AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2005
1933 ACT FILE NO. 333-______
1940 ACT FILE NO. 811-21462
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO. __
[ ] POST-EFFECTIVE AMENDMENT NO. __
AND
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 18
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
10801 MASTIN BOULEVARD, SUITE 222
OVERLAND PARK, KANSAS 66210
(913) 981-1020
AGENT FOR SERVICE
David J. Schulte
10801 Mastin Boulevard, Suite 222
Overland Park, Kansas 66210
COPIES OF COMMUNICATIONS TO:
Deborah Bielicke Eades, Esq. Steven F. Carman, Esq. Anna T. Pinedo, Esq.
Vedder, Price, Kaufman & Kammholz, P.C. Blackwell Sanders Peper Martin LLP Morrison & Foerster LLP
222 N. LaSalle Street 4801 Main Street, Suite 1000 1290 Avenue of the Americas
Chicago, IL 60601 Kansas City, MO 64112 New York, NY 10104
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement
_______________
If any of the securities being registered on this form are offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box)
/ / when declared effective pursuant to section 8(c).
---------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
====================================================================================================================================
PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED(1) OFFERING PRICE PER UNIT PRICE(1) REGISTRATION FEE(2)
------------------------------------------------------------------------------------------------------------------------------------
Tortoise Money Market Cumulative 40 $25,000 $1,000,000 $117.70
Preferred Shares.....................
====================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted to the Securities and Exchange Commission via Fed wire.
THE REGISTRANT INTENDS TO AMEND THIS REGISTRATION STATEMENT ON SUCH
LATER DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 14, 2005
PROSPECTUS LOGO
$
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
____ SERIES II MONEY MARKET CUMULATIVE PREFERRED (MMP(R)) SHARES
Liquidation Preference $25,000 per share
---------------
Tortoise Energy Infrastructure Corporation (the "Company") is a
nondiversified, closed-end management investment company that commenced
operations in February 2004. The Company's investment objective is to seek a
high level of total return with an emphasis on current distributions to
stockholders.
The Company is offering an additional series ("Series II") of auction
rate preferred stock (referred to as "Money Market Cumulative Preferred Shares"
or "MMP Shares") in this Prospectus. The Series II MMP Shares offered in this
Prospectus, together with the previously issued and currently outstanding MMP
Shares ("Series I") are collectively referred to as "MMP Shares." Individual
series of MMP Shares are referred to as a "series". Except as otherwise
described in this Prospectus, the terms of this series and all other series are
the same.
Investors in MMP Shares will be entitled to receive cash dividends at
an annual rate that may vary for each dividend period. The dividend rate for the
initial period for Series II from and including the issue date through _____,
2005 will be ___% per year. For each subsequent dividend period, the dividend
rate will be determined by an auction conducted in accordance with the
procedures described in this Prospectus, and in additional detail in Appendix A
to the Statement of Additional Information. Generally, following the initial
dividend period, each dividend period will be __ days.
MMP Shares will not be listed on any exchange or automated quotation
system. Generally, investors may only buy and sell MMP Shares through an order
placed at an auction with or through a broker-dealer that has entered into an
agreement with the auction agent or in a secondary market that those
broker-dealers may maintain. These broker-dealers are not required to maintain a
market in MMP Shares, and a secondary market, if one develops, may not provide
investors with liquidity. See "Risk Factors - Risks of Investing in MMP Shares -
Secondary Market Risk."
(continued on next page)
---------------
INVESTING IN MMP SHARES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE __ OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
PER SHARE TOTAL
--------- -----
Public offering price....................... $25,000 $
Underwriter discounts and commissions....... $ $
Proceeds to the Company (before expenses)(1) $ $
------------------------------
(1) Does not include offering expenses payable by the Company estimated to
be $_____.
The underwriters expect to deliver the Series II MMP Shares in
book-entry form, through the facilities of The Depository Trust Company, to
broker-dealers on or about _____, 2005.
---------------
LEHMAN BROTHERS STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 2005
On July 15, 2004, the Company issued two series (Series A and Series B)
of auction rate senior notes ("Tortoise Notes") due July 15, 2044, in an
aggregate principal amount of $110,000,000. On September 16, 2004, the Company
issued 1,400 MMP Shares (referred to in this Prospectus as "Series I MMP
Shares"), liquidation preference $25,000 per share ($35,000,000 aggregate
liquidation preference). On April 11, 2005, the Company issued an additional
series (Series C) of Tortoise Notes due April 11, 2045, in an aggregate
principal amount of $55,000,000. The outstanding Tortoise Notes are rated "Aaa"
and "AAA" by Moody's Investors Service Inc. ("Moody's") and Fitch Ratings
("Fitch"), respectively. The Series I MMP Shares are rated "AA2" and "AA" by
Moody's and Fitch, respectively. The Company may issue additional series of
Tortoise Notes or MMP Shares in the future. The MMP Shares and the Tortoise
Notes are intended to increase funds available for investment. This practice,
which is known as leverage, is speculative and involves significant risks.
This offering is conditioned upon the Series II MMP Shares receiving a
rating of "Aa2" from Moody's and "AA" from Fitch.
MMP Shares are senior in liquidation and distribution rights to the
Company's common stock. MMP Shares are junior in liquidation and distribution
rights to Tortoise Notes.
The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to stockholders. Under
normal circumstances, the Company invests at least 90% of total assets
(including assets obtained through leverage) in securities of energy
infrastructure companies, and invests at least 70% of total assets in equity
securities of master limited partnerships. Energy infrastructure companies
engage in the business of transporting, processing, storing, distributing or
marketing natural gas, natural gas liquids (primarily propane), coal, crude oil
or refined petroleum products, or exploring, developing, managing or producing
such commodities. There can be no assurance that the Company will achieve its
investment objective. Tortoise Capital Advisors, LLC serves as the Company's
investment adviser.
You should read this Prospectus, which contains important information
about the Company, before deciding whether to invest and retain it for future
reference. A Statement of Additional Information, dated _____, 2005, and as it
may be supplemented, containing additional information about the Company, has
been filed with the Securities and Exchange Commission (the "Commission") and is
incorporated by reference in its entirety into this Prospectus. You may request
a free copy of the Statement of Additional Information, the table of contents of
which is on page __ of this Prospectus, by calling (888) 728-8784 or by writing
to the Company. You may obtain a copy (and other information regarding the
Company) from the Commission's web site (http://www.sec.gov). You also may email
requests for these documents to the Commission at publicinfo@sec.gov or make a
request in writing to the Commission's Public Reference Section, Washington D.C.
20549-0102. Copies of the documents may be obtained from the Commission upon
paying the applicable fee.
The MMP Shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary............................................................ 1
Financial Highlights......................................................... 18
Use of Proceeds.............................................................. 20
Capitalization............................................................... 20
The Company.................................................................. 21
Investment Objective and Principal Investment Strategies..................... 23
Risk Factors................................................................. 32
Management of the Company.................................................... 41
Rating Agency Guidelines..................................................... 44
Description of Money Market Cumulative Preferred Shares...................... 46
The Auction.................................................................. 58
Description of Tortoise Notes and Borrowings................................. 62
Description of Common Stock.................................................. 63
Certain Provisions in the Company's Charter and Bylaws....................... 63
Closed-End Company Structure................................................. 65
Federal Income Tax Matters................................................... 65
Administrator, Custodian, Transfer Agent, Dividend Paying Agent,
Auction Agent and Redemption Agent......................................... 67
Underwriting................................................................. 68
Legal Opinions............................................................... 69
Intellectual Property Rights................................................. 70
Available Information........................................................ 70
Table of Contents for the Statement of Additional Information................ 71
You should rely only on the information contained in or incorporated by
reference in this Prospectus. Neither the Company nor the underwriters have
authorized anyone to provide you with different or inconsistent information. If
anyone provides you with different or inconsistent information, you should not
rely on it. The Company is not, and the underwriters are not, making an offer to
sell these Series II MMP Shares in any jurisdiction where the offer or sale is
not permitted. You should assume that the information in this Prospectus is
accurate only as of the date of this Prospectus, and that the Company's
business, financial condition and prospects may have changed since this date.
The Company will amend or supplement this Prospectus to reflect material changes
to the information contained in this Prospectus to the extent required by
applicable law.
i
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this Prospectus and in the Statement of Additional
Information, including the Articles Supplementary related to Series II Money
Market Cumulative Preferred Shares ("Series II MMP Shares") (the "Articles
Supplementary") attached as Appendix A to the Statement of Additional
Information. Capitalized terms used but not defined in this Prospectus shall
have the meanings given to such terms in Appendix A of the Statement of
Additional Information.
The Company.................. Tortoise Energy Infrastructure Corporation
(the "Company") is a nondiversified,
closed-end management investment company
that commenced operations in February 2004.
The Company's common stock, $0.001 par value
per share, is traded on the New York Stock
Exchange ("NYSE") under the symbol "TYG."
See "Description of Common Stock." As of
April 30, 2005, the Company had _____ shares
of common stock outstanding and net assets
applicable to shares of common stock of $___
million.
The Adviser.................. Tortoise Capital Advisors, LLC (the
"Adviser") was formed in October 2002 to
provide portfolio management services to
institutional and high-net-worth investors
seeking professional management of their MLP
investments. The Adviser is controlled
equally by Fountain Capital Management,
L.L.C. ("Fountain Capital") and Kansas City
Equity Partners LC ("KCEP"). As of April 30,
2005, the Adviser had approximately $___
million of client assets under management.
The Adviser's investment committee is
comprised of five portfolio managers.
The principal business address of the
Adviser is 10801 Mastin Boulevard, Suite
222, Overland Park, Kansas 66210.
The Offering ................ The Company is offering ______ Series II MMP
Shares at a purchase price of $25,000 per
share ($______ aggregate liquidation
preference) plus accumulated dividends, if
any, from the Original Issue Date. Series II
MMP Shares are being offered by Lehman
Brothers Inc. and Stifel, Nicolaus &
Company, Incorporated as underwriters. See
"Underwriting."
It is a condition of the underwriters'
obligation to purchase the Series II MMP
Shares that the Series II MMP Shares receive
a rating of "Aa2" from Moody's Investors
Service Inc. ("Moody's") and "AA" from Fitch
Ratings ("Fitch").
The issuance of MMP Shares represents the
leveraging of the Company's common stock.
See "Risk Factors -
General Risks of Investing in the Company -
Leverage Risk."
The Company anticipates that it will be able
to invest the net proceeds of this offering
in securities of energy infrastructure
companies that meet the Company's investment
objective and policies within approximately
three months after the completion of this
offering. Because of the investment
opportunities presented by restricted MLP
securities and the limited trading volume of
certain publicly traded MLP securities, the
Company often relies on direct placements to
acquire portfolio securities. To the extent
direct placement opportunities are not
available, the Company would have to acquire
such securities in the open market, which
could take longer than the three-month
period following this offering. Pending
investment in securities that meet the
Company's investment objective, it is
anticipated that the proceeds will be
invested in securities issued by the U.S.
government or its agencies or
instrumentalities or in high quality
short-term or long-term debt obligations.
MMP Shares................... MMP Shares are not listed on an exchange or
automated quotation system. Instead, you may
buy or sell MMP Shares at an Auction that
normally is held every __ (___) days by
submitting orders to a Broker-Dealer. In
addition to the Auctions, Broker-Dealers and
other broker-dealers may maintain a
secondary trading market in MMP Shares
outside of Auctions, but may discontinue
this activity at any time. There is no
assurance that a secondary market will
provide MMP stockholders with liquidity. You
may transfer MMP Shares outside of Auctions
only to or through a Broker-Dealer, or a
broker-dealer that has entered into a
separate agreement with a Broker-Dealer or
to the Company or any of its affiliates, in
certain cases.
For Series II MMP Shares, the dividend rate
for the initial Dividend Period from and
including the Original Issue Date through
_____, 2005, will be ___% per year. The
first Auction Date for Series II MMP Shares
will be _____, 2005 and the initial Dividend
Payment Date will be _____, 2005. Subsequent
Auctions generally will be held every __
(___) days unless the then current Dividend
Period is a Special Dividend Period, the
date that normally would be the Auction Date
is not a Business Day or unforeseen events
preclude the holding of an Auction.
Auction Procedures........... You may buy, sell or hold MMP Shares through
an Auction. Beneficial Owners and Potential
Beneficial
2
Owners of MMP Shares may participate in
Auctions only by submitting Orders through
broker-dealers who have entered into an
agreement with the Auction Agent and the
Company (a "Broker-Dealer") or through a
broker-dealer that has entered into a
separate agreement with a Broker-Dealer. In
general, the types of Orders that may be
placed with a Broker-Dealer include: Hold
Orders, Sell Orders, Bids to sell and Bids
to purchase. The following is a brief
summary of the Auction Procedures for both
Beneficial Owners and Potential Beneficial
Owners. See "The Auction--Auction
Procedures" for more detailed information.
Beneficial Owners. Prior to the Submission
Deadline on each Auction Date for MMP
Shares, each Beneficial Owner may submit
Orders with respect to a series of MMP
Shares to a Broker-Dealer as follows:
o Hold Order - indicating its desire to hold
MMP Shares of such series without regard to
the Applicable Rate for MMP Shares of such
series for the next succeeding Dividend
Period of MMP Shares of such series.
o Bid - indicating its desire to sell the
number of Outstanding MMP Shares, if any, of
such series held by such Beneficial Owner if
the Applicable Rate for MMP Shares of such
series for the next succeeding Dividend
Period of MMP Shares of such series shall be
less than the rate per annum specified by
such Beneficial Owner (also known as a hold
at rate order).
o Sell Order - indicating its desire to sell
the number of Outstanding MMP Shares, if
any, of such series held by such Beneficial
Owner without regard to the Applicable Rate
for MMP Shares of such series for the next
succeeding Dividend Period of MMP Shares of
such series.
Orders submitted (or the failure to do so)
by Beneficial Owners under certain
circumstances will have the effects as
described below:
o A Beneficial Owner of MMP Shares of such
series that submits a Bid with respect to
MMP Shares of such series to its
Broker-Dealer having a rate higher than the
Maximum Rate for MMP Shares of such series
on the Auction Date will be treated as
having submitted a Sell Order with respect
to such MMP Shares.
o A Beneficial Owner of MMP Shares of such
series that fails to submit an Order with
respect to such MMP Shares to its
Broker-Dealer will be deemed to have
3
submitted a Hold Order with respect to such
MMP Shares; provided, however, that if a
Beneficial Owner of Series II MMP Shares
fails to submit an Order with respect to
Series II MMP Shares to its Broker-Dealer
for an Auction relating to a Special Rate
Period of more than __ (___) days, such
Beneficial Owner will be deemed to have
submitted a Sell Order with respect to
Series II MMP Shares.
Potential Beneficial Owners. A customer of a
Broker-Dealer that is not a Beneficial Owner
of a series of MMP Shares but that wishes to
purchase MMP Shares of such series, or that
is a Beneficial Owner of a series of MMP
Shares that wishes to purchase additional
MMP Shares of such series (in each case, a
"Potential Beneficial Owner"), may submit
Bids to its Broker-Dealer in which it offers
to purchase such number of Outstanding MMP
Shares of such series specified in such bid
if the Applicable Rate for MMP Shares of
such series determined on such Auction Date
shall be higher than the rate specified in
such Bid. A Bid placed by a Potential
Beneficial Owner of MMP Shares of such
series specifying a rate higher than the
Maximum Rate for MMP Shares of such series
on the Auction Date will not be accepted.
The Auction Process. If Sufficient Clearing
Bids for a series of MMP Shares exist (that
is, the aggregate number of MMP Shares of
such series subject to Submitted Bids of
Potential Beneficial Owners specifying one
or more rates between the Minimum Rate (for
Standard Dividend Periods or less, only) and
the Maximum Rate (for all Dividend Periods)
for MMP Shares of such series exceeds, or is
equal to, the number of MMP Shares of such
series subject to Submitted Sell Orders),
the Applicable Rate for MMP Shares of such
series for the next succeeding Dividend
Period will be the lowest rate specified in
the Submitted Bids which, taking into
account such rate and all lower rates bid by
Broker-Dealers as or on behalf of Beneficial
Owners and Potential Beneficial Owners,
would result in Beneficial Owners and
Potential Beneficial Owners owning the
aggregate number of MMP Shares of such
series available for purchase in the
Auction.
If Sufficient Clearing Bids for a series of
MMP Shares do not exist (other than because
all of the Outstanding MMP Shares of such
series are subject to Submitted Hold
Orders), then the Applicable Rate for all
MMP Shares of such series for the next
succeeding Dividend
4
Period will be the Maximum Rate for MMP
Shares of such series.
The Auction Procedures include a pro rata
allocation of MMP Shares for purchase and
sale, which may result in a Beneficial Owner
continuing to hold or selling, or a
Potential Beneficial Owner purchasing, a
number of MMP Shares of a series that is
less than the number of MMP Shares of such
series specified in its Order. To the extent
the allocation procedures have that result,
Broker-Dealers will be required to make
appropriate pro rata allocations among their
respective customers.
Settlement of purchases and sales will be
made on the next Business Day (also a
Dividend Payment Date) after the Auction
Date through the Securities Depository in
accordance with the Securities Depository's
normal procedures.
Dividends and Dividend
Periods...................... The initial Dividend Period shall be __
(___) days for the Series II MMP Shares.
Subsequent to the initial Dividend Period,
each Dividend Period for Series II MMP
Shares generally will be __ (___) days in
length. The Applicable Rate for a particular
Dividend Period usually will be determined
by an Auction conducted on the Business Day
immediately preceding the start of the
Dividend Period. In most instances,
dividends are also payable every __ (___)
days, on the day following the end of the
Dividend Period. Prior to any Auction, the
Company may elect, subject to limitations
described herein, upon giving notice to the
Auction Agent and each Broker-Dealer, a
Special Dividend Period. A Special Dividend
Period is a Dividend Period consisting of a
specified number of days (other than __ for
Series II MMP Shares). A Special Dividend
Period will not be effective unless
Sufficient Clearing Bids exist at the
Auction in respect of a Special Dividend
Period. If Sufficient Clearing Bids do not
exist at the Auction, the Dividend Period
commencing on the Business Day succeeding
the Auction will be a __ (___) day Dividend
Period. See "Description of Money Market
Cumulative Preferred Shares--Dividends and
Dividend Periods--Determination of Dividend
Rate" and "The Auction."
Determination of
Applicable Rate.............. Except during a Default Period, the
Applicable Rate for any Dividend Period for
a series of MMP Shares will not be more than
the Maximum Rate. The Maximum Rate will
depend on the credit rating assigned to that
series of MMP Shares and on the duration of
the Dividend Period. The Maximum Rate will
be the Applicable Percentage of the
Reference Rate, subject to upward but not
downward
5
adjustment in the discretion of the Board of
Directors after consultation with the
Broker-Dealers. The Applicable Percentage
will be determined based on the lower of the
credit ratings assigned on that date to that
series of MMP Shares by Moody's and Fitch,
as follows:
MOODY'S FITCH APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or above AA- or above 200%
A3 to A1 A- to A+ 250%
Baa3 to Baa1 BBB- to BBB+ 275%
Below Baa3 Below BBB- 300%
For Standard Dividend Periods or less only,
the Applicable Rate resulting from an
Auction will not be less than the Minimum
Rate. The Applicable Rate for any Dividend
Period commencing during any Default Period,
and the Default Rate described under
"Description of Money Market Cumulative
Preferred Shares," initially will be 300% of
the Reference Rate. The Reference Rate is
the greater of:
(1) the applicable AA Composite Commercial
Paper Rate (for a Dividend Period of fewer
than 184 days) or the applicable Treasury
Index Rate (for a Dividend Period of 184
days or more), or
(2) the applicable London-Interbank Offered
Rate ("LIBOR").
Restrictions on Dividends,
Redemption and Other
Payments..................... As of April 30, 2005, the Company had three
series of auction rate senior notes
outstanding in an aggregate principal amount
of $165,000,000 ("Tortoise Notes"), which
constitute senior securities representing
indebtedness (as defined in the Investment
Company Act of 1940, as amended (the "1940
Act"). The Company may not declare any
dividend on MMP Shares of any series unless,
after giving effect to such dividend, asset
coverage with respect to such Tortoise Notes
(and any other Borrowings) is at least 200%.
In addition, the Company would not be
permitted to declare any other distribution
on or purchase or redeem MMP Shares of any
series unless, after giving effect to such
distribution, purchase or redemption, asset
coverage with respect to such Tortoise Notes
(and any other Borrowings) is at least 300%.
Dividends or other distributions on, or
redemptions or purchases of, MMP Shares of
any series also would be prohibited at any
time that an event of default under the
Tortoise Notes (and any other Borrowings)
has occurred and is continuing. See
"Description of Money Market Cumulative
Preferred
6
Shares--Restrictions on Dividend, Redemption
and Other Payments." In addition, the
Company may make further use of financial
leverage through other Borrowings (defined
below) which constitute senior securities
representing indebtedness under the 1940
Act.
Asset Maintenance............ The Company must maintain Eligible Assets
having an aggregated Discounted Value at
least equal to the MMP Shares Basic
Maintenance Amount as of each Valuation
Date. The Company also must maintain asset
coverage for the MMP Shares on a
non-discounted basis of at least 200% as of
the last business day of each month (the
"1940 Act MMP Shares Asset Coverage"). See
"Rating Agency Guidelines."
The Discount Factors and guidelines for
calculating the Discounted Value of the
Company's portfolio for purposes of
determining whether the MMP Shares Basic
Maintenance Amount has been satisfied have
been established by Moody's and Fitch in
connection with the Company's receipt from
Moody's and Fitch of the "Aa2" and "AA"
Credit Ratings, respectively, with respect
to the Series II MMP Shares on their
Original Issue Date.
The Company estimates that on the Original
Issue Date, the 1940 Act MMP Shares Asset
Coverage, based on the composition of its
portfolio as of _____, 2005, after giving
effect to the issuance of the Series II MMP
Shares offered hereby ($__,000,000) and the
deduction of underwriter discounts and
commissions and estimated offering expenses
for Series II MMP Shares ($___), will be
___%.
In addition, the Company must maintain asset
coverage requirements imposed in connection
with Tortoise Notes and there may be
additional asset coverage requirements
imposed in connection with other Borrowings,
if any.
Redemption................... Although the Company ordinarily will not
redeem MMP Shares, it may be required to
redeem MMP Shares if, for example, the
Company does not meet an asset coverage
ratio required by law or in order to correct
a failure to meet Rating Agency Guidelines
in a timely manner. The Company may
voluntarily redeem MMP Shares in certain
circumstances. See "Description of Money
Market Cumulative Preferred
Shares--Redemption."
Liquidation Preference....... The liquidation preference of the Series II
MMP Shares will be $25,000 per share plus
accumulated but unpaid dividends, if any,
thereon. See "Description of Money
7
Market Cumulative Preferred
Shares--Liquidation Rights."
Voting Rights.................... Except as otherwise indicated, holders of
MMP Shares have one vote per share and vote
together with holders of common stock as a
single class.
The 1940 Act requires that the holders of
the MMP Shares and any other preferred stock
voting as a separate class have the right to
elect two directors of the Company at all
times. The holders of outstanding common
stock and preferred stock, including MMP
Shares, voting together, shall elect the
remainder. However, upon the Company's
failure to pay dividends on preferred stock
in an amount equal to two full years of
dividends, the holders of preferred stock
have the right to elect, as a class, the
smallest number of additional directors as
shall be necessary to assure that a majority
of the directors has been elected by the
holders of preferred stock. The terms of the
additional directors shall end when the
Company pays or provides for all accumulated
and unpaid dividends. See "Description of
Money Market Cumulative Preferred
Shares--Voting Rights."
Investment Objective and
Principal Investment
Strategies................... The Company's investment objective is to
seek a high level of total return with an
emphasis on current distributions to
stockholders. There is no assurance that the
Company will attain its investment
objective. See "Investment Objective and
Principal Investment Strategies" and "Risk
Factors."
Under normal circumstances, the Company
invests at least 90% of its total assets
(including assets obtained through leverage)
in securities of energy infrastructure
companies, and invests at least 70% of its
total assets in equity securities of MLPs.
Energy infrastructure companies engage in
the business of transporting, processing,
storing, distributing or marketing natural
gas, natural gas liquids (primarily
propane), coal, crude oil or refined
petroleum products, or exploring,
developing, managing or producing such
commodities. The Company invests solely in
energy infrastructure companies organized in
the United States. All publicly traded
companies in which the Company invests have
an equity market capitalization greater than
$100 million.
MLP Securities. The Company invests
primarily in equity securities of MLPs,
which currently consist of the following
instruments: common units, convertible
subordinated units, I-Shares and limited
liability
8
company ("LLC") common units. As of the date
of this Prospectus, almost all MLP common
units, I-Shares and LLC common units in
which the Company invests are listed and
traded on the NYSE, American Stock Exchange
("AMEX") or NASDAQ National Market. The
Company also may purchase MLP common units
through direct placements. MLP convertible
subordinated units are not listed or
publicly traded, and typically are purchased
in directly negotiated transactions with MLP
affiliates or institutional holders of such
shares.
MLP common unit holders have typical limited
partner rights, including limited management
and voting rights. MLP common units have
priority over convertible subordinated units
upon liquidation. Common unit holders are
entitled to minimum quarterly distributions
("MQD"), including arrearage rights, prior
to any distribution payments to convertible
subordinated unit holders or incentive
distribution payments to the general
partner. MLP convertible subordinated units
are convertible to common units on a
one-to-one basis after the passage of time
and/or achievement of specified financial
goals. MLP convertible subordinated units
are entitled to MQD after the payments to
holders of common units and before incentive
distributions to the general partner. MLP
convertible subordinated units do not have
arrearage rights. I-Shares typically are
issued by a limited liability company that
owns an interest in and manages an MLP. An
I-Share issuer's assets consist solely of
MLP I-units and therefore I-Shares represent
an indirect investment in MLPs I-Shares have
similar features to common units except that
distributions are payable in additional
I-Shares rather than cash. The Company
invests in I-Shares only if it believes it
will have adequate cash to satisfy its
distribution targets.
Recently, some energy infrastructure
companies in which the Company may invest
have been organized as LLCs. Such companies
are treated in the same manner as MLPs for
federal income tax purposes and, unless
otherwise noted, the term MLP includes all
entities that are treated in the same manner
as MLPs for federal income tax purposes
regardless of their form of organization.
Consistent with its investment objective and
policies, the Company may invest in common
units or other securities of such LLCs.
These common units possess characteristics
similar to those of MLP common units, as
discussed in more detail below. See
"Investment Objectives and Principal
Investment
9
Strategies - Investment Securities - Limited
Liability Company Common Units."
Other Securities. Although the Company also
may invest in equity and debt securities of
energy infrastructure companies that are
organized and/or taxed as corporations, it
is likely that any such investments will be
in debt securities because the dividends
from equity securities from such
corporations typically do not meet the
Company's investment objective. The Company
also may invest in securities of general
partners or other affiliates of MLPs and
private companies operating energy
infrastructure assets.
Nonfundamental Policies. The Company has
adopted the following additional
nonfundamental investment policies:
o The Company may invest up to 30% of
its total assets in restricted
securities, primarily through
direct placements. Subject to this
policy, the Company may invest
without limitation in illiquid
securities. The types of direct
placements that the Company may
purchase consist of MLP convertible
subordinated units, MLP common
units and securities of private
energy infrastructure companies
(i.e., non-MLPs). Investments in
private companies that do not have
any publicly traded shares or units
outstanding are limited to 5% of
total assets.
o The Company may invest up to 25% of
its total assets in debt securities
of energy infrastructure companies,
including securities rated below
investment grade (commonly referred
to as "junk bonds"). Below
investment grade debt securities
will be rated at least B3 by
Moody's and at least B- by Standard
& Poor's Ratings Group ("S&P") at
the time of purchase, or comparably
rated by another statistical rating
organization or if unrated,
determined to be of comparable
quality by the Adviser.
o The Company will not invest more
than 10% of total assets in any
single issuer.
o The Company will not engage in
short sales.
The Company may change its nonfundamental
investment policies without stockholder
approval and will provide notice to
stockholders of material changes (including
notice through stockholder reports);
provided, however, that a change in the
policy of investing at least
10
90% of its total assets in energy
infrastructure companies requires 60 days'
prior written notice to stockholders. Unless
otherwise stated, all investment
restrictions apply only at the time of
purchase and the Company will not be
required to reduce a position due solely to
market value fluctuations. The term total
assets includes assets obtained through
leverage for the purpose of each investment
restriction. The Company may deviate
temporarily from its investment policies
pending investment of the leverage proceeds.
Pending receipt of the leverage proceeds,
the Board of Directors has approved an
interim policy permitting investments in a
single issuer in excess of 10% of total
assets under limited circumstances (but not
exceeding 12%). The interim policy will
terminate upon the receipt of the proceeds
of Series II MMP Shares.
Under adverse market or economic conditions
or pending investment of leverage proceeds,
the Company may invest up to 100% of its
total assets in securities issued or
guaranteed by the U.S. Government or its
instrumentalities or agencies, short-term
debt securities, certificates of deposit,
bankers' acceptances and other bank
obligations, commercial paper rated in the
highest category by a rating agency or other
fixed income securities deemed by the
Adviser to be consistent with a defensive
posture, or may hold cash. The Adviser also
may invest in such instruments to meet
working capital needs including, but not
limited to, for collateral in connection
with certain investment techniques, to hold
a reserve pending payment of distributions,
and to facilitate the payment of expenses
and settlement of trades. The yield on such
securities may be lower than the returns on
MLPs or yields on lower rated fixed income
securities. To the extent the Company uses
this strategy, it may not achieve its
investment objective.
Hedging Transactions......... The Company currently uses, and may in the
future use, interest rate transactions for
hedging purposes only, in an attempt to
reduce the interest rate risk arising from
the Company's leveraged capital structure.
The Company has entered into interest rate
swap transactions intended to hedge the
Company's interest payment obligations under
currently outstanding Series A and Series B
Tortoise Notes against material increases in
interest rates through mid-July 2007. The
Company's interest and dividend payment
obligations under the currently outstanding
Series C Tortoise Notes and the Series I MMP
Shares, respectively, remain unhedged as of
the date of this Prospectus. The Company
does not intend to hedge interest rate risk
of its portfolio holdings.
11
Interest rate transactions that the Company
may use for hedging purposes may expose the
Company to certain risks that differ from
the risks associated with its portfolio
holdings. See "Investment Objective and
Principal Investment Strategies - Hedging
Transactions" and "Risk Factors - General
Risks of Investing in the Company - Hedging
Risk."
Leverage..................... The Company intends to issue Series II MMP
Shares in an amount representing
approximately __% of its total assets,
which, together with already outstanding
Tortoise Notes and MMP Shares, will
represent approximately __% of its total
assets, as of ________, 2005 (including the
proceeds of Series II MMP Shares). The
Company intends to use leverage proceeds
primarily for investment purposes. The
Company also may leverage through other
borrowings, including the issuance of
additional series of Tortoise Notes, the
issuance of additional series of MMP Shares,
or commercial paper. The timing and terms of
any leverage transactions will be determined
by the Company's Board of Directors.
Throughout this Prospectus, Tortoise Notes,
commercial paper or other borrowings, are
collectively referred to as "Borrowings."
Payments to holders of MMP Shares in
liquidation or otherwise will be subject to
the prior payment of all outstanding
indebtedness, including Borrowings.
Risks........................ The following discussion summarizes the
principal risks that you should consider
before investing in MMP Shares and the
Company. For additional information about
the risks associated with MMP Shares and the
Company, see "Risk Factors."
Risks of MMP Shares. The primary risks of
investing in MMP Shares are as follows:
Interest Rate Risk. MMP Shares pay dividends
based on short-term interest rates. If
short-term interest rates rise, dividends on
the MMP Shares may rise so that the amount
of dividends due to holders of MMP Shares
would exceed the Distributable Cash Flow (as
defined below) by the Company's portfolio
securities. This might require that the
Company sell portfolio securities at a time
when it would otherwise not do so, which may
affect adversely the Company's future
ability to generate cash flow. In addition,
rising market interest rates could impact
negatively the value of the Company's
investment portfolio, reducing the amount of
assets serving as asset coverage for the MMP
Shares.
12
Auction Risk. You may not be able to sell
your MMP Shares at an Auction if the Auction
fails; that is, if there are more MMP Shares
offered for sale than there are buyers for
those MMP Shares. Also, if you place hold
orders (orders to retain MMP Shares) at an
Auction only at a specified rate, and the
bid rate exceeds the rate set at the
Auction, you will not retain your MMP
Shares. Finally, if you buy MMP Shares or
elect to retain MMP Shares without
specifying a rate below which you would not
wish to buy or continue to hold those MMP
Shares, and the Auction sets a below-market
rate, you may receive a lower rate of return
on your MMP Shares than the market rate of
interest. See "Description of Money Market
Cumulative Preferred Shares" and "The
Auction - Auction Procedures."
Secondary Market Risk. If you try to sell
your MMP Shares between Auctions, you may
not be able to sell any or all of your MMP
Shares, or you may not be able to sell them
for the liquidation preference plus
accumulated dividends. If the Company has
designated a Special Dividend Period (a
dividend period other than __ (___) days for
Series II MMP Shares), changes in interest
rates could affect the price you would
receive if you sold your MMP Shares in the
secondary market. Lehman Brothers Inc.,
Stifel, Nicolaus & Company, Incorporated and
broker-dealers that maintain a secondary
trading market for MMP Shares are not
required to maintain this market and the
Company has no control over the
establishment or maintenance of this market.
The Company is not required to redeem MMP
Shares if an Auction or an attempted
secondary market sale fails. MMP Shares are
not listed on an exchange or automated
quotation system. If you sell your MMP
Shares to a broker-dealer between Auctions,
you may receive less than the price you paid
for them, especially if market interest
rates have risen since the last Auction.
Senior Leverage Risk. The Series II MMP
Shares will be junior to Tortoise Notes and
any other Borrowings in liquidation and with
respect to distribution rights, and will
rank on a parity with currently outstanding
MMP Shares. The Tortoise Notes and any other
Borrowings may constitute a substantial lien
and burden on MMP Shares by reason of their
prior claim against the income of the
Company and against the net assets of the
Company in liquidation. The Company may not
be permitted to declare dividends or other
distributions with respect to any series of
MMP Shares unless at the time thereof the
Company meets certain asset coverage
requirements and the payment of principal
and interest is
13
not in default with respect to the Tortoise
Notes or any other Borrowings.
Ratings and Asset Coverage Risk. While
Moody's and Fitch have assigned ratings of
"Aa2" and "AA," respectively, to Series I
MMP Shares and are expected to assign such
ratings to Series II MMP Shares, the ratings
do not eliminate or necessarily mitigate the
risks of investing in MMP Shares. A rating
may not fully or accurately reflect all of
the credit and market risks associated with
a security. A rating agency could downgrade
MMP Shares, which may make your securities
less liquid at an Auction or in the
secondary market, though probably with
higher resulting interest rates. If a rating
agency downgrades the ratings assigned to
MMP Shares, the Company may alter its
portfolio or redeem MMP Shares. The Company
may voluntarily redeem MMP Shares under
certain circumstances. See "Description of
Money Market Cumulative Preferred Shares-
Redemption."
Inflation Risk. Inflation is the reduction
in the purchasing power of money resulting
from an increase in the price of goods and
services. Inflation risk is the risk that
the inflation adjusted or "real" value of
your MMP Shares investment or the income
from that investment will be worth less in
the future. As inflation occurs, the real
value of the MMP Shares and the dividend
payable to holders of MMP Shares declines.
In an inflationary period, however, it is
expected that, through the Auction process,
dividend rates would increase, tending to
offset this risk. See "Risk Factors - Risks
of Investing in the MMP Shares - Inflation
Risk."
Company Risks. The Company's net asset
value, its ability to pay dividends and the
liquidation preference on MMP Shares and its
ability to meet asset coverage requirements
depends on the performance of the Company's
investment portfolio. The performance of the
Company's investment portfolio is subject to
a number of risks, including the following:
Concentration Risk. The Company intends to
concentrate its investments in the energy
infrastructure sector, with an emphasis on
securities issued by MLPs. The primary risks
inherent in the energy infrastructure
industry include the following: (1) the
performance and level of distributions of
MLPs can be affected by direct and indirect
commodity price exposure, (2) a decrease in
market demand for natural gas or other
energy commodities could adversely affect
MLP revenues or cash flows, (3) energy
infrastructure assets deplete over
14
time and must be replaced, and (4) a rising
interest rate environment could increase an
MLP's cost of capital.
Nondiversification Risk. The Company is a
nondiversified investment company under the
1940 Act, and it is not a regulated
investment company under the U.S. Internal
Revenue Code of 1986, as amended (the
"Internal Revenue Code"). Accordingly, there
are no limits under the 1940 Act or Internal
Revenue Code with respect to the number or
size of issuers held by the Company.
Liquidity Risk. Certain MLP securities may
trade less frequently than those of other
companies due to their smaller
capitalizations. Investments in securities
that are less actively traded or over time
experience decreased trading volume may be
difficult to dispose of when the Company
believes it is desirable to do so, may
restrict the ability of the Company to take
advantage of other opportunities, and may be
more difficult to value.
Valuation Risk. The Company may invest up to
30% of total assets in restricted
securities, which are subject to
restrictions on resale. The value of such
investments ordinarily will be determined
based on fair valuations determined by the
Adviser pursuant to procedures adopted by
the Board of Directors. Restrictions on
resale or the absence of a liquid secondary
market may affect adversely the ability of
the Company to determine net asset value.
The sale price of securities that are
restricted or otherwise are not readily
marketable may be higher or lower than the
Company's most recent valuations.
Leverage Risk. Subject to limits imposed by
the 1940 Act and the Rating Agency
Guidelines, the Company may increase its
leverage above the amount estimated after
issuance of the Series II MMP Shares. The
Company intends to use leverage primarily
for investment purposes. The Company's use
of leverage may result in risks and can
magnify the effect of any losses. There is
no assurance that a leveraging strategy will
be successful.
See "Risk Factors--General Risks of
Investing in the Company" for a more
detailed discussion of these risks and other
risks of investing in the Company.
Tax Status of Company........ Unlike most investment companies, the
Company has not elected to be treated as a
regulated investment company under the
Internal Revenue Code. Therefore, the
Company is obligated to pay federal and
applicable
15
state corporate taxes on its taxable income.
On the other hand, the Company is not
subject to the diversification rules
applicable to regulated investment
companies. Under current federal income tax
law, the diversification rules limit the
amount that regulated investment companies
may invest directly in MLPs to 25% of the
value of their total assets. In addition,
unlike regulated investment companies, the
Company is not effectively required by the
Internal Revenue Code to distribute
substantially all of its income and capital
gains.
Taxation of MMP
Distributions................ Dividends with respect to MMP Shares from
the Company's earnings and profits allocated
to such shares generally will be taxed as
ordinary income, but may qualify for the
dividends received deduction for corporate
stockholders or for treatment as "qualified
dividend income" that is generally subject
to reduced rates of federal income taxation
for noncorporate stockholders. Distributions
in excess of the Company's allocable
earnings and profits, if any, will first
reduce a stockholder's adjusted tax basis in
his or her MMP Shares, and, after such
adjusted basis is reduced to zero, will be
treated as gain from the sale or exchange of
such MMP Shares. Because the Company will
invest a substantial portion of its assets
in MLPs, which are expected to generate cash
in excess of the taxable income allocated to
holders, it is possible that dividends
payable on MMP Shares could exceed earnings
and profits, which would be treated as a
tax-free return of capital and gain from the
sale or exchange of MMP Shares, as described
above. See "Federal Income Tax Matters."
Auction Agent................ Bank of New York will serve as Auction
Agent, transfer agent, registrar, dividend
paying agent and redemption agent with
respect to MMP Shares.
Book-Entry Only.............. Except as described herein, investors in MMP
Shares will not receive certificates
representing ownership of their shares.
Ownership of MMP Shares will be maintained
in book-entry form by the Securities
Depository or its nominee for the account of
the investor's Agent Member. The investor's
Agent Member, in turn, will maintain records
of the investor's beneficial ownership of
MMP Shares. Accordingly, references in this
Prospectus to an investor's investment in or
purchase, sale or ownership of MMP Shares
are to purchases, sales or ownership of
those shares by Beneficial Owners.
16
Dividends on the MMP Shares will be paid
through the Securities Depository on each
Dividend Payment Date. The Securities
Depository's normal procedures provide for
it to distribute the dividends in same-day
funds to Agent Members, who are in turn
expected to distribute the dividends to the
person for whom they are acting as agent in
accordance with the instructions of that
person. See "Description of Money Market
Cumulative Preferred Shares-Dividends and
Dividend Periods."
17
FINANCIAL HIGHLIGHTS
Information contained in the table below under the headings "Per Common
Share Data" and "Supplemental Data and Ratios" shows the audited operating
performance of the Company from commencement of investment operations on
February 27, 2004 through the end of its fiscal year on November 30, 2004, and
the unaudited operating performance of the Company from December 1, 2004 through
_____, 2005. Except when noted, the information in this table is derived from
the Company's financial statements audited by Ernst & Young, LLP, whose report
is contained in the Statement of Additional Information and is available from
the Company.
PERIOD FROM PERIOD FROM
DECEMBER 1, FEBRUARY 27,
2004 THROUGH 2004(1) THROUGH
___, 2005 NOVEMBER 30,
(UNAUDITED) 2004
------------ ---------------
PER COMMON SHARE DATA(2):
Net asset value, beginning of period.............................. $ --
Public offering price.......................................... 25.00
Underwriting discounts and offering costs on initial public
offering..................................................... (1.17)
Underwriting discounts and offering costs on issuance of
preferred stock.............................................. (0.06)
Underwriting discounts and offering costs on secondary
offering(3).................................................. --
Income (loss) from investment operations: (0.03)
Net investment loss............................................ 3.77
Net realized and unrealized gain on investments................ 3.74
------
Total increase from investment operations....................
Less dividends to preferred stockholders:
Net investment income.......................................... --
Return of capital.............................................. (0.01)
------
Total dividends to preferred stockholders.................... (0.01)
------
Less dividends to common stockholders:
Net investment income.......................................... --
Return of capital.............................................. (0.97)
------
Total dividends to common stockholders....................... (0.97)
------
Net asset value, end of period.................................... $26.53
======
Per share common share market value, end of period................ $27.06
Total investment return on market value(4)........................ 12.51%
18
PERIOD FROM PERIOD FROM
DECEMBER 1, FEBRUARY 27,
2004 THROUGH 2004(1) THROUGH
___, 2005 NOVEMBER 30,
(UNAUDITED) 2004
------------ ---------------
SUPPLEMENTAL DATA AND RATIOS
Net assets applicable to common stockholders, end of period
(000's)........................................................ $336,553
Ratio of expenses to average net assets before waiver(5)(6)....... 2.01%
Ratio of expenses to average net assets after waiver(5)(6)........ 1.73%
Ratio of expenses, without regard to non-recurring organizational
expenses, to average net assets before waiver(5)(6)............ 1.90%
Ratio of expenses, without regard to non-recurring organizational
expenses, to average net assets after waiver(5)(6)............. 1.62%
Ratio of investment loss to average net assets before waiver(5)(6) (0.45)%
Ratio of investment loss to average net assets after waiver(5)(6). (0.17)%
Portfolio turnover rate........................................... 1.39%
Tortoise Auction Rate Senior Notes, end of period (000's)......... $110,000
Per common share amount of borrowings outstanding at end of period $ 35,000
Per common share amount of net assets, excluding borrowings, at
end of period.................................................. $ 8.67
Asset coverage, per $1,000 of principal amount of auction rate
senior notes $ 35.21
Series A....................................................... $ 4,378
Series B....................................................... $ 4,378
Series C....................................................... n/a
Asset coverage, per $25,000 liquidation value per share of
preferred stock................................................ $265,395
Asset coverage ratio of auction rate senior notes(7).............. 438%
------------------------------------
(1) Commencement of operations.
(2) Information presented relates to a share of common stock outstanding
for the entire period.
(3) The public offering price, per common share, for the secondary offering
was $27.35, which represented the Company's market price per common
share on December 14, 2004.
(4) Not annualized. Total investment return is calculated assuming a
purchase of common stock at the market price on the first day and a
sale at the current market price on the last day of the period
reported. The calculation also assumes reinvestment of dividends at
actual prices pursuant to the Company's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions.
(5) Annualized.
(6) The expense ratios and net investment ratios do not reflect the effect
of dividend payments to preferred stockholders.
(7) Represents value of total assets less all liabilities and indebtedness
not represented by Tortoise auction rate senior notes and MMP Shares at
the end of the period divided by Tortoise auction rate senior notes
outstanding at the end of the period.
19
The following table sets forth information about the Company's
outstanding senior securities as of April 30, 2005:
TOTAL PRINCIPAL ASSET COVERAGE ASSET COVERAGE AVERAGE FAIR VALUE
AMOUNT/LIQUIDATION PER $1,000 OF PER SHARE ($25,000 PER $25,000
PREFERENCE PRINCIPAL LIQUIDATION DENOMINATION OR PER
TITLE OF SECURITY OUTSTANDING AMOUNT PREFERENCE) SHARE AMOUNT*
----------------- ------------------ -------------- ------------------ -------------------
Tortoise Notes
Series A $60,000,000 $ $25,000
Series B $50,000,000 $ $25,000
Series C $55,000,000 $ $25,000
Series I Money Market
Cumulative Preferred
Shares (1,400 MMP
Shares) $35,000,000 $ $25,000
------------------------------------
* Fair value of the Series A, Series B and Series C Tortoise Notes and
Series I MMP Shares approximates the principal amount and liquidation
preference, respectively, because interest and dividend rates payable on
the Series A, Series B and Series C Tortoise Notes and Series I MMP
Shares are determined at auctions and fluctuate with changes in current
market interest rates.
USE OF PROCEEDS
As of April 30, 2005, the Company had invested ____% of its total
investment portfolio in securities of energy infrastructure companies. The net
proceeds of the offering of Series II MMP Shares will be approximately $_____
after payment of the underwriting discounts and commissions and estimated
offering costs. The Company anticipates that it will be able to invest the net
proceeds of this offering in securities of energy infrastructure companies that
meet the Company's investment objective and policies as described under
"Investment Objective and Principal Investment Strategies" within approximately
three months after the completion of the offering. Because of the investment
opportunities presented by restricted MLP securities and the limited trading
volume of certain publicly traded MLP securities, the Company often relies on
direct placements to acquire portfolio securities. To the extent direct
placement opportunities are not available, the Company would have to acquire
such securities in the open market, which could take longer than the three-month
period following this offering. Pending the investment in securities that meet
the Company's investment objective, it is anticipated that the proceeds will be
invested in securities issued by the U.S. government or its agencies or
instrumentalities or in high quality, short-term or long-term debt obligations.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
_____, 2005, and as adjusted to give effect to the issuance of the Series II MMP
Shares offered hereby. As indicated below, common stockholders will bear the
offering costs associated with this offering.
20
ACTUAL AS ADJUSTED
------------ ------------
(UNAUDITED)
LONG-TERM DEBT:
Tortoise Notes, denominations of $25,000 or any multiple thereof* $165,000,000 $165,000,000
PREFERRED STOCK OUTSTANDING:
MMP Shares, $.001 par value per share, $25,000 stated value per share at
liquidation; 10,000,000 shares authorized (1,400 shares issued
and ____ shares issued, as adjusted), respectively*................ $ 35,000,000 $
COMMON STOCKHOLDERS' EQUITY:
Common Stock, $.001 par value per share; 100,000,000 shares
authorized, ______ shares outstanding*............................. $ $
Additional paid-in capital............................................ $ $ **
Undistributed net investment income................................... -- --
Accumulated net realized loss from investments:.......................
Net unrealized appreciation of investments............................
Net assets applicable to common stock................................. $ $
------------------------------------
* None of these outstanding shares/notes are held by or for the account
of the Company.
** As adjusted, additional paid-in capital reflects the proceeds of all
issuances of the common stock ($_____) less $0.001 par value per share
of common stock ($_____) and the offering costs related to the issuance
of common shares in the amount of $__ per share of common stock ($_____)
and less the estimated offering costs related to the issuance of
preferred stock in the amount of $_____.
THE COMPANY
The Company is a nondiversified, closed-end management investment
company registered under the 1940 Act that commenced operations on February 27,
2004. The Company was organized as a Maryland corporation on October 30, 2003,
pursuant to a charter (the "Charter") governed by the laws of the State of
Maryland. On February 27, 2004, the Company issued an aggregate of 11,000,000
shares of common stock, par value $0.001 per share, in an initial public
offering. On March 23, 2004 and April 8, 2004, the Company issued an additional
1,100,000 shares of common stock and 500,000 shares of common stock,
respectively, in connection with the partial exercises by the underwriters of
their over-allotment option. On July 15, 2004, the Company issued $110,000,000
aggregate principal amount of Series A and Series B Tortoise Notes. On September
16, 2004, the Company issued 1,400 Series I MMP Shares, liquidation preference
$25,000 per share ($35,000,000 aggregate liquidation preference). On December
22, 2004, the Company issued an additional 1,755,027 shares of common stock in a
registered offering to the public. On January 25, 2005, the Company issued
263,254 additional shares of common stock pursuant to the exercise by the
underwriters of their over-allotment option. On April 11, 2005, the Company
issued Series C Tortoise Notes in an aggregate principal amount of $55,000,000.
As of _____, 2005 the company had net assets of $_______ attributable to the
Company's common stock. The Company's common stock is listed on the NYSE under
the symbol "TYG." The Company's principal office is located at 10801 Mastin
Boulevard, Suite 222, Overland Park, Kansas 66210 and its telephone number is
(913) 981-1020.
21
The following provides information about the Company's outstanding
securities as of April 30, 2005:
AMOUNT
HELD BY THE
COMPANY OR
AMOUNT FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
-------------------------------------------------------------- ---------- ----------- -----------
Common Stock.................................................. 100,000,000 0
Tortoise Notes
Series A................................................... $60,000,000 0 $60,000,000
Series B................................................... $50,000,000 0 $50,000,000
Series C................................................... $55,000,000 0 $55,000,000
Preferred Stock 10,000,000
Series I MMP Shares........................................ -- 0 1,400
22
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE
The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to stockholders. For
purposes of the Company's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Company invests regardless of the tax character of the distributions. The
Company seeks to provide its stockholders with an efficient vehicle to invest in
a portfolio of MLPs. Similar to the federal income tax characterization of cash
distributions made by MLPs to its unit holders, the Company believes that its
common stockholders will have relatively high levels of the deferred taxable
income associated with cash distributions made by the Company to stockholders.
ENERGY INFRASTRUCTURE INDUSTRY
The Company concentrates its investments in the energy infrastructure
sector. The Company pursues its objective by investing principally in a
portfolio of equity securities issued by MLPs. MLP common units historically
have generated higher average total returns than domestic common stock (as
measured by the S&P 500) and fixed income securities. A more detailed
description of investment policies and restrictions and more detailed
information about portfolio investments are contained in the Statement of
Additional Information.
Energy Infrastructure Companies. For purposes of the Company's policy
of investing 90% of total assets in securities of energy infrastructure
companies, an energy infrastructure company is one that derives each year at
least 50% of its gross income from "Qualifying Income" under Section 7704 of the
Internal Revenue Code or one that derives at least 50% of its revenues from the
provision of services directly related to the generation of Qualifying Income.
Qualifying Income is defined as including any income and gains from the
exploration, development, mining or production, processing, refining,
transportation (including pipelines transporting gas, oil or products thereof),
or the marketing of any mineral or natural resource (including fertilizer,
geothermal energy, and timber).
Energy infrastructure companies (other than most pipeline MLPs) do not
operate as "public utilities" or "local distribution companies," and therefore
are not subject to rate regulation by state or federal utility commissions.
However, energy infrastructure companies may be subject to greater competitive
factors than utility companies, including competitive pricing in the absence of
regulated tariff rates, which could cause a reduction in revenue and which could
affect adversely profitability. Most pipeline MLPs are subject to government
regulation concerning the construction, pricing and operation of pipelines.
Pipeline MLPs are able to set prices (rates or tariffs) to cover operating
costs, depreciation and taxes, and provide a return on investment. These rates
are monitored by the Federal Energy Regulatory Commission (FERC) which seeks to
ensure that consumers receive adequate and reliable supplies of energy at the
lowest possible price while providing energy suppliers and transporters a just
and reasonable return on capital investment and the opportunity to adjust to
changing market conditions.
