OHA Investment Corporation
NGP Capital Resources CO (Form: 10-Q, Received: 11/10/2008 17:10:54)


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



FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period              to             

Commission file number: 814-00672



NGP Capital Resources Company
(Exact name of registrant as specified in its charter)
 

 
Maryland
20-1371499
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1221 McKinney Street, Suite 2975
Houston, Texas
77010
(Address of principal executive offices)
(Zip Code)

(713) 752-0062
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     o
Accelerated filer     x
Non-accelerated filer     o
(Do not check if smaller reporting company)
Smaller reporting company     o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o   No x

As of November 7, 2008, there were 21,628,202 shares of the registrant’s common stock outstanding.
 


 

 
T ABL E OF CONTENTS

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P AR T I - FINANCIAL INFORMATION
I te m 1. Consolidated Financial Statements
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS


   
September 30, 2008
(Unaudited)
   
December 31, 2007
 
Assets
           
Investments in portfolio securities at fair value (cost: $299,021,654 and $277,947,454, respectively)
  $ 299,850,813     $ 284,228,573  
Investments in corporate notes at fair value (cost: $11,598,261 and $11,631,599, respectively)
    8,244,900       8,955,500  
Investments in commodity derivative instruments at fair value (cost: $1,131,085 and $0, respectively)
    3,312,580       -  
Investments in U.S. Treasury Bills, at amortized cost which approximates fair value
    128,505,292       163,925,625  
Total investments
    439,913,585       457,109,698  
                 
Cash and cash equivalents
    63,403,174       18,437,115  
Accounts receivable
    35,345       17,569  
Interest receivable
    969,510       647,839  
Prepaid assets
    1,478,435       2,020,655  
                 
Total assets
  $ 505,800,049     $ 478,232,876  
                 
Liabilities and stockholders' equity (net assets)
               
Current liabilities
               
Accounts payable
  $ 3,617,159     $ 928,761  
Management and incentive fees payable
    4,470,880       2,032,107  
Dividends payable
    8,651,281       9,012,671  
Total current liabilities
    16,739,320       11,973,539  
                 
Long-term debt
    178,875,000       216,000,000  
                 
Total liabilities
    195,614,320       227,973,539  
                 
Commitments and contingencies  (Note 8)
               
                 
Stockholders’ equity (net assets)
               
Common stock, $.001 par value, 250,000,000 shares authorized; 21,628,202 and 17,500,332 shares issued and outstanding, respectively
    21,628       17,500  
Paid-in capital in excess of par
    307,886,738       245,881,078  
Undistributed net investment income (loss)
    (12,240,153 )     (103,394 )
Undistributed net realized capital gain (loss)
    14,860,223       859,133  
Net unrealized appreciation (depreciation) of portfolio securities, corporate notes and commodity derivative instruments
    (342,707 )     3,605,020  
                 
Total stockholders’ equity (net assets)
    310,185,729       250,259,337  
                 
Total liabilities and stockholders' equity (net assets)
  $ 505,800,049     $ 478,232,876  
                 
Net asset value per share
  $ 14.34     $ 14.30  
 
(See accompanying notes to consolidated financial statements)

 
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
   
September 30, 2008
   
September 30, 2007
 
Investment income
                       
Interest income
  $ 9,816,811     $ 9,011,405     $ 27,467,490     $ 26,940,522  
Dividend income
    -       -       -       93,710  
Other income
    52,877       47,960       137,767       245,704  
                                 
Total investment income
    9,869,688       9,059,365       27,605,257       27,279,936  
                                 
Operating expenses
                               
Management fees
    1,944,869       1,626,857       5,583,084       4,776,860  
Incentive fees
    2,526,011       (531,889 )     2,526,011       522,469  
Professional fees
    174,150       209,231       607,519       537,813  
Insurance expense
    198,812       132,423       596,442       397,268  
Interest expense and fees
    1,470,091       1,737,202       5,351,738       4,913,624  
State franchise taxes
    -       12,218       32,712       46,811  
Other general and administrative expenses
    690,152       614,816       2,134,624       1,897,879  
                                 
Total operating expenses
    7,004,085       3,800,858       16,832,130       13,092,724  
                                 
Net investment income (loss) before income taxes
    2,865,603       5,258,507       10,773,127       14,187,212  
                                 
Benefit (provision) for income taxes
    1,400,000       -       1,392,808       -  
                                 
Net investment income (loss)
    4,265,603       5,258,507       12,165,935       14,187,212  
                                 
Net realized capital gain (loss) on investments
                               
Net realized capital gain (loss) on portfolio securities, corporate notes and commodity derivative instruments
    18,301,090       (351,114 )     18,301,090       6,315,744  
Benefit (provision) for taxes on investments
    (4,300,000 )     -       (4,300,000 )     -  
                                 
Total net realized capital gain (loss) on investments
    14,001,090       (351,114 )     14,001,090       6,315,744  
                                 
Net increase (decrease) in unrealized appreciation (depreciation) on portfolio securities, corporate notes and commodity derivative instruments
    (3,812,904 )     (712,268 )     (3,947,727 )     5,308,882  
                                 
Net increase (decrease) in stockholders' equity (net assets) resulting from operations
  $ 14,453,789     $ 4,195,125     $ 22,219,298     $ 25,811,838  
                                 
Net increase (decrease) in stockholders' equity (net assets) resulting from operations per common share
  $ 0.66     $ 0.24     $ 1.02     $ 1.49  

(See accompanying notes to consolidated financial statements)

 
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (NET ASSETS)

   
Common Stock
   
Paid-in Capital in Excess
   
Undistributed Net Investment Income
   
Undistributed Net Realized Capital
   
Net Unrealized Appreciation (Depreciation) of Portfolio Securities, Corporate Notes and Commodity Derivative
   
Total Stockholders' Equity
 
   
Shares
   
Amount
   
of Par
   
(Loss)
   
Gain (Loss)
   
Instruments
   
(Net Assets)
 
Balance at December 31, 2007
    17,500,332     $ 17,500     $ 245,881,078     $ (103,394 )   $ 859,133     $ 3,605,020     $ 250,259,337  
Net increase in stockholders' equity (net assets) resulting from operations
    -       -       -       12,165,935       14,001,090       (3,947,727 )     22,219,298  
Issuance of common stock from public offering (net of underwriting costs)
    4,086,388       4,086       62,109,012       -       -       -       62,113,098  
Offering costs
    -       -       (780,628 )     -       -       -       (780,628 )
Dividends declared
    -       -       -       (24,302,694 )     -       -       (24,302,694 )
Issuance of common stock under dividend reinvestment plan
    41,482       42       677,276       -       -       -       677,318  
Balance at September 30, 2008 (unaudited)
    21,628,202     $ 21,628     $ 307,886,738     $ (12,240,153 )   $ 14,860,223     $ (342,707 )   $ 310,185,729  

(See accompanying notes to consolidated financial statements)

 
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
 
Cash flows from operating activities
           
Net increase in stockholders' equity (net assets) resulting from operations
  $ 22,219,298     $ 25,811,838  
Adjustments to reconcile net increase in stockholders' equity (net assets) resulting from operations to net cash used in operating activities
               
Payment-in-kind interest
    (2,335,374 )     (2,966,423 )
Payment-in-kind dividend
    -       (93,710 )
Net amortization of premiums, discounts and fees
    4,639,765       (2,168,463 )
Change in unrealized (appreciation) depreciation on portfolio securities, corporate notes and commodity derivative instruments
    3,947,727       (5,308,882 )
Effects of changes in operating assets and liabilities
               
Accounts receivable
    (17,776 )     447,258  
Interest receivable
    (321,671 )     59,991  
Prepaid assets
    542,220       664,520  
Accounts payable
    5,127,171       431,268  
Purchase of investments in portfolio securities, corporate notes and commodity derivative instruments
    (100,885,393 )     (194,255,244 )
Redemption of investments in portfolio securities, corporate notes and commodity derivative instruments
    76,409,056       109,508,043  
Sale of investments in corporate notes
    -       6,007,370  
Net sale of investments in U.S. Treasury Bills
    35,420,333       14,855,937  
                 
