TYG N-CSR
As filed with the Securities
and Exchange Commission on [date]
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER
REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file
number 811-21462
Tortoise Energy
Infrastructure Corporation
(Exact name of registrant as specified in charter)
10801 Mastin Blvd.,
Suite 222, Overland Park, KS 66210
(Address of principal executive offices) (Zip
code)
David J. Schulte
10801
Mastin Blvd., Suite 222, Overland Park, KS 66210
(Name and address of agent for
service)
913-981-1020
Registrant's
telephone number, including area code
Date of fiscal year end: November
30
Date of reporting period: November
30, 2006
Item 1. Report to Stockholders.
Company at a Glance
Tortoise Energy Infrastructure Corp. is a
pioneering closed-end investment company investing primarily in equity securities of Master Limited
Partnerships (MLPs) operating energy infrastructure assets.
Investment Objectives: Yield, Growth and
Quality
Our goal is to provide our stockholders with a
high level of total return with an emphasis on current distributions.
In seeking to achieve yield, we target
distributions to our stockholders that are roughly equal to the underlying yield on a direct investment in
MLPs. We accomplish this by maintaining our strategy of investing primarily in energy infrastructure companies
with attractive current yields and growth potential.
Tortoise Energy achieves dividend growth as
revenues of our underlying companies grow with the economy, with the population and through rate increases.
This revenue growth leads to increased operating profits, and when combined with internal expansion projects
and acquisitions, is expected to provide attractive growth in distributions to Tortoise Energy. We also seek
dividend growth through capital market strategies involving timely debt and equity offerings by Tortoise
Energy that are primarily invested in MLP issuer direct placements.
We seek to achieve quality by investing in
companies operating infrastructure assets that are critical to the U.S. economy. Often these assets would be
difficult to replicate. We also back experienced management teams with successful track records. By investing
in Tortoise Energy, our stockholders have access to a portfolio that is diversified through geographic regions
and across product lines, including natural gas, natural gas liquids, crude oil and refined products.
About Master Limited Partnerships
MLPs are limited partnerships whose units trade on
public exchanges such as the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and NASDAQ.
Buying MLP units makes an investor a limited partner in the MLP. There are currently more than 50 MLPs in the
market, mostly in industries related to energy, natural resources and real estate.
Tortoise Energy invests primarily in MLPs in the
energy infrastructure sector. Energy infrastructure MLPs are engaged in the transportation, storage and
processing of crude oil, natural gas and refined products from production points to the end users. Our
investments are primarily in mid-stream (mostly pipeline) operations, which typically produce steady cash
flows with less exposure to commodity prices than many alternative investments in the broader energy industry.
With the growth potential of this sector along with our disciplined investment approach, we endeavor to
generate a predictable and increasing dividend stream for our investors.
A Tortoise Energy Investment Versus a Direct
Investment in MLPs
Tortoise Energy seeks to provide its stockholders
with an efficient alternative to investing directly in MLPs. A direct investment in a MLP potentially offers
the opportunity to receive an attractive distribution that is approximately 80 percent tax deferred, with a
historically low correlation to returns on stocks and bonds. However, the tax characteristics of a direct MLP
investment are generally undesirable for tax-exempt investors such as retirement plans. Tortoise Energy is
structured as a C Corporation accruing federal and state income taxes, based on taxable earnings and
profits. Because of this innovative structure, pioneered by Tortoise Capital Advisors, institutions and
retirement accounts are able to join individual stockholders as investors in MLPs.
Additional features of Tortoise Energy
include:
|
One Form 1099 per stockholder at the end of the year, thus avoiding multiple K-1s and multiple
state filings for individual partnership investments; |
|
A professional management team, with nearly 100 years combined investment experience, to
select and manage the portfolio on your behalf; |
|
The ability to access investment grade credit markets to enhance the dividend rate; and |
|
Access to direct placements and other investments not available through the public
markets. |
Summary Financial Information
(Unaudited)
Year Ended November 30 |
|
|
|
2006 |
|
|
Market value per share |
|
|
$ |
36.13 |
|
Net asset value per share |
|
|
|
31.82 |
|
Total net assets |
|
|
|
532,433,365 |
|
Unrealized appreciation of investments (excluding interest rate swap contracts) |
|
|
before deferred taxes |
|
|
|
186,051,459 |
|
Unrealized appreciation of investments and interest rate swap |
|
|
contracts after deferred taxes |
|
|
|
111,580,962 |
|
Net investment loss |
|
|
|
(5,798,038 |
) |
Total realized gain after deferred taxes |
|
|
|
5,524,349 |
|
Total investment return based on market value(1) |
|
|
|
34.50 |
% |
Net operating expenses before leverage costs and taxes as a |
|
|
percent of average total assets(2) |
|
|
|
0.98 |
% |
Distributable cash flow as a percent of average net assets(3) |
|
|
|
7.54 |
% |
|
(1) |
See footnote 6 to the Financial Highlights on page 22 for further disclosure. |
(2) |
Represents expenses, after fee reimbursement. |
(3) |
See Key Financial Data which illustrates the calculation of distributable cash
flow. |
Allocation of Portfolio Assets
November 30, 2006 (Unaudited)
(Percentages based on total investment portfolio)
January 22, 2007
Fellow Stockholders,
Tortoise Energy Infrastructure Corp.s
(Tortoise Energy) fiscal 2006 results reflect our commitment to yield, growth and quality.
Our portfolio companies exceeded performance
expectations as a result of growing energy demand, internal growth projects and acquisitions. This
performance, coupled with a strong equity market, low interest rates and strengthening investor confidence in
the sector, led to an outstanding year for Tortoise Energy.
Performance Review and Outlook
Tortoise Energys total return for fiscal
year 2006 was 34.5 percent based on market value, including the reinvestment of quarterly dividends. Our
dividends for the year of $2.02 grew 12.8 percent over the $1.79 paid the prior year. Our most recent dividend
of $0.53 per common share was our eighth consecutive dividend increase since full investment of the initial
public offering proceeds. It represents an annualized dividend rate of $2.12 and is a 16.5 percent increase
over the 2005 fourth quarter annualized dividend rate of $1.82.
The average annual percentage increase of
distributions of our portfolio companies was 17 percent as compared to their distributions for the prior year.
The strength of our portfolio is evidenced by our selection of quality companies, led by excellent management
teams who focus on low-risk infrastructure assets and stable recurring revenue streams.
We maintain our expectation that our long-term
dividend growth will be approximately 4 percent on an annual basis.
2 |
Tortoise Energy Infrastructure Corp. |
|
Investment Review
In order to increase dividends and long-term
stockholder value, we issue debt and equity to allow us to make attractive investments, primarily through
issuer direct placements.
In June 2006, Tortoise Energy continued its
history of innovation in the capital marketplace by putting in place a universal shelf registration statement
which allows the company to issue, in multiple offerings, up to $125 million in common stock, preferred stock
or debt securities. The flexible nature of the shelf will allow us to efficiently raise funds to invest in
opportunities we believe will increase dividends and long-term stockholder value.
Under the shelf registration, we completed a $50
million public offering of common stock in August 2006 and an additional $52 million common stock offering in
December 2006. The proceeds of these offerings were used primarily to repay outstanding debt under a revolving
credit facility utilized to fund attractive direct placements and open market purchases.
Since its inception in February 2004 through the
date of this letter, Tortoise Energy has helped finance growth in the energy infrastructure MLP sector through
the completion of 25 direct purchases from MLP issuers or their affiliates totaling nearly $327 million.
Master Limited Partnership Investment Overview
and Outlook
In 2006, the MLP market continued to play a vital
role in the expansion of U.S. energy infrastructure. Lehman Brothers estimated that approximately $4 billion
was spent on internal growth projects in the 2006 calendar year compared to approximately $3 billion in 2005.
Expected internal growth project costs for the next few years exceed $17 billion. In addition, acquisition
activity through December 31, 2006 remained strong, with more than $11 billion of mainly natural gas assets
entering the MLP sector. We anticipate acquisitions in 2007 will also drive distribution growth, since MLPs
currently own less than 50 percent of the refined product, crude oil and natural gas midstream assets in the
United States.
These organic growth projects and acquisitions
will require equity and debt financing that could provide direct placement opportunities for Tortoise
Energy.
Conclusion
Population and economic growth trends should
continue to increase U.S. energy demand. We believe energy infrastructure will directly benefit, providing
investors an attractive return with minimal exposure to risks associated with volatile energy commodity
prices. We hope that investors seeking expertise in RIT and MLP portfolio management will find Tortoise Energy
a compelling option.
Thank you to our stockholders for your continued
support. As always, we will strive to deliver a rewarding return and we will remain steadfast to our objective
of providing you with an attractive yield, dividend growth and a portfolio of quality companies. We look
forward to seeing you at the annual stockholders meeting on April 13, 2007. For those unable to attend,
please access our webcast of the meeting at www.tortoiseadvisors.com.
Sincerely,
The Managing Directors
Tortoise Capital
Advisors, L.L.C.
|
|
|
|
|
H. Kevin Birzer |
Zachary A. Hamel |
Kenneth P. Malvey |
Terry Matlack |
David J. Schulte |
4 |
Tortoise Energy Infrastructure Corp. |
|
Table of Contents
6 |
|
Key Financial Data |
8 |
|
Managements Discussion |
12 |
|
Business Description |
15 |
|
Schedule of Investments |
17 |
|
Statement of Assets & Liabilities |
18 |
|
Statement of Operations |
19 |
|
Statement of Changes in Net Assets |
20 |
|
Statement of Cash Flows |
21 |
|
Financial Highlights |
23 |
|
Notes to Financial Statements |
30 |
|
Report of Independent Registered Public Accounting Firm |
31 |
|
Company Officers and Directors |
33 |
|
Additional Information |
Key Financial Data
(Unaudited)
(dollar amounts in thousands unless otherwise indicated)
|
Year Ended November 30,
|
|
|
2005 |
|
2006 |
|
|
Total Distributions Received from Investments |
|
|
|
|
|
|
|
|
Distributions received from master limited partnerships |
|
|
$ |
36,172 |
|
$ |
45,985 |
|
Dividends paid in stock |
|
|
|
4,403 |
|
|
5,862 |
|
Dividends from common stock |
|
|
|
95 |
|
|
97 |
|
Short-term interest and dividend Income |
|
|
|
1,121 |
|
|
746 |
|
|
|
|
|
|
Total from investments |
|
|
|
41,791 |
|
|
52,690 |
|
Operating Expenses Before Leverage Costs and Current Taxes |
|
|
Advisory fees, net of reimbursement |
|
|
|
4,805 |
|
|
6,254 |
|
Other operating expenses |
|
|
|
1,450 |
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
6,255 |
|
|
7,563 |
|
|
|
|
|
|
Distributable cash flow before leverage costs and current taxes |
|
|
|
35,536 |
|
|
45,127 |
|
Leverage costs(2) |
|
|
|
7,779 |
|
|
11,032 |
|
Current income tax expense |
|
|
|
214 |
|
|
472 |
|
|
|
|
|
|
Distributable Cash Flow(3) |
|
|
$ |
27,543 |
|
$ |
33,623 |
|
|
|
|
|
|
Dividends paid on common stock |
|
|
$ |
26,506 |
|
$ |
31,969 |
|
Dividends paid on common stock per share |
|
|
|
1.79 |
|
|
2.02 |
|
Payout percentage for period(4) |
|
|
|
96.2 |
% |
|
95.1 |
% |
Total assets, end of period |
|
|
|
695,978 |
|
|
928,431 |
|
Average total assets during period(5) |
|
|
|
663,318 |
|
|
773,568 |
|
Leverage (Tortoise Notes, Preferred Stock and short-term credit facility)(6) |
|
|
|
235,000 |
|
|
267,450 |
|
Leverage as a percent of total assets |
|
|
|
33.8 |
% |
|
28.8 |
% |
Unrealized appreciation net of deferred taxes, end of period |
|
|
|
84,456 |
|
|
196,037 |
|
Net assets, end of period |
|
|
|
404,274 |
|
|
532,433 |
|
Average net assets during period(7) |
|
|
|
414,802 |
|
|
446,210 |
|
Net asset value per common share |
|
|
|
27.12 |
|
|
31.82 |
|
Market value per share |
|
|
|
28.72 |
|
|
36.13 |
|
Shares outstanding |
|
|
|
14,906 |
|
|
16,732 |
|
Selected Operating Ratios(8) |
|
|
|
As a Percent of Average Total Assets |
|
|
Total distributions received from investments |
|
|
|
6.30 |
% |
|
6.81 |
% |
Operating expenses before leverage costs and current taxes |
|
|
|
0.94 |
% |
|
0.98 |
% |
Distributable cash flow before leverage costs and current taxes |
|
|
|
5.36 |
% |
|
5.83 |
% |
As a Percent of Average Net Assets |
|
|
Distributable cash flow |
|
|
|
6.64 |
% |
|
7.54 |
% |
(1) |
Q1 is the period from December through February. Q2 is the period from March through May.
Q3 is the period from June through August. Q4 is the period from September through November. |
(2) |
Leverage costs include interest expense, auction agent fee, interest rate swap expenses and
preferred dividends. |
(3) |
Net investment income (loss), before income taxes on the Statement of
Operations is adjusted as follows to reconcile to Distributable Cash Flow (DCF): increased by the return of
capital on MLP distributions and the value of paid-in-kind distributions; and decreased by dividends to
preferred stockholders, current taxes, and realized and short-term unrealized losses (gains) on interest rate
swap settlements. |
(4) |
Dividends paid as a percentage of Distributable Cash Flow. |
(5) |
Computed by averaging month-end values within each period. |
(6) |
The balance on the short-term credit facility was $32,450,000 as of November 30,
2006. |
(7) |
Computed by averaging daily values for the period. |
(8) |
Annualized for period less than one full year. |
6 |
Tortoise Energy Infrastructure Corp. |
|
|
2006
|
|
2005 Q4(1) |
|
Q1(1) |
|
Q2(1) |
|
Q3(1) |
|
Q4(1) |
|
|
|
|
|
$ |
10,188 |
|
$ |
10,601 |
|
$ |
11,074 |
|
$ |
11,715 |
|
$ |
12,595 |
|
|
1,197 |
|
|
1,242 |
|
|
1,186 |
|
|
1,689 |
|
|
1,745 |
|
|
26 |
|
|
31 |
|
|
32 |
|
|
34 |
|
|
|
|
|
218 |
|
|
197 |
|
|
199 |
|
|
194 |
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
11,629 |
|
|
12,071 |
|
|
12,491 |
|
|
13,632 |
|
|
14,496 |
|
|
1,300 |
|
|
1,248 |
|
|
1,550 |
|
|
1,660 |
|
|
1,796 |
|
|
397 |
|
|
343 |
|
|
310 |
|
|
321 |
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
1,697 |
|
|
1,591 |
|
|
1,860 |
|
|
1,981 |
|
|
2,131 |
|
|
|
|
|
|
|
|
|
|
|
|
9,932 |
|
|
10,480 |
|
|
10,631 |
|
|
11,651 |
|
|
12,365 |
|
|
2,488 |
|
|
2,661 |
|
|
2,723 |
|
|
2,864 |
|
|
2,784 |
|
|
214 |
|
|
59 |
|
|
137 |
|
|
138 |
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
$ |
7,230 |
|
$ |
7,760 |
|
$ |
7,771 |
|
$ |
8,649 |
|
$ |
9,443 |
|
|
|
|
|
|
|
|
|
|
|
$ |
6,764 |
|
$ |
7,155 |
|
$ |
7,472 |
|
$ |
8,494 |
|
$ |
8,848 |
|
|
0.455 |
|
|
0.48 |
|
|
0.50 |
|
|
0.51 |
|
|
0.53 |
|
|
93.6 |
% |
|
92.2 |
% |
|
96.2 |
% |
|
98.2 |
% |
|
93.7 |
% |
|
695,978 |
|
|
718,266 |
|
|
758,684 |
|
|
835,250 |
|
|
928,431 |
|
|
725,506 |
|
|
704,996 |
|
|
735,142 |
|
|
786,791 |
|
|
865,220 |
|
|
235,000 |
|
|
235,000 |
|
|
235,000 |
|
|
235,000 |
|
|
267,450 |
|
|
33.8 |
% |
|
32.7 |
% |
|
31.0 |
% |
|
28.1 |
% |
|
28.8 |
% |
|
84,456 |
|
|
99,072 |
|
|
129,299 |
|
|
148,264 |
|
|
196,037 |
|
|
404,274 |
|
|
410,642 |
|
|
432,077 |
|
|
492,866 |
|
|
532,433 |
|
|
421,244 |
|
|
411,181 |
|
|
419,521 |
|
|
446,196 |
|
|
507,852 |
|
|
27.12 |
|
|
27.55 |
|
|
28.91 |
|
|
29.59 |
|
|
31.82 |
|
|
28.72 |
|
|
29.42 |
|
|
28.75 |
|
|
30.62 |
|
|
36.13 |
|
|
14,906 |
|
|
14,906 |
|
|
14,944 |
|
|
16,655 |
|
|
16,732 |
|
|
|
|
6.43 |
% |
|
6.94 |
% |
|
6.74 |
% |
|
6.87 |
% |
|
6.72 |
% |
|
0.94 |
% |
|
0.92 |
% |
|
1.00 |
% |
|
1.00 |
% |
|
0.99 |
% |
|
5.49 |
% |
|
6.02 |
% |
|
5.74 |
% |
|
5.87 |
% |
|
5.73 |
% |
|
6.88 |
% |
|
7.65 |
% |
|
7.35 |
% |
|
7.69 |
% |
|
7.46 |
% |
Managements Discussion
The information contained in this section
should be read in conjunction with our Financial Statements and the Notes thereto. In addition, this report
contains certain forward-looking statements. These statements include the plans and objectives of management
for future operations and financial objectives and can be identified by the use of forward-looking terminology
such as may, will, expect, intend, anticipate,
estimate, or continue or the negative thereof or other variations thereon or
comparable terminology. These forward-looking statements are subject to the inherent uncertainties in
predicting future results and conditions. Certain factors that could cause actual results and conditions to
differ materially from those projected in these forward-looking statements are set forth in the Risk
Factors section of our public filings with the SEC.
