CORENERGY INFRASTRUCTURE TRUST, INC., 10-Q/A filed on 5/9/2012
Amended Quarterly Report
Document and Entity Information
3 Months Ended
Feb. 29, 2012
Mar. 31, 2012
Document and Entity Information [Abstract]
 
 
Entity Registrant Name
TORTOISE CAPITAL RESOURCES CORP 
 
Entity Central Index Key
0001347652 
 
Document Type
10-Q 
 
Document Period End Date
Feb. 29, 2012 
 
Amendment Flag
false 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
Current Fiscal Year End Date
--11-30 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
9,180,935 
Consolidated Balance Sheets (USD $)
Feb. 29, 2012
Nov. 30, 2011
Assets
 
 
Trading securities, at fair value
$ 29,503,101 
$ 27,037,642 
Other equity securities, at fair value
47,269,729 
41,856,730 
Leased property, net of accumulated depreciation of $470,895 and $294,309, respectively
13,655,954 
13,832,540 
Cash and cash equivalents
3,470,268 
2,793,326 
Property and equipment, net of accumulated depreciation of $1,540,523 and $1,483,616, respectively
3,799,102 
3,842,675 
Escrow receivable
1,677,052 
1,677,052 
Accounts receivable
2,215,991 
1,402,955 
Intangible lease asset, net of accumulated amortization of $194,626 and $121,641, respectively
900,145 
973,130 
Lease receivable
1,185,381 
474,152 
Prepaid expenses
217,800 
140,017 
Receivable for Adviser expense reimbursement
121,962 
Deferred tax asset
27,536 
Other assets
322,001 
107,679 
Total Assets
104,216,524 
94,287,396 
Liabilities
 
 
Management fees payable to Adviser
247,381 
365,885 
Distribution payable to common stockholders
1,009,462 
Accounts payable
507,814 
597,157 
Line of credit
1,045,000 
Long-term debt
2,237,355 
2,279,883 
Lease obligation
87,860 
107,550 
Deferred tax liability
3,428,378 
Accrued expenses and other liabilities
489,382 
510,608 
Total Liabilities
9,052,632 
3,861,083 
Stockholders' Equity
 
 
Warrants, no par value; 945,594 issued and outstanding at February 29, 2012 and November 30, 2011 (5,000,000 authorized)
1,370,700 
1,370,700 
Capital stock, non-convertible, $0.001 par value; 9,176,889 shares issued and outstanding at February 29, 2012 and 9,176,889 shares issued and outstanding at November 30, 2011 (100,000,000 shares authorized)
9,177 
9,177 
Additional paid-in capital
94,673,276 
95,682,738 
Accumulated deficit
(889,261)
(6,636,302)
Total Stockholders' Equity
95,163,892 
90,426,313 
Total Liabilities and Stockholders' Equity
$ 104,216,524 
$ 94,287,396 
Consolidated Balance Sheets (Parenthetical) (USD $)
Feb. 29, 2012
Nov. 30, 2011
Consolidated Balance Sheets [Abstract]
 
 
Accumulated depreciation, leased property
$ 470,895 
$ 294,309 
Accumulated depreciation, property and equipment
1,540,523 
1,483,616 
Accumulated amortization, intangible lease asset
$ 194,626 
$ 121,641 
Warrants, par value
   
   
Warrants, issued
945,594 
945,594 
Warrants, outstanding
945,594 
945,594 
Warrants, authorized
5,000,000 
5,000,000 
Capital stock non-convertible, par value
$ 0.001 
$ 0.001 
Capital stock non-convertible, shares issued
9,176,889 
9,176,889 
Capital stock non-convertible, shares outstanding
9,176,889 
9,176,889 
Capital stock non-convertible, shares authorized
100,000,000 
100,000,000 
Consolidated Statements of Income (Unaudited) (USD $)
3 Months Ended
Feb. 29, 2012
Feb. 28, 2011
Revenue
 
 
Sales revenue
$ 2,437,310 
 
Lease income
638,244 
 
Total Revenue
3,075,554 
 
Expenses
 
 
Cost of sales (excluding depreciation expense)
2,004,672 
 
Management fees, net of expense reimbursements
247,381 
234,680 
Professional fees
108,578 
80,876 
Depreciation expense
246,805 
 
Operating expenses
172,641 
 
Directors' fees
14,581 
14,573 
Interest expense
27,409 
 
Other expenses
57,260 
58,394 
Total Expenses
2,879,327 
388,523 
Gain (loss) from operations
196,227 
(388,523)
Other Income
 
 
Net distributions and dividend income on securities
85,262 
561,786 
Net realized and unrealized gain (loss) on trading securities
2,862,272 
1,422,329 
Net realized and unrealized gain (loss) on other equity securities
6,069,194 
(744,584)
Total Other Income
9,016,728 
1,239,531 
Income before income taxes
9,212,955 
851,008 
Taxes
 
 
Current tax expense
(10,000)
 
Deferred tax (expense) benefit
(3,455,914)
262,262 
Income tax (expense) benefit, net
(3,465,914)
262,262 
Net Income
$ 5,747,041 
$ 1,113,270 
Earnings Per Common Share:
 
