redemption at the option of the Company consisting of
a number of whole years as determined by the Board of Directors after
consultation with the Broker-Dealers, during each year of which the Tortoise
Notes subject to such Special Rate Period shall be redeemable at the Company's
option and/or in connection with any mandatory redemption at a price equal to
the principal amount plus accumulated but unpaid interest plus a premium
expressed as a percentage or percentages of $25,000 or expressed as a formula
using specified variables as determined by the Board of Directors after
consultation with the Broker-Dealers.
"STANDARD RATE PERIOD" means a Rate Period of 28 days.
"STATED MATURITY" with respect to Tortoise Notes Series C, shall mean ,
2045.
"SUBMISSION DEADLINE" means 1:00 p.m. (11:00 a.m. in the case of a
daily Auction Rate) Eastern Standard time, on any Auction Date or such other
time on any Auction Date by which Broker-Dealers are required to submit Orders
to the Auction Agent as specified by the Auction Agent from time to time.
"SUBMISSION PROCESSING DEADLINE" shall mean the earlier of (i) forty
(40) minutes after the Submission Deadline and (ii) the time when the Auction
Agent begins to disseminate the results of the Auction to the Broker-Dealers.
"SUBMITTED BID" shall have the meaning specified in Appendix B--Auction
Procedures.
"SUBMITTED HOLD ORDER" shall have the meaning specified in Appendix
B--Auction Procedures.
"SUBMITTED ORDER" shall have the meaning specified in Appendix
B--Auction Procedures.
"SUBMITTED SELL ORDER" shall have the meaning specified in Appendix
B--Auction Procedures.
"SUFFICIENT CLEARING BIDS" shall have the meaning specified in Appendix
B--Auction Procedures.
"TORTOISE NOTES BASIC MAINTENANCE AMOUNT" as of any Valuation Date has
the meaning set forth in the Rating Agency Guidelines.
"TORTOISE NOTES SERIES C" means the Series C of the Tortoise Notes or
any other Notes hereinafter designated as Series C of the Tortoise Notes.
"TREASURY INDEX RATE" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Rate
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Rate Periods with a length greater than
the longest maturity for such securities as having a
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length equal to such longest maturity, in all cases based upon data set forth in
the most recent weekly statistical release published by the Board of Governors
of the Federal Reserve System (currently in H.15(519)); provided, however, if
the most recent such statistical release shall not have been published during
the 15 days preceding the date of computation, the foregoing computations shall
be based upon the average of comparable data as quoted to the Company by at
least three recognized dealers in U.S. Government securities selected by the
Company.
"TRUSTEE" means BNY Midwest Trust Company, N.A. or such other person
who is named as a trustee pursuant to the terms of the Indenture.
"VALUATION DATE" means every Friday, or, if such day is not a Business
Day, the next preceding Business Day; provided, however, that the first
Valuation Date may occur on any other date established by the Company; provided,
further, however, that such first Valuation Date shall be not more than one week
from the date on which Tortoise Notes Series C initially are issued.
NOTE DETAILS, FORM OF NOTES AND REDEMPTION OF NOTES
INTEREST
(a) The Holders of any series of Tortoise Notes shall be entitled
to receive interest payments on their Tortoise Notes at the Applicable Rate,
determined as set forth in paragraph (c) below, and no more, payable on the
respective dates determined as set forth in paragraph (b) below. Interest on the
Outstanding Tortoise Notes of any series issued on the Original Issue Date shall
accumulate from the Original Issue Date.
(b)(i) Interest shall be payable, subject to subparagraph (b)(ii)
below, on each series of Tortoise Notes, with respect to any Rate Period on the
first Business Day following the last day of such Rate Period; provided,
however, if the Rate Period is greater than 30 days then on a monthly basis on
the first Business Day of each month within such Rate Period and on the Business
Day following the last day of such Rate Period.
(ii) If a day for payment of interest resulting from the
application of subparagraph (b)(i) above is not a Business Day, then
the Interest Payment Date shall be the first Business Day following
such day for payment of interest in the case of a series of Tortoise
Notes designated as "Series C."
(iii) The Company shall pay to the Paying Agent not later
than 3:00 p.m., New York City time, on the Business Day next preceding
each Interest Payment Date for each series of Tortoise Notes, an
aggregate amount of funds available on the next Business Day in the
City of New York, New York, equal to the interest to be paid to all
Holders of such Tortoise Notes on such Interest Payment Date. The
Company shall not be required to establish any reserves for the payment
of interest.
(iv) All moneys paid to the Paying Agent for the payment
of interest shall be held in trust for the payment of such interest by
the Paying Agent for the benefit of the Holders specified in
subparagraph (b)(v) below. Any moneys paid to the Paying Agent in
accordance with the foregoing but not applied by the Paying Agent to
the payment of interest, including interest earned on such moneys,
will, to the extent permitted by law, be repaid to the Company at the
end of 90 days from the date on which such moneys were to have been so
applied.
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(v) Each interest payment on a series of Tortoise Notes
shall be paid on the Interest Payment Date therefor to the Holders of
that series as their names appear on the security ledger or security
records of the Company on the Business Day next preceding such Interest
Payment Date. Interest in arrears for any past Rate Period may be
declared and paid at any time, without reference to any regular
Interest Payment Date, to the Holders as their names appear on the
books or records of the Company on such date, not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board of
Directors. No interest will be payable in respect of any Interest
Payment or payments which may be in arrears.
(c)(i) The interest rate on Outstanding Tortoise Notes of each
series during the period from and after the Original Issue Date to and including
the last day of the initial Rate Period therefor shall be equal to the rate per
annum set forth under (a) above. For each subsequent Rate Period with respect to
the Tortoise Notes Outstanding thereafter, the interest rate shall be equal to
the rate per annum that results from an Auction; provided, however, that if an
Auction for any subsequent Rate Period of a series of Tortoise Notes is not held
for any reason or if Sufficient Clearing Bids have not been made in an Auction
(other than as a result of all series of Tortoise Notes being the subject of
Submitted Hold Orders), then the interest rate on a series of Tortoise Notes for
any such Rate Period shall be the Maximum Rate (except during a Default Period
when the interest rate shall be the Default Rate, as set forth in (c)(ii)
below). The All Hold Rate will apply automatically following an Auction in which
all of the Outstanding series of Tortoise Notes are subject (or are deemed to be
subject) to Hold Orders. The rate per annum at which interest is payable on a
series of Tortoise Notes as determined pursuant to this paragraph (c)(i) shall
be the "Applicable Rate." For Standard Rate Periods or less only, the Applicable
Rate resulting from an Auction will not be less than the Minimum Rate.
(ii) Subject to the cure provisions below, a "Default
Period" with respect to a particular series will commence on any date
the Company fails to deposit irrevocably in trust in same-day funds,
with the Paying Agent by 12:00 noon, New York City time, (A) the full
amount of any declared interest on that series payable on the Interest
Payment Date (an "Interest Default") or (B) the full amount of any
redemption price (the "Redemption Price") payable on the date fixed for
redemption (the "Redemption Date") (a "Redemption Default") and
together with an Interest Default, hereinafter referred to as
"Default"). Subject to the cure provisions of (c)(iii) below, a Default
Period with respect to an Interest Default or a Redemption Default
shall end on the Business Day on which, by 12:00 noon, New York City
time, all unpaid interest and any unpaid Redemption Price shall have
been deposited irrevocably in trust in same-day funds with the Paying
Agent. In the case of an Interest Default, the Applicable Rate for each
Rate Period commencing during a Default Period will be equal to the
Default Rate, and each subsequent Rate Period commencing after the
beginning of a Default Period shall be a Standard Rate Period;
provided, however, that the commencement of a Default Period will not
by itself cause the commencement of a new Rate Period. No Auction shall
be held during a Default Period with respect to an Interest Default
applicable to that series of Tortoise Notes.
(iii) No Default Period with respect to an Interest Default
or Redemption Default shall be deemed to commence if the amount of any
interest or any Redemption Price due (if such default is not solely due
to the willful failure of the Company) is deposited irrevocably in
trust, in same-day funds with the Paying Agent by 12:00 noon, New York
City time within three Business Days after the applicable Interest
Payment Date or Redemption Date, together with an amount equal to the
Default Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 360 for each
series. The Default Rate shall be equal to the Reference Rate
multiplied by three (3).
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(iv) The amount of interest payable on each Interest
Payment Date of each Rate Period of less than one (1) year (or in
respect of interest on another date in connection with a redemption
during such Rate Period) shall be computed by multiplying the
Applicable Rate (or the Default Rate) for such Rate Period (or a
portion thereof) by a fraction, the numerator of which will be the
number of days in such Rate Period (or portion thereof) that such
Tortoise Notes were outstanding and for which the Applicable Rate or
the Default Rate was applicable and the denominator of which will be
360, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Rate Period of one
(1) year or more, the amount of interest per Tortoise Note payable on
any Interest Payment Date (or in respect of interest on another date in
connection with a redemption during such Rate Period) shall be computed
as described in the preceding sentence.
(d) Any Interest Payment made on any series of Tortoise Notes
shall first be credited against the earliest accrued but unpaid interest due
with respect to such series.
REDEMPTION
(a)(i) After the initial Rate Period, subject to the provisions of
the Indenture and to the extent permitted under the 1940 Act, the Company may,
at its option, redeem in whole or in part out of funds legally available
therefor a series of Tortoise Notes designated in the Indenture as (A) having a
Rate Period of one year or less, on the Business Day after the last day of such
Rate Period by delivering a notice of redemption not less than 15 days and not
more than 40 days prior to the date fixed for such redemption, at a redemption
price equal to the aggregate principal amount, plus an amount equal to accrued
but unpaid interest thereon (whether or not earned) to the date fixed for
redemption ("Redemption Price"), or (B) having a Rate Period of more than one
year, on any Business Day prior to the end of the relevant Rate Period by
delivering a notice of redemption not less than 15 days and not more than 40
days prior to the date fixed for such redemption, at the Redemption Price, plus
a redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions at the time of the designation of such Rate Period as set
forth in the Indenture; provided, however, that during a Rate Period of more
than one year no series of Tortoise Notes will be subject to optional redemption
except in accordance with any Specific Redemption Provisions approved by the
Board of Directors after consultation with the Broker-Dealers at the time of the
designation of such Rate Period. Notwithstanding the foregoing, the Company
shall not give a notice of or effect any redemption pursuant to this paragraph
(a)(i) unless, on the date on which the Company intends to give such notice and
on the date of redemption (a) the Company has available certain Deposit
Securities with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of a series of Tortoise Notes
by reason of the redemption of such Tortoise Notes on such date fixed for the
redemption and (b) the Company would have Eligible Assets with an aggregate
Discounted Value at least equal the Tortoise Notes Basic Maintenance Amount
immediately subsequent to such redemption, if such redemption were to occur on
such date, it being understood that the provisions of paragraph (d) below shall
be applicable in such circumstances in the event the Company makes the deposit
and takes the other action required thereby.
(ii) If the Company fails to maintain, as of any Valuation
Date, Eligible Assets with an aggregate Discounted Value at least equal
to the Tortoise Notes Basic Maintenance Amount or, as of the last
Business Day of any month, the 1940 Act Tortoise Notes Asset Coverage,
and such failure is not cured within ten Business Days following such
Valuation Date in the case of a failure to maintain the Tortoise Notes
Basic Maintenance Amount or on the last Business Day of the following
month in the case of a failure to maintain the 1940 Act Tortoise Notes
Asset Coverage as of such last Business Day (each an "Asset Coverage
Cure Date"), the Tortoise Notes
A-9
will be subject to mandatory redemption out of funds legally available
therefor. The principal amount of Tortoise Notes to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum principal
amount of Tortoise Notes the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the relevant
Asset Coverage Cure Date, would result in the Company having Eligible
Assets with an aggregate Discounted Value at least equal to the
Tortoise Notes Basic Maintenance Amount, or sufficient to satisfy 1940
Act Tortoise Notes Asset Coverage, as the case may be, in either case
as of the relevant Asset Coverage Cure Date (provided that, if there is
no such minimum principal amount of Tortoise Notes the redemption of
which would have such result, all Tortoise Notes then Outstanding will
be redeemed), and (B) the maximum principal amount of Tortoise Notes
that can be redeemed out of funds expected to be available therefor on
the Mandatory Redemption Date at the Mandatory Redemption Price set
forth in subparagraph (a)(iii) below.