Overview
Tortoise Energy seeks is to provide a growing
dividend stream to our investors, and when combined with MLP growth prospects, the investment offers the
opportunity for an attractive total return. We seek to provide our stockholders with an efficient vehicle to
invest in the energy infrastructure sector. While we are a registered investment company under the Investment
Company Act of 1940, as amended (the 1940 Act), we are not a regulated investment
company for federal tax purposes. Our dividends do not generate unrelated business taxable income (UBTI)
and our stock may therefore be suitable for holding by pension funds, IRAs and mutual funds, as well as
taxable accounts.
We invest primarily in MLPs through private and
public market purchases. MLPs are publicly traded partnerships whose equity interests are traded in the form
of units on public exchanges, such as the NYSE. Our private purchases principally involve providing financing
directly to an MLP through equity investments, which we refer to as direct placements. MLPs typically use this
financing to fund growth, acquisitions, recapitalizations, debt repayments and bridge financings. We generally
invest in companies that are publicly reporting, but for which private financing offers advantages. These
direct placement opportunities generally arise from our long-term relationships with energy infrastructure
MLPs and our unique expertise in origination, structuring, diligence and investment oversight.
Critical Accounting Policies
The financial statements are based on the
selection and application of critical accounting policies, which require management to make significant
estimates and assumptions. Critical accounting policies are those that are both important to the presentation
of our financial condition and results of operations and require managements most difficult, complex, or
subjective judgments. Our critical accounting policies are those applicable to the valuation of investments
and certain revenue recognition matters as discussed in Note 2 in the Notes to Financial Statements.
Determining Dividends Distributed to
Stockholders
Our portfolio generates cash flow from which we
pay dividends to stockholders. We pay dividends out of our distributable cash flow (DCF). Our
Board of Directors reviews the dividend rate quarterly, and may adjust the quarterly dividend throughout the
year. Our goal is to declare what we believe to be sustainable increases in our regular quarterly dividends.
We intend to reinvest the after-tax proceeds of sales of investments in order to maintain and grow our
dividend rate. We have targeted to pay at least 95 percent of DCF on an annualized basis.
Determining DCF
DCF is simply distributions received from
investments less our total expenses. The total distributions received from our investments includes the amount
received by us as cash distributions from MLPs, paid-in-kind distributions, and dividend and interest
payments. The total expenses include current or anticipated operating expenses, leverage costs and current
income taxes on our operating income. Each are summarized for you in the table on pages 6 and 7 and are
discussed in more detail below.
8 |
Tortoise Energy Infrastructure Corp. |
|
Managements Discussion
(Continued)
The key financial data table discloses the
calculation of DCF. The difference between distributions received from investments in the DCF calculation and
net investment income (loss) before taxes as reported in the Statement of Operations, is reconciled as
follows: (1) the Statement of Operations, in conformity with U.S. generally accepted accounting principles
(GAAP), recognizes distribution income from MLPs and common stock on their ex-dates, whereas the DCF
calculation reflects distribution income on their pay dates; (2) GAAP recognizes that a significant portion of
the cash distributions received from MLPs are treated as a return of capital and therefore excluded from
investment income, whereas the DCF calculation includes the return of capital; and (3) distributions received
from investments in the DCF calculation include the value of dividends paid-in-kind (additional stock),
whereas such amounts are not included as income for GAAP purposes. The treatment of expenses in the DCF
calculation also differs from what is reported in the Statement of Operations. In addition to the expenses
that are included in net investment income (loss) before taxes in the Statement of Operations, the DCF
calculation reflects dividends to preferred stockholders and realized and short-term unrealized gains (losses)
on interest swap settlements as additional leverage costs, as well as current tax expense.
Distributions Received from
Investments
Our ability to generate cash is dependent on the
ability of our portfolio of investments to generate cash flow from their operations. In order to maintain and
grow our dividend to our stockholders, we evaluate each holding based upon its contribution to our investment
income, our expectation for its growth rate, and its risk relative to other potential investments.
We concentrate on MLPs we believe can expect an
increasing demand for services from economic and population growth. Our disciplined investment process seeks
to select well-managed businesses with real, hard assets and stable recurring revenue streams.
Our focus remains primarily on investing in
fee-based service providers that operate long-haul, interstate pipelines. We further diversify among issuers,
geographies and energy commodities, while seeking to achieve a dividend yield equivalent to a direct
investment in energy infrastructure MLPs. In addition, most energy infrastructure companies are regulated and
utilize an inflation escalator index that factors in inflation as a cost pass-through. So, over the long-term,
we believe MLPs will outpace interest rate increases and produce positive returns.
Total distributions received from our investments
relating to DCF for the fiscal year ended 2006 was approximately $52.7 million, representing a 26.1 percent
increase as compared to $41.8 million for the fiscal year ended 2005. This increase reflects full-year
earnings on $235 million long-term leverage, partial-year earnings from the investment of approximately $48
million of net proceeds from equity issued in August and distribution increases from our MLP investments. The
average annual percentage increase of distributions of our MLPs as compared to the distributions of the prior
year was 17 percent. In addition, total distributions received from investments represented 6.81 percent of
average total assets for the year, an increase from 6.30 percent as compared to fiscal year 2005.
Expenses
We incur two types of expenses: (1) operating
expenses, consisting primarily of the advisory fee; and (2) leverage costs. On a percentage basis, operating
expenses before leverage costs and current taxes were an annualized 0.98 percent of average total assets for
the fiscal year ended 2006, as compared to 0.94 percent for the year ended 2005. Operating expenses before
leverage costs and current taxes for fiscal year ended 2006 increased 20.9 percent as compared to the year
ended 2005, primarily as a result of increased advisory fees. Advisory fees increased as a result of growth in
average total assets and from the impact of the contractual reduction in reimbursed advisory fees from 0.23
percent of managed assets to 0.10 percent which took effect March 1, 2006. The reimbursement will continue
until 2009. Other operating expenses decreased 9.7 percent as compared to fiscal year 2005, reflecting lower
non-asset based costs and general operating efficiencies realized during the year.
Managements Discussion
(Continued)
Leverage costs consist of four major components:
(1) the direct interest expense, which will vary from period to period as all of our Tortoise Notes and
revolving credit line have variable rates of interest; (2) the auction agent fees, which are the marketing
costs for the variable rate leverage; (3) the realized gain or loss on our swap arrangements; and (4) our
preferred dividends, which also carry a variable rate dividend. We have locked-in all of our long-term
leverage costs through interest rate swap agreements, converting our variable rate obligations to fixed rate
obligations for the term of the swap agreements. With very little short-term interest rate risk in Tortoise
Energy, we now have an all-in weighted average cost of leverage of 4.52 percent with a remaining weighted
average maturity of approximately 5 1/2 years. Details of our interest rate swap contracts are disclosed in
Note 11 of our Notes to Financial Statements.
As indicated in Note 11, Tortoise Energy has
agreed to pay U.S. Bank a fixed rate while receiving a floating rate based upon the one-month or one-week U.S.
Dollar London Interbank Offered Rate (LIBOR). LIBOR is the primary global benchmark or reference
rate for short-term interest rates and is intended to approximate our variable rate payment obligations. The
spread between the fixed rate and floating LIBOR rate is reflected in our Statement of Operations as a
realized or unrealized gain when the LIBOR rate exceeds the fixed rate (U.S. Bank pays Tortoise Energy the net
difference) or a realized or unrealized loss when the fixed rate exceeds the LIBOR rate (Tortoise Energy pays
U.S. Bank the net difference). We realized approximately $1.5 million in gains on interest rate swap
settlements during the year as compared to approximately $855,000 in losses for the fiscal year ended 2005.
This reflects the increase in average LIBOR rates to approximately 5.0 percent for fiscal year ended 2006 as
compared to approximately 3.2 percent for the year ended 2005.
Leverage costs increased to $11.0 million for the
fiscal year ended 2006 as compared to $7.8 million for year ended 2005, due to an increase in average leverage
outstanding, the full implementation of the swap agreements and interest expense associated with short-term
lines of credit utilized during the current fiscal year.
Distributable Cash Flow
For fiscal year ended 2006 our DCF was $33.6
million, an increase of $6.1 million or 22.1 percent as compared to fiscal year 2005. This increase is the net
result of growth in distributions and expenses as outlined above. Current income tax expense reflects
estimated Canadian taxes payable by Tortoise Energy on Canadian income allocated to the company. We paid
dividends of $32.0 million ($2.02 per share), representing approximately 95.1 percent of DCF during fiscal
year 2006. This is an increase of $5.5 million or 20.6 percent as compared to fiscal year 2005. On a per share
basis, we paid a $0.53 dividend on November 30, 2006, a 3.9 percent increase over 3rd Quarter 2006. The
annualized run rate of $2.12 per share equates to an 8.5 percent yield on our IPO price of $25.00. With the
growth in distributions from the MLPs in which we invest, we expect the dividend to continue to grow at least
4 percent annually.
Taxation of our Distributions
We invest in partnerships which have larger
distributions of cash than the accounting income which they generate. Accordingly, the distributions include a
return of capital component for accounting and tax purposes on our books. Dividends declared and paid by
Tortoise Energy in a year generally differ from taxable income for that year, as such dividends may include
the distribution of current year taxable income or returns of capital.
The taxability of the dividend you receive depends
on whether Tortoise Energy has annual earnings and profits. If so, those earnings and profits are first
allocated to the preferred shares, and then to the common shares. Because most of the distributions we have
received from MLPs are not income for tax purposes, we currently have very little taxable income to offset
against our expenses.
10 |
Tortoise Energy Infrastructure Corp. |
|
Managements Discussion
(Continued)
In the event Tortoise Energy has earnings and
profits, our dividend, like any other corporate dividend, would be taxable at the 15 percent qualified
dividend rate. Our dividend would include a taxable component for either of two reasons: first, the tax
characterization of the distributions we receive from MLPs could change and become less return of capital and
more in the form of income. Second, we could sell an MLP investment in which Tortoise Energy has a gain. The
unrealized gain we have in the portfolio is reflected in the Statement of Assets and Liabilities. Tortoise
Energys investments at value are $924.6 million, with an adjusted cost of $602.6 million. The $322
million difference reflects gain that would be realized if those investments were sold at those values. A sale
could give rise to earnings and profits in that period and make the distributions taxable qualified dividends.
Note, however, that the Statement of Assets and Liabilities reflects as a deferred tax liability the possible
future tax liability we would pay if all investments were liquidated at their indicated value. It is for these
two reasons that we inform you of the tax treatment after the close of each year because both of these items
are unpredictable until the year is over. For book purposes, dividends for fiscal year 2006, were comprised
entirely of return of capital. For tax purposes, dividends for fiscal year 2006 were approximately comprised
of 11 percent qualified dividend income and 89 percent return of capital. This information will be reported to
stockholders on Form 1099-DIV and available on our Web site at www.tortoiseadvisors.com.
Liquidity and Capital Resources
Tortoise Energy had total assets of $928 million
at fiscal year end 2006. Our total assets reflect the value of our investments, which are itemized in the
Schedule of Investments. It also reflects cash, interest and other receivables and any expenses that may have
been prepaid. During the year, total assets grew from $696 million to $928 million, an increase of 33 percent.
This change was primarily the result of an increase in unrealized appreciation of investments of $144 million,
increase of leverage of $32 million and $48 million in net equity proceeds from the issuance of 1,675,050
common shares. The Statement of Operations reflects unrealized appreciation before deferred tax expense of
$183 million, which includes $39 million in MLP distributions treated as return of capital.
The Company has a $60 million credit facility with
U.S. Bank, N.A. maturing June 13, 2007. The credit facility has a variable annual interest rate equal to the
one-month LIBOR rate plus 0.75 percent. Proceeds from the credit facility are primarily used to facilitate
direct placement equity investments. At November 30, 2006, we had approximately $32 million outstanding under
the facility.
Total leverage outstanding of $267 million is
comprised of $165 million in auction rate senior notes rated Aaa and AAA by
Moodys Investors Service Inc. and Fitch Ratings, respectively, $70 million in money market preferred
shares rated Aa2 and AA by Moodys Investors Service Inc. and Fitch Ratings,
respectively, and $32 million outstanding under the credit facility. Total leverage represented 28.8 percent
of total assets at November 30, 2006 as compared to 33.8 percent at November 30, 2005. Our long-term target
for leverage remains approximately 33 percent of total assets. We expect to use our line of credit to make
desirable investments as they become available and to reach our targeted leverage amount. As the line of
credit increases in size we would issue additional Tortoise Notes or Preferred Stock to repay the line and
provide longer-term capital for our Company.
Our Board of Directors has approved a policy
permitting temporary increases in the amount of leverage from 33 percent to 38 percent of total assets at the
time of incurrence, to allow participation in investment opportunities. The policy requires leverage to be
within the limits set forth in the 1940 Act (300 percent and 200 percent asset coverage for debt and preferred
shares, respectively) and indicates that leverage will be reduced to our long-term target over time in an
orderly fashion from portfolio sales and/or an equity offering.
