Investment Company Act file number 811-21462

Tortoise Energy Infrastructure Corporation
(Exact name of registrant as specified in charter)

10801 Mastin Blvd., Suite 222, Overland Park, KS 66210
(Address of principal executive offices) (Zip code)

David J. Schulte
10801 Mastin Blvd., Suite 222, Overland Park, KS 66210
(Name and address of agent for service)

Registrant's telephone number, including area code

Date of fiscal year end: November 30

Date of reporting period: November 30, 2007

 

 

Tortoise Energy Infrastructure Corp. is a pioneering closed-end investment company investing primarily in equity securities of publicly-traded Master Limited Partnerships (MLPs) operating energy infrastructure assets.

We seek a high level of total return with an emphasis on current dividends paid to stockholders.

In seeking to achieve yield, we target distributions to our stockholders that are roughly equal to the underlying yield on a direct investment in MLPs. In order to accomplish this, we maintain our strategy of investing primarily in energy infrastructure MLPs with attractive current yields and growth potential.

Tortoise Energy achieves dividend growth as revenues of our underlying companies grow with the economy, with the population and through rate increases. This revenue growth leads to increased operating profits, and when combined with internal expansion projects and acquisitions, is expected to provide attractive growth in distributions to Tortoise Energy. We also seek dividend growth through capital market strategies involving timely debt and equity offerings by Tortoise Energy that are primarily invested in MLP issuer direct placements.

We seek to achieve quality by investing in companies operating energy infrastructure assets that are critical to the U.S. economy. Often these assets would be difficult to replicate. We also back experienced management teams with successful track records. By investing in Tortoise Energy, our stockholders have access to a portfolio that is diversified through geographic regions and across product lines, including natural gas, natural gas liquids, crude oil and refined products.

MLPs are limited partnerships whose units trade on public exchanges such as the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and NASDAQ. Buying MLP units makes an investor a limited partner in the MLP. There are currently more than 60 MLPs in the market, mostly in industries related to energy and natural resources.

Tortoise Energy invests primarily in MLPs and their affiliates in the energy infrastructure sector. Energy infrastructure MLPs are engaged in the transportation, storage and processing of crude oil, natural gas and refined products from production points to the end users. Our investments are primarily in mid-stream (mostly pipeline) operations, which typically produce steady cash flows with less exposure to commodity prices than many alternative investments in the broader energy industry. With the growth potential of this sector along with our disciplined investment approach, we endeavor to generate a predictable and increasing dividend stream for our investors.

Tortoise Energy provides its stockholders an alternative to investing directly in MLPs and their affiliates. A direct MLP investment potentially offers an attractive distribution with a significant portion treated as return of capital, and a historically low correlation to returns on stocks and bonds. However, the tax characteristics of a direct MLP investment are generally undesirable for tax-exempt investors such as retirement plans. Tortoise Energy is structured as a C Corporation — accruing federal and state income taxes, based on taxable earnings and profits. Because of this innovative structure, pioneered by Tortoise Capital Advisors, institutions and retirement accounts are able to join individual stockholders as investors in MLPs.

Additional features of Tortoise Energy include:

•     One Form 1099 per stockholder at the end of the year, thus avoiding multiple K-1s and multiple state filings for individual partnership investments;

•     A professional management team, with nearly 100 years combined investment experience, to select and manage the portfolio on your behalf;

•     The ability to access investment grade credit markets to enhance stockholder return; and

•     Access to direct placements and other investments not available through the public markets.

 

 

Summary Financial Information  (Unaudited)

Year Ended November 30		2007
Market value per share	$	32.46
Net asset value per share		32.96
Total net assets		618,412,176
Unrealized appreciation of investments (excluding interest rate swap contracts)
before deferred taxes		95,600,586
Unrealized appreciation of investments and interest rate swap contracts
after deferred taxes		51,659,116
Net investment loss		(12,470,739	)
Net realized gain on investments and interest rate swaps after deferred taxes		26,630,652
Total investment return based on market value(1)		(4.43	)%

Allocation of Portfolio Assets November 30, 2007 (Unaudited) (Percentages based on total investment portfolio)

2007 Annual Report     1

 

 

January 21, 2008

Dear Fellow Stockholders,

The first half of Tortoise Energy Infrastructure Corp.’s (Tortoise Energy) fiscal year was defined by tremendous growth in our portfolio as we participated in numerous attractive investment opportunities, financed through multiple offerings of common stock, preferred stock and debt securities. However, we also faced some unique obstacles during the second half of the year that affected our stock price performance. First, we faced a broad market sell-off related to credit market concerns which pushed MLP prices down. We then faced increased leverage costs as demand for our notes and preferred stock decreased.

Despite this volatile second half, our portfolio companies continued to deliver strong growth in their quarterly distributions. In our view, this performance along with the ongoing need to expand the U.S. energy infrastructure sets the stage for growth in distributions from our portfolio companies in fiscal year 2008.

The volatility in financial markets was reflected in our stock price, in spite of growth in distributions from our investments in every quarter. We ended our second quarter with a year-to-date total return of 20.1 percent compared to our fiscal year total return of -4.4 percent. Our total return from inception to Nov. 30, 2007 is 13.9 percent on an annualized basis. These returns are based on market value, including the reinvestment of quarterly dividends.

Distributions from our portfolio holdings grew nearly 9 percent for the fiscal year, and our dividend growth over the prior year was 8.3 percent. Our recent dividend of $0.5525 per common share ($2.21 annualized) was our twelfth consecutive dividend increase since full investment of initial public offering proceeds. This reflects a 4.2 percent increase over the dividend paid in the same quarter of the prior year and a 0.45 percent increase over the dividend paid in the prior quarter. This dividend represented an annualized yield of 6.8 percent based on the closing price of $32.46 on Nov. 30, 2007. For tax purposes, 58.7 percent of dividends paid in fiscal year 2007 were treated as return of capital and 41.3 percent were characterized as qualified dividend income.

With continued focus on our strategic asset selection and liability management strategies, we maintain our expectation that long-term dividend growth will be approximately four percent on an annualized basis.

2     Tortoise Energy Infrastructure Corp.

 

 

In August 2007, turmoil in credit markets and liquidity concerns brought on by sub-prime mortgage market problems created a decline in demand for auction rate securities, including our notes and preferred stock. Auction rate notes and preferred stock had historically reset with interest rates at or near 1-month LIBOR (the London Interbank Offered Rate), but we began to experience increased financing costs as rates reset at levels above LIBOR. While we attempt to hedge interest rate exposure associated with changes in short-term LIBOR, effective hedges are not available with respect to the spread of our auction rates above or below LIBOR.

To adapt to this new environment, we reduced our reliance on the auction rate market by introducing our debt and preferred stock to longer-term institutional investors and by redeeming a portion of our outstanding notes. We extended the rate periods on Series A and B Notes to five years and one year, respectively, and we extended the rate periods on Auction Preferred I and Auction Preferred II Stock for three years each. We redeemed our $70 million Series E Notes in late October 2007 with proceeds from normal portfolio turnover and temporary use of our line of credit. All of these actions are designed to increase our financing flexibility and reduce our reliance on a single source of leverage.

We believe our $150 million credit facility, effective shelf registration statements and access to institutional debt investors provide us with the financial flexibility needed to transition through these challenging market conditions. We can always choose to reduce leverage through a partial liquidation of portfolio holdings, although we will only use this approach in moderation because we see significant investment opportunities in the MLP sector.

Although the increase in leverage costs decreased our Distributable Cash Flow for the 4th quarter 2007, leverage will remain an important component of our investment strategy, assuming it continues to create stockholder value by delivering investment returns that exceed our borrowing costs.

In fiscal 2007, we financed our investment activity by drawing on our effective shelf registration statements. Through multiple offerings during the year, we issued common stock, preferred stock and debt securities that totaled $280.7 million.

2007 Annual Report     3

 

 

During our fourth quarter, we actively participated in supporting MLP growth projects and asset purchases with the completion of a $7.5 million direct placement in Class D units of Copano Energy, L.L.C., a $3 million investment in the initial public offering of OSG America L.P. and a $14.5 million investment in the initial public offering of El Paso Pipeline Partners, L.P.

Since our inception in February 2004 through the date of this letter, we have financed energy infrastructure growth through the completion of 51 direct placement and IPO purchases totaling more than $545 million. During fiscal year 2007, we invested $217 million in direct placements and IPOs.

The second half of 2007 reflected a broad market sell-off related to sub-prime mortgage and credit market concerns which pushed MLP prices down. The S&P MLP Index reflected a total return of 19.7 percent for the six months ended May 31, 2007, compared to a total return of 10.3 percent for the twelve months ended Nov. 30, 2007. These returns are based on market value, including the reinvestment of quarterly dividends. Yet, according to Lehman Brothers, MLP market capitalization continued to climb, reaching $137.8 billion as of Oct. 17, 2007. Public and private offerings to finance internal growth projects and acquisition activity, and the emergence of oil and gas MLP initial public offerings fueled this growth.

During the year MLP dividend yield performance surpassed REITs and utilities. On Nov. 30, 2007, the Alerian MLP Index annualized dividend yield was 6.4 percent compared to the FTSE NAREIT Equity REIT Index yield of 4.6 percent and the Dow Jones Utility Average Index yield of 2.9 percent. We believe MLPs offer income investors attractive risk and return qualities relative to REITs and utilities.

In the short run, we expect a potentially slower economy which could have a minimal impact on energy demand. For the long term, we expect projected annual end-user demand growth for energy to be in the 1 percent range through 2030.

With more than $24 billion in MLP organic growth projects slated between now and 2010, we expect attractive distribution growth from our portfolio companies averaging 5 to 8 percent over the next several years and attractive direct placement investment opportunities.

We maintain our positive outlook that Tortoise Energy’s portfolio of companies will deliver yield, growth and quality and are poised to fund critical growth projects in the U.S. energy infrastructure industry.

Thank you for your confidence and support. We look forward to seeing you at the annual stockholders’ meeting on April 21, 2008. For those unable to attend, please access our webcast of the meeting at www.tortoiseadvisors.com.

Sincerely,

The Managing Directors

Tortoise Capital Advisors, L.L.C.

