Summary of NGP CAPITAL RESOURCES CO

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis of our financial condition and results of operations should be read in conjunction with management's discussion and analysis contained in our 2008 Annual Report on Form 10-K, as well as our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q that relate to estimates or expectations of our future performance or financial condition may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties, which could cause actual results and conditions to differ materially from those projected, including, but not limited to,

· uncertainties associated with the timing of transaction closings;

· changes in the prospects of our portfolio companies;

· changes in interest rates;

· changes in regional, national or international economic conditions and their impact on the industries in which we invest;

· continued disruption of credit and capital markets, such as the events that have occurred since the third quarter of 2008;

· the future operating results of our portfolio companies and their ability to achieve their objectives;

· changes in the conditions of the industries in which we invest;

· the adequacy of our cash resources and working capital;

· the timing of cash flows, if any, from the operations of our portfolio companies;

· the ability of our Manager to locate suitable investments for us and to monitor and administer the investments; and

· other factors enumerated in our filings with the SEC.

We may use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" and similar expressions to identify forward-looking statements. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties that could cause actual results to differ materially from our historical experience and present expectations. Undue reliance should not be placed on such forward-looking statements, as such statements speak only as of the date on which they are made. Additional information regarding these and other risks and uncertainties is contained in our periodic filings with the SEC.

Overview

We are a financial services company created to invest primarily in debt securities of small and mid-size private energy companies. We have elected to be regulated as a BDC under the 1940 Act and, as such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," which include securities of private U.S. companies, U.S. companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for federal income tax purposes we operate so as to be treated as a RIC under the Code. Pursuant to these elections, we generally will not have to pay corporate-level taxes on any income and capital gains we distribute to our stockholders. The Company has several subsidiaries that are single member limited liability companies and wholly owned limited partnerships established to hold certain portfolio investments or provide services to the Company in accordance with specific rules prescribed for a company operating as a RIC. The Company consolidates the results of its subsidiaries for financial reporting purposes. The Company does not consolidate the financial results of its portfolio companies.

Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. A key focus area for our targeted investments in the energy industry is domestic upstream businesses that produce, develop, acquire and explore for oil and natural gas. We also evaluate investment opportunities in such businesses as coal, power, electricity, energy services and alternative energy. Our investments generally range in size from $10 million to $50 million, however, we may invest more or less depending on market conditions and our Manager's view of a particular investment opportunity. Our targeted investments primarily consist of debt instruments, including senior and subordinated loans combined in one facility, sometimes with an equity component, and subordinated loans, sometimes with equity components. We may also invest in preferred stock and other equity securities on a stand-alone basis.

We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own and capital gains or losses on any debt or equity securities that we acquire in portfolio companies and subsequently sell. Our investments, if in the form of debt securities, typically have a term of three to seven years and bear interest at a fixed or floating rate. To the extent achievable, we seek to collateralize our investments by obtaining security interests in our portfolio companies' assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including commitment, origination, structuring, administration or due diligence fees; fees for providing managerial assistance; and possibly consultation fees. We recognize any such fees generated in connection with our investments as earned.

Our level of investment activity can and does vary substantially from period to period depending on many factors. Among these factors are: the amount of debt and equity capital available to energy companies, the level of acquisition and divestiture activity for such companies, the level and volatility of energy commodity prices, the general economic and competitive environment for the types of investments we make, and our own ability to raise capital, both through issuance of debt and equity securities, to fund our investments. We believe that the recent dislocation in the credit markets and decline in energy commodity prices should favorably impact the competitive environment, in that it has reduced the debt capital available to energy companies from other sources. While we currently have capital available to invest, our capital is not unlimited. We remain committed to our underwriting and investment disciplines in selectively investing in appropriate risk-reward opportunities within the energy sector.

Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially. In addition to the discussion below, our significant accounting policies are further described in Note 2 of our consolidated financial statements included in this Quarterly Report on Form 10-Q.

