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NGPC > SEC Filings for NGPC > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for NGP CAPITAL RESOURCES CO

Form 10-Q for NGP CAPITAL RESOURCES CO


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following analysis of our financial condition and results of operations in conjunction with management's discussion and analysis contained in our 2011 Annual Report on Form 10-K, as well as our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q that relate to estimates or expectations of our future performance or financial condition may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties, which could cause actual results and conditions to differ materially from those projected, including, but not limited to,

uncertainties associated with the timing of transaction closings;

changes in the prospects of our portfolio companies;

changes in interest rates;

the future operating results of our portfolio companies and their ability to achieve their objectives;

changes in regional, national or international economic conditions and their impact on the industries in which we invest;

continued disruption of credit and capital markets;

changes in the conditions of the industries in which we invest;

the adequacy of our cash resources and working capital;

the timing of cash flows, if any, from the operations of our portfolio companies;

the ability of our Manager to locate suitable investments for us and to monitor and administer the investments; and

other factors enumerated in our filings with the Securities and Exchange Commission, or the SEC.

We may use words such as "anticipates," "believes," "intends," "plans," "expects," "projects," "estimates," "will," "should," "may" and similar expressions to identify forward-looking statements. These forward-looking statements are subject to various risks and uncertainties. Certain factors could cause actual results and conditions to differ materially from those projected and our historical experience. You should not place undue reliance on such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statements made herein, unless required by law.

Overview

We are a financial services company created to invest primarily in debt securities of small and mid-size private energy companies. In early 2012, we expanded our investment strategy to also include middle market companies not engaged in the energy industry. We have elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, or the 1940 Act, and, as such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," which include securities of private U.S. companies, U.S. companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for federal income tax purposes we operate so as to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended. Pursuant to these elections, we generally do not have to pay corporate-level taxes on any income and capital gains we distribute to our stockholders. We have several direct and indirect subsidiaries that are single member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC. We consolidate the financial results of our subsidiaries for financial reporting purposes, and do not consolidate the financial results of our portfolio companies.

Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. A key focus area for our investments in the energy industry is domestic upstream businesses that produce, develop, acquire and explore for oil and natural gas. We also evaluate investment opportunities in such businesses as coal, power and energy services. Beginning in 2012, we are also seeking middle market investments within diversified industry sectors, including manufacturing, value-added distribution, business services, healthcare products and services, consumer services and select other sectors. Our investments generally range in size from $10 million to $50 million; however, we may invest more or less depending on market conditions and our Manager's view of a particular investment opportunity. Our portfolio investments primarily consist of debt instruments, including senior and subordinated loans combined in one facility, sometimes with an equity component, and subordinated loans, sometimes with equity components. We may also invest in preferred stock and other equity securities or royalty interests on a stand-alone basis.

We generate revenue in the form of interest income on the debt securities, limited-term royalty interests and net profits interests that we own, dividend income on common or preferred stock that we own, royalty income on royalty interests that we own and capital gains or losses on debt or equity securities that we acquire in portfolio companies and subsequently sell. Our investments, if in the form of debt securities, typically have a term of three to seven years and bear interest at a fixed or floating rate. To the extent achievable, we seek to collateralize our investments by obtaining security interests in our portfolio companies' assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or paid-in-kind, or PIK, dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including commitment, origination, structuring, administration or due diligence fees; fees for providing managerial assistance; and possibly consultation fees. We recognize any such fees generated in connection with our investments as earned.

Our level of investment activity can and does vary substantially from period to period depending on many factors. Some of these factors are the amount of debt and equity capital available to energy companies, the level of acquisition and divestiture activity for such companies, the level and volatility of energy commodity prices, the general economic environment and the competitive environment for the types of investments we make, and our own ability to raise capital to fund our investments, both through issuance of debt and equity securities. While we currently have capital available to invest, we do not have unlimited capital. We remain committed to our underwriting and investment disciplines in selectively investing in appropriate risk-reward opportunities within the energy and middle market sectors.

Portfolio and Investment Activity

On October 1, 2012, we funded a $6.0 million participation in the Midstates Petroleum Company, Inc., or Midstates, $600 million private placement of 10.75% Senior Unsecured Notes due 2020, or the Midstates Notes. Proceeds from the Midstates Notes offering were used primarily to fund the cash portion of the purchase price for Midstates' acquisition of assets of Eagle Energy Production, LLC.