H. Kevin Birzer		Zachary A. Hamel		Kenneth P. Malvey		Terry Matlack		David J. Schulte

4     Tortoise Energy Infrastructure Corp.

 

 

Table Of Contents

6	Key Financial Data
8	Management’s Discussion
12	Business Description
15	Schedule of Investments
17	Statement of Assets & Liabilities
18	Statement of Operations
19	Statement of Changes in Net Assets
20	Statement of Cash Flows
22	Financial Highlights
24	Notes to Financial Statements
34	Report of Independent Registered Public Accounting Firm
35	Company Officers and Directors
37	Additional Information

2007 Annual Report     5

 

 

Key Financial Data  (Supplemental Unaudited Information)

	Year Ended November 30,
	2006			2007
Total Distributions Received from Investments
Distributions received from master limited partnerships	$	45,985		$	64,255
Dividends paid in stock		5,862			10,554
Dividends from common stock		97			76
Short-term interest and dividend income		746			651
Total from investments		52,690			75,536
Operating Expenses Before Leverage Costs and Current Taxes
Advisory fees, net of reimbursement		6,254			10,571
Other operating expenses		1,309			1,627
		7,563			12,198
Distributable cash flow before leverage costs and current taxes		45,127			63,338
Leverage costs(2)		11,032			22,131
Current income tax expense		472			287
Distributable Cash Flow(3)	$	33,623		$	40,920
Dividends paid on common stock	$	31,969		$	40,702
Dividends paid on common stock per share		2.0200			2.1875
Payout percentage for period(4)		95.1	%		99.5	%
Net realized gain, net of deferred taxes		5,524,349			26,630,652
Total assets, end of period		928,431			1,261,638
Average total assets during period(5)		773,568			1,267,902
Leverage (Tortoise Notes, Preferred Stock and short-term credit facility)(6)		267,450			458,050
Leverage as a percent of total assets		28.8	%		36.3	%
Unrealized appreciation net of deferred taxes, end of period		196,037			247,696
Net assets, end of period		532,433			618,412
Average net assets during period(7)		446,210			659,996
Net asset value per common share		31.82			32.96
Market value per share		36.13			32.46
Shares outstanding		16,732,065			18,760,441
Selected Operating Ratios(8)
As a Percent of Average Total Assets
Total distributions received from investments		6.81	%		5.96	%
Operating expenses before leverage costs and current taxes		0.98	%		0.96	%
Distributable cash flow before leverage costs and current taxes		5.83	%		5.00	%
As a Percent of Average Net Assets
Distributable cash flow(3)		7.54	%		6.20	%

6     Tortoise Energy Infrastructure Corp.

 

 

2006				2007
Q4(1)				Q1(1)				Q2(1)				Q3(1)				Q4(1)
$	12,595			$	14,075			$	16,056			$	17,049			$	17,075
	1,745				1,801				2,802				2,869				3,082
	—				—				—				50				26
	156				129				154				40				328
	14,496				16,005				19,012				20,008				20,511
	1,796				2,122				2,748				2,966				2,735
	335				342				388				433				464
	2,131				2,464				3,136				3,399				3,199
	12,365				13,541				15,876				16,609				17,312
	2,784				3,320				4,912				6,191				7,708
	138				145				49				33				60
$	9,443			$	10,076			$	10,915			$	10,385			$	9,544
$	8,848			$	9,845			$	10,192			$	10,300			$	10,365
	0.5300				0.5400				0.5450				0.5500				0.5525
	93.7	%			97.7	%			93.4	%			99.2	%			108.6	%
	824,119				1,990,431				8,263,446				3,795,377				12,581,398
	928,431				1,130,442				1,393,637				1,332,533				1,261,638
	865,220				1,028,848				1,282,827				1,396,907				1,291,387
	267,450				316,600				435,000				490,000				458,050
	28.8	%			28.0	%			31.2	%			36.8	%			36.3	%
	196,037				259,275				338,616				274,539				247,696
	532,433				635,044				724,194				648,551				618,412
	507,852				602,104				706,449				694,971				634,928
	31.82				34.83				38.73				34.63				32.96
	36.13				36.38				42.12				39.52				32.46
	16,732,065				18,232,065				18,700,689				18,727,411				18,760,441
	6.72	%			6.31	%			5.88	%			5.68	%			6.37	%
	0.99	%			0.97	%			0.97	%			0.97	%			0.99	%
	5.73	%			5.34	%			4.91	%			4.71	%			5.38	%
	7.46	%			6.79	%			6.13	%			5.93	%			6.03	%

2007 Annual Report     7

 

 

Management’s Discussion

Tortoise Energy’s goal is to provide a growing dividend stream to our investors. We seek to provide our stockholders with an efficient vehicle to invest in the energy infrastructure sector. While we are a registered investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), we are not a “regulated investment company” for federal tax purposes. Our dividends do not generate unrelated business taxable income (UBTI) and our stock may therefore be suitable for holding by pension funds, IRAs and mutual funds as well as taxable accounts.

We invest primarily in MLPs through private and public market purchases. MLPs are publicly traded partnerships whose equity interests are traded in the form of units on public exchanges, such as the NYSE or NASDAQ. Our private purchases principally involve financing directly to an MLP through equity investments, which we refer to as direct placements. MLPs typically use this financing to fund growth, acquisitions, recapitalizations, debt repayments and bridge financings. We generally invest in companies that are publicly reporting, but for which a private financing offers advantages. These direct placement opportunities generally arise from our long-term relationships with energy infrastructure MLPs and our expertise in origination, structuring, diligence and investment oversight.

The financial statements are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex, or subjective judgments. Our critical accounting policies are those applicable to the valuation of investments and certain revenue recognition matters as discussed in Note 2 in the Notes to Financial Statements.

Our portfolio generates cash flow from which we pay dividends to stockholders. Our Board of Directors considers our distributable cash flow (“DCF”) in determining dividends to stockholders. Our Board of Directors reviews the dividend rate quarterly, and may adjust the quarterly dividend throughout the year. Our goal is to declare what we believe to be sustainable increases in our regular quarterly dividends. We have targeted to pay at least 95 percent of DCF on an annualized basis.

DCF is simply distributions received from investments less expenses. The total distributions received from our investments includes the amount received by us as cash distributions from MLPs, paid-in-kind distributions, and dividend and interest payments. The total expenses include current or anticipated operating expenses, leverage costs and current income taxes on our operating income. Each are summarized for you in the table on pages 6 and 7 and are discussed in more detail below.

The key financial data table discloses the calculation of DCF. 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: (1) the Statement of Operations, in conformity with U.S. generally accepted accounting principles (GAAP), recognizes distribution income from MLPs and common stock on their ex-dates, whereas the DCF calculation reflects distribution income on their pay dates; (2) GAAP recognizes that a significant portion of the cash distributions received from MLPs are treated as a return of capital and therefore excluded from investment income, whereas the DCF calculation includes the return of capital and (3) distributions received from investments in the DCF calculation include the value of dividends paid-in-kind (additional stock or MLP units), whereas such amounts are not included as income for GAAP purposes. 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 as disclosed in the Statement of Operations, the DCF calculation reflects interest expense, recurring auction agent fees, dividends to preferred stockholders and realized and unrealized gains (losses) on interest swap settlements as leverage costs, as well as current tax expense.

8     Tortoise Energy Infrastructure Corp.

 

 

Management’s Discussion

Our ability to generate cash is dependent on the ability of our portfolio of investments to generate cash flow from their operations. In order to maintain and grow our dividend to our stockholders, we evaluate each holding based upon its contribution to our investment income, our expectation for its growth rate, and its risk relative to other potential investments.

We concentrate on MLPs we believe can expect an increasing demand for services from economic and population growth. We seek well-managed businesses with hard assets and stable recurring revenue streams.

Our focus remains primarily on investing in fee-based service providers that operate long-haul, interstate pipelines. We further diversify among issuers, geographies and energy commodities to seek a dividend payment which approximates an investment directly in energy infrastructure MLPs. In addition, most energy infrastructure companies are regulated and utilize an inflation escalator index that factors in inflation as a cost pass-through. So, over the long-term, we believe MLPs’ distributions will outpace inflation and interest rate increases, and produce positive returns.

Total distributions received from our investments relating to DCF for the 4th quarter 2007 was approximately $21 million, representing a 42 percent increase as compared to 4th quarter 2006 and a 3 percent increase as compared to 3rd quarter 2007. These increases reflect the earnings from investment of the proceeds from additional leverage and our follow on equity offerings, as well as distribution increases from our MLP investments.

We incur two types of expenses: (1) operating expenses, consisting primarily of the advisory fee and (2) leverage costs. On a percentage basis, operating expenses before leverage costs and current taxes were an annualized 0.99 percent of average total assets for the 4th quarter 2007 as compared to 0.99 percent for the 4th quarter 2006 and 0.97 percent for the 3rd quarter 2007. Advisory fees, net of reimbursement, decreased as a result of reduced average total assets.

Leverage costs consist of four major components: (1) the direct interest expense on our Tortoise Notes and short-term credit facility; (2) the auction agent fees, which are the marketing costs for the variable rate leverage; (3) the realized and unrealized gain or loss on our swap settlements and (4) our preferred dividends.

We have entered into interest rate swap agreements in an attempt to reduce a portion of the interest rate risk arising from our leveraged capital structure. As indicated in Note 11, Tortoise Energy has agreed to pay U.S. Bank a fixed rate while receiving a floating rate based upon the 1-month or 1-week U.S. Dollar London Interbank Offered Rate (“LIBOR”). LIBOR is the primary global benchmark or reference rate for short-term interest rates, and is intended to approximate our variable rate payment obligation. While we generally hedge the interest rate exposure associated with changes in LIBOR, we cannot effectively hedge the spread above or below LIBOR at which the rates on our leverage reset during the auction process.

Historically, auctions for our leverage have resulted in interest rates ranging from slightly above to slightly below LIBOR. As a result of the recent sub-prime mortgage market problems and changes in how auction rate securities are accounted for by corporations, demand for our auction securities has decreased, causing interest rates to reset at levels above our historical range.

We have initiated steps to reduce the impact of these increased spreads. During the 4th quarter, we extended the reset dates on our Series A Notes, Series B Notes, Auction Preferred I Stock and Auction Preferred II Stock, fixing their interest and dividend rates for 5 years, 1 year, 3 years and 3 years, respectively. In addition, we redeemed the $70 million Series E Notes with proceeds from normal portfolio turnover and temporary use of our line of credit. Additional detail relating to these actions is included in Note 9 and Note 10 in the Notes to Financial Statements.

2007 Annual Report     9

 

 

Management’s Discussion

Associated with the redemption of the Series E Notes, we closed-out $65 million notional amount of interest rate swap contracts. Detailed information on this transaction is included in Note 11 in the Notes to Financial Statements.

The spread between the fixed swap rate and LIBOR is reflected in our Statement of Operations as a realized or unrealized gain when LIBOR exceeds the fixed rate (U.S. Bank pays Tortoise Energy the net difference) or a realized or unrealized loss when the fixed rate exceeds LIBOR (Tortoise Energy pays U.S. Bank the net difference). We realized approximately $421,000 in gains on interest rate swap settlements during the 4th quarter 2007 as compared to approximately $587,000 in realized gains for the 3rd quarter 2007.

