UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21549
Energy Income and Growth Fund
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: November 30
Date of reporting period: November 30, 2009
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
(GRAPHIC)
ANNUAL REPORT
FOR THE YEAR ENDED
NOVEMBER 30, 2009
ENERGY
Income and Growth Fund
(EIP LOGO)
Energy Income Partners, LLC
TABLE OF CONTENTS
ENERGY INCOME AND GROWTH FUND (FEN)
ANNUAL REPORT
NOVEMBER 30, 2009
Shareholder Letter ........................................................ 1
At A Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 6
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statements of Changes in Net Assets ....................................... 12
Statement of Cash Flows ................................................... 13
Financial Highlights ...................................................... 14
Notes to Financial Statements ............................................. 15
Report of Independent Registered Public Accounting Firm ................... 23
Additional Information .................................................... 24
Board of Trustees and Officers ............................................ 26
Privacy Policy ............................................................ 30
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Energy Income Partners, LLC ("EIP" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Energy Income and Growth Fund (the "Fund") to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of EIP
are just that: informed opinions. They should not be considered to be promises
or advice. The opinions, like the statistics, cover the period through the date
on the cover of this report. The risks of investing in the Fund are spelled out
in the prospectus, the statement of additional information, this report and
other regulatory filings.
SHAREHOLDER LETTER
ENERGY INCOME AND GROWTH FUND (FEN)
ANNUAL REPORT
NOVEMBER 30, 2009
Dear Shareholders:
2009 was more positive for the U.S. and global markets, which eased the minds of
economists and investors alike. Many economists believe that the recession that
began in December 2007 ended in March 2009. In fact, the Dow Jones Industrial
Average's total return from March 9, 2009, (the statistical end of the bear
market) to November 30, 2009, was 61.59%. Of course, no one can guarantee that
this trend will continue, but the economy has continued to rise and most
investors have found it easier to open their financial statements since March.
First Trust Advisors L.P. ("First Trust") has always believed that in order to
be successful in reaching your financial goals, you should be invested for the
long term. A long-term investor understands that the market, from a historical
perspective, has always experienced ups and downs. But history has shown that
the patient investor is typically rewarded over the long term. We have always
believed that staying invested in quality products and having a long-term
perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in
Energy Income and Growth Fund (the "Fund"). It contains a portfolio commentary
from the Fund's portfolio management team that provides a market recap for the
period, a performance analysis and a market and Fund outlook. Additionally, the
report provides the Fund's financial statements for the period covered by the
report. I encourage you to read this document and discuss it with your financial
advisor.
Since its inception, First Trust has been through many types of markets. We
remain committed to bringing you quality investment solutions regardless of the
inevitable volatility the market experiences. We offer a variety of products
that can fit many financial plans to help those investors seeking long-term
investment success. As well, we are committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of Energy Income and Growth Fund
Page 1
ENERGY INCOME AND GROWTH FUND
"AT A GLANCE"
AS OF NOVEMBER 30, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on NYSE Amex FEN
Common Share Price $ 22.30
Common Share Net Asset Value ("NAV") $ 20.20
Premium (Discount) to NAV 10.40%
Net Assets Applicable to Common Shares $136,520,489
Current Quarterly Distribution per Common Share (1) $ 0.4400
Current Annualized Distribution per Common Share $ 1.7600
Current Distribution Rate on Closing Common Share Price (2) 7.89%
Current Distribution Rate on NAV (2) 8.71%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
55041 First Trust Energy Income
Market NAV
------ ---
11/30/08 14.4 14.7
12/5/08 14.13 13.69
12/12/08 13.37 14.57
12/19/08 14.58 14.25
12/26/08 13.11 13.93
1/2/09 14.62 15.21
1/9/09 16.11 15.5
1/16/09 16.47 15.21
1/23/09 16.15 15.01
1/30/09 17.85 15.61
2/6/09 18.9 15.82
2/13/09 18.75 16.12
2/20/09 17.35 14.77
2/27/09 17.58 14.86
3/6/09 14.1 13.58
3/13/09 17.3 14.66
3/20/09 18 14.88
3/27/09 18.49 15.12
4/3/09 18.3 15.46
4/9/09 18.3 15.62
4/17/09 17.53 16.12
4/24/09 16.85 15.72
5/1/09 17.8 16.41
5/8/09 19.16 16.88
5/15/09 19.43 16.34
5/22/09 19.95 16.86
5/29/09 20.45 17.55
6/5/09 20.3 17.96
6/12/09 19.72 17.8
6/19/09 20 16.97
6/26/09 19.77 17.09
7/2/09 20.6 17.17
7/10/09 19.02 17.28
7/17/09 21 18.04
7/24/09 20.54 18.19
7/31/09 21.35 18.59
8/7/09 22.31 18.48
8/14/09 21.41 18.28
8/21/09 20.08 18.36
8/28/09 20.24 18.16
9/4/09 19.35 18.13
9/11/09 20.98 18.61
9/18/09 21.09 18.84
9/25/09 21.25 18.68
10/2/09 21.65 18.57
10/9/09 21.69 19.32
10/16/09 22.66 19.74
10/23/09 22.38 19.48
10/30/09 21.7 18.97
11/6/09 21.35 19.35
11/13/09 21.17 19.69
11/20/09 21.85 19.73
11/27/09 22.12 20.16
11/30/09 22.3 20.16
PERFORMANCE
Average Annual
Total Return
-------------------------------------
1 Year Ended 5 Years Ended Inception (6/24/2004)
11/30/2009 11/30/2009 to 11/30/2009
------------ ------------- ---------------------
Fund Performance
NAV (3) 51.03% 6.05% 8.05%
Market Value (4) 70.20% 7.40% 9.10%
Index Performance
S&P 500 Index 25.39% 0.71% 1.32%
Barclays Capital U.S. Credit Index of Corporate Bonds 24.56% 5.16% 5.55%
Alerian MLP Index 59.37% 10.06% 13.05%
Wells Fargo Midstream MLP Index 54.36% 9.65% 12.62%
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
----------------------- -----------
Midstream Oil 46.8%
Midstream Gas 37.1
Propane 6.1
Utility 5.4
Coal 2.4
Oil & Gas 2.0
Diversified Energy 0.2
-----
Total 100.0%
=====
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Magellan Midstream Partners, L.P. 11.0%
Enterprise Products Partners, L.P. 7.8
Plains All American Pipeline, L.P. 6.6
Kinder Morgan Energy Partners, L.P. 6.1
Enterprise GP Holdings, L.P. 5.0
ONEOK Partners, L.P. 4.4
NuStar Energy, L.P. 3.9
Energy Transfer Partners, L.P. 3.8
Enbridge Energy Partners, L.P. 3.8
Sunoco Logistics Partners, L.P. 3.3
----
Total 55.7%
====
(1) Most recent distribution paid or declared through 11/30/2009. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 11/30/2009. Subject to
change in the future.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gains distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Energy Income Partners, LLC ("EIP"), Westport, CT, was founded in 2003 to
provide professional asset management services in the area of energy-related
master limited partnerships ("MLPs") and other high-payout securities such as
income trusts and royalty trusts. EIP focuses mainly on energy-related
infrastructure assets such as pipelines, petroleum storage and terminals that
receive fee-based or regulated income from their corporate customers. EIP
manages or supervises approximately $330 million of assets, as of November 30,
2009. The other funds advised by EIP include a partnership for U.S. high net
worth individuals and a master-and-feeder fund for institutions. EIP also
manages separately managed accounts. EIP is a registered investment advisor and
serves as an advisor to one registered investment company other than the Energy
Income and Growth Fund.
PORTFOLIO MANAGEMENT TEAM
JAMES J. MURCHIE
FOUNDER AND CEO OF ENERGY INCOME PARTNERS, LLC
Mr. Murchie founded EIP in 2003 and is the portfolio manager for all funds
advised by EIP which focus on energy-related MLPs, income trusts and similar
securities. From 2005 to mid-2006, Mr. Murchie and the EIP investment team
joined Pequot Capital Management. In July 2006, Mr. Murchie and the EIP
investment team left Pequot and re-established EIP. From 1998 to 2003, Mr.
Murchie managed a long/short fund that invested in energy and cyclical equities
and commodities. From 1995 to 1997, he was a managing director at Tiger
Management where his primary responsibilities were investments in energy,
commodities and related equities. From 1990 to 1995, Mr. Murchie was a principal
at Sanford C. Bernstein where he was a top-ranked energy analyst and sat on the
Research Department's Recommendation Review Committee. Before joining Bernstein,
he spent 8 years at British Petroleum in 7 operating and staff positions of
increasing responsibility. He has served on the board of Clark Refining and
Marketing Company and as President and Treasurer of the Oil Analysts Group of
New York. Mr. Murchie holds degrees from Rice University and Harvard University.
EVA PAO
PRINCIPAL OF ENERGY INCOME PARTNERS, LLC
Ms. Pao has been with EIP since its inception in 2003 and is co-portfolio
manager for all of the funds advised by EIP. She joined EIP in 2003, serving as
Managing Director of EIP until the EIP investment team joined Pequot Capital
Management. From 2005 to mid-2006, Ms. Pao served as Vice President of Pequot
Capital Management. Prior to Harvard Business School, Ms. Pao was a Manager at
Enron Corp where she managed a portfolio in Canadian oil and gas equities for
Enron's internal hedge fund that specialized in energy-related equities and
managed a natural gas trading book. She received a B.A. from Rice University in
1996. She received an M.B.A. from the Harvard Business School in 2002.
ENERGY INCOME AND GROWTH FUND
The investment objective of the Energy Income and Growth Fund ("FEN" or the
"Fund") is to seek a high level of after-tax total return with an emphasis on
current distributions paid to shareholders. The Fund pursues its objective by
investing in MLPs and related public entities in the energy sector, which the
Fund's Sub-Advisor believes offer opportunities for income and growth. There can
be no assurance that the Fund's investment objective will be achieved. The Fund
may not be appropriate for all investors.
MARKET RECAP
As measured by the Alerian MLP Index and the Wells Fargo (formerly Wachovia)
Midstream MLP Index, the total return for energy-related MLPs over the fiscal
year ended November 30, 2009 was +59.37% and +54.36%, respectively. For the
Alerian MLP Index, these returns reflect a positive 11.70% from income
distribution, and the remaining returns are due to share appreciation. For the
Wells Fargo Midstream MLP Index, these returns reflect a positive 10.98% from
income distribution while the remaining returns are due to share appreciation.
These figures are according to data collected from several sources, including
the Alerian MLP Index, the Wells Fargo Midstream MLP Index and Bloomberg. While
in the short term, share appreciation can be volatile, we believe that over the
longer term, share appreciation will approximate growth in per share quarterly
cash distributions paid by MLPs. While over the last 10 years, growth in per
share MLP distributions has averaged about 6.6%, over the last 12 months the
cash distributions of MLPs has fallen by about 3% (Source: Alerian Capital
Management). This decline was due mostly to MLPs exposed to cyclical and
commodity businesses. MLPs engaged in true infrastructure businesses with steady
fee-for-service revenues and regulated tariffs actually increased their per
share cash distributions over the last year. We believe that the growth rate of
the dividend stream from MLPs in these true infrastructure businesses is
supported by the fundamentals of their underlying businesses. These
Page 3
PORTFOLIO COMMENTARY - CONTINUED
businesses are predominately pipelines, terminals and storage, which receive
fees and tariffs that are generally not directly related to commodity prices.
Driving this growth will be modest increases in demand, inflation-related
escalations to their fees and tariffs and the accretion from new projects and
acquisitions.
The weakness in the performance of MLP shares in 2008 was mirrored by a recovery
in 2009. The 2008 decline in market value was driven by forced selling from
levered funds, concerns over the credit markets, the economy, and the weakness
in energy commodity prices. Many professional investors had to sell shares to
meet redemptions or margin calls even though the underlying fundamentals and
dividends were still growing. As this forced selling abated, investors noticed
that the dividends of the infrastructure MLPs were remaining steady while
dividends for equities and REITs were falling dramatically. We believe these
strong fundamentals explain the strong rebound in share prices over the period
covered by this report.
