NEW YORK, NY — (MARKET WIRE) — 09/15/05 — Prospect Energy Corporation(NASDAQ: PSEC) (“Prospect Energy,” “the Company” or “we”) today announcedfinancial results for its fourth fiscal quarter and first fiscal year endedJune 30, 2005. We commenced operations on July 30, 2004 after closing ourinitial public offering of 7,000,000 shares of common stock at $15.00 pershare (with a subsequent greenshoe sale of 55,000 shares). After deductingunderwriting discounts, commissions and offering expenses, we received netproceeds of approximately $97 million for an opening balance of $13.74 netasset value per share. At June 30, 2005, our net asset value per share was$13.75. The purpose of the initial public offering was to provide capitalto invest primarily in mezzanine loans, senior secured loans and equityinvestments in U.S. middle-market energy-related companies.
Our board of directors has declared a first fiscal quarter (for the fiscalyear ended June 30, 2006) dividend of $0.20 per share, payable on September29, 2005, to shareholders of record as of September 22, 2005. The ex-dividend date is September 20, 2005. This dividend marks an increase of$0.05 or 33% from the prior quarter’s dividend of $0.15 per share, and thefourth consecutive quarterly increase. Our annualized dividend yield isnow approximately 5.8% based on our June 30 net asset value andapproximately 6.8% based on the September 15 market closing price per shareof $11.81.
We estimate that the current first fiscal quarter results will includeapproximately $0.15 per share of non-recurring expense (see SupplementalFinancial Information below). Without such expense, which we believe willdecline significantly beginning in the second fiscal quarter of 2006, weestimate that Net Investment Income would have been approximately $0.35 pershare in the present quarter and we would have been able to pay a largerdividend (and which would have increased the annualized dividend yieldbased on our September 15, 2005 closing price by as much as 5.0%). We areapproximately 65% invested, in long-term investments, and will continue totarget additional long-term investments that we expect will permit us tocontinue increasing our dividend. Our policy has been to pay our dividendsolely from net investment income in each quarter, with the goal ofbuilding and maintaining a long-term track record of steadily increasingdividends from earnings, rather than paying dividends out of capital.
OPERATING RESULTS
Our operating results are being presented in a slightly different mannerthan in the past. Within the Highlights section of this release,additional disclosures have been included to better assist in the analysisof both recurring and non-recurring charges. Non-recurring charges includelegal fees associated with previously reported events including theinternal investigation and certain legal proceedings. In addition, certainorganizational and other first-year expenses are viewed to benon-recurring. Based on these additional disclosures, we project futureannual recurring operating expenses to be approximately $3.4 million.Further, we believe that during the second fiscal quarter of this year, wewill see a significant decrease in these non-recurring expenses.
HIGHLIGHTS
Equity values:
Stockholders' equity as of June 30, 2005: $97.0 million Net asset value ("NAV") per share: $13.75 September 15 market closing price per share: $11.81 June 30 net asset value premium over September 15 market closing price per share: 16.4%
Fourth Fiscal Quarter Operating Results:
Net investment income: $1.173 million Net investment income per share: $0.16 Net investment income excluding non-recurring items*: $2.129 million Approximate annualized dividend yield based on NAV excluding non- recurring items: 9% Net investment income per share excluding non-recurring* items: $0.30 Net realized gains: $0 Net unrealized appreciation: $0 Dividends to shareholders per share: $0.15
Fiscal Year Operating Results:
Net investment income: $2.411 million Net investment income per share: $0.34 Net investment income excluding non-recurring items*: $4.494 million Net investment income per share excluding non-recurring* items: $0.64 Net realized loss: $0.002 million Net unrealized appreciation: $0.414 million Dividends to shareholders per share: $0.375
Fourth Fiscal Quarter Portfolio Activity:
Number of new long-term portfolio companies during period: 3 Cost of investments during period: $17.627 million
Fiscal Year Portfolio Activity:
Number of new long-term portfolio companies during period: 6 Cost of investments during period: $48.688 million Number of portfolio companies at end of period: 6
* See Supplemental Financial Information
PORTFOLIO AND INVESTMENT ACTIVITY
We completed our first fiscal year and fourth quarter, which was our thirdfull quarter since completion of our initial public offering on June 30,2005, with our portfolio invested approximately $48.7 million in sixlong-term investments, and the remainder in cash and short-terminstruments.
