UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q


(Mark
One)


þ
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended September 30, 2010




or




 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from _____________ to _______________




Commission
file number: 814-00672








NGP
Capital Resources Company


(Exact
name of registrant as specified in its charter)








Maryland
              20-1371499(State or other jurisdiction of
                incorporation or organization)
              (I.R.S. Employer
                Identification No.)1221 McKinney Street, Suite 2975
                Houston, Texas
              77010(Address of principal executive offices)
              (Zip Code)





(713)
752-0062


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes  þ   No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer    ̈
            Accelerated
      filer     þ
            Non-accelerated
      filer      ̈
            Smaller
      reporting company    ̈(Do
      not check if smaller reporting
company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes  ̈   No þ





As of
November 5, 2010, there were 21,628,202 shares of the registrant’s common stock
outstanding.







TABLE OF
CONTENTS





PART
      I - FINANCIAL INFORMATION
              1Item
      1.     Financial Statements
              1Item
      2.     Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
              30Item
      3.     Quantitative and Qualitative Disclosures
      About Market Risk
              37Item
      4.     Controls and Procedures
              38PART
      II – OTHER INFORMATION
              39Item
      1.     Legal Proceedings
              39Item
      1A.  Risk Factors
              39Item
      6.     Exhibits
              39







PART
I - FINANCIAL INFORMATION


Item
1. Financial Statements.


NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
BALANCE SHEETS





September 30, 2010
                                      
                                      
                                      December 31, 2009(Unaudited)AssetsInvestments
      in portfolio securities at fair valueControl
      investments - majority owned(cost:
      $126,227,931 and $118,590,412, respectively)
                                      
                                      $
                                      77,161,810
                                      
                                      
                                      $
                                      72,449,620Affiliate
      investments(cost:
      $34,096,517 and $30,727,367, respectively)
                                      
                                      
                                      33,216,052
                                      
                                      
                                      
                                      31,578,945Non-affiliate
      investments(cost:
      $78,812,538 and $92,832,647, respectively)
                                      
                                      
                                      76,884,017
                                      
                                      
                                      
                                      86,965,378Investments
      in corporate notes at fair value(cost:
      $11,502,179 and $11,539,564, respectively)
                                      
                                      
                                      10,413,838
                                      
                                      
                                      
                                      9,062,200Investments
      in commodity derivative instruments at fair value(cost:
      $0 and $30,100, respectively)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      49,000Total
      investments
                                      
                                      
                                      197,675,717
                                      
                                      
                                      
                                      200,105,143Cash
      and cash equivalents
                                      
                                      
                                      95,315,228
                                      
                                      
                                      
                                      108,288,217Accounts
      receivable and other current assets
                                      
                                      
                                      1,937,783
                                      
                                      
                                      
                                      2,115,663Interest
      receivable
                                      
                                      
                                      879,360
                                      
                                      
                                      
                                      1,241,609Prepaid
      assets
                                      
                                      
                                      1,308,235
                                      
                                      
                                      
                                      2,201,468Deferred
      tax assets
                                      
                                      
                                      3,867,362
                                      
                                      
                                      
                                      2,979,209Total
      current assets
                                      
                                      
                                      103,307,968
                                      
                                      
                                      
                                      116,826,166Total
      assets
                                      
                                      $
                                      300,983,685
                                      
                                      
                                      $
                                      316,931,309Liabilities
      and stockholders' equity (net assets)Current
      liabilitiesAccounts
      payable and accrued expenses
                                      
                                      $
                                      1,010,799
                                      
                                      
                                      $
                                      1,098,414Management
      and incentive fees payable
                                      
                                      
                                      1,409,553
                                      
                                      
                                      
                                      1,415,866Payables
      for investment securities purchased
                                      
                                      
                                      2,856,806
                                      
                                      
                                      
                                      -Dividends
      payable
                                      
                                      
                                      3,676,794
                                      
                                      
                                      
                                      3,676,794Income
      taxes payable
                                      
                                      
                                      48,837
                                      
                                      
                                      
                                      62,321Total
      current liabilities
                                      
                                      
                                      9,002,789
                                      
                                      
                                      
                                      6,253,395Deferred
      tax liabilities
                                      
                                      
                                      3,890,519
                                      
                                      
                                      
                                      3,002,366Long-term
      debt
                                      
                                      
                                      50,000,000
                                      
                                      
                                      
                                      67,500,000Total
      liabilities
                                      
                                      
                                      62,893,308
                                      
                                      
                                      
                                      76,755,761Commitments
      and contingencies  (Note 6)Stockholders’
      equity (net assets)Common
      stock, $.001 par value, 250,000,000 shares authorized;21,628,202
      shares issued and outstanding
                                      
                                      
                                      21,628
                                      
                                      
                                      
                                      21,628Paid-in
      capital in excess of par
                                      
                                      
                                      295,174,063
                                      
                                      
                                      
                                      295,174,063Undistributed
      net investment income (loss)
                                      
                                      
                                      (7,898,735
                                      )
                                      
                                      
                                      (4,944,530
                                      )Undistributed
      net realized capital gain (loss)
                                      
                                      
                                      (110,492
                                      )
                                      
                                      
                                      -Net
      unrealized appreciation (depreciation) of portfolio
      securities,corporate
      notes and commodity derivative instruments
                                      
                                      
                                      (49,096,087
                                      )
                                      
                                      
                                      (50,075,613
                                      )Total
      stockholders’ equity (net assets)
                                      
                                      
                                      238,090,377
                                      
                                      
                                      
                                      240,175,548Total
      liabilities and stockholders' equity (net assets)
                                      
                                      $
                                      300,983,685
                                      
                                      
                                      $
                                      316,931,309Net
      asset value per share
                                      
                                      $
                                      11.01
                                      
                                      
                                      $
                                      11.10





(See
accompanying notes to consolidated financial statements)


1





NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





For The Three Months Ended
                  
                  
                  For The Nine Months EndedSeptember 30, 2010
                  
                  
                  September 30, 2009
                  
                  
                  September 30, 2010
                  
                  
                  September 30, 2009Investment
      incomeInterest
      and dividend income:Control
      investments - majority owned
                  
                  $
                  1,188,139
                  
                  
                  $
                  967,554
                  
                  
                  $
                  3,384,042
                  
                  
                  $
                  967,554Affiliate
      investments
                  
                  
                  959,298
                  
                  
                  
                  1,158,016
                  
                  
                  
                  2,692,192
                  
                  
                  
                  3,959,181Non-affiliate
      investments
                  
                  
                  3,011,209
                  
                  
                  
                  3,965,629
                  
                  
                  
                  9,568,456
                  
                  
                  
                  13,731,339Royalty
      income (loss), net of amortization:Control
      investments - majority owned
                  
                  
                  522,473
                  
                  
                  
                  828,553
                  
                  
                  
                  1,277,258
                  
                  
                  
                  894,233Non-affiliate
      investments
                  
                  
                  (75,337
                  )
                  
                  
                  (1,755,557
                  )
                  
                  
                  (1,038,012
                  )
                  
                  
                  (5,489,340
                  )Commodity
      derivative income, net of expired options
                  
                  
                  -
                  
                  
                  
                  829,946
                  
                  
                  
                  16,079
                  
                  
                  
                  5,884,027Other
      income
                  
                  
                  640,000
                  
                  
                  
                  27,526
                  
                  
                  
                  1,570,000
                  
                  
                  
                  144,264Total
      investment income
                  
                  
                  6,245,782
                  
                  
                  
                  6,021,667
                  
                  
                  
                  17,470,015
                  
                  
                  
                  20,091,258Operating
      expensesManagement
      and incentive fees
                  
                  
                  1,409,553
                  
                  
                  
                  1,540,756
                  
                  
                  
                  4,171,952
                  
                  
                  
                  5,021,782Professional
      fees
                  
                  
                  159,960
                  
                  
                  
                  214,591
                  
                  
                  
                  646,936
                  
                  
                  
                  701,217Insurance
      expense
                  
                  
                  185,658
                  
                  
                  
                  199,959
                  
                  
                  
                  556,974
                  
                  
                  
                  600,140Interest
      expense and fees
                  
                  
                  339,073
                  
                  
                  
                  446,600
                  
                  
                  
                  956,254
                  
                  
                  
                  2,541,151Other
      general and administrative expenses
                  
                  
                  973,024
                  
                  
                  
                  718,585
                  
                  
                  
                  2,763,012
                  
                  
                  
                  2,261,123Total
      operating expenses
                  
                  
                  3,067,268
                  
                  
                  
                  3,120,491
                  
                  
                  
                  9,095,128
                  
                  
                  
                  11,125,413Net
      investment income before income taxes
                  
                  
                  3,178,514
                  
                  
                  
                  2,901,176
                  
                  
                  
                  8,374,887
                  
                  
                  
                  8,965,845Benefit
      (provision) for income taxes
                  
                  
                  (808,279
                  )
                  
                  
                  2,321
                  
                  
                  
                  (298,709
                  )
                  
                  
                  15,314Net
      investment income
                  
                  
                  2,370,235
                  
                  
                  
                  2,903,497
                  
                  
                  
                  8,076,178
                  
                  
                  
                  8,981,159Net
      realized capital gain (loss) on investmentsNet
      realized capital gain (loss) on portfolio securities, and corporate
      notes:Control
      investments - majority owned
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (350,000
                  )Non-affiliate
      investments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  296,037Benefit
      (provision) for taxes on capital gain (loss)
                  
                  
                  (91,879
                  )
                  
                  
                  -
                  
                  
                  
                  (110,492
                  )
                  
                  
                  119,000Total
      net realized capital gain (loss) on investments
                  
                  
                  (91,879
                  )
                  
                  
                  -
                  
                  
                  
                  (110,492
                  )
                  
                  
                  65,037Net
      unrealized gain (loss) on investmentsNet
      increase (decrease) in unrealized appreciation (depreciation) on portfolio
      securities, corporate notes and commodity derivative
      instruments:Control
      investments - majority owned
                  
                  
                  (2,838,653
                  )
                  
                  
                  1,688,108
                  
                  
                  
                  (2,925,328
                  )
                  
                  
                  (3,056,931
                  )Affiliate
      investments
                  
                  
                  (1,542,752
                  )
                  
                  
                  4,511,162
                  
                  
                  
                  (1,732,043
                  )
                  
                  
                  5,105,390Non-affiliate
      investments
                  
                  
                  1,261,745
                  
                  
                  
                  5,113,957
                  
                  
                  
                  5,308,870
                  
                  
                  
                  (19,724,604
                  )Benefit
      for taxes on unrealized gain (loss)
                  
                  
                  905,413
                  
                  
                  
                  513,400
                  
                  
                  
                  328,027
                  
                  
                  
                  2,154,226Total
      net unrealized gain (loss) on investments
                  
                  
                  (2,214,247
                  )
                  
                  
                  11,826,627
                  
                  
                  
                  979,526
                  
                  
                  
                  (15,521,919
                  )Net
      increase (decrease) in stockholders' equity (net assets) resulting from
      operations
                  
                  $
                  64,109
                  
                  
                  $
                  14,730,124
                  
                  
                  $
                  8,945,212
                  
                  
                  $
                  (6,475,723
                  )Net
      increase (decrease) in stockholders' equity (net assets) resulting from
      operations per common share
                  
                  $
                  -
                  
                  
                  $
                  0.68
                  
                  
                  $
                  0.42
                  
                  
                  $
                  (0.30
                  )





(See
accompanying notes to consolidated financial statements)


2





NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (NET ASSETS)


(Unaudited)





Net UnrealizedAppreciation (Depreciation)
                  
                  
                  TotalPaid-in Capital
                  
                  
                  Undistributed
                  
                  
                  Undistributed
                  
                  
                  of Portfolio Securities,
                  
                  
                  Stockholders'Common Stock
                  
                  
                  in Excess
                  
                  
                  Net Investment
                  
                  
                  Net Realized
                  
                  
                  Corporate
      Notes and Commodity
                  
                  
                  EquityShares
                  
                  
                  Amount
                  
                  
                  of Par
                  
                  
                  Income (Loss)
                  
                  
                  Capital Gain (Loss)
                  
                  
                  Derivative Instruments
                  
                  
                  (Net Assets)Balance
      at December 31, 2009
                  
                  
                  21,628,202
                  
                  
                  $
                  21,628
                  
                  
                  $
                  295,174,063
                  
                  
                  $
                  (4,944,530
                  )
                  
                  $
                  -
                  
                  
                  $
                  (50,075,613
                  )
                  
                  $
                  240,175,548Net
      increase (decrease) in stockholders' equity (net assets) resulting from
      operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,076,178
                  
                  
                  
                  (110,492
                  )
                  
                  
                  979,526
                  
                  
                  
                  8,945,212Dividends
      declared
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (11,030,383
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (11,030,383
                  )Balance
      at September 30, 2010
                  
                  
                  21,628,202
                  
                  
                  $
                  21,628
                  
                  
                  $
                  295,174,063
                  
                  
                  $
                  (7,898,735
                  )
                  
                  $
                  (110,492
                  )
                  
                  $
                  (49,096,087
                  )
                  
                  $
                  238,090,377





(See
accompanying notes to consolidated financial statements)




3





NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





For
      The Nine Months EndedSeptember 30, 2010
                
                
                September 30, 2009Cash
      flows from operating activitiesNet
      increase (decrease) in stockholders' equity (net assets) resulting from
      operations
                
                $
                8,945,212
                
                
                $
                (6,475,723
                )Adjustments
      to reconcile net increase (decrease) in stockholders' equity (net assets)
      resulting from operations to net cash provided by operating
      activitiesPayment-in-kind
      interest
                
                
                (4,547,397
                )
                
                
                (3,317,164
                )Net
      amortization of premiums, discounts and fees
                
                
                8,650,115
                
                
                
                10,128,588Change
      in unrealized (appreciation) depreciation on portfolio securities,
      corporate notes and commodity derivative instruments before
      taxes
                
                
                (651,499
                )
                
                
                17,676,145Current
      portion of deferred income taxes
                
                
                (888,153
                )
                
                
                (2,726,619
                )Non-current
      deferred income taxes
                
                
                888,153
                
                
                
                (314,194
                )Effects
      of changes in operating assets and liabilitiesAccounts
      receivable and other current assets
                
                
                177,880
                
                
                
                83,125Interest
      receivable
                
                
                362,249
                
                
                
                1,314,942Prepaid
      assets
                
                
                893,233
                
                
                
                903,284Accounts
      payable and accrued expenses
                
                
                (93,928
                )
                
                
                (3,435,521
                )Payables
      for investment securities purchased
                
                
                2,856,806
                
                
                
                -Income
      taxes payable
                
                
                (13,484
                )
                
                
                390,227Purchase
      of investments in portfolio securities, corporate notes and commodity
      derivative instruments
                
                
                (21,318,320
                )
                
                
                (33,196,662
                )Redemption
      of investments in portfolio securities, corporate notes and commodity
      derivative instruments
                
                
                20,296,527
                
                
                
                64,459,403Net
      cash provided by operating activities
                
                
                15,557,394
                
                
                
                45,489,831Cash
      flows from financing activitiesBorrowings
      under revolving credit facility
                
                
                174,905,200
                
                
                
                72,000,000Repayments
      on revolving credit facility
                
                
                (192,405,200
                )
                
                
                (152,000,000
                )Dividends
      paid
                
                
                (11,030,383
                )
                
                
                (15,788,587
                )Net
      cash used in financing activities
                
                
                (28,530,383
                )
                
                
                (95,788,587
                )Net
      decrease in cash and cash equivalents
                
                
                (12,972,989
                )
                
                
                (50,298,756
                )Cash
      and cash equivalents, beginning of period
                
                
                108,288,217
                
                
                
                133,805,575Cash
      and cash equivalents, end of period
                
                $
                95,315,228
                
                
                $
                83,506,819





(See
accompanying notes to consolidated financial statements)


4





NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
SCHEDULE OF INVESTMENTS


September
30, 2010


(Unaudited)





Portfolio Company
                                                                                              
                                                                                              Energy Industry Segment
                                                                                              
                                                                                              Investment (1) (2) (4)
                                                                                              
                                                                                              Principal
                                                                                              
                                                                                              
                                                                                              Cost
                                                                                              
                                                                                              
                                                                                              Fair Value (3)TARGETED INVESTMENTSControl Investments - Majority Owned (50% or more owned)Alden
      Resources, LLC (18)
                                                                                              
                                                                                              Coal
      Production
                                                                                              
                                                                                              Senior
      Secured
                                                                                              
                                                                                              $
                                                                                              16,497,033
                                                                                              
                                                                                              
                                                                                              $
                                                                                              14,961,969
                                                                                              
                                                                                              
                                                                                              $
                                                                                              14,861,969Multiple-Advance
      Term Loan - Tranche A(The
      greater of 12.00% or LIBOR +9.00%
      cash, 15.00% or LIBOR +12.00%
      PIK, due 1/05/2013)Senior
      Secured
                                                                                              
                                                                                              
                                                                                              23,420,914
                                                                                              
                                                                                              
                                                                                              
                                                                                              19,519,841
                                                                                              
                                                                                              
                                                                                              
                                                                                              19,519,841Multiple-Advance
      Term Loan - Tranche B(The
      greater of 12.00% or LIBOR +9.00%
      cash, 15.00% or LIBOR +12.00%
      PIK, due 1/05/2013) (6)Senior
      Secured
                                                                                              
                                                                                              
                                                                                              1,000,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,000,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,000,000Multiple-Advance
      Term Loan - Revolver(The
      greater of 12.00% or LIBOR +9.00%
      cash, 15.00% or LIBOR +12.00%
      PIK, due 1/05/2013)Class
      E Units - 100% of outstanding units
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,800,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,800,000entitled
      to 100% of distributions ofAlden
      Resources until payout,80%
      after payout (5)Royalty
      Interest
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,497,219
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,330,000BSR
      Holdings, LLC (7) (18)
                                                                                              