PERFORMANCE ANALYSIS
On a net asset value ("NAV") basis, the Fund provided a total return of +51.03%,
including the reinvestment of distributions, for the fiscal year ended November
30, 2009. This compares, according to collected data, to a total return of
25.39% for the S&P 500 Index, 24.56% for the Barclays Capital U.S. Credit Index
of Corporate Bonds, 59.37% for the Alerian MLP Index and 54.36% for the Wells
Fargo Midstream MLP Index. On a market value basis, the Fund had a total return,
including the reinvestment of dividends, for the fiscal year ended November 30,
2008, of +70.20%. The Fund's discount to NAV flipped to a premium to NAV over
the course of the fiscal year. On November 30, 2008, the Fund was priced at
$14.40 while the NAV was $14.68, a discount of 1.91%. On November 30, 2009, the
Fund was priced at $22.30 while the NAV was $20.20, a premium of 10.40%.
The Fund maintained its distribution of $0.44 per share during the fiscal year.
While the Fund had to sell a portion of its portfolio to reduce its borrowings
from September through November of 2008, a dividend cut was avoided due to the
strong coverage ratio maintained between the cash flow generated by the
portfolio holdings and the dividend obligations of the Fund. Most of the Fund's
peer group of MLP-focused closed-end funds cut their dividends over the past
year.
The underperformance of the Fund's NAV relative to the MLP benchmarks is driven
mostly by the Fund's more conservative portfolio which declined less last year
(before the effect of leverage) than the benchmarks. We believe the most
important long-term driver of value will be the maintenance and growth of the
dividends of the Fund's portfolio companies. On this measure, the Fund
outperformed the benchmarks as the weighted average growth in dividends of the
Fund's portfolio companies was about 3 percentage points better than that of the
Alerian MLP Index. Over the last 12 months, 13 MLPs cut or eliminated their
dividends. Only two of these were in the Fund's portfolio and even then only
after having reduced their positions in the two years prior to their cut.
MARKET AND FUND OUTLOOK
The MLP asset class experienced no new IPOs in 2009. In fact, some MLPs were
de-listed due to bankruptcies and restructurings. The number of energy-related
MLPs fell from a peak of 73 to 67 at the end of the calendar year. Two of the
six were acquired by other MLPs while the other four were taken private or
declared bankruptcy and were characterized by cyclical cash flows and/or too
much financial leverage. There was, however, a very healthy level of secondary
financing activity for MLPs as they continue to fund their ongoing investments
in new pipelines, processing and storage facilities. In 2009, there were 52
secondary equity offerings for MLPs that raised $7.3 billion. This compares to
$3.9 billion raised in 2008 and $5.4 billion raised in 2007 (not including
private transactions). MLPs also found access to the public debt markets,
raising $8.0 billion in 17 offerings. This compares to $8.2 billion in 2008 and
$5.2 billion in 2007. (Source: Barclays Capital). While access to debt in 2009
appears to be as good as prior years, pricing has changed and the difference in
the cost of debt between investment grade and non-investment grade companies has
widened substantially from two years ago.
In our opinion, the better-positioned MLPs have non-cyclical cash flows,
conservative balance sheets, modest and/or flexible organic growth commitments
and liquidity on their revolving lines of credit. While there has been a rebound
in commodity prices, cyclical cash flows will always be unpredictable, making
them a bad fit with a steady dividend obligation. Over the last few years, the
majority of MLP IPOs were companies whose primary business is the production of
oil and gas, shipping, refining or natural gas gathering. While some of these
MLPs have quality assets, competent management teams and the potential for
higher growth, they have more risk associated with the cyclical nature of their
businesses. We have written about the dangers of this trend in the past, and
remain vigilant about limiting our exposure to MLPs with cyclical cash flows.
Page 4
PORTFOLIO COMMENTARY - CONTINUED
The total return proposition of owning energy-related infrastructure MLPs has
been and continues to be their yield plus their growth. The yield of the MLPs,
weighted by market capitalization, on November 30, 2009, was 7.87% based on the
Alerian MLP Index. The growth in the quarterly cash distributions that make up
this yield has averaged between 6% and 7% annually over the last ten years. This
growth rate accelerated to about 12% in 2008 and dropped to -2% in 2009 (Source:
Alerian Capital Management). For true infrastructure MLPs, we expect dividend
growth rates to average in the mid-single digits over the next few years. This
growth will continue to be driven by modest increases in underlying demand as
the economy recovers, inflation and cost escalators in pipeline tariffs and
contracts and accretion from profitable capital projects and acquisitions. The
capital projects continue to be related to growth in areas such as the Canadian
Oil Sands, the new natural gas shale resources and the need for more
infrastructure related to biofuels and other environmental requirements. Thus
far, the MLPs as a group have done a great job capitalizing on these
opportunities. The slower capital spending by the customers of infrastructure
MLPs (oil and gas producers and refiners) experienced in 2009 appears to have
reversed course with higher commodity prices and a rosier outlook for the
economy. This is good news for the Fund's portfolio companies.
Page 5
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a)
NOVEMBER 30, 2009
SHARES/
UNITS DESCRIPTION VALUE
--------- ----------- ------------
MASTER LIMITED PARTNERSHIPS - 116.4%
OIL, GAS & CONSUMABLE FUELS - 114.8%
74,500 AmeriGas Partners, L.P. ................................... $ 2,795,240
110,000 Buckeye GP Holdings, L.P. (b) ............................. 3,081,100
25,000 Buckeye Partners, L.P. .................................... 1,317,500
465,471 Clearwater Natural Resources, L.P. (c) (d) (e) (f) ........ 0
124,300 Duncan Energy Partners, L.P. (b) .......................... 2,793,021
153,600 El Paso Pipeline Partners, L.P. (b) ....................... 3,640,320
150,947 Enbridge Energy Partners, L.P. (b) ........................ 7,440,178
7,582 Encore Energy Partners, L.P. (b) .......................... 134,429
159,000 Energy Transfer Equity, L.P. (b) .......................... 4,690,500
173,870 Energy Transfer Partners, L.P. (b) ........................ 7,526,832
267,803 Enterprise GP Holdings, L.P. (b) .......................... 9,908,711
515,998 Enterprise Products Partners, L.P. (b) .................... 15,371,580
40,709 EV Energy Partners, L.P. (b) .............................. 1,052,328
6,751 Exterran Partners, L.P. ................................... 130,497
74,874 Global Partners, L.P. (b) ................................. 1,758,790
100,700 Holly Energy Partners, L.P. (b) ........................... 3,695,690
112,836 Inergy Holdings, L.P. ..................................... 6,036,726
205,771 Kinder Morgan Energy Partners, L.P. (b) ................... 11,988,218
528,642 Magellan Midstream Partners, L.P. (b) ..................... 21,727,186
142,788 Natural Resource Partners, L.P. (b) ....................... 3,399,782
145,126 NuStar Energy, L.P. (b) ................................... 7,611,859
229,100 NuStar GP Holdings, LLC (b) ............................... 5,718,336
149,130 ONEOK Partners, L.P. (b) .................................. 8,752,440
70,000 Penn Virginia Resource Partners, L.P. (b) ................. 1,358,700
255,921 Plains All American Pipeline, L.P. (b) .................... 12,949,603
57,505 Quicksilver Gas Services, L.P. (b) ........................ 1,207,605
105,454 Sunoco Logistics Partners, L.P. (b) ....................... 6,511,785
27,000 TC Pipelines, L.P. ........................................ 977,130
70,000 TransMontaigne Partners, L.P. (b) ......................... 1,820,000
60,000 Williams Pipeline Partners, L.P. (b) ...................... 1,311,000
-------------
156,707,086
-------------
GAS UTILITIES - 1.6%
30,000 Spectra Energy Partners, L.P. ............................. 831,900
30,000 Suburban Propane Partners, L.P. ........................... 1,317,000
-------------
2,148,900
-------------
TOTAL MASTER LIMITED PARTNERSHIPS
(Cost $97,948,559) ..................................... 158,855,986
-------------
CANADIAN INCOME TRUSTS - 3.4%
OIL, GAS & CONSUMABLE FUELS - 2.7%
171,680 Keyera Facilities Income Fund ............................. 3,716,959
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.7%
90,000 Northland Power Income Fund ............................... 937,180
-------------
TOTAL CANADIAN INCOME TRUSTS
(Cost $3,266,024) ...................................... 4,654,139
-------------
See Notes to Financial Statements
Page 6
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
SHARES DESCRIPTION VALUE
--------- ----------- -------------
COMMON STOCKS - 24.5%
OIL, GAS & CONSUMABLE FUELS - 17.4%
65,470 Enbridge Energy Management, LLC (b) (g) ................... $ 3,197,535
22,000 Enbridge, Inc. (h) ........................................ 940,720
119,037 Kinder Morgan Management, LLC (b) (g) ..................... 5,984,007
179,500 Spectra Energy Corp. (i) .................................. 3,484,095
160,000 TransCanada Corp. (i) ..................................... 5,163,200
250,000 Williams Cos., Inc. (h) ................................... 4,972,500
-------------
23,742,057
-------------
GAS UTILITIES - 7.0%
118,000 ONEOK, Inc. (i) ........................................... 4,722,360
205,000 UGI Corp. (i) ............................................. 4,813,400
-------------
9,535,760
-------------
CAPITAL MARKETS - 0.1%
20,000 NGP Capital Resources Co. (b) ............................. 153,800
-------------
TOTAL COMMON STOCKS
(Cost $28,604,923) ..................................... 33,431,617
-------------
RIGHTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
17 Clearwater Natural Resources, L.P. (c) (d) (e) (f) ........ 0
-------------
TOTAL RIGHTS
(Cost $0) .............................................. 0
-------------
WARRANTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
48,956 Abraxas Petroleum Corp., Expiration 05/25/12 (c) (d) (e) .. 23,034
-------------
TOTAL WARRANTS
(Cost $0) .............................................. 23,034
-------------
TOTAL INVESTMENTS - 144.3%
(Cost $129,819,506) (j) ................................ 196,964,776
-------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------- -------------
CALL OPTIONS WRITTEN - (0.8%)
Enbridge, Inc.
220 @ 45 due Apr 10 ........................................... (24,200)
-------------
ONEOK, Inc.
800 @ 35 due Jan 10 ........................................... (412,000)
-------------
Spectra Energy Corp.
900 @ 20 due Dec 09 ........................................... (13,500)
195 @ 22.5 due Mar 10 ........................................ (1,950)
-------------
(15,450)
-------------
See Notes to Financial Statements
Page 7
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------- -------------
CALL OPTIONS WRITTEN - (CONTINUED)
TransCanada Corp.
600 @ 30 due Feb 10 ........................................... $ (192,000)
800 @ 35 due May 10 ........................................... (32,000)
-------------
(224,000)
-------------
UGI Corp.
800 @ 25 due Jan 10 ........................................... (10,000)
500 @ 30 due Jan 10 ........................................... (7,500)
-------------
(17,500)
-------------
Williams Cos., Inc.
800 @ 17.5 due Feb 10 ......................................... (228,000)
300 @ 20 due Dec 09 ........................................... (12,000)
600 @ 20 due Jan 10 ........................................... (48,000)
800 @ 22.5 due May 10 ......................................... (68,000)
-------------
(356,000)
-------------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $722,982) ........................... (1,049,150)
-------------
OUTSTANDING LOAN - (33.0)% ................................ (45,000,000)
NET OTHER ASSETS AND LIABILITIES - (10.5%) ................ (14,395,137)
-------------
NET ASSETS - 100.0% ....................................... $ 136,520,489
=============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All or a portion of this security is serving as collateral on the
outstanding loan.
(c) This security is restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended. Prior
to registration, restricted securities may only be resold in transactions
exempt from registration (see Note 2D - Restricted Securities in the Notes
to Financial Statements).
(d) This security is fair valued in accordance with procedures adopted by the
Fund's Board of Trustees.
(e) Non-income producing security.
(f) This partnership filed for protection in federal bankruptcy court on
January 7, 2009.
(g) Non-income producing security which pays regular in-kind distributions.
(h) Call options were written on this entire Common Stock position and are
fully covered by the Common Stock position.
(i) Call options were written on a portion of this Common Stock position and
are fully covered by the Common Stock position.
(j) Aggregate cost for federal income tax purposes is $117,713,175. As of
November 30, 2009, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$84,659,592 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$5,407,991.
