Attached files
file | filename |
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EX-32.1 - OHA Investment Corp | v165082_ex32-1.htm |
EX-32.2 - OHA Investment Corp | v165082_ex32-2.htm |
EX-31.1 - OHA Investment Corp | v165082_ex31-1.htm |
EX-31.2 - OHA Investment Corp | v165082_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
to
Commission
file number: 814-00672
NGP
Capital Resources Company
(Exact
name of registrant as specified in its charter)
Maryland
|
20-1371499
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
1221 McKinney Street, Suite 2975
Houston, Texas
|
77010
|
(Address of principal executive offices)
|
(Zip Code)
|
(713)
752-0062
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer þ
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do
not check if smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
As of
November 5, 2009, there were 21,628,202 shares of the registrant’s common stock
outstanding.
TABLE OF
CONTENTS
PART
I - FINANCIAL INFORMATION
|
1 |
Item
1. Consolidated Financial Statements
|
1 |
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
26 |
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
33 |
Item
4. Controls and Procedures
|
33 |
PART
II – OTHER INFORMATION
|
35 |
Item
1. Legal Proceedings
|
35 |
Item
1A. Risk Factors
|
35 |
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
35 |
Item
3. Defaults Upon Senior Securities
|
35 |
Item
4. Submission of Matters to a Vote of Security Holders
|
35 |
Item
5. Other Information
|
35 |
Item
6. Exhibits
|
35 |
PART
I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements.
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
BALANCE SHEETS
September 30, 2009
|
December 31, 2008
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Investments
in portfolio securities at fair value
|
||||||||
(cost:
$257,026,622 and $294,432,215, respectively)
|
$ | 193,728,176 | $ | 244,229,568 | ||||
Investments
in corporate notes at fair value
|
||||||||
(cost:
$11,551,596 and $11,586,899, respectively)
|
8,697,900 | 6,350,000 | ||||||
Investments
in commodity derivative instruments at fair value
|
||||||||
(cost:
$140,825 and $774,095, respectively)
|
616,053 | 8,212,872 | ||||||
Total
investments
|
203,042,129 | 258,792,440 | ||||||
Cash
and cash equivalents
|
83,506,819 | 133,805,575 | ||||||
Interest
receivable
|
1,095,418 | 2,410,360 | ||||||
Prepaid
assets and other current assets
|
1,146,045 | 1,940,282 | ||||||
Deferred
tax assets
|
7,033,472 | 200,000 | ||||||
Total
current assets
|
92,781,754 | 138,356,217 | ||||||
Deferred
tax assets
|
- | 3,600,000 | ||||||
Total
assets
|
$ | 295,823,883 | $ | 400,748,657 | ||||
Liabilities
and stockholders' equity (net assets)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 674,190 | $ | 512,926 | ||||
Management
and incentive fees payable
|
1,540,756 | 2,016,214 | ||||||
Dividends
payable
|
3,244,230 | 8,867,563 | ||||||
Income
taxes payable
|
93,787 | 3,529,308 | ||||||
Current
portion of long-term debt
|
40,000,000 | 75,000,000 | ||||||
Total
current liabilities
|
45,552,963 | 89,926,011 | ||||||
Deferred
tax liabilities
|
854,605 | - | ||||||
Long-term
debt, less current portion
|
- | 45,000,000 | ||||||
Total
liabilities
|
46,407,568 | 134,926,011 | ||||||
Commitments
and contingencies (Note 8)
|
||||||||
Stockholders’
equity (net assets)
|
||||||||
Common
stock, $.001 par value, 250,000,000 shares authorized;
|
||||||||
21,628,202
shares issued and outstanding
|
21,628 | 21,628 | ||||||
Paid-in
capital in excess of par
|
315,184,191 | 315,184,191 | ||||||
Undistributed
net investment income (loss)
|
(2,096,939 | ) | (3,420,716 | ) | ||||
Undistributed
net realized capital gain (loss)
|
1,984,349 | 2,038,312 | ||||||
Net
unrealized appreciation (depreciation) of portfolio
securities,
|
||||||||
corporate
notes and commodity derivative instruments
|
(65,676,914 | ) | (48,000,769 | ) | ||||
Total
stockholders’ equity (net assets)
|
249,416,315 | 265,822,646 | ||||||
Total
liabilities and stockholders' equity (net assets)
|
$ | 295,823,883 | $ | 400,748,657 | ||||
Net
asset value per share
|
$ | 11.53 | $ | 12.29 |
(See
accompanying notes to consolidated financial statements)
1
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||||||||||
September
30, 2009
|
September
30, 2008
|
September
30, 2009
|
September
30, 2008
|
|||||||||||||
Investment
income
|
||||||||||||||||
Interest
income
|
$ | 6,091,199 | $ | 7,638,673 | $ | 18,658,074 | $ | 24,168,913 | ||||||||
Royalty
income (loss), net of amortization
|
(927,004 | ) | 2,452,763 | (4,595,107 | ) | 3,573,202 | ||||||||||
Commodity
derivative income, net of expired options
|
829,946 | (274,625 | ) | 5,884,027 | (274,625 | ) | ||||||||||
Other
income
|
27,526 | 52,877 | 144,264 | 137,767 | ||||||||||||
Total
investment income
|
6,021,667 | 9,869,688 | 20,091,258 | 27,605,257 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Management
fees
|
1,540,756 | 1,944,869 | 5,021,782 | 5,583,084 | ||||||||||||
Incentive
fees
|
- | 2,526,011 | - | 2,526,011 | ||||||||||||
Professional
fees
|
214,591 | 174,150 | 701,217 | 607,519 | ||||||||||||
Insurance
expense
|
199,959 | 198,812 | 600,140 | 596,442 | ||||||||||||
Interest
expense and fees
|
446,600 | 1,470,091 | 2,541,151 | 5,351,738 | ||||||||||||
State
and excise taxes
|
30,047 | - | 42,732 | 32,712 | ||||||||||||
Other
general and administrative expenses
|
718,585 | 690,152 | 2,261,123 | 2,134,624 | ||||||||||||
Total
operating expenses
|
3,150,538 | 7,004,085 | 11,168,145 | 16,832,130 | ||||||||||||
Net
investment income (loss) before income taxes
|
2,871,129 | 2,865,603 | 8,923,113 | 10,773,127 | ||||||||||||
Benefit
(provision) for income taxes
|
847,254 | 1,400,000 | 2,565,919 | 1,392,808 | ||||||||||||
Net
investment income (loss)
|
3,718,383 | 4,265,603 | 11,489,032 | 12,165,935 | ||||||||||||
Net
realized capital gain (loss) on investments
|
||||||||||||||||
Net
realized capital gain (loss) on portfolio securities, corporate
notes and commodity derivative instruments
|
- | 18,301,090 | (53,963 | ) | 18,301,090 | |||||||||||
Benefit
(provision) for taxes on capital gain
|
- | (4,300,000 | ) | - | (4,300,000 | ) | ||||||||||
Total
net realized capital gain (loss) on investments
|
- | 14,001,090 | (53,963 | ) | 14,001,090 | |||||||||||
Net
increase (decrease) in unrealized appreciation (depreciation) on
portfolio securities, corporate notes and commodity derivative
instruments
|
11,313,227 | (3,812,904 | ) | (17,676,145 | ) | (3,947,727 | ) | |||||||||
Net
increase (decrease) in stockholders' equity (net assets) resulting
from operations
|
$ | 15,031,610 | $ | 14,453,789 | $ | (6,241,076 | ) | $ | 22,219,298 | |||||||
Net
increase (decrease) in stockholders' equity (net assets) resulting
from operations per common share
|
$ | 0.69 | $ | 0.66 | $ | (0.29 | ) | $ | 1.02 |
(See
accompanying notes to consolidated financial statements)
2
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (NET ASSETS)
Net
Unrealized
|
||||||||||||||||||||||||||||
Appreciation
(Depreciation)
|
Total
|
|||||||||||||||||||||||||||
Paid-in
Capital
|
Undistributed
|
Undistributed
|
of
Portfolio Securities,
|
Stockholders'
|
||||||||||||||||||||||||
Common
Stock
|
in
Excess
|
Net
Investment
|
Net
Realized
|
Corporate
Notes and Commodity
|
Equity
|
|||||||||||||||||||||||
Shares
|
Amount
|
of
Par
|
Income
(Loss)
|
Capital
Gain (Loss)
|
Derivative
Instruments
|
(Net
Assets)
|
||||||||||||||||||||||
Balance
at December 31, 2008
|
21,628,202 | $ | 21,628 | $ | 315,184,191 | $ | (3,420,716 | ) | $ | 2,038,312 | $ | (48,000,769 | ) | $ | 265,822,646 | |||||||||||||
Net
increase (decrease) in
|
||||||||||||||||||||||||||||
stockholders'
equity (net assets)
|
||||||||||||||||||||||||||||
resulting
from operations
|
- | - | - | 11,489,032 | (53,963 | ) | (17,676,145 | ) | (6,241,076 | ) | ||||||||||||||||||
Dividends
declared
|
- | - | - | (10,165,255 | ) | - | - | (10,165,255 | ) | |||||||||||||||||||
Balance
at September 30, 2009 (unaudited)
|
21,628,202 | $ | 21,628 | $ | 315,184,191 | $ | (2,096,939 | ) | $ | 1,984,349 | $ | (65,676,914 | ) | $ | 249,416,315 |
(See
accompanying notes to consolidated financial statements)
3
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
For The Nine Months Ended
|
||||||||
September 30, 2009
|
September 30, 2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
increase (decrease) in stockholders' equity (net assets) resulting from
operations
|
$ | (6,241,076 | ) | $ | 22,219,298 | |||
Adjustments to
reconcile net increase (decrease) in stockholders' equity (net assets)
resulting
from operations to net cash provided by operating
activities
|
||||||||
Payment-in-kind
interest
|
(3,317,164 | ) | (2,335,374 | ) | ||||
Net
amortization of premiums, discounts and fees
|
10,128,588 | 4,639,765 | ||||||
Change
in unrealized (appreciation) depreciation on portfolio
securities,
|
||||||||
corporate
notes and commodity derivative instruments
|
17,676,145 | 3,947,727 | ||||||
Effects
of changes in operating assets and liabilities
|
||||||||
Interest
receivable
|
1,314,942 | (321,671 | ) | |||||
Prepaid
assets and other current assets
|
794,237 | 524,444 | ||||||
Current
portion of deferred income taxes
|
(6,833,472 | ) | 2,900,000 | |||||
Non-current
deferred income taxes
|
4,454,605 | - | ||||||
Accounts
payable and accrued expenses
|
(314,194 | ) | 2,227,171 | |||||
Income
taxes payable
|
(3,435,521 | ) | - | |||||
Purchase
of investments in portfolio securities, corporate notes
|
||||||||
and
commodity derivative instruments
|
(33,196,662 | ) | (100,885,393 | ) | ||||
Redemption
of investments in portfolio securities, corporate notes
|
||||||||
and
commodity derivative instruments
|
64,459,403 | 76,409,056 | ||||||
Net
sale (purchase) of investments in U.S. Treasury Bills
|
- | 35,420,333 | ||||||
Net
cash provided by operating activities
|
45,489,831 | 44,745,356 | ||||||
Cash
flows from financing activities
|
||||||||
Proceeds
from the issuance of common stock, net of underwriting
costs
|
- | 62,790,416 | ||||||
Borrowings
under revolving credit facility
|
72,000,000 | 151,000,000 | ||||||
Repayments
on revolving credit facility
|
(152,000,000 | ) | (188,125,000 | ) | ||||
Offering
costs from the issuance of common stock
|
- | (780,628 | ) | |||||
Dividends
paid
|
(15,788,587 | ) | (24,664,085 | ) | ||||
Net
cash provided by (used in) financing activities
|
(95,788,587 | ) | 220,703 | |||||
Net
increase (decrease) in cash and cash equivalents
|
(50,298,756 | ) | 44,966,059 | |||||
Cash
and cash equivalents, beginning of period
|
133,805,575 | 18,437,115 | ||||||
Cash
and cash equivalents, end of period
|
$ | 83,506,819 | $ | 63,403,174 |
(See
accompanying notes to consolidated financial statements)
4
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
September
30, 2009
(Unaudited)
Portfolio
Company
|
Energy
Industry Segment
|
Investment
(2) (4)
|
Principal
|
Cost
|
Fair
Value (3)
|
|||||||||||
TARGETED
INVESTMENTS (21)
|
||||||||||||||||
Venoco,
Inc. (1)
|
Oil
& Natural Gas
|
Senior
Notes (7)
|
$ | 12,000,000 | $ | 11,947,893 | $ | 12,120,000 | ||||||||
Production
and Development
|
(8.75%,
due 12/15/2011)
|
|||||||||||||||
Chroma
Exploration &
|
Oil
& Natural Gas
|
10,002
Shares Series A Participating
|
- | 2,221,710 | - | |||||||||||
Production,
Inc. (1)
|
Production
and Development
|
Convertible
Preferred Stock (9)
|
||||||||||||||
9,134
Shares Series AA Participating
|
- | 2,089,870 | 500,000 | |||||||||||||
Convertible
Preferred Stock (9)
|
||||||||||||||||
8.11
Shares Common Stock (5)
|
- | - | - | |||||||||||||
Warrants
(5) (11)
|
- | - | - | |||||||||||||
Resaca
Exploitation Inc. (1)
|
Oil
& Natural Gas
|
Senior
Secured
|
10,000,000 | 9,815,376 | 9,815,376 | |||||||||||
Production
and Development
|
Revolving
Credit Facility
|
|||||||||||||||
(The
greater of 8.0% or LIBOR + 5.50%,
|
||||||||||||||||
due
5/01/2012)
|
||||||||||||||||
Common
Stock (6,574,216 shares) (5) (6) (19)
|
3,235,256 | 3,235,256 | 6,199,078 | |||||||||||||
Rubicon
Energy Partners,
|
Oil
& Natural Gas
|
LLC
Units (4,000 units) (5)
|
- | - | - | |||||||||||
LLC
(8)
|
Production
and Development
|
|||||||||||||||
BSR
Loco Bayou, LLC (1) (10)
|
Oil
& Natural Gas
|
Overriding
Royalty Interest
|
20,000 | 16,885 | 100,000 | |||||||||||
Production
and Development
|
Warrants
(5) (12)
|
10,000 | 10,000 | 200,000 | ||||||||||||