                                                                                              Oil
      & Natural Gas
                                                                                              
                                                                                              Units
      - 100% of outstanding units of
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              300,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              300,000Production
      and Development
                                                                                              
                                                                                              BSR
      Holdings, LLC which holds 50% workinginterest
      in certain BSR Loco Bayou, LLCoil
      and gas properties (5)Overriding
      Royalty Interest
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              14,750
                                                                                              
                                                                                              
                                                                                              
                                                                                              100,000DeanLake
      Operator, LLC (18)
                                                                                              
                                                                                              Oil
      & Natural Gas
                                                                                              
                                                                                              Class
      A Preferred Units - 100% of outstanding
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              14,000,255
                                                                                              
                                                                                              
                                                                                              
                                                                                              7,500,000Production
      and Development
                                                                                              
                                                                                              units
      entitled to 100% of distributions ofDeanLake
      Operator, LLC until payout,80%
      after payout (5)Overriding
      Royalty Interest
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              17,673
                                                                                              
                                                                                              
                                                                                              
                                                                                              50,000Formidable,
      LLC (18)
                                                                                              
                                                                                              Oil
      & Natural Gas
                                                                                              
                                                                                              Senior
      Secured
                                                                                              
                                                                                              
                                                                                              38,780,316
                                                                                              
                                                                                              
                                                                                              
                                                                                              38,780,316
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,300,000Production
      and Development
                                                                                              
                                                                                              Multiple-Advance
      Term Loan(LIBOR
      + 5.50% cash, LIBOR + 8.50%default,
      due 5/31/2008) (6) (11)Warrants
      (5)
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              500,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Formidable
      Holdings, LLC Units - 100% of
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              10,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              -pledged
      stock of Formidable, LLC (5) (11)Gatliff
      Services, LLC (18)
                                                                                              
                                                                                              Coal
      Processing
                                                                                              
                                                                                              Membership
      Units - 100% of outstanding
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              12,100,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              12,100,000units
      of Gatliff Services, LLC  (5)Rubicon
      Energy Partners,
                                                                                              
                                                                                              Oil
      & Natural Gas
                                                                                              
                                                                                              LLC
      Units (4,000 units) representing
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -LLC
      (18)
                                                                                              
                                                                                              Production
      and Development
                                                                                              
                                                                                              50%
      ownership of the assets ofRubicon
      Energy Partners, LLC (5)TierraMar
      Energy LP (18)
                                                                                              
                                                                                              Oil
      & Natural Gas
                                                                                              
                                                                                              Class
      A Preferred LP Units - 100% of
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              16,710,788
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,000,000Production
      and Development
                                                                                              
                                                                                              outstanding
      units entitled to 100% ofdistributions
      of TierraMar Energy LP untilpayout,
      67% after payout (5)Overriding
      Royalty Interest
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              15,120
                                                                                              
                                                                                              
                                                                                              
                                                                                              300,000Total
      Control Investments - Majority Owned (50% or more owned)
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              126,227,931
                                                                                              
                                                                                              
                                                                                              $
                                                                                              77,161,810





(See
accompanying notes to consolidated financial statements)




5




NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
SCHEDULE OF INVESTMENTS


September
30, 2010


(Unaudited)


(continued)





Portfolio Company
                                                                                                                                                                        
                                                                                                                                                                        Energy Industry Segment
                                                                                                                                                                        
                                                                                                                                                                        Investment (1) (2) (4)
                                                                                                                                                                        
                                                                                                                                                                        Principal
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        Cost
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        Fair Value (3)TARGETED INVESTMENTS - ContinuedAffiliate Investments - (5% to 25% owned)BioEnergy
      Holding, LLC (18)
                                                                                                                                                                        
                                                                                                                                                                        Alternative
      Fuels and
                                                                                                                                                                        
                                                                                                                                                                        Senior
      Secured Notes
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        15,485,039
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        14,256,743
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        14,256,743Specialty
      Chemicals
                                                                                                                                                                        
                                                                                                                                                                        (15.00%,
      due 3/06/2015)BioEnergy
      Holding Units - 11.5% of outstanding
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,296,771
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,296,771units
      of BioEnergy Holdings, LLC (5)Myriant
      Technologies Warrants (5) (12)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        49,238
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        49,238Myriant
      Technologies Units - 1.9% of the
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        418,755
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        418,755outstanding
      units of Myriant Technologies, LLC (5)Bionol
      Clearfield, LLC (9) (16) (18)
                                                                                                                                                                        
                                                                                                                                                                        Alternative
      Fuels and
                                                                                                                                                                        
                                                                                                                                                                        Senior
      Secured Tranche C
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,962,500
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,962,500
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,962,500Specialty
      Chemicals
                                                                                                                                                                        
                                                                                                                                                                        2nd
      Lien Term Loan(LIBOR
      + 7.00% cash, LIBOR + 9.00%default,
      due 9/06/2016)Resaca
      Exploitation Inc.
                                                                                                                                                                        
                                                                                                                                                                        Oil
      & Natural Gas
                                                                                                                                                                        
                                                                                                                                                                        Senior
      Secured
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        10,000,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,877,254
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,877,254Production
      and Development
                                                                                                                                                                        
                                                                                                                                                                        Revolving
      Credit Facility(The
      greater of 8.0% or LIBOR + 5.50%,due
      5/01/2012) (18)Common
      Stock (1,345,595 shares) - representing
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        3,235,256
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,354,7916.84%
      of outstanding common stock ofResaca
      Exploitation Inc. (5) (13) (17)Subtotal
      Affiliate Investments - (5% to 25% owned)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        34,096,517
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        33,216,052Non-affiliate
      Investments - (Less than 5%
    owned)Anadarko
      Petroleum Corporation
                                                                                                                                                                        
                                                                                                                                                                        Oil
      & Natural Gas
                                                                                                                                                                        
                                                                                                                                                                        Multiple-Advance
      Net Profits Interest
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        9,699,045
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        9,761,267
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        10,061,2652007-III
      Drilling Fund (18)
                                                                                                                                                                        
                                                                                                                                                                        Production
      and Development
                                                                                                                                                                        
                                                                                                                                                                        (Due
      4/23/2032)ATP
      Oil & Gas Corporation (18)
                                                                                                                                                                        
                                                                                                                                                                        Oil
      & Natural Gas
                                                                                                                                                                        
                                                                                                                                                                        Limited
      Term Royalty Interest
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        8,881,349
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        8,881,349Production
      and Development
                                                                                                                                                                        
                                                                                                                                                                        (Dollar
      Denominated - 16.00% Return)Black
      Pool Energy
                                                                                                                                                                        
                                                                                                                                                                        Oil
      & Natural Gas
                                                                                                                                                                        
                                                                                                                                                                        Senior
      Secured
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        17,895,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        17,715,397
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        17,715,397Partners,
      LLC (18)
                                                                                                                                                                        
                                                                                                                                                                        Production
      and Development
                                                                                                                                                                        
                                                                                                                                                                        Multiple-Advance
      Term Loan(The
      greater of 15.00% or LIBOR +11.00%
      cash, due 10/24/2011)Overriding
      Royalty Interest
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,758
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        100,000Warrants
      (5) (14)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        10,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        10,000Chroma
      Exploration &
                                                                                                                                                                        
                                                                                                                                                                        Oil
      & Natural Gas
                                                                                                                                                                        
                                                                                                                                                                        10,611
      Shares Series A Participating
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,221,710
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -Production,
      Inc. (18)
                                                                                                                                                                        
                                                                                                                                                                        Production
      and Development
                                                                                                                                                                        
                                                                                                                                                                        Convertible
      Preferred Stock (6)9,690
      Shares Series AA Participating
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2,089,870
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        750,000Convertible
      Preferred Stock (6)8.11
      Shares Common Stock (5)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -Warrants
      (5) (8)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -Greenleaf
      Investments, LLC (18)
                                                                                                                                                                        
                                                                                                                                                                        Oil
      & Natural Gas
                                                                                                                                                                        
                                                                                                                                                                        Senior
      Secured
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        8,944,362
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        8,868,014
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        8,868,014Production
      and Development
                                                                                                                                                                        
                                                                                                                                                                        Multiple-Advance
      Term Loan(The
      greater of 10.50% or LIBOR + 6.50%,due
      4/30/2011)Overriding
      Royalty Interest
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        5,197
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        400,000GMX
      Resources, Inc. (17)
                                                                                                                                                                        
                                                                                                                                                                        Oil
      & Natural Gas
                                                                                                                                                                        
                                                                                                                                                                        Senior
      Convertible Notes
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        6,025,000
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,870,984
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        4,865,188Production
      and Development
                                                                                                                                                                        
                                                                                                                                                                        (5.00%,
      due 2/1/2013)Nighthawk
      Transport I, LP (18)
                                                                                                                                                                        
                                                                                                                                                                        Energy
      Services
                                                                                                                                                                        
                                                                                                                                                                        Second
      Lien Term Loan B (10)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        13,022,642
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -LP
      Units (5) (10)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -Warrants
      (5) (10)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -Second
      Lien Delayed Draw Term Loan B (10)
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        1,457,656
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -





(See
accompanying notes to consolidated financial statements)




6




NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
SCHEDULE OF INVESTMENTS


September
30, 2010


(Unaudited)


(continued)





Portfolio Company
                                                                                          
                                                                                          Energy Industry Segment
                                                                                          
                                                                                          Investment (1) (2) (4)
                                                                                          
                                                                                          Principal
                                                                                          
                                                                                          
                                                                                          Cost
                                                                                          
                                                                                          
                                                                                          Fair Value (3)TARGETED INVESTMENTS - ContinuedNon-affiliate Investments - (Less than 5% owned) - ContinuedTammany
      Oil & Gas, LLC (18)
                                                                                          
                                                                                          Oil
      & Natural Gas
                                                                                          
                                                                                          Senior
      Secured
                                                                                          
                                                                                          $
                                                                                          24,232,804
                                                                                          
                                                                                          
                                                                                          $
                                                                                          24,232,804
                                                                                          
                                                                                          
                                                                                          $
                                                                                          24,232,804Production
      and Development
                                                                                          
                                                                                          Multiple-Advance
      Term Loan(The
      greater of 13.0% or LIBOR + 8.00%,due
      3/21/2010) (15)Overriding
      Royalty Interest
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          146,188
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,000,000Subtotal
      Non-affiliate Investments - (Less than 5% owned)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          78,812,538
                                                                                          
                                                                                          
                                                                                          $
                                                                                          76,884,017Subtotal
      Targeted Investments (63.92% of total investments)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          239,136,986
                                                                                          
                                                                                          
                                                                                          $
                                                                                          187,261,879CORPORATE
      NOTESPioneer
      Natural Resources Co. (17)
                                                                                          
                                                                                          Oil
      & Natural Gas
                                                                                          
                                                                                          Senior
      Notes, 7.2%, due 2028
                                                                                          
                                                                                          $
                                                                                          10,000,000
                                                                                          
                                                                                          
                                                                                          $
                                                                                          11,502,179
                                                                                          
                                                                                          
                                                                                          $
                                                                                          10,413,838Production
      and DevelopmentSubtotal
      Corporate Notes ( 3.55% of total investments)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          11,502,179
                                                                                          
                                                                                          
                                                                                          $
                                                                                          10,413,838CASH
      AND CASH EQUIVALENTSSubtotal
      Cash and Cash Equivalents (32.53% of total investments)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          95,315,228
                                                                                          
                                                                                          
                                                                                          $
                                                                                          95,315,228TOTAL
      INVESTMENTS, CASH AND CASH
      EQUIVALENTS
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          345,954,393
                                                                                          
                                                                                          
                                                                                          $
                                                                                          292,990,945LIABILITIES
      IN EXCESS OF OTHER ASSETS
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          (54,900,568
                                                                                          )NET
      ASSETS
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          238,090,377





NOTES TO CONSOLIDATED
SCHEDULE OF INVESTMENTS





(1)
            All
      of our investments are collateral for obligations under our credit
      facility.


(2)
            Percentages
      represent interest rates in effect at the end of the period and due dates
      represent the contractual maturity
dates.


(3)
            Our
      Board of Directors determines, in good faith, the fair value of our
      investments.


(4)
            All
      investments are in entities with primary operations in the United States
      of America.


(5)
            Non-income
      producing securities.


(6)
            Non-accrual
      status.


(7)
            BSR
      Loco Bayou repaid its term note in full on July 31, 2009.  We
      retain ownership of the overriding royalty interest and have exercised
      warrants in exchange for 50% working interest in certain BSR Loco Bayou
      properties that have been contributed to NGPC Asset Holdings II, LP in
      exchange for 100% of the outstanding units in BSR Holdings,
      LLC.  We sold our interest in BSR Loco Bayou in October
      2010.  See "Note 11: Subsequent
  Events."


(8)
            Chroma
      warrants expire on April 5, 2012 and provide us the right to purchase
      2,462 shares of common stock at a purchase price of $75.00 per
      share.


(9)
            BioEnergy
      Holdings, LLC owns 100% of Bionol Clearfield,
  LLC.


(10)
            Due
      to insufficient recoveries in the liquidation under Nighthawk's voluntary
      petition under Chapter 7 of the United States Bankruptcy Code, we
      recognized a realized loss of our total remaining investment in Nighthawk
      notes, warrants and units in December
2009.


(11)
            We
      accelerated the Formidable, LLC senior note and foreclosed on the
      Formidable, LLC member units on September 28, 2009.  We sold our
      interest in Formidable, LLC in October 2010.  See "Note 11:
      Subsequent Events."


(12)
            Myriant
      Technologies, LLC warrants expire on August 15, 2015 and provide us the
      right to purchase  32,680 units, representing membership
      interests of Myriant Technologies, LLC, at the  purchase price
      of $10.00 per unit.


(13)
            Resaca
      stock trades on the Alternative Investment Market of the London Stock
      Exchange.  On April 1, 2010, it began trading in U.S
      Dollars


(14)
            Black
      Pool warrants expire seven years after repayment of principal and interest
      and provide us the right to purchase approximately 25% of membership
      interest at the exercise price of $0.01 per
  unit.


(15)
            We
      are currently negotiating an extension of the Tammany Oil & Gas, LLC
      facility


(16)
            We
      issued a forebearance agreement to Bionol Clearfield, LLC on June 16, 2010
      due to a default event.


(17)
            Investments
      are level 2 securities hierarchy.


(18)
            Investments
      are level 3 securities hierarchy.





(See
accompanying notes to consolidated financial statements)




7





NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
SCHEDULE OF INVESTMENTS


December
31, 2009





Portfolio Company
                                                              
                                                              Energy Industry Segment
                                                              
                                                              Investment (1)(2)(4)
                                                              
                                                              Principal
                                                              
                                                              
                                                              Cost
                                                              
                                                              
                                                              Fair Value (3)Targeted Investments (17)Control Investments – Majority Owned (50% or more owned)Alden
      Resources, LLC
                                                              
                                                              Coal
      Production
                                                              
                                                              Senior
      Secured
                                                                Multiple-Advance
      Term Loan - Tranche A
                                                                (The
      greater of 12.00% or LIBOR +
                                                                9.00%
      cash, 15.00% or LIBOR +
                                                                12.00%
      PIK, due 1/05/2013)
                                                              
                                                              $
                                                              21,432,224
                                                              
                                                              
                                                              $
                                                              19,499,779
                                                              
                                                              
                                                              $
                                                              19,399,779Senior
      Secured
                                                                Multiple-Advance
      Term Loan - Tranche B
                                                                (The
      greater of 12.00% or LIBOR +
                                                                9.00%
      cash, 15.00% or LIBOR +
                                                                12.00% PIK, due
      1/05/2013) (6)
                                                              
                                                              
                                                              20,917,680
                                                              
                                                              
                                                              
                                                              19,519,841
                                                              
                                                              
                                                              
                                                              19,519,841Class
      E Units – 100% of outstanding units
                                                                entitled
      to 100% of distributions of
                                                                Alden
      Resources until payout,
                                                                80% after payout
      (5)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              5,800,000
                                                              
                                                              
                                                              
                                                              5,800,000Royalty
      Interest
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              2,519,051
                                                              
                                                              
                                                              
                                                              5,330,000BSR Holdings, LLC
      (7)
                                                              
                                                              Oil
      & Natural Gas
                                                                Production
      and Development
                                                              
                                                              Units – 100%
      of outstanding units of
                                                                BSR
      Holdings, LLC which holds 50%
                                                                working
      interest in certain BSR Loco
                                                                Bayou, LLC oil and
      gas properties (5)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              300,000
                                                              
                                                              
                                                              
                                                              300,000Overriding
      Royalty Interest
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              16,460
                                                              
                                                              
                                                              
                                                              100,000DeanLake
      Operator, LLC
                                                              
                                                              Oil
      & Natural Gas
                                                                Production
      and Development
                                                              
                                                              Senior
      Secured Term Loan
                                                                (10.00%
      cash, 12.00% PIK,
                                                                payable
      quarterly, due 6/30/2011)
                                                              
                                                              
                                                              3,500,000
                                                              
                                                              
                                                              
                                                              3,500,000
                                                              
                                                              
                                                              
                                                              3,500,000Class
      A Preferred Units – 100%
                                                                of
      outstanding units entitled to 100%
                                                                of
      distributions of DeanLake Operator, LLC
                                                                until payout, 80%
      after payout (5)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              10,400,255
                                                              
                                                              
                                                              
                                                              6,500,000Overriding
      Royalty Interest
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              18,046
                                                              
                                                              
                                                              
                                                              100,000Formidable,
      LLC
                                                              
                                                              Oil
      & Natural Gas
                                                                Production
      and Development
                                                              
