N-CSR 1 teaf3710358-ncsr.htm CERTIFIED SHAREHOLDER REPORT

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

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES


Investment Company Act file number 811-23248


Tortoise Essential Assets Income Term Fund
(Exact name of registrant as specified in charter)


11550 Ash Street, Suite 300, Leawood, KS 66211
(Address of principal executive offices) (Zip code)


P. Bradley Adams
Diane Bono
11550 Ash Street, Suite 300, Leawood, KS 66211
(Name and address of agent for service)


913-981-1020
Registrant's telephone number, including area code

Date of fiscal year end: November 30

Date of reporting period: November 30, 2019


Item 1. Report to Stockholders.




Annual Report | November 30, 2019





2019 Annual Report
Closed-End Funds





 
 
 
 
Tortoise
2019 Annual Report to Stockholders
 

This combined report provides you with a comprehensive review of our funds that span essential assets.

 
Table of contents
 
Closed-end Fund Comparison 1 TEAF: Fund Focus 20
Letter to Stockholders 2 Financial Statements 24
TYG:  Fund Focus 5 Notes to Financial Statements 62
NTG: Fund Focus                    8 Report of Independent Registered
TTP: Fund Focus 11      Public Accounting Firm 82
NDP: Fund Focus 14 Company Officers and Directors 83
TPZ: Fund Focus 17 Additional Information 85




 
TTP and TPZ distribution policies

Tortoise Pipeline & Energy Fund, Inc. (“TTP”) and Tortoise Power and Energy Infrastructure Fund, Inc. (“TPZ”) are relying on exemptive relief permitting them to make long-term capital gain distributions throughout the year. Each of TTP and TPZ, with approval of its Board of Directors (the “Board”), has adopted a distribution policy (the “Policy”) with the purpose of distributing over the course of each year, through periodic distributions as nearly equal as practicable and any required special distributions, an amount closely approximating the total taxable income of TTP and TPZ during such year and, if so determined by the Board, all or a portion of the return of capital paid by portfolio companies to TTP and TPZ during such year. In accordance with its Policy, TTP distributes a fixed amount per common share, currently $0.285, each quarter to its common shareholders. Prior to August 2019, the quarterly distribution rate was $0.4075. TPZ distributes a fixed amount per common share, currently $0.125, each month to its common shareholders. These amounts are subject to change from time to time at the discretion of the Board. Although the level of distributions is independent of TTP’s and TPZ’s performance, TTP and TPZ expect such distributions to correlate with its performance over time. Each quarterly and monthly distribution to shareholders is expected to be at the fixed amount established by the Board, except for extraordinary distributions in light of TTP’s and TPZ’s performance for the entire calendar year and to enable TTP and TPZ to comply with the distribution requirements imposed by the Internal Revenue Code. The Board may amend, suspend or terminate the Policy without prior notice to shareholders if it deems such action to be in the best interests of TTP, TPZ and their respective shareholders. For example, the Board might take such action if the Policy had the effect of shrinking TTP’s or TPZ’s assets to a level that was determined to be detrimental to TTP or TPZ shareholders. The suspension or termination of the Policy could have the effect of creating a trading discount (if TTP’s or TPZ’s stock is trading at or above net asset value), widening an existing trading discount, or decreasing an existing premium. You should not draw any conclusions about TTP’s or TPZ’s investment performance from the amount of the distribution or from the terms of TTP’s or TPZ’s distribution policy. Each of TTP and TPZ estimates that it has distributed more than its income and net realized capital gains; therefore, a portion of your distribution may be a return of capital. A return of capital may occur, for example, when some or all of the money that you invested in TTP or TPZ is paid back to you. A return of capital distribution does not necessarily reflect TTP’s or TPZ’s investment performance and should not be confused with “yield” or “income.” The amounts and sources of distributions reported are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon TTP’s and TPZ’s investment experience during the remainder of their fiscal year and may be subject to changes based on tax regulations. TTP and TPZ will send you a Form 1099-DIV for the calendar year that will tell you how to report these distributions for federal income tax purposes.

Tortoise



 
 
 2019 Annual Report | November 30, 2019
 

Closed-end Fund Comparison

Name/Ticker     Primary
f
ocus
    Structure     Total assets
($ millions)
1
    Portfolio mix
by asset type2
    Portfolio mix
by structure2

Tortoise Energy
Infrastructure Corp.

NYSE: TYG
Inception: 2/2004

Midstream
MLPs

C-corp

$1,826.5

Tortoise Midstream
Energy Fund, Inc.

NYSE: NTG
Inception: 7/2010

Natural gas
infrastructure
MLPs

C-corp

$1,266.8

Tortoise Pipeline
& Energy Fund, Inc.

NYSE: TTP
Inception: 10/2011

North
American
pipeline
companies

Regulated
investment
company

$209.1

Tortoise Energy
Independence
Fund, Inc.

NYSE: NDP
Inception: 7/2012

North
American
oil & gas
producers

Regulated
investment
company

$99.4

Tortoise Power and
Energy Infrastructure
Fund, Inc.

NYSE: TPZ
Inception: 7/2009

Power
& energy
infrastructure
companies
(Fixed income
& equity)

Regulated
investment
company

$184.8

Tortoise Essential
Assets Income
Term Fund

NYSE: TEAF
Inception: 3/2019

Essential
assets

Regulated
investment
company

$289.5


1

As of 12/31/2019

2

As of 11/30/2019


(unaudited)
 
Tortoise 1



 
 
 
 
Tortoise
2019 Annual Report to closed-end fund stockholders
 

Dear stockholder,

With our emphasis on essential assets, we focus on the trends and opportunities occurring across the sectors. One of our biggest focuses is on the energy evolution that is underway globally. Energy demand is growing worldwide, particularly from electrification in emerging countries. This increasing demand needs to be met with lower-carbon supply in order to decrease global carbon emissions. For this to happen, natural gas and renewables must take market share from coal for electricity generation. Additionally, U.S. midstream energy is playing a big role, exporting cheap and lower carbon energy to the rest of the world, increasing the need for critical infrastructure to support these exports. In the social infrastructure sector, we are encouraged by the role charter schools are playing in the school choice movement and are mindful of where senior living construction projects are most needed.

Energy Infrastructure

The broader energy sector, as represented by the S&P Energy Select Sector® Index, finished the fourth fiscal quarter ending November 30, 2019 in positive territory, returning 3.3%, bringing fiscal year 2019 performance to -7.7%. Oil markets experienced significant volatility during the period. Prices were caught in a tug-of-war between escalating tensions in the Middle East culminating in significant, but temporary supply outages, mixed signals from U.S.-China trade negotiations impacting demand growth.

Upstream

The Tortoise North American Oil and Gas Producers IndexSM returned -1.3% in the fourth fiscal quarter, bringing fiscal year performance to -22.7%. Crude oil prices, represented by West Texas Intermediate (WTI), began the fiscal quarter at $53.94 per barrel and peaked at $62.90 on Sept. 16, 2019 following the attacks on Saudi oil infrastructure. Prices troughed quickly thereafter at $52.45 on Oct. 3, 2019 on Saudi claims of minimal disruption to production and the potential for a U.S.-Iran deal before ending the fiscal year at $58.11.

U.S. crude oil production growth is expected to broadly moderate in 2020 as compared to the rapid growth over the past two years. Specifically, U.S. crude oil production is projected to average 12.3 million barrels per day (MMbbl/d) in 2019 and 13.2 MMbbl/d in 20201. U.S. producers are facing increased pressure from investors to exhibit capital discipline and reign in production growth in favor of higher free cash flow generation and return of capital to shareholders. Nonetheless, with multiple years of tremendous production growth, propelled by the U.S. shale revolution, the U.S. transitioned into a net exporter of oil and petroleum products for the first time in recent history. The U.S. became a net exporter of oil and petroleum products in September 2019 with net exports projected to grow in 2020 and beyond1. Rising U.S. energy exports of liquids and natural gas are expected to positively affect the U.S. trade deficit and will ultimately help reduce global CO2 emissions, along with renewables, as they take market share from coal.

Following the end of the fiscal year, the Organization of Petroleum Exporting Countries (OPEC) and their Non-OPEC partners (OPEC+) announced in December a clear goal of establishing a floor for crude oil prices through the seasonally weaker first quarter of 2020. OPEC+ members agreed to an incremental 0.5 MMbbl/d cut to the existing agreement taking the official cut to 1.7 MMbbl/d for 1Q20. In addition, Saudi Arabia agreed to continue its over-compliance of 0.4 MMbbl/d implying a new commitment level of cutting 2.1 MMbbl/d. Saudi Arabia is focused on stabilizing of crude oil prices following the recent Saudi Aramco initial public offering. While the deal was not extended, OPEC+ did set a date for an extraordinary meeting to be held in early March 2020 to determine the need for additional cuts. Emphasis will likely be placed upon improved compliance from various OPEC members with poor historical compliance (Iraq, Nigeria, and UAE). With trade tensions easing and the global economy not showing any signs of a true slowdown, oil demand growth is currently expected to improve in 2020, which should bring worldwide supply and demand into better balance.

Natural gas demand has remained robust supported by record levels of domestic power burn, increased exports to Mexico and record liquefied natural gas (LNG) exports driven by the startup of three new liquefaction and export facilities (Elba Island, Cameron LNG, Freeport LNG). However, surging natural gas supply more than offset strong demand, resulting in an elevated pace of inventory builds and pricing pressure through much of the period. Natural gas prices, represented by Henry Hub, opened the fiscal quarter at $2.39 per million British thermal units, hit a low of $2.08 on Oct. 18, and then peaked at $2.87 in November, due to colder than average weather in the midwest, before ending the fiscal year back down to $2.46.

Persistently low natural gas prices have prompted natural gas producers to reign in capex budgets and drilling programs in 2020. While natural gas production is expected to continue growing, the pace of supply growth is set to slow measurably, with production expected to average 91.8 billion cubic feet per day (Bcf/d) in 2019 and 93.8 Bcf/d in 20202. The backdrop of slowing production growth and strong domestic and export demand paints a picture of improving natural gas fundamentals in the future. The second wave of LNG export facilities, led by final investment decisions (FIDs) made to Exxon’s Golden Pass and Venture Global’s Calcasieu Pass LNG export facilities in 2019, will provide another meaningful catalyst for natural gas export demand growth from 2022 to 2025.

Midstream

Midstream energy performance lagged broader energy in the fourth fiscal quarter with the Tortoise North American Pipeline IndexSM returning -2.6% and the Tortoise MLP Index® returning -8.9%, bringing fiscal year performance to 5.9% and -7.0%, respectively. The sharp contrast in midstream index performance is due to midstream companies structured as C-Corporations outperforming those structured as MLPs. C-Corporations benefitted from several items versus MLPs, including: stronger corporate governance, broad market index inclusion for some companies, lack of K-1s, and a more certain corporate structure. Contributing to broad midstream underperformance for the fiscal quarter were concerns regarding a slowdown in U.S. production growth, political rhetoric regarding proposed fracking bans from Democratic Presidential candidates and tax loss selling. Gathering and processing companies in particular suffered following lower natural gas and natural gas liquids (NGL) pricing and the ‘going concern’ language introduced into Chesapeake Energy’s (CHK) quarterly filing. These items drove negative sentiment and raised questions related to producer financial health, counterparty risk and exposure to drilling slowdowns. However, the U.S. has seen tremendous production growth in recent years and we believe a more moderate pace of growth is healthy for the midstream sector through the reduction in growth capital expenditures and reduced risk of takeaway capacity overbuild.

(unaudited)
 
2 Tortoise



 
 
 2019 Annual Report | November 30, 2019
 
 
 
 

DCP Midstream LP (DCP) became the latest MLP to announce the elimination of its incentive distribution rights (IDRs) in the fourth fiscal quarter. As the era of simplification comes to a close, the results have advanced the midstream sector in our view and accomplished widespread cost of capital and corporate governance improvements. Looking forward, the midstream sector continues to evolve. There has been an industry-wide shift to higher distribution coverage and self-funding the equity portion of capital expenditure programs. With the expected moderation in U.S. production growth, midstream companies are now shifting focus toward executing on delivering value through the return of capital to shareholders in the form of debt reduction, sustainable yields and distribution growth, and potential stock buybacks. A particular emphasis on the generation of free cash flow yields comparable to other S&P 500 sectors continues to emerge, achieved through the sale of non-core assets and the reduction of growth capital expenditures.

Interest in publicly traded midstream companies and assets, from both public and private entities, has remained elevated, highlighting their strategic value and attractive valuations. Recently announced or closed transactions include Energy Transfer’s (ET) acquisition of SemGroup Corporation (SEMG), DTE Energy’s (DTE) acquisition of a natural gas gathering system in the Haynesville Shale and Pembina Pipeline Corporation’s (PPL CN) acquisition of Kinder Morgan Canada and the Cochin pipeline.

Downstream

Refinery utilization has remained challenged in 2019 due to heavy spring and fall turnarounds in preparation for the International Maritime Organization’s Jan. 1, 2020 implementation of sulfur reduction regulations on the shipping industry (IMO 2020), unplanned refinery outages, as well as the closure of Philadelphia Energy Solutions’ 350 Mbbl/d Philadelphia refinery, the largest refining complex on the east coast. IMO 2020 has positioned U.S. refiners to take advantage of higher distillate pricing and more heavily discounted medium-heavy sour crude oils as they have more flexibility than international refiners to use a wide range of crude oil feedstocks. We expected that U.S. refinery utilization and throughput will exhibit strong growth as refiners attempt to capture margin upside driven by IMO 2020.

