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Executives

John Homier – President and CEO

Steve Gardner – CFO

Kelly Plato – SVP

Analysts

Greg Mason – Stifel Nicolaus

Jasper Birch – Macquarie

Pavel Molchanov – Raymond James

Ralph Rueben [ph]

Bob Walt [ph] – NGPC

NGP Capital Resources Company (NGPC) Q1 2010 Earnings Conference Call May 6, 2010 11:00 AM ET

Operator

Ladies and gentlemen, welcome to your NGP Capital Resources Company’s first quarter 2010 earnings call. At this time all lines are in a listen-only mode with Q&A session to follow.

(Operator Instructions)

As a reminder, this conversation is being recorded.

Now I would like to turn the call over to your host, NGPC’s President and CEO John Homier. Sir you may begin.

John Homier

Good morning everyone and thank you for joining us today on this call to discuss our results for the first quarter of 2010. As usual, with me today on the call are Steve Gardner, our Chief Financial Officer and Kelly Plato, our Senior Vice President who heads our investment team.

After my opening remarks, Steve will provide a summary of our financial performance for the first quarter and will provide an update on our recently announced restatement. Following Steve, Kelly will discuss our targeted investment portfolio, specifically Alden co-company investment and several other meaningful investments in that portfolio.

I will conclude our presentation with a summary of our overall portfolio performance and investment quality. After that we’ll take questions from those of you who have called in.

As we discussed in our last call in early April, we continue to believe that we have successfully weathered the economic downturn and its effects on the energy markets that we serve. We feel that we are now in an excellent position for growth and expansion of our business in our investment portfolio. As Steve and Kelly will discuss, NGPC continues to generate net investment income and dividend, manage its financial leverage, see improving performance in our existing portfolio as well as position itself to add new investments into that portfolio.

As we announced about six weeks ago, our dividend for the first quarter of this year is $0.17 per common share; the same as for our fourth quarter dividend in 2009. The dividend was paid on April 9th.

As of the end of the quarter, our funded targeted investment consisted of 15 portfolio companies totaling $242.7 million and having fair value of $193 million. Our total committed and available for funding was approximately $248.7 million. Our net asset value at the end of the first quarter was $11.17 per common share.

Our earnings release was distributed this morning. Those who did not receive the copy of the release can call us or can download the release from our website, which as you know is www.ngpcrc.com. Also for anyone wishing to listen to a recording of our prepared comments today, we will have a replay available by phone through next Wednesday. The call will also be available through a link on the investor relations page of our website.

I would like to remind everyone at this point that our remarks today may include comments which could be considered forward-looking statements. And such statements are subject to many factors that can cause actual results to differ materially from our expectations as expressed in those forward-looking statements. Those factors are described in more detail in our SEC filings, which I refer you through our website or through the SEC website to review those filings. We undertake no obligation to publicly update or revise any forward-looking statements.

With that, I will turn the call over to Steve.

Steve Gardner

Thank you, John. Good morning everybody. For the first quarter of 2010, our net investment income totaled $2.4 million or $0.11 per share and the net increase in stockholders equity from operations was $5 million or $0.24 per share. The weighted average yield on our targeted portfolio investments exclusive of capital gains or losses was 7.23% at March 31, 2010, up from 5.38% at the end of 2009.

Operating expenses decreased in the first quarter in 2010 as compared to 2009 and this was largely the result of lower management fees and lower interest expense. Net unrealized appreciation for the quarter was $2.6 million after a small provision for income tax as we had modest increases in the evaluations of a couple of our portfolio investments. We did not have any realized gains or losses in the first quarter.

Our net asset value per share as of quarter end after giving effect to the 17% per share dividend and the results for operations was $11.17.

We currently have through our investment facility cash on hand and scheduled repayments during the year in excess of $100 million for new investment activity during 2010.

In our recently filed annual report on Form 10-K for 2009, we’ve restated our financial statements for the years ending December 31, 2007 and 2008. The restatement principally involved noncash accounting entries related to the net deferred tax asset and liability balances that typically arises as a result of timing differences in tax and GAAP accounting. In our case these differences were driven by unrealized appreciation and depreciation in certain of our portfolio investments that are held in taxable subsidiaries.

While the 2009 10-K corrected the financial statements for the calendar years of 2007 and 2008 we will also file amended 10-Qs to correct the interim financial statements for each quarter in the years 2007, 2008 and 2009. We intend to file the amended 10-Qs for the first quarters of these three years 2007, 2008 and 2009 along with our 10-Q for the first quarter of 2010, so that the comparisons among the various first quarters can be made accurately. We will file the amended 10-Qs for the second and third quarters of 2007, 2008 and 2009 within the next several weeks.