Master Limited Partnerships. Under normal circumstances, the Company
invests at least 70% of its total assets in equity securities of MLPs that each
year derive at least 90% of their gross income from Qualifying Income and are
taxed as partnerships, thereby eliminating federal income tax at the entity
level. An MLP generally has two classes of partners, the general partner and the
limited partners. The general partner is usually a major energy company,
investment fund or the direct management of the MLP. The general partner
normally controls the MLP through a 2% equity interest plus units that are
subordinated to the common (publicly traded) units for at least the first five
years of the partnership's existence and then only convert to common if certain
financial tests are met.
23
As a motivation for the general partner to manage the MLP successfully
and increase cash flows, the terms of most MLPs typically provide that the
general partner receives a larger portion of the net income as distributions
reach higher target levels. As cash flow grows, the general partner receives a
greater interest in the incremental income compared to the interest of limited
partners. The general partner's incentive compensation typically increases up to
50% of incremental income. Nevertheless, the aggregate amount distributed to
limited partners will increase as MLP distributions reach higher target levels.
Given this incentive structure, the general partner has an incentive to
streamline operations and undertake acquisitions and growth projects in order to
increase distributions to all partners.
Energy infrastructure MLPs in which the Company invests generally can
be classified in the following categories:
Pipeline MLPs are common carrier transporters of natural gas,
natural gas liquids (primarily propane, ethane, butane and natural
gasoline), crude oil or refined petroleum products (gasoline, diesel
fuel and jet fuel). Pipeline MLPs also may operate ancillary
businesses, such as storage and marketing of such products. Revenue is
derived from capacity and transportation fees. Historically, pipeline
output has been less exposed to cyclical economic forces due to its low
cost structure and government-regulated nature. In addition, pipeline
MLPs do not have direct commodity price exposure because they do not
own the product being shipped.
Processing MLPs are gatherers and processors of natural gas,
as well as providers of transportation, fractionation and storage of
natural gas liquids ("NGLs"). Revenue is derived from providing
services to natural gas producers, which require treatment or
processing before their natural gas commodity can be marketed to
utilities and other end user markets. Revenue for the processor is fee
based, although it is not uncommon to have some participation in the
prices of the natural gas and NGL commodities for a portion of revenue.
Propane MLPs are distributors of propane to homeowners for
space and water heating. Revenue is derived from the resale of the
commodity on a margin over wholesale cost. The ability to maintain
margin is a key to profitability. Propane serves approximately 3% of
the household energy needs in the United States, largely for homes
beyond the geographic reach of natural gas distribution pipelines.
Approximately 70% of annual cash flow is earned during the winter
heating season (October through March). Accordingly, volumes are
weather dependent, but have utility type functions similar to
electricity and natural gas.
Coal MLPs own, lease and manage coal reserves. Revenue is
derived from production and sale of coal, or from royalty payments
related to leases to coal producers. Electricity generation is the
primary use of coal in the United States. Demand for electricity and
supply of alternative fuels to generators are the primary drivers of
coal demand. Coal MLPs are subject to operating and production risks,
such as: the MLP or a lessee meeting necessary production volumes;
federal, state and local laws and regulations which may limit the
ability to produce coal; the MLP's ability to manage production costs
and pay mining reclamation costs; and the effect on demand that the
Clean Air Act standards have on coal-end users.
Although the Company also may invest in equity and debt securities of
energy infrastructure companies that are organized and/or taxed as corporations,
it is likely that any such investments will be in debt securities because the
equity dividends from such corporations typically do not meet the Company's
investment objective. The Company also may invest in securities of general
partners or other affiliates of MLPs and private companies operating energy
infrastructure assets.
24
INVESTMENT PROCESS
Under normal circumstances, the Company invests at least 90% of its
total assets (including assets obtained through leverage) in securities of
energy infrastructure companies. The Adviser seeks to invest in securities that
offer a combination of quality, growth and yield intended to result in superior
total returns over the long run. The Adviser's securities selection process
includes a comparison of quantitative, qualitative, and relative value factors.
Although the Adviser uses research provided by broker-dealers and investment
firms, primary emphasis is placed on proprietary analysis and valuation models
conducted and maintained by the Adviser's in-house investment analysts. To
determine whether a company meets its criteria, the Adviser generally will look
for a strong record of distribution growth, a solid ratio of debt to equity and
coverage ratio with respect to distributions to unit holders, and a proven track
record, incentive structure and management team. All of the public energy
infrastructure companies in which the Company will invest are expected to have a
market capitalization greater than $100 million.
INVESTMENT POLICIES
The Company seeks to achieve its investment objective by investing
primarily in securities of MLPs that the Adviser believes offer attractive
distribution rates and capital appreciation potential. The Company also may
invest in other securities set forth below if the Adviser expects to achieve the
Company's objective with such investments.
The Company's policy of investing at least 90% of its total assets
(including assets obtained through leverage) in securities of energy
infrastructure companies is nonfundamental and may be changed by the Board of
Directors without stockholder approval, provided that stockholders receive at
least 60 days' prior written notice of any change.
The Company has adopted the following additional nonfundamental
policies:
o Under normal circumstances, the Company invests at least 70%
and up to 100% of its total assets in equity securities issued
by MLPs. Equity units currently consist of common units,
convertible subordinated units, and pay-in-kind units.
o The Company may invest up to 30% of its total assets in
restricted securities, primarily through direct placements.
Subject to this policy, the Company may invest without
limitation in illiquid securities. The types of restricted
securities that the Company may purchase include MLP
convertible subordinated units, unregistered MLP common units
and securities of private companies (i.e., non-MLPs).
Investments in private companies that do not have any publicly
traded shares or units are limited to 5% of total assets.
o The Company may invest up to 25% of its total assets in debt
securities of energy infrastructure companies, including
certain securities rated below investment grade ("junk
bonds"). Below investment grade debt securities will be rated
at least B3 by Moody's and at least B- by S&P at the time of
purchase, or comparably rated by another statistical rating
organization or if unrated, determined to be of comparable
quality by the Adviser.
o The Company will not invest more than 10% of its total assets
in any single issuer.
o The Company will not engage in short sales.
Unless otherwise stated, all investment restrictions apply at the time
of purchase and the Company will not be required to reduce a position due solely
to market value fluctuations. The Company may temporarily deviate from its
investment policies pending investment of the leverage proceeds.
25
Pending receipt of the leverage proceeds, the Board of Directors has approved an
interim policy permitting investments in a single issuer in excess of 10% of
total assets under limited circumstances (but not exceeding 12%). The interim
policy will terminate upon the receipt of the proceeds of this offering.
INVESTMENT SECURITIES
The types of securities in which the Company may invest include, but
are not limited to, the following:
Equity Securities of MLPs. Consistent with its investment objective,
the Company may invest up to 100% of its total assets in equity securities
issued by energy infrastructure MLPs, including common units, convertible
subordinated units, I-Shares and common units of LLCs. The table below
summarizes the features of these securities, and a further discussion of these
securities follows.
CONVERTIBLE
COMMON UNITS SUBORDINATED UNITS
(FOR MLPS TAXED AS (FOR MLPS TAXED AS
PARTNERSHIPS)(1) PARTNERSHIPS) I-SHARES
------------------ ------------------ ---------------------------
VOTING RIGHTS.............. Limited to certain Same as common units No direct MLP voting rights
significant decisions; no
annual election of
directors
DIVIDEND PRIORITY.......... First right to minimum Second right to MQD; no Equal in amount and
quarterly distribution arrearage rights priority to common units
("MQD") specified in but paid in additional
Partnership Agreement; I-Shares at current market
arrearage rights value of I-Shares
DIVIDEND RATE.............. Minimum set in Partnership Equal in amount to common Equal in amount to common
Agreement; participate pro units; participate pro units
rata with subordinated rata with common units
after both MQDs are met above the MQD
TRADING.................... Listed on NYSE, AMEX and Not publicly traded Listed on NYSE
NASDAQ National Market
26
CONVERTIBLE
COMMON UNITS SUBORDINATED UNITS
(FOR MLPS TAXED AS (FOR MLPS TAXED AS
PARTNERSHIPS)(1) PARTNERSHIPS) I-SHARES
------------------ ------------------ ---------------------------
FEDERAL INCOME ............ Ordinary income to the Same as common units Full distribution treated
TAX TREATMENT extent of taxable income as return of capital;
allocated to holder; since distribution is in
tax-free return of capital shares, total basis is not
thereafter to extent of reduced
holder's basis; remainder
as capital gain
TYPE OF INVESTOR........... Retail; creates unrelated Same as common units Institutional; does not
business taxable income create unrelated business
for tax-exempt investor; taxable income; qualifying
investment by regulated income for regulated
investment companies investment companies
limited to 25% of total
assets
LIQUIDITY PRIORITY......... Intended to receive return Second right to return of Same as common units
of all capital first capital; pro rata with (indirect right through
common units thereafter I-share issuer)
CONVERSION RIGHTS.......... None One-to-one ratio into None
common units
------------------------------------
(1) Recently, some energy infrastructure companies in which the Company may
invest have been organized as limited liability companies ("LLCs").
Such companies are treated in the same manner as MLPs for federal
income tax purposes. Common units of LLCs have similar characteristics
as those of MLP common units, except that LLC common units typically
have voting rights with respect to the LLC and LLC common units held by
management are not entitled to increased percentages of cash
distributions as increased levels of cash distributions are received by
the LLC. The characteristics of LLCs and their common units are more
fully discussed below.
MLP Common Units. MLP common units represent an equity ownership
interest in a partnership, providing limited voting rights and entitling the
holder to a share of the company's success through distributions and/or capital
appreciation. Unlike stockholders of a corporation, common unit holders do not
elect directors annually and generally have the right to vote only on certain
significant events, such as mergers, a sale of substantially all of the assets,
removal of the general partner or material amendments to the partnership
agreement. MLPs are required by their partnership agreements to distribute a
large percentage of their current operating earnings. Common unit holders
generally have first right to a MQD prior to distributions to the convertible
subordinated unit holders or the general partner (including incentive
distributions). Common unit holders typically have arrearage rights if the MQD
is not met. In the event of liquidation, MLP common unit holders have a right to
the partnership's remaining assets after bondholders, other debt holders, and
preferred unit holders have been paid in full. MLP common units trade on a
national securities exchange or over-the-counter.
Limited Liability Company Common Units. Recently, some energy
infrastructure companies in which the Company may invest have been organized as
limited liability companies ("LLCs"). Such LLCs are treated in the same manner
as MLPs for federal income tax purposes. Consistent with its investment
objective and policies, the Company may invest in common units or other
securities of such LLCs. LLC common units represent an equity ownership interest
in an LLC, entitling the holder to a share of the LLC's success through
distributions and/or capital appreciation. Similar to MLPs, LLCs typically do
not pay federal income tax at the entity level and are required by their
operating agreements to distribute a large percentage of their current operating
earnings. LLC common unit holders generally have first right
27
to a MQD prior to distributions to subordinated unit holders and typically have
arrearage rights if the MQD is not met. In the event of liquidation, LLC common
unit holders have a right to the LLC's remaining assets after bond holders,
other debt holders and preferred unit holders, if any, have been paid in full.
LLC common units may trade on a national securities exchange or
over-the-counter.
In contrast to MLPs, LLCs have no general partner and there are no
incentives that entitle management or other unit holders to increased
percentages of cash distributions as distributions reach higher target levels.
In addition, LLC common unit holders typically have voting rights with respect
to the LLC, whereas MLP common units have limited voting rights.
MLP Convertible Subordinated Units. MLP convertible subordinated units
typically are issued by MLPs to founders, corporate general partners of MLPs,
entities that sell assets to the MLP, and institutional investors. The purpose
of the convertible subordinated units is to increase the likelihood that during
the subordination period there will be available cash to be distributed to
common unit holders. The Company expects to purchase convertible subordinated
units in direct placements from such persons. Convertible subordinated units
generally are not entitled to distributions until holders of common units have
received specified MQD, plus any arrearages, and may receive less in
distributions upon liquidation. Convertible subordinated unit holders generally
are entitled to MQD prior to the payment of incentive distributions to the
general partner, but are not entitled to arrearage rights. Therefore, they
generally entail greater risk than MLP common units. They are generally
convertible automatically into the senior common units of the same issuer at a
one-to-one ratio upon the passage of time or the satisfaction of certain
financial tests. These units do not trade on a national exchange or
over-the-counter, and there is no active market for convertible subordinated
units. The value of a convertible security is a function of its worth if
converted into the underlying common units. Convertible subordinated units
generally have similar voting rights to MLP common units.
MLP I-Shares. I-Shares represent an indirect investment in MLP I-units.
I-units are equity securities issued to affiliates of MLPs, typically a limited
liability company, that owns an interest in and manages the MLP. The issuer has
management rights but is not entitled to incentive distributions. The I-Share
issuer's assets consist exclusively of MLP I-units; however, the MLP does not
allocate income or loss to the I-Share issuer. Distributions by MLPs to I-unit
holders are made in the form of additional I-units generally equal in amount to
the cash received by common unit holders of MLPs. Distributions to I-Share
holders are made in the form of additional I-Shares generally equal in amount to
the I-units received by the I-Share issuer. The issuer of the I-Share is taxed
as a corporation for federal income tax purposes. Accordingly, investors receive
a Form 1099, are not allocated their proportionate share of income of the MLPs
and are not subject to state income tax filing obligations.
Debt Securities. The Company may invest up to 25% of its total assets
in debt securities of energy infrastructure companies, including securities
rated below investment grade. The Company's debt securities may have fixed or
variable principal payments and all types of interest rate and dividend payment
and reset terms, including fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features. To the extent that the
Company invests in below investment grade debt securities, such securities will
be rated, at the time of investment, at least B- by S&P's or B3 by Moody's or a
comparable rating by at least one other rating agency or, if unrated, determined
by the Adviser to be of comparable quality. If a security satisfies the
Company's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Company will not be required to dispose of
such security. If a downgrade occurs, the Adviser will consider what action,
including the sale of such security, is in the best interest of the Company and
its stockholders.
Because the risk of default is higher for below investment grade
securities than investment grade securities, the Adviser's research and credit
analysis is an especially important part of managing securities
28
of this type. The Adviser attempts to identify those issuers of below investment
grade securities whose financial condition the Adviser believes are adequate to
meet future obligations or have improved or is expected to improve in the
future. The Adviser's analysis focuses on relative values based on such factors
as interest or dividend coverage, asset coverage, earnings prospects and the
experience and managerial strength of the issuer.
Restricted Securities. The Company may invest up to 30% of its total
assets in restricted securities, primarily through direct placements. An issuer
may be willing to offer the purchaser more attractive features with respect to
securities issued in direct placements because it has avoided the expense and
delay involved in a public offering of securities. Adverse conditions in the
public securities markets also may preclude a public offering of securities. MLP
convertible subordinated units typically are purchased from affiliates of the
issuer or other existing holders of convertible units rather than directly from
the issuer.
Restricted securities obtained by means of direct placements are less
liquid than securities traded in the open market because of statutory and
contractual restrictions on resale. Such securities are, therefore, unlike
securities that are traded in the open market, which can be expected to be sold
immediately if the market is adequate. This lack of liquidity creates special
risks for the Company. However, the Company could sell such securities in
privately negotiated transactions with a limited number of purchasers or in
public offerings under the Securities Act of 1933, as amended (the "1933 Act").
MLP convertible subordinated units also convert to publicly traded common units
upon the passage of time and/or satisfaction of certain financial tests.
Defensive and Temporary Investments. Under adverse market or economic
conditions or pending investment of offering or leverage proceeds, the Company
may invest up to 100% of its total assets in securities issued or guaranteed by
the U.S. Government or its instrumentalities or agencies, short-term debt
securities, certificates of deposit, bankers' acceptances and other bank
obligations, commercial paper rated in the highest category by a rating agency
or other fixed income securities deemed by the Adviser to be consistent with a
defensive posture, or may hold cash. The Adviser also may invest in such
instruments to meet working capital needs including, but not limited to, for
collateral in connection with certain investment techniques, to hold a reserve
pending payment of dividends, and to facilitate the payments of expenses and
settlement of trades. The yield on such securities may be lower than the returns
on MLPs or yields on lower rated fixed income securities. To the extent the
Company uses this strategy, it may not achieve its investment objective.
USE OF LEVERAGE
The Company intends to leverage by using Borrowings and issuing MMP
Shares (including Series II MMP Shares) in an aggregate amount of approximately
__% of the Company's total assets, as of _____, 2005. The amount of outstanding
Borrowings and MMP Shares may vary with prevailing market or economic
conditions. In addition to issuing the Series II MMP Shares offered by this
Prospectus in an amount currently estimated to be approximately __% of the
Company's total assets, the Company recently issued $55,000,000 aggregate
principal amount of its Series C Tortoise Notes, due April 11, 2045, which
together with Series A and Series B Tortoise Notes and Series I MMP Shares
represent approximately __% of the Company's total assets. The timing and terms
of any additional leverage transactions will be determined by the Company's
Board of Directors. Leverage entails special risks. See "Risk Factors--General
Risks of Investing in the Company--Leverage Risk." The management fee paid to
the Adviser will be calculated on the basis of the Company's Managed Assets
(which includes the proceeds of any financial leverage), so the fee will be
higher when leverage is used.
The Company reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or to issue other
senior securities in order to maintain or increase the
29
Company's current level of leverage to the extent permitted by the 1940 Act and
existing agreements between the Company and third parties.
HEDGING TRANSACTIONS
In an attempt to reduce the interest rate risk arising from the
Company's leveraged capital structure, the Company currently uses, and may in
the future use, interest rate transactions such as swaps, caps and floors. The
use of interest rate transactions is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio security transactions. In an interest rate swap, the Company would
agree to pay to the other party to the interest rate swap (which is known as the
"counterparty") a fixed rate payment in exchange for the counterparty agreeing
to pay to the Company a variable rate payment that is intended to approximate
the Company's variable rate payment obligation on any variable rate borrowings.
The payment obligations would be based on the notional amount of the swap. The
Company has entered into interest rate swap transactions intended to hedge
against the Company's interest payment obligations under the outstanding Series
A and Series B Tortoise Notes against material increases in interest rates
through mid-July 2007. The Company's interest and dividend payment obligations
under the Series C Tortoise Notes and Series I MMP Shares, respectively, remain
unhedged as of the date of this Prospectus. In an interest rate cap, the Company
would pay a premium to the counterparty up to the interest rate cap and, to the
extent that a specified variable rate index exceeds a predetermined fixed rate,
would receive from the counterparty payments of the difference based on the
notional amount of such cap. In an interest rate floor, the Company would be
entitled to receive, to the extent that a specified index falls below a
predetermined interest rate, payments of interest on a notional principal amount
from the party selling the interest rate floor. Depending on the state of
interest rates in general, the Company's use of interest rate transactions could
affect the Company's ability to make required interest payments on the Tortoise
Notes. To the extent there is a decline in interest rates, the value of the
interest rate transactions could decline. If the counterparty to an interest
rate transaction defaults, the Company would not be able to use the anticipated
net receipts under the interest rate transaction to offset the Company's cost of
financial leverage.
CONFLICTS OF INTEREST
Conflicts of interest may arise from the fact that the Adviser and its
affiliates carry on substantial investment activities for other clients, in
which the Company has no interest. The Adviser or its affiliates may have
financial incentives to favor certain of such accounts over the Company. Any of
their proprietary accounts and other customer accounts may compete with the
Company for specific trades. The Adviser or its affiliates may give advice and
recommend securities to, or buy or sell securities for the Company which advice
or securities may differ from advice given to, or securities recommended or
bought or sold for, other accounts and customers, even though their investment
objectives may be the same as, or similar to, those of the Company.
The Adviser also serves as investment adviser to Tortoise North
American Energy Corporation ("TYN") and Tortoise MLP Investment Corporation
("TMLP"), each recently organized, nondiversified, closed-end investment
management companies. Once TYN commences operations, it intends to invest
primarily in publicly traded Canadian royalty trusts and income trusts and
publicly traded MLPs. Once TMLP commences operations, it intends to invest
primarily in publicly traded MLPs. To the extent certain MLP securities or other
energy infrastructure company securities meet the investment objectives of TYN
and TMLP, the Company may compete with TYN and TMLP for the same investment
opportunities.
The Adviser will evaluate a variety of factors in determining whether a
particular investment opportunity or strategy is appropriate and feasible for
the relevant account at a particular time, including, but not limited to, the
following: (1) the nature of the investment opportunity taken in the context of
the
30
other investments at the time; (2) the liquidity of the investment relative to
the needs of the particular entity or account; (3) the availability of the
opportunity (i.e., size of obtainable position); (4) the transaction costs
involved; and (5) the investment or regulatory limitations applicable to the
particular entity or account. Because these considerations may differ when
applied to the Company and relevant accounts under management in the context of
any particular investment opportunity, the investment activities of the Company,
on the one hand, and other managed accounts, on the other hand, may differ
considerably from time to time. In addition, the fees and expenses of the
Company will differ from those of the other managed accounts. Accordingly,
stockholders should be aware that the future performance of the Company and
other accounts of the Adviser may vary.
Situations may occur when the Company could be disadvantaged because of
the investment activities conducted by the Adviser and its affiliates for its
other accounts. Such situations may be based on, among other things, the
following: (1) legal or internal restrictions on the combined size of positions
that may be taken for the Company or the other accounts, thereby limiting the
size of the Company's position; or (2) the difficulty of liquidating an
investment for the Company or the other accounts where the market cannot absorb
the sale of the combined position. The Company's investment opportunities may be
limited by affiliations of the Adviser or its affiliates with energy
infrastructure companies.
Under the 1940 Act, the Company and its affiliates may be precluded
from co-investing in negotiated private placements of securities. The Company
and the Adviser have applied to the SEC for exemptive relief to permit the
Company and its affiliates to make such investments. There is no assurance that
the requested relief will be granted by the SEC. Unless and until the Company
and the Adviser obtain an exemptive order, the Company will not co-invest with
its affiliates in negotiated private placement transactions. Until the Company
and the Adviser receive exemptive relief, the Advisor will observe a policy for
allocating negotiated private placement opportunities among its clients that
takes into account the amount of each client's available cash and its investment
objectives.
The Adviser and its principals, officers, employees, and affiliates may
buy and sell securities or other investments for their own accounts and may have
actual or potential conflicts of interest with respect to investments made on
behalf of the Company. As a result of differing trading and investment
strategies or constraints, positions may be taken by principals, officers,
employees, and affiliates of the Adviser that are the same as, different from,
or made at a different time than positions taken for the Company.
PORTFOLIO TURNOVER
The Company's annual portfolio turnover rate may vary greatly from year
to year. Although the Company cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 30% under normal circumstances. From
the commencement of operations through November 30, 2004, the Company's actual
portfolio turnover rate was 1.39%. From the period beginning December 1, 2004
through _____, 2005, the portfolio turnover rate was ___%. Portfolio turnover
rate is not considered a limiting factor in the execution of investment
decisions for the Company. A higher turnover rate results in correspondingly
greater brokerage commissions and other transactional expenses that are borne by
the Company. High portfolio turnover may result in the Company's recognition of
gains that will increase the Company's tax liability and thereby lower the
amount of after-tax cash available for the payment of dividends. In addition,
high portfolio turnover may increase the Company's current and accumulated
earnings and profits, resulting in a greater portion of the Company's
distributions being treated as taxable dividends for federal income tax
purposes. See "Federal Income Tax Matters."
31
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security, like the MMP Shares, involves risk, including the risk that you may
receive little or no return on your investment or even that you may lose part or
all of your investment. Therefore, before investing you should consider
carefully the following risks that you assume when you invest in MMP Shares.
RISKS OF INVESTING IN MMP SHARES
Interest Rate Risk. The MMP Shares pay dividends based on short-term
interest rates. If short-term interest rates rise, dividend rates on the MMP
Shares may rise so that the amount of dividends payable to holders of MMP Shares
would exceed the amount of income from the Company's portfolio securities. This
might require the Company to sell portfolio securities at a time when it
otherwise would not do so, which may affect adversely the Company's future
ability to generate cash flow. While the Company may manage this risk by
entering into interest rate transactions, there is no guarantee this strategy
will be implemented or will be successful in reducing or eliminating interest
rate risk. In addition, rising market interest rates could impact negatively the
value of the Company's investment portfolio comprised of debt securities,
reducing the amount of assets serving as asset coverage for the MMP Shares.
Auction Risk. You may not be able to sell your MMP Shares at an Auction
if the Auction fails; that is, if there are more MMP Shares offered for sale
than there are buyers for those shares. Also, if you place hold orders (orders
to retain MMP Shares) at an Auction only at a specified rate, and that bid rate
exceeds the rate set at the Auction, you will not retain your MMP Shares.
Finally, if you buy shares or elect to retain shares without specifying a rate
below which you would not wish to continue to hold those shares, and the Auction
sets a below-market rate, you may receive a lower rate of return on your shares
than the market rate. See "Description of Money Market Cumulative Preferred
Shares" and "The Auction--Auction Procedures."
Secondary Market Risk. If you try to sell your MMP Shares between
Auctions, you may not be able to sell any or all of your shares, or you may not
be able to sell them for the liquidation preference plus accumulated dividends.
If the Company has designated a Special Dividend Period (a dividend period other
than __ (___) days for Series II MMP Shares), changes in interest rates could
affect the price you would receive if you sold your shares in the secondary
market. Lehman Brothers Inc., Stifel, Nicolaus & Company, Incorporated and
broker-dealers that maintain a secondary trading market for MMP Shares are not
required to maintain this market and the Company has no control over the
establishment or maintenance of this market. The Company is not required to
redeem shares if an Auction or an attempted secondary market sale fails. MMP
Shares are not registered on a stock exchange or the automated quotation system.
If you sell your MMP Shares to a broker-dealer between Auctions, you may receive
less than the price you paid for them, especially when market interest rates
have risen since the last Auction.
Senior Leverage Risk. The Series II MMP Shares will be junior to
Tortoise Notes and any other Borrowings in liquidation and with respect to
distribution rights, and will rank on a parity with any outstanding MMP Shares,
including Series I MMP Shares. Because the Company has outstanding Tortoise
Notes, the Company is prohibited from declaring, paying or making any dividends
or distributions on any series of MMP Shares unless it satisfies certain
conditions. The Company also will be prohibited from declaring, paying or making
any dividends or distributions on common stock unless it satisfies certain
conditions. See "Description of Money Market Cumulative Preferred
Shares--Restrictions on Dividend, Redemption and Other Payments."
32
The outstanding Tortoise Notes (or any other Borrowings) may constitute
a substantial burden on the MMP Shares by reason of their prior claim against
the income of the Company and against the net assets of the Company in
liquidation. The Company may not be permitted to declare dividends or other
distributions, including with respect to any series of MMP Shares, or purchase
or redeem shares, including MMP Shares, unless (1) at the time thereof the
Company meets certain asset coverage requirements and (2) there is no event of
default under the Tortoise Notes (or any other Borrowing) that is continuing.
See "Description of Money Market Cumulative Preferred Shares--Restrictions on
Dividend and Other Payments." In the event of a default under the Tortoise
Notes, the holders of Tortoise Notes have the right to accelerate the maturity
of the Tortoise Notes and the trustee may institute judicial proceedings against
the Company to enforce the rights of holders of Tortoise Notes.
Ratings and Asset Coverage Risk. While Moody's and Fitch have assigned
ratings of "Aa2" and "AA" respectively, to Series I MMP Shares and are expected
to assign such ratings to Series II MMP Shares, the ratings do not eliminate or
necessarily mitigate the risks of investing in MMP Shares. A rating agency could
downgrade MMP Shares, which may make your shares less liquid at an Auction or in
the secondary market, though probably with higher resulting dividend rates. If a
rating agency downgrades the ratings assigned to MMP Shares, the Company may be
required to alter its portfolio or redeem MMP Shares. The Company may
voluntarily redeem MMP Shares under certain circumstances. See "Rating Agency
Guidelines" for a description of the asset maintenance tests and other
requirements the Company must meet.
Due to the Company's issuance of Tortoise Notes, which constitute
senior securities representing indebtedness, as defined in the 1940 Act, the
value of the Company's total assets, less all liabilities and indebtedness of
the Company not represented by such Tortoise Notes, must be at least equal to
300% of the aggregate principal value of such Tortoise Notes. Upon the issuance
of any series of MMP Shares, the value of the Company's total assets, less all
liabilities and indebtedness of the Company not represented by senior securities
must be at least equal, immediately after the issuance of such MMP Shares, to
200% of the aggregate principal value of any Tortoise Notes and any outstanding
MMP Shares.
Because the Company expects the Series II MMP Shares to be of
"investment grade" quality, asset coverage or portfolio composition provisions
in addition to, and more stringent than, those required by the 1940 Act may be
imposed in connection with the issuance of such ratings. Because the Company has
issued Tortoise Notes and Series I MMP Shares that are "investment grade"
quality, asset coverage and portfolio composition provisions in addition to, and
more stringent than, those required by the 1940 Act have been imposed in
connection with the issuance of the ratings for the Tortoise Notes and Series I
MMP Shares. In addition, restrictions may be imposed by the rating agencies on
certain investment practices in which the Company may otherwise engage. Any
lender with respect to any additional Borrowings by the Company may require
additional asset coverage and portfolio composition provisions as well as
restrictions on the Company's investment practices.
Inflation Risk. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of your MMP
Shares investment or the income from that investment will be worth less in the
future. As inflation occurs, the real value of the MMP Shares and distributions
declines. In an inflationary period, however, it is expected that, through the
auction process, MMP Shares dividend rates would increase, tending to offset
this risk.
Decline in Net Asset Value Risk. A material decline in the Company's
net asset value may impair the Company's ability to pay dividends and the
liquidation preference on MMP Shares and to maintain required levels of asset
coverage for MMP Shares. The Company intends to redeem shares of MMP Shares if
necessary to comply with the asset coverage requirements.
33
GENERAL RISKS OF INVESTING IN THE COMPANY
The principal risks of investing in the Company are as follows:
Limited Operating History. The Company is a nondiversified, closed-end
management investment company that commenced operations in February 2004. There
is no assurance that the Company will continue to meet its investment objective.
Delay in Use of Proceeds. Although the Company currently intends to
invest the proceeds of Series II MMP Shares within approximately three months
following the closing of this offering, such investments may be delayed if
suitable investments are unavailable at the time or for other reasons. Because
of the investment opportunities presented by restricted MLP securities and the
limited trading volume of certain publicly traded MLP securities, the Company
often acquires portfolio securities through direct placements. To the extent
direct placement opportunities are not available, the Company would have to
acquire such securities in the open market, which could take longer than the
three-month period following this offering. Due to the trading market and
trading volumes for MLPs in general, it may take the Company some time to
accumulate positions in certain securities. Because the market for the MLP
securities may, at times, be less liquid than the market for many other
securities, the Company may be unable to obtain such securities within the time,
and in the amount, it currently anticipates. Pending the investment in
securities that meet the Company's investment objective, it is anticipated that
the proceeds will be invested in securities issued by the U.S. government or its
agencies or instrumentalities or in high quality, short-term or long-term debt
obligations. A delay in the anticipated use of proceeds could lower returns and
reduce the amount of cash available to make dividend payments on the MMP Shares.
Concentration Risk. Under normal circumstances, the Company
concentrates its investments in the energy infrastructure sector, with an
emphasis on securities issued by MLPs. Certain risks inherent in the energy
infrastructure business of these types of MLPs include the following:
o Processing and coal MLPs may be directly affected by energy
commodity prices. The volatility of commodity prices can
indirectly affect certain other MLPs due to the impact of
prices on volume of commodities transported, processed, stored
or distributed. Pipeline MLPs are not subject to direct
commodity price exposure because they do not own the
underlying energy commodity. While propane MLPs do own the
underlying energy commodity, the Adviser seeks high quality
MLPs that are able to mitigate or manage direct margin
exposure to commodity price levels. The MLP sector can be hurt
by market perception that MLPs' performance and distributions
are directly tied to commodity prices.
o The profitability of MLPs, particularly processing and
pipeline MLPs, may be materially impacted by the volume of
natural gas or other energy commodities available for
transporting, processing, storing or distributing. A
significant decrease in the production of natural gas, oil,
coal or other energy commodities, due to the decline of
production from existing facilities, import supply disruption,
depressed commodity prices or otherwise, would reduce revenue
and operating income of MLPs and, therefore, the ability of
MLPs to make distributions to partners.
o A sustained decline in demand for crude oil, natural gas and
refined petroleum products could adversely affect MLP revenues
and cash flows. Factors that could lead to a decrease in
market demand include a recession or other adverse economic
conditions, an increase in the market price of the underlying
commodity, higher taxes or other regulatory actions that
increase costs, or a shift in consumer demand for such
products.
34
o A portion of any one MLP's assets may be dedicated to natural
gas reserves and other commodities that naturally deplete over
time, which could have a materially adverse impact on an MLP's
ability to make distributions. Often the MLPs are dependent
upon exploration and development activities by third parties.
MLPs employ a variety of means of increasing cash flow,
including increasing utilization of existing facilities,
expanding operations through new construction, expanding
operations through acquisitions, or securing additional
long-term contracts. Thus, some MLPs may be subject to
construction risk, acquisition risk or other risk factors
arising from their specific business strategies. A significant
slowdown in large energy companies' disposition of energy
infrastructure assets and other merger and acquisition
activity in the energy MLP industry could reduce the growth
rate of cash flows received by the Company from MLPs that grow
through acquisitions.
o The profitability of MLPs could be adversely affected by
changes in the regulatory environment. Most MLPs' assets are
heavily regulated by federal and state governments in diverse
matters such as the way in which certain MLP assets are
constructed, maintained and operated and the prices they may
charge for their services. Such regulation can change over
time in scope and intensity. For example, a particular
byproduct of an MLP process may be declared hazardous by a
regulatory agency and unexpectedly increase production costs.
Moreover, many state and federal environmental laws provide
for civil as well as regulatory remediation, thus adding to
the potential exposure an MLP may face.
o A rising interest rate environment could adversely impact the
performance of MLPs. Rising interest rates could limit the
capital appreciation of equity units of MLPs as a result of
the increased availability of alternative investments at
competitive yields with MLPs. Rising interest rates may also
increase an MLP's cost of capital. A higher cost of capital
could limit growth from acquisition/expansion projects and
limit MLP distribution growth rates.
o Since the September 11th attacks, the U.S. government has
issued public warnings indicating that energy assets,
specifically those related to pipeline infrastructure,
production facilities and transmission and distribution
facilities, might be specific targets of terrorist activity.
The continued threat of terrorism and related military
activity will likely increase volatility for prices in natural
gas and oil and could affect the market for products of MLPs.
o Holders of MLP units are subject to certain risks inherent in
the partnership structure of MLPs including (1) tax risks
(described below), (2) limited ability to elect or remove
management, (3) limited voting rights, except with respect to
extraordinary transactions, and (4) conflicts of interest of
the general partner including those arising from incentive
distribution payments.
Industry Specific Risk. Energy infrastructure companies are also
subject to risks that are specific to the industry they serve.
Pipeline MLPs are subject to demand for crude oil or refined
products in the markets served by the pipeline, sharp decreases in
crude oil or natural gas prices that cause producers to curtail
production or reduce capital spending for exploration activities, and
environmental regulation. Demand for gasoline, which accounts for a
substantial portion of refined product transportation, depends on
price, prevailing economic conditions in the markets served, and
demographic and seasonal factors. Pipeline MLP unit prices are
primarily driven by distribution growth rates and prospects for
distribution growth.
35
The Federal Energy Regulatory Commission ("FERC"), which
regulates the amount pipeline operators may charge for their services,
currently is reconsidering the rates pipeline operators may charge
their customers. While it is not possible to know the outcome of this
matter, a decision by the FERC to reduce the rates may adversely impact
the profitability of some pipeline MLPs in which the Company invests.
Processing MLPs are subject to declines in production of
natural gas fields, which utilize the processing facilities as a way to
market the gas, prolonged depression in the price of natural gas or
crude oil refining, which curtails production due to lack of drilling
activity and declines in the prices of NGL products and natural gas
prices, resulting in lower processing margins.
Propane MLPs are subject to earnings variability based upon
weather patterns in the locations where the company operates and the
wholesale cost of propane sold to end customers. Propane MLP unit
prices are based on safety in distribution coverage ratios, interest
rate environment and, to a lesser extent, distribution growth.
Coal MLPs are subject to demand variability based on favorable
weather conditions, strong or weak domestic economy, the level of coal
stockpiles in the customer base, and the general level of prices of
competing sources of fuel for electric generation. They also are
subject to supply variability based on the geological conditions that
reduce productivity of mining operations, regulatory permits for mining
activities and the availability of coal that meets Clean Air Act
standards.
Cash Flow Risk. The Company will derive substantially all of its cash
flow from investments in equity securities of MLPs. The amount of cash that the
Company has available to distribute to stockholders depends entirely on the
ability of MLPs held by the Company to make distributions to its partners and
the tax character of those distributions. The Company has no control over the
actions of underlying MLPs. The amount of cash that each individual MLP can
distribute to its partners will depend on the amount of cash it generates from
operations, which will vary from quarter to quarter depending on factors
affecting the energy infrastructure market generally and on factors affecting
the particular business lines of the MLP. Available cash will also depend on the
MLP's level of operating costs (including incentive distributions to the general
partner), level of capital expenditures, debt service requirements, acquisition
costs (if any), fluctuations in working capital needs and other factors.
Tax Risk of MLPs. The Company's ability to meet its investment
objective will depend on the level of taxable income and distributions and
dividends it receives from the MLPs and other securities of energy
infrastructure companies in which the Company invests, a factor over which the
Company has no control. The benefit the Company derives from its investment in
MLPs depends largely on the MLPs being treated as partnerships for federal
income tax purposes. As a partnership, an MLP has no federal income tax
liability at the entity level. If, as a result of a change in current law or a
change in an MLP's business, an MLP were treated as a corporation for federal
income tax purposes, the MLP would be obligated to pay federal income tax on its
income at the corporate tax rate. If an MLP were classified as a corporation for
federal income tax purposes, the amount of its cash available for distribution
would be reduced and the distributions the Company receives might be taxed
entirely as dividend income. Therefore, treatment of one or more MLPs as a
corporation for federal income tax purposes could affect the Company's ability
to meet its investment objective.
Deferred Tax Risks of MLPs. As a limited partner in the MLPs in which
the Company invests, it will receive a pro rata share of income, gains, losses
and deductions from those MLPs. Historically, a significant portion of income
from such MLPs has been offset by tax deductions. The Company will incur a
current tax liability on that portion of an MLP's income and gains that is not
offset by tax deductions and losses. The percentage of an MLP's income and gains
which is offset by tax deductions and losses
36
will fluctuate over time for various reasons. A significant slowdown in
acquisition activity by MLPs held in the Company's portfolio could result in a
reduction of accelerated depreciation generated by new acquisitions, which may
result in increased current income tax liability to the Company.
The Company will accrue deferred income taxes for its future tax
liability associated with that portion of MLP distributions considered to be a
tax-deferred return of capital as well as capital appreciation of its
investments. Upon the Company's sale of an MLP security, the Company may be
liable for previously deferred taxes. The Company will rely to some extent on
information provided by the MLPs, which is not necessarily timely, to estimate
deferred tax liability for purposes of financial statement reporting and
determining its net asset value. From time to time the Company will modify its
estimates or assumptions regarding its deferred tax liability as new information
becomes available.
Equity Securities Risk. MLP common units and other equity securities
can be affected by macro economic and other factors affecting the stock market
in general, expectations of interest rates, investor sentiment towards MLPs or
the energy sector, changes in a particular issuer's financial condition, or
unfavorable or unanticipated poor performance of a particular issuer (in the
case of MLPs, generally measured in terms of distributable cash flow). Prices of
common units of individual MLPs and other equity securities can also be affected
by fundamentals unique to the partnership or company, including earnings power
and coverage ratios.
Investing in securities of smaller companies may involve greater risk
than is associated with investing in more established companies. Smaller
capitalization companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than larger more established
companies.
Because convertible subordinated units generally convert to common
units on a one-to-one ratio, the price that the Company can be expected to pay
upon purchase or to realize upon resale is generally tied to the common unit
price less a discount. The size of the discount varies depending on a variety of
factors including the likelihood of conversion, and the length of time remaining
to conversion, and the size of the block purchased.
The price of I-Shares and their volatility tend to be correlated to the
price of common units, although the price correlation is not precise.
Leverage Risk. The Company's use of leverage through the issuance of
preferred stock (including the Series II MMP Shares offered hereby) and
Borrowings, including Tortoise Notes, as well as the economic leverage inherent
in certain derivatives, including interest rate transactions, creates risks.
There is no assurance that the Company's leveraging strategies will be
successful. If the dividend rate on the MMP Shares exceeds the net rate of
return on the Company's portfolio, the leverage will result in a lower net asset
value than if the Company were not leveraged, and the Company's ability to pay
dividends and to meet its asset coverage requirements on the MMP Shares would be
reduced. In addition, to the extent that any forms of leverage used by the
Company are senior to the MMP Shares, payments to holders of MMP Shares in
liquidation or otherwise will be subject to the prior payment of obligations
relating to such other forms of leverage. Successful use of leverage depends on
the Adviser's ability to predict or hedge correctly interest rates and market
movements, and there is no assurance that the use of a leveraging strategy will
be successful during any period in which it is used.
Because the fee paid to the Adviser is calculated on the basis of
Managed Assets (as defined below), the fee will be higher when leverage is used,
which gives the Adviser an incentive to use leverage.
37
Hedging Strategy Risk. The Company currently uses, and may in the
future use, interest rate transactions for hedging purposes only, in an attempt
to reduce the interest rate risk arising from the Company's leveraged capital
structure. Interest rate transactions that the Company may use for hedging
purposes will expose the Company to certain risks that differ from the risks
associated with its portfolio holdings. There are economic costs of hedging
reflected in the price of interest rate swaps, floors, caps and similar
techniques, the costs of which can be significant, particularly when long-term
interest rates are substantially above short-term rates. In addition, the
Company's success in using hedging instruments is subject to the Adviser's
ability to predict correctly changes in the relationships of such hedging
instruments to the Company's leverage risk, and there can be no assurance that
the Adviser's judgment in this respect will be accurate. Consequently, the use
of hedging transactions might result in a poorer overall performance for the
Company, whether or not adjusted for risk, than if the Company had not engaged
in such transactions.
Depending on the state of interest rates in general, the Company's use
of interest rate transactions could enhance or decrease the cash available to
holders of common stock and/or the net assets available for coverage of MMP
Shares. To the extent there is a decline in interest rates, the value of
interest rate swaps or caps could decline, and could result in a decline in the
net assets available for coverage of the MMP Shares. In addition, if the
counterparty to an interest rate swap or cap defaults, the Company would not be
able to use the anticipated net receipts under the interest rate swap or cap to
offset the Company's cost of financial leverage.
Competition Risk. At the time the Company completed its initial public
offering in February 2004, it was the only publicly traded investment company
offering access to a portfolio of energy infrastructure MLPs. Since that time a
limited number of other alternatives to the Company as a vehicle for investment
in a portfolio of energy infrastructure MLPs, including other publicly traded
investment companies and private funds, have emerged. In addition, recent tax
law changes have increased, and future tax law changes may again increase, the
ability of regulated investment companies or other institutions to invest in
MLPs. These competitive conditions may adversely impact the Company's ability to
meet its investment objective, which in turn could adversely impact the
Company's ability to make dividend payments.
Restricted Security Risk. The Company may invest up to 30% of its total
assets in restricted securities, primarily through direct placements. Restricted
securities are less liquid than securities traded in the open market because of
statutory and contractual restrictions on resale. Such securities are,
therefore, unlike securities that are traded in the open market, which can be
expected to be sold immediately if the market is adequate. As discussed further
below, this lack of liquidity creates special risks for the Company. However,
the Company could sell such securities in privately negotiated transactions with
a limited number of purchasers or in public offerings under the 1933 Act. MLP
convertible subordinated units also convert to publicly traded common units upon
the passage of time and/or satisfaction of certain financial tests.
Restricted securities are subject to statutory and contractual
restrictions on their public resale, which may make it more difficult to value
them, may limit the Company's ability to dispose of them and may lower the
amount the Company could realize upon their sale. To enable the Company to sell
its holdings of a restricted security not registered under the 1933 Act, the
Company may have to cause those securities to be registered. The expenses of
registering restricted securities may be negotiated by the Company with the
issuer at the time the Company buys the securities. When the Company must
arrange registration because the Company wishes to sell the security, a
considerable period may elapse between the time the decision is made to sell the
security and the time the security is registered so that the Company could sell
it. The Company would bear the risks of any downward price fluctuation during
that period.
38
Liquidity Risk. Although common units of MLPs trade on the NYSE, AMEX,
and the Nasdaq National Market, certain MLP securities may trade less frequently
than those of larger companies due to their smaller capitalizations. In the
event certain MLP securities experience limited trading volumes, the prices of
such MLPs may display abrupt or erratic movements at times. Additionally, it may
be more difficult for the Company to buy and sell significant amounts of such
securities without an unfavorable impact on prevailing market prices. As a
result, these securities may be difficult to dispose of at a fair price at the
times when the Company believes it is desirable to do so. These securities also
are more difficult to value, and the Adviser's judgment as to value will often
be given greater weight than market quotations, if any exist. Investment of the
Company's capital in securities that are less actively traded or over time
experience decreased trading volume may restrict the Company's ability to take
advantage of other market opportunities or to dispose of securities in order to
make distributions on MMP Shares.
Valuation Risk. Market prices generally will not be available for MLP
convertible subordinated units, or securities of private companies, and the
value of such investments will ordinarily be determined based on fair valuations
determined by the Adviser pursuant to procedures adopted by the Board of
Directors. Similarly, common units acquired through direct placements will be
valued based on fair value determinations as long as they are subject to
restrictions on resale; however, the Adviser expects that such values will be
based on a discount from publicly available market prices. Restrictions on
resale or the absence of a liquid secondary market may adversely affect the
ability of the Company to determine its net asset value. The sale price of
securities that are not readily marketable may be lower or higher than the
Company's most recent determination of their fair value. Additionally, the value
of these securities typically requires more reliance on the judgment of the
Adviser than that required for securities for which there is an active trading
market. Due to the difficulty in valuing these securities and the absence of an
active trading market for these investments, the Company may not be able to
realize these securities' true value, or may have to delay their sale in order
to do so. This may affect adversely the Company's ability to make required
dividend payments on MMP Shares or to meet asset coverage requirements.
Interest Rate Risk. Generally, when market interest rates rise, the
values of debt securities decline, and vice versa. The Company's investment in
such securities means that its net asset value and market price of the Company's
common stock will tend to decline if market interest rates rise. During periods
of declining interest rates, the issuer of a security may exercise its option to
prepay principal earlier than scheduled, forcing the Company to reinvest in
lower yielding securities. This is known as call or prepayment risk. Lower grade
securities frequently have call features that allow the issuer to repurchase the
security prior to its stated maturity. An issuer may redeem a lower grade
obligation if the issuer can refinance the debt at a lower cost due to declining
interest rates or an improvement in the credit standing of the issuer.
Below Investment Grade Securities Risk. Investing in lower grade debt
instruments involves additional risks than investment grade securities. Adverse
changes in economic conditions are more likely to lead to a weakened capacity of
a below investment grade issuer to make principal payments and interest payments
than an investment grade issuer. An economic downturn could adversely affect the
ability of highly leveraged issuers to service their obligations or to repay
their obligations upon maturity. Similarly, downturns in profitability in the
energy infrastructure industry could adversely affect the ability of below
investment grade issuers in that industry to meet their obligations. The market
values of lower quality securities tend to reflect individual developments of
the issuer to a greater extent than do higher quality securities, which react
primarily to fluctuations in the general level of interest rates.
The secondary market for below investment grade securities may not be
as liquid as the secondary market for more highly rated securities. There are
fewer dealers in the market for below investment grade securities than
investment grade obligations. The prices quoted by different dealers may vary
significantly, and the spread between the bid and asked price is generally much
larger than for
39
higher quality instruments. Under adverse market or economic conditions, the
secondary market for below investment grade securities could contract further,
independent of any specific adverse change in the condition of a particular
issuer, and these instruments may become illiquid. As a result, the Company
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded. This
may affect adversely the Company's ability to make required dividend payments on
MMP Shares. Prices realized upon the sale of such lower-rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Company's net asset value.
Because investors generally perceive that there are greater risks
associated with lower quality securities of the type in which the Company may
invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the debt securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
Factors having an adverse impact on the market value of below
investment grade securities may have an adverse effect on the Company's net
asset value and the market value of its common stock. In addition, the Company
may incur additional expenses to the extent it is required to seek recovery upon
a default in payment of principal or interest on its portfolio holdings. In
certain circumstances, the Company may be required to foreclose on an issuer's
assets and take possession of its property or operations. In such circumstances,
the Company would incur additional costs in disposing of such assets and
potential liabilities from operating any business acquired.
Management Risk. The Adviser was formed in October 2002 to provide
portfolio management services to institutional and high-net worth investors
seeking professional management of their MLP investments. The Adviser has been
managing the Company since it began operations in February 2004 and is currently
in the formation process with two other investment companies that will invest in
the securities of energy infrastructure companies. The Adviser relies on the
officers, employees, and resources of Fountain Capital, KCEP and their
affiliates for certain functions. Three of the five members of the investment
committee are affiliates of, but not employees of, the Adviser, and each have
other significant responsibilities with such affiliated entities. Fountain
Capital, KCEP and their affiliates conduct businesses and activities of their
own in which the Adviser has no economic interest. If these separate activities
become significantly greater than the Adviser's activities, there could be
material competition for the efforts of key personnel.
Nondiversification Risk. The Company is a nondiversified, closed-end
management investment company under the 1940 Act and will not be treated as a
regulated investment company under the Internal Revenue Code. Accordingly, there
are no regulatory limits under the 1940 Act or the Internal Revenue Code on the
number or size of securities held by the Company. There currently are
approximately forty-seven companies presently organized as MLPs and only a
limited number of these companies operate energy infrastructure assets. The
Company selects MLP investments from this small pool of issuers. The Company may
invest in non-MLP securities issued by energy infrastructure companies to a
lesser degree, consistent with its investment objective and policies.
Anti-Takeover Provisions. The Company's charter and Bylaws include
provisions that could delay, defer or prevent other entities or persons from
acquiring control of the Company, causing it to engage in certain transactions
or modifying its structure. These provisions may be regarded as "anti-takeover"
provisions. Such provisions could limit the ability of stockholders to sell
their shares at a premium over the then-current market prices by discouraging a
third party from seeking to obtain control of the Company. See "Certain
Provisions in the Company's Charter and Bylaws."
40
Counterparty Risk. The Company may be subject to credit risk with
respect to the counterparties to certain derivative agreements entered into by
the Company. If a counterparty becomes bankrupt or otherwise fails to perform
its obligations under a derivative contract due to financial difficulties, the
Company may experience significant delays in obtaining any recovery under the
derivative contract in a bankruptcy or other reorganization proceeding. The
Company may obtain only a limited recovery or may obtain no recovery in such
circumstances.
Effects of Terrorism. The U.S. securities markets are subject to
disruption as a result of terrorist activities, such as the terrorist attacks on
the World Trade Center on September 11, 2001; war, such as the war in Iraq and
its aftermath; and other geopolitical events. Such events have led, and in the
future may lead, to short-term market volatility and may have long-term effects
on the U.S. economy and markets.
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The business and affairs of the Company are managed under the direction
of the Board of Directors. Accordingly, the Company's Board of Directors
provides broad supervision over the affairs of the Company, including
supervision of the duties performed by the Adviser. The officers of the Company
are responsible for the Company's day-to-day operations. The names and business
addresses of the directors and officers of the Company, together with their
principal occupations and other affiliations during the past five years, are set
forth in the Statement of Additional Information. The Board of Directors of the
Company consists of a majority of directors who are not interested persons (as
defined in the 1940 Act) of the Adviser or its affiliates.
INVESTMENT ADVISER
Pursuant to an Advisory Agreement, the Adviser provides the Company
with investment research and advice and furnishes the Company with an investment
program consistent with the Company's investment objective and policies, subject
to the supervision of the Board. The Adviser determines which portfolio
securities will be purchased or sold, arranges for the placing of orders for the
purchase or sale of portfolio securities, selects brokers or dealers to place
those orders, maintains books and records with respect to the Company's
securities transactions and reports to the Board on the Company's investments
and performance.
