SEC Company Response from PROSPECT CAPITAL CORP (PSEC, PSEC-PA) (CIK 0001287032) (PSEC) — Oct 5, 2012
PROSPECT CAPITAL CORP (PSEC, PSEC-PA) (CIK 0001287032)
Date: Oct. 5, 2012 · CIK: 0001287032 · Accession: 0001104659-12-067888
AI Filing Summary & Sentiment
File numbers found in text: 333-183530
Letter
VIA EDGAR United States Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 RE: Registration Statement (333-183530) of Prospect Capital Corporation (the “Company”)
Dear Mr. Greene:
We are in receipt of accounting comments from Christian Sandoe dated September 27, 2012 (the “Comment Letter”) to Steven Grigoriou of Skadden, Arps, Slate, Meagher & Flom LLP regarding the Company’s Registration Statement on Form N-2 (the “Registration Statement”) as well as comments from you by phone on September 27, 2012 regarding the Registration Statement.
The Company has considered your comments and has authorized us to make on its behalf the responses and changes to the Company’s Registration Statement discussed below. These changes are reflected in Pre-Effective Amendment No. 2 to the Company’s Registration Statement being filed today.
The Company’s responses to the comments are set forth below. For ease of reference, a summary of each comment is set forth in bold font and followed by the corresponding response.
We urge the Staff to review these responses at its earliest convenience, as the Company has exhausted its existing shelf registration statement and has a considerable backlog of investment opportunities.
Mr. Larry Greene
October 5, 2012
Page 2
Accounting Comments
1. Describe how Energy Solutions, and its predecessor Gas Solutions, are structured for legal and tax purposes. Are these entities corporate tax payers or pass-through vehicles for tax purposes?
Energy Solutions Holdings, Inc. (“Energy Solutions”) is a Delaware corporation formed on September 2, 2004, and a taxable C-corporation (“C-Corp”) for federal income tax purposes. Energy Solutions was formerly named Gas Solutions Holdings, Inc. (“Gas Solutions”). Prior to the reorganization, Gas Solutions owned 100% of each of Gas Solutions GP LLC (“Gas GP”) and Gas Solutions LP LLC (“Gas LP”), both of which were Delaware limited liability companies that were pass-through entities for federal income tax purposes. Gas GP owned 1% and Gas LP owned 99% of Gas Solutions II Ltd., a Texas limited partnership (“Gas Ltd”), which was treated as a pass-through entity for federal income tax purposes. This entity structure was established to help ensure that the Company would be able to maintain its regulated investment company status under Section 851 of the Internal Revenue Code (the “Code”), which, among other things, requires that at least 90% of its gross income consist of interest, dividends, gain on the sale of securities and related sources. This entity structure was in place since the Company made its initial investment in Gas Solutions in 2004.
The Company owned and continues to own several groups of companies engaged in different energy sector businesses, including natural gas gathering and processing, coal mining, electricity generation from renewable biomass fuels, and offshore energy supply vessel services. Prior to the reorganization, the Company’s energy sector businesses were managed on a decentralized basis, primarily at the local level, without a unified plan of operation. Without centralized management executing a comprehensive and unified business financing and operating plan, these groups of companies demanded significant unscheduled amounts of the Company’s most senior management time. Without integration, sharing of resources and scale, less than optimal results of operations resulted for each of these companies. To make the operations of these energy sector portfolio companies more efficient and effective, the Company reorganized its energy sector portfolio companies, consolidating them under Gas Solutions/Energy Solutions. The Company began planning a potential reorganization in the fourth quarter of 2010 and completed the reorganization in the fourth quarter of 2011.
