Company at a Glance
Tortoise Energy Capital Corp.
(NYSE: TYY) is a closed-end investment company investing primarily in equity
securities of publicly-traded Master Limited Partnerships (MLPs) and their
affiliates in the energy infrastructure sector.
Investment Goals: Yield, Growth
and Quality
TYY seeks a high level of total
return with an emphasis on current distributions paid to
stockholders.
In seeking to achieve
yield,
we target
distributions to our stockholders that are roughly equal to the underlying yield
on a direct investment in MLPs. In order to accomplish this, we maintain our
strategy of investing primarily in energy infrastructure companies with
attractive current yields and growth potential.
We seek to achieve distribution
growth
as revenues of our underlying companies grow with the economy, with the
population and through rate increases. This revenue growth generally leads to
increased operating profits, and when combined with internal expansion projects
and acquisitions, is expected to provide attractive growth in distributions to
us. We also seek distribution growth through timely debt and equity
offerings.
TYY seeks to achieve
quality
by
investing in companies operating energy infrastructure assets that are critical
to the U.S. economy. Often these assets would be difficult to replicate. We also
back experienced management teams with successful track records. By investing in
us, our stockholders have access to a portfolio that is diversified through
geographic regions and across product lines, including natural gas, natural gas
liquids, crude oil and refined products.
About Energy Infrastructure Master
Limited Partnerships
MLPs are limited partnerships whose
units trade on public exchanges such as the New York Stock Exchange (NYSE), NYSE
Alternext US and NASDAQ. Buying MLP units makes an investor a limited partner in
the MLP. There are currently more than 90 MLPs in the market in industries
related to energy and natural resources.
We primarily invest in MLPs and their
affiliates in the energy infrastructure sector. Energy infrastructure MLPs are
engaged in the transportation, storage and processing of crude oil, natural gas
and refined products from production points to the end users. Our investments
are primarily in midstream (mostly pipeline) operations, which typically produce
steady cash flows with less exposure to commodity prices than many alternative
investments in the broader energy industry. With the growth potential of this
sector, along with our disciplined investment approach, we endeavor to generate
a predictable and increasing distribution stream for our investors.
A TYY Investment Versus a Direct
Investment in MLPs
We provide our stockholders an
alternative to investing directly in MLPs and their affiliates. A direct MLP
investment potentially offers an attractive distribution with a significant
portion treated as return of capital, and a historically low correlation to
returns on stocks and bonds. However, the tax characteristics of a direct MLP
investment are generally undesirable for tax-exempt investors such as retirement
plans. We are structured as a C Corporation accruing federal and state income
taxes, based on taxable earnings and profits. Because of this innovative
structure, pioneered by Tortoise Capital Advisors, institutions and retirement
accounts are able to join individual stockholders as investors in
MLPs.
Additional features include:
-
One Form 1099 per stockholder at
the end of the year, thus avoiding multiple K-1s and multiple state filings
for individual partnership investments;
-
A professional management team,
with more than 130 years combined investment experience, to select and manage
the portfolio on your behalf;
-
The ability to access investment
grade credit markets to enhance stockholder return; and
-
Access to direct placements and
other investments not available through the public
markets.
March 31, 2013
Dear
Fellow Stockholders,
Following some weakness in December,
the calendar year kicked off with a broad-based rally as most equity markets
around the world responded favorably to Washingtons successful avoidance of the
fiscal cliff. Bullish economic data in the U.S. housing market, strong corporate
earnings, continued low interest rates and an uptick in manufacturing further
bolstered investor confidence. Momentum continued throughout the quarter, with
the markets largely ignoring a second potential cliff sequestration which
resulted from ongoing political gridlock in our nations capital.
Likewise, our fiscal quarter ended
Feb. 28, 2013 was a strong one for midstream MLPs which continued to demonstrate
the resiliency of underlying fundamentals and benefit from increasing North
American energy production.
Master Limited Partnership Sector
Review
The Tortoise MLP Index
®
had a total
return of 10.6 percent for our first fiscal quarter, with the bulk of the
performance delivered in January as MLPs rebounded due to greater clarity as the
first fiscal cliff was averted. Reversing last years relative underperformance,
MLPs outperformed the S&P 500 Index
®,
which gained 7.6 percent in total
return for the same period. The Tortoise Midstream MLP Index
®
returned 10.9
percent for the fiscal quarter, reflecting the stronger performance of pipeline
MLPs relative to more commodity-sensitive MLPs. While this positive performance
resulted in a nearly one percent decrease in yield during the quarter for the
sector as a whole, we continue to believe MLPs remain attractive for their
combination of current income and growth potential.
The dramatic change taking place in
North American energy production continues to be a significant driver of growth
for the midstream portion of the energy value chain and more specifically,
pipeline MLPs. U.S. crude oil production is increasingly displacing imports,
with production up 40 percent since 2008, as noted by the IHS, a global provider
of market and economic information. According to the U.S. Energy Information
Administration, the U.S. is expected to produce 7.3 million barrels per day in
2013, up from 6.5 million in 2012. This vigorous activity continues to spur
aggressive pipeline infrastructure build-out. We project nearly $45 billion will
be invested in pipeline MLP projects in three years through 2014.
Capital markets remained very active
and supportive, as MLPs raised approximately $9.2 billion in equity and $10.0
billion in debt in the first fiscal quarter, including the launch of five new
MLP initial public offerings. Merger and acquisition (M&A) activity also has
been healthy. Following the more than $38 billion in aggregate MLP M&A deals
in 2012, a total of $14.7 billion in MLP transactions was announced during the
fiscal quarter. The largest of the first-quarter deals was Kinder Morgan Energy
Partners $5 billion pending acquisition of Copano Energy, L.L.C., a gathering
and processing MLP. The transactions healthy premium drove further M&A
speculation in the gathering and processing sector during the quarter.
Fund Performance
Review
Our total assets increased from
$889.9 million on Nov. 30, 2012, to $979.1 million on Feb. 28, 2013, resulting
primarily from market appreciation of our investments. Our market-based total
return to stockholders for our first fiscal quarter was 16.8 percent and our
NAV-based total return was 11.2 percent per share (both including the
reinvestment of distributions). The difference between our market value total
return as compared to our NAV total return reflected the increase in the
markets premium of our stock price relative to our NAV during the
period.
During the quarter, our asset
performance was helped by our exposure to refined products pipeline MLPs, which
benefitted from an inflation escalator and stable demand, and to crude oil
pipeline MLPs, which continued to benefit from growing volumes driven by
increased production in North American shale basins, infrastructure constraints
and related pipeline build-out. Natural gas pipeline MLPs also contributed
positively. They continue to face some challenges for distribution growth in the
near term, with a positive overall long-term outlook underscored by developing
demand for newfound supply. With no holdings in upstream, our overall midstream
focus positively impacted performance as well.
(Unaudited)
2013 1st Quarter
Report
1
We also completed direct placement
investments in Inergy Midstream, L.P. and Rose Rock Midstream, L.P., which
together totaled $6.7 million. Inergy Midstream is a natural gas storage and
transportation business acquiring logistical assets in the Bakken, while Rose
Rock Midstream is a crude oil gathering, transportation and storage business
that is acquiring an interest in a pipeline linking the Niobrara shale in the
Rockies to Cushing, Okla.
We paid a distribution of $0.42 per
common share ($1.68 annualized) to our stockholders on March 1, 2013, an
increase of 0.6 percent quarter over quarter and of 2.4 percent year over year.
This distribution represented an annualized yield of 5.1 percent based on our
fiscal quarter closing price of $32.92. Our distribution payout coverage
(distributable cash flow divided by distributions) for the fiscal quarter was
110.9 percent, reflective of our emphasis on sustainability. We will provide
expectations for the tax characterization of our 2013 distributions later in the
year. A final determination of the characterization will be made in January
2014.
We ended the first fiscal quarter
with leverage (including bank debt, senior notes and preferred stock) at 16.6
percent of total assets, below our long-term target of 25 percent. This provides
us flexibility in managing the portfolio across market cycles and allows us to
add leverage when compelling opportunities arise. As of Feb. 28, 2013, our
leverage had a weighted average maturity of 2.8 years and a weighted average
cost of 4.78 percent, with more than 91 percent at fixed rates.
Additional information about our
financial performance is available in the Key Financial Data and Managements
Discussion sections of this report.
Conclusion
Please join us for our annual
stockholders meeting on May 30, 2013 at 10 a.m. Central time at our offices
located at 11550 Ash St., Suite 300, in Leawood, Kan. If you are unable to
attend the meeting, you can join us via the closed-end fund section of our Web
site at www.tortoiseadvisors.com. We have recently redesigned the site to better
serve you, and we welcome your feedback about its new features and
functionality.
Sincerely,
The Managing Directors
Tortoise
Capital Advisors, L.L.C.
The adviser
to Tortoise Energy Capital Corp.
|
|
|
H. Kevin
Birzer
|
Zachary A.
Hamel
|
Kenneth P.
Malvey
|
|
|
|
|
|
|
Terry
Matlack
|
David J.
Schulte
|
P. Bradley
Adams
|
The Tortoise MLP Index
®
is a
float-adjusted, capitalization-weighted index of energy master limited
partnerships (MLPs).
The Tortoise Midstream MLP Index
®
,
a sub-index of the Tortoise MLP Index
®
, is comprised of all constituents
included in the following sub sectors: Crude Oil Pipelines, Gathering &
Processing, Natural Gas Pipelines and Refined Products Pipelines.
The S&P 500 Index
®
is an
unmanaged market-value weighted index of stocks, which is widely regarded as the
standard for measuring large-cap U.S. stock market performance.
(Unaudited)
2
Tortoise Energy Capital Corp.
Key
Financial Data
(Supplemental Unaudited Information)
(dollar amounts in
thousands unless otherwise indicated)
|
The information presented below
regarding Distributable Cash Flow and Selected Financial Information is
supplemental non-GAAP financial information, which we believe is meaningful to
understanding our operating performance. The Distributable Cash Flow Ratios
include the functional equivalent of EBITDA for non-investment companies, and we
believe they are an important supplemental measure of performance and promote
comparisons from period-to-period. This information is supplemental, is not
inclusive of required financial disclosures (e.g. Total Expense Ratio), and
should be read in conjunction with our full financial statements.