The Adviser is located at 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210. The Adviser specializes in managing portfolios of MLPs and
other energy infrastructure companies. The Adviser was formed in October 2002 to
provide portfolio management services to institutional and high net worth
investors seeking professional management of their MLP investments. As of April
30, 2005, the Adviser had approximately $___ million of client assets under
management. The Adviser's investment committee is comprised of five seasoned
portfolio managers.
The Adviser is controlled equally by Fountain Capital Management,
L.L.C. ("Fountain Capital") and Kansas City Equity Partners LC ("KCEP").
Fountain Capital was formed in 1990 and is focused primarily on providing
investment advisory services to institutional investors with respect to below
investment grade debt. Atlantic Asset Management LLC ("Atlantic") is a minority
owner, and an affiliate, of Fountain Capital. Atlantic was formed in 1992 and
provides, directly or through affiliates, a variety of fixed-income investment
advisory services including investment grade bond and high-yield bond
strategies, investment grade collateralized debt obligations and mortgage hedge
funds. KCEP was formed in 1993 and is focused solely on managing two private
equity funds. KCEP focuses on private equity investments, including investments
in two natural resource infrastructure companies.
41
The Adviser relies on the officers, employees and resources of Fountain
Capital, KCEP and their affiliates for certain functions. Three of the five
members of the investment committee of the Adviser are affiliates of, but not
employees of, the Adviser. Each member of the investment committee has other
significant responsibilities with such affiliated entities. The affiliated
entities conduct businesses and activities of their own in which the Adviser has
no economic interest. If these separate activities are significantly greater
than the Adviser's activities, there could be material competition for the
efforts of key personnel.
The investment management of the Company's portfolio is the
responsibility of the Adviser's investment committee. The investment committee's
members are David J. Schulte, H. Kevin Birzer, Zachary A. Hamel, Kenneth P.
Malvey, and Terry C. Matlack, all of whom share responsibility for such
investment management. It is the policy of the investment committee that any one
member can require the Adviser to sell a security and any one member can veto
the committee's decision to invest in a security. Each committee member has been
a portfolio manager since the commencement of the Company's operations in
February, 2004.
David J. Schulte. Mr. Schulte has been a Managing Director of
the Adviser since 2002 and also is a Managing Director of KCEP. While a
Managing Director at KCEP, he led private financings for two growth
companies in the natural resource infrastructure sector. Since February
2004, Mr. Schulte has been an employee of the Adviser. Prior to joining
KCEP in 1993, Mr. Schulte had over five years of experience completing
acquisition and public equity financings as an investment banker at the
predecessor of Oppenheimer & Co, Inc. From 1986 to 1989, he was a
securities law attorney. Mr. Schulte holds a Bachelor of Science degree
in Business Administration from Drake University and a Juris Doctorate
degree from the University of Iowa. He earned his CFA designation in
1992, and is a member of the Financial Accounting Policy Committee of
the CFA Institute.
H. Kevin Birzer. Mr. Birzer has been a Managing Director of
the Advisor since 2002 and also is a Partner/Senior Analyst with
Fountain Capital. Mr. Birzer, who joined Fountain Capital in 1990, has
22 years of investment experience including 19 in high-yield
securities. Mr. Birzer began his career with Peat Marwick. His
subsequent experience includes three years working as a Vice President
for F. Martin Koenig & Co., focusing on equity and option investments,
and three years at Drexel Burnham Lambert, where he was a Vice
President in the Corporate Finance Department. Mr. Birzer graduated
with a Bachelor of Business Administration degree from the University
of Notre Dame and holds a Master of Business Administration degree from
New York University. He earned his CFA designation in 1988.
Zachary A. Hamel. Mr. Hamel has been a Managing Director of
the Adviser since 2002 and also is a Partner/Senior Analyst with
Fountain Capital. Mr. Hamel joined Fountain Capital in 1997. He covers
energy, chemicals and utilities. Prior to joining Fountain Capital, Mr.
Hamel worked for the Federal Deposit Insurance Corporation for eight
years as a Bank Examiner and a Regional Capital Markets Specialist. Mr.
Hamel graduated from Kansas State University with a Bachelor of Science
in Business Administration. He also attained a Master in Business
Administration from the University of Kansas School of Business. He
earned his CFA designation in 1998.
Kenneth P. Malvey. Mr. Malvey has been a Managing Director of
the Adviser since 2002 and also is a Partner/Senior Analyst with
Fountain Capital. Prior to joining Fountain Capital in 2002, Mr. Malvey
was one of three members of the Global Office of Investments for GE
Capital's Employers Reinsurance Corporation. Most recently he was the
Global Investment Risk Manager for a portfolio of approximately $24
billion of fixed-income, public equity and
42
alternative investment assets. Prior to joining GE Capital in 1996, Mr.
Malvey was a Bank Examiner and Regional Capital Markets Specialist with
the FDIC for nine years. Mr. Malvey graduated with a Bachelor of
Science degree in Finance from Winona State University, Winona,
Minnesota. He earned his CFA designation in 1996.
Terry C. Matlack. Mr. Matlack has been a Managing Director of
the Adviser since 2002 and also is a Managing Director of KCEP. Prior
to joining KCEP in 2001, Mr. Matlack was President of GreenStreet
Capital and its affiliates in the telecommunications service industry.
Prior to 1995, he was Executive Vice President and a member of the
board of directors of W.K. Communications, Inc., a cable television
acquisition company, and Chief Operating Officer of W.K. Cellular, a
cellular rural service area operator. He also has served as a
specialist in corporate finance with George K. Baum & Company, and as
Executive Vice President of Corporate Finance at B.C. Christopher
Securities Company. Mr. Matlack graduated with a Bachelor of Science in
Business Administration from Kansas State University and holds a
Masters of Business Administration and a Juris Doctorate from the
University of Kansas. He earned his CFA designation in 1985.
COMPENSATION AND EXPENSES
Under the Advisory Agreement, the Company pays to the Adviser
quarterly, as compensation for the services rendered by it, a fee equal on an
annual basis to 0.95% of the Company's average monthly Managed Assets. Managed
Assets means the total assets of the Company (including any assets attributable
to leverage that may be outstanding) minus accrued liabilities other than (1)
deferred taxes, (2) debt entered into for the purpose of leverage and (3) the
aggregate liquidation preference of any outstanding preferred stock. Because the
fee paid to the Adviser is determined on the basis of the Company's Managed
Assets, the Adviser's interest in determining whether to leverage the Company
may conflict with the interests of the Company. The Company's average monthly
Managed Assets are determined for the purpose of calculating the management fee
by taking the average of the monthly determinations of Managed Assets during a
given calendar quarter. The fees are payable for each calendar quarter within
five days after the end of that quarter. The Adviser has contractually agreed to
waive or reimburse the Company for fees and expenses, including the investment
advisory fee and other expenses in the amount of 0.23% of average monthly
Managed Assets through February 28, 2006 and 0.10% of average monthly Managed
Assets through February 28, 2009.
The Company bears all expenses not specifically assumed by the Adviser
incurred in the Company's operations and will bear the expenses of the offering
of its MMP Shares. Expenses borne by the Company include, but are not limited
to, the following: (1) expenses of maintaining the Company and continuing its
existence, (2) registration of the Company under the 1940 Act, (3) commissions,
spreads, fees and other expenses connected with the acquisition, holding and
disposition of securities and other investments, including placement and similar
fees in connection with direct placements entered into on behalf of the Company,
(4) auditing, accounting and legal expenses, (5) taxes and interest, (6)
governmental fees, (7) expenses of listing shares of the Company with a stock
exchange, and expenses of the issue, sale, repurchase and redemption (if any) of
interests in the Company, including expenses of conducting tender offers for the
purpose of repurchasing Company interests, (8) expenses of registering and
qualifying the Company and its shares under federal and state securities laws
and of preparing and filing registration statements and amendments for such
purposes, (9) expenses of reports and notices to stockholders and of meetings of
stockholders and proxy solicitations therefor, (10) expenses of reports to
governmental officers and commissions, (11) insurance expenses, (12) association
membership dues, (13) fees, expenses and disbursements of custodians and
subcustodians for all services to the Company (including without limitation
safekeeping of funds, securities and other investments, keeping of books,
accounts and records, and determination of net asset values), (14) fees,
expenses and disbursements of
43
transfer agents, dividend paying agents, stockholder servicing agents and
registrars for all services to the Company, (15) compensation and expenses of
directors of the Company who are not members of the Adviser's organization, (16)
pricing and valuation services employed by the Company, (17) all expenses
incurred in connection with leveraging of the Company's assets through a line of
credit, or issuing and maintaining notes or preferred stock, (18) all expenses
incurred in connection with the organization of the Company and offerings of the
Company's common stock, and (19) such non-recurring items as may arise,
including expenses incurred in connection with litigation, proceedings and
claims and the obligation of the Company to indemnify its directors, officers
and stockholders with respect thereto.
RATING AGENCY GUIDELINES
The Rating Agencies impose asset coverage requirements, which may limit
the Company's ability to engage in certain types of transactions and may limit
the Company's ability to take certain actions without confirming that such
action will not impair the ratings.
The Company may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by any Rating Agency. Failure to
adopt any modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any Rating
Agency may, at any time, change or withdraw any rating. The Board may, without
stockholder approval, modify, alter or repeal certain of the definitions and
related provisions which have been adopted by the Company pursuant to the Rating
Agency Guidelines only in the event the Company receives written confirmation
from the Rating Agency or Agencies that any amendment, alteration or repeal
would not impair the ratings then assigned to the MMP Shares.
The Company is required to satisfy two separate asset maintenance
requirements in respect of the MMP Shares: (1) the Company must maintain assets
in its portfolio that have a value, discounted in accordance with guidelines set
forth by each Rating Agency, at least equal to the aggregate liquidation
preference of the MMP Shares plus specified liabilities, payment obligations and
other amounts; and (2) the Company must satisfy the 1940 Act MMP Shares Asset
Coverage requirements.
MMP Shares Basic Maintenance Amount. The Company must maintain, as of
each Valuation Date on which MMP Shares are outstanding, Eligible Assets having
an aggregate Discounted Value at least equal to the MMP Shares Basic Maintenance
Amount, which is calculated separately for each Rating Agency that is then
rating the MMP Shares and so requires. If the Company fails to maintain Eligible
Assets having an aggregated Discounted Value at least equal to the MMP Shares
Basic Maintenance Amount as of any Valuation Date and such failure is not cured
on or before the related Asset Coverage Cure Date, the Company will be required
in certain circumstances to redeem certain of the shares of MMP Shares. See
"Description of Money Market Cumulative Preferred Shares."
The "MMP Shares Basic Maintenance Amount" as of any Valuation Date
currently is defined as the dollar amount equal to:
(1) the sum of (A) the sum of products resulting from
multiplying the number of outstanding MMP Shares on such date by
$25,000 (plus a redemption premium, if any) per share; (B) the
aggregate amount of dividends that will have accumulated at the
Applicable Rate (whether or not earned or declared) to and including
the first Dividend Payment Date for each outstanding MMP Share that
follows such Valuation Date (or to the 30th day after such Valuation
Date, if such 30th day occurs before the first following Dividend
Payment Date); (C) the amount of anticipated Company non-interest
expenses for the 90 days subsequent to such Valuation Date; (D) the
amount of the current outstanding balances of any indebtedness which is
senior to the MMP Shares plus interest actually accrued together with
30 days additional interest on the current
44
outstanding balances calculated at the current rate; and (E) any
current liabilities, payable during the 30 days subsequent to such
Valuation Date, including, without limitation, indebtedness due within
one year and any redemption premium due with respect to preferred stock
for which a Notice of Redemption has been given, as of such Valuation
Date, to the extent not reflected in any of (1)(A) through (1)(D); less
(2) the sum of any cash plus the value of any of the Company's
assets irrevocably deposited by the Company for the payment of any
obligation described in (1)(B) through (1)(E) ("value," for purposes of
this clause (2), means the Discounted Value of the security, except
that if the security matures prior to the relevant redemption payment
date and is either fully guaranteed by the U.S. Government or is rated
at least P-1 by Moody's, it will be valued at its face value).
Each Rating Agency may amend the definition of "MMP Shares Basic Maintenance
Amount" from time to time.
The Market Value of the Company's portfolio securities (used in
calculating the Discounted Value of Eligible Assets) is calculated using readily
available market quotations when appropriate, and in any event, consistent with
the Company's Valuation Procedures. For the purpose of calculating the MMP Share
Basic Maintenance Amount, portfolio securities are valued in the same manner as
the Company calculates its net asset value. See "Net Asset Value" in the
Statement of Additional Information.
Each Rating Agency's Discount Factors, the criteria used to determine
whether the assets held in the Company's portfolio are Eligible Assets, and the
guidelines for determining the Discounted Value of the Company's portfolio
holdings for purposes of determining compliance with the MMP Shares Basic
Maintenance Amount are based on Rating Agency Guidelines established in
connection with rating the MMP Shares. The Discount Factor relating to any asset
of the Company, the MMP Shares Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the Discounted Value of the Company's portfolio
and certain definitions and methods of calculation relating thereto may be
changed from time to time by the applicable Rating Agency, without the approval
of the Company, Board of Directors or stockholders.
A Rating Agency's Guidelines will apply to MMP Shares only so long as
that Rating Agency is rating such shares. The Company will pay certain fees to
Moody's, Fitch and any Other Rating Agency that may provide a rating for the MMP
Shares. The ratings assigned to MMP Shares are not recommendations to buy, sell
or hold MMP Shares. Such ratings may be subject to revision or withdrawal by the
assigning Rating Agency at any time.
1940 Act MMP Shares Asset Coverage. The Company is also required to
maintain, with respect to MMP Shares, as of the last Business Day on any month
in which any MMP Shares are outstanding, asset coverage of at least 200% (or
such other percentage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities representing shares of a
closed-end investment company as a condition of declaring dividends on its
common stock). If the Company fails to maintain the 1940 Act MMP Shares Asset
Coverage as of the last Business Day of any month and such failure is not cured
as of the last business day of the following month (the "Asset Coverage Cure
Date"), the Company will be required to redeem certain MMP Shares. See
"Description of Money Market Cumulative Preferred Shares."
The Company estimates that based on the composition of its portfolio as
of _____, 2005, assuming the issuance of all Series II MMP Shares offered hereby
and giving effect to the deduction of underwriting discounts and commissions and
estimated offering costs related thereto estimated at $______, the 1940 Act MMP
Shares Asset Coverage would be:
45
Value of Company assets less liabilities
not representing senior securities $
-------------------------------------------------------- = -------- = %
Senior securities representing indebtedness plus $
aggregate liquidation preference of MMP Shares
Notices. Under the current Rating Agency Guidelines, after the Original
Issue Date and in certain other circumstances, the Company is required to
deliver to any Rating Agency which is then rating the MMP Shares (1) a
certificate with respect to the calculation of the MMP Shares Basic Maintenance
Amount; (2) a certificate with respect to the calculation of the 1940 Act MMP
Shares Asset Coverage and the value of the portfolio holdings of the Company;
and (3) a letter prepared by the Company's independent accountants regarding the
accuracy of such calculations.
Notwithstanding anything herein to the contrary, the Rating Agency
Guidelines, as they may be amended from time to time by each Rating Agency will
be reflected in a written document and may be amended by each Rating Agency
without the vote, consent or approval of the Company, the Board of Directors and
any holder of shares of preferred stock, including any MMP Shares, or any other
stockholder of the Company.
A copy of the current Rating Agency Guidelines will be provided to any
holder of MMP Shares promptly upon request made by such holder to the Company by
writing the Company at 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas
66210.
DESCRIPTION OF MONEY MARKET CUMULATIVE PREFERRED SHARES
The following is a brief description of the terms of MMP Shares. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the more detailed description of Money Market
Cumulative Preferred Shares in the Articles Supplementary, a form of which is
attached as Appendix A to the Statement of Additional Information. Capitalized
terms not otherwise defined in the Prospectus shall have the same meaning as
defined in the Articles Supplementary.
GENERAL
The Company's Charter authorizes the issuance of up to 10,000,000
shares of preferred stock, par value $0.001 per share, with preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms and conditions of
redemption as determined by the Board of Directors without the approval of
common stockholders. In addition, the Board of Directors, without any action by
the Company's stockholders, may amend the Company's Charter to increase or
decrease the aggregate number of shares of stock or the number of shares of any
class or series of stock that the Company has authority to issue. The Articles
Supplementary currently authorize the issuance of up to 7,500 MMP Shares. On
September 16, 2004, the Company issued 1,400 Series I MMP Shares with an
aggregate liquidation preference of $35,000,000. The MMP Shares have a
liquidation preference of $25,000 per share, plus all accumulated but unpaid
dividends (whether or not earned or declared) to the date of final distribution.
The Series II MMP Shares when issued and sold through this offering (1) will be
fully paid and non-assessable, (2) will not be convertible into shares of common
stock or other stock of the Company, (3) will have no preemptive rights, and (4)
will not be subject to any sinking fund. The MMP Shares will be subject to
optional and mandatory redemption as described below under "--Redemption."
46
Holders of MMP Shares will not receive certificates representing their
ownership interest in such shares. The Depository Trust Company ("DTC") will
initially act as Securities Depository for the Agent Members with respect to the
MMP Shares.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described below, the Auction Agent will act as the transfer
agent, registrar, and paying agent for the MMP Shares. Furthermore, the Auction
Agent will send notices to holders of MMP Shares of any meeting at which holders
of MMP Shares have the right to vote. See "--Voting Rights" below. However, the
Auction Agent generally will serve merely as the agent of the Company, acting in
accordance with the Company's instructions.
Except in an Auction, the Company will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any MMP Share, so
long as the Company is current in the payment of dividends on the MMP Shares and
on any other shares of the Company ranking on a parity with the MMP Shares with
respect to the payment of dividends or upon liquidation.
DIVIDENDS AND DIVIDEND PERIODS
General. Holders of MMP Shares will be entitled to receive cash
dividends, when, as and if authorized by the Board of Directors and declared by
the Company, out of funds legally available therefor, on the initial Dividend
Payment Date with respect to the initial Dividend Period and, thereafter, on
each Dividend Payment Date with respect to a subsequent Dividend Period
(generally a period of __ (___) days, subject to certain exceptions for Series
II MMP Shares) at the rate per annum equal to the Applicable Rate for each
Dividend Period. Dividends so declared and payable shall be paid to the extent
permitted under Maryland law and to the extent available and in preference to
and priority over any distribution declared and payable on the common stock.
Dividends shall be payable from the Company's earnings and profits. Because of
the Company's emphasis on investments in MLPs, there is a possibility in unusual
circumstances that earnings and profits would not be sufficient to pay dividends
on MMP Shares. In such a case, dividends would be paid from cash flow in excess
of earnings and profits and would be treated as return of capital. See "Federal
Income Tax Matters."
On the Business Day next preceding each Dividend Payment Date, the
Company is required to deposit with the Paying Agent sufficient funds for the
payment of dividends. The Company does not intend to establish any reserves for
the payment of dividends.
All moneys paid to the Paying Agent for the payment of dividends shall
be held in trust for the payment of such dividends to each Holder. Each dividend
will be paid by the Paying Agent to the Holders as their names appear on the
share ledger or share records of the Company, which Holder(s) is expected to be
the nominee of the Securities Depository. The Securities Depository will credit
the accounts of the Agent Members of the Beneficial Owners in accordance with
the Securities Depository's normal procedures. The Securities Depository's
current procedures provide for it to distribute dividends in same-day funds to
Agent Members who are in turn expected to distribute such dividends to the
persons for whom they are acting as agents. The Agent Member of a Beneficial
Owner will be responsible for holding or disbursing such payments on the
applicable Dividend Payment Date to such Beneficial Owner in accordance with the
instructions of such beneficial owner.
Dividends in arrears for any past Dividend Period may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to the
Holder(s) as its name appears on the share ledger or share records of the
Company on such date, not exceeding fifteen (15) days preceding the payment date
thereof, as may be fixed by the Board of Directors. Any dividend payment shall
first be credited against the earliest accumulated but unpaid dividends. No
interest will be payable in respect of any dividend payment or payments which
may be in arrears. See "--Default Period" below.
47
The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period (or in respect of dividends on
another date in connection with a redemption during such Dividend Period) shall
be computed by multiplying the Applicable Rate (or the Default Rate) for such
Dividend Period (or a portion thereof) by a fraction, the numerator of which
will be the number of days in such Dividend Period (or portion thereof) that
such share was outstanding and for which the Applicable Rate or the Default Rate
was applicable and the denominator of which will be 360, multiplying the amount
so obtained by $25,000 per share, and rounding the amount so obtained to the
nearest cent.
Determination of Dividend Rate. The dividend rate for the initial
Dividend Period (i.e., the period from and including the Original Issue Date to
and including the initial Auction Date) and the initial Auction Date are set
forth on the cover page of the Prospectus. For each subsequent Dividend Period,
subject to certain exceptions, the dividend rate will be the Applicable Rate
that the Auction Agent advises the Company has resulted from an Auction.
The initial Dividend Period for the Series II MMP Shares shall be__
(___) days. Dividend Periods after the initial Dividend Period shall either be
Standard Dividend Periods or, subject to certain conditions and with notice to
Holders, Special Dividend Periods.
A Special Dividend Period will not be effective unless, among other
things, Sufficient Clearing Bids exist at the Auction in respect of such Special
Dividend Period (that is, in general, the number of shares subject to Buy Orders
by Potential Holders is at least equal to the number of shares subject to Sell
Orders by Existing Holders).
Dividends will accumulate at the Applicable Rate from the Original
Issue Date and shall be payable on each subsequent Dividend Payment Date. For
Dividend Periods of less than 30 days, Dividend Payment Dates shall occur on the
first Business Day following the last day of such Dividend Period and, if
greater than 30 days, then on a monthly basis on the first Business Day of each
month within such Dividend Period and on the Business Day following the last day
of such Dividend Period. Dividends will be paid through the Securities
Depository on each Dividend Payment Date.
Except during a Default Period as described below, the Applicable Rate
resulting from an Auction will not be greater than the Maximum Rate, which is
equal to the Applicable Percentage of the Reference Rate, subject to upward but
not downward adjustment in the discretion of the Board of Directors after
consultation with the Broker-Dealers. The Applicable Percentage will be
determined based on the lower of the credit ratings assigned on that date to
that series of MMP Shares by Moody's and Fitch, as follows:
MOODY'S FITCH
CREDIT RATING CREDIT RATING APPLICABLE PERCENTAGE
------------- ------------- ---------------------
Aa3 or above AA- or above 200%
A3 to A1 A- to A+ 250%
Baa3 to Baa1 BBB- to BBB+ 275%
Below Baa3 Below BBB- 300%
The Reference Rate is the greater of (1) the applicable AA Composite
Commercial Paper Rate (for a Dividend Period of fewer than 184 days) or the
applicable Treasury Index Rate (for a Dividend Period of 184 days or more), or
(2) the applicable LIBOR. For Standard Dividend Periods or less only, the
Applicable Rate resulting from an Auction will not be less than the Minimum
Rate, which is 70% of the applicable AA Composite Commercial Paper Rate. No
Minimum Rate is specified for Auctions with respect to Dividend Periods of more
than the Standard Dividend Period.
48
The Maximum Rate for the MMP Shares will apply automatically following
an Auction for such shares in which Sufficient Clearing Bids have not been made
(other than because all shares of MMP Shares were subject to Submitted Hold
Orders). If an Auction for any Dividend Period is not held for any reason,
including because there is no Auction Agent or Broker-Dealer, then the
Applicable Rate on the MMP Shares for any such Dividend Period shall be the
Maximum Rate (except for circumstances in which the Dividend Rate is the Default
Rate, as described below).
The All Hold Rate will apply automatically following an Auction in
which all of the outstanding shares are subject to (or are deemed to be subject
to) Submitted Hold Orders. The All Hold Rate is 80% of the applicable AA
Composite Commercial Paper Rate.
Prior to each Auction, Broker-Dealers will notify Holders of the term
of the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Company. After each Auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
Designation of Dividend Period. The Company will designate the duration
of Dividend Periods of MMP Shares; provided, however, that no such designation
is necessary for a Standard Dividend Period and that any designation of a
Special Dividend Period shall be effective only if (1) notice thereof shall have
been given as provided herein, (2) any failure to pay in the timely manner to
the Auction Agent the full amount of any dividend on, or the redemption price
of, MMP Shares shall have been cured as set forth under "--Default Period," (3)
Sufficient Clearing Bids shall have existed in an Auction held on the Auction
Date immediately preceding the first day of such proposed Special Dividend
Period, (4) if the Company shall have mailed a notice of redemption with respect
to any shares, as described under "--Redemption" below, the Redemption Price
with respect to such shares shall have been deposited with the Paying Agent, and
(5) in the case of the designation of a Special Dividend Period, the Company has
confirmed that, as of the Auction Date next preceding the first day of such
Special Dividend Period, it has Eligible Assets with an aggregate Discounted
Value at least equal to the MMP Shares Basic Maintenance Amount (as defined
above) and has consulted with the Broker-Dealers and has provided notice and a
MMP Shares Basic Maintenance Report to each Rating Agency which is then rating
the MMP Shares and so requires.
Designation of a Special Dividend Period. If the Company proposes to
designate any Special Dividend Period, not fewer than seven (or two Business
Days in the event the duration of the Dividend Period prior to such Special
Dividend Period is fewer than eight days) nor more than thirty (30) Business
Days prior to the first day of such Special Dividend Period, notice shall be (1)
made by press release and (2) communicated by the Company by telephonic or other
means to the Auction Agent and confirmed in writing promptly thereafter. Each
such notice shall state (A) that the Company proposes to exercise its option to
designate a succeeding Special Dividend Period, specifying the first and last
days thereof and (B) that the Company will, by 3:00 p.m. New York City time, on
the second Business Day next preceding the first day of such Special Dividend
Period, notify the Auction Agent, who will promptly notify the Broker-Dealers,
of either (x) its determination, subject to certain conditions, to proceed with
such Special Dividend Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Dividend
Period in which latter event the succeeding Dividend Period shall be a Standard
Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Dividend Period, the
Company shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
49
(1) a notice stating (A) that the Company has determined to
designate the next succeeding Dividend Period as a Special Dividend
Period, specifying the first and last days thereof and (B) the terms of
any Specific Redemption Provisions; or
(2) a notice stating that the Company has determined not to
exercise its option to designate a Special Dividend Period.
If the Company fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Dividend Period, the Company shall be deemed to have delivered a notice
to the Auction Agent with respect to such Dividend Period to the effect set
forth in clause (2) above, thereby resulting in a Standard Dividend Period.
Default Period. Subject to cure provisions, a "Default Period" with
respect to the MMP Shares will commence on any date the Company fails to deposit
irrevocably in trust in same-day funds, with the Paying Agent by 12:00 noon, New
York City time, (A) the full amount of any declared dividend payable on the
Dividend Payment Date (a "Dividend Default") or (B) the full amount of any
redemption price (the "Redemption Price") payable on the date fixed for
redemption (the "Redemption Date") (a "Redemption Default", and together with a
Dividend Default, hereinafter referred to as "Default").
Subject to cure provisions, a Default Period with respect to a Dividend
Default or a Redemption Default shall end on the Business Day on which, by 12:00
noon, New York City time, all unpaid dividends and any unpaid Redemption Price
shall have been deposited irrevocably in trust in same-day funds with the Paying
Agent. In the case of a Dividend Default, the Applicable Rate for each Dividend
Period commencing during a Default Period will be equal to the Default Rate, and
each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Standard Dividend Period; provided, however, that the
commencement of a Default Period will not by itself cause the commencement of a
new Dividend Period.
No Auction shall be held during a Default Period. No Default Period
with respect to a Dividend Default or Redemption Default shall be deemed to
commence if the amount of any dividend or any Redemption Price due (if such
default is not solely due to the willful failure of the Company) is deposited
irrevocably in trust, in same-day funds with the Paying Agent by 12:00 noon, New
York City time within three Business Days after the applicable Dividend Payment
Date or Redemption Date, together with an amount equal to the Default Rate
applied to the amount of such non-payment based on the actual number of days
comprising such period divided by 360. The Default Rate shall be equal to the
Reference Rate multiplied by three.
RESTRICTIONS ON DIVIDEND, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Company may not (1) declare any dividend with
respect to preferred stock, including MMP Shares, if, at the time of such
declaration (and after giving effect thereto), asset coverage with respect to
the Tortoise Notes (or any other Borrowings) of the Company that are senior
securities representing indebtedness (as defined in the 1940 Act), would be less
than 200% (or such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
declaring dividends on its preferred stock) or (2) declare any other
distribution on preferred stock, including MMP Shares, or purchase or redeem
preferred stock if at the time of the declaration, purchase or redemption (and
after giving effect thereto), asset coverage with respect to the Tortoise Notes
(or any other such Borrowings) that are senior securities representing
indebtedness would be less than 300% (or such other percentage as may in the
future be specified in or under the 1940 Act as the minimum asset
50
coverage for senior securities representing indebtedness of a closed-end
investment company as a condition of declaring distributions, purchases or
redemptions of its shares of capital stock).
"Senior securities representing indebtedness" generally means any bond,
debenture, note or similar obligation or instrument constituting a security
(other than stock) and evidencing indebtedness and includes the Company's
obligations under its outstanding Tortoise Notes. For purposes of determining
asset coverage for senior securities representing indebtedness in connection
with the payment of dividends or other distributions on or purchases or
redemptions of stock, the term "senior security" does not include any promissory
note or other evidence of indebtedness issued in consideration of any loan,
extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed. The term "senior
security" also does not include any such promissory note or other evidence of
indebtedness in any case where such a loan is for temporary purposes only and in
an amount not exceeding 5% of the value of the total assets of the Company at
the time the loan is made; a loan is presumed under the 1940 Act to be for
temporary purposes if it is repaid within 60 days and is not extended or
renewed; otherwise it is presumed not to be for temporary purposes. For purposes
of determining whether the 200% and 300% asset coverage requirements described
above apply in connection with dividends or distributions on, or purchases or
redemptions of, MMP Shares, such asset coverages may be determined on the basis
of values calculated as of a time within 48 hours (not including Sundays or
holidays) next preceding the time of the applicable determination.
In addition, a declaration of a dividend or other distribution on or
purchase or redemption of MMP Shares may be prohibited (1) at any time that an
event of default under Tortoise Notes (or any other Borrowings) has occurred and
is continuing; (2) if, after giving effect to such declaration, purchase or
redemption, the Company would not have eligible portfolio holdings with an
aggregated discounted value at least equal to any asset coverage requirements
associated with Tortoise Notes (or Borrowings); or (3) the Company has not
redeemed the full amount of Tortoise Notes (or any other Borrowings) required to
be redeemed by any provision for mandatory redemption.
Upon failure to pay dividends for two years or more, the holders of MMP
Shares will acquire certain additional voting rights. See "--Voting Rights"
below. Such rights shall be the exclusive remedy of the Holders of MMP Shares
upon any failure to pay dividends on MMP Shares.
For so long as any MMP Shares are outstanding, except as contemplated
by the Articles Supplementary, the Company will not declare, pay or set apart
for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, common stock or other shares of stock, if any, ranking junior to
MMP Shares as to dividends or upon liquidation) with respect to common stock or
any other shares of the Company ranking junior to or on a parity with MMP Shares
as to dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any common stock or any other such junior
shares (except by conversion into or exchange for shares of the Company ranking
junior to MMP Shares as to dividends and upon liquidation) or any such parity
shares (except by conversion into or exchange for shares of the Company ranking
junior to or on a parity with MMP Shares as to dividends and upon liquidation),
unless (1) there is no event of default under the Tortoise Notes (or any other
Borrowings) that is continuing; (2) immediately after such transaction, the
Company would have Eligible Assets with an aggregate Discounted Value at least
equal to the MMP Shares Basic Maintenance Amount and the Company would maintain
the 1940 Act MMP Shares Asset Coverage (see "Rating Agency Guidelines"); (3)
immediately after the transaction, the Company would have eligible portfolio
holdings with an aggregated discounted value at least equal to the asset
coverage requirements, if any, under the Tortoise Notes (or any other
Borrowings); (4) full cumulative dividends on MMP Shares due on or prior to the
date of the transaction have been declared and paid; and (5) the Company has
redeemed the full
51
number of MMP Shares required to be redeemed by any provision for mandatory
redemption contained in the Articles Supplementary (see "--Redemption").
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and
Maryland law, the Company at its option may redeem MMP Shares having a Dividend
Period of one year or less, in whole or in part, out of funds legally available
therefor, on the Dividend Payment Date upon not less than 15 calendar days', and
not more than 40 calendar days', prior notice. This optional redemption is not
available during the initial Dividend Period or during other limited
circumstances. The optional redemption price per share shall be $25,000 per
share, plus an amount equal to accumulated but unpaid dividends thereon (whether
or not earned or declared) to the date fixed for redemption. MMP Shares having a
Dividend Period of more than one year are redeemable at the option of the
Company, in whole or in part, out of funds legally available therefor, prior to
the end of the relevant Dividend Period, upon not less than 15 calendar days',
and not more than 40 calendar days', prior notice, subject to any Specific
Redemption Provisions, which may include the payment of redemption premiums in
the sole discretion of the Board of Directors. The Company shall not effect any
optional redemption unless after giving effect thereto (1) the Company has
available certain Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to Holders of MMP
Shares by reason of the redemption of MMP Shares on such date fixed for the
redemption, and (2) the Company would have Eligible Assets with an aggregate
Discounted Value at least equal to the MMP Shares Basic Maintenance Amount.
The Company also reserves the right to repurchase MMP Shares in market
or other transactions from time to time in accordance with applicable law and at
a price that may be more or less than the liquidation preference of the MMP
Shares, but is under no obligation to do so.
Mandatory Redemption. If the Company fails to maintain Eligible Assets
with an aggregate Discounted Value at least equal to the MMP Shares Basic
Maintenance Amount as of any Valuation Date or the 1940 Act MMP Shares Asset
Coverage as of the last Business Day of any month, and such failure is not cured
within ten Business Days following such Valuation Date in the case of a failure
to maintain the MMP Shares Basic Maintenance Amount or by the last Business Day
of the following month in the case of a failure to maintain the 1940 Act MMP
Shares Asset Coverage (each an "Asset Coverage Cure Date"), the MMP Shares will
be subject to mandatory redemption out of funds legally available therefor. See
"Rating Agency Guidelines." The number of MMP Shares to be redeemed in such
circumstances will be equal to the lesser of (1) the minimum number of MMP
Shares the redemption of which, if deemed to have occurred immediately prior to
the opening of business on the relevant Asset Coverage Cure Date, would result
in the Company having sufficient Eligible Assets to restore the MMP Shares Basic
Maintenance Amount or sufficient to satisfy the 1940 Act MMP Shares Asset
Coverage, as the case may be, in either case as of the relevant Asset Coverage
Cure Date (provided that, if there is no such minimum number of shares the
redemption of which would have such result, all MMP Shares then outstanding will
be redeemed), and (2) the maximum number of MMP Shares that can be redeemed out
of funds expected to be available therefor on the Mandatory Redemption Date (as
defined below) at the Mandatory Redemption Price (as defined below).
The Company shall allocate the number of shares required to be redeemed
to satisfy the MMP Shares Basic Maintenance Amount or the 1940 Act MMP Shares
Asset Coverage, as the case may be, pro rata among the Holders of MMP Shares in
proportion to the number of shares they hold, by lot or by such other method as
the Company shall deem fair and equitable, subject to any mandatory redemption
provisions.
52
The Company is required to effect such a mandatory redemption not later
than 40 days after the Asset Coverage Cure Date (the "Mandatory Redemption
Date"), except that if the Company does not have funds legally available for the
redemption of, or is not otherwise legally permitted to redeem, all of the
required number of MMP Shares that are subject to mandatory redemption, or the
Company otherwise is unable to effect such redemption on or prior to such
Mandatory Redemption Date, the Company will redeem those MMP Shares on the
earliest practicable date on which the Company will have such funds available,
upon notice to record owners of shares of MMP Shares and the Paying Agent. The
Company's ability to make a mandatory redemption may be limited by the
provisions of the 1940 Act or Maryland law.
The redemption price per share in the event of any mandatory redemption
will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption,
plus (in the case of a Dividend Period of more than one year only) a redemption
premium, if any, determined by the Board of Directors in its sole discretion
after consultation with the Broker-Dealers and set forth in any applicable
Specific Redemption Provisions (the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the
Company will file a notice of its intention to redeem with the Commission so as
to provide at least the minimum notice required by such Rule or any successor
provision (notice currently must be filed with the Commission generally at least
30 days prior to the redemption date). The Company shall deliver a notice of
redemption to the Auction Agent containing the information described below one
Business Day prior to the giving of notice to Holders in the case of an optional
redemption and on or prior to the 30th day preceding the Mandatory Redemption
Date in the case of a mandatory redemption. The Auction Agent will use its
reasonable efforts to provide notice to each Holder of MMP Shares called for
redemption by electronic means not later than the close of business on the
Business Day immediately following the day on which the Auction Agent determines
the shares to be redeemed (or, during a Default Period with respect to such
shares, not later than the close of business on the Business Day immediately
following the day on which the Auction Agent receives notice of redemption from
the Company). Such notice will be confirmed promptly in writing not later than
the close of business on the third Business Day preceding the redemption date by
providing the notice to each Holder of shares of MMP Shares called for
redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository ("Notice of Redemption"). Notice of Redemption will be
addressed to the registered owners of the MMP Shares at their addresses
appearing on the share records of the Company. Such notice will set forth (1)
the redemption date, (2) the number and identity of MMP Shares to be redeemed,
(3) the redemption price (specifying the amount of accumulated dividends to be
included therein and the amount of the redemption premium, if any), (4) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date, and (5) the provision under which redemption shall be made. No
defect in the Notice of Redemption or in the transmittal or mailing thereof will
affect the validity of the redemption proceedings, except as required by
applicable law.
If fewer than all of the shares of MMP Shares are redeemed on any date,
the shares to be redeemed on such date will be selected by the Company on a pro
rata basis in proportion to the number of shares held by such Holder, by lot or
by such other method as is determined by the Company to be fair and equitable,
subject to the terms of any Specific Redemption Provisions. MMP Shares may be
subject to mandatory redemption notwithstanding the terms of any Specific
Redemption Provisions. The Auction Agent will give notice to the Securities
Depository, whose nominee will be the record Holder of all of the MMP Shares,
and the Securities Depository will determine the number of shares to be redeemed
from the account of the Agent Member of each Beneficial Owner. Each Agent Member
will determine the number of shares to be redeemed from the account of each
Beneficial Owner for which it acts as agent. An Agent Member may select for
redemption shares from the accounts of some Beneficial Owners without selecting
53
for redemption any shares from the accounts of other Beneficial Owners. In this
case, in selecting the MMP Shares to be redeemed, the Agent Member will select
by lot or by other fair and equitable method. Notwithstanding the foregoing, if
neither the Securities Depository nor its nominee is the record Holder of all of
the shares, the particular shares to be redeemed shall be selected by the
Company by lot, on a pro rata basis or by such other method as the Company shall
deem fair and equitable, as contemplated above.
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, dividends on such shares will cease to
accumulate and such shares will be no longer deemed to be outstanding for any
purpose and all rights of the Holders of the shares so called for redemption
will cease and terminate, except the right of the Holders of such shares to
receive the redemption price, but without any interest or additional amount. The
Company shall be entitled to receive from the Paying Agent, promptly after the
date fixed for redemption, any cash deposited with the Paying Agent in excess of
(1) the aggregate redemption price of the MMP Shares called for redemption on
such date and (2) such other amounts, if any, to which Holders of MMP Shares
called for redemption may be entitled. The Company will be entitled to receive,
from time to time, from the Paying Agent the interest, if any, earned on such
funds deposited with the Paying Agent and the owners of shares so redeemed will
have no claim to any such interest. Any funds so deposited that are unclaimed
two years after such redemption date will be paid, to the extent permitted by
law, by the Paying Agent to the Company upon its request. Subsequent to such
payment, Holders of MMP Shares called for redemption may look only to the
Company for payment.
So long as any MMP Shares are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to distribute such
funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no MMP
Shares may be redeemed unless all dividends in arrears on the outstanding MMP
Shares, and all shares of the Company ranking on a parity with the MMP Shares
with respect to the payment of dividends or upon liquidation, have been or are
being contemporaneously paid or set aside for payment, except in connection with
the liquidation of the Company in which case all MMP Shares and all shares
ranking in parity with the MMP Shares must receive proportionate amounts and
that the foregoing shall not prevent the purchase or acquisition of all the
outstanding MMP Shares pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
Holders of all outstanding MMP Shares.
Except for the provisions described above, nothing contained in the
Articles Supplementary limits any legal right of the Company to purchase or
otherwise acquire any MMP Shares outside of an Auction at any price, whether
higher or lower than the price that would be paid in connection with an optional
or mandatory redemption, so long as, at the time of any such purchase, there is
no arrearage in the payment of dividends on, or the mandatory or optional
redemption price with respect to, any MMP Shares for which Notice of Redemption
has been given and the Company is in compliance with the 1940 Act MMP Shares
Asset Coverage and has Eligible Assets with an aggregate Discounted Value at
least equal to the MMP Shares Basic Maintenance Amount after giving effect to
such purchase or acquisition on the date thereof. Any shares which are
purchased, redeemed or otherwise acquired by the Company shall be returned to
the status of authorized but unissued shares. If fewer than all the outstanding
MMP Shares are redeemed or otherwise acquired by the Company, the Company shall
give notice of such transaction to the Auction Agent, in accordance with the
procedures agreed upon by the Board of Directors.
54
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, the Holders of MMP Shares then
outstanding and any other shares ranking on a parity with the MMP Shares then
outstanding, in preference to the holders of common stock, will be entitled to
payment out of the assets of the Company, or the proceeds thereof, available for
distribution to stockholders after satisfaction of claims of creditors of the
Company, including the holders of any outstanding Tortoise Notes, of a
liquidation preference in the amount equal to $25,000 per share of the MMP
Shares, plus an amount equal to accumulated dividends (whether or not earned or
declared but without interest) to the date of payment of such preference is made
in full or a sum sufficient for the payment thereof is set apart with the Paying
Agent. However, Holders of MMP Shares will not be entitled to any premium to
which such Holder might be entitled to receive upon certain redemptions of such
MMP Shares. After payment of the full amount of such liquidating distribution,
the Holders of the MMP Shares will not be entitled to any further participation
in any distribution of assets of the Company.
If, upon any such liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, the assets of the Company
available for distribution among the holders of all outstanding preferred stock,
including the MMP Shares, shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then available assets
shall be distributed among the holders of all outstanding preferred stock,
including the MMP Shares, ratably in any such distribution of assets according
to the respective amounts which would be payable on all such shares if all
amounts thereon were paid in full. Upon the dissolution, liquidation or winding
up of the affairs of the Company, whether voluntary or involuntary, until
payment in full is made to the Holders of MMP Shares of the liquidating
distribution to which they are entitled, (1) no dividend or other distribution
shall be made to the holders of common stock or any other class of stock of the
Company ranking junior to MMP Shares upon dissolution, liquidation or winding
up, and (2) no purchase, redemption or other acquisition for any consideration
by the Company shall be made in respect of common stock or any other class of
stock of the Company ranking junior to MMP Shares upon dissolution, liquidation
or winding up.
A consolidation, reorganization or merger of the Company with or into
any company, or a sale, lease or exchange of all or substantially all of the
assets of the Company in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Company.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation), by dividend, redemption or otherwise, is permitted
under Maryland law, amounts that would be needed, if the Company were to be
dissolved at the time of the distribution, to satisfy the liquidation preference
of the MMP Shares will not be added to the Company's total liabilities.
VOTING RIGHTS
Except as otherwise indicated in the Charter or Bylaws, or as otherwise
required by applicable law, Holders of MMP Shares have one vote per share and
vote together with holders of common stock as a single class. Under applicable
rules of the NYSE, the Company is currently required to hold annual meetings of
stockholders.
In connection with the election of the Board of Directors, the holders
of outstanding preferred stock, including MMP Shares, represented in person or
by proxy at said meeting, shall be entitled, as a class, to the exclusion of the
holders of all other securities and classes of stock to elect two directors of
the Company. The holders of outstanding common stock and preferred stock,
including MMP Shares, voting together as a single class, shall elect the balance
of the directors. Notwithstanding the foregoing, if (a) at the close of business
on any Dividend Payment Date, accumulated dividends (whether or not earned
55
or declared) on the preferred stock, including MMP Shares, equal to at least two
full years' dividends shall be due and unpaid; or (b) at any time holders of any
preferred stock, including MMP Shares, are entitled under the 1940 Act to elect
a majority of the directors of the Company, then the number of members
constituting the Board shall automatically be increased by the smallest number
that, when added to the two directors elected exclusively by the holders of
preferred stock, including MMP Shares, as described above, would constitute a
majority of the Board as so increased by such smallest number; and at a special
meeting of stockholders which will be called and held as soon as practicable,
and at all subsequent meetings at which directors are to be elected, the holders
of preferred stock, including MMP Shares, voting as a separate class, will be
entitled to elect the smallest number of additional directors that, together
with the two directors which such holders will be in any event entitled to
elect, constitutes a majority of the total number of directors of the Company as
so increased. The terms of office of the persons who are directors at the time
of that election will continue. If the Company thereafter shall pay, or declare
and set apart for payment, in full all dividends payable on all outstanding
preferred stock, including MMP Shares, for all past Dividend Periods, or the
Voting Period is otherwise terminated, the voting rights stated in the above
sentence shall cease, and the terms of office of all of the additional directors
elected by the holders of preferred stock, including MMP Shares (but not of the
directors with respect to whose election the holders of common stock were
entitled to vote or the two directors the holders of preferred stock, including
MMP Shares, have the right to elect in any event), will terminate automatically.
Any MMP Shares issued after the date hereof shall vote with the MMP Shares as a
single class on the matters described above, and the issuance of any other MMP
Shares by the Company may reduce the voting power of each MMP Share.
The affirmative vote of the holders of a majority of the outstanding
preferred stock, including MMP Shares, determined with reference to a "majority
of outstanding voting securities" as the term is defined in Section 2(a)(42) of
the 1940 Act, voting as a separate class, is required to:
(1) amend, alter or repeal any of the preferences, rights or
powers of such class so as to affect materially and adversely
such preferences, rights or powers;
(2) increase the authorized number of preferred stock;
(3) create, authorize or issue stock of any class ranking senior
to or in parity with the preferred stock with respect to the
payment of dividends or the distribution of assets, or any
securities convertible into, or warrants, options or similar
rights to purchase, acquire or receive, such shares ranking
senior to or in parity with the preferred stock or reclassify
any authorized shares of stock of the Company into any stock
ranking senior to or on parity with the preferred stock
(except that the Board of Directors, without the vote or
consent of the holders of preferred stock, may from time to
time authorize, create and classify, and the Company may from
time to time issue shares or series of preferred stock,
including other series of MMP Shares, ranking in parity with
the MMP Shares with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Company, and may authorize,
reclassify and/or issue any additional shares of MMP Shares,
including shares previously purchased or redeemed by the
Company, subject to continuing compliance by the Company with
1940 Act MMP Shares Asset Coverage and MMP Shares Basic
Maintenance Amount requirements);
(4) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or
insolvency proceedings against it, or file a petition seeking
or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or
consent to the appointment of a receiver, liquidator,
56
assignee, trustee, sequestrator (or other similar official) of
the Company or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be
required by applicable law, admit in writing its inability to
pay its debts generally as they become due or take any
corporate action in furtherance of any such action;
(5) create, incur or suffer to exist, or agree to create, incur or
suffer to exist, or consent to cause or permit in the future
(upon the happening of a contingency or otherwise) the
creation, incurrence or existence of any material lien,
mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material
encumbrance of any kind upon any of the Company's assets as a
whole, except (A) liens the validity of which are being
contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be
paid thereafter without penalty, (C) liens, pledges, charges,
security interests, security agreements or other encumbrances
arising in connection with any indebtedness senior to the MMP
Shares, or arising in connection with any futures contracts or
options thereon, interest rate swap or cap transactions,
forward rate transactions, put or call options, or other
similar transactions, (D) liens, pledges, charges, security
interests, security agreements or other encumbrances arising
in connection with any indebtedness permitted under clause (6)
below and (E) liens to secure payment for services rendered
including, without limitation, services rendered by the
Company's custodian and the Auction Agent; or
(6) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money or any direct or indirect
guarantee of such indebtedness for borrowed money or any
direct or indirect guarantee of such indebtedness, except the
Company may borrow and issue senior securities as may be
permitted by the Company's investment restrictions; provided,
however, that transfers of assets by the Company subject to an
obligation to repurchase shall not be deemed to be
indebtedness for purposes of this provision to the extent that
after any such transaction the Company has Eligible Assets
with an aggregate Discounted Value at least equal to the MMP
Shares Basic Maintenance Amount as of the immediately
preceding Valuation Date.
In addition, the affirmative vote of the holders of a majority of the
outstanding preferred stock, including MMP Shares, voting separately from any
other series, determined with reference to a "majority of outstanding voting
securities" as that term is defined in Section 2(a)(42) of the 1940 Act, shall
be required with respect to: (1) any plan of reorganization (as such term is
used in the 1940 Act) adversely affecting such shares or any action requiring a
vote of security holders of the Company under Section 13(a) of the 1940 Act; or
(2) any matter that materially and adversely affects the rights, preferences, or
powers of such series in a manner different from that of other series or classes
of the Company's shares of stock. For purposes of the foregoing, no matter shall
be deemed to adversely affect any right, preference or power unless such matter
(1) alters or abolishes any preferential right of such series; (2) creates,
alters or abolishes any right in respect of redemption of such series; or (3)
creates or alters (other than to abolish) any restriction on transfer applicable
to such series.
The foregoing voting provisions will not apply with respect to the MMP
Shares if, at or prior to the time when a vote is required, such shares have
been (1) redeemed or (2) called for redemption, and sufficient funds shall have
been deposited in trust to effect such redemption.
The Board of Directors, without the vote or consent of any holder of
preferred stock, including MMP Shares, or any other stockholder of the Company,
may from time to time modify, alter or repeal any or all of any definitions set
forth in the Rating Agency Guidelines or add covenants and other obligations of
the Company or confirm the applicability of covenants and other obligations set
forth in the
57
Rating Agency Guidelines in connection with obtaining or maintaining the rating
of any Rating Agency that is then rating the MMP Shares and any such
modification, alteration or repeal will not be deemed to affect the preferences,
rights or powers of MMP Shares or the holders thereof, provided the Board of
Directors receives written confirmation from such Rating Agency (such
confirmation in no event being required to be obtained from a particular Rating
Agency with respect to definitions or other provisions relevant only to another
Rating Agency's rating) that any such modification, alteration or repeal would
not adversely affect the rating then assigned by such Rating Agency.
Also, subject to compliance with applicable law, the Board of Directors
may modify the definition of Maximum Rate to increase the percentage amount by
which the Reference Rate is multiplied to determine the Maximum Rate shown
therein without the vote or consent of the holders of the preferred stock,
including MMP Shares, or any other stockholder of the Company, and without
receiving any confirmation from any Rating Agency after consultation with the
Broker-Dealers, provided that immediately following any such increase the
Company would be in compliance with the MMP Shares Basic Maintenance Amount.
Unless otherwise required by law, holders of MMP Shares shall not have
any relative rights or preferences or other special rights other than those
specifically set forth in the Articles Supplementary. The holders of MMP Shares
shall have no rights to cumulative voting. In the event that the Company fails
to pay any dividends on the MMP Shares, the exclusive remedy of the holders
shall be the right to vote for directors as discussed above.
THE AUCTION
GENERAL
Articles Supplementary. The Articles Supplementary provide that, except
as otherwise described herein, the Applicable Rate for the shares of each series
of preferred stock, for each Dividend Period of shares of such series after the
initial Dividend Period thereof, shall be equal to the rate per annum that the
Auction Agent advises has resulted on the Business Day preceding the first day
of such Subsequent Dividend Period (an "Auction Date") from implementation of
the auction procedures (the "Auction Procedures"), in which persons determine to
hold or offer to sell or, based on dividend rates bid by them, offer to purchase
or sell shares of such series. Each periodic implementation of the Auction
Procedures is referred to herein as an Auction. See the Articles Supplementary,
attached as Appendix A to the Statement of Additional Information for a more
complete description of the Auction process.