(iii) In determining the Tortoise Notes required to be
redeemed in accordance with the foregoing subparagraph (a)(ii), the
Company shall allocate the principal amount of Tortoise Notes required
to be redeemed to satisfy the Tortoise Notes Basic Maintenance Amount
or the 1940 Act Tortoise Notes Asset Coverage, as the case may be, pro
rata among the Holders of Tortoise Notes in proportion to the principal
amount of Tortoise Notes they hold, by lot or such other method as the
Company shall deem equitable, subject to the further provisions of this
subparagraph (iii). The Company shall effect any required mandatory
redemption pursuant to subparagraph (a)(ii) above no later than 40 days
after the Asset Coverage Cure Date (the "Mandatory Redemption Date"),
except that if the Company does not have funds legally available for
the redemption of, or is not otherwise legally permitted to redeem, the
principal amount of Tortoise Notes which would be required to be
redeemed by the Company under clause (A) of subparagraph (a)(ii) above
if sufficient funds were available, or the Company otherwise is unable
to effect such redemption on or prior to such Mandatory Redemption
Date, the Company shall redeem those Tortoise Notes, and other Notes,
on the earliest practicable date on which the Company will have such
funds available, upon notice pursuant to paragraph (b) below to record
owners of the Tortoise Notes to be redeemed and the Paying Agent. The
Company will deposit with the Paying Agent funds sufficient to redeem
the specified principal amount of Tortoise Notes with respect to a
redemption required under subparagraph (a)(ii) above, by 1:00 p.m., New
York City time, of the Business Day immediately preceding the Mandatory
Redemption Date. If fewer than all of the Outstanding Tortoise Notes
are to be redeemed pursuant to this subparagraph (iii), the principal
amount of Tortoise Notes to be redeemed shall be redeemed pro rata from
the Holders of such Tortoise Notes in proportion to the principal
amount of such Tortoise Note held by such Holders, by lot or by such
other method as the Company shall deem fair and equitable, subject,
however, to the terms of any applicable Specific Redemption Provisions.
"Mandatory Redemption Price" means the Redemption Price plus (in the
case of a Rate Period of one year or more only) a redemption premium,
if any, determined by the Board of Directors after consultation with
the Broker-Dealers and set forth in any applicable Specific Redemption
Provisions.
(b) In the event of a redemption pursuant to paragraph (a) above,
the Company will file a notice of its intention to redeem with the Commission so
as to provide at least the minimum notice required under Rule 23c-2 under the
1940 Act or any successor provision. In addition, the Company shall deliver a
notice of redemption to the Auction Agent and the Trustee (the "Notice of
Redemption") containing the information set forth below (i) in the case of an
optional redemption pursuant to subparagraph (a)(i) above, one Business Day
prior to the giving of notice to the Holders and (ii) in the case of a mandatory
redemption pursuant to subparagraph (a)(ii) above, on or prior to the 30th day
preceding the Mandatory Redemption Date. The Trustee will use its reasonable
efforts to provide notice to each Holder of Tortoise Notes called for redemption
by electronic or other reasonable means not later than the close of business on
the Business Day immediately following the day on which the Trustee
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determines the Tortoise Notes to be redeemed (or, during a Default Period with
respect to such Tortoise Notes, not later than the close of business on the
Business Day immediately following the day on which the Trustee receives Notice
of Redemption from the Company). The Trustee shall confirm such notice in
writing not later than the close of business on the third Business Day preceding
the date fixed for redemption by providing the Notice of Redemption to each
Holder of Tortoise Notes called for redemption, the Paying Agent (if different
from the Trustee) and the Securities Depository. Notice of Redemption will be
addressed to the registered owners of each series of Tortoise Notes at their
addresses appearing on the books or records of the Company. Such Notice of
Redemption will set forth (i) the date fixed for redemption, (ii) the principal
amount and identity of Tortoise Notes to be redeemed, (iii) the redemption price
(specifying the amount of accrued interest to be included therein), (iv) that
interest on the Tortoise Notes to be redeemed will cease to accrue on such date
fixed for redemption, and (v) the 1940 Act provision under which redemption
shall be made. No defect in the Notice of Redemption or in the transmittal or
mailing thereof will affect the validity of the redemption proceedings, except
as required by applicable law. If fewer than all Tortoise Notes held by any
Holder are to be redeemed, the Notice of Redemption mailed to such Holder shall
also specify the principal amount of Tortoise Notes to be redeemed from such
Holder.
(c) Notwithstanding the provisions of paragraph (a) above, no
Tortoise Notes may be redeemed unless all interest on the Outstanding Tortoise
Notes and all Notes of the Company ranking on a parity with the Tortoise Notes,
have been or are being contemporaneously paid or set aside for payment;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of all Outstanding Tortoise Notes pursuant to the successful
completion of an otherwise lawful purchase or exchange offer made on the same
terms to, and accepted by, Holders of all Outstanding Tortoise Notes.
(d) Upon the deposit of funds sufficient to redeem any Tortoise
Notes with the Paying Agent and the giving of the Notice of Redemption to the
Trustee under paragraph (b) above, interest on such Tortoise Notes shall cease
to accrue and such Tortoise Notes shall no longer be deemed to be Outstanding
for any purpose (including, without limitation, for purposes of calculating
whether the Company has maintained the requisite Tortoise Notes Basic
Maintenance Amount or the 1940 Act Tortoise Notes Asset Coverage), and all
rights of the Holder of the Tortoise Notes so called for redemption shall cease
and terminate, except the right of such Holder to receive the redemption price
specified in the Indenture, but without any interest or other additional amount.
Such redemption price shall be paid by the Paying Agent to the nominee of the
Securities Depository. The Company shall be entitled to receive from the Paying
Agent, promptly after the date fixed for redemption, any cash deposited with the
Paying Agent in excess of (i) the aggregate redemption price of the Tortoise
Notes called for redemption on such date and (ii) such other amounts, if any, to
which Holders of the Tortoise Notes called for redemption may be entitled. Any
funds so deposited that are unclaimed at the end of two years from such
redemption date shall, to the extent permitted by law, be paid to the Company,
after which time the Holders of Tortoise Notes so called for redemption may look
only to the Company for payment of the redemption price and all other amounts,
if any, to which they may be entitled. The Company shall be entitled to receive,
from time to time after the date fixed for redemption, any interest earned on
the funds so deposited.
(e) To the extent that any redemption for which Notice of
Redemption has been given is not made by reason of the absence of legally
available funds therefor, or is otherwise prohibited, such redemption shall be
made as soon as practicable to the extent such funds become legally available or
such redemption is no longer otherwise prohibited. Failure to redeem any series
of Tortoise Notes shall be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Company shall have failed, for
any reason whatsoever, to deposit in trust with the Paying Agent the redemption
price with respect to any Tortoise Notes for which such Notice of Redemption has
been given. Notwithstanding the fact that the Company may not have redeemed any
Tortoise Notes for which a Notice of Redemption has been given, interest may be
paid on a series of Tortoise Notes and shall
A-11
include those Tortoise Notes for which Notice of Redemption has been given but
for which deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the
redemption price of any Tortoise Notes called for redemption shall be held in
trust by the Paying Agent for the benefit of Holders of Tortoise Notes to be
redeemed.
(g) So long as any Tortoise Notes are held of record by the
nominee of the Securities Depository, the redemption price for such Tortoise
Notes will be paid on the date fixed for redemption to the nominee of the
Securities Depository for distribution to Agent Members for distribution to the
persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing contained
in the Indenture limits any right of the Company to purchase or otherwise
acquire any Tortoise Notes outside of an Auction at any price, whether higher or
lower than the price that would be paid in connection with an optional or
mandatory redemption, so long as, at the time of any such purchase, there is no
arrearage in the payment of interest on, or the mandatory or optional redemption
price with respect to, any series of Tortoise Notes for which Notice of
Redemption has been given and the Company is in compliance with the 1940 Act
Tortoise Notes Asset Coverage and has Eligible Assets with an aggregate
Discounted Value at least equal to the Tortoise Notes Basic Maintenance Amount
after giving effect to such purchase or acquisition on the date thereof. If less
than all the Outstanding Tortoise Notes of any series are redeemed or otherwise
acquired by the Company, the Company shall give notice of such transaction to
the Trustee, in accordance with the procedures agreed upon by the Board of
Directors.
(i) The Board of Directors may, without further consent of the
holders of the Tortoise Notes or the holders of shares of capital stock of the
Company, authorize, create or issue any class or series of Notes, including
other series of Tortoise Notes, ranking prior to or on a parity with the
Tortoise Notes to the extent permitted by the 1940 Act, if, upon issuance,
either (A) the net proceeds from the sale of such Notes (or such portion thereof
needed to redeem or repurchase the Outstanding Tortoise Notes) are deposited
with the Trustee in accordance with paragraph (d) above, Notice of Redemption as
contemplated by paragraph (b) above has been delivered prior thereto or is sent
promptly thereafter, and such proceeds are used to redeem all Outstanding
Tortoise Notes or (B) the Company would meet the 1940 Act Tortoise Notes Asset
Coverage, the Tortoise Notes Basic Maintenance Amount and the requirements set
forth below in "Certain Other Restrictions."
DESIGNATION OF RATE PERIOD
The initial Rate Period for Tortoise Notes Series C shall be __ days.
The Company will designate the duration of subsequent Rate Periods of each
series of Tortoise Notes; provided, however, that no such designation is
necessary for a Standard Rate Period and, provided further, that any designation
of a Special Rate Period shall be effective only if (i) notice thereof shall
have been given as provided in the Indenture, (ii) any failure to pay in a
timely manner to the Trustee the full amount of any interest on, or the
redemption price of, Tortoise Notes shall have been cured as provided above,
(iii) Sufficient Clearing Bids shall have existed in an Auction held on the
Auction Date immediately preceding the first day of such proposed Special Rate
Period, (iv) if the Company shall have mailed a Notice of Redemption with
respect to any Tortoise Notes, the redemption price with respect to such
Tortoise Notes shall have been deposited with the Paying Agent, and (v) in the
case of the designation of a Special Rate Period, the Company has confirmed that
as of the Auction Date next preceding the first day of such Special Rate Period,
it has Eligible Assets with an aggregate Discounted Value at least equal to the
Tortoise Notes Basic Maintenance Amount, and the Company has consulted with the
Broker-Dealers and has provided notice of such designation and otherwise
complied with the Rating Agency Guidelines.
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If the Company proposes to designate any Special Rate Period, not fewer
than 7 (or two Business Days in the event the duration of the Rate Period prior
to such Special Rate Period is fewer than 8 days) nor more than 30 Business Days
prior to the first day of such Special Rate Period, notice shall be (i) made by
press release and (ii) communicated by the Company by telephonic or other means
to the Trustee and confirmed in writing promptly thereafter. Each such notice
shall state (A) that the Company proposes to exercise its option to designate a
succeeding Special Rate Period, specifying the first and last days thereof and
(B) that the Company will by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of such Special Rate Period, notify
the Auction Agent and Trustee, who will promptly notify the Broker-Dealers, of
either (x) its determination, subject to certain conditions, to proceed with
such Special Rate Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Rate
Period, in which latter event the succeeding Rate Period shall be a Standard
Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Company
shall deliver to the Auction Agent and Trustee, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Company has determined
to designate the next succeeding Rate Period as a Special Rate Period,
specifying the first and last days thereof and (B) the terms of any
Specific Redemption Provisions; or
(ii) a notice stating that the Company has determined not
to exercise its option to designate a Special Rate Period.
If the Company fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period, the Company shall be deemed to have delivered a notice to
the Auction Agent with respect to such Rate Period to the effect set forth in
clause (ii) above, thereby resulting in a Standard Rate Period.
RESTRICTIONS ON TRANSFER
Tortoise Notes may be transferred only (a) pursuant to an order placed
in an Auction, (b) to or through a Broker-Dealer or (c) to the Company or any
Affiliate. Notwithstanding the foregoing, a transfer other than pursuant to an
Auction will not be effective unless the selling Existing Holder or the Agent
Member of such Existing Holder, in the case of an Existing Holder whose Tortoise
Notes are listed in its own name on the books of the Auction Agent, or the
Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a transfer
between persons holding Tortoise Notes through different Broker-Dealers, advises
the Auction Agent of such transfer. The certificates representing the Tortoise
Notes issued to the Securities Depository will bear legends with respect to the
restrictions described above and stop-transfer instructions will be issued to
the Transfer Agent and/or Registrar.
1940 ACT TORTOISE NOTES ASSET COVERAGE
The Company shall maintain, as of the last Business Day of each month
in which any Tortoise Notes are Outstanding, asset coverage with respect to the
Tortoise Notes which is equal to or greater than the 1940 Act Tortoise Notes
Asset Coverage; provided, however, that subparagraph (a)(ii) of "Redemption"
above shall be the sole remedy in the event the Company fails to do so.