As of June 30, 2005 our portfolio generated a current cash yield of 21.3%across all our long-term debt and equity investments. This cash yieldincludes interest from all of our long-term investments as well asdividends from Gas Solutions II Limited (“Gas Solutions”) and UnityVirginia Holdings. We expect this number to decline over time as we becomefully invested. Monetization of, or dividends from, other equity positionsthat we hold is not included in this yield estimate. In each of ourportfolio companies, we hold equity positions, ranging from minorityinterests to majority stakes, which we expect over time to contributesignificantly to our investment returns. Many of these equity positionsinclude features such as contractual minimum internal rate of returns,preferred distributions, flip structures and other features expected togenerate additional investment returns, as well as contractual protectionsand preferences over junior equity, in addition to the yield and securityoffered by our cash flow and collateral debt protections.
Unlike a traditional mezzanine portfolio that may be characterized by deepsubordination, minimal or no collateral, long-term maturities, noamortization and limited covenants, our portfolio consists of first andsecond mortgages and liens, hard asset collateral, two to five year averagedurations, amortizing positions and strong covenants. Our collateralconsists of assets such as receivables, inventory, natural gas reserves,crude oil reserves, coal reserves, pipelines, processing plants, oilfieldequipment, rolling stock and other hard assets.
During the quarter ended June 30, 2005, we completed three new investmentstotaling approximately $17.6 million in Stryker Energy II, LLC (“Stryker”),Whymore Coal Company (“Whymore”), and Miller Petroleum, Inc. (“Miller”).
On April 11, 2005, we provided $9.8 million in financing to Stryker. TheStryker financing is comprised of two facilities: $8.3 million in seniorsecured debt and $1.5 million of preferred equity. Stryker is a gasproduction company based in Cleveland, Ohio. Stryker focuses on high-grade,low-risk development drilling and production in the Appalachian Basin. Gasfrom the Appalachian Basin typically sells at a premium to gas produced onthe U.S. Gulf Coast because of its geographic proximity to the heating andpower generation demand markets in the northeastern United States. Strykeralready has drilled and completed more than 47 wells, with a multi-yearinventory of development locations which we expect will provide additionalcollateral and growth in the future.
On April 14, 2005, we provided $4.9 million in financing to Whymore insenior secured debt and preferred equity. Whymore is a coal productioncompany based in London, Kentucky, and a member of Kentucky’s SmallOperator Assistance Program, which provides benefits to operators with goodreclamation histories. Whymore owns more than 1.5 million tons of estimatedproven surface coal reserves across 500 acres in the River Gem, DeWitt,Hubbs Creek, and Hooker Branch mining areas of southern Kentucky in Knoxand Whitley Counties. Whymore also has rights to mine on an additional5,000 acres. Much of the reserve base is already permitted. Our investmentis secured by equipment and mineral assets and has attached preferredequity participation rights. Whymore is producing coal from two separatecoal bodies, the River Gem and DeWitt, and has contractually arranged tosell all of its current coal production for fixed prices through the firsttwo years of production after our initial funding in April.
On May 9, 2005, we provided $3.2 million in senior secured debt financingto Miller. Miller is an oil and gas production company based in Huntsville,Tennessee with 43,000 gross acres under lease in the heart of Tennessee’sAppalachian Basin. Since 1967, Miller has built a track record spanningover 35 years in this Basin’s oil and gas industry. Miller’s production andacreage position consists of the Jellico, Lindsay, Koppers North, KoppersSouth and Harriman fields. Miller currently has more than 40 producingwells. The Koppers North and Carden Prospect fields are being developedunder a drilling and development joint venture with Golden Triangle Energy(GTE), Inc. of Houston, Texas and Norwest Energy NL of Perth, Australia.Miller serves as operator and retains a 20% carried net revenue interestfor the first 20 wells and a 25% working interest in the remaining wellsdrilled by the joint venture. We made this investment together with aninvestment of $1.0 million by Petro Capital Advisors, LLC (“Petro Capital”)of Dallas, Texas. The funding is being utilized to repay existing debt andto fund additional development drilling. We and Petro Capital receivedwarrants in Miller as part of our respective investments.
Gas Solutions continues to generate net cash flow and net operating income.During the six months ended June 30, 2005, Gas Solutions generatedunaudited net operating income (revenues less operating expenses) of $5.6million. Additionally, we expect that Gas Solutions will generateannualized operating cash flow of approximately $10.0 million or more fromoperating activities, as determined under generally accepted accountingprocedures in the United States, during 2005.
Gas Solutions completed construction and started operation of the 22.5 mileExxon Hawkins NGL Pipeline connecting the Exxon Hawkins gas plant to GasSolutions on June 6, 2005. Deliveries for the month of June averaged 875barrels per day and are expected to exceed 1,000 barrels per day by the endof 2005. The Agreement with Exxon Gas & Power Marketing Company (“Exxon”)is effective as of June 30, 2004 and has a term of seven years with anannual renewal provision thereafter. Under the agreement, Exxon is todeliver a specified minimum number of barrels of natural gas liquids in thefirst five years and to pay a transportation, treating and fractionationfee which includes a capital recovery component. After five years ordelivery of the specified minimum barrels, the fee decreases to a basetransportation, treating and fractionation rate for the remainder of thecontract term. It is anticipated that the Agreement with Exxon willgenerate $728,000 of revenue annually.