Total leverage costs for DCF purposes increased to approximately $7.7 million for the 4th quarter 2007 as compared to $2.8 million for the 4th quarter 2006 and $6.2 million for the 3rd quarter 2007. These increases reflect the net issuance of additional long-term leverage and increased borrowing costs. The average cost of long-term leverage outstanding excluding the auction agent fees and net of our interest rate swap agreements was 6.12 percent for 4th quarter 2007 as compared to 4.92 for the 3rd quarter 2007. This change was the result of fixing interest and dividend rates for extended periods on a portion of our leverage as discussed above, and an increase in the auction rate spread to LIBOR.

For 4th quarter 2007, our DCF was approximately $9.5 million, an increase of $101,000 or 1 percent as compared to 4th quarter 2006 and a decrease of $841,000 or 8 percent as compared to 3rd quarter 2007. These changes are the net result of earnings from additional leverage, growth in distributions and increased expenses, as outlined above. Current income tax expense reflects estimated Canadian taxes payable by Tortoise Energy on Canadian income allocated to the company. We paid a dividend of $10.4 million, or 108.6 percent of DCF during the quarter and $40.7 million or 99.5 percent of DCF for the fiscal year. The decrease in DCF is primarily the result of an increase in current leverage costs. We anticipate near-term variances in our leverage costs to continue to impact DCF. Long term, we expect continued growth in distributions from our investments in MLPs to provide growth in DCF. This, when combined with more stable leverage costs and occasionally small portions of realized gains from investments, would provide stable and growing dividends. On a per share basis, we declared a $0.5525 dividend on November 12, 2007, for an annualized run-rate of $2.21. This is an increase of approximately 4 percent as compared to 4th quarter 2006 and 0.5 percent as compared to 3rd quarter 2007.

We invest in partnerships which generally have larger distributions of cash than the accounting income which they generate. Accordingly, the distributions include a return of capital component for accounting and tax purposes on our books. Dividends declared and paid by Tortoise Energy in a year generally differ from taxable income for that year, as such dividends may include the distribution of current year taxable income or return of capital.

The tax character of the dividend you receive depends on whether Tortoise Energy has annual earnings and profits. If so, those earnings and profits are first allocated to the preferred shares and then to the common shares.

In the event Tortoise Energy has earnings and profits, all or a portion of our dividend would be taxable at the 15 percent Qualified Dividend Income (“QDI”) rate, assuming various holding requirements are met by the stockholder. The portion of our dividend that is taxable may vary for either of two reasons: first, the characterization of the distributions we receive from MLPs could change annually based upon the K-1s we receive and become less return of capital and more in the form of income. Second, we could sell an MLP investment in which Tortoise Energy has a gain at any time. The unrealized gain we have in the portfolio is reflected in the Statement of Assets and Liabilities. At November 30, 2007, Tortoise Energy’s investments at value are $1.25 billion, with an adjusted cost of $833 million. The $417 million difference reflects gain that would be realized if those investments were sold at those values. A sale could give rise to earnings and profits in that period and make all or a portion of the distributions taxable qualified dividends. Note, however, that the Statement of Assets and Liabilities reflects as a deferred tax liability the possible future tax liability we would pay if all investments were liquidated at their indicated value. It is for these reasons that we inform you of the tax treatment after the close of each year because the ultimate result is underterminable and difficult to predict until the year is over.

10     Tortoise Energy Infrastructure Corp.

 

 

Management’s Discussion

For book purposes, dividends for the fiscal year ended 2007, were comprised entirely of return of capital. For tax purposes, dividends for fiscal year ended 2007 were comprised of approximately 58.7 percent return of capital and 41.3 percent qualified dividend income (presuming you hold the shares for the requisite holding period). This information will be reported to stockholders on Form 1099-DIV and is available on our Web site at www.tortoiseadvisors.com.

During 4th quarter 2007, we redeemed the $70 million Series E Notes with proceeds from normal portfolio turnover and temporary use of our line of credit.

Tortoise Energy had total assets of $1.26 billion at quarter end. Our total assets reflect the value of our investments, which are itemized in the Schedule of Investments. It also reflects cash, interest and other receivables and any expenses that may have been prepaid. During 4th quarter 2007, total assets decreased from $1.33 billion to $1.26 billion, a decrease of $70 million or 5 percent. This change was primarily the result of a decrease in net unrealized appreciation of investments.

Total leverage outstanding at November 30, 2007 of $458 million is comprised of $235 million in senior notes rated ‘Aaa’ and ‘AAA’ by Moody’s Investors Service Inc. and Fitch Ratings, respectively, $185 million in preferred stock rated ‘Aa2’ and ‘AA’ by Moody’s Investors Service Inc. and Fitch Ratings, respectively, and approximately $38 million outstanding under the credit facility. Total leverage represented 36.3 percent of total assets at November 30, 2007. Our long-term target for leverage remains approximately 33 percent of total assets, although temporary increases up to 38 percent are allowed. In this event, we intend to reduce leverage to our long-term target over time by executing portfolio sales and/or an equity offering. We may continue to utilize our line of credit to make desirable investments as they become available and provide flexibility in managing our capital structure.

2007 Annual Report     11

 

 

Business Description

November 30, 2007

Tortoise Energy Infrastructure Corp. (Tortoise Energy) commenced operations in February 2004. Tortoise Energy’s investment objective is to seek a high level of total return with an emphasis on current distributions to stockholders. For purposes of Tortoise Energy’s investment objective, total return includes capital appreciation of, and all distributions received from, securities in which Tortoise Energy invests regardless of the tax character of the distributions.

Tortoise Energy seeks to provide its stockholders with an efficient vehicle to invest in a portfolio consisting primarily of master limited partnerships (MLPs) and their affiliates in the energy infrastructure sector. Similar to the tax characterization of distributions made by MLPs to their unitholders, Tortoise Energy believes a relatively high portion of its distributions to stockholders will be treated as a return of capital.

Tortoise Energy is a non-diversified, closed-end management investment company, for which Tortoise Capital Advisors, L.L.C. (the Adviser) serves as Tortoise Energy’s investment adviser.

Energy infrastructure companies (including MLPs) engage in the business of gathering, transporting, processing, storing, distributing or marketing natural gas, natural gas liquids, coal, crude oil,refined petroleum products or other natural resources, or exploring, developing, managing or producing such commodities. Tortoise Energy invests solely in energy infrastructure companies operating in the United States.

Energy infrastructure companies (other than most pipeline MLPs) do not operate as “public utilities” or “local distribution companies,” and are therefore not subject to rate regulation by state or federal utility commissions. However, energy infrastructure companies may be subject to greater competitive factors than utility companies, including competitive pricing in the absence of regulated tariff rates, which could cause a reduction in revenue and which could adversely affect profitability. Most pipeline MLPs are subject to government regulation concerning the construction, pricing and operation of pipelines. Pipeline MLPs are able to set prices (rates or tariffs) to cover operating costs, depreciation and taxes, and provide a return on investment. These rates are monitored by the Federal Energy Regulatory Commission (FERC) which seeks to ensure that consumers receive adequate and reliable supplies of energy at the lowest possible price while providing energy suppliers and transporters a just and reasonable return on capital investment and the opportunity to adjust to changing market conditions.

Under normal circumstances, Tortoise Energy invests at least 70 percent of its total assets (including assets obtained through leverage) in equity securities of MLPs and their affiliates in the energy infrastructure sector. MLPs are organized as partnerships, thereby eliminating income tax at the entity level.

The typical MLP has two classes of partners—the general partner and the limited partners. The general partner is usually a major energy company, utility, investment fund or the direct management of the MLP. The general partner normally controls the MLP through a two percent equity interest plus units that are subordinated to the common (publicly traded) units for at least the first five years of the partnership’s existence and that only convert to common if certain financial tests are met.

As a motivation for the general partner to successfully manage the MLP and increase cash flows, the terms of most MLPs’ partnership agreements typically provide that the general partner receives a larger portion of the net income as distributions reach higher target levels. As cash flow grows, the general partner receives a greater interest in the incremental income compared to the interest of limited partners. The general partner’s incentive compensation typically increases up to 50 percent of incremental income. Nevertheless, the aggregate amount distributed to limited partners will increase as MLP distributions reach higher target levels. Given this structure, the general partner has an incentive to streamline operations and undertake acquisitions and growth projects in order to increase distributions to all partners.

Energy infrastructure MLPs in which Tortoise Energy invests can generally be classified in the following categories:

•     Pipeline MLPs are common carrier transporters of natural gas, natural gas liquids (primarily propane, ethane, butane and natural gasoline), crude oil or refined petroleum products (gasoline, diesel fuel and jet fuel). Pipeline MLPs also may operate ancillary businesses such as storage and marketing of such products. Revenue is derived from capacity and transportation fees. Historically, pipeline output has been less exposed to cyclical economic forces due to its low cost structure and government-regulated nature. In addition, pipeline MLPs do not have direct commodity price exposure because they do not own the product being shipped.

12     Tortoise Energy Infrastructure Corp.

 

 

Business Description

•     Processing MLPs are gatherers and processors of natural gas as well as providers of transportation, fractionation and storage of natural gas liquids (NGLs). Revenue is derived from providing services to natural gas producers, which require treatment or processing before their natural gas commodity can be marketed to utilities and other end user markets. Revenue for the processor is fee-based, although it is not uncommon to have some participation in the prices of the natural gas and NGL commodities for a portion of revenue.

•     Propane MLPs are distributors of propane to homeowners for space and water heating. Revenue is derived from the resale of the commodity on a margin over wholesale cost. The ability to maintain margin is a key to profitability. Propane serves approximately three percent of the household energy needs in the U.S., largely for homes beyond the geographic reach of natural gas distribution pipelines. Approximately 70 percent of annual cash flow is earned during the winter heating season (October through March). Accordingly, volumes are weather dependent, but have utility type functions similar to electricity and natural gas.

•     Coal MLPs own, lease and manage coal reserves. Revenue is derived from production and sale of coal, or from royalty payments related to leases to coal producers. Electricity generation is the primary use of coal in the United States. Demand for electricity and supply of alternative fuels to generators are the primary drivers of coal demand. Coal MLPs are subject to operating and production risks, such as: the MLP or a lessee meeting necessary production volumes; federal, state and local laws and regulations which may limit the ability to produce coal; the MLPs’ ability to manage production costs and pay mining reclamation costs; and the effect on demand that the Clean Air Act standards have on coal end-users.

•     Marine Shipping MLPs are primarily marine transporters of natural gas, crude oil or refined petroleum products. Marine shipping MLPs derive revenue from charging customers for the transportaion of these products utilizing the MLPs’ vessels. Transportaion services are typically provided pursuant to a charter or contract, the terms of which vary depending on, for example, the length of use of a particular vessel, the amount of cargo tansported, the number of voyages made, the parties operating a vessel or other factors.