The four groups of companies involved in the reorganization were the coal mining group of companies, comprising before the reorganization six separate entities (the “Yatesville Coal Group”), the biomass electrical generating power group
Mr. Larry Greene
October 5, 2012
Page 3
of companies (which include an idled power plant in Maine), comprising before the reorganization seven separate entities (the “Change Clean Energy Group”), the offshore energy supply vessel group of companies, comprising before the reorganization five separate entities (the “Freedom Marine Group”), and the natural gas gathering and processing plant group of companies, comprising before the reorganization four separate entities (the “Gas Solutions Group,” and together with the Yatesville Coal Group, the Change Clean Energy Group, the Freedom Marine Group and the Gas Solutions Group, the “Energy Groups”).
On December 1, 2011, Energy Solutions formed Yatesville Coal Holdings, LLC (“Yatesville Coal LLC”), Change Clean Energy Holdings, LLC (“Change Clean Energy LLC”) and Freedom Marine Holdings, LLC (“Freedom Marine LLC”), three Delaware limited liability companies treated as pass-through entities for federal income tax purposes, for the purposes of consolidating the Energy Groups under Energy Solutions.
Prior to the reorganization, the Yatesville Coal Group consisted of a group of five corporations and one limited liability company. Yatesville Coal Holdings, Inc. (“Yatesville”), a Delaware corporation, and Genesis Coal Corporation (“Genesis”), a Kentucky corporation, were each owned 100% by the Company. E & L Construction, Inc. (“E & L Construction”), a Kentucky corporation, C & A Construction, Inc. (“C & A Construction”), a Kentucky corporation, and East Kentucky Coal Holdings, Inc. (“East Kentucky”), a Delaware corporation, were each owned 100% by Yatesville. North Fork Collieries LLC, a Delaware limited liability company, was owned 100% by East Kentucky. For federal income tax purposes, all of the corporations were C-Corps and the limited liability company was treated as a pass-through entity.
In the first step of the reorganization related to the Yatesville Coal Group, on December 9, 2011, each of Genesis, E & L Construction, C & A Construction and East Kentucky merged with and into Yatesville, with Yatesville the surviving entity. The mergers were intended to qualify as tax-free reorganizations within the meaning of Section 368(a) of the Code.
Prior to the reorganization, the Change Clean Energy Group consisted of a group of five corporations and two limited liability companies. Change Clean Energy Holdings, Inc. (“CCEH”), a Delaware corporation, Change Clean Energy, Inc. (“CCEI”), a Delaware corporation, Worcester Energy Co., Inc. (“WECO”), a Maine corporation, and Worcester Energy Holdings Inc. (“WEHI”), a Delaware corporation, were each owned 100% by the Company. DownEast Power Company, LLC (“DEPC”), a Delaware limited liability company, was owned 100% by CCEH.
Mr. Larry Greene
October 5, 2012
Page 4
Precision Logging & Landclearing, Inc. (“PLL”), a Delaware corporation, was 100% owned by CCEI. BioChips LLC, a Maine limited liability company, was 51% owned by WEHI. For federal income tax purposes, all of the corporations were C-Corps, and all of the limited liability companies were treated as pass-through entities.
In the first step of the reorganization, which related to the Change Clean Energy Group, on December 1, 2011, the Company formed New CCEI, Inc. (“New CCEI”), a Delaware corporation, and the Company contributed 100% of the equity of CCEI held by the Company to New CCEI. Following this contribution, on December 5, 2011, CCEI was converted into a Delaware limited liability company treated as a pass-through entity for federal income tax purposes. On December 9, 2011, each of CCEH, WECO and WEHI merged with and into New CCEI, with New CCEI the surviving entity, and PLL merged with and into CCEI, with CCEI being the surviving entity. The contribution and conversion of CCEI and the foregoing mergers were intended to qualify as tax-free reorganizations within the meaning of Section 368(a) of the Code.
