UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-Q
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 31, 2007
 
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from                      to
 
COMMISSION FILE NUMBER: 001-33292
 

 
TORTOISE CAPITAL RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)

 MARYLAND
 
20-3431375
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
10801 MASTIN BOULEVARD, SUITE 222
OVERLAND PARK, KANSAS 66210
(Address of principal executive office) (Zip Code)
 
(866) 362-9331
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
 
Large accelerated filer o  Accelerated filer o  Non-accelerated filer x.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o  No x .
 
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of June 30, 2007 was 8,840,105. 
 
1

TORTOISE CAPITAL RESOURCES CORPORATION
 
TABLE OF CONTENTS
 
 
 
PART I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
Item 4.
 
 
 
 
PART II.
 
 
 
 
Item 1.
 
 
 
 
Item 1A.
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
Item 4.
 
 
 
 
Item 5.
 
 
 
 
Item 6.
 
 
 
 
SIGNATURES
 
 
 
 
2

 

Tortoise Capital Resources Corporation
           
STATEMENTS OF ASSETS& LIABILITIES
           
             
             
   
May 31, 2007
   
November 30, 2006
 
   
(Unaudited)
       
Assets
           
Investments at value, non-affiliated (cost $53,074,126 and $21,867,831, respectively)
  $
60,929,415
    $
22,196,689
 
Investments at value, affiliated (cost $48,753,776 and $14,828,825, respectively)
   
50,701,156
     
14,828,825
 
Investments at value, control (cost $18,800,000 and $5,550,000, respectively)
   
18,973,954
     
5,550,000
 
Total investments (cost $120,627,902 and $42,246,656, respectively)
   
130,604,525
     
42,575,514
 
Dividends receivable
   
124,586
     
24,262
 
Interest receivable from control investments
   
61,859
     
43,983
 
Other receivable from affiliate
   
-
     
44,487
 
Prepaid expenses and other assets
   
109,863
     
244,766
 
Total assets
   
130,900,833
     
42,933,012
 
                 
Liabilities
               
Management fees payable to Adviser
   
468,000
     
112,765
 
Accrued capital gain incentive fees payable to Adviser (Note 4)
   
1,496,494
     
-
 
Dividend payable on common shares
   
1,414,035
     
-
 
Accrued expenses and other liabilities
   
143,289
     
155,303
 
Current tax liability
   
67,786
     
86,386
 
Deferred tax liability
   
3,174,261
     
250,156
 
Total liabilities
   
6,763,865
     
604,610
 
Net assets applicable to common stockholders
  $
124,136,968
    $
42,328,402
 
                 
Net Assets Applicable to Common Stockholders Consist of
               
Warrants, no par value; 948,005 issued and outstanding
               
at May 31, 2007 and 772,124 issued and outstanding at
               
November 30, 2006 (5,000,000 authorized)
  $
1,374,147
    $
1,104,137
 
Capital stock, $0.001 par value; 8,837,721 shares issued and
               
outstanding at May 31, 2007 and 3,088,596 issued and outstanding
               
at November 30, 2006 (100,000,000 shares authorized)
   
8,838
     
3,089
 
Additional paid-in capital
   
118,662,119
     
41,018,413
 
Accumulated net investment loss, net of deferred tax benefit
    (2,101,017 )    
-
 
Accumulated realized gain (loss), net of deferred tax expense
   
7,595
      (906 )
Net unrealized appreciation of investments, net of deferred tax expense
   
6,185,286
     
203,669
 
Net assets applicable to common stockholders
  $
124,136,968
    $
42,328,402
 
                 
Net Asset Value per common share outstanding (net assets applicable
               
to common shares, divided by common shares outstanding)
  $
14.05
    $
13.70
 
 
See Accompanying Notes to the Financial Statements

3



Tortoise Capital Resources Corporation
             
SCHEDULES OF INVESTMENTS
               
May 31, 2007
               
 (Unaudited)
               
                 
                 
 Company
 Industry
 Type of Investment
 
Cost
   
Value
 
Control Investments (1)
               
Mowood, L.L.C.
Natural Gas Distribution
Equity Interest (100%) (2)
  $
1,500,000
    $
1,673,954
 
   
Subordinated Debt (12% Due 7/01/2016) (2)
   
5,050,000
     
5,050,000
 
VantaCore Partners, L.P.
Aggregate
Common Units (425,000) (2)
   
8,500,000
     
8,500,000
 
   
Subordinated Debt (10.86% Due 5/21/2014) (2) (3)
   
3,750,000
     
3,750,000
 
   
Incentive Distribution Rights (789 units) (2) (6)
   
-
     
-
 
Total Control Investments - 15.3% (4)
       
18,800,000
     
18,973,954
 
                     
Affiliated Investments (5)
                   
High Sierra Energy, L.P.
Diversified Energy Infrastructure
Common Units (633,179) (2)
   
14,373,762
     
17,279,455
 
Quest Midstream Partners, L.P.
Natural Gas/Gathering Processing
Common Units (945,946) (2)
   
17,228,876
     
15,836,890
 
Millennium Midstream Partners, L.P.
Natural Gas/Gathering Processing
Class A Common Units (875,000) (2)
   
17,132,568
     
17,584,811
 
   
Incentive Distribution Rights (78 units) (2) (6)
   
18,570
     
-
 
Total Affiliated Investments - 40.8% (4)
       
48,753,776
     
50,701,156
 
                     
Non-affiliated Investments
                   
Abraxas Energy Partners, L.P.
Natural Gas Gathering/Processing
Common Units (450,181) (2)
   
7,500,015
     
7,500,015
 
Eagle Rock Energy Partners, L.P.
Natural Gas Gathering/Processing
Common Units (659,071)
   
11,316,198
     
15,830,885
 
Legacy Reserves, L.P.
Natural Gas and Oil Exploitation
Limited Partner Units (264,705) (2)
   
4,073,598
     
7,585,386
 
High Sierra Energy GP, L.L.C.
Diversified Energy Infrastructure
Equity Interest (3%) (2) (6)
   
2,421,186
     
2,250,000
 
Alpine Municipal Money Market Fund
Short-term investment
Class I
   
18,459,523
     
18,459,523
 
Fidelity Institutional Tax-Exempt Portfolio Fund
Short-term investment
Class I
   
8,803,606
     
8,803,606
 
AIM Short-term Investments Prime Portfolio Money Market Fund
Short-term investment
Institutional Class
   
500,000
     
500,000
 
Total Non-affiliated Investments - 49.1% (4)
       
53,074,126
     
60,929,415
 
                     
Total Investments - 105.2%(4)
      $
120,627,902
    $
130,604,525
 
                     
(1) Control investments are generally defined under the Investment Company Act of 1940 as companies in which
         
at least 25% of the voting securities are owned; see Note 7 to the financial statements for further disclosure.
         