Incremental NGL supply from completed Permian takeaway projects and overall liquids production growth surpassed current levels of domestic NGL demand, primarily from petrochemical facilities, resulting in price pressure. We expect that moderating northeast liquids production growth and increased demand from petrochemical projects coming online in late 2019 and early 2020 will begin to draw down inventories.

Capital Markets

Capital markets activity increased during the fourth fiscal quarter with MLPs and other pipeline companies raising approximately $10.8 billion in total capital, with nearly all of the issuance in debt. This brings the total capital raised for the fiscal year to approximately $36.4 billion, slightly lower than the previous fiscal year. As expected, alternative options for capital and self-funding projects have continued to trend higher.

Merger and acquisition activity among MLPs and other pipeline companies in the last fiscal quarter of the year was largely driven by Energy Transfer’s acquisition of SemGroup Corporation, which at $5.1 billion made up nearly all of the merger and acquisition activity in the quarter. This brought the fiscal year’s announced transactions to $26.6 billion. This is significantly below the previous year when many large simplification transactions were announced. This fiscal year’s activity was driven by three large transactions. In addition to Energy Transfer’s acquisition of SemGroup Corporation, MPLX purchased Andeavor Logistics for approximately $13.5 billion and Pembina Pipeline Corporation purchased two businesses from Kinder Morgan for approximately $4.4 billion combined.

Sustainable infrastructure

Solar

The solar industry is set to install 13 gigawatts (GWs) of capacity in the U.S. in 2019, the second highest annual installation on record. Much of the activity has been concentrated in the southwest and southeast, with Florida and Texas ranking behind California in year-to-date installations. Signed solar PPA prices range from $18-35 megawatts/hour, putting solar on par with new gas generation and competitive with the operating costs of existing coal plants. Costs continue to decline, as evidenced by the 12% decline year-over-year in Q3 2019 to $0.95/watt for utility-scale projects3. On the policy front, the investment tax credit (ITC) is set to phase down for projects beginning construction at the end of 2019. We continue to monitor efforts to extend the ITC as we enter 2020, but do not view an extension as necessary given anticipated continued cost declines.

Wind

Wind installations totaled 1,927 megawatts (MWs) in the third calendar quarter of 2019, reaching a total installed capacity of more than 100,000 MW across the U.S. with an additional 46,500 MW of capacity currently under construction or in advanced development. Nineteen states now have more than 1,000 MW under construction or advanced development. Texas hosts 19% of the total development pipeline, followed by Wyoming (11%), Oklahoma (7%), Iowa, (6%), and Virginia (6%). It is also important to have offtake agreements in place. Currently, 44% of capacity in the pipeline has a Power Purchase Agreement (PPA) in place, while 28% is utility-owned and 6% has a hedge contract4. New developments are largely being driven by corporate customers who have signed 64% of capacity contracted in the third quarter. Turbine technology continues to improve with 22% of new turbines installed year to date rated between 3.4 MW and 3.6 MW in size4.

Social Infrastructure

Education

As campaigns for 2020 elections have intensified, school choice in general, and charter schools specifically, have received increased media attention. In this politically charged atmosphere, it is worth noting that a recent national poll indicated that a significant majority of voters support some form of school of choice (69%) with the overwhelming majority of african-american voters indicating it is an “important priority.” In some faster-growing states, a number of school district superintendents have acknowledged they would be unable to meet increasing enrollment without the growth of charter public schools.

(unaudited)
 
Tortoise 3



 
 
 
 
 
 
 

The market for publicly issued tax-exempt bonds for charter public schools, a proxy for the overall demand and the primary vehicle for charter school facility finance, was exceptionally strong in 2019. Par value of these bonds exceeded $3 billion, including more than $500 million of higher risk, single-investor projects. Chartering laws across the nation do not require school districts or municipalities to provide school buildings for charters, making access to facilities one of the greatest challenges faced by charter school leaders. With less than 10% of charter schools having ever accessed the public tax-exempt bond market, and resistance to purchasing bonds for early-stage charter schools by large, high-yield bond funds, Tortoise believes the unmet demand for private, single-investor capital for charter school facilities to be at least as large as today’s public market for charter school bonds. Tortoise will continue to seek out high-quality and high potential charter schools and selectively invest.

Senior Living

According to the National Investment Center for Seniors Housing and Care (NIC), which is particularly focused on for-profit communities, the national market occupancy for senior housing increased slightly to 88.0% in the third quarter, after falling to 87.7% in the second quarter, its lowest level in eight years.

Occupancy at non-profit communities has presented a different picture. As of the third quarter, not-for-profit senior living occupancy was nearly 7% higher than the for-profit space and the third quarter represented the highest occupancy levels for not-for-profit providers since 2007.

Regardless of its status as a for-profit or non-profit senior living provider, the local variation between market supply/demand seems to be widening while national construction continues to slow. We believe this should help markets with oversupply over the long term.

We remain bullish in the senior living space, with demographic trends in our favor. NIC estimates that 881,000 additional units of senior housing inventory will be needed to serve seniors between 2019 and 2030. If you consider the typical senior living facility size of approximately 100 units, that equates to 8,810 projects.

Project Finance

Demand for energy-related projects within the project finance sector has remained strong as efforts continue to de-carbonize power generation and fuel production throughout the U.S. In particular, there have been several positive renewable natural gas (RNG) updates. In July 2019, the Coalition for Renewable Natural Gas announced that the North American RNG industry had surpassed the 100-facility milestone. This equates to growth of nearly 150% over the past five years, from the 41 projects built between 1982 and 2014 and more than 50 additional projects under construction or in development. This evidences a strengthening of support for landfill gas and anaerobic digester projects that produce RNG. Demand for recycling projects is also growing as circular-economy efforts gain momentum in the areas of landfill avoidance and waste repurposing.

We continue to rely on our deep expertise in each of these areas, as well as our vast respective networks, to seek out opportunities where significant demand and barriers to entry exist and we can be a strategic provider of capital.

Concluding thoughts

We expect plenty of opportunities in essential assets in 2020. We believe there are catalyst driving the social infrastructure sector with the aging population driving housing demand and school of choice being a key driver for charter schools. We are also optimistic across the energy sector where we expect supply and demand will find better balance and companies will shine a brighter light on their cash flow as they return it to shareholders. Our long-term outlook is built around worldwide electricity demand doubling by 2050. In our view, natural gas and renewables need to replace coal in power generation. This is the fastest and most economical way to lower global CO2 emissions and improve living standards for people around the globe.



The S&P Energy Select Sector® Index is a capitalization-weighted index of S&P 500® Index companies in the energy sector involved in the development or production of energy products. The Tortoise North American Oil and Gas Producers IndexSM is a float-adjusted, capitalization-weighted index of North American energy companies engaged primarily in the production of crude oil, condensate, natural gas or natural gas liquids (NGLs). The Tortoise North American Pipeline IndexSM is a float adjusted, capitalization-weighted index of energy pipeline companies domiciled in the United States and Canada. The Tortoise MLP Index® is a float-adjusted, capitalization-weighted index of energy master limited partnerships.

The Tortoise indices are the exclusive property of Tortoise Index Solutions, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Tortoise MLP Index®, Tortoise North American Pipeline IndexSM and Tortoise North American Oil and Gas Producers IndexSM (the “Indices”). The Indices are not sponsored by S&P Dow Jones Indices or its affiliates or its third party licensors (collectively, “S&P Dow Jones Indices LLC”). S&P Dow Jones Indices will not be liable for any errors or omission in calculating the Indices. “Calculated by S&P Dow Jones Indices” and its related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Tortoise Index Solutions, LLC and its affiliates. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“SPFS”), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”).

It is not possible to invest directly in an index.

Performance data quoted represent past performance; past performance does not guarantee future results. Like any other stock, total return and market value will fluctuate so that an investment, when sold, may be worth more or less than its original cost.

1 Energy Information Administration, Short-Term Outlook, December 2019
2 BTU Analytics
3 Wood MacKenzie, power and renewables, December 2019
4 AWEA July-September 2019

(unaudited)
 
4 Tortoise



 
 
 2019 Annual Report | November 30, 2019
 
Tortoise
Energy Infrastructure Corp. (TYG)
 

Fund description

TYG seeks a high level of total return with an emphasis on current distributions paid to stockholders. TYG invests primarily in equity securities of master limited partnerships (MLPs) and their affiliates that transport, gather, process or store natural gas, natural gas liquids (NGLs), crude oil and refined petroleum products.

Fund performance review

Midstream energy performance lagged broader energy for the fourth fiscal quarter, but outperformed for the fiscal year. A combination of concerns regarding a slowdown in U.S. production growth, political rhetoric regarding proposed frack bans from Democratic candidates, and tax loss selling largely contributed to midstream underperformance for the fiscal quarter. Coverage and leverage has improved for many midstream companies. The average coverage ratio for the fund’s portfolio companies was 1.40x in 3Q2019 while average leverage was 3.80x. Since the fund’s inception, it has paid out more than $35 in cumulative distributions to stockholders. The fund’s market-based and NAV-based returns for the fiscal year ending November 30, 2019 were -15.5% and -16.4%, respectively (including the reinvestment of distributions). Comparatively, the Tortoise MLP Index® returned -7.0% for the same period.

2019 fiscal year highlights
Distributions paid per share (fiscal year 2019)       $2.6200
Distribution paid per share (4th quarter 2019) $0.6550
Distribution rate (as of 11/30/2019) 15.6%
Quarter-over-quarter distribution increase 0.0%
Year-over-year distribution increase 0.0%
Cumulative distributions paid per share to
       stockholders since inception in February 2004
$35.7025
Market-based total return (15.5)%
NAV-based total return (16.4)%
Premium (discount) to NAV (as of 11/30/2019) (2.8)%

Key asset performance drivers

Top five contributors       Company type       Performance driver
Buckeye Partners, L.P. Midstream refined product pipeline MLP Acquired at a premium
MTP Energy KMAA LLC – Private Midstream natural gas The underlying company was acquired for a premium
Phillips 66 Partners LP Midstream refined product pipeline MLP Eliminated incentive distribution rights (IDRs) leading to a lower cost of capital
Western Gas Partners LP Midstream gathering and processing MLP Clarity on Colorado drilling legislation and close of LP/GP merger
NuStar Energy L.P. Refined products pipelines MLP Strong volume growth from Permian and outlook for St. James and Corpus Christi assets
 
Bottom five contributors       Company type       Performance driver
EQM Midstream Partners, LP Midstream natural gas/natural gas liquids pipeline MLP Uncertainty around Mountain Valley Pipeline project combined with potential for slowing drilling activity in the Marcellus
Antero Midstream Corporation Midstream gathering and processing company Concerns around potential recontracting of gathering and process contracts and financial health of parent company Antero Resources (AR) as natural gas prices moved lower
Western Midstream Partners, LP Midstream gathering and processing MLP Carrying out strategic review
EnLink Midstream, LLC Midstream gathering and processing company Concern around producers slowing drilling activity in Oklahoma
MPLX LP Refined products pipeline MLP Continued uncertainty regarding organizational structure and parental support combined with north east natural G&P exposure

Unlike the fund return, index return is pre-expenses and taxes.

Performance data quoted represent past performance; past performance does not guarantee future results. Like any other stock, total return and market value will fluctuate so that an investment, when sold, may be worth more or less than its original cost. Portfolio composition is subject to change due to ongoing management of the fund. References to specific securities or sectors should not be construed as a recommendation by the fund or its adviser. See Schedule of Investments for portfolio weighting at the end of the fiscal quarter.

(unaudited)
 
Tortoise 5



 
 
 
 
Tortoise
Energy Infrastructure Corp. (TYG) (continued)
 

Fund structure and distribution policy

The fund is structured as a corporation and is subject to federal and state income tax on its taxable income. The fund has adopted a distribution policy in which the Board of Directors considers many factors in determining distributions to stockholders. Over the long term, the fund expects to distribute substantially all of its distributable cash flow (DCF) to holders of common stock. The fund’s Board of Directors reviews the distribution rate quarterly, and may adjust the quarterly distribution throughout the year. Although the level of distributions is independent of the funds’ performance in the short term, the fund expects such distributions to correlate with its performance over time.

Distributable cash flow and distributions

DCF is distributions received from investments less expenses. The total distributions received from investments include the amount received as cash distributions from investments, paid-in-kind distributions, and dividend and interest payments. Income also includes the premiums received from sales of covered call options, net of amounts paid to buy back out-of-the-money options. The total expenses include current or anticipated operating expenses, leverage costs and current income taxes. Current income taxes include taxes paid on net investment income, in addition to foreign taxes, if any. Taxes incurred from realized gains on the sale of investments, expected tax benefits and deferred taxes are not included in DCF.

Income from investments increased approximately 3.3% as compared to 3rd quarter 2019 primarily due to increased distribution rates on investments within the fund’s portfolio. Operating expenses, consisting primarily of fund advisory fees, decreased approximately 9.7% during the quarter due to lower asset-based fees. Overall leverage costs decreased approximately 3.9% as compared to 3rd quarter 2019 primarily due to leverage utilization during the quarter. As a result of the changes in income and expenses, DCF increased approximately 7.1% as compared to 3rd quarter 2019. The fund paid a quarterly distribution of $0.655 per share, which was equal to the distribution paid in the prior quarter and 4th quarter 2018. The fund has paid cumulative distributions to stockholders of $35.7025 per share since its inception in Feb. 2004.