 
Basic and Diluted
$ 0.63 
$ 0.12 
Weighted Average Shares of Common Stock Outstanding:
 
 
Basic and Diluted
9,176,889 
9,146,506 
Dividends declared per share
$ 0.11 
$ 0.10 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
3 Months Ended
Feb. 29, 2012
Feb. 28, 2011
Operating Activities
 
 
Net Income
$ 5,747,041 
$ 1,113,270 
Adjustments:
 
 
Distributions received from investment securities
1,053,007 
305,725 
Deferred income tax, net
3,455,914 
(262,262)
Depreciation expense
246,805 
 
Amortization of intangible lease asset
72,985 
 
Amortization of assumed debt premium
(42,527)
 
Realized and unrealized gain on trading securities
(2,862,272)
(1,422,329)
Realized and unrealized (gain) loss on other equity securities
(6,069,194)
744,584 
Changes in assets and liabilities:
 
 
Decrease in interest, dividend and distribution receivable
 
42,811 
Increase in lease receivable
(711,229)
 
Increase in accounts receivable
(813,036)
 
Increase in prepaid expenses and other assets
(292,105)
(5,971)
Increase in management fees payable to Adviser, net of expense reimbursement
3,458 
16,389 
Decrease in accounts payable
(89,343)
 
Decrease in accrued expenses and other liabilities
(21,226)
(6,489)
Net cash (used in) provided by operating activities
(321,722)
525,728 
Investing Activities
 
 
Purchases of long-term investments
 
(7,970,756)
Proceeds from sales of long-term investments
 
8,177,504 
Proceeds from sale of property and equipment
3,076 
 
Purchases of property and equipment
(29,722)
 
Net cash provided by (used in) investing activities
(26,646)
206,748 
Financing Activities
 
 
Payments on lease obligation
(19,690)
 
Advances from revolving line of credit
1,045,000 
 
Net cash provided by financing activities
1,025,310 
 
Net change in cash and cash equivalents
676,942 
732,476 
Cash and cash equivalents at beginning of year
2,793,326 
1,466,193 
Cash and cash equivalents at end of quarter
3,470,268 
2,198,669 
Supplemental Disclosure of Cash Flow Information
 
 
Interest paid
11,665 
 
Income taxes paid
$ 96,000 
 
Consolidated Statements of Equity (Unaudited) (USD $)
Total
Capital Stock
Warrants
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Beginning balance at Nov. 30, 2009
$ 84,296,585 
$ 9,078 
$ 1,370,700 
$ 101,929,307 
$ (19,012,500)
Beginning balance, shares at Nov. 30, 2009
 
9,078,090 
 
 
 
Net Income
14,666,874 
 
 
 
14,666,874 
Distributions to stockholders sourced as return of capital
(3,915,124)
 
 
(3,915,124)
 
Reinvestment of distributions to stockholders, shares
 
68,416 
 
 
 
Reinvestment of distributions to stockholders
430,838 
69 
 
430,769 
 
Ending balance at Nov. 30, 2010
95,479,173 
9,147 
1,370,700 
98,444,952 
(4,345,626)
Ending balance, shares at Nov. 30, 2010
 
9,146,506 
 
 
 
Net Income
2,922,143 
 
 
 
2,922,143 
Distributions to stockholders sourced as return of capital
(3,755,607)
 
 
(3,755,607)
 
Reinvestment of distributions to stockholders, shares
 
30,383 
 
 
 
Reinvestment of distributions to stockholders
252,242 
30 
 
252,212 
 
Consolidation of wholly-owned subsidiary
(4,471,638)
 
 
741,181 
(5,212,819)
Ending balance at Nov. 30, 2011
90,426,313 
9,177 
1,370,700 
95,682,738 
(6,636,302)
Ending balance, shares at Nov. 30, 2011
9,176,889 
9,176,889 
 
 
 
Net Income
5,747,041 
 
 
 
5,747,041 
Distributions to stockholders sourced as return of capital
(1,009,462)
 
 
(1,009,462)
 
Ending balance at Feb. 29, 2012
$ 95,163,892 
$ 9,177 
$ 1,370,700 
$ 94,673,276 
$ (889,261)
Ending balance, shares at Feb. 29, 2012
9,176,889 
9,176,889 
 
 
 
Basis of Presentation
BASIS OF PRESENTATION

1. BASIS OF PRESENTATION

Tortoise Capital Resources Corporation (the “Company”) was organized as a Maryland corporation on September 8, 2005. The Company completed its initial public offering in February 2007 as a non-diversified closed-end management investment company regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company withdrew its election to be treated as a BDC on September 21, 2011 in order to pursue qualification as a real estate investment trust (“REIT”). Historically as a BDC, the Company invested primarily in privately held companies operating in the U.S. energy infrastructure sector. The Company’s shares are listed on the New York Stock Exchange under the symbol “TTO.”

The financial statements included in this report 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 management’s most difficult, complex or subjective judgments. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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 consolidated financial statements. Actual results could differ from those estimates. Note 2 to the Consolidated Financial Statements, included in this report, further details information related to our significant accounting policies.