Valuation of Investments

Investments are carried at fair value, as determined in good faith by the Company's Board of Directors. On a quarterly basis, the investment team of the Manager prepares valuations for all of the assets in the Company's portfolio and presents the valuations to the Company's Valuation Committee and Board of Directors. The Valuation Committee determines and recommends the valuations to the Board of Directors, which reviews and ratifies the final portfolio valuations.

Investments in securities for which market quotations are readily available are recorded in the financial statements at such market quotations as of the valuation date. For investments in securities for which market quotations are unavailable, or which have various degrees of trading restrictions, the investment team of the Manager prepares valuation analyses.

Using the most recently available financial statements, forecasts and, when applicable, comparable transaction data, the investment team of the Manager prepares valuation analyses for the various securities in the Company's investment portfolio. The investment team prepares the valuation analyses using traditional valuation methodologies, which rely on estimates of the asset values and enterprise values of portfolio companies issuing securities.

The following three broad categories comprise the hierarchy that prioritizes the inputs to valuation techniques used to measure fair value:

· Level 1 - Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement.

· Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.

· Level 3 - Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company's own assumptions that market participants would use to price the asset or liability based on the best available information.

Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The Company estimates the fair value of the crude oil options using a combined income and market-based valuation methodology based upon forward commodity price and volatility curves. Independent pricing services provide the curves, which reflect broker market quotes.

Portfolio and Investment Activity

In May 2009, Nighthawk Transport I, LP and its subsidiaries (collectively, "Nighthawk") defaulted under the terms of its senior credit facility. Nighthawk was unable to restructure its obligations under the senior credit facility, and on July 10, 2009 filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code. The Company holds a 16.98% participation in a $109 million senior secured, second lien facility for Nighthawk. As of September 30, 2009, the outstanding balance due to the Company under this facility was $14.5 million, and we have recorded our investment in Nighthawk at a fair value of zero. Although we are pursuing our claims, because of Nighthawk's forced liquidation and the continuing surplus of assets in the oilfield services industry, we do not expect a substantial recovery of our invested capital.

On July 16, 2009, BioEnergy Holding, LLC ("BioEnergy") completed the reorganization of its specialty chemicals business, whereby a new entity, Myriant Technologies, LLC ("Myriant"), was formed to continue the activities (research, development, and commercialization) of the specialty chemicals business. In a cashless exchange for its original 648,000 BioEnergy warrants, NGPC received 140,687 BioEnergy warrants, 131,741 Myriant units and 32,680 Myriant warrants.

On July 20, 2009, the Company closed a recapitalization transaction with Alden Resources, LLC ("Alden"), a Kentucky-based specialty coal producer. As part of the recapitalization, NGPC Asset Holdings II, LP, a wholly owned subsidiary of the Company, purchased $5.8 million of preferred units representing substantially all of the equity in Alden. The proceeds of the preferred equity issuance are being used for capital expenditures, working capital and general corporate purposes. In addition to acquiring a majority ownership position, we hold a majority of the seats on the board of directors of Alden. We also restructured our existing $36.5 million Senior Secured Credit Facility with Alden into an amended and restated $60 million two tranche Senior Secured Credit Facility with initial funded amounts of $20 million in Tranche A Notes and $19.5 million in Tranche B Notes. The Tranche A and Tranche B Notes bear interest at LIBOR plus 9%, with a LIBOR floor of 3%. Both the Tranche A Notes and the Tranche B Notes have the option to pay interest-in-kind (PIK) at a coupon rate of LIBOR plus 12%, with a LIBOR floor of 3%.

On July 31, 2009, BSR Loco Bayou, LLC ("BSR") repaid in its entirety its $2.72 million Senior Secured Multiple Advance Term Loan and accrued interest of $0.27 million. The Company continues to hold an overriding royalty interest and warrants in BSR.