Tortoise Energy invests primarily in equity securities of MLPs, which currently consist of common units and convertible subordinated units. Tortoise Energy also may invest in I-Shares issued by affiliates of MLPs. Almost all MLP common units and I-Shares in which Tortoise Energy invests are listed and traded on the NYSE, AMEX or NASDAQ National Market. Tortoise Energy also may purchase MLP common units directly from MLPs or unitholders of MLPs that are not initially readily tradable. MLP convertible subordinated units are generally not listed or publicly traded and are typically purchased in direct transactions with MLP affiliates or institutional holders of such shares.

MLP common unitholders have typical limited partner rights, including limited management and voting rights. MLP common units have priority over convertible subordinated units upon liquidation. Common unitholders are entitled to minimum quarterly distributions (MQD), including arrearage rights, prior to any distribution payments to convertible subordinated unitholders or incentive distribution payments to the general partner. MLP convertible subordinated units generally are convertible into common units on a one-to-one basis after the passage of time and/or achievement of specified financial goals. MLP convertible subordinated units are entitled to MQD after the payments to holders of common units and before incentive distributions to the general partner. MLP convertible subordinated units generally do not have arrearage rights. I-Shares have similar features to common units except that distributions are payable in additional I-Shares rather than cash. Tortoise Energy invests in I-Shares only if it believes the issuer will have adequate cash to satisfy its distribution targets.

Under normal circumstances, Tortoise Energy invests at least 90 percent of its total assets (including assets obtained through leverage) in equity securities of energy infrastructure MLPs and their affiliates.

Tortoise Energy has adopted the following additional nonfundamental investment policies:

•     Tortoise Energy may invest up to 30 percent of its total assets in restricted securities. Subject to this policy, Tortoise Energy may invest without limitation in illiquid securities.

2007 Annual Report     13

 

 

Business Description

•     Tortoise Energy may invest up to 25 percent of its total assets in debt securities, including securities rated below investment grade (commonly referred to as junk bonds).

•     Tortoise Energy will not invest more than 10 percent of its total assets in any single issuer.

•     Tortoise Energy will not engage in short sales.

Unlike most investment companies, Tortoise Energy is not treated as a regulated investment company under the U.S. Internal Revenue Code of 1986, as amended (“the Internal Revenue Code”). Therefore, Tortoise Energy is obligated to pay federal and applicable state corporate taxes on its taxable income. Unlike regulated investment companies, Tortoise Energy is not required to distribute substantially all of its income and capital gains. Tortoise Energy invests a substantial portion of its assets in MLPs.

Although the MLPs generate income taxable to Tortoise Energy, the Company expects the MLPs to pay cash distributions in excess of the taxable income reportable by Tortoise Energy. Similarly, Tortoise Energy expects to distribute substantially all of its distributable cash flow (DCF). DCF is the amount received by Tortoise Energy as cash or paid-in-kind distributions from MLPs or their affiliates, and interest payments received on debt securities owned by Tortoise Energy, less current or anticipated operating expenses, taxes on Tortoise Energy’s taxable income, and leverage costs paid by Tortoise Energy (including leverage costs of its notes, preferred shares and temporary borrowings under its credit facility).

Stockholders of Tortoise Energy hold stock of a corporation. Shares of stock differ substantially from partnership interests for federal income tax purposes. Unlike holders of MLP common units, stockholders of Tortoise Energy will not recognize an allocable share of Tortoise Energy income, gains, losses and deductions. Stockholders recognize income only if Tortoise Energy pays distributions from current or accumulated earnings and profits allocable to the particular shares held by a stockholder. Such distributions will be taxable to a stockholder in the current period as dividend income. Dividend income will be treated as “qualified dividends” for federal income tax purposes, currently subject to favorable capital gains rates. If distributions exceed Tortoise Energy’s allocated current or accumulated earnings and profits, such excess distributions will constitute a tax-free return of capital to the extent of a stockholder’s basis in its stock. To the extent excess distributions exceed a stockholder’s basis, the amount in excess of basis will be taxed as capital gain.

Based on the historical performance of MLPs, Tortoise Energy expects that a significant portion of distributions to holders of stock will constitute a tax-free return of capital. In addition, earnings and profits are treated generally, for federal income tax purposes, as first being used to pay distributions on the preferred stock, if any, and then to the extent remaining, if any, to pay distributions on common stock. There is no assurance that Tortoise Energy will make regular distributions or that Tortoise Energy’s expectation regarding the tax character of its distributions will be realized. The special tax treatment for qualified dividends is scheduled to expire as of December 31, 2010.

Upon the sale of stock, a stockholder generally will recognize capital gain or loss measured by the difference between the sale proceeds received by the stockholder and the stockholder’s federal income tax basis in its stock sold, as adjusted to reflect return(s) of capital. Generally, such capital gain or loss will be long-term capital gain or loss if the stock were held as a capital asset for more than one year.

Tortoise Energy intends to pay out substantially all of its DCF to holders of stock through quarterly distributions. Tortoise Energy’s Board of Directors adopted a policy to target distributions to common stockholders in an amount of at least 95 percent of DCF on an annual basis. Distributions will be paid each fiscal quarter out of DCF, if any. There is no assurance that Tortoise Energy will continue to make regular distributions.

14     Tortoise Energy Infrastructure Corp.

 

 

Schedule of Investments

	November 30, 2007
	Shares			Value
Common Stock — 0.2%(1)
Shipping — 0.2%(1)
Republic of the Marshall Islands — 0.2%(1)
Capital Product Partners L.P. (Cost $1,136,941)		52,881		$	1,307,218
Master Limited Partnerships and Related Companies — 202.0%(1)
Crude/Refined Products Pipelines — 93.9%(1)
United States — 93.9%(1)
Buckeye Partners, L.P.		533,367			25,628,284
Enbridge Energy Partners, L.P.		925,300			47,366,107
Enbridge Energy Partners, L.P.(2) (3)		989,389			49,123,157
Global Partners LP		214,286			5,886,436
Holly Energy Partners, L.P.(4)		427,070			18,577,545
Kinder Morgan Management, LLC(3)		1,698,751			85,022,488
Magellan Midstream Partners, L.P.		2,016,200			88,269,236
NuStar Energy L.P.		921,100			52,134,260
NuStar GP Holdings, LLC		691,377			19,662,762
Plains All American Pipeline, L.P.(5)		1,860,784			97,300,395
SemGroup Energy Partners, L.P.		138,550			3,706,213
Sunoco Logistics Partners L.P.		930,280			46,616,331
TEPPCO Partners, L.P.		869,520			34,537,334
TransMontaigne Partners L.P.		207,800			6,441,800
					580,272,348
Natural Gas/Natural Gas Liquids Pipelines — 54.5%(1)
United States — 54.5%(1)
Boardwalk Pipeline Partners, LP		1,162,800			37,151,460
El Paso Pipeline Partners, L.P.		854,550			19,911,015
Energy Transfer Equity, L.P.		729,661			25,180,601
Energy Transfer Partners, L.P.		1,722,250			88,695,875
Enterprise GP Holdings L.P.		71,400			2,514,708
Enterprise Products Partners L.P.		2,911,275			91,006,457
ONEOK Partners, L.P.		267,455			16,092,767
Spectra Energy Partners, LP		332,965			8,347,433
TC PipeLines, LP		1,307,759			48,334,773
					337,235,089
Natural Gas Gathering/Processing — 38.2%(1)
United States — 38.2%(1)
Copano Energy, L.L.C.		1,032,001			40,248,039
Copano Energy, L.L.C.(2)		216,388			7,508,664
Crosstex Energy, L.P.		268,587			9,005,722
Crosstex Energy, L.P.(2) (6)		712,760			22,273,750
Crosstex Energy, L.P.(2) (6)		193,767			5,200,706
DCP Midstream Partners, LP		9,200			374,716
DCP Midstream Partners, LP(2)		404,625			16,189,046
Duncan Energy Partners L.P.		433,700			9,879,686

2007 Annual Report     15

 

 

Schedule of Investments

	November 30, 2007
	Shares			Value
Exterran Partners, L.P.		64,500		$	2,241,375
Exterran Partners, L.P.(2)		258,993			8,751,374
Hiland Partners, LP		41,048			1,949,780
MarkWest Energy Partners, L.P.(4)		2,201,640			72,147,743
Regency Energy Partners LP		133,000			4,103,050
Targa Resources Partners LP		142,600			4,064,100
Williams Partners L.P.		784,707			32,274,999
					236,212,750
Shipping — 5.0%(1)
Republic of the Marshall Islands — 0.7%(1)
Teekay LNG Partners L.P.		156,200			4,631,330
United States — 4.3%(1)
K-Sea Transportation Partners L.P.(4)		612,800			22,642,960
OSG America L.P.		197,835			3,697,536
					26,340,496
					30,971,826
Propane Distribution — 10.4%(1)
United States — 10.4%(1)
Inergy, L.P.		1,916,784			61,912,123
Inergy Holdings, L.P.		49,715			2,194,917
					64,107,040
Total Master Limited Partnerships and Related Companies (Cost $831,393,560)					1,248,799,053
Short-Term Investment — 0.0%(1)
United States Investment Company — 0.0%(1)
First American Government Obligations Fund — Class Y, 4.37%(7) (Cost $164,393)		164,393			164,393
Total Investments — 202.2%(1) (Cost $832,694,894)					1,250,270,664
Auction Rate Senior Notes — (38.0%)(1)					(235,000,000	)
Interest Rate Swap Contracts — (1.8%)(1)
$290,000,000 notional — Unrealized Depreciation(8)					(10,967,363	)
Liabilities in Excess of Cash and Other Assets — (32.5%)(1)					(200,891,125	)
Preferred Shares at Redemption Value — (29.9%)(1)					(185,000,000	)
Total Net Assets Applicable to Common Stockholders — 100.0%(1)				$	618,412,176

16     Tortoise Energy Infrastructure Corp.

 

 

Statement of Assets & Liabilities

	November 30, 2007
Assets
Investments at value, non-affiliated (cost $775,412,239)	$	1,136,902,416
Investments at value, affiliated (cost $57,282,655)		113,368,248
Total investments (cost $832,694,894)		1,250,270,664
Receivable for Adviser reimbursement		214,717
Receivable for investments sold		7,258,436
Interest and dividend receivable		4,018
Prepaid expenses and other assets		3,890,356
Total assets		1,261,638,191
Liabilities
Payable to Adviser		2,039,803
Payable for termination of interest rate swap contracts		1,722,483
Dividend and distribution payable on common stock		1,249,288
Dividend and distribution payable on preferred stock		322,390
Accrued expenses and other liabilities		679,945
Unrealized depreciation of interest rate swap contracts		10,967,363
Short-term borrowings		38,050,000
Current tax liability		58,106
Deferred tax liability		168,136,637
Auction rate senior notes payable		235,000,000
Total liabilities		458,226,015
Preferred Stock
$25,000 liquidation value per share applicable to 7,400 outstanding shares
(15,000 shares authorized)		185,000,000
Net assets applicable to common stockholders	$	618,412,176
Net Assets Applicable to Common Stockholders Consist of:
Capital stock, $0.001 par value; 18,760,441 shares issued and outstanding
(100,000,000 shares authorized)	$	18,760
Additional paid-in capital		355,843,223
Accumulated net investment loss, net of deferred tax benefit		(21,176,639	)
Undistributed realized gain, net of deferred tax expense		36,030,987
Net unrealized gain on investments and interest rate swap contracts,
net of deferred tax expense		247,695,845
Net assets applicable to common stockholders	$	618,412,176
Net Asset Value per common share outstanding (net assets applicable
to common stock, divided by common shares outstanding)	$	32.96