With the filing of our Annual Report on Form 10-K for the year ended November 30, 2011, the Company’s consolidated financial statements included the accounts of the Company and its wholly-owned subsidiary, Mowood. Mowood is the holding company for Omega Pipeline Company (“Omega”). Omega is a natural gas local distribution company that owns and operates a natural gas distribution system in Fort Leonard Wood, Missouri. Omega is responsible for purchasing and coordinating delivery of natural gas to Fort Leonard Wood as well as performing maintenance and expansion of the pipeline. In addition, Omega provides gas marketing services to local commercial end users. All significant inter-company balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period presented. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements. These consolidated financial statements and Management’s Discussion and Analysis of the Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the year ended November 30, 2011.

Mowood

Consolidation of Mowood was initiated at the time the Company withdrew its election to be treated as a BDC (September 21, 2011) and began reporting its financial results in accordance with general corporate reporting guidelines instead of under the AICPA Investment Company Audit Guide (the “Guide”). At that time, the presentation of the Company’s financial statements also changed prior year’s presentation and have been reclassified to conform to the presentation required for general corporate entities and to provide comparability of financial results across reporting periods. The reclassification of account balances are summarized below:

 

 

Items on the Consolidated Statements of Income for the period ended February 28, 2011 have been reclassified and aggregated to conform to the presentation of the results of operations for the period ended February 29, 2012. However, there was no impact to net income or earnings per share. Income from investment securities is no longer considered to be part of the Company’s operations and therefore has been classified as other income.

 

 

Components of cash flows for the period ended February 28, 2011 have been reclassified and aggregated to conform to the presentation of cash flows for the period ended February 29, 2012.

 

The accompanying consolidated financial statements reflect the results of the Company’s operations for the quarters ended February 28, 2011 and February 29, 2012. For the first quarter of 2011, the Mowood investment was reported under the Guide and therefore reported and accounted for as an investment carried at fair value; subsequent to September 21, 2011, the Company ceased reporting under the Guide.

The accompanying consolidated financial statements have been prepared in accordance with GAAP for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the Securities and Exchange Commission (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim period presented. Operating results for the three months ended February 29, 2012 are not necessarily indicative of the results that may be expected for the year ending November 30, 2012. These consolidated financial statements and Management’s Discussion and Analysis of the Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the year ended November 30, 2011.

Significant Accounting Policies
SIGNIFICANT ACCOUNTING POLICIES

Note 2. SIGNIFICANT ACCOUNTING POLICIES

A. Use of Estimates — The preparation of the consolidated financial statements in conformity with U.S. GAAP 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 consolidated financial statements. Actual results could differ from those estimates.

B. Investment Securities — The Company’s investments in securities are classified as either trading or other equity securities:

 

 

Trading securities — the Company’s publicly traded equity securities are classified as trading securities and are reported at fair value because the Company intends to sell these securities in order to acquire real asset investments.

 

 

Other equity securities — the Company’s other equity securities represent interests in private companies for which the Company has elected to report these at fair value under the fair value option.

C. Security Transactions and Fair Value — 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.

For equity securities that are freely tradable and listed on a securities exchange or over-the-counter market, the Company fair values those securities at their last sale price on that exchange or over-the-counter market on the valuation date. If the security is listed on more than one exchange, the Company will use the price from the exchange that it considers to be the principal exchange on which the security is traded. Securities listed on the NASDAQ will be valued at the NASDAQ Official Closing Price, which may not necessarily represent the last sale price. If there has been no sale on such exchange or over-the-counter market on such day, the security will be valued at the mean between the last bid price and last ask price on such day.

An equity security of a publicly traded company acquired in a private placement transaction without registration is subject to restrictions on resale that can affect the security’s liquidity and fair value. Such securities that are convertible into or otherwise will become freely tradable will be valued based on the market value of the freely tradable security less an applicable discount. Generally, the discount will initially be equal to the discount at which the Company purchased the securities. To the extent that such securities are convertible or otherwise become freely tradable within a time frame that may be reasonably determined, an amortization schedule may be used to determine the discount.

The Company holds investments in illiquid securities, including debt and equity securities of privately-held companies. These investments generally are subject to restrictions on resale, have no established trading market and are fair valued on a quarterly basis. 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 GAAP.

The Company determines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has determined the principal market, or the market in which the Company exits its private portfolio investments with the greatest volume and level of activity, to be

the private secondary market. Typically, private companies are bought and sold based on multiples of EBITDA, cash flows, net income, revenues, or in limited cases, book value.

 

For private company investments, value is often realized through a liquidity event of the entire company. Therefore, the value of the company as a whole (enterprise value) at the reporting date often provides the best evidence of the value of the investment and is the initial step for valuing the Company’s privately issued securities. For any one company, enterprise value may best be expressed as a range of fair values, from which a single estimate of fair value will be derived. In determining the enterprise value of a portfolio company, an analysis is prepared consisting of traditional valuation methodologies including market and income approaches. The Company considers some or all of the traditional valuation methods based on the individual circumstances of the portfolio company in order to derive its estimate of enterprise value.

The fair value of investments in private portfolio companies is determined based on various factors, including enterprise value, observable market transactions, such as recent offers to purchase a company, recent transactions involving the purchase or sale of the equity securities of the company, or other liquidation events. The determined equity values may be discounted when the Company has a minority position is subject to restrictions on resale, has specific concerns about the receptivity of the capital markets to a specific company at a certain time, or other comparable factors exist.