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TORTOISE NOTES BASIC MAINTENANCE AMOUNT
So long as the Tortoise Notes are Outstanding and any Rating Agency is
then rating the Tortoise Notes, the Company shall maintain, as of each Valuation
Date, Eligible Assets having an aggregate Discounted Value equal to or greater
than the Tortoise Notes Basic Maintenance Amount; provided, however, that
subparagraph (a)(ii) of "Redemption" above shall be the sole remedy in the event
the Company fails to do so.
CERTAIN OTHER RESTRICTIONS
For so long as any Tortoise Notes are Outstanding and any Rating Agency
is then rating the Tortoise Notes, the Company will not engage in certain
proscribed transactions set forth in the Rating Agency Guidelines, unless it has
received written confirmation from each such Rating Agency that proscribes the
applicable transaction in its Rating Agency Guidelines that any such action
would not impair the rating then assigned by such Rating Agency to a series of
Tortoise Notes.
For so long as any Tortoise Notes are Outstanding, the Company will not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, common shares or other shares of capital
stock of the Company) upon any class of shares of capital stock of the Company,
unless, in every such case, immediately after such transaction, the 1940 Act
Tortoise Notes Asset Coverage would be achieved after deducting the amount of
such dividend, distribution, or purchase price, as the case may be; provided,
however, that dividends may be declared upon any preferred shares of capital
stock of the Company if the Tortoise Notes and any other senior securities
representing indebtedness of the Company have an asset coverage of at least 200%
at the time of declaration thereof, after deducting the amount of such dividend.
COMPLIANCE PROCEDURES FOR ASSET MAINTENANCE TESTS
For so long as any Tortoise Notes are Outstanding and any Rating Agency
is then rating such Tortoise Notes:
(a) As of each Valuation Date, the Company shall determine in
accordance with the procedures specified in the Indenture (i) the Market Value
of each Eligible Asset owned by the Company on that date, (ii) the Discounted
Value of each such Eligible Asset using the Discount Factors, (iii) whether the
Tortoise Notes Basic Maintenance Amount is met as of that date, (iv) the value
of the total assets of the Company, less all liabilities, and (v) whether the
1940 Act Tortoise Notes Asset Coverage is met as of that date.
(b) Upon any failure to maintain the required Tortoise Notes Basic
Maintenance Amount or 1940 Act Tortoise Notes Asset Coverage on any Valuation
Date, the Company may use reasonable commercial efforts (including, without
limitation, altering the composition of its portfolio, purchasing Tortoise Notes
outside of an Auction or in the event of a failure to file a Rating Agency
Certificate (as defined below) on a timely basis, submitting the requisite
Rating Agency Certificate) to re-attain (or certify in the case of a failure to
file on a timely basis, as the case may be) the required Tortoise Notes Basic
Maintenance Amount or 1940 Act Tortoise Notes Asset Coverage on or prior to the
Asset Coverage Cure Date.
(c) Compliance with the Tortoise Notes Basic Maintenance Amount
and 1940 Act Tortoise Notes Asset Coverage tests shall be determined with
reference to those Tortoise Notes which are deemed to be Outstanding.
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(d) The Company shall deliver to each Rating Agency which is then
rating Tortoise Notes and any other party specified in the Rating Agency
Guidelines all certificates that are set forth in the respective Rating Agency
Guidelines regarding 1940 Act Tortoise Notes Asset Coverage, Tortoise Notes
Basic Maintenance Amount and/or related calculations at such times and
containing such information as set forth in the respective Rating Agency
Guidelines (each, a "Rating Agency Certificate").
(e) In the event that any Rating Agency Certificate is not
delivered within the time periods set forth in the Rating Agency Guidelines, the
Company shall be deemed to have failed to maintain the Tortoise Notes Basic
Maintenance Amount or the 1940 Act Tortoise Notes Asset Coverage, as the case
may be, on such Valuation Date for purposes of paragraph (b) above. In the event
that any Rating Agency Certificate with respect to an applicable Asset Coverage
Cure Date is not delivered within the time periods set forth in the Rating
Agency Guidelines, the Company shall be deemed to have failed to have Eligible
Assets with an aggregate Discounted Value at least equal to the Tortoise Notes
Basic Maintenance Amount or to meet the 1940 Tortoise Notes Asset Coverage, as
the case may be, as of the related Valuation Date, and such failure shall be
deemed not to have been cured as of such Asset Coverage Cure Date for purposes
of the mandatory redemption provisions.
DELIVERY OF NOTES
Upon the execution and delivery of the Indenture, the Company shall
execute and deliver to the Trustee, and the Trustee shall authenticate, the
Tortoise Notes and deliver them to The Depository Trust Company as provided in
the Indenture.
Prior to the delivery by the Trustee of any of the Tortoise Notes,
there shall have been filed with or delivered to the Trustee the following:
(a) A resolution duly adopted by the Company, certified by the
Secretary or other Authorized Officer thereof, authorizing the execution and
delivery of the Supplemental Indenture and the issuance of the Tortoise Notes;
(b) Duly executed copies of the Supplemental Indenture and a copy
of the Indenture;
(c) Rating letters from each Rating Agency rating the Tortoise
Notes; and
(d) An opinion of counsel pursuant to the requirements of the
Indenture.
TRUSTEE'S AUTHENTICATION CERTIFICATE
The Trustee's authentication certificate upon the Tortoise Notes shall
be substantially in the form provided. No Tortoise Note shall be secured hereby
or entitled to the benefit hereof, or shall be valid or obligatory for any
purpose, unless a certificate of authentication, substantially in such form, has
been duly executed by the Trustee; and such certificate of the Trustee upon any
Tortoise Note shall be conclusive evidence and the only competent evidence that
such Bond has been authenticated and delivered. The Trustee's certificate of
authentication shall be deemed to have been duly executed by it if manually
signed by an authorized officer of the Trustee, but it shall not be necessary
that the same person sign the certificate of authentication on all of the
Tortoise Notes issued.
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EVENTS OF DEFAULT; REMEDIES
EVENTS OF DEFAULT
An "Event of Default" means any one of the following events set forth
below (whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) default in the payment of any interest upon a series of
Tortoise Notes when it becomes due and payable and the continuance of such
default for thirty (30) days; or
(b) default in the payment of the principal of, or any premium on,
a series of Tortoise Notes at its Stated Maturity; or
(c) default in the performance, or breach, of any covenant or
warranty of the Company in the Indenture, and continuance of such default or
breach for a period of ninety (90) days after there has been given, by
registered or certified mail, to the Company by the Trustee a written notice
specifying such default or breach and requiring it to be remedied and stating
that such notice is a "Notice of Default;" or
(d) the entry by a court having jurisdiction in the premises of
(A) a decree or order for relief in respect of the Company in an involuntary
case or proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or (B) a decree or order adjudging the
Company a bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in respect
of the Company under any applicable Federal or State law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the continuance of
any such decree or order for relief or any such other decree or order unstayed
and in effect for a period of 60 consecutive days; or
(e) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree or order for relief in respect of the Company in an involuntary case or
proceeding under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, or the filing by it of a petition or
answer or consent seeking reorganization or relief under any applicable Federal
or State law, or the consent by it to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the Company or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the admission by it in writing of its inability to
pay its debts generally as they become due, or the taking of corporate action by
the Company in furtherance of any such action; or
(f) if, pursuant to Section 18(a)(1)(c)(ii) of the 1940 Act on the
last business day of each of twenty-four (24) consecutive calendar months, the
1940 Act Tortoise Notes Asset Coverage is less than 100%; or
(g) any other Event of Default provided with respect to a series
of Tortoise Notes, including a default in the payment of any Redemption Price
payable on the date fixed for redemption.
Unless otherwise noted, an Event of Default that relates only to one
series of Tortoise Notes will not affect any other series.
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ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT
If an Event of Default with respect to Tortoise Notes of a series at
the time Outstanding occurs and is continuing, then in every such case the
Trustee or the holders of not less than a majority in principal amount of the
Outstanding Tortoise Notes of that series may declare the principal amount of
all the Tortoise Notes of that series to be due and payable immediately, by a
notice in writing to the Company (and to the Trustee if given by holders), and
upon any such declaration such principal amount (or specified amount) shall
become immediately due and payable. If an Event of Default specified in
paragraphs (d) and (e) above with respect to Tortoise Notes of any series at the
time Outstanding occurs, the principal amount of all the Tortoise Notes of that
series shall automatically, and without any declaration or other action on the
part of the Trustee or any holder, become immediately due and payable.
At any time after such a declaration of acceleration with respect to
Tortoise Notes of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in principal amount of the Outstanding Tortoise Notes of that series,
by written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if:
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(i) all overdue interest on all Tortoise Notes of that
series,
(ii) the principal of (and premium, if any, on) any
Tortoise Notes of that series which have become due otherwise than by
such declaration of acceleration and any interest thereon at the rate
or rates prescribed therefor in such Tortoise Notes,
(iii) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate or rates prescribed
therefor in such Tortoise Notes,
(iv) all sums paid or advanced by the Trustee and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(b) all Events of Default with respect to Tortoise Notes of that
series, other than the non-payment of the principal of Tortoise Notes of that
series which have become due solely by such declaration of acceleration, have
been cured or waived.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE
The Company covenants that if:
(a) default is made in the payment of any interest on any Tortoise
Notes when such interest becomes due and payable and such default continues for
a period of 90 days, or
(b) default is made in the payment of the principal of (or
premium, if any, on) any Tortoise Notes at the Maturity thereof, the Company
will, upon demand of the Trustee, pay to it, for the benefit of the holders of
such Tortoise Notes, the whole amount then due and payable on such Tortoise
Notes for principal and any premium and interest and, to the extent that payment
of such interest shall be legally enforceable, interest on any overdue principal
and premium and on any overdue interest, at the rate or rates prescribed
therefor in such Tortoise Notes, and, in addition thereto, such further amount
as shall be
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sufficient to cover the costs and expenses of collection, including
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel.
If an Event of Default with respect to Tortoise Notes of any series
occurs and is continuing, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the holders of Tortoise Notes of such
series by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in the Indenture or in aid of the
exercise of any power granted in the Indenture, or to enforce any other proper
remedy.
APPLICATION OF MONEY COLLECTED
Any money collected by the Trustee pursuant to the provisions of the
Indenture relating to an Event of Default shall be applied in the following
order, at the date or dates fixed by the Trustee and, in case of the
distribution of such money on account of principal or any premium or interest,
upon presentation of the Tortoise Notes and the notation thereon of the payment
if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under the
Indenture;
and
SECOND: To the payment of the amounts then due and unpaid for principal
of and any premium and interest on the Tortoise Notes in respect of which or for
the benefit of which such money has been collected, ratably, without preference
or priority of any kind, according to the amounts due and payable on such
Tortoise Notes for principal and any premium and interest, respectively.
LIMITATION ON SUITS
No holder of any Tortoise Notes of any series shall have any right to
institute any proceeding, judicial or otherwise, with respect to the Indenture,
or for the appointment of a receiver or trustee, or for any other remedy
hereunder, unless
(a) such holder has previously given written notice to the Trustee
of a continuing Event of Default with respect to the Tortoise Notes of that
series;
(b) the holders of not less than a majority in principal amount of
the Outstanding Tortoise Notes of that series shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default in its
own name as Trustee hereunder;
(c) such holder or holders have offered to the Trustee indemnity
reasonably satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the holders of a majority in
principal amount of the Outstanding Tortoise Notes of that series;
it being understood and intended that no one or more of such holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of the Indenture to affect, disturb or prejudice the rights of any other of such
holders, or to obtain or to seek to obtain priority or preference over any other
A-18
of such holders or to enforce any right under the Indenture, except in the
manner provided and for the equal and ratable benefit of all of such holders.
UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST
Notwithstanding any other provision in the Indenture, the holder of any
Tortoise Notes shall have the right, which is absolute and unconditional, to
receive payment of the principal of and any premium and (subject to the
provisions of any supplemental indenture) interest on such Tortoise Notes on the
respective Stated Maturities expressed in such Tortoise Notes (or, in the case
of redemption, on the Redemption Date), and to institute suit for the
enforcement of any such payment and such rights shall not be impaired without
the consent of such holder.
RESTORATION OF RIGHTS AND REMEDIES
If the Trustee or any holder has instituted any proceeding to enforce
any right or remedy under the Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the holders shall
be restored severally and respectively to their former positions and thereafter
all rights and remedies of the Trustee and the holders shall continue as though
no such proceeding had been instituted.
RIGHTS AND REMEDIES CUMULATIVE
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Tortoise Notes, no right or remedy
conferred upon or reserved to the Trustee or to the holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or remedy.