(2) Fair valued securities have a total value of $87,010,511, which represents 70.1% of net assets applicable to common
 
stockholders. These securities are deemed to be restricted; see Note 6 to the financial statements for further disclosure.
 
(3)  Security is a variable rate instrument.  Interest rate is as of May 31, 2007.
               
(4) Calculated as a percentage of net assets applicable to common stockholders.
               
(5) Affiliated investments are generally defined under the Investment Company Act of 1940 as companies in which
         
at least 5% of the voting securities are owned. Affiliated investments in which at least 25% of the voting securities are
 
owned are generally defined as control investments as described in footnote 1; see Note 7 to the financial statements for further disclosure.
 
(6) Currently non-income producing.
                   
                     
 
See Accompanying Notes to the Financial Statements
 
4

 

Tortoise Capital Resources Corporation
             
SCHEDULES OF INVESTMENTS
               
November 30, 2006
               
                 
                 
 Company
 Industry
 Type of Investment
 
Cost
   
Value
 
Control Investments (1)
               
Mowood, L.L.C.
Natural Gas Distribution
Equity Interest (100%) (2)
  $
1,000,000
    $
1,000,000
 
   
Subordinated Debt (12% Due 7/01/2016) (2)
   
4,550,000
     
4,550,000
 
Total Control Investments - 13.2% (3)
       
5,550,000
     
5,550,000
 
                     
Affiliated Investments (4)
                   
High Sierra Energy, L.P.
Diversified Energy Infrastructure
Common Units (633,179) (2)
   
14,828,825
     
14,828,825
 
Total Affiliated Investments - 35.0% (3)
       
14,828,825
     
14,828,825
 
                     
Non-affiliated Investments
                   
Eagle Rock Energy Partners, L.P.
Natural Gas Gathering/Processing
Common Units (474,071) (2)
   
8,449,785
     
8,533,278
 
Eagle Rock Energy Partners, L.P.
Natural Gas Gathering/Processing
Common Units (185,000)
   
3,515,000
     
3,494,650
 
Legacy Reserves, L.P.
Natural Gas and Oil Exploitation
Limited Partner Units (264,705) (2)
   
4,300,446
     
4,566,161
 
High Sierra Energy GP, L.L.C.
Diversified Energy Infrastructure
Options (3%) (2) (5)
   
171,186
     
171,186
 
First American Prime Obligations Money Market Fund
Short-term investment
Class Y
   
5,431,414
     
5,431,414
 
Total Non-affiliated Investments - 52.4% (3)
       
21,867,831
     
22,196,689
 
                     
Total Investments - 100.6% (3)
      $
42,246,656
    $
42,575,514
 
                     
(1) Control investments are generally defined under the Investment Company Act of 1940 as companies in which
         
at least 25% of the voting securities are owned; see Note 7 to the financial statements for further disclosure.
         
(2) Fair valued securities have a total value of $33,649,450, which represents 79.5% of net assets applicable to common
 
stockholders. These securities are deemed to be restricted; see Note 6 to the financial statements for further disclosure.
 
(3) Calculated as a percentage of net assets applicable to common stockholders.
               
(4) Affiliated investments are generally defined under the Investment Company Act of 1940 as companies in which
         
at least 5% of the voting securities are owned. Affiliated investments in which at least 25% of the voting securities are
 
owned are generally defined as control investments as described in footnote 1; see Note 7 to the financial statements for further disclosure.
 
(5) The Company has an option to purchase a 3% Membership Interest (fully diluted) in High Sierra Energy GP, LLC at an
 
    exercise price of $2,250,000. The option may be exercised any time prior to May 2, 2007.
               

See Accompanying Notes to the Financial Statements
 
 
5

 
 
Tortoise Capital Resources Corporation
                       
STATEMENTS OF OPERATIONS (Unaudited)
                       
                         
   
For the three months ended
   
For the three months ended
   
For the six months ended
   
Period from
 December 8, 2005 (1) through
 
   
May 31, 2007
   
May 31, 2006
   
May 31, 2007
   
May 31, 2006
 
Investment Income
                       
   Distributions received from investments
                       
Non-affiliated investments
  $
347,442
    $
-
    $
695,872
    $
-
 
Affiliated investments
   
1,078,025
     
-
     
1,333,282
     
-
 
   Total distributions received from investments
   
1,425,467
             
2,029,154
         
   Less return of capital on distributions
                               
Non-affiliated investments
    (602,896 )    
-
      (889,148 )    
-
 
Affiliated investments
    (881,245 )    
-
      (1,075,050 )    
-
 
            Net distributions from investments
    (58,674 )    
-
     
64,956
     
-
 
   Dividends from money market mutual funds
   
442,126
     
347,496
     
581,659
     
751,001
 
   Interest income from control investments
   
162,404
     
-
     
290,876
     
-
 
Total Investment Income
   
545,856
     
347,496
     
937,491
     
751,001
 
                                 
Expenses
                               
   Base management fees
   
468,012
     
169,367
     
848,079
     
306,163
 
   Capital gain incentive fees (Note 4)
   
1,008,867
     
-
     
1,496,494
     
-
 
   Professional fees
   
157,467
     
44,201
     
214,848
     
83,597
 
   Directors' fees
   
25,205
     
23,129
     
48,373
     
43,743
 
   Administrator fees
   
20,063
      (6,844 )    
30,736
     
-
 
   Reports to stockholders
   
11,847
     
2,067
     
16,305
     
15,810
 
   Fund accounting fees
   
8,428
     
6,599
     
14,277
     
12,409
 
   Stock transfer agent fees
   
3,680
     
7,260
     
7,280
     
10,009
 
   Custodian fees and expenses
   
2,545
     
1,610
     
5,145
     
3,438
 
   Registration fees
   
6,395
     
-
     
8,063
     
-
 
   Other expenses
   
11,454
     
3,908
     
17,992
     
10,849
 
Total Expenses before Interest Expense,
                               
Preferred Stock Dividends and Loss on Redemption of Preferred Stock
   
1,723,963
     
251,297
     
2,707,592
     
486,018
 
   Interest expense
    (5,771 )    
-
     
117,710
     
-
 
   Preferred stock dividends
   
-
     
-
     
228,750
     
-
 
   Loss on redemption of preferred stock
    (33,346 )    
-
     
731,713
     
-
 
Total Interest Expense, Preferred Stock Dividends
                               
and Loss on Redemption of Preferred Stock
    (39,117 )    
-
     
1,078,173
     
-
 
Total Expenses
   
1,684,846
     
251,297
     
3,785,765
     
486,018
 
Net Investment Income (Loss), before Income Taxes
    (1,138,990 )    
96,199
      (2,848,274 )    
264,983
 