Business Description
November 30, 2006
Tortoise Energy
Tortoise Energy Infrastructure Corp. (Tortoise
Energy) commenced operations in February 2004. Tortoise Energys investment objective is to seek a high
level of total return with an emphasis on current distributions paid to stockholders and dividend growth. For
purposes of Tortoise Energys investment objective, total return includes capital appreciation of, and
all distributions received from, securities in which Tortoise Energy will invest regardless of the tax
character of the distributions.
Tortoise Energy seeks to provide its stockholders
with an efficient vehicle to invest in a portfolio of publicly traded master limited partnerships
(MLPs) in the energy infrastructure sector. Similar to the tax characterization of distributions
made by MLPs to its unitholders, Tortoise Energy believes a significant portion of its distributions to
stockholders will be treated as a return of capital.
Tortoise Energy is regulated as a non-diversified
investment management company, for which Tortoise Capital Advisors, L.L.C. (the Adviser) serves as
the Companys investment adviser.
Energy Infrastructure Industry
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. Tortoise Energy typically invests in energy infrastructure companies operating in
the United States. Energy infrastructure companies (other than most pipeline MLPs) do not operate as
public utilities or local distribution companies, and are therefore not subject to
rate regulation by state or federal utility commissions. However, energy infrastructure companies may be
subject to greater competitive factors than utility companies, including competitive pricing in the absence of
regulated tariff rates, which could cause a reduction in revenue and which could adversely affect
profitability. Most pipeline MLPs are subject to government regulation concerning the construction, pricing
and operation of pipelines.
Regulated 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, Tortoise Energy
invests at least 70 percent of its total assets in equity securities of MLPs that derive at least 90 percent
of their income from energy infrastructure operations and are organized as partnerships, thereby eliminating
income tax at the entity level.
A MLP 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 two percent equity
interest plus units that are subordinated to the common (publicly traded) units for at least the first five
years of the partnerships existence and then only converting to common if certain financial tests are
met.
As a motivation for the general partner to
successfully manage the MLP and increase cash flows, the terms of most MLPs typically provide that the general
partner receives a larger portion of the net income as distributions reach higher target levels. As cash flow
grows, the general partner receives a greater interest in the incremental income compared to the interest of
limited partners. The general partners incentive compensation typically increases up to 50 percent 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.
12 |
Tortoise Energy Infrastructure Corp. |
|
Business Description
(Continued)
Energy infrastructure MLPs in which Tortoise
Energy invests can generally 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 three percent of the household energy needs in the U.S.,
largely for homes beyond the geographic reach of natural gas distribution pipelines. Approximately 70 percent
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 U.S. 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 MLPs 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. |
Tortoise Energy invests primarily in equity
securities of MLPs, which currently consist of the following instruments: common units, convertible
subordinated units and I-Shares. Almost all MLP common units and I-Shares in which Tortoise Energy invests are
listed and traded on the NYSE, AMEX or NASDAQ. Tortoise Energy also may purchase MLP common units through
direct placements that are not initially readily tradable. MLP convertible subordinated units are not listed
or publicly traded and are typically purchased in direct transactions with MLP affiliates or institutional
holders of such shares.
MLP common unitholders 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 into common units on a one-to-one basis after the passage of time and/or
achievement of specified financial goals. MLP convertible subordinated units are entitled to MQD after the
payments to holders of common units and before incentive distributions to the general partner. MLP convertible
subordinated units do not have arrearage rights. I-Shares have similar features to common units except that
distributions are payable in additional I-Shares rather than cash. Tortoise Energy invests in I-Shares only if
it has adequate cash to satisfy its distribution targets.
Although Tortoise Energy also may invest
in equity and debt securities of energy infrastructure companies that are organized and/or taxed as
corporations, it is likely that any such investments will be in debt securities because the
dividends from equity securities of such corporations typically do not meet Tortoise Energys
investment objective. Tortoise Energy may also invest in securities of general partners or other
affiliates of MLPs and private companies operating energy infrastructure assets.
Summary of Investment Policies
Under normal circumstances, Tortoise Energy will
invest at least 90 percent of its total assets (including assets obtained through leverage) in securities of
energy infrastructure companies, and will invest at least 70 percent of its total assets in equity securities
of MLPs.
Business Description
(Continued)
Tortoise Energy has adopted the following
additional nonfundamental investment policies:
|
Tortoise Energy may invest up to 30 percent of its total assets in restricted securities.
Subject to this policy, the Company may invest without limitation in illiquid securities. |
|
Tortoise Energy may invest up to 25 percent of total assets in debt securities of energy
infrastructure companies, including securities rated below noninvestment grade (commonly referred to as
junk bonds). |
|
Tortoise Energy will not invest more than 10 percent of total assets in any single
issuer. |
|
Tortoise Energy will not engage in short sales. |
Tax Status of Company
Unlike most investment companies, Tortoise Energy
is not treated as a regulated investment company under the U.S. Internal Revenue Code of 1986, as amended (the
Internal Revenue Code). Therefore, Tortoise Energy is obligated to pay federal and applicable
state corporate taxes on its taxable income. Unlike regulated investment companies, Tortoise Energy is not
required to distribute substantially all of its income and capital gains. Tortoise Energy invests a
substantial portion of its assets in MLPs.
Although the MLPs generate income taxable to
Tortoise Energy, the Company expects the MLPs to pay cash distributions in excess of the taxable income
reportable by the Company. Similarly, Tortoise Energy expects to distribute cash in excess of its taxable
income to its stockholders and intends to distribute substantially all of its distributable cash flow
(generally, cash from operations less certain operating expenses and reserves).
Summary of Tax Features for U.S.
Stockholders
Stockholders of Tortoise Energy hold stock of a
corporation. Shares of stock differ substantially from partnership interests for federal income tax purposes.
Unlike holders of MLP common units, stockholders of Tortoise Energy will not recognize an allocable share of
Tortoise Energys income, gains, losses and deductions. Stockholders recognize income only if Tortoise
Energy pays distributions from current or accumulated earnings and profits allocable to the particular shares
held by a stockholder. Such distributions will be taxable to a stockholder in the current period as dividend
income. Dividend income will be treated as qualified dividends for federal income tax purposes,
currently subject to favorable capital gains rates. If distributions exceed Tortoise Energys allocated
current or accumulated earnings and profits, such excess distributions will constitute a tax-free return of
capital to the extent of a stockholders basis in its stock. To the extent excess distributions exceed a
stockholders basis, the amount in excess of basis will be taxed as capital gain.
Based on the historical performance of MLPs,
Tortoise Energy expects that a significant portion of distributions to holders of stock will constitute a
tax-free return of capital. In addition, 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 common stock. There is no assurance that Tortoise Energy will make regular
distributions or that Tortoise Energys expectation regarding the tax character of its distributions will
be realized. The special tax treatment for qualified dividends is scheduled to expire as of December 31, 2010.
Upon the sale of stock, a stockholder generally
will recognize capital gain or loss measured by the difference between the sale proceeds received by the
stockholder and the stockholders federal income tax basis in its stock sold, as adjusted to reflect
return(s) of capital. Generally, such capital gain or loss will be long-term capital gain or loss if stock
were held as a capital asset for more than one year.
Distributions
Tortoise Energy intends to pay out substantially
all of its Distributable Cash Flow (DCF) to stockholders through quarterly distributions. DCF is the amount
received by Tortoise Energy as cash or paid-in-kind distributions from MLPs or their affiliates, and dividend
and interest payments received, less current or anticipated operating expenses, dividends on MMP shares, taxes
on Company taxable income, and leverage costs paid by Tortoise Energy. Tortoise Energys Board of
Directors adopted a policy to target distributions to stockholders in an amount of at least 95 percent of DCF
on an annual basis. Distributions will be paid each fiscal quarter out of DCF, if any. There is no assurance
that Tortoise Energy will continue to make regular distributions.
14 |
Tortoise Energy Infrastructure Corp. |
|
Schedule of Investments
|
November 30, 2006
|
|
|
Shares
|
|
Value
|
|
Master Limited Partnerships and Related Companies
172.5%(1) |
|
|
|
|
|
|
|
|
Crude/Refined Products Pipelines 92.8%(1) |
|
|
Buckeye Partners, L.P. |
|
|
|
567,102 |
|
$ |
26,024,311 |
|
Enbridge Energy Partners, L.P. |
|
|
|
925,300 |
|
|
46,320,518 |
|
Holly Energy Partners, L.P.(2) |
|
|
|
427,070 |
|
|
17,163,943 |
|
Kinder Morgan Management, LLC(3)(4) |
|
|
|
1,590,621 |
|
|
73,168,566 |
|
Magellan Midstream Partners, L.P. |
|
|
|
2,190,213 |
|
|
84,783,145 |
|
Plains All American Pipeline, L.P. |
|
|
|
2,370,094 |
|
|
119,689,747 |
|
Sunoco Logistics Partners, L.P. |
|
|
|
934,625 |
|
|
45,366,698 |
|
TEPPCO Partners, L.P. |
|
|
|
869,520 |
|
|
34,233,002 |
|
Valero, L.P. |
|
|
|
860,689 |
|
|
47,234,612 |
|
|
|
|
|
|
|
|
|
|
|
493,984,542 |
|
|
|
|
Natural Gas/Natural Gas Liquid Pipelines 15.6%(1) |
|
|
DCP Midstream Partners, L.P. |
|
|
|
23,300 |
|
|
774,725 |
|
Enterprise GP Holdings, L.P. |
|
|
|
71,400 |
|
|
2,485,434 |
|
Enterprise Products Partners, L.P. |
|
|
|
2,323,940 |
|
|
65,721,023 |
|
ONEOK Partners, L.P. |
|
|
|
231,655 |
|
|
14,001,228 |
|
|
|
|
|
|
|
|
|
|
|
82,982,410 |
|
|
|
|
Natural Gas Gathering/Processing 48.9%(1) |
|
|
Boardwalk Pipeline Partners, L.P. |
|
|
|
108,000 |
|
|
3,223,800 |
|
Copano Energy, LLC |
|
|
|
592,448 |
|
|
35,019,601 |
|
Crosstex Energy, L.P. |
|
|
|
268,587 |
|
|
10,085,442 |
|
Crosstex Energy, L.P.(4)(5) |
|
|
|
712,760 |
|
|
22,701,406 |
|
Eagle Rock Energy Partners, L.P. |
|
|
|
13,500 |
|
|
255,015 |
|
Energy Transfer Equity, L.P.(5) |
|
|
|
729,661 |
|
|
20,342,949 |
|
Energy Transfer Partners, L.P. |
|
|
|
1,722,250 |
|
|
94,034,850 |
|
Hiland GP Holdings, L.P. |
|
|
|
39,050 |
|
|
927,438 |
|
Hiland Partners, L.P. |
|
|
|
41,048 |
|
|
2,164,461 |
|
MarkWest Energy Partners, L.P.(2) |
|
|
|
1,016,877 |
|
|
57,555,238 |
|
Universal Compression Partners, L.P. |
|
|
|
84,700 |
|
|
2,109,877 |
|
Williams Partners, L.P. |
|
|
|
310,380 |
|
|
12,005,499 |
|
|
|
|
|
|
|
|
|
|
|
260,425,576 |
|
|
|
|
Shipping 4.2%(1) |
|
|
United States 3.8%(1) |
|
|
K-Sea Transportation Partners, L.P.(2) |
|
|
|
571,300 |
|
|
20,452,540 |
|
Republic of the Marshall Islands 0.4%(1) |
|
|
Teekay LNG Partners, L.P. |
|
|
|
67,200 |
|
|
2,121,504 |
|
|
|
|
|
|
|
|
|
|
|
22,574,044 |
|
|
|
|
Schedule of Investments
(Continued)
|
November 30, 2006
|
|
|
Shares
|
|
Value
|
|
Propane Distribution 11.0%(1) |
|
|
|
|
|
|
|
|
Inergy, L.P. |
|
|
|
1,916,784 |
|
$ |
56,755,974 |
|
Inergy Holdings, L.P. |
|
|
|
49,715 |
|
|
1,921,982 |
|
|
|
|
|
|
|
|
|
|
|
58,677,956 |
|
|
|
|
Total Master Limited Partnerships and Related Companies (Cost $596,669,344) |
|
|
|
|
|
|
918,644,528 |
|
|
|
|
Promissory Note 1.0%(1) |
|
|
Principal Amount
|
|
|
|
|
Shipping 1.0%(1) |
|
|
E.W. Transportation, LLC Unregistered, 9.12%, Due 3/31/2009 |
|
|
(Cost $5,240,533)(5)(6) |
|
|
$ |
5,283,023 |
|
|
5,240,533 |
|
|
|
|
Short-Term Investments 0.1%(1) |
|
|
Shares
|
|
|
|
|
Investment Company 0.1%(1) |
|
|
First American Government Obligations Fund Class Y, 5.01%(7)(8) |
|
|
(Cost $673,845) |
|
|
|
673,845 |
|
|
673,845 |
|
|
|
|
Total Investments 173.6%(1) (Cost $602,583,722) |
|
|
|
|
|
|
924,558,906 |
|
Auction Rate Senior Notes (31.0%)(1) |
|
|
|
|
|
|
(165,000,000 |
) |
Interest Rate Swap Contracts 0.0%(1) |
|
|
$345,000,000 notional Unrealized Depreciation, Net(9) |
|
|
|
|
|
|
(202,951 |
) |
Liabilities in Excess of Cash and Other Assets (29.5%)(1) |
|
|
|
|
|
|
(156,922,590 |
) |
Preferred Shares at Redemption Value (13.1%)(1) |
|
|
|
|
|
|
(70,000,000 |
) |
|
|
|
Total Net Assets Applicable to Common Stockholders 100.0%(1) |
|
|
|
|
|
$ |
532,433,365 |
|
|
|
|
(1) |
Calculated
as a percentage of net assets applicable to common stockholders. |
(2) |
Due
to the Companys ownership percentage, this investment is deemed an affiliated
company. See Note 7 to the financial statements for further disclosure. |
(3) |
Security
distributions are paid in kind. Related company of master limited partnership. |
(4) |
Non-income
producing. |
(5) |
Fair
valued securities represent a total market value of $48,284,888 which represents 9.1% of
net assets. These securities are deemed to be restricted; see Note 6 to the financial
statements for further disclosure. |
(6) |
Security
is a variable rate instrument. Interest rate is as of November 30, 2006. |
(7) |
Rate
indicated is the 7-day effective yield as of November 30, 2006. |
(8) |
All
or a portion of the security is segregated as collateral for the unrealized depreciation
on the interest rate swap contracts. |
(9) |
See
Note 11 to the financial statements for further disclosure. |
See accompanying Notes to the
Financial Statements.