See Notes to Financial Statements
Page 8
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of November 30,
2009 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
11/30/09 PRICES INPUTS INPUTS
------------ ------------ ----------- ------------
Master Limited Partnerships* .. $158,855,986 $158,855,986 $ -- $--
Canadian Income Trusts* ....... 4,654,139 4,654,139 -- --
Common Stocks* ................ 33,431,617 33,431,617 -- --
Warrants* ..................... 23,034 -- 23,034 --
------------ ------------ ------- ---
Total Investments ............. $196,964,776 $196,941,742 $23,034 $--
============ ============ ======= ===
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
11/30/09 PRICES INPUTS INPUTS
------------ ----------- ----------- ------------
Call Options Written .......... $(1,049,150) $(1,049,150) $-- $--
=========== =========== === ===
* See the Portfolio of Investments for industry breakout.
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
presented.
INVESTMENTS AT FAIR VALUE TRANSFERS NET UNREALIZED
USING SIGNIFICANT UNOBSERVABLE BALANCE AS OF IN (OUT) APPRECIATION NET REALIZED BALANCE AS OF
INPUTS (LEVEL 3) NOVEMBER 30, 2008 OF LEVEL 3 (DEPRECIATION) GAINS (LOSSES) NOVEMBER 30, 2009
------------------------------ ----------------- ---------- -------------- -------------- -----------------
Master Limited Partnerships $2,792,826 $ -- $(2,792,826) $-- $--
Warrants 13,879 (23,034) 9,155 -- --
---------- -------- ----------- --- ---
Total Investments $2,806,705 $(23,034) $(2,783,671) $-- $--
========== ======== =========== === ===
Net change in unrealized depreciation from Level 3 investments held as of
November 30, 2009 was $2,792,826 and is included in "Net change in unrealized
appreciation (depreciation) before taxes on investments" on the Statement of
Operations.
See Notes to Financial Statements
Page 9
ENERGY INCOME AND GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2009
ASSETS:
Investments, at value
(Cost $129,819,506) ................................................ $196,964,776
Cash .................................................................. 9,702,492
Prepaid expenses ...................................................... 180,131
Receivables:
Income taxes ....................................................... 1,875,113
Fund shares sold ................................................... 140,295
Dividends .......................................................... 111,183
Investment securities sold ......................................... 39,233
Interest ........................................................... 158
------------
Total Assets .................................................... 209,013,381
------------
LIABILITIES:
Outstanding loan ...................................................... 45,000,000
Deferred income taxes ................................................. 26,095,391
Options written, at value (Premiums received $722,982) ................ 1,049,150
Payables:
Investment advisory fees ........................................... 145,856
Audit and tax fees ................................................. 113,240
Printing fees ...................................................... 26,128
Legal fees ......................................................... 18,267
Administrative fees ................................................ 13,857
Interest and fees on loan .......................................... 8,778
Trustees' fees and expenses ........................................ 6,712
Custodian fees ..................................................... 3,775
Income taxes ....................................................... 3,342
Transfer agent fees ................................................ 2,532
Other liabilities ..................................................... 5,864
------------
Total Liabilities ............................................... 72,492,892
------------
NET ASSETS ............................................................ $136,520,489
============
NET ASSETS CONSIST OF:
Paid-in capital ....................................................... $106,182,584
Par value ............................................................. 67,583
Net unrealized appreciation (depreciation) on investments, written
options and foreign currency translation, net of income taxes ...... 44,282,176
Accumulated net realized gain (loss) on investments, written options
and foreign currency transactions, net of income taxes ............. (1,117,184)
Accumulated net investment income (loss), net of income taxes ......... (12,894,670)
------------
NET ASSETS ............................................................ $136,520,489
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .. $ 20.20
============
Number of Common Shares outstanding (unlimited number of Common Shares
has been authorized) ............................................... 6,758,270
============
See Notes to Financial Statements
Page 10
ENERGY INCOME AND GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2009
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $58,864) ............... $ 1,047,431
Interest ............................................................ 1,710
------------
Total investment income .......................................... 1,049,141
------------
EXPENSES:
Investment advisory fees ............................................ 1,489,058
Interest and fees on loan ........................................... 1,105,915
Energy Notes offering costs ......................................... 324,047
Shelf offering costs ................................................ 170,391
Administrative fees ................................................. 141,460
Audit and tax fees .................................................. 106,963
Legal fees .......................................................... 94,348
Printing fees ....................................................... 75,929
Trustees' fees and expenses ......................................... 38,396
Transfer agent fees ................................................. 35,260
Insurance expense ................................................... 31,448
Custodian fees ...................................................... 22,475
Auction fees ........................................................ 19,965
Other ............................................................... 23,754
------------
Total expenses ................................................... 3,679,409
------------
NET INVESTMENT INCOME (LOSS) BEFORE TAXES ........................... (2,630,268)
------------
Current income tax benefit (expense) - foreign ................... 167,032
Current income tax benefit (expense) - state ..................... 24,119
Current federal income tax benefit (expense) ..................... (2,028,313)
Deferred federal income tax benefit (expense) .................... 2,867,200
-----------
Total income tax benefit (expense) ............................... 1,030,038
------------
NET INVESTMENT INCOME (LOSS) ........................................ (1,600,230)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) before taxes on:
Investments ...................................................... 3,213,323
Written options .................................................. 1,196,354
Foreign currency transactions .................................... 2,129
------------
Net realized gain (loss) before taxes ............................... 4,411,806
------------
Deferred federal income tax benefit (expense) .................... (1,525,524)
-----------
Total income tax benefit (expense) ............................... (1,525,524)
------------
Net realized gain (loss) on investments, written options and foreign
currency transactions ............................................ 2,886,282
------------
Net change in unrealized appreciation (depreciation) before taxes on:
Investments ...................................................... 70,922,148
Written options .................................................. (706,893)
Foreign currency translations .................................... 632
------------
Net change in unrealized appreciation (depreciation) before taxes ... 70,215,887
------------
Deferred federal income tax benefit (expense) .................... (24,242,951)
Deferred income tax benefit (expense) - state .................... (156,991)
-----------
Total income tax benefit (expense) ............................... (24,399,942)
------------
Net change in unrealized appreciation (depreciation) on investments,
written options and foreign currency translations ................ 45,815,945
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ............................. 48,702,227
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..... $ 47,101,997
============
See Notes to Financial Statements
Page 11
ENERGY INCOME AND GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
11/30/2009 11/30/2008
------------ ------------
OPERATIONS:
Net investment income (loss) ............................................... $ (1,600,230) $ (3,714,353)
Net realized gain (loss) ................................................... 2,886,282 8,261,568
Net change in unrealized appreciation (depreciation) ....................... 45,815,945 (71,654,830)
------------ ------------
Net increase (decrease) in net assets resulting from operations ............ 47,101,997 (67,107,615)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain .......................................................... (2,319,211) (10,702,017)
Return of capital .......................................................... (9,207,189) --
------------ ------------
Total distributions to shareholders ........................................ (11,526,400) (10,702,017)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares sold through shelf offering .................... 4,804,981 --
Proceeds from Common Shares reinvested ..................................... 1,259,581 269,029
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions .. 6,064,562 269,029
------------ ------------
Total increase (decrease) in net assets .................................... 41,640,159 (77,540,603)
NET ASSETS:
Beginning of period ........................................................ 94,880,330 172,420,933
------------ ------------
End of period .............................................................. $136,520,489 $ 94,880,330
============ ============
Accumulated net investment income (loss), net of income taxes .............. $(12,894,670) $(11,294,440)
============ ============
CAPITAL SHARE TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ....................................... 6,462,221 6,446,995
Common Shares sold through shelf offering .................................. 227,636 --
Common Shares issued as reinvestment under the Dividend Reinvestment Plan .. 68,413 15,226
------------ ------------
Common Shares at end of period ............................................. 6,758,270 6,462,221
============ ============
See Notes to Financial Statements
Page 12
ENERGY INCOME AND GROWTH FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ...... $ 47,101,997
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash used by operating activities:
Purchases of investments .......................................... (81,776,452)
Sales of investments .............................................. 68,439,475
Proceeds from written options ..................................... 1,395,514
Cost to close written options ..................................... (11,046)
Return of capital received from investments in MLPs ............... 11,496,906
Net realized gain/loss on investments and options ................. (4,409,677)
Net change in unrealized appreciation/depreciation on investments
and options .................................................... (70,215,255)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in income tax receivable ................................. 1,636,598
Decrease in interest receivable ................................... 227
Increase in dividends receivable (a) .............................. (38,408)
Decrease in prepaid expenses ...................................... 156,112
Decrease in interest and fees on loan payable ..................... (93,637)
Decrease in income tax payable .................................... (260,949)
Increase in investment advisory fees payable ...................... 36,062
Increase in audit and tax fees payable ............................ 6,240
Decrease in legal fees payable .................................... (23,739)
Increase in printing fees payable ................................. 4,040
Increase in administrative fees payable ........................... 3,427
Decrease in transfer agent fees payable ........................... (236)
Decrease in custodian fees payable ................................ (1,698)
Decrease in Trustees' fees and expenses payable ................... (785)
Increase in accrued expenses ...................................... 3,364
Increase in deferred income taxes ................................. 23,058,264
------------
CASH USED IN OPERATING ACTIVITIES .................................... $(3,493,656)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net realized gain ....... (2,319,211)
Return of capital distributions ................................... (9,207,189)
Proceeds of Common Shares sold .................................... 4,664,686
Proceeds of Common Shares reinvested .............................. 1,259,581
Issuance of loan .................................................. 47,850,000
Repayment of loan ................................................. (8,500,000)
Redemption of Series B Energy Notes ............................... (25,000,000)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES .......................... 8,747,867
-----------
Increase in cash ..................................................... 5,254,211
Cash at beginning of period .......................................... 4,448,281
-----------
CASH AT END OF PERIOD ................................................ $ 9,702,492
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees .................... $ 1,221,333
===========
Cash paid during the period for taxes ................................ $ 461,515
===========
----------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $632.
See Notes to Financial Statements
Page 13
ENERGY INCOME AND GROWTH FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
11/30/2009 11/30/2008 11/30/2007(a) 11/30/2006 11/30/2005
---------- ---------- ------------- ---------- ----------
Net asset value, beginning of period ................. $ 14.68 $ 26.74 $ 25.88 $ 22.53 $ 21.34
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ......................... (0.24)(b) (0.57) (0.67) (0.50) (0.34)
Net realized and unrealized gain (loss) .............. 7.43 (9.83) 3.06 5.23 2.86
-------- -------- -------- -------- --------
Total from investment operations after income tax .... 7.19 (10.40) 2.39 4.73 2.52
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain .................................... (0.35) (1.66) (1.53) -- (0.88)
Return of capital .................................... (1.41) -- -- (1.38) (0.45)
-------- -------- -------- -------- --------
Total from distributions ............................. (1.76) (1.66) (1.53) (1.38) (1.33)
-------- -------- -------- -------- --------
Premiums from shares sold in at the market offering .. 0.09 -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of period ....................... $ 20.20 $ 14.68 $ 26.74 $ 25.88 $ 22.53
======== ======== ======== ======== ========
Market value, end of period .......................... $ 22.30 $ 14.40 $ 23.82 $ 24.49 $ 20.92
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (c) ............ 51.03% (40.70)% 9.38% 22.23% 11.96%(e)
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (d) ............... 70.20% (34.74)% 2.96% 24.57% 0.29%
======== ======== ======== ======== ========
Net assets, end of period (in 000's) ................. $136,520 $ 94,880 $172,421 $166,850 $145,230
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes before
waiver (f) ........................................ 25.79% (20.03)% 8.52% 14.47% 8.62%
Including current and deferred income taxes after
waiver (f) ........................................ 25.79% (20.03)% 8.52% 14.29% 8.31%
Excluding current and deferred income taxes before
waiver ............................................ 3.32% 4.80% 3.94% 3.63% 2.64%
Excluding current and deferred income taxes after
waiver ............................................ 3.32% 4.80% 3.94% 3.45% 2.33%
Excluding current and deferred income taxes and
interest expense after waiver ..................... 2.32% 2.55% 1.89% 1.76% 1.57%
RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE
NET ASSETS:
Net investment income (loss) ratio before tax
expenses .......................................... (2.37)% (3.83)% (3.83)% (3.26)% (2.29)%
Net investment income (loss) ratio including tax
expenses (f) ...................................... (24.84)% 21.00% (8.41)% (14.10)% (8.27)%
Portfolio turnover rate .............................. 43% 38% 16% 17% 38%
SENIOR SECURITIES:
Total Energy Notes outstanding ($25,000 per note) .... N/A 1,000 2,360 2,360 1,360
Principal amount and market value per
Energy Note (g) ................................... N/A $ 25,006 $ 25,004 $ 25,069 $ 25,074
Asset coverage per Energy Note (h) ................... N/A $119,880 $ 98,060 $ 95,699 $131,786
Total loan outstanding (in 000's) .................... $ 45,000 $ 5,650 $ 15,250 N/A N/A
Asset coverage per $1,000 senior indebtedness ........ $ 4,034(j) $ 22,218(j) $ 12,306(i) N/A N/A
----------
(a) On September 14, 2007, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Energy Income Partners, LLC ("EIP"), and on
September 24, 2007, the Board of Trustees voted to approve EIP as
investment sub-advisor.