In total for the quarter ended September 30, 2009, we funded $12.1 million to existing portfolio companies and received $24.9 million in cash repayments. We did not add any new companies to our portfolio during the third quarter of 2009.

Following these transactions our investment portfolio consisted of eighteen portfolio companies and was invested as follows based on their fair values as of September 30, 2009: 47.2% in senior secured term loans, 4.2% in senior subordinated secured notes, 0.2% in participating convertible preferred stock, 2.1% in common stock, 3.0% in corporate notes, 7.4% in membership and partnership units, 4.0% in net profits interests, 2.2% in limited term royalty interests, and 0.5% in other investments. The balance of our investment portfolio (as a percentage of the whole portfolio) was comprised 29.2% of cash and cash equivalents.

Results of Operations

Investment Income

Investment income for the quarter ended September 30, 2009 was $6.0 million, with $5.9 million attributable to interest from targeted investments in ten portfolio companies, $0.8 million attributable to income from commodity derivative instruments, a $0.9 million net loss attributable to royalty income, net of amortization, and $0.2 million from corporate notes, investments in cash and cash equivalents and fee income from third parties and affiliates. This compares to investment income for the quarter ended September 30, 2008 of $9.9 million with $9.0 million attributable to targeted investments in eighteen portfolio companies, $0.9 million from corporate notes, investments in cash and cash equivalents and fee income from third parties and affiliates.

Investment income for the nine months ended September 30, 2009, was $20.1 million, primarily from $18.1 million in interest from targeted investments in portfolio companies. Additional investment income included $5.9 million attributable to income from commodity derivative instruments, a $4.6 million net loss attributable to royalty income, net of amortization, and $0.7 million from corporate notes, investments in cash and cash equivalents and fee income from third parties and affiliates. This compares to $21.4 million attributable to targeted investments in portfolio companies, a $0.3 million net loss from commodity derivative instruments, $3.6 million attributable to royalty income, net of amortization and $2.9 million from corporate notes, investments in cash and cash equivalents and fee income from third parties and affiliates for the same period in 2008.

Our total targeted portfolio balance decreased on a cost basis by approximately $42.0 million from $299.0 million on September 30, 2008 to $257.0 million on September 30, 2009. The balance of non-accruing and non-income producing investments on a cost basis increased from approximately $80.5 million at September 30, 2008 to approximately $116.9 million at September 30, 2009. The balance of non-accruing and non-income producing investments on a fair value basis decreased from approximately $85.1 million at September 30, 2008 to approximately $55.2 million at September 30, 2009. Although LIBOR rates dropped significantly from the third quarter of 2008 compared to the third quarter of 2009, this had a minimal effect on our targeted investment income because of LIBOR floors established for new portfolio companies and certain other existing portfolio companies during 2008. Additionally, the continued downward pressure on U.S. Treasury Bill interest rates during 2008 and 2009 reduced interest from cash and cash equivalents.

At September 30, 2009, the weighted average yield on targeted portfolio investments, exclusive of capital gains, was 3.63%. The weighted average yield of our corporate notes was 5.82%. The weighted average yield of our cash & cash equivalents was 0.64%. The weighted average yield on our total capital invested at September 30, 2009 was 3.16%. Further, four investments totaling $76.5 million on a cost basis (Nighthawk, $13.9 million; Formidable, LLC ("Formidable"), $38.8 million; Alden Tranche B, $19.5 million; and Chroma Exploration & Production, Inc., $4.3 million) are currently on non-accrual status. Investments totaling $40.3 million on a cost basis are non-income producing and include equity investments in TierraMar Energy LP preferred units, DeanLake Operator, LLC preferred units, Resaca Exploitation, Inc. ("Resaca") common stock, Alden Resources, LLC class E units and warrants and units associated with our investment in BioEnergy.

At September 30, 2008, the weighted average yield on targeted portfolio investments, exclusive of capital gains, was 12.41%. The weighted average yield of our corporate notes was 5.82%. The weighted average yield of our U.S. Treasury Bills and cash equivalents was 1.71%. The weighted average yield on our total capital invested at September 30, 2008 was 8.16%. These yields did not include income from four investments on non-accrual status.