Auction Agency Agreement. The Company has entered into an Auction
Agency Agreement (the "Auction Agency Agreement") with the Auction Agent
(currently, The Bank of New York) which provides, among other things, that the
Auction Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for the Series II MMP Shares so long as the Applicable Rate for
shares is to be based on the results of an Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Company on a date no earlier than 60 days after the notice. If the
Auction Agent should resign, the Company will use its best efforts to enter into
an agreement with a successor Auction Agent containing substantially the same
terms and conditions as the Auction Agency Agreement. The Company may remove the
Auction Agent provided that prior to such removal the Company shall have entered
into such an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements")
58
with several Broker-Dealers selected by the Company, which provide for the
participation of those Broker-Dealers in Auctions for the Series II MMP Shares.
After each Auction for MMP Shares, the Auction Agent will pay to each
Broker-Dealer, from funds provided by the Company, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a
Dividend Period of less than one year, or a percentage agreed to by the Company
and the Broker-Dealers in the case of any Auction immediately preceding a
Dividend Period of one year or longer, of the purchase price of MMP Shares
placed by such Broker-Dealer at such Auction. For the purposes of the preceding
sentence, MMP Shares will be placed by a Broker-Dealer if such shares were (a)
the subject of Hold Orders deemed to have been submitted to the Auction Agent by
the Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial Owners
or (b) the subject of an Order submitted by such Broker-Dealer that is (1) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or (2) a Submitted Bid
of a Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (3) a valid Hold Order.
The Company may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
AUCTION PROCEDURES
Beneficial Owners. Prior to the Submission Deadline on each Auction
Date for MMP Shares, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of shares (a "Beneficial Owner") may submit orders ("Orders") with respect to
shares to that Broker-Dealer as follows:
o Hold Order - indicating its desire to hold shares without
regard to the Applicable Rate for shares for the next Dividend
Period thereof.
o Bid - indicating its desire to sell shares if the Applicable
Rate for shares for the next Dividend Period thereof is less
than the rate specified in such Bid (also known as a
hold-at-a-rate order).
o Sell Order - indicating its desire to sell shares without
regard to the Applicable Rate for shares for the next Dividend
Period thereof.
Orders submitted (or the failure to do so) by Beneficial Owners under
certain circumstances will have the effects as described below. A Beneficial
Owner of shares that submits a Bid with respect to shares to its Broker-Dealer
having a rate higher than the Maximum Rate for shares on the Auction Date
therefor will be treated as having submitted a Sell Order with respect to such
shares to its Broker-Dealer. A Beneficial Owner of shares that fails to submit
an Order with respect to such shares to its Broker-Dealer will be deemed to have
submitted a Hold Order with respect to such shares to its Broker-Dealer;
provided, however, that if a Beneficial Owner of Series II MMP Shares fails to
submit an Order with respect to such shares to its Broker-Dealer for an Auction
relating to a Dividend Period of more than ___________ (__) days, such
Beneficial Owner will be deemed to have submitted a Sell Order with respect to
such shares to its Broker-Dealer. A Sell Order shall constitute an irrevocable
offer to sell the MMP Shares subject thereto. A Beneficial Owner that offers to
become the Beneficial Owner of additional MMP Shares is, for purposes of such
offer, a Potential Beneficial Owner as discussed below.
59
Potential Beneficial Owners. A customer of a Broker-Dealer that is not
a Beneficial Owner of MMP Shares but that wishes to purchase shares, or that is
a Beneficial Owner of shares that wishes to purchase additional shares (in each
case, a "Potential Beneficial Owner"), may submit Bids to its Broker-Dealer in
which it offers to purchase shares at $25,000 per share if the Applicable Rate
for shares for the next Dividend Period thereof is not less than the rate
specified in such Bid. A Bid placed by a Potential Beneficial Owner of shares
specifying a rate higher than the Maximum Rate for shares on the Auction Date
therefore will not be accepted.
The Auction Process. Each Broker-Dealer in turn will submit the Orders
of its respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating itself (unless otherwise permitted by
the Company) as an Existing Holder in respect of MMP Shares subject to Orders
submitted or deemed submitted to them by Beneficial Owners and a Potential
Holder in respect of MMP Shares subject to Orders submitted to them by Potential
Beneficial Owners. However, neither the Company nor the Auction Agent will be
responsible for a Broker-Dealer's failure to comply with the foregoing. Any
Order placed with the Auction Agent by a Broker-Dealer as or on behalf of an
Existing Holder or a Potential Holder will be treated in the same manner as an
Order placed with a Broker-Dealer by a Beneficial Owner or Potential Beneficial
Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent
an Order in respect of MMP Shares held by it or customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of MMP Shares held by it. A
Broker-Dealer may also submit Orders to the Auction Agent for its own account as
an Existing Holder or Potential Holder, provided it is not an affiliate of the
Company.
If Sufficient Clearing Bids for MMP Shares exist (that is, the number
of shares subject to Bids submitted or deemed submitted to the Auction Agent by
Broker-Dealers as or on behalf of Potential Holders with rates between the
Minimum Rate and the Maximum Rate for shares is at least equal to the number of
shares subject to Sell Orders submitted or deemed submitted to the Auction Agent
by Broker-Dealers as or on behalf of Existing Holders), the Applicable Rate for
shares for the next succeeding Dividend Period thereof will be the lowest rate
specified in the Submitted Bids which, taking into account such rate and all
lower rates bid by Broker-Dealers as or on behalf of Existing Holders and
Potential Holders, would result in Existing Holders and Potential Holders owning
the shares available for purchase in the Auction. If Sufficient Clearing Bids
for MMP Shares do not exist, the Applicable Rate for shares for the next
succeeding Dividend Period thereof will be the Maximum Rate for shares on the
Auction Date therefor. In such event, Beneficial Owners of shares that have
submitted or are deemed to have submitted Sell Orders may not be able to sell in
such Auction all shares subject to such Sell Orders. If Broker-Dealers submit or
are deemed to have submitted to the Auction Agent Hold Orders with respect to
all Existing Holders of MMP Shares, the Applicable Rate for shares for the next
succeeding Dividend Period thereof will be the All Hold Rate.
The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to hold or
selling, or a Potential Holder purchasing, a number of shares of MMP Shares that
is fewer than the number of shares specified in its Order. To the extent the
allocation procedures have that result, Broker-Dealers that have designated
themselves as Existing Holders or Potential Holders in respect of customer
Orders will be required to make appropriate pro rata allocations among their
respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members
60
in accordance with the Securities Depository's normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
BROKER-DEALERS
The Broker-Dealer agreements each provide that a Broker-Dealer may
submit Orders in Auctions for its own account. Any Broker-Dealer submitting an
Order for its own account in any Auction could have an advantage over other
Potential Holders in that it would have knowledge of other Orders placed through
it in that Auction. A Broker Dealer would not, however, have knowledge of Orders
submitted by other Broker-Dealers, if any. As a result of bidding by a
Broker-Dealer in an Auction, the Auction Rate may be higher or lower than the
rate that would have prevailed had the Broker-Dealer not bid. A Broker-Dealer
may also bid in an Auction in order to prevent what would otherwise be (a) a
failed Auction, (b) an "all-hold" Auction, or (c) the implementation of an
Interest Rate that the Broker-Dealer believes, in its sole judgment, does not
reflect the market for such securities at the time of the Auction. A
Broker-Dealer may also encourage additional or revised investor bidding in order
to prevent an "all-hold" Auction. In the Broker-Dealer agreements, each
Broker-Dealer agrees to handle customers' orders in accordance with its duties
under applicable securities laws and rules.
According to published news reports, the Commission has requested
information from a number of broker-dealers regarding certain of their practices
in connection with auction rate securities, such as the practices described in
the preceding paragraph. Lehman Brothers Inc. has advised the Company that it,
as a participant in the auction rate securities markets, has received an initial
letter from the Commission dated May 5, 2004 and a supplemental letter dated May
27, 2004 requesting that it voluntarily conduct an investigation regarding
certain of its practices and procedures in connection with those markets. Lehman
Brothers is cooperating fully and expects to continue to cooperate fully with
the Commission in providing the requested information. No assurance can be given
as to whether the results of this process will affect the market for the MMP
Shares or the auctions therefor.
SECONDARY MARKET TRADING AND TRANSFER OF MMP SHARES
The Broker-Dealers may maintain a secondary trading market of MMP
Shares outside of Auctions, but are not obligated to do so, and may discontinue
such activity at any time. The Company has made no arrangements for the
establishment of a secondary market. There can be no assurance that such
secondary trading market of MMP Shares, if any is established, will provide
owners with liquidity. MMP Shares are not listed on any exchange or automated
quotation system. Investors who purchase shares in an Auction for a Special
Dividend Period should note that because the dividend rate on such shares will
be fixed for the length of such Dividend Period, the value of the shares may
fluctuate in response to changes in interest rates, and may be more or less than
their original cost if sold on the open market in advance of the next Auction
therefor, depending upon market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of MMP Shares only in whole shares and only as follows:
(1) pursuant to a Bid or Sell Order placed with the Auction Agent
in accordance with the Auction Procedures,
(2) to a Broker-Dealer, or
(3) to the Company or any affiliate; provided, however, that (a) a
sale, transfer or other disposition of MMP Shares from a
customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall
not be deemed to be a sale, transfer or other
61
disposition for purposes of the foregoing if such
Broker-Dealer remains the Existing Holder of the shares so
sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers
other than pursuant to Auctions, the Broker-Dealer (or other
person, if permitted by the Company) to whom such transfer is
made shall advise the Auction Agent of such transfer.
DESCRIPTION OF TORTOISE NOTES AND BORROWINGS
The Charter authorizes the Company, without prior approval of holders
of common and preferred stock, including MMP Shares, to borrow money. The
Company may issue additional notes or other evidence of indebtedness (including
bank borrowings or commercial paper) and may secure any such Borrowings by
mortgaging, pledging or otherwise subjecting as security the Company's assets to
the extent permitted by the 1940 Act or Rating Agency Guidelines. In connection
with such borrowing, the Company may be required to maintain minimum average
balances with the lender or to pay a commitment or other fee to maintain a line
of credit. Any such requirements will increase the cost of borrowing over the
stated interest rate. Any Borrowings, including without limitation the Tortoise
Notes discussed below, will rank senior to the MMP Shares.
On July 15, 2004, the Company issued Series A and Series B Tortoise
Notes in an aggregate principal amount of $110,000,000 pursuant to the
provisions of an indenture. On April 11, 2005, the Company issued Series C
Tortoise Notes in an aggregate principal amount of $55,000,000. BNY Midwest
Trust Company serves as trustee and transfer agent and BONY serves as such agent
for the Tortoise Notes. The Tortoise Notes pay interest at rates that vary based
on auctions normally held every twenty-eight (28) days with respect to Series A
and Series B Tortoise Notes and every seven (7) days with respect to Series C
Tortoise Notes. The Tortoise Notes rank senior to the Company's common stock and
MMP Shares upon liquidation and distribution. The Tortoise Notes may be redeemed
prior to their maturity at the option of the Company, in whole or in part, under
certain circumstances and are subject to mandatory redemption upon failure of
the Company to maintain asset coverage requirements with respect to the Tortoise
Notes.
Limitations. Under the requirements of the 1940 Act, the Company,
immediately after issuing any Borrowings that are senior securities representing
indebtedness, including Tortoise Notes, must have an asset coverage of at least
300%. With respect to any such Borrowings, asset coverage means the ratio which
the value of the total assets of the Company, less all liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount
of any such Borrowings that are senior securities representing indebtedness,
issued by the Company. Certain types of Borrowings also may result in the
Company being subject to covenants in credit agreements relating to asset
coverages or portfolio composition or otherwise. The Company is subject to
certain restrictions imposed by guidelines of one or more rating agencies that
issued ratings for the Tortoise Notes. Such restrictions may be more stringent
than those imposed by the 1940 Act.
Distribution Preference. A declaration of a dividend or other
distribution on or purchase or redemption of common or MMP Shares is restricted:
(i) at any time that an event of default under the Tortoise Notes or any other
Borrowings has occurred and is continuing; or (ii) if after giving effect to
such declaration, the Company would not have eligible portfolio holdings with an
aggregated Discounted Value at least equal to any asset coverage requirements
associated with such Tortoise Notes or other Borrowings; or (iii) if the Company
has not redeemed the full amount of Tortoise Notes or other Borrowings, if any,
required to be redeemed by any provision for mandatory redemption. In addition,
the terms of any other Borrowings may contain provisions that limit certain
activities of the Company, including the payment of dividends to holders of MMP
Shares in certain circumstances.
62
Voting Rights. The Tortoise Notes have no voting rights, except to the
extent required by law or as otherwise provided in the indenture relating to the
acceleration of maturity upon the occurrence and continuance of an event of
default. In connection with any other Borrowings (if any), the 1940 Act does (in
certain circumstances) grant to the lenders to the Company certain voting rights
in the event of default in the payment of interest on or repayment of principal.
DESCRIPTION OF COMMON STOCK
The Charter authorizes the issuance of 100,000,000 shares of common
stock, par value $0.001 per share. The Board of Directors, without any action by
the Company's stockholders, may amend the Company's Charter to increase or
decrease the aggregate number of shares of stock or the number of shares of any
class or series of stock that the Company has authority to issue. All shares of
common stock have equal rights to the payment of dividends and the distribution
of assets upon liquidation. Shares of common stock will, when issued, be fully
paid and, subject to matters discussed in "Certain Provisions in the Company's
Charter and Bylaws," non-assessable, and will have no pre-emptive or conversion
rights or rights to cumulative voting. At any time when MMP Shares are
outstanding, common stockholders will not be entitled to receive any cash
distributions from the Company unless all accrued dividends on MMP Shares have
been paid, and unless asset coverage (as defined in the 1940 Act) with respect
to MMP Shares would be at least 200% after giving effect to the distributions.
At any time when Tortoise Notes are outstanding, common stockholders will not be
entitled to receive any cash distributions from the Company unless all accrued
interest on the Tortoise Notes has been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to Tortoise Notes would be at least 300%
after giving effect to the distributions.
The common stock is listed on the NYSE. The Company intends to hold
annual meetings of stockholders so long as the common stock is listed on a
national securities exchange and such meetings are required as a condition to
such listing.
CERTAIN PROVISIONS IN THE COMPANY'S CHARTER AND BYLAWS
The following description of certain provisions of the Charter and
Bylaws is only a summary. For a complete description, please refer to the
Charter and Bylaws, which have been filed as exhibits to the Company's
registration statement.
The Charter and Bylaws include provisions that could delay, defer or
prevent other entities or persons from acquiring control of the Company, causing
it to engage in certain transactions or modifying its structure. These
provisions may be regarded as "anti-takeover" provisions. Such provisions could
limit the ability of stockholders to sell their shares at a premium over the
then-current market prices by discouraging a third party from seeking to obtain
control of the Company.
CLASSIFICATION OF THE BOARD OF DIRECTORS; ELECTION OF DIRECTORS
The Charter provides that the number of directors may be established
only by the Board of Directors pursuant to the Bylaws, but may not be less than
one. The Bylaws provide that the number of directors may not be greater than
nine. Subject to any applicable limitations of the 1940 Act, any vacancy may be
filled, at any regular meeting or at any special meeting of stockholders called
for that purpose, only by a majority of the remaining directors, even if those
remaining directors do not constitute a quorum. Pursuant to the Charter, the
Board of Directors is divided into three classes: Class I, Class II and Class
III. The initial terms of Class I, Class II and Class III directors will expire
in 2005, 2006 and 2007, respectively. Beginning in 2005, upon the expiration of
their current terms, directors of each class
63
will be elected to serve for three-year terms and until their successors are
duly elected and qualify. Each year only one class of directors will be elected
by the stockholders. The classification of the Board of Directors should help to
assure the continuity and stability of the Company's strategies and policies as
determined by the Board of Directors.
The classified Board provision could have the effect of making the
replacement of incumbent directors more time-consuming and difficult. At least
two annual meetings of stockholders, instead of one, generally will be required
to effect a change in a majority of the Board of Directors. Thus, the classified
Board provision could increase the likelihood that incumbent directors will
retain their positions. The staggered terms of directors may delay, defer or
prevent a change in control of the Board, even though a change in control might
be in the best interests of the stockholders.
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed only for cause and
only by the affirmative vote of at least two-thirds of the votes entitled to be
cast in the election of directors. This provision, when coupled with the
provision in the Bylaws authorizing only the Board of Directors to fill vacant
directorships, precludes stockholders from removing incumbent directors, except
for cause and by a substantial affirmative vote, and filling the vacancies
created by the removal with nominees of stockholders.
AMENDMENT TO THE CHARTER AND BYLAWS
The Charter provides that amendments to the Charter must be declared
advisable by the Board of Directors and generally approved by the affirmative
vote of stockholders entitled to cast at least a majority of the votes entitled
to be cast on the matter. Certain provisions of the Charter, including its
provisions on classification of the Board of Directors, election and removal of
directors and conversion of the Company to an open-end investment company, may
be amended only by the affirmative vote of the stockholders entitled to cast at
least 80% of the votes entitled to be cast on the matter. However, if such a
proposal is approved by at least two-thirds of the continuing directors (as that
term is defined in the Company's charter) in addition to approval by the full
Board of Directors, such proposal may be approved by a majority of the votes
entitled to be cast on such matter. The Board of Directors has the exclusive
power to adopt, alter or repeal any provision of the Bylaws and to make new
Bylaws.
DISSOLUTION OF THE COMPANY
The Charter provides that any proposal to liquidate or dissolve the
Company requires the approval of the stockholders entitled to cast at least 80%
of the votes entitled to be cast on such matter. However, if such a proposal is
approved by at least two-thirds of the continuing directors (in addition to
approval by the full Board), such proposal may be approved by a majority of the
votes entitled to be cast on such matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by stockholders may be made only (1)
pursuant to notice of the meeting, (2) by the Board of Directors or (3) by a
stockholder who is entitled to vote at the meeting and who has complied with the
advance notice procedures of the Bylaws. With respect to special meetings of
stockholders, only the business specified in the Company's notice of the meeting
may be brought before the meeting. Nominations of persons for election to the
Board of Directors at a special meeting may be made only (1) pursuant to notice
of the meeting by the Company, (2) by the Board of Directors, or (3) provided
that the Board of Directors has
64
determined that Directors will be elected at the meeting, by a stockholder who
is entitled to vote at the meeting and who has complied with the advance notice
provisions of the Bylaws.
CLOSED-END COMPANY STRUCTURE
The Company is a closed-end investment company and as such its
stockholders will not have the right to cause the Company to redeem their
shares. Instead, the common stock will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, dividend
stability, portfolio credit quality, relative demand for and supply of such
shares in the market, general market and economic conditions and other factors.
Shares of closed-end companies frequently trade at a discount to their
net asset value. This characteristic of shares of closed-end management
investment companies is a risk separate and distinct from the risk that the
Company's net asset value may decrease as a result of investment activities. To
the extent the common shares do trade at a discount, the Company's Board of
Directors may from time to time engage in open-market repurchases or tender
offers for shares after balancing the benefit to stockholders of the increase in
the net asset value per share resulting from such purchases against the decrease
in the assets of the Company, the potential increase in the expense ratio of
expenses to assets of the Company and the decrease in asset coverage with
respect to any outstanding preferred stock, including MMP Shares. The Board of
Directors believes that in addition to the beneficial effects described above,
any such purchase or tender offers may result in the temporary narrowing of any
discount but will not have any long-term effect on the level of any discount.
There is no guarantee or assurance that the Company's Board of Directors will
decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in the shares trading
at a price equal or close to net asset value per share. Any share repurchase or
tender offers will be made in accordance with requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the 1940 Act and the
principal stock exchange on which the common shares are traded.
FEDERAL INCOME TAX MATTERS
The following is a general summary of certain federal income tax
considerations affecting the Company and its preferred stockholders. This
discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to stockholders in light of their
particular circumstances or who are subject to special rules, such as banks,
thrift institutions and certain other financial institutions, real estate
investment trusts, regulated investment companies, insurance companies, brokers
and dealers in securities or currencies, certain securities traders, tax-exempt
investors, individual retirement accounts, certain tax-deferred accounts and
foreign investors. Unless otherwise noted, this discussion assumes that
stockholders are U.S. persons and hold MMP Shares as capital assets. More
detailed information regarding the federal income tax consequences of investing
in the Company is in the Statement of Additional Information.
COMPANY FEDERAL INCOME TAXATION
The Company will be treated as a corporation for federal and state
income tax purposes. Thus, the Company will be obligated to pay federal and
state income tax on its taxable income. The Company intends to invest its assets
primarily in MLPs, which generally are treated as partnerships for federal
income tax purposes. As a partner in the MLPs, the Company will have to include
its allocable share of the MLP's taxable income in computing its taxable income
regardless of whether the MLPs make any distributions. Based upon the Company's
review of the historic results of the type of MLPs in which the
65
Company intends to invest, the Company expects that the cash flow received by
the Company with respect to its MLP investments will exceed the taxable income
allocated to the Company. There is no assurance that the Company's expectation
regarding the tax character of MLP distributions will be realized. If this
expectation is not realized, there will be greater tax expense borne by the
Company and less cash available to distribute to stockholders. In addition, the
Company will take into account in its taxable income amounts of gain or loss
recognized on the sale of MLP interests. Currently, the maximum regular federal
income tax rate for a corporation is 35%. The Company may be subject to a 20%
federal alternative minimum tax on its alternative minimum taxable income to the
extent that the alternative minimum tax exceeds the Company's regular federal
income tax.
The Company will not be treated as a regulated investment company under
the Internal Revenue Code. The Internal Revenue Code generally provides that a
regulated investment company does not pay an entity level income tax, provided
that it distributes all or substantially all of its income and capital gains.
The regulated investment company taxation rules have no application to the
Company or to stockholders of the Company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF MMP SHARES
Under present law, the Company is of the opinion that MMP Shares will
constitute equity of the Company, and thus distributions with respect to MMP
Shares (other than distributions in redemption of MMP Shares subject to Section
302(b) of the Internal Revenue Code) will generally constitute dividends to the
extent of the Company's allocable current or accumulated earnings and profits,
as calculated for federal income tax purposes. Such dividends generally will be
taxable as ordinary income to holders but are expected to be treated as
"qualified dividend income" that is generally subject to reduced rates of
federal income taxation for noncorporate investors and are also expected to be
eligible for the dividends received deduction available to corporate
stockholders under Section 243 of the Internal Revenue Code.
Qualified dividend income received by individual and other noncorporate
stockholders is taxed at long-term capital gain rates, which currently reach a
maximum of 15%. Qualified dividend income generally includes dividends from
domestic corporations and dividends from non-U.S. corporations that meet certain
criteria. To be treated as qualified dividend income, the stockholder must hold
the shares paying otherwise qualifying dividend income more than 60 days during
the 121-day period beginning 60 days before the ex-dividend date (or more than
90 days during the 181-day period beginning 90 days before the ex-dividend date
in the case of certain preferred stock dividends). A stockholder's holding
period may be reduced for purposes of this rule if the stockholder engages in
certain risk reduction transactions with respect to the MMP Shares. The
provisions of the Code applicable to qualified dividend income are effective
through 2008. Thereafter, higher tax rates will apply unless further legislative
action is taken.
Corporate holders should be aware that certain limitations apply to the
availability of the dividends received deduction, including limitations on the
aggregate amount of the deduction that may be claimed and limitations based on
the holding period of the MMP Shares, which holding period may be reduced if the
stockholder engages in risk reduction transactions with respect to its MMP
Shares. Corporate stockholders should consult their own tax advisors regarding
the application of these limitations to their particular situation.
Earnings and profits are treated generally, for federal income tax
purposes, as first being used to pay distributions on the MMP Shares, and then
to the extent remaining, if any, to pay distributions on the common stock.
Distributions in excess of the Company's earnings and profits, if any, will
first reduce a stockholder's adjusted tax basis in his or her MMP Shares and,
after the adjusted tax basis is reduced to zero, will constitute capital gains
to a stockholder who holds such shares as a capital asset.
66
SALE OF SHARES
The sale of MMP Shares by stockholders will generally be a taxable
transaction for federal income tax purposes. Holders of MMP Shares who sell such
shares will generally recognize gain or loss in an amount equal to the
difference between the net proceeds of the sale and their adjusted tax basis in
the shares sold. If such MMP Shares are held as a capital asset at the time of
the sale, the gain or loss will generally be a capital gain or loss. Similarly,
a redemption by the Company (including a redemption resulting from liquidation
of the Company), if any, of all the MMP Shares actually and constructively held
by a stockholder generally will give rise to capital gain or loss under Section
302(b) of the Internal Revenue Code if the stockholder does not own (and is not
regarded under certain tax law rules of constructive ownership as owning) any
common stock in the Company, and provided that the redemption proceeds do not
represent declared but unpaid dividends. Other redemptions may also give rise to
capital gain or loss, but certain conditions imposed by Section 302(b) of the
Internal Revenue Code must be satisfied to achieve such treatment.
Capital gain or loss will generally be long-term capital gain or loss
if the MMP Shares were held for more than one year and will be short-term
capital gain or loss if the disposed MMP Shares were held for one year or less.
Net long-term capital gain recognized by a noncorporate U.S. stockholder
generally will be subject to tax at a lower rate (currently a maximum rate of
15%) than net short-term capital gain or ordinary income (currently a maximum
rate of 35%). Under current law, the maximum tax rate on capital gain for
noncorporate stockholders is scheduled to increase to 20% for taxable years
after 2008. For corporate holders, capital gain is generally taxed at the same
rate as ordinary income, that is, currently at a maximum rate of 35%. A
stockholder's ability to deduct capital losses may be limited.
BACKUP WITHHOLDING
The Company may be required to withhold, for U.S. federal income tax
purposes, a portion of all taxable distributions (including redemption proceeds)
payable to stockholders who fail to provide the Company with their correct
taxpayer identification number, who fail to make required certifications or who
have been notified by the IRS that they are subject to backup withholding (or if
the Company has been so notified). Certain corporate and other stockholders
specified in the Internal Revenue Code and the regulations thereunder are exempt
from backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the stockholder's U.S. federal income
tax liability provided the appropriate information is furnished to the Internal
Revenue Service in a timely manner.
OTHER TAXATION
Foreign stockholders, including stockholders who are nonresident alien
individuals, may be subject to U.S. withholding tax on certain distributions at
a rate of 30% or such lower rates as may be prescribed by any applicable treaty.
Investors are advised to consult their own tax advisors with respect to
the application to their own circumstances of the above-described general
federal income taxation rules and with respect to other federal, state, local or
foreign tax consequences to them before making an investment in MMP Shares.
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT, DIVIDEND
PAYING AGENT, AUCTION AGENT AND REDEMPTION AGENT
The Company has engaged U.S. Bancorp Fund Services, LLC to serve as the
Company's administrator. The Company pays the administrator a monthly fee
computed at an annual rate of 0.07% of the first $300 million of the Company's
Managed Assets, 0.06% on the next $500 million of Managed
67
Assets and 0.04% on the balance of the Company's Managed Assets, subject to a
minimum annual fee of $45,000.
Computershare Investor Services, LLC serves as the Company's transfer
agent, dividend paying agent, and agent for the automatic dividend reinvestment
plan for the Company's shares of common stock.
U.S. Bank N.A. serves as the Company's custodian. The Company pays the
custodian a monthly fee computed at an annual rate of 0.015% on the first $100
million of the Company's Managed Assets and 0.01% on the balance of the
Company's Managed Assets, subject to a minimum annual fee of $4,800.
Bank of New York is the Auction Agent with respect to the MMP Shares
and acts as transfer agent, registrar, dividend paying agent and redemption
agent with respect to the MMP Shares.
UNDERWRITING
Lehman Brothers Inc. and Stifel, Nicolaus & Company, Incorporated are
acting as underwriters in this offering (the "Underwriters"). Subject to the
terms and conditions contained in the underwriting agreement by and among the
Underwriters, the Adviser and the Company, (a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part), the
Underwriters have agreed to purchase from the Company, and the Company has
agreed to sell to the Underwriters the Series II MMP Shares offered hereby.
The underwriting agreement provides that the Underwriters are obligated
to purchase, subject to certain conditions, all of the Series II MMP Shares
being offered if any are purchased. The conditions contained in the underwriting
agreement include requirements that (1) the representations and warranties made
by the Company to the Underwriters are true; (2) there has been no material
change in the financial markets; and (3) the Company and the Adviser deliver
customary closing documents to the Underwriters.
After the first Auction that includes the newly issued Series II MMP
Shares, payment by each purchaser of Series II MMP Shares sold through the
Auction will be made in accordance with the procedures described under "The
Auction."
DISCOUNTS AND COMMISSIONS
The Underwriters have advised the Company that they propose to offer
the Series II MMP Shares directly to the public at the public offering price
presented on the cover page of this Prospectus less an underwriting discount and
commission equal to $___ per share which is equal to __% of the initial offering
price. Investors must pay for any Series II MMP Shares purchased on or before
_____, 2005. After the offering, the Underwriters may change the price at which
they re-offer the Series II MMP Shares and other selling terms.
INDEMNIFICATION
The Company and the Adviser have agreed to indemnify the Underwriters
against certain liabilities relating to this offering, including liabilities
under the 1933 Act and liabilities arising from breaches of the representations
and warranties contained in the underwriting agreement and to contribute to
payments that the Underwriters may be required to make for those liabilities;
provided that such indemnification shall not extend to any liability or action
resulting directly from the gross negligence or willful misconduct of the
Underwriters.
68
LISTING
The MMP Shares, which have no history of public trading, will not be
listed on an exchange or automated quotation system. Broker-Dealers may maintain
a secondary trading market in the MMP Shares outside of Auctions; however, they
have no obligation to do so, and there can be no assurance that a secondary
market for the MMP Shares will develop or, if it does develop, that it will
provide holders with a liquid trading market (i.e., trading will depend on the
presence of willing buyers and sellers and the trading price will be subject to
variables to be determined at the time of the trade by such Broker-Dealers). The
Company has been advised that the Underwriters currently intend to make a market
in the MMP Shares, as permitted by applicable laws and regulations. However, the
Underwriters are not obligated to make a market in the MMP Shares between
Auctions and the market making may be discontinued at any time at their sole
discretion.
ELECTRONIC DISTRIBUTION
A Prospectus in electronic format may be made available on the Internet
sites or through other online services maintained by the Underwriters or their
affiliates. In those cases, prospective investors may view offering terms online
and prospective investors may be allowed to place orders online. The
Underwriters may allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distributions will be
made by the representative on the same basis as other allocations.
Other than the Prospectus in electronic format, the information on the
Underwriters' web site and any information contained in any other web site
maintained by the Underwriters is not part of the Prospectus or the registration
statement of which this Prospectus forms a part, has not been approved and/or
endorsed by the Company and should not be relied upon by investors.
CERTAIN RELATIONSHIPS AND FEES
To the extent permitted under the 1940 Act and the rules and
regulations promulgated thereunder, the Company anticipates that the
Underwriters may from time to time act as a broker or dealer and receive fees in
connection with the execution of the Company's portfolio transactions after the
Underwriters have ceased to be Underwriters and, subject to certain
restrictions, each may act as a broker while it is an Underwriter. The Company
anticipates that the Underwriters or one of their affiliates may from time to
time act in Auctions as a Broker-Dealer or dealer and receive fees as described
under "Description of the Money Market Cumulative Preferred Shares."
ADDRESSES
Lehman Brothers Inc.'s principal office is located at 745 Seventh
Avenue, New York, New York 10019.
Stifel, Nicolaus & Company, Incorporated's principal office is located
at 501 North Broadway, St. Louis, Missouri 63102.
LEGAL OPINIONS
Certain legal matters in connection with the Series II MMP Shares
offered hereby will be passed upon for the Company by Vedder, Price, Kaufman &
Kammholz, P.C., Chicago, Illinois, and for the Underwriters by Morrison &
Foerster LLP, New York, New York. Vedder, Price, Kaufman &
69
Kammholz, P.C. and Morrison & Foerster LLP may rely as to certain matters of
Maryland law on the opinion of Venable LLP, Baltimore, Maryland.
INTELLECTUAL PROPERTY RIGHTS
A patent application has been filed with the United States Patent and
Trademark Office describing the Adviser's systems and methods for managing a
portfolio of MLPs. There is no assurance that the patent will ultimately be
granted. The scope of the patent, if granted, is not known at this time and will
not necessarily preclude other firms from developing and operating a portfolio
of MLPs.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act and is required to file
reports, proxy statements and other information with the Commission. These
documents can be inspected and copied for a fee at the Commission's public
reference room, 450 Fifth Street, N.W., Washington, D.C. 20549. Reports, proxy
statements, and other information about the Company can be inspected at the
offices of the Commission.
This Prospectus does not contain all of the information in the
Company's registration statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Company and MMP Shares can be found in
the Company's Registration Statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The Commission maintains a web site
(http://www.sec.gov) that contains each Company's Registration Statement, other
documents incorporated by reference, and other information the Company has filed
electronically with the Commission, including proxy statements and reports filed
under the Securities Exchange Act of 1934.
70
TABLE OF CONTENTS
FOR THE STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds..............................................................S-1
Investment Limitations.......................................................S-1
Investment Objective and Principal Investment Strategies.....................S-4
Management of the Company...................................................S-16
Net Asset Value.............................................................S-25
Portfolio Transactions......................................................S-26
Additional Information Concerning the Auction...............................S-27
Certain Federal Income Tax Matters..........................................S-29
Proxy Voting Policies.......................................................S-33
Independent Registered Public Accounting Firm...............................S-34
Custodian...................................................................S-34
Internal Accountant.........................................................S-35
Additional Information......................................................S-35
Report of Independent Registered Public Accounting Firm.....................S-36
Financial Statements.........................................................F-1
Appendix A- Articles Supplementary...........................................A-1
Appendix B- Rating of Investments............................................B-1
71
================================================================================
$
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
_____ SERIES II MONEY MARKET CUMULATIVE PREFERRED SHARES
--------------------
PROSPECTUS
_____, 2005
--------------------
LEHMAN BROTHERS
STIFEL, NICOLAUS & COMPANY
INCORPORATED
================================================================================
[Tortoise Logo]
SUBJECT TO COMPLETION, DATED APRIL 14, 2005
The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF ADDITIONAL INFORMATION
Tortoise Energy Infrastructure Corporation, a Maryland corporation (the
"Company"), is a nondiversified, closed-end management investment company that
commenced operations in February 2004.
This Statement of Additional Information relates to the Company's
offering of Series II Money Market Cumulative Preferred Shares
(MMP(R)) Shares (the "Series II MMP Shares"). Series II MMP Shares, together
with the series of MMP shares previously issued ("Series I MMP Shares"), are
referred to as "MMP Shares.") Individual series of MMP Shares are referred to as
a "series." Except as described herein, the Series II MMP Shares are offered on
the same terms as the previously offered Series I MMP Shares. This Statement of
Additional Information, does not constitute a prospectus, but should be read in
conjunction with the Company's Prospectus relating to the Series II MMP Shares
dated _____, 2005. This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing MMP
Shares. Investors should obtain and read the Company's Prospectus prior to
purchasing MMP Shares. A copy of the Company's Prospectus may be obtained
without charge by calling (888) 728-8784. You also may obtain a copy of the
Company's Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the Prospectus.
This Statement of Additional Information is dated _____, 2005.
TABLE OF CONTENTS
PAGE
----
Use of Proceeds..............................................................S-1
Investment Limitations.......................................................S-1
Investment Objective and Principal Investment Strategies.....................S-4
Management of the Company...................................................S-16
Net Asset Value.............................................................S-25
Portfolio Transactions......................................................S-26
Additional Information Concerning the Auction...............................S-27
Certain Federal Income Tax Matters..........................................S-29
Proxy Voting Policies.......................................................S-33
Independent Registered Public Accounting Firm...............................S-34
Custodian...................................................................S-34
Internal Accountant.........................................................S-35
Additional Information......................................................S-35
Report of Independent Registered Public Accounting Firm.....................S-36
Financial Statements.........................................................F-1
Appendix A- Articles Supplementary...........................................A-1
Appendix B- Rating of Investments............................................B-1
i
USE OF PROCEEDS
The net proceeds of the offering of Series II MMP Shares (the
"Offering") will be approximately $______, after payment of the underwriting
discounts and commissions and estimated offering costs. The Company anticipates
that it will be able to invest substantially all of the net proceeds of the
Offering in securities that meet its investment objective and policies within
approximately three months after completion of the Offering. Because of the
investment opportunities presented by restricted MLP securities and the limited
trading volume of certain publicly traded MLP securities, the Company often
relies on direct placements to acquire portfolio securities. To the extent
direct placement opportunities are not available, the Company would have to
acquire such securities on the open market, which could take longer than the
three-month period following this Offering. Pending investment in securities
that meet the Company's investment objective, the Company anticipates that the
proceeds will be invested in securities issued by the U.S. government or its
agencies or instrumentalities or in high quality, short-term or long-term debt
obligations.
INVESTMENT LIMITATIONS
This section supplements the disclosure in the Prospectus and provides
additional information on the Company's investment limitations. Investment
limitations identified as fundamental may not be changed without the approval of
the holders of a majority of the Company's outstanding voting securities (which
for this purpose and under the Investment Company Act of 1940, as amended (the
"1940 Act"), means the lesser of (1) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (2) more
than 50% of the outstanding shares).
Investment limitations stated as a maximum percentage of the Company's
assets are only applied immediately after, and because of, an investment or a
transaction by the Company to which the limitation is applicable (other than the
limitations on borrowing). Accordingly, any later increase or decrease resulting
from a change in values, net assets or other circumstances will not be
considered in determining whether the investment complies with the Company's
investment limitations. All limitations that are based on a percentage of total
assets include assets obtained through leverage.
FUNDAMENTAL INVESTMENT LIMITATIONS
The following are the Company's fundamental investment limitations set
forth in their entirety. The Company may not:
(1) issue senior securities, except as permitted by the 1940
Act and the rules and interpretive positions of the SEC thereunder;
(2) borrow money, except as permitted by the 1940 Act and the
rules and interpretive positions of the SEC thereunder;
(3) make loans, except by the purchase of debt obligations, by
entering into repurchase agreements or through the lending of portfolio
securities and as otherwise permitted by the 1940 Act and the rules and
interpretive positions of the SEC thereunder;
(4) concentrate (invest 25% or more of total assets) its
investments in any particular industry, except that the Company will
concentrate its assets in the group of industries constituting the
energy infrastructure sector;
S-1
(5) underwrite securities issued by others, except to the
extent that the Company may be considered an underwriter within the
meaning of the Securities Act of 1933, as amended (the "1933 Act"), in
the disposition of restricted securities held in its portfolio;
(6) purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments, except that the
Company may invest in securities or other instruments backed by real
estate or securities of companies that invest in real estate or
interests therein; and
(7) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments, except that the
Company may purchase or sell options and futures contracts or invest in
securities or other instruments backed by physical commodities.
All other investment policies of the Company are considered
nonfundamental and may be changed by the Board of Directors of the Company (the
"Board") without prior approval of the Company's outstanding voting shares.
NONFUNDAMENTAL INVESTMENT POLICIES
The Company has adopted the following nonfundamental policies:
(1) Under normal circumstances, the Company will invest at least
90% of its total assets in securities of energy infrastructure
companies.
(2) Under normal circumstances, the Company will invest at least
70% of its total assets in equity securities issued by master
limited partnerships ("MLPs").
(3) The Company may invest up to 30% of its total assets in
restricted securities, primarily through direct placements.
Subject to this policy, the Company may invest without
limitation in illiquid securities. The types of direct
placements that the Company may purchase include MLP
convertible subordinated units, MLP common units and
securities of private energy infrastructure companies (i.e.,
non-MLPs). Investments in private companies that do not have
any publicly traded shares or units are limited to 5% of the
Company's total assets.
(4) The Company may invest up to 25% of its total assets in debt
securities of energy infrastructure companies, including
securities rated below investment grade (commonly referred to
as "junk bonds"). Below investment grade debt securities will
be rated at least B3 by Moody's Investors Service, Inc.
("Moody's") and at least B- by Standard & Poor's Ratings Group
("S&P's") at the time of purchase, or comparably rated by
another statistical rating organization or if unrated,
determined to be of comparable quality by the Adviser.
(5) The Company will not invest more than 10% of its total assets
in any single issuer.
(6) The Company will not engage in short sales.
The Company may temporarily deviate from its investment policies
pending investment of the leverage proceeds. Pending receipt of the leverage
proceeds, the Board of Directors has approved an interim policy permitting
investments in a single issuer in excess of 10% of total assets under limited
circumstances (but not exceeding 12%). The interim policy will terminate upon
the receipt of the leverage proceeds.
S-2
Currently under the 1940 Act, the Company is not permitted to incur
indebtedness unless immediately after such borrowing the Company has asset
coverage of at least 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the value of the
Company's total assets). Additionally, currently under the 1940 Act, the Company
may not declare any dividend or other distribution upon its common or preferred
stock, including the MMP Shares, or purchase any such stock, unless the
aggregate indebtedness of the Company has, at the time of the declaration of any
such dividend or distribution or at the time of any such purchase, an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. Currently under the 1940
Act, the Company is not permitted to issue preferred stock unless immediately
after such issuance the Company has asset coverage of at least 200% of the
liquidation value of the outstanding preferred stock (i.e., such liquidation
value may not exceed 50% of the value of the Company's total assets). In
addition, currently under the 1940 Act, the Company is not permitted to declare
any cash dividend or other distribution on its common stock unless, at the time
of such declaration, the Company's total assets less liabilities and
indebtedness not represented by senior securities (determined after deducting
the amount of such dividend or distribution) are at least 200% of such
liquidation value.
Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes if
it is repaid within sixty days and is not extended or renewed. Both transactions
involving indebtedness and any preferred stock issued by the Company would be
considered senior securities under the 1940 Act, and as such, are subject to the
asset coverage requirements discussed above.
Currently under the 1940 Act, the Company is not permitted to lend
money or property to any person, directly or indirectly, if such person controls
or is under common control with the Company, except for a loan from the Company
to a company which owns all of the outstanding securities of the Company.
Currently, under interpretative positions of the staff of the SEC, the Company
may not have on loan at any given time securities representing more than
one-third of its total assets.
The Company interprets its policies with respect to borrowing and
lending to permit such activities as may be lawful for the Company, to the full
extent permitted by the 1940 Act or by exemption from the provisions therefrom
pursuant to an exemptive order of the SEC.
The Company interprets its policy with respect to concentration to
include energy infrastructure companies, as defined in the Prospectus and below.
See "Investment Objective and Principal Investment Strategies."
Under the 1940 Act, the Company may, but does not intend to, invest up
to 10% of its total assets in the aggregate in shares of other investment
companies and up to 5% of its total assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a
shareholder in any investment company, the Company will bear its ratable share
of that investment company's expenses, and would remain subject to payment of
the Company's advisory fees and other expenses with respect to assets so
invested. Holders of common stock would therefore be subject to duplicative
expenses to the extent the Company invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein and in the
Prospectus. The net asset value and market value of leveraged shares will be
more volatile and the yield to shareholders will tend to fluctuate more than the
yield generated by unleveraged shares. A material decline in net asset value may
impair the Company's ability to maintain asset coverage on MMP Shares or to make
interest or principal payments thereon.
S-3
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The Prospectus presents the investment objective and the principal
investment strategies and risks of the Company. This section supplements the
disclosure in the Company's Prospectus and provides additional information on
the Company's investment policies, strategies and risks. Restrictions or
policies stated as a maximum percentage of the Company's assets are only applied
immediately after a portfolio investment to which the policy or restriction is
applicable (other than the limitations on borrowing). Accordingly, any later
increase or decrease resulting from a change in values, net assets or other
circumstances will not be considered in determining whether the investment
complies with the Company's restrictions and policies.
The Company's investment objective is to seek a high level of total
return with an emphasis on current distributions paid to stockholders. For
purposes of the Company's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Company will invest regardless of the tax character of the distribution. There
is no assurance that the Company will achieve its objective. The investment
objective and the investment policies discussed below are nonfundamental. The
Board of the Company may change the investment objective, or any policy or
limitation that is not fundamental, without a stockholder vote. Stockholders
will receive at least 60 days' prior written notice of any change to the
nonfundamental investment policy of investing at least 90% of total assets in
energy infrastructure companies. Unlike most other investment companies, the
Company will not be treated as a regulated investment company under the U.S.
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").
Therefore, the Company will be taxed as a regular "C" corporation and will be
subject to federal and applicable state corporate income taxes.
Under normal circumstances, the Company invests at least 90% of its
total assets (including assets obtained through leverage) in securities of
energy infrastructure companies. Energy infrastructure companies engage in the
business of transporting, processing, storing, distributing or marketing natural
gas, natural gas liquids (primarily propane), coal, crude oil or refined
petroleum products, or exploring, developing, managing or producing such
commodities. Companies that provide energy-related services to the foregoing
businesses also are considered energy infrastructure companies, if they derive
at least 50% of revenues from the provision of energy-related services to such
companies. The Company invests at least 70% of its total assets in a portfolio
of equity securities of energy infrastructure companies that are MLPs that the
Adviser believes offer attractive distribution rates and capital appreciation
potential. MLP equity securities (known as "units") currently consist of common
units, convertible subordinated units and pay-in-kind units or I-Shares
("I-Shares"). The Company also may invest in other securities, consistent with
its investment objective and fundamental and nonfundamental policies.
The following pages contain more detailed information about the types
of issuers and instruments in which the Company may invest, strategies the
Adviser may employ in pursuit of the Company's investment objective and a
discussion of related risks. The Adviser may not buy these instruments or use
these techniques unless it believes that doing so will help the Company achieve
its objective.
ENERGY INFRASTRUCTURE COMPANIES
For purposes of the Company's policy of investing 90% of its total
assets in securities of energy infrastructure companies, an energy
infrastructure company is one that derives each year at least 50% of its gross
income from "Qualifying Income" as defined in Section 7704 of the Internal
Revenue Code or one that derives at least 50% of its revenues from the provision
of services directly related to the generation of Qualifying Income. Qualifying
Income is defined as any income and gains from the exploration, development,
mining or production, processing, refining, transportation (including pipelines
transporting gas, oil or products thereof), or the marketing of any mineral or
natural resource (including fertilizer, geothermal energy, and timber).
S-4
Energy infrastructure MLPs are limited partnerships that derive each
year at least 90% of their gross income from Qualifying Income and are taxed as
partnerships, thereby eliminating federal income tax at the entity level. The
business of energy infrastructure MLPs is affected by supply and demand for
energy commodities because most MLPs derive revenue and income based upon the
volume of the underlying commodity transported, processed, distributed, and/or
marketed. Specifically, processing and coal MLPs may be directly affected by
energy commodity prices. Propane MLPs own the underlying energy commodity, and
therefore have direct exposure to energy commodity prices, although the Adviser
seeks high quality MLPs that are able to mitigate or manage direct margin
exposure to commodity prices. Pipeline MLPs have indirect commodity exposure to
oil and gas price volatility because although they do not own the underlying
energy commodity, the general level of commodity prices may affect the volume of
the commodity the MLP delivers to its customers and the cost of providing
services such as distributing natural gas liquids. The MLP sector in general
could be hurt by market perception that MLP's performance and valuation are tied
directly to commodity prices.
Energy infrastructure companies (other than most pipeline MLPs) do not
operate as "public utilities" or "local distribution companies," and therefore
are not subject to rate regulation by state or federal utility commissions.
However, energy infrastructure companies may be subject to greater competitive
factors than utility companies, including competitive pricing in the absence of
regulated tariff rates, which could cause a reduction in revenue and which could
affect adversely profitability. Most pipeline MLPs are subject to government
regulation concerning the construction, pricing and operation of pipelines.
Pipeline MLPs are able to set prices (rates or tariffs) to cover operating
costs, depreciation and taxes, and provide a return on investment. These rates
are monitored by the Federal Energy Regulatory Commission (FERC) which seeks to
ensure that consumers receive adequate and reliable supplies of energy at the
lowest possible price while providing energy suppliers and transporters a just
and reasonable return on capital investment and the opportunity to adjust to
changing market conditions.
Energy infrastructure MLPs in which the Company will invest generally
can be classified in the following categories:
Pipeline MLPs. Pipeline MLPs are common carrier transporters
of natural gas, natural gas liquids (primarily propane, ethane, butane
and natural gasoline), crude oil or refined petroleum products
(gasoline, diesel fuel and jet fuel). Pipeline MLPs also may operate
ancillary businesses such as storage and marketing of such products.
Revenue is derived from capacity and transportation fees. Historically,
pipeline output has been less exposed to cyclical economic forces due
to its low cost structure and government-regulated nature. In addition,
most pipeline MLPs have limited direct commodity price exposure because
they do not own the product being shipped.
Processing MLPs. Processing MLPs are gatherers and processors
of natural gas as well as providers of transportation, fractionation
and storage of natural gas liquids ("NGLs"). Revenue is derived from
providing services to natural gas producers, which require treatment or
processing before their natural gas commodity can be marketed to
utilities and other end user markets. Revenue for the processor is fee
based, although it is not uncommon to have some participation in the
prices of the natural gas and NGL commodities for a portion of revenue.
Propane MLPs. Propane MLPs are distributors of propane to
homeowners for space and water heating. Revenue is derived from the
resale of the commodity on a margin over wholesale cost. The ability to
maintain margin is a key to profitability. Propane serves approximately
3% of the household energy needs in the United States, largely for
homes beyond the geographic reach of natural gas distribution
pipelines. Approximately 70% of annual cash flow is earned
S-5
during the winter heating season (October through March). Accordingly,
volumes are weather dependent, but have utility type functions similar
to electricity and natural gas.
Coal MLPs. Coal MLPs own, lease and manage coal reserves.
Revenue is derived from production and sale of coal, or from royalty
payments related to leases to coal producers. Electricity generation is
the primary use of coal in the United States. Demand for electricity
and supply of alternative fuels to generators are the primary drivers
of coal demand. Coal MLPs are subject to operating and production
risks, such as: the MLP or a lessee meeting necessary production
volumes; federal, state and local laws and regulations which may limit
the ability to produce coal; the MLP's ability to manage production
costs and pay mining reclamation costs; and the effect on demand that
the Clean Air Act standards have on coal-end users.
MLPs typically achieve distribution growth by internal and external
means. MLPs achieve growth internally by experiencing higher commodity volume
driven by the economy and population, and through the expansion of existing
operations including increasing the use of underutilized capacity, pursuing
projects that can leverage and gain synergies with existing infrastructure and
pursuing so called "greenfield projects." External growth is achieved by making
accretive acquisitions. While opportunities for growth by acquisition appear
abundant based on current market conditions, especially for smaller MLPs, the
Adviser expects MLPs to grow primarily through internal means.
MLPs are subject to various federal, state and local environmental laws
and health and safety laws as well as laws and regulations specific to their
particular activities. Such laws and regulations address: health and safety
standards for the operation of facilities, transportation systems and the
handling of materials; air and water pollution requirements and standards; solid
waste disposal requirements; land reclamation requirements; and requirements
relating to the handling and disposition of hazardous materials. Energy
infrastructure MLPs are subject to the costs of compliance with such laws
applicable to them, and changes in such laws and regulations may affect
adversely their results of operations.
MLPs operating interstate pipelines and storage facilities are subject
to substantial regulation by FERC, which regulates interstate transportation
rates, services and other matters regarding natural gas pipelines including: the
establishment of rates for service; regulation of pipeline storage and liquefied
natural gas facility construction; issuing certificates of need for companies
intending to provide energy services or constructing and operating interstate
pipeline and storage facilities; and certain other matters. FERC also regulates
the interstate transportation of crude oil, including: regulation of rates and
practices of oil pipeline companies; establishing equal service conditions to
provide shippers with equal access to pipeline transportation; and establishment
of reasonable rates for transporting petroleum and petroleum products by
pipeline.
Energy infrastructure MLPs may be subject to liability relating to the
release of substances into the environment, including liability under federal
"SuperFund" and similar state laws for investigation and remediation of releases
and threatened releases of hazardous materials, as well as liability for injury
and property damage for accidental events, such as explosions or discharges of
materials causing personal injury and damage to property. Such potential
liabilities could have a material adverse effect upon the financial condition
and results of operations of energy infrastructure MLPs.