As always detailed results for the quarter are in our earnings release and also in our 10-Q, which we expect to file by the end of day Monday. We’ll be happy to answer any questions you might have about our financial performance at the end of the call but for now I’ll turn it over to Kelly to provide an update on our investment portfolio. Kelly?

Kelly Plato

Since our last call we’ve had significant milestones with two of our investments, Alden Resources and BioEnergy. As you are aware, Alden is a producer of specialty coal that is used in the manufacturing of silicon metal and as we discussed on the last call, Alden has begun mining on a significant permit area in Tennessee.

While we’re still in early stages of mining the permit in Tennessee, we’ve had good production results and the mining conditions and coal quality have been as expected.

Additionally, Alden has experienced good production results at its other mining areas and company production is up significantly. Average monthly production in 2009 was approximately 24,000 tons compared to last month April 2010 production of approximately 38,000 tons. Alden has also seen strong demand for its specialty coal this year and as a result we’re able to lock in attractive contract terms for 2010.

Alden’s biggest challenge at this point is to continue ramping up its production. We believe that’s achievable with new permit areas coming online.

BioEnergy during the first quarter completed its plant and has been selling ethanol under the terms of the (inaudible) agreement. The plant construction was very successful, it was completed on time and mostly on budget and the startup went relatively smooth.

Furthermore BioEnergy’s affiliate Myriant Technologies continues to make progress on its specialty chemicals business.

Tammany Oil & Gas continues to be one of our best performing portfolio companies, and on the last call we told you that we had extended the maturity on our facility with Tammany in order to provide them with additional time to complete the strategic transaction. They haven’t completed the transaction to date but it continued to work towards a (closing date) and in order to facilitate that closing we’ve recently further extended the maturity of the facility.

We continue to work towards resolution in our investment in Formidable and the remainder of the portfolio continues to perform as expected.

Turning to new investment activity, we had previously announced that we in conjunction with another investor had issued a commitment to participate in a convertible preferred issue by GeoMet Incorporated, a publicly traded oil and gas producer. Earlier this week GeoMet informed us that they had accepted a competing offer and consequently were discontinuing negotiations with us and our partner in the deal.

Our deal flow has increased and in the recent weeks deal quality has improved but as our experience with GeoMet suggests, it still is difficult to get to the finish line.

At present we’re working on a number of new investment opportunities and we remain optimistic about our opportunities for 2010. That concludes the highlights of the portfolio and performance and I’ll turn the call back to John.

John Homier

Thanks Kelly. Going back to our current portfolio, at the end of the first quarter of the year we assessed that the fair value of our investments in portfolio companies was about $193 million resulting in overall net asset value for the company of $242 million or as we’ve said earlier $11.17 per common share. This compares to approximately $240 million or $11.09 per common share as restated at the end of the first quarter of 2009 and approximately $240 million or $11.10 per common share at the end of 2009.

Because our investments are largely in negotiated and illiquid securities of energy companies, as you know, we maintain a qualitative system to evaluate the credit quality of those investments. It is intended to reflect the riskiness of the investment including among other things the collateral coverage and a sensitivity to external economic factors, the compensation structure for the investment, the overall long-term performance outlook for the portfolio companies business, and any other relevant factors.

(Inaudible) credit quality we rate our investment Res 1 to Res 7. By the end of the first quarter our average portfolio rating on a dollar weighted fair market value basis was 4.4 unchanged from year-end 2009. For reference, our weighted average rating was 4.1 at the end of the first quarter of 2009.

Let me say a bit more about our rating system. Virtually all of our investments begin as Res 4 indicating among other things that there is a balance between risk, return and market conditions at the time the investment is made.

Our investments generally envision some level of work by our client companies to enhance their assets and develop incremental cash flow. If that development has exceeded, the investments may migrate to better Res ratings indicating among other things outsize returns for the improved risk of the investment. If an investment is slow to perform and this could be for a variety of reasons but as is often slow or delayed progress and implementing the client’s development plan to bring new production and cash flow to fruition, we will migrate the investment to a lower Res rating and place it on our watch list.

Being on the watch list is not fatal. In fact, in a broad sense all of our investments are on an informal watch list as they all continue to be watched very closely even those that improved in rating. The watch list identifies investments that may present opportunities for implementation of restructuring plans that can lead to improved development performance but even when those plans are implemented, we may maintain the investment on the watch list for some period of time.