|
|
2012
|
|
|
2013
|
|
|
|
Q1
(1)
|
|
|
Q2
(1)
|
|
|
Q3
(1)
|
|
|
Q4
(1)
|
|
|
Q1
(1)
|
|
Total Income from Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received from master limited partnerships
|
|
$
|
11,966
|
|
|
$
|
11,854
|
|
|
$
|
12,285
|
|
|
$
|
12,457
|
|
|
$
|
12,664
|
|
Dividends paid in
stock
|
|
|
856
|
|
|
|
862
|
|
|
|
893
|
|
|
|
984
|
|
|
|
1,020
|
|
Total from investments
|
|
|
12,822
|
|
|
|
12,716
|
|
|
|
13,178
|
|
|
|
13,441
|
|
|
|
13,684
|
|
Operating Expenses Before Leverage Costs and Current
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees, net of fees waived
|
|
|
2,026
|
|
|
|
2,027
|
|
|
|
1,994
|
|
|
|
2,083
|
|
|
|
2,148
|
|
Other operating
expenses
|
|
|
260
|
|
|
|
232
|
|
|
|
224
|
|
|
|
225
|
|
|
|
267
|
|
|
|
|
2,286
|
|
|
|
2,259
|
|
|
|
2,218
|
|
|
|
2,308
|
|
|
|
2,415
|
|
Distributable cash flow
before leverage costs and current taxes
|
|
|
10,536
|
|
|
|
10,457
|
|
|
|
10,960
|
|
|
|
11,133
|
|
|
|
11,269
|
|
Leverage costs
(2)
|
|
|
2,140
|
|
|
|
2,281
|
|
|
|
2,011
|
|
|
|
1,999
|
|
|
|
2,009
|
|
Current income tax
expense
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributable Cash Flow
(4)
|
|
$
|
8,396
|
|
|
$
|
8,176
|
|
|
$
|
8,949
|
|
|
$
|
9,134
|
|
|
$
|
9,260
|
|
As a percent of average total
assets
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
from investments
|
|
|
6.00
|
%
|
|
|
5.91
|
%
|
|
|
6.22
|
%
|
|
|
6.08
|
%
|
|
|
5.97
|
%
|
Operating expenses before
leverage costs and current taxes
|
|
|
1.07
|
%
|
|
|
1.05
|
%
|
|
|
1.05
|
%
|
|
|
1.04
|
%
|
|
|
1.05
|
%
|
Distributable cash flow before leverage costs and current taxes
|
|
|
4.93
|
%
|
|
|
4.86
|
%
|
|
|
5.17
|
%
|
|
|
5.04
|
%
|
|
|
4.92
|
%
|
As a percent of average net
assets
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
from investments
|
|
|
9.66
|
%
|
|
|
9.67
|
%
|
|
|
10.23
|
%
|
|
|
9.97
|
%
|
|
|
9.87
|
%
|
Operating expenses before
leverage costs and current taxes
|
|
|
1.72
|
%
|
|
|
1.72
|
%
|
|
|
1.72
|
%
|
|
|
1.71
|
%
|
|
|
1.74
|
%
|
Leverage costs and current taxes
|
|
|
1.61
|
%
|
|
|
1.73
|
%
|
|
|
1.56
|
%
|
|
|
1.48
|
%
|
|
|
1.45
|
%
|
Distributable cash
flow
|
|
|
6.33
|
%
|
|
|
6.22
|
%
|
|
|
6.95
|
%
|
|
|
6.78
|
%
|
|
|
6.68
|
%
|
|
Selected Financial
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid on common
stock
|
|
$
|
8,037
|
|
|
$
|
8,104
|
|
|
$
|
8,161
|
|
|
$
|
8,275
|
|
|
$
|
8,354
|
|
Distributions
paid on common stock per share
|
|
|
0.4100
|
|
|
|
0.4125
|
|
|
|
0.4150
|
|
|
|
0.4175
|
|
|
|
0.4200
|
|
Distribution coverage percentage
for period
(6)
|
|
|
104.5
|
%
|
|
|
100.9
|
%
|
|
|
109.7
|
%
|
|
|
110.4
|
%
|
|
|
110.9
|
%
|
Net realized
gain (loss), net of income taxes, for the period
|
|
|
(2,709
|
)
|
|
|
2,750
|
|
|
|
11,088
|
|
|
|
38,951
|
|
|
|
11,821
|
|
Total assets, end of
period
|
900,119
|
|
792,048
|
|
|
872,718
|
|
889,880
|
|
979,059
|
|
Average total
assets during period
(7)
|
859,314
|
|
855,782
|
|
|
842,318
|
|
889,090
|
|
928,983
|
|
Leverage
(8)
|
169,700
|
|
160,700
|
|
|
161,900
|
|
171,800
|
|
162,700
|
|
Leverage as a
percent of total assets
|
18.9
|
%
|
|
|
20.3
|
%
|
|
|
18.6
|
%
|
|
|
19.3
|
%
|
|
|
16.6
|
%
|
Net unrealized appreciation, end
of period
|
277,802
|
|
219,669
|
|
265,407
|
|
241,412
|
|
293,189
|
|
Net assets, end
of period
|
550,701
|
|
484,864
|
|
531,497
|
|
540,491
|
|
594,500
|
|
Average net assets during
period
(9)
|
533,793
|
|
523,333
|
|
512,418
|
|
542,324
|
|
562,323
|
|
Net asset value
per common share
|
28.09
|
|
|
|
24.68
|
|
|
|
27.01
|
|
|
|
27.23
|
|
|
|
29.89
|
|
Market value per share
|
29.06
|
|
|
|
24.91
|
|
|
|
27.43
|
|
|
|
28.57
|
|
|
|
32.92
|
|
Shares
outstanding (actual)
|
19,602,374
|
|
19,645,662
|
|
19,674,462
|
|
19,846,818
|
|
19,889,616
|
|
(1)
|
Q1 is the
period from December through February. Q2 is the period from March through
May. Q3 is the period from June through August. Q4 is the period from
September through November.
|
(2)
|
Leverage costs
include interest expense, distributions to preferred stockholders and
other recurring leverage expenses.
|
(3)
|
Includes taxes
paid on net investment income and foreign taxes, if any. Taxes related to
realized gains are excluded from the calculation of Distributable Cash
Flow (DCF).
|
(4)
|
Net
investment income (loss), before income taxes on the Statement of
Operations is adjusted as follows to reconcile to DCF: increased by the
return of capital on MLP distributions, the value of paid-in-kind
distributions, distributions included in direct placement discounts,
premium on redemption of MRP stock and amortization of debt issuance
costs; and decreased by current taxes paid on net investment
income.
|
(5)
|
Annualized for periods less than one full year.
|
(6)
|
Distributable Cash Flow divided by distributions
paid.
|
(7)
|
Computed by averaging month-end values within each
period.
|
(8)
|
Leverage consists of long-term debt obligations, preferred stock
and short-term borrowings.
|
(9)
|
Computed by averaging daily net assets within each
period.
|
2013 1st Quarter
Report
3
Managements Discussion
(Unaudited)
|
The information contained in this
section should be read in conjunction with our Financial Statements and the
Notes thereto. In addition, this report contains certain forward-looking
statements. These statements include the plans and objectives of management for
future operations and financial objectives and can be identified by the use of
forward-looking terminology such as may, will, expect, intend,
anticipate, estimate, or continue or the negative thereof or other
variations thereon or comparable terminology. These forward-looking statements
are subject to the inherent uncertainties in predicting future results and
conditions. Certain factors that could cause actual results and conditions to
differ materially from those projected in these forward-looking statements are
set forth in the Risk Factors section of our public filings with the SEC.
Overview
Tortoise Energy Capital Corp.s (the
Company) goal is to provide a stable and growing distribution stream to our
investors. We seek to provide our stockholders with an efficient vehicle to
invest in the energy infrastructure sector. While we are a registered investment
company under the Investment Company Act of 1940, as amended (the 1940 Act),
we are not a regulated investment company for federal tax purposes. Our
distributions do not generate unrelated business taxable income (UBTI) and our
stock may therefore be suitable for holding by pension funds, IRAs and mutual
funds, as well as taxable accounts. We invest primarily in MLPs through private
and public market purchases. MLPs are publicly traded partnerships whose equity
interests are traded in the form of units on public exchanges, such as the NYSE
or NASDAQ. Tortoise Capital Advisors, L.L.C. serves as our investment
adviser.
Company Update
Total assets increased approximately
$89 million during the 1st quarter, primarily as a result of increased market
values of our MLP investments. Distribution increases from our MLP investments
were in-line with our expectations and asset-based expenses increased from the
previous quarter. Total leverage as a percent of total assets decreased and we
increased our quarterly distribution to $0.42 per share. Additional information
on these events and results of our operations are discussed in more detail
below.
Critical Accounting
Policies
The financial statements are based on
the selection and application of critical accounting policies, which require
management to make significant estimates and assumptions. Critical accounting
policies are those that are both important to the presentation of our financial
condition and results of operations and require managements most difficult,
complex, or subjective judgments. Our critical accounting policies are those
applicable to the valuation of investments, tax matters and certain revenue
recognition matters as discussed in Note 2 in the Notes to Financial
Statements.
Determining Distributions to
Stockholders
Our portfolio generates cash flow
from which we pay distributions to stockholders. Our Board of Directors has
adopted a policy of declaring what it believes to be sustainable distributions.
In determining distributions, our Board of Directors considers a number of
current and anticipated factors, including, among others, distributable cash
flow (DCF), realized and unrealized gains, leverage amounts and rates, current
and deferred taxes payable, and potential volatility in returns from our
investments and the overall market. While the Board considers many factors in
determining distributions to stockholders, particular emphasis is given to DCF
and distribution coverage. Distribution coverage is DCF divided by distributions
paid to stockholders and is discussed in more detail below. Over the long term,
we expect to distribute substantially all of our DCF to holders of common stock.
Our Board of Directors reviews the distribution rate quarterly and may adjust
the quarterly distribution throughout the year.
Determining DCF
DCF is distributions received from
investments, less expenses. The total distributions received from our
investments include the amount received by us as cash distributions from MLPs,
paid-in-kind distributions, and dividend and interest payments. The total
expenses include current or anticipated operating expenses, leverage costs and
current income taxes. Current income taxes include taxes paid on our net
investment income in addition to foreign taxes, if any. Taxes incurred from
realized gains on the sale of investments, expected tax benefits and deferred
taxes are not included in DCF.
The Key Financial Data table
discloses the calculation of DCF and should be read in conjunction with this
discussion. The difference between distributions received from investments in
the DCF calculation and total investment income as reported in the Statement of
Operations, is reconciled as follows: the Statement of Operations, in conformity
with U.S. generally accepted accounting principles (GAAP), recognizes
distribution income from MLPs and common stock on their ex-dates, whereas the
DCF calculation may reflect distribution income on their pay dates; GAAP
recognizes that a significant portion of the cash distributions received from
MLPs are characterized as a return of capital and therefore excluded from
investment income, whereas the DCF calculation includes the return of capital;
and, distributions received from investments in the DCF calculation include the
value of dividends paid-in-kind (additional stock or MLP units), whereas such
amounts are not included as income for GAAP purposes, and includes distributions
related to direct investments when the purchase price is reduced in lieu of
receiving cash distributions. The treatment of expenses in the DCF calculation
also differs from what is reported in the Statement of Operations. In addition
to the total operating expenses as disclosed in the Statement of Operations, the
DCF calculation reflects interest expense, other recurring leverage expenses,
distributions to preferred stockholders, as well as taxes paid on net investment
income. A reconciliation of Net Investment Loss, before Income Taxes to DCF is
included below.
4
Tortoise Energy Capital Corp.
Managements Discussion
(Unaudited)
(Continued)
|
Distributions Received from
Investments
Our ability to generate cash is
dependent on the ability of our portfolio of investments to generate cash flow
from their operations. In order to maintain and grow distributions to our
stockholders, we evaluate each holding based upon its contribution to our
investment income, our expectation for its growth rate, and its risk relative to
other potential investments.
We concentrate on MLPs we believe can
expect an increasing demand for services from economic and population growth. We
seek well-managed businesses with hard assets and stable recurring revenue
streams. Our focus remains primarily on investing in fee-based service providers
that operate long-haul, interstate pipelines. We further diversify among
issuers, geographies and energy commodities to seek a distribution payment which
approximates an investment directly in energy infrastructure MLPs. In addition,
many crude/refined products and natural gas liquids pipeline companies are
regulated and currently benefit from a tariff inflation escalation index of PPI
+ 2.65 percent. Over the long-term, we believe MLPs distributions will outpace
inflation and interest rate increases, and produce positive real
returns.