Energy infrastructure MLPs are subject to numerous business related
risks, including: deterioration of business fundamentals reducing profitability
due to development of alternative energy sources, changing demographics in the
markets served, unexpectedly prolonged and precipitous changes in commodity
prices and increased competition which takes market share; the lack of growth of
markets requiring growth through acquisitions; disruptions in transportation
systems; the dependence of certain MLPs upon the energy exploration and
development activities of unrelated third parties; availability of
S-6
capital for expansion and construction of needed facilities; a significant
decrease in natural gas production due to depressed commodity prices or
otherwise; the inability of MLPs to successfully integrate recent or future
acquisitions; and the general level of the economy.
Although the Company emphasizes investments in MLPs, it also may invest
in energy infrastructure companies that are not organized as MLPs. Non-MLP
companies may include companies that operate energy assets but which are
organized in corporate rather than in partnership form. Generally, the
partnership form is more suitable for companies that operate assets which
generate more stable cash flows. Companies that operate "midstream" assets
(e.g., transporting, processing, storing, distributing and marketing) tend to
generate more stable cash flows than those that engage in exploration and
development or delivery of products to the end consumer. Non-MLP companies also
may include companies that provide services directly related to the generation
of income from energy-related assets, such as oil drilling services, pipeline
construction and maintenance, and compression services.
The energy industry and particular energy infrastructure companies may
be affected adversely by possible terrorist attacks, such as the attacks that
occurred on September 11, 2001. It is possible that facilities of energy
infrastructure companies, due to the critical nature of their energy businesses
to the United States, could be direct targets of terrorist attacks or be
affected indirectly by attacks on others. They may incur significant additional
costs in the future to safeguard their assets. In addition, changes in the
insurance markets after September 11, 2001 may make certain types of insurance
more difficult to obtain or obtainable only at significant additional cost. To
the extent terrorism results in a lower level economic activity, energy
consumption could be adversely affected, which would reduce revenues and impede
growth. Terrorist or war related disruption of the capital markets could also
affect the ability of energy infrastructure companies to raise needed capital.
MASTER LIMITED PARTNERSHIPS
Under normal circumstances the Company invests at least 70% of its
total assets in equity securities of MLPs. An MLP is an entity that is taxed as
a partnership and that derives each year at least 90% of its gross income from
Qualifying Income. An MLP is a limited partnership the interests in which (known
as units) are traded on securities exchanges or over-the-counter. Organization
as a partnership and compliance with the Qualifying Income rules eliminates
federal income tax at the entity level.
An MLP has one or more general partners (who may be individuals,
corporations, or other partnerships) which manage the partnership, and limited
partners, which provide capital to the partnership but have no role in its
management. Typically, the general partner is owned by company management or
another publicly traded sponsoring corporation. When an investor buys units in a
MLP, he or she becomes a limited partner.
MLPs are formed in several ways. A nontraded partnership may decide to
go public. Several nontraded partnerships may roll up into a single MLP. A
corporation may spin-off a group of assets or part of its business into a MLP of
which it is the general partner, to realize the assets' full value on the
marketplace by selling the assets and using the cash proceeds received from the
MLP to address debt obligations or to invest in higher growth opportunities,
while retaining control of the MLP. A corporation may fully convert to a MLP,
although the income tax consequences make this an unappealing option for most
corporations. Also, a newly formed company may operate as an MLP from its
inception.
The sponsor or general partner of an MLP, other energy companies, and
utilities may sell assets to MLPs in order to generate cash to fund expansion
projects or repay debt. The MLP structure essentially transfers cash flows
generated from these acquired assets directly to MLP limited partner unit
holders.
S-7
In the case of an MLP buying assets from its sponsor or general partner
the transaction is intended to be based upon comparable terms in the acquisition
market for similar assets. To help insure that appropriate protections are in
place, the board of the MLP generally creates an independent committee to review
and approve the terms of the transaction. The committee often obtains a fairness
opinion and can retain counsel or other experts to assist its evaluation. Since
both parties normally have a significant equity stake in the MLP, both parties
are aligned to see that the transaction is accretive and fair to the MLP.
MLPs tend to pay relatively higher distributions than other types of
companies and the Company intends to use these MLP distributions in an effort to
meet its investment objective.
As a motivation for the general partner to successfully manage the MLP
and increase cash flows, the terms of MLPs typically provide that the general
partner receives a larger portion of the net income as distributions reach
higher target levels. As cash flow grows, the general partner receives a greater
interest in the incremental income compared to the interest of limited partners.
Although the percentages vary among MLPs, the general partner's marginal
interest in distributions generally increases from 2% to 15% at the first
designated distribution target level moving up to 25% and ultimately 50% as
pre-established distribution per unit thresholds are met. Nevertheless, the
aggregate amount distributed to limited partners will increase as MLP
distributions reach higher target levels. Given this incentive structure, the
general partner has an incentive to streamline operations and undertake
acquisitions and growth projects in order to increase distributions to all
partners.
Because the MLP itself does not pay federal income tax, its income or
loss is allocated to its investors, irrespective of whether the investors
receive any cash payment or other distributions from the MLP. An MLP typically
makes quarterly cash distributions. Although they resemble corporate dividends,
MLP distributions are treated differently for federal income tax purposes. The
MLP distribution is treated as a return of capital to the extent of the
investor's basis in his MLP interest and, to the extent the distribution exceeds
the investor's basis in the MLP, capital gain. The investor's original basis is
the price paid for the units. This basis is adjusted downwards with each
distribution and allocation of deductions (such as depreciation) and losses, and
upwards with each allocation of income and gain.
The partner generally will not incur federal income tax on
distributions until (1) his basis reaches zero; or (2) he sells his MLP units
and pays tax on his gain, which gain is increased due to the basis decrease
resulting from prior distributions. When the units are sold, the difference
between the sales price and the investor's adjusted basis is gain or loss for
federal income tax purposes.
For a further discussion and a description of MLP federal income tax
matters, see the section entitled "Certain Federal Income Tax Matters."
THE COMPANY'S INVESTMENTS
The types of securities in which the Company may invest include, but
are not limited to, the following:
Equity Securities. Consistent with its investment objective, the
Company may invest up to 100% of its total assets in equity securities issued by
energy infrastructure MLPs, including common units, convertible subordinated
units, I-Shares and common unites of limited liability companies ("LLCs") (each
discussed below). The Company also may invest up to 30% of total assets in
equity securities of non-MLPs.
S-8
The value of equity securities will be affected by changes in the stock
markets, which may be the result of domestic or international political or
economic news, changes in interest rates or changing investor sentiment. At
times, stock markets can be volatile and stock prices can change substantially.
Equity securities risk will affect the Company's net asset value per share,
which will fluctuate as the value of the securities held by the Company changes.
Not all stock prices change uniformly or at the same time, and not all stock
markets move in the same direction at the same time. Other factors affect a
particular stock's prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.
Investing in securities of smaller companies may involve greater risk
than is associated with investing in more established companies. Smaller
capitalization companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than larger more established
companies.
MLP Common Units. MLP common units represent an equity ownership
interest in a partnership, providing limited voting rights and entitling the
holder to a share of the company's success through distributions and/or capital
appreciation. Unlike shareholders of a corporation, common unit holders do not
elect directors annually and generally have the right to vote only on certain
significant events, such as mergers, a sale of substantially all of the assets,
removal of the general partner or material amendments to the partnership
agreement. MLPs are required by their partnership agreements to distribute a
large percentage of their current operating earnings. Common unit holders
generally have first right to a minimum quarterly distribution ("MQD") prior to
distributions to the convertible subordinated unit holders or the general
partner (including incentive distributions). Common unit holders typically have
arrearage rights if the MQD is not met. In the event of liquidation, MLP common
unit holders have a right to the partnership's remaining assets after
bondholders, other debt holders, and preferred unit holders have been paid in
full. MLP common units trade on a national securities exchange or
over-the-counter.
Limited Liability Company Common Units. Recently, some energy
infrastructure companies in which the Company may invest have been organized as
LLCs. Such LLCs are treated in the same manner as MLPs for federal income tax
purposes and, unless otherwise noted, the term MLP includes all entities that
are treated in the same manner as MLPs for federal income tax purposes
regardless of their form of organization. Consistent with its investment
objective and policies, the Company may invest in common units or other
securities of such LLCs. LLC common units represent an equity ownership interest
in an LLC, entitling the holders to a share of the LLC's success through
distributions and/or capital appreciation. Similar to MLPs, LLCs typically do
not pay federal income tax at the entity level and are required by their
operating agreements to distribute a large percentage of their current operating
earnings. LLC common unit holders generally have a right to a MQD prior to
distributions to subordinated unit holders and typically have arrearage rights
if the MQD is not met. In the event of liquidation, LLC common unit holders have
a right to the LLC's remaining assets after bondholders, other debt holders and
preferred unit holders, if any, have been paid in full. LLC common units trade
on a national securities exchange or over-the-counter.
In contrast to MLPs, LLCs have no general partner and there are no
incentives that entitle management or other unit holders to increased
percentages of cash distributions as distributions reach higher target levels.
In addition, LLC common unit holders typically have voting rights with respect
to the LLC, whereas MLP common units have limited voting rights.
S-9
MLP Convertible Subordinated Units. MLP convertible subordinated units
typically are issued by MLPs to founders, corporate general partners of MLPs,
entities that sell assets to the MLP, and institutional investors. The purpose
of the convertible subordinated units is to increase the likelihood that during
the subordination period there will be available cash to be distributed to
common unit holders. The Company expects to purchase subordinated units in
direct placements from such persons. Convertible subordinated units generally
are not entitled to distributions until holders of common units have received
specified MQD, plus any arrearages, and may receive less in distributions upon
liquidation. Convertible subordinated unit holders generally are entitled to MQD
prior to the payment of incentive distributions to the general partner, but are
not entitled to arrearage rights. Therefore, they generally entail greater risk
than MLP common units. They are generally convertible automatically into the
senior common units of the same issuer at a one-to-one ratio upon the passage of
time or the satisfaction of certain financial tests. These units do not trade on
a national exchange or over-the-counter, and there is no active market for
convertible subordinated units. The value of a convertible security is a
function of its worth if it were converted into the underlying common units.
Convertible subordinated units generally have similar voting rights to MLP
common units.
MLP I-Shares. I-Shares represent an indirect investment in MLP common
units. I-Shares are equity securities issued by affiliates of MLPs, typically a
limited liability company, that owns an interest in and manages the MLP. The
issuer has management rights but is not entitled to incentive distributions. The
I-Share issuer's assets consist exclusively of MLP I-units; however, the MLP
does not allocate income or loss to the I-Share issuer. Distributions to I-Share
holders are made in the form of additional I-units generally equal in amount to
the cash distribution received by common unit holders of the MLP. Distributions
to I-Share holders in the form of additional I-Shares are generally equal in
amount to the I-Units received by the I-Share issuer. The issuer of the I-Share
is taxed as a corporation for federal income tax purposes. Accordingly,
investors receive a Form 1099, are not allocated their proportionate share of
income of the MLP and are not subject to state income tax filing obligations
solely as a result of holding such I-Shares. Distributions of I-Shares generally
do not generate unrelated business taxable income for federal income tax
purposes and are qualifying income for mutual fund investors.
Debt Securities. The Company may invest up to 25% of its total assets
in debt securities of energy infrastructure companies, including certain
securities rated below investment grade ("junk bonds"). The Company's debt
securities may have fixed or variable principal payments and all types of
interest rate and dividend payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and auction
rate features. If a security satisfies the Company's minimum rating criteria at
the time of purchase and is subsequently downgraded below such rating, the
Company will not be required to dispose of such security. If a downgrade occurs,
the Adviser will consider what action, including the sale of such security, is
in the best interest of the Company and its stockholders.
Below Investment Grade Debt Securities. The Company may invest up to
25% of the Company's assets in below investment grade securities. The below
investment grade debt securities in which the Company invests are rated from B3
to Ba1 by Moody's, from B- to BB+ by S&P's, are comparably rated by another
nationally recognized rating agency or are unrated but determined by the Adviser
to be of comparable quality.
Investment in below investment grade securities involves substantial
risk of loss. Below investment grade debt securities or comparable unrated
securities are commonly referred to as "junk bonds" and are considered
predominantly speculative with respect to the issuer's ability to pay interest
and principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high yield
securities tend to be very volatile, and these
S-10
securities are less liquid than investment grade debt securities. For these
reasons, investment in the Company is subject to the following specific risks:
o increased price sensitivity to changing interest rates and to
a deteriorating economic environment;
o greater risk of loss due to default or declining credit
quality;
o adverse company specific events are more likely to render the
issuer unable to make interest and/or principal payments; and
o if a negative perception of the below investment grade debt
market develops, the price and liquidity of below investment
grade debt securities may be depressed. This negative
perception could last for a significant period of time.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a below investment grade debt issuer to make principal
payments and interest payments than an investment grade issuer. The principal
amount of below investment grade securities outstanding has proliferated in the
past decade as an increasing number of issuers have used below investment grade
securities for corporate financing. An economic downturn could affect severely
the ability of highly leveraged issuers to service their debt obligations or to
repay their obligations upon maturity. Similarly, downturns in profitability in
specific industries, such as the energy infrastructure industry, could adversely
affect the ability of below investment grade debt issuers in that industry to
meet their obligations. The market values of lower quality debt securities tend
to reflect individual developments of the issuer to a greater extent than do
higher quality securities, which react primarily to fluctuations in the general
level of interest rates. Factors having an adverse impact on the market value of
lower quality securities may have an adverse effect on the Company's net asset
value and the market value of its common stock. In addition, the Company may
incur additional expenses to the extent it is required to seek recovery upon a
default in payment of principal or interest on its portfolio holdings. In
certain circumstances, the Company may be required to foreclose on an issuer's
assets and take possession of its property or operations. In such circumstances,
the Company would incur additional costs in disposing of such assets and
potential liabilities from operating any business acquired.
The secondary market for below investment grade securities may not be
as liquid as the secondary market for more highly rated securities, a factor
which may have an adverse effect on the Company's ability to dispose of a
particular security when necessary to meet its liquidity needs. There are fewer
dealers in the market for below investment grade securities than investment
grade obligations. The prices quoted by different dealers may vary significantly
and the spread between the bid and asked price is generally much larger than
higher quality instruments. Under adverse market or economic conditions, the
secondary market for below investment grade securities could contract further,
independent of any specific adverse changes in the condition of a particular
issuer, and these instruments may become illiquid. As a result, the Company
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the
Company's net asset value.
Because investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the Company
may invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
quality segments of the debt securities market, changes in perceptions of
issuers' creditworthiness tend to occur
S-11
more frequently and in a more pronounced manner than do changes in higher
quality segments of the debt securities market, resulting in greater yield and
price volatility.
The Company will not invest in distressed, below investment grade
securities (those that are in default or the issuers of which are in
bankruptcy). If a debt security becomes distressed while held by the Company,
the Company may be required to bear extraordinary expenses in order to protect
and recover its investment if it is recoverable at all.
See Appendix B to this Statement of Additional Information for a
description of Moody's, Fitch Ratings ("Fitch") and S&P's ratings.
Restricted, Illiquid and Thinly-Traded Securities. The Company may
invest up to 30% of its total assets in restricted securities, primarily through
direct placements of MLP securities. Restricted securities obtained by means of
direct placement are less liquid than securities traded in the open market,
therefore, the Company may not be able to readily sell such securities.
Investments currently considered by the Adviser to be illiquid because of such
restrictions include convertible subordinated units and certain direct
placements of common units. Such securities are unlike securities that are
traded in the open market and which can be expected to be sold immediately if
the market is adequate. The sale price of securities that are not readily
marketable may be lower or higher than the Company's most recent determination
of their fair value. Additionally, the value of these securities typically
requires more reliance on the judgment of the Adviser than that required for
securities for which there is an active trading market. Due to the difficulty in
valuing these securities and the absence of an active trading market for these
investments, the Company may not be able to realize these securities' true
value, or may have to delay their sale in order to do so.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. The Adviser has the ability to deem restricted
securities as liquid. To enable the Company to sell its holdings of a restricted
security not registered under the 1933 Act, the Company may have to cause those
securities to be registered. When the Company must arrange registration because
the Company wishes to sell the security, a considerable period may elapse
between the time the decision is made to sell the security and the time the
security is registered so that the Company could sell it. The Company would bear
the risks of any downward price fluctuation during that period.
In recent years, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration, such as Rule 144A transactions.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that exist or may develop as a result of Rule 144A may provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment. An insufficient number of qualified institutional buyers interested
in purchasing Rule 144A-eligible securities held by the Company, however, could
affect adversely the marketability of such portfolio securities and the Company
might not be able to dispose of such securities promptly or at reasonable
prices.
S-12
The Company also may invest in securities that may not be restricted,
but are thinly-traded. Although securities of certain MLPs trade on the NYSE,
the AMEX, the Nasdaq National Market or other securities exchanges or markets,
such securities may trade less than those of larger companies due to their
relatively smaller capitalizations. Such securities may be difficult to dispose
of at a fair price during times when the Company believes it is desirable to do
so. Thinly-traded securities are also more difficult to value and the Adviser's
judgment as to value will often be given greater weight than market quotations,
if any exist. If market quotations are not available, thinly-traded securities
will be valued in accordance with procedures established by the Board.
Investment of the Company's capital in thinly-traded securities may restrict the
Company's ability to take advantage of market opportunities. The risks
associated with thinly-traded securities may be particularly acute in situations
in which the Company's operations require cash and could result in the Company
borrowing to meet its short term needs or incurring losses on the sale of
thinly-traded securities.
Commercial Paper. The Company may invest in commercial paper.
Commercial paper is a debt obligation usually issued by corporations and may be
unsecured or secured by letters of credit or a surety bond. Commercial paper
usually is repaid at maturity by the issuer from the proceeds of the issuance of
new commercial paper. As a result, investment in commercial paper is subject to
the risk that the issuer cannot issue enough new commercial paper to satisfy its
outstanding commercial paper, also known as rollover risk.
Asset-backed commercial paper is a debt obligation generally issued by
a corporate-sponsored special purpose entity to which the corporation has
contributed cash-flowing receivables like credit card receivables, auto and
equipment leases, and other receivables. Investment in asset-backed commercial
paper is subject to the risk that insufficient proceeds from the projected cash
flows of the contributed receivables are available to repay the commercial
paper.
U.S. Government Securities. The Company may invest in U.S. Government
Securities. There are two broad categories of U.S. Government-related debt
instruments: (a) direct obligations of the U.S. Treasury, and (b) securities
issued or guaranteed by U.S. Government agencies.
Examples of direct obligations of the U.S. Treasury are Treasury bills,
notes, bonds and other debt securities issued by the U.S. Treasury. These
instruments are backed by the "full faith and credit" of the United States. They
differ primarily in interest rates, the length of maturities and the dates of
issuance. Treasury bills have original maturities of one year or less. Treasury
notes have original maturities of one to ten years and Treasury bonds generally
have original maturities of greater than ten years.
Some agency securities are backed by the full faith and credit of the
United States and others are backed only by the rights of the issuer to borrow
from the U.S. Treasury (such as Federal Home Loan Bank Bonds and Federal
National Mortgage Association Bonds), while still others, such as the securities
of the Federal Farm Credit Bank, are supported only by the credit of the issuer.
With respect to securities supported only by the credit of the issuing agency or
by an additional line of credit with the U.S. Treasury, there is no guarantee
that the U.S. Government will provide support to such agencies and such
securities may involve risk of loss of principal and interest.
Repurchase Agreements. The Company may enter into "repurchase
agreements" backed by U.S. Government Securities. A repurchase agreement arises
when the Company purchases a security and simultaneously agrees to resell it to
the vendor at an agreed upon future date. The resale price is greater than the
purchase price, reflecting an agreed upon market rate of return that is
effective for the period of time the Company holds the security and that is not
related to the coupon rate on the purchased security. Such agreements generally
have maturities of no more than seven days and could be used to permit the
Company to earn interest on assets awaiting long term investment. The Company
requires continuous
S-13
maintenance by the custodian for the Company's account in the Federal
Reserve/Treasury Book-Entry System of collateral in an amount equal to, or in
excess of, the market value of the securities that are the subject of a
repurchase agreement. Repurchase agreements maturing in more than seven days are
considered illiquid securities. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Company could experience both delays in
liquidating the underlying security and losses, including: (a) possible decline
in the value of the underlying security during the period while the Company
seeks to enforce its rights thereto; (b) possible subnormal levels of income and
lack of access to income during this period; and (c) expenses of enforcing its
rights.
Reverse Repurchase Agreements. The Company may enter into reverse
repurchase agreements for temporary purposes with banks and securities dealers
if the creditworthiness of the bank or securities dealer has been determined by
the Adviser to be satisfactory. A reverse repurchase agreement is a repurchase
agreement in which the Company is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed-upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of securities because it avoids certain market risks and transaction
costs.
At the time when the Company enters into a reverse repurchase
agreement, liquid assets (cash, U.S. Government Securities or other "high-grade"
debt obligations) of the Company having a value at least as great as the
purchase price of the securities to be purchased will be segregated on the books
of the Company and held by the custodian throughout the period of the
obligation. The use of reverse repurchase agreements by the Company creates
leverage which increases the Company's investment risk. If the income and gains
on securities purchased with the proceeds of these transactions exceed the cost,
the Company's earnings or net asset value will increase faster than otherwise
would be the case; conversely, if the income and gains fail to exceed the cost,
earnings or net asset value would decline faster than otherwise would be the
case. The Company intends to enter into reverse repurchase agreements only if
the income from the investment of the proceeds is greater than the expense of
the transaction, because the proceeds are invested for a period no longer than
the term of the reverse repurchase agreement.
Margin Borrowing. Although it does not currently intend to, the Company
may in the future use margin borrowing of up to 33 1/3% of total assets for
investment purposes when the Adviser believes it will enhance returns. Any use
of margin borrowing by the Company would be subject to the asset leverage
requirements discussed earlier in this Statement of Additional Information. See
"Investment Limitations." Margin borrowings by the Company create certain
additional risks. For example, should the securities that are pledged to brokers
to secure margin accounts decline in value, or should brokers from which the
Company has borrowed increase their maintenance margin requirements (i.e.,
reduce the percentage of a position that can be financed), then the Company
could be subject to a "margin call," pursuant to which it must either deposit
additional funds with the broker or suffer mandatory liquidation of the pledged
securities to compensate for the decline in value. In the event of a precipitous
drop in the value of the assets of the Company, it might not be able to
liquidate assets quickly enough to pay off the margin debt and might suffer
mandatory liquidation of positions in a declining market at relatively low
prices, thereby incurring substantial losses. For these reasons, the use of
borrowings for investment purposes is considered a speculative investment
practice.
Interest Rate Transactions. In an attempt to reduce the interest rate risk
arising from the Company's leveraged capital structure, the Company currently
uses, and may in the future use, interest rate transactions such as swaps, caps
and floors. The use of interest rate transactions is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. In an interest rate
swap, the Company would agree to pay to the other party to the interest rate
swap (which is known as the "counterparty") a fixed rate payment in exchange for
the counterparty agreeing to pay to the Company a variable rate payment that is
intended to
S-14
approximate the Company's variable rate payment obligation on any variable rate
borrowings. The payment obligations would be based on the notional amount of the
swap. In an interest rate cap, the Company would pay a premium to the
counterparty to the interest rate cap and, to the extent that a specified
variable rate index exceeds a predetermined fixed rate, would receive from the
counterparty payments of the difference based on the notional amount of such
cap. In an interest rate floor, the Company would be entitled to receive, to the
extent that a specified index falls below a predetermined interest rate,
payments of interest on a notional principal amount from the party selling the
interest rate floor. Depending on the state of interest rates in general, the
Company's use of interest rate transactions could enhance or decrease
Distributable Cash Flow available for distribution with respect to its common
stock. To the extent there is a decline in interest rates, the value of the
interest rate transactions could decline, and could result in a decline in the
net asset value of the shares of common stock. In addition, if the counterparty
to an interest rate transaction defaults, the Company would not be able to use
the anticipated net receipts under the interest rate transaction to offset the
Company's cost of financial leverage.
The Company has entered into interest rate swap transactions intended
to hedge the Company's interest payment obligations under the currently
outstanding Series A and Series B Tortoise Notes against material increases in
interest rates through mid-July 2007. The Company's interest payment and
dividend payment obligations under the outstanding Series C Tortoise Notes and
Series I MMP Shares, respectively, remain unhedged as of the date of this
Statement of Additional Information.
Delayed-Delivery Transactions. Securities may be bought and sold on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. Typically, no interest accrues to the purchaser until the
security is delivered. The Company may receive fees or price concessions for
entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the purchaser
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations and the risk that the security will not be issued as
anticipated. Because payment for the securities is not required until the
delivery date, these risks are in addition to the risks associated with the
Company's investments. If the Company remains substantially fully invested at a
time when delayed-delivery purchases are outstanding, the delayed-delivery
purchases may result in a form of leverage. When delayed-delivery purchases are
outstanding, the Company will set aside appropriate liquid assets in a
segregated custodial account to cover the purchase obligations. When the Company
has sold a security on a delayed-delivery basis, the Company does not
participate in further gains or losses with respect to the security. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
securities, the Company could miss a favorable price or yield opportunity or
suffer a loss.
Securities Lending. The Company may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the Company
to retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by the Adviser to be
of good credit and legal standing. Furthermore, loans of securities will only be
made if, in the Adviser's judgment, the consideration to be earned from such
loans would justify the risk.
The Adviser understands that it is the current view of the Commission
staff that the Company may engage in loan transactions only under the following
conditions: (1) the Company must receive 100% collateral in the form of cash or
cash equivalents (e.g., U.S. Treasury bills or notes) from the
S-15
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities loaned (determined on a daily basis) rises above the
value of the collateral; (3) after giving notice, the Company must be able to
terminate the loan at any time; (4) the Company must receive reasonable interest
on the loan or a flat fee from the borrower, as well as amounts equivalent to
any dividends, interest, or other distributions on the securities loaned and to
any increase in market value; (5) the Company may pay only reasonable custodian
fees in connection with the loan; and (6) the Board must be able to vote proxies
on the securities loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower.
Defensive and Temporary Investments. Under adverse market or economic
conditions or pending investment of offering or leverage proceeds, the Company
may invest up to 100% of its total assets in securities issued or guaranteed by
the U.S. Government or its instrumentalities or agencies, short-term debt
securities, certificates of deposit, bankers' acceptances and other bank
obligations, commercial paper rated in the highest category by a rating agency
or other fixed income securities deemed by the Adviser to be consistent with a
defensive posture, or may hold cash. The Adviser also may invest in such
instruments to meet working capital needs including, but not limited to, the
need for collateral in connection with certain investment techniques, to hold a
reserve pending payment of dividends, and to facilitate the payments of expenses
and settlement of trades. The yield on such securities may be lower than the
returns on MLP securities or yields on lower rated fixed income securities. To
the extent the Company uses this strategy, it may not achieve its investment
objective.
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The business and affairs of the Company are managed under the direction
of the Board of Directors. Accordingly, the Company's Board of Directors
provides broad supervision over the affairs of the Company, including
supervision of the duties performed by the Adviser. The officers of the Company
are responsible for the Company's day-to-day operations. The directors and
officers of the Company and their principal occupations and other affiliations
during the past five years are set forth below. Each director and officer will
hold office until his successor is duly elected and qualifies, or until he
resigns or is removed in the manner provided by law. Unless otherwise indicated,
the address of each director and officer is 10801 Mastin Boulevard, Overland
Park, Kansas 66210. The Board of Directors consists of a majority of directors
who are not interested persons (as defined in the 1940 Act) of the Adviser or
its affiliates.
POSITION(S)
HELD WITH
COMPANY AND OTHER
LENGTH OF TIME PRINCIPAL OCCUPATION DURING PAST DIRECTORSHIPS
NAME AND AGE SERVED FIVE YEARS HELD BY DIRECTOR
------------------------- ------------------- ----------------------------------------- -----------------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello, 44 Director since 2003 Associate Professor of Risk Management Tortoise North
and Insurance, Robinson College of American Energy
Business, Georgia State University; Corporation and
Director of Graduate Personal Financial Tortoise MLP
Planning (PFP) Programs, Editor, Investment
"Financial Services Review," (an Corporation
academic journal dedicated to the study (closed-end
of individual financial management); investment companies)2
formerly, faculty member, Pennsylvania
State University.
S-16
POSITION(S)
HELD WITH
COMPANY AND OTHER
LENGTH OF TIME PRINCIPAL OCCUPATION DURING PAST DIRECTORSHIPS
NAME AND AGE SERVED FIVE YEARS HELD BY DIRECTOR
------------------------- ------------------- ----------------------------------------- -----------------------
John R. Graham, 59 Director since 2003 Executive-in-Residence and Professor of Tortoise North
Finance, College of Business American Energy
Administration, Kansas State University Corporation and
(has served as a professor or adjunct Tortoise MLP
professor since 1970); Chairman of the Investment
Board, President and CEO, Graham Capital Corporation
Management, Inc. and Owner of Graham (closed-end
Ventures; formerly, CEO, Kansas Farm investment
Bureau Financial Services, including companies)2; Erie
seven affiliated insurance or financial Indemnity Company;
service companies (1979-2000). Erie Family Life
Insurance Company;
Kansas State Bank
Charles E. Heath, 62 Director since 2003 Retired in 1999. Formerly, Chief Tortoise North
Investment Officer, General Electric's American Energy
Employers Reinsurance Corporation Corporation and
(1989-1999). CFA since 1974. Tortoise MLP
Investment
Corporation
(closed-end
investment companies)2
INTERESTED DIRECTORS AND OFFICERS1
H. Kevin Birzer, 45 Director and Partner/Senior Analyst, Fountain Tortoise North American
Chairman of the Capital (1990-present); Managing Energy Corporation and
Board since 2003 Director of the Adviser; formerly, Vice Tortoise MLP Investment
President, F. Martin Koenig & Co. Corporation (closed-end
(1983-1986); Vice President, investment companies)2
Corporate Finance Department,
Drexel Burnham Lambert (1986-1989).
Terry C. Matlack, 49 Director, Treasurer Managing Director, KCEP; Managing Tortoise North
Address: and Chief Financial Director of the Adviser; formerly, American Energy
233 West 47th Street, Officer since 2003, President, GreenStreet Capital. Corporation and
Kansas City, MO 64112 Chief Compliance Tortoise MLP
Officer since 2004 Investment
Corporation
(closed-end
investment
companies)2;
Trendstar Investment
Trust (open-end small
cap investment fund)
David J. Schulte, 43 President and Chief Managing Director, KCEP (1993- None
Executive Officer present); Managing Director of the
since 2003 Adviser. CFA since 1992; Member,
Financial Accounting Policy Committee
of CFA Institute.
Zachary A. Hamel, 38 Senior Vice Partner/Senior Analyst with Fountain None
President and Capital (1997-present); Managing
Secretary since 2003 Director of the Adviser.
S-17
POSITION(S)
HELD WITH
COMPANY AND OTHER
LENGTH OF TIME PRINCIPAL OCCUPATION DURING PAST DIRECTORSHIPS
NAME AND AGE SERVED FIVE YEARS HELD BY DIRECTOR
------------------------- ------------------- ----------------------------------------- -----------------------
Kenneth P. Malvey, 39 Senior Vice Partner/Senior Analyst, Fountain Capital None
President and Management (2002-present); Managing
Assistant Treasurer Director of the Adviser. Formerly,
since 2003 Investment Risk Manager and member of
the Global Office of Investments, GE
Capital's Employers Reinsurance
Corporation.
------------------------------------
(1) As a result of their respective positions held with the Adviser or its
affiliates, these individuals are considered "interested persons" of the
Company within the meaning of the 1940 Act.
(2) The Adviser also serves as investment adviser to Tortoise North American
Energy Corporation and Tortoise MLP Investment Corporation, both of
which are in the formation process and not yet operational as of the
date of this Statement of Additional Information.
The Company has an audit committee that consists of three directors of
the Company (the "Audit Committee") who are not "interested persons" of the
Company within the meaning of the 1940 Act ("Independent Directors"). The Audit
Committee members are Charles E. Heath (Chairman), Conrad S. Ciccotello and John
R. Graham. The Audit Committee's function is to oversee the Company's accounting
policies, financial reporting and internal control system. The Audit Committee
makes recommendations regarding the selection of independent auditors of the
Company, reviews the independence of such firm, reviews the scope of the audit
and internal controls, considers and reports to the Board on matters relating to
the Company's accounting and financial reporting practices, and performs such
other tasks as the full Board deems necessary or appropriate. The Audit
Committee held four meetings in the fiscal year ended November 30, 2004.
Directors and officers of the Company who are interested persons of the
Company receive no salary or fees from the Company. For the current fiscal year,
each Independent Director receives from the Company an annual retainer of
$15,000 ($6,000 for the Chairman of the Audit Committee) and a fee of $2,000
(and reimbursement for related expenses) for each meeting of the Board or
committee meeting (or $1,000 for each committee meeting that is held on the same
day as a Board meeting) he or she attends. Each Independent Director also
receives $1000 for each telephone committee meeting. No director or officer will
be entitled to receive pension or retirement benefits from the Company.
The table below sets forth the compensation paid to the directors by
the Company for the fiscal year ended November 30, 2004.
AGGREGATE COMPENSATION FROM
AGGREGATE THE COMPANY AND FUND COMPLEX
NAME AND POSITION WITH THE COMPENSATION FROM PAID TO DIRECTORS (3
COMPANY THE COMPANY* COMPANIES1)
-------------------------- ----------------- -----------------------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello........ $18,000 $18,000
John R. Graham.............. $18,000 $18,000
Charles E. Heath............ $20,000 $20,000
INTERESTED DIRECTORS
H. Kevin Birzer............. $ 0 $0
Terry C. Matlack............ $ 0 $0
---------------------------
1 As of November 30, 2004, Tortoise North American Energy Corporation and
Tortoise MLP Investment Corporation were not yet formed.
S-18
The following table sets forth the dollar range of equity securities
beneficially owned by each director in the Company as of the date of this
Statement of Additional Information.
AGGREGATE DOLLAR RANGE OF
AGGREGATE DOLLAR RANGE OF SECURITIES OF COMPANIES
COMPANY SECURITIES BENEFICIALLY OVERSEEN BY DIRECTOR IN FUND
NAME OF DIRECTOR OWNED BY DIRECTOR* COMPLEX (3 COMPANIES)
------------------------- -------------------------------- ----------------------------
INDEPENDENT DIRECTORS
Conrad S. Ciccotello..... $50,001 - $100,000 $50,001 - $100,000
John R. Graham........... Over $100,000 Over $100,000
Charles E. Heath......... Over $100,000 Over $100,000
INTERESTED DIRECTORS
H. Kevin Birzer.......... Over $100,000 Over $100,000
Terry C. Matlack......... Over $100,000 Over $100,000
* As of _____, 2005, the officers and directors of the Company, as a
group, own less than 1% of the Company's outstanding shares of common
stock.
CONTROL PERSONS
As of _____, 2005, the following persons owned of record or
beneficially more than 5% of the Company's common shares:
Stifel, Nicolaus & Company Inc.............................%
501 North Broadway
St. Louis, MO 63102
RBC Dain Rauscher Inc......................................%
1221 Avenue of the Americas
New York, NY 10036
Oppenheimer & Co. Inc......................................%
125 Broad Street
New York, NY 10004
Lehman Brothers Inc........................................%
745 Seventh Avenue
New York, NY 10019
First Clearing, LLC........................................%
901 East Byrd St., 15th Floor
Richmond, VA 23219
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty which is
established by a final judgment as being material to the cause of action. The
Charter contains such a provision which eliminates directors' and officers'
liability to the maximum extent permitted by Maryland law.
S-19
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law and the 1940 Act, to obligate itself to indemnify any present or
former director or officer or any individual who, while a director or officer of
the Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise as a director, officer, partner or
trustee, from and against any claim or liability to which that person may become
subject or which that person may incur by reason of his or her status as a
present or former director or officer of the Company and to pay or reimburse his
or her reasonable expenses in advance of final disposition of a proceeding. The
Bylaws obligate the Company, to the maximum extent permitted by Maryland law and
the 1940 Act, to indemnify any present or former director or officer or any
individual who, while a director of the Company and at the request of the
Company, serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise as
a director, officer, partner or trustee and who is made a party to the
proceeding by reason of his or her service in that capacity from and against any
claim or liability to which that person may become subject or which that person
may incur by reason of his or her status as a present or former director or
officer of the Company and to pay or reimburse his or her reasonable expenses in
advance of final disposition of a proceeding. The Charter and Bylaws also permit
the Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and any
employee or agent of the Company or a predecessor of the Company.
Maryland law requires a corporation (unless its charter provides
otherwise, which the Company's Charter does not) to indemnify a director or
officer who has been successful in the defense of any proceeding to which he is
made, or threatened to be made, a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made, or threatened to be made, a party by
reason of their service in those or other capacities unless it is established
that (a) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad faith or (ii)
was the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services or
(c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under Maryland law, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation or for a judgment of
liability on the basis that personal benefit was improperly received, unless in
either case a court orders indemnification and then only for expenses. In
addition, Maryland law permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written affirmation
by the director or officer of his or her good faith belief that he or she has
met the standard of conduct necessary for indemnification by the corporation and
(b) a written undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately determined that
the standard of conduct was not met.
INVESTMENT ADVISER
Tortoise Capital Advisers, L.L.C. (the "Adviser") serves as the
Company's investment adviser. The Adviser was formed by Fountain Capital
Management, L.L.C. ("Fountain Capital") and Kansas City Equity Partners, L.C.
("KCEP") in October 2002 to provide portfolio management services exclusively
with respect to energy infrastructure investments. The Adviser is controlled
equally by Fountain Capital and KCEP, each of which own half of all of the
voting shares of the Adviser.
Fountain Capital was formed in 1990 and is focused primarily on
providing investment advisory services to institutional investors with respect
to below investment grade debt. Atlantic Asset Management LLC ("Atlantic") is a
minority owner, and an affiliate, of Fountain Capital. Atlantic was formed in
1992 and provides, directly or through affiliates, a variety of fixed income
investment advisory
S-20
services including investment grade bond and high-yield bond strategies,
investment grade collateralized debt obligations and mortgage hedge funds.
KCEP was formed in 1993 and is focused solely on managing two private
equity funds. KCEP focuses on private equity investments, including investments
in two natural resource infrastructure companies.
The Adviser is located at 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210. The Adviser specializes in managing portfolios of MLPs and
other energy infrastructure companies. As of April 30, 2005, the Adviser had
approximately $____ million in assets under management in the energy
infrastructure industry.
Pursuant to an Investment Advisory Agreement (the "Advisory
Agreement"), the Adviser, subject to overall supervision by the Board, manage
the investments of the Company. The Adviser regularly provides the Company with
investment research advice and supervision and will furnish continuously an
investment program for the Company, consistent with the investment objective and
policies of the Company.
Day-to-day management of the Company's portfolio will be the
responsibility of the Adviser's investment committee. The members of the
investment committee are Messrs. Birzer, Hamel, Malvey, Matlack and Schulte.
Messrs. Matlack and Schulte are full-time employees of the Adviser. The other
members of the investment committee are affiliates of, but not employees of, the
Adviser. Members of the investment committee have significant responsibilities
with KCEP and/or Fountain Capital. All members of the investment committee have
undertaken to provide such services as necessary to fulfill the obligations of
the Adviser to the Company.
The following table provides information about other accounts managed
on a day-to-day basis by each of the portfolio managers as of _________, 2005.
NUMBER OF
ACCOUNTS MANAGED
IN WHICH THE
ADVISORY FEE IS
NUMBER OF OTHER BASED ON
REGISTERED PERFORMANCE OF
INVESTMENT NUMBER OF OTHER THE ACCOUNT AND
COMPANY ACCOUNTS POOLED INVESTMENT NUMBER OF OTHER THE TOTAL ASSETS
NAME OF MANAGER MANAGED VEHICLES MANAGED ACCOUNTS MANAGED IN SUCH ACCOUNTS
----------------------- ---------------- ----------------- ---------------- ----------------
H. Kevin Birzer........ 2(1) 6 179 3
Zachary A. Hamel....... 2(1) 6 179 3
Kenneth P. Malvey...... 2(1) 6 179 3
Terry C. Matlack....... 2(1) 3 154 5
David J. Schulte....... 2(1) 3 154 5
-------------------------------
(1) These investment companies are in the formation process and are not yet
operational as of the date of this Statement of Additional Information.
S-21
The following table sets forth the dollar range of equity securities
beneficially owned by each of the portfolio managers as of the date of this
Statement of Additional Information.
AGGREGATE DOLLAR RANGE OF COMPANY
NAME OF MANAGER SECURITIES BENEFICIALLY OWNED BY MANAGER
------------------- ----------------------------------------
H. Kevin Birzer Over $100,000
Zachary A. Hamel $50,001-$100,000
Kenneth P. Malvey $50,001-$100,000
Terry C. Matlack Over $100,000
David J. Schulte Over $100,000
Messrs. Schulte and Matlack are full-time employees of the Adviser and
receive a fixed salary for the services they provide. Fountain Capital is paid a
fixed monthly fee, subject to adjustment, for the services of Messrs. Birzer,
Hamel and Malvey. Each of Messrs. Schulte, Matlack, Birzer, Hamel and Malvey own
an equity interest in either KCEP or Fountain Capital, the two entities that
control the Adviser, and each thus benefits from increases in the net income of
the Adviser.
In addition to portfolio management services, the Adviser is obligated
to supply the Board and officers of the Company with certain statistical
information and reports, to oversee the maintenance of various books and records
and to arrange for the preservation of records in accordance with applicable
federal law and regulations. Under the Advisory Agreement, the Company pays to
the Adviser quarterly, as compensation for the services rendered and expenses
paid by it, a fee equal on an annual basis to 0.95% of the Company's average
monthly Managed Assets. Managed Assets means the total assets of the Company
(including any assets attributable to leverage that may be outstanding) minus
accrued liabilities other than (1) deferred taxes, (2) debt entered into for the
purpose of leverage and (3) the aggregate liquidation preference of any
outstanding preferred stock.
The Adviser has agreed contractually to waive or reimburse the Company
for fees and expenses, including the investment advisory fee and other expenses
in the amount of 0.23% of average monthly Managed Assets through February 28,
2006 and 0.10% of average monthly Managed Assets through February 28, 2009.
Because the management fees paid to the Adviser are based upon a
percentage of the Company's Managed Assets, fees paid to the Adviser will be
higher if the Company is leveraged; thus, the Adviser will have an incentive to
leverage the Company. Because the fee reimbursement agreement is based on
Managed Assets, to the extent the Company is engaged in leverage, the gross
dollar amount of the Adviser's fee reimbursement obligations to the Company will
increase. The Adviser intends to leverage the Company only when it believes it
will serve the best interests of the stockholders. The Company's average monthly
Managed Assets are determined for the purpose of calculating the management fee
by taking the average of the monthly determinations of Managed Assets during a
given calendar quarter. The fees are payable for each calendar quarter within 5
days of the end of that quarter.
For the Company's initial fiscal year beginning February 27, 2004 and
ending November 30, 2004, the Adviser received $2,647,010 as compensation for
advisory services and waived $640,855.
The Advisory Agreement provides that the Company will pay all expenses
other than those expressly stated to be payable by the Adviser, which expenses
payable by the Company shall include, without implied limitation: (1) expenses
of maintaining the Company and continuing its existence, (2) registration of the
Company under the 1940 Act, (3) commissions, spreads, fees and other expenses
connected with the acquisition, holding and disposition of securities and other
investments including placement and similar fees in connection with direct
placements entered into on behalf of the Company,
S-22
(4) auditing, accounting and legal expenses, (5) taxes and interest, (6)
governmental fees, (7) expenses of listing shares of the Company with a stock
exchange, and expenses of issue, sale, repurchase and redemption (if any) of
interests in the Company, including expenses of conducting tender offers for the
purpose of repurchasing Company interests, (8) expenses of registering and
qualifying the Company and its shares under federal and state securities laws
and of preparing and filing registration statements and amendments for such
purposes, (9) expenses of reports and notices to stockholders and of meetings of
stockholders and proxy solicitations therefore, (10) expenses of reports to
governmental officers and commissions, (11) insurance expenses, (12) association
membership dues, (13) fees, expenses and disbursements of custodians and
subcustodians for all services to the Company (including without limitation
safekeeping of funds, securities and other investments, keeping of books,
accounts and records, and determination of net asset values), (14) fees,
expenses and disbursements of transfer agents, dividend paying agents,
stockholder servicing agents and registrars for all services to the Company,
(15) compensation and expenses of directors of the Company who are not members
of the Adviser's organization, (16) pricing and valuation services employed by
the Company, (17) all expenses incurred in connection with leveraging of the
Company's assets through a line of credit, or issuing and maintaining preferred
stock or instruments evidencing indebtedness of the Company, (18) all expenses
incurred in connection with the organization of the Company and the initial
public offering of common stock, and (19) such non-recurring items as may arise,
including expenses incurred in connection with litigation, proceedings and
claims and the obligation of the Company to indemnify its directors, officers
and stockholders with respect thereto.
The Advisory Agreement provides that the Adviser will not be liable in
any way for any default, failure or defect in any of the securities comprising
the Company's portfolio if it has satisfied the duties and the standard of care,
diligence and skill set forth in the Advisory Agreement. However, the Adviser
shall be liable to the Company for any loss, damage, claim, cost, charge,
expense or liability resulting from the Adviser's willful misconduct, bad faith
or gross negligence or disregard by the Adviser of the Adviser's duties or
standard of care, diligence and skill set forth in the Agreement or a material
breach or default of the Adviser's obligations under the Advisory Agreement.
The Advisory Agreement will continue in force until December 31, 2005,
and from year to year thereafter, provided such continuance is approved by a
majority of the Board or by vote of the holders of a majority of the outstanding
voting securities of the Company. Additionally, the Advisory Agreement must be
approved annually by vote of a majority of the Independent Directors. The
Advisory Agreement may be terminated by the Adviser or the Company, without
penalty, on sixty (60) days' written notice to the other. The Advisory Agreement
will terminate automatically in the event of its assignment.
The Advisory Agreement was considered and approved by the Board,
including a majority of the Independent Directors, at the organizational meeting
of the Company held on December 12, 2003. In considering the Advisory Agreement,
the Board, including a majority of the Independent Directors, determined that
the terms of the agreement are fair and reasonable and that approval of the
Advisory Agreement on behalf of the Company is in the best interests of the
Company. In evaluating the Advisory Agreement, the Board reviewed materials
furnished by the Adviser and met with senior advisory personnel. The Board also
specifically considered the following as relevant to its determination to
approve the Advisory Agreement: (1) the history, reputation, qualification and
background of the Adviser and the team of analysts and portfolio managers
responsible for the Company's investment program; (2) the Adviser's reliance on
the personnel and resources of affiliates; (3) the unique nature of the product
and the specialized expertise of the Adviser in a niche market (MLPs); (4) that
the fee and expense ratios of the Company are reasonable given the quality of
services expected to be provided and are comparable to the fee and expense
ratios of similar closed-end funds with similar investment objectives and
policies; and (5) other factors deemed relevant by the Board. The Board noted
and approved that the fee rate
S-23
would be applicable to all assets under management, including amounts
attributable to leverage, and the potential conflict of the Adviser in
determining the amount of leverage.
POTENTIAL CONFLICTS OF INTEREST
The Adviser and its affiliates manage other accounts and portfolios
with investment strategies similar to those of the Company. Securities
frequently meet the investment objectives of the Company and such other accounts
and the Company may compete against other accounts for the same trade the
Company might otherwise make, including the priority of the trading order.
The Adviser also serves as investment adviser to Tortoise North
American Energy Corporation ("TYN") and Tortoise MLP Investment Corporation
("TMLP"), each recently organized, nondiversified, closed-end investment
management companies. Once TYN commences operations, it intends to invest
primarily in publicly traded Canadian royalty trusts and income trusts and
publicly traded MLPs. Once TMLP commences operations, it intends to invest
primarily in publicly traded MLPs. To the extent certain MLP securities or other
energy infrastructure company securities meet the investment objectives of TYN
and TMLP, the Company may compete with TYN and TMLP for the same investment
opportunities.
It is possible that at times identical securities will be held by the
Company and other accounts. However, positions in the same issuer may vary and
the length of time that the Company or other accounts may choose to hold their
investment in the same issuer may likewise vary. To the extent that one or more
of the accounts managed by the Adviser seeks to acquire the same security at
about the same time, the Company may not be able to acquire as large a position
in such security as it desires or it may have to pay a higher price for the
security. Similarly, the Company may not be able to obtain as large an execution
of an order to sell or as high a price for any particular portfolio security if
the Adviser decides to sell on behalf of another account the same portfolio
security at the same time. On the other hand, if the same securities are bought
or sold at the same time by the Company and other accounts, the resulting
participation in volume transactions could produce better executions for the
Company. In the event more than one account purchases or sells the same security
as the Company on a given date, the purchases and sales will be allocated among
the clients on a good faith equitable basis by the Adviser in its discretion in
accordance with the clients' various objectives and the Adviser's procedures.
Although the other accounts may have the same or similar investment objectives
and policies as the Company, their portfolios may not necessarily consist of the
same investments as the Company or each other, and their performance results are
likely to differ from those of the Company.
Under the 1940 Act, the Company and its affiliates may be precluded
from co-investing in negotiated private placements of securities. The Company
and the Adviser have applied to the SEC for exemptive relief to permit the
Company and its affiliates to make such investments. There is no guarantee that
the requested relief will be granted by the SEC. Unless and until the Company
and the Adviser obtain an exemptive order, the Company will not co-invest with
its affiliates in negotiated private placement transactions. Until the Company
and the Adviser receive exemptive relief, the Advisor will observe a policy for
allocating negotiated private placement opportunities among its clients that
takes into account the amount of each client's available cash and its investment
objectives.
CODE OF ETHICS
The Company and the Adviser have adopted a Code of Ethics under Rule
17j-1 of the 1940 Act, which is applicable to officers, directors and designated
employees of the Company and the Adviser (the "Code"). Subject to certain
limitations, the Code permits those officers, directors and designated employees
of the Company and the Adviser ("Covered Persons") to invest in securities,
including securities that may be purchased or held by the Company. The Code
contains provisions and
S-24
requirements designed to identify and address certain conflicts of interest
between personal investment activities of Covered Persons and the interests of
investment advisory clients such as the Company. Among other things, the Code
prohibits certain types of transactions absent prior approval, imposes time
periods during which personal transactions may not be made in certain
securities, and requires submission of duplicate broker confirmations and
statements and quarterly reporting of securities transactions. Exceptions to
these and other provisions of the Code may be granted in particular
circumstances after review by appropriate personnel.
The Code of Ethics of the Company can be reviewed and copied at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling the Securities and Exchange Commission at (202) 942-8090. The Code of
the Company is also available on the EDGAR Database on the Securities and
Exchange Commission's Internet site at http://www.sec.gov, and, upon payment of
a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov or by writing the Securities and Exchange Commission's Public
Reference Section, Washington, D.C. 20549-0102.
NET ASSET VALUE
The Company will compute its net asset value for its shares of common
stock as of the close of trading on the NYSE (normally 4:00 p.m. Eastern time)
no less frequently than the last business day of each calendar month and at such
other times as the Board may determine. The Company makes its net asset value
available for publication monthly. For purposes of determining the net asset
value of a common share, the net asset value of the Company will equal the value
of the total assets of the Company (the value of the securities the Company
holds, plus cash or other assets, including interest accrued but not yet
received) less (1) all of its liabilities (including without limitation accrued
expenses and both current and deferred income taxes), (2) accumulated and unpaid
interest payments and dividends on any outstanding debt or preferred stock,
respectively, (3) the aggregate liquidation value of any outstanding preferred
stock, (4) the aggregate principal amount of any outstanding senior notes,
including any series of Tortoise Notes, and (5) any distributions payable on the
common stock. The net asset value per common share of the Company will equal the
net asset value of the Company divided by the number of outstanding shares of
common stock.