Sonoran
Energy, Inc. (1)
|
Oil
& Natural Gas
|
Warrants
(5) (13)
|
10,000 | 10,000 | - | |||||||||||
Production
and Development
|
||||||||||||||||
Nighthawk
Transport I, LP (1)
|
Energy
Services
|
Second
Lien
|
13,022,642 | 12,498,495 | - | |||||||||||
Term
Loan B
|
||||||||||||||||
(The
greater of 21.0% or LIBOR + 16.50%,
|
||||||||||||||||
w/
PIK option available up to 6.0%,
|
||||||||||||||||
due
10/03/2010) (9)
|
||||||||||||||||
LP
Units (5)
|
224 | 224 | - | |||||||||||||
Warrants
(5) (14)
|
850,000 | 850,000 | - | |||||||||||||
Second
Lien
|
1,457,656 | 1,440,477 | - | |||||||||||||
Delayed
Draw Term Loan B
|
||||||||||||||||
(The
greater of 21.0% or LIBOR + 16.50%,
|
||||||||||||||||
w/
PIK option available up to 6.0%,
|
||||||||||||||||
due
10/03/2010) (9)
|
||||||||||||||||
Alden
Resources, LLC (8)
|
Coal
Production
|
Senior
Secured
|
20,631,213 | 18,575,047 | 18,475,047 | |||||||||||
Multiple-Advance
Term Loan - Tranche A
|
||||||||||||||||
(The
greater of 12.00% or LIBOR +
|
||||||||||||||||
9.00
% cash, 15.00% or LIBOR +
|
||||||||||||||||
12.00%
PIK, due 1/01/2013)
|
||||||||||||||||
Senior
Secured
|
20,135,900 | 19,519,841 | 19,519,841 | |||||||||||||
Multiple-Advance
Term Loan - Tranche B
|
||||||||||||||||
(The
greater of 12.00% or LIBOR +
|
||||||||||||||||
9.00
% cash, 15.00% or LIBOR +
|
||||||||||||||||
12.00%
PIK, due 1/01/2013) (9)
|
||||||||||||||||
Class
E Units (5)
|
5,800,000 | 5,800,000 | 5,800,000 | |||||||||||||
Royalty
Interest
|
2,660,000 | 2,530,325 | 5,330,000 |
5
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
September
30, 2009
(Unaudited)
(Continued)
Portfolio
Company
|
Energy
Industry Segment
|
Investment
(2) (4)
|
Principal
|
Cost
|
Fair
Value (3)
|
|||||||||||
TARGETED
INVESTMENTS (21) - Continued
|
||||||||||||||||
Tammany
Oil & Gas, LLC (1)
|
Oil
& Natural Gas
|
Senior
Secured
|
26,022,804 | 25,921,525 | 25,921,525 | |||||||||||
Production
and Development
|
Multiple-Advance
Term Loan
|
|||||||||||||||
(The
greater of 13.0% or LIBOR + 8.00%,
|
||||||||||||||||
due
3/21/2010)
|
||||||||||||||||
Overriding
Royalty Interest (6)
|
200,000 | 180,549 | 1,000,000 | |||||||||||||
TierraMar
Energy LP (8)
|
Oil
& Natural Gas
|
Class
A Preferred LP Units (5)
|
17,710,788 | 17,710,788 | 9,000,000 | |||||||||||
Production
and Development
|
Overriding
Royalty Interest
|
20,000 | 16,149 | 300,000 | ||||||||||||
Anadarko
Petroleum Corporation
|
Oil
& Natural Gas
|
Multiple-Advance
Net Profits Interest
|
10,970,082 | 11,049,824 | 11,399,824 | |||||||||||
2007-III
Drilling Fund (1)
|
Production
and Development
|
(Due
4/23/2032)
|
||||||||||||||
Formidable,
LLC (1) (15)
|
Oil
& Natural Gas
|
Senior
Secured
|
38,771,388 | 38,771,388 | 5,600,000 | |||||||||||
Production
and Development
|
Multiple-Advance
Term Loan
|
|||||||||||||||
(LIBOR
+ 5.50% cash, LIBOR + 8.50%
|
||||||||||||||||
default,
due 5/31/2008) (9)
|
||||||||||||||||
Warrants
(5) (15)
|
500,000 | 500,000 | - | |||||||||||||
Formidable
Holdings, LLC Units (5)
|
10,000 | 10,000 | - | |||||||||||||
DeanLake
Operator, LLC (8)
|
Oil
& Natural Gas
|
Senior
Secured Term Loan
|
3,500,000 | 3,500,000 | 3,500,000 | |||||||||||
Production
and Development
|
(12.00%
cash, 14.00% PIK,
|
|||||||||||||||
payable
quarterly, due 6/30/2011)
|
||||||||||||||||
Class
A Preferred Units (5)
|
10,400,255 | 10,400,255 | 6,500,000 | |||||||||||||
Overriding
Royalty Interest
|
20,000 | 18,260 | 100,000 | |||||||||||||
Bionol
Clearfield, LLC (1)
|
Alternative
Fuels and
|
Senior
Secured Tranche C
|
5,000,000 | 5,000,000 | 5,000,000 | |||||||||||
Specialty
Chemicals
|
Construction
Loan
|
|||||||||||||||
(LIBOR
+ 7.00%, due 9/06/2016)
|
||||||||||||||||
BioEnergy
Holding, LLC (1)
|
Alternative
Fuels and
|
Senior
Secured Notes
|
12,255,231 | 10,822,116 | 10,822,116 | |||||||||||
Specialty
Chemicals
|
(15.00%,
due 3/06/2015)
|
|||||||||||||||
BioEnergy
International Warrants (5) (16)
|
34,766 | 34,766 | 34,766 | |||||||||||||
BioEnergy
Holding Units (5)
|
1,296,771 | 1,296,771 | 1,296,771 | |||||||||||||
Myriant
Technologies Warrants (5) (17)
|
49,238 | 49,238 | 49,238 | |||||||||||||
Myriant
Technologies Units (5)
|
418,755 | 418,755 | 418,755 | |||||||||||||
Greenleaf
Investments, LLC (1)
|
Oil
& Natural Gas
|
Senior
Secured
|
11,352,336 | 11,155,813 | 11,155,813 | |||||||||||
Production
and Development
|
Multiple-Advance
Term Loan
|
|||||||||||||||
(The
greater of 10.50% or LIBOR + 6.50%,
|
||||||||||||||||
due
4/30/2011)
|
||||||||||||||||
Overriding
Royalty Interest (6)
|
100,000 | 61,149 | 400,000 | |||||||||||||
ATP
Oil & Gas Corporation (1)
|
Oil
& Natural Gas
|
Limited
Term Royalty Interest
|
32,814,792 | 12,820,896 | 6,353,000 | |||||||||||
Production
and Development
|
||||||||||||||||
Black
Pool Energy
|
Oil
& Natural Gas
|
Senior
Secured
|
17,000,000 | 16,707,026 | 16,707,026 | |||||||||||
Partners,
LLC (1)
|
Production
and Development
|
Multiple-Advance
Term Loan
|
||||||||||||||
(The
greater of 12.00% or LIBOR +
|
||||||||||||||||
8.00
% cash, 14.00% or LIBOR +
|
||||||||||||||||
10.00%
PIK, due 10/24/2011)
|
||||||||||||||||
Overriding
Royalty Interest (6)
|
10,000 | 9,955 | 100,000 | |||||||||||||
Warrants
(5) (20)
|
10,000 | 10,000 | 10,000 | |||||||||||||
Subtotal
Targeted Investments (67.61% of total investments)
|
$ | 257,026,622 | $ | 193,728,176 |
6
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
September
30, 2009
(Unaudited)
(Continued)
Issuing
Company
|
Energy
Industry Segment
|
Investment
(2) (4)
|
Principal
|
Cost
|
Fair
Value (3)
|
|||||||||||
CORPORATE
NOTES (21)
|
||||||||||||||||
Pioneer
Natural Resources Co.
|
Oil
& Natural Gas
|
Senior
Notes, 7.2%, due 2028
|
$ | 10,000,000 | $ | 11,551,596 | $ | 8,697,900 | ||||||||
Production
and Development
|
||||||||||||||||
Subtotal
Corporate Notes ( 3.04% of total investments)
|
$ | 11,551,596 | $ | 8,697,900 | ||||||||||||
COMMODITY
DERIVATIVE INSTRUMENTS (21)
|
||||||||||||||||
Put
Options (18)
|
Put
Options with BP Corporation North America, Inc. to sell up
to
|
140,825 | 616,053 | |||||||||||||
32,750
Bbls of crude oil at a strike price of $85.00 per Bbl. 4
monthly
|
||||||||||||||||
contracts
beginning on October 1, 2009 and expiring on January 31,
2010.
|
||||||||||||||||
Subtotal
Commodity Derivative Instruments ( 0.21% of total
investments)
|
$ | 140,825 | $ | 616,053 | ||||||||||||
CASH
|
||||||||||||||||
Subtotal
Cash (29.14% of total investments)
|
$ | 83,506,819 | $ | 83,506,819 | ||||||||||||
TOTAL
INVESTMENTS, CASH AND CASH
EQUIVALENTS
|
$ | 352,225,862 | $ | 286,548,948 | ||||||||||||
LIABILITIES
IN EXCESS OF OTHER ASSETS
|
$ | (37,132,633 | ) | |||||||||||||
NET
ASSETS
|
$ | 249,416,315 |
7
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
September
30, 2009
(Unaudited)
(Continued)
NOTES TO CONSOLIDATED
SCHEDULE OF INVESTMENTS
(1)
|
Portfolio
company is not controlled by or affiliated with the Company as defined by
the Investment Company Act of 1940.
|
(2)
|
Percentages
represent interest rates in effect at the end of the period and due dates
represent the contractual maturity
dates.
|
(3)
|
Fair
value of targeted investments is determined by or under the direction of
the Board of Directors.
|
(4)
|
All
investments are in entities with primary operations in the United States
of America.
|
(5)
|
Non-income
producing securities.
|
(6)
|
Securities
are subject to restrictions as to their
sale.
|
(7)
|
Upon
the March 30, 2006 closing of Venoco, Inc.'s TexCal acquisition, Venoco
Inc.'s senior notes became collateralized by second priority
liens.
|
(8)
|
Portfolio
company is controlled by the Company as defined by the Investment Company
Act of 1940.
|
(9)
|
Non-accrual
status.
|
(10)
|
BSR
Loco Bayou repaid its term note in full on July 31, 2009. The Company
retains ownership of ORRI and Warrants until settlement is negotiated and
approved.
|
(11)
|
Chroma
warrants expire on April 5, 2012 and provide the Company the right to
purchase 2,462 shares of common stock at a purchase price of $75.00 per
share.
|
(12)
|
BSR
Loco Bayou warrants expire on August 15, 2013 and provide the Company the
right to purchase 10,000 investor units at the exercise price of $160.00
per investor unit.
|
(13)
|
Sonoran
warrants expire on November 28, 2014 and provide the Company the right to
purchase shares of common stock up to 2.87 million shares, on a fully
diluted basis with anti-dilution provisions, at the exercise price of
$0.20 per share. Sonoran announced it filed Chapter 11 bankruptcy on June
19, 2009 and sold all of its assets under Section 363. Upon official
notification of results of the Section 363 sale, Sonoron warrants will be
written off as a realized loss
|
(14)
|
Nighthawk
warrants expire on May 13, 2017 and provide the Company the right to
purchase approximately 7.1% of limited partnership units at the exercise
price of $0.001 per unit. On July 10, 2009, Nighthawk filed a voluntary
petition under Chapter 7 of the United States Bankruptcy
Code.
|
(15)
|
Formidable
senior note was accelerated and the Company foreclosed on the member units
of Formidable, LLC on September 28,
2009.
|
(16)
|
BioEnergy
International, LLC warrants expire on August 15, 2010 and provide the
Company the right to purchase 140,687 units, representing membership
interests of BioEnergy International, LLC, at the purchase price of $10.00
per unit.
|
(17)
|
Myriant
Technologies, LLC warrants expire on August 15, 2015 and provide the
Company the right to purchase 32,680 units, representing membership
interests of Myriant Technologies, LLC, at the purchase price of $10.00
per unit.
|
(18)
|
Put
Options are related to the limited term royalty interest purchased from
ATP Oil & Gas Corporation.
|
(19)
|
Resaca
stock is listed on the Alternative Investment Market of the London Stock
Exchange, denominated in British pounds and its reported fair value
at September 30,
2009 has been converted to U.S. dollars at the exchange rate effective on
September 30, 2009.
|
(20)
|
Black
Pool warrants expire seven years after repayment of principal and interest
and provide the Company the right to purchase approximately 25% of
membership interest at the
exercise price of $0.01 per unit.
|
(21)
|
All
investments in portfolio securities, corporate notes and commodity
derivative instruments are level 3
securities.
|
(See
accompanying notes to consolidated financial statements)
8
NGP CAPITAL RESOURCES
COMPANY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
December
31, 2008
Portfolio
Company
|
Energy
Industry
Segment
|
Investment (2) (4)
|
Principal
|
Cost
|
Fair Value(3)
|
|||||||||||
Targeted
Investments
|
|
|
|
|
|
|||||||||||
Venoco, Inc. (1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Senior Notes (7)
(8.75%,
due 12/15/2011)
|
$
|
12,000,000
|
$
|
11,932,367
|
$
|
5,760,000
|
||||||||
Chroma Exploration
& Production, Inc. (1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
9,711
Shares Series A Participating
Convertible Preferred
Stock (9)
|
—
|
2,221,710
|
—
|
|||||||||||
|
|
8,868
Shares Series AA Participating
Convertible Preferred
Stock (9)
|
—
|
2,089,870
|
1,000,000
|
|||||||||||
|
|
8.11 Shares Common
Stock (5)
|
—
|
—
|
—
|
|||||||||||
|
|
Warrants (5)
(11)
|
—
|
—
|
—
|
|||||||||||
Resaca Exploitation
Inc. (1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Senior
Secured
Multiple-Advance
Term Loan
(The
greater of 10.0% or LIBOR +
6.00%,
due 5/01/2012)
|
28,000,000
|
27,592,657
|
27,592,657
|
|||||||||||
|
|
Common Stock
(6,574,216 shares) (5)
(6)
(20)
|
3,235,256
|
3,235,256
|
1,093,688
|
|||||||||||
Crossroads Energy, LP
(1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Senior
Secured
Multiple-Advance
Term Loan
(The
greater of 10.0% or LIBOR + 5.50%, due 6/29/2009)
|
4,820,204
|
4,781,487
|
4,781,487
|
|||||||||||
|
|
Overriding Royalty
Interest (6)
|
10,000
|
5,120
|
250,000
|
|||||||||||
Rubicon Energy
Partners, LLC (8)
(23)
|
Oil
& Natural Gas
Production
and Development
|
LLC Units (4,000
units) (5)
|
—
|
—
|
750,000
|
|||||||||||
BSR Loco Bayou, LLC
(1)
(10)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Senior
Secured
Multiple-Advance
Term Loan
(LIBOR
+ 5.50% cash, LIBOR + 8.50%
default, due
8/15/2009) (9)
|
2,888,986
|
2,401,884
|
1,539,795
|
|||||||||||
|
|
Overriding
Royalty Interest
|
20,000
|
19,372
|
20,000
|
|||||||||||
|
|
Warrants (5)
(12)
|
10,000
|
10,000
|
—
|
|||||||||||
Sonoran Energy, Inc.