                                                              Senior
      Secured
                                                                Multiple-Advance
      Term Loan
                                                                (LIBOR
      + 5.50% cash, LIBOR + 8.50%
                                                                default, due
      5/31/2008) (6)
                                                              
                                                              
                                                              38,780,316
                                                              
                                                              
                                                              
                                                              38,780,316
                                                              
                                                              
                                                              
                                                              5,600,000Warrants (5)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              500,000
                                                              
                                                              
                                                              
                                                              —Formidable
      Holdings, LLC Units – 100%
                                                                of pledged stock of
      Formidable, LLC (5)(11)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              10,000
                                                              
                                                              
                                                              
                                                              —Rubicon
      Energy Partners, LLC
                                                              
                                                              Oil
      & Natural Gas
                                                                Production
      and Development
                                                              
                                                              LLC
      Units (4,000 units) representing 50%
                                                                ownership
      of the assets of
                                                                Rubicon Energy
      Partners, LLC (5)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              —
                                                              
                                                              
                                                              
                                                              —TierraMar
      Energy LP
                                                              
                                                              Oil
      & Natural Gas
                                                                Production
      and Development
                                                              
                                                              Class
      A Preferred LP Units – 100%
                                                                of
      outstanding units entitled to 100%
                                                                of
      distributions of TierraMar Energy LP
                                                                until payout, 67%
      after payout (5)
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              17,710,788
                                                              
                                                              
                                                              
                                                              6,000,000Overriding
      Royalty Interest
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              15,876
                                                              
                                                              
                                                              
                                                              300,000Total
      Control Investments – Majority Owned (50% or more
      owned)
                                                              
                                                              
                                                              $
                                                              118,590,412
                                                              
                                                              
                                                              $
                                                              72,449,620





8




NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
SCHEDULE OF INVESTMENTS


December
31, 2009


(continued)





Portfolio Company
                                                                                                    
                                                                                                    Energy Industry Segment
                                                                                                    
                                                                                                    Investment (1)(2)(4)
                                                                                                    
                                                                                                    Principal
                                                                                                    
                                                                                                    
                                                                                                    Cost
                                                                                                    
                                                                                                    
                                                                                                    Fair Value (3)Targeted Investments (17)  – ContinuedAffiliate Investments – (5% to 25% owned)BioEnergy
      Holding, LLC
                                                                                                    
                                                                                                    Alternative
      Fuels and
                                                                                                      Specialty
      Chemicals
                                                                                                    
                                                                                                    Senior
      Secured Notes
                                                                                                      (15.00%,
      due 3/06/2015)
                                                                                                    
                                                                                                    $
                                                                                                    12,255,231
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    10,862,125
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    10,862,125BioEnergy
      International Warrants (5)(12)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    34,766
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    34,766BioEnergy
      Holding Units – 11.5%
                                                                                                      of
      outstanding units of BioEnergy
                                                                                                      Holdings, LLC (5)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,296,771
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1,296,771Myriant Technologies
      Warrants (5)(13)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    49,238
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    49,238Myriant
      Technologies Units – 1.9%
                                                                                                      of
      the outstanding units of
                                                                                                      Myriant Technologies,
      LLC (5)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    418,755
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    418,755Bionol Clearfield,
      LLC (9)
                                                                                                    
                                                                                                    Alternative
      Fuels and
                                                                                                      Specialty
      Chemicals
                                                                                                    
                                                                                                    Senior
      Secured Tranche C
                                                                                                      Construction
      Loan
                                                                                                      (LIBOR
      + 7.00%, due 9/06/2016)
                                                                                                    
                                                                                                    
                                                                                                    5,000,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5,000,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5,000,000Resaca
      Exploitation Inc.
                                                                                                    
                                                                                                    Oil
      & Natural Gas
                                                                                                      Production
      and Development
                                                                                                    
                                                                                                    Senior
      Secured
                                                                                                      Revolving
      Credit Facility
                                                                                                      (The
      greater of 8.0% or LIBOR + 5.50%,
                                                                                                      due
      5/01/2012)
                                                                                                    
                                                                                                    
                                                                                                    10,000,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    9,830,456
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    9,830,456Common
      Stock (6,651,098 shares) –
                                                                                                      representing
      6.86% of outstanding common stock of
                                                                                                      Resaca Exploitation
      Inc. (5)(15)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    3,235,256
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    4,086,834Subtotal
      Affiliate Investments – (5% to 25% owned)
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    30,727,367
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    31,578,945Non-affiliate
      Investments – (Less than 5% owned)Anadarko
      Petroleum
                                                                                                      Corporation
      2007 – III Drilling Fund
                                                                                                    
                                                                                                    Oil
      & Natural Gas
                                                                                                      Production
      and Development
                                                                                                    
                                                                                                    Multiple-Advance
      Net Profits Interest
                                                                                                      (Due
      4/23/2032)
                                                                                                    
                                                                                                    $
                                                                                                    10,579,495
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    10,662,801
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    11,012,799ATP
      Oil & Gas Corporation
                                                                                                    
                                                                                                    Oil
      & Natural Gas
                                                                                                      Production
      and Development
                                                                                                    
                                                                                                    Limited
      Term Royalty Interest
                                                                                                      (Volume
      Denominated – 400 MBBL Pay-off)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    9,335,754
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5,642,113Limited
      Term Royalty Interest
                                                                                                      (Dollar
      Denominated – 16.00% Return)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    14,935,631
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    14,935,631Black
      Pool Energy Partners, LLC
                                                                                                    
                                                                                                    Oil
      & Natural Gas
                                                                                                      Production
      and Development
                                                                                                    
                                                                                                    Senior
      Secured
                                                                                                      Multiple-Advance
      Term Loan
                                                                                                      (The
      greater of 12.00% or LIBOR + 8.00% cash,
                                                                                                      14.00%
      or LIBOR + 10.00% PIK,
                                                                                                      due
      10/24/2011)
                                                                                                    
                                                                                                    
                                                                                                    18,300,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    18,013,814
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    18,013,814Overriding
      Royalty Interest
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    9,884
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    100,000Warrants (5)(16)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    10,000
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    10,000Chroma
      Exploration &
                                                                                                      Production,
      Inc.
                                                                                                    
                                                                                                    Oil
      & Natural Gas
                                                                                                      Production
      and Development
                                                                                                    
                                                                                                    10,302
      Shares Series A Participating
                                                                                                      Convertible Preferred
      Stock (6)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,221,710
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —9,408
      Shares Series AA Participating
                                                                                                      Convertible Preferred
      Stock (6)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2,089,870
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    500,0008.11 Shares Common
      Stock (5)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —Warrants (5)(8)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —Greenleaf
      Investments, LLC
                                                                                                    
                                                                                                    Oil
      & Natural Gas
                                                                                                      Production
      and Development
                                                                                                    
                                                                                                    Senior
      Secured
                                                                                                      Multiple-Advance
      Term Loan
                                                                                                      (The
      greater of 10.50% or LIBOR + 6.50%,
                                                                                                      due
      4/30/2011)
                                                                                                    
                                                                                                    
                                                                                                    10,783,558
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    10,616,048
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    10,616,048Overriding
      Royalty Interest
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    31,028
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    400,000Nighthawk
      Transport I,  LP
                                                                                                    
                                                                                                    Energy
      Services
                                                                                                    
                                                                                                    Second Lien Term Loan
      B (10)
                                                                                                    
                                                                                                    
                                                                                                    13,022,642
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —LP Units (5)(10)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —Warrants (5)(10)
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —Second Lien Delayed
      Draw Term Loan B (10)
                                                                                                    
                                                                                                    
                                                                                                    1,457,656
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    —





(See
accompanying notes to consolidated financial statements)




9





NGP CAPITAL RESOURCES COMPANY




CONSOLIDATED
SCHEDULE OF INVESTMENTS


December
31, 2009


(continued)





Portfolio Company
                                                                                                                        
                                                                                                                        Energy Industry Segment
                                                                                                                        
                                                                                                                        Investment (1)(2)(4)
                                                                                                                        
                                                                                                                        Principal
                                                                                                                        
                                                                                                                        
                                                                                                                        Cost
                                                                                                                        
                                                                                                                        
                                                                                                                        Fair Value (3)Targeted Investments (17)  – ContinuedNon-affiliate Investments – (Less than 5% owned) – ContinuedTammany
      Oil & Gas, LLC
                                                                                                                        
                                                                                                                        Oil
      & Natural Gas
                                                                                                                          Production
      and Development
                                                                                                                        
                                                                                                                        Senior
      Secured
                                                                                                                          Multiple-Advance
      Term Loan
                                                                                                                          (The
      greater of 13.0% or LIBOR + 8.00%,
                                                                                                                          due
      3/21/2010)
                                                                                                                        
                                                                                                                        $
                                                                                                                        24,782,804
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        24,734,973
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        24,734,973Overriding
      Royalty Interest
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        171,134
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,000,000Subtotal
      Non-affiliate Investments – (Less than 5% owned)
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        92,832,647
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        86,965,378Subtotal
      Targeted Investments (61.93% of total investments)
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        242,150,426
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        190,993,943Corporate Notes (17)Pioneer
      Natural Resources Co.
                                                                                                                        
                                                                                                                        Oil
      & Natural Gas
                                                                                                                          Production
      and Development
                                                                                                                        
                                                                                                                        Senior
      Notes, 7.2%, due 2028
                                                                                                                        
                                                                                                                        $
                                                                                                                        10,000,000
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        11,539,564
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        9,062,200Subtotal
      Corporate Notes (2.94% of total investments)
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        11,539,564
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        9,062,200Commodity Derivative
      Instruments (17)Put Options (14)
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        Put
      Options with BP Corporation North
                                                                                                                          America,
      Inc. to sell up to 32,750 Bbls of
                                                                                                                          crude
      oil at a strike price of $85.00 per Bbl.
                                                                                                                          4
      monthly contracts beginning on October 1, 2009
                                                                                                                          and
      expiring on January 31, 2010.
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        30,100
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        49,000Subtotal
      Commodity Derivatives (0.02% of total investments)
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        30,100
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        49,000Cash
      and Cash EquivalentsSubtotal
      Cash and Cash Equivalents (35.11% of total
    investments)
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        108,288,217
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        108,288,217Total
      investments, cash and cash equivalents
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        362,008,307
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        308,393,360Liabilities
      in excess of other assets
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (68,217,812
                                                                                                                        )Net
      assets
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        240,175,548




10





NGP
CAPITAL RESOURCES COMPANY





CONSOLIDATED
SCHEDULE OF INVESTMENTS


December
31, 2009


(continued)




Notes
to Consolidated Schedule of Investments


(1)
            All of our investments are
      collateral for obligations under our credit
    facility.


(2)
            Percentages represent interest
      rates in effect at the end of the period and due dates represent the
      contractual maturity dates.


(3)
            Our Board of Directors
      determines, in good faith, the fair value of our
      investments.


(4)
            All investments are in entities
      with primary operations in the United States of
      America.


(5)
            Non-income producing
      securities.


(6)
            Non-accrual
      status.


(7)
            BSR Loco Bayou repaid its term
      note in full on July 31, 2009. We retained ownership of the overriding
      royalty interest and have exercised warrants in exchange for 50% working
      interest in certain BSR Loco Bayou properties that have been contributed
      to NGPC Asset Holdings II, LP in exchange for 100% of the outstanding
      units in BSR Holdings, LLC.


(8)
            Chroma warrants expire on April
      5, 2012 and provide us the right to purchase 2,462 shares of common stock
      at a purchase price of $75.00 per
share.


(9)
            BioEnergy Holdings, LLC owns 100%
      of Bionol Clearfield, LLC.


(10)
            Due to insufficient recoveries in
      the liquidation under Nighthawk’s voluntary petition under Chapter 7 of
      the United States Bankruptcy Code, we recognized a realized loss of our
      total remaining investment in Nighthawk notes, warrants and units in
      December 2009.


(11)
            We accelerated the Formidable,
      LLC senior note and foreclosed on the Formidable, LLC member units on
      September 28, 2009.


(12)
            BioEnergy International, LLC
      warrants expire on August 15, 2010 and provide us the right to purchase
      140,687 units, representing membership interests of BioEnergy
      International, LLC, at the purchase price of $10.00 per
      unit.


(13)
            Myriant Technologies, LLC
      warrants expire on August 15, 2015 and provide us the right to purchase
      32,680 units, representing membership interests of Myriant Technologies,
      LLC, at the purchase price of $10.00 per
  unit.


(14)
            We purchased Put Options related
      to the limited term royalty interest purchased from ATP Oil & Gas
      Corporation.


(15)
            Resaca stock trades on the
      Alternative Investment Market of the London Stock Exchange, denominated in
      British pounds, and we reported the fair value at December 31, 2009 in
      U.S. dollars converted at the exchange rate effective on December 31,
      2009.


(16)
            Black Pool warrants expire seven
      years after repayment of principal and interest and provide us the right
      to purchase approximately 25% of membership interest at the exercise price
      of $0.01 per unit.


(17)
            All investments in portfolio
      securities, corporate notes and commodity derivative instruments are level
      3 securities hierarchy.




(See
accompanying notes to consolidated financial statements)


11





NGP
CAPITAL RESOURCES COMPANY


CONSOLIDATED
FINANCIAL HIGHLIGHTS


(Unaudited)





For
      The Nine Months EndedSeptember 30, 2010
                
                
                September 30, 2009Per
      Share Data  (1)Net
      asset value, beginning of period
                
                $
                11.10
                
                
                $
                12.15Net
      investment income
                
                
                0.37
                
                
                
                0.42Net
      realized and unrealized gain (loss) on portfolio securities, corporate
      notes and commodity derivative instruments (3)
                
                
                0.05
                
                
                
                (0.72
                )Net
      increase (decrease) in stockholders' equity (net assets) resulting from
      operations
                
                
                0.42
                
                
                
                (0.30
                )Dividends
      declared
                
                
                (0.51
                )
                
                
                (0.47
                )Net
      asset value, end of period
                
                $
                11.01
                
                
                $
                11.38Market
      value, beginning of period
                
                $
                8.13
                
                
                $
                8.37Market
      value, end of period
                
                $
                9.06
                
                
                $
                7.26Market
      value return  (2)
                
                
                18.32
                %
                
                
                (6.85
                )%Net
      asset value return (2)
                
                
                5.31
                %
                
                
                0.58
                %Ratios
      and Supplemental Data($
      and shares in thousands)Net
      assets, end of period
                
                $
                238,090
                
                
                $
                246,196Average
      net assets
                
                $
                239,133
                
                
                $
                254,516Common
      shares outstanding at the end of the period
                
                
                21,628
                
                
                
                21,628Total
      operating expenses/average net assets (4)
                
                
                5.09
                %
                
                
                5.84
                %Total
      operating expenses less management and incentive fees and interest
      expense/average net assets (4)
                
                
                2.22
                %
                
                
                1.87
                %Total
      operating expenses less management and incentive fees/average net assets
      (4)
                
                
                2.75
                %
                
                
                3.21
                %Net
      investment income/average net assets (4)
                
                
                4.52
                %
                
                
                4.72
                %Net
      increase (decrease) in net assets resulting from operations/average net
      assets (4)
                
                
                5.00
                %
                
                
                (3.40
                )%Portfolio
      turnover rate
                
                
                8.49
                %
                
                
                25.33
                %





(1)
            Per
      Share Data is based on common shares outstanding at the end of the
      period.


(2)
            Return
      calculations assume reinvestment of dividends and are not
      annualized.


(3)
            Calculated
      as a balancing amount necessary to reconcile the change in net assets
      value per share with the other per share information
      presented.  This amount may not agree with the aggregate gains
      and losses for the period because the difference in the net asset value at
      the beginning and end of year may not equal the per share changes of the
      line items disclosed.


(4)
            Annualized.





(See
accompanying notes to consolidated financial statements)


12




NGP
CAPITAL RESOURCES COMPANY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


September
30, 2010


(Unaudited)




Note 1:
            Organization





These
Consolidated Financial Statements present the financial position, results of
operations and cash flows of NGP Capital Resources Company and its consolidated
subsidiaries.  The terms “we,” “us,” “our” and “NGPC” refer to NGP
Capital Resources Company and its consolidated subsidiaries.We are a financial
services company organized in July 2004 as a Maryland corporation to invest
primarily in small and mid-size private energy companies. Our investment
objective is to generate both current income and capital appreciation primarily
through debt investments with certain equity components. We are a closed-end,
non-diversified management investment company that has elected to be regulated
as a business development company, or BDC, under the Investment Company Act of
1940, or the 1940 Act. In addition, for federal income tax purposes we operate
so as to be treated as a regulated investment company, which we refer to as a
RIC, under the Internal Revenue Code of 1986, as amended, or the Code. We have
several direct and indirect subsidiaries that are single member limited
liability companies and wholly-owned limited partnerships established to hold
certain portfolio investments or provide services to us in accordance with
specific rules prescribed for a company operating as a RIC.  These
subsidiaries are:





·
            NGPC
      Funding GP, LLC, a Texas limited liability
  company;


·
            NGPC
      Nevada, LLC, a Nevada limited liability
company;


·
            NGPC
      Funding, LP, a Texas limited
partnership;


·
            NGPC
      Asset Holdings GP, LLC, a Texas limited liability
  company;


·
            NGPC
      Asset Holdings, LP, a Texas limited
partnership;


·
            NGPC
      Asset Holdings II, LP, a Texas limited
  partnership,


·
            NGPC
      Asset Holdings III, LP, a Texas limited
  partnership;


·
            NGPC
      Asset Holdings V, LP, a Texas limited partnership
  and


·
            NGPC
      Asset Holdings VI, LP, a Texas limited
  partnership.





We are
managed and advised, subject to the overall supervision of our Board of
Directors, by NGP Investment Advisor, LP or our Manager, a Delaware limited
partnership owned by NGP Energy Capital Management, L.L.C. and NGP
Administration, LLC, or our Administrator.