16 |
Tortoise Energy Infrastructure Corp. |
|
Statement of Assets & Liabilities
|
November 30, 2006
|
|
Assets |
|
|
|
|
|
Investments at value, non-affiliated (cost $545,719,706) |
|
|
$ |
829,387,185 |
|
Investments at value, affiliated (cost $56,864,016) |
|
|
|
95,171,721 |
|
|
|
|
Total investments (cost $602,583,722) |
|
|
|
924,558,906 |
|
Cash |
|
|
|
386,064 |
|
Receivable for Adviser reimbursement |
|
|
|
144,483 |
|
Interest and dividend receivable |
|
|
|
15,801 |
|
Distribution receivable from master limited partnerships |
|
|
|
903,327 |
|
Prepaid expenses and other assets |
|
|
|
2,422,395 |
|
|
|
|
Total assets |
|
|
|
928,430,976 |
|
|
|
|
Liabilities |
|
|
Payable to Adviser |
|
|
|
1,372,586 |
|
Dividend payable on preferred shares |
|
|
|
248,256 |
|
Short-term borrowings |
|
|
|
32,450,000 |
|
Accrued expenses and other liabilities |
|
|
|
487,800 |
|
Unrealized depreciation on interest rate swap contracts, net |
|
|
|
202,951 |
|
Current tax liability |
|
|
|
270,792 |
|
Deferred tax liability |
|
|
|
125,965,226 |
|
Auction rate senior notes payable: |
|
|
Series A, due July 15, 2044 |
|
|
|
60,000,000 |
|
Series B, due July 15, 2044 |
|
|
|
50,000,000 |
|
Series C, due April 10, 2045 |
|
|
|
55,000,000 |
|
|
|
|
Total liabilities |
|
|
|
325,997,611 |
|
|
|
|
Preferred Shares |
|
|
$25,000 liquidation value per share applicable to 2,800 outstanding shares |
|
|
(7,500 shares authorized) |
|
|
|
70,000,000 |
|
|
|
|
Net assets applicable to common stockholders |
|
|
$ |
532,433,365 |
|
|
|
|
Net Assets Applicable to Common Stockholders Consist of |
|
|
Capital stock, $0.001 par value; 16,732,065 shares issued and outstanding |
|
|
(100,000,000 shares authorized) |
|
|
$ |
16,732 |
|
Additional paid-in capital |
|
|
|
335,685,469 |
|
Accumulated net investment loss, net of deferred tax benefit |
|
|
|
(8,705,900 |
) |
Undistributed realized gain, net of deferred tax expense |
|
|
|
9,400,335 |
|
Net unrealized gain on investments and interest rate swap contracts, |
|
|
net of deferred tax expense |
|
|
|
196,036,729 |
|
|
|
|
Net assets applicable to common stockholders |
|
|
$ |
532,433,365 |
|
|
|
|
Net Asset Value per common share outstanding (net assets applicable to common shares, |
|
|
divided by common shares outstanding) |
|
|
$ |
31.82 |
|
|
|
|
See accompanying Notes to the
Financial Statements.
Statement of Operations
|
Year Ended November 30, 2006
|
|
Investment Income |
|
|
|
|
|
Distributions received from master limited partnerships
(including $8,977,799 from affiliates) |
|
|
$ |
45,985,121 |
|
Less return of capital on distributions (including $7,692,964 from affiliates) |
|
|
|
(39,150,579 |
) |
|
|
|
Distribution income from master limited partnerships |
|
|
|
6,834,542 |
|
Dividends from common stock |
|
|
|
97,034 |
|
Dividends from money market mutual funds |
|
|
|
188,952 |
|
Interest |
|
|
|
557,385 |
|
|
|
|
Total Investment Income |
|
|
|
7,677,913 |
|
|
|
|
Expenses |
|
|
Advisory fees |
|
|
|
7,241,559 |
|
Administrator fees |
|
|
|
499,764 |
|
Professional fees |
|
|
|
267,558 |
|
Directors fees |
|
|
|
123,630 |
|
Reports to stockholders |
|
|
|
123,078 |
|
Custodian fees and expenses |
|
|
|
78,718 |
|
Fund accounting fees |
|
|
|
67,856 |
|
Registration fees |
|
|
|
47,242 |
|
Stock transfer agent fees |
|
|
|
14,221 |
|
Other expenses |
|
|
|
86,508 |
|
|
|
|
Total Expenses before Interest Expense and Auction Agent Fees |
|
|
|
8,550,134 |
|
|
|
|
Interest expense |
|
|
|
8,482,876 |
|
Auction agent fees |
|
|
|
665,717 |
|
|
|
|
Total Interest Expense and Auction Agent Fees |
|
|
|
9,148,593 |
|
|
|
|
Total Expenses |
|
|
|
17,698,727 |
|
|
|
|
Less expense reimbursement by Adviser |
|
|
|
(987,587 |
) |
|
|
|
Net Expenses |
|
|
|
16,711,140 |
|
|
|
|
Net Investment Loss, before Income Taxes |
|
|
|
(9,033,227 |
) |
Current tax expense |
|
|
|
(471,753 |
) |
Deferred tax benefit |
|
|
|
3,706,942 |
|
|
|
|
Income tax benefit, net |
|
|
|
3,235,189 |
|
|
|
|
Net Investment Loss |
|
|
|
(5,798,038 |
) |
|
|
|
Realized and Unrealized Gain (Loss) on Investments and Interest Rate Swaps |
|
|
Net realized gain on investments |
|
|
|
7,554,238 |
|
Net realized gain on interest rate swap settlements |
|
|
|
1,502,072 |
|
|
|
|
Net realized gain, before deferred tax expense |
|
|
|
9,056,310 |
|
Deferred tax expense |
|
|
|
(3,531,961 |
) |
|
|
|
Net realized gain on investments and interest rate swap settlements |
|
|
|
5,524,349 |
|
Net unrealized appreciation of investments |
|
|
|
186,051,459 |
|
Net unrealized depreciation of interest rate swap contracts |
|
|
|
(3,105,467 |
) |
|
|
|
Net unrealized appreciation, before deferred tax expense |
|
|
|
182,945,992 |
|
Deferred tax expense |
|
|
|
(71,365,030 |
) |
|
|
|
Net unrealized appreciation of investments and interest rate swap contracts |
|
|
|
111,580,962 |
|
|
|
|
Net Realized and Unrealized Gain (Loss) on Investments and Interest Rate Swaps |
|
|
|
117,105,311 |
|
|
|
|
Dividends to Preferred Stockholders |
|
|
|
(3,529,740 |
) |
|
|
|
Net Increase in Net Assets Applicable to Common Stockholders |
|
|
Resulting from Operations |
|
|
$ |
107,777,533 |
|
|
|
|
See accompanying Notes to the Financial
Statements.
18 |
Tortoise Energy Infrastructure Corp. |
|
Statement
of Changes in Net Assets
|
Year Ended November 30, |
|
|
2006
|
|
2005
|
|
Operations |
|
|
|
|
|
|
|
|
Net investment loss |
|
|
$ |
(5,798,038 |
) |
$ |
(2,664,574 |
) |
Net realized gain on investments and interest rate swap settlements |
|
|
|
5,524,349 |
|
|
3,910,013 |
|
Net unrealized appreciation of investments and interest rate swap contracts |
|
|
|
111,580,962 |
|
|
36,586,625 |
|
Dividends to preferred stockholders |
|
|
|
(3,529,740 |
) |
|
(1,639,910 |
) |
|
|
|
|
|
Net increase in net assets applicable to common stockholders |
|
|
resulting from operations |
|
|
|
107,777,533 |
|
|
36,192,154 |
|
|
|
|
|
|
Dividends and Distributions to Common Stockholders |
|
|
Net investment income |
|
|
|
|
|
|
|
|
Return of capital |
|
|
|
(31,969,335 |
) |
|
(26,506,341 |
) |
|
|
|
|
|
Total dividends to common stockholders |
|
|
|
(31,969,335 |
) |
|
(26,506,341 |
) |
|
|
|
|
|
Capital Share Transactions |
|
|
Proceeds from secondary offering of 1,755,027 common shares |
|
|
|
|
|
|
47,999,988 |
|
Proceeds from issuance of 263,254 common shares in connection |
|
|
with exercising an overallotment option granted to underwriters |
|
|
of the secondary offering |
|
|
|
|
|
|
7,199,997 |
|
Proceeds from shelf offering of 1,675,050 common shares |
|
|
|
50,000,243 |
|
|
|
|
Underwriting discounts and offering expenses associated with the |
|
|
issuance of common shares |
|
|
|
(2,202,315 |
) |
|
(2,443,688 |
) |
Underwriting discounts and offering expenses associated with the |
|
|
issuance of preferred shares |
|
|
|
|
|
|
(356,815 |
) |
Issuance of 151,500 and 203,080 common shares from reinvestment |
|
|
of dividend distributions to stockholders, respectively |
|
|
|
4,553,739 |
|
|
5,635,662 |
|
|
|
|
|
|
Net increase in net assets, applicable to common stockholders, |
|
|
from capital share transactions |
|
|
|
52,351,667 |
|
|
58,035,144 |
|
|
|
|
|
|
Total increase in net assets applicable to common stockholders |
|
|
|
128,159,865 |
|
|
67,720,957 |
|
Net Assets |
|
|
Beginning of year |
|
|
|
404,273,500 |
|
|
336,552,543 |
|
|
|
|
|
|
End of year |
|
|
$ |
532,433,365 |
|
$ |
404,273,500 |
|
|
|
|
|
|
Accumulated net investment loss, net of deferred tax benefit, |
|
|
at the end of year |
|
|
$ |
(8,705,900 |
) |
$ |
(2,907,862 |
) |
|
|
|
|
|
See accompanying Notes to the Financial Statements.
Statement of Cash Flows
|
Year Ended November 30, 2006
|
|
Cash Flows From Operating Activities |
|
|
|
|
|
Distributions received from master limited partnerships |
|
|
$ |
45,081,794 |
|
Interest and dividend income received |
|
|
|
848,046 |
|
Purchases of long-term investments |
|
|
|
(101,346,179 |
) |
Proceeds from sales of long-term investments |
|
|
|
16,539,916 |
|
Proceeds from sales of short-term investments, net |
|
|
|
5,022,570 |
|
Proceeds from interest rate swap contracts, net |
|
|
|
1,502,072 |
|
Interest expense paid |
|
|
|
(8,963,254 |
) |
Current tax expense paid |
|
|
|
(415,222 |
) |
Operating expenses paid |
|
|
|
(7,296,223 |
) |
|
|
|
Net cash used in operating activities |
|
|
|
(49,026,480 |
) |
|
|
|
Cash Flows From Financing Activities |
|
|
Advances from revolving line of credit |
|
|
|
82,170,000 |
|
Repayments on revolving line of credit |
|
|
|
(49,720,000 |
) |
Issuance of common stock |
|
|
|
50,000,243 |
|
Stock issuance costs |
|
|
|
(2,202,315 |
) |
Dividends paid to common stockholders |
|
|
|
(27,415,596 |
) |
Dividends paid to preferred stockholders |
|
|
|
(3,465,210 |
) |
|
|
|
Net cash provided by financing activities |
|
|
|
49,367,122 |
|
|
|
|
Net increase in cash |
|
|
|
340,642 |
|
Cash beginning of year |
|
|
|
45,422 |
|
|
|
|
Cash end of year |
|
|
$ |
386,064 |
|
|
|
|
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 |
|
|
$ |
107,777,533 |
|
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 |
|
|
|
(101,346,179 |
) |
Return of capital on distributions received |
|
|
|
39,150,579 |
|
Proceeds from sales of long-term investments |
|
|
|
16,539,916 |
|
Proceeds from sales of short-term investments, net |
|
|
|
5,022,570 |
|
Deferred income tax expense |
|
|
|
71,190,049 |
|
Net unrealized appreciation of investments and interest rate swap contracts |
|
|
|
(182,945,992 |
) |
Realized gains on investments |
|
|
|
(7,554,238 |
) |
Accretion of discount on investments |
|
|
|
(17,287 |
) |
Amortization of debt issuance costs |
|
|
|
57,579 |
|
Dividends to preferred stockholders |
|
|
|
3,529,740 |
|
Changes in operating assets and liabilities: |
|
|
Increase in interest and dividend receivable |
|
|
|
(881,365 |
) |
Increase in prepaid expenses and other assets |
|
|
|
(66,519 |
) |
Increase in current tax liability |
|
|
|
56,531 |
|
Increase in payable to Adviser, net of expense reimbursement |
|
|
|
364,727 |
|
Increase in accrued expenses and other liabilities |
|
|
|
95,876 |
|
|
|
|
Total adjustments |
|
|
|
(156,804,013 |
) |
|
|
|
Net cash used in operating activities |
|
|
$ |
(49,026,480 |
) |
|
|
|
Non-Cash Financing Activities |
|
|
Reinvestment of distributions by common stockholders in additional common shares |
|
|
$ |
4,553,739 |
|
|
|
|
See accompanying Notes to
the Financial Statements.