(1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Warrants (5)
(13)
|
10,000
|
10,000
|
—
|
|||||||||||
Nighthawk Transport
I, LP (1)
(23)
|
Energy
Services
|
Second
Lien
Term
Loan B
(The
greater of 15.0% or
LIBOR
+ 10.50%, due 10/03/2010)
|
12,895,524
|
12,184,611
|
8,929,131
|
|||||||||||
|
|
LP Units (5)
|
224
|
224
|
—
|
|||||||||||
|
|
Warrants (5)
(14)
|
850,000
|
850,000
|
—
|
|||||||||||
|
|
Second
Lien
Delayed
Draw Term Loan B
(The
greater of 15.0% or LIBOR +
10.50%,
due 10/03/2010)
|
1,443,427
|
1,420,362
|
1,075,842
|
|||||||||||
Alden Resources, LLC
(1)
(21)
(23)
|
Coal
Production
|
Senior
Secured )
Multiple-Advance
Term Loan
(LIBOR
+ 8.00% cash, due 1/05/2013
|
36,285,168
|
33,772,038
|
28,283,440
|
|||||||||||
|
|
Royalty
Interest
|
2,660,000
|
2,565,017
|
7,500,000
|
|||||||||||
|
|
Warrants (5)
(15)
|
100,000
|
100,000
|
—
|
(See
accompanying notes to consolidated financial statements)
9
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
December
31, 2008
(Continued)
Portfolio Company
|
Energy Industry
Segment
|
Investment (2) (4)
|
Principal
|
Cost
|
Fair Value(3)
|
|||||||||||
Targeted
Investments – Continued
|
|
|
|
|
||||||||||||
Tammany Oil & Gas, LLC (1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Senior
Secured
Multiple-Advance
Term Loan
(The
greater of 11.0% or LIBOR + 6.00%, due 3/21/2010)
|
31,447,804
|
31,197,085
|
31,197,085
|
|||||||||||
|
|
Overriding Royalty Interest (5)
(6)
|
200,000
|
200,000
|
550,000
|
|||||||||||
TierraMar Energy LP (8)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Overriding
Royalty Interest
|
20,000
|
16,828
|
300,000
|
|||||||||||
|
|
Class A Preferred LP Units (5)
|
16,634,830
|
16,634,830
|
13,500,000
|
|||||||||||
Anadarko
Petroleum Corporation
2007-III Drilling Fund (1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Multiple-Advance
Net Profits Interest
(Due
4/23/2032)
|
37,255,948
|
37,352,982
|
37,352,982
|
|||||||||||
Formidable, LLC (1)
(19)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Senior
Secured
Multiple-Advance
Term Loan
(LIBOR
+ 5.50% cash, LIBOR + 8.50%
default, due 5/31/2008) (9)
|
37,299,054
|
37,299,054
|
22,500,000
|
|||||||||||
|
|
Warrants (5)
(16)
|
500,000
|
500,000
|
—
|
|||||||||||
DeanLake Operator, LLC (8)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Class A Preferred Units (5)
|
13,900,255
|
13,900,255
|
10,000,000
|
|||||||||||
|
|
Overriding
Royalty Interest
|
20,000
|
18,897
|
20,000
|
|||||||||||
Bionol Clearfield, LLC (1)
(23)
|
Alternative
Fuels and
Specialty
Chemicals
|
Senior
Secured Tranche C
Construction
Loan
(LIBOR
+ 7.00%, due 9/06/2016)
|
5,000,000
|
5,000,000
|
5,000,000
|
|||||||||||
BioEnergy Holding, LLC (1)
(23)
|
Alternative
Fuels and
Specialty
Chemicals
|
Senior
Secured Notes
(15.00%,
due 3/06/2015)
|
10,606,557
|
9,757,613
|
9,757,613
|
|||||||||||
|
|
BioEnergy International Warrants (5)
(17)
|
595,845
|
595,845
|
595,845
|
|||||||||||
|
|
BioEnergy Holding Units (5)
|
376,687
|
376,687
|
376,687
|
|||||||||||
Greenleaf Investments, LLC (1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Senior
Secured
Multiple-Advance
Term Loan
(The
greater of 10.50% or LIBOR +
6.50%,
due 4/30/2011)
|
12,229,693
|
11,951,818
|
11,951,818
|
|||||||||||
|
|
Overriding Royalty Interest (6)
|
100,000
|
86,263
|
300,000
|
|||||||||||
ATP Oil & Gas Corporation (1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Limited
Term Royalty Interest
|
32,814,792
|
24,319,585
|
12,219,000
|
|||||||||||
Black Pool Energy Partners, LLC (1)
(23)
|
Oil
& Natural Gas
Production
and Development
|
Senior
Secured
Multiple-Advance
Term Loan
(The
greater of 12.00% or LIBOR + 8.00% cash, 14.00% or LIBOR + 10.00%
PIK,
due
10/24/2011)
|
302,497
|
12,498
|
12,498
|
|||||||||||
|
|
Overriding Royalty Interest (5)
(6)
|
10,000
|
10,000
|
10,000
|
|||||||||||
|
Warrants (5)
(22)
|
10,000
|
10,000
|
10,000
|
||||||||||||
Subtotal
Targeted Investments (62.2% of total investments)
|
$ |
294,432,215
|
$ |
244,229,568
|
(See
accompanying notes to consolidated financial statements)
10
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
December
31, 2008
(continued)
Issuing
Company
|
Energy
Industry
Segment
|
Investment (2) (4)
|
Principal
|
Cost
|
Fair Value(3)
|
|||||||||||
Corporate
Notes
|
|
|
|
|
|
|||||||||||
Pioneer Natural Resources Co. (23)
|
Oil
& Natural Gas
Production
and Development
|
Senior
Notes, 7.2%, due 2028
|
$
|
10,000,000
|
$
|
11,586,899
|
$
|
6,350,000
|
||||||||
Subtotal
Corporate Notes ( 1.62% of total investments)
|
$ |
11,586,899
|
$ |
6,350,000
|
||||||||||||
Commodity
Derivative Instruments
|
|
|
|||||||
Put Options (18)
(23)
|
Put
Options with BP Corporation North America, Inc. to sell up to
615,000
MMBtu of natural gas at a strike price of $10.00 per MMBtu.
12
monthly contracts beginning on July 1, 2008 and expiring on June 30,
2009.
|
$
|
141,570
|
$
|
933,484
|
||||
|
Put
Options with BP Corporation North America, Inc. to sell up to
237,750
Bbls of crude oil at a strike price of $101.00 per Bbl. 15
monthly
contracts
beginning on July 1, 2008 and expiring on September 30,
2009.
|
491,700
|
6,146,906
|
||||||
|
Put
Options with BP Corporation North America, Inc. to sell up to
32,750
Bbls of crude oil at a strike price of $85.00 per Bbl. 4
monthly
contracts
beginning on October 1, 2009 and expiring on January 31,
2010.
|
140,825
|
1,132,482
|
||||||
Subtotal
Commodity Derivatives (2.1% of total investments)
|
$ |
774,095
|
$ |
8,212,872
|
||||
Cash
|
|
|
||||||
Subtotal
Cash (34.08% of total investments)
|
$ |
133,805,575
|
$ |
133,805,575
|
||||
Total
investments, cash and cash equivalents
|
$ |
440,598,784
|
$
|
392,598,015
|
||||
Liabilities
in excess of other assets
|
$ |
(126,775,369)
|
||||||
Net
assets
|
$ |
265,822,646
|
(See
accompanying notes to consolidated financial statements)
11
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED
SCHEDULE OF INVESTMENTS
December
31, 2008
(continued)
Notes
to Consolidated Schedule of Investments
|
(1)
|
Portfolio
company is not controlled by or affiliated with the Company as defined by
the Investment Company Act of 1940.
|
|
(2)
|
Percentages
represent interest rates in effect at the end of the period and due dates
represent the contractual maturity
dates.
|
|
(3)
|
Fair
value of targeted investments is determined by or under the direction of
the Board of Directors.
|
|
(4)
|
All
investments are in entities with primary operations in the United States
of America.
|
|
(5)
|
Non-income
producing securities.
|
|
(6)
|
Securities
are subject to restrictions as to their
sale.
|
|
(7)
|
Upon
the March 30, 2006 closing of Venoco, Inc.’s TexCal acquisition, Venoco
Inc.’s senior notes became collateralized by second priority
liens.
|
|
(8)
|
Portfolio
company is controlled by the Company as defined by the Investment Company
Act of 1940.
|
|
(9)
|
Non-accrual
status.
|
(10)
|
Portfolio
company was issued a written notice of
default.
|
(11)
|
Chroma
warrants expire on April 5, 2012 and provide the Company the right to
purchase 2,462 shares of common stock at a purchase price of $75.00 per
share.
|
(12)
|
BSR
Loco Bayou warrants expire on August 15, 2013 and provide the Company the
right to purchase 10,000 investor units at the exercise price of $160.00
per investor unit.
|
(13)
|
Sonoran
warrants expire on November 28, 2014 and provide the Company the right to
purchase shares of common stock up to 2.87 million shares, on a fully
diluted basis with anti-dilution provisions, at the exercise price of
$0.20 per share.
|
(14)
|
Nighthawk
warrants expire on May 13, 2017 and provide the Company the right to
purchase approximately 2.5% of limited partnership units at the exercise
price of $0.001 per unit.
|
(15)
|
Alden
warrants provide the Company the right to purchase 23% of class C units at
an exercise price of $0.739 per unit, expiring in December 2013 and the
right to purchase 10% of class C units at an exercise price of $0.739 per
unit, expiring in July 2014.
|
(16)
|
Formidable
warrants expire on March 31, 2015 and provide the Company the right to
purchase membership interest representing 30% of all distributions at an
exercise price of $1,000 per percentage
point.
|
(17)
|
BioEnergy
International, LLC warrants expire on August 15, 2010 and provide the
Company the right to purchase 648,000 units, representing membership
interests of BioEnergy International, LLC, at the purchase price of $10.00
per unit.
|
(18)
|
Put
Options are related to the limited term royalty interest purchased from
ATP Oil & Gas Corporation.
|
(19)
|
Portfolio
company was issued a written notice of default on February 13,
2009.
|
(20)
|
Resaca
Exploitation, Inc. stock is listed on the Alternative Investment Market of
the London Stock Exchange, denominated in British pounds and its reported
fair value at December 31, 2008 has been converted to U.S. dollars at the
exchange rate effective on December 31,
2008.
|
(21)
|
Portfolio
company was issued a written notice of default on February 5,
2009.
|
(22)
|
Black
Pool warrants expire seven years after repayment of principal and interest
and provide the Company the right to purchase approximately 25% of
membership interest at the exercise price of $0.01 per
unit.
|
(23)
|
Level
3 security per SFAS No.
157 hierarchy.
|
(See accompanying notes to consolidated financial statements)
12
NGP
CAPITAL RESOURCES COMPANY
CONSOLIDATED
FINANCIAL HIGHLIGHTS
(Unaudited)
For the Nine Months Ended
|
||||||||
September 30, 2009
|
September 30, 2008
|
|||||||
Per
Share Data (1)
|
||||||||
Net
asset value, beginning of period
|
$ | 12.29 | $ | 14.30 | ||||
Increase
in net assets as a result of
|
||||||||
secondary
public stock offering
|
- | 0.40 | ||||||
Underwriting
discounts and commissions related
|
||||||||
to
secondary public stock offerings
|
- | (0.15 | ) | |||||
Other
costs related to secondary public stock offerings
|
- | (0.03 | ) | |||||
Net
increase in net assets from secondary public offerings
|
- | 0.22 | ||||||
Net
asset value after public stock offerings
|
12.29 | 14.52 | ||||||
Net
investment income (loss)
|
0.53 | 0.56 | ||||||
Net
realized and unrealized gain (loss) on portfolio
securities,
|
||||||||
corporate
notes and commodity derivative instruments
|
(0.82 | ) | 0.46 | |||||
Net
increase (decrease) in stockholders' equity (net assets)
|
||||||||
resulting
from operations
|
(0.29 | ) | 1.02 | |||||
Dividends
declared
|
(0.47 | ) | (1.20 | ) | ||||
Net
asset value, end of period
|
$ | 11.53 | $ | 14.34 | ||||
Market
value, beginning of period
|
$ | 8.37 | $ | 15.63 | ||||
Market
value, end of period
|
$ | 7.26 | $ | 14.57 | ||||
Market
value return (2)
|
(6.85 | )% | 0.98 | % | ||||
Net
asset value return (2)
|
0.75 | % | 8.63 | % | ||||
Ratios
and Supplemental Data
|
||||||||
($
and shares in thousands)
|
||||||||
Net
assets, end of period
|
$ | 249,416 | $ | 310,186 | ||||
Average
net assets
|
$ | 257,619 | $ | 280,223 | ||||
Common
shares outstanding at end of period
|
21,628 | 21,628 | ||||||
Total
operating expenses less management and
|
||||||||
incentive
fees and interest expense/average net assets (3)
|
1.87 | % | 1.61 | % | ||||
Total
operating expenses less management
|
||||||||
and
incentive fees/average net assets (3)
|
3.19 | % | 4.16 | % | ||||
Total
operating expenses/average net assets (3)
|
5.80 | % | 8.02 | % | ||||
Net
investment income (loss)/average net assets (3)
|
5.96 | % | 5.80 | % | ||||
Net
increase (decrease) in net assets resulting from
|
||||||||
operations/average
net assets (3)
|
(3.24 | )% | 10.59 | % | ||||
Portfolio
turnover rate
|
25.02 | % | 27.27 | % |
(1) Per
Share Data is based on common shares outstanding at end of period.
(2)
Return calculations assume reinvestment of dividends and are not
annualized.
(3)
Annualized.
(See
accompanying notes to consolidated financial statements)
13
NGP
CAPITAL RESOURCES COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2009
(Unaudited)
Note
1:
|
Organization
|
NGP
Capital Resources Company (together with its consolidated subsidiaries, where
applicable, “NGPC”, or the “Company,” which may also be referred to as “we,”
“us,” or “our”) was organized as a Maryland corporation in July 2004. The
Company has elected to be regulated as a business development company (“BDC”)
under the Investment Company Act of 1940, as amended (the “1940
Act”). In addition, for federal income tax purposes the Company has
elected to be treated as a regulated investment company (“RIC”) under the
Internal Revenue Code of 1986, as amended (the “Code”). The Company
has several subsidiaries that are single member limited liability companies and
wholly owned limited partnerships established to hold certain portfolio
investments or provide services to the Company in accordance with specific rules
prescribed for a company operating as a RIC. These consolidated
subsidiaries are: NGPC Funding GP, LLC, a Texas limited liability company; NGPC
Nevada, LLC, a Nevada limited liability company; NGPC Funding, LP, a Texas
limited partnership; NGPC Asset Holdings GP, LLC, a Texas limited liability
company; NGPC Asset Holdings, LP, a Texas limited partnership; NGPC Asset
Holdings II, LP, a Texas limited partnership (“NGPC II”); NGPC Asset Holdings
III, LP, a Texas limited partnership; NGPC Asset Holdings V, LP, a Texas limited
partnership; NGPC Asset Holdings VI, LP, a Texas limited partnership; Formidable
Holdings, LLC, a Delaware limited liability company; and Formidable Operating,
LLC, a Delaware limited liability company. Effective May 28, 2008,
NGPC Asset Holdings IV, LP merged with and into NGPC II. The Company
consolidates the results of its subsidiaries for financial reporting
purposes. The Company does not consolidate the financial results of
its portfolio companies.
The
Company’s investment objective is to generate both current income and capital
appreciation through debt investments with certain equity
components.
The
Company is managed and advised, subject to the overall supervision of the
Company’s board of directors (the “Board of Directors”), by NGP Investment
Advisor, LP (the “Manager”), a Delaware limited partnership owned by NGP Energy
Capital Management, L.L.C., and NGP Administration, LLC (the “Administrator”),
the Company’s administrator.
Note
2:
|
Significant
Accounting Policies
|
The
interim unaudited consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The management of the
Company prepares the interim consolidated financial statements, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) have been
omitted pursuant to such rules and regulations, although the Company believes
the disclosures included herein are adequate to make the information presented
not misleading. In the opinion of management, all adjustments, which
are of a normal recurring nature considered necessary for presentation of the
information, have been included. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2008. Interim results
are not necessarily indicative of results for a full year. Subsequent events
have been evaluated through November 6, 2009, which is the date the financial
statements were issued. See Subsequent Events in Note 12.
The
following is a summary of the significant accounting policies consistently
applied by the Company in the preparation of its consolidated financial
statements:
Use
of Estimates
The
interim consolidated financial statements have been prepared in accordance with
GAAP that require management to make estimates and assumptions that affect the
amounts reported in the interim consolidated financial statements and the
accompanying notes to the interim consolidated financial
statements. Actual results could differ from these
estimates.
14
Cash
and Cash Equivalents
Cash and
cash equivalents include short-term, liquid investments in accounts such as
demand deposit accounts, money market accounts, certain overnight investment
sweep accounts and money market fund accounts. Cash and cash
equivalents are carried at cost, which approximates fair value.
Prepaid
Assets
Prepaid
assets consist of premiums paid for directors’ and officers’ insurance and
fidelity bonds with a policy term of one year and fees associated with the
establishment of the policy or credit facility. Such premiums and
fees are amortized monthly on a straight-line basis over the term of the policy
or credit facility.