The Key Financial Data table discloses the calculation of DCF and should be read in conjunction with this discussion. The difference between distributions received from investments in the DCF calculation and total investment income as reported in the Statement of Operations, is reconciled as follows: the Statement of Operations, in conformity with U.S. generally accepted accounting principles (GAAP), recognizes distribution income from MLPs and other investments on their ex-dates, whereas the DCF calculation may reflect distribution income on their pay dates; GAAP recognizes that a significant portion of the cash distributions received from MLPs and other investments are characterized as a return of capital and therefore excluded from investment income, whereas the DCF calculation includes the return of capital (net of any distributions deemed to be return of principal); and distributions received from investments in the DCF calculation include the value of dividends paid-in-kind (additional stock or MLP units), whereas such amounts may not be included as income for GAAP purposes and includes distributions related to direct investments when the purchase price is reduced in lieu of receiving cash distributions. Net premiums on options written (premiums received less amounts paid to buy back out-of-the-money options) with expiration dates during the fiscal quarter are included in the DCF calculation, whereas GAAP recognizes the net effect of options written as realized and unrealized gains (losses). Income for DCF purposes is reduced by amortizing the cost of certain investments that may not have a residual value after a known time period and by distributions received from investments deemed to be return of principal. The treatment of expenses in the DCF calculation also differs from what is reported in the Statement of Operations. In addition to the total operating expenses, including fee waiver, as disclosed in the Statement of Operations, the DCF calculation reflects interest expense, realized and unrealized gains (losses) on interest rate swap settlements, distributions to preferred stockholders, other recurring leverage expenses, as well as taxes paid on net investment income.

“Net Investment Income (Loss), before Income Taxes” on the Statement of Operations is adjusted as follows to reconcile to DCF for YTD and 4th quarter 2019 (in thousands):

      YTD 2019       4th Qtr 2019
Net Investment Loss,
       before Income Taxes $    (18,708 ) $        (4,719 )
Adjustments to reconcile to DCF:
       Distributions characterized as
              return of capital, net 149,182 38,218
       Other 1,655 729
              DCF $ 132,129 $ 34,228

Leverage

The fund’s leverage utilization decreased $65.0 million during 4th quarter 2019 and represented 37.1% of total assets at November 30, 2019. The fund has maintained compliance with its applicable coverage ratios. At year-end, including the impact of interest rate swaps, approximately 79% of the leverage cost was fixed, the weighted-average maturity was 3.3 years and the weighted-average annual rate on leverage was 3.66%. During the quarter, Series CC notes, with a notional amount of $15,000,000 and a fixed rate of 3.48% were paid in full upon maturity. These rates will vary in the future as a result of changing floating rates, utilization of the fund’s credit facilities and as leverage and swaps mature or are redeemed.

Income taxes

During 4th quarter 2019, the fund’s deferred tax liability decreased by $39.4 million to $116.5 million, primarily as a result of a decrease in value of its investment portfolio. The fund had net realized losses of $6.5 million during the quarter. To the extent that the fund has taxable income, it will owe federal and state income taxes. Tax payments can be funded from investment earnings, fund assets, or borrowings.

Please see the Financial Statements and Notes to Financial Statements for additional detail regarding critical accounting policies, results of operations, leverage, taxes and other important fund information.

For further information regarding the calculation of distributable cash flow and distributions to stockholders, as well as a discussion of the tax impact on distributions and results and recent tax reform, please visit www.tortoiseadvisors.com.

(unaudited)
 
6 Tortoise



 
 
2019 Annual Report | November 30, 2019
 
TYG Key Financial Data (supplemental unaudited information)
(dollar amounts in thousands unless otherwise indicated)
 

The information presented below regarding Distributable Cash Flow and Selected Financial Information is supplemental non-GAAP financial information, which the fund believes is meaningful to understanding operating performance. The Distributable Cash Flow Ratios include the functional equivalent of EBITDA for non-investment companies, and the fund believes they are an important supplemental measure of performance and promote comparisons from period-to-period. This information is supplemental, is not inclusive of required financial disclosures (e.g. Total Expense Ratio), and should be read in conjunction with the full financial statements.

Year Ended November 30, 2018 2019
    2018     2019     Q4(1)     Q1(1)     Q2(1)     Q3(1)     Q4(1)
Total Income from Investments
       Distributions and dividends
              from investments $ 177,860 $ 174,696 $ 44,214 $ 43,148 $ 44,564 $ 42,910 $ 44,074
       Dividends paid in kind 2,752 801 113 115 117 269 300
       Interest earned on corporate bonds 467 119 348
       Premiums on options written 1,274 3,267 1,258 793 1,092 668 714
              Total from investments 181,886 179,231 45,585 44,056 45,773 43,966 45,436
Operating Expenses Before Leverage
       Costs and Current Taxes
       Advisory fees, net of fees waived 21,466 19,522 5,392 4,849 5,215 4,979 4,479
       Other operating expenses 1,741 1,624 438 415 420 407 382
23,207 21,146 5,830 5,264 5,635 5,386 4,861
       Distributable cash flow before
              leverage costs and current taxes 158,679 158,085 39,755 38,792 40,138 38,580 40,575
       Leverage costs(2) 26,088 25,956 6,561 6,365 6,637 6,607 6,347
       Current income tax expense(3)
              Distributable Cash Flow(4) $ 132,591 $ 132,129 $ 33,194 $ 32,427 $ 33,501 $ 31,973 $ 34,228
 
Net realized gain (loss), net of
       income taxes, for the period $ 42,565 $ 29,053 $ (45,158 ) $ (10,210 ) $ 10,905 $ 34,895 $ (6,537 )
As a percent of average total assets(5)
       Total from investments 7.75 % 8.55 % 7.91 % 8.61 % 8.42 % 8.38 % 9.71 %
       Operating expenses before
              leverage costs and current taxes 1.01 % 1.03 % 1.01 % 1.03 % 1.04 % 1.03 % 1.04 %
       Distributable cash flow before
              leverage costs and current taxes 6.74 % 7.52 % 6.90 % 7.58 % 7.38 % 7.35 % 8.67 %
As a percent of average net assets(5)
       Total from investments 12.81 % 14.51 % 12.90 % 14.36 % 14.01 % 14.41 % 17.12 %
       Operating expenses before
              leverage costs and current taxes 1.67 % 1.76 % 1.65 % 1.72 % 1.72 % 1.77 % 1.83 %
       Leverage costs and current taxes 1.88 % 2.16 % 1.86 % 2.08 % 2.03 % 2.17 % 2.39 %
       Distributable cash flow 9.26 % 10.59 % 9.39 % 10.56 % 10.26 % 10.47 % 12.90 %
 
Selected Financial Information
Distributions paid on common stock $ 138,298 $ 140,588 $ 35,131 $ 35,131 $ 35,131 $ 35,131 $ 35,195
Distributions paid on common stock
       per share 2.6200 2.6200 0.6550 0.6550 0.6550 0.6550 0.6550
Total assets, end of period(6) 2,136,339 1,680,775 2,136,339 2,129,174 2,110,273 1,951,035 1,680,775
Average total assets during period(6)(7) 2,293,998 2,044,102 2,311,256 2,074,901 2,157,919 2,080,591 1,876,534
Leverage(8) 652,100 623,900 652,100 679,100 683,700 688,900 623,900
Leverage as a percent of total assets 30.5 % 37.1 % 30.5 % 31.9 % 32.4 % 35.3 % 37.1 %
Net unrealized depreciation,
       end of period (338,892 ) (543,310 ) (338,892 ) (302,159 ) (300,530 ) (421,920 ) (543,310 )
Net assets, end of period 1,260,300 930,286 1,260,300 1,245,766 1,220,946 1,097,489 930,286
Average net assets during period(9) 1,388,683 1,203,943 1,417,581 1,243,981 1,296,336 1,210,078 1,064,735
Net asset value per common share 23.50 17.31 23.50 23.23 22.76 20.43 17.31
Market value per share 22.59 16.82 22.59 22.91 21.90 20.39 16.82
Shares outstanding (000’s) 53,635 53,732 53,635 53,635 53,635 53,732 53,732

(1) Q1 is the period from December through February. Q2 is the period from March through May. Q3 is the period from June through August. Q4 is the period from September through November.
(2) Leverage costs include interest expense, distributions to preferred stockholders, interest rate swap expenses and other recurring leverage expenses.
(3) Includes taxes paid on net investment income and foreign taxes, if any. Taxes related to realized gains are excluded from the calculation of Distributable Cash Flow (“DCF”).
(4) “Net investment income (loss), before income taxes” on the Statement of Operations is adjusted as follows to reconcile to DCF: increased by the return of capital on distributions, the dividends paid in stock and increased liquidation value, the premium on dividends paid in kind, the net premiums on options written and amortization of debt issuance costs; and decreased by realized and unrealized gains (losses) on interest rate swap settlements, distributions received that are excluded for DCF purposes and amortization on certain investments.
(5) Annualized for periods less than one full year.
(6) Includes deferred issuance and offering costs on senior notes and preferred stock.
(7) Computed by averaging month-end values within each period.
(8) Leverage consists of senior notes, preferred stock and outstanding borrowings under credit facilities.
(9) Computed by averaging daily net assets within each period.

Tortoise 7



 
 
 
 
Tortoise
Midstream Energy Fund, Inc. (NTG)
 

Fund description

NTG seeks to provide stockholders with a high level of total return with an emphasis on current distributions. NTG invests primarily in midstream energy equities that own and operate a network of pipeline and energy related logistical infrastructure assets with an emphasis on those that transport, gather, process and store natural gas and natural gas liquids (NGLs). NTG targets midstream energy equities, including MLPs benefiting from U.S. natural gas production and consumption expansion, with minimal direct commodity exposure.

Fund performance review

Midstream energy performance lagged broader energy for the fourth fiscal quarter, but outperformed for the fiscal year. A combination of concerns regarding a slowdown in U.S. production growth, political rhetoric regarding proposed frack bans from Democratic candidates, and tax loss selling largely contributed to midstream underperformance for the fiscal quarter. Coverage and leverage has improved for many midstream companies. The average coverage ratio for the fund’s portfolio companies was 1.42x in 3Q2019 while average leverage was 3.82x.

The fund’s market-based and NAV-based returns for the fiscal year ending November 30, 2019 were -17.6% and -16.6%, respectively (including the reinvestment of distributions). Comparatively, the Tortoise MLP Index® returned -7.0% for the same period.

2019 fiscal year highlights      
Distributions paid per share (fiscal year 2019) $1.6900
Distributions paid per share (4th quarter 2019) $0.4225
Distribution rate (as of 11/30/2019) 17.1%
Quarter-over-quarter distribution increase 0.0%
Year-over-year distribution increase 0.0%
Cumulative distributions paid per share to
       stockholders since inception in July 2010 $15.4600
Market-based total return (17.6)%
NAV-based total return (16.6)%
Premium (discount) to NAV (as of 11/30/2019) (6.4)%

Key asset performance drivers

Top five contributors         Company type         Performance driver
Buckeye Partners, L.P. Midstream refined product pipeline MLP Acquired at a premium
Western Gas Partners LP Midstream gathering and processing MLP Clarity on Colorado drilling legislation and close of LP/GP merger
NuStar Energy L.P. Refined products pipelines MLP Strong volume growth from Permian and outlook for St. James and Corpus Christi assets
ONEOK, Inc. Midstream natural gas/natural gas liquids pipeline company Continued execution of backlog of infrastructure projects with high returns
Phillips 66 Partners LP Midstream refined product pipeline MLP Eliminated incentive distribution rights (IDRs) leading to a lower cost of capital
         
Bottom five contributors Company type Performance driver
EQM Midstream Partners, LP Midstream natural gas/natural gas liquids pipeline MLP Uncertainty around Mountain Valley Pipeline project combined with potential for slowing drilling activity in the Marcellus
Western Midstream Partners, LP Midstream gathering and processing MLP Carrying out strategic review
Antero Midstream Corporation Midstream gathering and processing company Concerns around potential recontracting of gathering and process contracts and financial health of parent company Antero Resources (AR) as natural gas prices moved lower
EnLink Midstream, LLC Midstream gathering and processing company Concern around producers slowing drilling activity in Oklahoma
MPLX LP Refined products pipeline MLP Continued uncertainty regarding organizational structure and parental support combined with north east natural G&P exposure

Unlike the fund return, index return is pre-expenses and taxes.

Performance data quoted represent past performance; past performance does not guarantee future results. Like any other stock, total return and market value will fluctuate so that an investment, when sold, may be worth more or less than its original cost. Portfolio composition is subject to change due to ongoing management of the fund. References to specific securities or sectors should not be construed as a recommendation by the fund or its adviser. See Schedule of Investments for portfolio weighting at the end of the fiscal quarter.

(unaudited)
 
8 Tortoise



 
 
2019 Annual Report | November 30, 2019
 
 
 
 

Fund structure and distribution policy

The fund is structured as a corporation and is subject to federal and state income tax on its taxable income. The fund has adopted a distribution policy in which the Board of Directors considers many factors in determining distributions to stockholders. Over the long term, the fund expects to distribute substantially all of its distributable cash flow (DCF) to holders of common stock. The fund’s Board of Directors reviews the distribution rate quarterly, and may adjust the quarterly distribution throughout the year. Although the level of distributions is independent of the funds’ performance in the short term, the fund expects such distributions to correlate with its performance over time.