20 |
Tortoise Energy Infrastructure Corp. |
|
Financial Highlights
|
Year Ended November 30, 2006 |
|
Year Ended November 30, 2005 |
|
Period from February 27, 2004(1) through November 30, 2004 |
|
|
|
|
Per Common Share Data(2) |
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, beginning of period |
|
|
$ |
27.12 |
|
$ |
26.53 |
|
$ |
|
|
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 shares |
|
|
|
|
|
|
(0.02 |
) |
|
(0.06 |
) |
Premiums less underwriting discounts and |
|
|
offering costs on secondary offering(3) |
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and offering costs |
|
|
on shelf offering of common stock(4) |
|
|
|
(0.14 |
) |
|
|
|
|
|
|
Income (loss) from Investment Operations: |
|
|
Net investment loss(5) |
|
|
|
(0.32 |
) |
|
(0.16 |
) |
|
(0.03 |
) |
Net realized and unrealized gain on investments(5) |
|
|
|
7.41 |
|
|
2.67 |
|
|
3.77 |
|
|
|
|
|
|
|
|
Total increase from investment operations |
|
|
|
7.09 |
|
|
2.51 |
|
|
3.74 |
|
|
|
|
|
|
|
|
Less Dividends to Preferred Stockholders: |
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
Return of capital |
|
|
|
(0.23 |
) |
|
(0.11 |
) |
|
(0.01 |
) |
|
|
|
|
|
|
|
Total dividends to preferred stockholders |
|
|
|
(0.23 |
) |
|
(0.11 |
) |
|
(0.01 |
) |
|
|
|
|
|
|
|
Less Dividends to Common Stockholders: |
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
Return of capital |
|
|
|
(2.02 |
) |
|
(1.79 |
) |
|
(0.97 |
) |
|
|
|
|
|
|
|
Total dividends to common stockholders |
|
|
|
(2.02 |
) |
|
(1.79 |
) |
|
(0.97 |
) |
|
|
|
|
|
|
|
Net Asset Value, end of period |
|
|
$ |
31.82 |
|
$ |
27.12 |
|
$ |
26.53 |
|
|
|
|
|
|
|
|
Per common share market value, end of period |
|
|
$ |
36.13 |
|
$ |
28.72 |
|
$ |
27.06 |
|
Total Investment Return Based on Market Value(6) |
|
|
|
34.50 |
% |
|
13.06 |
% |
|
12.51 |
% |
Supplemental Data and Ratios |
|
|
Net assets applicable to common stockholders, |
|
|
end of period (000s) |
|
|
$ |
532,433 |
|
$ |
404,274 |
|
$ |
336,553 |
|
Ratio of expenses (including current and deferred income |
|
|
tax expense) to average net assets before waiver:(7)(8)(9) |
|
|
|
20.03 |
% |
|
9.10 |
% |
|
15.20 |
% |
Ratio of expenses (including current and deferred income |
|
|
tax expense) to average net assets after waiver:(7)(8)(9) |
|
|
|
19.81 |
% |
|
8.73 |
% |
|
14.92 |
% |
Ratio of expenses (excluding current and deferred income |
|
|
tax expense) to average net assets before waiver:(7)(8)(9)(10) |
|
|
|
3.97 |
% |
|
3.15 |
% |
|
2.01 |
% |
Ratio of expenses (excluding current and deferred income |
|
|
tax expense) to average net assets after waiver:(7)(8)(9)(10) |
|
|
|
3.75 |
% |
|
2.78 |
% |
|
1.73 |
% |
Ratio of expenses (excluding current and deferred income |
|
|
tax expense), without regard to non-recurring organizational |
|
|
expenses, to average net assets before waiver:(7)(8)(9)(10) |
|
|
|
3.97 |
% |
|
3.15 |
% |
|
1.90 |
% |
Ratio of expenses (excluding current and deferred income |
|
|
tax expense), without regard to non-recurring organizational |
|
|
expenses, to average net assets after waiver:(7)(8)(9)(10) |
|
|
|
3.75 |
% |
|
2.78 |
% |
|
1.62 |
% |
(Continued)
Financial Highlights
(Continued)
|
Year Ended November 30, 2006 |
|
Year Ended November 30, 2005 |
|
Period from February 27, 2004(1) through November 30, 2004 |
|
|
|
|
Ratio of net investment loss to average net assets |
|
|
|
|
|
|
|
|
|
|
|
before waiver:(7)(8)(10) |
|
|
|
(2.24 |
)% |
|
(1.42 |
)% |
|
(0.45 |
)% |
Ratio of net investment loss to average net assets |
|
|
after waiver:(7)(8)(10) |
|
|
|
(2.02 |
)% |
|
(1.05 |
)% |
|
(0.17 |
)% |
Ratio of net investment loss to average net assets |
|
|
after current and deferred income tax expense, |
|
|
before waiver:(7)(8)(9) |
|
|
|
(18.31 |
)% |
|
(7.37 |
)% |
|
(13.37 |
)% |
Ratio of net investment loss to average net assets |
|
|
after current and deferred income tax expense, |
|
|
after waiver:(7)(8)(9) |
|
|
|
(18.09 |
)% |
|
(7.00 |
)% |
|
(13.65 |
)% |
Portfolio turnover rate(7) |
|
|
|
2.18 |
% |
|
4.92 |
% |
|
1.83 |
% |
Tortoise Auction Rate Senior Notes, end of period (000s) |
|
|
$ |
165,000 |
|
$ |
165,000 |
|
$ |
110,000 |
|
Tortoise Preferred Shares, end of period (000s) |
|
|
$ |
70,000 |
|
$ |
70,000 |
|
$ |
35,000 |
|
Per common share amount of auction rate senior notes |
|
|
outstanding at end of period |
|
|
$ |
9.86 |
|
$ |
11.07 |
|
$ |
8.67 |
|
Per common share amount of net assets, excluding auction |
|
|
rate senior notes, at end of period |
|
|
$ |
41.68 |
|
$ |
38.19 |
|
$ |
35.21 |
|
Asset coverage, per $1,000 of principal amount of auction |
|
|
rate senior notes and short-term borrowings(11) |
|
|
$ |
4,051 |
|
$ |
3,874 |
|
$ |
4,378 |
|
Asset coverage ratio of auction rate senior notes |
|
|
and short-term borrowings(11) |
|
|
|
405 |
% |
|
387 |
% |
|
438 |
% |
Asset coverage, per $25,000 liquidation value per share |
|
|
of preferred shares(12) |
|
|
$ |
215,155 |
|
$ |
169,383 |
|
$ |
265,395 |
|
Asset coverage ratio of preferred shares(13) |
|
|
|
299 |
% |
|
272 |
% |
|
332 |
% |
(1) |
Commencement of Operations. |
(2) |
Information presented relates to a share of common stock outstanding for the entire
period. |
(3) |
The amount is less than $0.01 per share, and represents the premium on the secondary
offering of $0.14 per share, less the underwriting discounts and offering costs of $0.14 per share for the
year ended November 30, 2005. |
(4) |
Represents the dilution per common share from underwriting and other offering
costs. |
(5) |
The per common share data for the periods ended November 30, 2005 and 2004, do not reflect
the change in estimate of investment income and return of capital, for the respective period. See Note 2C to
the financial statements for further disclosure. |
(6) |
Not annualized for periods less than a year. 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 Companys dividend reinvestment plan. Total investment return does not reflect brokerage
commissions. |
(7) |
Annualized for periods less than one full year. |
(8) |
The expense ratios and net investment loss ratios do not reflect the effect of dividend
payments to preferred stockholders. |
(9) |
The Company accrued $71,661,802, $24,659,420 and $30,330,018 for years ended November 30,
2006 and 2005 and for the period from February 27, 2004 through November 30, 2004, respectively, for current
and deferred income tax expense. |
(10) |
The ratio excludes the impact of current and deferred income taxes. |
(11) |
Represents value of total assets less all liabilities and indebtedness not represented by
auction rate senior notes, short-term borrowings and preferred shares at the end of the period divided by
auction rate senior notes and short-term borrowings outstanding at the end of the period. |
(12) |
Represents value of total assets less all liabilities and indebtedness not represented by
preferred shares at the end of the period divided by preferred shares outstanding at the end of the period,
assuming the retirement of all auction rate senior notes and short-term borrowings. |
(13) |
Represents value of total assets less all liabilities and indebtedness not represented by
auction rate senior notes, short-term borrowings and preferred shares at the end of the period divided by
auction rate senior notes, short-term borrowings and preferred shares outstanding at the end of the
period. |
See accompanying Notes to the
Financial Statements.
22 |
Tortoise Energy Infrastructure Corp. |
|
Notes to Financial Statements
November 30, 2006
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 Companys 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 Companys 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, recognition of distribution income and
disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could
differ from those estimates.
B. Investment Valuation
The Company primarily owns securities that are
listed on a securities exchange. 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 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 asked price on such day.
The Company may invest up to 30 percent of its
total assets in restricted securities. Restricted securities are subject to statutory or contractual
restrictions on their public resale, which may make it more difficult to obtain a valuation and may limit the
Companys ability to dispose of them. Investments in private placement securities and other securities
for which market quotations are not readily available will be valued in good faith by using fair value
procedures approved by the Board of Directors. Such fair value procedures consider factors such as discounts
to publicly traded issues, securities with similar yields, quality, type of issue, coupon, duration and
rating. If events occur that will affect the value of the Companys portfolio securities before the net
asset value has been calculated (a significant event), the portfolio securities so affected will
generally be priced using a fair value procedure.
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.
The Company generally values its interest rate
swap contracts using industry-accepted models which discount the estimated future cash flows based on 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
identified cost basis. Interest income is recognized on the accrual basis, including amortization of premiums
and accretion of discounts. Distributions are recorded on the ex-dividend date. Distributions received from
the Companys investments in master limited partnerships (MLPs) generally are comprised of
ordinary income, capital gains 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, as the actual character of these distributions is not known until after the fiscal year-end of the
Company.
For the period from December 1, 2004 through
November 30, 2005, the Company estimated the allocation of investment income and return of capital for the
distributions received from MLPs within the Statement of Operations. For this period, the Company had
estimated approximately 23 percent as investment income and approximately 77 percent as return of
capital.
Notes to Financial Statements
(Continued)
Subsequent to November 30, 2005, the Company
reclassified the amount of investment income and return of capital it recognized based on the 2005 tax
reporting information received from the individual MLPs. This reclassification amounted to an increase in
pre-tax net investment income of approximately $190,000 or $0.01 per share ($116,000 or $0.007 per share, net
of deferred tax expense); an increase of approximately $139,000 or $0.01 per share ($85,000 or $0.005 per
share, net of deferred tax expense) in unrealized appreciation of investments; and a decrease in realized
gains of approximately $329,000 or $0.02 per share ($201,000 or $0.01 per share, net of deferred tax benefit)
for the period from December 1, 2005 through November 30, 2006. The reclassification is reflected in the
accompanying financial statements.
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. For the year ended November 30, 2005, the
Companys dividends, for book and tax purposes, were comprised entirely of return of capital as a result
of the net investment loss incurred by the Company. For the year ended November 30, 2006, the Companys
dividends for book purposes were comprised of 100 percent return of capital and approximately 11 percent
qualified dividend income and 89 percent return of capital for tax purposes.
Dividends to preferred stockholders are based on
variable rates set at auctions, normally held every 28 days. Dividends on preferred shares are accrued on a
daily basis for the subsequent 28-day period at a rate as determined on the auction date. Dividends on
preferred shares are payable every 28 days, on the first day following the end of the dividend period. The
character of dividends to preferred stockholders made during the year may differ from their ultimate
characterization for federal income tax purposes. For the year ended November 30, 2005, for tax purposes, the
Company determined the dividends to preferred stockholders were comprised entirely of return of capital. For
the year ended November 30, 2006, for tax purposes, the Company determined the dividends to preferred
stockholders were comprised entirely of qualified dividend income.
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 MLPs taxable income in computing its own taxable income. The
Companys tax expense or benefit is included in the Statement of Operations based on the component of
income or gains (losses) to which such expense or benefit relates. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation allowance is recognized if, based
on the weight of available evidence, is more likely than not that some portion or all of the deferred income
tax asset will not be realized.
F. Organization Expenses, Offering and Debt
Issuance Costs
The Company is responsible for paying all
organizational expenses, which were expensed as incurred. Offering costs related to the issuance of common and
preferred stock is charged to additional paid-in capital when the shares are issued. Offering costs (excluding
underwriter commissions) of $75,000 were charged to additional paid-in capital for the common shares issued in
August 2006. Debt issuance costs related to the auction rate senior notes 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 derivative instruments included as unrealized gains or losses
in the accompanying Statement of Operations. Monthly cash settlements under the terms of the derivative
instruments are recorded as realized gains or losses in the Statement of Operations.
24 |
Tortoise Energy Infrastructure Corp. |
|
Notes to Financial Statements
(Continued)
H. Indemnifications
Under the Companys organizational documents,
its officers and directors are indemnified against certain liabilities arising out of the performance of their
duties to the Company. In addition, in the normal course of business, the Company may enter into contracts
that provide general indemnification to other parties. The Companys maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made against the Company that have
not yet occurred, and may not occur. However, the Company has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
I. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards
Board (FASB) released FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN
48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and
disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be
taken in the course of preparing the Companys tax returns to determine whether the tax positions are
more-likely-than-not of being sustained by the applicable tax authority. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of
the effective date. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006, but not
before the Companys last NAV calculation in the first required financial statement reporting period for
its fiscal year beginning after December 15, 2006. At this time, the Company is evaluating the implications of
FIN 48 and whether it will have any impact on the Companys financial statements.
In September 2006, FASB issued Statement on
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This standard establishes
a single authoritative definition of fair value, sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already
required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS No. 157 is
effective for the Company beginning December 1, 2007. The changes to current generally accepted accounting
principles from the application of this statement relate to the definition of fair value, the methods used to
measure fair value, and the expanded disclosures about fair value measurements. The Company has recently begun
to evaluate the application of the statement, and is not in a position at this time to evaluate the
significance of its impact, if any, on the Companys financial statements.
3. Concentration of Risk
The Companys 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 percent of its total assets in securities of domestic
energy infrastructure companies, and to invest at least 70 percent of its total assets in equity securities of
MLPs. The Company will not invest more than 10 percent of its total assets in any single issuer as of the time
of purchase. The Company may invest up to 25 percent 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 objective.
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 percent of the
Companys 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 Companys
operations through February 28, 2006, the Adviser agreed to waive or reimburse the Company for fees and
expenses in an amount equal to 0.23 percent of the average monthly Managed Assets of the Company. For periods
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 percent of the average monthly Managed Assets of the Company.
Notes to Financial Statements
(Continued)
The Company has engaged U.S. Bancorp Fund
Services, LLC to serve as the Companys administrator. The Company pays the administrator a monthly fee
computed at an annual rate of 0.07 percent of the first $300 million of the Companys Managed Assets,
0.06 percent on the next $500 million of Managed Assets and 0.04 percent on the balance of the Companys
Managed Assets.
Computershare Trust Company, N.A. serves as the
Companys transfer agent, dividend paying agent, and agent for the automatic dividend reinvestment
plan.
U.S. Bank, N.A. serves as the Companys
custodian. The Company pays the custodian a monthly fee computed at an annual rate of 0.015 percent on the
first $100 million of the Companys Managed Assets and 0.01 percent on the balance of the Companys
Managed Assets.
5. Income Taxes
Deferred income taxes reflect the net tax effect
of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax
purposes. Components of the Companys deferred tax assets and liabilities as of November 30, 2006 are as
follows:
Deferred tax assets: |
|
|
|
|
|
Net operating loss carryforwards |
|
|
$ |
15,907,329 |
|
Organization costs |
|
|
|
43,633 |
|
|
|
|
|
|
|
|
15,950,962 |
|
|
|
|
Deferred tax liabilities: |
|
|
Net unrealized gains on investment securities and interest
rate swap contracts |
|
|
|
125,507,264 |
|
Basis reduction of investment in MLPs |
|
|
|
16,408,924 |
|
|
|
|
|
|
|
$ |
141,916,188 |
|
|
|
|
Total net deferred tax liability |
|
|
$ |
125,965,226 |
|
|
|
|
For the year ended November 30, 2006, the
components of income tax expense include current foreign taxes of $471,753 and deferred federal and state
income taxes (net of federal tax benefit) of $63,871,286 and $7,318,763, respectively. As of November 30,
2006, the Company had a net operating loss for federal income tax purposes of approximately $40,788,000. If
not utilized, this net operating loss will expire as follows: $2,883,000, $15,979,000 and $21,926,000 in the
years ending November 30, 2024, 2025 and 2026, respectively.
Total income tax expense differs from the amount
computed by applying the federal statutory income tax rate of 35 percent to net investment loss and realized
and unrealized gains (losses) on investments and interest rate swap contracts before taxes for the year ended
November 30, 2006, as follows:
Application of statutory income tax rate |
|
|
$ |
64,039,176 |
|
State income taxes, net of federal tax benefit |
|
|
|
7,318,763 |
|
Other, net |
|
|
|
303,863 |
|
|
|
|
Total |
|
|
$ |
71,661,802 |
|
|
|
|
At November 30, 2006, a valuation allowance was
not recorded because the Company believes it is more likely than not, that there is an ability to utilize its
deferred tax asset.
As of November 30, 2006, the aggregate cost of
securities for Federal income tax purposes was $560,276,425. At November 30, 2006, the aggregate gross
unrealized appreciation for all securities in which there was an excess of value over tax cost was
$364,282,481 and the aggregate gross unrealized depreciation for all securities in which there was an excess
of tax cost over value was $0.
26 |
Tortoise Energy Infrastructure Corp. |
|
Notes to Financial Statements
(Continued)
6. Restricted Securities
Certain of the Companys investments are
restricted and are valued as determined in accordance with procedures established by the Board of Directors
and more fully described in Note 2. The table below shows the number of units held or principal amount, the
acquisition date, acquisition cost, value per unit of such securities and percent of net assets which the
securities comprise.