(b) Based on average shares outstanding.
(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in net
asset value per share and does not reflect sales load.
(d) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in Common
Share price.
(e) In 2005, the Fund received reimbursements from the investment advisor and
former sub-advisor. This reimbursement had no effect on the Fund's total
return.
(f) Includes current and deferred income taxes associated with each component
of the Statement of Operations.
(g) Includes accumulated and unpaid interest.
(h) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the Energy Notes) and dividing by the
outstanding Energy Notes in 000's.
(i) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
outstanding in 000's.
(j) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding and the Energy Notes) and
dividing by the loan outstanding in 000's. If this methodology had been
used historically, fiscal year 2007 would have been $16,175.
N/A Not applicable.
See Notes to Financial Statements
Page 14
NOTES TO FINANCIAL STATEMENTS
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
1. FUND DESCRIPTION
Energy Income and Growth Fund (the "Fund") is a non-diversified, closed-end
management investment company organized as a Massachusetts business trust on
March 25, 2004, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund trades under the ticker symbol FEN on the NYSE Amex (formerly the
American Stock Exchange).
The Fund's investment objective is to seek a high level of after-tax total
return with an emphasis on current distributions paid to shareholders. The Fund
seeks to provide its shareholders with an efficient vehicle to invest in a
portfolio of cash-generating securities of energy companies. The Fund focuses on
investing in publicly-traded master limited partnerships ("MLPs") and related
public entities in the energy sector, which Energy Income Partners, LLC ("EIP"
or the "Sub-Advisor") believes offer opportunities for income and growth. Due to
the tax treatment of cash distributions made by MLPs to their investors, a
portion of the distributions received may be tax deferred, thereby maximizing
cash available for distribution by the Fund to its shareholders. There can be no
assurance that the Fund's investment objective will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Fund's Common Shares is determined daily as
of the close of regular trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. The
NAV per Common Share is calculated by dividing the value of all assets of the
Fund (including accrued dividends and interest), less all liabilities (including
accrued expenses, dividends declared but unpaid and deferred income taxes and
any borrowings of the Fund) by the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and other investments. Additionally, if events occur after the close of the
principal markets for particular securities (e.g., domestic debt and foreign
securities), but before the Fund values its assets, that could materially affect
NAV, First Trust may use a fair value method to value the Fund's securities and
other investments. The use of fair value pricing by the Fund is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Fixed-income securities with a
remaining maturity of 60 days or more will be valued by the Fund using a pricing
service. Short-term investments that mature in less than 60 days when purchased
are valued at amortized cost.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
- Quoted prices for identical or similar securities in markets that
are non-active. A non-active market is a market where
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
there are few transactions for the security, the prices are not
current, or price quotations vary substantially either over time
or among market makers, or in which little information is
released publicly.
- Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds,
loss severities, credit risks, and default rates).
- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's net assets as of November 30, 2009 is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
COVERED OPTIONS. The Fund is subject to equity price risk in the normal course
of pursuing its investment objective and may enter into options written to hedge
against changes in the value of equities. The Fund may write (sell) covered call
or put options ("options") on all or a portion of the common stock of energy
companies held in the Fund's portfolio as determined to be appropriate by the
Sub-Advisor. The number of options the Fund can write (sell) is limited by the
amount of common stock of energy companies the Fund holds in its portfolio. The
Fund will not write (sell) "naked" or uncovered options. By writing (selling)
options, the Fund seeks to generate additional income, in the form of premiums
received for writing (selling) the options, and may provide a partial hedge
against a market decline in the underlying equity security. Options are
marked-to-market daily and their value will be affected by changes in the value
and dividend rates of the underlying equity securities, changes in interest
rates, changes in the actual or perceived volatility of the securities markets
and the underlying equity securities and the remaining time to the options'
expiration. The value of options may also be adversely affected if the market
for the options becomes less liquid or smaller.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss. If the price
of the underlying equity security is less than the option's strike price, the
option will likely expire without being exercised. The option premium received
by the Fund will, in this case, be treated as short-term capital gain on the
expiration date of the option. The Fund may also elect to close out its position
in an option prior to its expiration by purchasing an option of the same series
as the option written (sold) by the Fund.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter ("OTC") options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is
recognized and recorded on the accrual basis, including amortization of premiums
and accretion of discounts. The Fund will rely to some extent on information
provided by the MLPs, which is not necessarily timely, to estimate taxable
income allocable to the MLP units held in the Fund's portfolio and to estimate
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
the associated deferred tax asset or liability. From time to time, the Fund will
modify its estimates and/or assumptions regarding its deferred tax liability as
new information becomes available. To the extent the Fund modifies its estimates
and/or assumptions, the NAV of the Fund will likely fluctuate.
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital from the MLP to the extent of the cost basis of
such MLP investments. Cumulative distributions received in excess of the Fund's
cost basis in an MLP generally are recorded as capital gain.
D. RESTRICTED SECURITIES:
The Fund may invest up to 35% of its Managed Assets, which is the gross asset
value of the Fund minus accrued liabilities (excluding the principal amount of
any borrowings), in restricted securities. Restricted securities are securities
that cannot be offered for public sale without first being registered under the
Securities Act of 1933, as amended. Prior to registration, restricted securities
may only be resold in transactions exempt from registration. The Fund holds the
restricted securities at November 30, 2009 shown in the following table. The
Fund does not have the right to demand that such securities be registered. These
securities are valued according to the valuation procedures as stated in the
Portfolio Valuation footnote (Note 2A) and are not expressed as a discount to
the value of a comparable unrestricted security.
ACQUISITION SHARES/ CARRYING % OF
SECURITY DATE UNITS PRICE COST VALUE NET ASSETS
-------- ----------- ------- ----- ---------- ------- ----------
Abraxas Petroleum Corp. - Warrants 05/25/07 48,956 $0.47 $ -- $23,034 0.02%
Clearwater Natural Resources, L.P. 08/01/05 465,471 -- 8,601,560 -- --
Clearwater Natural Resources, L.P. - Rights 08/01/05 17 -- -- -- --
---------- ------- ----
$8,601,560 $23,034 0.02%
========== ======= ====
E. DISTRIBUTIONS TO SHAREHOLDERS:
The Fund intends to make quarterly distributions to Common Shareholders. On
December 11, 2006, the Board of Trustees approved a managed distribution policy
to better align the Fund with its after-tax total return investment objective.
The Fund's distributions generally will consist of cash and paid-in-kind
distributions from MLPs or their affiliates, dividends from common stocks,
interest from debt instruments and income from other investments held by the
Fund less operating expenses, including taxes. Distributions to Common
Shareholders are recorded on the ex-date and are based on U.S. generally
accepted accounting principles, which may differ from their ultimate
characterization for federal income tax purposes.
Distributions made from current and accumulated earnings and profits of the Fund
will be taxable to shareholders as dividend income. Distributions that are in an
amount greater than the Fund's current and accumulated earnings and profits will
represent a tax-deferred return of capital to the extent of a shareholder's
basis in the Common Shares, and such distributions will correspondingly increase
the realized gain upon the sale of the Common Shares. Additionally,
distributions not paid from current and accumulated earnings and profits that
exceed a shareholder's tax basis in the Common Shares will be taxed as a capital
gain.
Distributions of $2,319,211 paid during the year ended November 30, 2009, are
anticipated to be characterized as taxable dividends for federal income tax
purposes. The remaining $9,207,189 in distributions paid during the year ended
November 30, 2009 is expected to be return of capital. However, the ultimate
determination of the character of the distributions will be made after the 2009
calendar year. Distributions of $10,702,017 paid during the year ended November
30, 2008, were characterized as taxable dividends for federal income tax
purposes. Distributions will automatically be reinvested in additional Common
Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
F. INCOME TAXES:
The Fund is treated as a regular C corporation for U.S. federal income tax
purposes and as such will be obligated to pay federal and applicable state and
foreign corporate taxes on its taxable income. The Fund's tax expense or benefit
is included in the Statement of Operations based on the component of income or
gains (losses) to which such expense or benefit relates. The current U.S.
federal maximum graduated income tax rate for corporations is 35%. In addition,
the U.S. imposes a 20% alternative minimum tax on the recalculated alternative
minimum taxable income of an entity treated as a corporation. This differs from
most investment companies, which elect to be treated as "regulated investment
companies" under the U.S. Internal Revenue Code of 1986, as amended. The various
investments of the Fund may cause the Fund to be subject to state income taxes
on a portion of its income at various rates.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
The tax deferral benefit the Fund derives from its investment in MLPs results
largely because the MLPs are treated as partnerships for federal income tax
purposes. As a partnership, an MLP has no income tax liability at the entity
level. As a limited partner in the MLPs in which it invests, the Fund will be
allocated its pro rata share of income, gains, losses, deductions and credits
from the MLPs, regardless of whether or not any cash is distributed from the
MLPs.
To the extent that the distributions received from the MLPs exceed the net
taxable income realized by the Fund from its investment, a tax liability
results. This tax liability is a deferred liability to the extent that MLP
distributions received have not exceeded the Fund's adjusted tax basis in the
respective MLPs. To the extent that distributions from an MLP exceed the Fund's
adjusted tax basis, the Fund will recognize a taxable capital gain. For the year
ended November 30, 2009, distributions of $11,496,906 received from MLPs have
been reclassified as a return of capital. The cost basis of applicable MLPs has
been reduced accordingly.
The Fund's provision for income taxes consists of the following:
Current federal income tax benefit (expense) ..... $ (2,028,313)
Current state tax expense benefit (expense) ...... 24,119
Current foreign tax benefit (expense) ............ 167,032
Deferred federal income tax benefit (expense) .... (22,901,275)
Deferred state income tax benefit (expense) ...... (156,991)
------------
Total income tax benefit (expense) ............... $(24,895,428)
============
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. At November 30, 2009, the Fund
had a net operating loss carry forward for federal and state income tax purposes
of $4,014,426 and $11,433,639, respectively. The Fund's 2009 income tax
provision includes a full valuation allowance against the deferred tax assets
associated with this state net operating loss. Components of the Fund's deferred
tax assets and liabilities as of November 30, 2009 are as follows:
DEFERRED TAX ASSETS:
Federal net operating loss ....................... $ 1,405,049
State net operating loss ......................... 659,574
State income taxes ............................... 53,474
Other ............................................ 181,656
------------
Total deferred tax assets ........................ 2,299,753
Less: valuation allowance ........................ (659,574)
------------
Net deferred tax assets .......................... $ 1,640,179
============
DEFERRED TAX LIABILITIES:
Unrealized gains on investment securities ........ $(27,735,570)
------------
Total deferred tax liabilities ................... (27,735,570)
------------
Total net deferred tax liabilities ............... $(26,095,391)
============
Total income taxes differ from the amount computed by applying the maximum
graduated federal income tax rate of 35% to net investment income and realized
and unrealized gains on investments.
Application of statutory income tax rate ......... $25,199,099
State income taxes, net .......................... (173,245)
Change in valuation allowance .................... 337,413
Other ............................................ (467,839)
-----------
Total ............................................ $24,895,428
===========
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2004, 2005,
2006, 2007 and 2008 remain open to federal and state audit. The Internal Revenue
Service initiated a corporate income tax audit during the first quarter of 2008
for the Fund's 2004 tax year. Subsequently, the audit was expanded to include
the 2005 and 2006 tax years. The audit is still ongoing and the Fund expects the
audit to last through the second quarter of 2010. As of November 30, 2009,
management has evaluated the application of these standards to the Fund, and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax provisions.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
G. EXPENSES:
The Fund will pay all expenses directly related to its operations.
H. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investment securities and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase trade date and subsequent sale trade date is included in "Net
realized gain (loss) on foreign currency transactions" on the Statement of
Operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets (the value of the securities and other
investments the Fund holds plus cash or other assets, including interest accrued
but not yet received, minus accrued liabilities other than the principal amount
of any borrowings).
EIP serves as the Fund's sub-advisor and manages the Fund's portfolio subject to
First Trust's supervision. The Sub-Advisor receives a monthly portfolio
management fee calculated at an annual rate of 0.50% of Managed Assets that is
paid by First Trust out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., an indirect majority-owned
subsidiary of The PNC Financial Services Group, serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. PFPC Trust Company, also an indirect, majority-owned subsidiary of
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each additional trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and Valuation Committee is
paid $2,500 annually to serve in such capacities, with such compensation paid by
the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings.The Lead
Independent Trustee and each Committee chairman served two-year terms which
ended on December 31, 2009, before rotating to serve as a chairman of another
committee or as Lead Independent Trustee. The officers and the "Interested"
Trustee receive no compensation from the Fund for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES AND OPTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the year ended November 30, 2009, were $79,897,822
and $66,886,196, respectively.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
--------------- --------- ------------
Options outstanding at November 30, 2008 .. 4,546 $ 534,868
Options Written ........................... 20,069 2,808,613
Options Expired ........................... (7,173) (992,882)
Options Exercised ......................... (8,549) (1,413,099)
Options Closed ............................ (1,578) (214,518)
------ -----------
Options outstanding at November 30, 2009 .. 7,315 $ 722,982
====== ===========
5. ENERGY NOTES
The 1,000 Series B Energy Notes, at a principal value of $25,000 per note, were
redeemed in full on February 26, 2009 in the amount of $25,000,000. The high and
the low annual interest rates during the period December 1, 2008 through
February 26, 2009 were 3.75% and 0.74%, respectively, and the average interest
rate was 1.34%. The redemption of Series B Energy Notes was financed through a
credit agreement with BNP Paribas Prime Brokerage Inc. ("BNP") (see Note 7
below). At the time of the refinancing, the Fund had unamortized offering costs
of $92,378 and commissions of $231,669. Because the Series B Energy Notes were
redeemed prior to the maturity date of March 30, 2046, the combined amount of
$324,047 was expensed on February 26, 2009. This is shown on the Statement of
Operations under "Energy Notes offering costs."
6. CREDIT AGREEMENT WITH THE BANK OF NOVA SCOTIA
The Fund had a credit agreement with The Bank of Nova Scotia that had a maximum
commitment amount of $55,000,000. This credit agreement was scheduled to
terminate on March 26, 2009. On January 23, 2009, all outstanding borrowings, in
the amount of $8,150,000, were paid in full through a credit agreement with BNP
(see Note 7 below).
The average amount outstanding between December 1, 2008 and January 23, 2009 was
$6,734,906 with a weighted average interest rate of 3.05%. The high and low
annual interest rates during the period December 1, 2008 through January 23,
2009 were 4.81% and 2.17%, respectively.
7. COMMITTED FACILITY AGREEMENT WITH BNP PARIBAS PRIME BROKERAGE INC.
On January 23, 2009, the Fund entered into a committed facility agreement with
BNP that has a maximum commitment amount of $60,000,000. The committed facility
required an upfront payment from the Fund equal to $150,000. Absent certain
events of default or failure to maintain certain collateral requirements, BNP
may not terminate the committed facility agreement except upon 180 calendar days
prior notice. The borrowing rate under the facility is equal to the 3-month
LIBOR plus 150 basis points. In addition, under the facility, the Fund pays a
commitment fee of 0.80% on the undrawn amount of such facility.
On January 23, 2009, the committed facility was used to pay in full outstanding
borrowings under a credit agreement with The Bank of Nova Scotia in the amount
of $8,150,000. This committed facility was also used to redeem in full the
Series B Energy Notes in the principal amount of $25,000,000 on February 26,
2009.
The average amount outstanding between January 23, 2009 and November 30, 2009
was $36,554,521, with a weighted average interest rate of 2.11%. As of November
30, 2009, the Fund had outstanding borrowings of $45,000,000 under this
committed facility agreement. The high and low annual interest rates during the
period January 23, 2009 through November 30, 2009 were 2.83% and 1.76%,
respectively. The interest rate at November 30, 2009 was 1.76%.
8. AT THE MARKET OFFERING
On May 19, 2009, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with JonesTrading Institutional Services LLC ("JonesTrading") whereby
the Fund may offer and sell up to 1,000,000 Common Shares from time to time
through JonesTrading as agent for the offer and sale of the Common Shares. Sales
of Common Shares pursuant to the sales agreement may be made in negotiated
transactions or transactions that are deemed to be "at the market" as defined in
Rule 415 under the Securities Act of 1933, as amended, including sales made
directly on the NYSE Amex or sales made through a market maker other than on an
exchange, at an offering price equal to or in excess of the net asset value per
share of the Funds Common Shares at the time such Common Shares are initially
sold.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
The Fund has used the net proceeds from the sale of the Common Shares in
accordance with it's investment objective and policies. Please see the
prospectus and the prospectus supplement related to this offering for additional
information. Transactions for the fiscal year ended November 30, 2009 related to
offerings under such sales agreement are as follows:
COMMON
SHARES NET PROCEEDS NET ASSET VALUE PROCEEDS RECEIVED IN
SOLD RECEIVED OF SHARES SOLD EXCESS OF NET ASSET VALUE
------ ------------ --------------- -------------------------
227,636 $4,804,981 $4,215,868 $589,113
Additionally, estimated offering costs of $319,000 related to this offering have
been recorded as a prepaid asset and are being amortized to expense by the Fund
on a straight line basis over the lesser of one year or until the fund sells all
1,000,000 Common Shares related to this offering.
9. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
10. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
INDUSTRY CONCENTRATION RISK: The Fund invests at least 85% of its Managed Assets
in securities issued by energy companies, energy sector MLPs and MLP-related
entities. Given this industry concentration, the Fund is more susceptible to
adverse economic or regulatory occurrences affecting that industry than an
investment company that is not concentrated in a single industry. Energy issuers
may be subject to a variety of factors that may adversely affect their business
or operations, including high interest costs in connection with capital
construction programs, high leverage costs associated with environmental and
other regulations, the effects of economic slowdown, surplus capacity, increased
competition from other providers of services, uncertainties concerning the
availability of fuel at reasonable prices, the effects of energy conservation
policies and other factors.
MLP RISK: An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. If the Fund is not in compliance with certain credit facility
provisions, the Fund may not be permitted to declare dividends or other
distributions.
RESTRICTED SECURITIES RISK: The Fund may invest in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that are unregistered or are held by control persons of the issuer and
securities that are subject to contractual restrictions on their resale. As a
result, restricted securities may be more difficult to value and the Fund may
have difficulty disposing of such assets either in a timely manner or for a
reasonable price. In order to dispose of an unregistered security, the Fund,
where it has contractual rights to do so, may have to cause such security to be
registered. A considerable period may elapse between the time the decision is
made
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
to sell the security and the time the security is registered so that the Fund
could sell it. Contractual restrictions on the resale of securities vary in
length and scope and are generally the result of a negotiation between the
issuer and acquirer of the securities. The Fund would, in either case, bear
market risks during that period.
NON-DIVERSIFICATION RISK: Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.
11. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events on the Fund through
January 27, 2010, the date the financial statements were issued, and has
determined that there was the following subsequent event:
On January 12, 2010, the Fund declared a dividend of $0.44 per share to Common
Shareholders of record January 25, 2010, payable January 29, 2010.
Page 22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF ENERGY INCOME AND GROWTH FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Energy Income and Growth Fund (the "Fund") as
of November 30, 2009, and the related statements of operations and cash flows
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2009 by correspondence with the Fund's
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Energy
Income and Growth Fund as of November 30, 2009, the results of its operations
and its cash flows for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
the periods presented, in conformity with accounting principles generally
accepted in the United States of America.
(DELOITTE & TOUCHE LLP)
Chicago, Illinois
January 27, 2010
Page 23
ADDITIONAL INFORMATION
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above NAV at the time of valuation,
the Fund will issue new shares at a price equal to the greater of (i)
NAV per Common Share on that date or (ii) 95% of the market price on
that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the NYSE Amex (formerly
the American Stock Exchange) or elsewhere, for the participants'
accounts. It is possible that the market price for the Common Shares
may increase before the Plan Agent has completed its purchases.
Therefore, the average purchase price per share paid by the Plan Agent
may exceed the market price at the time of valuation, resulting in the
purchase of fewer shares than if the dividend or distribution had been
paid in Common Shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase Common Shares
in the open market within 30 days of the valuation date except where
temporary curtailment or suspension of purchases is necessary to
comply with federal securities laws. Interest will not be paid on any
uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 24
ADDITIONAL INFORMATION - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High
Income Fund, First Trust Strategic High Income Fund II, First Trust
Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance and
Financial Opportunities Fund and First Trust Active Dividend Income Fund was
held on April 16, 2009. At the Annual Meeting, Trustees Richard E. Erickson and
Thomas R. Kadlec were elected by holders of the Common Shares of the Fund as
Class II Trustees for three-year terms expiring at the Fund's annual meeting of
shareholders in 2012. The number of votes cast in favor of Dr. Erickson was
5,378,900, the number of votes against was 241,695 and the number of abstentions
was 841,626. The number of votes cast in favor of Mr. Kadlec was 5,383,317, the
number of votes against was 237,278 and the number of abstentions was 841,626.
James A. Bowen, Robert F. Keith and Niel B. Nielson are the current and
continuing Trustees.
Page 25
BOARD OF TRUSTEES AND OFFICERS
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009 (UNAUDITED)
Information pertaining to the Trustees and Officers of the Fund is set forth
below.
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST
NAME, ADDRESS, FUND COMPLEX OTHER TRUSTEESHIPS OR
DATE OF BIRTH AND TERM OF OFFICE AND PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
----------------------------- --------------------- --------------------------- --------------- -----------------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - Three Year Term Physician; President, 61 None
c/o First Trust Advisors L.P. - Since Fund Wheaton Orthopedics;
120 E. Liberty Drive, Inception Co-owner and Co-Director
Suite 400 (January 1996 to May
Wheaton, IL 60187 2007), Sports Med Center
D.OB.: 04/51 for Fitness; Limited
Partner, Gundersen Real
Estate Partnership;
Limited Partner,
Sportsmed LLC
Thomas R. Kadlec, Trustee - Three Year Term Senior Vice President and 61 Director of ADM
c/o First Trust Advisors L.P. - Since Fund Chief Financial Officer Investor Services, Inc.
120 E. Liberty Drive, Inception (May 2007 to Present), and ADM Investor
Suite 400 Vice President and Chief Services International
Wheaton, IL 60187 Financial Officer (1990 to
D.O.B.: 11/57 May 2007), ADM
Investor Services, Inc.
(Futures Commission
Merchant)
Robert F. Keith, Trustee - Three Year Term President (2003 to 61 None
c/o First Trust Advisors L.P. - Since June 2006 Present), Hibs Enterprises
120 E. Liberty Drive, (Financial and
Suite 400 Management Consulting)
Wheaton, IL 60187
D.O.B.: 11/56
----------
(1) Currently, Robert F. Keith, is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec,
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, are each serving as
trustees until the Fund's 2010 annual meeting of shareholders. Officers of
the Fund have an indefinite term.
Page 26
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST
NAME, ADDRESS, FUND COMPLEX OTHER TRUSTEESHIPS OR
DATE OF BIRTH AND TERM OF OFFICE AND PRINCIPAL OCCUPATIONS OVERSEEN BY DIRECTORSHIPS
POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
----------------------------- --------------------- --------------------------- --------------- -----------------------
INDEPENDENT TRUSTEES (CONTINUED)
Niel B. Nielson, Trustee - Three Year Term President (June 2002 to 61 Director of Covenant
c/o First Trust Advisors L.P. - Since Fund Present), Covenant College Transport Inc.
