Tortoise Energy Capital (NYSE:TYY)
Q4 2013 Results Earnings Call
December 12, 2013, 04:30 PM ET
Terry Matlack – Managing Director and Co-Founder
Zach Hamel – Managing Director and Co-Founder
Rob Thummel – Portfolio Manager and Senior Investment Analyst
Matt Sallee – Portfolio Manager and Senior Investment Analyst
Brad Adams – Managing Director
Derek Walker – Bank of America Merrill Lynch
Maynard Lichterman – Morgan Stanley
Greetings and welcome to the Tortoise Capital Advisors Closed End Fund Yearend Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Terry Matlack, Managing Director for Tortoise Capital Advisors. Thank you, Mr. Matlack, you may begin.
Thank you very much. Good afternoon to all of you and thank you for joining us. It’s my pleasure to welcome you here to our 2013 Year End Closed-End Fund Conference Call. As a reminder, the presentation today is available on our website at www.tortoiseadvisors.com and it's in the closed end fund presentation section of that website.
Joining me today on the call is Zach Hamel, our fellow Managing Director and Member of the Investment Committee, Rob Thummel and Matt Sallee, Portfolio Managers and Brad Adams, Managing Director and CFO of the Funds. As always, I am also joined by other members of our team as well.
With that, I’d like to remind you that our presentation contains certain forward-looking statements that are based on current expectations and they are subject to a number of uncertainties and risks. Actual results may differ materially. Please take a look at the forward-looking statement disclosure that's on Slide 3 of the presentation, which is available on our website.
At Tortoise, we believe in steady wins. That belief has been at the foundation of our investment philosophy and our firm since its inception and it's reflected on Slide 4. We take a long term perspective that spans evolving investment cycles. Our goal is really straightforward is to deliver attractive, total returns that typically are a combination of current income and growth in that income.
We focus on proven management teams and perhaps most important we value quality. We take care in evaluating risk as well as potential reward, which we believe is taken on greater importance in the wake of the 2008 financial crises.
On Slide 5, we summarize our family of publicly traded closed end funds. As of November 30, we had approximately $13.7 billion in assets under management. They are all are listed on the New York Stock Exchange, it includes four MLP funds and three additional funds that are broader in scope, but are also energy or infrastructure focused. We also manage open-end funds and other accounts and those are not the subject of today’s call.
You can see the investment focus of each of the funds in more detail on Slide 6, where we lay out their portfolio mix by asset type. As a reminder, TYG and TYY both focus on midstream MLP equity investments, but with a particular emphasis on long-haul pipelines, which are diversified across crude oil, refined products and natural gas. NTG also focuses on pipelines, but especially so on natural gas infrastructure.
TYN has the broadest investment horizon of the MLP funds with a focus on both midstream and upstream companies. TTP focuses on equity securities of North American pipeline companies, particularly those organized as pipeline corporations and to a lesser extent MLPs.
Our newest closed end fund, NDP, which was launched in 2012, focuses on North American upstream equity investments, specifically companies that engage in the production of crude oil, condensate, natural gas and NGLs. Finally, TPZ is broadly focused on up, mid and downstream companies with an emphasis on fixed-income securities issued by power and energy infrastructure companies. TPZ also has an equity component, which we believe provides a partial hedge against inflation.
Since our call last year, the sub-sector allocation in our midstream focused funds has remained generally consistent. However, with respect to our midstream strategies, we have focused especially on very high quality fee-based pipeline companies that are positioned to take advantage of the growth in crude oil production across the country, as well as gas production in the Northeast and we strive to avoid risk associated with changing flows due to new basin developments.
All four of the MLP funds are structured as taxable c-corporations in order to allow them to be pure-play MLP equity products. You can see from the chart on Slide 7 that each of them invest in virtually all MLPs or the I-Shares of MLPs. We have three closed-end funds that are structured as traditional flow-through funds or regulated investment companies more commonly known as RICs. Each has an investment mandate that expands outside of MLPs. All funds historically have paid distributions quarterly with the exception of TPZ, because it’s a fixed-income focus, TPZ’s distribution we pay monthly.
This is an exciting time in North American Energy as reflected on Slide 8. Due to advancing technologies, the discovery of more reservoirs of resource-rich shale, there’s a domestic energy renewal and it’s dramatically altering the global balance of energy. This has tremendous promise for a host of benefits.
Our domestic economies enjoying energy cost advantages on a world scale that will have positive impacts for decades. Growing production continues to create opportunities across the value chain beginning with exploration and production companies, but also driving critical needs for the pipeline and related infrastructures to move newly discovered oil and gas from gathering areas to end users.