Note
      2:
            Significant Accounting
      Policies





Basis
of Presentation





These
interim unaudited consolidated financial statements include the accounts of us
and our subsidiaries.  We eliminate all significant intercompany accounts
and transactions. We consolidate the financial results of our direct
subsidiaries for financial reporting purposes.  In accordance with
Article 6 of Regulation S-X of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, we do not consolidate the financial
results of our portfolio companies, including those in which we have a
controlling interest.





We
prepare the interim consolidated financial statements, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission, or the
SEC. We omit certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP, pursuant to such
rules and regulations.  We believe we include all adjustments, which
are of a normal recurring nature, so that these financial statements fairly
present the financial position of our company.




Use
of Estimates





Preparing
interim consolidated financial statements in accordance with GAAP requires us to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and the accompanying notes to the consolidated
financial statements.  Although we believe our estimates and
assumptions are reasonable, actual results could differ from these
estimates.  Interim results are not necessarily indicative of results
for a full year.  You should read these unaudited consolidated
financial statements in conjunction with the consolidated financial statements
and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2009.




13




Cash
and Cash Equivalents





Cash and
cash equivalents include short-term, liquid investments with an original
maturity of three months or less in accounts such as demand deposit accounts,
money market accounts, certain overnight investment sweep accounts and money
market fund accounts.  Cash and cash equivalents are carried at cost,
which approximates fair value.





Prepaid
Assets





Prepaid
assets consist of premiums paid for directors’ and officers’ insurance and
fidelity bonds with a policy term of one year and fees associated with the
establishment of the policy or credit facility.





Concentration
of Credit Risk





We place
our cash and cash equivalents with financial institutions and, at times, cash
held in checking or money market accounts may exceed the Federal Deposit
Insurance Corporation insured limit.





Valuation
of Investments





The 1940
Act requires the separate identification of investments according to the
percentage ownership in a portfolio company’s outstanding voting
securities.  The percentages and categories are as
follows:





·
            Non-affiliate investments - we
      own less than 5% of a portfolio company’s outstanding voting
      securities


·
            Affiliate investments - we own 5%
      or more but not more than 25% of a portfolio company’s outstanding voting
      securities


·
            Control investments - we own more
      than 25% but less than 50% of a portfolio company’s outstanding voting
      securities


·
            Control investments – majority
      owned – we own 50% or more of a portfolio company’s outstanding voting
      securities.





Fair
value is the price that would be received by a seller of an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.  The fair value definition focuses on exit price
in the principal, or most advantageous, market and prioritizes the use of
observable market inputs over unobservable entity-specific inputs. On a
quarterly basis, the investment team of the Manager prepares valuations for all
of the assets in our portfolio and presents them to our valuation
committee.  The valuation committee recommends their valuations to the
Board of Directors, which in good faith determines the final investment
valuations.





We record
investments in securities for which market quotations are readily available 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, we prepare valuation analyses as generally
described below.





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 our investment
portfolio.  These valuation analyses rely on estimates of the asset
values and enterprise values of portfolio companies issuing
securities.





The
methodologies for determining asset valuations include estimates based
on:  the liquidation or sale value of a portfolio company’s assets,
the discounted value of expected future net cash flows from the assets and third
party valuations of a portfolio company’s assets, such as engineering reserve
reports of oil and natural gas properties.  The investment team of the
Manager considers some or all of the above valuation methods to determine the
estimated asset value of a portfolio company.





The
methodologies for determining enterprise valuations include estimates based
on:  valuations of comparable public companies, recent sales of
comparable companies, the value of recent investments in the equity securities
of a portfolio company and on the methodologies used for asset
valuations.  The investment team of the Manager considers some or all
of the above valuation methods to determine the estimated enterprise value of a
portfolio company.


14




The
methodologies for determining estimated current market values of comparable
securities include estimates based on: recent initial offerings of comparable
securities of public and private companies; recent secondary market sales of
comparable securities of public and private companies; current market implied
interest rates for comparable securities in general; and current market implied
interest rates for non-comparable securities in general, with adjustments for
such elements as size of issue, tenor and liquidity. The investment team of the
Manager considers some or all of the above valuation methods to determine the
estimated current market value of a comparable security.





Debt Securities: We record
our investments in non-convertible debt securities at fair value, which
generally approximates cost plus amortized original issue discount, or OID,
to the extent that the estimated asset or enterprise value of the portfolio
company exceeds the outstanding debt of the portfolio company.  We
record our investment in convertible debt securities at fair value which
generally approximates the higher of: 1) cost plus amortized OID, to the extent
that the estimated asset or enterprise value of the portfolio company equals or
exceeds the outstanding debt of the portfolio company; and 2) our pro rata
share, upon conversion, of the residual equity value of the portfolio company
available after deducting all outstanding debt from its estimated enterprise
value.  If the estimated asset or enterprise value is less than the
sum of the value of our debt investment and all other debt securities of the
portfolio company that rank equal to or senior to our debt investment, we reduce
the value of the debt investment beginning with the junior-most debt investment
such that the asset or enterprise value less the value of the outstanding debt
that ranks equal to or senior to us is zero.  We record investments in
debt securities at market value as of the valuation date to the extent that such
market quotations are readily available.  We also compare each of our
calculated amounts to the estimated current market values of comparable
securities.





Equity Securities: We record
our investments in preferred and common equity securities (including
warrants or options to acquire equity securities) at fair value based on our pro
rata share of the residual equity value available after deducting all
outstanding debt from the estimated enterprise value.  We also compare
each of our calculated amounts to the estimated current market values of
comparable securities.  We may also utilize an option pricing method
(“OPM”), in addition to our other valuation methods, to value the various
preferred stock, common stock, and warrants we have in companies with complex
capital structures.  The OPM treats preferred stock, common stock and
warrants as call options on the enterprise value, with exercise prices based on
liquidation preference of the preferred stock.  The option-pricing method
commonly uses the Black-Scholes model to price the call option.  The OPM
considers the various terms of the stockholder agreements upon liquidation of
the enterprise.  In addition, the OPM implicitly considers the effect of
the liquidation preference as of a future liquidation date, not as of the
valuation date.





Property-Based Equity Participation
Rights: We record our investments in overriding royalty and net profits
interests at fair value based on a multiple of cash flows generated by such
investments, multiples from transactions involving the sale of comparable assets
and/or the discounted value of expected future net cash flows from such
investments.  We
derive appropriate cash flow multiples from the review of comparable
transactions involving similar assets. We derive the discounted value of future
net cash flows, when appropriate, from third party valuations of a portfolio
company’s assets, such as engineering reserve reports of oil and natural gas
properties.





We
estimate the fair value of the crude oil and natural gas 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.





Due to
the uncertainty inherent in the valuation process, our estimates of fair value
may differ significantly from the values determined from a ready market for the
securities, and the differences could be material.  Additionally,
changes in the market environment and other events that may occur over the life
of the investments may cause the gains or losses ultimately realized on these
investments to be different from the valuations currently assigned.





Securities
Transactions, Interest and Dividend Income Recognition





We
account for all securities transactions on a trade-date basis and we accrete
premiums and discounts into interest income using the effective interest method.
In conjunction with the acquisition of debt securities, we may receive
detachable warrants, other equity securities or property interests such as
overriding royalty interests.  We record these interests separately
from the debt securities at their initial fair value, with a corresponding
amount recorded as a discount to the associated debt security.  We
recognize income from overriding royalty interests as received and we amortize
the recorded assets using the units of production method.  We defer
the portion of the loan origination fees paid that represent additional yield or
discount on a loan and accrete the balance into interest income over the life of
the loan using the effective interest method.  Upon the prepayment of
a loan or debt security, we record any unamortized loan origination fees as
interest income and we record any unamortized premium or discount as a realized
gain or loss on the investment.  We accrete market premiums or
discounts on acquired loans or fixed income investments into interest income
using the effective interest method.  We recognize dividend income on
the ex-dividend date.  We accrue interest income if we expect that we
will ultimately be able to collect it.  When collectability of
interest or dividends is doubtful, we place the investment on non-accrual status
and evaluate any existing interest or dividend receivable balances to determine
if a write off is necessary.  We assess the collectability of the
interest and dividends on many factors, including the portfolio company’s
ability to service its loan based on current and projected cash flows as well as
the current valuation of the portfolio company’s assets.


15




Payment-in-Kind
Interest and Dividends





We may
have investments in our portfolio that contain payment-in-kind, or PIK,
provisions.  We compute PIK interest income or dividend income at the
contractual rate specified in each investment agreement and add that amount to
the principal balance of the investment.  For those investments with
PIK interest or dividends, we calculate our income accruals on the principal
balance plus any PIK amounts.  If the portfolio company’s asset
valuation is not sufficient to cover the contractual interest, we will not
accrue interest income or dividend income on the investment. To maintain our RIC
status, we must pay out this non-cash income to stockholders in the form of
dividends, even though we have not yet collected the cash. For the quarter ended
September 30, 2010, PIK interest income was $2.0 million, net of a $0.9 million
reserve. For the quarter ended September 30, 2009, PIK interest income was $2.1
million, net of a $0.03 million reserve.  For the nine months ended
September 30, 2010 PIK interest income was $4.3 million, net of a $2.5 million
reserve.  For the nine months ended September 30, 2009, PIK interest
income was $3.5 million, with no PIK reserve.  We did not recognize
any PIK dividend income during the quarters ended September 30, 2010 or
2009.





Net
Realized Gains or Losses and Net Change in Unrealized Appreciation or
Depreciation





We
calculate realized capital gains on a security as the excess of the net amount
realized from the sale or other disposition of such security over the amortized
cost for the security.  We calculate realized capital losses on a
security as the amount by which the net amount realized from the sale or other
disposition of such security is less than the amortized cost of such
security.  We consider unamortized fees, prepayment premiums, and
investments charged off during the year, net of recoveries.  We do not
include unrealized appreciation or depreciation previously
recognized.





We
calculate unrealized capital depreciation on a security as the amount by which
the original cost of such security exceeds the fair value of such
security.  Our Board of Directors determines, in good faith, all
period-end fair valuations in accordance with GAAP and the 1940
Act.  Net unrealized appreciation or depreciation reflects the change
in portfolio investment values during the reporting period, including the
reversal of previously recorded unrealized appreciation or depreciation when we
realize the settled capital gains or losses.





We do not
account for our commodity derivative instruments, if any, as hedging instruments
for financial accounting purposes. Net unrealized appreciation or
depreciation reflects the change in derivative values during the reporting
period including the reversal of previously recorded unrealized appreciation or
depreciation when we realize the settled gains or losses.





Fee
Income Recognition





Fee income primarily
includes financial advisory, transaction structuring, loan administration,
commitment and prepayment fees. Financial advisory fees represent amounts
received for providing advice and analysis to companies and we recognize these
fees as earned when such services are performed provided collection is
probable.  For the quarter ended September 30, 2010, we recorded
approximately $0.6 million of advisory income,
compared to $0.03 million of loan administration fees for the quarter ended
September 30, 2009.  For the nine months ended September 30, 2010, we
recorded $1.6 million of advisory income, loan administration fees and
commitment fees, compared to $0.1 million of loan administration fees for the
nine months ended September 30, 2009.Transaction structuring fees
represent amounts received for structuring, financing and executing transactions
and are generally payable only if the transaction closes. We defer such fees and
accrete these fees into interest income over the life of the loan using the
effective interest method.  Commitment fees represent amounts received
for committed funding and are generally payable whether or not the transaction
closes.  We defer commitment fees on transactions that close within
the commitment period and accrete these fees into interest income over the life
of the loan using the effective interest method.  We record commitment
fees on transactions that do not close in the month the commitment period
expires.  Amendment fees represent amounts received for amending
current investment terms or structures. We treat amendment fees as we treat
commitment fees. We record amendment fees when the amendment is executed and
accrete over the life of the loan using the effective interest
method.  We recognize prepayment and loan administration fees when
received.  For the quarter ended September 30, 2010, we recorded
approximately $0.3 million of fee income, compared to $0.6 million for the
quarter ended September 30, 2009. For the
nine months ended September 30, 2010, we recorded approximately $0.8 million of
fee income, compared to $1.5 million for the nine months ended September 30,
2009.





Dividends





We record
dividends to stockholders on the ex-dividend date.  We currently
intend that our distributions each year will be sufficient to maintain our
status as a RIC for federal income tax purposes and to eliminate excise tax
liability.  We currently intend to make distributions to stockholders
on a quarterly basis of substantially all net taxable income.  We also
intend to make distributions of net realized capital gains, if any, at least
annually.  However, we may in the future decide to retain such capital
gains for investment and designate such retained amounts as a deemed
distribution.  Each quarter, the Manager estimates our annual taxable
earnings.  The Board of Directors considers this estimate and
determines the amount to be paid out as a dividend, if any.  We
generally declare our dividends each quarter and pay them shortly
thereafter.





The
following table summarizes our recent distribution history:





Distribution HistoryDeclaration Date
                    
                    Amount
                    
                    Record Date
                    
                    Payment DateMarch
      10, 2009
                    
                    $
                    0.200
                    
                    March
      31, 2009
                    
                    April
      10, 2009June
      11, 2009
                    
                    $
                    0.120
                    
                    June
      30, 2009
                    
                    July
      10, 2009September
      10, 2009
                    
                    $
                    0.150
                    
                    September
      30, 2009
                    
                    October
      9, 2009December
      3, 2009
                    
                    $
                    0.170
                    
                    December
      31, 2009
                    
                    January
      7, 2010March
      10, 2010
                    
                    $
                    0.170
                    
                    March
      31, 2010
                    
                    April
      9, 2010June
      15, 2010
                    
                    $
                    0.170
                    
                    June
      30, 2010
                    
                    July
      9, 2010September
      14, 2010
                    
                    $
                    0.170
                    
                    September
      30, 2010
                    
                    October
      8, 2010




16




We have
established an “opt out” dividend reinvestment plan for our common
stockholders.  As a result, if we declare a dividend, our plan agent
automatically reinvests a stockholder’s cash dividend in additional shares of
our common stock unless the stockholder, or his or her broker, specifically
“opts out” of the dividend reinvestment plan and elects to receive cash
dividends. It is customary practice for many brokers to “opt out” of dividend
reinvestment plans on behalf of their clients unless specifically instructed
otherwise.  As of October 8, 2010, the date of the most recent
dividend payment, holders of 2,256,691 shares, or approximately 10.4% of the
21,628,202 outstanding common shares, participated in our dividend reinvestment
plan.





The plan
agent of our dividend reinvestment plan purchases shares in the open market for
credit to the accounts of plan participants unless the average of the closing
sales prices for the shares for the five days immediately preceding the payment
date exceeds 110% of the most recently reported net asset value per
share.





The table
below summarizes recent participation in our dividend reinvestment
plan:





Dividend
Reinvestment Plan Participation





Percentage of
                        
                        
                        
                        
                        
                        
                        
                        
                        Common Stock DividendsParticipating
                        
                        
                        Outstanding
                        
                        
                        Total
                        
                        
                        
                        
                        
                        Purchased in
                        
                        
                        PurchasedDividend
                        
                        Shares
                        
                        
                        Shares
                        
                        
                        Distribution
                        
                        
                        Cash Dividends
                        
                        
                        Open Market (1)
                        
                        
                        PriceMarch
      2009
                        
                        
                        2,179,204
                        
                        
                        
                        10.1
                        %
                        
                        $
                        4,325,640
                        
                        
                        $
                        3,889,799
                        
                        
                        $
                        435,841
                        
                        
                        $
                        6.4340June
      2009
                        
                        
                        1,889,207
                        
                        
                        
                        8.7
                        %
                        
                        $
                        2,595,384
                        
                        
                        $
                        2,368,679
                        
                        
                        $
                        226,705
                        
                        
                        $
                        5.7848September
      2009
                        
                        
                        2,306,518
                        
                        
                        
                        10.7
                        %
                        
                        $
                        3,244,230
                        
                        
                        $
                        2,898,252
                        
                        
                        $
                        345,978
                        
                        
                        $
                        7.6243December
      2009
                        
                        
                        2,372,306
                        
                        
                        
                        11.0
                        %
                        
                        $
                        3,676,794
                        
                        
                        $
                        3,273,502
                        
                        
                        $
                        403,292
                        
                        
                        $
                        8.8884March
      2010
                        
                        
                        2,343,298
                        
                        
                        
                        10.8
                        %
                        
                        $
                        3,676,794
                        
                        
                        $
                        3,278,433
                        
                        
                        $
                        398,361
                        
                        
                        $
                        7.7955June
      2010
                        
                        
                        2,262,290
                        
                        
                        
                        10.5
                        %
                        
                        $
                        3,676,794
                        
                        
                        $
                        3,292,205
                        
                        
                        $
                        384,589
                        
                        
                        $
                        7.7944September
      2010
                        
                        
                        2,256,691
                        
                        
                        
                        10.4
                        %
                        
                        $
                        3,676,794
                        
                        
                        $
                        3,293,157
                        
                        
                        $
                        383,637
                        
                        
                        $
                        9.7349





(1)  Our
transfer agent purchases or issues shares in the following month.





Income
Taxes





We
currently qualify as a RIC for federal income tax purposes, which generally
allows us to avoid paying corporate income taxes on income or gains that we
distribute to our stockholders. We have distributed and intend to distribute
sufficient dividends to eliminate taxable income. We may also be subject to
federal excise tax if we do not distribute at least 98% of our investment
company taxable income in any calendar year and 98% of our capital gains in any
calendar year.  We currently intend that our distributions each year will
be sufficient to maintain our status as a RIC for federal income tax purposes
and to eliminate excise tax liability.