CONTROL BY HOLDERS
The holders of not less than a majority in principal amount of the
Outstanding Tortoise Notes of any series shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee, with
respect to the Tortoise Notes of such series, provided that
(1) such direction shall not be in conflict with any rule of law
or with the Indenture, and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
WAIVER OF PAST DEFAULTS
The holders of not less than a majority in principal amount of the
Outstanding Tortoise Notes of any series may on behalf of the holders of all the
Tortoise Notes of such series waive any past default hereunder with respect to
such series and its consequences, except a default
(1) in the payment of the principal of or any premium or interest
on any Tortoise Notes of such series, or
A-19
(2) in respect of a covenant or provision which cannot be modified
or amended without the consent of the holder of each Outstanding Tortoise Notes
of such series affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of the Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture shall upon request of the Company cease to be of further
effect (except as to any surviving rights of registration of transfer or
exchange of any Tortoise Notes expressly provided for herein or in the terms of
such security), and the Trustee, at the expense of the Company, shall execute
proper instruments acknowledging satisfaction and discharge of the Indenture,
when
(a) Either:
(i) all Tortoise Notes theretofore authenticated and
delivered (other than (1) securities which have been destroyed, lost or
stolen and which have been replaced or paid as provided in the
Indenture; and (2) Tortoise Notes for whose payment money has
theretofore been deposited in trust or segregated and held in trust by
the Company and thereafter repaid to the Company or discharged from
such trust, as provided in the Indenture) have been delivered to the
Trustee for cancellation; or
(ii) all such Tortoise Notes not theretofore delivered to
the Trustee for cancellation have become due and payable, or will
become due and payable at their Stated Maturity within one year, or are
to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by
the Trustee in the name, and at the expense, of the Company, and the
Company, in the case of this subsection (ii) has deposited or caused to
be deposited with the Trustee as trust funds in trust money in an
amount sufficient to pay and discharge the entire indebtedness on such
securities not theretofore delivered to the Trustee for cancellation,
for principal and any premium and interest to the date of such deposit
(in the case of Securities which have become due and payable) or to the
Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums
payable hereunder by the Trust; and
(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of the
Indenture have been complied with.
Notwithstanding the satisfaction and discharge of the Indenture, the obligations
of the Company to the Trustee under the Indenture and, if money shall have been
deposited with the Trustee pursuant to subparagraph (ii) of paragraph (a) above,
the obligations of the Trustee under certain provisions of the Indenture shall
survive.
A-20
THE TRUSTEE
CERTAIN DUTIES AND RESPONSIBILITIES
(1) Except during the continuance of an Event of Default,
(A) the Trustee undertakes to perform such duties and
only such duties as are specifically set forth in the Indenture and as
required by the Trust Indenture Act, and no implied covenants or
obligations shall be read into the Indenture against the Trustee; and
(B) in the absence of bad faith on its part, the Trustee
may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
the Indenture; but in the case of any such certificates or opinions
which by any provision of the Indenture are specifically required to be
furnished to the Trustee, the Trustee shall be under a duty to examine
the same to determine whether or not they conform to the requirements
of the Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein).
(2) In case an Event of Default has occurred and is continuing,
the Trustee shall exercise such of the rights and powers vested in it by the
Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs.
(3) In no event shall the Trustee be responsible or liable for
special, indirect, or consequential loss or damage of any kind whatsoever
(including, but not limited to, loss of profit) irrespective of whether the
Trustee has been advised of the likelihood of such loss or damage and regardless
of the form of action.
(4) In no event shall the Trustee be responsible or liable for any
failure or delay in the performance of its obligations arising out of or caused
by, directly or indirectly, forces beyond its control, including, without
limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil
or military disturbances, nuclear or natural catastrophes or acts of God, and
interruptions, loss or malfunctions of utilities, communications or computer
(software and hardware) services; it being understood that the Trustee shall use
reasonable efforts which are consistent with accepted practices in the banking
industry to resume performance as soon as practicable under the circumstances.
(5) No provision of the Indenture shall be construed to relieve
the Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that:
(A) this Subsection shall not be construed to limit the
effect of Subsection (1)(A) of this Section;
(B) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it shall
be proved that the Trustee was negligent in ascertaining the pertinent
facts;
(C) the Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance
with the direction of the holders of a majority in principal amount of
the Outstanding securities of any series, determined as provided in the
Indenture, relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred upon the Trustee, under the Indenture with
respect to the Securities of such series; and
A-21
(D) no provision of the Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties, or in the
exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to
it.
NOTICE OF DEFAULTS
If a default occurs hereunder with respect to Tortoise Notes of any
series, the Trustee shall give the Holders of Tortoise Notes of such series
notice of such default as and to the extent provided by the Trust Indenture Act;
provided, however, that in the case of any default with respect to Tortoise
Notes of such series, no such notice to Holders shall be given until at least 90
days after the occurrence thereof. For the purpose hereof, the term "default"
means any event which is, or after notice or lapse of time or both would become,
an Event of Default with respect to Tortoise Notes of such series.
CERTAIN RIGHTS OF TRUSTEE
Subject to the provisions under "Certain Duties and Responsibilities"
above:
(a) the Trustee may conclusively rely and shall be protected in
acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;
(b) any request or direction of the Company shall be sufficiently
evidenced by a Company Request or Company Order, and any resolution of the Board
of Directors shall be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of the Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee may, in the absence of
bad faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel of its selection and the
written advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken, suffered
or omitted by it in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by the Indenture at the request or direction
of any of the holders pursuant to the Indenture, unless such holders shall have
offered to the Trustee security or indemnity reasonably satisfactory to it
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document, but
the Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Company, personally or by agent
or attorney;
(g) the Trustee may execute any of the trusts or powers or perform
any duties hereunder either directly or by or through agents or attorneys and
the Trustee shall not be responsible for any misconduct or negligence on the
part of any agent or attorney appointed with due care by it hereunder;
A-22
(h) the Trustee shall not be liable for any action taken, suffered
or omitted to be taken by it in good faith and reasonably believed by it to be
authorized or within the discretion or rights or powers conferred upon it by the
Indenture;
(i) the Trustee shall not be deemed to have notice of any default
or Event of Default unless a Responsible Officer of the Trustee has actual
knowledge thereof or unless written notice of any event which is in fact such a
default is received by the Trustee at the Corporate Trust Office of the Trustee,
and such notice references the Tortoise Notes and the Indenture;
(j) the rights, privileges, protections, immunities and benefits
given to the Trustee, including its rights to be indemnified, are extended to,
and shall be enforceable by, the Trustee in each of its capacities hereunder;
and
(k) the Trustee may request that the Company deliver an Officers'
Certificate setting forth the names of individuals and/or titles of officers
authorized at such time to take specified actions pursuant to the Indenture,
which Officers' Certificate may be signed by any person authorized to sign an
Officers' Certificate, including any person specified as so authorized in any
such certificate previously delivered and not superceded.
COMPENSATION AND REIMBURSEMENT
The Company agrees:
(a) to pay to the Trustee from time to time such compensation as
shall be agreed in writing between the parties for all services rendered by it
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);
(b) except as otherwise expressly provided, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of the
Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and
(c) to indemnify each of the Trustee or any predecessor Trustee
for, and to hold it harmless against, any and all losses, liabilities, damages,
claims or expenses including taxes (other than taxes imposed on the income of
the Trustee) incurred without negligence or bad faith on its part, arising out
of or in connection with the acceptance or administration of the trust or trusts
hereunder, including the costs and expenses of defending itself against any
claim (whether asserted by the Company, a holder or any other Person) or
liability in connection with the exercise or performance of any of its powers or
duties hereunder.
When the Trustee incurs expenses or renders services in connection with
an Event of Default, the expenses (including the reasonable charges and expenses
of its counsel) and the compensation for the services are intended to constitute
expenses of administration under any applicable Federal or State bankruptcy,
insolvency or other similar law.
The provisions hereof shall survive the termination of the Indenture.
CONFLICTING INTERESTS
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by,
A-23
and subject to the provisions of, the Trust Indenture Act and the Indenture. To
the extent not prohibited by the Trust Indenture Act, the Trustee shall not be
deemed to have a conflicting interest by virtue of being a trustee under the
Indenture with respect to Tortoise Notes of more than one series.
RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR
No resignation or removal of the Trustee and no appointment of a
successor Trustee shall become effective until the acceptance of appointment by
the successor Trustee in accordance with the applicable requirements.
The Trustee may resign at any time with respect to the Tortoise Notes
of one or more series by giving written notice thereof to the Company. If the
instrument of acceptance by a successor Trustee shall not have been delivered to
the Trustee within 60 days after the giving of such notice of resignation, the
resigning Trustee may petition, at the expense of the Company, any court of
competent jurisdiction for the appointment of a successor Trustee with respect
to the Tortoise Notes of such series.
The Trustee may be removed at any time with respect to the Tortoise
Notes of any series by Act of the holders of a majority in principal amount of
the Outstanding Tortoise Notes of such series, delivered to the Trustee and to
the Company. If the instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of a notice
of removal pursuant to this paragraph, the Trustee being removed may petition,
at the expense of the Company, any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Tortoise Notes of such
series.
If at any time:
(a) the Trustee shall fail to comply after written request
therefor by the Company or by any holder who has been a bona fide holder of
Tortoise Notes for at least six months, or
(b) the Trustee shall cease to be eligible and shall fail to
resign after written request therefor by the Company or by any such holder, or
(c) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of the
Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, then, in any such case, (i) the Company by a Board
Resolution may remove the Trustee with respect to all Tortoise Notes, or (ii)
any holder who has been a bona fide holder of Tortoise Notes for at least six
months may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee with respect to
all Tortoise Notes and the appointment of a successor Trustee or Trustees.
If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, with respect
to the Tortoise Notes of one or more series, the Company, by a Board Resolution,
shall promptly appoint a successor Trustee or Trustees with respect to the
Tortoise Notes of that or those series (it being understood that any such
successor Trustee may be appointed with respect to the Tortoise Notes of one or
more or all of such series and that at any time there shall be only one Trustee
with respect to the Tortoise Notes of any particular series) and shall comply
with the applicable requirements. If, within one year after such resignation,
removal or incapability, or the occurrence of such vacancy, a successor Trustee
with respect to the Tortoise Notes of any series shall be appointed by Act of
the holders of a majority in principal amount of the Outstanding Tortoise Notes
of such series delivered to the Company and the retiring Trustee, the successor
Trustee so appointed shall, forthwith upon its acceptance of such appointment in
accordance with the applicable requirements,
A-24
become the successor Trustee with respect to the Tortoise Notes of such series
and to that extent supersede the successor Trustee appointed by the Company.
If no successor Trustee with respect to the Tortoise Notes of any
series shall have been so appointed by the Company or the holders and accepted
appointment in the manner required, any holder who has been a bona fide holder
of Tortoise Notes of such series for at least six months may, on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee with respect to the
Tortoise Notes of such series.
The Company shall give notice of each resignation and each removal of
the Trustee with respect to the Tortoise Notes of any series and each
appointment of a successor Trustee with respect to the Tortoise Notes of any
series to all holders of Tortoise Notes of such series in the manner provided.
Each notice shall include the name of the successor Trustee with respect to the
Tortoise Notes of such series and the address of its Corporate Trust Office.
ACCEPTANCE OF APPOINTMENT BY SUCCESSOR
In case of the appointment hereunder of a successor Trustee with
respect to all Tortoise Notes, every such successor Trustee so appointed shall
execute, acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee; but, on the request
of the Company or the successor Trustee, such retiring Trustee shall, upon
payment of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee and
shall duly assign, transfer and deliver to such successor Trustee all property
and money held by such retiring Trustee hereunder.
In case of the appointment hereunder of a successor Trustee with
respect to the Tortoise Notes of one or more (but not all) series, the Company,
the retiring Trustee and each successor Trustee with respect to the Tortoise
Notes of one or more series shall execute and deliver a supplemental indenture
wherein each successor Trustee shall accept such appointment and which (1) shall
contain such provisions as shall be necessary or desirable to transfer and
confirm to, and to vest in, each successor Trustee all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Tortoise Notes of
that or those series to which the appointment of such successor Trustee relates,
(2) if the retiring Trustee is not retiring with respect to all Tortoise Notes,
shall contain such provisions as shall be deemed necessary or desirable to
confirm that all the rights, powers, trusts and duties of the retiring Trustee
with respect to the Tortoise Notes of that or those series as to which the
retiring Trustee is not retiring shall continue to be vested in the retiring
Trustee, and (3) shall add to or change any of the provisions of the Indenture
as shall be necessary to provide for or facilitate the administration of the
trusts hereunder by more than one Trustee, it being understood that nothing in
the Indenture shall constitute such Trustees co-trustees of the same trust and
that each such Trustee shall be trustee of a trust or trusts hereunder separate
and apart from any trust or trusts hereunder administered by any other such
Trustee; and upon the execution and delivery of such supplemental indenture the
resignation or removal of the retiring Trustee shall become effective to the
extent provided therein and each such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee with respect to the Tortoise Notes of that or
those series to which the appointment of such successor Trustee relates; but, on
request of the Company or any successor Trustee, such retiring Trustee shall
duly assign, transfer and deliver to such successor Trustee all property and
money held by such retiring Trustee hereunder with respect to the Tortoise Notes
of that or those series to which the appointment of such successor Trustee
relates.