Concentration
of Credit Risk
The
Company places its cash and cash equivalents with financial institutions and, at
times, cash held in checking accounts may exceed the Federal Deposit Insurance
Corporation insured limit. On September 15, 2008, Lehman Brothers
Holdings Inc. (“Lehman Holdings”) filed for protection under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court in the
Southern District of New York. Subsidiaries of Lehman Holdings were
not included in the filing. The business of Lehman Brothers Private
Investment Management (“PIM”), including the Company’s money market and bond
holdings, was transferred during September 2008 to Barclays Wealth, the wealth
management division of Barclays Bank PLC (“Barclays”), which operates in the
United States as Barclays Capital Inc. As of September 30, 2009, the
Company’s Barclays money market account balance was $945,877 and the fair market
value of our senior notes and corporate notes were $12.12 million and $8.70
million, respectively. The Company currently believes that the
transfer of its Lehman Brothers account to Barclays will not have a material
adverse effect on its financial position, results of operations or cash
flows.
Valuation
of Investments
Investments
are carried at fair value, as determined in good faith by the Company’s Board of
Directors. On a quarterly basis, the investment team of the Manager
prepares valuations for all of the assets in the Company’s portfolio and
presents the valuations to the Company’s valuation committee (the “Valuation
Committee”) and Board of Directors. The Valuation Committee
determines and recommends the valuations to the Board of Directors, which
reviews and ratifies the final portfolio valuations.
Investments
in securities for which market quotations are readily available are recorded in
the financial statements at such market quotations as of the valuation
date. For investments in securities for which market quotations are
unavailable, or which have various degrees of trading restrictions, the
investment team of the Manager prepares valuation analyses, as generally
described below.
Using the
most recently available financial statements, forecasts and, when applicable,
comparable transaction data, the investment team of the Manager prepares
valuation analyses for the various securities in the Company’s investment
portfolio. The investment team prepares the valuation analyses using
traditional valuation methodologies, which rely on estimates of the asset values
and enterprise values of portfolio companies issuing securities.
The
methodologies for determining asset valuations include estimates based
on: the liquidation or sale value of a portfolio company’s assets,
the discounted value of expected future net cash flows from the assets and third
party valuations of the portfolio company’s assets, such as engineering reserve
reports of oil and natural gas properties. The investment team of the
Manager considers some or all of the above valuation methods to determine the
estimated asset value of a portfolio company.
The
methodologies for determining enterprise valuations include estimates based
on: valuations of comparable public companies, recent sales of
comparable companies, the value of recent investments in the equity securities
of a portfolio company and the methodologies used for asset
valuations. The investment team of the Manager considers some or all
of the above valuation methods to determine the estimated enterprise value of a
portfolio company.
The
methodologies for determining estimated current market values of comparable
securities include estimates based on: recent initial offerings of comparable
securities of public and private companies; recent secondary market sales of
comparable securities of public and private companies; current market implied
interest rates for comparable securities in general; and current market implied
interest rates for non-comparable securities in general, with adjustments for
such things as size of issue and tenor. The investment team of the Manager
considers some or all of the above valuation methods to determine the estimated
current market value of a comparable security.
15
Debt Securities: The Company
records its investments in non-convertible debt securities at fair value which
generally approximates cost plus amortized original issue discount
(“OID”) to the extent that the estimated asset or enterprise value of the
portfolio company exceeds the outstanding debt of the portfolio company, subject
to comparison to the estimated current market values of comparable
securities. The Company records its investment in convertible debt
securities at fair value which generally approximates the higher of: 1) cost
plus amortized OID, to the extent that the estimated asset or enterprise value
of the portfolio company equals or exceeds the outstanding debt of the portfolio
company; and 2) the Company’s pro rata share, upon conversion, of the residual
equity value of the portfolio company available after deducting all outstanding
debt from its estimated enterprise value, both subject to comparison to the
estimated current market values of comparable securities. If the estimated asset
or enterprise value is less than the sum of the value of the Company’s debt
investment and all other debt securities of the portfolio company pari passu or senior to the
Company’s debt investment, the Company reduces the value of the debt investment
beginning with the junior-most debt investment such that the asset or enterprise
value less the value of the outstanding pari passu or senior debt is
zero, subject to comparison to the estimated current market values of comparable
securities. The Company records investments in debt securities for
which market quotations are readily available at such market quotations as of
the valuation date.
Equity Securities: The
Company records its investments in preferred and common equity
securities (including warrants or options to acquire equity securities) at fair
value based on its pro rata share of the residual equity value available after
deducting all outstanding debt from the estimated enterprise value, subject to
comparison to the estimated current market values of comparable
securities.
Property-Based Equity Participation
Rights: The Company records its investments in overriding royalty and net
profits interests at fair value based on a multiple of cash flows generated by
such investments, multiples from transactions involving the sale of comparable
assets and/or the discounted value of expected future net cash flows from such
investments.
Appropriate cash flow multiples are derived from the review of comparable
transactions involving similar assets. The Company derives the discounted value
of future net cash flows, when appropriate, from third party valuations of a
portfolio company’s assets, such as engineering reserve reports of oil and
natural gas properties.
Due to
the uncertainty inherent in the valuation process, such estimates of fair value
may differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be
material. Additionally, changes in the market environment and other
events that may occur over the life of the investments may cause the gains or
losses ultimately realized on these investments to be different from the
valuations currently assigned.
Valuation
of Commodity Derivative Instruments
All
derivative instruments, other than those that meet specific exclusions, are
recorded at fair value according to current accounting rules. Quoted
market prices are the best evidence of fair value. If quotations are
not available, management bases its best estimate of fair value on the quoted
market price of derivatives with similar characteristics or on valuation
techniques. The Company’s derivative instruments are either exchange
traded or transacted in an over-the-counter market. Valuation is
determined by reference to readily available public data. Management
bases the option fair values for the natural gas option transactions on the
Black-Scholes pricing model and bases the crude oil transactions on the
Turnbull-Wakeman pricing model. Fair value results are verified
against the applicable counterparty’s fair values.
Securities
Transactions, Interest and Dividend Income Recognition
All
securities transactions are accounted for on a trade-date basis. Interest income
is recorded on the accrual basis to the extent that such amounts are expected to
be collected. Premiums and discounts are accreted into interest
income using the effective interest method. Detachable warrants, other equity
securities or property interests such as overriding royalty interests obtained
in conjunction with the acquisition of debt securities are recorded separately
from the debt securities at their initial fair value, with a corresponding
amount recorded as a discount to the associated debt security. Income
from overriding royalty interests is recognized as received and the recorded
assets are charged amortization using the units of production
method. The portion of the loan origination fees paid that represent
additional yield or discount on a loan are deferred and accreted into interest
income over the life of the loan using the effective interest
method. Upon the prepayment of a loan or debt security, any
unamortized loan origination fees are recorded as interest income and any
unamortized premium or discount is recorded as a realized gain or
loss. Market premiums or discounts on acquired loans or fixed income
investments are accreted into interest income using the effective interest
method. Dividend income is recognized on the ex-dividend
date. Accruing interest or dividends on investments is deferred when
it is determined that the interest or dividend is not
collectible. Collectability of the interest and dividends is
assessed, based on many factors including the portfolio company’s ability to
service its loan based on current and projected cash flows as well as the
current valuation of the portfolio company’s assets.
16
Payment-in-Kind
Interest and Dividends
The
Company may have investments in its portfolio that contain payment-in-kind
(“PIK”) provisions. The Company computes PIK interest or dividends at
the contractual rate specified in each investment agreement, adds it to the
principal balance of the investment and records it as interest or dividend
income. For investments with PIK interest or dividends, the Company
bases income accruals on the principal balance including any PIK. To
maintain the Company’s RIC status, this non-cash source of income must be paid
out to stockholders in the form of dividends, even though the Company has not
yet collected the cash. For the quarter ended September 30, 2009, PIK
interest income was $2,067,416, net of a $32,693 reserve. For the
quarter ended September 30, 2008 PIK interest income was $606,557, net of a
$77,884 reserve. There was no PIK dividend income for the quarter
ended September 30, 2009 or September 30, 2008. If the portfolio
company’s asset valuation is not sufficient to cover the contractual interest,
the Company will not accrue PIK interest income or PIK dividend income on the
investment.
Net
Realized Gains or Losses and Net Change in Unrealized Appreciation or
Depreciation
Realized
gains or losses are measured by the difference between the net proceeds from the
repayment or sale and the amortized cost basis of the investment, considering
unamortized fees and prepayment premiums, and without regard to unrealized
appreciation or depreciation previously recognized, and include investments
charged off during the year, net of recoveries. Net unrealized
appreciation or depreciation reflects the change in portfolio investment values
during the reporting period including the reversal of previously recorded
unrealized appreciation or depreciation, when capital gains or losses are
realized.
Derivative
accounting rules require that fair value changes of derivative instruments that
do not qualify for hedge accounting be reported in the current period, rather
than in the period the derivatives are settled and/or the hedged transaction is
settled. This can result in significant earnings volatility. The
Company has decided not to designate these instruments as hedging instruments
for financial accounting purposes. Net unrealized appreciation or
depreciation reflects the change in derivative values during the reporting
period including the reversal of previously-recorded unrealized appreciation or
depreciation, when settled gains or losses are realized.
Fee
Income Recognition
Fees
primarily include financial advisory, transaction structuring, loan
administration, commitment and prepayment fees. Financial advisory fees
represent amounts received for providing advice and analysis to companies and
are recognized as earned when such services are performed, provided collection
is probable. Transaction structuring fees represent amounts received
for structuring, financing and executing transactions and are generally payable
only if the transaction closes. Such fees are deferred and accreted into
interest income over the life of the loan using the effective interest
method. Commitment fees represent amounts received for committed
funding and are generally payable whether or not the transaction
closes. On transactions that close within the commitment period,
commitment fees are deferred and accreted into interest income over the life of
the loan using the effective interest method. Commitment fees on
transactions that do not close are generally recognized over the period the
commitment is outstanding. Prepayment and loan administration fees
are recognized as they are received. For the quarter ended September
30, 2009 the Company accreted approximately $0.6 million of fee income into
interest income, compared to approximately $0.5 million of fee income for the
quarter ended September 30, 2008.
Dividends
Dividends
to stockholders are recorded on the ex-dividend date. The Company
currently intends that its distributions each year will be sufficient to
maintain the Company’s status as a RIC for federal income tax purposes and to
eliminate excise tax liability. The Company currently intends to make
distributions to stockholders on a quarterly basis of substantially all of its
net taxable income. The Company also intends to make distributions of
net realized capital gains, if any, at least annually. However, the
Company may in the future decide to retain such capital gains for investment and
designate such retained amount as a deemed distribution. The
Company’s Board of Directors determines the amount to be paid out as a dividend,
if any, each quarter, based on the annual taxable earnings estimated by the
Manager. Based on that estimate, the Company declares the dividend
each quarter and pays such dividend shortly thereafter.
17
The
following table summarizes the Company’s dividends for the year 2008 and for the
first, second and third quarters of 2009:
Dividend
History
Declaration Date
|
Amount
|
Record Date
|
Payment Date
|
||||
March
19, 2008
|
$ | 0.400 |
March
31, 2008
|
April
11, 2008
|
|||
June
9, 2008
|
$ | 0.400 |
June
30, 2008
|
July
11, 2008
|
|||
September
10, 2008
|
$ | 0.400 |
September
30, 2008
|
October
10, 2008
|
|||
December
19, 2008
|
$ | 0.410 |
December
29, 2008
|
January
5, 2009
|
|||
March
10, 2009
|
$ | 0.200 |
March
31, 2009
|
April
10, 2009
|
|||
June
11, 2009
|
$ | 0.120 |
June
30, 2009
|
July
10, 2009
|
|||
September
10, 2009
|
$ | 0.150 |
September
30, 2009
|
October
9,
2009
|
The
Company has established an “opt out” dividend reinvestment plan for its common
stockholders. As a result, if the Company declares a dividend, then a
stockholder’s cash dividend will be automatically reinvested in additional
shares of the Company’s common stock unless the stockholder, or his or her
broker, specifically “opts out” of the dividend reinvestment plan and elects to
receive cash dividends. It is customary practice for many brokers to “opt out”
of dividend reinvestment plans on behalf of their clients unless specifically
instructed otherwise. As of October 9, 2009, the date of the most
recent dividend payment, holders of 2,306,518 shares, or approximately 10.7% of
the 21,628,202 outstanding common shares, participated in the Company’s dividend
reinvestment plan.
The
Company’s dividend reinvestment plan provides for the plan agent to purchase
shares in the open market for credit to the accounts of plan participants unless
the average of the closing sales prices for the shares for the five days
immediately preceding the payment date exceeds 110% of the most recently
reported net asset value per share.
The table
below summarizes participation in the Company’s dividend reinvestment plan for
the year 2008 and for the first, second and third quarters of 2009:
Dividend
Reinvestment Plan Participation
Percentage
of
|
Common
Stock Dividends
|
|||||||||||||||||||||||||||||||
Participating
|
Outstanding
|
Total
|
Purchased
in
|
Purchase
|
Newly
Issued Shares
|
|||||||||||||||||||||||||||
Dividend
|
Shares
|
Shares
|
Distribution
|
Cash
Dividends
|
Open
Market
|
Price
|
Amount
|
Shares
|
||||||||||||||||||||||||
March
2008
|
1,693,284 | 9.7 | % | $ | 7,000,133 | $ | 6,322,815 | $ | - | $ | 16.33 | $ | 677,318 | 41,482 | ||||||||||||||||||
June
2008
|
1,655,552 | 9.4 | % | $ | 8,651,281 | $ | 7,989,060 | $ | 662,221 | $ | 15.69 | $ | - | - | ||||||||||||||||||
September
2008
|
1,739,829 | 8.0 | % | $ | 8,651,281 | $ | 7,955,350 | $ | 695,931 | $ | 11.45 | $ | - | - | ||||||||||||||||||
December
2008
|
1,749,954 | 8.1 | % | $ | 8,867,563 | $ | 8,150,082 | $ | 717,481 | $ | 9.50 | $ | - | - | ||||||||||||||||||
March
2009
|
2,179,204 | 10.1 | % | $ | 4,325,640 | $ | 3,889,799 | $ | 435,841 | $ | 6.43 | $ | - | - | ||||||||||||||||||
June
2009
|
1,889,207 | 8.7 | % | $ | 2,595,384 | $ | 2,368,679 | $ | 226,705 | $ | 5.78 | $ | - | - | ||||||||||||||||||
September
2009
|
2,306,518 | 10.7 | % | $ | 3,244,230 | $ | 2,898,252 | $ | 345,978 | (1) | $ | 7.62 | $ | - | - |
(1) Shares
were purchased on October 9, 2009 for the September 2009
dividend. See above and Note 4 for further detail.
Note 3:
|
Credit Facilities and
Borrowings
|
On July
16, 2009, the Company repaid the entire $75 million balance on its Treasury
Secured Revolving Credit Agreement (as amended, the “Treasury
Facility”). The Treasury Facility had a three-year term, maturing
August 31, 2009, and bore interest, at the Company’s option, at either (i) LIBOR
plus 25 basis points or (ii) the base rate. The Company did not renew
or extend the Treasury Credit Facility at its maturity on August 31,
2009.
18
Under the
terms of the Company’s Amended and Restated Revolving Credit Agreement (as
amended, the “Investment Facility”), the lenders have agreed to extend revolving
credit to the Company in an amount not to exceed $87.5 million, with the ability
to increase the credit available to an amount not to exceed $175 million by
obtaining additional commitments from existing lenders or new
lenders. The total amount committed was $87.5 million and $40.0
million was outstanding under the Investment Facility as of September 30,
2009. By comparison, as of December 31, 2008, the total amount
committed was $87.5 million and $45.0 million was outstanding under the
Investment Facility. The Investment Facility has a four-year term,
maturing on August 31, 2010, and bears interest, at the Company’s option, at
either (i) LIBOR plus 150 to 250 basis points, based on the degree of leverage
of the Company or (ii) the base rate plus 0 to 75 basis points, based on the
degree of leverage of the Company. Proceeds from the Investment
Facility are used to supplement the Company’s equity capital to make portfolio
investments. As of September 30, 2009, the interest rate was 3.25% on
$40.0 million (prime rate). See Subsequent Events in Note
12.