Prior to the reorganization, the Freedom Marine Group consisted of a group of one corporation and four limited liability companies. Freedom Marine Holding, Inc. (“Freedom Marine”), a Delaware corporation, was owned 100% by the Company. Jettco Marine Services LLC (“Jettco”) was owned 86.78% (fully diluted) by Freedom Marine. Jettco owned three Louisiana limited liability companies, each of which owns an offshore energy supply vessel operating in the Gulf of Mexico. For federal income tax purposes, the corporation was a C-Corp and the limited liability companies were treated as pass-through entities. Energy Solutions and the Freedom Marine business since the reorganization have made additional investments in acquiring and expanding the technological and operational capability of offshore energy supply vessels in the Gulf of Mexico. As part of the reorganization and comprehensive business plan, the Company has recently made additional investments in Freedom Marine, enabling Freedom Marine to purchase a vessel with a satellite-enhanced dynamic positioning system (“DPS”) and to retrofit existing vessels with DPS, significantly enhancing the operational capability and competitiveness of Freedom Marine. The Company made the investments in connection with the reorganization and might not have made such investments absent the reorganization.
On December 9, 2011, after the initial steps of the reorganization described above, including all of the mergers described above, the final steps of the reorganization were taken in which:
Mr. Larry Greene
October 5, 2012
Page 5
· Freedom Marine merged with and into Freedom Marine LLC, with Freedom Marine LLC the surviving entity;
· Yatesville merged with and into Yatesville Coal LLC, with Yatesville Coal LLC the surviving entity; and
· New CCEI merged with and into Change Clean Energy LLC, with Change Clean Energy LLC the surviving entity.
Each of these mergers was intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code.
On December 20, 2011, Gas Solutions changed its name to Energy Solutions Holdings Inc. to reflect the diverse nature of its energy sector businesses.
Charts illustrating the corporate structure and tax status of the entities involved in the reorganization before and after the reorganization are attached hereto as Exhibit A and Exhibit B, respectively.
On January 4, 2012, Gas GP and Gas LP sold their interests in Gas Ltd to an unaffiliated third party, with the result that Energy Solutions continued to own miscellaneous direct assets, such as propane contracts and cash transferred from Gas Ltd to Gas Solutions prior to January 4, 2012, and the entities set forth on Exhibit B as subsidiaries in energy businesses.
As a result of the reorganization, the energy businesses now indirectly owned by Energy Solutions benefit from a comprehensive business, financing, and operating plan designed to implement efficient and effective operations, support scale growth, and provide centralized financing, with one chief financial officer/controller and one capital budget, each at the corporate parent level. Energy Solutions is constantly evaluating energy opportunities, including with respect to the coal and biomass businesses.
Building on the reorganization and comprehensive business plan for Energy Solutions, Energy Solutions has recently made additional investments in Freedom Marine, enabling Freedom Marine to purchase a vessel with a DPS and to retrofit existing vessels with DPS, significantly enhancing the operational capability and competitiveness of Freedom Marine. Freedom Marine is operating four offshore vessels and has been steadily improving operating results since the reorganization.
2. Describe how the transfers of assets (CCEHI, CCEI, Freedom Marine and Yatesville) to Energy Solutions by the Company were accounted for both
Mr. Larry Greene
October 5, 2012
Page 6
under US GAAP and for federal tax purposes, including appropriate authoritative support. Did the accounting for these transfers have any impact on the sale of assets by Energy Solutions in 2012, and if so, how.
All of the mergers (they were not asset transfers) were structured to qualify as tax-free reorganizations within the meaning of Section 368(a) of the Code. As a result, no gain or loss was recognized in connection with the reorganization, and the pre-existing tax basis of the assets of each entity involved in the reorganization, as well as the pre-existing tax attributes (including net operating losses, or “NOLs”) of each such entity, were inherited by Energy Solutions for federal income tax purposes.
From a US GAAP standpoint, the interests in the merging companies owned by the Company were transferred with no gains or losses recognized on the transfer. Moving the investments from one controlled entity to another is not a substantive event and does not result in any gain or loss being realized.