2007 Annual Report     17

 

 

Statement of Operations

	Year Ended November 30, 2007
Investment Income
Distributions from master limited partnerships (including $7,336,843 from affiliates)	$	64,255,348
Less return of capital on distributions (including $6,323,553 from affiliates)		(55,070,326	)
Net distributions from master limited partnerships		9,185,022
Dividends from common stock		75,396
Dividends from money market mutual funds		380,487
Interest		270,805
Total Investment Income		9,911,710
Operating Expenses
Advisory fees		11,814,839
Administrator fees		681,256
Professional fees		369,882
Custodian fees and expenses		143,927
Directors’ fees		108,002
Reports to stockholders		100,001
Fund accounting fees		88,428
Registration fees		61,596
Stock transfer agent fees		12,999
Other expenses		61,076
Total Operating Expenses		13,442,006
Interest expense		16,066,014
Auction agent fees		903,021
Amortization of debt issuance costs		901,586
Total Interest, Auction Agent and Debt Issuance Costs		17,870,621
Total Expenses		31,312,627
Less expense reimbursement by Adviser		(1,243,667	)
Net Expenses		30,068,960
Net Investment Loss, before Income Taxes		(20,157,250	)
Current tax expense		(344,910	)
Deferred tax benefit		8,031,421
Income tax benefit, net		7,686,511
Net Investment Loss		(12,470,739	)
Realized and Unrealized Gain on Investments and Interest Rate Swaps
Net realized gain on investments		43,095,272
Net realized gain on interest rate swap settlements		2,283,637
Net realized loss on termination of interest rate swap contracts		(1,722,483	)
Net realized gain, before deferred tax expense		43,656,426
Deferred tax expense		(17,025,774	)
Net realized gain on investments and interest rate swaps		26,630,652
Net unrealized appreciation of investments		95,600,586
Net unrealized depreciation of interest rate swap contracts		(10,764,412	)
Net unrealized appreciation, before deferred tax expense		84,836,174
Deferred tax expense		(33,177,058	)
Net unrealized appreciation of investments and interest rate swap contracts		51,659,116
Net Realized and Unrealized Gain on Investments and Interest Rate Swaps		78,289,768
Dividends and Distributions to Preferred Stockholders		(7,250,380	)
Net Increase in Net Assets Applicable to Common Stockholders Resulting from Operations	$	58,568,649

18     Tortoise Energy Infrastructure Corp.

 

 

Statement of Changes in Net Assets

	Year Ended November 30,
	2007			2006
Operations
Net investment loss	$	(12,470,739	)	$	(5,798,038	)
Net realized gain on investments and interest rate swaps		26,630,652			5,524,349
Net unrealized appreciation of investments and interest rate
swap contracts		51,659,116			111,580,962
Dividends and distributions to preferred stockholders		(7,250,380	)		(3,529,740	)
Net increase in net assets applicable to common stockholders
resulting from operations		58,568,649			107,777,533
Dividends and Distributions to Common Stockholders
Net investment income		—			—
Return of capital		(40,702,410	)		(31,969,335	)
Total dividends and distributions to common stockholders		(40,702,410	)		(31,969,335	)
Capital Stock Transactions
Proceeds from shelf offerings of 1,927,915 and 1,675,050 common
shares, respectively		68,101,321			50,000,243
Underwriting discounts and offering expenses associated with the
issuance of common stock		(2,311,224	)		(2,202,315	)
Underwriting discounts and offering expenses associated with the
issuance of preferred stock		(1,408,368	)		—
Issuance of 100,461 and 151,500 common shares from reinvestment
of dividend distributions to stockholders, respectively		3,730,843			4,553,739
Net increase in net assets, applicable to common stockholders,
from capital stock transactions		68,112,572			52,351,667
Total increase in net assets applicable to common stockholders		85,978,811			128,159,865
Net Assets
Beginning of year		532,433,365			404,273,500
End of year	$	618,412,176		$	532,433,365
Accumulated net investment loss, net of deferred tax benefit,
at the end of year	$	(21,176,639	)	$	(8,705,900	)

2007 Annual Report     19

 

 

Statement of Cash Flows

	Year Ended November 30, 2007
Cash Flows From Operating Activities
Distributions received from master limited partnerships	$	65,158,675
Interest and dividend income received		732,751
Purchases of long-term investments		(356,532,937	)
Proceeds from sales of long-term investments		106,684,544
Proceeds from sales of short-term investments, net		509,452
Proceeds from interest rate swap settlements, net		2,283,637
Interest expense paid		(17,447,233	)
Income taxes paid		(557,596	)
Operating expenses paid		(11,729,281	)
Net cash used in operating activities		(210,897,988	)
Cash Flows From Financing Activities
Advances from revolving line of credit		373,650,000
Repayments on revolving line of credit		(368,050,000	)
Issuance of common stock		68,101,321
Issuance of preferred stock		115,000,000
Issuance of auction rate senior notes		140,000,000
Redemption of auction rate senior notes		(70,000,000	)
Common and preferred stock issuance costs		(3,588,086	)
Debt issuance costs		(1,666,370	)
Dividends and distributions paid to common stockholders		(35,722,279	)
Dividends and distributions paid to preferred stockholders		(7,212,662	)
Net cash provided by financing activities		210,511,924
Net decrease in cash		(386,064	)
Cash — beginning of year		386,064
Cash — end of year	$	—

20     Tortoise Energy Infrastructure Corp.

 

 

	Year Ended November 30, 2007
Reconciliation of net increase in net assets applicable to common stockholders
resulting from operations to net cash used in operating activities
Net increase in net assets applicable to common stockholders resulting from operations	$	58,568,649
Adjustments to reconcile net increase in net assets applicable to common stockholders
resulting from operations to net cash used in operating activities:
Purchases of long-term investments		(356,532,937	)
Return of capital on distributions received		55,070,326
Proceeds from sales of long-term investments		113,942,980
Proceeds from sales of short-term investments, net		509,452
Deferred income tax expense		42,171,411
Net unrealized appreciation of investments and interest rate swap contracts		(84,836,174	)
Net realized gain on investments		(43,095,272	)
Accretion of discount on investments		(5,721	)
Amortization of debt issuance costs		901,586
Dividends and distributions to preferred stockholders		7,250,380
Changes in operating assets and liabilities:
Decrease in interest, dividend and distribution receivable		915,110
Increase in prepaid expenses and other assets		(798,336	)
Increase in receivable for investments sold		(7,258,436	)
Increase in payable for termination of interest rate swap contracts		1,722,483
Decrease in current tax liability		(212,686	)
Increase in payable to Adviser, net of expense reimbursement		596,983
Increase in accrued expenses and other liabilities		192,214
Total adjustments		(269,466,637	)
Net cash used in operating activities	$	(210,897,988	)
Non-Cash Financing Activities
Reinvestment of distributions by common stockholders in additional common shares	$	3,730,843

2007 Annual Report     21

 

 

Financial Highlights

	Year Ended November 30, 2007						Year Ended November 30, 2006						Year Ended November 30, 2005						Period from February 27, 2004(1) through November 30, 2004
Per Common Share Data(2)
Net Asset Value, beginning of period		$	31.82					$	27.12					$	26.53					$	—
Public offering price			—						—						—						25.00
Underwriting discounts and offering costs on
issuance of common and preferred stock(3)			(0.08	)					(0.14	)					(0.02	)					(1.23	)
Premiums less underwriting discounts and
offering costs on offerings(4)			0.08						—						—						—
Income (loss) from Investment Operations:
Net investment loss(5)			(0.61	)					(0.32	)					(0.16	)					(0.03	)
Net realized and unrealized gain
on investments(5)			4.33						7.41						2.67						3.77
Total increase from investment operations			3.72						7.09						2.51						3.74
Less Dividends and Distributions to
Preferred Stockholders:
Net investment income			—						—						—						—
Return of capital			(0.39	)					(0.23	)					(0.11	)					(0.01	)
Total dividends and distributions to
preferred stockholders			(0.39	)					(0.23	)					(0.11	)					(0.01	)
Less Dividends and Distributions
to Common Stockholders:
Net investment income			—						—						—						—
Return of capital			(2.19	)					(2.02	)					(1.79	)					(0.97	)
Total dividends and distributions to
common stockholders			(2.19	)					(2.02	)					(1.79	)					(0.97	)
Net Asset Value, end of period		$	32.96					$	31.82					$	27.12					$	26.53
Per common share market value, end of period		$	32.46					$	36.13					$	28.72					$	27.06
Total Investment Return Based on Market Value(6)			(4.43	)%					34.50	%					13.06	%					12.51	%
Supplemental Data and Ratios
Net assets applicable to common stockholders,
end of period (000’s)		$	618,412					$	532,433					$	404,274					$	336,553
Ratio of expenses (including current and
deferred income tax expense) to average
net assets before waiver(7) (8) (9)			11.19	%					20.03	%					9.10	%					15.20	%
Ratio of expenses (including current and
deferred income tax expense) to average
net assets after waiver(7) (8) (9)			11.00	%					19.81	%					8.73	%					14.92	%
Ratio of expenses (excluding current and
deferred income tax expense) to average
net assets before waiver(7) (8) (10)			4.75	%					3.97	%					3.15	%					2.01	%
Ratio of expenses (excluding current and
deferred income tax expense) to average
net assets after waiver(7) (8) (10)			4.56	%					3.75	%					2.78	%					1.73	%
Ratio of expenses (excluding current and
deferred income tax expense), without
regard to non-recurring organizational
expenses, to average net assets
before waiver(7) (8) (10)			4.75	%					3.97	%					3.15	%					1.90	%

22     Tortoise Energy Infrastructure Corp.

 

 