A-25
Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in the
first or second preceding paragraph, as the case may be.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible.
MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible, without the execution or
filing of any paper or any further act on the part of any of the parties hereto.
In case any Tortoise Notes shall have been authenticated, but not delivered, by
the Trustee then in office, any successor by merger, conversion or consolidation
to such authenticating Trustee may adopt such authentication and deliver the
Tortoise Notes so authenticated with the same effect as if such successor
Trustee had itself authenticated such Tortoise Notes.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS
The Company shall not consolidate with or merge into any other Person
or convey, transfer or lease its properties and assets substantially as an
entirety to any Person, and the Company shall not permit any Person to
consolidate with or merge into the Company, unless:
(a) in case the Company shall consolidate with or merge into
another Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, the Person formed by such
consolidation or into which the Company is merged or the Person which acquires
by conveyance or transfer, or which leases, the properties and assets of the
Company substantially as an entirety shall be a corporation, partnership or
trust, shall be organized and validly existing under the laws of any domestic or
foreign jurisdiction and shall expressly assume, by an indenture supplemental
hereto, executed and delivered to the Trustee, in form satisfactory to the
Trustee, the due and punctual payment of the principal of and any premium and
interest on all the Tortoise Notes and the performance or observance of every
covenant of the Indenture on the part of the Company to be performed or
observed;
(b) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of the Company or any
subsidiary as a result of such transaction as having been incurred by the
Company or such Subsidiary at the time of such transaction, no Event of Default,
and no event which, after notice or lapse of time or both, would become an Event
of Default, shall have happened and be continuing;
(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture comply
and that all conditions precedent in the Indenture provided for relating to such
transaction have been complied with.
A-26
SUCCESSOR SUBSTITUTED
Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any conveyance, transfer or lease of the properties
and assets of the Company substantially as an entirety, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, transfer or lease is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
with the same effect as if such successor Person had been named as the Company
in the Indenture, and thereafter, except in the case of a lease, the predecessor
Person shall be relieved of all obligations and covenants under the Indenture
and the Tortoise Notes.
DEFEASANCE AND COVENANT DEFEASANCE
DEFEASANCE AND DISCHARGE
Upon the Company's exercise of its option (if any) to have the
provisions of the Indenture relating to Defeasance applied to any Tortoise Notes
or any series of Tortoise Notes, as the case may be, the Company shall be deemed
to have been discharged from its obligations, with respect to such Tortoise
Notes as provided in the Indenture on and after the date the conditions set
forth are satisfied (hereinafter called "Defeasance"). For this purpose, such
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by such Tortoise Notes and to have satisfied
all its other obligations under such Tortoise Notes and the Indenture insofar as
such Tortoise Notes are concerned (and the Trustee, at the expense of the
Company, shall execute proper instruments acknowledging the same), subject to
the following which shall survive until otherwise terminated or discharged
hereunder: (1) the rights of holders of such Tortoise Notes to receive, solely
from the trust fund, payments in respect of the principal of and any premium and
interest on such Tortoise Notes when payments are due, (2) the Company's
obligations with respect to such Tortoise Notes, (3) the rights, powers, trusts,
duties and immunities of the Trustee.
COVENANT DEFEASANCE
Upon the Company's exercise of its option (if any) to have provisions
of the Indenture relating to Covenant Defeasance applied to any Tortoise Notes
or any series of Tortoise Notes, as the case may be, (1) the Company shall be
released from its obligations under certain provisions of the Indenture for the
benefit of the holders of such Tortoise Notes and (2) the occurrence of any
event specified in the Indenture, and any such covenants provided pursuant to
certain provisions of the Indenture shall be deemed not to be or result in an
Event of Default, in each case with respect to such Tortoise Notes as provided
in the Indenture on and after the date the conditions are satisfied (hereinafter
called "Covenant Defeasance"). For this purpose, such Covenant Defeasance means
that, with respect to such Tortoise Notes, the Company may omit to comply with
and shall have no liability in respect of any term, condition or limitation set
forth in any such specified section of the Indenture, whether directly or
indirectly by reason of any reference elsewhere in the Indenture, or by reason
of any reference in any such section or article of the Indenture to any other
provision in the Indenture or in any other document, but the remainder of the
Indenture and such Tortoise Notes shall be unaffected thereby.
CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE
(a) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee which satisfies the requirements
and agrees to comply with the provisions of the relevant Article of the
Indenture applicable to it) as trust funds in trust for the purpose of making
the following payments, specifically pledged as security for, and dedicated
solely to, the benefits of the
A-27
holders of such Tortoise Notes, (i) money in an amount, or (ii) U.S. Government
Obligations which through the scheduled payment of principal and interest in
respect thereof in accordance with their terms will provide, not later than one
day before the due date of any payment, money in an amount, or (iii) such other
obligations or arrangements as may be specified with respect to such Tortoise
Notes, or (iv) a combination thereof, in each case sufficient, in the opinion of
a nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and discharge,
and which shall be applied by the Trustee (or any such other qualifying trustee)
to pay and discharge, the principal of and any premium and interest on such
Tortoise Notes on the respective Stated Maturities, in accordance with the terms
of the Indenture and such Tortoise Notes. As used in the Indenture, "U.S.
Government Obligation" means (x) any security which is (i) a direct obligation
of the United States of America for the payment of which the full faith and
credit of the United States of America is pledged or (ii) an obligation of a
Person controlled or supervised by and acting as an agency or instrumentality of
the United States of America the payment of which is unconditionally guaranteed
as a full faith and credit obligation by the United States of America, which, in
either case (i) or (ii), is not callable or redeemable at the option of the
Company thereof, and (y) any depositary receipt issued by a bank (as defined in
Section 3(a)(2) of the Tortoise Notes Act) as custodian with respect to any U.S.
Government Obligation which is specified in Clause (x) above and held by such
bank for the account of the holder of such depositary receipt, or with respect
to any specific payment of principal of or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depositary receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest evidenced by such depositary receipt.
(b) In the event of an election to have Defeasance and Discharge
apply to any Tortoise Notes or any series of Tortoise Notes, as the case may be,
the Company shall have delivered to the Trustee an Opinion of Counsel stating
that (i) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (ii) since the date of this instrument,
there has been a change in the applicable Federal income tax law, in either case
(i) or (ii) to the effect that, and based thereon such opinion shall confirm
that, the holders of such Tortoise Notes will not recognize gain or loss for
Federal income tax purposes as a result of the deposit, Defeasance and discharge
to be effected with respect to such Tortoise Notes and will be subject to
Federal income tax on the same amount, in the same manner and at the same times
as would be the case if such deposit, Defeasance and discharge were not to
occur.
(c) In the event of an election to have Covenant Defeasance apply
to any Tortoise Notes or any series of Tortoise Notes, as the case may be, the
Company shall have delivered to the Trustee an Opinion of Counsel to the effect
that the holders of such Tortoise Notes will not recognize gain or loss for
Federal income tax purposes as a result of the deposit and Covenant Defeasance
to be effected with respect to such Tortoise Notes and will be subject to
Federal income tax on the same amount, in the same manner and at the same times
as would be the case if such deposit and Covenant Defeasance were not to occur.
(d) The Company shall have delivered to the Trustee an Officers'
Certificate to the effect that neither such Tortoise Notes nor any other
Tortoise Notes of the same series, if then listed on any Tortoise Notes
exchange, will be delisted as a result of such deposit.
(e) No event which is, or after notice or lapse of time or both
would become, an Event of Default with respect to such Tortoise Notes or any
other Tortoise Notes shall have occurred and be continuing at the time of such
deposit or, with regard to any such event specified, at any time on or prior to
the 90th day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 90th day).
A-28
(f) Such Defeasance or Covenant Defeasance shall not cause the
Trustee to have a conflicting interest within the meaning of the Trust Indenture
Act (assuming all Tortoise Notes are in default within the meaning of such Act).
(g) Such Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which the Company is a party or by which it is bound.
(h) Such Defeasance or Covenant Defeasance shall not result in the
trust arising from such deposit constituting an investment company within the
meaning of the Investment Company Act unless such trust shall be registered
under the Investment Company Act or exempt from registration thereunder.
(i) No event or condition shall exist that would prevent the
Company from making payments of the principal of (and any premium) or interest
on the Tortoise Notes of such series on the date of such deposit or at any time
on or prior to the 90th day after the date of such deposit (it being understood
that this condition shall not be deemed satisfied until after such 90th day).
(j) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Defeasance or Covenant Defeasance have been
complied with.
(k) The Company shall have delivered to the Trustee an Opinion of
Counsel substantially to the effect that (i) the trust funds deposited pursuant
hereto will not be subject to any rights of any holders of indebtedness or
equity of the Company, and (ii) after the 90th day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally, except that if a court were to rule under any such law in any case or
proceeding that the trust funds remained property of the Company, no opinion is
given as to the effect of such laws on the trust funds except the following: (A)
assuming such trust funds remained in the possession of the trustee with whom
such funds were deposited prior to such court ruling to the extent not paid to
holders of such Tortoise Notes, such trustee would hold, for the benefit of such
holders, a valid and perfected security interest in such trust funds that is not
avoidable in bankruptcy or otherwise and (B) such holders would be entitled to
receive adequate protection of their interests in such trust funds if such trust
funds were used.
A-29
APPENDIX B-
TORTOISE NOTES AUCTION PROCEDURES
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date
for a series of Tortoise Notes:
(i) each Beneficial Owner of Tortoise Notes of
such series may submit to its Broker-Dealer
information as to:
(A) the principal amount of Outstanding
Tortoise Notes, if any, of such
series held by such Beneficial
Owner which such Beneficial Owner
desires to continue to hold without
regard to the Applicable Rate for
Tortoise Notes of such series for
the next succeeding Rate Period of
such series;
(B) the principal amount of Outstanding
Tortoise Notes, if any, of such
series held by such Beneficial
Owner which such Beneficial Owner
offers to sell if the Applicable
Rate for Tortoise Notes of such
series for the next succeeding Rate
Period of Tortoise Notes of such
series shall be less than the rate
per annum specified by such
Beneficial Owner; and/or
(C) the principal amount of Outstanding
Tortoise Notes, if any, of such
series held by such Beneficial
Owner which such Beneficial Owner
offers to sell without regard to
the Applicable Rate for Tortoise
Notes of such series for the next
succeeding Rate Period of Tortoise
Notes of such series;
and
(ii) one or more Broker-Dealers, using lists of
Potential Beneficial Owners, shall in good
faith for the purpose of conducting a
competitive Auction in a commercially
reasonable manner, contact Potential
Beneficial Owners (by telephone or
otherwise), including Persons that are not
Beneficial Owners, on such lists to
determine the principal amount of Tortoise
Notes, if any, of such series which each
such Potential Beneficial Owner offers to
purchase if the Applicable Rate for Tortoise
Notes of such series for the next succeeding
Rate Period of Tortoise Notes of such series
shall not be less than the rate per annum
specified by such Potential Beneficial
Owner.