The
obligations under the Investment Facility are collateralized by substantially
all of the Company’s assets and are guaranteed by the Company’s existing and
future subsidiaries, other than special purpose subsidiaries and certain other
subsidiaries. The Investment Facility contains affirmative and
reporting covenants and certain financial ratio and restrictive covenants,
including: (a) maintaining a ratio of net asset value to consolidated total
indebtedness (excluding net hedging liabilities) of the Company and its
subsidiaries, of not less than 2.25:1.0, (b) maintaining a ratio of net asset
value to consolidated total indebtedness (including net hedging liabilities) of
the Company and its subsidiaries, of not less than 2.0:1.0, (c) maintaining a
ratio of EBITDA (excluding revenue from collateral under the Treasury Facility)
to interest expense (excluding interest on loans under the Treasury Facility) of
the Company and its subsidiaries of not less than 3.0:1.0, (d) limitations on
additional indebtedness, (e) limitations on liens, (f) limitations on mergers
and other fundamental changes, (g) limitations on dividends, (h) limitations on
disposition of assets other than in the normal course of business, (i)
limitations on transactions with affiliates, (j) limitations on agreements that
prohibit liens on properties of the Company and its subsidiary guarantors, (k)
limitations on sale and leaseback transactions, (l) limitations on speculative
hedging transactions and (m) limitations on the aggregate amount of unfunded
commitments. From time to time, certain of the lenders may provide customary
commercial and investment banking services to the Company.
In
addition to the Company’s Investment Facility, the Company may also fund a
portion of its investments with issuances of equity or senior debt
securities. The Company may also securitize a portion of its
investments in mezzanine or senior secured loans or other assets. The
Company expects its primary use of funds to be investments in portfolio
companies, cash distributions to holders of its common stock and payment of fees
and other operating expenses.
Note 4:
|
Issuance
of Common Stock
|
On August
6, 2004, the Company, in its initial capitalization transaction, sold 100 shares
of common stock to NGP Energy Capital Management, L.L.C. (formerly known as
Natural Gas Partners, L.L.C.) for $15.00 per share. On November 9,
2004, the Company’s Registration Statement on Form N-2 (Registration No.
333-118279) was declared effective by the SEC in connection with the public
offering of 16,000,000 shares of common stock (plus up to 2,400,000 additional
shares of common stock upon the exercise of the underwriters’ over-allotment
option), which commenced on November 10, 2004. The number of
securities covered by the registration statement, including the shares of common
stock subject to the underwriters’ over-allotment option, was 18,400,000, of
which 17,400,000 were sold to the public at a price of $15.00 per
share. The net proceeds from this offering, after deducting expenses
of approximately $2,308,000 and underwriting discounts and commissions of $0.825
per share, were approximately $244,337,000.
On
February 6, 2008, the Company’s shelf registration statement on Form N-2
(Registration No. 333-146715) registering the offering, from time to time, of up
to $250,000,000 in aggregate offering price of the Company’s common stock was
declared effective by the SEC. On April 10, 2008, the Company
commenced a public offering of 3,700,000 shares of common stock (plus up to
550,000 additional shares of common stock subject to the underwriters’
over-allotment option) of which 4,086,388 shares were sold to the public at a
price of $16.00 per share. The net proceeds from this offering, after
deducting expenses of approximately $781,000 and underwriting discounts and
commissions of $0.80 per share, were approximately $61,330,000.
The
Company has established a dividend reinvestment plan for the Company’s common
stockholders, which provides for reinvestment of distributions paid by the
Company, on behalf of each plan participant, by the Company’s transfer agent, in
accordance with the plan terms. The purpose of the plan is to provide
stockholders of record of the Company’s common stock, par value $.001 per share,
with a method of investing cash dividends and distributions in additional shares
at the current market price, without charges for record-keeping, custodial, and
reporting services. However, the plan is an “opt-out”
plan. This means, if the Company declares a cash dividend, a
stockholder’s cash dividend will be automatically reinvested in additional
shares of its common stock unless the stockholder specifically “opts out” of the
dividend reinvestment plan in writing, and elects to receive cash
dividends. Any stockholder of record may elect to partially
participate in the plan, or begin or resume participation at any time, by
providing the plan agent with written notice. It is customary
practice for many brokers to “opt out” of dividend reinvestment plans on behalf
of their clients unless specifically instructed otherwise.
The
Company has issued 141,714 shares of common stock to participants in the
dividend reinvestment plan since the inception of the plan. See
Dividends in Note 2.
19
Note 5:
|
Investment
Management
|
Investment
Advisory Agreement
The
Company has entered into an investment advisory agreement with the Manager (the
“Investment Advisory Agreement”). Under the Investment Advisory
Agreement, the Manager provides investment advisory services to, and manages the
day-to-day operations of, the Company, subject to the overall supervision of the
Company’s Board of Directors.
For
providing these services, the Manager receives a fee from the Company,
consisting of two components — a base management fee and an incentive
fee.
Under the
Investment Advisory Agreement, the base management fee is calculated quarterly
as 0.45% of the average of total assets of the Company as of the end of the two
previous quarters, and is payable quarterly in arrears. The Manager
has agreed to waive permanently, subsequent to September 30, 2007, that portion
of the management fee attributable to U.S. Treasury securities or other short
term investments acquired with borrowings under the Company’s credit facilities
to the extent the amount of such securities exceeds $100 million. All
of the $1,540,756 management and incentive fees payable to the Manager as of
September 30, 2009 was attributable to the base management fee for the quarter
ended September 30, 2009. The base management fee for the quarter
ended September 30, 2008 was $1,944,869.
The
incentive fee under the Investment Advisory Agreement consists of two parts. The
first part, which is calculated and payable quarterly in arrears, equals 20% of
the excess, if any, of the Company’s net investment income for the quarter that
exceeds a quarterly hurdle rate equal to 2% (8% annualized) of the Company’s net
assets.
For this
purpose, net investment income means interest income, dividend income, and any
other income (including any other fees, such as commitment, origination,
syndication, structuring, diligence, managerial assistance, monitoring, and
consulting fees or other fees that the Company receives from portfolio
companies) accrued during the fiscal quarter, minus the Company’s operating
expenses for the quarter (including the base management fee, expenses payable
under the administration agreement, any interest expense and dividends paid on
issued and outstanding preferred stock, if any, but excluding the incentive
fee). Accordingly, the Company may pay an incentive fee based
partly on accrued interest, the collection of which is uncertain or
deferred. Net investment income includes, in the case of investments
with a deferred interest feature (such as original issue discount, debt
instruments with payment-in-kind interest and zero coupon securities), accrued
income that the Company has not yet received in cash. Net investment
income does not include any realized capital gains or losses, or unrealized
capital appreciation or depreciation.
The
incentive fees due in any fiscal quarter will be calculated as
follows:
|
·
|
No
incentive fee in any fiscal quarter in which the Company’s net investment
income does not exceed the hurdle
rate.
|
|
·
|
20%
of the amount of the Company’s net investment income, if any, that exceeds
the hurdle rate in any fiscal
quarter.
|
There
were no investment income incentive fees earned for the third quarters of 2009
and 2008.
The
second part of the incentive fee (the “Capital Gains Fee”) is determined and
payable in arrears as of the end of each fiscal year (or upon termination of the
Investment Advisory Agreement, as of the termination date). The
Capital Gains Fee equals (1) 20% of (a) the Company’s net realized capital gain
(realized capital gains less realized capital losses) on a cumulative basis from
the closing date of the Company’s initial public offering to the end of such
fiscal year, less (b) any unrealized capital depreciation at the end of such
fiscal year, less (2) the aggregate amount of all Capital Gains Fees paid to the
Manager in prior fiscal years. The Company did not earn Capital Gains
Fees for the third quarter of 2009 compared to $2.5 million accrued for the
third quarter of 2008.
Realized
capital gains on a security are the amounts in excess of the net amount realized
from the sale or other disposition of such security over the amortized cost for
the security. Realized capital losses on a security are the amounts
by which the net amount realized from the sale or other disposition of such
security is less than the amortized cost of such security. Unrealized
capital depreciation on a security is the amount by which the original cost of
such security exceeds the fair value of such security at the reporting date or
period end. The Company determines all period-end valuations in
accordance with GAAP and the 1940 Act.
20
The
Manager has agreed that, to the extent permissible under federal securities laws
and regulations, including Regulation M, it will utilize 30% of the fees it
receives from the capital gains portion of the incentive fee (up to a maximum of
$5 million of fees received in the aggregate) to purchase shares of the
Company’s common stock in open market purchases through an independent trustee
or agent. Pursuant to this voluntary agreement, with respect to the
capital gains incentive fees earned for 2007, the Manager previously purchased
approximately $105,000 of the Company’s stock. Any sales of such
stock will comply with any applicable six-month holding period under Section
16(b) of the Securities Act of 1933 and all other restrictions contained in any
law or regulation, to the fullest extent applicable to any such
sale. Any change in this voluntary agreement will not be implemented
without at least 90 days prior notice to stockholders and compliance with all
applicable laws and regulations.
The
Investment Advisory Agreement was originally approved by the Company’s Board of
Directors on November 9, 2004. The investment advisory agreement
provides that unless terminated earlier as described below, the agreement shall
remain in effect from year-to-year after November 9, 2006, provided continuation
is approved at least annually by the Company’s Board of Directors or by the
affirmative vote of the holders of a majority of the Company’s outstanding
voting securities, including, in either case, approval by a majority of the
Company’s Board of Directors who are not interested persons. On
October 30, 2008, the Company’s Board of Directors, including all of the
independent directors, approved an extension of the investment advisory
agreement through November 9, 2009.
The
Investment Advisory Agreement may be terminated at any time, without the payment
of any penalty, by a vote of the Company’s Board of Directors or the holders of
a majority of the Company’s shares on 60 days written notice to the Manager, and
would automatically terminate in the event of its “assignment” (as defined in
the 1940 Act). Either party may terminate the agreement, without
penalty, upon not more than 60 days written notice to the other.
The
Investment Advisory Agreement provides that, absent willful misfeasance, bad
faith or gross negligence in the performance of its duties or the reckless
disregard of its duties and obligations, the Manager and its officers, manager,
agents, employees, controlling persons, members and any other person or entity
affiliated with it are entitled to indemnification from the Company for any
damages, liabilities, costs and expenses (including reasonable attorneys’ fees
and amounts reasonably paid in settlement) arising from the rendering of the
Manager’s services under the Investment Advisory Agreement or otherwise as the
Company’s Manager.
Pursuant
to the Investment Advisory Agreement, the Manager will pay for the compensation
and routine overhead expenses of the investment professionals of the Company’s
management team and their respective staffs, when and to the extent engaged in
providing management and investment advisory services to the Company. The
Company will bear all other costs and expenses of its operations and
transactions.
The
Manager, NGP Investment Advisor, LP, was formed in 2004 and maintains an office
at 1221 McKinney Street, Suite 2975, Houston, Texas 77010. The
Manager’s sole activity is to perform management and investment advisory
services for the Company. The Manager is a registered investment
adviser under the Investment Advisers Act of 1940.
The
foregoing description of the Investment Advisory Agreement is qualified in its
entirety by reference to the full text of the document, a copy of which was
filed as Exhibit 10.1 to the Company’s Form 10-K for the year ended
December 31, 2004, and is incorporated herein by reference.
Administration Agreement
The
Company has entered into an administration agreement with the Administrator (the
“Administration Agreement”), under which the Administrator furnishes the Company
with office facilities, equipment and clerical, bookkeeping and record keeping
services at such facilities. Under the Administration Agreement, the
Administrator also performs, or oversees the performance by third parties of,
the Company’s required administrative services, which include being responsible
for the financial records that the Company is required to maintain and preparing
reports to the Company’s stockholders and reports filed with the
SEC. In addition, the Administrator assists in determining and
publishing the Company’s net asset value, oversees the preparation and filing of
the Company’s tax returns and the printing and dissemination of reports to the
Company’s stockholders and generally oversees the payment of the Company’s
expenses and the performance of administrative and professional services
rendered to the Company by others. To the extent permitted under the
1940 Act, the Administrator may also provide on the Company’s behalf,
significant managerial assistance to the Company’s portfolio
companies. Payments under the agreement are equal to amounts based
upon the allocable portion of the Administrator’s costs and expenses incurred in
connection with administering the Company’s business. The
Administrator bills the Company for charges under the Administration Agreement
monthly in arrears. Either party may terminate the Administration
Agreement without penalty upon 60 days written notice to the other
party. The Administration Agreement will automatically terminate in
the event of its “assignment” (as defined in the 1940 Act).
21
Of the
$674,190 in accounts payable as of September 30, 2009, $251,872 was due to the
Administrator for expenses incurred on the Company’s behalf for the month of
September 2009. By comparison, $210,362 was due to the Administrator
for expenses incurred on the Company’s behalf for the month of September
2008.
The
Company’s Board of Directors originally approved the Administration Agreement on
November 9, 2004. The Administration Agreement provides that unless
terminated earlier, the agreement will continue in effect until November 9,
2006, and from year-to-year thereafter provided such continuance is approved at
least annually by (i) the Company’s Board of Directors and (ii) a
majority of the members of the Company’s Board of Directors who are not parties
to the Administration Agreement or “interested persons” of any such
party. On October 30, 2008, the Company’s Board of Directors,
including a majority of the independent directors, approved the continuation of
the Administration Agreement through November 9, 2009.
The
foregoing description of the Administration Agreement is qualified in its
entirety by reference to the full text of the document, a copy of which was
filed as Exhibit 10.2 to the Company’s Form 10-K for the year ended
December 31, 2004, and is incorporated herein by reference.
Note 6:
|
Federal Income
Taxes
|
The
Company intends to qualify for tax purposes as a RIC under Subchapter M of
Chapter 1 of the Internal Revenue Code of 1986, as amended. As a RIC,
the Company generally will not be subject to federal income tax on the portion
of its investment company taxable income and net capital gain (i.e., realized
net long term capital gains in excess of realized net short term capital losses)
distributed to stockholders. To qualify as a RIC, the Company is
required, among other things, to distribute to its stockholders at least 90% of
investment company taxable income, as defined by the Code, and to meet certain
asset diversification requirements.
The
Company met all RIC requirements and distributed substantially all of its
investment company taxable income for the years ended December 31, 2006, 2007
and 2008. Thus, the Company did not incur any federal income tax
liability for any of these periods.
The
following Company consolidated subsidiaries are subject to federal income taxes
for the period ended September 30, 2009: NGPC Asset Holdings, LP, NGPC Asset
Holdings II, LP, NGPC Asset Holdings III, LP, NGPC Asset Holdings V, LP and NGPC
Asset Holdings VI, LP. The difference between the effective income tax
rate of 28.29% and the statutory federal tax rate of 34% for the nine months
ended September 30, 2009 is primarily attributable to RIC investment company
taxable income and net capital gains that generally will not be subject to
federal income tax, and federal income tax refunds. The difference between
the effective income tax rate of 20.66% and the statutory federal tax rate of
34% for the quarter ended September 30, 2009 is attributable to RIC investment
company taxable income and net capital gains that generally will not be subject
to federal income tax, and federal income tax refunds.
Note 7:
|
Reclassifications
|
The
Company adjusts certain components of net assets to reflect permanent
differences between financial and tax reporting. These
reclassifications have no effect on total net assets or net asset value per
share. During the years ended December 31, 2008 and 2007, the Company
reclassified $135,563 and $64,170, respectively, from undistributed net
investment income (loss) to paid-in capital in excess of par. These
reclassifications were primarily due to non-deductible meal expenses,
non-deductible excise taxes, and income and expenses from a wholly owned
subsidiary. For the year ended December 31, 2008, the
reclassification from undistributed net realized capital gain (loss) to paid-in
capital in excess of par was $7,433,016. During the year ended
December 31, 2007 there were no reclassifications from undistributed net
realized capital gain (loss) to paid-in capital in excess of par.