Certain of our wholly
owned subsidiaries have elected to be taxed as a corporation for federal income
tax purposes. Each of these subsidiaries may hold one or more portfolio
investments listed on our Consolidated Schedule of Investments. These taxable
subsidiaries allow us to hold portfolio companies organized as limited liability
corporations or other forms of pass-through entities and still satisfy the RIC
tax requirement that at least 90% of our gross revenue for income tax purposes
must consist of investment income. The income of the limited liability
corporations or other pass-through entities owned by our taxable subsidiaries is
taxed at the subsidiary level only and does not flow through to the RIC. We do
not consolidate the taxable subsidiaries for income tax purposes. We do
consolidate the results of our taxable subsidiaries for financial reporting
purposes and therefore our Consolidated Statements of Operations reflect income
tax expense of those subsidiaries. We
allocate a deferred tax asset valuation allowance to gross deferred tax assets
categorized to net investment income, realized capital gain (loss) on
investments and unrealized gain (loss) on investments.  We record the
changes in the allocation of the valuation allowance due to changes in the gross
deferred tax assets in these categories on our Consolidated Statement of
Operations. These changes may impact the provision (benefit) for taxes in a
category in periods without other taxable
activities.





Note 3:
            Credit Facilities and
      Borrowings





Under the
terms of our Amended and Restated Revolving Credit Agreement, or Investment
Facility, the lenders have agreed to extend revolving credit to us in an amount
not to exceed $67.5 million.  We may increase the credit available to
an amount not to exceed $175.0 million by obtaining additional commitments from
existing lenders or new lenders. The total amount committed was $67.5
million and the amount outstanding was $50.0 million under the Investment
Facility as of September 30, 2010.  By comparison, the total amount
committed as of December 31, 2009 was $67.5 million and the entire amount of
$67.5 million was outstanding under the Investment Facility.  The
Investment Facility matures on August 31, 2012, and bears interest, at our
option, at either (i) LIBOR plus 425 to 575 basis points, or (ii) the base rate
plus 325 to 475 basis points, both based on our amounts
outstanding.  We intend to use the proceeds from the Investment
Facility to supplement our equity capital to make portfolio
investments.  As of September 30, 2010, the interest rate was 7.0% on
$50.0 million (Prime plus 375 basis points).  As of September 30,
2010, the amount available to us under the Investment Facility was $15.2
million.  We repaid the entire $50.0 million balance in October
2010.


17




In
February 2010, we had a letter of credit of $2.6 million issued under the
Investment Facility with respect to our investment in Alden Resources, LLC
(“Alden”). As of September 30, 2010, the letter of credit balance was $2.3
million but was not drawn.





Substantially
all of our assets are collateral for the obligations under the Investment
Facility. In addition, our existing and future subsidiaries, other than special
purpose subsidiaries and certain other subsidiaries are guarantors of the
Investment Facility.  The Investment Facility contains affirmative and
reporting covenants and certain financial ratio and restrictive covenants that
apply to our subsidiaries and us.  The most restrictive covenants
are:





·
            maintaining a ratio of net asset
      value to consolidated total indebtedness (excluding net hedging
      liabilities) of not less than
2.25:1.0,


·
            maintaining a ratio of net asset
      value to consolidated total indebtedness (including net hedging
      liabilities) of not less than
2.0:1.0,


·
            maintaining a ratio of EBITDA to
      interest expense of not less than
  3.0:1.0.





We are in
compliance with these covenants as of September 30, 2010.





From time
to time, we may receive customary commercial and investment banking services
from our lenders.





In
addition to our Investment Facility, we may also fund a portion of our
investments with issuances of equity or senior debt securities.  We
may also securitize a portion of our investments in mezzanine or senior secured
loans or other assets.  We expect to use these funds primarily for
investments in portfolio companies, cash distributions to holders of our common
stock and payment of fees and other operating expenses.





Note 4:
            Investment
      Management





Investment
Advisory Agreement





We have
entered into an investment advisory agreement with the Manager under which the
Manager administers our day-to-day operations and provides investment advisory
services to us.  The Manager is subject to the overall supervision of
our Board of Directors.




For
providing these services, we pay the Manager a fee, consisting of two components
— a base management fee and an incentive fee.





Base Management
Fee:  According to the investment advisory agreement, we
calculate the base management fee as 0.45% of the average of our total assets as
of the end of the two previous quarters.  We record and pay this base
management fee quarterly in arrears.  The Manager has agreed to waive
permanently, subsequent to September 30, 2007, that portion of the management
fee attributable to U.S. Treasury securities acquired with borrowings under our
credit facilities to the extent the amount of such securities exceeds $100
million.  We purchase such securities in connection with our RIC
requirements.





The
entire amount of the $1,409,553 management and incentive fees payable to the
Manager as of September 30, 2010 consists of the base management fee for the
quarter ended September 30, 2010.  By comparison, the entire amount of
the $1,415,866 management and incentive fees payable to the Manager as of
December 31, 2009 consisted of the base management fee for the quarter ended
December 31, 2009.




18




Incentive Fee:  The
incentive fee under the investment advisory agreement consists of two
parts.





We
calculate the first part of the incentive fee, the Investment Income Incentive
Fee, as 20% of the excess, if any, of our net investment income for the quarter
that exceeds a quarterly hurdle rate equal to 2% (8% annualized) of our net
assets.  We calculate and pay this Investment Income Incentive Fee
quarterly in arrears.





For the
purpose of this fee calculation, net investment income means interest income,
dividend income, and any other income (including any other fees, such as
commitment, origination, syndication, structuring, diligence, managerial
assistance, monitoring, and consulting fees or other fees that we receive from
portfolio companies) accrued during the fiscal quarter, minus our operating
expenses for the quarter (including the base management fee, expenses payable
under the administration agreement, any interest expense and dividends paid on
issued and outstanding preferred stock, if any, but excluding the incentive
fee).   Accordingly, we may pay an incentive fee based partly on
accrued interest, the collection of which is uncertain or
deferred.  Net investment income includes, in the case of investments
with a deferred interest feature (such as original issue discount, debt
instruments with payment-in-kind interest and zero coupon securities), accrued
income that we have not yet received in cash.  Net investment income
does not include any realized capital gains, realized capital losses, or
unrealized capital appreciation or depreciation.





We did
not pay any Investment Income Incentive Fees for the third quarters of 2010 and
2009.




We
calculate the second part of the incentive fee, the Capital Gains Fee, as (1)
20% of (a) our net realized capital gains (realized capital gains less realized
capital losses) on a cumulative basis from the closing date of our initial
public offering to the end of such fiscal year, less (b) any unrealized capital
depreciation at the end of such fiscal year, less (2) the aggregate amount of
all Capital Gains Fees paid to the Manager in prior fiscal years.  We
determine and pay the Capital Gains Fee in arrears as of the end of each fiscal
year (or upon termination of the investment advisory agreement, as of the
termination date).  We did not pay any Capital Gains Fees for the
third quarters of 2010 and 2009.




Our
Board of Directors originally approved the investment advisory agreement on
November 9, 2004.  The investment advisory agreement provides that
unless terminated earlier as described below, the agreement shall remain in
effect from year-to-year after November 9, 2006.  The Board of
Directors or the affirmative vote of the holders of a majority of our
outstanding voting securities must approve the continuation of the agreement at
least annually.  Additionally, in either case, the approval must be by
a majority of our directors who are not interested persons.  On
November 3, 2010, our Board of Directors, including all of the independent
directors, approved an extension of the investment advisory agreement through
November 9, 2011.





The
agreement may be terminated at any time, without the payment of any penalty, by
a vote of our Board of Directors or the holders of a majority of our shares on
60 days written notice to the Manager, and would automatically terminate in the
event of its “assignment” (as defined in the 1940 Act).  The agreement
may be terminated by either party without penalty upon not more than 60 days
written notice to the other.





The
investment advisory agreement provides that, absent willful misfeasance, bad
faith or gross negligence in the performance of its duties or the reckless
disregard of its duties and obligations, the Manager and its officers, manager,
agents, employees, controlling persons, members and any other person or entity
affiliated with it are entitled to indemnification from us for any damages,
liabilities, costs and expenses (including reasonable attorneys’ fees and
amounts reasonably paid in settlement) arising from the rendering of the
Manager’s services under the investment advisory agreement or otherwise as our
Manager.




19




Pursuant
to the investment advisory agreement, the Manager pays the compensation and
routine overhead expenses of the investment professionals of our management team
and their respective staffs, when and to the extent engaged in providing
management and investment advisory services to us.  We will bear all other
costs and expenses of our operations and transactions.





The
Manager, NGP Investment Advisor, LP, was formed in 2004 and maintains an office
at 1221 McKinney Street, Suite 2975, Houston, Texas 77010.  The
Manager’s sole activity is to perform management and investment advisory
services for us.  The Manager is a registered investment adviser under
the Investment Advisers Act of 1940.





Administration Agreement





We have
entered into an administration agreement with the Administrator, under which the
Administrator furnishes us with office facilities, equipment and clerical,
bookkeeping and record keeping services at such facilities.  Under the
administration agreement, the Administrator also performs, or oversees the
performance by third parties of, our required administrative
services.  These administrative services include being responsible for
the financial records that we are required to maintain, preparing reports to our
stockholders and preparing reports filed with the SEC.  In addition,
the Administrator assists in determining and publishing our net asset
value.  The Administrator oversees the preparation and filing of our
tax returns, the printing and dissemination of reports to our stockholders and
generally oversees the payment of our expenses and the performance of
administrative and professional services rendered to us by others.  To
the extent permitted under the 1940 Act, the Administrator may also provide on
our behalf, significant managerial assistance to our portfolio
companies.  We base payments under the agreement upon the allocable
portion of the Administrator’s costs and expenses incurred in connection with
administering our business.  The Administrator bills us for charges
under the administration agreement monthly in arrears.  The agreement
may be terminated by either party without penalty upon 60 days’ written notice
to the other party and will automatically terminate in the event of its
“assignment” (as defined in the 1940 Act).





We owed
$275,569 to the Administrator as of September 30, 2010 for expenses incurred on
our behalf for the month of September 2010.  We include this amount in
accounts payable and accrued expenses.  By comparison, we owed
$311,886 to the Administrator as of December 31, 2009 for expenses incurred on
our behalf for the month of December 2009.





Our Board
of Directors originally approved the administration agreement on November 9,
2004.  The administration agreement provides that unless terminated
earlier, the agreement will continue in effect until November 9, 2006, and
from year-to-year thereafter provided that (i) our Board of Directors and
(ii) a majority of our directors who are not parties to the administration
agreement or “interested persons” of any such party approve such continuance at
least annually.  On November 3, 2010, our Board of Directors,
including all of the independent directors, approved the continuation of the
administration agreement through November 9, 2011.




20




Note 5:
            Federal Income
      Taxes





We intend
to qualify for tax purposes as a RIC under Subchapter M of Chapter 1 of the
Code, as amended.  As a RIC, the IRS generally will not tax the
portion of our investment company taxable income and net capital gain (i.e.,
realized net long term capital gains in excess of realized net short term
capital losses) distributed to stockholders.  To qualify as a RIC, we
are required, among other things, to distribute to our stockholders at least 90%
of investment company taxable income, as defined by the Code, and to meet
certain asset diversification requirements.




For the
five years ended December 31, 2009, we met all RIC requirements. We distributed
substantially all of our investment company taxable income for these
years.  Thus, we did not incur any federal income tax liability for
any of these periods.





When a
“C” corporation qualifies to be taxed as a RIC, it is subject to corporate-level
tax on appreciation inherent in its assets on the date it becomes a RIC (i.e.,
built-in gain) that it recognizes within the first 10 years of its RIC status. A
RIC generally may use loss carryforwards arising in taxable years while it was a
“C” corporation to reduce its net recognized built-in gain, although a RIC is
not otherwise allowed to utilize such loss carryforwards. Because we intend to
qualify as a RIC under Subchapter M of the Code for 2005 and later years, it is
uncertain whether we will fully utilize the tax benefit of our loss
carryforward.  Thus, the RIC loss carryforwards are fully
valued.





Certain
of our wholly owned subsidiaries have elected to be taxed as a corporation for
federal income tax purposes. The following of our consolidated subsidiaries are
taxable entities: NGPC Asset Holdings, LP, NGPC Asset Holdings II, LP, NGPC
Asset Holdings III, LP, NGPC Asset Holdings V, LP and NGPC Asset Holdings VI,
LP, collectively NGPCAH.




The
difference between the effective income tax rate of 0.90% and the statutory
federal tax rate of 34% for the nine months ended September 30, 2010 is
primarily attributable to RIC investment company taxable income that generally
will not be subject to federal income tax and valuation allowance on deferred
tax assets.  The difference between the effective income tax rate of 0.11%
and the statutory federal tax rate of 34% for the three months ended September
30, 2010 is primarily attributable to RIC investment company taxable income that
generally will not be subject to federal income tax and valuation allowance on
deferred tax assets.  In addition, during the third quarter of 2010, we
recorded a return to provision adjustment to the realized capital gain (loss) on
investments category and we recorded an offsetting amount to the unrealized gain
(loss) on investments category, therefore there was no impact on the effective
tax rate.


By
comparison, the difference between the effective income tax rate of 26.11% and
the statutory federal tax rate of 34% for the nine months ended September 30,
2009 was primarily attributable to RIC investment company taxable income that
generally will not be subject to federal income tax, and federal income tax
refunds.  The difference between the effective income tax rate of (3.63%)
and the statutory federal tax rate of 34% for the three months ended September
30, 2009 was attributable to RIC investment company taxable income that
generally will not be subject to federal income tax and federal income tax
refunds.




Note 6:
            Commitments and
      Contingencies





As of
September 30, 2010, we had investments in or commitments to fund investments in
seventeen portfolio companies totaling $252.1 million.  Of this total,
$242.8 million was outstanding and $9.3 million remained committed and available
to fund. Generally, these commitments have fixed expiration dates and we do
not expect to fund the entire $9.3 million of commitments before they
expire.  We do not report the unused portions of these commitments on
our Consolidated Balance Sheets.  In February 2010, we had a letter of
credit of $2.6 million issued under the Investment Facility with respect to our
investment in Alden. As of September 30, 2010, the letter of credit balance was
$2.3 million but was not drawn.  In addition, we have continuing
obligations under the investment advisory agreement with the Manager and under
the administration agreement with the Administrator.  The agreements
provide that, absent willful misfeasance, bad faith or gross negligence in the
performance of its duties or the reckless disregard of its duties and
obligations, the Manager, the Administrator and its officers, managers, agents,
employees, controlling persons, members and any other person or entity
affiliated with them will be entitled to indemnification from us for any
damages, liabilities, costs and expenses (including reasonable attorneys’ fees
and amounts reasonably paid in settlement) arising from the rendering of the
Manager’s or Administrator’s services under the agreements or otherwise as our
investment adviser or administrator. The agreements also provide that the
Manager, the Administrator and their affiliates will not be liable to us or any
stockholder for any error of judgment, mistake of law, any loss or damage with
respect to any of our investments or any action taken or omitted to be taken by
the Manager or the Administrator in connection with the performance of any of
their duties or obligations under the agreements or otherwise as investment
adviser or administrator to us, except to the extent specified in Section 36(b)
of the 1940 Act concerning loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services. In the normal course of
business, we enter into a variety of undertakings containing a variety of
representations that may expose us to some risk of loss.  We do not
expect significant losses, if any, from such undertakings.




21




Note 7:
            Reclassifications





GAAP
requires adjustments to certain components of net assets to reflect permanent
differences between financial and tax reporting. These reclassifications have no
effect on total net assets or net asset value per share. Permanent differences
between financial and tax reporting for the current year are generally not
quantifiable until the end of the year. The table below summarizes the
reclassifications from undistributed net investment income (loss), undistributed
net realized capital gain (loss), and paid-in capital in excess of par for the
year ended December 31, 2009. These reclassifications are primarily due to
operating losses, return of capital distributions, reclassification of the
distribution of dividends paid, non-deductible meal expenses, non-deductible
excise taxes, income and expenses from wholly owned subsidiaries and the $13.9
million write-off of our investment in Nighthawk.