120 E. Liberty Drive, Inception
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
INTERESTED TRUSTEE
James A. Bowen(2), Trustee, - Three Year Trustee President, First Trust 61 Trustee of Wheaton
President, Chairman of the Term and Indefinite Advisors L.P. and First College
Board and CEO Officer Term Trust Portfolios L.P.;
120 E. Liberty Drive, - Since Fund Chairman of the Board of
Suite 400 Inception Directors, BondWave LLC
Wheaton, IL 60187 (Software Development
D.O.B.: 09/55 Company/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
NAME, ADDRESS, POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ------------------------ --------------------- ---------------------------------
OFFICERS WHO ARE NOT TRUSTEES(3)
Mark R. Bradley Treasurer, Controller, - Indefinite Term Chief Financial Officer, First
120 E. Liberty Drive, Chief Financial Officer - Since Fund Trust Advisors L.P. and First
Suite 400 and Chief Accounting Inception Trust Portfolios L.P.; Chief
Wheaton, IL 60187 Officer Financial Officer, BondWave LLC
D.O.B.: 11/57 (Software Development
Company/Investment Advisor) and
Stonebridge Advisors LLC
(Investment Advisor)
----------
(1) Currently, Robert F. Keith is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson are each serving as
trustees until the Fund's 2010 annual meeting of shareholders. Officers of
the Fund have an indefinite term.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 27
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009 (UNAUDITED)
NAME, ADDRESS, POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ------------------------ --------------------- ---------------------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
Erin E. Chapman Assistant Secretary - Indefinite Term Assistant General Counsel
120 E. Liberty Drive, - Since June 2009 (October 2007 to Present),
Suite 400 Associate Counsel (March 2006 to
Wheaton, IL 60187 October 2007), First Trust
D.O.B.: 08/76 Advisors L.P. and First Trust
Portfolios L. P.; Associate
Attorney (November 2003 to March
2006), Doyle & Bolotin, Ltd.
James M. Dykas Assistant Treasurer - Indefinite Term Senior Vice President (April 2007
120 E. Liberty Drive, - Since December 2005 to Present), Vice President
Suite 400 (January 2005 to April 2007),
Wheaton, IL 60187 First Trust Advisors L.P. and
D.O.B.: 01/66 First Trust Portfolios L.P.;
Executive Director (December 2002
to January 2005), Vice President
(December 2000 to December 2002),
Van Kampen Asset Management and
Morgan Stanley Investment
Management
Christopher R. Fallow Assistant Vice President - Indefinite Term Assistant Vice President (August
120 E. Liberty Drive, - Since December 2006 2006 to Present), Associate
Suite 400 (January 2005 to August 2006),
Wheaton, IL 60187 First Trust Advisors L.P. and
D.O.B.: 04/79 First Trust Portfolios L.P.;
Municipal Bond Trader (July 2001
to January 2005), BondWave LLC
(Software Development Company/
Investment Advisor)
W. Scott Jardine Secretary and Chief - Indefinite Term General Counsel, First Trust
120 E. Liberty Drive, Compliance Officer - Since Fund Advisors L.P., First Trust
Suite 400 Inception Portfolios L.P. and BondWave LLC
Wheaton, IL 60187 (Software Development
D.O.B.: 05/60 Company/Investment Advisor);
Secretary of Stonebridge Advisors
LLC (Investment Advisor)
Daniel J. Lindquist Vice President - Indefinite Term Senior Vice President (September
120 E. Liberty Drive, - Since December 2005 2005 to Present), Vice President
Suite 400 (April 2004 to September 2005),
Wheaton, IL 60187 First Trust Advisors L.P. and
D.O.B.: 02/70 First Trust Portfolios L.P.
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 28
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009 (UNAUDITED)
NAME, ADDRESS, POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
--------------------- ------------------------ --------------------- ---------------------------------
OFFICERS WHO ARE NOT TRUSTEES(3)
Coleen D. Lynch Assistant Vice President - Indefinite Term Assistant Vice President (January
120 E. Liberty Drive, - Since July 2008 2008 to Present), First Trust
Suite 400 Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.; Vice President
D.O.B.: 07/58 (May 1998 to January 2008), Van
Kampen Asset Management and
Morgan Stanley Investment
Management
Kristi A. Maher Assistant Secretary and - Indefinite Term Deputy General Counsel (May 2007
120 E. Liberty Drive, Deputy Chief - Assistant Secretary to Present), Assistant General
Suite 400 Compliance Officer since July 2004 and Counsel (March 2004 to May 2007),
Wheaton, IL 60187 Deputy Chief First Trust Advisors L.P. and
D.O.B.: 12/66 Compliance Officer First Trust Portfolios L.P.
since November 2009
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 29
PRIVACY POLICY
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.
SOURCES OF INFORMATION
We may collect nonpublic personal information about you from the following
sources:
- Information we receive from you or your broker-dealer, investment
adviser or financial representative through interviews, applications,
agreements or other forms;
- Information about your transactions with us, our affiliates or others;
- Information we receive from your inquiries by mail, e-mail or
telephone; and
- Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
- In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians and
trustees, or that assist us in the distribution of investor materials
such as trustees, banks, financial representatives and printers.
- We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund. Please note,
however, that the California Financial Information Privacy Act contains an "opt
out" mechanism that California consumers may use to prevent us from sharing
nonpublic personal information with affiliates.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do change
it, we will tell you promptly.
For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.
Page 30
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This Page Left Blank Intentionally.
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Energy Income Partners, LLC
49 Riverside Avenue
Westport, CT 06880
ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party.
(c) During the period covered by this report, the code of ethics that
applies to the registrant's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and that
relates to any element of the code of ethics description was amended
to name W. Scott Jardine as the Compliance Coordinator for the
implementation and administration of the aforementioned code. The
amended code of ethics is provided as an exhibit pursuant to Item
12(a)(1).
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are
employed by the registrant or a third party, that relates to one or
more of the items set forth in paragraph (b) of this item's
instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years were
$2,000 for the fiscal year ended November 30, 2008 and $72,000 for the fiscal
year ended November 30, 2009.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for assurance and related services by the principal
accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for the fiscal year ended
November 30, 2008 and $0 for the fiscal year ended November 30, 2009.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed
in each of the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for the fiscal year ended November 30, 2008 and $0 for
the fiscal year ended November 30, 2009.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $47,000
for the fiscal year ended November 30, 2008 and $42,400 for the fiscal year
ended November 30, 2009. These fees were for tax consultation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of
the last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning to the registrant's
adviser were $0 for the fiscal year ended November 30, 2008 and $0 for the
fiscal year ended November 30, 2009.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for the fiscal year ended November 30, 2008 and
$0 for the fiscal year ended November 30, 2009.
All Other Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years for products and services provided by the
principal accountant to the registrant's investment adviser, other than the
services reported in paragraphs (a) through (c) of this Item were $0 for the
fiscal year ended November 30, 2008 and $0 for the fiscal year ended November
30, 2009.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the DE MINIMIS exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the registrant and the registrant's investment adviser of
this Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the registrant for the fiscal year
ended November 30, 2008, were $47,000 for the registrant and $12,143 for the
registrant's investment adviser, and for the fiscal year ended November 30,
2009, were $42,400 for the registrant and $36,000 for the registrant's
investment adviser.
(h) The registrant's audit committee of its Board of Trustees has
determined that the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Registrant has a separately designated audit committee consisting of
all the independent trustees of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ENERGY INCOME PARTNERS, LLC
PROXY VOTING POLICIES AND PROCEDURES
If an adviser exercises voting authority with respect to client securities,
Advisers Act Rule 206(4)-6 requires the adviser to adopt and implement written
policies and procedures reasonably designed to ensure that client securities are
voted in the best interest of the client. This is consistent with legal
interpretations which hold that an adviser's fiduciary duty includes handling
the voting of proxies on securities held in client accounts over which the
adviser exercises investment or voting discretion, in a manner consistent with
the best interest of the client.
ABSENT UNUSUAL CIRCUMSTANCES, EIP EXERCISES VOTING AUTHORITY WITH RESPECT TO
SECURITIES HELD IN CLIENT ACCOUNTS PURSUANT TO PROVISIONS IN ITS ADVISORY
AGREEMENTS. ACCORDINGLY, EIP HAS ADOPTED THESE POLICIES AND PROCEDURES WITH THE
AIM OF MEETING THE FOLLOWING REQUIREMENTS OF RULE 206(4)-6:
- ensuring that proxies are voted in the best interest of clients;
- addressing material conflicts that may arise between EIP's interests
and those of its clients in the voting of proxies;
- disclosing to clients how they may obtain information on how EIP voted
proxies with respect to the client's securities;
- describing to clients EIP's proxy voting policies and procedures and,
upon request, furnishing a copy of the policies and procedures to the
requesting client.
ENGAGEMENT OF RISKMETRICS GROUP
With the aim of ensuring that proxies are voted in the best interest of EIP
clients, EIP has engaged RiskMetrics Group ("RiskMetrics"), formerly known as
Institutional Shareholder Services, as its independent proxy voting service to
provide EIP with proxy voting recommendations, as well as to handle the
administrative mechanics of proxy voting. EIP has directed RiskMetrics to
utilize its Proxy Voting Guidelines in making recommendations to vote, as those
guidelines may be amended from time to time.
CONFLICTS OF INTEREST IN PROXY VOTING
There may be instances where EIP's interests conflict, or appear to conflict,
with client interests in the voting of proxies. For example, EIP may provide
services to, or have an investor who is a senior member of, a company whose
management is soliciting proxies. There may be a concern that EIP would vote in
favor of management because of its relationship with the company or a senior
officer. Or, for example, EIP (or its
senior executive officers) may have business or personal relationships with
corporate directors or candidates for directorship.
EIP addresses these conflicts or appearances of conflicts by ensuring that
proxies are voted in accordance with the recommendations made by RiskMetrics, an
independent third party proxy voting service. As previously noted, in most
cases, proxies will be voted in accordance with RiskMetrics's own pre-existing
proxy voting guidelines.
DISCLOSURE ON HOW PROXIES WERE VOTED
EIP will disclose to clients in its Form ADV how clients can obtain information
on how their proxies were voted, by contacting EIP at its office in Westport,
CT. EIP will also disclose in the ADV a summary of these proxy voting policies
and procedures and that upon request, clients will be furnished a full copy of
these policies and procedures.
It is the responsibility of the CCO to ensure that any requests made by clients
for proxy voting information are responded to in a timely fashion and that a
record of requests and responses are maintained in EIP's books and records.
PROXY MATERIALS
EIP personnel will instruct custodians to forward to RiskMetrics all proxy
materials received on securities held in EIP client accounts.
LIMITATIONS
In certain circumstances, where EIP has determined that it is consistent with
the client's best interest, EIP will not take steps to ensure that proxies are
voted on securities in the client's account. The following are circumstances
where this may occur:
*LIMITED VALUE: Proxies will not be required to be voted on securities in a
client's account if the value of the client's economic interest in the
securities is indeterminable or insignificant (less than $1,000). Proxies
will also not be required to be voted for any securities that are no longer
held by the client's account.
*SECURITIES LENDING PROGRAM: When securities are out on loan, they are
transferred into the borrower's name and are voted by the borrower, in its
discretion. In most cases, EIP will not take steps to see that loaned
securities are voted. However, where EIP determines that a proxy vote, or
other shareholder action, is materially important to the client's account,
EIP will make a good faith effort to recall the security for purposes of
voting, understanding that in certain cases, the attempt to recall the
security may not be effective in time for voting deadlines to be met.
*UNJUSTIFIABLE COSTS: In certain circumstances, after doing a cost-benefit
analysis, EIP may choose not to vote where the cost of voting a client's
proxy would exceed any anticipated benefits to the client of the proxy
proposal.
OVERSIGHT OF POLICY
The CCO is responsible for overseeing these proxy voting policies and
procedures. In addition, the CCO will review these policies and procedures not
less than annually with a view to determining whether their
implementation has been effective and that they are operating as intended and in
such a fashion as to maintaining EIP's compliance with all applicable
requirements.