Pursuant to an agreement with U.S. Bancorp Fund Services, LLC (the
"Accounting Services Provider"), the Accounting Services Provider will value the
assets in the Company's portfolio in accordance with Valuation Procedures
adopted by the Board of Directors. The Accounting Services Provider will obtain
securities market quotations from independent pricing services approved by the
Adviser and ratified by the Board. Securities for which market quotations are
readily available shall be valued at "market value." Any other securities shall
be valued at "fair value."
Valuation of certain assets at market value will be as follows. For
equity securities, the Accounting Services Provider will first use readily
available market quotations and will obtain direct written broker-dealer
quotations if a security is not traded on an exchange or quotations are not
available from an approved pricing service. For fixed income securities, the
Accounting Services Provider will use readily available market quotations based
upon the last updated sale price or market value from a pricing service or by
obtaining a direct written broker-dealer quotation from a dealer who has made a
market in the security. For options, futures contracts and options on futures
contracts, the Accounting Services Provider will use readily available market
quotations. If no sales are reported on any exchange or OTC market, the
Accounting Services Provider will use the calculated mean based on bid and asked
prices obtained from the primary exchange or OTC market. Other assets will be
valued at market value pursuant to the Valuation Procedures.
S-25
If the Accounting Services Provider cannot obtain a market value or the
Adviser determines that the value of a security as so obtained does not
represent a fair value as of the valuation time (due to a significant
development subsequent to the time its price is determined or otherwise), fair
value for the security shall be determined pursuant to Valuation Procedures
adopted by the Board. The Valuation Procedures provide that the Adviser will
consider a variety of factors with respect to the individual issuer and security
in determining and monitoring the continued appropriateness of fair value,
including, without limitation, financial statements and fundamental data with
respect to the issuer, cost, the amount of any discount, restrictions on
transfer and registration rights and other information deemed relevant. A report
of any prices determined pursuant to certain preapproved methodologies will be
presented to the Board or a designated committee thereof for approval at the
next regularly scheduled Board meeting; otherwise approval of the Board shall be
sought promptly. The Valuation Procedures provide for two preapproved
methodologies. First, direct placements of securities of private companies
(i.e., companies with no outstanding public securities) ordinarily will be
valued at cost initially. Second, securities that are convertible into publicly
traded securities (i.e., convertible subordinated units) ordinarily will be
valued at the market value of the publicly traded security less a discount
initially determined with respect to each security based on the discount
negotiated at the time of purchase. The foregoing methods for valuing privately
placed securities may be used only as long as the Adviser believes they continue
to represent fair value.
In computing net asset value, the Company will review the valuation of
the obligation for income taxes separately for current taxes and deferred taxes
due to the differing impact of each on (1) the anticipated timing of required
tax payments and (2) the impact of each on the treatment of distributions by the
Company to its stockholders.
The allocation between current and deferred income taxes is determined
based upon the value of assets reported for book purposes compared to the
respective net tax bases of assets as recognized for federal income tax
purposes. It is anticipated that cash distributions from MLPs in which the
Company invests will exceed the amount of taxable income allocable to the
Company by such MLPs primarily as a result of depreciation and amortization
deductions recorded by the MLPs. This may result, in effect, in a portion of the
cash distribution received by the Company not being treated as income for
federal income tax purposes. The relative portion of such distributions not
treated as income for tax purposes will vary among the MLPs, and also will vary
year by year for each MLP. The Adviser will be able to directly confirm the
portion of each distribution recognized as taxable income when it receives
annual tax reporting information from each MLP.
PORTFOLIO TRANSACTIONS
EXECUTION OF PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for
the Company, broker-dealer selection, and negotiation of brokerage commission
rates. The Adviser's primary consideration in effecting a security transaction
will be to obtain the best execution. In selecting a broker-dealer to execute
each particular transaction, the Adviser will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and the difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Company on a continuing
basis. Accordingly, the price to the Company in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the execution services offered.
The ability to invest in direct placements of MLP securities is
critical to the Company's ability to meet its investment objective because of
the limited number of MLP issuers available for investment and,
S-26
in some cases, the relatively small trading volumes of certain securities.
Accordingly, the Company may, from time to time, enter into arrangements with
placement agents in connection with direct placement transactions.
In evaluating placement agent proposals, the Company considers each
broker's access to issuers of MLP securities and experience in the MLP market,
particularly the direct placement market. In addition to these factors, the
Company considers whether the proposed services are customary, whether the
proposed fee schedules are within the range of customary rates, whether any
proposal would obligate the Company to enter into transactions involving a
minimum fee, dollar amount or volume of securities, or into any transaction
whatsoever, and other terms such as indemnification provisions.
Subject to such policies as the Board may from time to time determine,
the Adviser shall not be deemed to have acted unlawfully or to have breached any
duty solely by reason of its having caused the Company to pay a broker or dealer
that provides brokerage and research services to the Adviser an amount of
commission for effecting a Company investment transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Company and to other clients of the Adviser as to which the Adviser
exercises investment discretion. The Adviser is further authorized to allocate
the orders placed by it on behalf of the Company to such brokers and dealers who
also provide research or statistical material or other services to the Company
or the Adviser. Such allocation shall be in such amounts and proportions as the
Adviser shall determine and the Adviser will report on said allocations
regularly to the Board indicating the brokers to whom such allocations have been
made and the basis therefor.
PORTFOLIO TURNOVER
The Company's annual portfolio turnover rate may vary greatly from year
to year. Although the Company cannot accurately predict its annual portfolio
turnover rate, it is not expected to exceed 30% under normal circumstances. From
the commencement of operations through November 30, 2004, the Company's actual
portfolio turnover rate was 1.39%. For the period beginning December 1, 2004
through _____, 2005, the portfolio turnover rate was ___%. However, portfolio
turnover rate is not considered a limiting factor in the execution of investment
decisions for the Company. A higher turnover rate results in correspondingly
greater brokerage commissions and other transactional expenses that are borne by
the Company. High portfolio turnover may result in the Company's recognition of
gains that will increase the Company's taxable income, possibly resulting in an
increased tax liability, as well as increasing the Company's current and
accumulated earnings profits resulting in a greater portion of the Company's
distributions on its shares of common and preferred stock being treated as
taxable dividends for federal income tax purposes. See "Certain Federal Income
Tax Matters."
ADDITIONAL INFORMATION CONCERNING THE AUCTION
GENERAL
Auction Agency Agreement. The Company has entered into an Auction
Agency Agreement (the "Auction Agency Agreement") with the Auction Agent
(currently, The Bank of New York) which provides, among other things, that the
Auction Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for each series of MMP Shares so long as the Applicable Rate for
MMP Shares of such series is to be based on the results of an Auction.
S-27
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Company, which provide for the participation of those
Broker-Dealers in Auctions for Series II MMP Shares. See "Broker-Dealers" below.
Securities Depository. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members with respect to each series of
MMP Shares. One certificate for each series of MMP Shares will be registered in
the name of Cede & Co., as nominee of the Securities Depository. Such
certificate will bear a legend to the effect that such certificate is issued
subject to the provisions restricting transfers of MMP Shares contained in the
Articles Supplementary of Money Market Cumulative Preferred Shares (the
"Articles Supplementary"). The Company also will issue stop-transfer
instructions to the transfer agent for MMP Shares. Prior to the commencement of
the right of the holders of the MMP Shares to elect a majority of the Company's
directors, as described in the "Description of MMP Shares - Voting Rights"
section of the Prospectus, Cede & Co. will be the Holder of record of all MMP
Shares and owners of such MMP Shares will not be entitled to receive
certificates representing their ownership interest in such MMP Shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in MMP Shares, whether for its own account or
as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as non-fiduciary agent for the Company in
connection with Auctions. In the absence of bad faith or gross negligence on its
part, the Auction Agent will not be liable for any action taken, suffered, or
omitted or for any error of judgment made by it in the performance of its duties
under the Auction Agency Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been grossly
negligent in ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of MMP Shares, the Auction Agent's registry of Existing
Holders, the results of Auctions and notices from any Broker-Dealer (or other
Person, if permitted by the Company) with respect to transfers described under
"The Auction" in the Prospectus and notices from the Company. The Auction Agent
is not required to accept any such notice for an Auction unless it is received
by the Auction Agent by 3:00 p.m., New York City time, on the Business Day
preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Company on a date no earlier than 60 days after such notice. If
the Auction Agent should resign, the Company will use its best efforts to enter
into an agreement with a successor Auction Agent containing substantially the
same terms and conditions as the Auction Agency Agreement. The Company may
remove the Auction Agent provided that prior to such removal the Company shall
have entered into such an agreement with a successor Auction Agent.
BROKER-DEALERS
After each Auction for MMP Shares, the Auction Agent will pay to each
Broker-Dealer, from funds provided by the Company, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Company and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of MMP Shares placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence, MMP
Shares will be placed by a Broker-Dealer if such MMP
S-28
Shares were (a) the subject of Hold Orders deemed to have been submitted to the
Auction Agent by the Broker-Dealer and were acquired by such Broker-Dealer for
its own account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such Broker-Dealer
that is (i) a Submitted Bid of an Existing Holder that resulted in such Existing
Holder continuing to hold such MMP Shares as a result of the Auction or (ii) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such MMP Shares as a result of the Auction or (iii) a valid Hold
Order.
The Company may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Company) may participate in Auctions for its own account.
However, the Company, by notice to all Broker-Dealers, may prohibit all
Broker-Dealers from submitting Bids at Auctions for their own accounts, provided
that they may continue to submit Hold Orders and Sell Orders for their own
accounts. Any Broker-Dealer that is an affiliate of the Company may submit
orders in Auctions, but only if such Orders are not for its own account. If a
Broker-Dealer submits an Order for its own account in any Auction, it might have
an advantage over other Bidders because it would have knowledge of all Orders
submitted by it in that Auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that Auction.
CERTAIN FEDERAL INCOME TAX MATTERS
The following is a summary of certain material U.S. federal income tax
considerations relating to the purchase, ownership and disposition of MMP
Shares. The discussion generally applies only to holders of MMP Shares that are
U.S. holders. You will be a U.S. holder if you are an individual who is a
citizen or resident of the United States, a U.S. domestic corporation, or any
other person that is subject to U.S. federal income tax on a net income basis in
respect of an investment in MMP Shares. This summary deals only with U.S.
holders that hold MMP Shares as capital assets and who purchase MMP Shares in
connection with this offering. It does not address considerations that may be
relevant to you if you are an investor that is subject to special tax rules,
such as a financial institution, insurance company, regulated investment
company, real estate investment trust, investor in pass-through entities, U.S.
holder of MMP Shares whose "functional currency" is not the United States
dollar, tax-exempt organization, dealer in securities or currencies, trader in
securities or commodities that elects mark to market treatment, a person who
holds MMP Shares in a qualified tax deferred account such as an IRA, or a person
who will hold MMP Shares as a position in a "straddle," "hedge" or as part of a
"constructive sale" for federal income tax purposes. In addition, this
discussion does not address the possible application of the U.S. federal
alternative minimum tax.
This summary is based on the provisions of the Internal Revenue Code,
the applicable Treasury regulations promulgated thereunder, judicial authority
and current administrative rulings, as in effect on the date of this Statement
of Additional Information, all of which may change. Any change could apply
retroactively and could affect the continued validity of this summary.
As stated above, this discussion does not discuss all aspects of U.S.
federal income taxation that may be relevant to a particular holder of MMP
Shares in light of such holder's particular circumstances and income tax
situation. Prospective holders should consult their own tax advisors as to the
specific tax consequences to them of the purchase, ownership and disposition of
MMP Shares, including the application and the effect of state, local, foreign
and other tax laws and the possible effects of changes in U.S. or other tax
laws.
S-29
FEDERAL INCOME TAX TREATMENT OF THE COMPANY
The Company will be treated as a regular C corporation for federal and
state income tax purposes. The Company will compute and pay federal and state
income tax on its taxable income. Thus, the Company will be subject to federal
income tax on its taxable income at tax rates up to 35%. Additionally, in
certain instances the Company could be subject to the federal corporate
alternative minimum tax of 20% on its alternative minimum taxable income to the
extent that the alternative minimum tax exceeds its regular federal income tax.
As indicated above, the Company invests its assets primarily in MLPs.
MLPs generally are treated as partnerships for federal income tax purposes.
Since partnerships are generally not subject to federal income tax, the partners
must report as their income their proportionate share of the partnership's
income. Thus, as a partner in MLPs, the Company will include its proportionate
share of the MLPs' income in computing its federal taxable income, irrespective
of whether any cash or other distributions are made by the MLP to the Company.
Distributions by such MLPs will not be eligible for the dividends received
deduction when received by the Company. The Company also takes into account in
computing its taxable income any other items of Company income, gain, deduction
or loss. The Company anticipates that these may include interest income earned
on the Company's investment in debt securities, deductions for Company operating
expenses and gain or loss recognized by the Company on the sale of MLP interests
or any other security.
As explained below, based upon the historic performance of MLPs, the
Company anticipates initially that its proportionate share of the MLPs' taxable
income will be significantly less than the amount of cash distributions received
by the Company from the MLPs. In such case, the Company anticipates that it will
not incur a current federal income tax on a significant portion of its cash
flow, particularly after taking into account the Company's current operating
expenses. If the MLPs' taxable income is greater than the MLPs' cash
distributions, the Company will incur current federal income tax liability,
possibly in excess of the cash distributions it receives.
The Company anticipates that each year it will turn over a certain
portion of its investment assets. The Company will recognize gain or loss on the
disposition of all or a portion of its interest in MLPs in an amount equal to
the difference between the sales price and the Company's basis in the MLP
interests sold. To the extent the Company received MLP cash distributions in
excess of the taxable income reportable by the Company with respect to the
respective MLP interest, the Company's basis in the MLP interest will be reduced
and the Company's gain on the sale of such MLP interest will be
increased.
The Company has not elected to be treated as a regulated investment
company under the federal income tax laws. The federal income tax laws generally
provide that a regulated investment company does not pay an entity level income
tax, provided that it distributes all or substantially all of its income and
capital gains to its stockholders. The regulated investment company taxation
rules have no application to the Company or stockholders of the Company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF MMP SHARES
Under present law, the Company believes that MMP Shares will constitute
stock of the Company, and thus distributions with respect to MMP Shares (other
than distributions in redemption of MMP Shares subject to Section 302(b) of the
Internal Revenue Code) will generally constitute dividends to the extent of the
Company's current or accumulated earnings and profits, as calculated for federal
income tax purposes. Dividends generally will be taxable as ordinary income to
holders, but are expected to be treated as "qualified dividend income" that is
generally subject to reduced rates of federal income taxation for noncorporate
investors, as described below. In the case of corporate holders of MMP Shares,
subject to applicable requirements and limitations, dividends may be eligible
for the dividends received deduction
S-30
available to corporations under Section 243 of the Internal Revenue Code.
Distributions in excess of the Company's earnings and profits, if any, will
first reduce a shareholder's adjusted tax basis in his or her shares and, after
the adjusted tax basis is reduced to zero, will constitute capital gains to a
holder who holds such shares as a capital asset. Earnings and profits are
treated, for federal income tax purposes, as first being used to pay
distributions on the MMP Shares, and then to the extent remaining, if any, to
pay distributions on the shares of common stock. Because the Company has elected
not to be treated as a regulated investment company under the Internal Revenue
Code, the Company is not entitled to designate dividends made with respect to
the common shares and the MMP Shares as capital gain distributions.
Qualified dividend income received by individual and other noncorporate
shareholders is taxed at long-term capital gain rates, which currently reach a
maximum of 15%. Qualified dividend income generally includes dividends from
domestic corporations and dividends from non-U.S. corporations that meet certain
criteria. To be treated as qualified dividend income, the shareholder must hold
the shares paying otherwise qualifying dividend income more than 60 days during
the 121-day period beginning 60 days before the ex-dividend date (or more than
90 days during the 181-day period beginning 90 days before the ex-dividend date
in the case of certain preferred stock dividends). A stockholder's holding
period may be reduced for purposes of this rule if the stockholder engages in
certain risk reduction transactions with respect to the MMP Shares. The
provisions of the Internal Revenue Code applicable to qualified dividend income
are effective through 2008. Thereafter, higher tax rates will apply unless
further legislative action is taken.
Distributions on MMP Shares from the Company's current or accumulated
earnings and profits are also expected to be eligible for the dividends received
deduction available to corporate stockholders. Corporate stockholders should be
aware that certain limitations apply to the availability of the dividends
received deduction, including limitations on the aggregate amount of the
deduction that may be claimed and limitations based on the holding period of the
MMP Shares, which holding period may be reduced if the stockholder engages in
risk reduction transactions with respect to its MMP Shares. Corporate
stockholders should consult their own tax advisors regarding the application of
these limitations to their particular situation.
The Company will notify shareholders annually as to the federal income
tax status of Company distributions to them.
Sale or Redemption of MMP Shares. The sale of MMP Shares by holders
will generally be a taxable transaction for federal income tax purposes. Holders
of MMP Shares who sell such shares will generally recognize gain or loss in an
amount equal to the difference between the net proceeds of the sale and their
adjusted tax basis in the shares sold. If such MMP Shares are held as a capital
asset at the time of the sale, the gain or loss will generally be a capital gain
or loss and will be long-term capital gain or loss if the MMP Shares were held
for more than twelve months. Similarly, a redemption by the Company (including a
redemption resulting from liquidation of the Company), if any, of all the MMP
Shares actually and constructively held by a shareholder generally will give
rise to capital gain or loss under Section 302(b) of the Internal Revenue Code
if the shareholder does not own (and is not regarded under certain tax law rules
of constructive ownership as owning) any shares of common stock in the Company,
and provided that the redemption proceeds do not represent declared but unpaid
dividends. Other redemptions may also give rise to capital gain or loss, but
certain conditions imposed by Section 302(b) of the Internal Revenue Code must
be satisfied to achieve such treatment.
Capital gain or loss will generally be long-term capital gain or loss
if the MMP Shares were held for more than one year and will be short-term
capital gain or loss if the disposed MMP Shares were held for one year or less.
Net long-term capital gain recognized by a noncorporate U.S. stockholder
generally will be subject to tax at a lower rate (currently a maximum rate of
15%) than net short-term capital gain or
S-31
ordinary income (currently a maximum rate of 35%). Under current law, the
maximum tax rate on capital gain for noncorporate stockholders is scheduled to
increase to 20% for taxable years after 2008. For corporate stockholders,
capital gain is generally taxed at the same rate as ordinary income, that is,
currently at a maximum rate of 35%. A stockholder's ability to deduct capital
losses for federal income tax purposes may be limited.
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
Federal Income Taxation of MLPs. MLPs are similar to corporations in
many respects, but differ in others, especially in the way they are taxed for
federal income tax purposes. A corporation is a distinct legal entity, separate
from its stockholders and employees and is treated as a separate entity for
federal income tax purposes as well. Like individual taxpayers, a corporation
must pay a federal income tax on its income. To the extent the corporation
distributes its income to its stockholders in the form of dividends, the
stockholders must pay federal income tax on the dividends they receive. For this
reason, it is said that corporate income is double-taxed, or taxed at two
levels.
An MLP that satisfies the Qualifying Income rules, and does not elect
otherwise, is treated for federal income tax purposes as a pass-through entity.
No federal income tax is paid at the partnership level. A partnership's income
is considered earned by all the partners; it is allocated among all the partners
in proportion to their interests in the partnership (generally as provided in
the partnership agreement), and each partner pays tax on his, her or its share
of the partnership income. All the other items that go into determining taxable
income and tax owed are passed through to the partners as well - capital gains
and losses, deductions, credits, etc. Partnership income is thus said to be
single-taxed or taxed only at one level - that of the partner.
The Internal Revenue Code generally requires "publicly-traded
partnerships" to be treated as corporations for federal income tax purposes.
However, if the publicly-traded partnership satisfies certain requirements and
does not elect otherwise, the publicly-traded partnership will be taxed as a
partnership for federal income tax purposes, referred to herein as an MLP. Under
these requirements, an MLP must receive each year 90% or more of its gross
income from specified sources of Qualifying Income.
Qualifying Income for MLPs includes interest, dividends, real estate
rents, gain from the sale or disposition of real property, certain income and
gain from commodities or commodity futures, and income and gain from certain
mineral or natural resources activities. Mineral or natural resources activities
that generate Qualifying Income include income and gains from the exploration,
development, mining or production, processing, refining, transportation
(including pipelines transporting gas, oil or products thereof), or the
marketing of any mineral or natural resource (including fertilizer, geothermal
energy and timber). This means that most MLPs today are in energy, timber, or
real estate related businesses.
Because the MLP itself does not pay federal income tax, its income or
loss is allocated to its investors, irrespective of whether the investors
receive any cash or other distributions from the MLP. MLPs generally make
quarterly cash distributions. Although they resemble corporate dividends, MLP
distributions are treated differently. The MLP distribution is treated as a
return of capital to the extent of the investor's basis in his MLP interest and,
to the extent the distribution exceeds the investor's basis in the MLP interest,
capital gain. The investor's original basis is generally the price paid for the
units. The basis is adjusted downward with each distribution and allocation of
deductions (such as depreciation) and losses, and upwards with each allocation
of income.
It is important to note that an MLP investor is taxed on his share of
partnership income whether or not he actually receives any cash or other
property from the partnership. The tax is based not on money or other property
he actually receives, but his proportionate share of what the partnership earns.
S-32
However, most MLPs make it a policy to make quarterly distributions to their
partners that will comfortably exceed any income tax owed.
The partner generally will not be taxed on distributions until (1) his
basis reaches zero; or (2) he sells his MLP units and pays tax on his gain,
which gain is increased due to the basis decrease resulting from prior
distributions. When the units are sold, the difference between the sales price
and the investor's adjusted basis is the gain or loss for federal income tax
purposes.
At tax filing season an MLP investor will receive a Schedule K-1 form
showing the investor's share of each item of partnership income, gain, loss,
deduction and credit. The investor will use that information to figure the
investor's taxable income (MLPs generally provide their investors with material
that walks them through all the steps). If there is net income derived from the
MLP, the investor pays federal income tax at his, her or its tax rate. If there
is a net loss derived from the MLP, it is generally considered a "passive loss"
under the Internal Revenue Code and generally may not be used to offset income
from other sources, but must be carried forward.
Because the Company is a corporation, the Company, and not its
stockholders, will report the income or loss of the MLPs. Thus, the Company's
stockholders will not have to deal with any Schedule K-1 reporting income and
loss items of the MLPs. Stockholders, instead, will receive a Form 1099 from the
Company. In addition, due to the Company's anticipated broad public ownership,
the Company does not expect to be subject to the passive activity loss
limitation rules mentioned in the preceding paragraph.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company may be required to withhold for U.S. federal income tax
purposes a portion of all taxable distributions (including redemption proceeds)
payable to shareholders who fail to provide the Company with their correct
taxpayer identification number or who fail to make required certifications, or
who have been notified by the Internal Revenue Service that they are subject to
backup withholding (or if the Company has been so notified). Certain corporate
and other stockholders specified in the Internal Revenue Code and the
regulations thereunder are exempt from backup withholding. Backup withholding is
not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability provided the appropriate
information is furnished to the Internal Revenue Service.
OTHER TAXATION
Non-U.S. shareholders, including shareholders who are nonresident alien
individuals, may be subject to U.S. withholding tax on certain distributions at
a rate of 30%, or such lower rates as may be prescribed by any applicable
treaty.
Investors are advised to consult their own tax advisors with respect to
the application of the above-described general federal income tax rules to their
own circumstances and with respect to other federal, state, local or foreign tax
consequences to them before making an investment in MMP Shares.
PROXY VOTING POLICIES
The Company and the Adviser have adopted proxy voting policies and
procedures ("Proxy Policy"), which they believe are reasonably designed to
ensure that proxies are voted in the best interests of the Company and its
stockholders. Subject to the oversight of the Board, the Board has delegated
responsibility for implementing the Proxy Policy to the Adviser. Because of the
unique nature of MLPs in which the Company primarily invests, the Adviser shall
evaluate each proxy on a case-by-case basis.
S-33
Because proxies of MLPs are expected to relate only to extraordinary measures,
the Company does not believe it is prudent to adopt pre-established voting
guidelines.
In the event requests for proxies are received with respect to the
voting of equity securities other than MLP equity units, on routine matters,
such as election of directors or approval of auditors, the proxies usually will
be voted with management unless the Adviser determines it has a conflict or the
Adviser determines there are other reasons not to vote with management. On
non-routine matters, such as amendments to governing instruments, proposals
relating to compensation and stock option and equity compensation plans,
corporate governance proposals and stockholder proposals, the Adviser will vote,
or abstain from voting if deemed appropriate, on a case by case basis in a
manner it believes to be in the best economic interest of the Company's
stockholders. In the event requests for proxies are received with respect to
debt securities, the Adviser will vote on a case by case basis in a manner it
believes to be in the best economic interest of the Company's stockholders.
The Chief Executive Officer is responsible for monitoring Company
actions and ensuring that (1) proxies are received and forwarded to the
appropriate decision makers; and (2) proxies are voted in a timely manner upon
receipt of voting instructions. The Company is not responsible for voting
proxies it does not receive, but will make reasonable efforts to obtain missing
proxies. The Chief Executive Officer shall implement procedures to identify and
monitor potential conflicts of interest that could affect the proxy voting
process, including (1) significant client relationships; (2) other potential
material business relationships; and (3) material personal and family
relationships. All decisions regarding proxy voting shall be determined by the
Investment Committee of the Adviser and shall be executed by the Chief Executive
Officer. Every effort shall be made to consult with the portfolio manager and/or
analyst covering the security. The Company may determine not to vote a
particular proxy, if the costs and burdens exceed the benefits of voting (e.g.,
when securities are subject to loan or to share blocking restrictions).
If a request for proxy presents a conflict of interest between the
Company's stockholders on one hand, and the Adviser, the principal underwriters,
or any affiliated persons of the Company, on the other hand, Company management
may (i) disclose the potential conflict to the Board of Directors and obtain
consent; or (ii) establish an ethical wall or other informational barrier
between the persons involved in the conflict and the persons making the voting
decisions.
Information regarding how the Company voted proxies for the period from
its commencement of operations through June 30, 2004, is available by calling
the Company at 1-888-728-8784. You may also access this information on the
Securities and Exchange Commission's website at http://www.sec.gov. The
Company's website at www.tortoiseenergy.com provides a link to all of its
reports on the Commission's website.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP serves as the independent registered public
accounting firm for the Company. Ernst & Young LLP provides audit services, tax
return preparation and assistance and consultation in connection with review of
the Company's filings with the Commission.
CUSTODIAN
U.S. Bank National Association, 425 Walnut Street, Cincinnati, OH 45202
serves as the custodian of the Company's cash and investment securities. The
Company pays the custodian a monthly
S-34
fee computed at an annual rate of 0.015% on the first $100 million of the
Company's Managed Assets and 0.01% on the balance of the Company's Managed
Assets, subject to a minimum annual fee of $4,800.
INTERNAL ACCOUNTANT
U.S. Bancorp Fund Services, LLC ("U.S. Bancorp") serves as the
Company's internal accountant. For its services, the Company pays U.S. Bancorp a
fee computed at $24,500 for the first $50 million of the Company's Managed
Assets, 0.0125% on the next $200 million of Managed Assets and 0.0075% on the
balance of the Company's Managed Assets. For period beginning February 27, 2004
through November 30, 2004, the Company paid U.S. Bancorp $40,061 for internal
accounting services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the MMP Shares offered hereby, has been filed by the Company with
the Commission. The Company's Prospectus and this Statement of Additional
Information do not contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. Please refer to the
Registration Statement for further information with respect to the Company and
the offering of the MMP Shares. Statements contained in the Company's Prospectus
and this Statement of Additional Information as to the contents of any contract
or other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to a Registration Statement, each such statement being qualified in all
respects by such reference. Copies of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Commission
upon the payment of certain fees prescribed by the Commission.
S-35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND STOCKHOLDERS
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
We have audited the accompanying statement of assets and liabilities of
Tortoise Energy Infrastructure Corporation (the Company), including the schedule
of investments, as of November 30, 2004, and the related statements of
operations, changes in net assets, and cash flows, and financial highlights for
the period from February 27, 2004 (commencement of operations) through November
30, 2004. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial highlights. Our
procedures included confirmation of investments owned as of November 30, 2004,
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of the Company at November 30, 2004, the results of its operations,
changes in its net assets, its cash flows, and its financial highlights for the
period from February 27, 2004 (commencement of operations) through November 30,
2004, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
January 7, 2005
S-36
FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS, AS OF NOVEMBER 30, 2004,
FOR THE PERIOD FROM FEBRUARY 27, 2004 THROUGH NOVEMBER 30, 2004
F-1
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 2004
---------------------------------
SHARES VALUE
---------------- ---------------
MASTER LIMITED PARTNERSHIPS - 149.09%+
Coal - 3.98%+
Natural Resource Partners L.P. 253,700 $ 13,395,360
--------------
Crude/Refined Products Pipelines - 90.82%+
Buckeye Partners, L.P. 407,300 16,727,811
Enbridge Energy Partners, L.P. 419,200 20,821,664
Holly Energy Partners, L.P. 427,070 14,217,160
Kaneb Pipe Line Partners, L.P. 412,000 24,699,400
Kinder Morgan Energy Partners, L.P. 59,200 2,690,048
Kinder Morgan Management, LLC # 883,599 36,095,019
K-Sea Transportation Partners L.P. 65,600 2,227,120
Magellan Midstream Partners, L.P. 841,637 49,000,106
Pacific Energy Partners, L.P. 656,500 18,441,085
Plains All American Pipeline, L.P. 767,335 28,337,682
Plains All American Pipeline, L.P. ^ 486,855 16,898,737
Sunoco Logistics Partners, L.P. 838,200 33,829,752
TEPPCO Partners, L.P. 613,300 24,072,025
Valero, L.P. 294,700 17,605,378
--------------
305,662,987
--------------
Natural Gas/Natural Gas Liquid Pipelines - 16.11%+
Enterprise Products Partners, L.P. 1,937,510 47,449,620
Northern Border Partners, L.P. 142,100 6,754,013
--------------
54,203,633
--------------
Natural Gas Gathering/Processing - 26.67%+
Copano Energy, LLC* 170,500 4,207,940
Energy Transfer Partners, L.P. 918,444 49,577,607
Markwest Energy Partners, L.P. 226,100 10,748,794
Markwest Energy Partners, L.P. ^ 579,710 25,217,385
--------------
89,751,726
--------------
Propane Distribution - 11.51%+
Inergy, L.P. 1,300,000 38,116,000
Inergy, L.P. ^ 24,861 637,934
--------------
38,753,934
--------------
Total Master Limited Partnerships (Cost $423,182,650) 501,767,640
--------------
PRINCIPAL AMOUNT
----------------
PROMISSORY NOTES - 2.26%+
K-Sea Transportation Partners L.P. - Unregistered, 8.000%, Due
03/31/2009 (Cost $7,593,556)^@ $7,698,458 7,593,556
--------------
SHARES
----------------
INVESTMENT COMPANIES - 0.95%+
First American Government Obligations Money Market Fund -
Class Y (Cost $3,209,326) 3,209,326 3,209,326
--------------
TOTAL INVESTMENTS - 152.30%+ (COST $433,985,532) 512,570,522
Interest Rate Swap Contracts - 0.06%+
$60,000,000 notional, Matures 7/10/2007 - Unrealized
Depreciation (82,599)
F-2
NOVEMBER 30, 2004
---------------------------------
SHARES VALUE
---------------- ---------------
$50,000,000 notional, Matures 7/17/2007 - Unrealized
Depreciation (125,931)
---------------
(208,530)
---------------
Liabilities in Excess of Other Assets - (41.84%)+ (140,809,449)
--------------
Preferred Shares at Redemption Value - (10.40%)+ (35,000,000)
---------------
TOTAL NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS - 100.00%+ $336,552,543
==============
------------------------------------
Footnotes and Abbreviations
+ Calculated as a percentage of net assets.
* Non-Income producing security.
^ Fair valued securities represent a total market value of $50,347,612
which represents 14.96% of net assets.
# Security distributions are paid in kind.
@ Security is a variable rate instrument. Interest rate is as of
November 30, 2004.
See Accompanying Notes to the Financial Statements
F-3
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF ASSETS & LIABILITIES
NOVEMBER 30, 2004
---------------------------------
ASSETS
Investments at value (cost $433,985,532) $512,570,522
Cash 4,278,840
Receivable for Adviser reimbursement 183,137
Interest receivable 24,031
Prepaid expenses and other assets 1,889,685
------------
Total assets 518,946,215
------------
LIABILITIES
Payable to Adviser 756,435
Dividend payable on preferred stock 42,486
Dividend payable on common stock 5,454,186
Accrued expenses and other liabilities 602,017
Unrealized depreciation on interest rate swap contracts 208,530
Deferred tax liability 30,330,018
Auction rate senior notes payable:
Series A, due July 15, 2044 60,000,000
Series B, due July 15, 2044 50,000,000
------------
Total liabilities 147,393,672
------------
PREFERRED STOCK
$25,000 liquidation value per share applicable to 1,400 outstanding shares
(7,500 shares authorized) 35,000,000
------------
Net assets applicable to common stockholders $336,552,543
============
NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS CONSIST OF
Capital stock, $0.001 par value; 12,684,154 shares issued and outstanding
(100,000,000 shares authorized) $ 12,684
Additional paid-in capital 288,948,032
Accumulated net investment loss, net of deferred tax benefit (243,288)
Accumulated realized loss, net of deferred tax benefit (34,027)
Net unrealized gain on investments and interest rate swap contracts, net
of deferred tax expense 47,869,142
------------
Net assets applicable to common shareholders $336,552,543
============
Net Asset Value per common share outstanding (net assets applicable to
common shares, divided by common shares outstanding) $ 26.53
============
See Accompanying Notes to the Financial Statements
F-4
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF OPERATIONS
PERIOD FROM
FEBRUARY 27, 2004(1)
THROUGH
NOVEMBER 30, 2004
--------------------
INVESTMENT INCOME:
Distributions from master limited partnerships $ 2,542,488
Dividends from money market mutual funds 187,689
Interest 845,641
------------
TOTAL INVESTMENT INCOME 3,575,818
------------
EXPENSES:
Advisory fees 2,647,010
Organizational expenses 249,003
Professional fees 317,864
Administrator fees 188,608
Directors' fees 68,480
Reports to Stockholders 60,175
Fund accounting fees 40,061
Custodian fees and expenses 40,060
Registration fees 28,623
Stock transfer agent fees 10,002
Other expenses 52,797
------------
Total expenses before interest expense and auction agent fees 3,702,682
------------
Interest expense on auction rate senior notes 768,645
Auction agent fees 144,178
------------
912,823
TOTAL EXPENSES 4,615,506
------------
Less, expense reimbursement by Adviser (640,855)
------------
NET EXPENSES 3,974,651
------------
NET INVESTMENT LOSS, BEFORE DEFERRED TAX BENEFIT (398,833)
Deferred tax benefit 155,545
------------
NET INVESTMENT LOSS (243,288)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 312,748
Net realized loss on interest rate swap settlements (368,530)
------------
Net realized loss, before deferred tax benefit (55,782)
Deferred tax benefit 21,755
------------
Net realized loss on investments and interest rate swap
settlements (34,027)
------------
Net change in unrealized appreciation of investments 78,584,990
Net change in unrealized depreciation of interest rate swap contracts (208,530)
------------
Net change in unrealized gain, before deferred tax expense 78,376,460
Deferred tax expense (30,507,318)
------------
Net change in unrealized appreciation of investments and interest rate
swap contracts 47,869,142
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 47,835,115
------------
DIVIDENDS TO PREFERRED STOCKHOLDERS (152,568)
------------
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM
OPERATIONS $ 47,439,259
============
See Accompanying Notes to the Financial Statements
F-5
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM
FEBRUARY 27, 2004(1)
THROUGH
NOVEMBER 30, 2004
--------------------
OPERATIONS:
Net investment loss $ (243,288)
Net realized loss on investments and interest rate swap settlements (34,027)
Net change in unrealized appreciation of investments and interest rate swap contracts 47,869,142
Dividends to preferred stockholders (152,568)
------------
Net increase in net assets applicable to common stockholders resulting from
operations 47,439,259
------------
DIVIDENDS AND DISTRIBUTIONS TO COMMON STOCKHOLDERS:
Net investment income --
Return of capital (12,278,078)
------------
Total dividends to common stockholders (12,278,078)
------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from initial public offering of 11,000,000 common shares 275,000,000
Proceeds from issuance of 1,600,000 common shares in connection with
exercising an overallotment option granted to underwriters of the initial
public offering 40,000,000
Underwriting discounts and offering expenses associated with the issuance of common
stock (14,705,165)
Underwriting discounts and offering expenses associated with the issuance of preferred
stock (725,000)
Issuance of 61,107 common shares from reinvestment of dividend distributions to
stockholders 1,453,105
------------
Net increase in net assets, applicable to common stockholders, from capital share
transactions 301,022,940
------------
Total increase in net assets applicable to common stockholders 336,184,121
NET ASSETS:
Beginning of period 368,422
------------
End of period $336,552,543
============
Accumulated net investment loss, net of deferred tax benefit, at November 30, 2004 $ (243,288)
============
------------------------------------
(1) Commencement of Operations.
See Accompanying Notes to the Financial Statements
F-6
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
STATEMENT OF CASH FLOWS
PERIOD FROM
FEBRUARY 27, 2004(1)
THROUGH
NOVEMBER 30, 2004
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Distributions received from master limited partnerships $ 14,304,509
Interest income received 810,088
Interest income received from money market funds 187,689
Purchases of long term investments (445,922,215)
Proceeds from sale of investments 3,708,544
Net purchases of short term investments (3,209,614)
Payments for interest rate swap settlements (368,530)
Interest expense paid (606,655)
Operating expenses paid (2,829,735)
-------------
Net cash used in operating activities (433,925,919)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 315,000,000
Issuance of auction rate senior notes payable 110,000,000
Issuance of preferred stock 35,000,000
Common stock issuance costs (14,705,165)
Debt issuance costs (1,435,500)
Preferred stock issuance costs (542,129)
Dividends paid to preferred stockholders (110,082)
Dividends paid to common stockholders (5,370,787)
-------------
Net cash provided by financing activities 437,836,337
-------------
Net decrease in cash 3,910,418
Cash--beginning of period 368,422
-------------
Cash--end of period $ 4,278,840
=============
RECONCILIATION OF NET INCREASE IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS
RESULTING FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES:
Net increase in net assets, applicable to common stockholders, resulting from
operations $ 47,439,259
Adjustments to reconcile net increase in net assets, applicable to common
stockholders, resulting from operations to net cash used in operating
activities:
Purchases of long-term investments, net of return of capital adjustments (434,160,194)
Proceeds from sales of investments 3,708,544
Net purchases of short term investments (3,209,614)
Deferred income taxes 30,330,018
Net change in unrealized appreciation on investments and interest rate swap
contracts (78,376,460)
Realized gains on investments (312,748)
Accretion of discount on investments (11,522)
Amortization of debt issuance costs 13,659
Dividends to preferred stockholders 152,568
Changes in operating assets and liabilities:
Increase in interest receivable (24,031)
Increase in prepaid expenses and other assets (467,842)
Increase in payable to Adviser 573,298
Increase in accrued expenses and other liabilities 419,146
-------------
Total adjustments (481,365,178)
-------------
F-7
PERIOD FROM
FEBRUARY 27, 2004(1)
THROUGH
NOVEMBER 30, 2004
--------------------
Net cash used in operating activities $(433,925,919)
=============
NON-CASH FINANCING ACTIVITIES:
Reinvestment of distributions to common stockholders $ 1,453,105
=============
------------------------------------
(1) Commencement of Operations.
See Accompanying Notes to the Financial Statements
F-8
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
FINANCIAL HIGHLIGHTS
PERIOD FROM
FEBRUARY 27, 2004(1)
THROUGH
NOVEMBER 30, 2004
--------------------
PER COMMON SHARE DATA(2)
Net asset value, beginning of period
Public offering price $ 25.00
Underwriting discounts and offering costs on initial public offering (1.17)
Underwriting discounts and offering costs on issuance of preferred stock (0.06)
Income from investment operations:
Net investment loss (0.03)
Net realized and unrealized gain on investments 3.77
-------------
Total increase from investment operations 3.74
-------------
Less dividends to preferred stockholders:
Net investment income --
Return of capital (0.01)
-------------
Total dividends to preferred stockholders (0.01)
-------------
Less dividends to common stockholders:
Net investment income --
Return of capital (0.97)
-------------
Total dividends to common stockholders (0.97)
------------
Net asset value, end of period $ 26.53
=============
Per common share market value, end of period $ 27.06
Total investment return based on market value(3) 12.51%
SUPPLEMENTAL DATA AND RATIOS
Net assets applicable to common stockholders, end of period (000's) $ 336,553
Ratio of expenses to average net assets before waiver: (4)(5) 2.01%
Ratio of expenses to average net assets after waiver: (4)(5) 1.73%
Ratio of expenses, without regard to non-recurring organizational expenses, to
average net assets before waiver: (4)(5) 1.90%
Ratio of expenses, without regard to non-recurring organizational expenses, to
average net assets after waiver: (4)(5) 1.62%
Ratio of net investment loss to average net assets before waiver: (4)(5) (0.45)%
Ratio of net investment loss to average net assets after waiver: (4)(5) (0.17)%
Portfolio turnover rate 1.39%
Tortoise Auction Rate Senior Notes, end of period (000's) $ 110,000
Per common share amount of borrowings outstanding at end of period $ 8.67
Per common share amount of net assets, excluding borrowings, at end of period $ 35.21
Asset coverage, per $1,000 of principal amount of auction rate senior notes
Series A $ 4,378
Series B $ 4,378
Asset coverage ratio of auction rate senior notes(6) 438%
------------------------------------
(1) Commencement of operations.
(2) Information presented relates to a share of common stock outstanding
for the entire period.
(3) Not annualized. Total investment return is calculated assuming a
purchase of common stock at the market price on the first day and a
sale at the current market price on the last day of the period
reported. The calculation also assumes reinvestment of dividends at
actual prices pursuant to the Company's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions.
(4) Annualized.
(5) The expense ratios and net investment income ratios do not reflect the
effect of dividend payments to preferred stockholders.
(6) Represents value of total assets less all liabilities and indebtedness
not represented by Tortoise auction rate senior notes and MMP Shares at
the end of the period divided by Tortoise auction rate senior notes
outstanding at the end of the period.
See Accompanying Notes to the Financial Statements
F-9
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2004
1. Organization
Tortoise Energy Infrastructure Corporation (the "Company") was
organized as a Maryland corporation on October 29, 2003, and is a
non-diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Company's investment
objective is to seek a high level of total return with an emphasis on current
dividends paid to stockholders. The Company seeks to provide its stockholders
with an efficient vehicle to invest in the energy infrastructure sector. The
Company commenced operations on February 27, 2004. The Company's shares are
listed on the New York Stock Exchange under the symbol "TYG".
2. Significant Accounting Policies
A. Use of Estimates - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Actual results could differ from those
estimates.
B. Investment Valuation - The Company primarily owns securities
that are listed on a securities exchange. The Company values those securities at
their last sale price on that exchange on the valuation date. If the security is
listed on more than one exchange, the Company will use the price of the exchange
that it generally considers to be the principal exchange on which the security
is traded. Securities listed on the NASDAQ Stock Market, Inc. ("NASDAQ") will be
valued at the NASDAQ Official Closing Price, which may not necessarily represent
the last sale price. If there has been no sale on such exchange or NASDAQ on
such day, the security will be valued at the mean between bid and ask price on
such day.
The Company may invest up to 30% of its total assets in restricted
securities. Restricted securities may be subject to statutory and contractual
restrictions on their public resale, which may make it more difficult to obtain
a valuation and may limit the Company's ability to dispose of them. Investments
in private placement securities and other securities for which market quotations
are not readily available will be valued in good faith by using fair value
procedures approved by the Board of Directors. Such fair value procedures
consider factors such as discounts to publicly traded issuance, securities with
similar yields, quality, type of issue, coupon, duration and rating.
The Company generally values short-term debt securities at prices based
on market quotations for such securities, except those securities purchased with
60 days or less to maturity are valued on the basis of amortized cost, which
approximates market value. If events occur that will affect the value of the
Company's portfolio securities before the net asset value has been calculated (a
"significant event"), the portfolio securities so affected will generally be
priced using a fair value procedure.
The Company generally values its interest rate swap contracts by
discounting the future cash flows from the stated terms of the interest rate
swap agreement by using interest rates currently available in the market, or
based on dealer quotations, if available.
C. Security Transactions and Investment Income - Security
transactions are accounted for on the date the securities are purchased or sold
(trade date). Realized gains and losses are reported on an
F-10
identified cost basis. Distributions are recorded on the ex-dividend date.
Distributions received from the Company's investments in master limited
partnerships ("MLPs") generally are comprised of income and return of capital
from the MLP. The Company records investment income and return of capital based
on estimates made at the time such distributions are received. Such estimates
are based on historical information available from each MLP and other industry
sources. These estimates may subsequently be revised based on information
received from MLPs after their tax reporting periods are concluded. Interest
income is recognized on the accrual basis, including amortization of premiums
and accretion of discounts.
D. Dividends to Stockholders - Dividends to common stockholders
are recorded on the ex-dividend date. The character of dividends to common
stockholders made during the year may differ from their ultimate
characterization for federal income tax purposes. The Company's dividend, for
book purposes, is comprised entirely of return of capital as a result of the
current period net loss incurred by the Company. For tax purposes, the Company
estimates the current dividend to common stockholders is also comprised of 100%
return of capital for the current fiscal year. The Company is unable to make
final determinations as to the tax character of the dividend to common
stockholders until after the end of the calendar year. The Company will inform
stockholders of the final character of the dividend during January 2005.
Dividends to preferred stockholders are based on a variable rates set
at auctions, normally held every 28 days. Dividends on preferred shares are
accrued for the subsequent 28 day period on the auction date. Dividends on
preferred shares are payable every 28 days, on the first day following the end
of the dividend period.
E. Federal Income Taxation - The Company, as a corporation, is
obligated to pay federal and state income tax on its taxable income. The Company
invests its assets primarily in MLPs, which generally are treated as
partnerships for federal income tax purposes. As a limited partner in the MLPs,
the Company reports its allocable share of the MLP's taxable income in computing
its own taxable income. The Company's tax expense or benefit will be included in
the Statement of Operations based on the component of income or gains (losses)
to which such expense or benefit relates. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. To the extent the Company has a net deferred tax asset, a valuation
allowance is recognized if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred income tax asset
will not be realized. Future realization of deferred income tax assets
ultimately depends on the existence of sufficient taxable income of the
appropriate character in either the carryback or carryforward period under the
tax law.
F. Organization Expenses, Offering and Debt Issuance Costs - The
Company is responsible for paying all organization expenses, which are expensed
as incurred. Offering costs related to the issuance of common and preferred
stock are charged to additional paid-in capital when the shares are issued. Debt
issuance costs related to the auction rate senior notes payable are capitalized
and amortized over the period the notes are outstanding.
G. Derivative Financial Instruments - The Company uses derivative
financial instruments (principally interest rate swap contracts) to manage
interest rate risk. The Company has established policies and procedures for risk
assessment and the approval, reporting and monitoring of derivative financial
instrument activities. The Company does not hold or issue derivative financial
instruments for speculative purposes. All derivative financial instruments are
recorded at fair value with changes in value during the reporting period, and
amounts accrued under the agreements, included as unrealized gains or losses in
the Statement of Operations. Monthly cash settlements under the terms of the
interest rate swap agreements are recorded as realized gains or losses in the
Statement of Operations.
F-11
H. Indemnifications - Under the Company's organizational
documents, its Officers and Directors are indemnified against certain
liabilities arising out of the performance of their duties to the Company. In
addition, in the normal course of business, the Company enters into contracts
that provide general indemnification to other parties. The Company's maximum
exposure under these arrangements is unknown, as this would involve future
claims that may be made against the Company that have not yet occurred, and may
not occur. However, the Company has not had prior claims or losses pursuant to
these contracts and expects the risk of loss to be remote.
3. Concentration of Risk
The Company's investment objective is to seek a high level of total
return with an emphasis on current dividends paid to its stockholders. Under
normal circumstances, the Company intends to invest at least 90% of its total
assets in securities of domestic energy infrastructure companies, and will
invest at least 70% of its total assets in equity securities of MLPs. The
Company may invest up to 25% of its assets in debt securities, which may include
below investment grade securities. Companies that primarily invest in a
particular sector may experience greater volatility than companies investing in
a broad range of industry sectors. The Company may, for defensive purposes,
temporarily invest all or a significant portion of its assets in investment
grade securities, short-term debt securities and cash or cash equivalents. To
the extent the Company uses this strategy, it may not achieve its investment
objectives.
4. Agreements
The Company has entered into an Investment Advisory Agreement with
Tortoise Capital Advisors, LLC (the "Adviser"). Under the terms of the
agreement, the Company will pay the Adviser a fee equal to an annual rate of
0.95% of the Company's average monthly total assets (including any assets
attributable to leverage) minus the sum of accrued liabilities (other than
deferred income taxes, debt entered into for purposes of leverage and the
aggregate liquidation preference of outstanding preferred shares) ("Managed
Assets"), in exchange for the investment advisory services provided. For the
period following the commencement of the Company's operations through February
28, 2006, the Adviser has agreed to waive or reimburse the Company for fees and
expenses in an amount equal to 0.23% of the average monthly Managed Assets of
the Company. For years ending February 28, 2007, 2008 and 2009, the Adviser has
agreed to waive or reimburse the Company for fees and expenses in an amount
equal to 0.10% of the average monthly Managed Assets of the Company.
The Company has engaged U.S. Bancorp Fund Services, LLC to serve as the
Company's administrator. The Company will pay the administrator a monthly fee
computed at an annual rate of 0.07% of the first $300 million of the Company's
Managed Assets, 0.06% on the next $500 million of Managed Assets and 0.04% on
the balance of the Company's Managed Assets, subject to a minimum annual fee of
$45,000.
U.S. Bank N.A. serves as the Company's custodian. The Company pays the
custodian a monthly fee computed at an annual rate of 0.015% on the first $100
million of the Company's Managed Assets and 0.01% on the balance of the
Company's Managed Assets, subject to a minimum annual fee of $4,800.
5. Income Taxes
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting and tax purposes. Components of the Company's deferred tax assets and
liabilities as of November 30, 2004, are as follows:
F-12
Deferred tax assets:
Organization costs................................... $ 82,478
Net operating loss carryforwards..................... 1,086,392
-------------
1,168,870
-------------
Deferred tax liabilities:
Unrealized gains on investment securities and
interest rate swap contracts...................... 30,507,318
Basis of investment in MLPs.......................... 991,570
-------------
31,498,888
-------------
Total net deferred tax liability..................... $30,330,018
=============
For the period from February 27, 2004 to November 30, 2004, the
components of income tax expense include $27,358,823 and $3,037,849 for deferred
federal and state income taxes, respectively, as well as a reduction of the
Company's valuation allowance as of February 27, 2004 in the amount of $66,654.
At November 30, 2004, the Company had a net operating loss for federal income
tax purposes of approximately $2,786,000. This net operating loss may be carried
forward for 20 years, and accordingly would expire after the year ended November
30, 2024.
Total income taxes differ from the amount computed by applying the
federal statutory income tax rate of 35% to net investment income and realized
and unrealized gains on investments and interest rate swap contracts before
taxes as follows:
Application of statutory income tax rate............. $ 27,272,646
State income taxes................................... 3,037,849
Change in deferred tax valuation allowance........... (66,654)
Other, net........................................... 86,177
-------------
Total................................................ $ 30,330,018
=============
At November 30, 2004, the Company did not record a valuation allowance
against its deferred tax assets.
At November 30, 2004, the cost basis of investments for federal income
tax purposes was $431,443,044. At November 30, 2004, gross unrealized
appreciation and depreciation of investments for federal income tax purposes
were as follows:
Gross unrealized appreciation.........$ 81,127,478
Gross unrealized depreciation......... --
-------------
Net unrealized appreciation...........$ 81,127,478
=============
6. Investment Transactions
For the period ended November 30, 2004, the Company purchased (at cost)
and sold securities (at proceeds) in the amount of $445,922,215 and $3,708,544
(excluding short-term debt securities and interest rate swaps), respectively.