Year
                                        
                                        Undistributed Net
                                          Investment
                                          Income
      (Loss)
                                        
                                        
                                        Undistributed
                                          Net
      Realized
                                          Capital Gain
      (Loss)
                                        
                                        
                                        Paid-in
      Capital
                                          in
      Excess of
      Par2009
                                        
                                        $
                                        2,293,828
                                        
                                        
                                        $
                                        12,180,142
                                        
                                        
                                        $
                                        (14,473,970
                                        )





Note
      8:
            Investments
      and Fair Value




Investments
consisted of the following as of September 30, 2010 and December 31,
2009:





Investments,
      cash and cash equivalentsSeptember 30, 2010Cost
                  
                  
                  % of total
                  
                  
                  Fair Value
                  
                  
                  % of totalLong
      term investmentsSenior
      secured debt
                  
                  $
                  154,174,838
                  
                  
                  
                  44.6
                  %
                  
                  $
                  120,594,522
                  
                  
                  
                  41.2
                  %Senior
      convertible notes
                  
                  
                  4,870,984
                  
                  
                  
                  1.4
                  %
                  
                  
                  4,865,188
                  
                  
                  
                  1.7
                  %Royalty
      interests
                  
                  
                  2,705,905
                  
                  
                  
                  0.8
                  %
                  
                  
                  7,280,000
                  
                  
                  
                  2.5
                  %Limited
      term royalties
                  
                  
                  8,881,349
                  
                  
                  
                  2.6
                  %
                  
                  
                  8,881,349
                  
                  
                  
                  3.0
                  %Net
      profits interests
                  
                  
                  9,761,267
                  
                  
                  
                  2.8
                  %
                  
                  
                  10,061,265
                  
                  
                  
                  3.4
                  %Membership
      and partnership units
                  
                  
                  50,636,569
                  
                  
                  
                  14.6
                  %
                  
                  
                  32,415,526
                  
                  
                  
                  11.0
                  %Participating
      preferred stock
                  
                  
                  4,311,580
                  
                  
                  
                  1.2
                  %
                  
                  
                  750,000
                  
                  
                  
                  0.3
                  %Common
      stock
                  
                  
                  3,235,256
                  
                  
                  
                  0.9
                  %
                  
                  
                  2,354,791
                  
                  
                  
                  0.8
                  %Warrants
                  
                  
                  559,238
                  
                  
                  
                  0.2
                  %
                  
                  
                  59,238
                  
                  
                  
                  0.0
                  %Total
      long term investments
                  
                  $
                  239,136,986
                  
                  
                  
                  69.1
                  %
                  
                  $
                  187,261,879
                  
                  
                  
                  63.9
                  %Corporate
      notes
                  
                  
                  11,502,179
                  
                  
                  
                  3.3
                  %
                  
                  
                  10,413,838
                  
                  
                  
                  3.6
                  %Total
      investments
                  
                  $
                  250,639,165
                  
                  
                  
                  72.4
                  %
                  
                  $
                  197,675,717
                  
                  
                  
                  67.5
                  %Cash
      and cash equivalents
                  
                  
                  95,315,228
                  
                  
                  
                  27.6
                  %
                  
                  
                  95,315,228
                  
                  
                  
                  32.5
                  %Total
      investments, cash  and cash equivalents
                  
                  $
                  345,954,393
                  
                  
                  
                  100.0
                  %
                  
                  $
                  292,990,945
                  
                  
                  
                  100.0
                  %


22





Investments,
      Cash and Cash EquivalentsDecember 31, 2009Cost
                  
                  
                  % of total
                  
                  
                  Fair Value
                  
                  
                  % of totalLong
      term investmentsSenior
      secured debt
                  
                  $
                  160,357,352
                  
                  
                  
                  44.3
                  %
                  
                  $
                  127,077,036
                  
                  
                  
                  41.2
                  %Royalty
      interests
                  
                  
                  2,781,479
                  
                  
                  
                  0.8
                  %
                  
                  
                  7,330,000
                  
                  
                  
                  2.4
                  %Limited
      term royalties
                  
                  
                  24,271,385
                  
                  
                  
                  6.7
                  %
                  
                  
                  20,577,744
                  
                  
                  
                  6.7
                  %Net
      profits interests
                  
                  
                  10,662,801
                  
                  
                  
                  2.9
                  %
                  
                  
                  11,012,799
                  
                  
                  
                  3.6
                  %Membership
      and partnership units
                  
                  
                  35,936,569
                  
                  
                  
                  9.9
                  %
                  
                  
                  20,315,526
                  
                  
                  
                  6.6
                  %Participating
      preferred stock
                  
                  
                  4,311,580
                  
                  
                  
                  1.2
                  %
                  
                  
                  500,000
                  
                  
                  
                  0.2
                  %Common
      stock
                  
                  
                  3,235,256
                  
                  
                  
                  0.9
                  %
                  
                  
                  4,086,834
                  
                  
                  
                  1.3
                  %Warrants
                  
                  
                  594,004
                  
                  
                  
                  0.2
                  %
                  
                  
                  94,004
                  
                  
                  
                  0.0
                  %Total
      long term investments
                  
                  $
                  242,150,426
                  
                  
                  
                  66.9
                  %
                  
                  $
                  190,993,943
                  
                  
                  
                  62.0
                  %Corporate
      notes
                  
                  
                  11,539,564
                  
                  
                  
                  3.2
                  %
                  
                  
                  9,062,200
                  
                  
                  
                  2.9
                  %Crude
      oil put options
                  
                  
                  30,100
                  
                  
                  
                  0.0
                  %
                  
                  
                  49,000
                  
                  
                  
                  0.0
                  %Total
      investments
                  
                  $
                  253,720,090
                  
                  
                  
                  70.1
                  %
                  
                  $
                  200,105,143
                  
                  
                  
                  64.9
                  %Cash
      and cash equivalents
                  
                  
                  108,288,217
                  
                  
                  
                  29.9
                  %
                  
                  
                  108,288,217
                  
                  
                  
                  35.1
                  %Total
      investments, cash  and cash equivalents
                  
                  $
                  362,008,307
                  
                  
                  
                  100.0
                  %
                  
                  $
                  308,393,360
                  
                  
                  
                  100.0
                  %





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 we have 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 our own assumptions that market participants would use to price
      the asset or liability based on the best available
      information.


23


The
following tables set forth by level within the fair value hierarchy our
financial assets that we accounted for at fair value on a recurring basis as of
September 30, 2010 and December 31, 2009. 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. Our 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.   We did
not have any liabilities measured at fair value on a recurring basis at
September 30, 2010 or December 31, 2009.





Fair Value Measurements as of September 30,
      2010Prices
      withQuoted
      Prices
                  
                  
                  Observablein
      Active
                  
                  
                  Market
                  
                  
                  UnobservableMarkets
                  
                  
                  Inputs
                  
                  
                  InputsAssets at Fair Value
                  
                  Total
                  
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)Long
      term investmentsControl
      investmentsSenior
      secured debt
                  
                  $
                  40,681,810
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  40,681,810Royalty
      interests
                  
                  
                  5,780,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,780,000Preferred
      units
                  
                  
                  30,700,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,700,000Total
      control investments
                  
                  
                  77,161,810
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  77,161,810Affiliate
      investmentsSenior
      secured debt
                  
                  
                  29,096,497
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  29,096,497EquityCommon
      stock
                  
                  
                  2,354,791
                  
                  
                  
                  -
                  
                  
                  
                  2,354,791
                  
                  
                  
                  -Preferred
      units
                  
                  
                  1,715,526
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,715,526Warrants
                  
                  
                  49,238
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  49,238Sub-total
      equity
                  
                  
                  4,119,555
                  
                  
                  
                  -
                  
                  
                  
                  2,354,791
                  
                  
                  
                  1,764,764Total
      affiliate investments
                  
                  
                  33,216,052
                  
                  
                  
                  -
                  
                  
                  
                  2,354,791
                  
                  
                  
                  30,861,261Non-affiliate
      investmentsSenior
      secured debt
                  
                  
                  50,816,215
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  50,816,215Senior
      convertible notes
                  
                  
                  4,865,188
                  
                  
                  
                  -
                  
                  
                  
                  4,865,188
                  
                  
                  
                  -Royalty
      interests
                  
                  
                  1,500,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,500,000Limited
      term royalties
                  
                  
                  8,881,349
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,881,349Net
      profits interests
                  
                  
                  10,061,265
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,061,265EquityParticipating
      preferred stock
                  
                  
                  750,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  750,000Warrants
                  
                  
                  10,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10,000Sub-total
      equity
                  
                  
                  760,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  760,000Total
      non-affiliate investments
                  
                  
                  76,884,017
                  
                  
                  
                  -
                  
                  
                  
                  4,865,188
                  
                  
                  
                  72,018,829Corporate
      notes
                  
                  
                  10,413,838
                  
                  
                  
                  -
                  
                  
                  
                  10,413,838
                  
                  
                  
                  -Total
      assets at fair value
                  
                  $
                  197,675,717
                  
                  
                  $
                  -
                  
                  
                  $
                  17,633,817
                  
                  
                  $
                  180,041,900


24





Fair Value Measurements as of December 31,
      2009Prices
      withQuoted
      Prices
                    
                    
                    Observablein
      Active
                    
                    
                    Market
                    
                    
                    UnobservableMarkets
                    
                    
                    Inputs
                    
                    
                    InputsAssets at Fair Value
                    
                    Total
                    
                    
                    (Level 1)
                    
                    
                    (Level 2)
                    
                    
                    (Level 3)Long
      term investmentsControl
      investmentsSenior
      secured debt
                    
                    $
                    48,019,620
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    48,019,620Royalty
      interests
                    
                    
                    5,830,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,830,000Preferred
      units
                    
                    
                    18,600,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    18,600,000Total
      Control Investments
                    
                    
                    72,449,620
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    72,449,620Affiliate
      investmentsSenior
      secured debt
                    
                    
                    25,692,581
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    25,692,581EquityCommon
      stock
                    
                    
                    4,086,834
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,086,834Preferred
      units
                    
                    
                    1,715,526
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,715,526Warrants
                    
                    
                    84,004
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    84,004Sub-total
      equity
                    
                    
                    5,886,364
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,886,364Total
      affiliate investments
                    
                    
                    31,578,945
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    31,578,945Non-affiliate
      investmentsSenior
      secured debt
                    
                    
                    53,364,835
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    53,364,835Royalty
      interests
                    
                    
                    1,500,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,500,000Limited
      term royalties
                    
                    
                    20,577,744
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,577,744Net
      profits interests
                    
                    
                    11,012,799
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,012,799EquityParticipating
      preferred stock
                    
                    
                    500,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    500,000Warrants
                    
                    
                    10,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,000Sub-total
      equity
                    
                    
                    510,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    510,000Total
      non-affiliate investments
                    
                    
                    86,965,378
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    86,965,378Corporate
      notes
                    
                    
                    9,062,200
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,062,200Crude
      oil put options
                    
                    
                    49,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    49,000Total
      assets at fair value
                    
                    $
                    200,105,143
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    200,105,143


25


As
required by the 1940 Act, we classify our investments by level of
control.  Control investments include both majority-owned control
investments (50% or more owned) and non-majority owned control investments (more
than 25% but less than 50% owned).  Non-control investments include
both affiliate investments (5% to 25% owned) and non-affiliate investments (less
than 5% owned).





The
following tables present roll-forwards of the changes in the fair value during
the three and nine-month periods ended September 30, 2010 for all investments
for which we determine fair value using unobservable (Level 3)
factors.  During the three and nine-month periods ended September 30,
2010, none of the investments in portfolio companies changed between the
categories of Control Investments – Majority Owned, Affiliate Investments and
Non-Affiliate Investments. During the three and nine-month periods ended
September 30, 2010, we transferred our investment in Resaca common stock from
Level 3 to Level 2, and during the nine-month period ended September 30, 2010,
we transferred our investments in corporate notes from Level 3 to Level 2 due to
changes in observability of significant inputs.





Assets at Fair Value Using Unobservable Inputs
      (Level 3)Control
                    
                    
                    Affiliate
                    
                    
                    Non-affiliate
                    
                    
                    TotalInvestments
                    
                    
                    Investments
                    
                    
                    Investments
                    
                    
                    InvestmentsFair
      value June 30, 2010Senior
      secured debt
                    
                    $
                    49,065,176
                    
                    
                    $
                    27,947,444
                    
                    
                    $
                    51,834,556
                    
                    
                    $
                    128,847,176Royalty
      interests
                    
                    
                    5,830,000
                    
                    
                    
                    -
                    
                    
                    
                    1,500,000
                    
                    
                    
                    7,330,000Net
      profits interests
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,298,287
                    
                    
                    
                    10,298,287Common
      stock
                    
                    
                    -
                    
                    
                    
                    3,897,543
                    
                    
                    
                    -
                    
                    
                    
                    3,897,543Preferred
      units
                    
                    
                    22,100,000
                    
                    
                    
                    1,715,526
                    
                    
                    
                    -
                    
                    
                    
                    23,815,526Warrants
                    
                    
                    -
                    
                    
                    
                    84,004
                    
                    
                    
                    10,000
                    
                    
                    
                    94,004Limited
      term royalties
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,548,457
                    
                    
                    
                    12,548,457Participating
      preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    750,000
                    
                    
                    
                    750,000Total
      fair value June 30, 2010
                    
                    
                    76,995,176
                    
                    
                    
                    33,644,517
                    
                    
                    
                    76,941,300
                    
                    
                    
                    187,580,993Transfers
      in (out) of Level 3Common
      stock
                    
                    
                    -
                    
                    
                    
                    (3,897,543
                    )
                    
                    
                    -
                    
                    
                    
                    (3,897,543
                    )Total
      transfers in (out) of Level 3
                    
                    
                    -
                    
                    
                    
                    (3,897,543
                    )
                    
                    
                    -
                    
                    
                    
                    (3,897,543
                    )Net
      amortization of premiums, discounts and feesSenior
      secured debt
                    
                    
                    139,160
                    
                    
                    
                    95,777
                    
                    
                    
                    69,045
                    
                    
                    
                    303,982Royalty
      interests
                    
                    
                    (11,347
                    )
                    
                    
                    -
                    
                    
                    
                    (15,024
                    )
                    
                    
                    (26,371
                    )Net
      profits interests
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,147
                    )
                    
                    
                    (7,147
                    )Limited
      term royalties
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,018,812
                    )
                    
                    
                    (2,018,812
                    )Total
      net amortization of premiums, discounts and fees
                    
                    
                    127,813
                    
                    
                    
                    95,777
                    
                    
                    
                    (1,971,938
                    )
                    
                    
                    (1,748,348
                    )Net
      unrealized gains (losses)Senior
      secured debt
                    
                    
                    (300,000
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (300,000
                    )Royalty
      interests
                    
                    
                    (38,653
                    )
                    
                    
                    -
                    
                    
                    
                    15,024
                    
                    
                    
                    (23,629
                    )Preferred
      units
                    
                    
                    (2,500,000
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,500,000
                    )Limited
      term royalties
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    381,856
                    
                    
                    
                    381,856Total
      net unrealized gains (losses)
                    
                    
                    (2,838,653
                    )
                    
                    
                    -
                    
                    
                    
                    396,880
                    
                    
                    
                    (2,441,773
                    )PurchasesSenior
      secured debt
                    
                    
                    380,610
                    
                    
                    
                    907
                    
                    
                    
                    -
                    
                    
                    
                    381,517Preferred
      units
                    
                    
                    12,100,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,100,000Total
      purchases
                    
                    
                    12,480,610
                    
                    
                    
                    907
                    
                    
                    
                    -
                    
                    
                    
                    12,481,517Payment-in-kindSenior
      secured debt
                    
                    
                    896,864
                    
                    
                    
                    1,064,869
                    
                    
                    
                    -
                    
                    
                    
                    1,961,733Total
      payment-in-kind
                    
                    
                    896,864
                    
                    
                    
                    1,064,869
                    
                    
                    
                    -
                    
                    
                    
                    1,961,733Sales
      and repaymentsSenior
      secured debt
                    
                    
                    (9,500,000
                    )
                    
                    
                    (12,500
                    )
                    
                    
                    (1,087,386
                    )
                    
                    
                    (10,599,886
                    )Preferred
      units
                    
                    
                    (1,000,000
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,000,000
                    )Net
      profits interests
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (229,875
                    )
                    
                    
                    (229,875
                    )Warrants
                    
                    
                    -
                    
                    
                    
                    (34,766
                    )
                    
                    
                    -
                    
                    
                    
                    (34,766
                    )Limited
      term royalties
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,030,152
                    )
                    
                    
                    (2,030,152
                    )Total
      sales and repayments
                    
                    
                    (10,500,000
                    )
                    
                    
                    (47,266
                    )
                    
                    
                    (3,347,413
                    )
                    
                    
                    (13,894,679
                    )Fair
      value September 30, 2010Senior
      secured debt
                    
                    
                    40,681,810
                    
                    
                    
                    29,096,497
                    
                    
                    
                    50,816,215
                    
                    
                    
                    120,594,522Royalty
      interests
                    
                    
                    5,780,000
                    
                    
                    
                    -
                    
                    
                    
                    1,500,000
                    
                    
                    
                    7,280,000Net
      profits interests
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    10,061,265
                    
                    
                    
                    10,061,265Preferred
      units
                    
                    
                    30,700,000
                    
                    
                    
                    1,715,526
                    
                    
                    
                    -
                    
                    
                    
                    32,415,526Warrants
                    
                    
                    -
                    
                    
                    
                    49,238
                    
                    
                    
                    10,000
                    
                    
                    
                    59,238Limited
      term royalties
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,881,349
                    
                    
                    
                    8,881,349Participating
      preferred stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    750,000
                    
                    
                    
                    750,000Total
      fair value September 30, 2010
                    
                    $
                    77,161,810
                    
                    
                    $
                    30,861,261
                    
                    
                    $
                    72,018,829
                    
                    
                    $
                    180,041,900


26





Assets
      at Fair Value Using Unobservable Inputs (Level
      3)Control
                        
                        
                        Affiliate
                        
                        
                        Non-affiliate
                        
                        
                        Corporate
                        
                        
                        Commodity
      Derivative
                        
                        
                        TotalInvestments
                        
                        
                        Investments
                        
                        
                        Investments
                        
                        
                        Notes
                        
                        
                        Instruments
                        
                        
                        InvestmentsFair
      value December 31, 2009Senior
      secured debt
                        
                        $
                        48,019,620
                        
                        
                        $
                        25,692,581
                        
                        
                        $
                        53,364,835
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        127,077,036Royalty
      interests
                        
                        
                        5,830,000
                        
                        
                        
                        -
                        
                        
                        
                        1,500,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,330,000Net
      profits interests
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        11,012,799
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        11,012,799Common
      stock
                        
                        
                        -
                        
                        
                        
                        4,086,834
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,086,834Preferred
      units
                        
                        
                        18,600,000
                        
                        
                        
                        1,715,526
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        20,315,526Warrants
                        
                        
                        -
                        
                        
                        
                        84,004
                        
                        
                        
                        10,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        94,004Limited
      term royalties
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        20,577,744
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        20,577,744Participating
      preferred stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        500,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        500,000Corporate
      notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        9,062,200
                        
                        
                        
                        -
                        
                        
                        
                        9,062,200Commodity
      derivative instruments
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        49,000
                        
                        
                        
                        49,000Total
      fair value December 31, 2009
                        
                        
                        72,449,620
                        
                        
                        
                        31,578,945
                        
                        
                        
                        86,965,378
                        
                        
                        
                        9,062,200
                        
                        
                        