Total distributions received from our
investments for the 1st quarter 2013 was approximately $13.7 million, an
increase of 6.7 percent as compared to 1st quarter 2012 and an increase of 1.8
percent as compared to 4th quarter 2012. These changes reflect increases in per
share distribution rates on our MLP investments, the distributions received from
additional investments funded from equity proceeds and the impact of various
portfolio trading activity.
Expenses
We incur two types of expenses: (1)
operating expenses, consisting primarily of the advisory fee, and (2) leverage
costs. On a percentage basis, operating expenses before leverage costs and
current taxes were an annualized 1.05 percent of average total assets for the
1st quarter 2013, a decrease of 0.02 percent as compared to the 1st quarter 2012
and an increase of 0.01 percent as compared to 4th quarter 2012. Advisory fees
for the 1st quarter 2013 increased 3.1 percent from 4th quarter 2012 as a result
of increased average managed assets for the quarter. Yields on our MLP
investments are currently below their 5-year historical average of approximately
7 percent. All else being equal, if MLP yields decrease and distributions remain
constant or grow, MLP asset values will increase as will our managed assets and
advisory fees. Other operating expenses increased as compared to 4th quarter
2012, primarily due to estimated franchise and professional fees.
Leverage costs consist of two major
components: (1) the direct interest expense on our senior notes and short-term
credit facility, and (2) distributions to preferred stockholders. Other leverage
expenses include rating agency fees and commitment fees. Total leverage costs
for DCF purposes were approximately $2.0 million for the 1st quarter 2013,
relatively unchanged as compared to 4th quarter 2012.
The weighted average annual rate of
our leverage at February 28, 2013 was 4.78 percent. This rate includes balances
on our bank credit facility which accrue interest at a variable rate equal to
one-month LIBOR plus 1.25 percent. Our weighted average rate may vary in future
periods as a result of changes in LIBOR, the utilization of our credit facility
and as our leverage matures or is redeemed. Additional information on our
leverage and amended credit facility is disclosed below in Liquidity and Capital
Resources and in our Notes to Financial Statements.
Distributable Cash Flow
For 1st quarter 2013, our DCF was
approximately $9.3 million, an increase of 10.3 percent as compared to 1st
quarter 2012 and an increase of 1.4 percent as compared to 4th quarter 2012.
These changes are the net result of distributions and expenses as outlined
above. We declared a distribution of $8.4 million, or $0.42 per share, during
the quarter. This represents an increase of $0.01 per share as compared to 1st
quarter 2012 and an increase of $0.0025 per share as compared to 4th quarter
2012.
Our distribution coverage ratio was
110.9 percent for 1st quarter 2013. Our goal is to pay what we believe to be
sustainable distributions with any increases safely covered by earned DCF. A
distribution coverage ratio of greater than 100 percent provides flexibility for
on-going management of the portfolio, changes in leverage costs, the impact of
taxes from realized gains and other expenses. An on-going distribution coverage
ratio of less than 100 percent will, over time, erode the earning power of a
portfolio and may lead to lower distributions. We expect to allocate a portion
of the projected future growth in DCF to increase distributions to stockholders
while also continuing to build critical distribution coverage to help preserve
the sustainability of distributions to stockholders for the years
ahead.
Net investment loss before income
taxes on the Statement of Operations is adjusted as follows to reconcile to DCF
for 1st quarter 2013 (in thousands):
|
1st Qtr 2013
|
Net Investment Loss, before
Income Taxes
|
|
$
|
(3,618
|
)
|
|
Adjustments to reconcile to DCF:
|
|
|
|
|
|
Dividends paid in stock
|
|
|
1,020
|
|
|
Distributions characterized
as return of capital
|
|
|
11,798
|
|
|
Amortization of debt issuance costs
|
|
|
60
|
|
|
DCF
|
|
$
|
9,260
|
|
|
Liquidity and Capital
Resources
We had total assets of $979 million
at quarter-end. Our total assets reflect the value of our investments, which are
itemized in the Schedule of Investments. It also reflects cash, interest and
receivables and any expenses that may have been prepaid. During 1st quarter
2013, total assets increased $89 million, primarily the result of an increase in
the value of our investments as reflected by the change in realized and
unrealized gains on investments (excluding return of capital on
distributions).
2013 1st Quarter
Report
5
Managements Discussion
(Unaudited)
(Continued)
|
We issued 42,798 shares of our common
stock during the quarter under our at-the-market equity program for a net total
of approximately $1.3 million. We used a portion of the proceeds to fund net
purchases during the quarter and the remainder to reduce outstanding leverage.
We are waiving our advisory fees on the net proceeds from shares issued under
our at-the-market equity program for six months.
Total leverage outstanding at
February 28, 2013 was $162.7 million, a decrease of $9.1 million as compared to
November 30, 2012. On an adjusted basis to reflect the timing of the payment of
our 1st quarter 2013 distribution, leverage decreased approximately $1.4
million. Outstanding leverage is comprised of $104.1 million in senior notes,
$50 million in MRP stock and $8.6 million outstanding under the credit facility,
with 91.6 percent of leverage with fixed rates and a weighted average maturity
of 2.8 years. Total leverage represented 16.6 percent of total assets at
February 28, 2013, as compared to 19.3 percent as of November 30, 2012 and 18.9
percent as of February 29, 2012. Our leverage as a percent of total assets
remains below our long-term target level of 25 percent of total assets, allowing
the opportunity to add leverage when compelling investment opportunities arise.
Temporary increases to up to 30 percent of our total assets may be permitted,
provided that such leverage is consistent with the limits set forth in the 1940
Act, and that such leverage is expected to be reduced over time in an orderly
fashion to reach our long-term target. Our leverage ratio is impacted by
increases or decreases in MLP values, issuance of equity and/or the sale of
securities where proceeds are used to reduce leverage.
Our longer-term leverage (excluding
our bank credit facility) of $154.1 million on February 28, 2013 was comprised
of 68 percent private placement debt and 32 percent publicly traded preferred
equity with a weighted average rate of 4.93 percent and weighted average
laddered maturity of 2.9 years.
Our Mandatory Redeemable Preferred
Stock has an optional redemption feature allowing us to redeem all or a portion
of the stock after May 1, 2013 and on or prior to May 1, 2014 at $10.10 per
share. Any optional redemption after May 1, 2014 and on or prior to May 1, 2015
will be at $10.05 per share. Any redemption after May 1, 2015 will be at the
liquidation preference amount of $10.00 per share.
We have used leverage to acquire MLPs
consistent with our investment philosophy. The terms of our leverage are
governed by regulatory and contractual asset coverage requirements that arise
from the use of leverage. Additional information on our leverage and asset
coverage requirements is discussed in Notes 9, 10 and 11 in the Notes to
Financial Statements. Our coverage ratios are updated each week on our Web site
at www.tortoiseadvisors.com.
Taxation of our Distributions and
Income Taxes
We invest in partnerships that
generally have cash distributions in excess of their income for accounting and
tax purposes. Accordingly, the distributions include a return of capital
component for accounting and tax purposes.
Distributions declared and paid by us
in a year generally differ from taxable income for that year, as such
distributions may include the distribution of current year taxable income or
return of capital.
The taxability of the distribution
you receive depends on whether we have annual earnings and profits (E&P).
E&P is primarily comprised of the taxable income from MLPs with certain
specified adjustments as reported on annual K-1s, fund operating expenses and
net realized gains. If we have E&P, it is first allocated to the preferred
shares and then to the common shares.
In the event we have E&P
allocated to our common shares, all or a portion of our distribution will be
taxable at the Qualified Dividend Income (QDI) rate, assuming various holding
requirements are met by the stockholder. The QDI rate is variable based on the
taxpayers taxable income. The portion of our distribution that is taxable may
vary for either of two reasons. First, the characterization of the distributions
we receive from MLPs could change annually based upon the K-1 allocations and
result in less return of capital and more in the form of income. Second, we
could sell an MLP investment and realize a gain or loss at any time. It is for
these reasons that we inform you of the tax treatment after the close of each
year as the ultimate characterization of our distributions is undeterminable
until the year is over.
E&P for 2012 exceeded total
distributions to stockholders. As a result, for tax purposes, distributions to
common stockholders for the year ended 2012 were 100 percent qualified dividend
income. This information is reported to stockholders on Form 1099-DIV and is
available on our Web site at www.tortoiseadvisors.com. For book purposes, the
source of distributions to common stockholders for the year ended 2012 was 100
percent return of capital.
As of November 30, 2012, we had
approximately $15 million in net operating losses. To the extent we have taxable
income in the future that is not offset by net operating losses, we will owe
federal and state income taxes. Tax payments can be funded from investment
earnings, fund assets or borrowings.
The unrealized gain or loss we have
in the portfolio is reflected in the Statement of Assets and Liabilities. At
February 28, 2013, our investments are valued at $977.5 million, with an
adjusted cost of $522.5 million. The $455.0 million difference reflects
unrealized gain that would be realized for financial statement purposes if those
investments were sold at those values. The Statement of Assets and Liabilities
also reflects either a net deferred tax liability or net deferred tax asset
depending primarily upon unrealized gains (losses) on investments, realized
gains (losses) on investments, capital loss carryforwards and net operating
losses. At February 28, 2013, the balance sheet reflects a net deferred tax
liability of approximately $210.4 million or $10.58 per share. Accordingly, our
net asset value per share represents the amount which would be available for
distribution to stockholders after payment of taxes. Details of our taxes are
disclosed in Note 5 in our Notes to Financial Statements.
6
Tortoise Energy Capital Corp.
Schedule of Investments
February 28,
2013
|
(Unaudited)
|
|
|
Shares
|
|
Fair
Value
|
Master Limited Partnerships and
|
|
|
|
|
|
Related Companies
164.4%
(1)
|
|
|
|
|
|
|
|
Crude/Refined Products Pipelines
61.0%
(1)
|
|
|
|
|
United States
61.0%
(1)
|
|
|
|
|
|
Buckeye Partners, L.P.
|
610,100
|
|
$
|
33,982,570
|
|
Enbridge Energy
Partners, L.P.
|
1,372,700
|
|
|
38,037,517
|
|
Holly Energy Partners, L.P.
|
559,000
|
|
|
23,064,340
|
|
Magellan
Midstream Partners, L.P.
|
1,404,600
|
|
|
70,454,736
|
|
MPLX LP
|
268,481
|
|
|
8,776,644
|
|
NuStar Energy
L.P.
|
508,300
|
|
|
25,943,632
|
|
Oiltanking Partners, L.P.
|
147,900
|
|
|
6,492,810
|
|
Plains All
American Pipeline, L.P.
|
1,318,400
|
|
|
72,182,400
|
|
Rose Rock Midstream, L.P.
|
75,312
|
|
|
2,560,608
|
|
Sunoco Logistics
Partners L.P.
|
1,087,000
|
|
|
67,970,110
|
|
Tesoro Logistics LP
|
260,300
|
|
|
12,988,970
|
|
|
|
|
|
362,454,337
|
|
Natural Gas/Natural Gas Liquids Pipelines
75.6%
(1)
|
|
|
United States
75.6%
(1)
|
|
|
|
|
|
Boardwalk Pipeline Partners, LP
|
1,282,700
|
|
|
34,055,685
|
|
El Paso Pipeline
Partners, L.P.
|
1,208,086
|
|
|
50,485,914
|
|
Energy Transfer Equity, L.P.
|
277,200
|
|
|
14,744,268
|
|
Energy Transfer
Partners, L.P.
|
935,900
|
|
|
44,838,969
|
|
Enterprise Products Partners L.P.
|
1,220,300
|
|
|
69,154,401
|
|
EQT Midstream
Partners, LP
|
173,842
|
|
|
6,595,565
|
|
Inergy Midstream, L.P.
|
213,600
|
|
|
5,113,584
|
|
Inergy
Midstream, L.P.