     Current tax expense
   
-
      (34,855 )    
-
      (95,955 )
     Deferred tax benefit
   
432,817
     
-
     
747,257
     
-
 
Total tax benefit (expense)
   
432,817
      (34,855 )    
747,257
      (95,955 )
Net Investment Income (Loss)
    (706,173 )    
61,344
      (2,101,017 )    
169,028
 
                                 
Realized and Unrealized Gain on Investments
                               
   Net realized gain on investments, before deferred tax expense
   
13,712
     
-
     
13,712
     
-
 
Deferred tax expense
    (5,211 )    
-
      (5,211 )    
-
 
Net Realized Gain on Investments
   
8,501
     
-
     
8,501
     
-
 
   Net unrealized appreciation of non-affiliated investments
   
5,179,360
     
-
     
7,507,863
     
-
 
   Net unrealized appreciation of affiliated investments
   
1,505,983
     
-
     
1,965,951
     
-
 
   Net unrealized appreciation of control investments
   
40,435
     
-
     
173,954
     
-
 
Net unrealized appreciation, before deferred tax expense
   
6,725,778
     
-
     
9,647,768
     
-
 
Deferred tax expense
    (2,555,796 )    
-
      (3,666,151 )    
-
 
Net Unrealized Appreciation of Investments
   
4,169,982
     
-
     
5,981,617
     
-
 
Net Realized and Unrealized Gain on Investments
   
4,178,483
     
-
     
5,990,118
     
-
 
                                 
Net Increase in Net Assets Applicable to Common Stockholders
                         
   Resulting from Operations
  $
3,472,310
    $
61,344
    $
3,889,101
    $
169,028
 
                                 
Net Increase in Net Assets Applicable to Common Stockholders:
                         
   Resulting from Operations Per Common Share
                               
   Basic
  $
0.39
    $
0.02
    $
0.58
    $
0.05
 
   Diluted
  $
0.35
    $
0.02
    $
0.51
    $
0.05
 
                                 
Weighted Average Shares of Common Stock Outstanding:
                               
   Basic
   
8,830,580
     
3,088,596
     
6,653,445
     
3,088,596
 
   Diluted
   
9,785,726
     
3,088,596
     
7,587,209
     
3,088,596
 
                                 
                                 
(1) Commencement of Operations.
                               
 
See Accompanying Notes to the Financial Statements
 
 
6

 
 
Tortoise Capital Resources Corporation
                 
STATEMENTS OF CHANGES IN NET ASSETS
                 
                   
   
For the six months ended
   
Period from
December 8, 2005 (1) through
   
Period from
 December 8, 2005 (1) through
 
   
May 31, 2007
   
May 31, 2006
   
November 30, 2006
 
   
(Unaudited)
   
(Unaudited)
       
                   
Operations
                 
   Net investment income (loss)
  $ (2,101,017 )   $
169,028
    $
733,276
 
   Net realized gain (loss) on investments
   
8,501
              (906 )
   Net unrealized appreciation of investments
   
5,981,617
    $
-
     
203,669
 
Net increase in net assets applicable to common stockholders resulting from operations
   
3,889,101
     
169,028
     
936,039
 
                         
Dividends and Distributions to Common Stockholders
                       
   Net investment income
   
-
     
-
      (639,220 )
   Return of capital
    (1,722,895 )    
-
      (410,903 )
   Total dividends and distributions to common stockholders
    (1,722,895 )    
-
      (1,050,123 )
                         
Capital Share Transactions
                       
   Proceeds from private offerings of 3,066,667 common shares
   
-
     
44,895,868
     
44,895,868
 
   Proceeds from issuances of 772,124 warrants
   
-
     
1,104,137
     
1,104,137
 
   Proceeds from initial public offering of 5,740,000 common shares
   
86,100,000
     
-
     
-
 
   Proceeds from issuance of 185,006 warrants
   
283,059
     
-
     
-
 
   Proceeds from exercise of 9,125 warrants
   
136,875
     
-
     
-
 
Underwriting discounts and offering expenses associated with the issuance of
                 
      common shares
    (6,877,574 )     (3,769,372 )     (3,769,373 )
Net increase in net assets, applicable to common stockholders, from capital share transactions
   
79,642,360
     
42,230,633
     
42,230,632
 
Total increase in net assets applicable to common stockholders
   
81,808,566
     
42,399,661
     
42,116,548
 
                         
Net Assets
                       
   Beginning of period
   
42,328,402
     
211,854
     
211,854
 
   End of period
  $
124,136,968
    $
42,611,515
    $
42,328,402
 
   Accumulated net investment income (loss) net of deferred tax expense (benefit), at end of period
  $ (2,101,017 )   $
74,973
    $
-
 
                         
(1) Commencement of Operations.
                       
 
See Accompanying Notes to the Financial Statements
 
 
7

 
Tortoise Capital Resources Corporation
           
STATEMENT OF CASH FLOWS (Unaudited)
           
   
For the six
months ended
May 31, 2007
   
Period from
December 8, 2005 (1)
through
May 31, 2006
 
Cash Flows From Operating Activities
           
Distributions received from investments
  $
2,029,104
    $
-
 
Interest and dividend income received
   
754,385
     
646,060
 
Purchases of long-term investments
    (58,000,016 )     (16,999,991 )
Purchases of short-term investments, net
    (22,331,715 )     (25,758,402 )
Interest expense paid
    (122,231 )    
-
 
Preferred stock dividends
    (228,750 )    
-
 
Current tax expense paid
    (18,600 )        
Operating expenses paid
    (877,205 )     (424,210 )
Net cash used in operating activities
    (78,795,028 )     (42,536,543 )
Cash Flows from Financing Activities
               
 Issuance of common stock
   
86,236,875
     
46,000,005
 
Common stock issuance costs
    (6,684,333 )     (3,769,372 )
Issuance of preferred stock
   
18,216,941
     
-
 
Redemption of preferred stock
    (18,870,000 )    
-
 
Preferred stock issuance costs
    (78,654 )    
-
 
Issuance of warrants
   
283,059
     
-
 
Advances from revolving line of credit
   
12,600,000
     
-
 
Repayments on revolving line of credit
    (12,600,000 )    
-
 
Dividends paid to common stockholders
    (308,860 )    
-
 
Net cash provided by financing activities
   
78,795,028
     
42,230,633
 
      Net decrease in cash
   
-
      (305,910 )
      Cash--beginning of period
   
-
     
305,910
 
      Cash--end of period
  $
-
    $
-
 
                 
                 