However, the development of new basins and the resulting change of flows has made investment in the energy value chain, very, very dynamic. The rapid growth and changes in the sector makes security selection and positioning an important factor. We continue to have a positive long-term outlook, expecting distribution growth in midstream companies and production growth in upstream companies.
We’ll continue to monitor the impact of macroeconomic environment, but we still believe that these assets are absolutely critical to our energy needs and are attracted to investors in periods of economic growth and uncertainty.
At this point, I’ll turn it over to Zach Hamel, who will begin our discussion of the energy value chain market update and our outlook. And he will be joined by Rob Thummel and Matt Sallee. Zach?
Thanks Terry. The broad equity market has again enjoyed strong performance in fiscal 2013. Equities have moved steadily higher despite a number of headwinds and chief among them part as in gridlock at Washington and a partial shutdown of the government.
Fixed income has underperformed due to a moderate rise in interest rates and concern that the Fed will begin to taper its asset purchases. On Slide 10, we’ll look at the year-to-date performance across energy sector and on the upstream side of the value chain, oil and gas producers have gained about 20% boosted by escalating volumes of oil and natural gas production out of those North American sales that Terry mentioned as well as a slight uptick in commodity prices.
Meanwhile the energy and infrastructure side of things including MLPs and pipelines also had strong results, up about 27% and 20% respectively. Stable fundamentals, substantial build-out underway to support robust production and continued steady underlying distribution and dividend growth continues to drive this performance.
Utilities have also had a positive year, up about 11.5%, still they trail the other sectors of the value chain due to a more negative response of the Federal reserve's tapering commentary. Fixed income generally struggled with an uncertain interest environment including energy and power fixed income.
In regards to interest rates, the most frequent question we receive revolves around rising interest rate impact on energy companies. We feel it’s important to term it why interest rates are rising to truly address the impact on our investments and what the Fed has made clear is that a tapering or reduction in asset purchases will be the result of an improving economy. While we did see an improvement in GDP for the third quarter, the fourth quarter is expected to be a little bit weaker hence it is unclear on how much that will factor into the Fed’s timing.
Nonetheless, we do expect GDP growth to be in the 2% to 3% range in 2014. And most important, that improving economy is positive from energy companies as it should translate into more end user demand generating more volumes of oil and natural gas produced and shipped through pipelines. Specifically as it relates to MLPs and pipeline companies, we believe that rising rates may provide a short term headwind, but the dividend and distribution growth will ultimately allow these companies to generate positive returns.
And now I’m going to turn the call over to Rob Thummel who will lead our discussion on the upstream sector of the energy value chain. Rob?
Thanks, Zach. North America is continuing its march towards energy independence as production of crude oil increases. These volume increases benefit both upstream producers as well as the midstream transportation providers. To take advantage of growing production our upstream strategy targets North American producers of crude oil, natural gas and natural gas liquids that are contributing to North America’s progress towards energy independence.
Our strategy focuses on the best producers operating in the most prolific North American basins that appear to have the best opportunities for production growth. We focus on high quality producers that are both financially disciplined and efficient operators, which leads us to upstream companies with exposure to the key basins where production growth is the most significant.
Slide 11 highlights the opportunities presented as a result of growing crude oil production from the three premier oil basins in the United States. It wasn’t too long ago when everyone talked about how U.S. crude oil production was on the decline. Technology has really changed all of that. Now three premier oil basins, the Permian Basin in West Texas, the Bakken Shale in North Dakota and the Eagle Ford Shale in South Texas are growing production volumes as well as market share.
These three premier oil basins collectively are forecasted to grow production volume by approximately 70% by 2020. By 2020 these three basins are also expected to represent almost 60% of total lower 48 crude oil production.
Moving to Slide 12. Slide 12 really captures all the good things going on in the United States with regards to liquids production. Oil produced in the U.S. is rising and oil imported from foreign countries as well. According to the Energy Information Administration, U.S. crude oil production is up an astonishing 50% since 2008 and as expected, production will top 8 million barrels per day by early 2014. And the pace of production is also gaining momentum.
North America is now leading the globe in energy production growth. The chart on the bottom highlights this dramatic growth in North American oil and liquids production relative to other energy producing countries. Growth of U.S. oil and liquids volumes in 2012 was almost 1 million barrels per day. This growth was higher than any other country in the world and growth is expected to continue as we move it into 2014.