Net cash provided by (used in) operating activities
    44,745,356       (47,006,497 )
                 
Cash flows from financing activities
               
Net proceeds from the issuance of common stock
    62,790,416       -  
Borrowings under revolving credit facility
    151,000,000       51,000,000  
Repayments on revolving credit facility
    (188,125,000 )     -  
Offering costs from the issuance of common stock
    (780,628 )     -  
Dividends paid
    (24,664,085 )     (9,243,034 )
                 
Net cash provided by (used in) financing activities
    220,703       41,756,966  
                 
Net increase (decrease) in cash and cash equivalents
    44,966,059       (5,249,531 )
Cash and cash equivalents, beginning of period
    18,437,115       12,334,329  
                 
Cash and cash equivalents, end of period
  $ 63,403,174     $ 7,084,798  

(See accompanying notes to consolidated financial statements)
 
 
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2008
(Unaudited)

Portfolio Company
 
Energy Industry Segment
 
Investment (2) (4)
 
Principal
   
Cost
   
Fair Value (3)
 
TARGETED INVESTMENTS
                 
Venoco, Inc. (1) (11)
 
Oil & Natural Gas
 
Senior Notes (7)
  $ 12,000,000     $ 11,927,465     $ 10,440,000  
   
Production and
 
(8.75%, due 12/15/2011)
                       
   
Development
                           
                                 
Chroma Exploration &
 
Oil & Natural Gas
 
9,428 Shares Series A Participating
    -       2,221,710       -  
Production, Inc. (1) (11)
 
Production and
 
Convertible Preferred Stock (9)
                       
   
Development
 
8,610 Shares Series AA Participating
    -       2,089,870       1,567,402  
       
Convertible Preferred Stock (9)
                       
       
8.11 Shares Common Stock (5)
    -       -       -  
       
Warrants (5) (13)
    -       -       -  
                                 
Resaca Exploitation Inc. (1) (11)
 
Oil & Natural Gas
 
Senior Secured
    22,000,000       21,568,211       21,568,211  
   
Production and
 
Multiple-Advance Term Loan
                       
   
Development
 
(The greater of 10.0% or LIBOR + 6.00%,
                       
       
due 5/01/2012)
                       
       
Common Stock (6,574,216 shares) (5) (22)
    3,235,256       3,235,256       9,289,399  
                                 
Crossroads Energy, LP (1) (11)
 
Oil & Natural Gas
 
Senior Secured
    4,759,075       4,702,016       4,702,016  
   
Production and
 
Multiple-Advance Term Loan
                       
   
Development
 
(The greater of 10.0% or LIBOR + 5.50%,
                       
       
due 6/29/2009)
                       
       
Overriding Royalty Interest (6)
    10,000       6,143       250,000  
                                 
Rubicon Energy Partners,
 
Oil & Natural Gas
 
LLC Units (4,000 units) (5)
    -       -       1,700,000  
LLC (8) (11)
 
Production and
                           
   
Development
                           
                                 
BSR Loco Bayou, LLC (1) (11) (12)
 
Oil & Natural Gas
 
Senior Secured
    3,025,289       2,487,545       1,625,456  
   
Production and
 
Multiple-Advance Term Loan
                       
   
Development
 
(LIBOR + 5.50% cash, +7.50% PIK - until 8/15/08,
                       
       
cash only thereafter, due 8/15/2009) (9)
                       
       
Overriding Royalty Interest  (6)
    20,000       19,514       20,000  
       
Warrants (5) (14)
    10,000       10,000       -  
                                 
Sonoran Energy, Inc. (1) (11)
 
Oil & Natural Gas
 
Warrants (5) (15)
    10,000       10,000       10,000  
   
Production and
                           
   
Development
                           
                                 
Nighthawk Transport I, LP (1) (11)
 
Energy Services
 
Second Lien
    13,325,371       12,528,195       12,528,195  
       
Term Loan B
                       
       
(The greater of 15.0% or LIBOR + 10.50%,
                       
       
due 10/03/2010)
                       
       
LP Units (5)
    224       224       150,000  
       
Warrants (5) (16)
    850,000       850,000       850,000  
                                 
       
Second Lien
    1,488,912       1,463,025       1,463,025  
       
Delayed Draw Term Loan B
                       
       
(The greater of 15.0% or LIBOR + 10.50%,
                       
       
due 10/03/2010)
                       
 
 
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2008
(Unaudited)
(Continued)

Portfolio Company
 
Energy Industry Segment
 
Investment (2) (4)
 
Principal
   
Cost
   
Fair Value (3)
 
TARGETED INVESTMENTS - Continued
                 
Alden Resources, LLC (1) (11)
 
Coal Production
 
Senior Secured
    36,285,168       33,660,832       33,660,832  
       
Multiple-Advance Term Loan
                       
       
(LIBOR + 8.00% cash, due 1/05/2013)
                       
       
Royalty Interest (6)
    2,660,000       2,579,356       2,660,000  
       
Warrants (5) (17)
    100,000       100,000       100,000  
                                 
Tammany Oil & Gas, LLC (1) (11)
 
Oil & Natural Gas
 
Senior Secured
    29,447,804       29,149,665       29,149,665  
   
Production and
 
Multiple-Advance Term Loan
                       
   
Development
 
(The greater of 11.0% or LIBOR + 6.00%,
                       
       
due 3/21/2010)
                       
       
Overriding Royalty Interest (5) (6)
    200,000       200,000       550,000  
                                 
TierraMar Energy LP (8) (11)
 
Oil & Natural Gas
 
Overriding Royalty Interest (6)
    20,000       17,276       300,000  
   
Production and
 
Class A Preferred LP Units (5)
    16,634,830       16,634,830       16,634,830  
   
Development
                           
                                 
Anadarko Petroleum Corporation
 
Oil & Natural Gas
 
Multiple-Advance Net Profits Interest
    47,520,151       47,619,394       47,619,394  
2007-III Drilling Fund (1) (11)
 
Production and
 
(Due 4/23/2032)
                       
   
Development
                           
                                 
Formidable, LLC (1) (11) (21)
 
Oil & Natural Gas
 
Senior Secured
    37,299,054       37,299,054       37,299,054  
   
Production and
 
Multiple-Advance Term Loan
                       
   
Development
 
(LIBOR + 5.50% cash, due 5/31/2008) (9)
                       
       
Warrants (5) (18)
    500,000       500,000       500,000  
                                 
DeanLake Operator, LLC (8) (11)
 
Oil & Natural Gas
 
Class A Preferred LP Units (5)
    13,900,255       13,900,255       13,900,255  
   
Production and
 
Overriding Royalty Interest (6)
    20,000       19,120       20,000  
   
Development
                           
                                 
Bionol Clearfield, LLC (1) (11)
 
Alternative Fuels and
 
Senior Secured Tranche C
    5,000,000       5,000,000       5,000,000  
   
Specialty Chemicals
 
Construction Loan
                       
       
(LIBOR + 7.00%, due 9/06/2016)
                       
                                 
BioEnergy Holding, LLC (1) (11)
 
Alternative Fuels and
 
Senior Secured Notes
    10,606,557       9,738,049       9,738,049  
   
Specialty Chemicals
 
(15.00%, due 3/06/2015)
                       
       
BioEnergy International Warrants (5) (19)
    595,845       595,845       595,845  
       
BioEnergy Holding Units (5)
    376,687       376,687       376,687  
                                 
Greenleaf Investments, LLC (1) (11)
 
Oil & Natural Gas
 
Senior Secured
    11,627,645       11,321,192       11,321,192  
   
Production and
 
Multiple-Advance Term Loan
                       
   
Development
 
(The greater of 10.50% or LIBOR + 6.00%,
                       
       
due 4/30/2011)
                       
       
Overriding Royalty Interest (6)
    100,000       92,856       300,000  
                                 
ATP Oil & Gas Corporation (1) (11)
 
Oil & Natural Gas
 
Limited Term Royalty Interest
    32,814,792       27,098,069       23,961,306  
   
Production and
                           
   
Development
                           
                                 
Subtotal Targeted Investments (59.57% of total investments)
          $ 299,021,654     $ 299,850,813  
 