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
  $
3,889,101
    $
169,028
 
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
    (58,000,016 )     (16,999,991 )
       Return of capital on distributions received
   
1,964,198
     
-
 
       Net purchases of short-term investments
    (22,331,715 )     (25,758,402 )
   Accrued capital gain incentive fees payable to Adviser
   
1,496,494
     
-
 
   Deferred income tax expense
   
2,924,105
     
-
 
   Realized gains on investments
    (13,712 )    
-
 
   Loss on redemption of preferred stock
   
731,713
     
-
 
   Net unrealized appreciation of investments
    (9,647,768 )    
-
 
       Changes in operating assets and liabilities
               
        Increase in interest and dividends receivable
    (118,200 )     (104,941 )
        Increase in prepaid expenses and other assets
    (13,850 )     (19,789 )
        Increase (decrease) in current tax liability
    (18,600 )    
95,955
 
        Increase in management fees payable to Adviser
   
355,235
     
106,802
 
        Decrease in accrued expenses and other liabilities
    (12,013 )     (25,205 )
        Total adjustments
    (82,684,129 )     (42,705,571 )
Net cash used in operating activities
  $ (78,795,028 )   $ (42,536,543 )
                 
(1) Commencement of Operations.
               
 
See Accompanying Notes to the Financial Statements
 
 
8

 
Tortoise Capital Resources Corporation
                 
FINANCIAL HIGHLIGHTS
                 
                   
   
For the six months ended
 
Period from December 8, 2005 (1) through
   
Period from December 8, 2005 (1) through
 
   
May 31, 2007
   
May 31, 2006
   
November 30, 2006
 
   
(Unaudited)
 
(Unaudited)
       
                   
Per Common Share Data (2)
                 
   Net Asset Value, beginning of period
  $
13.70
    $
-
    $
-
 
Initial offering price
   
-
     
15.00
     
15.00
 
Premium less underwriting discounts and offering costs on initial public
         
offering of common shares (3)
   
0.02
     
-
     
-
 
Underwriting discounts and offering costs on issuance of common shares
   
-
      (1.22 )     (1.22 )
   Income from Investment Operations:
                       
Net investment income (loss) (4)
    (0.24 )    
0.02
     
0.21
 
Net realized and unrealized gain on investments (4)
   
0.84
     
-
     
0.05
 
Total increase from investment operations
   
0.60
     
0.02
     
0.26
 
Less Dividends and Distributions to Common Stockholders:
                 
Net investment income
   
-
     
-
      (0.21 )
Return of capital
    (0.26 )    
-
      (0.13 )
Total dividends and distributions to common stockholders
    (0.26 )    
-
      (0.34 )
   Net Asset Value, end of period
  $
14.05
    $
13.80
    $
13.70
 
   Per common share market value, end of period (5)
  $
17.85
   
N/A
   
N/A
 
   Total Investment Return, including capital gain incentive fees, based on net asset value (6)
    4.22 %     (8.00 )%     (6.39 )%
   Total Investment Return, excluding capital gain incentive fees, based on net asset value (6)
    5.48 %     (8.00 )%     (6.39 )%
   Total Investment Return, based on market value (7)
    20.07 %  
N/A
   
N/A
 
Supplemental Data and Ratios
                       
   Net assets applicable to common stockholders, end of period (000's)
  $
124,137
    $
42,612
    $
42,328
 
Ratio of expenses (including current and deferred income tax expense
         
and capital gain incentive fees) to average net assets: (8) (9) (10)
    14.66 %     2.88 %     3.64 %
Ratio of expenses (excluding current and deferred income tax expense)
         
to average net assets: (8) (11)
    8.27 %     2.40 %     2.40 %
Ratio of expenses (excluding current and deferred income tax expense
         
and capital gain incentive fees) to average net assets: (8) (11) (12)
    5.00 %     2.40 %     2.40 %
Ratio of net investment income (loss) to average net assets before current
         
and deferred income tax expense and capital gain incentive fees: (8) (9) (10)
    (2.95 )%     0.84 %     2.71 %
Ratio of net investment income (loss) to average net assets before current
         
and deferred income tax expense : (8) (11)
    (6.22 )%     0.84 %     2.71 %
Ratio of net investment income (loss) to average net assets after current
         
and deferred income tax expense and capital gain incentive fees: (8) (11) (12)
    (12.61 )%     0.36 %     1.47 %
   Portfolio turnover rate (8)
    0.00 %     0.00 %     9.51 %
                         
(1) Commencement of Operations.
                       
(2) Information presented relates to a share of common stock outstanding for the entire period.
 
(3) This amount represents the premium on the initial public offering of $1.17 per share, less the underwriting discounts and offering costs of $1.15 per share.
 
(4) The per common share data for the period from December 8, 2005 through May 31, 2006 and the period from December 8, 2005 through November 30, 2006
 
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.
 
(5) Per common share market value for the period from December 8, 2005 through May 31, 2006 and the period from December 8, 2005 through November 30, 2006
 
not applicable as shares were not publicly traded.
                       
(6) Not annualized for periods less than a year. Total investment return is calculated assuming a purchase of common stock at the initial offering price,
 
reinvestment of dividends at actual prices pursuant to the Company's dividend reinvestment plan or net asset value, as applicable, and a sale at net asset value, end of period.
 
Total investment return does not reflect brokerage commissions.
                 
(7) Not annualized for periods less than a year. Total investment return is calculated assuming a purchase of common stock at the initial public offering price,
 
reinvestment of dividends at actual prices pursuant to the Company's dividend reinvestment plan or market value, as applicable, and a sale at market value,
 
end of period. Total investment return on a market value basis is shown for the period from February 7, 2007 (the Company's initial public offering) through May 31, 2007.
 
Total investment return does not reflect brokerage commissions.
                 
(8) Annualized for periods less than one full year.
                       
(9) For the six months ended May 31, 2007, the Company accrued $2,924,105 in net deferred income tax expense.
 
For the period from December 8, 2005 through May 31, 2006, the Company accrued $95,955 in current income tax expense.
 
For the period from December 8, 2005 through November 30, 2006, the Company accrued $265,899 in current income tax expense, and $250,156 in net deferred income tax expense.
 
(10) For the six months ended May 31, 2007, the Company accrued $1,496,494 in capital gain incentive fees. There were no capital gain incentive fees accrued for the period from
 
December 8, 2005 through May 31, 2006 or the period from December 8, 2005 through November 30, 2006.
 
(11) The ratio excludes the impact of current and deferred income taxes.
               
(12) The ratio excludes the impact of capital gain incentive fees.
                 