(2)
|
214,286
|
|
|
4,962,864
|
|
Kinder Morgan Management, LLC
(3)
|
655,273
|
|
|
54,276,298
|
|
ONEOK Partners,
L.P.
|
642,800
|
|
|
35,231,868
|
|
Regency Energy Partners LP
|
1,705,700
|
|
|
40,578,603
|
|
Spectra Energy
Partners, LP
|
578,500
|
|
|
21,358,220
|
|
TC PipeLines, LP
|
402,200
|
|
|
18,444,892
|
|
Williams
Partners L.P.
|
1,005,500
|
|
|
49,973,350
|
|
|
|
|
|
449,814,481
|
|
Natural Gas Gathering/Processing
27.8%
(1)
|
|
|
|
|
United States 27.8%
(1)
|
|
|
|
|
|
Access Midstream Partners, L.P.
|
863,355
|
|
|
32,151,340
|
|
Copano Energy, L.L.C.
|
488,600
|
|
|
18,840,416
|
|
Crestwood Midstream Partners LP
(3)
|
377,253
|
|
|
9,469,050
|
|
DCP Midstream Partners, LP
|
554,876
|
|
|
22,544,612
|
|
MarkWest Energy Partners, L.P.
|
368,600
|
|
|
21,072,862
|
|
Southcross Energy Partners, L.P.
|
101,635
|
|
|
2,328,458
|
|
Summit Midstream Partners, LP
|
177,600
|
|
|
3,999,552
|
|
Targa Resources Partners LP
|
465,000
|
|
|
19,153,350
|
|
Western Gas Equity Partners, LP
|
161,446
|
|
|
5,484,321
|
|
Western Gas Partners LP
|
548,500
|
|
|
30,079,740
|
|
|
|
|
|
165,123,701
|
|
Total Master Limited Partnerships and
|
|
|
|
|
|
Related Companies (Cost
$522,332,859)
|
|
|
|
977,392,519
|
|
|
|
|
|
|
|
Short-Term Investment 0.0%
(1)
|
|
|
|
|
|
|
|
|
|
|
|
United States Investment Company 0.0%
(1)
|
|
|
|
|
|
Fidelity Institutional Money Market Portfolio
|
|
|
|
|
|
Class I, 0.12%
(4)
(Cost $143,250)
|
143,250
|
|
|
143,250
|
|
Total Investments 164.4%
(1)
|
|
|
|
|
|
(Cost $522,476,109)
|
|
|
|
977,535,769
|
|
Other Assets and Liabilities (38.5%)
(1)
|
|
|
|
(228,936,228
|
)
|
Long-Term Debt Obligations (17.5%)
(1)
|
|
|
|
(104,100,000
|
)
|
Mandatory Redeemable Preferred Stock
|
|
|
|
|
|
at Liquidation Value
(8.4%)
(1)
|
|
|
|
(50,000,000
|
)
|
Total Net Assets Applicable to
|
|
|
|
|
|
Common Stockholders
100.0%
(1)
|
|
|
$
|
594,499,541
|
|
(1)
|
Calculated as
a percentage of net assets applicable to common
stockholders.
|
(2)
|
Restricted
securities have been fair valued in accordance with procedures approved by
the Board of Directors and have a total fair value of $4,962,864, which
represents 0.8% of net assets. See Note 7 to the financial statements for
further disclosure.
|
(3)
|
Security
distributions are paid-in-kind.
|
(4)
|
Rate indicated
is the current yield as of February 28,
2013.
|
See accompanying Notes to
Financial Statements.
2013 1st Quarter
Report
7
Statement of Assets & Liabilities
February 28,
2013
|
(Unaudited)
|
|
Assets
|
|
|
|
Investments at fair value (cost
$522,476,109)
|
$
|
977,535,769
|
|
Receivable for Adviser fee
waiver
|
|
7,418
|
|
Current tax asset
|
|
241,695
|
|
Prepaid expenses and other
assets
|
|
1,274,158
|
|
Total assets
|
|
979,059,040
|
|
Liabilities
|
|
|
|
Payable to Adviser
|
|
1,460,399
|
|
Distributions payable to common
stockholders
|
|
8,353,654
|
|
Accrued expenses and other
liabilities
|
|
1,599,331
|
|
Deferred tax liability
|
|
210,446,115
|
|
Short-term borrowings
|
|
8,600,000
|
|
Long-term debt obligations
|
|
104,100,000
|
|
Mandatory redeemable preferred
stock
|
|
|
|
($10.00
liquidation value per share;
|
|
|
|
5,000,000
shares outstanding)
|
|
50,000,000
|
|
Total liabilities
|
|
384,559,499
|
|
Net assets applicable to common stockholders
|
$
|
594,499,541
|
|
Net Assets Applicable to Common Stockholders Consist
of:
|
|
|
Capital stock, $0.001 par value;
19,889,616 shares issued
|
|
|
|
and
outstanding (100,000,000 shares authorized)
|
$
|
19,890
|
|
Additional paid-in capital
|
|
242,430,276
|
|
Accumulated net investment loss, net of
income taxes
|
|
(77,289,437
|
)
|
Undistributed realized gain, net of income
taxes
|
|
136,149,862
|
|
Net unrealized appreciation of
investments, net of income taxes
|
|
293,188,950
|
|
Net assets applicable to common stockholders
|
$
|
594,499,541
|
|
Net Asset Value per common share
outstanding
|
|
|
|
(net assets
applicable to common stock,
|
|
|
|
divided by
common shares outstanding)
|
$
|
29.89
|
|
Statement of Operations
|
|
|
|
Period From December 1, 2012 through February 28,
2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Investment Income
|
|
|
|
Distributions from master limited partnerships
|
$
|
12,663,410
|
|
Less return of capital on
distributions
|
|
(11,798,015
|
)
|
Net
distributions from master limited partnerships
|
|
865,395
|
|
Dividends from money market mutual
funds
|
|
54
|
|
Total Investment Income
|
|
865,449
|
|
Operating Expenses
|
|
|
|
Advisory fees
|
|
2,158,486
|
|
Administrator fees
|
|
90,830
|
|
Professional fees
|
|
47,289
|
|
Directors fees
|
|
30,490
|
|
Stockholder communication expenses
|
|
25,454
|
|
Fund accounting fees
|
|
17,074
|
|
Registration fees
|
|
13,748
|
|
Custodian fees and
expenses
|
|
10,428
|
|
Franchise fees
|
|
5,977
|
|
Stock transfer agent fees
|
|
4,281
|
|
Other
operating expenses
|
|
21,922
|
|
Total Operating Expenses
|
|
2,425,979
|
|
Leverage Expenses
|
|
|
|
Interest expense
|
|
1,489,809
|
|
Distributions to mandatory redeemable preferred stockholders
|
|
493,755
|
|
Amortization of debt issuance
costs
|
|
60,266
|
|
Other
leverage expenses
|
|
24,891
|
|
Total Leverage Expenses
|
|
2,068,721
|
|
Total Expenses
|
|
4,494,700
|
|
Less fees waived by
Adviser
|
|
(10,823
|
)
|
Net Expenses
|
|
4,483,877
|
|
Net Investment Loss, before Income
Taxes
|
|
(3,618,428
|
)
|
Deferred tax benefit
|
|
1,132,119
|
|
Net Investment Loss
|
|
(2,486,309
|
)
|
Realized and Unrealized Gain on Investments
|
|
|
|
Net realized gain on investments,
before income taxes
|
|
18,698,498
|
|
Deferred tax expense
|
|
(6,877,308
|
)
|
Net realized gain on investments
|
|
11,821,190
|
|
Net
unrealized appreciation of investments, before income taxes
|
|
81,899,271
|
|
Deferred tax expense
|
|
(30,122,553
|
)
|
Net unrealized appreciation of investments
|
|
51,776,718
|
|
Net Realized and Unrealized Gain on
Investments
|
|
63,597,908
|
|
Net
Increase in Net Assets Applicable to Common Stockholders
|
|
|
|
Resulting from
Operations
|
$
|
61,111,599
|
|
See accompanying Notes to
Financial Statements.
8
Tortoise Energy Capital Corp.
Statement of Changes in Net Assets
|
|
Period from
|
|
|
|
|
|
|
|
December 1, 2012
|
|
|
|
|
|
|
|
through
|
|
Year Ended
|
|
February 28,
2013
|
|
November 30,
2012
|
|
(Unaudited)
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
|
|
$
|
(2,486,309
|
)
|
|
|
|
$
|
(11,362,253
|
)
|
|
Net realized gain on
investments
|
|
|
11,821,190
|
|
|
|
|
|
50,079,819
|
|
|
Net
unrealized appreciation of investments
|
|
|
51,776,718
|
|
|
|
|
|
26,987,037
|
|
|
Net increase in net assets applicable to
common
stockholders resulting from operations
|
|
|
61,111,599
|
|
|
|
|
|
65,704,603
|
|
|
Distributions to Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
Return of capital
|
|
|
(8,353,639
|
)
|
|
|
|
|
(32,577,041
|
)
|
|
Capital Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from shelf
offerings of 42,798 and
189,723
common
shares, respectively
|
|
|
1,263,440
|
|
|
|
|
|
5,313,493
|
|
|
Underwriting discounts and offering expenses
associated
with
the issuance of common stock
|
|
|
(12,634
|
)
|
|
|
|
|
(164,695
|
)
|
|
Issuance of 75,921 common
shares from reinvestment
of
distributions
to stockholders
|
|
|
|
|
|
|
|
|
2,085,579
|
|
|
Net increase in net assets applicable to
common
stockholders from capital stock transactions
|
|
|
1,250,806
|
|
|
|
|
|
7,234,377
|
|
|
Total increase in net
assets applicable to common stockholders
|
|
|
54,008,766
|
|
|
|
|
|
40,361,939
|
|
|
Net
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
period
|
|
|
540,490,775
|
|
|
|
|
|
500,128,836
|
|
|
End of
period
|
|
$
|
594,499,541
|
|
|
|
|
$
|
540,490,775
|
|
|
Accumulated net investment
loss, net of income taxes, end of period
|
|
$
|
(77,289,437
|
)
|
|
|
|
$
|
(74,803,128
|
)
|
|
See accompanying Notes to
Financial Statements.