Distributable cash flow and distributions

DCF is distributions received from investments less expenses. The total distributions received from investments include the amount received as cash distributions from MLPs, paid-in-kind distributions, and dividend and interest payments. Income also includes the premiums received from sales of covered call options, net of amounts paid to buy back out-of-the-money options. The total expenses include current or anticipated operating expenses, leverage costs and current income taxes. Current income taxes include taxes paid on net investment income in addition to foreign taxes, if any. Taxes incurred from realized gains on the sale of investments, expected tax benefits and deferred taxes are not included in DCF.

Income from investments increased approximately 0.8% as compared to 3rd quarter 2019 primarily due to increased distribution rates on investments within the fund’s portfolio. Operating expenses, consisting primarily of fund advisory fees, decreased approximately 10.2% during the quarter due to lower asset-based fees. Leverage costs decreased approximately 4.5% as compared to 3rd quarter 2019 primarily due to lower leverage utilization during the quarter. As a result of the changes in income and expenses, DCF increased approximately 3.7% as compared to 3rd quarter 2019. The fund paid a quarterly distribution of $0.4225 per share, which was equal to the distribution paid in the prior quarter and 4th quarter 2018. The fund has paid cumulative distributions to stockholders of $15.46 per share since its inception in July 2010.

The Key Financial Data table discloses the calculation of DCF and should be read in conjunction with this discussion. The difference between distributions received from investments in the DCF calculation and total investment income as reported in the Statement of Operations, is reconciled as follows: the Statement of Operations, in conformity with U.S. generally accepted accounting principles (GAAP), recognizes distribution income from MLPs, common stock and other investments on their ex-dates, whereas the DCF calculation may reflect distribution income on their pay dates; GAAP recognizes that a significant portion of the cash distributions received from MLPs, common stock and other investments are characterized as a return of capital and therefore excluded from investment income, whereas the DCF calculation includes the return of capital; and distributions received from investments in the DCF calculation include the value of dividends paid-in-kind (additional stock or MLP units), whereas such amounts may not be included as income for GAAP purposes, and includes distributions related to direct investments when the purchase price is reduced in lieu of receiving cash distributions. Net premiums on options written (premiums received less amounts paid to buy back out-of-the-money options) with expiration dates during the fiscal quarter are included in the DCF calculation, whereas GAAP recognizes the net effect of options written as realized and unrealized gains (losses). The treatment of expenses in the DCF calculation also differs from what is reported in the Statement of Operations. In addition to the total operating expenses, including fee waiver, as disclosed in the Statement of Operations, the DCF calculation reflects interest expense, distributions to preferred stockholders, other recurring leverage expenses, as well as taxes paid on net investment income.

“Net Investment Income (Loss), before Income Taxes” on the Statement of Operations is adjusted as follows to reconcile to DCF for YTD and 4th quarter 2019 (in thousands):

      YTD 2019       4th Qtr 2019
Net Investment Loss,
     before Income Taxes $ (21,284 ) $ (4,564 )
Adjustments to reconcile to DCF:
     Distributions characterized
          as return of capital 112,443 27,870
     Other 3,833 1,075
          DCF $    94,992 $    24,381

Leverage

The fund’s leverage utilization decreased by $65.5 million during 4th quarter 2019 and represented 39.8% of total assets at November 30, 2019. The fund has maintained compliance with its applicable coverage ratios. At year-end, approximately 84% of the leverage cost was fixed, the weighted-average maturity was 3.3 years and the weighted-average annual rate on leverage was 3.84%. During the quarter, Series K notes, with a notional amount of $35,000,000 and a floating rate based on 3-month LIBOR plus 1.30% were paid in full upon maturity. These rates will vary in the future as a result of changing floating rates, utilization of the fund’s credit facility and as leverage matures or is redeemed.

Income taxes

During 4th quarter 2019, the fund’s deferred tax liability decreased by $28.3 million to $27.9 million, primarily as a result of the decrease in value of its investment portfolio. The fund had net realized losses of $8.6 million during the quarter. As of November 30, 2019, the fund had net operating losses of $1.3 million and capital loss carryforwards of $26.9 million for federal income tax purposes. To the extent that the fund has taxable income in the future that is not offset by net operating losses, it will owe federal and state income taxes. Tax payments can be funded from investment earnings, fund assets, or borrowings.

Please see the Financial Statements and Notes to Financial Statements for additional detail regarding critical accounting policies, results of operations, leverage, taxes and other important fund information.

For further information regarding the calculation of distributable cash flow and distributions to stockholders, as well as a discussion of the tax impact on distributions and results and recent tax reform, please visit www.tortoiseadvisors.com.

(unaudited)
 
Tortoise 9



 
 
 
 
NTG Key Financial Data (supplemental unaudited information)
(dollar amounts in thousands unless otherwise indicated)
 

The information presented below regarding Distributable Cash Flow and Selected Financial Information is supplemental non-GAAP financial information, which the fund believes is meaningful to understanding operating performance. The Distributable Cash Flow Ratios include the functional equivalent of EBITDA for non-investment companies, and the fund believes they are an important supplemental measure of performance and promote comparisons from period-to-period. This information is supplemental, is not inclusive of required financial disclosures (e.g. Total Expense Ratio), and should be read in conjunction with the full financial statements.

Year Ended November 30, 2018 2019
    2018     2019     Q4(1)     Q1(1)     Q2(1)     Q3(1)     Q4(1)
Total Income from Investments
       Distributions and dividends
              from investments $ 115,952 $ 125,782 $ 31,874 $ 31,399 $ 31,824 $ 31,244 $ 31,315
       Dividends paid in kind 1,879 518 68 69 70 179 200
       Interest earned on corporate bonds 315 85 230
       Premiums on options written 1,254 3,300 1,254 542 890 927 941
              Total from investments 119,085 129,915 33,196 32,010 32,784 32,435 32,686
Operating Expenses Before Leverage
       Costs and Current Taxes
       Advisory fees, net of fees waived 12,863 13,531 3,264 3,145 3,715 3,526 3,145
       Other operating expenses 1,319 1,271 352 334 324 312 301
14,182 14,802 3,616 3,479 4,039 3,838 3,446
       Distributable cash flow before
              leverage costs and current taxes 104,903 115,113 29,580 28,531 28,745 28,597 29,240
       Leverage costs(2) 17,304 20,121 4,749 4,999 5,175 5,088 4,859
       Current income tax expense(3)
              Distributable Cash Flow(4) $ 87,599 $ 94,992 $ 24,831 $ 23,532 $ 23,570 $ 23,509 $ 24,381
 
Net realized gain (loss), net of
       income taxes, for the period $ 46,530   $ (35,176 ) $ (4,243 ) $ (29,889 ) $ (6,278 ) $ 9,631   $ (8,640 )
As a percent of average total assets(5)
       Total from investments 8.11 % 8.69 % 8.38 % 8.81 % 8.46 % 8.73 % 9.96 %
       Operating expenses before
              leverage costs and current taxes 0.99 % 1.02 % 0.91 % 0.96 % 1.04 % 1.03 % 1.05 %
       Distributable cash flow before
              leverage costs and current taxes 7.12 % 7.67 % 7.47 % 7.85 % 7.42 % 7.70 % 8.91 %
As a percent of average net assets(5)
       Total from investments 13.07 % 14.43 % 13.08 % 14.36 % 13.79 % 14.70 % 17.18 %
       Operating expenses before
              leverage costs and current taxes 1.60 % 1.70 % 1.42 % 1.56 % 1.70 % 1.74 % 1.81 %
       Leverage costs and current taxes 1.95 % 2.31 % 1.87 % 2.24 % 2.18 % 2.31 % 2.55 %
       Distributable cash flow 9.52 % 10.42 % 9.79 % 10.56 % 9.91 % 10.65 % 12.82 %
 
Selected Financial Information
Distributions paid on common stock $ 86,693 $ 106,822 $ 26,705 $ 26,706 $ 26,705 $ 26,706 $ 26,705
Distributions paid on common stock
       per share 1.6900 1.6900 0.4225 0.4225 0.4225 0.4225 0.4225
Total assets, end of period(6) 1,506,745 1,163,500 1,506,745 1,508,643 1,498,278 1,380,446 1,163,500
Average total assets during period(6)(7) 1,429,518 1,447,092 1,588,197 1,472,955 1,536,794 1,473,596 1,316,053
Leverage(8) 517,100 462,600 517,100 522,600 527,300 528,100 462,600
Leverage as a percent of total assets 34.3 % 39.8 % 34.3 % 34.6 % 35.2 % 38.3 % 39.8 %
Net unrealized appreciation (depreciation),
       end of period 23,424 (64,329 ) 23,424 75,853 93,595 15,163 (64,329 )
Net assets, end of period 915,033 667,708 915,033 905,859 886,270 786,294 667,708
Average net assets during period(9) 887,014 871,496 1,018,337 903,917 943,080 875,555 762,956
Net asset value per common share 14.48 10.56 14.48 14.33 14.02 12.44 10.56
Market value per common share 13.72 9.88 13.72 13.66 13.21 12.03 9.88
Shares outstanding (000’s) 63,208 63,208 63,208 63,208 63,208 63,208 63,208

(1) Q1 is the period from December through February. Q2 is the period from March through May. Q3 is the period from June through August. Q4 is the period from September through November.
(2) Leverage costs include interest expense, distributions to preferred stockholders and other recurring leverage expenses.
(3) Includes taxes paid on net investment income and foreign taxes, if any. Taxes related to realized gains are excluded from the calculation of Distributable Cash Flow (“DCF”).
(4) “Net investment income (loss), before income taxes” on the Statement of Operations is adjusted as follows to reconcile to DCF: increased by the return of capital on distributions, the dividends paid in stock and increased liquidation value, the premium on dividends paid in kind and amortization of debt issuance costs.
(5) Annualized for periods less than one full year.
(6) Includes deferred issuance and offering costs on senior notes and preferred stock.
(7) Computed by averaging month-end values within each period.
(8) Leverage consists of senior notes, preferred stock and outstanding borrowings under the credit facility.
(9) Computed by averaging daily net assets within each period.

10 Tortoise



 
 
2019 Annual Report | November 30, 2019
 
Tortoise
Pipeline & Energy Fund, Inc. (TTP)
 

Fund description

TTP seeks a high level of total return with an emphasis on current distributions paid to stockholders. TTP invests primarily in equity securities of North American pipeline companies that transport natural gas, natural gas liquids (NGLs), crude oil and refined products and, to a lesser extent, in other energy infrastructure companies.

Fund performance review

Midstream energy performance lagged broader energy for the fourth fiscal quarter, but outperformed for the fiscal year. A combination of concerns regarding a slowdown in U.S. production growth, political rhetoric regarding proposed frack bans from Democratic candidates, and tax loss selling largely contributed to midstream underperformance for the fiscal quarter. The fund’s market-based and NAV-based returns for the fiscal year ending November 30, 2019 were -11.1% and -12.0%, respectively (including the reinvestment of distributions). Comparatively, the Tortoise North American Pipeline IndexSM returned 5.9% for the same period.

2019 fiscal year highlights
Distributions paid per share (fiscal year 2019)        $1.3850
Distributions paid per share (4th quarter 2019) $0.2850
Distribution rate (as of 11/30/2019) 9.9%
Quarter-over-quarter distribution increase (decrease) (0.0)%
Year-over-year distribution increase (decrease) (30.1)%
Cumulative distributions paid per share to
stockholders since inception in October 2011 $13.1125
Market-based total return (11.1)%
NAV-based total return (12.0)%
Premium (discount) to NAV (as of 11/30/2019) (11.2)%

Please refer to the inside front cover of the report for important information about the fund’s distribution policy

The fund’s covered call strategy, which focuses on independent energy companies that are key pipeline transporters, enabled the fund to generate current income. The notional amount of the fund’s covered calls averaged approximately 6% of total assets, and their out-of-the-money percentage at the time written averaged approximately 9% during the fiscal quarter.

Key asset performance drivers

Top five contributors       Company type       Performance driver
Enbridge Inc. Midstream crude oil pipeline company Visible dividend growth of 5-7% in 2020+
ONEOK, Inc. Midstream natural gas/natural gas liquids pipeline company Continued execution of backlog of infrastructure projects with high returns
Buckeye Partners, L.P. Midstream refined product pipeline MLP Acquired at a premium
NuStar Energy L.P. Refined products pipelines MLP Strong volume growth from Permian and outlook for St. James and Corpus Christi assets
Inter Pipeline Ltd. Midstream crude oil Bid to acquire the company
pipeline company in corporate transaction
         
Bottom five contributors Company type Performance driver
Antero Midstream Corporation Midstream gathering and processing company Concerns around potential recontracting of gathering and process contracts and financial health of parent company Antero Resources (AR) as natural gas prices moved lower
EnLink Midstream, LLC Midstream gathering and processing company Concern around producers slowing drilling activity in Oklahoma
Equitrans Midstream Corporation Midstream natural gas/natural gas liquids pipeline company Uncertainty around Mountain Valley Pipeline project
Plains GP Holdings, L.P. Midstream crude oil pipeline company Uncertain crude oil production growth from Permian in 2020 leading to concerns to potential of over build
MPLX LP Refined products pipeline MLP Continued uncertainty regarding organizational structure and parental support combined with north east natural G&P exposure

Unlike the fund return, index return is pre-expenses.