 
See Accompanying Notes to the Financial Statements
 
 
9

 
TORTOISE CAPITAL RESOURCES CORPORATION
 
NOTES TO FINANCIAL STATEMENTS
 
MAY 31, 2007
 
(UNAUDITED)
 
1.
Organization
Tortoise Capital Resources Corporation (the "Company") was organized as a Maryland corporation on September 8, 2005, and is a non-diversified closed-end management investment company focused on the U.S. energy infrastructure sector.  The Company invests primarily in privately held and micro-cap public companies operating in the midstream and downstream segments, and to a lesser extent the upstream segment.  The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is externally managed by Tortoise Capital Advisors, L.L.C., an investment advisor specializing in managing portfolios of securities of MLPs and other energy companies.

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 invests primarily in illiquid securities including debt and equity securities of privately-held companies.  The investments generally are subject to restrictions on resale, have no established trading market and are fair valued on a quarterly basis.  Fair value is intended to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced liquidation or sale.  Because of the inherent uncertainty of valuation, the fair values of such investments, which are determined in accordance with procedures approved by the Company’s Board of Directors, may differ materially from the values that would have been used had a ready market existed for the investments.  The Company’s Board of Directors may consider other methods of valuing investments as appropriate and in conformity with U.S. generally accepted accounting principles.  The Company has also retained an independent valuation firm to provide valuation assistance for particular investments, as requested by the Board of Directors.

The process for determining the fair value of a security of a private investment begins with determining the enterprise value of the company that issued the security.  The fair value of the investment is based on the enterprise value at which a company could be sold in an orderly disposition over a reasonable period of time between willing parties.  There is no one methodology to determine enterprise value and for any one company, enterprise value may best be expressed as a range of fair values, from which a single estimate of enterprise value will be derived.

If the portfolio company has an adequate enterprise value to support the repayment of its debt, the fair value of the Company’s loan or debt security normally corresponds to cost unless the portfolio company’s condition or other factors lead to a determination of fair value at a different amount.  When receiving warrants or free equity securities (“nominal cost equity”), the Company allocates the cost basis of the nominal cost equity at the time of origination, if any.  The fair value of equity interests in portfolio companies is determined based on various factors, including the enterprise value remaining for equity holders after repayment of debt and other preference capital, and other pertinent factors such as recent offers to purchase a company, recent transactions involving the purchase or sale of equity securities, or other liquidation events.  The determined equity values are generally discounted when holding a minority position, when restrictions on resale are present, when there are specific concerns about the receptivity of the capital markets to a specific company at a certain time, or when other factors are present.
 
For freely tradable equity securities that are listed on a securities exchange, the Company values those securities at the closing price on that exchange on the valuation date.  If the security is listed on more than one exchange, the Company uses 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 is valued at the mean between bid and asked price on such day.

C. Interest and Fee Income– Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected.  When investing in instruments with an original issue discount or payment-in-kind interest, the Company will accrue interest income during the life of the investment, even though the Company will not necessarily be receiving cash as the interest is accrued.  Fee income will include fees, if any, for due diligence, structuring, commitment and facility fees, transaction services, consulting services and management services rendered to portfolio companies and other third parties.  Commitment and facility fees generally are recognized as income over the life of the underlying loan, whereas due diligence, structuring, transaction service, consulting and management service fees generally are recognized as income when services are rendered.  For the three and six-month periods ended May 31, 2007, the Company received no fee income.

D. 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.  Distributions received from the Company’s investments in limited partnerships and limited liability companies generally are comprised of ordinary income, capital gains and return of capital.  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 information available from each company and/or other industry sources.  These estimates may subsequently be revised based on information received from the entity after their tax reporting periods are concluded, as the actual character of these distributions are not known until after the fiscal year-end of the Company.

For the period from December 8, 2005 (Commencement of Operations) through November 30, 2006, the Company estimated the allocation of investment income and return of capital for the distributions received from its portfolio companies within the Statement of Operations.  For this period, the Company had estimated approximately 8 percent as investment income and approximately 92 percent as return of capital.

During the current period, the Company reclassified the amount of investment income and return of capital it recognized based on the 2006 tax reporting information received from the individual portfolio companies.  This reclassification amounted to a decrease in pre-tax net investment income of approximately $314,000 or $0.04 per share ($195,000 or $0.02 per share, net of deferred tax benefit), an increase in unrealized appreciation of investments of approximately $300,000 or $0.03 per share ($186,000 or $0.02 per share, net of deferred tax expense) and an increase in realized gains of approximately $14,000 or $0.002 per share ($9,000 or $0.001 per share, net of deferred tax expense) for the period from December 8, 2005 (Commencement of Operations) through November 30, 2006.  The reclassification is reflected in the accompanying Statements of Operations for the three-month and six-month periods ended May 31, 2007.

E. Dividends to Stockholders–The amount of any quarterly dividends will be determined by the Board of Directors. Distributions to stockholders are recorded on the ex-dividend date. The character of distributions made during the year may differ from their ultimate characterization for federal income tax purposes.  For the six-month period ended May 31, 2007, the Company’s dividends, for book purposes, were comprised entirely of return of capital.  For the year ended November 30, 2006, the Company’s dividends, for book purposes were comprised of 61 percent investment income and 39 percent return of capital, and for tax purposes were comprised of 42 percent investment income and 58 percent return of capital.  Had the information from the 2006 tax reporting information from the individual portfolio companies as described in the paragraph above been obtained prior to November 30, 2006, the Company's dividends, for book purposes, would have been comprised of 31percent investment income and 69 percent return of capital.  The tax character of dividends paid for the year ended November 30, 2007 will be determined subsequent to year-end.
 
10

F. Federal and State 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 limited partnerships (LPs) or limited liability companies (LLCs), which are treated as partnerships for federal and state income tax purposes. As a limited partner, the Company reports its allocable share of taxable income in computing its own taxable income. The Company’s tax expense or benefit will be included in the Statement of Operations based on the component of income or gains (losses) to which such expense or benefit relates. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

G. Organization Expenses and Offering Costs - The Company is responsible for paying all organization and offering expenses. Offering costs paid by the Company were charged as a reduction of paid-in capital at the completion of the Company’s initial public offering, and amounted to $850,574 (excluding underwriter commissions).  Organizational expenses in the amount of $88,906 were expensed prior to the commencement of operations.

H. Indemnifications - Under the Company’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Company. In addition, in the normal course of business, the Company may enter into contracts that provide general indemnification to other parties. The Company’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred, and may not occur.   However, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

I.  Warrants - The Statement of Assets and Liabilities as of November 30, 2006 reflects a revision to the warrants and additional paid-in capital accounts.  After further evaluation of the underlying assumptions and characteristics of the warrants, it was determined that $1,104,137 should be attributed to the value of the warrants and additional paid-in capital reduced by the same amount.  This revision has no impact on net assets applicable to common stockholders or net asset value per common share outstanding.