                        49,000
                        
                        
                        
                        200,105,143Transfers
      in (out) of Level 3Common
      stock
                        
                        
                        -
                        
                        
                        
                        (4,086,834
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,086,834
                        )Corporate
      notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (9,062,200
                        )
                        
                        
                        -
                        
                        
                        
                        (9,062,200
                        )Total
      transfers in (out) of Level 3
                        
                        
                        -
                        
                        
                        
                        (4,086,834
                        )
                        
                        
                        -
                        
                        
                        
                        (9,062,200
                        )
                        
                        
                        -
                        
                        
                        
                        (13,149,034
                        )Net
      amortization of premiums, discounts and feesSenior
      secured debt
                        
                        
                        397,381
                        
                        
                        
                        210,700
                        
                        
                        
                        245,576
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        853,657Royalty
      interests
                        
                        
                        (24,672
                        )
                        
                        
                        -
                        
                        
                        
                        (50,902
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (75,574
                        )Net
      profits interests
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (23,186
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (23,186
                        )Limited
      term royalties
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (9,335,754
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (9,335,754
                        )Total
      net amortization of premiums, discounts and fees
                        
                        
                        372,709
                        
                        
                        
                        210,700
                        
                        
                        
                        (9,164,266
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,580,857
                        )Net
      unrealized gains (losses)Senior
      secured debt
                        
                        
                        (300,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (300,000
                        )Royalty
      interests
                        
                        
                        (25,328
                        )
                        
                        
                        -
                        
                        
                        
                        50,902
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        25,574Net
      profits interests
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (49,999
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (49,999
                        )Preferred
      units
                        
                        
                        (2,600,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,600,000
                        )Limited
      term royalties
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,693,640
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,693,640Participating
      preferred stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        250,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        250,000Commodity
      derivative instruments
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (18,900
                        )
                        
                        
                        (18,900
                        )Total
      net unrealized gains (losses)
                        
                        
                        (2,925,328
                        )
                        
                        
                        -
                        
                        
                        
                        3,944,543
                        
                        
                        
                        -
                        
                        
                        
                        (18,900
                        )
                        
                        
                        1,000,315PurchasesSenior
      secured debt
                        
                        
                        3,000,000
                        
                        
                        
                        1,248,128
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,248,128Net
      profits interests
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,193
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,193Preferred
      units
                        
                        
                        15,700,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        15,700,000Total
      purchases
                        
                        
                        18,700,000
                        
                        
                        
                        1,248,128
                        
                        
                        
                        1,193
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        19,949,321Payment-in-kindSenior
      secured debt
                        
                        
                        2,564,809
                        
                        
                        
                        1,982,588
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,547,397Total
      payment-in-kind
                        
                        
                        2,564,809
                        
                        
                        
                        1,982,588
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,547,397Sales
      and repaymentsSenior
      secured debt
                        
                        
                        (13,000,000
                        )
                        
                        
                        (37,500
                        )
                        
                        
                        (2,794,196
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (15,831,696
                        )Preferred
      units
                        
                        
                        (1,000,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,000,000
                        )Warrants
                        
                        
                        -
                        
                        
                        
                        (34,766
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (34,766
                        )Net
      profits interests
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (879,542
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (879,542
                        )Limited
      term royalties
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (6,054,281
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (6,054,281
                        )Total
      sales and repayments
                        
                        
                        (14,000,000
                        )
                        
                        
                        (72,266
                        )
                        
                        
                        (9,728,019
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (23,800,285
                        )SettlementsCommodity
      derivative instruments
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (30,100
                        )
                        
                        
                        (30,100
                        )Total
      settlements
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (30,100
                        )
                        
                        
                        (30,100
                        )Fair
      value September 30, 2010Senior
      secured debt
                        
                        
                        40,681,810
                        
                        
                        
                        29,096,497
                        
                        
                        
                        50,816,215
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        120,594,522Royalty
      interests
                        
                        
                        5,780,000
                        
                        
                        
                        -
                        
                        
                        
                        1,500,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,280,000Net
      profits interests
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,061,265
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        10,061,265Preferred
      units
                        
                        
                        30,700,000
                        
                        
                        
                        1,715,526
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        32,415,526Warrants
                        
                        
                        -
                        
                        
                        
                        49,238
                        
                        
                        
                        10,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        59,238Limited
      term royalties
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        8,881,349
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        8,881,349Participating
      preferred stock
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        750,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        750,000Total
      fair value September 30, 2010
                        
                        $
                        77,161,810
                        
                        
                        $
                        30,861,261
                        
                        
                        $
                        72,018,829
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        180,041,900


27


Note 9:
            Commodity Derivative
      Instruments





We may
periodically enter into commodity derivative instruments to manage our exposure
to commodity price fluctuations. We use all of our derivatives for risk
management purposes and we do not hold any amounts for speculative or trading
purposes. These contracts generally consist of options contracts on underlying
commodities.  Investments in derivative instruments represent future
commitments or options to purchase or sell other financial instruments or
commodities at specific prices on specified future dates, which expose us to
market risk if the market value of the contract is higher or lower than the
contract price at the maturity date. Additionally, these derivative instruments
expose us to credit risk arising from the potential inability of counterparties
to perform under the terms of the contracts.





We
acquired a limited term royalty interest from ATP Oil & Gas Corporation and
received royalty payments from this investment based on crude oil and natural
gas production and prices. As a result, fluctuations in crude oil and natural
gas prices exposed our investment to price risks. As of September 4, 2008, we
had entered into option contracts to manage the price risk associated with these
royalty payments. We decided not to designate these instruments as hedging
instruments for financial accounting purposes. We recognized the change in the
instruments’ fair value currently on the Consolidated Statements of Operations
as net increase (decrease) in unrealized appreciation (depreciation) on
portfolio securities, corporate notes and commodity derivative
instruments.  The realized gains (losses) on commodity derivatives
consist of revenues received on favorable expired options less the cost of all
expired positions, and we recognized these gains in investment
income.





All of
our commodity derivative instruments were expired as of January 31,
2010.





The
components of gains (losses) on commodity derivative instruments are as
follows:




For
      the Nine Months EndedSeptember 30, 2010
                  
                  
                  September 30, 2009Unrealized
      losses on commodity derivatives
                  
                  $
                  (18,900
                  )
                  
                  $
                  (6,963,549
                  )Realized
      gains on commodity derivatives
                  
                  
                  16,079
                  
                  
                  
                  5,884,027Net
      losses on commodity derivative instruments
                  
                  $
                  (2,821
                  )
                  
                  $
                  (1,079,522
                  )





Note 10:
            Recent
      Accounting Pronouncements





In
January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures, which amends ASC 820 and requires additional disclosure
related to recurring and non-recurring fair value measurements in respect to
transfers in and out of Levels 1 and 2 and activity in Level 3 fair value
measurements. The update also clarifies existing disclosure requirements related
to activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those
fiscal years. We adopted the new guidance in our Annual Report on Form 10-K for
the year ended December 31, 2009.





Note 11:
            Subsequent
      Events





On
October 4, 2010, we sold all of our interests in Formidable, LLC (“Formidable”),
Formidable’s subsidiaries, and all associated rights and claims between
Formidable and us for $6.0 million.  The sale price comprised a $3.0
million cash payment and a promissory note for $3.0 million issued by Powder
River Acquisitions, LLC that was personally guaranteed by its
owner.  The note bears interest at 8% per annum and has a maturity of
one year.  We estimate that our realized capital loss will be
approximately $33.3 million and we will reverse $34.0 million of previously
recorded unrealized depreciation.





In
October 2010, we sold our overriding royalty interest associated with our BSR
Holdings, LLC investment, and BSR Holdings, LLC sold all of its oil and gas
working interests for gross proceeds of $340,000.  We estimate that
our realized capital loss, net of fees and expenses, will be approximately
$5,000 on the sale and we will reverse approximately $85,000 of unrealized
appreciation.


28


On
October 14, 2010, we closed a $9.0 million participation in a $180.0 million
Term Loan (the “Crestwood Term Loan”) issued by Crestwood Holdings, LLC
(“Crestwood”), the holding company for wholly-owned subsidiary Crestwood
Midstream Partners, LP (“Crestwood Midstream”).  Crestwood Midstream
is a gas gathering and processing company operating primarily in the Barnett
Shale in north Texas.  The Crestwood Term Loan earns interest at LIBOR
(subject to a 2% floor) plus 850 basis points.  We purchased the
participation at a 2% discount, resulting in an expected yield to maturity of
approximately 10.9%.  Crestwood’s interests in Crestwood Midstream
serve as collateral for the Crestwood Term Loan. Crestwood used the proceeds
from the Crestwood Term Loan to facilitate the acquisition of the interests in
Crestwood Midstream from Quicksilver Resources, Inc.





On
October 18, 2010, we closed a $25.0 million Senior Secured Term Loan (the
“Contour Term Loan”) with Pallas Contour Mining, LLC, a privately held highwall
mining company based in West Virginia, and we funded our initial investment of
$15.0 million.  The Contour Term Loan pays cash interest at 14% per
annum.





In
October 2010, we purchased an additional $1.9 million face amount of Senior
Convertible Notes due in 2013 (the "GMX Notes") issued by GMX Resources, Inc. in
the secondary market.  We purchased the GMX Notes, which bear interest
at 5%, at a discount, resulting in an expected yield to maturity of
approximately 15%.


29


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





You
should read the following analysis of our financial condition and results of
operations in conjunction with management’s discussion and analysis contained in
our 2009 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;


·
            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.  We base such statements on currently available operating,
financial and competitive information and they are subject to various risks and
uncertainties that could cause actual results to differ materially from our
historical experience and present expectations.  You should not place
undue reliance on such forward-looking statements; as such statements speak only
as of the date on which they are made.  You should read the additional
information regarding these and other risks and uncertainties 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.  We have several
direct and indirect subsidiaries that are single member limited liability
companies and wholly-owned limited partnerships established to hold certain
portfolio investments or provide services to us in accordance with specific
rules prescribed for a company operating as a RIC.  We consolidate the
financial results of our subsidiaries for financial reporting purposes. In
accordance with Article 6 of Regulation S-X of the Securities Act of 1933, we do
not consolidate the financial results of our 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.


30


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.  Some of 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 environment and the competitive
environment for the types of investments we make, and our own ability to raise
capital, both through issuance of debt and equity securities.  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
is reducing the debt capital available to energy companies from other
sources. Though the same macro economic factors also make our access to new
debt and equity capital less certain, in October 2009, we extended the maturity
date of our Investment Facility to August 2012. While we currently have
capital available to invest, it 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





We base
the discussion and analysis of our financial condition and results of operations
on our financial statements, which we have  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, we describe our significant accounting
policies further in “Note 2: Significant Accounting Polices” of our consolidated
financial statements included in this Quarterly Report on Form
10-Q.





Valuation
of Investments





The 1940
Act requires the separate identification of investments according to the
percentage ownership in a portfolio company’s outstanding voting
securities.  The percentages and categories are as
follows:





·
            Non-affiliate investments - we
      own less than 5% of a portfolio company’s outstanding voting
      securities


·
            Affiliate investments - we own 5%
      or more but not more than 25% of a portfolio company’s outstanding voting
      securities


·
            Control investments - we own more
      than 25% but less than 50% of a portfolio company’s outstanding voting
      securities


·
            Control investments – majority
      owned - we own 50% or more of a portfolio company’s outstanding voting
      securities.





Fair
value is the price that would be received by a seller of an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.  The fair value definition focuses on exit price
in the principal, or most advantageous, market and prioritizes the use of
observable market inputs over unobservable entity-specific inputs. On a
quarterly basis, the investment team of the Manager prepares valuations for all
of the assets in our portfolio and presents them to our valuation
committee.  The valuation committee recommends their valuations to the
Board of Directors, which in good faith determines the final portfolio
valuations.





We record
investments in securities for which market quotations are readily available 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.  See “Note 2: Significant Accounting Polices” for
additional discussion.





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 our investment
portfolio.  These valuation analyses rely on estimates of the asset
values and enterprise values of portfolio companies issuing
securities.


31


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 we have 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 our 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. Our 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. We estimate the fair value of the crude oil and natural gas 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.





Investment
Activity





On
September 10, 2010, we received approval from our Investment Committee to
purchase GMX Resources, Inc.’s Senior Convertible Notes, maturing in 2013 and
2015 on the secondary market.  As of September 30, 2010, we had
acquired $6.0 million face value of the Senior Convertible Notes that mature in
2013.  We purchased the GMX notes, which bear interest at 5%, at a
discount, resulting in an expected yield to maturity of approximately
15%.





On
September 30, 2010, we closed on a $16.1 million equity commitment to Gatliff
Services, LLC (“Gatliff”) which is a wholly owned subsidiary of NGPC Asset
Holdings II, LP.  We funded $12.1 million at closing and Gatliff used
the proceeds to purchase Alden Resources, LLC’s (“Alden”) coal preparation plant
and related facilities.  Gatliff simultaneously leased back the plant
and facilities to Alden under a 10-year operating lease agreement.  As
lessor of the plant, Gatliff intends to invest up to $4.0 million in plant
upgrades, for the total $16.1 million commitment. Alden used the $12.1 million
of sales proceeds to pay down $9.5 million on their senior secured debt with us,
and to pay past due trade payables and financial advisory fees.





For the
quarter ended September 30, 2010, investments increased by a net amount of $5.6
million.  We funded $3.3 million to existing portfolio companies and
$18.1 million to two new portfolio companies.  Repayments on existing
investments totaled $15.8 million.





Following
these transactions, we had eighteen portfolio companies in our investment
portfolio.  The fair values of our portfolio as of September 30, 2010
were as follows:





·
            41.2%
      in senior secured term loans,


·
            1.7%
      in senior convertible notes,


·
            2.5%
      in royalty interests,


·
            0.3%
      in participating convertible preferred
stock,


·
            0.8%
      in common stock,


·
            3.6%
      in corporate notes,


·
            11.0%
      in membership and partnership
units,


·
            3.4%
      in net profits interests,


·
            3.0%
      in limited term royalty interests,
and


·
            32.5%
      in cash and cash equivalents.


32


Results
of Operations





Investment
Income





Investment income for the quarter ended September 30,
2010 was $6.2 million, including $4.9 million in interest from targeted
investments in ten of our portfolio companies, $0.4 million from net royalty
income and $0.9 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, 2009 of $6.0
million, primarily from $5.9 million in interest from targeted investments in
ten portfolio companies, $0.8 million from commodity derivative instruments, a
$0.9 million net loss from net royalty income, and $0.2 million from corporate
notes, investments in cash and cash equivalents and fee income from third
parties and affiliates. The $0.7
million increase in income from corporate notes, investments in cash and cash
equivalents and fee income from third parties and affiliates for this period in
2010, when compared to the same period in 2009 results primarily from advisory
fee income of $0.6 million from Alden Resources, LLC.




For the nine months ended
September 30, 2010, investment income decreased by $2.6 million, or 13.0%, to
$17.5 million from $20.1 million for the same period in 2009. For the nine
months ended September 30, 2010, we recorded $15.0 million from targeted
investments in portfolio companies, $0.2 million from net royalty income and
$2.2 million from corporate notes, investments in cash and cash equivalents and
fee income from third parties and affiliates. This compares to investment income
of $20.1 million for the nine months ended September 30, 2009, consisting
primarily of $18.1 million from targeted investments in portfolio
companies.  Additional income components for the nine months ended
September 30, 2009 were $5.9 million from commodity derivative instruments, a
$4.6 million net loss on net royalty income and $0.7 million from corporate
notes, investments in cash and cash equivalents and fee income from third
parties and affiliates. The $1.5
million increase in income from corporate notes, investments in cash and cash
equivalents and fee income from third parties and affiliates for this period in
2010, when compared to the same period in 2009 results primarily from advisory
fee income of $0.6 million from Alden Resources, LLC and $0.8 million in
forfeited commitment fees from prospective clients whose loans did not
close.









Our total
targeted portfolio balance decreased on a cost basis by approximately $17.9
million from $257.0 million on September 30, 2009 to $239.1 million on September
30, 2010.  The balance of non-accruing and non-income producing
investments on a cost basis was approximately $117.0 million at September 30,
2010, consistent with the balance at September 30, 2009.  The balance
of non-accruing and non-income producing investments on a fair value basis
increased from approximately $55.2 million at September 30, 2009 to
approximately $60.4 million at September 30, 2010.  Although LIBOR
rates remained low during the third quarter of 2010, they 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 2010
and 2009.  Additionally, the continued downward pressure on U.S.
Treasury Bill interest rates during 2010 and 2009 reduced interest from cash and
cash equivalents.





At
September 30, 2010, the weighted average yield on targeted portfolio
investments, exclusive of capital gains, was 8.36%.  The weighted
average yield of our corporate notes was 5.82%.  The weighted average
yield of our cash and cash equivalents was 0.59%.  The weighted
average yield on our total capital invested at September 30, 2010 was
6.13%.  Further, three investments totaling $62.6 million on a cost basis
(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 $54.4 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 class E units, Gatliff
Services, LLC and warrants and units associated with our investment in
BioEnergy.  On October 4, 2010, we sold all of our interests in
Formidable, LLC.  See “Note 11: Subsequent Events” for our discussion
of the Formidable sale.





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 and
cash equivalents was 0.64%. The weighted average yield on our total capital
invested at September 30, 2009 was 3.16%.





We
compute yields on investments 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. 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.


33


Operating
Expenses





For the
quarters ended September 30, 2009 and 2010, operating expenses were $3.1
million.  The 2010 total consisted of investment advisory and
management fees of $1.4 million, insurance expenses, administrative services
fees, professional fees, director’s fees and other general and administrative
expenses of $1.4 million and credit facility interest expense and fees of $0.3
million.  In comparison, for the quarter ended September 30, 2009,
investment advisory and management fees were $1.5 million, insurance expenses,
administrative services fees, professional fees, director’s fees and other
general and administrative expenses were $1.1 million and credit facility
interest expense and fees were $0.5 million.