Investment Security |
Number of Units or Principal Amount |
Acquisition Date |
Acquisition Cost |
Value Per Unit |
Percent of Net Assets |
|
Energy Transfer Equity, L.P. |
|
|
|
Common Units |
|
|
729,661 |
|
|
11/27/06 |
|
|
$20,000,008 |
|
|
$27.88 |
|
|
3.8 |
% |
Crosstex Energy, L.P. |
|
|
|
Subordinated Units |
|
|
712,760 |
|
|
6/29/06 |
|
|
20,000,046 |
|
|
31.85 |
|
|
4.3 |
|
E.W. Transportation, LLC |
|
|
|
Promissory Note |
|
|
$5,283,023 |
|
|
5/03/04 |
|
|
5,203,778 |
|
|
N/A |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$45,203,832 |
|
|
|
|
|
9.1 |
% |
|
|
|
|
|
7. Investments in Affiliates
Investments representing 5 percent or more of the
outstanding voting securities of a portfolio company result in that company being considered an affiliated
company, as defined in the 1940 Act. The aggregate market value of all securities of affiliates held by the
Company as of November 30, 2006 amounted to $95,171,721, representing 17.9 percent of net assets applicable to
common stockholders. A summary of affiliated transactions for each company which is or was an affiliate at or
during the year ended November 30, 2006 is as follows:
|
November 30, 2006 |
|
|
Share Balance 11/30/05 |
Gross Additions |
|
Gross Deductions |
|
Realized Gain (Loss) |
|
Distribution Income |
|
Share Balance |
|
Market Value |
|
|
Holly Energy Partners, L.P. |
|
|
|
427,070 |
|
$ |
|
|
|
|
|
|
|
|
$ |
1,103,976 |
|
|
427,070 |
|
$ |
17,163,943 |
|
Inergy, L.P.(1) |
|
|
|
1,850,634 |
|
|
1,219,771 |
|
|
|
|
|
|
|
|
1,980,178 |
|
|
1,916,784 |
|
|
56,755,974 |
|
K-Sea Transportation Partners, L.P. |
|
|
|
571,300 |
|
|
|
|
|
|
|
|
|
|
|
1,399,685 |
|
|
571,300 |
|
|
20,452,540 |
|
MarkWest Energy Partners, L.P. |
|
|
|
805,810 |
|
|
9,494,498 |
|
|
|
|
|
|
|
|
3,127,071 |
|
|
1,016,877 |
|
|
57,555,238 |
|
Sunoco Logistics Partners, L.P.(1) |
|
|
|
934,625 |
|
|
|
|
|
|
|
|
|
|
|
1,366,889 |
|
|
934,625 |
|
|
45,366,698 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,714,269 |
|
|
|
|
|
|
|
$ |
8,977,799 |
|
|
|
|
$ |
197,294,393 |
|
|
|
|
|
|
|
|
(1) |
Company was not an affiliate at November 30, 2006. |
8. Investment Transactions
For the year ended November 30, 2006, the Company
purchased (at cost) and sold securities (proceeds) in the amount of $101,346,179 and $16,539,916 (excluding
short-term debt securities and interest rate swaps), respectively.
9. Auction Rate Senior Notes
The Company has issued $60,000,000, $50,000,000,
and $55,000,000 aggregate principal amount of auction rate senior notes Series A, Series B, and Series C,
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 for Series A and Series B, and April
10, 2045 for Series C. Fair value of the Notes approximates carrying amount because the interest rate
fluctuates with changes in interest rates available in the current market.
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, Series B,
and Series C as of November 30, 2006 were 5.53 percent, 5.52 percent, and 5.49 percent, respectively. The
weighted average interest rates for Series A, Series B, and Series C for the year ended November 30, 2006,
were 5.14 percent, 5.18 percent, and 5.10 percent, 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 percent
which is included in auction agent fees in the accompanying Statement of Operations. 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, the rate period will be 28 days for Series A and Series B, and
7 days for Series C. The Notes are not listed on any exchange or automated quotation system.
Notes to Financial Statements
(Continued)
The Notes are redeemable in certain circumstances
at the option of the Company. The Notes are also subject to a mandatory redemption if the Company fails to
meet an asset coverage ratio required by law, or fails to cure in a timely manner a deficiency as stated in
the rating agency guidelines applicable to the Notes.
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
Companys outstanding preferred shares; (2) senior to all of the Companys 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.
10. Preferred Shares
The Company has 7,500 authorized Money Market
Preferred (MMP) Shares, of which 2,800 shares (1,400 MMP Shares and 1,400 MMP II Shares) are
currently outstanding. The MMP and MMP II Shares have rights determined by the Board of Directors. The MMP and
MMP II Shares have a liquidation value of $25,000 per share plus any accumulated, but unpaid dividends,
whether or not declared. Fair value of the MMP Shares approximates carrying amount because the interest rate
fluctuates with changes in interest rates available in the current market.
Holders of the MMP and MMP II Shares are entitled
to receive cash dividend payments at an annual rate that may vary for each rate period. The dividend rates for
MMP and MMP II Shares as of November 30, 2006, were 5.57 percent. The weighted average dividend rates for MMP
and MMP II Shares for the year ended November 30, 2006, were 5.23 percent. 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 percent which is included in the auction agent fees in the accompanying Statement of Operations. Under
the Investment Company Act of 1940, the Company may not declare dividends or make other distributions on
shares of common stock or purchases of such shares if, at the time of the declaration, distribution or
purchase, asset coverage with respect to the outstanding MMP Shares would be less than 200 percent.
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 a
deficiency in a timely manner as stated in the rating agency guidelines.
The holders of MMP and MMP II 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 stock or
the holders of common stock.
11. 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 payments on the Companys 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 percent and 200 percent asset coverage of the liquidation value of
the outstanding auction rate senior notes and MMP shares, respectively, or if the Company loses its credit
rating on its auction rate senior notes or MMP Shares, then the Company could be required to make a
termination payment, in addition to redeeming all or some of the auction rate senior notes and MMP Shares.
Details of the interest rate swap contracts outstanding as of November 30, 2006, were as follows:
28 |
Tortoise Energy Infrastructure Corp. |
|
Notes to Financial Statements
(Continued)
Counterparty |
Maturity Date |
Notional Amount |
Fixed Rate Paid by the Company |
Floating Rate Received by the Company |
Unrealized Appreciation/ (Depreciation) |
|
U.S. Bank, N.A. |
|
|
|
7/10/2007 |
|
|
$ 60,000,000 |
|
|
3.54 |
% |
|
1 month U.S. Dollar LIBOR |
|
|
$ 623,771 |
|
U.S. Bank, N.A.* |
|
|
|
7/05/2011 |
|
|
60,000,000 |
|
|
4.63 |
% |
|
1 month U.S. Dollar LIBOR |
|
|
49,335 |
|
U.S. Bank, N.A. |
|
|
|
7/17/2007 |
|
|
50,000,000 |
|
|
3.56 |
% |
|
1 month U.S. Dollar LIBOR |
|
|
581,010 |
|
U.S. Bank, N.A.* |
|
|
|
7/12/2011 |
|
|
50,000,000 |
|
|
4.64 |
% |
|
1 month U.S. Dollar LIBOR |
|
|
31,353 |
|
U.S. Bank, N.A. |
|
|
|
5/01/2014 |
|
|
55,000,000 |
|
|
4.54 |
% |
|
1 week U.S. Dollar LIBOR |
|
|
826,321 |
|
U.S. Bank, N.A. |
|
|
|
11/12/2020 |
|
|
35,000,000 |
|
|
5.20 |
% |
|
1 month U.S. Dollar LIBOR |
|
|
(1,144,669 |
) |
U.S. Bank, N.A. |
|
|
|
11/18/2020 |
|
|
35,000,000 |
|
|
5.21 |
% |
|
1 month U.S. Dollar LIBOR |
|
|
(1,170,072 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$345,000,000 |
|
|
|
|
|
|
|
|
$ (202,951 |
) |
|
|
|
|
|
* |
The Company has entered into additional interest rate swap contracts for Series A and
Series B notes with settlements commencing on 7/10/2007 and 7/17/2007, respectively. |
The Company is exposed to credit risk on the
interest rate swap contracts if the counterparty should fail to perform under the terms of the interest rate
swap contracts. The amount of credit risk is limited to the net appreciation of the interest rate swap
contract, as no collateral is pledged by the counterparty.
12. Common Stock
The Company has 100,000,000 shares of capital
stock authorized and 16,732,065 shares outstanding at November 30, 2006. Transactions in common shares for the
years ended November 30, 2005 and 2006, were as follows:
Shares at November 30, 2004 |
|
|
12,684,154 |
|
Shares sold through secondary offering and exercise of overallotment options |
|
|
2,018,281 |
|
Shares issued through reinvestment of dividends |
|
|
203,080 |
|
|
|
|
Shares at November 30, 2005 |
|
|
14,905,515 |
|
Shares sold through shelf offering |
|
|
1,675,050 |
|
Shares issued through reinvestment of dividends |
|
|
151,500 |
|
|
|
|
Shares at November 30, 2006 |
|
|
16,732,065 |
|
|
|
|
13. Credit Facility
On June 13, 2006, the Company
entered into a $20 million unsecured committed credit facility maturing June 13, 2007,
with U.S. Bank, N.A. On July 25, 2006, the principal amount of the credit facility was
increased to $60 million. The credit facility has a variable annual interest rate equal
to the one-month LIBOR rate plus 0.75 percent. Proceeds from the credit facility are
used to execute the Companys investment objective. The average principal balance
and interest rate for the period during which the credit facility was utilized was
approximately $15.8 million and 6.09 percent, respectively. At November 30, 2006, the
principal balance outstanding was $32.45 million.
14. Subsequent Event
On December 13, 2006, the
Company issued 1,500,000 shares of common stock through a shelf offering
registration statement that became effective on June 23, 2006. The net proceeds of
approximately $50.2 million from this offering were used to retire a portion of the
Companys short-debt under the existing unsecured credit facility fully
described in Note 13.
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,
2006, and the related statements of operations and cash flows for the year then ended
and the statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits 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. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements and
financial highlights, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of November 30, 2006, by
correspondence with the custodian and brokers. We believe that our audits provide 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 Tortoise Energy Infrastructure Corporation at
November 30, 2006, the results of its operations and its cash flows for the year then
ended and the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for the periods indicated therein, in conformity with
U.S. generally accepted accounting principles.
Kansas City, Missouri
January
16, 2007
30 |
Tortoise Energy Infrastructure Corp. |
|
Company Officers and Directors
(Unaudited)
November 30, 2006
Name and Age* |
|
Position(s) Held with Company and Length of Time Served |
|
Principal Occupation During past Five Years |
|
Number of Portfolios in Fund Complex Overseen by Director2 |
|
Other Public Company Directorships Held by Director |
|
Independent Directors |
Conrad S. Ciccotello, (Born 1960) |
|
Director since 2003 |
|
Tenured Associate Professor of Risk Management and Insurance, Robinson College of Business,
Georgia State University (faculty member since 1999); Director of Graduate Personal Financial Planning (PFP)
Programs, Editor, Financial Services Review, (an academic journal dedicated to the study of
individual financial management); formerly, faculty member, Pennsylvania State University (1997-1999). |
|
3 |
|
None |
|
John R. Graham, (Born 1945) |
|
Director since 2003 |
|
Executive-in-Residence and Professor of Finance, College of Business Administration, Kansas
State University (has served as a professor or adjunct professor since 1970); Chairman of the Board, President
and CEO, Graham Capital Management, Inc., primarily a real estate development and investment company and a
venture capital company; and Owner of Graham Ventures, a business services and venture capital firm; formerly,
CEO, Kansas Farm Bureau Financial Services, including seven affiliated insurance or financial service
companies (1979-2000). |
|
3 |
|
Erie Indemnity Company; Kansas State Bank |
|
Charles E. Heath, (Born 1942) |
|
Director since 2003 |
|
Retired in 1999. Formerly, Chief Investment Officer, GE Capitals Employers Reinsurance
Corporation (1989-1999). Chartered Financial Analyst (CFA) since 1974. |
|
3 |
|
None |
|
(1) |
As a result of their respective positions held with the Adviser or its affiliates, these
individuals are considered interested persons within the meaning of the 1940 Act. |
(2) |
This number includes Tortoise North American Energy Corporation (TYN) and
Tortoise Energy Capital Corporation (TYY). The Adviser also serves as investment adviser to TYN,
TYY and Tortoise Capital Resources Corporation (TTO), a fund that intends to elect to become a
business development company in the first half of 2007. Each independent director is also an independent
director of TTO. |
* |
The address of each director and officer is 10801 Mastin Boulevard, Suite 222, Overland
Park, Kansas 66210. |
Company Officers and Directors
(Unaudited)
November 30, 2006 (Continued)
Name and Age* |
|
Position(s) Held with Company and Length of Time Served |
|
Principal Occupation During past Five Years |
|
Number of Portfolios in Fund Complex Overseen by Director2 |
|
Other Public Company Directorships Held by Director |
|
Interested Directors and Officers1 |
H. Kevin Birzer, (Born 1959) |
|
Director and Chairman of the Board since 2003 |
|
Managing Director of the Adviser since 2002; Partner, Fountain Capital Management
(1990-present); formerly, Vice President, Corporate Finance Department, Drexel Burnham Lambert
(1986-1989); Vice President, F. Martin Koenig & Co., an investment management firm (1983-1986). |
|
3 |
|
None |
|
Terry C. Matlack, (Born 1956) |
|
Director and Chief Financial Officer since 2003, Chief Compliance Officer from 2004
through May 2006; Assistant Treasurer since November 2005; Treasurer from 2003 to November 2005 |
|
Managing Director of the Adviser since 2002; Managing Director, KCEP
(2001-present); formerly, President, GreenStreet Capital, a private investment firm
(1998-2001). |
|
3 |
|
None |
|
David J. Schulte, (Born 1961) |
|
President and Chief Executive Officer since 2003 |
|
Managing Director of the Adviser since 2002; Managing Director, KCEP
(1993-present); CFA since 1992. |
|
|
|
None |
|
Zachary A. Hamel, (Born 1965) |
|
Secretary since 2003 |
|
Managing Director of the Adviser since 2002; Partner, Fountain Capital Management (1997-present). |
|
|
|
None |
|
Kenneth P. Malvey, (Born 1965) |
|
Treasurer since November 2005; Assistant Treasurer from 2003 to November 2005 |
|
Managing Director of the Adviser since 2002; Partner, Fountain Capital Management
(2002-present); formerly, Investment Risk Manager and member of the Global Office of Investments, GE
Capital's Employers Reinsurance Corporation (1996-2002). |
|
|
|
None |
|
(1) |
As
a result of their respective positions held with the Adviser or its affiliates, these
individuals are considered interested persons within the meaning of the 1940
Act. |
(2) |
This
number includes Tortoise North American Energy Corporation (TYN) and
Tortoise Energy Capital Corporation (TYY). The Adviser also serves as
investment adviser to TYN, TYY and TTO. Mr. Bizer is also a director and Chairman of the
Board of TTO. Mr. Matlack is also a director of TTO and is the Chief Financial Officer
and Assistant Treasurer of each of TYY, TYN and TTO. Mr. Schulte is the President and
Chief Executive Officer of each of TYY, TYN and TTO. Mr. Hamel is the Secretary of each
of TYY, TYN and TTO. Mr. Malvey is the Treasurer of each of TYY, TYN and TTO. |
* |
The
address of each director and officer is 10801 Mastin Boulevard, Suite 222, Overland Park,
Kansas 66210. |
32 |
Tortoise Energy Infrastructure Corp. |
|
Additional Information
(Unaudited)
Director and Officer Compensation
The Company does not compensate any of its
directors who are interested persons nor any of its officers. The following table sets forth information with
respect to the aggregate compensation paid by the Company to each independent director during fiscal 2006 for
their services as a director. The Company did not pay any special compensation to any of its directors or
officers.
Independent Directors |
Aggregate Compensation from Company |
|
Conrad S. Ciccotello |
|
|
|
$40,480 |
|
John R. Graham |
|
|
|
$36,480 |
|
Charles E. Heath |
|
|
|
$35,480 |
|
Aggregate Compensation Paid by Company to Independent Directors |
|
|
|
$112,440 |
|
Stockholder Proxy Voting Results
The annual meeting of stockholders was held on
April 12, 2006. The matters considered at the meeting, together with the actual vote tabulations relating to
such matters are as follows:
1. |
To elect Charles E. Heath and Terry C. Matlack as Directors of the Company, each to hold
office for a term of three years and until his successor is duly elected and qualified. |
|
No. of Shares |
(i) Charles E. Heath |
|
|
|
|
|
Affirmative |
|
|
|
13,784,978 |
|
Withheld |
|
|
|
146,830 |
|
|
|
|
TOTAL |
|
|
|
13,931,808 |
|
(ii) Terry C. Matlack* |
|
|
Affirmative |
|
|
|
2,408 |
|
Withheld |
|
|
|
0 |
|
|
|
|
TOTAL |
|
|
|
2,408 |
|
* |
Preferred stockholders are the only class of stockholders entitled to vote on this
director. |
John R. Graham and H. Kevin Birzer
continued as directors and their terms expire on the date of the 2007 annual meeting of stockholders, and
Conrad S. Ciccotello continued as a director and his term expires on the date of the 2008 annual meeting of
stockholders.