J. Recent Accounting Pronouncements– In July 2006, the Financial Accounting Standards Board (“FASB”) issued 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 Company’s 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 years as of the effective date.  At this time, the Company is evaluating the implications of FIN 48 and its impact on the financial statements has not yet been determined.

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 in the year beginning December 1, 2007. The changes to current U.S. 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 Company’s financial statements.
 
3.
Concentration of Risk
The Company’s goal is to provide stockholders with a high level of total return with an emphasis on dividends and dividend growth.  The Company invests primarily in privately issued unsecured subordinated debt and equity securities within the U.S. energy infrastructure sector that will generally be expected to pay interest or dividends on a current basis.  The Company seeks to obtain enhanced returns through warrants or other equity conversion features within certain subordinated debt securities in which the Company invests.  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, L.L.C. (the “Adviser”).  Under the terms of the agreement, the Adviser is paid a fee consisting of a base management fee and an incentive fee.

The base management fee is 0.375 percent (1.5 percent annualized) of the Company’s average monthly Managed Assets, calculated and paid quarterly in arrears within thirty days of the end of each fiscal quarter.  The term “Managed Assets” as used in the calculation of the management fee means total assets (including any assets purchased with or attributable to borrowed funds) minus accrued liabilities other than (1) deferred taxes, (2) debt entered into for the purpose of leverage, and (3) the aggregate liquidation preference of any outstanding preferred shares.  The base management fee for any partial quarter is appropriately prorated.

The incentive fee consists of two parts.  The first part, the investment income fee, is equal to 15 percent of the excess, if any, of the Company’s Net Investment Income for the fiscal quarter over a quarterly hurdle rate equal to 2 percent (8 percent annualized), and multiplied, in either case, by the Company’s average monthly Net Assets for the quarter.  “Net Assets” means the Managed Assets less deferred taxes, debt entered into for the purposes of leverage and the aggregate liquidation preference of any outstanding preferred shares.  “Net Investment Income” means interest income (including accrued interest that we have not yet received in cash), dividend and distribution income from equity investments (but excluding that portion of cash distributions that are treated as a return of capital), and any other income (including any fees such as commitment, origination, syndication, structuring, diligence, monitoring, and consulting fees or other fees that the Company is entitled to receive from portfolio companies) accrued during the fiscal quarter, minus the Company’s operating expenses for such quarter (including the base management fee, expense reimbursements payable pursuant to the Investment Advisory Agreement, any interest expense, any accrued income taxes related to net investment income, and dividends paid on issued and outstanding preferred stock, if any, but excluding the incentive fee payable).  Net Investment Income also includes, in the case of investments with a deferred interest or income feature (such as original issue discount, debt or equity instruments with a payment-in-kind feature, and zero coupon securities), accrued income that the Company has not yet received in cash.  Net Investment Income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation.  The investment income fee is calculated and payable quarterly in arrears within thirty (30) days of the end of each fiscal quarter, with the first potential fee commencing on December 8, 2006.  The investment income fee calculation is adjusted appropriately on the basis of the number of calendar days in the first fiscal quarter the fee accrues or the fiscal quarter during which the Agreement is in effect in the event of termination of the Agreement during any fiscal quarter.  The second part of the incentive fee payable to the Adviser, the capital gains fee, is equal to:  (A) 15 percent of (i) the Company’s net realized capital gains (realized capital gains less realized capital losses) on a cumulative basis from December 8, 2005 to the end of each fiscal year, less (ii) any unrealized capital depreciation at the end of such fiscal year, less (B) the aggregate amount of all capital gains fees paid to the Adviser in prior fiscal years.  The calculation of the capital gains fee includes any capital gains that result from the cash distributions that are treated as a return of capital.  In that regard, any such return of capital will be treated as a decrease in the cost basis of an investment for purposes of calculating the capital gains fee.  The capital gains fee is calculated and payable annually within thirty (30) days of the end of each fiscal year.  Realized capital gains on a security will be calculated as the excess of the net amount realized from the sale or other disposition of such security over the adjusted cost basis for the security.  Realized capital losses on a security will be calculated as the amount by which the net
 
11

amount realized from the sale or other disposition of such security is less than the adjusted cost basis of such security.  Unrealized capital depreciation on a security will be calculated as the amount by which the Company’s adjusted cost basis of such security exceeds the fair value of such security at the end of a fiscal year.  During the six-month period ended May 31, 2007, the Company accrued no investment income fees, and accrued $1,496,494 as a provision for capital gains incentive fees.  The provision for capital gains incentive fees is a result of the increase in fair value and unrealized appreciation of investments.  Pursuant to the Investment Advisory Agreement, the capital gains incentive fee is paid annually only if there are realization events and only if the calculation defined in the agreement results in an amount due.

All fiscal year-end valuations are determined by the Company in accordance with U.S. generally accepted accounting principles, the 1940 Act, and the policies and procedures of the Company.  The Adviser shall use at least 25 percent of any capital gains fee received on or prior to December 8, 2007 to purchase the Company’s common stock in the open market.  In the event the Investment Advisory Agreement is terminated, the capital gains fee calculation shall be undertaken as of, and any resulting capital gains fee shall be paid within thirty (30) days of the date of termination.  The Advisor may, from time to time, waive or defer all or any part of the compensation described in the Investment Advisory Agreement.

The Company has engaged U.S. Bancorp Fund Services, L.L.C. to serve as the Company’s fund accounting services provider.  The Company pays the provider a monthly fee computed at an annual rate of $24,000 on the first $50,000,000 of the Company’s Net Assets, 0.0125 percent on the next $200,000,000 of Net Assets and 0.0075 percent on the balance of the Company’s Net Assets.

The Adviser has been engaged as the Company’s administrator.  The Company pays the administrator a fee equal to an annual rate of 0.07 percent of aggregate average daily Managed Assets up to and including $150,000,000, 0.06 percent of aggregate average daily Managed Assets on the next $100,000,000, 0.05 percent of aggregate average daily Managed Assets on the next $250,000,000, and 0.02 percent on the balance.  This fee is calculated and accrued daily and paid quarterly in arrears.

Computershare Trust Company, N.A. serves as the Company's transfer agent, dividend paying agent, and  agent for the automatic dividend reinvestment plan.

U.S. Bank, N.A. serves as the Company's custodian. The Company pays the custodian a monthly fee computed at an annual rate of 0.015 percent on the first $200,000,000 of the Company's portfolio assets and 0.01 percent on the balance of the Company's portfolio assets, subject to a minimum annual fee of $4,800.