On September 19, 2012, GMX Resources, Inc., or GMX, consummated an exchange offer for its outstanding 5% Senior Convertible Notes due 2013, or the 2013 Notes, pursuant to which holders tendering the 2013 Notes received new Senior Secured Second-Priority Notes due 2018, or the 2018 Notes, and shares of GMX common stock. We tendered our 2013 Notes in the exchange offer, and consequently received 2018 Notes with a face value of $12.7 million and 3,646,368 shares of GMX common stock. We sold 300,000 shares of GMX common stock in September 2012 and an additional 254,000 shares in October 2012. Interest on the 2018 Notes accrues at a rate of 9% per annum and is payable quarterly (commencing March 2, 2013) at GMX's option, in cash or, with respect to interest paid prior to September 19, 2014, either in the form of cash, GMX common stock, or a combination thereof. The number of shares of GMX stock, if any, to be issued in lieu of cash interest is calculated by assigning a value per share equal to the product of (a) 0.75 and (b) the 10-day volume weighted average price ending the business day prior to the interest payment date. As a result of the GMX exchange offer, the estimated fair value of our investment in GMX increased from $9.6 million at June 30, 2012 to $11.9 million at September 30, 2012.

In February 2012, our Net Profits Interest, or NPI, in Anadarko Petroleum Corporation, or APC, achieved its 12.375% simple yield and converted to a Tail NPI of 3% which was to last for 36 months, then revert back to APC. In August 2012, APC purchased the remaining Tail NPI for $0.4 million, with an effective date of July 1, 2012. Our effective yield on the APC investment was 13.7%.

Effective as of July 31, 2012, our Senior Secured Term Loan with Black Pool Energy Partners, LLC, or Black Pool, which had a balance of $15.7 million as of June 30, 2012, was restructured. Huff Energy Holdings, Inc., or HEH, a newly-formed private oil and gas company which merged with Black Pool, agreed to assume the Term Loan (including accrued and unpaid interest of $0.4 million, which was rolled into the principal balance) and became the new borrower under the related credit agreement. We retained our first lien on the original Black Pool properties and were granted a first lien on additional proved developed properties of certain HEH subsidiaries. In exchange for the additional collateral, we agreed to reduce the interest rate under the Term Loan to 11% and to extend the maturity to April 15, 2013. In connection with the restructuring, we agreed to sell our 3% overriding royalty interest, or ORRI, in oil and gas wells operated by Black Pool, and penny warrants to purchase approximately 25% of the membership interests in Black Pool, back to Black Pool for $0.1 million. As a result of this restructuring, the estimated fair value of our investment in Black Pool/HEH increased from $9.8 million at June 30, 2012 to $16.2 million at September 30, 2012.

In 2011 and 2012, we have purchased from ATP Oil & Gas Corporation, or ATP, limited-term ORRIs in certain offshore oil and gas producing properties operated by ATP in the Gulf of Mexico, including $25.0 million advanced on July 3, 2012. Under this arrangement, we own the right to portions (ranging from 5.0% to 10.8%) of the monthly revenues from the various oil and gas properties subject to the ORRI in ATP's Gomez and Telemark properties. Our unrecovered investment as of September 30, 2012 was $42.9 million. The terms of the ORRI provide that it will terminate after we receive payments that equal our investments in the ORRI plus a time-value factor that is calculated at a rate of 13.2 % per annum. On August 17, 2012, ATP filed for protection under Chapter 11 of the U.S. Bankruptcy Code, and received debtor-in-possession financing of approximately $600 million. On August 23, 2012, the bankruptcy judge presiding over ATP's case signed an order allowing ATP to pay amounts received after August 17, 2012 to those parties entitled to receive them, including the ORRIs, provided that the owners of the ORRIs execute an agreement providing for the repayment to ATP of any amounts that the bankruptcy court later finds to have been inappropriately paid, or a Disgorgement Agreement. We executed a Disgorgement Agreement and began receiving monthly distributions in September from ATP of our share of production proceeds received by ATP after August 17, 2012.