For the
nine months ended September 30, 2010, operating expenses were $9.1 million
compared to $11.1 million for the nine months ended September 30, 2009. The 2010
amount consisted of investment advisory and management and incentive fees of
$4.2 million, insurance expenses, administrative services fees, professional
fees, directors’ fees and other general and administrative expenses of $3.9
million and credit facility interest expense and fees of $1.0 million. This
compares to investment advisory and management and incentive fees of $5.0
million, insurance expenses, administrative services fees, professional fees,
directors’ fees and other general and administrative expenses of $3.6 million
and credit facility interest expense and fees of $2.5 million for the nine
months ended September 30, 2009.  Overall lower portfolio balances in
2010 resulted in lower investment advisory and management fees, and lowered
levels of borrowings reduced our credit facility interest expense and
fees.





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, 2010, net investment income before income taxes was
$3.2 million compared to $2.9 million for the quarter ended September 30,
2009.  The 9.6% increase was primarily due to a $0.5 million increase
in royalty income and a $0.6 million increase in fee income, offset by a $0.9
million decrease in interest income.





For the
nine months ended September 30, 2010, net investment income before income taxes
was $8.4 million compared to $9.0 million for the nine months ended September
30, 2009.  The 6.6% 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 credit
facility interest expense and fees on our reduced debt balance.





Net
Realized Gains





We did
not have any net realized capital gains or losses for the quarters ended
September 30, 2010 or 2009.  We recorded a tax provision adjustment
for the quarter ended September 30, 2010 of $0.09 million resulting from a
routine quarterly valuation allowance reallocation.





We did
not have any net realized capital gains or losses for the nine months ended
September 30, 2010.  We recorded a tax provision adjustment for the
nine months ended September 30, 2010 of $0.10 million resulting from routine
quarterly valuation allowance reallocations.  For the nine months
ended September 30, 2009, net realized capital losses were $0.05 million before
income tax benefit of $0.12 million.





Unrealized
Appreciation or Depreciation on Investments





For the
quarter ended September 30, 2010, the increase in net unrealized depreciation
after income taxes was $2.2 million, comprised of a $4.0 million decrease in
targeted portfolio fair value offset by a $0.9 million increase in the fair
value of our corporate notes and a tax benefit of $0.9 million.  The
decrease in targeted portfolio fair value was largely a result of changes in the
estimated current market values of underlying assets.





For the
quarter ended September 30, 2009, the decrease in net unrealized depreciation
before income tax benefit of $0.5 million was $11.3 million.  This
total was comprised of an $11.1 million increase in targeted portfolio fair
value, a $0.9 million increase in the fair value of our corporate notes, offset
by a $0.7 million decrease in the fair value of our commodity derivative
instruments.


34


For the
nine months ended September 30, 2010, the increase in net unrealized
appreciation before income tax benefit of $0.3 million was $0.7 million,
comprised of a decrease in targeted portfolio fair value of $0.7 million offset
by a $1.4 million increase in the fair value of our corporate notes. By
comparison, for the nine months ended September 30, 2009, the increase in net
unrealized depreciation before income tax benefit of $2.2 million 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.





While, in
general, current capital and commodity markets are more stable than during the
prior eighteen months, conditions are 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, 2010, we had a net increase in stockholders’ equity
(net assets) resulting from operations of $0.1 million, compared to a net
increase of $14.7 million, or $0.68 per share for the quarter ended September
30, 2009.  The $14.7 million or $0.68 per share net decrease was
attributable to the $0.5 million decrease in net investment income after
income taxes and the $14.0 million increase in unrealized depreciation on our
investments during the third quarter of 2010, compared to the third quarter of
2009.





For the
nine months ended September 30, 2010, the net increase in stockholders’ equity
(net assets) resulting from operations was $8.9 million, or $0.42 per share,
compared to a decrease of $6.5 million, or $0.30 per share decrease, for the
nine months ended September 30, 2009.  The $15.4 million or $0.72 per
share net increase was primarily attributable to the $16.5 million increase
in unrealized appreciation, partially offset by a $0.9 million decrease in net
investment income after income taxes for the nine months ended September 30,
2010 compared to the same period in 2009.





Financial
Condition, Liquidity and Capital Resources





During
the quarter ended September 30, 2010, we generated cash from operations,
including interest earned on our portfolio securities, as well as our
investments in corporate notes and from cash and cash equivalents.  At
September 30, 2010, we had cash and cash equivalents of $95.3 million and
investments in corporate notes of $10.4 million.  The amount
outstanding on our Investment Facility at September 30, 2010 was $50.0 million
and an additional $15.2 million was available. We repaid the $50.0 million
balance in October 2010.





Our net
cash provided by operating activities for the nine months ended September 30,
2010 was $15.6 million, $29.9 million less than the $45.5 million for the nine
months ended September 30, 2009.  This reduction was primarily due to
lower redemptions of investments in portfolio securities offset by lower
investments.  Redemptions decreased by $44.2 million, to $20.3 million
in this period in 2010 from $64.5 million in the same period in
2009.  The higher redemptions in 2009 included Resaca Exploitation,
Inc., $23.1 million, APC Drill Fund III net profits interest, $26.3 million,
Crossroads Energy, LP, $5.2 million, Tammany Oil & Gas, LLC, $5.4 million
and BSR Loco Bayou, LLC, $2.9 million.  By comparison, redemptions for
this period in 2010 included Alden Resources, LLC, $9.5 million, ATP Oil and Gas
Corporation dollar denominated limited term royalty, $6.1 million, Greenleaf
Investments, LLC, $1.8 million and TierraMar Energy, LP, $1.0
million.  The lower redemptions in 2010 were offset by an $11.9
million decrease in purchases of investments in portfolio securities, to $21.3
million in 2010 from $33.2 million in 2009.  The higher purchases in
2009 included Black Pool Energy Partners, $16.5 million, Resaca Exploitation
Inc., $5.1 million, Alden Class E preferred units, $5.8 million, Alden Tranche
B, $3.2 million and Formidable, LLC, $1.5 million.  By comparison,
purchases in 2010 included Gatliff Services, LLC, $12.1 million, Alden, $3.0
million, GMX Resources, Inc., $4.9 million and BioEnergy Holdings, LLC, $1.2
million.





As of
September 30, 2010, we had investments in or commitments to fund loan facilities
to seventeen portfolio companies totaling $252.1 million, of which $242.8
million was drawn.  We expect to fund our investments in 2010 from
available cash, income earned on our portfolio and temporary investments,
repayments or realizations of existing investments and from borrowings under our
Investment Facility.  In the future, we may also fund a portion of our
investments with issuances of equity or senior debt securities.  We
may also securitize a portion of our investments in mezzanine or senior secured
loans or other assets.  We expect our primary use of funds to be
investments in portfolio companies, cash distributions to holders of our common
stock and payment of fees and other operating expenses.





Commodity
Derivative Instruments





We may
periodically use commodity derivative instruments to manage our exposure to
commodity price fluctuations.  We do not designate these instruments as
hedging instruments for financial accounting purposes, and, as a result, we
recognize the change in the instruments’ fair value currently on the
Consolidated Statements of Operations as net increase (decrease) in unrealized
appreciation (depreciation) on portfolio securities, corporate notes and
commodity derivative instruments.


35


In June
2008, we acquired a limited term volume-denominated royalty interest from ATP,
and the royalty payments associated with this investment were subject to
fluctuations in natural gas and oil prices.  To manage this risk, we
purchased oil and natural gas put options on approximately 93% of our royalty
interest.   See “Note 9: Commodity Derivative Instruments” in the
accompanying notes to the consolidated financial statements for further
description of our put options.  We also acquired a limited term
dollar-denominated royalty interest from ATP in October 2009.  The
royalty payments associated with this investment are not subject to price risk
and there are no commodity derivative instruments associated with ATP
II.





All of
our commodity derivative instruments expired as of January 31, 2010 and we
received payment for the final volumes associated with the limited term royalty
interest in September 2010.





Contractual
Obligations





A summary
of our contractual payment obligations at September 30, 2010 is as
follows:





Less
      than
                          
                          
                          
                          
                          
                          
                          
                          
                          More
      thanContractual Obligations
                          
                          Total
                          
                          
                          1 Year
                          
                          
                          1-3 Years
                          
                          
                          3-5 Years
                          
                          
                          5 YearsSeptember
      30, 2010:Long-term
      debt obligations—revolving
      credit facilities (1)
                          
                          $
                          50,000,000
                          
                          
                          $
                          -
                          
                          
                          $
                          50,000,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -Total
                          
                          $
                          50,000,000
                          
                          
                          $
                          -
                          
                          
                          $
                          50,000,000
                          
                          
                          $
                          -
                          
                          
                          $
                          -





(1)  Excludes
accrued interest amounts and $2.3 million letter of credit issued but not drawn.
We repaid the $50,000,000 balance in October 2010.





Off-Balance
Sheet Arrangements





Currently,
we do not engage in any off-balance sheet arrangements, including any risk
management of commodity pricing or other hedging practices.





Dividends





We have
elected to operate our business to be taxed as a RIC for federal income tax
purposes. As a RIC, we generally may not pay corporate-level federal income
taxes on any ordinary income or capital gains that we distribute to our
stockholders as dividends.  To maintain our RIC status, we must meet
specific source-of-income and asset diversification requirements and distribute
annually an amount equal to at least 90% of our “investment company taxable
income” (which generally consists of ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if any,
reduced by deductible expenses) and net tax-exempt interest.  In order
to avoid certain excise taxes imposed on RICs, we must distribute during each
calendar year an amount at least equal to the sum of (1) 98% of our ordinary
income for the calendar year, (2) 98% of our capital gain net income (i.e.,
realized capital gains in excess of realized capital losses) for the one-year
period ended on October 31 of that calendar year, and (3) 100% of any ordinary
income or capital gain net income not distributed in prior years. We currently
intend to make sufficient distributions to satisfy the annual distribution
requirement and to avoid the excise taxes.





We may
not achieve operating results that will allow us to make distributions at a
specific level or to increase the amount of these distributions from time to
time. In addition, we may be limited in our ability to make distributions due to
the asset coverage test for borrowings when applicable to us as a BDC under the
1940 Act and due to provisions in our credit facility. If we do not distribute a
certain percentage of our income annually, we will suffer adverse tax
consequences, including possible loss of our status as a RIC. We cannot assure
stockholders that they will receive any distributions or distributions at any
specific level.


36


Portfolio
Credit Quality





Virtually
all of our portfolio investments are in negotiated, and often illiquid,
securities of energy companies. We maintain a system to evaluate the credit
quality of these investments. While incorporating quantitative analysis, this
system is a qualitative assessment. We intend for this system to reflect the
overall, long-term performance of a portfolio company’s business, the collateral
coverage of an investment, and other relevant factors.  During the
quarter ended September 30, 2010, of the twenty-five rated investments in our
seventeen portfolio companies and our corporate notes, compared to the quarter
ended June 30, 2010, one improved in rating, one declined in rating, twenty-one
retained the same rating and we added two investments to the rating
system.  We carried fifteen investments totaling approximately $152.0
million, or approximately 61% of the $251 million in total investments, on a
cost basis, on our watch list due to slower than expected development of the
assets supporting the investments, the downturn in general economic and energy
market conditions or deterioration in asset coverage.





For the
third quarter of 2010, the combined increase in unrealized depreciation of our
portfolio securities and corporate notes was $3.1 million.  This
increase in unrealized depreciation was largely due to decreases in the
estimated market values of underlying assets, consisting primarily of the
decreases in the fair value of our investment in (i) Dean Lake Operator of $2.6
million, (ii) Formidable of $0.3 million, and (iii) Resaca common stock of $1.5
million, offset by an increase in the fair value of our corporate notes of $0.9
million.





Recently
Issued Accounting Pronouncements





See
“Note 10: Recent Accounting Pronouncements” in the accompanying notes to
consolidated financial statements for details of recently issued accounting
pronouncements and their expected impact on our financial
statements.





Item 3.
            Quantitative and Qualitative
      Disclosures About Market
Risk.





There
have been no material changes from the information provided in Item 7A of our
Annual Report on Form 10-K for the year ended December 31,
2009.


37





Item 4.
            Controls and
      Procedures.





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
which we refer to as the Exchange Act), designed to ensure that information
required to be disclosed in our reports under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission and accumulated and
communicated to management, including our Chief Executive Officer and our Chief
Financial Officer, to allow timely decisions regarding required
disclosure.





In
connection with the preparation of this Quarterly Report on Form 10-Q, as of the
end of the fiscal period covered by this Quarterly Report on Form 10-Q, we
performed an evaluation, under the supervision and with the participation of
management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) promulgated
under the Exchange Act.





Based on
an evaluation of our disclosure controls and procedures as of the end of the
period covered by this Form 10-Q conducted by our management, with the
participation of our Chief Executive Officer and our Chief Financial Officer,
our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures were effective in providing reasonable
assurance (i) that information required to be disclosed in the reports we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission and (ii) that such information is accumulated and
communicated to management in a manner that allows timely decisions regarding
required disclosure.





Changes
in Internal Control Over Financial Reporting





There
were no changes in internal control over financial reporting during the quarter
ended September 30, 2010 that have materially affected or are reasonably likely
to materially affect, our internal control over financial
reporting.





Remediation
of Material Weakness





As
described in Item 4 of our Quarterly Reports on Form 10-Q for the periods ended
March 31, 2010 and June 30, 2010, management identified various remedial steps
that were in the process implementation with respect to the previously disclosed
material weakness.  We designed our remediation efforts, as outlined
below, to address the material weakness identified by management and to
strengthen our internal control over financial reporting.  Beginning
in the first quarter of 2009 we implemented the following remediation steps to
address the previously disclosed material weakness and to improve our internal
control over financial reporting:


•
            improved procedures for the
      calculation and reconciliation process of our deferred income tax assets
      and liabilities, including validation of underlying supporting
      data;


•
            engaged external tax experts to
      support our financial closing and reporting process;
      and


•
            enhanced
      quarterly management review of the calculation of the deferred income tax
      assets and liabilities and underlying supporting
  data.





We have
now completed our evaluation and testing of these additional internal control
processes.  As of September 30, 2010, management has evaluated the
remedial action, reviewed each of the remediated controls and found the controls
to be operating effectively.  As a result of these new control
processes and procedures, management believes it has remediated the material
weakness in its disclosure controls and procedures.


38


PART
II – OTHER INFORMATION




Item 1.
            Legal
      Proceedings.





There
have been no material changes to the legal proceedings disclosed under Part I,
Item 3, “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009.




Item 1A.
            Risk
    Factors.





Except as
provided below, there have been no material changes to the risk factors
disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form
10-K for the fiscal year ended December 31, 2009.




Our
business is subject to increasingly complex corporate governance, public
disclosure and accounting requirements that could adversely affect our business
and financial results.




We are
subject to changing rules and regulations of federal and state government as
well as the stock exchange on which our common stock is listed. These entities,
including the Public Company Accounting Oversight Board, the SEC and the Nasdaq
Global Market, have issued a significant number of new and increasingly complex
requirements and regulations over the course of the last several years and
continue to develop additional regulations and requirements in response to laws
enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and
Protection Act, or the Dodd-Frank Act, was enacted. There are significant
corporate governance and executive compensation-related provisions in the
Dodd-Frank Act that require the SEC to adopt additional rules and regulations.
Prior to full implementation, it will be difficult to assess the impact of the
Dodd-Frank Act on the Company. Our efforts to comply with these requirements
have resulted in, and are likely to continue to result in, an increase in
expenses and a diversion of management's time from other business
activities.




Item 6.
            Exhibits.





See
“Index to Exhibits” following the signature page for a description of the
exhibits furnished as part of this Quarterly Report on Form
10-Q.


39


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




NGP
      CAPITAL RESOURCES COMPANYDate:  November
      9, 2010
              
              By:
              /s/ John H. HomierJohn
      H. HomierPresident
      and Chief Executive OfficerDate:  November
      9, 2010
              
              By:
              /s/ Stephen K. GardnerStephen
      K. GardnerChief
      Financial Officer, Treasurer and
Secretary





Index
to Exhibits





Exhibits No.
            
            Exhibit3.1
            
            Articles
      of Incorporation (filed as Exhibit (a)(1) to our Registration Statement on
      Form N-2 filed on August 16, 2004 (Registration No. 333-118279) and
      incorporated herein by reference)3.2
            
            Articles
      of Amendment and Restatement (filed as Exhibit 3.2 our Annual Report on
      Form 10-K for the year ended December 31, 2004 and incorporated herein by
      reference)3.3
            
            Bylaws
      (filed as Exhibit (b) to our Registration Statement on Form N-2 filed on
      August 16, 2004 (Registration No. 333-118279) and incorporated herein by
      reference)4.1
            
            Form
      of Stock Certificate (filed as Exhibit (d) to our Pre-Effective Amendment
      No. 2 to Registration Statement on Form N-2 filed on October 7, 2004
      (Registration No. 333-118279) and incorporated herein by
      reference)4.2
            
            Dividend
      Reinvestment Plan (filed as Exhibit (e) to our Registration Statement on
      Form N-2 filed on August 16, 2004 (Registration No. 333-118279) and
      incorporated herein by reference)31.1*
            
            Certification
      required by Rule 13a-14(a)/15d-14(a) by the Chief Executive
      Officer31.2*
            
            Certification
      required by Rule 13a-14(a)/15d-14(a) by the Chief Financial
      Officer32.1*
            
            Section
      1350 Certification by the Chief Executive Officer32.2*
            
            Section
      1350 Certification by the Chief Financial
  Officer


*Filed
herewith.