With that brief discussion as background, investments totaling $137.1 million or approximately 57% of the $242.7 million in target investments that we have on a cost basis are carried on our watch list. Significant investments on the watch list are Alden and BioEnergy, which Kelly just reported on. Also Formidable, which is on the watch list, which of course we’ve discussed on previous calls.

Investments in three of our portfolio companies totaling $62.6 million or approximately 26% of our investments, again on a cost basis or carried as non-accrual as of March 31. The majority of that of course is the investment in Formidable.

Substantially all of our investments are secured by our borrower’s assets or are otherwise at the upper level of our borrower’s capital structure.

As of March 31, 92% of our targeted investments on a fair market value basis are at the top level of our borrower’s capital structures with no security senior to ours. These investments are either first lien or if not secured in a traditional sense are either direct ownership interests, which we own or have limitations on capital senior to us. The remaining 8% of our targeted investments are in some form or fashion a junior position vis-a-vis other senior lenders.

As Kelly discussed many of our investments are showing good progress in the development and growth. Furthermore NGPC has been very busy this year evaluating potential new investments and we believe that we’re well positioned to exploit appropriate new opportunities that arise and that our investable capital and low leverage will allow us to grow our portfolio with new investments that yield good long-term risk adjusted returns.

That completes our prepared comments. I now like to turn the call back over to the operator to facilitate Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Greg Mason from Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

Could you talk about the BP oil spill? And does it have any negative impact from any of your companies or potentially positive impact for any of your companies?

John Homier

The one that we think has potential for the biggest impact would be our investment in Black Pool, which I’ll let Kelly tell you a little bit more about just refresh what’s going on there and how that could be impactful.

Kelly Plato

Black Pool has three wells that have been drilled and completed but they’re in the process of installing a platform to produce the wells from now. The wells are in state waters south of Texas in the Galveston area block 307. And we’ve been worried that it might be difficult to get services. They seem to be out of the path of the oil spill and I don’t believe that there’s going to be any impact directly from the oil spill. But boats along the coast are like booked up considerably by BP. I did talk to the CEO of Black Pool this morning and he said as of now there’s no delay on their work and they’re scheduled to be installing the platform on May 25th. So it seems like that will be a nonevent for Black Pool.

Greg Mason – Stifel Nicolaus

And how do you think this impacts the long-term opportunities you have for both offshore and onshore opportunities?

John Homier

We could speculate a lot about that. Generally more of our investments are onshore than offshore and those that are offshore plus with only one exception, they’re all on the shelf in shallow waters; the Mississippi Canyon well that’s the subject of BASIS POINTS’s difficulties right now. You could play out different scenarios. I mean if the state government for state waters leases and the federal government for water leases were to really clamp down in terms requirement, it could make development onshore more difficult. (Again, implicitly) that would seem to make opportunities onshore more attractive.

It seems hard for me to believe that the regulations will clamp down on the high (inaudible) that we have, we don’t by and large have plans to drill exploration wells in the deepwater on the shelf for that matter. We’re basically doing much more mundane redevelopment of existing older assets. And so one of the byproducts of that is that you don’t run into the unexpected pressures if you are drilling. The other aspect is that a lot of the work that our clients do is related to stimulating the existing production zones and improving surface handling facilities and things of that nature. So we’re just not in that deep water exploration business.

Greg Mason – Stifel Nicolaus

Can you talk about as you’re looking at these pipeline of new deals, what the new deals look like in terms of interest rates and covenants and attractive features relative to what we were seeing maybe 12 months ago?

John Homier

Do you want to try that Kelly?

Kelly Plato

Yes, Greg, they’re all over the board. Interest rates are probably a little lower than what we saw this time last year. The covenants are still – everyone is expecting fairly tight covenants. The deal that we struck with GeoMet we thought was fairly attractive and favorable for us then, obviously somebody thought they could do a little better but –

Steve Gardner

Kelly, excuse me, (inaudible) pointed out that in the GeoMet deal, the primary difference in the competing offer was a relaxing of financial coverage it wasn’t in terms of return.

Kelly Plato

Yes, that’s true. It was relaxing covenants.

Greg Mason – Stifel Nicolaus

So when you say interest rates were a little lower, what are you seeing in terms of those interest rates today?

Kelly Plato

Well, it’s very much different than like you see it on the high yield market where we were seeing interest rates more in the mid teens just for coupon rates and probably lower double digits. Last year at this time we were seeing interest rates on high yield bonds that were in the mid-to-high teens and now they’re in the higher single digits. There has been a little tightening in the spread.