For the purposes hereof, the communication
by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, of
information referred to in clause (i) (A),
(i) (B), (i) (C) or (ii) of this paragraph
(a) is hereinafter referred to as an "Order"
and collectively as "Orders" and each
Beneficial Owner and each Potential
Beneficial Owner placing an Order with a
Broker-Dealer, and such Broker-Dealer
placing an Order with the Auction Agent, is
hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order
containing the information referred to in
clause (i)(A) of this
B-1
paragraph (a) is hereinafter referred to as
a "Hold Order" and collectively as "Hold
Orders"; an Order containing the information
referred to in clause (i)(B) or (ii) of this
paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an
Order containing the information referred to
in clause (i)(C) of this paragraph (a) is
hereinafter referred to as a "Sell Order"
and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder
of Tortoise Notes of a series subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the principal amount of Outstanding
Tortoise Notes of such series
specified in such Bid if the
Applicable Rate for Tortoise Notes
of such series determined on such
Auction Date shall be less than the
rate specified therein;
(B) such principal amount or a lesser
principal amount of Outstanding
Tortoise Notes of such series to be
determined as set forth in clause
(iv) of paragraph (a) of Section 4
of this Appendix B if the
Applicable Rate for Tortoise Notes
of such series determined on such
Auction Date shall be equal to the
rate specified therein; or
(C) the principal amount of Outstanding
Tortoise Notes of such series
specified in such Bid if the rate
specified therein shall be higher
than the Maximum Rate for Tortoise
Notes of such series, or such
principal amount or a lesser
principal amount of Outstanding
Tortoise Notes of such series to be
determined as set forth in clause
(iii) of paragraph (b) of Section 4
of this Appendix B if the rate
specified therein shall be higher
than the Maximum Rate for Tortoise
Notes of such series and Sufficient
Clearing Bids for Tortoise Notes of
such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an
Existing Holder of Tortoise Notes of a
series of Tortoise Notes subject to an
Auction on any Auction Date shall constitute
an irrevocable offer to sell:
(A) the principal amount of Outstanding
Tortoise Notes of such series
specified in such Sell Order; or
(B) such principal amount or a lesser
principal amount of Outstanding
Tortoise Notes of such series as
set forth in clause (iii) of
paragraph (b) of Section 4 of this
Appendix B if Sufficient Clearing
Bids for Tortoise Notes of such
series do not exist;
PROVIDED, HOWEVER, that a Broker-Dealer that
is an Existing Holder with respect to a
series of Tortoise Notes shall not be liable
to any Person for failing to sell such
Tortoise Notes pursuant to a Sell Order
described in the proviso to paragraph (c) of
Section 2 of this Appendix B if (1) such
Tortoise Notes were transferred by the
Beneficial Owner thereof without compliance
by such Beneficial Owner or its transferee
Broker-Dealer (or other transferee person,
if permitted by the Company)
B-2
with the provisions of the Indenture or
(2) such Broker-Dealer has informed the
Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to
such Broker-Dealer's records, such
Broker-Dealer believes it is not the
Existing Holder of such Tortoise Notes.
(iii) A Bid by a Potential Beneficial Owner or a
Potential Holder of Tortoise Notes of a
series subject to an Auction on any Auction
Date shall constitute an irrevocable offer
to purchase:
(A) the principal amount of Outstanding
Tortoise Notes of such series
specified in such Bid if the
Applicable Rate for Tortoise Notes
of such series determined on such
Auction Date shall be higher than
the rate specified therein; or
(B) such principal amount or a lesser
principal amount of Outstanding
Tortoise Notes of such series as
set forth in clause (v) of
paragraph (a) of Section 4 of this
Appendix B if the Applicable Rate
for Tortoise Notes of such series
determined on such Auction Date
shall be equal to the rate
specified therein.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the
Auction Agent prior to the Submission Deadline or prior to the Submission
Processing Deadline (if certain conditions are satisfied) on each Auction Date
all Orders for Tortoise Notes of a series subject to an Auction on such Auction
Date obtained by such Broker-Dealer, designating itself (unless otherwise
permitted by the Company) as an Existing Holder in respect of Tortoise Notes
subject to Orders submitted or deemed submitted to it by Beneficial Owners and
as a Potential Holder in respect of Tortoise Notes subject to Orders submitted
to it by Potential Beneficial Owners, and shall specify with respect to each
such Order:
(i) the name of the Bidder placing such Order
(which shall be the Broker-Dealer unless
otherwise permitted by the Company);
(ii) the aggregate principal amount of Tortoise
Notes of such series that are the subject of
such Order;
(iii) to the extent that such Bidder is an
Existing Holder of Tortoise Notes of such
series:
(A) the principal amount of Tortoise
Notes, if any, of such series
subject to any Hold Order of such
Existing Holder;
(B) the principal amount of Tortoise
Notes, if any, of such series
subject to any Bid of such Existing
Holder and the rate specified in
such Bid; and
(C) the principal amount of Tortoise
Notes, if any, of such series
subject to any Sell Order of such
Existing Holder; and
(iv) to the extent such Bidder is a Potential
Holder of Tortoise Notes of such series, the
rate and principal amount of Tortoise Notes
of such series specified in such Potential
Holder's Bid.
B-3
(b) If any rate specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall round
such rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding
Tortoise Notes of a series held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline or Submission Processing
Deadline, as the case may be, the Auction Agent shall deem a Hold Order to have
been submitted by or on behalf of such Existing Holder covering the principal
amount of Outstanding Tortoise Notes of such series held by such Existing Holder
and not subject to Orders submitted to the Auction Agent; provided, however,
that if an Order or Orders covering all of the Outstanding Tortoise Notes of
such series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline or Submission Processing Deadline, as the case
may be, for an Auction relating to a Special Rate Period consisting of more than
28 Rate Period Days, the Auction Agent shall deem a Sell Order to have been
submitted by or on behalf of such Existing Holder covering the principal amount
of outstanding Tortoise Notes of such series held by such Existing Holder and
not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is
submitted to the Auction Agent covering in the aggregate more than the principal
amount of Outstanding Tortoise Notes of a series subject to an Auction held by
such Existing Holder, such Orders shall be considered valid in the following
order of priority:
(i) all Hold Orders for Tortoise Notes of such
series shall be considered valid, but only
up to and including in the aggregate
principal amount of Outstanding Tortoise
Notes of such series held by such Existing
Holder, and if the aggregate principal
amount of Tortoise Notes of such series
subject to such Hold Orders exceeds the
aggregate principal amount of Outstanding
Tortoise Notes of such series held by such
Existing Holder, the principal amount of
Tortoise Notes subject to each such Hold
Order shall be reduced pro rata to cover the
principal amount of Outstanding Tortoise
Notes of such series held by such Existing
Holder;
(ii) (A) any Bid for Tortoise Notes of such
series shall be considered valid up to and
including the excess of the principal amount
of Outstanding Tortoise Notes of such series
subject to any Hold Orders referred to in
clause (i) above;
(B) subject to subclause (A), if more
than one Bid of an Existing Holder
for Tortoise Notes of such series
is submitted to the Auction Agent
with the same rate and the
aggregate principal amount of
Outstanding Tortoise Notes of such
series subject to such Bids is
greater than such excess, such Bids
shall be considered valid up to and
including the amount of such
excess, and the principal amount of
Tortoise Notes of such series
subject to each Bid with the same
rate shall be reduced pro rata to
cover the principal amount of
Tortoise Notes of such series equal
to such excess;
(C) subject to subclauses (A) and (B),
if more than one Bid of an Existing
Holder for Tortoise Notes of such
series is submitted to the Auction
Agent with different rates, such
Bids shall be
B-4
considered valid in the ascending
order of their respective rates up
to and including the amount of such
excess; and
(D) in any such event, the principal
amount, if any, of such Outstanding
Tortoise Notes of such series
subject to any portion of Bids
considered not valid in whole or in
part under this clause (ii) shall
be treated as the subject of a Bid
for Tortoise Notes of such series
by or on behalf of a Potential
Holder at the rate therein
specified; and
(iii) all Sell Orders for Tortoise Notes of such
series shall be considered valid up to and
including the excess of the principal amount
of Outstanding Tortoise Notes of such series
held by such Existing Holder over the
aggregate principal amount of Tortoise Notes
of such series subject to valid Hold Orders
referred to in clause (i) above and valid
Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more Tortoise Notes
of a series is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and
principal amount therein specified.
(f) Any Order submitted by a Beneficial Owner or a
Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE
AND APPLICABLE RATE.
(a) Not earlier than the Submission Processing Deadline
on each Auction Date for a series of Tortoise Notes, the Auction Agent shall
assemble all valid Orders submitted or deemed submitted to it by the
Broker-Dealers in respect of Tortoise Notes of such series (each such Order as
submitted or deemed submitted by a Broker-Dealer being hereinafter referred to
individually as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell
Order," as the case may be, or as a "Submitted Order" and collectively as
"Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the
case may be, or as "Submitted Orders") and shall determine for such series:
(i) the excess of the aggregate principal amount
of Outstanding Tortoise Notes of such series
over the principal amount of Outstanding
Tortoise Notes of such series subject to
Submitted Hold Orders (such excess being
hereinafter referred to as the "Available
Tortoise Notes" of such series);
(ii) from the Submitted Orders for Tortoise Notes
of such series whether:
(A) the aggregate principal amount of
Outstanding Tortoise Notes of such
series subject to Submitted Bids of
Potential Holders specifying one or
more rates between the Minimum Rate
(for Standard Rate Periods or less,
only) and the Maximum Rate (for all
Rate Periods) for Tortoise Notes of
such series; exceeds or is equal to
the sum of:
(B) the aggregate principal amount of
Outstanding Tortoise Notes of such
series subject to Submitted Bids of
Existing Holders
B-5
specifying one or more rates
between the Minimum Rate (for
Standard Rate Periods or less,
only) and the Maximum Rate (for all
Rate Periods) for Tortoise Notes of
such series; and
(C) the aggregate principal amount of
Outstanding Tortoise Notes of such
series subject to Submitted Sell
Orders (in the event such excess or
such equality exists (other than
because all of the Outstanding
Tortoise Notes of such series are
subject to Submitted Hold Orders),
such Submitted Bids in subclause
(A) above being hereinafter
referred to collectively as
"Sufficient Clearing Bids" for
Tortoise Notes of such series); and
(iii) if Sufficient Clearing Bids for Tortoise
Notes of such series exist, the lowest rate
specified in such Submitted Bids (the
"Winning Bid Rate" for Tortoise Notes of
such series) which if:
(A) (I) each such Submitted Bid of
Existing Holders specifying such
lowest rate and
(II) all other such Submitted
Bids of Existing Holders
specifying lower rates were
rejected, thus entitling
such Existing Holders to
continue to hold the
Tortoise Notes of such
series that are subject to
such Submitted Bids; and
(B) (I) each such Submitted Bid of
Potential Holders specifying such
lowest rate and
(II) all other such Submitted
Bids of Potential Holders
specifying lower rates were
accepted; would result in
such Existing Holders
described in subclause (A)
above continuing to hold an
aggregate principal amount
of Outstanding Tortoise
Notes of such series which,
when added to the aggregate
principal amount of
Outstanding Tortoise Notes
of such series to be
purchased by such Potential
Holders described in
subclause (B) above, would
equal not less than the
Available Tortoise Notes of
such series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 3, the Auction Agent
shall advise the Company of the Minimum Rate and Maximum Rate for the series of
Tortoise Notes for which an Auction is being held on the Auction Date and, based
on such determination, the Applicable Rate for Tortoise Notes of such series for
the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for Tortoise
Notes of such series exist, that the
Applicable Rate for all Tortoise Notes of
such series for the next succeeding Rate
Period thereof shall be equal to the Winning
Bid Rate for Tortoise Notes of such series
so determined;
(ii) if Sufficient Clearing Bids for Tortoise
Notes of such series do not exist (other
than because all of the Outstanding Tortoise
Notes of such series
B-6
are subject to Submitted Hold Orders), that
the Applicable Rate for all Tortoise Notes
of such series for the next succeeding Rate
Period thereof shall be equal to the Maximum
Rate for Tortoise Notes of such series; or
(iii) if all of the Outstanding Tortoise Notes of
such series are subject to Submitted Hold
Orders, that the Applicable Rate for all
Tortoise Notes of such series for the next
succeeding Rate Period thereof shall be All
Hold Rate.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF TORTOISE NOTES. Existing Holders shall continue to hold
the Tortoise Notes that are subject to Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph (a) of Section 3 of this Appendix B,
the Submitted Bids and Submitted Sell Orders shall be accepted or rejected by
the Auction Agent and the Auction Agent shall take such other action as set
forth below:
(a) If Sufficient Clearing Bids for a series of Tortoise
Notes have been made, all Submitted Sell Orders with respect to Tortoise Notes
of such series shall be accepted and, subject to the provisions of paragraphs
(d) and (e) of this Section 4, Submitted Bids with respect to Tortoise Notes of
such series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to Tortoise Notes of such
series shall be rejected:
(i) Existing Holders' Submitted Bids for
Tortoise Notes of such series specifying any
rate that is higher than the Winning Bid
Rate for Tortoise Notes of such series shall
be accepted, thus requiring each such
Existing Holder to sell the Tortoise Notes
subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for
Tortoise Notes of such series specifying any
rate that is lower than the Winning Bid Rate
for Tortoise Notes of such series shall be
rejected, thus entitling each such Existing
Holder to continue to hold the Tortoise
Notes subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for
Tortoise Notes of such series specifying any
rate that is lower than the Winning Bid Rate
for Tortoise Notes of such series shall be
accepted;
(iv) each Existing Holder's Submitted Bid for
Tortoise Notes of such series specifying a
rate that is equal to the Winning Bid Rate
for Tortoise Notes of such series shall be
rejected, thus entitling such Existing
Holder to continue to hold the Tortoise
Notes subject to such Submitted Bid, unless
the aggregate principal amount of
Outstanding Tortoise Notes subject to all
such Submitted Bids shall be greater than
the principal amount of Tortoise Notes
("remaining Tortoise Notes") in the excess
of the Available Tortoise Notes of such
series over the principal amount of Tortoise
Notes subject to Submitted Bids described in
clauses (ii) and (iii) of this paragraph
(a), in which event such Submitted Bid of
such Existing Holder shall be rejected in
part, and such Existing Holder shall be
entitled to continue to hold Tortoise Notes
subject to such Submitted Bid, but only in
an amount equal to the principal amount of
Tortoise Notes of such series obtained by
multiplying the remaining principal amount
by a fraction, the numerator of which shall
be the principal amount of Outstanding
Tortoise Notes held by such Existing Holder
B-7
subject to such Submitted Bid and the
denominator of which shall be the aggregate
principal amount of Outstanding Tortoise
Notes subject to such Submitted Bids made by
all such Existing Holders that specified a
rate equal to the Winning Bid Rate for
Tortoise Notes of such series; and
(v) each Potential Holder's Submitted Bid for
aggregate principal amount of such series
specifying a rate that is equal to the
Winning Bid Rate for aggregate principal
amount of such series shall be accepted but
only in an amount equal to the principal
amount of Tortoise Notes of such series
obtained by multiplying the principal amount
of Tortoise Notes in the excess of the
Available Tortoise Notes of such series over
the principal amount of Tortoise Notes
subject to Submitted Bids described in
clauses (ii) through (iv) of this paragraph
(a) by a fraction, the numerator of which
shall be the principal amount of Outstanding
Tortoise Notes subject to such Submitted Bid
and the denominator of which shall be the
aggregate principal amount of Outstanding
Tortoise Notes subject to such Submitted
Bids made by all such Potential Holders that
specified a rate equal to the Winning Bid
Rate for Tortoise Notes of such series.