The mergers pre-dated the sale of the interests in Gas Ltd by Gas GP and Gas LP, and accounting for the mergers did not have any impact on such sale, nor did the sale have any impact on accounting for the mergers from either a US GAAP or tax perspective.
3. Please explain why the Energy Solutions distribution should be treated as a dividend subject to the income incentive fee calculation in Section 3(b)(i) of the advisory contract.
The Energy Solutions distributions must be treated as dividends subject to the income incentive fee calculation in Section 3(b)(i) of the advisory contract instead of a capital gain subject to the capital gain incentive fee calculation in Section 3(b)(ii) of the advisory contract because the sale of Gas Ltd generated taxable earnings and profits for Energy Solutions, and Energy Solutions has dividended a portion of such earnings and profits to the Company in the 2012 Company fiscal year.
The American Institute of CPAs (“AICPA”) Investment Companies Audit and Accounting Guide (the “AICPA Guide”), the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 946-20-50-8 and the Glossary Guide define dividends as pro rata payments to shareholders from taxable earnings and profits. Return of capital, by comparison, is defined in the AICPA Guide as distributions in excess of taxable earnings and profits. Capital gains would be reported once all capital invested has been returned. Since the distributions from Energy Solutions to the Company were sourced from taxable earnings and profits, such distributions must be treated and reported by the
Mr. Larry Greene
October 5, 2012
Page 7
Company for federal income tax purposes as dividends consisting of ordinary income, as required by Sections 301 and 316 of the Code.
4. Please explain why the Energy Solutions distribution should not be treated as a realized capital gain subject to calculation under Section 3(b)(ii) of the advisory contract.
Energy Solutions is the corporate parent of a variety of operating businesses in the energy sector as described in response to comment 1. Accordingly, it is excluded from the definition of investment company under Section 3(a) of the 1940 Act. Energy Solutions is also excluded from the definition of investment company under FASB ASC 946-10-20 because its business purpose and activity includes mak
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CORRESP 1 filename1.htm SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP FOUR TIMES SQUARE NEW YORK 10036-6522 FIRM/AFFILIATE OFFICES TEL: (212) 735-3000 FAX: (212) 735-2000 BOSTON www.skadden.com CHICAGO HOUSTON DIRECT DIAL LOS ANGELES 212-735-2790 PALO ALTO DIRECT FAX SAN FRANCISCO 917-777-2790 WASHINGTON, D.C. rprins@SKADDEN.COM WILMINGTON BEIJING BRUSSELS FRANKFURT HONG KONG LONDON MOSCOW MUNICH October 5, 2012 PARIS SÃO PAULO SHANGHAI SINGAPORE SYDNEY TOKYO TORONTO VIENNA VIA EDGAR Mr. Larry Greene Senior Counsel United States Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 RE: Registration Statement (333-183530) of Prospect Capital Corporation (the “Company”) Dear Mr. Greene: We are in receipt of accounting comments from Christian Sandoe dated September 27, 2012 (the “Comment Letter”) to Steven Grigoriou of Skadden, Arps, Slate, Meagher & Flom LLP regarding the Company’s Registration Statement on Form N-2 (the “Registration Statement”) as well as comments from you by phone on September 27, 2012 regarding the Registration Statement. The Company has considered your comments and has authorized us to make on its behalf the responses and changes to the Company’s Registration Statement discussed below. These changes are reflected in Pre-Effective Amendment No. 2 to the Company’s Registration Statement being filed today. The Company’s responses to the comments are set forth below. For ease of reference, a summary of each comment is set forth in bold font and followed by the corresponding response. We urge the Staff to review these responses at its earliest convenience, as the Company has exhausted its existing shelf registration statement and has a considerable backlog of investment opportunities. Mr. Larry Greene October 5, 2012 Page 2 Accounting Comments 1. Describe how Energy Solutions, and its predecessor Gas Solutions, are structured for legal and tax purposes. Are these entities corporate tax payers or pass-through vehicles for tax purposes? Energy Solutions Holdings, Inc. (“Energy Solutions”) is a Delaware corporation formed on September 2, 2004, and a taxable C-corporation (“C-Corp”) for federal income tax purposes. Energy Solutions was formerly named Gas Solutions Holdings, Inc. (“Gas Solutions”). Prior to the reorganization, Gas Solutions owned 100% of each of Gas Solutions GP LLC (“Gas GP”) and Gas Solutions LP LLC (“Gas LP”), both of which were Delaware limited liability companies that were pass-through entities for federal income tax purposes. Gas GP owned 1% and Gas LP owned 99% of Gas Solutions II Ltd., a Texas limited partnership (“Gas Ltd”), which was treated as a pass-through entity for federal income tax purposes. This entity structure was established to help ensure that the Company would be able to maintain its regulated investment company status under Section 851 of the Internal Revenue Code (the “Code”), which, among other things, requires that at least 90% of its gross income consist of interest, dividends, gain on the sale of securities and related sources. This entity structure was in place since the Company made its initial investment in Gas Solutions in 2004. The Company owned and continues to own several groups of companies engaged in different energy sector businesses, including natural gas gathering and processing, coal mining, electricity generation from renewable biomass fuels, and offshore energy supply vessel services. Prior to the reorganization, the Company’s energy sector businesses were managed on a decentralized basis, primarily at the local level, without a unified plan of operation. Without centralized management executing a comprehensive and unified business financing and operating plan, these groups of companies demanded significant unscheduled amounts of the Company’s most senior management time. Without integration, sharing of resources and scale, less than optimal results of operations resulted for each of these companies. To make the operations of these energy sector portfolio companies more efficient and effective, the Company reorganized its energy sector portfolio companies, consolidating them under Gas Solutions/Energy Solutions. The Company began planning a potential reorganization in the fourth quarter of 2010 and completed the reorganization in the fourth quarter of 2011. The four groups of companies involved in the reorganization were the coal mining group of companies, comprising before the reorganization six separate entities (the “Yatesville Coal Group”), the biomass electrical generating power group Mr. Larry Greene October 5, 2012 Page 3 of companies (which include an idled power plant in Maine), comprising before the reorganization seven separate entities (the “Change Clean Energy Group”), the offshore energy supply vessel group of companies, comprising before the reorganization five separate entities (the “Freedom Marine Group”), and the natural gas gathering and processing plant group of companies, comprising before the reorganization four separate entities (the “Gas Solutions Group,” and together with the Yatesville Coal Group, the Change Clean Energy Group, the Freedom Marine Group and the Gas Solutions Group, the “Energy Groups”). On December 1, 2011, Energy Solutions formed Yatesville Coal Holdings, LLC (“Yatesville Coal LLC”), Change Clean Energy Holdings, LLC (“Change Clean Energy LLC”) and Freedom Marine Holdings, LLC (“Freedom Marine LLC”), three Delaware limited liability companies treated as pass-through entities for federal income tax purposes, for the purposes of consolidating the Energy Groups under Energy Solutions. Prior to the reorganization, the Yatesville Coal Group consisted of a group of five corporations and one limited liability company. Yatesville Coal Holdings, Inc. (“Yatesville”), a Delaware corporation, and Genesis Coal Corporation (“Genesis”), a Kentucky corporation, were each owned 100% by the Company. E & L Construction, Inc. (“E & L Construction”), a Kentucky corporation, C & A Construction, Inc. (“C & A Construction”), a Kentucky corporation, and East Kentucky Coal Holdings, Inc. (“East Kentucky”), a Delaware corporation, were each owned 100% by Yatesville. North Fork Collieries LLC, a Delaware limited liability company, was owned 100% by East Kentucky. For federal income tax purposes, all of the corporations were C-Corps and the limited liability company was treated as a pass-through entity. In the first step of the reorganization related to the Yatesville Coal Group, on December 9, 2011, each of Genesis, E & L Construction, C & A Construction and East Kentucky merged with and into Yatesville, with Yatesville the surviving