Performance data quoted represent past performance; past performance does not guarantee future results. Like any other stock, total return and market value will fluctuate so that an investment, when sold, may be worth more or less than its original cost. Portfolio composition is subject to change due to ongoing management of the fund. References to specific securities or sectors should not be construed as a recommendation by the fund or its adviser. See Schedule of Investments for portfolio weighting at the end of the fiscal quarter.

(unaudited)
 
Tortoise 11



 
 
 
 
Tortoise
Pipeline & Energy Fund, Inc. (TTP) (continued)
 

Fund structure and distribution policy

The fund is structured to qualify as a Regulated Investment Company (RIC) allowing it to pass-through to shareholders income and capital gains earned, thus avoiding double-taxation. To qualify as a RIC, the fund must meet specific income, diversification and distribution requirements. Regarding income, at least 90 percent of the fund’s gross income must be from dividends, interest and capital gains. The fund must meet quarterly diversification requirements including the requirement that at least 50 percent of the assets be in cash, cash equivalents or other securities with each single issuer of other securities not greater than 5 percent of total assets. No more than 25 percent of total assets can be invested in any one issuer other than government securities or other RIC’s. The fund must also distribute at least 90 percent of its investment company income. RIC’s are also subject to excise tax rules which require RIC’s to distribute approximately 98 percent of net income and net capital gains to avoid a 4 percent excise tax.

The fund has adopted a distribution policy which is included on the inside front cover of this report. To summarize, the fund intends to distribute an amount closely approximating the total taxable income for the year and, if so determined by the Board, distribute all or a portion of the return of capital paid by portfolio companies during the year. The fund may designate a portion of its distributions as capital gains and may also distribute additional capital gains in the last calendar quarter of the year to meet annual excise distribution requirements. The fund distributes a fixed amount per common share, currently $0.285, each quarter to its common shareholders. This amount is subject to change from time to time at the discretion of the Board. Although the level of distributions is independent of the funds’ performance in the short term, the fund expects such distributions to correlate with its performance over time.

Distributable cash flow and distributions

Distributable cash flow (DCF) is income from investments less expenses. Income from investments includes the amount received as cash or paid-in-kind distributions from common stock, master limited partnerships (MLPs), affiliates of MLPs, and pipeline and other energy companies in which the fund invests, and dividend payments on short-term investments. Income also includes the premiums received from sales of covered call options, net of amounts paid to buy back out-of-the-money options. The total expenses include current or anticipated operating expenses and leverage costs.

Income from investments decreased approximately 10.0% as compared to 3rd quarter 2019, primarily due to lower premiums from covered call options. Operating expenses, consisting primarily of fund advisory fees, decreased approximately 8.2% during the quarter, primarily due to lower asset-based fees. Leverage costs decreased 2.7% as compared to 3rd quarter 2019 primarily as a result of a decrease in interest rates during the quarter. As a result of the changes in income and expenses, DCF decreased approximately 11.6% as compared to 3rd quarter 2019. In addition, the fund had net realized losses on investments of $1.5 million during 4th quarter 2019. The fund paid a quarterly distribution of $0.285 per share, which was equal to the distribution paid in the prior quarter and a decrease of 30% from the 4th quarter 2018. The fund has paid cumulative distributions to stockholders of $13.1125 per share since its inception in October 2011.

The Key Financial Data table discloses the calculation of DCF and should be read in conjunction with this discussion. The difference between income from investments in the DCF calculation and total investment income as reported in the Statement of Operations, is reconciled as follows: (1) the Statement of Operations, in conformity with U.S. generally accepted accounting principles (GAAP), recognizes distributions and dividend income from MLPs, common stock and other investments on their ex-dates, whereas the DCF calculation may reflect distributions and dividend income on their pay dates; (2) GAAP recognizes that a significant portion of the cash distributions received from MLPs, common stock and other investments are characterized as a return of capital and therefore excluded from investment income, whereas the DCF calculation includes the return of capital; (3) income from investments in the DCF calculation includes the value of dividends paid-in-kind (additional stock or units), whereas such amounts may not be included as income for GAAP purposes; and (4) net premiums on options written (premiums received less amounts paid to buy back out-of-the-money options) with expiration dates during the fiscal quarter are included in the DCF calculation, whereas GAAP recognizes the net effect of options written as realized and unrealized gains (losses).

“Net Investment Income (Loss)” on the Statement of Operations is adjusted as follows to reconcile to DCF for YTD and 4th quarter 2019 (in thousands):

      YTD 2019       4th Qtr 2019
Net Investment Loss $ (1,236 ) $ (71 )
Adjustments to reconcile to DCF:
Net premiums on options written 3,623 484
Distributions characterized
as return of capital 11,183 2,671
Other 261 69
DCF $ 13,831 $ 3,153

Leverage

The fund’s leverage utilization increased by $0.3 million during 4th quarter 2019 and represented 32.1% of total assets at November 30, 2019. The fund has maintained compliance with its applicable coverage ratios. At year-end, approximately 71% of the leverage cost was fixed, the weighted-average maturity was 2.9 years and the weighted-average annual rate on leverage was 3.82%. These rates will vary in the future as a result of changing floating rates, utilization of the fund’s credit facility and as leverage matures or is redeemed.

Please see the Financial Statements and Notes to Financial Statements for additional detail regarding critical accounting policies, results of operations, leverage and other important fund information.

For further information regarding the calculation of distributable cash flow and distributions to stockholders, as well as a discussion of the tax impact on distributions, please visit www.tortoiseadvisors.com.

(unaudited)
 
12 Tortoise



 
 
2019 Annual Report | November 30, 2019
 
TTP Key Financial Data (supplemental unaudited information)
(dollar amounts in thousands unless otherwise indicated)
 

The information presented below regarding Distributable Cash Flow and Selected Financial Information is supplemental non-GAAP financial information, which the fund believes is meaningful to understanding operating performance. The Distributable Cash Flow Ratios include the functional equivalent of EBITDA for non-investment companies, and the fund believes they are an important supplemental measure of performance and promote comparisons from period-to-period. This information is supplemental, is not inclusive of required financial disclosures (e.g. Total Expense Ratio), and should be read in conjunction with the full financial statements.

Year Ended November 30, 2018 2019
      2018     2019     Q4(1)     Q1(1)     Q2(1)     Q3(1)     Q4(1)
Total Income from Investments
Dividends and distributions
from investments, net of
foreign taxes withheld $ 14,738 $ 15,444 $ 3,649 $ 3,617 $ 4,032 $ 3,905 $ 3,890
Dividends paid in kind 1,796 237 422 53 54 62 68
Net premiums on options written 4,808 3,622 1,154 1,133 1,039 967 483
Total from investments 21,342 19,303 5,225 4,803 5,125 4,934 4,441
Operating Expenses Before
Leverage Costs
Advisory fees, net of fees waived 2,845 2,414 696 606 643 602 563
Other operating expenses 605 549 147 146 149 138 116
3,450 2,963 843 752 792 740 679
Distributable cash flow before
leverage costs 17,892 16,340 4,382 4,051 4,333 4,194 3,762
Leverage costs(2) 2,582 2,509 668 641 633 626 609
Distributable Cash Flow(3) $ 15,310 $ 13,831 $ 3,714 $ 3,410 $ 3,700 $ 3,568 $ 3,153
Net realized loss on investments
and foreign currency translation,
for the period $ (356 ) $ (16,707 ) $ (596 ) $ (6,959 ) $ (5,479 ) $ (2,745 ) $ (1,524 )
As a percent of average total assets(4)
Total from investments 8.29 % 8.82 % 8.29 % 8.73 % 8.84 % 8.96 % 8.74 %
Operating expenses before
leverage costs 1.34 % 1.35 % 1.34 % 1.37 % 1.37 % 1.34 % 1.34 %
Distributable cash flow before
leverage costs 6.95 % 7.47 % 6.95 % 7.36 % 7.47 % 7.62 % 7.40 %
As a percent of average net assets(4)
Total from investments 11.32 % 12.29 % 11.43 % 12.16 % 11.97 % 12.63 % 12.46 %
Operating expenses before
leverage costs 1.83 % 1.89 % 1.84 % 1.90 % 1.85 % 1.89 % 1.91 %
Leverage costs 1.37 % 1.60 % 1.46 % 1.62 % 1.48 % 1.60 % 1.71 %
Distributable cash flow 8.12 % 8.80 % 8.13 % 8.64 % 8.64 % 9.14 % 8.84 %
 
Selected Financial Information
Distributions paid on common stock $ 16,327 $ 13,873 $ 4,082 $ 4,082 $ 4,081 $ 2,855 $ 2,855
Distributions paid on common stock
per share 1.6300 1.3850 0.4075 0.4075 0.4075 0.2850 0.2850
Total assets, end of period(5) 235,259 192,751 235,259 227,676 222,673 207,072 192,751
Average total assets during period(5)(6) 257,585 218,949 252,876 223,114 229,950 218,436 203,852
Leverage(7) 69,800 61,800 69,800 61,800 63,100 61,500 61,800
Leverage as a percent of total assets 29.7 % 32.1 % 29.7 % 27.1 % 28.3 % 29.7 % 32.1 %
Net unrealized depreciation,
end of period (34,897 ) (37,569 ) (34,897 ) (23,375 ) (19,404 ) (28,190 ) (37,569 )
Net assets, end of period 163,202 129,887 163,202 163,313 157,061 143,463 129,887
Average net assets during period(8) 188,518 157,017 183,386 160,184 169,837 155,032 142,932
Net asset value per common share 16.29 12.97 16.29 16.30 15.68 14.32 12.97
Market value per common share 14.33 11.52 14.33 14.63 14.02 12.84 11.52
Shares outstanding (000’s) 10,016 10,016 10,016 10,016 10,016 10,016 10,016

(1) Q1 is the period from December through February. Q2 is the period from March through May. Q3 is the period from June through August. Q4 is the period from September through November.
(2) Leverage costs include interest expense, distributions to preferred stockholders and other recurring leverage expenses.
(3) “Net investment income (loss)” on the Statement of Operations is adjusted as follows to reconcile to Distributable Cash Flow (“DCF”): increased by net premiums on options written, the return of capital on distributions, the dividends paid in stock and increased liquidation value, the premium on dividends paid in kind and amortization of debt issuance costs.
(4) Annualized for periods less than one full year.
(5) Includes deferred issuance and offering costs on senior notes and preferred stock.
(6) Computed by averaging month-end values within each period.
(7) Leverage consists of senior notes, preferred stock and outstanding borrowings under the revolving credit facility.
(8) Computed by averaging daily net assets within each period.

Tortoise 13



 
 
 
 
Tortoise
Energy Independence Fund, Inc. (NDP)
 

Fund description

NDP seeks a high level of total return with an emphasis on current distributions paid to stockholders. NDP invests primarily in equity securities of upstream North American energy companies that engage in the exploration and production of crude oil, condensate, natural gas and natural gas liquids that generally have a significant presence in North American oil and gas fields, including shale reservoirs.

Fund performance review

Oil markets experienced significant volatility during the period. Prices were caught in a tug-of-war between escalating tensions in the Middle East culminating in significant but temporary supply outages, mixed signals from U.S.-China trade negotiations impacting demand growth. The fund’s market-based and NAV-based returns for the fiscal year ending November 30, 2019 were -52.4% and -45.4%, respectively (including the reinvestment of distributions). Comparatively, the Tortoise North American Oil and Gas Producers IndexSM returned -22.7% for the same period.

2019 fiscal year highlights
Distributions paid per share (fiscal year 2019)       $1.0750
Distributions paid per share (4th quarter 2019) $0.1000
Distribution rate (as of 11/30/2019) 11.0%
Quarter-over-quarter distribution increase (decrease) (0.0)%
Year-over-year distribution increase (decrease) (77.1)%
Cumulative distributions paid per share to
stockholders since inception in July 2012 $12.0125
Market-based total return (52.4)%
NAV-based total return (45.4)%
Premium (discount) to NAV (as of 11/30/2019) (12.9)%

The fund utilizes a covered call strategy, which seeks to generate income while reducing overall volatility. The premium income generated from this strategy helped to lower NAV volatility during the quarter. The notional amount of the fund’s covered calls averaged approximately 70% of total assets and their out-of-the-money percentage at the time written averaged approximately 14% during the fiscal quarter.

Key asset performance drivers

Top five contributors         Company type         Performance driver
Anadarko Petroleum Corp. Upstream oil and natural gas producer Occidental Petroleum offered premium to acquire all of the outstanding shares
Marathon Petroleum Corporation Downstream refiner Generated significant free cash flow to pay dividend and buyback shares as well as announced spin-off of retail gasoline business
Valero Energy Corporation Downstream refiner Increased exports and IMO exposure and margin capture leading to improved earnings outlook
NextEra Energy, Inc. Integrated infrastructure Highly visible growth from renewable buildout
Buckeye Partners, L.P. Midstream refined product pipeline MLP Acquired at a premium
         
Bottom five contributors Company type Performance driver
Range Resources Corporation Upstream natural gas producer Declining natural gas prices resulting in weaker earnings and a lower growth outlook
Antero Resources Corporation Upstream oil and natural gas producer Declining natural gas prices resulting in weaker earnings and a lower growth outlook
EQT Corporation Upstream natural gas producer Declining natural gas prices resulting in weaker earnings and a lower growth outlook
Concho Resources Inc. Upstream liquids producer Unexpected operational challenge tied to well spacing raised concerns about future growth
Cabot Oil & Gas Corporation Upstream natural gas producer Declining natural gas prices resulting in weaker earnings and a lower growth outlook

Unlike the fund return, index return is pre-expenses.