(b) If Sufficient Clearing Bids for a series of Tortoise
Notes have not been made (other than because all of the Outstanding Tortoise
Notes of such series are subject to Submitted Hold Orders), subject to the
provisions of paragraph (d) of this Section 4, Submitted Orders for Tortoise
Notes of such series shall be accepted or rejected as follows in the following
order of priority and all other Submitted Bids for Tortoise Notes of such series
shall be rejected:
(i) Existing Holders' Submitted Bids for
Tortoise Notes of such series specifying any
rate that is equal to or lower than the
Maximum Rate for Tortoise Notes of such
series shall be rejected, thus entitling
such Existing Holders to continue to hold
the Tortoise Notes subject to such Submitted
Bids;
(ii) Potential Holders' Submitted Bids for
Tortoise Notes of such series specifying any
rate that is equal to or lower than the
Maximum Rate for Tortoise Notes of such
series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for
Tortoise Notes of such series specifying any
rate that is higher than the Maximum Rate
for Tortoise Notes of such series and the
Submitted Sell Orders for Tortoise Notes of
such series of each Existing Holder shall be
accepted, thus entitling each Existing
Holder that submitted or on whose behalf was
submitted any such Submitted Bid or
Submitted Sell Order to sell the Tortoise
Notes of such series subject to such
Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the
principal amount of Tortoise Notes of such
series obtained by multiplying the principal
amount of Tortoise Notes of such series
subject to Submitted Bids described in
clause (ii) of this paragraph (b) by a
fraction, the numerator of which shall be
the principal amount of Outstanding Tortoise
Notes of such series held by such Existing
Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of
which shall be the aggregate principal
amount of Outstanding Tortoise Notes of such
series subject to all such Submitted Bids
and Submitted Sell Orders.
B-8
(c) If all of the Outstanding Tortoise Notes of a series
are subject to Submitted Hold Orders, all Submitted Bids for Tortoise Notes of
such series shall be rejected.
(d) If, as a result of the procedures described in clause
(iv) or (v) of paragraph (a) or clause (iii) of paragraph (b) of this Section 4,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, less than an Authorized
Denomination of Tortoise Notes on any Auction Date, the Auction Agent shall, in
such manner as it shall determine in its sole discretion, round up or down the
principal amount of Tortoise Notes of such series to be purchased or sold by any
Existing Holder or Potential Holder on such Auction Date as a result of such
procedures so that the principal amount of Tortoise Notes so purchased or sold
by each Existing Holder or Potential Holder on such Auction Date shall be equal
to an Authorized Denomination.
(e) If, as a result of the procedures described in clause
(v) of paragraph (a) of this Section 4, any Potential Holder would be entitled
or required to purchase less than an Authorized Denomination of Tortoise Notes
on any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, allocate Tortoise Notes of such series or
purchase among Potential Holders so that only Tortoise Notes of such series in
Authorized Denominations are purchased on such Auction Date as a result of such
procedures by any Potential Holder, even if such allocation results in one or
more Potential Holders not purchasing Tortoise Notes of such series on such
Auction Date.
(f) Based on the results of each Auction for a series of
Tortoise Notes, the Auction Agent shall determine the aggregate principal amount
of Tortoise Notes of such series to be purchased and the aggregate principal
amount of Tortoise Notes of such series to be sold by Potential Holders and
Existing Holders and, with respect to each Potential Holder and Existing Holder,
to the extent that such aggregate principal amount of Tortoise Notes and such
aggregate principal amount of Tortoise Notes to be sold differ, determine to
which other Potential Holder(s) or Existing Holder(s) they shall deliver, or
from which other Potential Holder(s) or Existing Holder(s) they shall receive,
as the case may be, Tortoise Notes of such series. Notwithstanding any provision
of the Auction Procedures or the Settlement Procedures to the contrary, in the
event an Existing Holder or Beneficial Owner of Tortoise Notes of a series with
respect to whom a Broker-Dealer submitted a Bid to the Auction Agent for such
Tortoise Notes that was accepted in whole or in part, or submitted or is deemed
to have submitted a Sell Order for such Tortoise Notes that was accepted in
whole or in part, fails to instruct its Agent Member to deliver such Tortoise
Notes against payment therefor, partial deliveries of Tortoise Notes that have
been made in respect of Potential Holders' or Potential Beneficial Owners'
Submitted Bids for Tortoise Notes of such series that have been accepted in
whole or in part shall constitute good delivery to such Potential Holders and
Potential Beneficial Owners.
(g) Neither the Company nor the Auction Agent nor any
affiliate of either shall have any responsibility or liability with respect to
the failure of an Existing Holder or a Potential Holder to deliver Tortoise
Notes of any series or to pay for Tortoise Notes of any series sold or purchased
pursuant to the Auction Procedures or otherwise.
B-9
APPENDIX C-
RATING OF INVESTMENTS
MOODY'S INVESTORS SERVICE, INC.
Moody's long-term obligation ratings are opinions of the relative
credit risk of fixed-income obligations with an original maturity of one year or
more. They address the possibility that a financial obligation will not be
honored as promised. Such ratings reflect both the likelihood of default and any
financial loss suffered in the even of default.
"Aaa" Obligations rated Aaa are judged to be of the highest quality,
with minimal credit risk.
"Aa" Obligations rated Aa are judged to be of high quality and are
subject to very low credit risk.
"A" Obligations rated A are considered upper-medium grade and are
subject to low credit risk.
"Baa" Obligations rated Baa are subject to moderate credit risk. They
are considered medium-grade and as such may possess certain speculative
characteristics.
"Ba" Obligations rated Ba are judged to have speculative elements and
are subject to substantial credit risk.
"B" Obligations rated B are considered speculative and are subject to
high credit risk.
"Caa" Obligations rated Caa are judged to be of poor standing and are
subject to very high credit risk.
"Ca" Obligations rated Ca are highly speculative and are likely in, or
very near, default, with some prospect of recovery of principal and interest.
"C" Obligations rated C are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal and
interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range; and the modifier 3 indicates a ranking in the lower end
of that generic rating category.
US MUNICIPAL AND TAX-EXEMPT RATINGS
Municipal ratings are based upon the analysis of four primary factors
relating to municipal finance: economy, debt, finances, and
administration/management strategies. Each of the factors is evaluated
individually and for its effect on the other factors in the context of the
municipality's ability to repay its debt.
"Aaa" Issuers or issues rated Aaa demonstrate the strongest
creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"Aa" Issuers or issues rated Aa demonstrate very strong
creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"A" Issuers or issues rated A present above average creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
C-1
"Baa" Issuers or issues rated Baa represent average creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"Ba" Issuers or issues rated Ba demonstrate below-average
creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"B" Issuers or issues rated B demonstrate weak creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"Caa" Issuers or issues rated Caa demonstrate very weak
creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"Ca" Issuers or issues rated Ca demonstrate extremely weak
creditworthiness relative to other US municipal or tax-exempt issuers or issues.
"C" Issuers or issues rated C demonstrate the weakest creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating category from Aa through Caa. The modifier 1 indicates that the issuer or
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
DESCRIPTION OF MOODY'S HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES AND
OTHER SHORT-TERM LOANS
Moody's ratings for state and municipal notes and other short-term
loans are designated "Moody's Investment Grade" ("MIG" or, for variable or
floating rate obligations, "VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings. Symbols used will be as follows:
"MIG-1" This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
"MIG-2" This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
"MIG-3" This designation denotes acceptable credit quality. Liquidity
and cash-flow protection may be narrow, and market access for refinancing is
likely to be less well-established.
"SG" This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection. Demand
features rated in this category may be supported by a liquidity provider that
does not have an investment grade short-term rating or may lack the structural
and/or legal protections necessary to ensure the timely payment of purchase
price upon demand.
"VMIG 1" This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
C-2
"VMIG 2" This designation denotes strong credit quality. Good
protection is afforded by the strong short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
"VMIG 3" This designation denotes acceptable credit quality. Adequate
protection is afforded by the satisfactory short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
DESCRIPTION OF MOODY'S SHORT TERM RATINGS
Moody's short-term ratings are opinions of the ability of issuers to
honor short-term financial obligations. Ratings may be assigned to issuers,
short-term programs or to individual short-term debt instruments. Such
obligations generally have an original maturity not exceeding thirteen months,
unless explicitly noted.
"P-1" Issuers (or supporting institutions) rated Prime-1 have a
superior ability to repay short-term debt obligations.
"P-2" Issuers (or supporting institutions) rated Prime-2 have a
strong ability to repay short-term debt obligations.
"P-3" Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability to repay short-term obligations.
"NP" Issuers (or supporting institutions) rated Not Prime do not
fall within any of the Prime rating categories.
FITCH RATINGS
A brief description of the applicable Fitch Ratings ("Fitch") ratings
symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
"AAA" -- Highest credit quality. `AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This capacity is
highly unlikely to be affected adversely by foreseeable events.
"AA" -- Very high credit quality. `AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
"A" -- High credit quality. `A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for higher
ratings.
"BBB" -- Good credit quality. `BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
C-3
SPECULATIVE GRADE
"BB" -- Speculative. `BB' ratings indicate that there is a possibility
of credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
"B" -- Highly speculative. `B' ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
"CCC", "CC", "C" -- High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A `CC' rating indicates that
default of some kind appears probable. `C' ratings signal imminent default.
"DDD", "DD", And "D" Default -- The ratings of obligations in this
category are based on their prospects for achieving partial or full recovery in
a reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the following
serve as general guidelines. `DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. `DD'
indicates potential recoveries in the range of 50%-90%, and `D' the lowest
recovery potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities rated `DDD' have the
highest prospect for resumption of performance or continued operation with or
without a formal reorganization process. Entities rated `DD' and `D' are
generally undergoing a formal reorganization or liquidation process; those rated
`DD' are likely to satisfy a higher portion of their outstanding obligations,
while entities rated `D' have a poor prospect for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
"F1" -- Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
"F2" -- Good credit quality. A satisfactory capacity for timely payment
of financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
"F3" -- Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
"B" -- Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" -- High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
"D" -- Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
C-4
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' Long-term
rating category, to categories below `CCC', or to Short-term ratings other than
`F1'.
"NR" indicates that Fitch Ratings does not rate the issuer or issue in
question.