Since the end of our first fiscal year, on July 19, 2005, we completed onenew long-term investment of $9.25 million of senior secured debt financingto Arctic Acquisition Corp. (“Arctic”), a coiled tubing oilfield servicescompany based in Houston, Texas. We are also entitled to a significantequity ownership position in Arctic as part of the investment.
On August 10, 2005, we provided an additional $625,000 of senior secureddebt financing to Whymore for which we also received additional equity inthis company.
Today, September 15, 2005, we provided an additional $5.0 million of seniorsecured debt financing to Stryker.
We expect that these three deals in the aggregate will add approximately$0.07 per share contribution to Interest Income on a quarterly basis,provided all interest payments are made on a timely basis according to theterms of the agreements with these three companies.
Our investment pace is both difficult to estimate and lumpy, with both thenumber of deals each month and the size of such deals having a wide rangeof possible outcomes. Preliminary investment terms might be outlined withcounterparties in a potential transaction, but such potential transactionmight not be consummated for due diligence or other factors, as has beenthe case from time to time in the past. We continue to target investing $3million to $10 million on average per month, in line with our historicalactivity. We are pleased with the quantity and quality of our potentialtransaction flow, which has continued to build over the year since ourinitial public offering.
Hurricane Katrina slowed investment activity for us and others but did notdirectly affect the production of our oil and gas portfolio companies asnone of our portfolio companies have offshore production in the watersaround Louisiana. Rising commodity prices, in part, based on HurricaneKatrina and in part, based on other macroeconomic supply and demandfactors, tend to benefit upstream-related portfolio companies. However,our risk management hedging covenants with our portfolio companies attemptto reduce commodity risk for currently producing assets. In addition, ourdebt orientation and portfolio diversification with respect to geography,wells, fields, industry sectors and other variables, help to reduceportfolio volatility and manage risk. Our portfolio spans oil production,gas production, coal production, pipelines, processing, and oilfieldservices, and we expect over time to continue to diversify the portfoliointo areas such as power generation, renewables, storage, refining, wasteprocessing, utility services and other sectors.
FUTURE CORPORATE DISCLOSURE
As we move into our second fiscal year, we become an “accelerated filer” asdefined in Rule 12b-2 of the Securities Exchange Act of 1934. Accordingly,we expect to announce our earnings and file our 10-Qs within 40 days of theend of each fiscal quarter, and next year’s 10-K within 60 days of the endof the fiscal year. The following year, the 10-Q deadlines will beshortened to 35 days.
Because of the short period between today’s fiscal year end disclosure andthe end of our first fiscal quarter in September, compounded by a movementtoward accelerated filing, we will be disclosing earnings again in a shorttime period, most likely the first week of November.
LEGAL PROCEEDINGS
The one legal proceeding against us which involves potentially materialdemands relates to Dallas Gas Partners, LP (“DGP”). DGP filed a complaintagainst us on November 30, 2004, in the United States District Court forthe Southern District of Texas in Galveston. The complaint seeks relief notlimited to $100 million. We believe that the DGP complaint is frivolous andwithout merit and continue to defend the matter vigorously. On August 9,2005, we filed our motion for summary judgment requesting dismissal of theDGP suit in its entirety. Although we recognize the inherent uncertainty ofany litigation, we believe that the Court sees substantial merit to ourmotion and expect a positive ruling. The Court has set a hearing date ofOctober 12, 2005 for our motion. More information on this matter isavailable from the federal court system’s website, Public Access to CourtElectronic Records (“PACER”) web site located athttps://ecf.txsd.uscourts.gov/cgi-bin/login.pl.
The legal costs of defending the DGP law suit and the OSHA matter that waspreviously disclosed by us, as well as handling other non-recurring legalmatters, have been significant over the past fiscal year, particularlyduring the third and the fourth quarter of the fiscal year ended 2005. Webelieve that these costs will diminish substantially in coming quarters.We have separately set forth the financial effect of these non-recurringitems.
CONFERENCE CALL
The Company will host a conference call Friday, September 16, 2005, at 1:00pm Eastern Time. The conference call dial-in number will be 1-877-407-8214.A recording of the conference call will be available for approximately 7days. To hear a replay, call 1-877-660-6853 and use Playback Account # 286and Playback Conference ID # 166802.