The Company undertakes a multi-step valuation process each quarter in connection with determining the fair value of private investments. An independent valuation firm has been engaged by the Company to provide independent, third-party valuation consulting services based on procedures that the Company has identified and may ask them to perform from time to time on all or a selection of private investments as determined by the Company. The multi-step valuation process is specific to the level of assurance that the Company requests from the independent valuation firm. For positive assurance, the process is as follows:

 

 

The independent valuation firm prepares the preliminary valuations and the supporting analysis. At February 29, 2012, the independent valuation firm performed positive assurance valuation procedures on five portfolio companies comprising 99.9 percent of the total fair value of other equity securities.

 

 

The Investment Committee of Tortoise Capital Advisors, L.L.C. reviews the preliminary valuations and supporting analyses, and considers and assesses, as appropriate, any changes that may be required to the preliminary valuations;

 

 

The Board of Directors assesses the final valuations and ultimately determines the fair value of each investment in the Company’s portfolio in good faith.

The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value as required under disclosure guidance related to the fair value of financial instruments.

Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.

Escrow Receivable — The fair value of the escrow receivable due the Company, which relates to the sale of International Resource Partners, LP, will be released upon satisfaction of certain post-closing obligations and/or the expiration of certain time periods (the shortest of which is 14 months from the April 2011 closing date of the sale).

Long-term Debt — The fair value of the Company’s long-term debt is calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the Company’s current expected rate for an equivalent transaction. The estimated fair values of the Company’s financial instruments are shown in the table below. The carrying value of the line of credit approximates the fair value due to its short term nature.

 

                                 
Description   February 29, 2012     November 30, 2011  
  Carrying Amount     Fair Value     Carrying Amount     Fair Value  

Financial Assets

                               

Cash and cash equivalents

  $ 3,470,268     $ 3,470,268     $ 2,793,326     $ 2,793,326  

Escrow receivable

    1,677,052       1,677,052       1,677,052       1,677,052  

Financial Liabilities

                               

Long-term debt

    2,237,355       2,324,084       2,279,883       2,320,851  

Line of Credit

    1,045,000       1,045,000              

 

D. Cash and Cash Equivalents — The Company maintains cash balances at financial institutions in amounts that regularly exceed FDIC insured limits. The Company’s cash equivalents are comprised of short-term, liquid money market instruments.

E. Accounts Receivable — Accounts receivable is presented at face value net of an allowance for doubtful accounts. Accounts are considered past due based on the terms of sale with the customers. The Company reviews accounts for collectability based on an analysis of specific outstanding receivables, current economic conditions and past collection experience. At February 29, 2012, management determined that an allowance for doubtful accounts related to our leases was not required. Lease payments by our major tenant as defined within Note 8, have remained timely and without lapse. Management also determined that an allowance for doubtful accounts related to other revenue items was not necessary at February 29, 2012.

F. Revenue and Other Income Recognition — Specific policies for the Company’s revenue and other income items are as follows:

 

 

Sales Revenue — Omega, acting as a principal, provides for transportation services and natural gas supply for its customers on a firm basis. In addition, Omega is paid fees for the operation and maintenance of its pipeline, including expansion of the pipeline. Omega is responsible for the coordination, supervision and quality of the expansions while actual construction is generally performed by third party contractors. Revenues related to natural gas distribution are recognized upon delivery of natural gas and upon the substantial performance of management and supervision services related to the expansion of the natural gas distribution system.

 

 

Dividends and distributions from investments — Dividends and distributions from investments are recorded on their ex-dates and are reflected as other income within the accompanying Consolidated Statements of Income. Distributions received from the Company’s investments generally are characterized as ordinary income, capital gains and distributions received from investment securities. The portion characterized as return of capital is paid by our investees from their cash flow from operations. The Company records investment income, capital gains and distributions received from investment securities 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 entities 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, 2011 through February 29, 2012, the Company estimated the allocation of investment income and distributions received from investment securities for the distributions received from its portfolio companies within the Consolidated Statements of Income. For this period, the Company has estimated approximately 7 percent as investment income and approximately 93 percent distributions received from investment securities. The return of capital portion of the distributions are reflected on the cash flow statements as “distributions received from investment securities.”

 

 

Realized and unrealized gains (losses) on trading securities and other equity securities — Changes in the fair values of the Company’s securities during the period reported and the gains or losses realized upon sale of securities during the period are reflected as other income within the accompanying Consolidated Statements of Income.

 

 

Lease Income — Income related to the Company’s leased property is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured. Rental payments on the leased property are typically received on a semi-annual basis and are included as lease income within the accompanying Consolidated Statements of Income.

 

 

Securities Transactions and Investment Income Recognition — Securities 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 our equity investments generally are comprised of ordinary income, capital gains and distributions received from investment securities from the portfolio company. We record 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 portfolio company and/or other industry sources. These estimates may subsequently be revised based on information received from the portfolio companies after their tax reporting periods are concluded, as the actual character of these distributions are not known until after our fiscal year end.

G. Cost of Sales — Included in the Company’s cost of sales are the amounts paid for gas and propane that are delivered to customers as well as the cost of material and labor related to the expansion of the natural gas distribution system.