5.
Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes.  Components of the Company’s deferred tax assets and liabilities as of May 31, 2007, and November 30, 2006 are as follows:
   
May 31, 2007
   
November 30, 2006
 
Deferred tax asset:
           
Organization costs
  $
30,406
    $
31,532
 
Capital gain incentive fees
   
568,668
     
-
 
Net operating loss carryforwards
   
607,937
     
-
 
     
1,207,011
     
31,532
 
Deferred tax liabilities:
               
Net unrealized gains on investment securities
   
3,791,118
     
124,967
 
Basis reduction of investment in MLPs
   
590,154
     
156,721
 
     
4,381,272
     
281,688
 
Total net deferred tax liability
  $
3,174,261
    $
250,156
 

The amount of deferred tax asset for the net operating loss at May 31, 2007 is for the year to date operations for the year ended November 30, 2007.
 
Total income taxes differ from the amount computed by applying the federal statutory income tax rate of 34 percent for the periods ended May 31, 2007 and 35 percent for the periods ended May 31, 2006 to net investment income (loss) and realized and unrealized gains (losses) on investments before taxes, as follows.

Management has re-evaluated the rate at which it expects the components of deferred tax assets and liabilities to reverse in the future and has determined that 34 percent is reflective of its expected future federal income tax rate at which such amounts are expected to reverse.  The impact of this change is not significant to income tax expense for the current period.

   
For the three
   
For the three
 
   
months ended
   
months ended
 
   
May 31, 2007
   
May 31, 2006
 
             
Application of statutory income tax rate
  $
1,904,282
    $
31,280
 
State income taxes, net of federal taxes
   
224,033
     
3,575
 
Total
  $
2,128,315
    $
34,855
 
 
   
For the six
   
For the period
 
   
months ended
   
December 8, 2006 to
 
   
May 31, 2007
   
May 31, 2006
 
             
Application of statutory income tax rate
  $
2,316,490
    $
86,113
 
State income taxes, net of federal taxes
   
272,528
     
9,842
 
Preferred dividends
   
86,925
     
-
 
Loss on redemption of preferred stock
   
248,162
     
-
 
Total
  $
2,924,105
    $
95,955
 

For the three months ended May 31, 2007, the components of income tax expense include deferred federal and state income taxes (net of federal benefit) of $1,904,282 and $224,033, respectively.  For the three months ended May 31, 2006, the components of income tax expense include current federal and state income tax expense of $31,280 and $3,575, respectively.

For the six months ended May 31, 2007, the components of income tax expense include deferred federal and state income taxes (net of federal benefit) of $2,651,577 and $272,528, respectively.  For the period from December 8, 2005 to May 31, 2006, the components of income tax expense include current federal and state income taxes (net of federal benefit) of $86,113 and $9,842, respectively.

At May 31, 2007, a valuation allowance was not recorded because the Company believes it is more likely that not that there is an ability to utilize its deferred tax asset.

As of May 31, 2007, the aggregate cost of securities for Federal income tax purposes was $119,074,866.  At May 31, 2007, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $12,674,097 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $1,144,438.
 
12

 
6.
Restricted Securities
Certain of the Company’s 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 tables below show the equity interest, number of units or principal amount, the acquisition date(s), acquisition cost (excluding return of capital adjustments), value per unit of such securities and percent of net assets applicable to common stockholders as of May 31, 2007 and November 30, 2006, respectively.

May 31, 2007
 
 
Investment Security
Equity Interest, Units or Principal Amount
Acquisition Dates
Acquisition Cost
Value Per Unit
Percent of Net Assets
Abraxas Energy Partners, L.P.
Common Units
450,181
5/25/07
$7,500,015
$16.66
6.0%
High Sierra Energy, L.P.
Common Units
633,179
11/2/06
14,828,825
27.29
13.9
High Sierra Energy GP, L.L.C.
Equity Interest
3%
11/2/06
5/1/07
2,421,186
N/A
1.8
Legacy Reserves, L.P.
Limited Partner Units
264,705
3/14/06
4,499,985
28.66
6.1
Millennium Midstream Partners, L.P.
Class A Common Units
875,000
12/28/06
17,481,430
20.10
14.2
Millennium Midstream Partners, L.P.
Incentive Distribution Rights
78
12/28/06
18,570
-
-
Mowood, L.L.C.
Equity Interest
100%
6/5/06,
5/4/07
1,500,000
N/A
1.3
Mowood, L.L.C.
Subordinated Debt
$5,050,000
6/5/06,
5/4/07
5,050,000
N/A
4.1
Quest Midstream Partners, L.P.
Common Units
945,946
12/22/06
17,500,001
16.74
12.8
VantaCore Partners, L.P.
Common Units
425,000
5/21/07
8,500,000
20.00
6.8
VantaCore Partners, L.P.
Incentive Distribution Rights
789
5/21/07
-
-
-
VantaCore Partners, L.P.
Subordinated Debt
$3,750,000
5/21/07
3,750,000
N/A
3.0
       
$83,050,012
 
70.0%

November 30, 2006
 
 
Investment Security
Equity Interest, Units or Principal Amount
Acquisition Date
Acquisition Cost
Value Per Unit
Percent of Net Assets
Eagle Rock Energy    Partners, L.P.
Common Units
474,071
3/27/06
$12,058,401
$18.00
  20.1%
High Sierra Energy, L.P.
Common Units
633,179
11/2/06
14,828,825
23.42
35.0
High Sierra Energy GP, L.L.C.
Option to Purchase Equity Interest
3%
11/2/06
171,186
N/A
0.4
Legacy Reserves, L.P.
Limited Partner Units
264,705
3/14/06
4,499,985
17.25
10.8
Mowood, L.L.C.
Equity Interest
100%
6/5/06
1,000,000
N/A
2.4
Mowood, L.L.C.
Subordinated Debt
$4,550,000
6/5/06
4,550,000
N/A
10.8
       
$37,108,397
 
79.5%
 
7.
Investments in Affiliates and Control Entities
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.  Investments representing 25 percent or more of the outstanding voting securities of a portfolio company result in that company being considered a control company, as defined in the 1940 Act. The aggregate value of all securities of affiliates and controlled entities held by the Company as of May 31, 2007 amounted to $69,675,110 representing 56.1 percent of net assets applicable to common stockholders.  A summary of affiliated transactions for each company which is or was an affiliate or controlled entity at May 31, 2007 or during the six months then ended is as follows:

                           
May 31, 2007
 
   
Units/ Equity Interest/ Principal Balance 11/30/06
   
Gross Additions
   
Gross Deductions
   
Gross Distributions
   
Units/
Equity Interest/
Principal Balance
   
Value
 
High Sierra Energy, L.P.
   