Moving to natural gas on Slide 13, the story around natural gas is that North America has plenty of supply to fill its needs. Natural gas production has been flat in 2013. However, the sources of supply have shifted as low natural gas prices have slowed drilling in some areas. The Marcellus Shale located in Pennsylvania is reshaping the flow of natural gas across North America. Marcellus production has grown from virtually nothing to nearly 12 BCF or billion cubic feet per day in the last four years and 2013 production is up more than 50% over 2012.
This has helped to offset production declines in other natural gas phases. Currently the Marcellus Shale is providing almost 15% of U.S. natural gas supply, a far greater percentage of market share than any other North American gas fields, and that percentage is expected to increase to 24% by 2020. As a longer term story in natural gas is on the demand side of the equation, North America’s prolific natural gas production has resulted in stable and globally competitive prices for natural gas and associated gas liquids.
This dynamic combined with low labor cost, labor market stability and well-developed infrastructure is expected to drive increased use of natural gas from a [Marriott] of sources including power generation and also a resulting renaissance in U.S. manufacturing. We expect demand for U.S. shale gas from countries around the world to liquefied natural gas or LNG. Near the end of August the price of natural gas in Japan was nearly five times higher than in the U.S. and natural gas prices in Europe were nearly three times higher than in the U.S.
LNG can be easily transferred to where it's needed. As global demand for gas increases its anticipated global demand for LNG trade also will expand, due to its low domestic cost compared to other places in the world, which should increase U.S. exports over time.
Now I’ll turn it over to Matt Sallee, who will address the midstream and downstream sections of the value chain and our 2014 outlook. Matt?
Thanks, Rob. The robust production Rob just lined out continues to drive activity in the midstream portion of the energy value chain. As you'll see on Slide 14, these tremendous volumes coming out of North American shale specifically oil and gas liquids demand new infrastructure and pipeline companies are aggressively building it. The project backlog for crude oil pipelines and storage continues to be robust as the latest projects include debottlenecking along the Gulf Coast refining complex as well as additional capacity out of the Permian Basin.
The map on Slide 14 shows the major North American shales and the size of projects underway. Clearly the pace of projects remain strong. In just the next few years, we expect more than 30 billion in MLP pipeline and related organic growth projects. The projects currently underway include new crude oil pipelines, rail and storage terminals along with natural gas and NGL infrastructure, particularly in the Marcellus, which we highlighted earlier.
Infrastructure build on needs there are particularly critical with capacity having a hard time keeping pace with production. This has resulted in price differentials, which means gas at points in the Marcellus selling at a significant discount. Thanks to growing production of natural gas liquids, which primarily are used as a feedstock in the petrochemical industry. North America has emerged as a global cost leader in the supply plastics and the leading exporter of liquefied petroleum gas of LPG, which is driving some additional infrastructure build-out.
Capital markets have remained supportive of this growth and company balance sheets are in very good shape. As reflected on Slide 15, this year MLP and pipeline companies have raised about $80 billion in equity and debt offerings, surpassing the total raised in 2012. There are 18 MLP IPOs in 2013, raising a total of 4.4 billion. About half of these names were midstream with the balance ranging from upstream to -- from upstream to refining.
Merger and acquisition activity has been healthy as well. Approximately $61 billion in MLP and pipeline transactions have been announced during the year, also surpassing the total for 2012. A number of midstream pipeline companies are in the process of restructuring [them like] value.
The largest such examples include One Oak, which announced the spinoff of its utility assets transitioning to a pure play general partner as well as Spectra energy, which has completed the dropdown of its U.S. gas transmission assets and [includes] MLP in a deal valued at $12.3 million.
The downstream sector is also solid. As reflected on Slide 16, rate base growth is expected from environmental and smart grid initiatives. Ratemaking structures are reducing regulatory lag and regulated utilities generally have maintained an attractive return on equity relative to the cost of capital. The average awarded ROE has remained relatively range bounded about 10% since the beginning of 2008. At the same time, the average regulatory lag is at the lowest level in five years.
Moving to the regulatory front, Washington continues to be busy with respect to energy despite a plethora of other political issues that have competed for law makers attention. On Slide 17 we highlight some of the more relevant news items. To begin with, the annual FERC tariff escalator took effect in July, resulting in tariff adjustment of 4.6% for most petroleum pipelines. In addition, MLP potential taxation [chatter has quieted] and the IRS continues to have a broad view of qualifying income based on recent Private letter rulings issue.