 

H. Distributions to Stockholders — The amount of any quarterly distributions to stockholders 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 year ended November 30, 2011 and the period ended February 29, 2012 the source of the Company’s distributions for book purposes was 100 percent distributions received from investment securities. For the year ended November 30, 2011, the Company’s distributions for tax purposes were comprised of 100 percent qualified dividend income. The tax character of distributions paid to common stockholders in the current year will be determined subsequent to November 30, 2012.

I. Federal and State Income Taxation — The Company, as a corporation, is obligated to pay federal and state income tax on its taxable income. Currently, the highest regular marginal federal income tax rate for a corporation is 35 percent. The Company may be subject to a 20 percent federal alternative minimum tax on its federal alternative minimum taxable income to the extent that its alternative minimum tax exceeds its regular federal income tax.

The Company’s trading securities and other equity securities are limited partnerships or limited liability companies 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 is included in the Consolidated Statements of Income. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.

J. Leases — The Company includes assets subject to lease arrangements within Leased property, net of accumulated depreciation in the Consolidated Balance Sheet. Lease payments received are reflected on the Consolidated Statements of Income, net of amortization of any off market adjustments.

K. Long-Lived Assets and Intangibles — Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from five to twenty years. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements, which extend the useful lives of assets, are capitalized and depreciated over the remaining estimated useful life of the asset.

The Company initially records long-lived assets at their acquisition cost, unless the transaction is accounted for as a business combination. If the transaction is accounted for as a business combination, the Company allocates the purchase price to the acquired tangible and intangible assets and liabilities based on their estimated fair values. The Company determines the fair values of assets and liabilities based on discounted cash flow models using current market assumptions, appraisals, recent transactions involving similar assets or liabilities and/or other objective evidence, and depreciates the asset values over the estimated remaining useful lives.

In connection with these transactions, the Company may acquire long-lived assets that are subject to an existing lease contract with the seller or other lessee party and the Company may assume outstanding debt of the seller as part of the consideration paid. If, at the time of acquisition, the existing lease or debt contract is not at current market terms, the Company will record an asset or liability at the time of acquisition representing the amount by which the fair value of the lease or debt contract differs from its contractual value. Such amount is then amortized over the remaining contract term as an adjustment to the related lease revenue or interest expense.

L. Offering Costs — Offering costs related to the issuance of common stock are charged to additional paid-in capital when the stock is issued.

M. Recent Accounting Pronouncement — In May 2011, the FASB issued ASU No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements” in GAAP and the International Financial Reporting Standards (“IFRSs”). ASU No. 2011-04 amends FASB ASC Topic 820, Fair Value Measurements and Disclosures, to establish common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRSs. ASU No. 2011-04 is effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. Management is currently evaluating the impact of these amendments and does not believe they will have a material impact on the Company’s consolidated financial statements.

Concentrations
CONCENTRATIONS

Note 3. CONCENTRATIONS

The Company has historically invested in securities of privately-held and publicly-traded companies in the midstream and downstream segments of the U.S. energy infrastructure sector. As of February 29, 2012, investments in securities of energy infrastructure companies represented approximately 74 percent of the Company’s total assets. The Company is now focused on identifying and acquiring real property assets in the U.S. energy infrastructure sector that are REIT qualified.

 

The Company’s leased property at February 29, 2012 is leased to a single entity, Public Service Company of New Mexico, as further described in Note 8. Public Service Company of New Mexico’s financial condition and ability and willingness to satisfy its obligations under its leases with the Company has a considerable impact on the Company’s results of operations and ability to service its indebtedness.

Mowood, the Company’s wholly owned subsidiary, has a ten-year contract expiring in 2015 to supply natural gas to the Department of Defense (“DOD”). Revenue related to the DOD contract accounted for 91 percent of sales revenues for the period from December 1, 2011 through February 29, 2012. Mowood, through its wholly owned subsidiary Omega, performs management and supervision services related to the expansion of the natural gas distribution system used by the DOD. Amounts due from the DOD account for 92 percent of the consolidated accounts receivable balance at February 29, 2012.

Mowood’s contracts for its supply of natural gas are concentrated among select providers. Payments to its largest supplier of natural gas accounted for 52 percent of cost of sales for the period from December 1, 2011 through February 29, 2012.

Agreements
AGREEMENTS

Note 4. AGREEMENTS

On December 1, 2011, the Company executed a Management Agreement with Corridor InfraTrust Management, LLC (“Corridor”). The terms of the Management Agreement include a quarterly management fee equal to 0.25 percent (1.00 percent annualized) of the value of the Company’s average monthly managed assets for such quarter. Managed assets means all of the securities of the Company and all of the real property assets of the Company (including any securities or real property assets purchased with or attributable to any borrowed funds) minus all of the accrued liabilities other than (1) deferred taxes and (2) debt entered into for the purpose of leverage. The Management Agreement also includes a quarterly incentive fee of 10 percent of the increase in distributions paid over a threshold distribution equal to $0.125 per share per quarter. The Management Agreement also requires at least half of any incentive fees to be reinvested in the Company’s common stock. In addition, the Company entered into a new Advisory Agreement by and among the Company, Tortoise Capital Advisors, L.L.C. and Corridor under which Tortoise Capital Advisors, L.L.C. will provide certain securities focused investment services necessary to evaluate, monitor and liquidate the Company’s remaining securities portfolio and also provide the Company with certain operational (i.e. non-investment) services. Corridor will compensate Tortoise Capital Advisors, L.L.C. for such services provided to the Company.