7. Auction Rate Senior Notes
The Company has issued $60,000,000 and $50,000,000 aggregate principal
amount of auction rate senior notes Series A and Series B, respectively
(collectively, the "Notes"). The Notes were issued in denominations of $25,000.
The principal amount of the Notes will be due and payable on July 15, 2044. Fair
value of the notes approximates carrying amount because the interest rate
fluctuates with changes in interest rates available in the current market.
F-13
Holders of the Notes are entitled to receive cash interest payments at
an annual rate that may vary for each rate period. Interest rates for Series A
and Series B as of November 30, 2004 were 2.25% and 2.35%, respectively. The
weighted average interest rates for Series A and Series B for the period from
July 15, 2004 (issuance date) through November 30, 2004, were 2.03% and 2.05%,
respectively. These rates include the applicable rate based on the latest
results of the auction, plus commissions paid to the auction agent in the amount
of 0.25%. For each subsequent rate period, the interest rate will be determined
by an auction conducted in accordance with the procedures described in the
Notes' prospectus. Generally, each rate period will be 28 days. The Notes will
not be listed on any exchange or automated quotation system.
The Notes are redeemable in certain circumstances at the option of the
Company. The Notes are also subject to a mandatory redemption if the Company
fails to meet an asset coverage ratio required by law, or fails to cure
deficiency as stated in the Company's rating agency guidelines in a timely
manner.
The Notes are unsecured obligations of the Company and, upon
liquidation, dissolution or winding up of the Company, will rank: (1) senior to
all the Company's outstanding preferred shares; (2) senior to all of the
Company's outstanding common shares; (3) on a parity with any unsecured
creditors of the Company and any unsecured senior securities representing
indebtedness of the Company; and (4) junior to any secured creditors of the
Company.
8. Preferred Stock
The Company has 7,500 authorized preferred shares, of which 1,400
shares (MMP Shares) are currently outstanding. The MMP Shares have rights
determined by the Board of Directors. The MMP Shares have a liquidation value of
$25,000 per share plus any accumulated, but unpaid dividends, whether or not
declared.
Holders of the MMP Shares are entitled to receive cash dividend
payments at an annual rate that may vary for each rate period. The dividend rate
as of November 30, 2004 was 2.55%. The weighted average dividend rate for the
period from September 16, 2004 (issuance date) through November 30, 2004, was
2.31%. This rate includes the applicable rate based on the latest results of the
auction, plus commissions paid to the auction agent in the amount of 0.25%.
Under the Investment Company Act of 1940, the Company may not declare dividends
or make other distribution on shares of common stock or purchases of such shares
if, at the time of the declaration, distribution or purchase, asset coverage
with respect to the outstanding Preferred Shares would be less than 200%.
The MMP Shares are redeemable in certain circumstances at the option of
the Company. The MMP Shares are also subject to a mandatory redemption if the
Company fails to meet an asset coverage ratio required by law, or fails to cure
deficiency as stated in the Company's rating agency guidelines in a timely
manner.
The holders of MMP Shares have voting rights equal to the holders of
common stock (one vote per share) and will vote together with the holders of
shares of common stock as a single class except on matters affecting only the
holders of preferred shares or the holders of common shares.
9. Interest Rate Swap Contracts
The Company has entered into interest rate swap contracts to protect
itself from increasing interest expense on its leverage resulting from
increasing short-term interest rates. A decline in interest rates may result in
a decline in the value of the swap contracts, which may result in a decline in
the net assets of the Company. In addition, if the counterparty to the interest
rate swap contracts defaults, the Company would not be able to use the
anticipated receipts under the swap contracts to offset the interest
F-14
payments on the Company's leverage. At the time the interest rate swap contracts
reach their scheduled termination, there is a risk that the Company would not be
able to obtain a replacement transaction or that the terms of the replacement
would not be as favorable as on the expiring transaction. In addition, if the
Company is required to terminate any swap contract early due to the Company
failing to maintain a required 300% asset coverage of the liquidation value of
the outstanding auction rate senior notes or if the Company loses its credit
rating on its auction rate senior notes, then the Company could be required to
make a termination payment, in addition to redeeming all or some of the auction
rate senior notes. Details of the interest rate swap contracts outstanding as of
November 30, 2004, were as follows:
FIXED RATE FLOATING RATE UNREALIZED
TERMINATION NOTIONAL PAID BY RECEIVED BY APPRECIATION/
COUNTERPARTY DATE AMOUNT THE COMPANY THE COMPANY (DEPRECIATION)
------------ ----------- -------- ----------- ------------- --------------
U.S. Bank, N.A. 07/10/2007 $60,000,000 3.54% 1 month U.S. Dollar LIBOR $ (82,599)
U.S. Bank, N.A. 07/17/2007 50,000,000 3.56% 1 month U.S. Dollar LIBOR (125,931)
----------
$(208,530)
==========
10. Common Stock
The Company has 100,000,000 shares of beneficial interest authorized
and 12,684,154 shares outstanding at November 30, 2004. Transactions in common
shares for the period February 27, 2004 through November 30, 2004, were as
follows:
Beginning shares........................................ 23,047
Shares sold through initial public offering and
exercise of over allotment options................... 12,600,000
Shares issued through reinvestment of dividends......... 61,107
-------------
Ending shares........................................... 12,684,154
=============
11. Subsequent Events
On December 1, 2004 the Company paid a dividend in the amount of $0.43
per share, for a total of $5,454,186. Of this total, the dividend reinvestment
amounted to $1,105,225.
Effective November 10, 2004, the Company's Board of Directors approved
an additional common stock offering. The Company received net proceeds of
$46,244,961 and issued 1,755,027 shares on December 22, 2004, in connection with
this offering.
F-15
UNAUDITED FINANCIAL STATEMENTS,
AS OF ______________, 2005 FOR THE PERIOD FROM
DECEMBER 1, 2004 THROUGH ______________, 2005
F-16
[TO COME]
F-17
APPENDIX A-
ARTICLES SUPPLEMENTARY
SERIES II MONEY MARKET CUMULATIVE PREFERRED SHARES
Tortoise Energy Infrastructure Corporation (the "Company"), a Maryland
corporation, certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: Under a power contained in Article V, of the charter of the
Company (the "Charter"), the Board of Directors by duly adopted resolutions
classified and designated ______ shares of authorized but unissued Preferred
Stock (as defined in the Charter) as shares of Series II Money Market Cumulative
Preferred Shares, liquidation preference $25,000 per share, with the following
preferences, rights, voting powers, restrictions, limitations as to dividends
and other distributions, qualifications and terms and conditions of redemption,
which, upon any restatement of the Charter, shall become part of Article V of
the Charter, with any necessary or appropriate renumbering or relettering of the
sections or subsections hereof.
MONEY MARKET CUMULATIVE PREFERRED SHARES
DESIGNATION
MMP Shares: _____ shares of Preferred Stock are classified and
designated as Series II Money Market Cumulative Preferred Shares, liquidation
preference $25,000 per share ("MMP Shares"). The initial Dividend Period for the
MMP Shares shall be the period from and including the Original Issue Date
thereof to but excluding _________, 2005. Each MMP Share shall have an
Applicable Rate for its initial Dividend Period equal to ____% per annum and an
initial Dividend Payment Date of ________, 2005. Each MMP Share shall have such
other preferences, rights, voting powers, restrictions, limitations as to
dividends and other distributions, qualifications and terms and conditions of
redemption, in addition to those required by applicable law or set forth in the
Charter applicable to shares of Preferred Stock ("Preferred Shares"), as are set
forth in Part I and Part II of these terms of the MMP Shares. The MMP Shares
shall constitute a separate series of Preferred Shares.
Subject to the provisions of Section 11 of Part I hereof, the Board of
Directors of the Company may, in the future, authorize the issuance of
additional MMP Shares with the same preferences, rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption and other terms herein
described, except that the initial Dividend Period, the Applicable Rate for the
initial Dividend Period and the initial Dividend Payment Date shall be as set
forth in an Articles Supplementary relating to such additional MMP Shares.
As used in Part I and Part II of these terms of the MMP Shares,
capitalized terms shall have the meanings provided in Section 17 of Part I.
PART I: MMP SHARES TERMS
1. Number of Shares; Ranking. (a) The initial number of authorized MMP
Shares is _____ shares. No fractional MMP Shares shall be issued.
(b) Any MMP Shares which at any time have been redeemed or purchased by
the Company shall, after redemption or purchase, be returned to the status of
authorized but unissued Preferred Shares, without further designation as to
series.
A-1
(c) The MMP Shares shall rank on a parity with shares of any other
series of Preferred Shares (including any other MMP Shares) as to the payment of
dividends to which the shares are entitled and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Company.
(d) No Holder of MMP Shares shall have, solely by reason of being a
Holder, any preemptive right, or, unless otherwise determined by the Directors,
other right to acquire, purchase or subscribe for any MMP Shares, shares of
common stock of the Company ("Common Shares") or other securities of the Company
which it may hereafter issue or sell.
(e) No Holder of MMP Shares shall be entitled to exercise the rights of
an objecting stockholder under Title 3, Subtitle 2 of the Maryland General
Corporation Law (the "MGCL") or any successor provision.
2. Dividends. (a) The Holders of MMP Shares shall be entitled to
receive cash dividends, when, as and if authorized by the Board of Directors and
declared by the Company, out of funds legally available therefor, at the rate
per annum equal to the Applicable Rate, determined as set forth in paragraph (c)
of this Section 2, and no more, payable on the respective dates determined as
set forth in paragraph (b) of this Section 2. Dividends on Outstanding MMP
Shares issued on the Original Issue Date shall accumulate from the Original
Issue Date.
(b) (i) Dividends shall be payable when, as and if authorized by the
Board of Directors and declared by the Company following the initial Dividend
Payment Date, subject to subparagraph (b)(ii) of this Section 2, on MMP Shares,
with respect to any Dividend Period on the first Business Day following the last
day of the Dividend Period; provided, however, if the Dividend Period is greater
than 30 days, then on a monthly basis on the first Business Day of each month
within the Dividend Period and on the Business Day following the last day of the
Dividend Period.
(ii) If a day for payment of dividends resulting from the
application of subparagraph (b)(i) above is not a Business Day, then
the Dividend Payment Date shall be the first Business Day that falls
after such day for payment of dividends.
(iii) The Company shall pay to the Paying Agent not later than
3:00 p.m., New York City time, on the Business Day next preceding each
Dividend Payment Date for the MMP Shares, an aggregate amount of funds
available on the next Business Day in the City of New York, New York,
equal to the dividends to be paid to all Holders of such shares on such
Dividend Payment Date. The Company shall not be required to establish
any reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of
dividends shall be held in trust for the payment of such dividends by
the Paying Agent for the benefit of the Holders specified in
subparagraph (b)(v) of this Section 2. Any moneys paid to the Paying
Agent in accordance with the foregoing but not applied by the Paying
Agent to the payment of dividends, will, to the extent permitted by
law, be repaid to the Company at the end of 90 days from the date on
which such moneys were to have been so applied.
(v) Each dividend on MMP Shares shall be paid on the Dividend
Payment Date therefor to the Holders as their names appear on the share
ledger or share records of the Company on the Business Day next
preceding such Dividend Payment Date. Dividends in arrears for any past
Dividend Period may be declared and paid at any time, without reference
to any regular Dividend Payment Date, to the Holders as their names
appear on the share ledger or share records of the Company on such
date, not exceeding 15 days preceding the payment date thereof, as may
be fixed by the Board of
A-2
Directors. No interest will be payable in respect of any dividend
payment or payments which may be in arrears.
(c) (i) The dividend rate on Outstanding MMP Shares during the period
from and after the Original Issue Date to and including the last day of the
initial Dividend Period therefor shall be equal to the rate per annum set forth
under "Designation" above. For each subsequent Dividend Period with respect to
the MMP Shares Outstanding thereafter, the dividend rate shall be equal to the
rate per annum that results from an Auction; provided, however, that if
Sufficient Clearing Bids have not been made in an Auction (other than as a
result of all MMP Shares being the subject of Submitted Hold Orders), then the
dividend rate on the MMP Shares for any such Dividend Period shall be the
Maximum Rate (except during a Default Period when the dividend rate shall be the
Default Rate (as set forth in Section 2(c) (ii) below)). If an Auction for any
subsequent Dividend Period is not held for any reason, including because there
is no Auction Agent or Broker-Dealer, then the dividend rate on the MMP Shares
for such Dividend Period shall be the Maximum Rate (except during a Default
Period when the dividend rate shall be the Default Rate (as set forth in Section
2(c)(ii) below)).
The All Hold Rate will apply automatically following an Auction in
which all of the Outstanding MMP Shares are subject (or are deemed to be
subject) to Hold Orders. The rate per annum at which dividends are payable on
MMP Shares as determined pursuant to this Section 2(c)(i) shall be the
"Applicable Rate."
(ii) Subject to the cure provisions below, a "Default Period"
will commence on any date the Company fails to deposit irrevocably in
trust in same-day funds, with the Paying Agent by 12:00 noon, New York
City time, (A) the full amount of any declared dividend payable on the
Dividend Payment Date (a "Dividend Default") or (B) the full amount of
any redemption price (the "Redemption Price") payable on the date fixed
for redemption (the "Redemption Date") (a "Redemption Default", and
together with a Dividend Default, hereinafter referred to as
"Default"). Subject to the cure provisions of Section 2(c)(iii) below,
a Default Period with respect to a Dividend Default or a Redemption
Default shall end on the Business Day on which, by 12:00 noon, New York
City time, all unpaid dividends and any unpaid Redemption Price shall
have been deposited irrevocably in trust in same-day funds with the
Paying Agent. In the case of a Dividend Default, the Applicable Rate
for each Dividend Period commencing during a Default Period will be
equal to the Default Rate, and each subsequent Dividend Period
commencing after the beginning of a Default Period shall be a Standard
Dividend Period; provided, however, that the commencement of a Default
Period will not by itself cause the commencement of a new Dividend
Period. No Auction shall be held during a Default Period.
(iii) No Default Period with respect to a Dividend Default or
Redemption Default shall be deemed to commence if the amount of any
dividend or any Redemption Price due (if such default is not solely due
to the willful failure of the Company) is deposited irrevocably in
trust, in same-day funds with the Paying Agent by 12:00 noon, New York
City time within three Business Days after the applicable Dividend
Payment Date or Redemption Date, together with an amount equal to the
Default Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 360. The
Default Rate shall be equal to the Reference Rate multiplied by three
(3).
(iv) The amount of dividends per share payable (if declared)
on each Dividend Payment Date of each Dividend Period (or in respect of
dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate
(or the Default Rate) for such Dividend Period (or a portion thereof)
by a fraction, the numerator of which will be the number of days in
such Dividend Period (or portion thereof) that such share was
Outstanding and for which the Applicable Rate or the Default Rate was
applicable and the denominator of which will
A-3
be 360, multiplying the amount so obtained by the liquidation
preference per share, and rounding the amount so obtained to the
nearest cent.
(d) Any dividend payment made on MMP Shares shall first be credited
against the earliest accumulated but unpaid dividends due with respect to such
Shares.
(e) For so long as the MMP Shares are Outstanding, except as
contemplated by Part I of these terms of the MMP Shares, the Company will not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Shares or other shares of capital
stock, if any, ranking junior to the MMP Shares as to dividends or upon
liquidation) with respect to Common Shares or any other shares of the Company
ranking junior to or on a parity with the MMP Shares as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Company ranking junior to the MMP
Shares as to dividends and upon liquidation) or any such parity shares (except
by conversion into or exchange for shares of the Company ranking junior to or on
a parity with the MMP Shares as to dividends and upon liquidation), unless (1)
there is no event of default under any Borrowings (including the Tortoise Notes)
that is continuing; (2) immediately after such transaction, the Company would
have Eligible Assets with an aggregate Discounted Value at least equal to the
MMP Shares Basic Maintenance Amount and the 1940 Act MMP Shares Asset Coverage
would be achieved, (3) immediately after the transaction, the Company would have
eligible portfolio holdings with an aggregated discounted value at least equal
to the asset coverage requirements, if any, under any Borrowings, (4) full
cumulative dividends on the MMP Shares due on or prior to the date of the
transaction have been declared and paid and (5) the Company has redeemed the
full number of MMP Shares required to be redeemed by any provision for mandatory
redemption contained in Section 3(a)(ii).
3. Redemption. (a) (i) After the initial Dividend Period, subject to
the provisions of this Section 3 and to the extent permitted under the 1940 Act
and Maryland law, the Company may, at its option, redeem in whole or in part out
of funds legally available therefor MMP Shares herein designated as (A) having a
Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption to the Auction Agent
not less than 15 calendar days and not more than 40 calendar days prior to the
date fixed for such redemption, at a redemption price per share equal to
$25,000, plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date fixed for redemption
("Redemption Price"), or (B) having a Dividend Period of more than one year, on
any Business Day prior to the end of the relevant Dividend Period by delivering
a notice of redemption to the Auction Agent not less than 15 calendar days and
not more than 40 calendar days prior to the date fixed for such redemption, at
the Redemption Price, plus a redemption premium, if any, determined solely by
the Board of Directors and set forth in any applicable Specific Redemption
Provisions at the time of the designation of such Dividend Period as set forth
in Section 4 of these terms of the MMP Shares; provided, however, that during a
Dividend Period of more than one year no MMP Shares will be subject to optional
redemption except in accordance with any Specific Redemption Provisions approved
by the Board of Directors after consultation with the Broker-Dealers at the time
of the designation of such Dividend Period. Notwithstanding the foregoing, the
Company shall not give a notice of or effect any redemption pursuant to this
Section 3(a)(i) unless, on the date on which the Company intends to give such
notice and on the date of redemption (1) the Company has available certain
Deposit Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not less than the
amount (including any applicable premium) due to Holders of MMP Shares by reason
of the redemption of such MMP Shares on such date fixed for the redemption and
(2) the Company would have Eligible Assets with an aggregate Discounted Value at
least equal to the MMP Shares Basic Maintenance Amount immediately subsequent to
such redemption, if such redemption were to occur on such date, it being
understood that the provisions of paragraph (d) of
A-4
this Section 3 shall be applicable in such circumstances in the event the
Company makes the deposit and takes the other action required thereby.
(ii) If the Company fails to maintain, as of any Valuation
Date, Eligible Assets with an aggregate Discounted Value at least equal
to the MMP Shares Basic Maintenance Amount or, as of the last Business
Day of any month, the 1940 Act MMP Shares Asset Coverage, and such
failure is not cured within ten Business Days following such Valuation
Date in the case of a failure to maintain the MMP Shares Basic
Maintenance Amount or on the last Business Day of the following month
in the case of a failure to maintain the 1940 Act MMP Shares Asset
Coverage (each an "Asset Coverage Cure Date"), the MMP Shares will be
subject to mandatory redemption out of funds legally available
therefor. The number of MMP Shares to be redeemed in such circumstances
will be equal to the lesser of (1) the minimum number of MMP Shares the
redemption of which, if deemed to have occurred immediately prior to
the opening of business on the relevant Asset Coverage Cure Date, would
result in the Company having Eligible Assets with an aggregate
Discounted Value at least equal to the MMP Shares Basic Maintenance
Amount, or sufficient to satisfy the 1940 Act MMP Shares Asset
Coverage, as the case may be, in either case as of the relevant Asset
Coverage Cure Date (provided that, if there is no such minimum number
of shares the redemption of which would have such result, all MMP
Shares then Outstanding will be redeemed), and (2) the maximum number
of MMP Shares that can be redeemed out of funds expected to be
available therefor on the Mandatory Redemption Date at the Mandatory
Redemption Price set forth in subparagraph (a)(iii) of this Section 3.
(iii) In determining the MMP Shares required to be redeemed in
accordance with the foregoing Section 3(a)(ii), the Company shall
allocate the number of shares required to be redeemed to satisfy the
MMP Shares Basic Maintenance Amount or the 1940 Act MMP Shares Asset
Coverage, as the case may be, pro rata among the Holders of MMP Shares
in proportion to the number of shares they hold by lot or by such other
method as the Company shall deem fair and equitable, subject to any
mandatory redemption provisions, subject to the further provisions of
this subparagraph (iii). The Company shall effect any required
mandatory redemption pursuant to subparagraph (a)(ii) of this Section 3
no later than 40 calendar days after the Asset Coverage Cure Date (the
"Mandatory Redemption Date"), except that if the Company does not have
funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, the number of MMP Shares which would be
required to be redeemed by the Company under clause (A) of subparagraph
(a)(ii) of this Section 3 if sufficient funds were available, together
with shares of other Preferred Shares which are subject to mandatory
redemption under provisions similar to those contained in this Section
3, or the Company otherwise is unable to effect such redemption on or
prior to such Mandatory Redemption Date, the Company shall redeem those
MMP Shares, and shares of other Preferred Shares which it was unable to
redeem, on the earliest practicable date on which the Company will have
such funds available, upon notice pursuant to Section 3(b) to record
owners of the MMP Shares to be redeemed and the Paying Agent. The
Company will deposit with the Paying Agent funds sufficient to redeem
the specified number of MMP Shares with respect to a redemption
required under subparagraph (a)(ii) of this Section 3, by 12:00 p.m.,
New York City time, on the Mandatory Redemption Date. If fewer than all
of the Outstanding MMP Shares are to be redeemed pursuant to this
Section 3(a)(iii), the number of shares to be redeemed shall be
redeemed pro rata from the Holders of such shares in proportion to the
number of such shares held by such Holders, by lot or by such other
method as the Company shall deem fair and equitable, subject, however,
to the terms of any applicable Specific Redemption Provisions.
"Mandatory Redemption Price" means the Redemption Price plus (in the
case of a Dividend Period of one year or more only) a redemption
premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealers and set forth in any applicable
Specific Redemption Provisions.
(b) In the event of a redemption pursuant to Section 3(a), the Company
will file a notice of its intention to redeem with the Commission so as to
provide at least the minimum notice
A-5
required under Rule 23c-2 under the 1940 Act or any successor provision. In
addition, the Company shall deliver a notice of redemption to the Auction Agent
(the "Notice of Redemption") containing the information set forth below (1) in
the case of an optional redemption pursuant to subparagraph (a)(i) above, one
Business Day prior to the giving of notice to the Holders, and (2) in the case
of a mandatory redemption pursuant to subparagraph (a)(ii) above, on or prior to
the 30th day preceding the Mandatory Redemption Date. The Auction Agent will use
its reasonable efforts to provide notice to each Holder of MMP Shares called for
redemption by electronic or other reasonable means not later than the close of
business on the Business Day immediately following the day on which the Auction
Agent determines the shares to be redeemed (or, during a Default Period with
respect to such shares, not later than the close of business on the Business Day
immediately following the day on which the Auction Agent receives Notice of
Redemption from the Company). The Auction Agent shall confirm such notice in
writing not later than the close of business on the third Business Day preceding
the date fixed for redemption by providing the Notice of Redemption to each
Holder of shares called for redemption, the Paying Agent (if different from the
Auction Agent) and the Securities Depository. Notice of Redemption will be
addressed to the registered owners of MMP Shares at their addresses appearing on
the share records of the Company. Such Notice of Redemption will set forth (1)
the date fixed for redemption, (2) the number and identity of MMP Shares to be
redeemed, (3) the redemption price (specifying the amount of accumulated
dividends to be included therein and the amount of the redemption premium, if
any), (4) that dividends on the shares to be redeemed will cease to accumulate
on such date fixed for redemption, and (5) the provision under which redemption
shall be made. No defect in the Notice of Redemption or in the transmittal or
mailing thereof will affect the validity of the redemption proceedings, except
as required by applicable law. If fewer than all shares held by any Holder are
to be redeemed, the Notice of Redemption mailed to such Holder shall also
specify the number of shares to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section 3,
but subject to Section 7(f), no MMP Shares may be redeemed unless all dividends
in arrears on the Outstanding MMP Shares and all shares of capital stock of the
Company ranking on a parity with the MMP Shares with respect to payment of
dividends or upon liquidation, have been or are being contemporaneously paid or
set aside for payment; provided, however, that the foregoing shall not prevent
the purchase or acquisition of all Outstanding MMP Shares pursuant to the
successful completion of an otherwise lawful purchase or exchange offer made on
the same terms to, and accepted by, Holders of all Outstanding MMP Shares.
(d) Upon the deposit of funds on the date fixed for redemption
sufficient to redeem MMP Shares with the Paying Agent and the giving of the
Notice of Redemption to the Auction Agent under paragraph (b) of this Section 3,
dividends on such shares shall cease to accumulate and such shares shall no
longer be deemed to be Outstanding for any purpose (including, without
limitation, for purposes of calculating whether the Company has maintained the
requisite MMP Shares Basic Maintenance Amount or the 1940 Act MMP Shares Asset
Coverage), and all rights of the Holder of the shares so called for redemption
shall cease and terminate, except the right of such Holder to receive the
redemption price specified herein, but without any interest or other additional
amount. Such redemption price shall be paid by the Paying Agent to the nominee
of the Securities Depository. Upon written request, the Company shall be
entitled to receive from the Paying Agent, promptly after the date fixed for
redemption, any cash deposited with the Paying Agent in excess of (1) the
aggregate redemption price of the MMP Shares called for redemption on such date
and (2) such other amounts, if any, to which Holders of MMP Shares called for
redemption may be entitled. Any funds so deposited that are unclaimed at the end
of two years from such redemption date shall, to the extent permitted by law, be
paid to the Company upon its written request, after which time the Holders of
MMP Shares so called for redemption may look only to the Company for payment of
the redemption price and all other amounts, if any, to which they may be
entitled.
A-6
(e) To the extent that any redemption for which a Notice of Redemption
has been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem MMP Shares shall be deemed
to exist at any time after the date specified for redemption in a Notice of
Redemption when the Company shall have failed, for any reason whatsoever, to
deposit in trust with the Paying Agent the redemption price with respect to any
shares for which such Notice of Redemption has been given. Notwithstanding the
fact that the Company may not have redeemed MMP Shares for which a Notice of
Redemption has been given, dividends may be declared and paid on MMP Shares and
shall include those MMP Shares for which Notice of Redemption has been given but
for which deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption
price of MMP Shares called for redemption shall be held in trust by the Paying
Agent for the benefit of Holders of shares so to be redeemed.
(g) So long as any MMP Shares are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
date fixed for redemption to the nominee of the Securities Depository for
distribution to Agent Members for distribution to the persons for whom they are
acting as agent.
(h) Except for the provisions described above, nothing contained in
these terms of the MMP Shares limits any right of the Company to purchase or
otherwise acquire any MMP Shares outside of an Auction at any price, whether
higher or lower than the price that would be paid in connection with an optional
or mandatory redemption, so long as, at the time of any such purchase, there is
no arrearage in the payment of dividends on, or the mandatory or optional
redemption price with respect to, any MMP Shares for which Notice of Redemption
has been given and the Company is in compliance with the 1940 Act MMP Shares
Asset Coverage and has Eligible Assets with an aggregate Discounted Value at
least equal to the MMP Shares Basic Maintenance Amount after giving effect to
such purchase or acquisition on the date thereof. If fewer than all the
Outstanding MMP Shares are redeemed or otherwise acquired by the Company, the
Company shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Directors.
(i) In the case of any redemption pursuant to this Section 3, only
whole MMP Shares shall be redeemed, and in the event that any provision of the
Charter would require redemption of a fractional share, the Auction Agent shall
be authorized to round up so that only whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary, including, without
limitation, Sections 2(e), 6(f) and 11 of Part I hereof, the Board of Directors
may authorize, create or issue any class or series of shares of capital stock,
including other series of Preferred Shares, ranking prior to or on a parity with
the MMP Shares with respect to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the
Company, to the extent permitted by the 1940 Act, as amended, if, upon issuance,
the Company would meet the 1940 Act MMP Shares Asset Coverage, the MMP Shares
Basic Maintenance Amount and the requirements of Section 11 of Part I hereof.
4. Designation of Dividend Period. (a) The initial Dividend Period for
the MMP Shares is as set forth under "Designation" above. The Company will
designate the duration of subsequent Dividend Periods of MMP Shares; provided,
however, that no such designation is necessary for a Standard Dividend Period
and, provided further, that any designation of a Special Dividend Period shall
be effective only if (1) notice thereof shall have been given as provided
herein, (2) any failure to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, MMP
A-7
Shares shall have been cured as provided above, (3) Sufficient Clearing Bids
shall have existed in an Auction held on the Auction Date immediately preceding
the first day of such proposed Special Dividend Period, (4) if the Company shall
have mailed a Notice of Redemption with respect to any shares, the redemption
price with respect to such shares shall have been deposited with the Paying
Agent, and (5) in the case of the designation of a Special Dividend Period, the
Company has confirmed that as of the Auction Date next preceding the first day
of such Special Dividend Period, it has Eligible Assets with an aggregate
Discounted Value at least equal to the MMP Shares Basic Maintenance Amount, and
the Company has consulted with the Broker-Dealers and has provided notice of
such designation and a MMP Shares Basic Maintenance Report to Moody's (if
Moody's is then rating the MMP Shares), Fitch (if Fitch is then rating the MMP
Shares) and any Other Rating Agency which is then rating the MMP Shares and so
requires.
(b) If the Company proposes to designate any Special Dividend Period,
not fewer than seven (or two Business Days in the event the duration of the
Dividend Period prior to such Special Dividend Period is fewer than eight days)
nor more than 30 Business Days prior to the first day of such Special Dividend
Period, notice shall be (1) made by press release and (2) communicated by the
Company by telephonic or other means to the Auction Agent and confirmed in
writing promptly thereafter. Each such notice shall state (A) that the Company
proposes to exercise its option to designate a succeeding Special Dividend
Period, specifying the first and last days thereof and (B) that the Company will
by 3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such Special Dividend Period, notify the Auction Agent, who will
promptly notify the Broker-Dealers, of either (x) its determination, subject to
certain conditions, to proceed with such Special Dividend Period, subject to the
terms of any Specific Redemption Provisions, or (y) its determination not to
proceed with such Special Dividend Period, in which latter event the succeeding
Dividend Period shall be a Standard Dividend Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Dividend Period, the
Company shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Company has determined to
designate the next succeeding Dividend Period as a Special Dividend
Period, specifying the first and last days thereof and (B) the terms of
any Specific Redemption Provisions; or
(ii) a notice stating that the Company has determined not to
exercise its option to designate a Special Dividend Period.
If the Company fails to deliver either such notice with
respect to any designation of any proposed Special Dividend Period to the
Auction Agent or is unable to make the confirmation provided in clause (v) of
paragraph (a) of this Section 4 by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of such proposed Special Dividend
Period, the Company shall be deemed to have delivered a notice to the Auction
Agent with respect to such Dividend Period to the effect set forth in clause
(ii) above, thereby resulting in a Standard Dividend Period.
5. Restrictions on Transfer. MMP Shares may be transferred only (a)
pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer or
(c) to the Company or any Affiliate. Notwithstanding the foregoing, a transfer
other than pursuant to an Auction will not be effective unless the selling
Existing Holder or the Agent Member of such Existing Holder, in the case of an
Existing Holder whose shares are listed in its own name on the books of the
Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer, in
the case of a transfer between persons holding MMP Shares through different
Broker-Dealers, advises the Auction Agent of such transfer. The certificate
representing
A-8
the MMP Shares issued to the Securities Depository will bear
legends with respect to the restrictions described above and stop-transfer
instructions will be issued to the Transfer Agent and/or Registrar.
6. Voting Rights. (a) Except as otherwise provided in the Charter or
Bylaws, herein or as otherwise required by applicable law, (1) each holder of
MMP Shares shall be entitled to one vote for each MMP Share held on each matter
submitted to a vote of stockholders of the Company, and (2) the holders of
Outstanding Preferred Shares, including the MMP Shares, and Common Shares shall
vote together as a single class on all matters submitted to stockholders;
provided, however, that the holders of Outstanding Preferred Shares, including
the MMP Shares, shall be entitled, as a class, to the exclusion of the holders
of shares of all other classes of stock of the Company, to elect two Directors
of the Company at all times. The identity and class (if the Board of Directors
is then classified) of the nominees for such Directors may be fixed by the Board
of Directors. Subject to paragraph (b) of this Section 6, the holders of
outstanding Common Shares and Preferred Shares, including the MMP Shares, voting
together as a single class, shall elect the balance of the Directors.
(b) During any period in which any one or more of the conditions
described below shall exist (such period being referred to herein as a "Voting
Period"), the number of Directors constituting the Board of Directors shall
automatically increase by the smallest number that, when added to the two
Directors elected exclusively by the holders of Preferred Shares, including the
MMP Shares, would constitute a majority of the Board of Directors as so
increased by such smallest number; and the holders of Preferred Shares,
including the MMP Shares, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of shares of the Company), to elect such smallest number
of additional Directors, together with the two Directors that such holders are
in any event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend Payment Date
accumulated dividends (whether or not earned or declared) on Preferred
Shares equal to at least two full years' dividends shall be due and
unpaid; or
(ii) if at any time holders of any Preferred Shares are
entitled under the 1940 Act to elect a majority of the Directors of the
Company.
Upon the termination of a Voting Period, the voting rights described in
this paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the holders of Preferred Shares, including
the MMP Shares, upon the further occurrence of any of the events described in
this paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of the
holders of Preferred Shares, including the MMP Shares, to elect additional
Directors as described in paragraph (b) of this Section 6, the Company shall
notify the Auction Agent, and the Auction Agent shall instruct the Directors to
call a special meeting of such holders, and mail a notice of such special
meeting to such holders, such meeting to be held not less than 10 nor more than
30 calendar days after the date of mailing of such notice. If the Company fails
to send such notice to the Auction Agent or if a special meeting is not called,
it may be called by any such holder on like notice. The record date for
determining the holders entitled to notice of and to vote at such special
meeting shall be the close of business on the fifth Business Day preceding the
day on which such notice is mailed. At any such special meeting and at each
meeting of holders of Preferred Shares, including the MMP Shares, held during a
Voting Period at which Directors are to be elected, such holders, voting
together as a class (to the exclusion of the holders of all other securities and
classes of capital stock of the Company), shall be entitled to elect the number
of Directors prescribed in paragraph (b) of this Section 6 on a
one-vote-per-share basis.
A-9
(d) The terms of office of all persons who are Directors of the Company
at the time of a special meeting of holders of the MMP Shares and holders of
other Preferred Shares to elect Directors shall continue, notwithstanding the
election at such meeting by the holders and such other holders of the number of
Directors that they are entitled to elect, and the persons so elected by such
holders, together with the two incumbent Directors elected by such holders and
the remaining incumbent Directors, shall constitute the duly elected Directors
of the Company.
(e) Simultaneously with the termination of a Voting Period, the terms
of office of the additional Directors elected by the holders of the MMP Shares
and holders of other Preferred Shares pursuant to paragraph (b) of this Section
6 shall terminate, the number of Directors constituting the Board of Directors
shall decrease accordingly, the remaining Directors shall constitute the
Directors of the Company and the voting rights of such holders to elect
additional Directors pursuant to paragraph (b) of this Section 6 shall cease,
subject to the provisions of the last sentence of paragraph (b) of this
Section 6.
(f) So long as any of the shares of Preferred Shares, including the MMP
Shares, are Outstanding, the Company will not, without the affirmative vote of
the holders of a majority of the outstanding Preferred Shares determined with
reference to a "majority of outstanding voting securities" as that term is
defined in Section 2(a)(42) of the 1940 Act (a "1940 Act Majority"), voting as a
separate class:
(i) amend, alter or repeal any of the preferences, rights or
powers of such class of Preferred Shares so as to affect materially and
adversely such preferences, rights or powers as defined in Section 6(h)
below;
(ii) increase the authorized number of shares of Preferred
Shares;
(iii) create, authorize or issue shares of any class of shares
of stock ranking senior to or on a parity with the Preferred Shares
with respect to the payment of dividends or the distribution of assets,
or any securities convertible into, or warrants, options or similar
rights to purchase, acquire or receive, such shares of capital stock
ranking senior to or on a parity with the Preferred Shares or
reclassify any authorized shares of capital stock of the Company into
any shares ranking senior to or on a parity with the Preferred Shares
(except that, notwithstanding the foregoing, but subject to the
provisions of either Section 3(j) or 11, as applicable, the Board of
Directors, without the vote or consent of the holders of the Preferred
Shares, including the MMP Shares, may from time to time authorize,
create and classify, and the Company may from time to time issue,
shares or series of Preferred Shares, ranking on a parity with the MMP
Shares with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up to the affairs of
the Company, and may authorize, reclassify and/or issue any additional
MMP Shares, including shares previously purchased or redeemed by the
Company, subject to continuing compliance by the Company with 1940 Act
MMP Shares Asset Coverage and MMP Shares Basic Maintenance Amount
requirements);
(iv) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency
proceedings against it, or file a petition seeking or consenting to
reorganization or relief under any applicable federal or state law
relating to bankruptcy or insolvency, or consent to the appointment of
a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or a substantial part of its property,
or make any assignment for the benefit of creditors, or, except as may
be required by applicable law, admit in writing its inability to pay
its debts generally as they become due or take any corporate action in
furtherance of any such action;
(v) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future
(upon the happening of a contingency or otherwise) the
A-10
creation, incurrence or existence of any material lien, mortgage,
pledge, charge, security interest, security agreement, conditional sale
or trust receipt or other material encumbrance of any kind upon any of
the Company's assets as a whole, except (A) liens the validity of which
are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid
thereafter without penalty, (C) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in
connection with any indebtedness senior to the MMP Shares or arising in
connection with any futures contracts or options thereon, interest rate
swap or cap transactions, forward rate transactions, put or call
options, short sales of securities or other similar transactions; (D)
liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness
permitted under clause (vi) below and (E) liens to secure payment for
services rendered including, without limitation, services rendered by
the Company's custodian and the Auction Agent; or
(vi) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of
such indebtedness for borrowed money or any direct or indirect
guarantee of such indebtedness, except the Company may borrow and issue
senior securities as may be permitted by the Company's investment
restrictions; provided, however, that transfers of assets by the
Company subject to an obligation to repurchase shall not be deemed to
be indebtedness for purposes of this provision to the extent that after
any such transaction the Company has Eligible Assets with an aggregate
Discounted Value at least equal to the MMP Shares Basic Maintenance
Amount as of the immediately preceding Valuation Date.
(g) The affirmative vote of the holders of a 1940 Act Majority of the
Outstanding Preferred Shares, including the MMP Shares, voting as a separate
class, shall be required to approve any plan of reorganization (as such term is
used in the 1940 Act) adversely affecting such shares or any action requiring a
vote of security holders of the Company under Section 13(a) of the 1940 Act.
(h) The affirmative vote of the holders of a 1940 Act Majority of the
Outstanding shares of any series of Preferred Shares, including the MMP Shares,
voting separately from any other series, shall be required with respect to any
matter that materially and adversely affects the rights, preferences, or powers
of that series in a manner different from that of other series of classes of the
Company's shares of capital stock. For purposes of the foregoing, no matter
shall be deemed to adversely affect any right, preference or power unless such
matter (i) alters or abolishes any preferential right of such series; (ii)
creates, alters or abolishes any right in respect of redemption of such series;
or (iii) creates or alters (other than to abolish) any restriction on transfer
applicable to such series. The vote of holders of any shares described in this
Section 6(h) will in each case be in addition to a separate vote of the
requisite percentage of Common Shares and/or Preferred Shares, if any, necessary
to authorize the action in question.
(i) The rights of the MMP Shares or the Holders thereof, including,
without limitation, the interpretation or applicability of any or all covenants
or other obligations of the Company contained herein or of the definitions of
the terms contained herein, all such covenants, obligations and definitions
having been adopted pursuant to Rating Agency Guidelines, may from time to time
be modified, altered or repealed by the Board of Directors in its sole
discretion, based on a determination by the Board of Directors that such action
is necessary or appropriate in connection with obtaining or maintaining the
rating of any Rating Agency with respect to the MMP Shares or revising the
Company's investment restrictions or policies consistent with guidelines of any
Rating Agency, and any such modification, alteration or repeal will not be
deemed to affect the preferences, rights or powers of MMP Shares or the Holders
thereof, provided that the Board of Directors receives written confirmation from
each relevant Rating Agency (with such confirmation in no event being required
to be obtained from a particular Rating Agency with respect to definitions or
other provisions relevant only to and adopted in
A-11
connection with another Rating Agency's rating of the MMP Shares) that any such
modification, alteration or repeal would not adversely affect the rating then
assigned by such Rating Agency.
The terms of the MMP Shares are subject to the Rating Agency
Guidelines, as reflected in a written document and as amended from time to time
by the respective Rating Agency, for so long as the MMP Shares are then rated by
the applicable Rating Agency. Such Rating Agency Guidelines may be amended by
the respective Rating Agency without the vote, consent or approval of the
Company, the Board of Directors and any holder of shares of Preferred Shares,
including MMP Shares, or any other stockholder of the Company.
In addition, subject to compliance with applicable law, the Board of
Directors may modify the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of the Preferred
Shares, including the MMP Shares, or any other stockholder of the Company, and
without receiving any confirmation from any rating agency after consultation
with the Broker-Dealers, provided that immediately following any such increase
the Company would be in compliance with the MMP Shares Basic Maintenance Amount.
(j) Unless otherwise required by law, Holders of MMP Shares shall not
have any relative rights or preferences or other special rights other than those
specifically set forth herein. The Holders of MMP Shares shall have no rights to
cumulative voting. If the Company fails to pay any dividends on the MMP Shares,
the exclusive remedy of the Holders shall be the right to vote for Directors
pursuant to the provisions of this Section 6.
(k) The foregoing voting provisions will not apply with respect to the
MMP Shares if, at or prior to the time when a vote is required, such shares have
been (i) redeemed or (ii) called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
7. Liquidation Rights. (a) Upon the dissolution, liquidation or winding
up of the affairs of the Company, whether voluntary or involuntary, the Holders
of MMP Shares then outstanding, together with holders of shares of any class of
shares ranking on a parity with the MMP Shares upon dissolution, liquidation or
winding up, shall be entitled to receive and to be paid out of the assets of the
Company (or the proceeds thereof) available for distribution to its stockholders
after satisfaction of claims of creditors of the Company an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for MMP Shares shall be $25,000 per share, plus an amount equal to all
accumulated dividends thereon (whether or not earned or declared but without
interest) to the date payment of such distribution is made in full or a sum
sufficient for the payment thereof is set apart with the Paying Agent. No
redemption premium shall be paid upon any liquidation even if such redemption
premium would be paid upon optional or mandatory redemption of the relevant
shares. In determining whether a distribution (other than upon voluntary or
involuntary liquidation), by dividend, redemption or otherwise, is permitted
under the MGCL, amounts that would be needed, if the Company were to be
dissolved at the time of distribution, to satisfy the liquidation preference of
the MMP Shares will not be added to the Company's total liabilities.
(b) If, upon any liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary, the assets of the Company
available for distribution among the holders of all outstanding Preferred
Shares, including the MMP Shares, shall be insufficient to permit the payment in
full to holders of the amounts to which they are entitled, then the available
assets shall be distributed among the holders of all outstanding Preferred
Shares, including the MMP Shares, ratably in any distribution of assets
according to the respective amounts which would be payable on all the shares if
all amounts thereon were paid in full.
A-12
(c) Upon the dissolution, liquidation or winding up of the affairs of
the Company, whether voluntary or involuntary, until payment in full is made to
the holders of MMP Shares of the liquidation distribution to which they are
entitled, (1) no dividend or other distribution shall be made to the holders of
Common Shares or any other class of shares of capital stock of the Company
ranking junior to MMP Shares upon dissolution, liquidation or winding up and (2)
no purchase, redemption or other acquisition for any consideration by the
Company shall be made in respect of the Common Shares or any other class of
shares of capital stock of the Company ranking junior to MMP Shares upon
dissolution, liquidation or winding up.
(d) A consolidation, reorganization or merger of the Company with or
into any other trust or company, or a sale, lease or exchange of all or
substantially all of the assets of the Company in consideration for the issuance
of equity securities of another trust or company shall not be deemed to be a
liquidation, dissolution or winding up, whether voluntary or involuntary, for
the purposes of this Section 7.
(e) After the payment to the holders of Preferred Shares, including MMP
Shares, of the full preferential amounts provided for in this Section 7, the
holders of Preferred Shares, including MMP Shares, as such shall have no right
or claim to any of the remaining assets of the Company.
(f) If the assets of the Company or proceeds thereof available for
distribution to the Holders of MMP Shares, upon any dissolution, liquidation or
winding up of the affairs of the Company, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to paragraph (a) of this Section 7, no such distribution shall
be made on account of any shares of any other class or series of Preferred
Shares ranking on a parity with MMP Shares unless proportionate distributive
amounts shall be paid on account of the MMP Shares, ratably, in proportion to
the full distributable amounts to which holders of all such parity shares are
entitled upon such dissolution, liquidation or winding up.
(g) Subject to the rights of the holders of shares of any series or
class or classes of stock ranking on a parity with MMP Shares with respect to
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Company, after payment shall have been made in full to the
holders of the MMP Shares as provided in paragraph (a) of this Section 7, but
not prior thereto, any other series or class or classes of stock ranking junior
to MMP Shares with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Company shall, subject to any
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the holders
of the MMP Shares shall not be entitled to share therein.
8. Auction Agent. For so long as any MMP Shares are Outstanding, the
Auction Agent, duly appointed by the Company to so act, shall be in each case a
commercial bank, trust company or other financial institution independent of the
Company and its Affiliates (which, however, may engage or have engaged in
business transactions with the Company or its Affiliates) and at no time shall
the Company or any of its Affiliates act as the Auction Agent in connection with
the Auction Procedures. If the Auction Agent resigns or for any reason its
appointment is terminated during any period that any MMP Shares are outstanding,
the Company shall use its best efforts promptly thereafter to appoint another
qualified commercial bank, trust company or financial institution to act as the
Auction Agent.
9. 1940 Act MMP Shares Asset Coverage. The Company shall maintain, as
of the last Business Day of each month in which any shares of the MMP Shares are
Outstanding, asset coverage with respect to the MMP Shares which is equal to or
greater than the 1940 Act MMP Shares Asset Coverage; provided, however, that
Section 3(a)(ii) shall be the sole remedy if the Company fails to do so.
A-13
10. MMP Shares Basic Maintenance Amount. So long as the MMP Shares are
Outstanding and Moody's, Fitch or any Other Rating Agency which so requires is
then rating the shares of the MMP Shares, the Company shall maintain, as of each
Valuation Date, Moody's Eligible Assets (if Moody's is then rating the MMP
Shares), Fitch Eligible Assets (if Fitch is then rating the MMP Shares) and (if
applicable) Other Rating Agency Eligible Assets having an aggregate Discounted
Value equal to or greater than the MMP Shares Basic Maintenance Amount;
provided, however, that Section 3(a)(ii) shall be the sole remedy in the event
the Company fails to do so.
11. Certain Other Restrictions. For so long as any MMP Shares are
Outstanding and any Rating Agency is then rating such shares, the Company will
not, unless it has received written confirmation from each such rating agency
that any such action would not impair the rating then assigned by such Rating
Agency to such shares, engage in certain proscribed transactions set forth in
the Rating Agency Guidelines.
12. Compliance Procedures for Asset Maintenance Tests. For so long as
any MMP Shares are Outstanding and Moody's, Fitch or any Other Rating Agency
which so requires is then rating such shares, the Company shall deliver to each
rating agency which is then rating MMP Shares and any other party specified in
the Rating Agency Guidelines all certificates that are set forth in the
respective Rating Agency Guidelines regarding 1940 Act MMP Shares Asset
Coverage, MMP Shares Basic Maintenance Amount and/or related calculations at
such times and containing such information as set forth in the respective Rating
Agency Guidelines.
13. Notice. All notices or communications hereunder, unless otherwise
specified in these terms of the MMP Shares, shall be sufficiently given if in
writing and delivered in person, by telecopier, by electronic means or mailed by
first-class mail, postage prepaid. Notices delivered pursuant to this Section 13
shall be deemed given on the earlier of the date received or the date five days
after which such notice is mailed, except as otherwise provided in these terms
of the MMP Shares or by the MGCL for notices of Stockholders' meetings.
14. Waiver. To the extent permitted by Maryland law, holders of a 1940
Act Majority of the Outstanding Preferred Shares, including the MMP Shares,
acting collectively or voting separately from any other series, may by
affirmative vote waive any provision hereof intended for their respective
benefit in accordance with such procedures as may from time to time be
established by the Board of Directors.
15. Termination. If no MMP Shares are outstanding, all rights and
preferences of such shares established and designated hereunder shall cease and
terminate, and all obligations of the Company under these terms of the MMP
Shares, shall terminate.
16. Facts Ascertainable Outside Charter. Subject to the provisions of
these terms of the MMP Shares, the Board of Directors may, by resolution duly
adopted, without stockholder approval (except as otherwise provided by these
terms of the MMP Shares or required by applicable law), modify these terms of
the MMP Shares to reflect any modification hereto which the Board of Directors
is entitled to adopt pursuant to the terms of Section 6(i) hereof or otherwise
without stockholder approval. To the extent permitted by applicable law, the
Board of Directors may interpret, modify or adjust the provisions of these terms
of the MMP Shares to resolve any inconsistency or ambiguity or to remedy any
defect.
17. Definitions. As used in Part I and Part II of these terms of the
MMP Shares, the following terms shall have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:
A-14
(a) "AA" Composite Commercial Paper Rate" on any date means (i) the
interest equivalent of [(1) the 7-day rate, in the case of a Dividend Period
which is a Standard Dividend Period or shorter, (2) the 30-day rate, in the case
of a Dividend Period greater than 7 days but fewer than or equal to 31 days or
(3) the 180-day rate, in the case of all other Dividend Periods], on financial
commercial paper on behalf of issuers whose corporate bonds are rated "AA" by
S&P, or the equivalent of such rating by another nationally recognized rating
agency, as announced by the Federal Reserve Bank of New York for the close of
business on the Business Day immediately preceding such date; or (ii) if the
Federal Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the interest equivalent of such rates on financial
commercial paper placed on behalf of such issuers, as quoted on a discount basis
or otherwise by the Commercial Paper Dealers to the Auction Agent for the close
of business on the Business Day immediately preceding such date (rounded to the
next highest .001 of 1%). If any Commercial Paper Dealer does not quote a rate
required to determine the "AA" Composite Commercial Paper Rate, such rate shall
be determined on the basis of the quotations (or quotation) furnished by the
remaining Commercial Paper Dealers (or Dealer), if any, or, if there are no such
Commercial Paper Dealers, by a nationally recognized dealer in financial
commercial paper of such issuers then making such quotations selected by the
Company. For purposes of this definition, (A) "Commercial Paper Dealers" shall
mean (1) Citigroup Global Markets Inc., Lehman Brothers Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (2) in lieu of any
thereof, its respective Affiliate or successor; and (3) if any of the foregoing
shall cease to quote rates for financial commercial paper of issuers of the sort
described above, in substitution therefor, a nationally recognized dealer in
financial commercial paper of such issuers then making such quotations selected
by the Company, and (B) "interest equivalent" of a rate stated on a discount
basis for financial commercial paper of a given number of days' maturity shall
mean a number equal to the quotient (rounded upward to the next higher
one-thousandth of 1%) of (1) such rate expressed as a decimal, divided by (2)
the difference between (x) 1.00 and (y) a fraction, the numerator of which shall
be the product of such rate expressed as a decimal, multiplied by the number of
days in which such financial commercial paper shall mature and the denominator
of which shall be 360.
(b) "Affiliate" means any person controlled by, in control of or under
common control with the Company; provided that no Broker-Dealer controlled by,
in control of or under common control with the Company shall be deemed to be an
Affiliate nor shall any corporation or any person controlled by, in control of
or under common control with such corporation, one of the directors, directors
or executive officers of which also is a Director of the Company be deemed to be
an Affiliate solely because such Director, director or executive officer also is
a Director of the Company.
(c) "Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
(d) "All Hold Rate" means 80% of the "AA" Composite Commercial Paper
Rate.
(e) "Applicable Percentage" means the percentage associated with the
lower of the credit ratings assigned to the MMP Shares by Moody's or Fitch, as
follows:
MOODY'S FITCH APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or above AA- or above 200%
A3 to A1 A- to A+ 250%
Baa3 to Baa1 BBB- to BBB+ 275%
Below Baa3 Below BBB- 300%
A-15
(f) "Applicable Rate" means, with respect to the MMP Shares for each
Dividend Period (i) if Sufficient Clearing Orders exist for the Auction in
respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not
exist for the Auction in respect thereof, the Maximum Rate, (iii) in the case
where all the MMP Shares are the subject of Hold Orders for the Auction in
respect thereof, the All Hold Rate, and (iv) if an Auction is not held for any
reason (including the circumstance where there is no Auction Agent or
Broker-Dealer), the Maximum Rate.