On April 26, 2012, we funded a $25.0 million participation in a $2 billion Senior Notes offering by Everest Acquisition, LLC, which subsequently changed its name to EP Energy, LLC, or EP Energy. EP Energy is owned by a group of investors led by Apollo Global Management, LLC. Proceeds of the EP Energy Senior Notes offering were used to finance EP Energy's acquisition of all of El Paso Corporation's U.S. oil and gas exploration and production assets. The EP Energy Senior Notes are unsecured, earn interest at a rate of 9.375% per annum, and are due May 1, 2020. In August 2012, we sold $15.0 million face amount of our EP Energy Senior Notes for an average price of 108.5, resulting in a realized short-term capital gain of $1.3 million, or $0.06 per share. This portion of our investment in EP Energy Senior Notes generated a 46.2% internal rate of return and a return on investment of 1.12x.

On July 10, 2012, we acquired $50.0 million of redeemable Preferred Units in Castex Energy 2005, L.P., or Castex 2005, a private oil and gas limited partnership engaged in the acquisition, exploration and development of oil and natural gas properties in South Louisiana and the shallow waters of the Gulf of Mexico. The Preferred Units earn 8% cumulative cash dividends, payable quarterly. Upon redemption, holders of the Preferred Units have the option to elect to receive the outstanding face amount plus either (a) a cash payment resulting in a total 12% internal rate of return (inclusive of the 8% cash dividends), or (b) a limited partnership interest, of which our share would be two-thirds of a 1% limited partnership interest. The Preferred Units are callable by Castex 2005 at any time after one year subject to the redemption rights described above. Each holder of the Preferred Units has the right to put its Preferred Units to Castex 2005 on the redemption terms described above on or after the earlier of (a) July 1, 2016, (b) a change of control or (c) liquidation.

In May 2012, we purchased in the secondary market an additional $2.7 million of the Southern Pacific Resource Corporation, or STP, $275 million Second Lien Term Loan, or the STP Term Loan. During the first quarter of 2012, we purchased $7.1 million of the STP Term Loan in the secondary market at a cost of $7.2 million. STP is a publicly traded Canadian company, engaged in the exploration and development in the Athabasca oil sands region of Alberta and the thermal production of heavy oil in Senlac, Saskatchewan. Proceeds of the STP Term Loan were used to construct a new Steam-Assisted Gravity Drainage facility in Alberta, Canada. The STP Term Loan matures in January 2016 and earns interest payable quarterly at an annual rate of LIBOR + 8.5% with a 2% LIBOR floor or Prime rate + 7.5% with a 3% Prime floor.

In March 2012, Crestwood Holdings, LLC, or Crestwood, refinanced its Senior Secured Term Loan and repaid in full our balance outstanding of $8.0 million with a 2% call premium, generating additional interest income of $0.2 million. Our investment in Crestwood generated a 14.2% internal rate of return and a return on investment of 1.2x.

From commencement of investment operations in November 2004 through September 30, 2012, we have invested $985.9 million in 42 portfolio companies, all energy-related, and received principal repayments, realizations and settlements of $750.0 million. The following table summarizes our investment activity for the nine months ended September 30, 2012 and 2011 (dollars in millions):

                                                       2012         2011
Investment portfolio, beginning of period            $ 175.0     $  242.6
New investments                                         84.8         72.9
Additional investments in existing clients              28.2         21.4
Principal repayments, realizations and settlements     (52.1 )     (167.3 )
Investment portfolio, end of period                  $ 235.9     $  169.6

Number of portfolio companies at end of period            18           18

The table below shows our portfolio investments by type as of September 30, 2012 and December 31, 2011. We compute yields on investments using interest rates as of the balance sheet date and include amortization of original issue discount, or OID, and market premium or discount, royalty interest income, net profits income and other similar investment income, weighted by their respective costs when averaged. We compute the yield on income from derivatives using estimated derivative income, net of expired options costs. These yields do not include income from any investments on non-accrual status but do include the cost basis of such investments in the denominator. Such weighted average yields are not necessarily indicative of expected total returns on a portfolio.