Performance data quoted represent past performance: past performance does not guarantee future results. Like any other stock, total return and market value will fluctuate so that an investment, when sold, may be worth more or less than its original cost. Portfolio composition is subject to change due to ongoing management of the fund. References to specific securities or sectors should not be construed as a recommendation by the fund or its adviser. See Schedule of Investments for portfolio weighting at the end of the fiscal quarter.

(unaudited)
 
14 Tortoise



 
 
2019 Annual Report | November 30, 2019
 
 
 
 

Fund structure and distribution policy

The fund is structured to qualify as a Regulated Investment Company (RIC) allowing it to pass-through to shareholders income and capital gains earned, thus avoiding double-taxation. To qualify as a RIC, the fund must meet specific income, diversification and distribution requirements. Regarding income, at least 90 percent of the fund’s gross income must be from dividends, interest and capital gains. The fund must meet quarterly diversification requirements including the requirement that at least 50 percent of the assets be in cash, cash equivalents or other securities with each single issuer of other securities not greater than 5 percent of total assets. No more than 25 percent of total assets can be invested in any one issuer other than government securities or other RIC’s. The fund must also distribute at least 90 percent of its investment company income. RIC’s are also subject to excise tax rules which require RIC’s to distribute approximately 98 percent of net income and net capital gains to avoid a 4 percent excise tax.

The fund has adopted a distribution policy which intends to distribute an amount closely approximating the total taxable income for the year and, if so determined by the Board, distribute all or a portion of the return of capital paid by portfolio companies during the year. The fund may designate a portion of its distributions as capital gains and may also distribute additional capital gains in the last calendar quarter of the year to meet annual excise distribution requirements. Distribution amounts are subject to change from time to time at the discretion of the Board. Although the level of distributions is independent of the funds’ performance in the short term, the fund expects such distributions to correlate with its performance over time.

Distributable cash flow and distributions

Distributable cash flow (DCF) is income from investments less expenses. Income from investments includes the amount received as cash or paid-in-kind distributions from investments and dividend payments on short-term investments. Income also includes the premiums received from sales of covered call options, net of amounts paid to buy back out-of-the-money options. The total expenses include current or anticipated operating expenses and leverage costs.

Income from investments decreased approximately 54.5% as compared to 3rd quarter 2019, primarily due to decreased premiums received on written covered call options. Operating expenses, consisting primarily of fund advisory fees, decreased approximately 15.1% during the quarter due primarily to lower asset-based fees. Total leverage costs decreased approximately 26.0% as compared to 3rd quarter 2019, due to lower leverage utilization and interest rates during the quarter. As a result of the changes in income and expenses, DCF decreased by approximately 59.6% as compared to 3rd quarter 2019. In addition, the fund had net realized losses on investments of $2.3 million during 4th quarter 2019.

The fund paid a distribution of $0.10 per share during 4th quarter 2019, which was equal to the distribution paid in the prior quarter and a decrease of 77% from 4th quarter 2018. The fund has paid cumulative distributions to stockholders of $12.0125 per share since its inception in July 2012.

The Key Financial Data table discloses the calculation of DCF and should be read in conjunction with this discussion. The difference between income from investments in the DCF calculation and total investment income as reported in the Statement of Operations, is reconciled as follows: (1) the Statement of Operations, in conformity with U.S. generally accepted accounting principles (GAAP), recognizes distributions and dividend income from MLPs, common stock and other investments on their ex-dates, whereas the DCF calculation may reflect distributions and dividend income on their pay dates; (2) GAAP recognizes that a significant portion of the cash distributions received from MLPs, common stock and other investments are characterized as a return of capital and therefore excluded from investment income, whereas the DCF calculation includes the return of capital; (3) income from investments in the DCF calculation includes the value of dividends paid-in-kind (additional stock or units), whereas such amounts may not be included as income for GAAP purposes; and (4) net premiums on options written (premiums received less amounts paid to buy back out-of-the-money options) with expiration dates during fiscal quarter are included in the DCF calculation, whereas GAAP recognizes the net effect of options written as realized and unrealized gains (losses).

“Net Investment Income (Loss)” on the Statement of Operations is adjusted as follows to reconcile to DCF for YTD and 4th quarter 2019 (in thousands):

      YTD 2019       4th Qtr 2019
Net Investment Income (loss) $ (1,491 ) $ 66
Adjustments to reconcile to DCF:
       Net premiums on options written 17,101 1,771
       Distributions characterized
              as return of capital 1,323 146
              DCF $   16,933 $       1,983

Leverage

The fund’s leverage utilization decreased $2.2 million as compared to 3rd quarter 2019. The fund utilizes all floating rate leverage that had an interest rate of 2.70% and represented 29.9% of total assets at year-end. The fund has maintained compliance with its applicable coverage ratios. The interest rate on the fund’s leverage will vary in the future along with changing floating rates.

Please see the Financial Statements and Notes to Financial Statements for additional detail regarding critical accounting policies, results of operations, leverage and other important fund information.

For further information regarding the calculation of distributable cash flow and distributions to stockholders, as well as a discussion of the tax impact on distributions, please visit www.tortoiseadvisors.com.

(unaudited)
 
Tortoise 15



 
 
   
 
NDP Key Financial Data (supplemental unaudited information)
(dollar amounts in thousands unless otherwise indicated)
 

The information presented below regarding Distributable Cash Flow and Selected Financial Information is supplemental non-GAAP financial information, which the fund believes is meaningful to understanding operating performance. The Distributable Cash Flow Ratios include the functional equivalent of EBITDA for non-investment companies, and the fund believes they are an important supplemental measure of performance and promote comparisons from period-to-period. This information is supplemental, is not inclusive of required financial disclosures (e.g. Total Expense Ratio), and should be read in conjunction with the full financial statements.

Year Ended November 30, 2018 2019
    2018     2019     Q4(1)     Q1(1)     Q2(1)     Q3(1)     Q4(1)
Total Income from Investments
       Distributions and dividends
              from investments, net of
              foreign taxes withheld $ 5,122 $ 2,971 $ 1,167 $ 1,250 $ 394 $ 538 $ 789
       Dividends paid in stock 796 152
       Net premiums on options written 24,820 17,101 6,400 4,966 5,279 5,085 1,771
              Total from investments 30,738 20,072 7,719 6,216 5,673 5,623 2,560
Operating Expenses Before
       Leverage Costs
       Advisory fees, net of fees waived 2,639 1,434 613 437 421 315 261
       Other operating expenses 566 476 134 133 133 110 100
3,205 1,910 747 570 554 425 361
       Distributable cash flow before
              leverage costs 27,533 18,162 6,972 5,646 5,119 5,198 2,199
       Leverage costs(2) 1,759 1,229 486 371 350 292 216
Distributable Cash Flow(3) $ 25,774 $ 16,933 $ 6,486 $ 5,275 $ 4,769 $ 4,906 $ 1,983
Net realized loss on investments
       and foreign currency translation,
       for the period $ (6,693 ) $ (88,310 ) $ (2,031 ) $ (37,544 ) $ (17,350 ) $ (31,152 ) $ (2,264 )
As a percent of average total assets(4)
       Total from investments 12.72 % 15.22 % 13.91 % 15.48 % 15.12 % 19.20 % 10.92 %
       Operating expenses before
              leverage costs 1.33 % 1.45 % 1.35 % 1.42 % 1.48 % 1.45 % 1.54 %
       Distributable cash flow before
              leverage costs 11.39 % 13.77 % 12.56 % 14.06 % 13.64 % 17.75 % 9.38 %
As a percent of average net assets(4)
       Total from investments 17.42 % 21.32 % 19.29 % 21.38 % 20.05 % 28.01 % 15.34 %
       Operating expenses before
              leverage costs 1.82 % 2.03 % 1.87 % 1.96 % 1.96 % 2.12 % 2.16 %
       Leverage costs 1.00 % 1.31 % 1.21 % 1.28 % 1.24 % 1.45 % 1.29 %
       Distributable cash flow 14.60 % 17.98 % 16.21 % 18.14 % 16.85 % 24.44 % 11.89 %
 
Selected Financial Information
Distributions paid on common stock $ 25,587 $ 15,829 $ 6,414 $ 6,430 $ 6,445 $ 1,477 $ 1,477
Distributions paid on common stock
       per share 1.7500 1.0750 0.4375 0.4375 0.4375 0.1000 0.1000
Total assets, end of period 191,285 88,684 191,285 156,648 123,229 95,078 88,684
Average total assets during period(5) 241,656 131,848 222,541 162,807 148,821 116,182 94,064
Leverage(6) 57,100 26,500 57,100 42,400 34,600 28,700 26,500
Leverage as a percent of total assets 29.9 % 29.9 % 29.9 % 27.1 % 28.1 % 30.2 % 29.9 %
Net unrealized depreciation,
       end of period (50,328 ) (21,026 ) (50,328 ) (28,074 ) (27,092 ) (21,503 ) (21,026 )
Net assets, end of period 132,488 61,550 132,488 111,490 87,720 65,322 61,550
Average net assets during period(7) 176,481 94,144 160,534 117,918 112,274 79,655 66,948
Net asset value per common share 9.02 4.17 9.02 7.57 5.94 4.42 4.17
Market value per common share 9.00 3.63 9.00 8.08 7.40 3.99 3.63
Shares outstanding (000’s) 14,696 14,768 14,696 14,733 14,768 14,768 14,768

(1) Q1 is the period from December through February. Q2 is the period from March through May. Q3 is the period from June through August. Q4 is the period from September through November.
(2)

Leverage costs include interest expense and other recurring leverage expenses.

(3) “Net investment income (loss)” on the Statement of Operations is adjusted as follows to reconcile to Distributable Cash Flow (“DCF”): increased by net premiums on options written, the return of capital on distributions the distributions paid in stock and the premium on dividends paid in kind.
(4) Annualized for periods less than one full year.
(5) Computed by averaging month-end values within each period.
(6) Leverage consists of outstanding borrowings under the revolving credit facility.
(7) Computed by averaging daily net assets within each period.

16 Tortoise



 
 
2019 Annual Report | November 30, 2019
 
Tortoise
Power and Energy Infrastructure Fund, Inc. (TPZ)
 

Fund description

TPZ seeks to provide a high level of current income to stockholders, with a secondary objective of capital appreciation. TPZ seeks to invest primarily in fixed income and dividend-paying equity securities of power and energy infrastructure companies that provide stable and defensive characteristics throughout economic cycles.

Fund performance review

Midstream energy performance lagged broader energy for the fourth fiscal quarter, but outperformed for the fiscal year. A combination of concerns regarding a slowdown in U.S. production growth, political rhetoric regarding proposed frack bans from Democratic candidates, and tax loss selling largely contributed to midstream underperformance for the fiscal quarter. The fund’s market-based and NAV-based returns for the fiscal year ending November 30, 2019 were -1.4% and -2.6%, respectively (including the reinvestment of distributions). Comparatively, the TPZ Benchmark Composite* returned 9.4% for the same period. The fund’s fixed income holdings outperformed its equity holdings on a total return basis.

2019 fiscal year highlights      
Distributions paid per share (fiscal year 2019) $1.5000
Monthly distribution paid per share (4th quarter 2019) $0.1250
Distribution rate (as of 11/30/2019) 9.6%
Quarter-over-quarter distribution increase 0.0%
Year-over-year distribution increase 0.0%
Cumulative distribution to stockholders
       since inception in July 2009 $16.7750
Market-based total return (1.4)%
NAV-based total return (2.6)%
Premium (discount) to NAV (as of 11/30/2019) (12.0)%

* The TPZ Benchmark Composite includes the BofA Merrill Lynch U.S. Energy Index (CIEN), the BofA Merrill Lynch U.S. Electricity Index (CUEL) and the Tortoise MLP Index® (TMLP). It is comprised of a blend of 70% fixed income and 30% equity securities issued by companies in the power and energy infrastructure sectors.

Please refer to the inside front cover of the report for important information about the fund’s distribution policy.

Key asset performance drivers

Top five contributors      Company type      Performance driver
Enbridge Inc. (fixed income) Midstream crude oil pipeline company Successful efforts to reduce leverage
Enbridge Inc. Midstream crude oil pipeline company Visible dividend growth of 5-7% in 2020+
TransCanada Corporation (fixed income) Midstream natural gas/natural gas liquids pipeline company Regulated business model and defensive fixed income security
Buckeye Partners, L.P. Midstream refined product pipeline MLP Acquired at a premium
SemGroup Corp. (fixed income) Midstream crude oil pipeline company Acquired by an investment grade company
 
Bottom five contributors Company type Performance driver
Antero Midstream Corporation Midstream gathering and processing company Concerns around potential recontracting of gathering and process contracts and financial health of parent company Antero Resources (AR) as natural gas prices moved lower
Western Midstream Partners, LP Midstream gathering and processing MLP Carrying out strategic review
EnLink Midstream, LLC Midstream gathering and processing company Concern around producers slowing drilling activity in Oklahoma
MPLX LP Refined products pipeline MLP Continued uncertainty regarding organizational structure and parental support combined with north east natural G&P exposure
Equitrans Midstream Corporation Midstream natural gas/natural gas liquids pipeline company Uncertainty around Mountain Valley Pipeline project

Unlike the fund return, index return is pre-expenses.