2013 1st Quarter
Report
9
Statement of Cash Flows
Period from December 1, 2012 through
February 28, 2013
|
(Unaudited)
|
|
|
|
|
Cash Flows From Operating
Activities
|
|
|
|
Distributions received from master limited partnerships
|
$
|
12,663,410
|
|
Dividend income received
|
|
56
|
|
Purchases of long-term investments
|
|
(27,511,230
|
)
|
Proceeds from sales of long-term
investments
|
|
27,145,505
|
|
Purchases of short-term investments, net
|
|
(54,965
|
)
|
Interest expense paid
|
|
(1,495,972
|
)
|
Distributions to mandatory redeemable preferred stockholders
|
|
(493,755
|
)
|
Income taxes refunded
|
|
10,250
|
|
Operating expenses paid
|
|
(2,372,692
|
)
|
Net
cash provided by operating activities
|
|
7,890,607
|
|
Cash Flows From Financing Activities
|
|
|
|
Advances from revolving line of
credit
|
|
22,300,000
|
|
Repayments on revolving line of credit
|
|
(31,400,000
|
)
|
Issuance of common stock
|
|
1,263,440
|
|
Common
stock issuance costs
|
|
(54,047
|
)
|
Net
cash used in financing activities
|
|
(7,890,607
|
)
|
Net
change in cash
|
|
|
|
Cash beginning of period
|
|
|
|
Cash
end of period
|
$
|
|
|
Reconciliation of net increase in net assets
applicable to
|
|
|
|
common stockholders
resulting from operations to net cash
|
|
|
|
provided by operating
activities
|
|
|
|
Net
increase in net assets applicable to common
|
|
|
|
stockholders resulting from operations
|
$
|
61,111,599
|
|
Adjustments to reconcile net
increase in net assets
|
|
|
|
applicable to common stockholders resulting from
|
|
|
|
operations to net cash provided by operating activities:
|
|
|
|
Purchases of long-term investments
|
|
(27,511,230
|
)
|
Proceeds from sales of long-term investments
|
|
27,145,505
|
|
Purchases of short-term investments, net
|
|
(54,965
|
)
|
Return of capital on distributions received
|
|
11,798,015
|
|
Deferred tax expense
|
|
35,867,742
|
|
Net unrealized appreciation of investments
|
|
(81,899,271
|
)
|
Net realized gain on investments
|
|
(18,698,498
|
)
|
Amortization of debt issuance costs
|
|
60,266
|
|
Changes in operating assets and liabilities:
|
|
|
|
Decrease in current tax asset
|
|
10,250
|
|
Increase in prepaid expenses and other assets
|
|
(27,429
|
)
|
Increase in payable to Adviser, net of fees waived
|
|
51,979
|
|
Increase in accrued expenses and other liabilities
|
|
36,644
|
|
Total adjustments
|
|
(53,220,992
|
)
|
Net
cash provided by operating activities
|
$
|
7,890,607
|
|
See accompanying Notes to
Financial Statements.
10
Tortoise Energy Capital Corp.
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1,
2012
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Year
Ended
|
|
|
through
|
|
November 30,
|
|
November 30,
|
|
November 30,
|
|
November 30,
|
|
November
30,
|
|
|
February 28, 2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
Data
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset
Value, beginning of period
|
|
$
|
27.23
|
|
|
|
$
|
25.54
|
|
|
$
|
25.27
|
|
|
$
|
19.90
|
|
|
$
|
12.85
|
|
|
$
|
27.84
|
|
Income
(Loss) from Investment Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
(2)(3)
|
|
|
(0.13
|
)
|
|
|
|
(0.58
|
)
|
|
|
(0.75
|
)
|
|
|
(0.60
|
)
|
|
|
(0.20
|
)
|
|
|
(0.89
|
)
|
Net
realized and unrealized gains (losses) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and interest rate swap contracts
(2)(3)
|
|
|
3.21
|
|
|
|
|
3.93
|
|
|
|
2.64
|
|
|
|
7.50
|
|
|
|
8.88
|
|
|
|
(12.05
|
)
|
Total income (loss) from investment operations
|
|
|
3.08
|
|
|
|
|
3.35
|
|
|
|
1.89
|
|
|
|
6.90
|
|
|
|
8.68
|
|
|
|
(12.94
|
)
|
Distributions to Auction Preferred Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
(0.35
|
)
|
Distributions to Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
of capital
|
|
|
(0.42
|
)
|
|
|
|
(1.66
|
)
|
|
|
(1.62
|
)
|
|
|
(1.60
|
)
|
|
|
(1.60
|
)
|
|
|
(1.70
|
)
|
Capital
Stock Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums less underwriting discounts and offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on issuance of common stock
(4)
|
|
|
0.00
|
|
|
|
|
(0.00
|
)
|
|
|
0.00
|
|
|
|
0.07
|
|
|
|
0.01
|
|
|
|
|
|
Net
Asset Value, end of period
|
|
$
|
29.89
|
|
|
|
$
|
27.23
|
|
|
$
|
25.54
|
|
|
$
|
25.27
|
|
|
$
|
19.90
|
|
|
$
|
12.85
|
|
Per common
share market value, end of period
|
|
$
|
32.92
|
|
|
|
$
|
28.57
|
|
|
$
|
26.21
|
|
|
$
|
27.06
|
|
|
$
|
22.38
|
|
|
$
|
11.11
|
|
Total
Investment Return Based on Market Value
(5)
|
|
|
16.77
|
%
|
|
|
|
15.92
|
%
|
|
|
3.10
|
%
|
|
|
29.31
|
%
|
|
|
120.32
|
%
|
|
|
(52.44
|
)%
|
|
Supplemental Data
and Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
applicable to common stockholders,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
end of
period (000s)
|
|
$
|
594,500
|
|
|
|
$
|
540,491
|
|
|
$
|
500,129
|
|
|
$
|
488,835
|
|
|
$
|
356,015
|
|
|
$
|
224,483
|
|
Average
net assets (000s)
|
|
$
|
562,323
|
|
|
|
$
|
527,912
|
|
|
$
|
495,831
|
|
|
$
|
435,781
|
|
|
$
|
289,712
|
|
|
$
|
402,149
|
|
Ratio of
Expenses to Average Net Assets
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
|
1.56
|
%
|
|
|
|
1.54
|
%
|
|
|
1.51
|
%
|
|
|
1.46
|
%
|
|
|
1.51
|
%
|
|
|
1.84
|
%
|
Other
operating expenses
|
|
|
0.19
|
|
|
|
|
0.18
|
|
|
|
0.22
|
|
|
|
0.26
|
|
|
|
0.38
|
|
|
|
0.30
|
|
Fee
waiver
(7)
|
|
|
(0.01
|
)
|
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1.74
|
|
|
|
|
1.72
|
|
|
|
1.73
|
|
|
|
1.72
|
|
|
|
1.89
|
|
|
|
2.14
|
|
Leverage expenses
(8)
|
|
|
1.49
|
|
|
|
|
1.93
|
|
|
|
2.20
|
|
|
|
2.23
|
|
|
|
2.02
|
|
|
|
4.37
|
|
Income
tax expense (benefit)
(9)
|
|
|
25.87
|
|
|
|
|
7.63
|
|
|
|
4.74
|
|
|
|
17.59
|
|
|
|
22.42
|
|
|
|
(28.32
|
)
|
Total expenses
|
|
|
29.10
|
%
|
|
|
|
11.28
|
%
|
|
|
8.67
|
%
|
|
|
21.54
|
%
|
|
|
26.33
|
%
|
|
|
(21.81
|
)%
|
See accompanying Notes to
Financial Statements.
2013 1st Quarter
Report
11
Financial Highlights
(Continued)
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, 2012
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
through
|
|
November 30,
|
|
November 30,
|
|
November 30,
|
|
November 30,
|
|
November 30,
|
|
|
February 28,
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net
investment loss to average net assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before fee
waiver
(6)(8)
|
|
|
|
(1.80
|
)%
|
|
|
|
(2.15
|
)%
|
|
|
(2.93
|
)%
|
|
|
(2.65
|
)%
|
|
|
(1.53
|
)%
|
|
|
(3.67
|
)%
|
Ratio of net investment loss to
average net assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
after
fee waiver
(6)(8)
|
|
|
|
(1.79
|
)%
|
|
|
|
(2.15
|
)%
|
|
|
(2.92
|
)%
|
|
|
(2.65
|
)%
|
|
|
(1.53
|
)%
|
|
|
(3.67
|
)%
|
Portfolio
turnover rate
|
|
|
|
2.93
|
%
|
|
|
|
17.90
|
%
|
|
|
19.37
|
%
|
|
|
12.92
|
%
|
|
|
14.86
|
%
|
|
|
6.44
|
%
|
Short-term borrowings, end of
period (000s)
|
|
|
$
|
8,600
|
|
|
|
$
|
17,700
|
|
|
$
|
12,900
|
|
|
$
|
7,400
|
|
|
$
|
14,600
|
|
|
|
|
|
Long-term debt
obligations, end of period (000s)
|
|
|
$
|
104,100
|
|
|
|
$
|
104,100
|
|
|
$
|
104,100
|
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
Preferred stock, end of period
(000s)
|
|
|
$
|
50,000
|
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
65,000
|
|
|
$
|
60,000
|
|
|
$
|
95,000
|
|
Per common share
amount of long-term debt obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding, end of period
|
|
|
$
|
5.23
|
|
|
|
$
|
5.25
|
|
|
$
|
5.32
|
|
|
$
|
4.65
|
|
|
$
|
5.03
|
|
|
$
|
5.15
|
|
Per common share amount of net
assets, excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
long-term debt obligations, end of period
|
|
|
$
|
35.12
|
|
|
|
$
|
32.48
|
|
|
$
|
30.86
|
|
|
$
|
29.92
|
|
|
$
|
24.93
|
|
|
$
|
18.00
|
|
Asset coverage,
per $1,000 of principal amount of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
long-term debt obligations and
short-term borrowings
(10)
|
|
|
$
|
6,719
|
|
|
|
$
|
5,848
|
|
|
$
|
5,702
|
|
|
$
|
6,686
|
|
|
$
|
4,977
|
|
|
$
|
4,550
|
|
Asset coverage ratio of
long-term debt obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
short-term borrowings
(10)
|
|
|
|
672
|
%
|
|
|
|
585
|
%
|
|
|
570
|
%
|
|
|
669
|
%
|
|
|
498
|
%
|
|
|
455
|
%
|
Asset coverage,
per $25,000 liquidation value per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of auction preferred
stock
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,336
|
|
Asset coverage, per $10
liquidation value per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
mandatory redeemable preferred stock
(11)
|
|
|
$
|
47
|
|
|
|
$
|
41
|
|
|
$
|
40
|
|
|
$
|
40
|
|
|
$
|
32
|
|
|
|
|
|
Asset coverage
ratio of preferred stock
(11)
|
|
|
|
465
|
%
|
|
|
|
415
|
%
|
|
|
399
|
%
|
|
|
401
|
%
|
|
|
316
|
%
|
|
|
221
|
%
|
(1)
|
Information
presented relates to a share of common stock outstanding for the entire
period.
|
(2)
|
The per common
share data for the years ended November 30, 2011, 2010, 2009, and 2008 do
not reflect the change in estimate of investment income and return of
capital, for the respective year. See Note 2C to the financial statements
for further disclosure.
|
(3)
|
The per common
share data for the year ended November 30, 2008 reflects the cumulative
effect of adopting ASC 740-10, which was a $776,852 increase to the
beginning balance of accumulated net investment loss, or $(0.04) per
share.
|
(4)
|
Represents the
premiums on the shelf offerings of less than $0.01 per share, less the
underwriter discount and offering costs of less than $0.01 per share for
the period from December 1, 2012 through February 28, 2013. Represents the
premiums on the shelf offering of less than $0.01 per share, less the
underwriter discount and offering costs of less than $0.01 per share for
the year ended November 30, 2012. Represents the premiums on the shelf
offerings of less than $0.01 per share, less the underwriter discount and
offering costs of less than $0.01 per share for the year ended November
30, 2011. Represents the premiums on the shelf offerings of $0.10 per
share, less the underwriting discount and offering costs of $0.03 per
share for the year ended November 30, 2010. Represents the premiums on the
shelf offerings of $0.02 per share, less the underwriting discount and
offering costs of $0.01 per share for the year ended November 30, 2009.