22
Note 8:
|
Commitments and
Contingencies
|
As of
September 30, 2009, the Company had investments in or commitments to fund
investments to eighteen portfolio companies totaling $262.3 million, on which
$257.0 million was drawn. In addition, the Company has continuing
obligations under the investment advisory agreement with the Manager and the
administration agreement with the Administrator. The agreements
provide that, absent willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of the reckless disregard of its duties
and obligations, the Manager, the Administrator and its officers, managers,
agents, employees, controlling persons, members and any other person or entity
affiliated
with them will be entitled to indemnification from the Company for any damages,
liabilities, costs and expenses (including reasonable attorneys’ fees and
amounts reasonably paid in settlement) arising from the rendering of the
Manager’s or Administrator’s services under the agreements or otherwise as the
Company’s investment adviser or administrator. The agreements also provide that
the Manager, the Administrator and their affiliates will not be liable to the
Company or any stockholder for any error of judgment, mistake of law, any loss
or damage with respect to any of the Company’s investments or any action taken
or omitted to be taken by the Manager or the Administrator in connection with
the performance of any of their duties or obligations under the agreements or
otherwise as investment adviser or administrator to the Company, except to the
extent specified in Section 36(b) of the 1940 Act concerning loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services. In the normal course of business, the Company enters into a variety of
undertakings containing a variety of representations that may expose the Company
to some risk of loss. The amount of future loss, if any, arising from
such undertakings, while not quantifiable, is not expected to be
significant.
Note 9:
|
Fair
Value
|
The
following three broad categories comprise the hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value:
|
·
|
Level 1 — Quoted unadjusted prices
for identical instruments in active markets to which the Company has
access at the date of
measurement.
|
|
·
|
Level 2 — Quoted prices for similar
instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations
in which all significant inputs and significant value drivers are
observable in active markets. Level 2 inputs are those in
markets for which there are few transactions, the prices are not current,
little public information exists or instances where prices vary
substantially over time or among brokered market
makers.
|
|
·
|
Level 3 — Model derived valuations
in which one or more significant inputs or significant value drivers are
unobservable. Unobservable inputs are those inputs that reflect the
Company’s own assumptions that market participants would use to price the
asset or liability based on the best available
information.
|
The
following table sets forth by level within the fair value hierarchy the
Company's financial assets that were accounted for at fair value on a
recurring basis as of September 30, 2009. Fair value accounting
classifies financial assets and liabilities in their entirety based on the
lowest level of input that is significant to the fair value
measurement. The Company's assessment of the significance of a
particular input to the fair value measurement requires judgment, and may affect
the valuation of fair value assets and liabilities and their placement within
the fair value hierarchy levels. The Company estimates the fair value of
the crude oil options using a combined income and market-based valuation
methodology based upon forward commodity price and volatility
curves. Independent pricing services provide the curves, which
reflect broker market quotes.
The
following table presents the Company’s assets measured at fair value on a
recurring basis at September 30, 2009:
Prices
with
|
||||||||||||||||
Quoted
Prices
|
Observable
|
|||||||||||||||
in
Active
|
Market
|
Unobservable
|
||||||||||||||
Markets
|
Inputs
|
Inputs
|
||||||||||||||
Assets at Fair Value
|
Total
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
Long
Term Investments
|
$ | 202,426,076 | $ | - | $ | - | $ | 202,426,076 | ||||||||
Crude
Oil Put Options
|
616,053 | - | - | 616,053 | ||||||||||||
Total
Assets at Fair Value
|
$ | 203,042,129 | $ | - | $ | - | $ | 203,042,129 |
The
Company did not have any liabilities measured at fair value on a recurring basis
at September 30, 2009.
23
The
following table presents a roll forward of the Company’s assets measured at fair
value on a recurring basis using significant unobservable inputs
(Level 3) from December 31, 2008 to September 30, 2009.
Long
Term
|
||||
Assets at Fair Value Using Unobservable Inputs
(Level 3)
|
Investments
|
|||
Balance
as of December 31, 2008
|
$ | 258,792,440 | ||
Transfers
in (out) of Level 3
|
- | |||
Net
amortization of premiums, discounts and fees
|
(10,128,588 | ) | ||
Net
realized gains (losses)
|
(53,963 | ) | ||
Net
unrealized gains (losses)
|
(17,676,145 | ) | ||
Purchases,
sales and redemptions
|
(27,891,615 | ) | ||
Balance
as of September 30, 2009
|
$ | 203,042,129 |
Of the
$17,676,145 in net unrealized losses presented in the table above, $6,963,549
relates to reversals of unrealized gains on commodity derivative instruments
recognized in 2008 and offset by commodity derivative income during
2009. The remaining balance of $10,712,596 relates to unrealized
losses on investments held at September 30, 2009. The Company
presents net unrealized losses on the Consolidated Statement of Operations as
“Net increase (decrease) in unrealized appreciation (depreciation) on portfolio
securities, corporate notes and commodity derivative instruments.”
Note 10:
|
Commodity Derivative
Instruments
|
The
Company may periodically enter into commodity derivative instruments to manage
our exposure to commodity price fluctuations. The Company uses all of
its derivatives for risk management purposes and does not hold any for
speculative or trading purposes. These contracts generally consist of
options contracts on underlying commodities.
The
Company acquired a limited term royalty interest from ATP Oil & Gas
Corporation (“ATP”) and will receive royalty payments from this investment that
are based on crude oil and natural gas production and prices. As a
result, the Company is exposed to fluctuations in crude oil and natural gas
prices. On June 4, 2008, the Company entered into option contracts to
manage the price risk associated with these royalty payments. The
Company accounts for these contracts in accordance with derivative instruments
and hedging accounting rules. The Company has decided not to
designate these instruments as hedging instruments for financial accounting
purposes. As a result, we recognize the change in the instruments’
fair value currently on the Consolidated Statement of Operations as “Net
increase (decrease) in unrealized appreciation (depreciation) on portfolio
securities, corporate notes and commodity derivative instruments.”
Investments
in derivative instruments represent future commitments or options to purchase or
sell other financial instruments or commodities at specific prices at specified
future dates, which expose the Company to market risk if the market value of the
contract is higher or lower than the contract price at the maturity
date. Additionally, these derivative instruments expose the Company
to credit risk arising from the potential inability of counterparties to perform
under the terms of the contracts.
The
components of gains (losses) on commodity derivative instruments are as
follows:
For the Nine Months Ended
|
||||||||
September 30, 2009
|
September 30, 2008
|
|||||||
Unrealized
gains (losses) on commodity derivatives
|
$ | (6,963,549 | ) | $ | 2,181,494 | |||
Commodity
derivative income, net of expired options
|
5,884,027 | (274,625 | ) | |||||
Net
gains (losses) on commodity derivative instruments
|
$ | (1,079,522 | ) | $ | 1,906,869 |
The
Company records unrealized gains (losses) on commodity derivatives on the
Consolidated Statement of Operations as “Net increase (decrease) in unrealized
appreciation (depreciation) on portfolio securities, corporate notes and
commodity derivative instruments.”
24
The
realized gains (losses) on commodity derivatives consist of revenues received on
favorable expired options less the cost of the related expired positions
and are included in total investment income.
Below is
a summary of the Company’s commodity derivative instruments as of September 30,
2009.
Weighted
|
||||||||||||
Volumes
(Bbls) at
|
average
strike
|
Fair
Value at
|
||||||||||
September 30, 2009
|
price per Bbl
|
September 30, 2009
|
||||||||||
Oil:
|
||||||||||||
Put
Options:
|
||||||||||||
2009
|
25,750 | $ | 85.00 | 480,937 | ||||||||
2010
|
7,000 | $ | 85.00 | 135,116 | ||||||||
Total
Oil Put Options
|
32,750 | $ | 616,053 |
Note 11:
|
Recent Accounting
Pronouncements
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued an
accounting standards update which established a framework for measuring fair
value and required additional disclosures about fair value
measurements. As of January 1, 2009, the Company has considered
the new guidance and there is no impact to our consolidated financial
statements, as we do not have non-financial assets or liabilities.
In
March 2008, the FASB issued an accounting standards update on disclosures
about derivative instruments and hedging activities. The new
accounting guidance does not change the accounting for derivatives but requires
enhanced disclosures about derivative strategies and accounting
practices. The Company adopted the new guidance as of January 1,
2009.
In May
2008, the FASB issued an accounting standards update which identified a
consistent framework for selecting accounting principles to be used in preparing
financial statements for non-governmental entities that are presented in
conformity with United States GAAP. The accounting standards update
was effective July 1, 2009. The Company does not believe that the
adoption of this standard will have an impact on its consolidated financial
statements.
In April
2009, the FASB issued three new accounting standards relating to certain aspects
of fair value measurement and related disclosures. The accounting
standards update was effective April 1, 2009. The Company does not
believe that the adoption of these standards will have an impact on its
consolidated financial statements.
In April
2009, the FASB issued an accounting standards update to provide additional
guidance for estimating the fair value of assets or liabilities with low levels
of activity. The new guidance was effective prospectively for interim
and annual reporting periods ending after June 15, 2009. The Company
adopted the new guidance in its Quarterly Report on Form 10-Q for the quarter
ended June 30, 2009. The adoption of this new accounting guidance is
not expected to have a material effect on the Company’s consolidated financial
statements or disclosures.
In May
2009, the FASB issued an accounting standards update on subsequent
events. The new accounting guidance establishes reporting and
disclosure requirements based on the existence of conditions at the date of the
balance sheet for events or transactions that occur after the balance sheet date
but before the financial statements are issued or are available to be
issued. The accounting guidance includes a new required disclosure of
the date through which an entity has evaluated subsequent events and whether
that date is the date the financial statements were issued or were available to
be issued. The Company adopted the new guidance in its Quarterly
Report on Form 10-Q for the quarter ended June 30, 2009. See
Significant Accounting Policies in Note 2.
In June
2009, the FASB issued an accounting standards update which identified the FASB
Accounting Standards Codification as the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities. The
new accounting guidance is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The Company
adopted the new guidance in its Quarterly Report on Form 10-Q for the quarter
ended September 30, 2009.
25
Note
12:
|
Subsequent
Events
|
On
October 2, 2009, the Company entered into a Fourth Amendment to Amended and
Restated Revolving Credit Agreement (the “Fourth Amendment’), among the Company,
the lender parties thereto and SunTrust Bank, as administrative agent for the
lenders. The Fourth Amendment extended the maturity of the Company’s
Investment Facility from August 31, 2010 to August 31, 2012. The
Investment Facility is priced at LIBOR plus 425 to 575 basis points, depending
on the amount drawn. The Company paid a 100 basis point fee in
conjunction with the extension of the maturity. Three of the four
banks in the syndicate reduced their commitments, resulting in the reduction of
the current commitments under the Investment Facility from $87.5 million to
$67.5 million.
On
October 9, 2009, the Company sold its entire investment in Venoco Inc. Senior
Notes for approximately $12.3 million, resulting in a realized capital gain of
approximately $307,000.
On
October 14, 2009, the Company closed an investment with ATP. The
Company acquired a limited term overriding royalty interest in certain oil and
gas producing properties operated by ATP for $15.0 million. The
investment will be accounted for as a dollar denominated production
payment.
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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The
following analysis of our financial condition and results of operations should
be read in conjunction with management’s discussion and analysis contained in
our 2008 Annual Report on Form 10-K, as well as our consolidated financial
statements and the notes thereto included in this Quarterly Report on Form
10-Q.
Forward-Looking
Statements
Certain
statements in this Quarterly Report on Form 10-Q that relate to estimates or
expectations of our future performance or financial condition may constitute
“forward-looking statements” as defined under the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to
various risks and uncertainties, which could cause actual results and conditions
to differ materially from those projected, including, but not limited
to,
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uncertainties
associated with the timing of transaction
closings;
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changes
in the prospects of our portfolio
companies;
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changes
in interest rates;
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changes
in regional, national or international economic conditions and their
impact on the industries in which we
invest;
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continued
disruption of credit and capital markets, such as the events that have
occurred since the third quarter of
2008;
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the
future operating results of our portfolio companies and their ability to
achieve their objectives;
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changes
in the conditions of the industries in which we
invest;
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the
adequacy of our cash resources and working
capital;
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the
timing of cash flows, if any, from the operations of our portfolio
companies;
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the
ability of our Manager to locate suitable investments for us and to
monitor and administer the investments;
and
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other
factors enumerated in our filings with the
SEC.
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We may
use words such as “anticipates,” “believes,” “expects,” “intends,” “will,”
“should,” “may” and similar expressions to identify forward-looking
statements. Such statements are based on currently available
operating, financial and competitive information and are subject to various
risks and uncertainties that could cause actual results to differ materially
from our historical experience and present expectations. Undue
reliance should not be placed on such forward-looking statements, as such
statements speak only as of the date on which they are
made. Additional information regarding these and other risks and
uncertainties is contained in our periodic filings with the
SEC.
26
Overview
We are a
financial services company created to invest primarily in debt securities of
small and mid-size private energy companies. We have elected to be
regulated as a BDC under the 1940 Act and, as such, we are required to comply
with certain regulatory requirements. For instance, we generally have
to invest at least 70% of our total assets in “qualifying assets,”
which include securities of private U.S. companies, U.S. companies whose
securities are listed on a national securities exchange but whose market
capitalization is less than $250 million, cash, cash equivalents, U.S.
government securities and high-quality debt investments that mature in one year
or less. In addition, for federal income tax purposes we operate so
as to be treated as a RIC under the Code. Pursuant to these
elections, we generally will not have to pay corporate-level taxes on any income
and capital gains we distribute to our stockholders. The Company has
several subsidiaries that are single member limited liability companies and
wholly owned limited partnerships established to hold certain portfolio
investments or provide services to the Company in accordance with specific rules
prescribed for a company operating as a RIC. The Company consolidates
the results of its subsidiaries for financial reporting purposes. The Company
does not consolidate the financial results of its portfolio
companies.
Our
investment objective is to generate both current income and capital appreciation
primarily through debt investments with certain equity components. A
key focus area for our targeted investments in the energy industry is domestic
upstream businesses that produce, develop, acquire and explore for oil and
natural gas. We also evaluate investment opportunities in such
businesses as coal, power, electricity, energy services and alternative
energy. Our investments generally range in size from $10 million to
$50 million, however, we may invest more or less depending on market conditions
and our Manager’s view of a particular investment opportunity. Our targeted
investments primarily consist of debt instruments, including senior and
subordinated loans combined in one facility, sometimes with an equity component,
and subordinated loans, sometimes with equity components. We may also
invest in preferred stock and other equity securities on a stand-alone
basis.
We
generate revenue in the form of interest income on the debt securities that we
own, dividend income on any common or preferred stock that we own and capital
gains or losses on any debt or equity securities that we acquire in portfolio
companies and subsequently sell. Our investments, if in the form of debt
securities, typically have a term of three to seven years and bear interest at a
fixed or floating rate. To the extent achievable, we seek to collateralize our
investments by obtaining security interests in our portfolio companies'
assets. We also may acquire minority or majority equity interests in
our portfolio companies, which may pay cash or in-kind dividends on a recurring
or otherwise negotiated basis. In addition, we may generate revenue
in other forms including commitment, origination, structuring, administration or
due diligence fees; fees for providing managerial assistance; and possibly
consultation fees. We recognize any such fees generated in connection
with our investments as earned.