(g) "Asset Coverage Cure Date" has the meaning set forth in Section
3(a)(ii).
(h) "Auction" means each periodic operation of the procedures set forth
under "Auction Procedures."
(i) "Auction Agent" means The Bank of New York unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Directors enters into an agreement with the Company
to follow the Auction Procedures for the purpose of determining the Applicable
Rate.
(j) "Auction Date" means the first Business Day next preceding the
first day of a Dividend Period.
(k) "Auction Procedures" means the procedures for conducting Auctions
set forth in Part II hereof.
(l) "Beneficial Owner," with respect to MMP Shares, means a customer of
a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if
applicable, the Auction Agent) as a holder of shares of the series.
(m) "Bid" shall have the meaning specified in paragraph (a) of Section
1 of Part II of these terms of the MMP Shares.
(n) "Bidder" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of these terms of the MMP Shares; provided, however, that
neither the Company nor any affiliate thereof shall be permitted to be a Bidder
in an Auction, except that any Broker-Dealer that is an affiliate of the Company
may be a Bidder in an Auction, but only if the Orders placed by such
Broker-Dealer are not for its own account.
(o) "Board of Directors" or "Board" means the Board of Directors of the
Company or any duly authorized committee thereof as permitted by applicable law.
(p) "Broker-Dealer" means any broker-dealer or broker-dealers, or other
entity permitted by law to perform the functions required of a Broker-Dealer by
the Auction Procedures, that has been selected by the Company and has entered
into a Broker-Dealer Agreement that remains effective.
(q) "Broker-Dealer Agreement" means an agreement among the Auction
Agent and a Broker-Dealer, pursuant to which the Broker-Dealer agrees to follow
the Auction Procedures.
(r) "Business Day" means a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which banks
in the City of New York, New York are authorized or obligated by law to close.
A-16
(s) "Code" means the Internal Revenue Code of 1986, as amended.
(t) "Commercial Paper Dealers" has the meaning set forth in the
definition of "AA" Composite Commercial Paper Rate.
(u) "Commission" means the Securities and Exchange Commission.
(v) "Common Shares" means the shares of common stock, par value $.001
per share, of the Company.
(w) "Default" has the meaning set forth in Section 2(c)(ii) of this
Part I.
(x) "Default Period" has the meaning set forth in Section 2(c)(ii) of
this Part I.
(y) "Default Rate" means the Reference Rate multiplied by three (3).
(z) "Deposit Securities" means cash and any obligations or securities,
including Short-Term Money Market Instruments that are Eligible Assets, rated at
least AAA, A-1 or SP-1 by S&P, except that, for purposes of section 3(a)(i) of
this Part I, such obligations or securities shall be considered "Deposit
Securities" only if they are also rated at least P-2 by Moody's.
(aa) "Discount Factor" means the Fitch Discount Factor (if Fitch is
then rating the MMP Shares), the Moody's Discount Factor (if Moody's is then
rating the MMP Shares) or any Other Rating Agency Discount Factor (if any Other
Rating Agency is then rating the MMP Shares), whichever is applicable.
(bb) "Discounted Value" has the meaning set forth in the Rating Agency
Guidelines.
(cc) "Dividend Default" has the meaning set forth in Section 2(c)(ii)
of this Part I.
(dd) "Dividend Payment Date" with respect to the MMP Shares means any
date on which dividends are payable pursuant to Section 2(b) of this Part I.
(ee) "Dividend Period" means, with respect to the MMP Shares, the
period commencing on the Original Issue Date thereof and ending on the date
specified for such series on the Original Issue Date thereof and thereafter, as
to such series, the period commencing on the day following each Dividend Period
for such series and ending on the day established for such series by the
Company.
(ff) "Eligible Assets" means Fitch's Eligible Assets or Moody's
Eligible Assets (if Moody's or Fitch are then rating the MMP Shares) and/or
Other Rating Agency Eligible Assets (if any Other Rating Agency is then rating
the MMP Shares), whichever is applicable.
(gg) "Existing Holder," with respect to shares of MMP Shares, shall
mean a Broker-Dealer (or any such other Person as may be permitted by the
Company) that is listed on the records of the Auction Agent as a holder of
shares of such series.
(hh) "Fitch" means Fitch Ratings and its successors at law.
(ii) "Fitch Discount Factor" means the discount factors set forth in
the Fitch Guidelines for use in calculating the Discounted Value of the
Company's assets in connection with Fitch's ratings of MMP Shares.
A-17
(jj) "Fitch Guidelines" mean the guidelines provided by Fitch, as may
be amended from time to time, in connection with Fitch's ratings of MMP Shares.
(kk) "Holder" means, with respect to MMP Shares, the registered holder
of MMP Shares as the same appears on the share ledger or share records of the
Company.
(ll) "Hold Order" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of these terms of the MMP Shares.
(mm) "LIBOR" on any Auction Date, means (i) the rate for deposits in
U.S. dollars for the designated Dividend Period, which appears on display page
3750 of Moneyline's Telerate Service ("Telerate Page 3750") (or such other page
as may replace that page on that service, or such other service as may be
selected by Lehman Brothers Inc. or its successors) as of 11:00 a.m., London
time, on the day that is the London Business Day on the Auction Date or, if the
Auction Date is not a London Business Day, the London Business Day preceding the
Auction Date (the "LIBOR Determination Date"), or (ii) if such rate does not
appear on Telerate Page 3750 or such other page as may replace such Telerate
Page 3750, (A) Lehman Brothers Inc. shall determine the arithmetic mean of the
offered quotations of the reference banks to leading banks in the London
interbank market for deposits in U.S. dollars for the designated Dividend Period
in an amount determined by Lehman Brothers Inc. by reference to requests for
quotations as of approximately 11:00 a.m. (London time) on such date made by
Lehman Brothers Inc. to the reference banks, (B) if at least two of the
reference banks provide such quotations, LIBOR shall equal such arithmetic mean
of such quotations, (C) if only one or none of the reference banks provide such
quotations, LIBOR shall be deemed to be the arithmetic mean of the offered
quotations that leading banks in The City of New York selected by Lehman
Brothers Inc. (after obtaining the Company's approval) are quoting on the
relevant LIBOR Determination Date for deposits in U.S. dollars for the
designated Dividend Period in an amount determined by Lehman Brothers Inc.
(after obtaining the Company's approval) that is representative of a single
transaction in such market at such time by reference to the principal London
offices of leading banks in the London interbank market; provided, however, that
if Lehman Brothers Inc. is not a Broker-Dealer or does not quote a rate required
to determine the LIBOR, the LIBOR will be determined on the basis of the
quotation or quotations furnished by any other Broker-Dealer selected by the
Company to provide such rate or rates not being supplied by Lehman Brothers
Inc.; provided further, that if Lehman Brothers Inc. and/or a substitute
Broker-Dealer are required but unable to determine a rate in accordance with at
least one of the procedures provided above, the LIBOR shall be the most recently
determinable LIBOR. If the number of Dividend Period days shall be (i) 7 or more
but fewer than 21 days, such rate shall be the seven-day LIBOR rate; (ii) more
than 21 but fewer than 49 days, such rate shall be one-month LIBOR rate; (iii)
49 or more but fewer than 77 days, such rate shall be the two-month LIBOR rate;
(iv) 77 or more but fewer than 112 days, such rate shall be the three-month
LIBOR rate; (v) 112 or more but fewer than 140 days, such rate shall be the
four-month LIBOR rate; (vi) 140 or more but fewer that 168 days, such rate shall
be the five-month LIBOR rate; (vii) 168 or more but fewer 189 days, such rate
shall be the six-month LIBOR rate; (viii) 189 or more but fewer than 217 days,
such rate shall be the seven-month LIBOR rate; (ix) 217 or more but fewer than
252 days, such rate shall be the eight-month LIBOR rate; (x) 252 or more but
fewer than 287 days, such rate shall be the nine-month LIBOR rate; (xi) 287 or
more but fewer than 315 days, such rate shall be the ten-month LIBOR rate; (xii)
315 or more but fewer than 343 days, such rate shall be the eleven-month LIBOR
rate; and (xiii) 343 or more days but fewer than 365 days, such rate shall be
the twelve-month LIBOR rate.
(nn) "London Business Day" means any day on which commercial banks are
generally open for business in London.
A-18
(oo) "MMP Shares" means Series II Money Market Cumulative Preferred
Shares, liquidation preference $25,000 per share.
(pp) "MMP Shares Basic Maintenance Amount" as of any Valuation Date has
the meaning set forth in the Rating Agency Guidelines.
(qq) "Mandatory Redemption Date" has the meaning set forth in Section
3(a)(iii) of this Part I.
(rr) "Mandatory Redemption Price" has the meaning set forth in Section
3(a)(iii) of this Part I.
(ss) "Market Value" means the market value of an asset of the Company
as determined as follows:
For equity securities, the value obtained from readily available market
quotations. If an equity security is not traded on an exchange or not available
from a Board-approved pricing service, the value obtained from written
broker-dealer quotations. For fixed-income securities, the value obtained from
readily available market quotations based on the last updated sale price or the
value obtained from a pricing service or the value obtained from a written
broker-dealer quotation from a dealer who has made a market in the security.
Market value for other securities will mean the value obtained pursuant to the
Company's Valuation procedures. If the market value of a security cannot be
obtained, or the Company's investment adviser determines that the value of a
security as so obtained does not represent the fair value of a security, fair
value for that security shall be determined pursuant to methodologies
established by the Board of Directors.
(tt) "Maximum Rate" means, on any date on which the Applicable Rate is
determined, the rate equal to the Applicable Percentage of the Reference Rate,
subject to upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers, provided that immediately
following any such increase the Company would be in compliance with the MMP
Shares Basic Maintenance Amount.
(uu) "Minimum Rate" means, on any Auction Date with respect to a
Dividend Period of 30 days or fewer, 70% of the "AA" Composite Commercial Paper
Rate at the close of business on the Business Day next preceding such Auction
Date. There shall be no Minimum Rate on any Auction Date with respect to a
Dividend Period of more than the Standard Dividend Period.
(vv) "Moody's" means Moody's Investors Service, Inc. or its successors.
(ww) "Moody's Discount Factor" means the discount factors set forth in
the Moody's Guidelines as eligible for use in calculating the Discounted Value
of the Company's assets in connection with Moody's ratings of MMP Shares.
(xx) "Moody's Eligible Assets" means assets of the Company set forth in
the Moody's Guidelines as eligible for inclusion in calculating the Discounted
Value of the Company's assets in connection with Moody's ratings of MMP Shares.
(yy) "Moody's Guidelines" mean the guidelines provided by Moody's, as
may be amended from time to time, in connection with Moody's ratings of MMP
Shares.
A-19
(zz) "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(aaa) "1940 Act MMP Shares Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Company which are
stock, including all outstanding MMP Shares (or such other asset coverage as may
in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are stock of a closed-end investment
company as a condition of declaring dividends on its common stock), determined
on the basis of values calculated as of a time within 48 hours next preceding
the time of such determination.
(bbb) "Notice of Redemption" means any notice with respect to the
redemption of MMP Shares pursuant to Section 3.
(ccc) "Order" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of these terms of the MMP Shares.
(ddd) "Original Issue Date" means, with respect to the MMP Shares,
___________, 2005.
(eee) "Other Rating Agency" means any rating agency other than Fitch or
Moody's then providing a rating for the MMP Shares pursuant to the request of
the Company.
(fff) "Other Rating Agency Discount Factor" means the discount factors
set forth in the Other Rating Agency Guidelines as eligible for use in
calculating the Discounted Value of the Company's assets in connection with such
Other Rating Agency's ratings of MMP Shares.
(ggg) "Other Rating Agency Eligible Assets" means assets of the Company
designated by any Other Rating Agency as eligible for inclusion in calculating
the discounted value of the Company's assets in connection with such Other
Rating Agency's rating of MMP Shares.
(hhh) "Other Rating Agency Guidelines" means the guidelines provided by
each Other Rating Agency, as may be amended from time to time, in connection
with the Other Rating Agency's rating of MMP Shares.
(iii) "Outstanding" or "outstanding" means, as of any date, MMP Shares
theretofore issued by the Company except, without duplication, (i) any MMP
Shares theretofore canceled, redeemed or repurchased by the Company, or
delivered to the Auction Agent for cancellation or with respect to which the
Company has given notice of redemption and irrevocably deposited with the Paying
Agent sufficient funds to redeem such MMP Shares and (ii) any MMP Shares
represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Company. Notwithstanding the foregoing, (A) for
purposes of voting rights (including the determination of the number of shares
required to constitute a quorum), any of the MMP Shares to which the Company or
any Affiliate of the Company shall be the Existing Holder shall be disregarded
and not deemed outstanding; (B) in connection with any Auction, any MMP Shares
as to which the Company or any person known to the Auction Agent to be an
Affiliate of the Company shall be the Existing Holder thereof shall be
disregarded and deemed not to be outstanding; and (C) for purposes of
determining the MMP Shares Basic Maintenance Amount, MMP Shares held by the
Company shall be disregarded and not deemed outstanding but shares held by any
Affiliate of the Company shall be deemed outstanding.
A-20
(jjj) "Paying Agent" means Bank of New York unless and until another
entity appointed by a resolution of the Board of Directors enters into an
agreement with the Company to serve as paying agent.
(kkk) "Performing" means with respect to any asset, the issuer of such
investment is not in default of any payment obligations in respect thereof.
(lll) "Person" or "person" means and includes an individual, a
partnership, a trust, a Company, an unincorporated association, a joint venture
or other entity or a government or any agency or political subdivision thereof.
(mmm) "Potential Beneficial Owner," with respect to shares of MMP
Shares, shall mean a customer of a Broker-Dealer that is not a Beneficial Owner
of shares of such series but that wishes to purchase shares of such series, or
that is a Beneficial Owner of shares of such series that wishes to purchase
additional shares of such series.
(nnn) "Potential Holder," with respect to shares of MMP Shares, shall
mean a Broker-Dealer (or any such other person as may be permitted by the
Company) that is not an Existing Holder of MMP Shares of such series or that is
an Existing Holder of MMP Shares of such series that wishes to become the
Existing Holder of additional MMP Shares of such series.
(ooo) "Preferred Shares" means the shares of preferred stock, par value
$.001 per share, including the MMP Shares, of the Company from time to time.
(ppp) "Rating Agency" means each of Fitch (if Fitch is then rating MMP
Shares), Moody's (if Moody's is then rating MMP Shares), and any Other Rating
Agency.
(qqq) "Rating Agency Guidelines" mean Fitch Guidelines (if Fitch is
then rating MMP Shares), Moody's Guidelines (if Moody's is then rating MMP
Shares) and any Other Rating Agency Guidelines (if any Other Rating Agency is
then rating MMP Shares), whichever is applicable.
(rrr) "Redemption Default" has the meaning set forth in Section
2(c)(ii) of this Part I.
(sss) "Redemption Price" has the meaning set forth in Section 3(a)(i)
of this Part I.
(ttt) "Reference Rate" means, with respect to the determination of the
Maximum Rate and Default Rate, the greater of (1) the applicable "AA" Composite
Commercial Paper Rate (for a Dividend Period of fewer than 184 days) or the
applicable Treasury Index Rate (for a Dividend Period of 184 days or more), or
(2) the applicable LIBOR.
(uuu) "Securities Act" means the Securities Act of 1933, as amended
from time to time.
(vvv) "Securities Depository" means The Depository Trust Company and
its successors and assigns or any successor securities depository selected by
the Company that agrees to follow the procedures required to be followed by such
securities depository in connection with the MMP Shares.
(www) "Sell Order" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of these terms of the MMP Shares.
A-21
(xxx) "Special Dividend Period" means a Dividend Period that is not a
Standard Dividend Period.
(yyy) "Specific Redemption Provisions" means, with respect to any
Special Dividend Period of more than one year, either, or any combination of (i)
a period (a "Non-Call Period") determined by the Board of Directors after
consultation with the Broker-Dealers, during which the shares subject to such
Special Dividend Period are not subject to redemption at the option of the
Company pursuant to Section 3(a)(ii) and (ii) a period (a "Premium Call
Period"), consisting of a number of whole years as determined by the Board of
Directors after consultation with the Broker-Dealers, during each year of which
the shares subject to such Special Dividend Period shall be redeemable at the
Company's option pursuant to Section 3(a)(i) and/or in connection with any
mandatory redemption pursuant to Section 3(a)(ii) at a price per share equal to
$25,000 plus accumulated but unpaid dividends plus a premium expressed as a
percentage or percentages of $25,000 or expressed as a formula using specified
variables as determined by the Board of Directors after consultation with the
Broker-Dealers.
(zzz) "Standard Dividend Period" means a Dividend Period of [7] days.
(aaaa) "Submission Deadline" means 1:00 P.M., Eastern Standard time, on
any Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time.
(bbbb) "Submitted Bid" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of these terms of the MMP Shares.
(cccc) "Submitted Hold Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these terms of the MMP Shares.
(dddd) "Submitted Order" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of these terms of the MMP Shares.
(eeee) "Submitted Sell Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these terms of the MMP Shares.
(ffff) "Sufficient Clearing Bids" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these terms of the MMP Shares.
(gggg) "Treasury Index Rate" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities having
the same number of 30-day periods to maturity as the length of the applicable
Dividend Period, determined, to the extent necessary, by linear interpolation
based upon the yield for such securities having the next shorter and next longer
number of 30-day periods to maturity treating all Dividend Periods with a length
greater than the longest maturity for such securities as having a length equal
to such longest maturity, in all cases based upon data set forth in the most
recent weekly statistical release published by the Board of Governors of the
Federal Reserve System (currently in H.15(519)); provided, however, if the most
recent such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Company by at least three
recognized dealers in U.S. Government securities selected by the Company.
(hhhh) "Valuation Date" has the meaning set forth in the Rating Agency
Guidelines.
A-22
(iiii) "Winning Bid Rate" has the meaning set forth in Section
3(a)(iii) of Part II of these terms of the MMP Shares.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
PART II: AUCTION PROCEDURES
1. Orders. (a) Prior to the Submission Deadline on each Auction Date
for shares of MMP Shares:
(i) each Beneficial Owner of shares of the series may submit
to its Broker-Dealer information as to:
(A) the number of Outstanding shares, if any, of the
series held by the Beneficial Owner which the Beneficial Owner
desires to continue to hold without regard to the Applicable
Rate for shares of the series for the next succeeding Dividend
Period of the shares;
(B) the number of Outstanding shares, if any, of the
series held by the Beneficial Owner which the Beneficial Owner
offers to sell if the Applicable Rate for shares of the series
for the next succeeding Dividend Period of shares of the
series shall be less than the rate per annum specified by the
Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of the
series held by the Beneficial Owner which the Beneficial Owner
offers to sell without regard to the Applicable Rate for
shares of the series for the next succeeding Dividend Period
of shares of the series; and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the purpose of conducting a
competitive Auction in a commercially reasonable manner, contact
Potential Beneficial Owners (by telephone or otherwise), including
Persons that are not Beneficial Owners, on such lists to determine the
number of shares, if any, of that series which each Potential
Beneficial Owner offers to purchase if the Applicable Rate for shares
for the next succeeding Dividend Period of shares of that series shall
not be less than the rate per annum specified by the Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A)(i), (B), (i)(C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
A-23
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of
MMP Shares subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of outstanding shares of the series
specified in the Bid if the Applicable Rate for shares of the
series determined on the Auction Date shall be less than the
rate specified therein;
(B) the number or a lesser number of outstanding
shares of the series to be determined as set forth in clause
(iv) of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of the series determined on the
Auction Date shall be equal to the rate specified therein; or
(C) the number of outstanding shares of the series
specified in the Bid if the rate specified therein shall be
higher than the Maximum Rate for shares of the series, or the
number or a lesser number of outstanding shares of the series
to be determined as set forth in clause (iii) of paragraph (b)
of Section 4 of this Part II if the rate specified therein
shall be higher than the Maximum Rate for shares of the series
and Sufficient Clearing Bids for shares of the series do not
exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder
of shares of MMP Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of the series
specified in the Sell Order; or
(B) the number or a lesser number of outstanding
shares of the series as set forth in clause (iii) of paragraph
(b) of Section 4 of this Part II if Sufficient Clearing Bids
for shares of the series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with
respect to shares of MMP Shares shall not be liable to any Person for
failing to sell the shares pursuant to a Sell Order described in the
proviso to paragraph (c) of Section 2 of this Part II if (1) the shares
were transferred by the Beneficial Owner thereof without compliance by
the Beneficial Owner or its transferee Broker-Dealer (or other
transferee person, if permitted by the Company) with the provisions of
Section 7 of this Part II or (2) such Broker-Dealer has informed the
Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to the Broker-Dealer's records, the Broker-Dealer
believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential
Holder of shares of MMP Shares subject to an Auction on any Auction
Date shall constitute an irrevocable offer to purchase:
(A) the number of outstanding shares of the series
specified in the Bid if the Applicable Rate for shares of the
series determined on the Auction Date shall be higher than the
rate specified therein; or
(B) the number or a lesser number of outstanding
shares of the series as set forth in clause (v) of paragraph
(a) of Section 4 of this Part II if the Applicable Rate for
shares of the series determined on the Auction Date shall be
equal to the rate specified therein.
A-24
(C) No Order for any number of MMP Shares other than
whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent. (a) Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders for MMP Shares subject to an
Auction on the Auction Date, designating itself (unless otherwise permitted by
the Company) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for the shares:
(i) the name of the Bidder placing the Order (which shall be
the Broker-Dealer unless otherwise permitted by the Company);
(ii) the aggregate number of shares of the series that are the
subject of the Order;
(iii) to the extent that the Bidder is an Existing Holder of
shares of the series:
(A) the number of shares, if any, of the series
subject to any Hold Order of the Existing Holder;
(B) the number of shares, if any, of the series
subject to any Bid of the Existing Holder and the rate
specified in the Bid; and
(C) the number of shares, if any, of the series
subject to any Sell Order of the Existing Holder; and
(iv) to the extent the Bidder is a Potential Holder of shares
of the series, the rate and number of shares of the series specified in
the Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round the rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding MMP Shares
held by any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted by or on behalf of the Existing Holder covering the number of
outstanding shares of the series held by the Existing Holder and not subject to
Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the outstanding shares of the series held by any Existing
Holder is not submitted to the Auction Agent prior to the Submission Deadline
for an Auction relating to a Special Dividend Period consisting of more than [7]
Dividend Period Days, the Auction Agent shall deem a Sell Order to have been
submitted by or on behalf of the Existing Holder covering the number of
outstanding shares of the series held by the Existing Holder and not subject to
Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of outstanding MMP
Shares subject to an Auction held by the Existing Holder, the Orders shall be
considered valid in the following order of priority:
(i) all Hold Orders for shares of the series shall be
considered valid, but only up to and including in the aggregate the
number of outstanding shares of the series held by such Existing
Holder, and if the number of shares of the series subject to Hold
Orders exceeds the
A-25
number of outstanding shares of the series held by such Existing
Holder, the number of shares subject to each Hold Order shall be
reduced pro rata to cover the number of outstanding shares of the
series held by such Existing Holder;
(ii) (A) any Bid for shares of the series shall be considered
valid up to and including the excess of the number of outstanding
shares of the series held by the Existing Holder over the number of
shares of the series subject to any Hold Orders referred to in clause
(i) above;
(B) subject to subclause (A), if more than one Bid of
an Existing Holder for shares of the series is submitted to
the Auction Agent with the same rate and the number of
Outstanding shares of the series subject to Bids is greater
than such excess, the Bids shall be considered valid up to and
including the amount of the excess, and the number of shares
of the series subject to each Bid with the same rate shall be
reduced pro rata to cover the number of shares of the series
equal to such excess;
(C) subject to subclauses (A) and (B), if more than
one Bid of an Existing Holder for shares of the series is
submitted to the Auction Agent with different rates, the Bids
shall be considered valid in the ascending order of their
respective rates up to and including the amount of the excess;
and
(D) in any such event, the number, if any, of
Outstanding shares of the series subject to any portion of
Bids considered not valid in whole or in part under this
clause (ii) shall be treated as the subject of a Bid for
shares of the series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of the series shall be
considered valid up to and including the excess of the number of
Outstanding shares of the series held by the Existing Holder over the
sum of shares of such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of MMP Shares is
submitted to the Auction Agent by or on behalf of any Potential Holder, each Bid
submitted shall be a separate Bid with the rate and number of shares therein
specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. (a) Not earlier than the Submission Deadline on each Auction
Date for shares of MMP Shares, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of shares
of the series (each Order as submitted or deemed submitted by a Broker-Dealer
being hereinafter referred to individually as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a
"Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids"
or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and
shall determine for the series:
(i) the excess of the number of Outstanding shares of the
series over the number of Outstanding shares of the series subject to
Submitted Hold Orders (the excess being hereinafter referred to as the
"Available MMP Shares");
A-26
(ii) from the Submitted Orders for shares of such series
whether:
(A) the number of Outstanding shares of the series
subject to Submitted Bids of Potential Holders specifying one
or more rates between the Minimum Rate (for Standard Dividend
Periods or less, only) and the Maximum Rate (for all Dividend
Periods) for shares of the series; exceeds or is equal to the
sum of:
(B) the number of Outstanding shares of the series
subject to Submitted Bids of Existing Holders specifying one
or more rates between the Minimum Rate (for Standard Dividend
Periods or less, only) and the Maximum Rate (for all Dividend
Periods) for shares of the series; and
(C) the number of Outstanding shares of the series
subject to Submitted Sell Orders
(in the event the excess or the equality exists (other than because the
number of shares of the series in subclauses (B) and (C) above is zero
because all of the Outstanding shares of the series are subject to
Submitted Hold Orders), the Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing Bids" for
shares of the series); and
(iii) if Sufficient Clearing Bids for shares of the series
exist, the lowest rate specified in such Submitted Bids (the "Winning
Bid Rate" for shares of such series) which if:
(A) (I) each Submitted Bid of Existing Holders
specifying the lowest rate and (II) all other such Submitted
Bids of Existing Holders specifying lower rates were rejected,
thus entitling the Existing Holders to continue to hold the
shares of the series that are subject to the Submitted Bids;
and
(B) (I) each Submitted Bid of Potential Holders
specifying the lowest rate and (II) all other the Submitted
Bids of Potential Holders specifying lower rates were
accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of the
series which, when added to the number of Outstanding shares of the
series to be purchased by the Potential Holders described in subclause
(B) above, would equal not less than the Available MMP Shares.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 3, the Auction Agent shall advise the
Company of the Minimum Rate and Maximum Rate for MMP Shares for which an Auction
is being held on the Auction Date and, based on such determination, the
Applicable Rate for shares of the series for the next succeeding Dividend Period
thereof as follows:
(i) if Sufficient Clearing Bids for shares of the series
exist, that the Applicable Rate for all shares of the series for the
next succeeding Dividend Period thereof shall be equal to the Winning
Bid Rate for shares of the series so determined;
(ii) if Sufficient Clearing Bids for shares of the series do
not exist (other than because all of the Outstanding shares of the
series are subject to Submitted Hold Orders), that the Applicable Rate
for all shares of the series for the next succeeding Dividend Period
thereof shall be equal to the Maximum Rate for shares of the series; or
A-27
(iii) if all of the Outstanding shares of the series are
subject to Submitted Hold Orders, that the Applicable Rate for all
shares of the series for the next succeeding Dividend Period thereof
shall be All Hold Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Existing Holders shall continue to hold the MMP Shares
that are subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 3 of this Part II, the Submitted Bids and
Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the
Auction Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of MMP Shares have been
made, all Submitted Sell Orders with respect to shares of the series shall be
accepted and, subject to the provisions of paragraphs (d) and (e) of this
Section 4, Submitted Bids with respect to shares of the series shall be accepted
or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of the series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of the series
specifying any rate that is higher than the Winning Bid Rate for shares
of the series shall be accepted, thus requiring each Existing Holder to
sell the MMP Shares subject to the Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of the series
specifying any rate that is lower than the Winning Bid Rate for shares
of the series shall be rejected, thus entitling each Existing Holder to
continue to hold the MMP Shares subject to the Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of the
series specifying any rate that is lower than the Winning Bid Rate for
shares of the series shall be accepted;
(iv) Each Existing Holder's Submitted Bid for shares of the
series specifying a rate that is equal to the Winning Bid Rate for
shares of the series shall be rejected, thus entitling the Existing
Holder to continue to hold the MMP Shares subject to the Submitted Bid,
unless the number of Outstanding MMP Shares subject to all Submitted
Bids shall be greater than the number of MMP Shares ("remaining
shares") in the excess of the Available MMP Shares over the number of
MMP Shares subject to Submitted Bids described in clauses (ii) and
(iii) of this paragraph (a), in which event the Submitted Bid of the
Existing Holder shall be rejected in part, and the Existing Holder
shall be entitled to continue to hold MMP Shares subject to the
Submitted Bid, but only in an amount equal to the number of MMP Shares
obtained by multiplying the number of remaining shares by a fraction,
the numerator of which shall be the number of Outstanding MMP Shares
held by the Existing Holder subject to the Submitted Bid and the
denominator of which shall be the aggregate number of Outstanding MMP
Shares subject to the Submitted Bids made by all such Existing Holders
that specified a rate equal to the Winning Bid Rate for shares of the
series; and
(v) Each Potential Holder's Submitted Bid for shares of the
series specifying a rate that is equal to the Winning Bid Rate for
shares of the series shall be accepted but only in an amount equal to
the number of shares of the series obtained by multiplying the number
of shares in the excess of the Available MMP Shares over the number of
MMP Shares subject to Submitted Bids described in clauses (ii) through
(iv) of this paragraph (a) by a fraction, the numerator of which shall
be the number of Outstanding MMP Shares subject to the Submitted Bid
and the denominator of which shall be the aggregate number of
Outstanding MMP Shares subject to Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning Bid Rate
for shares of the series.
A-28
(b) If Sufficient Clearing Bids for shares of MMP Shares have not been
made (other than because all of the Outstanding shares of the series are subject
to Submitted Hold Orders), subject to the provisions of paragraph (d) of this
Section 4, Submitted Orders for shares of the series shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids for shares of the series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of the series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of the series shall be rejected, thus entitling Existing Holders
to continue to hold the MMP Shares subject to the Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of the
series specifying any rate that is equal to or lower than the Maximum
Rate for shares of the series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of the
series specifying any rate that is higher than the Maximum Rate for
shares of the series and the Submitted Sell Orders for shares of the
series of each Existing Holder shall be accepted, thus entitling each
Existing Holder that submitted or on whose behalf was submitted any
Submitted Bid or Submitted Sell Order to sell the shares of the series
subject to the Submitted Bid or Submitted Sell Order, but in both cases
only in an amount equal to the number of shares of such series obtained
by multiplying the number of shares of the series subject to Submitted
Bids described in clause (ii) of this paragraph (b) by a fraction, the
numerator of which shall be the number of Outstanding shares of the
series held by the Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the
aggregate number of Outstanding shares of such series subject to all
such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of MMP Shares are subject to
Submitted Hold Orders, all Submitted Bids for shares of the series shall be
rejected.
(d) If, as a result of the procedures described in clause (iv) or (v)
of paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of MMP Shares
on any Auction Date, the Auction Agent shall, in the manner as it shall
determine in its sole discretion, round up or down the number of MMP Shares to
be purchased or sold by any Existing Holder or Potential Holder on the Auction
Date as a result of the procedures so that the number of shares so purchased or
sold by each Existing Holder or Potential Holder on the Auction Date shall be
whole shares of MMP Shares.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 4, any Potential Holder would be entitled or
required to purchase less than a whole share of MMP Shares on any Auction Date,
the Auction Agent shall, in the manner as it shall determine in its sole
discretion, allocate MMP Shares or purchase among Potential Holders so that only
whole shares of MMP Shares are purchased on the Auction Date as a result of such
procedures by any Potential Holder, even if the allocation results in one or
more Potential Holders not purchasing MMP Shares on the Auction Date.
(f) Based on the results of each Auction for shares of MMP Shares, the
Auction Agent shall determine the aggregate number of shares of the series to be
purchased and the aggregate number of shares of the series to be sold by
Potential Holders and Existing Holders and, with respect to each Potential
Holder and Existing Holder, to the extent that the aggregate number of shares to
be purchased and the aggregate number of shares to be sold differ, determine to
which other Potential Holder(s) or Existing Holder(s) they shall deliver, or
from which other Potential Holder(s) or Existing
A-29
Holder(s) they shall receive, as the case may be, MMP Shares. Notwithstanding
any provision of the Auction Procedures or the Settlement Procedures to the
contrary, in the event an Existing Holder or Beneficial Owner of shares of MMP
Shares with respect to whom a Broker-Dealer submitted a Bid to the Auction Agent
for the shares that was accepted in whole or in part, or submitted or is deemed
to have submitted a Sell Order for such shares that was accepted in whole or in
part, fails to instruct its Agent Member to deliver the shares against payment
therefor, partial deliveries of MMP Shares that have been made in respect of
Potential Holders' or Potential Beneficial Owners' Submitted Bids for shares of
the series that have been accepted in whole or in part shall constitute good
delivery to such Potential Holders and Potential Beneficial Owners.
(g) Neither the Company nor the Auction Agent nor any affiliate of
either shall have any responsibility or liability with respect to the failure of
an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver MMP Shares or to pay
for MMP Shares sold or purchased pursuant to the Auction Procedures or
otherwise.
SECOND: The Series II Money Market Cumulative Preferred Shares have
been classified and designated by the Board of Directors under the authority
contained in the charter.
THIRD: These Articles Supplementary have been approved by the Board of
Directors in the manner and by the vote required by law.
FOURTH: The undersigned President of the Company acknowledges these
Articles Supplementary to be the corporate act of the Company and, as to all
matters or facts required to be verified under oath, the undersigned President
acknowledges that, to the best of his knowledge, information and belief, these
matters and facts are true in all material respects and that this statement is
made under the penalties of perjury.
[SIGNATURE PAGE FOLLOWS]
A-30
IN WITNESS WHEREOF, the Company has caused these Articles Supplementary
to be signed in its name and on its behalf by its President and attested to by
its Treasurer on this __ day of __________, 2005.
ATTEST: TORTOISE ENERGY INFRASTRUCTURE
CORPORATION
------------------------------- -------------------------------
Terry C. Matlack David J. Schulte
Treasurer President
A-31
APPENDIX B-
RATING OF INVESTMENTS
MOODY'S INVESTORS SERVICE, INC.
Moody's long-term obligation ratings are opinions of the relative
credit risk of fixed-income obligations with an original maturity of one year or
more. They address the possibility that a financial obligation will not be
honored as promised. Such ratings reflect both the likelihood of default and any
financial loss suffered in the event of default.
"Aaa" Obligations rated Aaa are judged to be of the highest quality,
with minimal credit risk.
"Aa" Obligations rated Aa are judged to be of high quality and are
subject to very low credit risk.
"A" Obligations rated A are considered upper-medium grade and are
subject to low credit risk.
"Baa" Obligations rated Baa are subject to moderate credit risk. They
are considered medium-grade and as such may possess certain speculative
characteristics.
"Ba" Obligations rated Ba are judged to have speculative elements and
are subject to substantial credit risk.
"B" Obligations rated B are considered speculative and are subject to
high credit risk.
"Caa" Obligations rated Caa are judged to be of poor standing and are
subject to very high credit risk.
"Ca" Obligations rated Ca are highly speculative and are likely in, or
very near, default, with some prospect of recovery of principal and interest.
"C" Obligations rated C are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal and
interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range; and the modifier 3 indicates a ranking in the lower end
of that generic rating category.
US MUNICIPAL AND TAX-EXEMPT RATINGS
Municipal ratings are based upon the analysis of four primary factors
relating to municipal finance: economy, debt, finances, and
administration/management strategies. Each of the factors is evaluated
individually and for its effect on the other factors in the context of the
municipality's ability to repay its debt.
"Aaa" Issuers or issues rated Aaa demonstrate the strongest
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"Aa" Issuers or issues rated Aa demonstrate very strong
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"A" Issuers or issues rated A present above average creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
B-1
"Baa" Issuers or issues rated Baa represent average creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"Ba" Issuers or issues rated Ba demonstrate below-average
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"B" Issuers or issues rated B demonstrate weak creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
"Caa" Issuers or issues rated Caa demonstrate very weak
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"Ca" Issuers or issues rated Ca demonstrate extremely weak
creditworthiness relative to other US municipal or tax-exempt issuers
or issues.
"C" Issuers or issues rated C demonstrate the weakest creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating category from Aa through Caa. The modifier 1 indicates that the
issuer or obligation ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that generic rating
category.
DESCRIPTION OF MOODY'S HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES AND
OTHER SHORT-TERM LOANS
Moody's ratings for state and municipal notes and other short-term
loans are designated "Moody's Investment Grade" ("MIG" or, for variable or
floating rate obligations, "VMIG"). Such ratings recognize the differences
between short-term credit risk and long-term risk. Factors affecting the
liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings. Symbols used will be as follows:
"MIG-1" This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
"MIG-2" This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
"MIG-3" This designation denotes acceptable credit quality. Liquidity
and cash-flow protection may be narrow, and market access for refinancing is
likely to be less well-established.
"SG" This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection. Demand
features rated in this category may be supported by a liquidity provider that
does not have an investment grade short-term rating or may lack the structural
and/or legal protections necessary to ensure the timely payment of purchase
price upon demand.
"VMIG 1" This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
B-2
"VMIG 2" This designation denotes strong credit quality. Good
protection is afforded by the strong short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
"VMIG 3" This designation denotes acceptable credit quality. Adequate
protection is afforded by the satisfactory short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
DESCRIPTION OF MOODY'S SHORT TERM RATINGS
Moody's short-term ratings are opinions of the ability of issuers to
honor short-term financial obligations. Ratings may be assigned to issuers,
short-term programs or to individual short-term debt instruments. Such
obligations generally have an original maturity not exceeding thirteen months,
unless explicitly noted.
"P-1" Issuers (or supporting institutions) rated Prime-1 have a
superior ability to repay short-term debt obligations.
"P-2" Issuers (or supporting institutions) rated Prime-2 have a strong
ability to repay short-term debt obligations.
"P-3" Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability to repay short-term obligations.
"NP" Issuers (or supporting institutions) rated Not Prime do not fall
within any of the Prime rating categories.
FITCH RATINGS
A brief description of the applicable Fitch Ratings ("Fitch") ratings
symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
"AAA" -- Highest credit quality. 'AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This capacity is
highly unlikely to be affected adversely by foreseeable events.
"AA" -- Very high credit quality. 'AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for timely
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
"A" -- High credit quality. 'A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for higher
ratings.
"BBB" -- Good credit quality. 'BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
B-3
SPECULATIVE GRADE
"BB" -- Speculative. 'BB' ratings indicate that there is a possibility
of credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
"B" -- Highly speculative. 'B' ratings indicate that significant credit
risk is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
"CCC", "CC", "C" -- High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon sustained,
favorable business or economic developments. A 'CC' rating indicates that
default of some kind appears probable. 'C' ratings signal imminent default.
"DDD", "DD", And "D" Default -- The ratings of obligations in this
category are based on their prospects for achieving partial or full recovery in
a reorganization or liquidation of the obligor. While expected recovery values
are highly speculative and cannot be estimated with any precision, the following
serve as general guidelines. 'DDD' obligations have the highest potential for
recovery, around 90%-100% of outstanding amounts and accrued interest. 'DD'
indicates potential recoveries in the range of 50%-90%, and 'D' the lowest
recovery potential, i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities rated 'DDD' have the
highest prospect for resumption of performance or continued operation with or
without a formal reorganization process. Entities rated 'DD' and 'D' are
generally undergoing a formal reorganization or liquidation process; those rated
'DD' are likely to satisfy a higher portion of their outstanding obligations,
while entities rated 'D' have a poor prospect for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
"F1" -- Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
"F2" -- Good credit quality. A satisfactory capacity for timely payment
of financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
"F3" -- Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade. B Speculative. Minimal capacity
for timely payment of financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
"B" -- Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
"C" -- High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
"D" -- Default. Denotes actual or imminent payment default.
B-4
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the 'AAA' Long-term
rating category, to categories below 'CCC', or to Short-term ratings other than
'F1'.
"NR" indicates that Fitch Ratings does not rate the issuer or issue in
question.
"Withdrawn" -- A rating is withdrawn when Fitch Ratings deems the
amount of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
"Rating Watch" -- Ratings are placed on Rating Watch to notify
investors that there is a reasonable probability of a rating change and the
likely direction of such change. These are designated as "Positive", indicating
a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch typically is resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are 'stable' could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch Ratings may be unable to identify
the fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
STANDARD & POOR'S CORPORATION
A brief description of the applicable Standard & Poor's Corporation, a division
of The McGraw-Hill Companies ("Standard & Poor's" or "S&P"), rating symbols and
their meanings (as published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation. The issue credit rating is
not a recommendation to purchase, sell, or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. The result is a
dual rating, in which the short-term ratings address the put feature, in
addition to the usual long-term rating. Medium-term notes are assigned long-term
ratings.
B-5
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms of
the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights. The issue ratings
definitions are expressed in terms of default risk. As such, they pertain to
senior obligations of an entity. Junior obligations are typically rated lower
than senior obligations, to reflect the lower priority in bankruptcy, as noted
above.
"AAA" -- An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" -- An obligation rated 'AA' differs from the highest-rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" -- An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
BBB -- An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
BB, B, CCC, CC, and C -- Obligations rated 'BB', 'B', 'CCC', 'CC', and
'C' are regarded as having significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB -- An obligation rated 'BB' is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions, which could
lead to the obligor's inadequate capacity to meet its financial commitment on
the obligation.
B -- An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated 'CCC' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C -- The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
B-6
D -- An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
"+/-" -- Plus (+) or minus (-). The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"c" -- The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"P" -- The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
"*" -- Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" -- The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an 'r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R. -- Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS
Under present commercial bank regulations issued by the Comptroller of
the Currency, bonds rated in the top four categories ('AAA', 'AA', 'A', 'BBB',
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A Standard & Poor's note ratings reflect the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
B-7
Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
"SP-1" -- Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a plus
(+) designation.
"SP-2" -- Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes over the term of
the notes.
"SP-3" -- Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
"A-1" -- A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations is
extremely strong.
"A-2" -- A short-term obligation rated 'A-2' is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is satisfactory.
"A-3" -- A short-term obligation rated 'A-3' exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation.
"B" -- A short-term obligation rated 'B' is regarded as having
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
"C" -- A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
B-8
"D" -- A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
`D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
B-9
TORTOISE ENERGY INFRASTRUCTURE CORPORATION
-----------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------------------------
, 2005
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
The Registrant's audited financial statements dated November 30, 2004,
the notes to the financial statements and report of independent registered
public accounting firm thereon are filed herein. Updated, unaudited financial
statements of the Registrant will be filed by amendment.
2. Exhibits:
a.1. Articles of Incorporation.(1)
a.2. Articles of Amendment and Restatement.(2)
a.3. Form of Articles Supplementary.(4)
b.1. By-laws.(1)
b.2. Amended and Restated Bylaws.(2)
c. None.
d.1. Form of Preferred Stock Certificate.*
d.2. Form of Fitch Rating Guidelines and Moody's Rating
Guidelines.**
e. Terms and Conditions of the Dividend Reinvestment
Plan.(3)
f. Not applicable.
g.1. Investment Advisory Agreement with Tortoise Capital
Advisors, L.L.C.(3)
g.2. Reimbursement Agreement.(3)
h. Form of Underwriting Agreement.**
i. None.
j. Custody Agreement.(3)
k.1 Stock Transfer Agency Agreement.(2)
k.2 Administration Agreement.(3)
k.3 Fund Accounting Agreement.(3)
k.4 Form of Auction Agency Agreement.**
k.5 Form of Broker-Dealer Agreement.**
k.6 DTC Representations Letter.(6)
l. Opinion of Venable LLP**
m. Not applicable.
n.1. Consent of Auditors.**
o. Not applicable.
p. Subscription Agreement.(3)
q. None.
r. Code of Ethics for the Registrant and the Adviser.(5)
s. Powers of Attorney.(5)
(*) Filed herewith.
(**) To be filed by amendment.
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 31, 2003 (File Nos. 333-110143 and
811-21462).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on January 30,
2004 (File Nos. 333-110143 and 811-21462).
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on June 28, 2004
(File Nos. 333-114545 and 811-21462).
C-1
(4) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 15, 2004 (File Nos. 333-119784 and
811-21462).
(5) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on November 24,
2004 (File Nos. 33-119784 and 811-21462).
(6) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on April 1, 2005
(File Nos. 333-122350 and 811-21462).
ITEM 25: MARKETING ARRANGEMENTS
Reference is made to the underwriting agreement to be filed in an
amendment to the Registration Statement.
ITEM 26: OTHER EXPENSES AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Securities and Exchange Commission Fees................. $ *
Directors' Fees and Expenses............................ *
Printing (other than certificates)...................... *
Accounting fees and expenses............................ *
Legal fees and expenses................................. *
Rating Agency Fees...................................... *
Auction Agency Fee...................................... *
Miscellaneous........................................... *
-
Total................................................ *
=
* To be completed by amendment.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of ______, 2005, the number of record holders of each class of
securities of the Registrant was:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
----------------------------------------- ----------------------------
Common Shares ($0.001 par value).........
Preferred Stock (Liquidation Preference
$25,000 per share)....................
Long-term Debt ($165,000,000 aggregate
principal amount).....................
C-2
ITEM 29. INDEMNIFICATION
Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty which is
established by a final judgment as being material to the cause of action. The
Registrant's charter contains such a provision which eliminates directors' and
officers' liability to the maximum extent permitted by Maryland law.
The Registrant's charter authorizes it, to the maximum extent permitted by
Maryland law and the Investment Company Act of 1940, as amended (the "1940
Act"), to obligate itself to indemnify any present or former director or officer
or any individual who, while a director of the Registrant and at the request of
the Registrant, serves or has served another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or other
enterprise as a director, officer, partner or trustee, from and against any
claim or liability to which that person may become subject or which that person
may incur by reason of his or her status as a present or former director or
officer of the Registrant and to pay or reimburse his or her reasonable expenses
in advance of final disposition of a proceeding. The Registrant's Bylaws
obligate it, to the maximum extent permitted by Maryland law and the 1940 Act,
to indemnify any present or former director or officer or any individual who,
while a director of the Registrant and at the request of the Registrant, serves
or has served another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or other enterprise as a director,
officer, partner or trustee and who is made a party to the proceeding by reason
of his service in that capacity from and against any claim or liability to which
that person may become subject or which that person may incur by reason of his
or her status as a present or former director or officer of the Registrant and
to pay or reimburse his or her reasonable expenses in advance of final
disposition of a proceeding. The charter and Bylaws also permit the Registrant
to indemnify and advance expenses to any person who served as a predecessor of
the Registrant in any of the capacities described above and any employee or
agent of the Registrant or a predecessor of the Registrant.
Maryland law requires a corporation (unless its charter provides otherwise,
which the Registrant's charter does not) to indemnify a director or officer who
has been successful in the defense of any proceeding to which he is made a party
by reason of his service in that capacity. Maryland law permits a corporation to
indemnify its present and former directors and officers, among others, against
judgements, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. However,
under Maryland law, a Maryland corporation may not indemnify for an adverse
judgement in a suit by or in the right of the corporation or for a judgement of
liability on the basis that personal benefit was improperly received, unless in
either case a court orders indemnification and then only for expenses. In
addition, Maryland law permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written affirmation
by the director or officer of his or her good faith belief that he or she has
met the standard of conduct necessary for indemnification by the corporation and
(b) a written undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately determined that
the standard of conduct was not met.
The provisions set forth above apply insofar as they are consistent with Section
17(h) of the 1940 Act, which prohibits indemnification of any director or
officer of the Registrant against any liability to the
C-3
Registrant or its stockholders to which such director or officer otherwise would
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended ("1933 Act"), may be provided to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding or payment pursuant to any insurance policy)
is asserted against the Registrant by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The information in the Statement of Additional Information under the
caption "Management of the Company--Directors and Officers" is hereby
incorporated by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All such accounts, books, and other documents are maintained at the
offices of the Registrant, at the offices of the Registrant's investment
adviser, Tortoise Capital Advisors, L.L.C., 10801 Mastin Boulevard, Suite 222,
Overland Park, Kansas 66210, at the offices of the custodian, U.S. Bank National
Association, 425 Walnut Street, M.L. CN-OH-W6TC, Cincinnati, Ohio 45202, at the
offices of the transfer agent, Computershare Investor Services, LLC, Two North
LaSalle Street, Chicago, Illinois 60602, at the offices of the administrator,
U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee, WI 53202,
or at the offices of the Auction Agent and Paying Agent, The Bank of New York,
101 Barclay Street, 7W, New York, NY 10280.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the offering of shares
until the Prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of the registration statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the Prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. (a) For the purposes of determining any liability under the
1933 Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A
C-4
and contained in the form of prospectus filed by the Registrant under Rule
497(h) under the 1933 Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
1933 Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prominent delivery within two business days of
receipt of a written or oral request the Registrant's statement of additional
information.
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Overland Park and State of Kansas, on the 14th day
of April, 2005.
Tortoise Energy Infrastructure Corporation
By: /s/ David J. Schulte
-------------------------------------
David J. Schulte, President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
/s/ Terry C. Matlack* Director and Treasurer (Principal
------------------------------------ Financial and Accounting Officer) April 14, 2005
Terry C. Matlack
/s/ Conrad S. Ciccotello* Director
------------------------------------
Conrad S. Ciccotello April 14, 2005
/s/ John R. Graham* Director
------------------------------------
John R. Graham April 14, 2005
/s/ Charles E. Heath* Director
------------------------------------
Charles E. Heath April 14, 2005
/s/ H. Kevin Birzer* Director
------------------------------------
H. Kevin Birzer April 14, 2005
/s/ David J. Schulte President and Chief Executive Officer
------------------------------------
David J. Schulte (Principal Executive Officer) April 14, 2005
* By David J. Schulte pursuant to power of attorney, filed on January 30, 2004
in connection with Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-2, filed on January 30, 2004 (File Nos. 333-110143 and
811-21462) and is hereby incorporated by reference.
EXHIBIT INDEX
a.1. Articles of Incorporation.(1)
a.2. Articles of Amendment and Restatement.(2)
a.3. Form of Articles Supplementary.(4)
b.1. By-laws.(1)
b.2. Amended and Restated Bylaws.(2)
c. None.
d.1. Form of Preferred Stock Certificate.*
d.2. Form of Fitch Rating Guidelines and Moody's Rating
Guidelines.**
e. Terms and Conditions of the Dividend Reinvestment Plan.(3)
f. Not applicable.
g.1. Investment Advisory Agreement with Tortoise Capital Advisors,
L.L.C.(3)
g.2. Reimbursement Agreement.(3)
h. Form of Underwriting Agreement.**
i. None.
j. Custody Agreement.(3)
k.1 Stock Transfer Agency Agreement.(2)
k.2 Administration Agreement.(3)
k.3 Fund Accounting Agreement.(3)
k.4 Form of Auction Agency Agreement.**
k.5 Form of Broker-Dealer Agreement.**
k.6 DTC Representations Letter.(6)
l. Opinion of Venable LLP**
m. Not applicable.
n.1. Consent of Auditors.**
o. Not applicable.
p. Subscription Agreement.(3)
q. None.
r. Code of Ethics for the Registrant and the Adviser.(5)
s. Powers of Attorney.(5)
(*) Filed herewith.
(**) To be filed by amendment.
(1) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 31, 2003 (File Nos. 333-110143 and
811-21462).
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on January 30,
2004 (File Nos. 333-110143 and 811-21462).
(3) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on June 28, 2004
(File Nos. 333-114545 and 811-21462).
(4) Incorporated by reference to Registrant's Registration Statement on
Form N-2, filed on October 15, 2004 (File Nos. 333-119784 and
811-21462).
(5) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on November 24,
2004 (File Nos. 33-119784 and 811-21462).
(6) Incorporated by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, filed on April 1, 2005
(File Nos. 333-122350 and 811-21462).