"Withdrawn" -- A rating is withdrawn when Fitch Ratings deems the
amount of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
"Rating Watch" -- Ratings are placed on Rating Watch to notify
investors that there is a reasonable probability of a rating change and the
likely direction of such change. These are designated as "Positive", indicating
a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch typically is resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are `stable' could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch Ratings may be unable to identify
the fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
STANDARD & POOR'S CORPORATION
A brief description of the applicable Standard & Poor's Corporation, a division
of The McGraw-Hill Companies ("Standard & Poor's" or "S&P"), rating symbols and
their meanings (as published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation. The issue credit rating is
not a recommendation to purchase, sell, or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. The result is a
dual rating, in which the short-term ratings address the put feature, in
addition to the usual long-term rating. Medium-term notes are assigned long-term
ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
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1. Likelihood of payment - capacity and willingness of the
obligor to meet its financial commitment on an obligation in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors' rights. The
issue ratings definitions are expressed in terms of default risk. As such, they
pertain to senior obligations of an entity. Junior obligations are typically
rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
"AAA" -- An obligation rated `AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" -- An obligation rated `AA' differs from the highest-rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" -- An obligation rated `A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
BBB -- An obligation rated `BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB, B, CCC, CC, AND C -- Obligations rated `BB', `B', `CCC', `CC', and
`C' are regarded as having significant speculative characteristics. `BB'
indicates the least degree of speculation and `C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB -- An obligation rated `BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to the obligor's inadequate capacity to meet its financial commitment on
the obligation.
B -- An obligation rated `B' is more vulnerable to nonpayment than
obligations rated `BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated `CCC' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated `CC' is currently highly vulnerable to
nonpayment.
C -- The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D -- An obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not
C-6
expired, unless Standard & Poor's believes that such payments will be made
during such grace period. The `D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
"+/-" -- Plus (+) or minus (-). The ratings from `AA' to `CCC' may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"c" -- The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"P" -- The letter `p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
"*" -- Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" -- The `r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. -- Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS
Under present commercial bank regulations issued by the Comptroller of
the Currency, bonds rated in the top four categories (`AAA', `AA', `A', `BBB',
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A Standard & Poor's note ratings reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
C-7
Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
"SP-1" -- Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a plus
(+) designation.
"SP-2" -- Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes over the term of
the notes.
"SP-3" -- Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from `A-1' for the
highest quality obligations to `D' for the lowest. These categories are as
follows:
"A-1" -- A short-term obligation rated `A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations is
extremely strong.
"A-2" -- A short-term obligation rated `A-2' is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is satisfactory.
"A-3" -- A short-term obligation rated `A-3' exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.
"B" -- A short-term obligation rated `B' is regarded as having
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"C" -- A short-term obligation rated `C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
C-8
"D" -- A short-term obligation rated `D' is in payment default. The `D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
`D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
C-9
Tortoise Energy Infrastructure Corporation
_____________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
_____________________________________________________
, 2005
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
The Registrant's audited financial statements dated November 30, 2004,
the notes to the financial statements and report of independent registered
public accounting firm accountants thereon, and the Registrant's unaudited
financial statements dated January 31, 2005 and notes thereto will be filed with
a pre-effective amendment to the Registrant's Registration Statement.
2. Exhibits:
a.1. Articles of Incorporation. 1
a.2. Articles of Amendment and Restatement. 2
a.3. Articles Supplementary. 4
b.1. By-laws. 1
b.2. Amended and Restated By-Laws. 2
c. None.
d.1. Form of Note.*
d.2. Form of Indenture of Trust.*
d.3. Form of Supplemental Indenture of Trust. *
d.4. Statement of Eligibility of Trustee on Form T-1. 3
d.5. Fitch Guidelines and Moody's Guidelines.**
e. Terms and Conditions of the Dividend Reinvestment
Plan. 2
f. Not applicable.
g.1. Investment Advisory Agreement with Tortoise Capital
Advisors, L.L.C. 3
g.2. Reimbursement Agreement. 3
h.1. Form of Underwriting Agreement.**
h.2. Form of Master Agreement Among Underwriters.**
h.3. Form of Master Selected Dealers Agreement.**
i. None.
j. Custody Agreement. 3
k.1. Stock Transfer Agency Agreement. 3
k.2. Administration Agreement. 3
k.3. Fund Accounting Agreement. 3
k.4. Form of Auction Agency Agreement.*
k.5. Form of Broker-Dealer Agreement.*
k.6. Form of DTC Representation Letter.*
l. Opinion of Venable LLP**
m. Not applicable.
n. Consent of Auditors.**
o. Not applicable.
p. Subscription Agreement. 3
q. None.
r.1. Amended Code of Ethics for the Registrant.5
r.2. Amended Code of Ethics for the Adviser. 5
s. Powers of Attorney. 2
------------------
(*) Filed herewith.
(**) To be filed by amendment.
III-1
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 31, 2003 (File Nos. 333-110143 and
811-21462).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on January 30,
2004 (File Nos. 333-110143 and 811-21462).
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on June 28, 2004
(File Nos. 333-114545 and 811-21462).
(4) Incorporated by reference to Registrant's Registration Statement filed
on October 15, 2004 (File Nos. 333-119784 and 811-21462).
(5) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on November 24,
2004 (File Nos. 333-119784 and 811-21462).
ITEM 25: MARKETING ARRANGEMENTS
Reference will be made to the underwriting agreement for the
Registrant's Tortoise Notes to be filed in an amendment to the Registrant's
Registration Statement.
ITEM 26: OTHER EXPENSES AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Securities and Exchange Commission fees................ $ *
Directors' Fees and Expenses............................ *
Printing (other than certificates)...................... *
Accounting fees and expenses............................ *
Legal fees and expenses................................. *
Rating Agency fees...................................... *
Trustee fees............................................ *
Auction Agent fees...................................... *
Miscellaneous........................................... *
---
Total................................................ $ *
===
------------------
* To be completed by amendment
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of January 31, 2005, the number or record holders of each class of
securities of the Registrant was
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Common Shares ($0.001 par value).......
Preferred Stock (Liquidation Preference
$25,000 per share)...................
Long-term Debt ($110,000,000
aggregate principal amount...........
ITEM 29. INDEMNIFICATION
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for
III-2
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 judgement as being material to the cause of action. The
Registrant's charter contains such a provision which eliminates directors' and
officers' liability to the maximum extent permitted by Maryland law.
The Registrant's charter authorizes it, to the maximum extent permitted
by Maryland law and the Investment Company Act of 1940, as amended (the "1940
Act"), to indemnify any present or former director or officer or any individual
who, while a director of the Registrant and at the request of the Registrant,
serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise as
a director, officer, partner or trustee, from and against any claim or liability
to which that person may become subject or which that person may incur by reason
of his or her status as a present or former director or officer of the
Registrant and to pay or reimburse his or her reasonable expenses in advance of
final disposition of a proceeding. The Registrant's Bylaws obligate it, to the
maximum extent permitted by Maryland law and the 1940 Act, to indemnify any
present or former director or officer or any individual who, while a director of
the Registrant and at the request of the Registrant, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise as a director, officer, partner
or trustee and who is made a party to the proceeding by reason of his service in
that capacity from and against any claim or liability to which that person may
become subject or which that person may incur by reason of his or her status as
a present or former director or officer of the Registrant and to pay or
reimburse his or her reasonable expenses in advance of final disposition of a
proceeding. The charter and Bylaws also permit the Registrant to indemnify and
advance expenses to any person who served a predecessor of the Registrant in any
of the capacities described above and any employee or agent of the Registrant or
a predecessor of the Registrant.
Maryland law requires a corporation (unless its charter provides
otherwise, which the Registrant's charter does not) to indemnify a director or
officer who has been successful in the defense of any proceeding to which he is
made a party by reason of his service in that capacity. Maryland law permits a
corporation to indemnify its present and former directors and officers, among
others, against judgements, penalties, fines, settlements and reasonable
expenses actually incurred by them in connection with any proceeding to which
they may be made a party by reason of their service in those or other capacities
unless it is established that (a) the act or omission of the director or officer
was material to the matter giving rise to the proceeding and (i) was committed
in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, under Maryland law, a Maryland corporation may not indemnify
for an adverse judgement in a suit by or in the right of the corporation or for
a judgement of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, Maryland law permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (b) a written undertaking by him or on his behalf to repay the amount paid
or reimbursed by the corporation if it is ultimately determined that the
standard of conduct was not met.
The provisions set forth above apply insofar as they are consistent
with Section 17(h) of the 1940 Act, which prohibits indemnification of any
director or officer of the Registrant against any liability to the Registrant or
its shareholders to which such director or officer otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
III-3
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended ("1933 Act"), may be provided to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding or payment pursuant to any insurance policy)
is asserted against the Registrant by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The information in the Statement of Additional Information under the
caption "Management of the Company--Directors and Officers" is hereby
incorporated by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All such accounts, books, and other documents are maintained at the
offices of the Registrant, at the offices of the Registrant's investment
adviser, Tortoise Capital Advisors, L.L.C., 10801 Mastin Boulevard, Suite 222,
Overland Park, Kansas 66210, at the offices of the custodian, U.S. Bank National
Association, 425 Walnut Street, M.L. CN-OH-W6TC, Cincinnati, Ohio 45202 or at
the offices of the transfer agent, Computershare Investor Services, LLC, Two
North LaSalle Street, Chicago, Illinois 60602 or at the offices of the
administrator, U.S. Bancorp Fund Services, LLC, 615 East Michigan Street,
Milwaukee, WI 53202, at the offices of the Auction Agent, The Bank of New York,
101 Barclay Street, 7W, New York, NY 10286 or at the offices of the Trustee, BNY
Midwest Trust Company, N.A., 2 N. LaSalle Street, Chicago, IL 60602.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the offering of Tortoise
Notes until the prospectus is amended if (1) subsequent to the effective date of
its registration statement, the net asset value declines more than ten percent
from its net asset value as of the effective date of the registration statement
or (2) the net asset value increases to an amount greater than its net proceeds
as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. (a) For the purposes of determining any liability under the
1933 Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A 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.
III-4
(b) For the purpose of determining any liability under the
1933 Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prominent delivery within two business days of
receipt of a written or oral request the Registrant's statement of additional
information.
III-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Overland Park and State of Kansas, on the day of
January 27, 2005.
Tortoise Energy Infrastructure Corporation
By: /s/ David J. Schulte
-------------------------------------
David J. Schulte, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
/s/ Terry C. Matlack* Director and Treasurer (Principal
------------------------------
Terry C. Matlack Financial and Accounting Officer) January 27, 2005
/s/ Conrad S. Ciccotello*
------------------------------
Conrad S. Ciccotello Director January 27, 2005
/s/ John R. Graham*
------------------------------
John R. Graham Director January 27, 2005
/s/ Charles E. Heath*
------------------------------
Charles E. Heath Director January 27, 2005
/s/ H. Kevin Birzer*
------------------------------
H. Kevin Birzer January 27, 2005
/s/ David J. Schulte President and Chief Executive
------------------------------ Officer
David J. Schulte (Principal Executive Officer) January 27, 2005
* By David J. Schulte pursuant to power of attorney, filed on January 30,
2004 in connection with Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2, filed on January 30, 2004 (File
Nos. 333-110143 and 811-21462) and is hereby incorporated by reference.
III-6
EXHIBIT INDEX
a.1. Articles of Incorporation. 1
a.2. Articles of Amendment and Restatement. 2
a.3. Articles Supplementary. 4
b.1. By-laws. 1
b.2. Amended and Restated By-Laws. 2
c. None.
d.1. Form of Note.*
d.2. Form of Indenture of Trust.*
d.3. Form of Supplemental Indenture of Trust. *
d.4. Statement of Eligibility of Trustee on Form T-1. 3
d.5. Fitch Guidelines and Moody's Guidelines.**
e. Terms and Conditions of the Dividend Reinvestment
Plan. 2
f. Not applicable.
g.1. Investment Advisory Agreement with Tortoise Capital
Advisors, L.L.C. 3
g.2. Reimbursement Agreement. 3
h.1. Form of Underwriting Agreement.**
h.2. Form of Master Agreement Among Underwriters.**
h.3. Form of Master Selected Dealers Agreement.**
i. None.
j. Custody Agreement. 3
k.1. Stock Transfer Agency Agreement. 3
k.2. Administration Agreement. 3
k.3. Fund Accounting Agreement. 3
k.4. Form of Auction Agency Agreement.*
k.5. Form of Broker-Dealer Agreement.*
k.6. Form of DTC Representation Letter.*
l. Opinion of Venable LLP**
m. Not applicable.
n. Consent of Auditors.**
o. Not applicable.
p. Subscription Agreement. 3
q. None.
r.1. Amended Code of Ethics for the Registrant.5
r.2. Amended Code of Ethics for the Adviser. 5
s. Powers of Attorney. 2
------------------
(*) Filed herewith.
(**) To be filed by amendment.
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 31, 2003 (File Nos. 333-110143 and
811-21462).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on January 30,
2004 (File Nos. 333-110143 and 811-21462).
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on June 28, 2004
(File Nos. 333-114545 and 811-21462).
(4) Incorporated by reference to Registrant's Registration Statement filed
on October 15, 2004 (File Nos. 333-119784 and 811-21462).
(5) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on November 24,
2004 (File Nos. 333-119784 and 811-21462).
III-7