2. |
To ratify the selection of Ernst & Young LLP as the independent registered public
accounting firm of the Company for its fiscal year ending November 30, 2006. |
|
No. of Shares |
Affirmative |
|
|
|
13,806,027 |
|
Against |
|
|
|
69,108 |
|
Abstain |
|
|
|
56,673 |
|
|
|
|
TOTAL |
|
|
|
13,931,808 |
|
Based upon votes required for
approval, each of these matters passed.
Forward-Looking Statements
This report contains forward-looking
statements within the meaning of the Securities Act of 1933. By their nature, all forward-looking
statements involve risks and uncertainties, and actual results could differ materially from those contemplated
by the forward-looking statements. Several factors that could materially affect Tortoise Energy Infrastructure
Corporations (the Company) actual results are the performance of the portfolio of
investments held by it, the conditions in the U.S. and international financial, petroleum and other markets,
and the price at which shares of the Company will trade in the public markets. These factors and additional
factors are set forth in the Risk Factors section of the Companys public filings with the
SEC.
Proxy Voting Policies
A description of the policies and procedures that
the Company uses to determine how to vote proxies relating to portfolio securities owned by the Company and
information regarding how the Company voted proxies relating to the portfolio of securities during the
12-month period ended June 30, 2006 are available to stockholders (i) without charge, upon request by calling
the Company at (913) 981-1020 or toll-free at (866) 362-9331 and on the Companys Web site at
www.tortoiseadvisors.com; and (ii) on the SECs Web site at www.sec.gov.
Additional Information
(Unaudited)
(Continued)
Form N-Q
The Company files its complete schedule of
portfolio holdings for the first and third quarters of each fiscal year with the SEC on Form N-Q. The
Companys Form N-Q and statement of additional information are available without charge upon request by
calling the Company toll-free at (866) 362-9331 or by visiting the SECs Web site at www.sec.gov. In
addition, you may review and copy the Companys Form N-Q at the SECs Public Reference Room in
Washington D.C. You may obtain information on the operation of the Public Reference Room by calling (800)
SEC-0330. The Companys Form N-Qs are also available on the Companys Web site at
www.tortoiseadvisors.com.
Statement of Additional Information
The Statement of Additional Information
(SAI) includes additional information about the fund directors and is available upon request
without charge by calling the Company toll-free at (866) 362-9331.
Annual Certification
The Companys Chief Executive
Officer has submitted to the New York Stock Exchange the annual CEO certification as required by
Section 303A.12(a) of the NYSE Listed Company Manual.
The Company has filed with the SEC the
certifications of its Chief Executive Officer and Chief Financial Officer required by Section 302 of
the Sarbanes-Oxley Act.
Privacy Policy
In order to conduct its business, the Company
collects and maintains certain nonpublic personal information about its stockholders of record with respect to
their transactions in shares of the Companys securities. This information includes the
stockholders address, tax identification or Social Security number, share balances, and dividend
elections. We do not collect or maintain personal information about stockholders whose share balances of our
securities are held in street name by a financial institution such as a bank or broker.
We do not disclose any nonpublic
personal information about you, the Companys other stockholders or the Companys former
stockholders to third parties unless necessary to process a transaction, service an account, or as
otherwise permitted by law.
To protect your personal information internally,
we restrict access to nonpublic personal information about the Companys stockholders to those employees
who need to know that information to provide services to our stockholders. We also maintain certain other
safeguards to protect your nonpublic personal information.
Important Notice About Automatic Dividend
Reinvestment Plan
The Board of Directors of the Company has approved
an amendment to the Companys Automatic Dividend Reinvestment Plan (the Plan) to implement a
cash purchase option described below and to clarify the procedures for open market purchases. A registration
statement covering the shares to be issued by the Company pursuant to the cash purchase option must be
declared effective by the Securities and Exchange Commission prior to the Amended Plan being implemented. We
expect to implement the Amended Plan on April 1, 2007, subject to such registration statement being declared
effective. Registered stockholders will be notified of any delay in implementation of the Amended Plan. In
addition, a notice will be posted on our Advisors Web site at www.tortoiseadvisors.com regarding the
status of the expected April 1, 2007 effective date for the Amended Plan.
Upon its effectiveness, the Dividend Reinvestment
and Cash Purchase Plan (the Amended Plan) will allow registered holders of the Companys
common stock to make optional cash investments, in accordance with the Amended Plan, on a monthly basis. Any
single investment pursuant to the cash purchase option under the Amended Plan must be in an amount of at least
$100 and may not exceed $5,000 per month unless a request for waiver has been granted. A request for waiver
should be directed to the Company at 1-866-362-9331 and the Company has the sole discretion to grant any
requested waiver. Optional cash investments may be delivered to the Agent by personal check or by online
access at www.computershare.com. Stockholders who hold shares in street or other nominee name who want to
participate in optional cash investments should contact their broker, bank or other nominee and follow their
instructions. There is no obligation to make an optional cash investment at any time, and the amount of such
investments may vary from time to time. Optional cash investments must be received by the Agent no later than
two business days prior to the monthly payment date for purchase of common shares on the next succeeding
purchase date under the Amended Plan. Scheduled optional cash purchases may be cancelled or refunded upon a
participants written request received by the Agent at least two business days prior to the purchase
date. Participants will not be able to instruct the Agent to purchase common shares at a specific time or at a
specific price.
34 |
Tortoise Energy Infrastructure Corp. |
|
Additional Information
(Unaudited)
(Continued)
If a stockholders shares are registered
directly with the Company or with a brokerage firm that participates in the Companys Plan (and upon
effectiveness, the Amended Plan), all distributions are automatically reinvested for stockholders by the Agent
in additional shares of common stock of the Company (unless a stockholder is ineligible or elects otherwise).
Stockholders holding shares that participate in the Plan in a brokerage account may not be able to transfer
the shares to another broker and continue to participate in the Plan. Stockholders who elect not to
participate in the Plan (or the Amended Plan) will receive all distributions payable in cash paid by check
mailed directly to the stockholder of record (or, if the shares are held in street or other nominee name, then
to such nominee) by Computershare, as dividend paying agent. Distributions subject to tax (if any) are taxable
whether or not shares are reinvested.
If on the distribution payment date or the
purchase date for optional cash investments, the net asset value per share of the common stock is equal to or
less than the market price per share of common stock plus estimated brokerage commissions, the Company will
issue additional shares of common stock to participants. The number of shares will be determined by the
greater of the net asset value per share or 95 percent of the market price. Otherwise, shares generally will
be purchased on the open market by the Agent as soon as possible following the payment date or purchase date,
but in no event later than 30 days after such date except as necessary to comply with applicable law. The plan
previously provided that purchases would be made prior to the succeeding ex-dividend date. The amendments to
the plan also eliminate provisions which gave the plan agent the discretion to cease open market purchases
upon a subsequent change in the market discount. There are no brokerage charges with respect to shares issued
directly by the Company as a result of distributions payable either in shares or in cash or as a result of
optional cash investments. However, each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Agents open-market purchases in connection with the reinvestment of
distributions or optional cash investments. If a participant elects to have the Agent sell part or all of his
or her common stock and remit the proceeds, such participant will be charged a transaction fee of $15.00 plus
his or her pro rata share of brokerage commissions on the shares sold.
Stockholders may elect not to participate in the
Plan (or the Amended Plan) by sending written instructions to Computershare, as dividend paying agent, at the
address set forth below. Participation is completely voluntary and may be terminated or resumed at any time
without penalty by giving notice in writing to the Agent; such termination will be effective with respect to a
particular distribution if notice is received prior to such record date.
Additional information about the Plan (and the
Amended Plan) may be obtained by writing to Computershare Trust Company, N.A, P.O. Box 43078, Providence, R.I.
02940-3078. You may also contact Computershare by phone at (312) 588-4990 or visit their Web site at
www.computershare.com.
Approval of the Investment Advisory
Agreement
In approving the renewal of the Investment
Advisory Agreement in November 2006, the independent directors (Directors) of Tortoise Energy
Infrastructure Corporation (the Company) requested and received extensive data and information
from the Adviser concerning the Company and the services provided to it by the Adviser under the Investment
Advisory Agreement. In addition, the Directors requested and received data and information from independent,
third-party sources regarding the factors considered in their evaluation.
Factors Considered
The Directors considered and evaluated all the
information provided by the Adviser. The Directors did not identify any single factor as being all-important
or controlling, and each Director may have attributed different levels of importance to different factors. In
deciding to renew the agreement, the Directors decision was based on the following factors.
Nature, Extent and Quality of Services
Provided. The Directors considered information regarding the history, qualification and background of
the Adviser and the individuals responsible for the Advisers investment program, the adequacy of the
number of the Adviser personnel and other Adviser resources and plans for growth, use of affiliates of the
Adviser, and the particular expertise with respect to energy infrastructure companies, MLP markets and
financing (including private financing). The Directors concluded that the unique nature of the fund and the
specialized expertise of the Adviser in the niche market of MLPs made it uniquely qualified to serve as the
advisor. Further, the Directors recognized that the Advisers commitment to a long-term investment
horizon correlated well to the investment strategy of the Company.
Additional Information
(Unaudited)
(Continued)
Investment Performance of the Company and
the Adviser, Costs of the Services To Be Provided and Profits To Be Realized by the Adviser and its Affiliates
from the Relationship, and Fee Comparisons. The Directors reviewed and evaluated information regarding
the Companys performance (including quarterly, last twelve months, and from inception) and the
performance of the other Adviser accounts (including other investment companies), and information regarding
the nature of the markets during the performance period, with a particular focus on the MLP sector. The
Directors also considered the Companys performance as compared to comparable closed-end funds for the
relevant periods.
The Adviser provided detailed information
concerning its cost of providing services to the Company, its profitability in managing the Company, its
overall profitability, and its financial condition. The Directors have reviewed with the Adviser the
methodology used to prepare this financial information. This financial information regarding the Adviser is
considered in order to evaluate the Advisers financial condition, its ability to continue to provide
services under the Investment Advisory Agreement, and the reasonableness of the current management fee, and
was, to the extent possible, evaluated in comparison to other closed-end funds with similar investment
objectives and strategies.
The Directors considered and evaluated information
regarding fees charged to, and services provided to, other investment companies advised by the Adviser
(including the impact of any fee reimbursement arrangements), fees charged to separate institutional accounts
by the Adviser, and comparisons of fees of closed-end funds with similar investment objectives and strategies,
including other MLP investment companies, to the Company. The Directors noted that the fee charged to the
Company (0.95% of the Companys average monthly Managed Assets) is below the average of the fees charged
in comparable closed-end MLP funds. The Directors also considered the Advisers existing contractual
agreement to waive fees and expenses in the amount of 0.10% of average monthly Managed Assets in years three
through five of the Companys operations. The Directors concluded that the fees and expenses that the
Company is paying under the Advisory Agreement are reasonable given the quality of services provided under the
Advisory Agreement and that such fees and expenses are comparable to, and in many cases lower than, the fees
charged by advisors to comparable funds.
Economies of Scale. The Directors
considered information from the Adviser concerning whether economies of scale would be realized as the Company
grows, and whether fee levels reflect any economies of scale for the benefit of the Companys
stockholders. The Directors concluded that economies of scale are difficult to measure and predict overall.
Accordingly, the Directors reviewed other information, such as year-over-year profitability of the Adviser
generally, the profitability of its management of the Company specifically, and the fees of competitive funds
not managed by the Adviser over a range of asset sizes. The Directors concluded the Adviser is appropriately
sharing any economies of scale through its competitive fee structure and through reinvestment in its business
to provide stockholders additional content and services.
Collateral Benefits Derived by the
Adviser. The Directors reviewed information from the Adviser concerning collateral benefits it
receives as a result of its relationship with the Company. They concluded that the Adviser generally does not
use the Companys or stockholder information to generate profits in other lines of business, and
therefore does not derive any significant collateral benefits from them. The Directors did not, with respect
to their deliberations concerning their approval of the continuation of the Investment Advisory Agreement,
consider the benefits the Adviser may derive from relationships the Adviser may have with brokers through soft
dollar arrangements because the Adviser does not employ any such arrangements in rendering its advisory
services to the Company.
Conclusions of the Directors
As a result of this process, the independent
directors, assisted by the advice of legal counsel that is independent of the Adviser, taking into account all
of the factors discussed above and the information provided by the Adviser, unanimously concluded that the
Investment Advisory Agreement between the Company and the Adviser is fair and reasonable in light of the
services provided and should be renewed.
36 |
Tortoise Energy Infrastructure Corp. |
|
Office of the Company and of the Investment Adviser
Tortoise Capital Advisors, L.L.C.
10801 Mastin Boulevard, Suite 222
Overland Park, Kan. 66210
(913) 981-1020
(913) 981-1021 (fax)
www.tortoiseadvisors.com
Managing Directors of Tortoise Capital Advisors, L.L.C.
H. Kevin Birzer
Zachary A. Hamel
Kenneth P. Malvey
Terry Matlack
David J. Schulte
Board of Directors of Tortoise Energy Infrastructure Corp.
H. Kevin Birzer, Chairman
Tortoise Capital Advisors, L.L.C.
Terry Matlack
Tortoise Capital Advisors, L.L.C.
Conrad S. Ciccotello
Independent
John R. Graham
Independent
Charles E. Heath
Independent |
ADMINISTRATOR
U.S. Bancorp Fund Services, L.L.C.
615 East Michigan St.
Milwaukee, Wis. 53202
CUSTODIAN
U.S. Bank, N.A.
1555 North Rivercenter Drive, Suite 302
Milwaukee, Wis. 53212
TRANSFER, DIVIDEND DISBURSING AND REINVESTMENT AGENT
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, R.I. 02940-3078
(312) 588-4990
www.computershare.com
LEGAL COUNSEL
Blackwell Sanders Peper Martin LLP
4801 Main St.
Kansas City, Mo. 64112
INVESTOR RELATIONS
(866) 362-9331
info@tortoiseadvisors.com
STOCK SYMBOL
Listed NYSE Symbol: TYG
This report is for stockholder information. This is not a
prospectus intended for use in the purchase or sale of
fund shares. Past performance is no guarantee of future
results and your investment may be worth more or
less at the time you sell. |
Tortoise Capital Advisors Family of Funds
|
Name |
|
Ticker/ Inception Date |
|
Targeted Investments |
|
Investor Suitability |
|
Investment Restrictions |
|
Total Assets as of 11/30/06 ($ in millions) |
|
Tortoise Energy |
|
TYG Feb. 2004 |
|
U.S. Energy Infrastructure |
|
Retirement Accounts Pension Plans
Taxable Accounts |
|
30% Restricted Securities 10% Issuer-Limited |
|
$928 |
Tortoise Capital |
|
TYY May 2005 |
|
U.S. Energy Infrastructure |
|
Retirement Accounts Pension Plans Taxable Accounts |
|
50% Restricted Securities 15% Issuer-Limited |
|
$707 |
Tortoise North America |
|
TYN Oct. 2005 |
|
Canadian and U.S. Energy Infrastructure |
|
Taxable Accounts |
|
50% Restricted Securities Diversified to Meet RIC Requirements |
|
$173 |
...Steady Wins"
Tortoise Capital Advisors, L.L.C.
Investment Adviser to
Tortoise Energy Infrastructure Corp.