 
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2008
(Unaudited)
(Continued)

Issuing Company
 
Energy Industry Segment
 
Investment (2) (4)
 
Principal
   
Cost
   
Fair Value (3)
 
                           
CORPORATE NOTES
                 
Pioneer Natural Resources Co. (11)
 
Oil & Natural Gas
 
Senior Notes, 7.2%, due 2028
  $ 10,000,000     $ 11,598,261     $ 8,244,900  
   
Production and
                           
   
Development
                           
                                 
Subtotal Corporate Notes ( 1.64% of total investments)
          $ 11,598,261     $ 8,244,900  
                                 
                                 
COMMODITY DERIVATIVE INSTRUMENTS
                       
Put Options (11) (20)
     
Put Options with BP Corp. NA to sell up to 615,000 MMBtu of  natural gas at a strike price of $10.00 per MMBtu. 12 monthly contracts beginning on July 1, 2008 and expiring on June 30, 2009.
          $ 243,360     $ 990,590  
                                 
       
Put Options with BP Corp. NA to sell up to 237,750 Bbls of crude oil at a strike price of $101.00 per Bbl.  15 monthly contracts beginning on July 1, 2008 and expiring on September 30, 2009.
            746,900       2,028,037  
                                 
       
Put Options with BP Corp. NA to sell up to 32,750 Bbls of crude oil at a strike price of $85.00 per Bbl.  4 monthly contracts beginning on October 1, 2009 and expiring on January 31, 2010.
            140,825       293,953  
                                 
                                 
Subtotal Commodity Derivatives ( 0.66% of total investments)
          $ 1,131,085     $ 3,312,580  
                                 
GOVERNMENT SECURITIES (10)
                       
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
  $ 8,000,000     $ 8,551,692     $ 8,551,692  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
U.S. Treasury Bills
     
U.S. Treasury Bills, 1.772%, due 10/09/2008
    12,000,000       11,995,360       11,995,360  
                                 
                                 
                                 
Subtotal Government Securities (25.53% of total investments)
          $ 128,505,292     $ 128,505,292  
                                 
                                 
CASH
                               
Subtotal Cash (12.6% of total investments)
          $ 63,403,174     $ 63,403,174  
                                 
TOTAL INVESTMENTS, CASH AND CASH EQUIVALENTS
          $ 503,659,466     $ 503,316,759  
                                 
LIABILITIES IN EXCESS OF OTHER ASSETS
                  $ (193,131,030 )
                                 
NET ASSETS
                  $ 310,185,729  
 
 
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2008
(Unaudited)
(Continued)

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS

(1)
Portfolio company is not controlled by or affiliated with the Company as defined by the Investment Company Act of 1940.

(2)
Percentages represent interest rates in effect at the end of the period and due dates represent the contractual maturity dates.

(3)
Fair value of targeted investments is determined by or under the direction of the Board of Directors.

(4)
All investments are in entities with primary operations in the United States of America.

(5)
Non-income producing securities.

(6)
Securities are subject to restrictions as to their sale.

(7)
Upon the March 30, 2006 closing of Venoco, Inc.'s TexCal acquisition, Venoco Inc.'s senior notes became collateralized by second priority liens.

(8)
Portfolio company is controlled by the Company as defined by the Investment Company Act of 1940.

(9)
Non-accrual status.

(10)
Level 1 security per SFAS No. 157 hierachy.

(11)
Level 3 security per SFAS No. 157 hierachy.

(12)
Portfolio company was issued a written notice of default.

(13)
Chroma warrants expire on April 5, 2012 and provide the Company the right to purchase 2,462 shares of common stock at a purchase price of $325.00 per share.

(14)
BSR Loco Bayou warrants expire on August 15, 2013 and provide the Company the right to purchase 10,000 investor units at the exercise price of $160.00 per investor unit.

(15)
Sonoran warrants expire on November 28, 2014 and provide the Company the right to purchase shares of common stock up to 2.87 million shares, on a fully diluted basis with anti-dilution provisions, at the exercise price of $0.20 per share.

(16)
Nighthawk warrants expire on May 13, 2017 and provide the Company the right to purchase approximately 2.5% of limited partnership units at the exercise price of $0.001 per unit.

(17)
Alden warrants provide the Company the right to purchase 23% of class C units at an exercise price of $0.739 per unit, expiring in December 2013 and the right to purchase 10% of class C units at an exercise price of $0.739 per unit, expiring in July 2014.

(18)
Formidable warrants expire on March 31, 2015 and provide the Company the right to purchase membership interest representing 30% of all distributions at an exercise price of $1,000 per percentage point.

(19)
BioEnergy International, LLC warrants expire on August 15, 2010 and provide the Company the right to purchase 648,000 units, representing membership interests of BioEnergy International, LLC, at the  purchase price of $10.00 per unit.

(20)
Put Options are related to the limited term royalty interest purchased from ATP Oil & Gas Corporation.

(21)
Executed forbearance agreement with portfolio company.

(22)
Resaca stock is listed on the Alternative Investment Market of the London Stock Exchange, denominated in British pounds and its reported fair value at September 30, 2008 has been converted to U.S. dollars at the exchange rate effective on September 30, 2008.

(See accompanying notes to consolidated financial statements)

 
NGP CAPITAL RESOURCES COMPANY
CONSOLIDATED FINANCIAL HIGHLIGHTS
(Unaudited)

   
For the Nine Months Ended
 
   
September 30, 2008
   
September 30, 2007
 
Per Share Data  (1)
           
             
Net asset value, beginning of period
  $ 14.30     $ 13.96  
                 
Increase in net assets as a result of secondary public stock offering
    0.40       -  
Underwriting discounts and commissions related to secondary public stock offering
    (0.15 )     -  
Other costs related to secondary public stock offering
    (0.03 )     -  
Net increase in net assets from secondary public offering
    0.22       -  
                 
Net asset value after public stock offering
    14.52       13.96  
                 
Net investment income (loss)
    0.56       0.82  
Net realized and unrealized gain (loss) on portfolio securities, corporate notes and commodity derivative instruments
    0.46       0.67  
                 
Net increase (decrease) in stockholders' equity (net assets) resulting from operations
    1.02       1.49  
                 
Dividends declared
    (1.20 )     (0.93 )
                 
Net asset value, end of period
  $ 14.34     $ 14.52  
                 
Market value, beginning of period
  $ 15.63     $ 16.75  
Market value, end of period
  $ 14.57     $ 16.23  
Market value return  (2)
    0.98 %     2.38 %
Net asset value return (2)
    8.63 %     9.89 %
                 
Ratios and Supplemental Data
               
($ and shares in thousands)
               
                 
Net assets, end of period
  $ 310,186     $ 253,713  
Average net assets
  $ 280,223     $ 248,485  
Common shares outstanding at end of period
    21,628       17,470  
Total operating expenses less management and incentive fees and interest expense/average net assets (3)
    1.61 %     1.55 %
Total operating expenses less management and incentive fees/average net assets (3)
    4.16 %     4.19 %
Total operating expenses/average net assets (3)
    8.02 %     7.04 %
Net investment income (loss)/average net assets (3)
    5.80 %     7.63 %
Net increase (decrease) in net assets resulting from operations/average net assets (3)
    10.59 %     13.89 %
Portfolio turnover rate
    27.27 %     44.07 %


(1) Per Share Data is based on common shares outstanding at end of period.
(2) Return calculations assume reinvestment of dividends and are not annualized.
(3) Annualized.