BALANCE SHEETS(UNAUDITED) As of June 30, As of June 30,(in thousands) 2005 2004--------------------------------------------------------------------------AssetsCash held in segregated account $ 9,587 $ 1Investments, at value including accrued interest (cost - $87,524) 87,938Accrued interest receivable 206Prepaid expenses 49Total assets $ 97,780 $ 1LiabilitiesAccrued liabilities 617Due to Investment Adviser 77 $ 100Other current liabilities 47Total liabilities 741 100Stockholders' EquityCommon stock, par value $.001 per share, 100,000,000 common shares authorized, 7,055,100 issued and outstanding $ 7Paid-in capital in excess of par 96,955 1Overdistributed net investment income/(loss) (335) (100)Net realized loss (2)Net unrealized appreciation 414Total stockholders' equity 97,039 (99)Total liabilities and stockholders' equity $ 97,780 $ 1STATEMENTS OF OPERATIONS Three months ended Twelve months ended(UNAUDITED) June 30, 2005June 30, 2005(in thousands)--------------------------------------------------------------------------Investment IncomeInterest income $ 1,786 $ 4,586Dividend income 475 2,675Other income 72 72Total investment income 2,333 7,333Operating ExpensesInvestment advisory fee 491 1,808Administration costs (29) 266Legal fees 177 1,715Valuation services 25 42Other professional fees 67 230Insurance expense 88 325Directors fees 73 220Organizational costs 0 125General and administrative expenses 268 191Total operating expenses 1,160 4,922Net investment income 1,173 2,411Net realized loss - (2)Net unrealized appreciation - 414Net increase in stockholders' equity resulting from operations $ 1,173 $ 2,823Basic net increase in stockholders' equity per common share resulting from operations $ 0.16 $ 0.40PER SHARE DATA (UNAUDITED) For the three For the twelve months ended months ended June 30, 2005June 30, 2005Net asset value, beginning of period $ 13.74 $ (.01)Proceeds from initial public offering -- 13.95Costs related to the initial public offering -- (.21)Net investment income 0.16 0.34Net unrealized appreciation -- 0.06Dividend declared and paid (.15) (.38)Net asset value at end of period $ 13.75 $ 13.75Supplemental FinancialInformation(UNAUDITED) Three months ended Twelve months ended(in thousands) June 30, 2005June 30, 2005--------------------------------------------------------------------------Total investment income $ 2,333 $ 7,333Total operating expenses 1,160 4,922Net investment income 1,173 2,411Add back non-recurring items 956 2,083Adjusted net investment income $ 2,129 $ 4,494Net investment income per common share $ 0.16 $ 0.40Adjusted net investment income per common share $ 0.30 $ 0.64
ABOUT PROSPECT ENERGY CORPORATION
Prospect Energy Corporation is a financial services company that lends toand invests in energy-related businesses and assets. Prospect Energy’sinvestment objective is to generate both current income and long-termcapital appreciation through debt and equity investments.
Prospect Energy has elected to be treated as a business development companyunder the Investment Company Act of 1940 (“1940 Act”). Accordingly, we arerequired to comply with a series of regulatory requirements under the 1940Act as well as applicable NASDAQ, state, and federal rules and regulations.In addition, we have elected to be treated as a regulated investmentcompany under the Internal Revenue Code of 1986 (“Code”). The Codespecifies certain quarterly asset diversification and annual source ofincome requirements. Certain investments in the partnerships, limitedliability companies, joint ventures and other “pass through” entitiescommon in the energy industry can create enhanced risks of compliance withthe Code. To the extent we remain in compliance with the applicableprovisions of the Code, we will not be required to pay corporate-leveltaxes on any income that we earn. To the extent we do not qualify aselected, corporate-level taxes may be imposed upon our net income.
This press release contains forward-looking statements within the meaningof the Private Securities Litigation Reform Act of 1995. Forward-lookingstatements involve risks and uncertainties, including, but not limited to,statements as to our future operating results; our business prospects andthe prospects of our portfolio companies; the impact of investments that weexpect to make; the dependence of our future success on the general economyand its impact on the industries in which we invest; the ability of ourportfolio companies to achieve their objectives; our expected financingsand investments; the adequacy of our cash resources and working capital;and the timing of cash flows, if any, from the operations of our portfoliocompanies.
We may use words such as “anticipates,” “believes,” “expects,” “intends,””will,” “should,” “may” and similar expressions to identify forward-lookingstatements. Such statements are based on currently available operating,financial and competitive information and are subject to various risks anduncertainties that could cause actual results to differ materially from ourhistorical experience and our present expectations. Undue reliance shouldnot be placed on such forward-looking statements as such statements speakonly as of the date on which they are made. We do not undertake to updateour forward-looking statements unless required by law.
Please send investment proposals to:Prospect Energy CorporationJohn BarryChairman and Chief Executive Officerjbarry@prospectstreet.comGrier EliasekPresident and Chief Operating Officergrier@prospectstreet.comTelephone (212) 448-0702