10801 Mastin Blvd., Suite 222 Overland Park, Kan. 66210
(913) 981-1020 (913) 981-1021 (fax) www.tortoiseadvisors.com |
Item 2. Code of Ethics.
The Registrant has adopted a code of ethics that
applies to the Registrants President, Chief Executive Officer and Chief Financial Officer. The
Registrant has not made any amendments to this code of ethics during the period covered by this report.
The Registrant has not granted any waivers from any provisions of this code of ethics during the period
covered by this report.
Item 3. Audit Committee Financial
Expert.
The Registrants Board of Directors has
determined that there is at least one audit committee financial expert serving on its audit
committee. Mr. Conrad Ciccotello is the audit committee financial expert and is considered
to be independent as each term is defined in Item 3 of Form N-CSR. In addition to his experience
overseeing or assessing the performance of companies or public accountants with respect to the preparation,
auditing or evaluation of financial statements, Mr. Ciccotello has a Ph.D. in Finance.
Item 4. Principal Accountant Fees and
Services.
The Registrant has engaged its principal
accountant to perform audit services, audit-related services and tax services during the past two fiscal
years. Audit services refer to performing an audit of the Registrant's annual financial
statements or services that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years. Audit-related services refer to
the assurance and related services by the principal accountant that are reasonably related to the performance
of the audit. Tax services refer to professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning. The following table details the approximate
amounts of aggregate fees billed to the Registrant for the last two fiscal years for audit fees, audit-related
fees, tax fees and other fees by the principal accountant.
|
|
FYE 11/30/2006 |
FYE 11/30/2005 |
|
Audit Fees |
|
|
|
$160,000 |
|
|
$237,000 |
|
Audit-Related Fees |
|
|
|
$17,000 |
|
|
$39,000 |
|
Tax Fees |
|
|
|
$81,000 |
|
|
$47,000 |
|
All Other Fees |
|
|
|
|
|
|
|
|
Aggregate Non-Audit Fees |
|
|
|
$98,000 |
|
|
$86,000 |
|
|
The audit committee has adopted pre-approval
policies and procedures that require the audit committee to pre-approve (i) the selection of the
Registrants independent registered public accounting firm, (ii) the engagement of the independent
registered public accounting firm to provide any non-audit services to the Registrant, (iii) the engagement of
the independent registered public accounting firm to provide any non-audit services to the Adviser or any
entity controlling, controlled by, or under common control with the Adviser that provides ongoing services to
the Registrant, if the engagement relates directly to the operations and financial reporting of the
Registrant, and (iv) the fees and other compensation to be paid to the independent registered public
accounting firm. The Chairman of the audit committee may grant the pre-approval of any engagement of the
independent registered public accounting firm for non-audit services of less than $5,000, and such delegated
pre-approvals will be presented to the full audit committee at its next meeting for ratification. Under
certain limited circumstances, pre-approvals are not required under securities law regulations for certain
non-audit services below certain de minimus thresholds. Since the adoption of these policies and procedures,
the audit committee has pre-approved all audit and non-audit services provided to the Registrant by the
principal accountant, and all non-audit services provided by the principal accountant to the Adviser. None of
these services provided by the principal accountant were approved by the audit committee pursuant to the de
minimus exception under Rule 2.01(c)(7)(i)(C) or Rule 2.01(c)(7)(ii) of Regulation S-X. All of the
principal accountants hours spent on auditing the registrants financial statements were attributed
to work performed by full-time permanent employees of the principal accountant.
In addition, in the registrants
fiscal year ended November 30, 2006, the principal accountant billed the Adviser fees in the amount
of $20,500 in connection with determining the Advisers compliance with AIMR-PPS®
standards in 2005 and 2004, but did not bill the Adviser for any fees for non-audit services for the
fiscal year ended November 30, 2005. In addition, in January 2007, the Adviser paid the principal
accountant fees in the amount of $10,000 for general tax consultation in the fiscal year ended
November 30, 2006. No entity controlling, controlled by, or under common control with the Adviser
that provides ongoing services to the Registrant, has paid to, or been billed for fees by, the
principal accountant for non-audit services rendered to the Adviser or such entity during the
Registrants last two fiscal years. The audit committee has considered whether the
principal accountants provision of services (other than audit services) to the Registrant, the
Adviser or any entity controlling, controlled by, or under common control with the Adviser that
provides services to the Registrant is compatible with maintaining the principal accountants
independence in performing audit services.
Item 5. Audit Committee of Listed
Registrants.
The Registrant has a
separately-designated standing audit committee established in accordance with Section 3(a)(58) of
the Securities Exchange Act of 1934, and is comprised of Mr. Conrad Ciccotello, Mr. John Graham and
Mr. Charles Heath.
Item 6. Schedule of
Investments.
Schedule of Investments is included as
part of the report to shareholders filed under Item 1.
Item 7. Disclosure of Proxy Voting
Policies and Procedures for Closed-End Management Investment Companies.
Copies of the proxy voting policies and
procedures of the Registrant and the Adviser are attached hereto as Exhibit 99.VOTEREG and Exhibit
99.VOTEADV, respectively.
Item 8. Portfolio Managers of
Closed-End Management Investment Companies.
Unless otherwise
indicated, information is presented as of November 30, 2006.
Portfolio Managers
Management of the
registrants portfolio is the responsibility of a team of portfolio managers consisting of H. Kevin
Birzer, Zachary A. Hamel, Kenneth P. Malvey, Terry C. Matlack and David J. Schulte, all of whom are Managers
of the Adviser, comprise the investment committee of the Adviser and share responsibility for such investment
management. All decisions to invest in a portfolio company must be approved by the unanimous decision of the
Advisers investment committee and any one member of the Advisers investment committee can require
the Advisor to sell a security or can veto the investment committees decision to invest in a security.
Biographical information about each member of the Advisers investment committee as of the date of this
filing is set forth below.
Name |
|
Positions(s) Held With Registrant and Length of Time Served |
|
Principal Occupation During Past Five Years |
H. Kevin Birzer |
|
Director and Chairman of the Board of registrant since 2003 |
|
Managing Director of the Adviser since 2002; Partner, Fountain Capital Management,
L.L.C. (Fountain Capital), a registered investment advisor (1990 - present). Formerly, Vice
President, Corporate Finance Department, Drexel Burnham Lambert (1986-1989); and Vice President, F.
Martin Koenig & Co. (1983- 1986). |
Zachary A. Hamel |
|
Secretary of registrant since 2003 |
|
Managing Director of the Adviser since 2002; Partner, Fountain Capital
(1997-present). |
Kenneth P. Malvey |
|
Treasurer of registrant since November 2005; Assistant Treasurer of registrant from
2003 to November 2005 |
|
Managing Director of the Adviser since 2002; Partner, Fountain Capital
(2002-present). Formerly, Investment Risk Manager and member of the Global Office of Investments, GE
Capitals Employers Reinsurance Corporation (1996 - 2002). |
Terry C. Matlack |
|
Director and Chief Financial Officer of registrant since 2003; Assistant Treasurer
of registrant since November 2005; Treasurer of registrant from 2003 to November 2005; Chief
Compliance Officer of registrant from its inception through May 2006 |
|
Managing Director of the Adviser since 2002; Managing Director, Kansas City Equity
Partners LC (KCEP), a private equity firm (2001- present). Formerly, President, GreenStreet
Capital (1995 - 2001). |
David J. Schulte |
|
President and Chief Executive Officer of registrant since 2003 |
|
Managing Director of the Adviser since 2002; Managing Director, KCEP
(1993-present). |
Messrs. Birzer and Matlack also serve as directors
of Tortoise North American Energy Corporation (TYN) and Tortoise Energy Capital Corporation
(TYY), registered closed-end management investment companies, as well as Tortoise Capital
Resources Corporation (TTO), a closed-end management investment company that intends to elect to
be regulated as a business development company. Messrs. Matlack, Schulte, Hamel and Malvey also serve as
officers of TYN, TYY and TTO. The Adviser also serves as the investment adviser to TYN, TYY and TTO.
The following
table provides information about the other accounts managed on a day-to-day basis by each
of the portfolio managers as of November 30, 2006:
Name of Manager |
Number of Accounts |
Total Assets of Accounts |
|
Number of Accounts Paying a Performance Fee |
|
Total Assets of Accounts Paying a Performance Fee |
|
H. Kevin Birzer |
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
2 |
|
$879,812,575 |
|
0 |
|
|
|
Other pooled investment vehicles |
|
5 |
|
$1,928,523,567 |
|
1 |
|
$42,933,012 |
|
Other accounts |
|
182 |
|
$1,965,319,994 |
|
0 |
|
|
|
Zachary A. Hamel |
|
Registered investment companies |
|
2 |
|
$879,812,575 |
|
0 |
|
|
|
Other pooled investment vehicles |
|
5 |
|
$1,928,523,567 |
|
1 |
|
$42,933,012 |
|
Other accounts |
|
182 |
|
$1,965,319,994 |
|
0 |
|
|
|
Kenneth P. Malvey |
|
Registered investment companies |
|
2 |
|
$879,812,575 |
|
0 |
|
|
|
Other pooled investment vehicles |
|
5 |
|
$1,928,523,567 |
|
1 |
|
$42,933,012 |
|
Other accounts |
|
182 |
|
$1,965,319,994 |
|
0 |
|
|
|
Terry C. Matlack |
|
Registered investment companies |
|
2 |
|
$879,812,575 |
|
0 |
|
|
|
Other pooled investment vehicles |
|
2 |
|
$69,933,012 |
|
2 |
|
$69,933,012 |
|
Other accounts |
|
160 |
|
$185,779,727 |
|
0 |
|
|
|
David J. Schulte |
|
Registered investment companies |
|
2 |
|
$879,812,575 |
|
0 |
|
|
|
Other pooled investment vehicles |
|
2 |
|
$69,933,012 |
|
2 |
|
$69,933,012 |
|
Other accounts |
|
160 |
|
$185,779,727 |
|
0 |
|
|
|
Material 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 registrant has no interest. The Adviser or its affiliates
may have financial incentives to favor certain of these accounts over the registrant. Any of their
proprietary accounts or other customer accounts may compete with the registrant for specific trades.
The Adviser or its affiliates may give advice and recommend securities to, or buy or sell securities
for, other accounts and customers, which advice or securities recommended may differ from advice
given to, or securities recommended or bought or sold for, the registrant, even though their
investment objectives may be the same as, or similar to, the registrants objectives. When two
or more clients advised by the Adviser or its affiliates seek to purchase or sell the same publicly
traded securities, the securities actually purchased or sold will be allocated among the clients on
a good faith equitable basis by the Adviser in its discretion and in accordance with the
clients various investment objectives and the Advisers procedures. In some cases, this
system may adversely affect the price or size of the position the registrant may obtain or sell. In
other cases, the registrants ability to participate in volume transactions may produce better
execution for it.
The registrant, TYY, TYN
and TTO have the same investment adviser, rely on some of the same personnel and will use the same
portfolio managers. To the extent certain energy infrastructure company securities meet the
registrants investment objective and the objectives of other investment companies or accounts
managed by the Adviser, the registrant may compete with such companies or accounts for the same
investment opportunities.
Situations may occur
when the registrant could be disadvantaged because of the investment activities conducted by the
Adviser and its affiliates for their other accounts. Such situations may be based on, among other
things, the following: (1) legal or internal restrictions on the combined size of positions that may
be taken for the registrant or the other accounts, thereby limiting the size of the
registrants position; (2) the difficulty of liquidating an investment for the registrant or
the other accounts where the market cannot absorb the sale of the combined position; or (3) limits
on co-investing in private placement securities under the Investment Company Act of 1940. The
registrants investment opportunities may be limited by affiliations of the Adviser or its
affiliates with energy infrastructure companies.
In addition, three of
the five portfolio managers are affiliates of, but not employees of, the Adviser, and each has other
significant responsibilities with Fountain Capital, which conducts businesses and activities of its
own in which the Adviser has no economic interest. If these separate activities become significantly
greater or have greater profit potential than the Advisers activities, there could be material
competition for the efforts of these portfolio managers.
Compensation
None of Messrs. Birzer,
Hamel, Malvey, Matlack or Schulte receives any direct compensation from the registrant or any other
of the managed accounts reflected in the table above. All such accounts are managed by the Adviser,
Fountain Capital or KCEP. Messrs. Schulte and Matlack are full-time employees of the Adviser
and receive a fixed salary for the services they provide. Messrs. Birzer, Hamel and Malvey are
employees of Fountain Capital 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 or Malvey. Each of Messrs. Birzer, Hamel, Malvey, Matlack and Schulte 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, KCEP or Fountain Capital.
Securities Owned in the Registrant by
Portfolio Managers
The following table
provides information about the dollar range of equity securities in the registrant beneficially
owned by each of the portfolio managers as of November 30, 2006:
Portfolio Manager |
Aggregate Dollar Range of Holdings in the Registrant |
|
H. Kevin Birzer |
Over $100,000 |
|
Zachary A. Hamel |
Over $100,000 |
|
Kenneth P. Malvey |
Over $100,000 |
|
Terry C. Matlack |
Over $100,000 |
|
David J. Schulte |
Over $100,000 |
|
Item 9. Purchases of
Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
|
Period |
|
(a) Total Number of Shares (or Units) Purchased |
|
(b) Average Price Paid per Share (or Unit) |
|
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
|
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
|
|
Month #1 |
|
0 |
|
0 |
|
0 |
|
0 |
|
6/1/06-6/30/06 |
|
|
Month #2 |
|
0 |
|
0 |
|
0 |
|
0 |
|
7/1/06-7/31/06 |
|
|
Month #3 |
|
0 |
|
0 |
|
0 |
|
0 |
|
8/1/06-8/31/06 |
|
|
Month #4 |
|
0 |
|
0 |
|
0 |
|
0 |
|
9/1-06-9/30/06 |
|
|
Month #5 |
|
0 |
|
0 |
|
0 |
|
0 |
|
10/1/06-10/31/06 |
|
|
Month #6 |
|
0 |
|
0 |
|
0 |
|
0 |
|
11/1/06-11/30/06 |
|
|
Total |
|
0 |
|
0 |
|
0 |
|
0 |
|
|
Item 10. Submission of Matters to
a Vote of Security Holders.
None.
Item 11. Controls and
Procedures.
(a) The
Registrants President/Chief Executive Officer and Chief Financial Officer have concluded that
the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940 (the 1940 Act)) are effective as of a date within 90 days
of the filing date of this report, based on the evaluation of these controls and procedures required
by Rule 30a-3(b) under the 1940 Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange
Act of 1934, as amended.
(b) There were no
significant changes in the Registrant's internal controls over financial reporting (as defined in
Rule 30a-3(d) under the 1940 Act) that occurred during the Registrant's second fiscal quarter of the
period covered by this report that have materially affected, or are reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
Item 12. Exhibits.
(a) (1) Any code of ethics or
amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the
Registrant intends to satisfy Item 2 requirements through filing of an exhibit.
Incorporated by the reference to the Registrants Form N-CSR filed on February 3,
2006.
(2) Certifications pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
(3) Any written solicitation to
purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the
report by or on behalf of the Registrant to 10 or more persons. None.
(b) Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) |
Tortoise Energy Infrastructure Corporation |
By (Signature and Title) |
/s/ David Schulte |
|
David J. Schulte, President and Chief Executive Officer |
Date January 31, 2007 |
Pursuant to the requirements of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
By (Signature and Title) |
/s/ David Schulte |
|
David J. Schulte, President and Chief Executive Officer |
Date January 31, 2007 |
By (Signature and Title) |
/s/ Terry Matlack |
|
Terry C. Matlack, Chief Financial Officer |
Date January 31, 2007 |