(See accompanying notes to consolidated financial statements)


NGP CAPITAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
 
Note 1:
Organization

NGP Capital Resources Company (the “Company”) was organized as a Maryland corporation in July 2004. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”).  In addition, for federal income tax purposes the Company has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”).  The Company has several subsidiaries that are single member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to the Company in accordance with specific rules prescribed for a company operating as a RIC.  These consolidated subsidiaries are: NGPC Funding GP, LLC, a Texas limited liability company; NGPC Nevada, LLC, a Nevada limited liability company; NGPC Funding, LP, a Texas limited partnership; NGPC Asset Holdings GP, LLC, a Texas limited liability company; NGPC Asset Holdings, LP, a Texas limited partnership; NGPC Asset Holdings II, LP, a Texas limited partnership (“NGPC II”); NGPC Asset Holdings III, LP, a Texas limited partnership, and NGPC Asset Holdings V, LP, a Texas limited partnership.  Effective May 28, 2008, NGPC Asset Holdings IV, LP merged with and into NGPC II.  The Company consolidates the results of its subsidiaries for financial reporting purposes.  The Company does not consolidate the financial results of its portfolio companies.

The Company was created to invest primarily in small and mid-size private energy companies, which, until July 21, 2008, were generally defined as companies that have net asset values or annual revenues of less than $500 million and are not issuers of publicly traded securities.  On July 21, 2008, the Securities and Exchange Commission expanded the definition of eligible portfolio companies to include domestic operating companies with securities listed on a national securities exchange so long as the company has a market capitalization of less than $250 million.  The Company’s investment objective is to generate both current income and capital appreciation through debt investments with certain equity components.
 
The Company is managed and advised, subject to the overall supervision of the Company’s board of directors (the “Board of Directors”), by NGP Investment Advisor, LP (the “Manager”), a Delaware limited partnership owned by NGP Energy Capital Management, LLC, and NGP Administration, LLC (the “Administrator”), the Company’s administrator.
 
Note 2:
Significant Accounting Policies
 
The interim unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by management of the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations, although the Company believes the disclosures included herein are adequate to make the information presented not misleading.  In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for presentation of the information have been included.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  Interim results are not necessarily indicative of results for a full year.

The following is a summary of the significant accounting policies consistently applied by the Company in the preparation of its consolidated financial statements:
 
Use of Estimates
 
The interim consolidated financial statements have been prepared in accordance with GAAP that require management to make estimates and assumptions that affect the amounts reported in the interim consolidated financial statements and the accompanying notes to the interim consolidated financial statements.  Actual results could differ from these estimates.


Cash and Cash Equivalents
 
Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less when purchased. Cash and cash equivalents are carried at cost, which approximates fair value.

Prepaid Assets
 
Prepaid assets consist of premiums paid for directors’ and officers’ insurance and fidelity bonds with a policy term of one year, fees associated with the establishment of the policy or credit facility, and registration expenses related to the Company’s shelf filing. Such premiums and fees are amortized monthly on a straight-line basis over the term of the policy or credit facility.  Registration expenses are deferred and will be charged as a reduction of capital upon the sale of shares.
 
Concentration of Credit Risk
 
The Company places its cash and cash equivalents with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
 
Valuation of Investments
 
Investments are carried at fair value, as determined in good faith by the Company’s Board of Directors.  On a quarterly basis, the investment team of the Manager prepares valuations for all of the assets in our portfolio companies and presents the valuations to the Company’s valuation committee (the “Valuation Committee”) and Board of Directors.  The valuations are determined and recommended by the Valuation Committee to the Board of Directors, which reviews and ratifies the final portfolio valuations.

Investments in securities for which market quotations are readily available are recorded in the financial statements at such market quotations as of the valuation date adjusted for appropriate liquidity discounts, if applicable. For investments in securities for which market quotations are unavailable, or which have various degrees of trading restrictions, the investment team prepares valuation analyses, as generally described below.

Using the most recently available financial statements, forecasts and, when applicable, comparable transaction data, the investment team of the Manager prepares valuation analyses for the various securities in the Company’s investment portfolio. These valuation analyses are prepared using traditional valuation methodologies, which rely on estimates of the asset values and enterprise values of portfolio companies issuing securities.
 
The methodologies for determining asset valuations include estimates based on:  the liquidation or sale value of a portfolio company’s assets, the discounted value of expected future net cash flows from the assets and third party valuations of the portfolio company’s assets, such as engineering reserve reports of oil and gas properties.  The investment team of the Manager considers some or all of the above valuation methods to determine the estimated asset value of a portfolio company.

The methodologies for determining enterprise valuations include estimates based on:  valuations of comparable public companies, recent sales of comparable companies, the value of recent investments in the equity securities of a portfolio company and also on the methodologies used for asset valuations.  The investment team of the Manager considers one or all of the above valuation methods to determine the estimated enterprise value of a portfolio company.

Debt Securities: The Company records its investments in non-convertible debt securities at fair value which generally approximates cost  plus amortized original issue discount (“OID”) to the extent that the estimated asset or enterprise value of the portfolio company exceeds the outstanding debt of the portfolio company. The Company records its investment in convertible debt securities at fair value which generally approximates the higher of: 1) cost plus amortized OID, to the extent that the estimated asset or enterprise value of the portfolio company equals or exceeds the outstanding debt of the portfolio company; and 2) the Company’s pro rata share, upon conversion, of the residual equity value of the portfolio company available after deducting all outstanding debt from its estimated enterprise value. If the estimated asset or enterprise value is less than the sum of the value of the Company’s debt investment and all other debt securities of the portfolio company pari passu or senior to the Company’s debt investment, the Company reduces the value of its debt investment beginning with its junior-most debt investment such that the asset or enterprise value less the value of the outstanding pari passu or senior debt is zero.  Investments in debt securities for which market quotations are readily available are recorded in the financial statements at such market quotations as of the valuation date adjusted for appropriate liquidity discounts, if applicable.

 
Equity Securities: The Company records its  investments in preferred and common equity securities (including warrants or options to acquire equity securities) at fair value based on its pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value.

Property-Based Equity Participation Rights: The Company records its investments in overriding royalty and net profits interests at fair value based on a multiple of cash flows generated by such investments, multiples from transactions involving the sale of comparable assets and/or the discounted value of expected future net cash flows from such investments. Appropriate cash flow multiples are derived from the review of comparable transactions involving similar assets. The discounted value of future net cash flows is derived, when appropriate, from third party valuations of a portfolio company’s assets, such as engineering reserve reports of oil and gas properties.

Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned.
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement on Financial Accounting Statement 157, Fair Value Measurements (“Statement 157”). This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. Statement 157 applies to fair value measurements already required or permitted by existing standards. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The changes to current generally accepted accounting principles from the application of Statement 157 relate to the definition of fair value, the methods used to measure fair value and the expanded disclosures about fair value measurements.

As of January 1, 2008, the Company adopted Statement 157.  The Company has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determination. Based on this assessment, the adoption of this standard did not have a material effect on the Company’s net asset value.

Valuation of Commodity Derivative Instruments

Current accounting rules require that all derivative instruments, other than those that meet specific exclusions, be recorded at fair value. Quoted market prices are the best evidence of fair value. If quotations are not available, management’s best estimate of fair value is based on the quoted market price of derivatives with similar characteristics or on valuation techniques.  The Company’s derivative instruments are either exchange traded or transacted in an over-the-counter market. Valuation is determined by reference to readily available public data. Option fair values for the natural gas option transactions are based on the Black-Scholes pricing model and the crude oil transactions are based on the Turnbull-Wakeman pricing model and verified against the applicable counterparty’s fair values.

Securities Transactions, Interest and Dividend Income Recognition

All securities transactions are accounted for on a trade-date basis. Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected. Premiums and discounts are accreted into interest income using the effective interest method. Detachable warrants, other equity securities or property interests such as overriding royalty interests obtained in conjunction with the acquisition of debt securities are recorded separately from the debt securities at their initial fair value, with a corresponding amount recorded as a discount to the associated debt security. Income from overriding royalty interests is recognized as received and the recorded assets are charged depletion using the unit of production depletion method. The portion of the loan origination fees paid that represent additional yield or discount on a loan are deferred and accreted into interest income over the life of the loan using the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income and any unamortized premium or discount is recorded as a realized gain or loss. Market premiums or discounts on acquired loans or fixed income investments are accreted into interest income using the effective interest method. Dividend income is recognized on the ex-dividend date. Accruing interest or dividends on investments is deferred when it is determined that the interest or dividend is not collectible. Collectability of the interest and dividends is assessed, based on many factors including the portfolio company’s ability to service its loan based on current and projected cash flows as well as the current valuation of the portfolio company’s assets.