Meanwhile the Department of Energy has conditionally authorized several LNG export projects with the total capacity of roughly 7 Bcf a day. This includes a Maryland Terminal with a capacity of about a Bcf a day and this terminal is already connected to an interstate pipeline that draws from wells in the Marcellus.
The EPA has been active on other fronts. In November it proposed lower ethanol blending standards for 2014 to deal with the 10% blend wall that we are bumping up against currently. The EPA has also proposed standards for carbon emissions from electric generating facilities.
It's implemented these standards to make the construction in new coal fired power plants uneconomical in our view. The EPA is scheduled to propose Co2 emission rules for existing power plants by June of 2014. We think that these standards will be less onerous than those that they’ve set out for new plants but it could cause additional closures.
On Slide 18, shifting to our 2014 outlook, we expect, robust domestic oil production anchored in the Permian, Bakken and Eagle Ford fields. The total production from these basins is forecasted to grow at an average annual rate of 14% for the next 10 years. In addition the Marcellus field should provide additional gas required to meet growing demand.
For these basins, the amount of resource expected to be recovered per well is increasing, while the amount of time and cost to drill each well has declined, which has driven significant strong stock performance for companies with exposure to these basins.
Oil and gas producers continue to benefit from improvement technology. As an example pad drilling, which involves drilling multiple wells from a single site has improved the efficiencies and reduced the number of drilling rigs needed to drill an equivalent number of wells without reducing the volume of oil and gas coming from each well.
We believe this will continue to drive growth for Western companies. With this rapid production growth it’s important to pay attention to price realizations in the various basins as both quality and location discounts can occur. Our outlook for the midstream space remains positive. We expect petroleum pipelines to remain steady supported by growing production and attractive escalator expected for 2014.
Strong diesel demand continues to be a tailwind and we expect stable gasoline demand. The project backlog for crude oil pipelines and storage continues to build and refined product exports to provide incremental tailwinds in terms of both volumes and new infrastructure needs.
So overall we think that the outlook for refined products -- refined product pipelines is steady and crude oil pipelines is particularly strong. Natural gas pipelines continue to be stable and will likely benefit from the Marcellus build-out as well as long term expanding demand potential.
However, in the near term we continue to monitor re-contracting rates to ensure that our portfolios are well-positioned. We’re seeing an emergence of basis differentials in the northeast as pipeline infrastructure is expanding rapidly to keep pace with Marcellus gas production growth.
On the gathering and processing side, we anticipate the companies will benefit from the infrastructure build-out supporting liquids-rich production that we do expect ethane prices to remain under pressure for the foreseeable future. The outlook for downstream is a bit mixed. We believe that cleaner generation and electric transmission will be the focus of growth efforts and a constructive regulatory relationship will provide a path to modest earnings growth. We will continue to monitor, allowed ROEs to ensure that companies are earning a reasonable return on those investments.
So with that, I’ll turn the meeting over to Brad Adams for a look at the financials, leverage and tax characterization of our closed-end funds. Brad.
Thanks, Matt. As a reminder, we publish complete financial statements on a quarterly basis. These include a key financial data page, the calculation of our distributable cash flow or DCF and management’s discussion of results and trends. Our goal is to provide the information, perspective and transparency investors need to understand their fund's performance. In addition to these reports, a wide range of other company information is available on our website.
On the top half of Slide 20, we've included performance information for the 2013 fiscal year and since inception for each fund. Additional performance information is available on our website. As noted earlier, these funds have different investment strategies that will drive their performance differently through various market conditions.
All the funds posted positive market and NAV based total returns for the fiscal year ending November 30. The difference between the market value total return as compared to the NAV total return reflects the change in the market's premium or discount of each fund’s stock price relative to its NAV over the period.
We recognize that some of the funds currently are trading at discounts. There are factors impacting premiums and discounts that are not within our control. We focus on what we can control and that’s making investment's [interest come close]. Over time, we believe the market will reward that. In the short term, you see the current discounts in NAV as buying opportunity for our funds.
Further down the page you'll see information relating to our current distribution rate, distributions to stockholders and the coverage of those distributions. The funds currently have attractive distribution rates compared to other income-oriented asset classes. TYG, TYY, TYN and NTG generated increased DCF in 2013 and as a result, increased their distribution to stockholders during the year.
Distribution rates for TTP and NDP remain steady during the year as lower volatility put downward pressure on the [covered call] portion of their investment strategies. TPZ, which was a heavier focus on fixed income securities over equities continue to pay the expected and by design flat distribution throughout the year maintaining a steady monthly distribution even with prevailing interest rates substantially lower than the rates available at the time we launched the product in 2009.