Weighted average yields on investments are computed as of a specific date using interest rates as of the balance sheet date and include amortization of loan discount points, original issue discount and market premium or discount, royalty interest income, net profits income and other similar investment income, weighted by their respective costs when averaged. Additionally, these yields do not include income from any investments on non-accrual status. Such weighted average yields are not necessarily indicative of expected total returns on a portfolio.

Operating Expenses

For the quarter ended September 30, 2009, operating expenses were $3.2 million compared to $7.0 million for the quarter ended September 30, 2008. The 2009 amount consisted of investment advisory and management fees of $1.5 million, insurance expenses, administrative services fees, professional fees, directors' fees and other general and administrative expenses of $1.2 million and credit facility interest and fees of $0.5 million. In comparison, for the quarter ended September 30, 2008, investment advisory and management fees were $4.5 million, insurance expenses, administrative services fees, professional fees, directors' fees and other general and administrative expenses totalled $1.0 million and credit facility interest and fees were $1.5 million. The third quarter of 2008 included approximately $2.5 million of incentive fees accrued with respect to the net realized gains associated with our investments in Rubicon Energy Partners, LLC ("Rubicon") ($12.3 million) and Resaca ($6.0 million).

For the nine months ended September 30, 2009, operating expenses were $11.2 million compared to $16.8 million for the same period of 2008. The 2009 amount consisted of investment advisory and management and incentive fees of $5.0 million, insurance expenses, administrative services fees, professional fees, directors' fees, organization costs and other general and administrative expenses of $3.7 million and credit facility interest and fees of $2.5 million. This compares to investment advisory and management fees of $8.1 million, insurance expenses, administrative services fees, professional fees, directors' fees, organization costs and other general and administrative expenses of $3.3 million and credit facility interest and fees of $5.4 million for the nine months ended September 30, 2008.

Operating expenses for the three and nine month periods include our allocable portion of the total organizational and operating expenses incurred by us, the Manager and the Administrator, as determined by our Board of Directors and representatives of the Manager and the Administrator. According to the terms of the investment advisory agreement, we calculate the base management fee quarterly as 0.45% of the average of our total assets as of the end of the two previous quarters. Other general and administrative expenses include allocated share of employee, facilities and stockholder services and marketing costs.

Net Investment Income before Income Taxes

For the quarter ended September 30, 2009, net investment income before income taxes was $2.9 million and $2.9 million for the quarter ended September 30, 2008. The year to year change was flat primarily due to lower interest income on overall lower principal balances, the increase in the balance of non-accruing investments and the effect of lower commodity prices on royalty income, net of amortization, offset by lower incentive fee accruals, interest expense and management fees.

For the nine months ended September 30, 2009, net investment income before income taxes was $8.9 million compared to $10.8 million for the nine months ended September 30, 2008. The 17.2% decrease was primarily due to lower interest income on overall lower principal balances and an increase in the balance of non-accruing and non-income producing investments, offset by lower incentive fee accruals and credit facility interest expense and fees on our reduced debt balance.

Net Realized Gains

There were no realized capital gains or losses for the quarter ended September 30, 2009. Realized capital gains for the quarter ended September 30, 2008 were $18.3 million, before taxes, on the sale of $4.8 million of portfolio investments in Resaca and Rubicon.

For the nine months ended September 30, 2009, realized capital losses were $0.05 million. Realized capital gains for the nine months ended September 30, 2008 were $18.3 million, before taxes, on the sale of $4.8 million of portfolio investments in Resaca and Rubicon.