 
Payment-in-Kind Interest and Dividends

The Company may have investments in its portfolio that contain payment-in-kind (“PIK”) provisions. PIK interest or dividends, computed at the contractual rate specified in each investment agreement, are added to the principal balance of the investment and recorded as interest or dividend income.  For investments with PIK interest or dividends, the Company bases income accruals on the principal balance including any PIK.  If the portfolio company’s asset valuation is not sufficient to cover the contractual interest, the Company will not accrue interest income or dividend income on the investment.  To maintain the Company’s RIC status, this non-cash source of income must be paid out to stockholders in the form of dividends, even though the Company has not yet collected the cash.  For the quarter ended September 30, 2008, PIK interest income, net of a $0.1 million reserve, was $0.6 million and PIK dividend income totaled $0.  For the quarter ended September 30, 2007, PIK interest income, net of a $0.1 million reserve, was $1.2 million, and PIK dividend income totaled $0.  For the nine months ended September 30, 2008, PIK interest income, net of a $0.2 million reserve, was $2.3 million and PIK dividend income, net of a $0.1 million reserve, was $0.  For the nine months ended September 30, 2007, PIK interest income, net of a $0.1 million reserve, was $3.0 million and PIK dividend income was $0.1 million.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, considering unamortized fees and prepayment premiums, and without regard to unrealized appreciation or depreciation previously recognized, and include investments charged off during the year, net of recoveries.  Net unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period including the reversal of previously recorded unrealized appreciation or depreciation, when capital gains or losses are realized.

Derivative accounting rules require that fair value changes of derivative instruments that do not qualify for hedge accounting be reported in current period, rather than in the period the derivatives are settled and/or the hedged transaction is settled. This can result in significant earnings volatility.  The company has decided not to designate these instruments as hedging instruments for financial accounting purposes. Net unrealized appreciation or depreciation reflects the change in derivative values during the reporting period including the reversal of previously recorded unrealized appreciation or depreciation, when settled gains or losses are realized.

Fee Income Recognition
 
Fees primarily include financial advisory, transaction structuring, loan administration, commitment and prepayment fees. Financial advisory fees represent amounts received for providing advice and analysis to companies and are recognized as earned when such services are performed, provided collection is probable. Transaction structuring fees represent amounts received for structuring, financing and executing transactions and are generally payable only if the transaction closes. Such fees are deferred and accreted into interest income over the life of the loan using the effective interest method. Commitment fees represent amounts received for committed funding and are generally payable whether or not the transaction closes. On transactions that close within the commitment period, commitment fees are deferred and accreted into interest income over the life of the loan using the effective interest method. Commitment fees on transactions that do not close are generally recognized over the period the commitment is outstanding. Prepayment and loan administration fees are recognized as they are received.  For the quarter ended September 30, 2008, the Company accreted approximately $0.5 million of fee income into interest income, compared to approximately $0.7 million of fee income for the quarter ended September 30, 2007.
 
Dividends
 
Dividends to stockholders are recorded on the ex-dividend date. The Company currently intends that its distributions each year will be sufficient to maintain the Company’s status as a RIC for federal income tax purposes and to eliminate excise tax liability.  The Company currently intends to make distributions to stockholders on a quarterly basis of substantially all of its net taxable income.    The Company also intends to make distributions of net realized capital gains, if any, at least annually.  However, the Company may in the future decide to retain such capital gains for investment and designate such retained amount as a deemed distribution.  The amount to be paid out as a dividend, if any, is determined by the Company’s Board of Directors each quarter and is based on the annual taxable earnings estimated by the Manager.  Based on that estimate, a dividend is declared each quarter and paid shortly thereafter.


Prior to 2005, the Company was treated as a “C” corporation, had no taxable income and therefore did not declare a dividend for that period.  The following table summarizes the Company’s dividend history:

Dividend History

Declaration Date
 
Amount
 
Record Date
 
Payment Date
March 18, 2005
  $ 0.120  
March 31, 2005
 
April 15, 2005
June 17, 2005
  $ 0.125  
June 30, 2005
 
July 15, 2005
September 19, 2005
  $ 0.140  
September 30, 2005
 
October 14, 2005
December 15, 2005
  $ 0.275  
December 27, 2005
 
January 4, 2006
March 10, 2006
  $ 0.160  
March 31, 2006
 
April 17, 2006
June 14, 2006
  $ 0.180  
June 30, 2006
 
July 14, 2006
September 14, 2006
  $ 0.250  
September 29, 2006
 
October 13, 2006
December 7, 2006
  $ 0.330  
December 19, 2006
 
December 29, 2006
March 19, 2007
  $ 0.265  
March 30, 2007
 
April 13, 2007
June 13, 2007
  $ 0.310  
June 29, 2007
 
July 13, 2007
September 12, 2007
  $ 0.350  
September 28, 2007
 
October 12, 2007
December 12, 2007
  $ 0.515  
December 28, 2007
 
January 4, 2008
March 19, 2008
  $ 0.400  
March 31, 2008
 
April 11, 2008
June 9, 2008
  $ 0.400  
June 30, 2008
 
July 11, 2008
September 10, 2008
  $ 0.400  
September 30, 2008
 
October 10, 2008

The Company has established an “opt out” dividend reinvestment plan for its common stockholders. As a result, if the Company declares a dividend, then a stockholder’s cash dividend will be automatically reinvested in additional shares of the Company’s common stock unless the stockholder, or his or her broker, specifically “opts out” of the dividend reinvestment plan and elects to receive cash dividends. It is customary practice for many brokers to “opt out” of dividend reinvestment plans on behalf of their clients unless specifically instructed otherwise. As of October 10, 2008, the date of the most recent dividend payment, holders of 1,739,829 shares, or approximately 8.0% of outstanding shares, were participants in the Company’s dividend reinvestment plan.

The Company’s dividend reinvestment plan provides for the plan agent to purchase shares in the open market for credit to the accounts of plan participants unless the average of the closing sales prices for the shares for the five days immediately preceding the payment date exceeds 110% of the most recently reported net asset value per share.

The table below summarizes participation in the Company’s dividend reinvestment plan:

Dividend Reinvestment Plan Participation

         
 
               
Common Stock Dividends
 
   
 
   
 
   
 
         
 
   
Newly Issued Shares
 
Dividend
 
Participating Shares
   
Percentage of Outstanding Shares
   
Total Distribution
   
Cash Dividends
   
Purchased in Open Market
   
Amount
   
Shares
 
March 2005
    -       0.0 %   $ 2,088,012     $ 2,088,012     $ -     $ -       -  
June 2005
    1,215,870       7.0 %   $ 2,175,013     $ 2,023,029     $ 151,984     $ -       -  
September 2005
    1,488,904       8.6 %   $ 2,436,014     $ 2,227,567     $ 208,447     $ -       -  
December 2005
    1,660,140       9.5 %   $ 4,785,028     $ 4,328,488     $ 456,540     $ -       -  
March 2006
    1,618,940       9.3 %   $ 2,784,016     $ 2,524,986     $ 259,030     $ -       -  
June 2006
    1,410,227       8.1 %   $ 3,132,018     $ 2,878,177     $ 253,841     $ -       -  
September 2006
    1,270,634       7.3 %   $ 4,350,025     $ 4,032,366     $ 317,659     $ -       -  
December 2006
    1,111,045       6.4 %   $ 5,742,033     $ 5,375,388     $ -     $ 366,645       22,168  
March 2007
    1,355,671       7.8 %   $ 4,616,901     $ 4,257,648     $ -     $ 359,253       22,692  
June 2007
    1,363,066       7.8 %   $ 5,407,938     $ 4,985,387     $ -     $ 422,550       24,694  
September 2007
    1,438,143       8.2 %   $ 6,114,379     $ 5,611,029     $ -     $ 503,350       30,678  
December 2007
    1,605,164       9.2 %   $ 9,012,670     $ 8,186,010     $ 826,659     $ -       -  
March 2008
    1,693,284       9.7 %   $ 7,000,133     $ 6,322,815     $ -     $ 677,318       41,482  
June 2008
    1,655,552       9.4 %   $ 8,651,281     $ 7,989,060     $ 662,221     $ -       -  
September 2008
    1,739,829       8.0 %   $ 8,651,281     $ 7,955,350     $ 695,931     $ -       - (1)

(1)  Shares were purchased on October 10, 2008 for the September 2008 dividend.  See above and Note 4 for futher detail.