Performance data quoted represent past performance; past performance does not guarantee future results. Like any other stock, total return and market value will fluctuate so that an investment, when sold, may be worth more or less than its original cost. Portfolio composition is subject to change due to ongoing management of the fund. References to specific securities or sectors should not be construed as a recommendation by the fund or its adviser. See Schedule of Investments for portfolio weighting at the end of the fiscal quarter.

(unaudited)
   
Tortoise 17



 
 
   
 
Tortoise
Power and Energy Infrastructure Fund, Inc. (TPZ) (continued)
 

Fund structure and distribution policy

The fund is structured to qualify as a Regulated Investment Company (RIC) allowing it to pass-through to shareholders income and capital gains earned, thus avoiding double-taxation. To qualify as a RIC, the fund must meet specific income, diversification and distribution requirements. Regarding income, at least 90 percent of the fund gross income must be from dividends, interest and capital gains. The fund must meet quarterly diversification requirements including the requirement that at least 50 percent of the assets be in cash, cash equivalents or other securities with each single issuer of other securities not greater than 5 percent of total assets. No more than 25 percent of total assets can be invested in any one issuer other than government securities or other RIC’s. The fund must also distribute at least 90 percent of its investment company income. RIC’s are also subject to excise tax rules which require RIC’s to distribute approximately 98 percent of net income and net capital gains to avoid a 4 percent excise tax.

The fund has adopted a distribution policy which is included on the inside front cover of this report. To summarize, the fund intends to distribute an amount closely approximating the total taxable income for the year and, if so determined by the Board, distribute all or a portion of the return of capital paid by portfolio companies during the year. The fund may designate a portion of its distributions as capital gains and may also distribute additional capital gains in the last calendar quarter of the year to meet annual excise distribution requirements. The fund distributes a fixed amount per common share, currently $0.125, each month to its common shareholders. This amount is subject to change from time to time at the discretion of the Board. Although the level of distributions is independent of the funds’ performance in the short term, the fund expects such distributions to correlate with its performance over time.

Distributable cash flow and distributions

Distributable cash flow (DCF) is income from investments less expenses. Income from investments includes the accrued interest from corporate bonds, cash distributions and paid-in-kind distributions from master limited partnerships (MLPs) and other equity investments and dividends earned from short-term investments. The total expenses include current or anticipated operating expenses and leverage costs.

Income from investments increased approximately 1.0% as compared to 3rd quarter 2019 due primarily to trading activity within the fund’s portfolio. Operating expenses, consisting primarily of fund advisory fees, decreased approximately 7.4% during the quarter due primarily to lower asset-based fees. Total leverage costs decreased approximately 6.8% as compared to 3rd quarter 2019, primarily due to lower leverage utilization and interest rates during the quarter. As a result of the changes in income and expenses, DCF increased approximately 4.5% as compared to 3rd quarter 2019. In addition, the fund had net realized gains on investments of $4.3 million during 4th quarter 2019.

The fund paid monthly distributions of $0.125 per share during 4th quarter 2019, which was unchanged over the prior quarter and 4th quarter 2018. The fund’s Board of Directors has declared monthly distributions of $0.125 per share to be paid during 1st quarter 2020. The fund has paid cumulative distributions to stockholders of $16.775 per share since its inception in July 2009.

The Key Financial Data table discloses the calculation of DCF and should be read in conjunction with this discussion. The difference between income from investments in the DCF calculation and total investment income as reported in the Statement of Operations, is reconciled as follows: (1) U.S. generally accepted accounting principles (GAAP), recognizes distribution income from MLPs, common stock and other investments on their ex-dates, whereas the DCF calculation may reflect distribution income on their pay dates; (2) GAAP recognizes that a significant portion of the cash distributions received from MLPs, common stock and other investments are characterized as a return of capital and therefore excluded from investment income, whereas the DCF calculation includes the return of capital; (3) income from investments in the DCF calculation includes the value of dividends paid-in-kind (additional stock or units), whereas such amounts may not be included as income for GAAP purposes; and (4) amortization of premium or discount for all securities is calculated using the yield to worst methodology for GAAP purposes while yield to call is used in calculating amortization for long-dated hybrid securities in the DCF calculation. The treatment of expenses in the DCF calculation also differs from what is reported in the Statement of Operations. In addition to the total operating expenses, including fee waiver, as disclosed in the Statement of Operations, the DCF calculation reflects interest expense and realized and unrealized gains (losses) on interest rate swap settlements as leverage costs.

“Net Investment Income (Loss)” on the Statement of Operations is adjusted as follows to reconcile to DCF for YTD and 4th quarter 2019 (in thousands):

YTD 2019      4th Qtr 2019
Net Investment Income $ 2,722 $ 747
Adjustments to reconcile to DCF:
       Distributions characterized
              as return of capital 6,296 1,624
       Other 240 53
              DCF $   9,258 $       2,424

Leverage

The fund’s leverage utilization decreased $2.0 million as compared to 3rd quarter 2019 and represented 30.4% of total assets at November 30, 2019. The fund has maintained compliance with its applicable coverage ratios. At year-end, including the impact of interest rate swaps, approximately 61% of the leverage cost was fixed, the weighted-average maturity was 2.4 years and the weighted-average annual rate on leverage was 2.81%. These rates will vary in the future as a result of changing floating rates and as swaps mature or are redeemed.

Please see the Financial Statements and Notes to Financial Statements for additional detail regarding critical accounting policies, results of operations, leverage and other important fund information.

For further information regarding the calculation of distributable cash flow and distributions to stockholders, as well as a discussion of the tax impact on distributions, please visit www.tortoiseadvisors.com.

(unaudited)  
   
18 Tortoise



 
 
2019 Annual Report | November 30, 2019
 
TPZ Key Financial Data (supplemental unaudited information)
(dollar amounts in thousands unless otherwise indicated)
 

The information presented below regarding Distributable Cash Flow and Selected Financial Information is supplemental non-GAAP financial information, which the fund believes is meaningful to understanding operating performance. The Distributable Cash Flow Ratios include the functional equivalent of EBITDA for non-investment companies, and the fund believes they are an important supplemental measure of performance and promote comparisons from period-to-period. This information is supplemental, is not inclusive of required financial disclosures (e.g. Total Expense Ratio), and should be read in conjunction with the full financial statements.

Year Ended November 30, 2018 2019
2018 2019 Q4(1) Q1(1) Q2(1) Q3(1) Q4(1)
Total Income from Investments
       Interest earned on corporate bonds     $ 5,440     $ 5,437     $ 1,369     $ 1,357     $ 1,381     $ 1,368     $ 1,331
       Distributions and dividends
              from investments, net of
              foreign taxes withheld 6,747 7,632 1,654 1,841 1,909 1,907 1,975
       Dividends paid in kind 1,233 175 284 39 40 47 49
              Total from investments 13,420 13,244 3,307 3,237 3,330 3,322 3,355
Operating Expenses Before
       Leverage Costs
       Advisory fees 1,898 1,825 473 447 476 462 440
       Other operating expenses 546 521 137 140 141 131 109
2,444 2,346 610 587 617 593 549
       Distributable cash flow before
              leverage costs 10,976 10,898 2,697 2,650 2,713 2,729 2,806
       Leverage costs(2) 1,394 1,640 373 413 435 410 382
              Distributable Cash Flow(3) $ 9,582 $ 9,258 $ 2,324 $ 2,237 $ 2,278 $ 2,319 $ 2,424
Net realized gain (loss) on
       investments and foreign currency
       translation, for the period $ 8,973 $ 4,740 $ 3,996 $ (520 ) $ 878 $ 94 $ 4,288
As a percent of average total assets(4)
       Total from investments 6.72  % 6.89 % 6.55  % 6.85 % 6.66  % 6.78  % 7.23 %
       Operating expenses before
              leverage costs 1.22  % 1.22 % 1.21 % 1.24 % 1.23 % 1.21 % 1.18 %
       Distributable cash flow before
              leverage costs 5.50 % 5.67 % 5.34 % 5.61 % 5.43 % 5.57 % 6.05 %
As a percent of average net assets(4)
       Total from investments 9.09 % 9.62 % 8.93 % 9.54 % 9.20 % 9.53 % 10.25 %
       Operating expenses before
              leverage costs 1.66 % 1.70 % 1.65 % 1.73 % 1.70 % 1.70 % 1.68 %
       Leverage costs 0.94 % 1.19 % 1.01 % 1.22 % 1.20 % 1.18 % 1.17 %
       Distributable cash flow 6.49 % 6.73 % 6.27 % 6.59 % 6.30 % 6.65 % 7.40 %
 
Selected Financial Information
Distributions paid on common stock $ 10,427 $ 10,427 $ 2,607 $ 2,607 $ 2,607 $ 2,606 $ 2,607
Distributions paid on common stock
       per share 1.5000 1.5000 0.3750 0.3750 0.3750 0.3750 0.3750
Total assets, end of period 191,906 177,843 191,906 195,308 197,731 190,032 177,843
Average total assets during period(5) 199,749 192,260 200,269 191,512 198,360 194,528 186,087
Leverage(6) 53,400 54,100 53,400 53,800 56,600 56,100 54,100
Leverage as a percent of total assets 27.8 % 30.4 % 27.8 % 27.5 % 28.6 % 29.5 % 30.4 %
Net unrealized appreciation (depreciation),
       end of period 3,956 (7,471 ) 3,956 9,850 9,939 5,062 (7,471 )
Net assets, end of period 137,325 123,015 137,325 140,763 139,785 133,107 123,015
Average net assets during period(7) 147,616 137,701 146,848 137,573  143,596 138,251 131,313
Net asset value per common share 19.76 17.70 19.76 20.25 20.11 19.15 17.70
Market value per common share 17.17 15.57 17.17 17.97 18.25 18.17 15.57
Shares outstanding (000’s) 6,951 6,951 6,951 6,951 6,951 6,951 6,951

(1) Q1 is the period from December through February. Q2 is the period from March through May. Q3 is the period from June through August. Q4 is the period from September through November.
(2) Leverage costs include interest expense, interest rate swap expenses and other recurring leverage expenses.
(3) “Net investment income (loss)” on the Statement of Operations is adjusted as follows to reconcile to Distributable Cash Flow (“DCF”): increased by the return of capital on distributions, the dividends paid in stock and increased liquidation value and the premium on dividends paid in kind; and decreased by realized and unrealized gains (losses) on interest rate swap settlements.
(4) Annualized for periods less than one full year.
(5) Computed by averaging month-end values within each period.
(6) Leverage consists of outstanding borrowings under the revolving credit facility.
(7) Computed by averaging daily net assets within each period.

Tortoise 19



 
 
 
 
Tortoise
Essential Assets Income Term Fund (TEAF)
 

Fund description

TEAF seeks to provide a high level of total return with an emphasis on current distributions. TEAF provides investors access to a combination of public and direct investments in essential assets that are making an impact on clients and communities.

Fund performance

We are pleased with the performance of much of the fund’s portfolio; however continue to be frustrated with the volatility in the energy infrastructure allocation of the portfolio, which negatively impacted NAV during the last fiscal quarter. We continue to manage TEAF with a long-term focus and continue to believe the energy infrastructure companies in the fund will benefit from growing natural gas demand over the long and medium term and we have seen a strong rebound in early fiscal 2020. We continue to have conviction that TEAF’s investment strategy, investments in public and direct investments across social infrastructure, sustainable infrastructure and energy infrastructure, offers investors attractive total return potential while providing stable current income.

We continue to progress in transitioning the portfolio to the targeted allocation of 60% direct investments. As of Nov. 30, 2019, TEAF’s total direct investment commitments were approximately $87 million or 32% of the portfolio. Additionally, we are very pleased to have completed the fund’s allocation to direct sustainable infrastructure investments. The direct investment pipeline remains robust.

Public Energy Infrastructure

Energy infrastructure equities remained an underperformer during the fourth fiscal quarter, despite generally constructive 3Q earnings reports in October and November.
Natural gas prices rebounded early in the fiscal quarter, but ultimately did not sustain the rally as growing natural gas supply has outpaced demand.
Gathering and processing companies in the natural gas sector were the main performance detractors in the energy infrastructure sleeve as a result of the weaker natural gas prices and concerns around volume growth in 2020.
Valuation of energy infrastructure companies are at all-time lows entering 2020 and we maintain conviction that the medium and long-term fundamentals of the group will drive cash flow higher in subsequent years.
We continue to believe that equities will perform better as free cash flow generation in the sector is will inflect significantly higher in 2020 / 2021.

Private Energy Infrastructure

TEAF funded a private investment in Mexico Pacific Limited, an LNG export facility on the pacific coast of Mexico, during the fiscal quarter. The facility is under development and expected to export 12 million tons per annum of U.S. shale gas to Asia.
TEAF closed a private investment in public equity transaction (PIPE) during the fiscal quarter. The fund purchased $5.5 million of Noble Midstream Partners (NBLX) units. The investment was used by NBLX in a simplification transaction in which NBLX acquired 100% of its outstanding incentive distribution rights and all of Noble Energy’s (NBL) remaining midstream interests.

(unaudited)
 
20 Tortoise



 
 
 2019 Annual Report | November 30, 2019
 
 
 
 

Public Sustainable Infrastructure

The fund’s global listed sustainable infrastructure securities performed extremely well during the fiscal quarter.
An overweight position in UK utilities contributed to the strong performance. These securities outperformed ahead of the UK general elections as the risk of a Labour victory, which had weighed on sector over the past three years due to the party’s nationalization plan, faded away in the polls.
Additionally, renewable-focused securities performed well, supported by continued value creation in the renewable value chain. Overall, investors seeking yield and exposure to clean electricity generators continued to value these assets at higher multiples.