Unrealized Appreciation or Depreciation on Investments

For the quarter ended September 30, 2009, the decrease in net unrealized depreciation was $11.3 million, comprised of an $11.1 million increase in targeted portfolio fair value and an increase of $0.9 million in the fair value of our corporate notes, offset by a decrease of $0.7 million in the fair value of commodity derivative instruments. The increase in targeted portfolio fair value was largely a result of changes in the estimated current market values of underlying assets. The decrease in the fair value of commodity derivative instruments was a result of the reversal of prior period unrealized appreciation due to realizations in the third quarter of 2009.

For the quarter ended September 30, 2008, the increase in net unrealized depreciation was $3.8 million, comprised of a $5.6 million decrease in targeted portfolio fair value, a $0.6 million decrease in the fair value of corporate notes and a $2.4 million increase in the fair value of commodity derivative instruments. The decrease in targeted portfolio fair value was largely a result of the realization and reversal of $7.7 million of unrealized gains reported in previous quarters, through the sale of the assets associated with our ownership of Rubicon and the sale of our Resaca overriding royalty interests.

For the nine months ended September 30, 2009, the increase in net unrealized depreciation was $17.7 million, comprised of a decrease in targeted portfolio fair value of $13.1 million and a $7.0 million decrease in the fair value of commodity derivative instruments, offset by a $2.4 million increase in the fair value of our corporate notes. This compares to an increase in net unrealized depreciation of $3.9 million for the nine months ended September 30, 2008, comprised of a $5.4 million decrease in targeted portfolio fair values, a $0.7 million decrease in the fair value of corporate notes and a $2.2 million increase in the fair value of commodity derivative instruments.

Thus far this year, disruption in the credit and equity capital markets and the volatility of energy commodity prices, have made it more difficult to predict the timing and amount of future realized capital gains. In addition, capital markets volatility has impacted our unrealized appreciation and depreciation. While, in general, current capital and commodity markets are more stable than during the earlier part of this year, conditions remain such that it remains difficult to predict capital gains or losses or fluctuations in our portfolio values.

Net Increase or Decrease in Stockholders' Equity from Operations

For the quarter ended September 30, 2009, we had a net increase in stockholders' equity (net assets) resulting from operations of $15.0 million, or $0.69 per share, compared to a net increase of $14.5 million, or $0.66 per share for the quarter ended September 30, 2008. The $0.5 million, or $0.03 per share net increase is attributable to a $15.1 million decrease in unrealized depreciation on portfolio securities and a $0.6 million decrease in income tax benefits, offset by a decrease in net realized (after tax) capital gain on portfolio securities of $14.0 million during the third quarter of 2009, compared to the third quarter of 2008.

For the nine months ended September 30, 2009 the net decrease in stockholders' equity (net assets), resulting from operations was $6.2 million, or $0.29 per share, compared to an increase of $22.2 million, or $1.02 per share for the nine months ended September 30, 2008. The $28.4 million, or $1.31 per share net decrease is attributable to a decrease in net investment income before income taxes of $1.9 million due to lower overall investment income offset by lower management fees and interest expense, $13.7 million increase in unrealized depreciation on portfolio securities, a decrease in net realized (after tax) capital gain on portfolio securities of $14.1 million, offset by a $1.2 million increase in income tax benefits during the third quarter of 2009, compared to the third quarter of 2008.

Financial Condition, Liquidity and Capital Resources

During the quarter ended September 30, 2009, we generated cash from operations, including interest earned on our portfolio securities, as well as our investments in corporate notes and U.S. government securities. We received cash redemptions of investments in portfolio securities and commodity derivative instruments of $24.9 million. At September 30, 2009, we had cash and cash equivalents of $83.5 million and investments in corporate notes of $8.7 million. Our Investment Facility, with an outstanding balance of $40 million at September 30, 2009, will mature on August 31, 2010. We repaid the entire $75 million balance of our Treasury Facility on July 16, 2009. We did not renew the Treasury Facility on its August 31, 2009 maturity date, and we have no plans to do so. As of September 30, 2009, we had investments in or commitments to fund loan facilities to eighteen portfolio companies totaling $262.3 million, of . . .