 
Note 3:
Credit Facilities and Borrowings

On September 29, 2008, the Company entered into a Third Amendment to Amended and Restated Revolving Credit Agreement, effective as of September 29, 2008, which amended certain provisions of the Company’s Amended and Restated Revolving Credit Agreement, dated as of August 31, 2006 (as amended, the “Investment Facility”).  These amendments (i) extended the commitment termination date, (ii) clarified certain definitions relating to permitted senior investment participation and (iii) decreased the aggregate commitment amount under the Investment Facility from $100 million to $87.5 million.  The Company paid a 50 basis point fee in conjunction with the amendment.

Under the terms of the Company’s Investment Facility, the lenders have agreed to extend revolving credit to the Company in an amount not to exceed $87.5 million, with the ability to increase the credit available to an amount not to exceed $175 million by obtaining additional commitments from existing lenders or new lenders.  The total amount committed was $87.5 million and $52.625 million was outstanding under the Investment Facility as of September 30, 2008.  By comparison, the total amount committed as of December 31, 2007 was $100 million and $89.75 million was outstanding under the Investment Facility.  The Investment Facility has a four-year term and bears interest, at the Company’s option, at either (i) LIBOR plus 150 to 250 basis points, based on the degree of leverage of the Company or (ii) the base rate plus 0 to 75 basis points, based on the degree of leverage of the Company.  The LIBOR pricing is a 25 basis point increase from the previous grid.  Proceeds from the Investment Facility will be used to supplement the Company’s equity capital to make portfolio investments.  As of September 30, 2008, the interest rates were 5.25% (Prime rate of 5.00% plus 25 basis points) on $43 million and 4.2375% (LIBOR rate of 2.4875% plus 175 basis points) on $9.625 million.

The obligations under the Investment Facility are collateralized by substantially all of the Company’s assets, except certain assets that collateralize the Treasury Facility and are guaranteed by the Company’s existing and future subsidiaries, other than special purpose subsidiaries and certain other subsidiaries.  The Investment Facility contains affirmative and reporting covenants and certain financial ratio and restrictive covenants, including: (a) maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of the Company and its subsidiaries, of not less than 2.25:1.0, (b) maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of the Company and its subsidiaries, of not less than 2.0:1.0, (c) maintaining a ratio of EBITDA (excluding revenue from collateral under the Treasury Facility) to interest expense (excluding interest on loans under the Treasury Facility) of the Company and its subsidiaries of not less than 3.0:1.0, (d) limitations on additional indebtedness, (e) limitations on liens, (f) limitations on mergers and other fundamental changes, (g) limitations on dividends, (h) limitations on disposition of assets other than in the normal course of business, (i) limitations on transactions with affiliates, (j) limitations on agreements that prohibit liens on properties of the Company and its subsidiary guarantors, (k) limitations on sale and leaseback transactions, (l) limitations on speculative hedging transactions and (m) limitations on the aggregate amount of unfunded commitments.
 
On September 29, 2008, the Company entered into a Fourth Amendment to Treasury Secured Revolving Credit Agreement, effective as of September 29, 2008, which amended certain provisions and clarified certain definitions relating to permitted senior investment participation of the Company’s Treasury Secured Revolving Credit Agreement, dated as of August 31, 2006 (as amended, the “Treasury Facility”). The Company paid a 5 basis point fee in conjunction with the amendment.  Under the terms of the Company’s Treasury Facility, the lenders party thereto and SunTrust Bank, as administrative agent for the lenders, have extended credit available under the Treasury Facility to an amount not to exceed $175 million by obtaining additional commitments from existing lenders or new lenders.  The total amount committed and outstanding under the Treasury Facility as of September 30, 2008 was $126.25 million, which was unchanged compared to the committed and outstanding amounts as of December 31, 2007.  Proceeds from the Treasury Facility are used to facilitate the growth of the Company’s investment portfolio and provide flexibility in the sizing of its portfolio investments. The Treasury Facility has a three year term and bears interest, at the Company’s option, at either (i) LIBOR plus 25 basis points or (ii) the base rate. On September 29, 2008, the Required Lenders exercised their option to convert pricing of the Treasury Facility from LIBOR-based to Prime-based.  The prime rate was 5% as of September 29, 2008.  As of September 30, 2008, the interest rate on the Company’s outstanding borrowings under the Treasury Facility was 5.00% (Prime rate) on $126.25 million. The obligations under the Treasury Facility are collateralized by certain securities and are guaranteed by the Company’s existing and future subsidiaries, other than special purpose subsidiaries and certain other subsidiaries. The Treasury Facility contains affirmative and reporting covenants and certain financial ratio and restrictive covenants, including: (a) maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of the Company and its subsidiaries, of not less than 2.25:1.0, (b) maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of the Company and its subsidiaries, of not less than 2.0:1.0, (c) maintaining a ratio of net income (excluding revenue from cash collateral) plus interest, taxes, depreciation and amortization expenses (“EBITDA”) to interest expense (excluding interest on loans under the Treasury Facility) of the Company and its subsidiaries of not less than 3.0:1.0, (d) maintaining a ratio of collateral to the aggregate principal amount of loans under the Treasury Facility of not less than 1.01:1.0, (e) limitations on additional indebtedness, (f) limitations on liens, (g) limitations on mergers and other fundamental changes, (h) limitations on dividends, (i) limitations on disposition of assets other than in the normal course of business, (j) limitations on transactions with affiliates, (k) limitations on agreements that prohibit liens on properties of the Company and its subsidiary guarantors, (l) limitations on sale and leaseback transactions, (m) limitations on speculative hedging transactions, and (n) limitations on the aggregate amount of unfunded commitments.

 
From time to time, certain of the lenders may provide customary commercial and investment banking services to the Company.

The Manager has agreed to waive permanently, subsequent to September 30, 2007, that portion of the management fee attributable to U.S. Treasury securities acquired with borrowings under the Company’s credit facilities to the extent the amount of such securities exceeds $100 million.
 
In addition to the Company’s Investment Facility, the Company may also fund a portion of its investments with issuances of equity or senior debt securities. The Company may also securitize a portion of its investments in mezzanine or senior secured loans or other assets. The Company expects its primary use of funds to be investments in portfolio companies, cash distributions to holders of its common stock and payment of fees and other operating expenses.

Note 4:
Issuance of Common Stock
 
On August 6, 2004, the Company, in its initial capitalization transaction, sold 100 shares of common stock to NGP Energy Capital Management, L.L.C. (formerly known as Natural Gas Partners, L.L.C.) for $15.00 per share. On November 9, 2004, the Company’s Registration Statement on Form N-2 (Registration No. 333-118279) was declared effective by the SEC in connection with the public offering of 16,000,000 shares of common stock (plus up to 2,400,000 additional shares of common stock upon the exercise of the underwriters’ over-allotment option), which commenced on November 10, 2004. The number of securities covered by the registration statement, including the shares of common stock subject to the underwriters’ over-allotment option, was 18,400,000, of which 17,400,000 were sold to the public at a price of $15.00 per share.

The net proceeds from this offering, after deducting expenses of approximately $2,308,000 and underwriting discounts and commissions of $0.825 per share, were approximately $244,337,000.

On February 6, 2008, the Company’s Registration Statement on Form N-2 (Registration No. 333-146715) was declared effective by the SEC in connection with the public offering of an additional 3,700,000 shares of common stock (plus up to 555,000 additional shares of common stock upon the exercise of the underwriters’ over-allotment option), which commenced on April 10, 2008. The number of securities covered by this registration statement, including the shares of common stock subject to the underwriters’ over-allotment option, was 4,255,000, of which 4,086,388 were sold to the public at a price of $16.00 per share.