Amount is less than $0.01 for the period from December 1, 2012 through
February 28, 2013 and for the years ended November 30, 2012 and
2011.
|
(5)
|
Not annualized
for periods less than one full year. Total investment return is calculated
assuming a purchase of common stock at the beginning of the period and a
sale at the closing price on the last day of the period reported
(excluding brokerage commissions). The calculation also assumes
reinvestment of distributions at actual prices pursuant to the Companys
dividend reinvestment plan.
|
(6)
|
Annualized for
periods less than one full year.
|
(7)
|
Less than
0.01% for the years ended November 30, 2012 and 2011.
|
(8)
|
The expense
ratios and net investment loss ratios do not reflect the effect of
distributions to auction preferred stockholders.
|
(9)
|
For the period
from December 1, 2012 through February 28, 2013, the Company accrued
$35,867,742 for net deferred income tax expense. For the year ended
November 30, 2012, the Company accrued $156,831 for net current income tax
expense and $40,105,889 for net deferred income tax expense. For the year
ended November 30, 2011, the Company accrued $490,272 for current income
tax expense and $23,004,007 for net deferred income tax expense. For the
year ended November 30, 2010, the Company accrued $409,606 for net current
income tax expense and $76,240,282 for net deferred income tax expense.
For the year ended November 30, 2009, the Company accrued $302,906 for net
current income tax benefit and $65,242,595 for net deferred income tax
expense. For the year ended November 30, 2008, the Company accrued
$427,891 for net current income tax expense and $114,309,765 for net
deferred income tax benefit.
|
(10)
|
Represents
value of total assets less all liabilities and indebtedness not
represented by long-term debt obligations, short-term borrowings and
preferred stock at the end of the period divided by long-term debt
obligations and short-term borrowings outstanding at the end of the
period.
|
(11)
|
Represents
value of total assets less all liabilities and indebtedness not
represented by long-term debt obligations, short-term borrowings and
preferred stock at the end of the period divided by the sum of long-term
debt obligations, short-term borrowings and preferred stock outstanding at
the end of the period.
|
See accompanying Notes to
Financial Statements.
12
Tortoise Energy Capital Corp.
Notes
to Financial Statements
(Unaudited)
February 28,
2013
|
1. Organization
Tortoise Energy Capital Corporation
(the Company) was organized as a Maryland corporation on March 4, 2005, and is
a non-diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended (the 1940 Act). The Companys investment
objective is to seek a high level of total return with an emphasis on current
distributions to stockholders. The Company seeks to provide its stockholders
with an efficient vehicle to invest in the energy infrastructure sector. The
Company received the proceeds of its initial public offering and commenced
operations on May 31, 2005. The Companys stock is listed on the New York Stock
Exchange under the symbol TYY.
2. Significant Accounting Policies
A. Use of Estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, recognition of distribution income, and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
B. Investment Valuation
The Company primarily owns securities
that are listed on a securities exchange or over-the-counter market. The Company
values those securities at their last sale price on that exchange or
over-the-counter market on the valuation date. If the security is listed on more
than one exchange, the Company uses the price from the exchange that it
considers to be the principal exchange on which the security is traded.
Securities listed on the NASDAQ will be valued at the NASDAQ Official Closing
Price, which may not necessarily represent the last sale price. If there has
been no sale on such exchange or over-the-counter market on such day, the
security will be valued at the mean between the last bid price and last ask
price on such day.
The Company may invest up to 50
percent of its total assets in restricted securities. Restricted securities are
subject to statutory or contractual restrictions on their public resale, which
may make it more difficult to obtain a valuation and may limit the Companys
ability to dispose of them. Investments in restricted securities and other
securities for which market quotations are not readily available will be valued
in good faith by using fair value procedures approved by the Board of Directors.
Such fair value procedures consider factors such as discounts to publicly traded
issues, time until conversion date, securities with similar yields, quality,
type of issue, coupon, duration and rating. If events occur that affect the
value of the Companys portfolio securities before the net asset value has been
calculated (a significant event), the portfolio securities so affected will
generally be priced using fair value procedures.
An equity security of a publicly
traded company acquired in a direct placement transaction may be subject to
restrictions on resale that can affect the securitys liquidity and fair value.
Such securities that are
convertible or
otherwise will become freely tradable will be valued based on the market value
of the freely tradable security less an applicable discount. Generally, the
discount will initially be equal to the discount at which the Company purchased
the securities. To the extent that such securities are convertible or otherwise
become freely tradable within a time frame that may be reasonably determined, an
amortization schedule may be used to determine the discount.
The Company generally values debt
securities at prices based on market quotations for such securities, except
those securities purchased with 60 days or less to maturity are valued on the
basis of amortized cost, which approximates market value.
C. Security Transactions and
Investment Income
Security transactions are accounted
for on the date the securities are purchased or sold (trade date). Realized
gains and losses are reported on an identified cost basis. Interest income is
recognized on the accrual basis, including amortization of premiums and
accretion of discounts. Dividend and distribution income is recorded on the
ex-dividend date. Distributions received from the Companys investments in
master limited partnerships (MLPs) generally are comprised of ordinary income
and return of capital from the MLPs. The Company allocates distributions between
investment income and return of capital based on estimates made at the time such
distributions are received. Such estimates are based on information provided by
each MLP and other industry sources. These estimates may subsequently be revised
based on actual allocations received from MLPs after their tax reporting periods
are concluded, as the actual character of these distributions is not known until
after the fiscal year end of the Company.
For the period from December 1, 2012
through February 28, 2013, the Company estimated the allocation of investment
income and return of capital for the distributions received from MLPs within the
Statement of Operations. For this period, the Company has estimated
approximately 7 percent as investment income and approximately 93 percent as
return of capital.
D. Distributions to Stockholders
Distributions to common stockholders
are recorded on the ex-dividend date. The Company may not declare or pay
distributions to its common stockholders if it does not meet asset coverage
ratios required under the 1940 Act or the rating agency guidelines for its debt
and preferred stock following such distribution. The character of distributions
to common stockholders made during the year may differ from their ultimate
characterization for federal income tax purposes. For book purposes, the source
of the Companys distributions to common stockholders for the year ended
November 30, 2012 and the period ended February 28, 2013 was 100 percent return
of capital. For tax purposes, the Companys distributions to common stockholders
for the year ended November 30, 2012 were 100 percent qualified dividend income.
The tax character of distributions paid to common stockholders in the current
year will be determined subsequent to November 30, 2013.
2013 1st Quarter
Report
13
Notes
to Financial Statements
(Unaudited)
(Continued)
|
Distributions to mandatory redeemable
preferred (MRP) stockholders are accrued daily based on a fixed annual rate
and are paid on the first business day of each month. The Company may not
declare or pay distributions to its preferred stockholders if it does not meet a
200 percent asset coverage ratio for its debt or the rating agency basic
maintenance amount for the debt following such distribution. The character of
distributions to MRP stockholders made during the year may differ from their
ultimate characterization for federal income tax purposes. For book purposes,
the source of the Companys distributions to MRP stockholders for the year ended
November 30, 2012 and the period ended February 28, 2013 was 100 percent return
of capital. For tax purposes, the Companys distributions to MRP stockholders
for the year ended November 30, 2012 were 100 percent qualified dividend income.
The tax character of distributions paid to MRP stockholders in the current year
will be determined subsequent to November 30, 2013.
E. Federal Income
Taxation
The Company, as a corporation, is
obligated to pay federal and state income tax on its taxable income. Currently,
the highest regular marginal federal income tax rate for a corporation is 35
percent. The Company may be subject to a 20 percent federal alternative minimum
tax (AMT) on its federal alternative minimum taxable income to the extent that
its AMT exceeds its regular federal income tax.
The Company invests its assets
primarily in MLPs, which generally are treated as partnerships for federal
income tax purposes. As a limited partner in the MLPs, the Company reports its
allocable share of the MLPs taxable income in computing its own taxable income.
The Companys tax expense or benefit is included in the Statement of Operations
based on the component of income or gains (losses) to which such expense or
benefit relates. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation
allowance is recognized if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred income tax asset
will not be realized.
F. Offering and Debt Issuance
Costs
Offering costs related to the
issuance of common and preferred stock are charged to additional paid-in capital
when the stock is issued. Debt issuance costs related to long-term debt
obligations and MRP Stock are capitalized and amortized over the period the debt
and MRP Stock is outstanding.
G. Derivative Financial
Instruments
The Company may use derivative
financial instruments (principally interest rate swap contracts) in an attempt
to manage interest rate risk. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company does not hold or issue
derivative financial instruments for speculative purposes. All derivative
financial instruments are recorded at fair
value with changes in fair value during the reporting period, and amounts
accrued under the agreements, included as unrealized gains or losses in the
accompanying Statement of Operations. Monthly cash settlements under the terms
of the derivative instruments and termination of such contracts are recorded as
realized gains or losses in the accompanying Statement of Operations. The
Company did not hold any derivative financial instruments during the period
ended February 28, 2013.
H. Indemnifications
Under the Companys organizational
documents, its officers and directors are indemnified against certain
liabilities arising out of the performance of their duties to the Company. In
addition, in the normal course of business, the Company may enter into contracts
that provide general indemnifications to other parties. The Companys maximum
exposure under these arrangements is unknown, as this would involve future
claims that may be made against the Company that have not yet occurred, and may
not occur. However, the Company has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
I. Recent Accounting
Pronouncements
In December 2011, the FASB issued ASU
2011-11 Balance Sheet (Topic 210) Disclosures about Offsetting Assets and
Liabilities. ASU 2011-11 requires new disclosures for recognized financial
instruments and derivative instruments that are either offset on the balance
sheet in accordance with the offsetting guidance in ASC 210-20-45 or ASC
815-10-45 or are subject to enforceable master netting arrangement or similar
arrangement. ASU 2011-11 is effective for periods beginning on or after January
1, 2013 and must be applied retrospectively. Management is currently evaluating
the impact of these amendments on the financial statements.
3. Concentration of Risk
Under normal circumstances, the
Company will have at least 80 percent of its net assets, plus any borrowings for
investment purposes, invested in equity securities of entities in the energy
sector and at least 80 percent of its total assets in equity securities of MLPs
and their affiliates in the energy infrastructure sector. The Company will not
invest more than 15 percent of its total assets in any single issuer as of the
time of purchase. The Company may invest up to 50 percent of its total assets in
restricted securities, all of which may be illiquid securities. The Company may
invest up to 20 percent of its total assets in debt securities, including
securities rated below investment grade. In determining application of these
policies, the term total assets includes assets obtained through leverage.
Companies that primarily invest in a particular sector may experience greater
volatility than companies investing in a broad range of industry sectors. The
Company may, for defensive purposes, temporarily invest all or a significant
portion of its assets in investment grade securities, short-term debt securities
and cash or cash equivalents. To the extent the Company uses this strategy, it
may not achieve its investment objective.
14
Tortoise Energy Capital Corp.