	Year Ended November 30, 2007						Year Ended November 30, 2006						Year Ended November 30, 2005						Period from February 27, 2004(1) through November 30, 2004
Ratio of expenses (excluding current and
deferred income tax expense), without
regard to non-recurring organizational
expenses, to average net assets
after waiver(7) (8) (10)			4.56	%					3.75	%					2.78	%					1.62	%
Ratio of net investment loss to average
net assets before waiver(7) (8) (10)			(3.24	)%					(2.24	)%					(1.42	)%					(0.45	)%
Ratio of net investment loss to average
net assets after waiver(7) (8) (10)			(3.05	)%					(2.02	)%					(1.05	)%					(0.17	)%
Ratio of net investment loss to average
net assets after current and deferred
income tax expense, before waiver(7) (8) (9)			(9.68	)%					(18.31	)%					(7.37	)%					(13.37	%)
Ratio of net investment loss to average
net assets after current and deferred
income tax expense, after waiver(7) (8) (9)			(9.49	)%					(18.09	)%					(7.00	)%					(13.65	)%
Portfolio turnover rate(7)			9.30	%					2.18	%					4.92	%					1.83	%
Tortoise Auction Rate Senior Notes,
end of period (000’s)		$	235,000					$	165,000					$	165,000					$	110,000
Tortoise Preferred Stock, end of period (000’s)		$	185,000					$	70,000					$	70,000					$	35,000
Per common share amount of auction rate
senior notes outstanding at end of period		$	12.53					$	9.86					$	11.07					$	8.67
Per common share amount of net assets,
excluding auction rate senior notes,
at end of period		$	45.49					$	41.68					$	38.19					$	35.21
Asset coverage, per $1,000 of principal
amount of auction rate senior notes and
short-term borrowings(11)		$	3,942					$	4,051					$	3,874					$	4,378
Asset coverage ratio of auction rate senior
notes and short-term borrowings(11)			394	%					405	%					387	%					438	%
Asset coverage, per $25,000 liquidation
value per share of preferred stock(12)		$	108,569					$	215,155					$	169,383					$	265,395
Asset coverage, per $25,000 liquidation
value per share of preferred stock(13)		$	58,752					$	74,769					$	68,008					$	83,026
Asset coverage ratio of preferred stock(13)			235	%					299	%					272	%					332	%

2007 Annual Report     23

 

 

November 30, 2007

Tortoise Energy Infrastructure Corporation (the “Company”) was organized as a Maryland corporation on October 29, 2003, and is a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company’s investment objective is to seek a high level of total return with an emphasis on current dividends and distributions paid to stockholders. The Company seeks to provide its stockholders with an efficient vehicle to invest in the energy infrastructure sector. The Company commenced operations on February 27, 2004. The Company’s stock is listed on the New York Stock Exchange under the symbol “TYG.”

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, recognition of distribution income and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

The Company primarily owns securities that are listed on a securities exchange. The Company values those securities at their last sale price on that exchange on the valuation date. If the security is listed on more than one exchange, the Company will use the price of the exchange that it generally considers to be the principal exchange on which the security is traded. Securities listed on the NASDAQ will be valued at the NASDAQ Official Closing Price, which may not necessarily represent the last sale price. If there has been no sale on such exchange or NASDAQ on such day, the security will be valued at the mean between bid and ask price on such day.

The Company may invest up to 30 percent of its total assets in restricted securities. Restricted securities are subject to statutory or contractual restrictions on their public resale, which may make it more difficult to obtain a valuation and may limit the Company’s ability to dispose of them. Investments in private placement securities and other securities for which market quotations are not readily available will be valued in good faith by using fair value procedures approved by the Board of Directors. Such fair value procedures consider factors such as discounts to publicly traded issues, securities with similar yields, quality, type of issue, coupon, duration and rating. If events occur that will affect the value of the Company’s portfolio securities before the net asset value has been calculated (a “significant event”), the portfolio securities so affected will generally be priced using a fair value procedure.

The Company generally values short-term debt securities at prices based on market quotations for such securities, except those securities purchased with 60 days or less to maturity are valued on the basis of amortized cost, which approximates market value.

The Company generally values its interest rate swap contracts using industry-accepted models which discount the estimated future cash flows based on the stated terms of the interest rate swap agreement by using interest rates currently available in the market, or based on dealer quotations, if available.

Security transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are reported on an identified cost basis. Interest income is recognized on the accrual basis, including amortization of premiums and accretion of discounts. Distributions are recorded on the ex-dividend date. Distributions received from the Company’s investments in master limited partnerships (“MLPs”) generally are comprised of ordinary income, capital gains and return of capital from the MLP. The Company records investment income and return of capital based on estimates made at the time such distributions are received. Such estimates are based on historical information available from each MLP and other industry sources. These estimates may subsequently be revised based on information received from MLPs after their tax reporting periods are concluded, as the actual character of these distributions is not known until after the fiscal year-end of the Company.

24     Tortoise Energy Infrastructure Corp.

 

 

For the period from December 1, 2005 through November 30, 2006, the Company estimated the allocation of investment income and return of capital for the distributions received from MLPs within the Statement of Operations. For this period, the Company had estimated approximately 14 percent as investment income and approximately 86 percent as return of capital. Subsequent to November 30, 2006, the Company reclassified the amount of investment income and return of capital it recognized based on the 2006 tax reporting information received from the individual MLPs. This reclassification amounted to an increase in pre-tax net investment income of approximately $276,000 or $0.015 per share ($168,000 or $0.009 per share, net of deferred tax expense); a decrease of approximately $173,000 or $0.009 per share ($105,000 or $0.006 per share, net of deferred tax benefit) in unrealized appreciation of investments and a decrease in realized gains of approximately $103,000 or $0.006 per share ($63,000 or $0.003 per share, net of deferred tax benefit) for the year ended November 30, 2007.

Dividends and distribution to common stockholders are recorded on the ex-dividend date. The character of dividends and distributions to common stockholders made during the year may differ from their ultimate characterization for federal income tax purposes. For the year ended November 30, 2007, the Company’s dividends and distributions for book purposes were comprised of 100 percent return of capital. For the year ended November 30, 2007, the Company’s dividends and distributions, for tax purposes, were comprised of approximately 41.3 percent qualified dividend income and 58.7 percent return of capital.

Dividends and distributions to preferred stockholders are based on variable rates set at auctions, normally held every 28 days unless a special rate period is designated. Dividends and distributions on preferred stock are accrued on a daily basis for the subsequent rate period at a rate determined on the auction date. Dividends and distributions on preferred stock are payable on the first day following the end of the dividend period. The character of dividends and distributions to preferred stockholders made during the year may differ from their ultimate characterization for federal income tax purposes. For the year ended November 30, 2007, for tax purposes, the Company determined the dividends and distributions to preferred stockholders were comprised entirely of qualified dividend income.

The Company, as a corporation, is obligated to pay federal and state income tax on its taxable income. Currently, the maximum marginal regular federal income tax rate for a corporation is 35 percent. The Company may be subject to a 20 percent federal alternative minimum tax on its federal alternative minimum taxable income to the extent that its alternative minimum tax exceeds its regular federal income tax. For the year ended November 30, 2007, the alternative minimum tax is estimated to be $57,984 which may be credited in the future.

The Company invests its assets primarily in MLPs, which generally are treated as partnerships for federal income tax purposes. As a limited partner in the MLPs, the Company reports its allocable share of the MLP’s taxable income in computing its own taxable income. The Company’s tax expense or benefit is included in the Statement of Operations based on the component of income or gains (losses) to which such expense or benefit relates. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.

The Company is responsible for paying all organizational expenses, which were expensed as incurred. Offering costs related to the issuance of common and preferred stock are charged to additional paid-in capital when the stock is issued. Offering costs (excluding underwriter commissions) of $263,700 and $114,003 were charged to additional paid-in capital for the issuance of common stock in December 2006 and March 2007, respectively. Offering costs (excluding underwriter commissions) of $134,778 and $123,591 were charged to additional paid-in capital for the issuance of preferred stock in April 2007 and August 2007, respectively. Debt issuance costs related to the auction rate senior notes are capitalized and amortized over the period the notes are outstanding. The amount of such capitalized costs (excluding underwriter commissions) for Auction Rate Senior Notes Series D issued in March 2007 was $136,889.

2007 Annual Report     25

 

 

The Company uses derivative financial instruments (principally interest rate swap contracts) in an attempt to manage interest rate risk. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not hold or issue derivative financial instruments for speculative purposes. All derivative financial instruments are recorded at fair value with changes in value during the reporting period and amounts accrued under the derivative instruments included as unrealized gains or losses in the accompanying Statement of Operations. Monthly cash settlements under the terms of the derivative instruments and the termination of such contracts are recorded as realized gains or losses in the Statement of Operations.

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

In July 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. Recent SEC guidance allows implementing FIN 48 in the Company’s net asset value calculations as late as its last net asset value calculation in the first required financial statement reporting period. As a result, the Company will incorporate FIN 48 in its February 29, 2008 quarterly financial statements. As of the date of this report, the Company is evaluating the implications of FIN 48 and its impact to the financial statements has not yet been determined.

In September 2006, FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements.” This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS No. 157 is effective for the Company beginning December 1, 2007. The changes to current U.S. generally accepted accounting principles from the application of this statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. As of November 30, 2007, the Company does not believe the adoption of SFAS No. 157 will have a material quantitative impact on the financial statements; however, additional disclosures may be required about the inputs used to develop the measurements and the effect of certain measurements on changes in net assets for the period.

26     Tortoise Energy Infrastructure Corp.

 

 

The Company’s investment objective is to seek a high level of total return with an emphasis on current dividends and distributions paid to its stockholders. Under normal circumstances, the Company intends to invest at least 90 percent of its total assets in securities of domestic energy infrastructure companies, and to invest at least 70 percent of its total assets in equity securities of MLPs. The Company will not invest more than 10 percent of its total assets in any single issuer as of the time of purchase. The Company may invest up to 25 percent of its assets in debt securities, which may include below investment grade securities. In determining application of these policies, the term “total assets” includes assets obtained through leverage. Companies that primarily invest in a particular sector may experience greater volatility than companies investing in a broad range of industry sectors. The Company may, for defensive purposes, temporarily invest all or a significant portion of its assets in investment grade securities, short-term debt securities and cash or cash equivalents. To the extent the Company uses this strategy, it may not achieve its investment objective.

The Company has entered into an Investment Advisory Agreement with Tortoise Capital Advisors, L.L.C. (the “Adviser”). Under the terms of the agreement, the Company will pay the Adviser a fee equal to an annual rate of 0.95 percent of the Company’s average monthly total assets (including any assets attributable to leverage) minus the sum of accrued liabilities (other than deferred income taxes, debt entered into for purposes of leverage and the aggregate liquidation preference of outstanding preferred stock) (“Managed Assets”), in exchange for the investment advisory services provided. Effective March 1, 2006 through February 28, 2009, the Adviser has agreed to waive or reimburse the Company for fees and expenses in an amount equal to 0.10 percent of the average monthly Managed Assets of the Company.

The Company has engaged U.S. Bancorp Fund Services, LLC to serve as the Company’s administrator. Effective October 1, 2007, the Company pays the administrator a monthly fee computed at an annual rate of 0.04 percent of the first $1,000,000,000 of the Company’s Managed Assets, 0.03 percent on the next $1,000,000,000 of Managed Assets and 0.02 percent on the balance of the Company’s Managed Assets. Prior to October 1, 2007, the Company paid the administrator a monthly fee computed at an annual rate of 0.07 percent of the first $300,000,000 of the Company’s Managed Assets, 0.06 percent on the next $500,000,000 of Managed Assets and 0.04 percent on the balance of the Company’s Managed Assets.