Our level
of investment activity can and does vary substantially from period to period
depending on many factors. Among these factors are: the amount of
debt and equity capital available to energy companies, the level of acquisition
and divestiture activity for such companies, the level and volatility of energy
commodity prices, the general economic and competitive environment for the types
of investments we make, and our own ability to raise capital, both through
issuance of debt and equity securities, to fund our investments. We
believe that the recent dislocation in the credit markets and decline in energy
commodity prices should favorably impact the competitive environment, in that it
has reduced the debt capital available to energy companies from other
sources. While we currently have capital available to invest, our
capital is not unlimited. We remain committed to our underwriting and
investment disciplines in selectively investing in appropriate risk-reward
opportunities within the energy sector.
Accounting
Policies
Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
GAAP. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Changes in the economic
environment, financial markets and any other parameters used in determining such
estimates could cause actual results to differ materially. In
addition to the discussion below, our significant accounting policies are
further described in Note 2 of our consolidated financial statements included in
this Quarterly Report on Form 10-Q.
Valuation
of Investments
Investments
are carried at fair value, as determined in good faith by the Company’s Board of
Directors. On a quarterly basis, the investment team of the Manager
prepares valuations for all of the assets in the Company’s portfolio and
presents the valuations to the Company’s Valuation Committee and Board of
Directors. The Valuation Committee determines and recommends the
valuations to the Board of Directors, which reviews and ratifies the final
portfolio valuations.
27
Investments
in securities for which market quotations are readily available are recorded in
the financial statements at such market quotations as of the valuation
date. For investments in securities for which market quotations are
unavailable, or which have various degrees of trading restrictions, the
investment team of the Manager prepares valuation analyses.
Using the
most recently available financial statements, forecasts and, when applicable,
comparable transaction data, the investment team of the Manager prepares
valuation analyses for the various securities in the Company’s investment
portfolio. The investment team prepares the valuation analyses using
traditional valuation methodologies, which rely on estimates of the asset values
and enterprise values of portfolio companies issuing securities.
The
following three broad categories comprise the hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value:
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Level 1 — Quoted unadjusted prices
for identical instruments in active markets to which the Company has
access at the date of
measurement.
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Level 2 — Quoted prices for similar
instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations
in which all significant inputs and significant value drivers are
observable in active markets. Level 2 inputs are those in
markets for which there are few transactions, the prices are not current,
little public information exists or instances where prices vary
substantially over time or among brokered market
makers.
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Level 3 — Model derived valuations
in which one or more significant inputs or significant value drivers are
unobservable. Unobservable inputs are those inputs that reflect the
Company’s own assumptions that market participants would use to price the
asset or liability based on the best available
information.
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Fair
value accounting classifies financial assets and liabilities in their entirety
based on the lowest level of input that is significant to the fair value
measurement. The Company's assessment of the significance of a
particular input to the fair value measurement requires judgment, and may affect
the valuation of fair value assets and liabilities and their placement within
the fair value hierarchy levels. The Company estimates the fair value of
the crude oil options using a combined income and market-based valuation
methodology based upon forward commodity price and volatility
curves. Independent pricing services provide the curves, which
reflect broker market quotes.
Portfolio
and Investment Activity
In May
2009, Nighthawk Transport I, LP and its subsidiaries (collectively, “Nighthawk”)
defaulted under the terms of its senior credit facility. Nighthawk was
unable to restructure its obligations under the senior credit facility, and on
July 10, 2009 filed a voluntary petition under Chapter 7 of the United States
Bankruptcy Code. The Company holds a 16.98% participation in a $109
million senior secured, second lien facility for Nighthawk. As of
September 30, 2009, the outstanding balance due to the Company under this
facility was $14.5 million, and we have recorded our investment in Nighthawk at
a fair value of zero. Although we are pursuing our claims, because of
Nighthawk’s forced liquidation and the continuing surplus of assets in the
oilfield services industry, we do not expect a substantial recovery of our
invested capital.
On July
16, 2009, BioEnergy Holding, LLC (“BioEnergy”) completed the reorganization of
its specialty chemicals business, whereby a new entity, Myriant Technologies,
LLC (“Myriant”), was formed to continue the activities (research, development,
and commercialization) of the specialty chemicals business. In a
cashless exchange for its original 648,000 BioEnergy warrants, NGPC received
140,687 BioEnergy warrants, 131,741 Myriant units and 32,680 Myriant
warrants.
On July
20, 2009, the Company closed a recapitalization transaction with Alden
Resources, LLC (“Alden”), a Kentucky-based specialty coal
producer. As part of the recapitalization, NGPC Asset Holdings II,
LP, a wholly owned subsidiary of the Company, purchased $5.8 million of
preferred units representing substantially all of the equity in
Alden. The proceeds of the preferred equity issuance are being used
for capital expenditures, working capital and general corporate
purposes. In addition to acquiring a majority ownership position, we
hold a majority of the seats on the board of directors of Alden. We
also restructured our existing $36.5 million Senior Secured Credit Facility with
Alden into an amended and restated $60 million two tranche Senior Secured Credit
Facility with initial funded amounts of $20 million in Tranche A Notes and $19.5
million in Tranche B Notes. The Tranche A and Tranche B Notes bear
interest at LIBOR plus 9%, with a LIBOR floor of 3%. Both the Tranche
A Notes and the Tranche B Notes have the option to pay interest-in-kind (PIK) at
a coupon rate of LIBOR plus 12%, with a LIBOR floor of 3%.
28
On July
31, 2009, BSR Loco Bayou, LLC (“BSR”) repaid in its entirety its $2.72 million
Senior Secured Multiple Advance Term Loan and accrued interest of $0.27
million. The Company continues to hold an overriding royalty interest
and warrants in BSR.
In total
for the quarter ended September 30, 2009, we funded $12.1 million to existing
portfolio companies and received $24.9 million in cash repayments. We
did not add any new companies to our portfolio during the third quarter of
2009.
Following
these transactions our investment portfolio consisted of eighteen portfolio
companies and was invested as follows based on their fair values as of September
30, 2009: 47.2% in senior secured term loans, 4.2% in senior subordinated
secured notes, 0.2% in participating convertible preferred stock, 2.1% in common
stock, 3.0% in corporate notes, 7.4% in membership and partnership units, 4.0%
in net profits interests, 2.2% in limited term royalty interests, and 0.5% in
other investments. The balance of our investment portfolio (as a
percentage of the whole portfolio) was comprised 29.2% of cash and cash
equivalents.
Results
of Operations
Investment
Income
Investment
income for the quarter ended September 30, 2009 was $6.0 million, with $5.9
million attributable to interest from targeted investments in ten portfolio
companies, $0.8 million attributable to income from commodity derivative
instruments, a $0.9 million net loss attributable to royalty income, net of
amortization, and $0.2 million from corporate notes, investments in cash and
cash equivalents and fee income from third parties and
affiliates. This compares to investment income for the quarter ended
September 30, 2008 of $9.9 million with $9.0 million attributable to targeted
investments in eighteen portfolio companies, $0.9 million from corporate notes,
investments in cash and cash equivalents and fee income from third parties and
affiliates.
Investment
income for the nine months ended September 30, 2009, was $20.1 million,
primarily from $18.1 million in interest from targeted investments in portfolio
companies. Additional investment income included $5.9 million
attributable to income from commodity derivative instruments, a $4.6 million net
loss attributable to royalty income, net of amortization, and $0.7 million from
corporate notes, investments in cash and cash equivalents and fee income from
third parties and affiliates. This compares to $21.4 million
attributable to targeted investments in portfolio companies, a $0.3 million net
loss from commodity derivative instruments, $3.6 million attributable to royalty
income, net of amortization and $2.9 million from corporate notes, investments
in cash and cash equivalents and fee income from third parties and affiliates
for the same period in 2008.
Our total
targeted portfolio balance decreased on a cost basis by approximately $42.0
million from $299.0 million on September 30, 2008 to $257.0 million on September
30, 2009. The balance of non-accruing and non-income producing
investments on a cost basis increased from approximately $80.5 million at
September 30, 2008 to approximately $116.9 million at September 30,
2009. The balance of non-accruing and non-income producing
investments on a fair value basis decreased from approximately $85.1 million at
September 30, 2008 to approximately $55.2 million at September 30,
2009. Although LIBOR rates dropped significantly from the third
quarter of 2008 compared to the third quarter of 2009, this had a minimal effect
on our targeted investment income because of LIBOR floors established for new
portfolio companies and certain other existing portfolio companies during
2008. Additionally, the continued downward pressure on U.S. Treasury
Bill interest rates during 2008 and 2009 reduced interest from cash and cash
equivalents.
At
September 30, 2009, the weighted average yield on targeted portfolio
investments, exclusive of capital gains, was 3.63%. The weighted
average yield of our corporate notes was 5.82%. The weighted average
yield of our cash & cash equivalents was 0.64%. The weighted
average yield on our total capital invested at September 30, 2009 was
3.16%. Further, four investments totaling $76.5 million on a cost
basis (Nighthawk, $13.9 million; Formidable, LLC (“Formidable”), $38.8 million;
Alden Tranche B, $19.5 million; and Chroma Exploration & Production, Inc.,
$4.3 million) are currently on non-accrual status. Investments
totaling $40.3 million on a cost basis are non-income producing and include
equity investments in TierraMar Energy LP preferred units, DeanLake Operator,
LLC preferred units, Resaca Exploitation, Inc. (“Resaca”) common stock, Alden
Resources, LLC class E units and warrants and units associated with our
investment in BioEnergy.
At
September 30, 2008, the weighted average yield on targeted portfolio
investments, exclusive of capital gains, was 12.41%. The weighted
average yield of our corporate notes was 5.82%. The weighted average
yield of our U.S. Treasury Bills and cash equivalents was 1.71%. The
weighted average yield on our total capital invested at September 30, 2008 was
8.16%. These yields did not include income from four investments on
non-accrual status.
Weighted
average yields on investments are computed as of a specific date using interest
rates as of the balance sheet date and include amortization of loan discount
points, original issue discount and market premium or discount, royalty interest
income, net profits income and other similar investment income, weighted by
their respective costs when averaged. Additionally, these yields do
not include income from any investments on non-accrual status. Such
weighted average yields are not necessarily indicative of expected total returns
on a portfolio.
29
Operating
Expenses
For the
quarter ended September 30, 2009, operating expenses were $3.2 million compared
to $7.0 million for the quarter ended September 30, 2008. The 2009
amount consisted of investment advisory and management fees of $1.5 million,
insurance expenses, administrative services fees, professional fees, directors’
fees and other general and administrative expenses of $1.2 million and credit
facility interest and fees of $0.5 million. In comparison, for the
quarter ended September 30, 2008, investment advisory and management fees were
$4.5 million, insurance expenses, administrative services fees, professional
fees, directors’ fees and other general and administrative expenses totalled
$1.0 million and credit facility interest and fees were $1.5
million. The third quarter of 2008 included approximately $2.5
million of incentive fees accrued with respect to the net realized gains
associated with our investments in Rubicon Energy Partners, LLC (“Rubicon”)
($12.3 million) and Resaca ($6.0 million).
For the
nine months ended September 30, 2009, operating expenses were $11.2 million
compared to $16.8 million for the same period of 2008. The 2009
amount consisted of investment advisory and management and incentive fees of
$5.0 million, insurance expenses, administrative services fees, professional
fees, directors’ fees, organization costs and other general and administrative
expenses of $3.7 million and credit facility interest and fees of $2.5
million. This compares to investment advisory and management fees of
$8.1 million, insurance expenses, administrative services fees, professional
fees, directors’ fees, organization costs and other general and administrative
expenses of $3.3 million and credit facility interest and fees of $5.4 million
for the nine months ended September 30, 2008.
Operating
expenses for the three and nine month periods include our allocable portion of
the total organizational and operating expenses incurred by us, the Manager and
the Administrator, as determined by our Board of Directors and representatives
of the Manager and the Administrator. According to the terms of the
investment advisory agreement, we calculate the base management fee quarterly as
0.45% of the average of our total assets as of the end of the two previous
quarters. Other general and administrative expenses include allocated
share of employee, facilities and stockholder services and marketing
costs.
Net
Investment Income before Income Taxes
For the
quarter ended September 30, 2009, net investment income before income taxes was
$2.9 million and $2.9 million for the quarter ended September 30,
2008. The year to year change was flat primarily due to lower
interest income on overall lower principal balances, the increase in the balance
of non-accruing investments and the effect of lower commodity prices on royalty
income, net of amortization, offset by lower incentive fee accruals, interest
expense and management fees.
For the
nine months ended September 30, 2009, net investment income before income taxes
was $8.9 million compared to $10.8 million for the nine months ended September
30, 2008. The 17.2% decrease was primarily due to lower interest
income on overall lower principal balances and an increase in the balance of
non-accruing and non-income producing investments, offset by lower incentive fee
accruals and credit facility interest expense and fees on our reduced debt
balance.
Net
Realized Gains
There
were no realized capital gains or losses for the quarter ended September 30,
2009. Realized capital gains for the quarter ended September 30, 2008
were $18.3 million, before taxes, on the sale of $4.8 million of portfolio
investments in Resaca and Rubicon.
For the
nine months ended September 30, 2009, realized capital losses were $0.05
million. Realized capital gains for the nine months ended September
30, 2008 were $18.3 million, before taxes, on the sale of $4.8 million of
portfolio investments in Resaca and Rubicon.
Unrealized
Appreciation or Depreciation on Investments
For the
quarter ended September 30, 2009, the decrease in net unrealized depreciation
was $11.3 million, comprised of an $11.1 million increase in targeted portfolio
fair value and an increase of $0.9 million in the fair value of our corporate
notes, offset by a decrease of $0.7 million in the fair value of commodity
derivative instruments. The increase in targeted portfolio fair value
was largely a result of changes in the estimated current market values of
underlying assets. The decrease in the fair value of commodity
derivative instruments was a result of the reversal of prior period unrealized
appreciation due to realizations in the third quarter of 2009.
For the
quarter ended September 30, 2008, the increase in net unrealized depreciation
was $3.8 million, comprised of a $5.6 million decrease in targeted portfolio
fair value, a $0.6 million decrease in the fair value of corporate notes and a
$2.4 million increase in the fair value of commodity derivative
instruments. The decrease in targeted portfolio fair value was
largely a result of the realization and reversal of $7.7 million of unrealized
gains reported in previous quarters, through the sale of the assets associated
with our ownership of Rubicon and the sale of our Resaca overriding royalty
interests.
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For the
nine months ended September 30, 2009, the increase in net unrealized
depreciation was $17.7 million, comprised of a decrease in targeted portfolio
fair value of $13.1 million and a $7.0 million decrease in the fair value of
commodity derivative instruments, offset by a $2.4 million increase in the fair
value of our corporate notes. This compares to an increase in net
unrealized depreciation of $3.9 million for the nine months ended September 30,
2008, comprised of a $5.4 million decrease in targeted portfolio fair values, a
$0.7 million decrease in the fair value of corporate notes and a $2.2 million
increase in the fair value of commodity derivative instruments.
Thus far
this year, disruption in the credit and equity capital markets and the
volatility of energy commodity prices, have made it more difficult to predict
the timing and amount of future realized capital gains. In addition,
capital markets volatility has impacted our unrealized appreciation and
depreciation. While, in general, current capital and commodity
markets are more stable than during the earlier part of this year, conditions
remain such that it remains difficult to predict capital gains or losses or
fluctuations in our portfolio values.
Net
Increase or Decrease in Stockholders’ Equity from Operations
For the
quarter ended September 30, 2009, we had a net increase in stockholders’ equity
(net assets) resulting from operations of $15.0 million, or $0.69 per share,
compared to a net increase of $14.5 million, or $0.66 per share for the quarter
ended September 30, 2008. The $0.5 million, or $0.03 per share net
increase is attributable to a $15.1 million decrease in unrealized depreciation
on portfolio securities and a $0.6 million decrease in income tax benefits,
offset by a decrease in net realized (after tax) capital gain on portfolio
securities of $14.0 million during the third quarter of 2009, compared to the
third quarter of 2008.