Notes
to Financial Statements
(Unaudited)
(Continued)
|
4. Agreements
The Company has entered into an
Investment Advisory Agreement with Tortoise Capital Advisors, L.L.C. (the
Adviser). Under the terms of the agreement, the Company pays the Adviser a fee
equal to an annual rate of 0.95 percent of the Companys average monthly total
assets (including any assets attributable to leverage and excluding any net
deferred tax asset) minus accrued liabilities (other than net deferred tax
liability, debt entered into for purposes of leverage and the aggregate
liquidation preference of outstanding preferred stock) (Managed Assets), in
exchange for the investment advisory services provided. The Adviser has
contractually agreed to waive all fees due under the Investment Advisory
Agreement related to the net proceeds received from the issuance of additional
common stock under the at-the-market equity program for a six month period
following the date of issuance.
U.S. Bancorp Fund Services, LLC
serves as the Companys administrator. The Company pays the administrator a
monthly fee computed at an annual rate of 0.04 percent of the first
$1,000,000,000 of the Companys Managed Assets, 0.01 percent on the next
$500,000,000 of Managed Assets and 0.005 percent on the balance of the Companys
Managed Assets.
Computershare Trust Company, N.A.
serves as the Companys transfer agent and registrar and Computershare Inc.
serves as the Companys dividend paying agent and agent for the automatic
dividend reinvestment plan.
U.S. Bank, N.A. serves as the
Companys custodian. The Company pays the custodian a monthly fee computed at an
annual rate of 0.004 percent of the Companys portfolio assets, plus portfolio
transaction fees.
5. Income Taxes
Deferred income taxes reflect the net
tax effect of temporary differences between the carrying amount of assets and
liabilities for financial reporting and tax purposes. Components of the
Companys deferred tax assets and liabilities as of February 28, 2013, are as
follows:
Deferred tax
assets:
|
|
|
Net
operating loss carryforwards
|
$
|
11,751,037
|
AMT credit
|
|
687,987
|
Organization costs
|
|
10,879
|
|
|
12,449,903
|
Deferred tax
liabilities:
|
|
|
Basis reduction of investment in
MLPs
|
|
55,525,075
|
Net
unrealized gains on investment securities
|
|
167,370,943
|
|
|
222,896,018
|
Total net
deferred tax liability
|
$
|
210,446,115
|
At February 28, 2013, a valuation
allowance on deferred tax assets was not deemed necessary because the Company
believes it is more likely than not that there is an ability to realize its
deferred tax assets through future taxable
income. Any adjustments to the Companys estimates of future taxable
income will be made in the period such determination is made. The Company
recognizes the tax benefits of uncertain tax positions only when the position is
more likely than not to be sustained upon examination by the tax authorities
based on the technical merits of the tax position. The Companys policy is to
record interest and penalties on uncertain tax positions as part of tax expense.
As of February 28, 2013, the Company had no uncertain tax positions and no
penalties and interest were accrued. All tax years since inception remain open
to examination by federal and state tax authorities.
Total income tax expense differs from
the amount computed by applying the federal statutory income tax rate of 35
percent to net investment loss and net realized and unrealized gains on
investments for the period ended February 28, 2013, as follows:
Application of
statutory income tax rate
|
$
|
33,942,769
|
State income taxes, net of
federal tax benefit
|
|
1,726,233
|
Nondeductible
payments on preferred stock
|
|
198,740
|
Total income tax
expense
|
$
|
35,867,742
|
Total income taxes are computed by
applying the federal statutory rate plus a blended state income tax rate.
For the period from December 1, 2012
through February 28, 2013, the components of income tax expense include deferred
federal and state income tax expense (net of federal tax benefit) of $34,131,890
and $1,735,852, respectively.
As of November 30, 2012, the Company
had a net operating loss for federal income tax purposes of approximately
$15,453,000. The net operating loss may be carried forward for 20 years. If not
utilized, this net operating loss will expire as follows: $4,355,000, $31,000,
$10,079,000, $958,000 and $30,000 in the years ending November 30, 2027, 2028,
2029, 2030 and 2031, respectively. The amount of deferred tax asset for net
operating losses at February 28, 2013 includes amounts for the period from
December 1, 2012 through February 28, 2013. As of November 30, 2012, the Company
estimated that it utilized its capital loss carryforward of approximately
$23,000,000. Such estimate is subject to revision upon receipt of the 2012 tax
reporting information from the individual MLPs. For corporations, capital losses
can only be used to offset capital gains and cannot be used to offset ordinary
income. As of November 30, 2012, an AMT credit of $687,987 was available, which
may be credited in the future against regular income tax. This credit may be
carried forward indefinitely.
As of February 28, 2013, the
aggregate cost of securities for federal income tax purposes was $371,510,708.
The aggregate gross unrealized appreciation for all securities in which there
was an excess of fair value over tax cost was $606,025,061, the aggregate gross
unrealized depreciation for all securities in which there was an excess of tax
cost over fair value was $0 and the net unrealized appreciation was
$606,025,061.
2013 1st Quarter
Report
15
Notes
to Financial Statements
(Unaudited)
(Continued)
|
6. Fair Value of Financial
Instruments
Various inputs are used in
determining the value of the Companys investments. These inputs are summarized
in the three broad levels listed below:
|
Level 1
|
quoted prices in
active markets for identical investments
|
|
|
|
|
Level 2
|
other
significant observable inputs (including quoted prices for similar
investments, market corroborated inputs, etc.)
|
|
|
|
|
Level 3
|
significant
unobservable inputs (including the Companys own assumptions in
determining the fair value of investments)
|
The inputs or methodology used for
valuing securities are not necessarily an indication of the risk associated with
investing in those securities.
The following table provides the fair
value measurements of applicable Company assets by level within the fair value
hierarchy as of February 28, 2013. These assets are measured on a recurring
basis.
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
|
Description
|
|
February 28,
2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Limited
Partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Related Companies
(a)
|
|
|
$
|
977,392,519
|
|
|
$
|
972,429,655
|
|
$
|
4,962,864
|
|
$
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term
Investment
(b)
|
|
|
|
143,250
|
|
|
|
143,250
|
|
|
|
|
|
|
Total Assets
|
|
|
$
|
977,535,769
|
|
|
$
|
972,572,905
|
|
$
|
4,962,864
|
|
$
|
|
(a)
|
All other
industry classifications are identified in the Schedule of
Investments.
|
(b)
|
Short-term
investment is a sweep investment for cash balances in the Company at
February 28, 2013.
|
The Company did not hold any Level 3
securities during the period from December 1, 2012 through February 28,
2013.
Valuation
Techniques
In general, and where applicable, the
Company uses readily available market quotations based upon the last updated
sales price from the principal market to determine fair value. This pricing
methodology applies to the Companys Level 1 investments.
An equity security of a publicly
traded company acquired in a private placement transaction without registration
under the Securities Act of 1933, as amended (the 1933 Act), is subject to
restrictions on resale that can affect the securitys fair value. If such a
security is convertible into publicly-traded common shares, the security
generally will be valued at the common share market price adjusted by a
percentage discount due to the restrictions and categorized as Level 2 in the
fair value hierarchy. If the security has characteristics that are dissimilar to
the class of security that trades on the
open market, the security will generally be valued and categorized as
Level 3 in the fair value hierarchy.
The Company utilizes the beginning of
reporting period method for determining transfers between levels. There were no
transfers between levels for the period ended February 28, 2013.
7. Restricted
Security
Certain of the Companys investments
are restricted and are valued as determined in accordance with procedures
established by the Board of Directors, as more fully described in Note 2. The
table below shows the number of units held, acquisition date, acquisition cost,
fair value, fair value per share and percent of net assets which the security
comprises at February 28, 2013.
|
|
|
|
|
|
|
|
|
|
|
Fair Value as
|
|
Number of
|
|
Acquisition
|
|
Acquisition
|
|
|
|
Fair Value
|
|
Percent of
|
Investment Security
|
Shares
|
|
Date
|
|
Cost
|
|
Fair Value
|
|
Per Share
|
|
Net Assets
|
Inergy
Midstream, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
Unregistered Common Units
|
214,286
|
|
12/7/12
|
|
$4,500,006
|
|
$4,962,864
|
|
$23.16
|
|
0.8%
|
The carrying value per unit of
unrestricted common units of Inergy Midstream, L.P. was $23.10 on November 3,
2012, the date of the purchase agreement and the date an enforceable right to
acquire the restricted Inergy Midstream, L.P. units was obtained by the
Company.
8. Investment
Transactions
For the period from December 1, 2012
through February 28, 2013, the Company purchased (at cost) and sold securities
(proceeds received) in the amount of $27,511,230 and $27,145,505 (excluding
short-term debt securities), respectively.
9. Long-Term Debt
Obligations
The Company has $104,100,000
aggregate principal amount of private senior notes, Series D, Series F, Series
G, Series H, and Series I (collectively, the Notes), outstanding. The Notes
are unsecured obligations of the Company and, upon liquidation, dissolution or
winding up of the Company, will rank: (1) senior to all of the Companys
outstanding preferred shares; (2) senior to all of the Companys outstanding
common stock; (3) on parity with any unsecured creditors of the Company and any
unsecured senior securities representing indebtedness of the Company and (4)
junior to any secured creditors of the Company. Holders of the Notes are
entitled to receive cash interest payments each quarter until maturity. The
Series D, Series F, Series H and Series I Notes accrue interest at fixed rates
and the Series G Notes accrue interest at an annual rate that resets each
quarter based on 3-month LIBOR plus 1.35 percent. The Notes are not listed on
any exchange or automated quotation system.
16
Tortoise Energy Capital Corp.
Notes
to Financial Statements
(Unaudited)
(Continued)
|
The Notes are redeemable in certain
circumstances at the option of the Company. The Notes are also subject to a
mandatory redemption if the Company fails to meet asset coverage ratios required
under the 1940 Act or the rating agency guidelines if such failure is not waived
or cured. At February 28, 2013, the Company was in compliance with asset
coverage covenants and basic maintenance covenants for its senior
notes.
The estimated fair value of each
series of fixed-rate Notes was calculated, for disclosure purposes, by
discounting future cash flows by a rate equal to the current U.S. Treasury rate
with an equivalent maturity date, plus either 1) the spread between the interest
rate on recently issued debt and the U.S. Treasury rate with a similar maturity
date or 2) if there has not been a recent debt issuance, the spread between the
AAA corporate finance debt rate and the U.S. Treasury rate with an equivalent
maturity date plus the spread between the fixed rates of the Notes and the AAA
corporate finance debt rate. The estimated fair value of the Series G Notes
approximates the carrying amount because the interest rate fluctuates with
changes in interest rates available in the current market. The estimated fair
values in the table below are Level 2 valuations within the fair value
hierarchy. The following table shows the maturity date, interest rate,
notional/carrying amount and estimated fair value for each series of Notes
outstanding at February 28, 2013.
|
|
|
|
|
|
|
Notional/
|
|
|
|
|
|
Maturity
|
|
Interest
|
|
Carrying
|
|
Estimated
|
Series
|
|
Date
|
|
Rate
|
|
Amount
|
|
Fair Value
|
Series D
|
|
December 21, 2014
|
|
6.07%
|
|
|
$
|
39,400,000
|
|
$
|
42,504,081
|
Series F
|
|
June 17, 2013
|
|
6.02%
|
|
|
|
34,700,000
|
|
|
35,519,660
|
Series G
|
|
June 15, 2014
|
|
1.66%
|
(1)
|
|
|
5,000,000
|
|
|
5,000,000
|
Series H
|
|
June 15, 2016
|
|
3.88%
|
|
|
|
12,500,000
|
|
|
13,163,004
|
Series I
|
|
June 15, 2018
|
|
4.55%
|
|
|
|
12,500,000
|
|
|
13,647,909
|
|
|
|
|
|
|
|
$
|
104,100,000
|
|
$
|
109,834,654
|
(1)
|
Floating rate;
rate effective for period from December 15, 2012 through March 15, 2013.