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

U.S. Bank, N.A. serves as the Company’s custodian. The Company pays the custodian a monthly fee computed at an annual rate of 0.015 percent on the first $100,000,000 of the Company’s portfolio assets and 0.01 percent on the balance of the Company’s portfolio assets.

2007 Annual Report     27

 

 

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. Components of the Company’s deferred tax assets and liabilities as of November 30, 2007, are as follows:

Deferred tax assets:
Net operating loss carryforwards	$	16,597,908
Deferred expense associated with interest rate swap terminations		672,324
Organization costs		24,211
		17,294,443
Deferred tax liabilities:
Net unrealized gains on investment securities and interest rate swap contracts		158,684,322
Basis reduction of investment in MLPs		26,746,758
		185,431,080
Total net deferred tax liability	$	168,136,637

At November 30, 2007, a valuation allowance was not recorded because the Company believes it is more likely than not that there is an ability to realize its deferred tax assets.

Total income tax expense differs from the amount computed by applying the federal statutory income tax rate of 35 percent to net investment loss and realized and unrealized gains (losses) on investments and interest rate swap contracts before taxes for the year ended November 30, 2007, as follows:

Application of statutory income tax rate	$	37,816,948
State income taxes, net of federal tax benefit		4,321,937
Foreign taxes, net of federal tax benefit		286,926
Other, net		90,510
Total	$	42,516,321

For the year ended November 30, 2007, the components of current income tax expense include foreign taxes (net of federal tax benefit) of $286,926 and alternative minimum tax for U.S. tax purposes of $57,984 and deferred federal and state income taxes (net of federal tax benefit) of $37,849,474 and $4,321,937, respectively. As of November 30, 2007, the Company had a net operating loss for federal income tax purposes of approximately $42,293,000. If not utilized, this net operating loss will expire as follows: $2,883,000, $15,979,000, $22,275,000 and $1,156,000 in the years ending November 30, 2024, 2025, 2026 and 2027 respectively.

As of November 30, 2007, the aggregate cost of securities for federal income tax purposes was $764,113,464. At November 30, 2007, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $490,572,118, the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $4,414,918 and the net unrealized appreciation was $486,157,200.

28     Tortoise Energy Infrastructure Corp.

 

 

Certain of the Company’s investments are restricted and are valued as determined in accordance with procedures established by the Board of Directors as more fully described in Note 2. The table below shows the number of units held, acquisition date, acquisition cost, value per unit of such securities and percent of net assets which the securities comprise at November 30, 2007.

Investment Security		Number of Units	Acquisition Date	Acquisition Cost		Value Per Unit	Value as Percent of Net Assets
Copano Energy, L.L.C.	Common Units	216,388	10/19/07	$	7,500,008	$34.70	1.2%
Crosstex Energy, L.P.	Series C Subordinated Units	712,760	6/29/06		20,000,046	31.25	3.6
Crosstex Energy, L.P.	Series D Subordinated Units	193,767	3/23/07		5,000,002	26.84	0.9
DCP Midstream Partners, LP	Common Units	404,625	6/22/07		17,500,031	40.01	2.6
Enbridge Energy Partners, L.P.	Class C Common Units	989,389	4/02/07		50,000,000	49.65	7.9
Exterran Partners, L.P.	Common Units	258,993	7/09/07		9,000,007	33.79	1.4
				$	109,000,094		17.6%

The carrying value per unit of unrestricted common units of Copano Energy, L.L.C. was $38.99 on August 31, 2007, the date of the purchase agreement and date an enforceable right to acquire the restricted Copano Energy, L.L.C. units was obtained by the Company. The carrying value per unit of unrestricted common units of Crosstex Energy, L.P. (into which the restricted subordinated units are convertible) was $34.65 on March 23, 2007, the date of the purchase agreement and date an enforceable right to acquire the restricted Crosstex Energy, L.P. units was obtained by the Company. The carrying value per unit of unrestricted common units of DCP Midstream Partners, LP was $45.48 on June 22, 2007, the date of the purchase agreement and date an enforceable right to acquire the restricted DCP Midstream Partners, L.P. units was obtained by the Company. The carrying value per unit of unrestricted common units of Enbridge Energy Partners, L.P. (into which the restricted Class C common units are convertible) was $56.39 on April 2, 2007, the date of the purchase agreement and date an enforceable right to acquire the restricted Enbridge Energy Partners, L.P. units was obtained by the Company. The carrying value per unit of unrestricted common units of Exterran Partners, L.P. was $39.44 on July 9, 2007, the date of the purchase agreement and date an enforceable right to acquire the restricted Exterran Partners, L.P. units was obtained by the Company.

Investments representing 5 percent or more of the outstanding voting securities of a portfolio company result in that company being considered an affiliated company, as defined in the 1940 Act. The aggregate market value of all securities of affiliates held by the Company as of November 30, 2007 amounted to $113,368,248, representing 18.3 percent of net assets applicable to common stockholders. A summary of affiliated transactions for each company which is or was an affiliate at November 30, 2007 or during the year ended November 30, 2007, is as follows:

													November 30, 2007
	Share Balance 11/30/06		Gross Additions		Gross Reductions			Realized Gain (Loss)			Gross Distributions Received		Share Balance		Value
Holly Energy Partners, L.P.	427,070		$	—		$  —			$  —		$	1,189,390	427,070		$	18,577,545
K-Sea Transportation Partners L.P.	571,300			1,639,250		—			—			1,606,668	612,800			22,642,960
MarkWest Energy Partners, L.P.(1)	1,016,877			5,384,778		—			—			4,540,785	2,201,640			72,147,743
			$	7,024,028		$  —			$  —		$	7,336,843			$	113,368,248

2007 Annual Report     29

 

 

For the year ended November 30, 2007, the Company purchased (at cost) and sold securities (proceeds) in the amount of $356,532,937 and $113,942,980 (excluding short-term debt securities and interest rate swaps), respectively.

The Company has issued $235,000,000 aggregate principal amount of auction rate senior notes (collectively, the “Notes”). The Notes were issued in denominations of $25,000. Holders of the Notes are entitled to receive cash interest payments at an annual rate that may vary for each rate period. Estimated fair value of Series A and Series B Notes was calculated using the spread between the rates received at the time the special rate periods commenced to the U.S. Treasury rates with equivalent maturity dates. At November 30, 2007, the spread of each series was applied to the equivalent U.S. Treasury rate and the future cash flows were discounted to determine estimated fair value. Estimated fair value of Series C and Series D Notes approximates the carrying amount because the interest rate fluctuates with changes in interest rates available in the current market. The table below shows the maturity date, notional/carrying amount, estimated fair value, current rate as of November 30, 2007, the weighted-average rate for the year ended November 30, 2007 and the typical rate period for each series of Notes outstanding at November 30, 2007. The Company may designate a rate period that is different than the rate period indicated in the table below.

Series	Maturity Date	Notional/Carrying Amount			Estimated Fair Value		Current Rate	Weighted- Average Rate	Rate Period
Series A	July 15, 2044	$	60,000,000		$	61,874,847	6.75%(1)	5.63%		28 days(1)
Series B	July 15, 2044		50,000,000			50,370,965	7.00%(2)	5.67%		28 days(2)
Series C	April 10 , 2045		55,000,000			55,000,000	5.60%	5.44%		7 days
Series D	March 27, 2047		70,000,000			70,000,000	5.85%	5.68%(3)		28 days
		$	235,000,000		$	237,245,812

The rates shown in the table above do not include commissions paid to the auction agent which are included in auction agent fees in the accompanying Statement of Operations. At the time the special rate periods commenced, the Company paid commissions for Series A and Series B Notes in the amount of $240,000 and $75,000, respectively, which are being amortized over the rate period. Series C and Series D Notes pay commissions in the amount of 0.25 percent. For each subsequent rate period, the interest rate will be determined by an auction conducted in accordance with the procedures described in the Notes’ prospectus. The Notes are not listed on any exchange or automated quotation system.

On May 30, 2007, the Company issued $70,000,000 aggregate principal amount of Series E Notes with a stated maturity date of May 30, 2047. On October 26, 2007, the Company fully redeemed the Series E Notes. The weighted-average interest rate for the period from May 30, 2007 (date of issuance) through October 26, 2007 (date of redemption) was 5.76 percent. This rate does not include commissions paid to the auction agent in the amount of 0.25 percent which are included in auction agent fees in the accompanying Statement of Operations. The amount of capitalized costs (excluding underwriter commissions) from the issuance of the Series E Notes was $129,481. At redemption, the unamortized balance of capitalized costs was expensed and resulted in a loss on early redemption in the amount of $829,481 which is included in amortization of debt issuance costs in the accompanying Statement of Operations.

The Notes are redeemable in certain circumstances at the option of the Company. The Notes are also subject to a mandatory redemption if the Company fails to meet an asset coverage ratio required by law, or fails to cure in a timely manner a deficiency as stated in the rating agency guidelines applicable to the Notes.

30     Tortoise Energy Infrastructure Corp.

 

 

The Notes are unsecured obligations of the Company and, upon liquidation, dissolution or winding up of the Company, will rank: (1) senior to all the Company’s outstanding preferred shares; (2) senior to all of the Company’s outstanding common shares; (3) on a parity with any unsecured creditors of the Company and any unsecured senior securities representing indebtedness of the Company and (4) junior to any secured creditors of the Company.

The Company has 15,000 authorized shares of Preferred Stock, of which 7,400 shares are currently outstanding. The Preferred Stock has rights determined by the Board of Directors. The Preferred Stock has a liquidation value of $25,000 per share plus any accumulated, but unpaid dividends and distributions, whether or not declared. Holders of the Preferred Stock are entitled to receive cash dividend payments at an annual rate that may vary for each rate period. Estimated fair value of Auction Preferred I and Auction Preferred II Stock was calculated using the spread between the rates received at the time the special rate periods commenced to the U.S. Treasury rates with equivalent maturity dates. At November 30, 2007, the spread between each series was applied to the equivalent U.S. Treasury rate and the future cash flows were discounted to determine the estimated fair value. Estimated fair value of the Money Market Preferred (“MMP”) III Stock and MMP IV Stock approximates the carrying amount because the dividend rate fluctuates with changes in interest rates available in the current market. The table below shows the number of shares outstanding, aggregate liquidation preference, estimated fair value, current rate as of November 30, 2007, the weighted-average rate for the year ended November 30, 2007 and the typical rate period for each series of Preferred Stock outstanding at November 30, 2007. The Company may designate a rate period that is different than the rate period indicated in the table below.