633,179
    $
-
    $
-
    $
606,751
     
633,179
    $
17,279,455
 
Millennium Midstream Partners, L.P.
       Class A Common Units
   
-
     
17,481,430
     
-
     
387,625
     
875,000
     
17,584,811
 
Millennium Midstream Partners, L.P.
       Incentive Distribution Rights
   
-
     
18,570
     
-
     
-
     
78
     
-
 
Mowood, L.L.C. Subordinated Debt
  $
4,550,000
     
500,000
     
-
     
-
    $
5,050,000
     
5,050,000
 
Mowood, L.L.C.
 Equity Interest
    100 %    
500,000
     
-
     
-
      100 %    
1,673,954
 
Quest Midstream Partners, L.P.
   
-
     
17,500,001
     
-
     
338,906
     
945,946
     
15,836,890
 
VantaCore Partners, L.P.   Subordinated Debt
   
-
     
3,750,000
     
-
     
-
    $
3,750,000
     
3,750,000
 
VantaCore Partners, L.P.   Common Units
   
-
     
8,500,000
     
-
     
-
     
425,000
     
8,500,000
 
            $
44,500,001
    $
-
    $
1,333,282
            $
69,675,110
 

8.
Investment Transactions
For the six-month period ended May 31, 2007, the Company purchased (at cost) securities in the amount of $58,000,016 and sold no securities (excluding short-term debt securities).

9.
Credit Facilities
On December 13, 2006, the Company entered into a $15,000,000 secured committed credit facility, maturing December 12, 2007, with U.S. Bank, N.A.  The principal amount of the credit facility was subsequently increased to $20,000,000.  The credit facility has a variable annual interest rate equal to the one-month LIBOR rate plus 1.75 percent, a non-usage fee equal to an annual rate of 0.375 percent of the difference between the total credit facility commitment and the average outstanding balance at the end of each day for the preceding fiscal quarter, and is secured with all assets of the Company.  The non-usage fee is not applicable during a defined 120 day “resting period” following the initial public offering.  Proceeds from the credit facility are used to execute the Company’s investment objective. The average principal balance and interest rate for the period during which the credit facility was utilized (December 22, 2006 through February 6, 2007) was approximately $11,600,000 and 7.08 percent, respectively.
On April 23, 2007, the Company replaced its previous revolving credit facility with U.S. Bank, N.A. and entered into a new secured committed credit facility with U.S. Bank, N.A. as a lender, agent and lead arranger, and Bank of Oklahoma, N.A.  The new credit facility matures on March 21, 2008 and provides for a revolving credit facility of up to $20,000,000 that can be increased to $40,000,000 if certain conditions are met.  The revolving credit facility has a variable annual interest rate equal to the one-month LIBOR rate plus 1.75 percent, a non-usage fee equal to an annual rate of 0.375 percent of the difference between the total credit facility commitment and the average outstanding balance at the end of each day for the preceding fiscal quarter, and is secured with all assets of the Company.  The non-usage fee is not applicable during a defined 120 day “resting period” following the initial public offering.  As of May 31, 2007, there was no outstanding principal balance under the credit facility.
 
13


10.
Preferred Stock
On December 22, 2006, the Company issued 466,666 shares of Series A Redeemable Preferred Stock and 70,006 warrants at $15.00 per share.  On December 26, 2006, the Company issued an additional 766,667 shares of Series A Redeemable Preferred Stock and 115,000 warrants at $15.00 per share.  Holders of Series A Redeemable Preferred Stock received cash dividends (as declared by the Board of Directors and from funds legally available for distribution) at the annual rate of 10 percent of the original issue price.  On February 7, 2007, the Company redeemed all of the preferred stock at $15.00 per share plus a 2 percent premium, for a total redemption price of $18,870,000. After attributing $283,059 in value to the warrants, the redemption premium of $370,000 and $78,654 in issuance costs, the Company recognized a loss on redemption of the preferred stock of $731,713.  In addition, dividends in the amount of $228,750 were paid to the preferred stockholders.

11.
Common Stock
The Company has 100,000,000 shares authorized and 8,837,721 shares outstanding at May 31, 2007.

Shares at November 30, 2006
   
3,088,596
 
Shares sold through initial public offering
   
5,740,000
 
Shares issued upon exercise of warrants
   
9,125
 
Shares at May 31, 2007
   
8,837,721
 

12.
Warrants
At May 31, 2007, there were 948,005 warrants issued and outstanding.  The warrants became exercisable on the date of the Company’s initial public offering of common shares, subject to a lock-up period with respect to the underlying common shares.  Each warrant entitles the holder to purchase one common share at the exercise price of $15.00 per common share.  Warrants were issued as separate instruments from common shares and are permitted to be transferred independently from the common shares.  The warrants have no voting rights and the common shares underlying the unexercised warrants will have no voting rights until such common shares are received upon exercise of the warrants. All warrants will expire on February 6, 2013.

Warrants at November 30, 2006
   
772,124
 
Warrants issued in December 2006
   
185,006
 
Warrants exercised
    (9,125 )
Warrants at May 31, 2007
   
948,005
 
 
13.
Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per share:
 
   
For the three months ended May 31, 2007
   
For the three months ended May 31, 2006
   
For the six months ended May 31, 2007
   
Period from December 8, 2005 (Commencement of Operations) through May 31, 2006
 
Numerator for basic and diluted net increase in net assets applicable to common stockholders resulting from operations per common share
  $
3,472,310
    $
61,344
    $
3,889,101
    $
169,028
 
Denominator for basic weighted average shares
   
8,830,580
     
3,088,596
     
6,653,445
     
3,088,596
 
Average warrants outstanding
   
955,146
     
-
     
933,764
     
-
 
Denominator for diluted weighted average shares
   
9,785,726
     
3,088,596
     
7,587,209
     
3,088,596
 
Basic net increase in net assets applicable to common stockholders resulting from operations per common share
  $
0.39
    $
0.02
    $
0.58
    $
0.05
 
Diluted net increase in net assets applicable to common stockholders resulting from operations per common share
  $
0.35
    $
0.02
    $
0.51
    $
0.05
 

Warrants to purchase 772,124 shares of common stock at $15.00 per share were outstanding during the three months ended May 31, 2006 and the period from December 8, 2005 (Commencement of Operations) through May 31, 2006 but were not included in the computation of diluted earnings per share because the warrants’ exercise price was greater than the average net asset value of the common shares, and therefore, the effect would be anti-dilutive.

14.
Subsequent Events

On June 1, 2007, the Company paid a dividend in the amount of $0.16 per share, for a total of $1,414,035.  Of this total, the dividend reinvestment amounted to $42,537.
 
14


ADDITIONAL INFORMATION