The net proceeds from this offering, after deducting expenses of approximately $781,000 and underwriting discounts and commissions of $0.80 per share, were approximately $61,330,000.

The Company has established a dividend reinvestment plan for the Company’s common stockholders, which provides for reinvestment of distributions paid by the Company, on behalf of each plan participant, by the Company’s transfer agent, in accordance with the plan terms. The purpose of the plan is to provide stockholders of record of the Company’s common stock, par value $.001 per share, with a method of investing cash dividends and distributions in additional shares at the current market price without charges for record-keeping, custodial, and reporting services. However, the plan is an “opt-out” plan. This means, if the Company declares a cash dividend, a stockholder’s cash dividend will be automatically reinvested in additional shares of its common stock unless the stockholder specifically “opts out” of the dividend reinvestment plan in writing, and elects to receive cash dividends. Any stockholder of record may elect to partially participate in the plan, or begin or resume participation at any time, by providing the plan agent with written notice. It is customary practice for many brokers to “opt out” of dividend reinvestment plans on behalf of their clients unless specifically instructed otherwise.

The Company issued 22,168 and 78,064 shares of common stock, respectively, in 2006 and 2007 to participants in the dividend reinvestment plan. For the nine months ended September 30, 2008, the Company issued 41,482 shares of common stock to participants in the dividend reinvestment plan.  As of September 30, 2008, holders of 1,739,829 shares, or approximately 8.0% of outstanding shares, were participants in the Company’s dividend reinvestment plan.  As a result, of the $8,651,281 total amount distributed for the 2008 third quarter dividend, $695,931 was used by the dividend reinvestment plan agent to acquire shares in the open market for credit to the accounts of the plan participants.  See Dividends in Note 2 .

 
Note 5:
Investment Management

Investment Advisory Agreement

The Company has entered into an investment advisory agreement with the Manager under which the Manager, subject to the overall supervision of the Company’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Company.

For providing these services, the Manager receives a fee from the Company, consisting of two components — a base management fee and an incentive fee.

Under the investment advisory agreement, the base management fee is calculated quarterly as 0.45% of the average of total assets of the Company as of the end of the two previous quarters, and is payable quarterly in arrears.  The Manager has agreed to waive permanently, subsequent to September 30, 2007, that portion of the management fee attributable to U.S. Treasury securities acquired with borrowings under the Company’s credit facilities to the extent the amount of such securities exceeds $100 million.  Of the $4,470,880 management and incentive fees payable to the Manager as of September 30, 2008, $1,944,869 is attributable to the base management fee for the quarter ended September 30, 2008.  The base management fee for the quarter ended September 30, 2007 was $1,626,857.

The incentive fee under the investment advisory agreement consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of the excess, if any, of the Company’s net investment income for the quarter that exceeds a quarterly hurdle rate equal to 2% (8% annualized) of the Company’s net assets.

For this purpose, net investment income means interest income, dividend income, and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, managerial assistance, monitoring, and consulting fees or other fees that the Company receives from portfolio companies) accrued during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement, any interest expense and dividends paid on issued and outstanding preferred stock, if any, but excluding the incentive fee).   Accordingly, the Company may pay an incentive fee based partly on accrued interest, the collection of which is uncertain or deferred.  Net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that the Company has not yet received in cash. Net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation.

The incentive fees due in any fiscal quarter will be calculated as follows:

 
·
No incentive fee in any fiscal quarter in which the Company’s net investment income does not exceed the hurdle rate.
 
·
20% of the amount of the Company’s net investment income, if any, that exceeds the hurdle rate in any fiscal quarter.

There were no investment income incentive fees earned for the third quarters of 2008 or 2007.  Investment income incentive fees earned were $0 and $88,060 for the nine months ended September 30, 2008 and 2007, respectively.

The second part of the incentive fee (the “Capital Gains Fee”) is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement, as of the termination date), and equals (1) 20% of (a) the Company’s net realized capital gain (realized capital gains less realized capital losses) on a cumulative basis from the closing date of the Company’s initial public offering to the end of such fiscal year, less (b) any unrealized capital depreciation at the end of such fiscal year, less (2) the aggregate amount of all Capital Gains Fees paid to the Manager in prior fiscal years.  An accrual of $2,526,011 was made for Capital Gains Fees earned for the third quarter of 2008.  An accrual of $434,409 was made for estimated year to date Capital Gains Fees for the period ended September 30, 2007.

Realized capital gains on a security are calculated as the excess of the net amount realized from the sale or other disposition of such security over the amortized cost for the security. Realized capital losses on a security are calculated as the amount by which the net amount realized from the sale or other disposition of such security is less than the amortized cost of such security. Unrealized capital depreciation on a security is calculated as the amount by which the original cost of such security exceeds the fair value of such security at the end of a fiscal year. All period-end valuations are determined by the Company in accordance with GAAP and the 1940 Act.

 
The Manager has agreed that, to the extent permissible under federal securities laws and regulations, including Regulation M, it will utilize 30% of the fees it receives from the capital gains portion of the incentive fee (up to a maximum of $5 million of fees received in the aggregate) to purchase shares of the Company’s common stock in open market purchases through an independent trustee or agent.  Pursuant to this voluntary agreement, with respect to the capital gains incentive fees earned for 2007, the Manager has purchased approximately $105,000 of the Company’s stock.  Any sales of such stock will comply with any applicable six-month holding period under Section 16(b) of the Securities Act of 1933, as amended, and all other restrictions contained in any law or regulation, to the fullest extent applicable to any such sale.  Any change in this voluntary agreement will not be implemented without at least 90 days’ prior notice to stockholders and compliance with all applicable laws and regulations.

The investment advisory agreement was originally approved by the Company’s Board of Directors on November 9, 2004. The investment advisory agreement provides that unless terminated earlier as described below, the agreement shall remain in effect from year-to-year after November 9, 2006, provided continuation is approved at least annually by the Company’s Board of Directors or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, including, in either case, approval by a majority of the members of the Company’s Board of Directors who are not interested persons.  On October 30, 2008, the Company’s Board of Directors, including a majority of the independent directors, approved an extension of the investment advisory agreement through November 9, 2009.

The agreement may be terminated at any time, without the payment of any penalty, by a vote of the Company’s Board of Directors or the holders of a majority of the Company’s shares on 60 days’ written notice to the Manager, and would automatically terminate in the event of its “assignment” (as defined in the 1940 Act).  The agreement may be terminated by either party without penalty upon not more than 60 days’ written notice to the other.

The investment advisory agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, the Manager and its officers, manager, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Manager’s services under the investment advisory agreement or otherwise as the Company’s Manager.

Pursuant to the investment advisory agreement, the compensation and routine overhead expenses of the investment professionals of the Company’s management team and their respective staffs, when and to the extent engaged in providing management and investment advisory services to the Company, will be paid for by the Manager.  The Company will bear all other costs and expenses of its operations and transactions.

The Manager, NGP Investment Advisor, LP, was formed in 2004 and maintains an office at 1221 McKinney Street, Suite 2975, Houston, Texas 77010.  The Manager’s sole activity is to perform management and investment advisory services for the Company. The Manager is a registered investment adviser under the Investment Advisers Act of 1940.

The foregoing description of the investment advisory agreement is qualified in its entirety by reference to the full text of the document, a copy of which was filed as Exhibit 10.1 to the Company’s Form 10-K for the year ended December 31, 2004, and is incorporated herein by reference.

Administration  Agreement

The Company has entered into an administration agreement with the Administrator, under which the Administrator furnishes the Company with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities.  Under the administration agreement, the Administrator also performs, or oversees the performance by third parties of, the Company’s required administrative services, which include being responsible for the financial records that the Company is required to maintain and preparing reports to the Company’s stockholders and reports filed with the SEC.  In addition, the Administrator assists in determining and publishing the Company’s net asset value, oversees the preparation and filing of the Company’s tax returns and the printing and dissemination of reports to the Company’s stockholders and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others.  To the extent permitted under the 1940 Act, the Administrator may also provide on the Company’s behalf, significant managerial assistance to the Company’s portfolio companies.  Payments under the agreement are equal to amounts based upon the allocable portion of the Administrator’s costs and expenses incurred in connection with administering the Company’s business.  The Administrator bills the Company for charges under the administration agreement monthly in arrears.  The agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party and will automatically terminate in the event of its “assignment” (as defined in the 1940 Act).