Income Taxes
INCOME TAXES

Note 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 February 29, 2012 and November 30, 2011 are as follows:

 

                 
    February 29, 2012     November 30, 2011  

Deferred Tax Assets:

               

Organization costs

  $ (19,511)      $ (20,068)   

Net operating loss carry forwards

    (4,367,714)        (2,624,525)   

Cost recovery of leased assets

    (99,176)        (119,970)   

AMT and state of Kansas credit

    (215,039)        (205,039)   
   

 

 

   

 

 

 

Sub-total

  $ (4,701,440)      $ (2,969,602)   
   

 

 

   

 

 

 

Deferred Tax Liabilities:

               

Basis reduction of investment in partnerships

  $ 4,072,650       $ 2,244,914    

Net unrealized gain on investment securities

    4,057,168         697,152    
   

 

 

   

 

 

 

Sub-total

  $ 8,129,818       $ 2,942,066    
   

 

 

   

 

 

 

Total net deferred tax liability (asset)

  $ 3,428,378       $ (27,536)    
   

 

 

   

 

 

 

At February 29, 2012, a valuation allowance on deferred tax assets was not deemed necessary because the Company believes it is more likely than not that there is an ability to realize its deferred tax assets through future taxable income. Any adjustments to the Company’s estimates of future taxable income will be made in the period such determination is made. The Company’s policy is to record interest and penalties on uncertain tax positions as part of tax expense. As of February 29, 2012, the Company had no uncertain tax positions and no penalties and interest were accrued. Tax years subsequent to the year ending November 30, 2006 remain open to examination by federal and state tax authorities.

 

Total income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rates of 35 percent for the period ended February 29, 2012 and 34 percent for the period ended February 28, 2011 to net investment income and net realized and unrealized gains on investments for the periods presented, as follows:

 

                 
    For the
three months ended
February 29, 2012
    For the
three months ended
February 28, 2011
 
   

 

 

 

Application of statutory income tax rate

  $ 3,224,535       $ 289,343   

State income taxes, net of federal tax benefit

    241,379         15,488   

Other

    —         (8,560)  

Change in deferred tax valuation allowance

    —         (558,533)  
   

 

 

   

 

 

 

Total income tax expense (benefit)

  $ 3,465,914       $ (262,262)  
   

 

 

   

 

 

 

Total income taxes are computed by applying the federal statutory rate plus a blended state income tax rate.

The components of income tax expense include the following for the periods presented:

 

                 
Description  

For the

three months ended

February 29, 2012

   

For the

three months ended

February 28, 2011

 

 

 

Current tax expense:

               

AMT

  $ 10,000       $ —    
   

 

 

   

 

 

 

Total current tax expense

    10,000         —    
   

 

 

   

 

 

 

Deferred tax expense (benefit):

               

Federal

    3,215,230         (248,937)  

State (net of federal tax benefit)

    240,684         (13,325)  
   

 

 

   

 

 

 

Total deferred tax expense (benefit)

    3,455,914         (262,262)  
   

 

 

   

 

 

 

Total Income tax expense (benefit)

  $ 3,465,914       $ (262,262)  
   

 

 

   

 

 

 

The deferred income tax benefit for the three months ended February 28, 2011 includes the impact of the change in valuation allowance.

As of November 30, 2011, the Company had a net operating loss for federal income tax purposes of approximately $7,236,000. The net operating loss may be carried forward for 20 years. If not utilized, this net operating loss will expire as follows: $3,883,000 and $3,353,000 in the years ending November 30, 2029 and 2030, respectively. The amount of deferred tax asset for net operating losses at February 29, 2012 includes amounts for the period from December 1, 2011 through February 29, 2012. As of November 30, 2011, the Company estimated that it utilized its capital loss carry forward for approximately $12,000,000. Such estimate is subject to revision upon receipt of the 2011 tax reporting information from the individual partnerships. As of November 30, 2011, an alternative minimum tax credit of $203,109 was available, which may be credited in the future against regular income tax. This credit may be carried forward indefinitely.

The aggregate cost of securities for federal income tax purposes and securities with unrealized appreciation and depreciation, were as follows:

 

                 
Description  

February 29, 2012

   

November 30, 2011

 

 

 

Aggregate cost for federal income tax purposes

  $ 59,559,785      $ 65,471,208   
   

 

 

   

 

 

 

Gross unrealized appreciation

    19,430,998        8,307,122   

Gross unrealized depreciation

    (2,217,953)       (4,883,958)  
   

 

 

   

 

 

 

Net unrealized appreciation

  $ 17,213,045      $ 3,423,164   
   

 

 

   

 

 

 

 

Fair Value of Financial Instruments
FAIR VALUE OF FINANCIAL INSTRUMENTS

Note 6. FAIR VALUE OF FINANCIAL INSTRUMENTS

Valuation Techniques

In general, and where applicable, the Company uses readily available market quotations based upon the last updated sales price from the principal market to determine fair value. This pricing methodology applies to the Company’s Level 1 trading securities.