For the
nine months ended September 30, 2009 the net decrease in stockholders’ equity
(net assets), resulting from operations was $6.2 million, or $0.29 per share,
compared to an increase of $22.2 million, or $1.02 per share for the nine months
ended September 30, 2008. The $28.4 million, or $1.31 per share net
decrease is attributable to a decrease in net investment income before income
taxes of $1.9 million due to lower overall investment income offset
by lower management fees and interest expense, $13.7 million increase in
unrealized depreciation on portfolio securities, a decrease in net realized
(after tax) capital gain on portfolio securities of $14.1 million, offset by a
$1.2 million increase in income tax benefits during the third quarter of 2009,
compared to the third quarter of 2008.
Financial
Condition, Liquidity and Capital Resources
During
the quarter ended September 30, 2009, we generated cash from operations,
including interest earned on our portfolio securities, as well as our
investments in corporate notes and U.S. government securities. We
received cash redemptions of investments in portfolio securities and commodity
derivative instruments of $24.9 million. At September 30, 2009, we
had cash and cash equivalents of $83.5 million and investments in corporate
notes of $8.7 million. Our Investment Facility, with an outstanding
balance of $40 million at September 30, 2009, will mature on August 31,
2010. We repaid the entire $75 million balance of our Treasury
Facility on July 16, 2009. We did not renew the Treasury Facility on
its August 31, 2009 maturity date, and we have no plans to do so. As
of September 30, 2009, we had investments in or commitments to fund loan
facilities to eighteen portfolio companies totaling $262.3 million, of which
$257.0 million was drawn. We expect to fund our investments in 2009
from available cash, income earned on our portfolio and temporary investments,
repayments or realizations of existing investments and from borrowings under our
Investment Facility. In the future, we may also fund a portion of our
investments with issuances of equity or senior debt securities. We
may also securitize a portion of our investments in mezzanine or senior secured
loans or other assets. We expect our primary use of funds to be
investments in portfolio companies, cash distributions to holders of our common
stock and payment of fees and other operating expenses.
Commodity
Derivative Instruments
We use
commodity derivative instruments to manage our exposure to commodity price
fluctuations. We do not designate these instruments as hedging instruments
for financial accounting purposes. As a result, we recognize the
change in the instruments’ fair value currently on the Consolidated Statement of
Operations as “Net increase (decrease) in unrealized appreciation (depreciation)
on portfolio securities, corporate notes and commodity derivative
instruments.”
We
acquired a limited term royalty interest from ATP, and the royalty payments
associated with this investment are subject to fluctuations in natural gas and
oil prices. To manage this risk, we purchased oil and natural gas put
options on approximately 93% of our royalty interest. These
transactions limit exposure to declines in oil and natural gas
prices. See “Note 10: Commodity Derivative Instruments” in the
accompanying notes to the consolidated financial statements for further
description of our put options.
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Contractual
Obligations
A summary
of our contractual payment obligations at September 30, 2009 is as
follows:
Less
than
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More
than
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Contractual Obligations
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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|||||||||||||||
September
30, 2009:
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Long-term
debt obligations— revolving credit facilities (1)
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$ | 40,000,000 | $ | 40,000,000 | $ | - | $ | - | $ | - | ||||||||||
Total
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$ | 40,000,000 | $ | 40,000,000 | $ | - | $ | - | $ | - |
(1)
Excludes accrued interest amounts.
Off-Balance
Sheet Arrangements
Currently,
we do not engage in any off-balance sheet arrangements, including any risk
management of commodity pricing or other hedging practices.
Dividends
We have
elected to operate our business so as to be taxed as a RIC under Subchapter M of
the Code. To maintain our RIC status, we must distribute at least 90%
of our “investment company taxable income” (which generally consists of ordinary
income and realized net short-term gains in excess of realized net long-term
capital losses, if any, reduced by deductible expenses) and net tax-exempt
interest. In order to avoid certain excise taxes imposed on RICs, we
will be required to distribute at least 98% of our ordinary income and net
capital gains, and 100% of any income realized, but not distributed or deemed
distributed, in preceding years. We currently intend to make
sufficient distributions to satisfy the annual distribution requirement and to
avoid the excise taxes.
We may
not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our ability
to make distributions due to the asset coverage test for borrowings when
applicable to us as a BDC under the 1940 Act and due to provisions in our credit
facilities. If we do not distribute a certain percentage of our income annually,
we will suffer adverse tax consequences, including possible loss of our status
as a RIC. We cannot assure stockholders that they will receive any distributions
or distributions at a particular level.
Portfolio
Credit Quality
Virtually
all of our portfolio investments are in negotiated, and often illiquid,
securities of energy companies. We maintain a system to evaluate the credit
quality of these investments. While incorporating quantitative analysis, this
system is a qualitative assessment. This system is intended to reflect the
overall, long-term performance of a portfolio company’s business, the collateral
coverage of an investment, and other relevant factors. As a consequence of the
general economic downturn and associated weakness in the energy markets, two of
our investments, Nighthawk and Formidable, have experienced significant
degradation in value that may not be recoverable. However, we believe that our
other assets which may be experiencing stress in the near term generally have
cost structures that should tolerate it. Of the twenty-four rated investments in
eighteen portfolio companies, compared to the prior quarter end, one improved in
rating, zero declined in rating, nineteen retained the same rating and four
investments were added during the quarter. Thirteen investments
totaling approximately $144.8 million (including $13.9 million for Nighthawk and
$38.8 million for Formidable), or approximately 56% of the $257.2 million in
targeted investments and commodity derivative instruments, on a cost basis, are
carried on our watch list due to deterioration in asset coverage, slower than
expected development of the assets supporting the investments, or the downturn
in general economic and energy market conditions. While restructuring
of some of these watch list investments has been and may be required, subject to
general economic and commodity market conditions in the long term, other than
the investments in Nighthawk and Formidable, we do not currently foresee
significant permanent long-term deterioration in the existing
portfolio.
32
For the
third quarter of 2009, the combined increase in unrealized appreciation of our
portfolio securities, corporate notes and commodity derivative instruments of
$11.3 million was largely due to changes in the estimated market values of
underlying assets totaling $12.0 million. This $12.0 million was offset by $0.7
million in reversals of prior year unrealized appreciation of commodity
derivative instruments due to third quarter 2009 realizations. The
$12.0 million net increase in fair value was comprised of increases of
unrealized appreciation totaling $13.6 million offset by increases in unrealized
depreciation of $1.6 million. The $13.6 million increase in unrealized
appreciation consisted primarily of higher market values for Resaca common
stock, $4.5 million; Alden term notes and royalty, $3.4 million; ATP Oil &
Gas Corp. limited term royalty, $2.4 million and Venoco, Inc. senior notes, $1.3
million. The $1.6 million increase in unrealized depreciation consisted
primarily of a decrease in market value for our investment in TierraMar Energy
LP preferred units of $1.5 million.
Recently
Issued Accounting Pronouncements
See
“Note 11: Recent Accounting Pronouncements” in the accompanying notes to
consolidated financial statements for details of recently issued accounting
pronouncements and their expected impact on our financial
statements.
Item 3.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
There
have been no material changes from the information provided in Item 7A of our
Annual Report on Form 10-K for the year ended December 31, 2008.
Item 4.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures (as defined in 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), designed to ensure that information required to be disclosed in our
reports under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms and accumulated and communicated to management, including our
Chief Executive Officer and our Chief Financial Officer, to allow timely
decisions regarding required disclosure. Based on an evaluation of
our disclosure controls and procedures as of the end of the period covered by
this Quarterly Report on Form 10-Q conducted by our management, with the
participation of our Chief Executive Officer and our Chief Financial Officer,
our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were not effective as of September 30, 2009
because they are not yet able to conclude that we have remediated the material
weakness in internal control over financial reporting identified in Item 9A of
our Annual Report on Form 10-K for the year ended December 31,
2008.
The
certifications of our Chief Executive Officer and our Chief Financial Officer
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are
attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set
forth in this Item 4 contain information concerning (i) the evaluation of our
disclosure controls and procedures referred to in paragraph 4 of the
certifications, and (ii) material weaknesses in the design or operation of our
internal control over financial reporting referred to in paragraph 5 of those
certifications. Those certifications should be read in conjunction with this
Item 4 for a more complete understanding of the matters covered by the
certifications.
Changes
in Internal Control Over Financial Reporting
As of
December 31, 2008, our assessment of the effectiveness of our internal control
over financial reporting identified a material weakness in our internal control
over financial reporting. Our management determined that as of
December 31, 2008, the Company did not maintain effective controls over the
determination and reporting of the provision for income taxes. Specifically,
management did not perform a sufficiently precise review to ensure the
completeness and accuracy of the Company’s calculation of its income tax
provision and deferred income tax assets and liabilities. This deficiency
resulted in errors in the annual tax provision and deferred income tax assets
and liabilities for the fiscal year ended December 31, 2008 (which resulted in
audit adjustments to our consolidated financial statements).
33
Beginning
in the first quarter of 2009, and into the second and third quarters, the
Company implemented the following remediation steps to address this material
weakness discussed above and to improve its internal controls over financial
reporting:
|
·
|
improved procedures for the
calculation and reconciliation process of our deferred income tax assets
and liabilities, including validation of underlying supporting
data;
|
|
·
|
enhanced quarterly management
review of the calculation of the deferred income tax assets and
liabilities and underlying supporting data;
and
|
|
·
|
engaged external tax experts to
support the Company’s financial closing and reporting
process.
|
We
believe that these remediation steps represent ongoing improvement measures.
While we have taken steps to begin remediation of the material weakness,
additional measures may be required. We will assess the effectiveness of our
remediation efforts in connection with our management's tests of internal
control over financial reporting in conjunction with our December 31,
2009 financial statements. Except as discussed above, we have
not identified any changes in our internal controls over financial reporting
during the third quarter of 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
34
PART
II – OTHER INFORMATION
Item 1.
|
Legal
Proceedings.
|
Neither
the Company nor any of its subsidiaries is currently a party to, and no property
of the Company or any of its subsidiaries is the subject of, any material legal
proceeding, nor to our knowledge, is any material legal proceeding threatened
against the Company, any of its subsidiaries or any of their
property.
Item 1A.
|
Risk
Factors.
|
There
have been no material changes to the risk factors disclosed under Part I, Item
1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2008.
Item 2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds.
|
Not
applicable.
Item 3.
|
Defaults
Upon Senior Securities.
|
Not
applicable.
Item 4.
|
Submission
of Matters to a Vote of Security
Holders.
|
Not
applicable.
Item 5.
|
Other
Information.
|
Not
applicable.
Item 6.
|
Exhibits.
|
See
“Index to Exhibits” following the signature page for a description of the
exhibits filed as part of this Quarterly Report on Form 10-Q.
35
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NGP
CAPITAL RESOURCES COMPANY
|
|||
By:
|
/s/
John H. Homier
|
||
John
H. Homier
|
|||
President
and Chief Executive Officer
|
By:
|
/s/
Stephen K. Gardner
|
||
Stephen
K. Gardner
|
|||
Chief
Financial Officer, Treasurer and
Secretary
|
Date:
November 6, 2009
Index
to Exhibits
Exhibits
No.
|
Exhibit
|
|
3.1
|
Articles
of Amendment and Restatement (filed as Exhibit 3.2 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2004 and incorporated
herein by reference)
|
|
3.2
|
Bylaws
(filed as Exhibit (b) to the Company’s Registration Statement on Form N-2
filed on August 16, 2004 (Registration No. 333-118279) and incorporated
herein by reference)
|
|
4.1
|
Form
of Stock Certificate (filed as Exhibit (d) to the Company’s Pre-Effective
Amendment No. 2 to Registration Statement on Form N-2 filed on October 7,
2004 (Registration No. 333-118279) and incorporated herein by
reference)
|
|
4.2
|
Dividend
Reinvestment Plan (filed as Exhibit (e) to the Company’s Registration
Statement on Form N-2 filed on August 16, 2004 (Registration No.
333-118279) and incorporated herein by reference)
|
|
10.1
|
Investment
Advisory Agreement between the Company and NGP Investment Advisor, LP
(filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2004 and incorporated herein by
reference)
|
|
10.2
|
Administration
Agreement between the Company and NGP Administration, LLC (filed
as
Exhibit
10.2 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference)
|
|
10.3
|
Trademark
License Agreement between the Company and NGP Energy Capital Management,
L.L.C. (formerly known as Natural Gas Partners, L.L.C.) (filed as Exhibit
10.3 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference)
|
|
10.4
|
Form
of Indemnity Agreement (filed as Exhibit 10.5 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2004 and incorporated
herein by reference)
|
|
10.5
|
Amended
and Restated Revolving Credit Agreement, dated as of August 31, 2006,
among the Company, the lenders from time to time party thereto and
SunTrust Bank, as administrative agent for the lenders (filed as Exhibit
10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006 and incorporated herein by
reference)
|
|
10.6
|
Treasury
Secured Revolving Credit Agreement, dated as of August 31, 2006, among the
Company, the lenders from time to time party thereto and SunTrust Bank as
administrative agent for the lenders (filed as Exhibit 10.7 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2006 and incorporated herein by reference)
|
|
10.7
|
Custody
Agreement between the Company and Wells Fargo Bank, N.A. (filed as Exhibit
(j)(1) to the Company’s Registration Statement on Form N-2 filed October
15, 2007 (Registration No. 333-146715) and incorporated herein by
reference)
|
|
10.8
|
Amendment
No. 1 to Custody Agreement between the Company and Wells Fargo Bank, N.A.
(filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007 and incorporated herein by
reference)
|
|
10.9
|
Amendment
No. 2 to Custody Agreement between the Company and Wells Fargo Bank, N.A.
(filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007 and incorporated herein by
reference)
|
|
10.10
|
First
Amendment to Amended and Restated Revolving Credit Agreement effective as
of August 31, 2006, among the Company, the lenders from time to time party
thereto and SunTrust Bank (filed as Exhibit 10.7 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and
incorporated herein by reference)
|
|
10.11
|
First
Amendment to Treasury Secured Revolving Credit Agreement effective as of
August 31, 2006, among the Company, the lenders from time to time party
thereto and SunTrust Bank (filed as Exhibit 10.9 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and
incorporated herein by reference)
|
|
10.12
|
Second
Amendment to Treasury Secured Revolving Credit Agreement effective as of
October 18, 2007, among the Company, the lenders from time to time party
thereto and SunTrust Bank (filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K on October 24, 2007 and incorporated herein by
reference)
|
|
10.13
|
Second
Amendment to Amended and Restated Revolving Credit Agreement effective as
of March 13, 2008, among the Company, the lenders from time to time party
thereto and SunTrust Bank (filed as Exhibit 10.11 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and
incorporated herein by
reference)
|
Exhibits
No.
|
Exhibit
|
|
10.14
|
Third
Amendment to Treasury Secured Revolving Credit Agreement effective as of
March 13, 2008, among the Company, the lenders from time to time party
thereto and SunTrust Bank (filed as Exhibit 10.12 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and
incorporated herein by reference)
|
|
10.15
|
Third
Amendment to Amended and Restated Revolving Credit Agreement effective as
of September 29, 2008, among the Company, the lenders from time to time
party thereto and SunTrust Bank (filed as Exhibit 10.13 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 and
incorporated herein by reference)
|
|
10.16
|
Fourth
Amendment to Treasury Secured Revolving Credit Agreement effective as of
September 29, 2008, among the Company, the lenders from time to time party
thereto and SunTrust (filed as Exhibit 10.14 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008 and
incorporated herein by reference)
|
|
31.1*
|
Certification
required by Rule 13a-14(a)/15d-14(a) by the Chief Executive
Officer
|
|
31.2*
|
Certification
required by Rule 13a-14(a)/15d-14(a) by the Chief Financial
Officer
|
|
32.1*
|
Section
1350 Certification by the Chief Executive Officer
|
|
32.2*
|
Section
1350 Certification by the Chief Financial
Officer
|
_______________________
*Filed herewith.