RECORDKEEPING ON PROXIES
In it the responsibility of EIP's CCO to ensure that the following proxy voting
records are maintained:
- a copy of EIP's proxy voting policies and procedures;
- a copy of all proxy statements received on securities in client
accounts (EIP may rely on RiskMetrics or the SEC's EDGAR system to
satisfy this requirement);
- a record of each vote cast on behalf of a client (EIP relies on
RiskMetrics to satisfy this requirement);
- a copy of any document prepared by EIP that was material to making a
voting decision or that memorializes the basis for that decision;
- a copy of each written client request for information on how proxies
were voted on the client's behalf or for a copy of EIP's proxy voting
policies and procedures, and
- a copy of any written response to any client request for information
on how proxies were voted on their behalf or furnishing a copy of
EIP's proxy voting policies and procedures.
The CCO will see that these books and records are made and maintained in
accordance with the requirements and time periods provided in Rule 204-2 of the
Advisers Act.
For any registered investment companies advised by EIP, votes made on its
behalf will be stored electronically or otherwise recorded so that they are
available for preparation of the Form N-PX, Annual Report of Proxy Voting
Record of Registered Management Investment Company.
RISK MTERICS
U.S. Proxy Voting Guidelines Concise Summary
(Digest of Selected Key Guidelines)
January 15, 2009
1. Operational Items:
AUDITOR RATIFICATION
Vote FOR proposals to ratify auditors, unless any of the following apply:
- An auditor has a financial interest in or association with the
company, and is therefore not independent;
- There is reason to believe that the independent auditor has rendered
an opinion which is neither accurate nor indicative of the company's
financial position;
- Poor accounting practices are identified that rise to a serious level
of concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures; or
- Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
- Non-audit ("other") fees exceed audit fees + audit-related fees + tax
compliance/preparation fees
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account:
- The tenure of the audit firm;
- The length of rotation specified in the proposal;
- Any significant audit-related issues at the company;
- The number of Audit Committee meetings held each year;
- The number of financial experts serving on the committee; and
- Whether the company has a periodic renewal process where the auditor
is evaluated for both audit quality and competitive price.
2. Board of Directors:
VOTING ON DIRECTOR(1) NOMINEES IN UNCONTESTED ELECTIONS
Vote on director nominees should be determined on a CASE-BY-CASE basis.
Vote AGAINST or WITHHOLD(2) from individual directors who:
- Attend less than 75 percent of the board and committee meetings
without a valid excuse, such as illness, service to the nation, work
on behalf of the company, or funeral obligations. If the company
provides meaningful public or private disclosure explaining the
director's absences, evaluate the information on a CASE-BY-CASE basis
taking into account the following factors:
- Degree to which absences were due to an unavoidable conflict;
- Pattern of absenteeism; and
- Other extraordinary circumstances underlying the director's
absence;
- Sit on more than six public company boards;
- Are CEOs of public companies who sit on the boards of more than two
public companies besides their own -- withhold only at their outside
boards.
Vote AGAINST or WITHHOLD from all nominees of the board of directors, (except
from new nominees, who should be considered on a CASE-BY-CASE basis) if:
----------
(1) RiskMetrics' classification of directors can be found in U.S. PROXY VOTING
GUIDELINES SUMMARY.
(2) In general, companies with a plurality vote standard use "Withhold" as the
valid opposition vote option in director elections; companies with a
majority vote standard use "Against". However, it will vary by company and
the proxy must be checked to determine the valid opposition vote for the
particular company.
- The company's proxy indicates that not all directors attended 75% of
the aggregate of their board and committee meetings, but fails to
provide the required disclosure of the names of the directors
involved. If this information cannot be obtained, vote
against/withhold from all incumbent directors;
- The company's poison pill has a dead-hand or modified dead-hand
feature. Vote against/withhold every year until this feature is
removed;
- The board adopts or renews a poison pill without shareholder approval,
does not commit to putting it to shareholder vote within 12 months of
adoption (or in the case of an newly public company, does not commit
to put the pill to a shareholder vote within 12 months following the
IPO), or reneges on a commitment to put the pill to a vote, and has
not yet received a withhold/against recommendation for this issue;
- The board failed to act on a shareholder proposal that received
approval by a majority of the shares outstanding the previous year (a
management proposal with other than a FOR recommendation by management
will not be considered as sufficient action taken);
- The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years (a management proposal with other than a FOR
recommendation by management will not be considered as sufficient
action taken);
- The board failed to act on takeover offers where the majority of the
shareholders tendered their shares;
- At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company has
failed to address the underlying issue(s) that caused the high
withhold/against vote;
- The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for election-
any or all appropriate nominees (except new) may be held accountable;
- The board lacks accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is
measured by one- and three-year total shareholder returns in the
bottom half of a company's four-digit GICS industry group (Russell
3000 companies only).
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Classification of Directors below) when:
- The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
- The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
- The company lacks a formal nominating committee, even if board attests
that the independent directors fulfill the functions of such a
committee;
- The full board is less than majority independent.
Vote AGAINST or WITHHOLD from the members of the Audit Committee if:
- The non-audit fees paid to the auditor are excessive;
- The company receives an adverse opinion on the company's financial
statements from its auditor; or
- There is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.
Vote CASE-by-CASE on members of the Audit Committee and/or the full board if
poor accounting practices, which rise to a level of serious concern are
indentified, such as: fraud; misapplication of GAAP; and material weaknesses
identified in Section 404 disclosures.
Examine the severity, breadth, chronological sequence and duration, as well as
the company's efforts at remediation or corrective actions in determining
whether negative vote recommendations are warranted against the members of the
Audit Committee who are responsible for the poor accounting practices, or the
entire board.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee if:
- There is a negative correlation between the chief executive's pay and
company performance (see discussion under Equity Compensation Plans);
- The company reprices underwater options for stock, cash or other
consideration without prior shareholder approval, even if allowed in
their equity plan;
- The company fails to submit one-time transfers of stock options to a
shareholder vote;
- The company fails to fulfill the terms of a burn rate commitment they
made to shareholders;
- The company has backdated options (see "Options Backdating" policy);
The company has poor compensation practices (see "Poor Pay Practices" policy).
Poor pay practices may warrant withholding votes from the CEO and potentially
the entire board as well.
Vote AGAINST or WITHHOLD from directors, individually or the entire board, for
egregious actions or failure to replace management as appropriate.
INDEPENDENT CHAIR (SEPARATE CHAIR/CEO)
Generally vote FOR shareholder proposals requiring that the chairman's position
be filled by an independent director, unless the company satisfies ALL of the
following criteria:
The company maintains the following counterbalancing features:
- Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role
may alternatively reside with a presiding director, vice chairman, or
rotating lead director; however the director must serve a minimum of
one year in order to qualify as a lead director.) The duties should
include, but are not limited to, the following:
- presides at all meetings of the board at which the chairman is
not present, including executive sessions of the independent
directors;
- serves as liaison between the chairman and the independent
directors;
- approves information sent to the board;
- approves meeting agendas for the board;
- approves meeting schedules to assure that there is sufficient
time for discussion of all agenda items;
- has the authority to call meetings of the independent directors;
- if requested by major shareholders, ensures that he is available
for consultation and direct communication;
- Two-thirds independent board;
- All independent key committees;
- Established governance guidelines;
- A company in the Russell 3000 universe must not have exhibited
sustained poor total shareholder return (TSR) performance, defined as
one- and three-year TSR in the bottom half of the company's four-digit
GICS industry group within the Russell 3000 only), unless there has
been a change in the Chairman/CEO position within that time;
- The company does not have any problematic governance or management
issues, examples of which include, but are not limited to:
- Egregious compensation practices;
- Multiple related-party transactions or other issues putting
director independence at risk;
- Corporate and/or management scandals;
- Excessive problematic corporate governance provisions; or
- Flagrant board or management actions with potential or realized
negative impact on shareholders.
MAJORITY VOTE SHAREHOLDER PROPOSALS
Generally vote FOR precatory and binding resolutions requesting that the board
change the company's bylaws to stipulate that directors need to be elected with
an affirmative majority of votes cast, provided it does not conflict with the
state law where the company is incorporated. Binding resolutions need to allow
for a carve-out for a plurality vote standard when there are more nominees than
board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
know as a director resignation policy) that provides guidelines so that the
company will promptly address the situation of a holdover director.
PERFORMANCE/GOVERNANCE EVALUATION FOR DIRECTORS
Vote WITHHOLD/AGAINST on all director nominees if the board lacks accountability
and oversight, coupled with sustained poor performance relative to peers,
measured by one- and three-year total shareholder returns in the bottom half of
a company's four-digit GICS industry group (Russell 3000 companies only).
Evaluate board accountability and oversight at companies that demonstrate
sustained poor performance. Problematic provisions include but are not limited
to:
- a classified board structure;
- a supermajority vote requirement;
- majority vote standard for director elections with no carve out for
contested elections;
- the inability of shareholders to call special meetings;
- the inability of shareholders to act by written consent;
- a dual-class structure; and/or
- a non-shareholder approved poison pill.
If a company exhibits sustained poor performance coupled with a lack of board
accountability and oversight, also take into consideration the company's
five-year total shareholder return and five-year operational metrics in the
evaluation.
3. Proxy Contests
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote CASE-BY-CASE on the election of directors in contested elections,
considering the following factors:
- Long-term financial performance of the target company relative to its
industry;
- Management's track record;
- Background to the proxy contest;
- Qualifications of director nominees (both slates);
- Strategic plan of dissident slate and quality of critique against
management;
- Likelihood that the proposed goals and objectives can be achieved
(both slates);
- Stock ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally vote FOR shareholder proposals calling for the reimbursement of
reasonable costs incurred in connection with nominating one or more candidates
in a contested election where the following apply:
- The election of fewer than 50% of the directors to be elected is
contested in the election;
- One or more of the dissident's candidates is elected;
- Shareholders are not permitted to cumulate their votes for directors;
and
- The election occurred, and the expenses were incurred, after the
adoption of this bylaw.
4. Antitakeover Defenses and Voting Related Issues
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Vote CASE-BY-CASE on advance notice proposals, giving support to proposals that
allow shareholders to submit proposals/nominations reasonably close to the
meeting date and within the broadest window possible, recognizing the need to
allow sufficient notice for company, regulatory and shareholder review.
To be reasonable, the company's deadline for shareholder notice of a proposal/
nominations must not be more than 60 days prior to the meeting, with a submittal
window of at least 30 days prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in
regard to a proponent's economic and voting position in the company so long as
the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review such proposal.
POISON PILLS
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has: (1) A
shareholder approved poison pill in place; or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if either:
- Shareholders have approved the adoption of the plan; or
- The board, in exercising its fiduciary responsibilities, determines
that it is in the best interest of shareholders under the
circumstances to adopt a pill without the delay that would result from
seeking stockholder approval (i.e., the "fiduciary out" provision). A
poison pill adopted under this "fiduciary out" will be put to a
shareholder ratification vote within 12 months of adoption or expire.
If the pill is not approved by a majority of the votes cast on this
issue, the plan will immediately terminate.
Vote FOR shareholder proposals calling for poison pills to be put to a vote
within a time period of less than one year after adoption. If the company has no
non-shareholder approved poison pill in place and has adopted a policy with the
provisions outlined above, vote AGAINST the proposal. If these conditions are
not met, vote FOR the proposal, but with the caveat that a vote within 12 months
would be considered sufficient.
Vote CASE-by-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
- No lower than a 20% trigger, flip-in or flip-over;
- A term of no more than three years;
- No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
- Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or seek
a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
For management proposals to adopt a poison pill for the stated purpose of
preserving a company's net operating losses ("NOL pills"), the following factors
should be considered:
- the trigger (NOL pills generally have a trigger slightly below 5%);
- the value of the NOLs;
- the term;
- shareholder protection mechanisms (sunset provision, causing
expiration of the pill upon exhaustion or expiration of NOLs); and
- other factors that may be applicable.
In addition, vote WITHHOLD/AGAINST the entire board of directors, (except new
nominees, who should be considered on a CASE-by-CASE basis) if the board adopts
or renews a poison pill without shareholder approval, does not commit to putting
it to a shareholder vote within 12 months of adoption (or in the case of a newly
public company, does not commit to put the pill to a shareholder vote within 12
months following the IPO), or reneges on a commitment to put the pill to a vote,
and has not yet received a withhold recommendation for this issue.
5. Mergers and Corporate Restructurings
OVERALL APPROACH
For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction, balancing various and sometimes countervailing factors
including:
- VALUATION - Is the value to be received by the target shareholders (or
paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
- MARKET REACTION - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.