The Company’s other equity securities are classified as Level 3. See discussion of the valuation technique and assumptions in Note 2.

Various inputs are used in determining the fair value of the Company’s assets and liabilities. These inputs are summarized in the three broad levels listed below:

 

   

Level 1 — quoted prices in active markets for identical investments.

 

   

Level 2 — other significant observable inputs (including quoted prices for similar investments, market corroborated inputs,etc.).

 

   

Level 3 — significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables provide the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of February 29, 2012 and November 30, 2011. These assets and liabilities are measured on a recurring basis.

February 29, 2012

 

                                 
Description   February 29, 2012     Level 1     Fair Value
Level 2
    Level 3  

Assets:

                               

Trading securities

  $ 29,503,101      $ 29,503,101      $ —       $ —   

Other equity securities

    47,269,729        —        —         47,269,729   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 76,772,830      $ 29,503,101      $ —       $ 47,269,729   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

November 30, 2011

 

                               
Description   November 30, 2011     Level 1     Fair Value
Level 2
    Level 3  

Assets:

                               

Trading securities

  $ 27,037,642      $ 27,037,642      $ —       $ —   

Other equity securities

    41,856,730        —        —         41,856,730   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 68,894,372      $ 27,037,642      $ —       $ 41,856,730   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

The changes for all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the three months ended February 29, 2012 and February 28, 2011, are as follows:

 

                 
Description   Three months ended
February 29, 2012
    Three months ended
February 28, 2011
 

Fair value beginning balance

  $ 41,856,730      $ 72,929,409   

Total realized and unrealized (losses) gains included in net income

    6,069,194        (744,584

Purchases

    —        400,000   

Sales

    —        (400,000

Return of capital adjustments impacting cost of basis securities

    (656,195     (84,009
   

 

 

   

 

 

 

Fair value ending balance

  $ 47,269,729      $ 72,100,816   
   

 

 

   

 

 

 

The amount of total gains (losses) for the period included in net income attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date

  $ 6,069,194      $ (744,584
   

 

 

   

 

 

 

The Company utilizes the beginning of reporting period method for determining transfers between levels. There were no transfers between levels for the three months ended February 29, 2012 and February 28, 2011, respectively.

Certain condensed financial information of the unconsolidated affiliates follows. The information is the most recently available financial information for these companies, which is the three months ending December 31, 2011 as reported by the portfolio companies for High Sierra Energy LP (7.1 percent equity interest), VantaCore Partners LP, (20.1 percent equity interest) and Lighfoot Capital Partners LP (6.7 percent equity interest).

 

                     

Revenues

  $  818,192,834             Current assets   $  424,194,000  

Operating expenses

  $ 798,060,623             Noncurrent assets   $ 491,438,000  

Net Income

  $ 13,627,754             Current liabilities   $ 336,763,000  
                    Noncurrent liabilities   $ 174,049,000  
                    Partner’s equity   $ 404,820,000  
Property and Equipment
PROPERTY AND EQUIPMENT

Note 7. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

 

                 
Description   February 29, 2012     November 30, 2011  

 

 

Natural gas pipeline

  $ 5,215,424      $ 5,215,424   

Vehicles and storage trailers

    110,782        98,717   

Computers

    13,419        12,150   
   

 

 

   

 

 

 

Gross property, plant and equipment

    5,339,625        5,326,291   
   

 

 

   

 

 

 

Less accumulated depreciation

    (1,540,523     (1,483,616
   

 

 

   

 

 

 

Net property, plant and equipment

  $ 3,799,102      $ 3,842,675   
   

 

 

   

 

 

 

 

Leases
LEASES

Note 8. LEASES

The Company’s investment in the Eastern Interconnect Project (“EIP”) is leased under net operating leases with various terms to Public Service Company of New Mexico (“PNM”). PNM is referred to as the “Major Tenant”.

The future contracted minimum rental receipts for all net leases as of February 29, 2012 are as follows:

 

         
    Amount  

March 1 – December 31, 2012

  $ 2,370,762  

2013

    2,844,914  

2014

    2,844,914  

2015

    1,422,457  

Thereafter

    —    
   

 

 

 

Total

  $ 9,483,047  
   

 

 

 

In view of the fact that the Major Tenant leases a substantial portion of the Company’s net leased property which is a significant source of revenues and operating income, its financial condition and ability and willingness to satisfy its obligations under its lease with the Company, has a considerable impact on the results of operation and the Company’s ability to service its indebtedness.

The Major Tenant is currently subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and is required to file with the SEC annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. The audited financial statements and unaudited financial statements of the Major Tenant can be found on the SEC’s website at www.sec.gov. The Company makes no representation as to the accuracy or completeness of the audited and unaudited financial statements of the Major Tenant but has no reason not to believe the accuracy or completeness of such information. In addition, the Major Tenant has no duty, contractual or otherwise, to advise the Company of any events that might have occurred subsequent to the date of such financial statements which could affect the significance or accuracy of such information. None of the information in the public reports of the Major Tenant that are filed with the SEC is incorporated by reference into, or in any way forms a part of this filing.