Distribution coverage for the MLP funds is in excess of 100% reflecting our focus on distribution sustainability. As a reminder, distribution coverage is DCF provided by distributions paid to stockholders. Our goal is to have distribution coverage that provides our investment team the flexibility to make tactical trades that result in less current cash flow.
In addition, distribution coverage acts as a shock absorber if a portfolio company cuts distribution or if operating expenses or leverage cost increase. How much distribution coverage should there be? For each quarter we consider a number of factors including expected near-term and longer term growth in MLP distributions.
We look at expectations on operating cost and leverage cost both today and in the future and we consider the taxes on realized gains from expected portfolio turnover. We use this information, along with years of investment experience and fund management expertise to shape our thinking.
It’s also important to remember that the DCF that isn’t paid out, it doesn’t go away. It remains in the NAV, hard at work and growing, and is reflective of Tortoise's long-term and steady investment philosophy.
To that end, in 2014, we anticipate growth and MLP distributions will drive an increase in DCF in a number of the funds. We expect to allocate a portion of the growth in DCF to increase distributions to stockholders while also continuing to build critical distribution coverage to help preserve the sustainability of distributions for stockholders for the years ahead.
Moving to leverage on Slide 21, the fund's leverage-related metrics are very solid and reflect our conservative strategy. As a reminder, our general policy in most cases is to fix the rate on a majority of our leverage, latter the due dates and extend the average maturities. With this strategy, we basically lock-in the spread earned on leverage for a number of years, which help support our goal of long-term distribution sustainability. NDP is a sole exception, utilizing floating-rate leverage to support its very low leverage target of between 10% and 15% of total assets.
We employ interest rate swaps to fix the majority of the variable rate leverage structure in TYN and TPZ. TYN and TPZ’s leverage have 270-day rolling maturities with the rates effectively fixed on a majority of the leverage for an average of 3.3 years and 3.4 years respectively.
During the year, we capitalized on the low interest-rate environment, completed leverage-related transactions in some of the funds. Transactions include refinancing TYG’s preferred stock last December and private placement debt issuances in TYG and TYY in September and November. With these transactions, we were able to lengthen the fund's weighted average maturities while reducing their weighted average leverage cost. Details regarding our leverage structure are available on our website.
Let’s move to Slide 22. As we discussed before, our investment process identifies relative value opportunities. We acted upon these opportunities this year, generating positive performance within our portfolios. As a result TYG, TYY and TYN realized significant capital gains, producing earnings and profits in excess of distributions to stockholders. 100% of their distributions for 2013 are characterized as qualified dividend income or QDI.
We expect NTG to have more dividend income and less return of capital in future years as a result of increasing realized gains on down the road. Beginning in 2013, the QDI income tax rates vary from 0% to 20% depending on an individual's taxable income.
TTP, NDP and TPZ are structured as RICS. The character of their earnings flows through to stockholders. As RICs, these funds also pay out their capital gains, if any, each year. Please note that this tax information is only a current estimate and is subject to change. Final distribution characterization will be reported on 1099s, which will be provided to stockholders in January
Terry, that concludes my comments and I’ll turn it back over to you for concluding remarks.
Okay. Thank you, Brad. And thanks to the Zach, Rob and Matt. I guess in summary there are three points, I would like to make. First, we believe it’s a great time to be investing in North America Energy, reserves, production, cash flows are growing and stock prices are responding. The abundant domestic source of energy is favorably impacting our economy, consumers, our national security even. It has implications worldwide in our ability to compete. By investing in this strategy you'll have the opportunity to benefit as production growth gains momentum.
A second point is that this is creating opportunities across the entire energy value chain. And our funds offer different ways to gain exposure to the activity that’s taking place whether that’s closer to the oil patch production or the key transporters of the new found abundant oil and gas.
And lastly, we believe with the high quality investments on the balance sheet to the funds and the leverage levels of the funds are in great shape. The combination of these three factors should result in sustainable and growing distributions to our stockholders and creation of long-term value.
With that, I’ll conclude our formal remarks and open it up to questions.
Thank you. Ladies and gentlemen, at this, we’ll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Maynard Lichterman from Morgan Stanley. Please proceed with your question.
Maynard Lichterman – Morgan Stanley
Thank you very much. Gentlemen, I understand the conservative nature of the way you manage funds, but I do you have to comment and question of the somewhat anaemic growth and dividend toward especially for example on NTG.