Series	Shares Outstanding			Aggregate Liquidation Preference			Estimated Fair Value		Current Rate	Weighted- Average Rate	Rate Period
Auction Preferred I Stock		1,400		$	35,000,000		$	35,845,940	6.25%(1)	5.56%	28 days(1)
Auction Preferred II Stock		1,400			35,000,000			35,934,264	6.25%(2)	5.57%	28 days(2)
MMP III Stock		2,400			60,000,000			60,000,000	6.10%	5.79%(3)	28 days
MMP IV Stock		2,200			55,000,000			55,000,000	6.15%	6.28%(4)	28 days
		7,400		$	185,000,000		$	186,780,204

The rates shown in the table above do not include commissions paid to the auction agent which are included in auction agent fees in the accompanying Statement of Operations. At the time the special rate periods commenced, the Company paid commissions for Auction Preferred I Stock and Auction Preferred II Stock in the amount of $175,000 and $178,500, respectively, which are being amortized over the rate period. MMP III Stock and MMP IV Stock pay commissions in the amount of 0.25 percent. Under the Investment Company Act of 1940, the Company may not declare dividends or make other distributions on shares of common stock or purchases of such shares if, at the time of the declaration, distribution or purchase, asset coverage with respect to the outstanding Preferred Stock would be less than 200 percent.

The Preferred Stock is redeemable in certain circumstances at the option of the Company. The Preferred Stock is also subject to a mandatory redemption if the Company fails to meet an asset coverage ratio required by law, or fails to cure a deficiency in a timely manner as stated in the rating agency guidelines.

The holders of Preferred Stock have voting rights equal to the holders of common stock (one vote per Preferred share) and will vote together with the holders of shares of common stock as a single class except on matters affecting only the holders of preferred stock or the holders of common stock.

2007 Annual Report     31

 

 

The Company has entered into interest rate swap contracts in an attempt to protect itself from increasing interest and dividend expense on its leverage resulting from increasing short-term interest rates. A decline in interest rates may result in a decline in the value of the swap contracts, which may result in a decline in the net assets of the Company. In addition, if the counterparty to the interest rate swap contracts defaults, the Company would not be able to use the anticipated receipts under the swap contracts to offset the interest payments on the Company’s leverage. At the time the interest rate swap contracts reach their scheduled termination, there is a risk that the Company would not be able to obtain a replacement transaction, or that the terms of the replacement would not be as favorable as on the expiring transaction. In addition, if the Company is required to terminate any swap contract early due to the Company failing to maintain a required 300 percent and 200 percent asset coverage of the liquidation value of the outstanding auction rate senior notes and Preferred Stock, respectively, or if the Company loses its credit rating on its auction rate senior notes or Preferred Stock, then the Company could be required to make a termination payment, in addition to redeeming all or some of the auction rate senior notes and Preferred Stock. Details of the interest rate swap contracts outstanding as of November 30, 2007, are as follows:

Counterparty	Maturity Date	Notional Amount		Fixed Rate Paid by the Company	Floating Rate Received by the Company	Unrealized Depreciation
U.S. Bank, N.A.	7/12/2011	$	50,000,000	4.64%	1 month U.S. Dollar LIBOR	$	(1,183,408	)
U.S. Bank, N.A.	4/21/2012		55,000,000	4.99%	1 month U.S. Dollar LIBOR		(2,159,587	)
U.S. Bank, N.A.	4/21/2013		60,000,000	5.03%	1 month U.S. Dollar LIBOR		(2,627,930	)
U.S. Bank, N.A.	5/01/2014		55,000,000	4.54%	1 week U.S. Dollar LIBOR		(953,064	)
U.S. Bank, N.A.	11/12/2020		35,000,000	5.20%	1 month U.S. Dollar LIBOR		(1,999,478	)
U.S. Bank, N.A.	11/18/2020		35,000,000	5.21%	1 month U.S. Dollar LIBOR		(2,043,896	)
		$	290,000,000			$	(10,967,363	)

On November 29, 2007, the Company terminated $5,000,000 of a $60,000,000 notional swap contract (4.99 percent, 4/21/2012) and completely terminated a $60,000,000 notional swap contract (4.63 percent, 7/5/2011). The Company realized losses of $205,267 and $1,517,216, respectively, which are included in net realized loss on termination of interest rate swap contracts in the accompanying Statement of Operations.

The Company is exposed to credit risk on the interest rate swap contracts if the counterparty should fail to perform under the terms of the interest rate swap contracts. The amount of credit risk is limited to the net appreciation of the interest rate swap contracts, if any, as no collateral is pledged by the counterparty.

The Company has 100,000,000 shares of capital stock authorized and 18,760,441 shares outstanding at November 30, 2007. Transactions in common stock for the years ended November 30, 2006 and 2007, were as follows:

Shares at November 30, 2005	14,905,515
Shares sold through shelf offering	1,675,050
Shares issued through reinvestment of dividends and distributions	151,500
Shares at November 30, 2006	16,732,065
Shares sold through shelf offerings	1,927,915
Shares issued through reinvestment of dividends and distributions	100,461
Shares at November 30, 2007	18,760,441

32     Tortoise Energy Infrastructure Corp.

 

 

On June 13, 2006, the Company entered into a $20,000,000 unsecured committed credit facility maturing June 13, 2007, with U.S. Bank, N.A. The principal amount of the credit facility was subsequently increased to $120,000,000. The credit facility had a variable annual interest rate equal to one-month LIBOR plus 0.75 percent. Proceeds from the credit facility were used to execute the Company’s investment objective.

On March 22, 2007, the Company entered into an agreement establishing a new $150,000,000 unsecured credit facility maturing on March 21, 2008. The new credit facility replaces the previous credit facility. Under the terms of the new credit facility, U.S. Bank, N.A. serves as a lender and the lending syndicate agent on behalf of other lenders participating in the credit facility. Outstanding balances generally will accrue interest at a variable annual rate equal to one-month LIBOR plus 0.75 percent.

The average principal balance and interest rate for the period during which the credit facilities were utilized during the year ended November 30, 2007 was approximately $45,400,000 and 6.00 percent, respectively. At November 30, 2007, the principal balance outstanding was $38,050,000 at an interest rate of 5.99 percent.

Subsequent to November 30, 2007, the Company issued shares in the amount of $1,249,288 for the dividend reinvestment portion of the dividend payable on November 30, 2007.

On December 21, 2007 the Company issued 327,450 shares of common stock. The net proceeds of approximately $10,200,000 from this offering were used to retire a portion of the Company’s short-term debt under the unsecured credit facility.

2007 Annual Report     33

 

 

Report Of Independent Registered Public Accounting Firm

We have audited the accompanying statement of assets and liabilities of Tortoise Energy Infrastructure Corporation (the Company), including the schedule of investments, as of November 30, 2007, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of November 30, 2007, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Tortoise Energy Infrastructure Corporation at November 30, 2007, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated therein, in conformity with U.S. generally accepted accounting principles.

Kansas City, Missouri

January 16, 2008

34     Tortoise Energy Infrastructure Corp.

 

 

Company Officers and Directors  (Unaudited)

November 30, 2007

Name and Age*	Position(s) with Company, Term of Office and Length of Time Served		Principal Occupation During Past Five Years		Number of Portfolios in Fund Complex Overseen by Director(1)	Other Positions Held by Director
Independent Directors
Conrad S. Ciccotello, (Born 1960)	Director since 2003		Tenured Associate Professor of Risk Management and Insurance, Robinson College of Business, Georgia State University (faculty member since 1999); Director of Graduate Personal Financial Planning Programs; formerly, Editor, “Financial Services Review,” (2001-2007) (an aca- demic journal dedicated to the study of individual financial management); formerly, faculty member, Pennsylvania State University (1997-1999).		6	None
John R. Graham, (Born 1945)	Director since 2003		Executive-in-Residence and Professor of Finance (Part-time), College of Business Administration, Kansas State University (has served as a professor or adjunct professor since 1970); Chairman of the Board, President and CEO, Graham Capital Management, Inc., (primarily a real estate develop- ment, investment and venture capital company) and Owner of Graham Ventures (a business services and ven- ture capital firm); Part-time Vice President Investments, FB Capital Management, Inc. (a registered investment adviser), since 2007. Formerly, CEO, Kansas Farm Bureau Financial Services, including seven affiliated insurance or financial service companies (1979-2000).		6	Kansas State Bank
Charles E. Heath, (Born 1942)	Director since 2003		Retired in 1999. Formerly, Chief Investment Officer, GE Capital’s Employers Reinsurance Corporation (1989-1999); Chartered Financial Analyst (“CFA”) designation since 1974.		6	None

(1)   This number includes TYY, TYN, TTO, two private companies and the Company. Our Adviser also serves as the investment adviser to TYY, TYN, TTO and two private companies.

*      The address of each director and officer is 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.

2007 Annual Report     35

 

 

Company Officers and Directors  (Unaudited)

November 30, 2007 (Continued)

Name and Age*	Position(s) with Company, Term of Office and Length of Time Served		Principal Occupation During Past Five Years		Number of Portfolios in Fund Complex Overseen by Director(1)	Other Positions Held by Director
Interested Directors and Officers(2)
H. Kevin Birzer, (Born 1959)	Director and Chairman of the Board since 2003		Managing Director of our Adviser since 2002; Partner, Fountain Capital Management (1990-present); Vice President, Corporate Finance Department, Drexel Burnham Lambert (1986-1989); formerly, Vice President, F. Martin Koenig & Co., an investment management firm (1983-1986); CFA designation since 1988.		6	None
Terry C. Matlack, (Born 1956)	Director and Chief Financial Officer since 2003, Chief Compliance Officer from 2004 through May 2006; Assistant Treasurer since November 2005; Treasurer from 2003 to November 2005		Managing Director of our Adviser since 2002; Full-time Managing Director, Kansas City Equity Partners, L.C. (“KCEP”) (2001-2002); formerly, President, GreenStreet Capital, a private investment firm (1998-2001); CFA designation since 1985.		6	None
David J. Schulte, (Born 1961)	President and Chief Executive Officer since 2003		Managing Director of our Adviser since 2002; Full-time Managing Director, KCEP (1993-2002); CFA designation since 1992.		N/A	None
Zachary A. Hamel, (Born 1965)	Senior Vice President since April 2007; Secretary from 2003 to April 2007		Managing Director of our Adviser since 2002; Partner, Fountain Capital Management (1997-present); CFA designation since 1998.		N/A	None
Kenneth P. Malvey, (Born 1965)	Senior Vice President since April 2007; Treasurer since November 2005; Assistant Treasurer from 2003 to November 2005		Managing Director of our Adviser since 2002; Partner, Fountain Capital Management (2002-present); formerly Investment Risk Manager and member of Global Office of Investments, GE Capital’s Employers Reinsurance Corporation (1996-2002); CFA designation since 1996.		N/A	None