entity. The mergers were intended to qualify as tax-free reorganizations within the meaning of Section 368(a) of the Code. Prior to the reorganization, the Change Clean Energy Group consisted of a group of five corporations and two limited liability companies. Change Clean Energy Holdings, Inc. (“CCEH”), a Delaware corporation, Change Clean Energy, Inc. (“CCEI”), a Delaware corporation, Worcester Energy Co., Inc. (“WECO”), a Maine corporation, and Worcester Energy Holdings Inc. (“WEHI”), a Delaware corporation, were each owned 100% by the Company. DownEast Power Company, LLC (“DEPC”), a Delaware limited liability company, was owned 100% by CCEH. Mr. Larry Greene October 5, 2012 Page 4 Precision Logging & Landclearing, Inc. (“PLL”), a Delaware corporation, was 100% owned by CCEI. BioChips LLC, a Maine limited liability company, was 51% owned by WEHI. For federal income tax purposes, all of the corporations were C-Corps, and all of the limited liability companies were treated as pass-through entities. In the first step of the reorganization, which related to the Change Clean Energy Group, on December 1, 2011, the Company formed New CCEI, Inc. (“New CCEI”), a Delaware corporation, and the Company contributed 100% of the equity of CCEI held by the Company to New CCEI. Following this contribution, on December 5, 2011, CCEI was converted into a Delaware limited liability company treated as a pass-through entity for federal income tax purposes. On December 9, 2011, each of CCEH, WECO and WEHI merged with and into New CCEI, with New CCEI the surviving entity, and PLL merged with and into CCEI, with CCEI being the surviving entity. The contribution and conversion of CCEI and the foregoing mergers were intended to qualify as tax-free reorganizations within the meaning of Section 368(a) of the Code. Prior to the reorganization, the Freedom Marine Group consisted of a group of one corporation and four limited liability companies. Freedom Marine Holding, Inc. (“Freedom Marine”), a Delaware corporation, was owned 100% by the Company. Jettco Marine Services LLC (“Jettco”) was owned 86.78% (fully diluted) by Freedom Marine. Jettco owned three Louisiana limited liability companies, each of which owns an offshore energy supply vessel operating in the Gulf of Mexico. For federal income tax purposes, the corporation was a C-Corp and the limited liability companies were treated as pass-through entities. Energy Solutions and the Freedom Marine business since the reorganization have made additional investments in acquiring and expanding the technological and operational capability of offshore energy supply vessels in the Gulf of Mexico. As part of the reorganization and comprehensive business plan, the Company has recently made additional investments in Freedom Marine, enabling Freedom Marine to purchase a vessel with a satellite-enhanced dynamic positioning system (“DPS”) and to retrofit existing vessels with DPS, significantly enhancing the operational capability and competitiveness of Freedom Marine. The Company made the investments in connection with the reorganization and might not have made such investments absent the reorganization. On December 9, 2011, after the initial steps of the reorganization described above, including all of the mergers described above, the final steps of the reorganization were taken in which: Mr. Larry Greene October 5, 2012 Page 5 · Freedom Marine merged with and into Freedom Marine LLC, with Freedom Marine LLC the surviving entity; · Yatesville merged with and into Yatesville Coal LLC, with Yatesville Coal LLC the surviving entity; and · New CCEI merged with and into Change Clean Energy LLC, with Change Clean Energy LLC the surviving entity. Each of these mergers was intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. On December 20, 2011, Gas Solutions changed its name to Energy Solutions Holdings Inc. to reflect the diverse nature of its energy sector businesses. Charts illustrating the corporate structure and tax status of the entities involved in the reorganization before and after the reorganization are attached hereto as Exhibit A and Exhibit B, respectively. On January 4, 2012, Gas GP and Gas LP sold their interests in Gas Ltd to an unaffiliated third party, with the result that Energy Solutions continued to own miscellaneous direct assets, such as propane contracts and cash transferred from Gas Ltd to Gas Solutions prior to January 4, 2012, and the entities set forth on Exhibit B as subsidiaries in energy businesses. As