There are others that compete with you in the same universe that primarily -- investor almost completely invest in MLPs and this year have shown substantially greater increase and I think one of the reasons why your net asset value is substantially above your share price right now is because of the very fact that your dividend growth is compared to many very, very minor. Maybe you could comment on that and clarify for me if I am wrong about any of what I've said?
Well this is Terry. I guess I would comment first that certainly we believe that in the case of NTG the fund that you mentioned that we have a very high quality portfolio and as you know it has been focused more on the natural gas sector. Natural gas has had some headwinds that are more diversified fund, perhaps would not, but at the same time we think that it has very, very high quality and sticky cash flows.
And in terms of the conservative nature of our payout, I can tell you that what we do is we spend a lot of time thinking about what we think is appropriate. We want to make sure that we build cushion. We are always mindful of what happened during the great recession of 2008.
We know that all the companies that we invest in build some cushion and so our object is to build cushion over time and make sure that we have an absolutely totally sustainable distribution to our shareholders.
Given that, when we achieve what we think is a reasonable cushion than we expect to pass on a portion of that growth to shareholders. And as Brad mentioned in his comments, of course, any portion that's not paid is their earning and growing money and creating distributions for future periods.
Maynard Lichterman – Morgan Stanley
I wonder if I could -- had do follow one with that.
Maynard Lichterman – Morgan Stanley
…if that's permitted. So you show increase in net asset value on this very NTG 21.6%, which I think is pretty good. And yet the dividend growth is so slow. I understand all you said, I just wanted to make sure you understand that, that’s in my opinion why you are carrying that discount? Maybe you agree that that’s why you carrying the discount you are carrying, it's the lowest increase you’ve got with any other funds you have. So, I won’t bother there?
Yes. I can’t dispute some of the facts that you’ve indicated. But I will tell you that it is our newest fund and part of the discount to NAV has to do with the maturity of the fund and the establishment of a deferred tax liability. What a deferred tax liability is, one way to look at it is an interest free loan from the federal government.
But those factors are some day due and payable in the closed-end fund corporation. And so, typically funds that have been in existence longer periods establish gains in their portfolio. They keep those gains at work and are generating distributions with those gains. Against that, they have normal leverage and then they have a deferred tax liability that basically has a zero carrying cost to that liability and so when you just look at discount alone and sort of ignore the impact of deferred tax liabilities on that calculation, I think it's very easy to come to the conclusion that NTG is trading closest to NAV or to discount to its NAV.
We think over time, that our investors will appreciate the quality of the investments and that it will basically achieve results that are similar to the other funds that we got in place.
Maynard Lichterman – Morgan Stanley
Thank you for the question. Brad, do you have anything to add or Zach, no, okay. Next question.
Our next question comes from the line of Derek Walker from Bank of America Merrill Lynch. Please proceed with your question.
Derek Walker – Bank of America Merrill Lynch
Hi. Good afternoon, guys. My question here is just a quick one on leverage. You mentioned your conservative approach there, but I guess do you have any appetite to actually increase leverage there and then I guess can you just kind of briefly – I may have missed your formal remarks, but just your overall outlook on interest rate environment and as pertained to your overall cost of leverage. I know you mentioned your preference for fixed rate debt, but any kind of therapy appreciate it.
Sure, this is Brad. As you mentioned, yes, we are conservative when it comes to our leverage structure and right now we are kind of across the Board on our funds. We are kind of operating at the low end of our longer term targets and we feel good where we are right now as far as total leverage as a percent of total assets.
As far as predicting interest rates, we don't even try to do that here. If you look at our leverage structure, we try to obviously fix the majority of our leverage and you will see that consistently across the funds where our intent is to do that.
We also will latter our maturities. So we have various tranches of pretty small sizes maturing almost every year in each one of these funds. So we don't have any or try to avoid any major impact on our distribution in a rising interest rate environment and again this kind of leads back to Terry's comments about our distributions and sustainability of distributions.
Derek Walker – Bank of America Merrill Lynch
Yes that's perfect. I appreciate it. Thank you.
And ladies and -- oh I am sorry.
No I was just going to ask if there are any additional questions.
(Operator instructions) There are no further questions in the queue at this time. I would like to hand it back over to management for closing comments.
Okay. Thank you very much. Well we thank you all for your support of Tortoise and joining this call. It's cold here in the Central part of the country. We hope that you have a happy holiday and safe travels and again thank you for joining us.
Ladies and gentlemen, this does conclude today teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
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