 
Of the $3,617,159 in accounts payable as of September 30, 2008, $210,362 was due to the Administrator for expenses incurred on the Company’s behalf for the month of September 2008.  By comparison, $208,611 was due to the Administrator for expenses incurred on the Company’s behalf for the month of September 2007.

The administration agreement was originally approved by the Company’s Board of Directors on November 9, 2004. The administration agreement provides that unless terminated earlier the agreement will continue in effect until November 9, 2006, and from year-to-year thereafter provided such continuance is approved at least annually by (i) the Company’s Board of Directors and (ii) a majority of the members of the Company’s Board of Directors who are not parties to the administration agreement or “interested persons” of any such party.  On October 30, 2008, the Company’s Board of Directors, including a majority of the independent directors, approved the continuation of the administration agreement through November 9, 2009.

The foregoing description of the administration agreement is qualified in its entirety by reference to the full text of the document, a copy of which was filed as Exhibit 10.2 to the Company’s Form 10-K for the year ended December 31, 2004, and is incorporated herein by reference.

Note 6:
Federal Income Taxes

The Company operates so as to be treated for tax purposes as a RIC under Subchapter M of Chapter 1 of the Code.  As a RIC, the Company generally will not be subject to federal income tax on the portion of its investment company taxable income and net capital gain (i.e., realized net long term capital gains in excess of realized net short term capital losses) distributed to stockholders. To qualify as a RIC, the Company is required, among other things, to distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset diversification requirements.  At December 31, 2004, the Company’s temporary investments included commercial paper of certain issuers that exceeded 5% of the value of its total assets. These investments were classified as cash equivalents for financial statement purposes. The Company was advised, however, that for purposes of the federal income tax rules governing RIC status, these commercial paper investments could not be classified as cash items, in which case the Company did not meet the RIC asset diversification requirements at December 31, 2004 and was instead treated as a “C” corporation for tax purposes for 2004.

For the years ended December 31, 2005, 2006 and 2007, the Company met all RIC requirements. The Company distributed substantially all of its investment company taxable income for 2005, 2006 and 2007. Thus, the Company did not incur any federal income tax liability for any of these periods.

Differences between the effective income tax rate and the statutory federal tax rate for the periods ended September 30, 2008 and 2007 were as follows:

   
For the Nine Months Ended
 
   
September 30, 2008
(Unaudited)
   
September 30, 2007
(Unaudited)
 
             
Statutory federal rate on loss from continuing operations
    34 %     34 %
Effect of net deferred tax assets
    (34 %)     (34 %)
                 
Effective tax rate on earnings from  continuing operations
    0 %     0 %
 
 
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are as follows:

   
For the Nine Months Ended
 
   
September 30, 2008
(Unaudited)
   
September 30, 2007
(Unaudited)
 
             
Deferred tax assets
           
Net operating loss carry forwards
  $ 33,866     $ 156,674  
Net organization costs
    39,939       87,866  
Total gross deferred tax assets
    73,805       244,540  
Less valuation allowance
    (73,805 )     (244,540 )
Net deferred tax assets
    -       -  
                 
Deferred tax liabilities
               
Unrealized gains, net
    -       -  
Prepaid expenses
    -       -  
Total gross deferred tax liabilities
    -       -  
                 
Net deferred tax assets
  $ -     $ -  

When a “C” corporation qualifies to be taxed as a RIC, it is subject to corporate-level tax on appreciation inherent in its assets on the date it becomes a RIC (i.e., built-in gain) that it recognizes within the first 10 years of its RIC status. A RIC generally may use loss carry forwards arising in taxable years while it was a “C” corporation to reduce its net recognized built-in gain, although a RIC is not otherwise allowed to utilize such loss carry forwards. Because the Company intends to qualify as a RIC under Subchapter M of the Code for 2005 and later years, it is uncertain whether the Company will fully utilize the tax benefit of its loss carryforward of approximately $142,000 at December 31, 2004. The valuation allowance for deferred tax assets for the period August 6, 2004 (commencement of operations) through December 31, 2004 was primarily included to reflect this uncertainty. After reducing the deferred tax asset by this allowance, the amount of the remaining deferred tax asset of $266,013 would entirely offset the deferred tax liability of $266,013 estimated as of December 31, 2004 should the Company recognize its built-in gain in future years. Because the loss carryforward is expected to offset the built-in gain, no provision for federal income taxes has been recorded for the period August 6, 2004 (commencement of operations) through December 31, 2004.  The loss carryforward will expire in the year 2024.

The Company’s consolidated subsidiaries, NGPC Asset Holdings, LP, NGPC Asset Holdings II, LP, NGPC Asset Holdings III, LP, NGPC Asset Holdings IV, LP and NGPC Asset Holdings V, LP, collectively (“NGPCAH”), are or were subject to federal income taxes. For the year ended December 31, 2005 (its first year of operations), NGPCAH operated at a loss and thus, at December 31, 2005, NGPCAH had a deferred tax asset of approximately $15,000, composed of net operating loss carry forwards. For the year ended December 31, 2006, NGPCAH operated at a small profit, resulting in a reduction of the deferred tax asset composed of net operating loss carry forwards of approximately $1,000. For the year ended December 31, 2007, NGPCAH had net operating income of approximately $315,000 resulting in a reduction of the deferred tax asset composed of net operating loss carry forwards of approximately $122,808.  Realization of the net deferred tax asset is not likely based on current levels of estimated taxable income and, accordingly, NGPCAH recorded valuation allowances of approximately $15,000, $14,000 and $109,000 at December 31, 2005, 2006, and 2007, respectively.  For the three months ended September 30, 2008, NGPCAH recorded realized net capital gains of approximately $12.3 million and estimated ordinary losses of approximately $3.9 million.  The ordinary losses include the estimated operating losses of TierraMar Energy LP.  NGPCAH recorded a 35% provision for income taxes, or $4.3 million, on the capital gains for the period ended September 30, 2008 and a $1.4 million tax benefit on the estimated operating losses.

Note 7:
Reclassifications

GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on total net assets or net asset value per share. For the years ended December 31, 2007, 2006 and 2005, $64,170, $15,710 and $586,225, respectively, were reclassified to undistributed net investment income (loss) from paid-in capital in excess of par.  These reclassifications were primarily due to non-deductible meal expenses, non-deductible excise taxes and income and expenses from a wholly-owned subsidiary.

 
Note 8:
Commitments and Contingencies

As of September 30, 2008, the Company had investments in or commitments to fund loan facilities to eighteen portfolio companies totaling $365 million, on which $301 million was drawn. In addition, the Company has continuing obligations under the investment advisory agreement with the Manager and the administration agreement with the Administrator. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, the Manager, the Administrator and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with them will be entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Manager’s or Administrator’s services under the agreements or otherwise as the Company’s investment adviser or administrator. The agreements also provide that the Manager, the Administrator and their affiliates will not be liable to the Company or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of the Company’s investments or any action taken or omitted to be taken by the Manager or the Administrator in connection with the performance of any of their duties or obligations under the agreements or otherwise as investment adviser or administrator to the Company, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, the Company enters into a variety of undertakings containing a variety of representations that may expose the Company to some risk of loss. The amount of future loss, if any, arising from such undertakings, while not quantifiable, is not expected to be significant.

Note 9:
Fair Value

In September 2006, FASB issued Statement 157, which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. Statement 157 applies to fair value measurements already required or permitted by existing standards. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The changes to current generally accepted accounting principles from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements.

As of January 1, 2008, the Company adopted Statement 157. The Company has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. Based on this assessment, the adoption of this standard did not have a material effect on the Company’s net asset value. However, the adoption of the standard does require the Company to provide additional disclosures about the inputs used to develop the measurements and the effect of certain measurements on changes in net assets for the reportable periods as contained in the Company’s periodic filings.