a result of the reorganization, the energy businesses now indirectly owned by Energy Solutions benefit from a comprehensive business, financing, and operating plan designed to implement efficient and effective operations, support scale growth, and provide centralized financing, with one chief financial officer/controller and one capital budget, each at the corporate parent level. Energy Solutions is constantly evaluating energy opportunities, including with respect to the coal and biomass businesses. Building on the reorganization and comprehensive business plan for Energy Solutions, Energy Solutions has recently made additional investments in Freedom Marine, enabling Freedom Marine to purchase a vessel with a DPS and to retrofit existing vessels with DPS, significantly enhancing the operational capability and competitiveness of Freedom Marine. Freedom Marine is operating four offshore vessels and has been steadily improving operating results since the reorganization. 2. Describe how the transfers of assets (CCEHI, CCEI, Freedom Marine and Yatesville) to Energy Solutions by the Company were accounted for both Mr. Larry Greene October 5, 2012 Page 6 under US GAAP and for federal tax purposes, including appropriate authoritative support. Did the accounting for these transfers have any impact on the sale of assets by Energy Solutions in 2012, and if so, how. All of the mergers (they were not asset transfers) were structured to qualify as tax-free reorganizations within the meaning of Section 368(a) of the Code. As a result, no gain or loss was recognized in connection with the reorganization, and the pre-existing tax basis of the assets of each entity involved in the reorganization, as well as the pre-existing tax attributes (including net operating losses, or “NOLs”) of each such entity, were inherited by Energy Solutions for federal income tax purposes. From a US GAAP standpoint, the interests in the merging companies owned by the Company were transferred with no gains or losses recognized on the transfer. Moving the investments from one controlled entity to another is not a substantive event and does not result in any gain or loss being realized. The mergers pre-dated the sale of the interests in Gas Ltd by Gas GP and Gas LP, and accounting for the mergers did not have any impact on such sale, nor did the sale have any impact on accounting for the mergers from either a US GAAP or tax perspective. 3. Please explain why the Energy Solutions distribution should be treated as a dividend subject to the income incentive fee calculation in Section 3(b)(i) of the advisory contract. The Energy Solutions distributions must be treated as dividends subject to the income incentive fee calculation in Section 3(b)(i) of the advisory contract instead of a capital gain subject to the capital gain incentive fee calculation in Section 3(b)(ii) of the advisory contract because the sale of Gas Ltd generated taxable earnings and profits for Energy Solutions, and Energy Solutions has dividended a portion of such earnings and profits to the Company in the 2012 Company fiscal year. The American Institute of CPAs (“AICPA”) Investment Companies Audit and Accounting Guide (the “AICPA Guide”), the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 946-20-50-8 and the Glossary Guide define dividends as pro rata payments to shareholders from taxable earnings and profits. Return of capital, by comparison, is defined in the AICPA Guide as distributions in excess of taxable earnings and profits. Capital gains would be reported once all capital invested has been returned. Since the distributions from Energy Solutions to the Company were sourced from taxable earnings and profits, such distributions must be treated and reported by the Mr. Larry Greene October 5, 2012 Page 7 Company for federal income tax purposes as dividends consisting of ordinary income, as required by Sections 301 and 316 of the Code. 4. Please explain why the Energy Solutions distribution should not be treated as a realized capital gain subject to calculation under Section 3(b)(ii) of the advisory contract. Energy Solutions is the corporate parent of a variety of operating businesses in the energy sector as described in response to comment 1. Accordingly, it is excluded from the definition of investment company under Section 3(a) of the 1940 Act. Energy Solutions is also excluded from the definition of investment company under FASB ASC 946-10-20 because its business purpose and activity includes mak