                                                September 30, 2012                             December 31, 2011
                                    Weighted                                       Weighted
                                    Average         Percentage of Portfolio        Average         Percentage of Portfolio
                                     Yields          Cost          Fair Value       Yields          Cost          Fair Value
Senior secured debt                     9.6 %          37.4 %            31.6 %       11.0 %          62.8 %            58.6 %
Subordinated debt                      12.1 %          17.8 %            19.9 %       12.7 %           6.4 %             7.8 %
Senior convertible notes                0.0 %           0.0 %             0.0 %       15.6 %           6.5 %             5.6 %
Limited term royalties                 13.5 %          18.1 %            20.0 %       12.3 %          16.5 %            19.6 %
Net profits interests                   N/A             0.0 %             0.0 %       11.1 %           1.9 %             2.4 %
Contingent earn-out                     0.0 %           0.0 %             0.2 %        0.0 %           0.0 %             2.2 %
Commodity derivative instruments        0.0 %           0.1 %             0.0 %        0.0 %           0.2 %             0.3 %
Royalty interests                     561.1 %           0.0 %             1.2 %      821.2 %           0.1 %             0.8 %
Equity securities
Membership and partnership units        7.7 %          22.1 %            25.3 %        0.0 %           1.0 %             0.6 %
Participating preferred stock           0.0 %           1.9 %             0.0 %        0.0 %           2.5 %             0.3 %
Common stock                            0.0 %           2.5 %             1.4 %        0.0 %           1.9 %             0.8 %
Warrants                                0.0 %           0.1 %             0.4 %        0.0 %           0.2 %             1.0 %
Total equity securities                 7.7 %          26.6 %            27.1 %        0.0 %           5.6 %             2.7 %
Total portfolio investments            10.1 %         100.0 %           100.0 %       11.6 %         100.0 %           100.0 %

As of September 30, 2012 and December 31, 2011, the total fair value of our portfolio investments was $213.1 million and $145.1 million, respectively. Of those fair value totals, approximately $199.2 million, or 93%, and $135.3 million, or 93%, are measured using significant unobservable (i.e., Level 3) inputs.

The table below summarizes our non-accruing and non-income producing investments:

                                          September 30, 2012                December 31, 2011
(Dollars in thousands)                  Cost          Fair Value          Cost          Fair Value
Non-accruing investments
BioEnergy Holding, LLC              $    15,511      $        -       $    15,511      $        -
Bionol Clearfield, LLC                    4,950               -             4,950               -
Chroma Exploration & Production,
Inc.                                      4,312               63            4,312              500
Total non-accruing investments           24,773               63           24,773              500
Non-income producing investments
BioEnergy Holding, LLC units              1,297               -             1,297               -
BP Corporation NA, Inc. put
options                                     326               44              417              417
Castex Energy Development Fund,
LP units                                      0            1,920                0                0
DeanLake Operator, LLC preferred
units                                        -                -                -               150
Globe BG, LLC (contingent Alden
Resources royalty earn-out)                  -               370               -             3,270
GMX Resources, Inc. common stock          2,606            2,677               -                -
Black Pool Energy Partners, LLC
warrants                                     10               -                10               -
Myriant Corporation common stock
and warrants                                468              920              468              770
Resaca Exploitation, Inc. common
stock and warrants                        3,485              292            3,485            1,463
Spirit Resources, LLC warrants               25              147               25               25
Tammany Oil & Gas, LLC warrants               5              500                5            1,000
Total non-income producing
investments                               8,222            6,870            5,707            7,095
Total non-accruing and
non-income
 producing investments              $    32,995      $     6,933      $    30,480      $     7,595

Results of Operations

Investment Income

During the three months ended September 30, 2012, our total investment income was $6.3 million, decreasing $1.0 million, or 14%, compared to the corresponding period of 2011. The decrease in 2012 was primarily attributable to the recognition, in the three-month period ended September 30, 2011, of $2.0 million of interest and royalty income (including $1.1 million of previously unamortized OID) from our investment in Alden Resources, LLC, or Alden, which was sold in the third quarter of 2011, partially offset by dividend income of $0.9 million in the third quarter of 2012 from our new investment in Castex 2005.

During the nine months ended September 30, 2012, investment income decreased by $5.7 million, or 25%, to $17.3 million compared to the same period in 2011. For the nine months ended September 30, 2012, we recorded $16.3 million of interest from investments in debt instruments and $0.9 million attributable to royalties and other income, compared to $20.8 million of interest and $2.1 million of royalties and other income for the nine months ended September 30, 2011. The decrease in 2012 is primarily attributable to the recognition in the second quarter of 2011, of $4.5 million of previously unrecognized payment-in-kind, or PIK, interest on Tranche B of a Term Loan issued to Alden, which was sold in July 2011.