Operator

Our next question domes from Jasper Birch from Macquarie.

Jasper Birch – Macquarie

Just to follow up on the line that Greg was asking about in terms of – thanks for the color on sort of the structure of the deals but I think last quarter you gave some guidance on sort of what your pipeline was looking like, how many deals you had in there and sort of the size and maybe timing. Any indication? I know there’s a lot of uncertainty right now.

Kelly Plato

It’s about the same, I don’t have that number off the top of my head. Last quarter it was about $120 million that was in the deals that we were working on pretty heavily. It should be about the same, take GeoMet out and add a couple of new deals that we’ve started to work on in the last week or two and it should be still in that $120 million to $150 million type range.

Jasper Birch – Macquarie

What do you think your conversion rate, I mean if you had the gas on that?

Kelly Plato

It’s hard to say and really couldn’t handicap it.

Jasper Birch – Macquarie

And then just one last thing. Did you guys provide a number for what your excess undistributed taxable income was, both as a parent and the subs, taxable subs?

Steve Gardner

Coming into this year it was roughly $0.20, so that’s where we stand.

Operator

Our next question comes from Pavel Molchanov from Raymond James.

Pavel Molchanov – Raymond James

Just a quick conceptual question if I may; historically you’ve talked about in general one deal out of 30 that you see in the pipeline is consummated. Is that still the right assumption to use going forward or is it becoming more or less selective?

John Homier

No, I think that’s still very much the kind of way it works. That number has been a stable number over a long period of time. And again, some of that – that’s taking the ones that are off of our log. A lot of times there are deals that are dispatched with a phone call and may not make it on the log. So I mean there’s already some little bit of screening that goes on to say that it looks like it’s transaction that could fit for us as opposed to one (apparently) doesn’t fit and doesn’t even get logged – past an initial conversation.

Pavel Molchanov – Raymond James

Then kind of as a follow-up to that so, you talked about the GeoMet deal kind of slipped. Obviously E&P just generally tends to be competitive. Are you seeing better opportunities outside the traditional E&P survey whether it’s services or call or anything like that?

John Homier

Not really. Most of what we’re seeing at the E&P – and there hasn’t been a lot of services deals in the last few months but we’ve seen a few and they haven’t been that attractive to us.

Operator

Our next question comes from Ralph Rueben from (inaudible).

Ralph Rueben

Can you talk a little bit more about Alden and is it profitable, and what’s the longer term strategy? It represents 20% of NAV. Is there a strategy to try and monetize that some point in the future and kind of what kind of milestones do you need to reach in order to get to that point?

John Homier

That’s a very good question and what we’re willing to do right now is to keep our options open. There is a price I’m sure that we would sell it for today. But basically we kind of view our investments as being long-term IRR generators. And so we’re going to look at what the market value might be. I think it needs to turn the corner and improve the operations before we’d be in a position to want to test the market in that regard. Although as Kelly said, it’s a very good looking market right now. The net coal that we produce is very much in demand in the marketplace and we do have overtures from time to time from companies that would like to have discussions about buying it, generally we think on the (inaudible) and we think we could do better with a little bit more performance under our belts.

Long-term we are not a coal company. So at some point in time we would want to take and rationalize that investment for a variety of reasons. One is to get capital to invest in other things. Another reason would be, as you correctly pointed out, it’s a lumpy investment and it would be good at the right time to call that cash in and invest it in three or four, five other investments and help our overall portfolio granularity.

So I think it’s fair to say that ultimately we’re a seller but it’s not really fair to put a specific timeframe on it right now.

Ralph Rueben

Is this profitable now?

John Homier

Yes. ‘09 was a tough year. We had a good first quarter and then getting to the new permit areas on production in April was important. There has been a lot of progress made out there and we’ve got some more work to do and we’re pretty excited about the opportunities at Alden.

Operator

(Operator Instructions) Our next question comes from Bob Walt [ph] from NGPC.

Bob Walt – NGPC

Do you give out interest coverage ratios on your loan portfolio and debt-to-EBITDA ratios on your loan portfolio?

John Homier

No, we don’t.

Operator

(Operator Instructions) I’m showing no further questions at this time sir.

John Homier

Alright, well, ladies and gentlemen, thank you so much for being on the call with us today and we will look forward to visiting with you again later in the year to discuss our second quarter results when those are available. Thank you so much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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