The weighted-average interest rate for the period from December 1, 2012
through February 28, 2013 was 1.67 percent.
|
10. Preferred Stock
The Company has 10,000,000 shares of
preferred stock authorized. Of that amount, the Company has 5,000,000 authorized
shares of Mandatory Redeemable Preferred (MRP) C Stock and all 5,000,000
shares are outstanding at February 28, 2013. The MRP C Stock has a liquidation
value of $10.00 per share plus any accumulated but unpaid distributions, whether
or not declared, and is mandatorily redeemable on May 1, 2018. The MRP C Stock
pays cash distributions on the first business day of each month at an annual
rate of 3.95 percent. The shares of MRP C Stock trade on the NYSE under the
symbol TYY Pr C.
The MRP Stock has rights determined
by the Board of Directors. Except as otherwise indicated in the Companys
Charter or Bylaws, or as otherwise required by law, the holders of MRP Stock
have voting rights equal to the holders of common stock (one vote per MRP share)
and will vote together with the holders of shares of common stock as a single
class except on matters affecting only the holders of preferred stock or the
holders of common stock. The 1940 Act requires that the holders of any preferred
stock (including MRP Stock), voting separately as a single class, have the right
to elect at least two directors at all times.
At February 28, 2013, the estimated
fair value of the MRP C Stock is based on the closing market price of $10.13 per
share and is a Level 1 valuation within the fair value hierarchy. The following
table shows the mandatory redemption date, fixed rate, number of shares
outstanding, aggregate liquidation preference and estimated fair value as of
February 28, 2013.
|
|
Mandatory
|
|
|
|
|
|
Aggregate
|
|
|
|
|
Redemption
|
|
Fixed
|
|
Shares
|
|
Liquidation
|
|
Estimated
|
Series
|
|
Date
|
|
Rate
|
|
Outstanding
|
|
Preference
|
|
Fair Value
|
MRP C
Stock
|
|
May 1, 2018
|
|
3.95%
|
|
5,000,000
|
|
$50,000,000
|
|
$50,650,000
|
The MRP Stock is redeemable in
certain circumstances at the option of the Company. Under the Investment Company
Act of 1940, the Company may not declare dividends or make other distributions
on shares of common stock or purchases of such shares if, at the time of the
declaration, distribution or purchase, asset coverage with respect to the
outstanding MRP Stock would be less than 200 percent. The MRP Stock is also
subject to a mandatory redemption if the Company fails to meet an asset coverage
ratio of at least 225 percent as determined in accordance with the 1940 Act or a
rating agency basic maintenance amount if such failure is not waived or cured.
At February 28, 2013, the Company was in compliance with asset coverage
covenants and basic maintenance covenants for its MRP Stock.
11. Credit Facility
As of February 28, 2013, the Company
had a $40,000,000 unsecured, revolving credit facility that matures on June 17,
2013. U.S. Bank, N.A. serves as a lender and the lending syndicate agent on
behalf of other lenders participating in the credit facility. Outstanding
balances generally will accrue interest at a variable annual rate equal to
one-month LIBOR plus 1.25 percent and unused portions of the credit facility
will accrue a non-usage fee equal to an annual rate of 0.20 percent.
The average principal balance and
interest rate for the period during which the credit facility was utilized
during the period ended February 28, 2013 was approximately $20,800,000 and 1.46
percent, respectively. At February 28, 2013, the principal balance outstanding
was $8,600,000 at an interest rate of 1.45 percent.
2013 1st Quarter
Report
17
Notes
to Financial Statements
(Unaudited)
(Continued)
|
Under the terms of the credit
facility, the Company must maintain asset coverage required under the 1940 Act.
If the Company fails to maintain the required coverage, it may be required to
repay a portion of an outstanding balance until the coverage requirement has
been met. At February 28, 2013, the Company was in compliance with the terms of
the credit facility.
12. Common Stock
The Company has 100,000,000 shares of
capital stock authorized and 19,889,616 shares outstanding at February 28, 2013.
Transactions in common stock for the period ended February 28, 2013, were as
follows:
Shares at
November 30, 2012
|
19,846,818
|
Shares sold through shelf
offerings
|
42,798
|
Shares at
February 28, 2013
|
19,889,616
|
13. Subsequent
Events
On March 1, 2013, the Company paid a
distribution in the amount of $0.42 per common share, for a total of $8,353,639.
Of this total, the dividend reinvestment amounted to $648,958.
The Company has performed an
evaluation of subsequent events through the date the financial statements were
issued and has determined that no additional items require recognition or
disclosure.
18
Tortoise Energy Capital Corp.
Additional Information
(Unaudited)
|
Director and Officer
Compensation
The Company does not compensate any
of its directors who are interested persons, as defined in Section 2(a)(19) of
the 1940 Act, nor any of its officers. For the period ended February 28, 2013,
the aggregate compensation paid by the Company to the independent directors was
$27,250. The Company did not pay any special compensation to any of its
directors or officers.
Forward-Looking
Statements
This report contains forward-looking
statements within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934. By their nature, all forward-looking statements involve
risks and uncertainties, and actual results could differ materially from those
contemplated by the forward-looking statements. Several factors that could
materially affect the Companys actual results are the performance of the
portfolio of investments held by it, the conditions in the U.S. and
international financial, petroleum and other markets, the price at which shares
of the Company will trade in the public markets and other factors discussed in
filings with the SEC.
Proxy Voting
Policies
A description of the policies and
procedures that the Company uses to determine how to vote proxies relating to
portfolio securities owned by the Company and information regarding how the
Company voted proxies relating to the portfolio of securities during the
12-month period ended June 30, 2012 are available to stockholders (i) without
charge, upon request by calling the Company at (913) 981-1020 or toll-free at
(866) 362-9331 and on the Companys Web site at www.tortoiseadvisors.com; and
(ii) on the SECs Web site at www.sec.gov.
Form N-Q
The Company files its complete
schedule of portfolio holdings for the first and third quarters of each fiscal
year with the SEC on Form N-Q. The Companys Form N-Q is available without
charge upon request by calling the Company at (866) 362-9331 or by visiting the
SECs Web site at www.sec.gov. In addition, you may review and copy the
Companys Form N-Q at the SECs Public Reference Room in Washington D.C. You may
obtain information on the operation of the Public Reference Room by calling
(800) SEC-0330.
The Companys Form N-Qs are also
available on the Companys Web site at www.tortoiseadvisors.com.
Statement of Additional
Information
The Statement of Additional
Information (SAI) includes additional information about the Companys
directors and is available upon request without charge by calling the Company at
(866) 362-9331 or by visiting the SECs Web site at www.sec.gov.
Certifications
The Companys Chief Executive Officer
has submitted to the New York Stock Exchange the annual CEO certification as
required by Section 303A.12(a) of the NYSE Listed Company Manual.
The Company has filed with the SEC,
as an exhibit to its most recently filed N-CSR, the certification of its Chief
Executive Officer and Chief Financial Officer required by Section 302 of the
Sarbanes-Oxley Act.
Privacy Policy
In order to conduct its business, the
Company collects and maintains certain nonpublic personal information about its
stockholders of record with respect to their transactions in shares of the
Companys securities. This information includes the stockholders address, tax
identification or Social Security number, share balances, and distribution
elections. We do not collect or maintain personal information about stockholders
whose share balances of our securities are held in street name by a financial
institution such as a bank or broker.
We do not disclose any nonpublic
personal information about you, the Companys other stockholders or the
Companys former stockholders to third parties unless necessary to process a
transaction, service an account, or as otherwise permitted by law.
To protect your personal information
internally, we restrict access to nonpublic personal information about the
Companys stockholders to those employees who need to know that information to
provide services to our stockholders. We also maintain certain other safeguards
to protect your nonpublic personal information.
2013 1st Quarter
Report
19
Office
of the Company and
of the Investment
Adviser
Tortoise Capital
Advisors, L.L.C.
11550 Ash Street, Suite 300
Leawood, Kan. 66211
(913) 981-1020
(913) 981-1021 (fax)
www.tortoiseadvisors.com
Managing
Directors of
Tortoise Capital Advisors, L.L.C.
P. Bradley Adams
H. Kevin Birzer
Zachary A.
Hamel
Kenneth P. Malvey
Terry Matlack
David J.
Schulte
Board of
Directors of
Tortoise Energy Capital Corp.
H. Kevin Birzer,
Chairman
Tortoise Capital
Advisors, L.L.C.
Terry
Matlack
Tortoise Capital
Advisors, L.L.C.
Conrad S.
Ciccotello
Independent
John R.
Graham
Independent
Charles E.
Heath
Independent
|
ADMINISTRATOR
U.S. Bancorp Fund Services, LLC
615 East Michigan
St.
Milwaukee, Wis.
53202
CUSTODIAN
U.S. Bank, N.A.
1555 North
Rivercenter Drive, Suite 302
Milwaukee, Wis. 53212
TRANSFER, DIVIDEND DISBURSING
AND REINVESTMENT
AGENT
Computershare
Trust Company, N.A. / Computershare Inc.
P.O. Box 43078
Providence, R.I. 02940-3078
(800) 426-5523
www.computershare.com
LEGAL
COUNSEL
Husch Blackwell
LLP
4801 Main St.
Kansas City, Mo. 64112
INVESTOR
RELATIONS
(866) 362-9331
info@tortoiseadvisors.com
STOCK
SYMBOL
Listed NYSE
Symbol: TYY
This report is for stockholder
information. This is not a prospectus intended for use in the purchase or
sale of fund shares.
Past
performance is no guarantee of future results and your investment may be
worth more or less at the time you
sell.
|
Tortoise
Capital Advisors Closed-end Funds
Pureplay MLP
Funds
|
|
Broader
Funds
|
Name
|
Ticker
|
|
Focus
|
Total
Assets
(1)
($ in
millions)
|
|
Name
|
Ticker
|
|
Focus
|
Total
Assets
(1)
($ in
millions)
|
Tortoise Energy
Infrastructure Corp.
|
|
|
Midstream Equity
|
$2,029
|
|
Tortoise Pipeline &
Energy Fund, Inc.
|
|
|
Pipeline Equity
|
$382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tortoise Energy
Capital Corp.
|
|
|
Midstream Equity
|
$1,040
|
|
Tortoise Energy
Independence
Fund, Inc.
|
|
|
North American Upstream Equity
|
$412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tortoise MLP
Fund, Inc.
|
|
|
Natural Gas Infrastructure
Equity
|
$1,893
|
|
Tortoise Power and
Energy Infrastructure
Fund,
Inc.
|
|
|
Power & Energy Infrastructure Debt &
Dividend Paying Equity
|
$237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tortoise North
American Energy Corp.
|
|
|
Midstream/Upstream Equity
|
$258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tortoise (NYSE:TYY)
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Tortoise (NYSE:TYY)
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