Operating Expenses



The table below summarizes the components of our operating expenses (in
thousands):



                                       For The Three Months Ended            For The Nine Months Ended
                                              September 30,                        September 30,
                                         2012               2011              2012               2011
Interest expense and bank fees      $        598       $        377      $      1,256       $      1,143
Management and incentive fees              1,127              1,337             3,275              4,262
Professional fees, insurance
expenses and other G&A                     1,169              1,319             3,662              3,846
Total operating expenses            $      2,894       $      3,033      $      8,193       $      9,251

For the three months ended September 30, 2012, operating expenses were $2.9 million, decreasing $0.1 million, or 3%, compared to the quarter ended September 30, 2011. Interest expense and fees on our credit facilities were $0.6 million for the three months ended September 30, 2012 compared to $0.4 million for the three months ended September 30, 2011, as a result of increased average borrowing levels. Management and incentive fees were lower in the quarter ended September 30, 2012 at $1.1 million compared to $1.3 million for the quarter ended September 30, 2011, primarily as a result of lower average total asset balances, which are the basis for the base management fee computation. Professional fees, insurance expense and other general and administrative expenses for the quarter ended September 30, 2012 decreased $0.1 million, or 11%, to $1.2 million, compared to $1.3 million for the quarter ended September 30, 2011, primarily as a result of lower professional fees.

For the nine months ended September 30, 2012, operating expenses were $8.2 million, decreasing $1.1 million, or 12%, compared to $9.3 million for the nine months ended September 30, 2011. Interest expense and fees on our credit facilities increased to $1.3 million for the nine months ended September 30, 2012 compared to $1.1 million for the nine months ended September 30, 2011, due to increased average borrowing levels. Management and incentive fees for the nine months ended September 30, 2012 were $3.3 million, decreasing $1.0 million, compared to $4.3 million for the first nine months of 2011, primarily as a result of lower base management fees in 2012 and the incurrence of $0.3 million of investment income incentive fees in 2011. Professional fees, insurance expense and other general and administrative expenses decreased slightly to $3.7 million for the year-to-date period ended September 30, 2012, compared to $3.8 million for the corresponding period in 2011.

Operating expenses include our allocable portion of the total organizational and operating expenses incurred by us, our Manager and our Administrator, as determined by our Board of Directors and representatives of our Manager and our Administrator. According to the terms of the Investment Advisory Agreement, we calculate the base management fee quarterly as 0.45% of the average of our total assets as of the end of the two previous quarters. Other general and administrative expenses include our allocated share of employee, facilities, stockholder services and marketing costs incurred by our Administrator.

Net Investment Income

For the three months ended September 30, 2012, net investment income was $3.4 million, or $0.16 per common share, compared to $4.3 million, or $0.20 per common share, for the three months ended September 30, 2011. The $0.9 million, or 20.0%, decrease was attributable to the $1.0 million decrease in investment income, partially offset by the $0.1 million decrease in operating expenses, both of which are described above.

For the nine months ended September 30, 2012, net investment income was $9.0 million compared to $13.6 million for the nine months ended September 30, 2011. The $4.6 million, or 34%, decrease was attributable to the $5.7 million decrease in investment income, partially offset by the $1.1 million decrease in operating expenses, both of which are described above.

Net Realized Gains (Losses)

For the three months ended September 30, 2012, we recognized net realized capital gains of $1.7 million resulting primarily from the sale of $15.0 million face amount of EP Energy Senior Unsecured Notes at an average price of 108.5 and the sale of our APC Tail NPI for $0.4 million. For the three months ended September 30, 2011, we recognized net realized capital losses of $30.9 million resulting primarily from losses on the sale of our investments in Alden and Gatliff Services, LLC, or Gatliff, $3.7 million; Dean Lake Operator, LLC, or Dean Lake, $13.9 million; and TierraMar Energy, LP, or TierraMar, $15.3 million, partially offset by realized gains from the sales of the after pay-out ORRI and 50% of our warrants of Tammany Oil & Gas, LLC, or Tammany, of $2.0 million.

For the nine months ended September 30, 2012, we recognized net realized capital gains of $1.7 million, as described above. For the nine months ended September 30, 2011, we recognized net realized capital losses of $30.4 million resulting primarily from realized losses on the sale of our investments in Alden and Gatliff, $3.7 million; DeanLake, $13.9 million; TierraMar, $15.2 million; and . . .

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