Private Sustainable Infrastructure

TEAF did not make any additional private sustainable infrastructure investments during the quarter as the fund previously reached its target allocation in private sustainable deals.
To date, the fund has invested approximately $44 million in three entities.

Social Infrastructure

TEAF completed a debt investment in The Cottages of Perry Hall during the fiscal quarter. The senior living facility is located in Parkville, MD, just outside of Baltimore and has 64 units. Since undergoing a management change in early 2018, the facility has recently reached 100% occupancy following renovations and a new operational plan.
TEAF completed a debt investment in a private school in Fort Pierce, FL, during the fiscal quarter. The school, St. James Christian Academy, is using the proceeds to acquire and renovate one of the facilities it is currently leasing. The investment is expected to allow the school to increase enrollment from 700 students to more than 1,000 students within three years.

2019 fiscal year highlights
(since fund inception 3/26/2019)
Distributions paid per share (fiscal year 2019)       $0.7595
Distributions paid per share (4th quarter 2019) $0.3255
Distribution rate (as of 11/30/2019) 8.3%
Quarter-over-quarter distribution increase 0.0%
Year-over-year distribution increase 0.0%
Cumulative distributions paid per share
       to stockholders since inception in March 2019
$0.7595
Market-based total return (18.5)%
NAV-based total return (8.0)%
Premium (discount) to NAV (as of 11/30/2019) (11.4)%

Performance data quoted represent past performance; past performance does not guarantee future results. Like any other stock, total return and market value will fluctuate so that an investment, when sold, may be worth more or less than its original cost. Portfolio composition is subject to change due to ongoing management of the fund. References to specific securities or sectors should not be construed as a recommendation by the fund or its adviser. See Schedule of Investments for portfolio weighting at the end of the fiscal quarter.

(unaudited)
 
Tortoise 21



 
 
 
 
Tortoise
Essential Assets Income Term Fund (TEAF) (continued)
 

Fund structure and distribution policy

The fund is structured to qualify as a Regulated Investment Company (RIC) allowing it to pass-through to shareholders income and capital gains earned, thus avoiding double-taxation. To qualify as a RIC, the fund must meet specific income, diversification and distribution requirements. Regarding income, at least 90 percent of the fund gross income must be from dividends, interest and capital gains. The fund must meet quarterly diversification requirements including the requirement that at least 50 percent of the assets be in cash, cash equivalents or other securities with each single issuer of other securities not greater than 5 percent of total assets. No more than 25 percent of total assets can be invested in any one issuer other than government securities or other RIC’s. The fund must also distribute at least 90 percent of its investment company income. RIC’s are also subject to excise tax rules which require RIC’s to distribute approximately 98 percent of net income and net capital gains to avoid a 4 percent excise tax.

The fund has adopted a distribution policy which intends to distribute an amount closely approximating the total taxable income for the year and, if so determined by the Board, distribute all or a portion of the return of capital paid by portfolio companies during the year. The fund may designate a portion of its distributions as capital gains and may also distribute additional capital gains in the last calendar quarter of the year to meet annual excise distribution requirements. Distribution amounts are subject to change from time to time at the discretion of the Board. Although the level of distributions is independent of the funds’ performance in the short term, the fund expects such distributions to correlate with its performance over time.

Distributable cash flow and distributions

DCF is income from investments less expenses. Income from investments includes the accrued interest from bonds, the amount received as cash or paid-in-kind distributions from investments and dividend payments on short-term investments. Income also includes the premiums received from sales of covered call options, net of amounts paid to buy back out-of-the-money options. The total expenses include current or anticipated operating expenses and leverage costs.

Income from investments decreased approximately 16.9% as compared to 3rd quarter 2019 due primarily to the impact of distribution timing differences quarter over quarter. Operating expenses, consisting primarily of fund advisory fees, increased slightly during the quarter. Total leverage costs decreased approximately 9.1% as compared to 3rd quarter 2019, primarily due to lower interest rates during the quarter. As a result of the changes in income and expenses, DCF decreased approximately 20.7% as compared to 3rd quarter 2019. In addition, the fund had net realized losses on investments of $9.2 million during 4th quarter 2019.

The fund paid monthly distributions of $0.1085 per share during 4th quarter 2019. The fund’s Board of Directors has declared monthly distributions of $0.1085 per share to be paid during 1st quarter 2020. The fund has paid cumulative distributions to stockholders of $0.7595 per share since its inception in March 2019.

The Key Financial Data table discloses the calculation of DCF and should be read in conjunction with this discussion. The difference between income from investments in the DCF calculation and total investment income as reported in the Statement of Operations, is reconciled as follows: the Statement of Operations, in conformity with U.S. generally accepted accounting principles (GAAP), recognizes distributions and dividend income from MLPs, common stock and other investments on their ex-dates, whereas the DCF calculation may reflect distributions and dividend income on their pay dates; GAAP recognizes that a significant portion of the cash distributions received from MLPs, common stock and other investments are characterized as a return of capital and therefore excluded from investment income, whereas the DCF calculation includes the return of capital; income from investments in the DCF calculation includes the value of dividends paid-in-kind (additional stock or units), whereas such amounts may not be included as income for GAAP purposes. Net premiums on options written (premiums received less amounts paid to buy back out-of-the-money options) with expiration dates during fiscal quarter are included in the DCF calculation, whereas GAAP recognizes the net effect of options written as realized and unrealized gains (losses). The treatment of expenses in the DCF calculation also differs from what is reported in the Statement of Operations. Transaction costs related to acquiring certain investments in affiliated entities are included in cost basis of the investment for DCF purposes and amortized over a period of time.

“Net Investment Income (Loss)” on the Statement of Operations is adjusted as follows to reconcile to DCF for YTD 2019 and 4th quarter 2019 (in thousands):

      YTD 2019       4th Qtr 2019
Net Investment Income,
       before Income Taxes $ 3,725 $ 172
Adjustments to reconcile to DCF:
       Distributions characterized
              as return of capital 3,965 1,400
       Net premiums on options written 5,368 1,762
       Other 649 649
              DCF $ 13,707 $ 3,983

Leverage

The fund’s leverage utilization was relatively unchanged as compared to 3rd quarter 2019. The fund utilizes all floating rate leverage that had an interest rate of 2.50% and represented 11.8% of total assets at year-end. The fund has maintained compliance with its applicable coverage ratios. The interest rate on the fund’s leverage will vary in the future along with changing floating rates.

Please see the Financial Statements and Notes to Financial Statements for additional detail regarding critical accounting policies, results of operations, leverage and other important fund information.

For further information regarding the calculation of distributable cash flow and distributions to stockholders, as well as a discussion of the tax impact on distributions, please visit www.tortoiseadvisors.com.

(unaudited)
 
22 Tortoise



 
 
2019 Annual Report | November 30, 2019
 
TEAF Key Financial Data (supplemental unaudited information)
(dollar amounts in thousands unless otherwise indicated)
 

The information presented below regarding Distributable Cash Flow and Selected Financial Information is supplemental non-GAAP financial information, which the fund believes is meaningful to understanding operating performance. The Distributable Cash Flow Ratios include the functional equivalent of EBITDA for non-investment companies, and the fund believes they are an important supplemental measure of performance and promote comparisons from period-to-period. This information is supplemental, is not inclusive of required financial disclosures (e.g. Total Expense Ratio), and should be read in conjunction with the full financial statements.

Period from
March 29, 2019(1)
through 2019
      November 30, 2019       Q2(2)       Q3(2)       Q4(2)
Total Income from Investments
       Interest earned on bonds and notes $ 3,109 $ 548 $ 1,164 $ 1,397
       Distributions and dividends from investments,
              net of foreign taxes withheld 9,616 3,805 3,576 2,235
       Distributions paid in kind 206 62 144
       Net premiums on options written 3,965 1,137 1,428 1,400
              Total from investments 16,896 5,490 6,230 5,176
 
Operating Expenses Before Leverage Costs
       Advisory fees 2,099 546 792 761
       Other operating expenses 470 102 165 203
2,569 648 957 964
       Distributable cash flow before leverage costs 14,327 4,842 5,273 4,212
       Leverage costs(3) 620 139 252 229
              Distributable Cash Flow(4) $ 13,707 $ 4,703 $ 5,021 $ 3,983
 
Net realized loss on investments and foreign
       currency translation, for the period $ (12,936 ) $ (71 ) $ (3,168 ) $ (9,697 )
As a percent of average total assets(5)
       Total from investments 8.89 % 11.25 % 8.65 % 7.46 %
       Operating expenses before leverage costs 1.35 % 1.33 % 1.33 % 1.39 %
       Distributable cash flow before leverage costs 7.54 % 9.92 % 7.32 % 6.07 %
As a percent of average net assets(5)
       Total from investments 9.90 % 12.01 % 9.73 % 8.49 %
       Operating expenses before leverage costs 1.51 % 1.42 % 1.50 % 1.58 %
       Leverage costs 0.36 % 0.30 % 0.39 % 0.38 %
       Distributable cash flow 8.03 % 10.29 % 7.84 % 6.53 %
 
Selected Financial Information
Distributions paid on common stock $ 10,247 $ 1,464 $ 4,391 $ 4,392
Distributions paid on common stock per share 0.7595 0.1085 0.3255 0.3255
Total assets, end of period 271,915 288,040 276,736 271,915
Average total assets during period(6) 280,814 278,413 285,731 278,477
Leverage(7) 32,000 31,500 31,500 32,000
Leverage as a percent of total assets 11.8 % 10.9 % 11.4 % 11.8 %
Net unrealized depreciation, end of period (15,821 ) (15,131 ) (22,549 ) (15,821 )
Net assets, end of period 237,461 255,534 243,882 237,461
Average net assets during period(8) 252,217 260,772 253,916 244,483
Net asset value per common share 17.60 18.94 18.08 17.60
Market value per common share 15.60 18.45 16.25 15.60
Shares outstanding (000’s) 13,491      13,491      13,491       13,491

(1) Commencement of operations.
(2) Q2 represents the period from March 29, 2019 (commencement of operations) through May 31, 2019. Q3 represents the period from June through August. Q4 represents the period from September through November.
(3) Leverage costs include interest expense and other recurring leverage expenses.
(4) “Net investment income (loss)” on the Statement of Operations is adjusted as follows to reconcile to Distributable Cash Flow (“DCF”): increased by the return of capital on distributions and the net premiums on options written and decreased by amortization on certain investments.
(5) Annualized.
(6) Computed by averaging month-end values within each period.
(7) Leverage consists of outstanding borrowings under the margin loan facility.
(8) Computed by averaging daily net assets within each period.

Tortoise 23



 
 
 
 
TYG Consolidated Schedule of Investments
November 30, 2019
 

      Shares       Fair Value
Master Limited Partnerships — 126.4%(1)
Crude Oil Pipelines — 18.2%(1)
United States — 18.2%(1)
BP Midstream Partners LP 248,258 $ 3,624,567
Genesis Energy L.P. 621,847 11,821,312
PBF Logistics LP 856,856 17,522,705
Plains All American Pipeline, L.P. 4,497,553 78,257,422
Shell Midstream Partners, L.P. 2,940,946 57,818,998
169,045,004
Natural Gas/Natural Gas Liquids Pipelines — 38.4%(1)
United States — 38.4%(1)
Cheniere Energy Partners LP 300,314 11,673,205
DCP Midstream, LP 2,268,264 47,883,053
Energy Transfer LP(2) 13,261,563 156,619,059
Enterprise Products Partners L.P. 5,353,209 140,896,461
357,071,778
Natural Gas Gathering/Processing — 22.4%(1)
United States — 22.4%(1)
CNX Midstream Partners LP 2,621,599 38,013,186
Enable Midstream Partners LP 2,023,704 18,597,840
EQM Midstream Partners, LP 2,612,476 60,531,069
Hess Midstream Partners LP 647,635 13,244,136
Noble Midstream Partners LP(3) 432,663 8,406,642
Western Midstream Partners, LP 3,939,053 69,839,410
208,632,283
Other — 0.5%(1)
United States — 0.5%(1)
Westlake Chemical Partners LP 206,837 4,589,713
Refined Product Pipelines — 46.9%(1)
United States — 46.9%(1)
Holly Energy Partners, L.P. 2,356,962 52,701,670
Magellan Midstream Partners, L.P. 2,112,028 123,490,277
MPLX LP 5,177,155 122,439,716
NuStar Energy L.P.(4) 2,518,020 71,058,524
Phillips 66 Partners LP 1,193,614 66,520,108
436,210,295
Total Master Limited Partnerships
       (Cost $1,246,716,130) 1,175,549,073
 
Common Stock — 37.5%(1)
Crude Oil Pipelines — 1.5%(1)
Canada — 1.5%(1)
Enbridge Inc. 353,090 13,417,420
Marine Transportation — 1.6%(1)
Monaco — 1.6%(1)
GasLog Partners LP 1,039,959 15,131,403
Natural Gas Gathering/Processing — 17.9%(1)
United States — 17.9%(1)
Antero Midstream Corporation 6,010,622 27,528,649
EnLink Midstream, LLC 4,396,866 20,885,114
Rattler Midstream LP 3,643 57,960
Targa Resources Corp. 1,766,097 64,515,523
The Williams Companies, Inc. 2,359,522 53,608,340
166,595,586