On December 31, 2009, Mowood sold one of its wholly owned subsidiaries to an unrelated third party. As part of that agreement, Mowood assumed a lease obligation, including insurance and other maintenance costs, for office space to be used by the sold subsidiary through April 2013. The fair value of the future minimum lease payments and estimated costs were recorded as a liability upon the sale of the subsidiary.

 

                 
    Lease   Interest   Estimated   Total
Period   Obligation   Portion   Expenses   Obligation

March – November 30, 2012

  $ 60,489   $(1,951)   $ 1,800   $ 60,338

December 1, 2012 – March 31, 2013

  26,966   (244)   800   27,522
   

 

 

 

 

 

 

 

Total

  $ 87,455   $(2,195)   $ 2,600   $ 87,860
   

 

 

 

 

 

 

 

Intangibles
INTANGIBLES

Note 9. INTANGIBLES

The Company has recorded an intangible lease asset for the fair value of the amount by which the remaining contractual lease payments exceed market lease rates at the time of acquisition. The intangible lease asset is being amortized on a straight-line basis over the life of the lease term, which expires on April 1, 2015. Amortization of the intangible lease asset is reflected in the accompanying Consolidated Statements of Income as a reduction to lease income.

 

         
    Intangible  
        Lease Asset      

Balance at November 30, 2011

  $ 973,130   

Accumulated amortization for period ended February 29, 2012

    (72,985
   

 

 

 

Balance at February 29, 2012

  $ 900,145  
   

 

 

 

 

Remaining estimated amortization on the lease is as follows:

 

         
Period   Amount  

March 1 – November 30, 2012

  $ 218,954  

2013

    291,939  

2014

    291,939  

2015

    97,313  

Thereafter

    —    
   

 

 

 

Total

  $ 900,145  
   

 

 

 
Credit Facilities
CREDIT FACILITIES

Note 10. CREDIT FACILITIES

On November 30, 2011, the Company entered into a 180-day rolling evergreen margin loan facility with Bank of America, N.A. The terms of the agreement provide for a $10,000,000 facility that is secured by certain of the Company’s assets. Outstanding balances generally will accrue interest at a variable rate equal to one-month LIBOR plus 0.75 percent and unused portions of the facility will accrue a fee equal to an annual rate of 0.25 percent. The Company did not have any borrowings outstanding as of November 30, 2011, and the facility was not utilized during the period of December 1, 2011 through February 29, 2012. As of February 29, 2012, the Company had segregated trading securities with an aggregate value of $1,322,790 to serve as collateral for potential borrowings under the loan facility.

On October 29, 2011, Mowood entered into a revolving note payable with a financial institution with a maximum borrowing base of $1,250,000. Borrowings on the note are secured by all of Mowood’s assets. Interest accrues at LIBOR, plus a 400 percent margin (4.244 percent on February 29, 2012), is payable monthly, with all outstanding principal and accrued interest payable on October 29, 2012. During the quarter, Mowood borrowed $1,045,000 to support working capital requirements. The agreement contains various restrictive covenants, with the most significant relating to minimum consolidated fixed charge ratio, the incidence of additional indebtedness, member distributions, and extension of guaranties, future investments in other subsidiaries and change in ownership. As of February 29, 2012 the Company was in compliance with all covenants.

Warrants
WARRANTS

Note 11. WARRANTS

At February 29, 2012 and November 30, 2011, the Company had 945,594 warrants issued and outstanding. The warrants were issued to stockholders that invested in the Company’s initial private placements and became exercisable on February 7, 2007 (the closing 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 entitled the holder to purchase one common share at the exercise price of $15.00 per common share. Warrants were issued as separate instruments from the 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 have no voting rights until such common shares are received upon exercise of the warrants.

On April 8, 2011, a proposal was approved by the Company’s stockholders which allowed the Company to amend the exercise price of its outstanding warrants from $15.00 per common share to an amount equal to the greater of the market price of the Company’s common shares on the New York Stock Exchange, each as determined at the end of the fiscal quarter immediately following approval of the proposal, plus 7.0 percent, and to extend the expiration date of such warrants by one year. Based on these guidelines, the exercise price of the warrants was changed to $11.41 per common share as of May 31, 2011. All warrants expire on February 6, 2014. This modification was not material to the financial statements.

Earnings Per Share
EARNINGS PER SHARE

Note 12. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

 

                 
    For the     For the  
Description   three months ended
February 29, 2012
    three months ended
February 28, 2011
 

Net income

  $ 5,747,041     $ 1,113,270  

Basic and diluted weighted average shares (1)

    9,176,889       9,146,506  

Basic and diluted earnings per share

  $ 0.63     $ 0.12  

The $0.51 increase in earnings per share from February 28, 2011 to February 29, 2012 is a result in the weighted average change in overall net income related to our Mowood consolidation, lease operating and securities transactions.

Subsequent Events
SUBSEQUENT EVENTS

Note 13. SUBSEQUENT EVENTS

On February 6, 2012, the Company declared a dividend of $0.11 per share for a total distribution of $1,009,462. The distribution was paid on March 1, 2012 to stockholders of record on February 22, 2012. The dividend reinvestment amounted to 3.4 percent.