- STRATEGIC RATIONALE - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of
historical acquisitions.
- NEGOTIATIONS AND PROCESS - Were the terms of the transaction
negotiated at arm's-length? Was the process fair and equitable? A fair
process helps to ensure the best price for shareholders. Significant
negotiation "wins" can also signify the deal makers' competency. The
comprehensiveness of the sales process (e.g., full auction, partial
auction, no auction) can also affect shareholder value.
- CONFLICTS OF INTEREST - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger
than if they did not hold these interests. Consider whether these
interests may have influenced these directors and officers to support
or recommend the merger. The change-in-control figure presented in the
"RMG Transaction Summary" section of this report is an aggregate
figure that can in certain cases be a misleading indicator of the true
value transfer from shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to
determine whether a potential conflict exists.
- GOVERNANCE - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other
issues (such as valuation) outweigh any deterioration in governance.
6. State of Incorporation
REINCORPORATION PROPOSALS
Evaluate management or shareholder proposals to change a company's state of
incorporation on a CASE-BY-CASE basis, giving consideration to both financial
and corporate governance concerns including the following:
- Reasons for reincorporation;
- Comparison of company's governance practices and provisions prior to
and following the reincorporation; and
- Comparison of corporation laws of original state and destination state
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
7. Capital Structure
COMMON STOCK AUTHORIZATION
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
- Specific reasons/ rationale for the proposed increase;
- The dilutive impact of the request as determined through an allowable
cap generated by RiskMetrics' quantitative model;
- The board's governance structure and practices; and
- Risks to shareholders of not approving the request.
Vote FOR proposals to approve increases beyond the allowable cap when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
PREFERRED STOCK
Vote CASE-BY-CASE on proposals to increase the number of shares of preferred
stock authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
- Specific reasons/ rationale for the proposed increase;
- The dilutive impact of the request as determined through an allowable
cap generated by RiskMetrics' quantitative model;
- The board's governance structure and practices; and
- Risks to shareholders of not approving the request.
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense).
Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.
8. Executive and Director Compensation
EQUITY COMPENSATION PLANS
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
- The total cost of the company's equity plans is unreasonable;
- The plan expressly permits the repricing of stock options/stock
appreciation rights (SARs) without prior shareholder approval;
- The CEO is a participant in the proposed equity-based compensation
plan and there is a disconnect between CEO pay and the company's
performance where over 50 percent of the year-over-year increase is
attributed to equity awards;
- The company's three year burn rate exceeds the greater of 2% and the
mean plus one standard deviation of its industry group;
- The plan provides for the acceleration of vesting of equity awards
even though an actual change in control may not occur (e.g., upon
shareholder approval of a transaction or the announcement of a tender
offer); or
- The plan is a vehicle for poor pay practices.
POOR PAY PRACTICES
Vote AGAINST or WITHHOLD from compensation committee members, CEO, and
potentially the entire board, if the company has poor compensation practices.
Vote AGAINST equity plans if the plan is a vehicle for poor compensation
practices.
The following practices, while not exhaustive, are examples of poor compensation
practices that may warrant withhold vote recommendations:
- Egregious employment contracts - Contracts containing multi-year
guarantees for salary increases, bonuses and equity compensation;
- Excessive perks/tax reimbursements:
- Overly generous perquisites, which may include, but are not
limited to the following: personal use of corporate aircraft,
personal security system maintenance and/or installation, car
allowances;
- Reimbursement of income taxes on executive perquisites or other
payments;
- Perquisites for former executives, such as car allowances,
personal use of corporate aircraft or other inappropriate
arrangements;
Abnormally large bonus payouts without justifiable performance linkage or
proper disclosure - Performance metrics that are changed, canceled or
replaced during the performance period without adequate explanation of the
action and the link to performance;
- Egregious pension/SERP (supplemental executive retirement plan)
payouts:
- Inclusion of additional years of service not worked that result
in significant payouts;
- Inclusion of performance-based equity awards in the pension
calculation;
- New CEO with overly generous new hire package:
- Excessive "make whole" provisions;
- Any of the poor pay practices listed in this policy;
- Excessive severance and/or change in control provisions:
- Inclusion of excessive change in control or severance payments,
especially those with a multiple in excess of 3X cash pay;
- Payments upon an executive's termination in connection with
performance failure;
- Change in control payouts without loss of job or substantial
diminution of job duties (single-triggered);
- New or materially amended employment or severance agreements that
provide for modified single triggers, under which an executive
may voluntarily leave for any reason and still receive the
change-in-control severance package;
- Liberal change in control definition in individual contracts or
equity plans which could result in payments to executives without
an actual change in control occurring;
- New or materially amended employment or severance agreements that
provide for an excise tax gross-up. Modified gross-ups would be
treated in the same manner as full gross-ups;
- Perquisites for former executives such as car allowances,
personal use of corporate aircraft or other inappropriate
arrangements;
- Dividends or dividend equivalents paid on unvested performance shares
or units;
- Poor disclosure practices:
- Unclear explanation of how the CEO is involved in the pay setting
process;
- Retrospective performance targets and methodology not discussed;
- Methodology for benchmarking practices and/or peer group not
disclosed and explained;
- Internal Pay Disparity:
- Excessive differential between CEO total pay and that of next
highest paid named executive officer (NEO);
- Options backdating (covered in a separate policy);
- Other excessive compensation payouts or poor pay practices at the
company.
OTHER COMPENSATION PROPOSALS AND POLICIES
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY) MANAGEMENT PROPOSALS
Vote CASE-BY-CASE on management proposals for an advisory vote on executive
compensation. Vote AGAINST these resolutions in cases where boards have failed
to demonstrate good stewardship of investors' interests regarding executive
compensation practices.
For U.S. companies, consider the following factors in the context of each
company's specific circumstances and the board's disclosed rationale for its
practices:
RELATIVE CONSIDERATIONS:
- Assessment of performance metrics relative to business strategy, as
discussed and explained in the CD&A;
- Evaluation of peer groups used to set target pay or award
opportunities;
- Alignment of company performance and executive pay trends over time
(e.g., performance down: pay down);
- Assessment of disparity between total pay of the CEO and other Named
Executive Officers (NEOs).
DESIGN CONSIDERATIONS:
- Balance of fixed versus performance-driven pay;
- Assessment of excessive practices with respect to perks, severance
packages, supplemental executive pension plans, and burn rates.
COMMUNICATION CONSIDERATIONS:
- Evaluation of information and board rationale provided in CD&A about
how compensation is determined (e.g., why certain elements and pay
targets are used, and specific incentive plan goals, especially
retrospective goals);
- Assessment of board's responsiveness to investor input and engagement
on compensation issues (e.g., in responding to majority-supported
shareholder proposals on executive pay topics).
EMPLOYEE STOCK PURCHASE PLANS -- NON-QUALIFIED PLANS
Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR
nonqualified employee stock purchase plans with all the following features:
- Broad-based participation (i.e., all employees of the company with the
exclusion of individuals with 5 percent or more of beneficial
ownership of the company);
- Limits on employee contribution, which may be a fixed dollar amount or
expressed as a percent of base salary;
- Company matching contribution up to 25 percent of employee's
contribution, which is effectively a discount of 20 percent from
market value;
- No discount on the stock price on the date of purchase since there is
a company matching contribution.
Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice
options, taking into consideration:
- Historic trading patterns--the stock price should not be so volatile
that the options are likely to be back "in-the-money" over the near
term;
- Rationale for the re-pricing--was the stock price decline beyond
management's control?
- Is this a value-for-value exchange?
- Are surrendered stock options added back to the plan reserve?
- Option vesting--does the new option vest immediately or is there a
black-out period?
- Term of the option--the term should remain the same as that of the
replaced option;
- Exercise price--should be set at fair market or a premium to market;
- Participants--executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance,
then also take into consideration the company's total cost of equity plans and
its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and
timing of the repricing proposal. The proposal should clearly articulate why the
board is choosing to conduct an exchange program at this point in time.
Repricing underwater options after a recent precipitous drop in the company's
stock price demonstrates poor timing. Repricing after a recent decline in stock
price triggers additional scrutiny and a potential AGAINST vote on the proposal.
At a minimum, the decline should not have happened within the past year. Also,
consider the terms of the surrendered options, such as the grant date, exercise
price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to suggest that repricings are being
done to take advantage of short-term downward price movements. Similarly, the
exercise price of surrendered options should be above the 52-week high for the
stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
OTHER SHAREHOLDER PROPOSALS ON COMPENSATION
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)
Generally, vote FOR shareholder proposals that call for non-binding shareholder
ratification of the compensation of the Named Executive Officers and the
accompanying narrative disclosure of material factors provided to understand the
Summary Compensation Table.
GOLDEN COFFINS/EXECUTIVE DEATH BENEFITS
Generally vote FOR proposals calling on companies to adopt a policy of obtaining
shareholder approval for any future agreements and corporate policies that could
oblige the company to make payments or awards following the death of a senior
executive in the form of unearned salary or bonuses, accelerated vesting or the
continuation in force of unvested equity grants, perquisites and other payments
or awards made in lieu of compensation. This would not apply to any benefit
programs or equity plan proposals for which the broad-based employee population
is eligible.
SHARE BUYBACK HOLDING PERIODS
Generally vote AGAINST shareholder proposals prohibiting executives from selling
shares of company stock during periods in which the company has announced that
it may or will be repurchasing shares of its stock. Vote FOR the proposal when
there is a pattern of abuse by executives exercising options or selling shares
during periods of share buybacks.
STOCK OWNERSHIP OR HOLDING PERIOD GUIDELINES
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While RMG favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
Vote on a CASE-BY-CASE on shareholder proposals asking companies to adopt
policies requiring Named Executive Officers to retain 75% of the shares acquired
through compensation plans while employed and/or for two years following the
termination of their employment, and to report to shareholders regarding this
policy. The following factors will be taken into account:
- Whether the company has any holding period, retention ratio, or
officer ownership requirements in place. These should consist of:
- Rigorous stock ownership guidelines, or
- A holding period requirement coupled with a significant long-term
ownership requirement, or
- A meaningful retention ratio,
- Actual officer stock ownership and the degree to which it meets or
exceeds the proponent's suggested holding period/retention ratio or
the company's own stock ownership or retention requirements.
- Problematic pay practices, current and past, which may promote a
short-term versus a long-term focus.
TAX GROSS-UP PROPOSALS
Generally vote FOR proposals asking companies to adopt a policy of not providing
tax gross-up payments to executives, except where gross-ups are provided
pursuant to a plan, policy, or arrangement applicable to management employees of
the company, such as a relocation or expatriate tax equalization policy.
9. Corporate Social Responsibility (CSR) Issues
OVERALL APPROACH
When evaluating social and environmental shareholder proposals, RMG considers
the following factors:
- Whether adoption of the proposal is likely to enhance or protect
shareholder value;
- Whether the information requested concerns business issues that relate
to a meaningful percentage of the company's business as measured by
sales, assets, and earnings;
- The degree to which the company's stated position on the issues raised
in the proposal could affect its reputation or sales, or leave it
vulnerable to a boycott or selective purchasing;
- Whether the issues presented are more appropriately/effectively dealt
with through governmental or company-specific action;
- Whether the company has already responded in some appropriate manner
to the request embodied in the proposal;
- Whether the company's analysis and voting recommendation to
shareholders are persuasive;
- What other companies have done in response to the issue addressed in
the proposal;
- Whether the proposal itself is well framed and the cost of preparing
the report is reasonable;
- Whether implementation of the proposal's request would achieve the
proposal's objectives;
- Whether the subject of the proposal is best left to the discretion of
the board;
- Whether the requested information is available to shareholders either
from the company or from a publicly available source; and
- Whether providing this information would reveal proprietary or
confidential information that would place the company at a competitive
disadvantage.
GENETICALLY MODIFIED INGREDIENTS
Generally vote AGAINST proposals asking suppliers, genetic research companies,
restaurants and food retail companies to voluntarily label genetically
engineered (GE) ingredients in their products and/or eliminate GE ingredients.
The cost of labeling and/or phasing out the use of GE ingredients may not be
commensurate with the benefits to shareholders and is an issue better left to
regulators.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients taking into account:
- The company's business and the proportion of it affected by the
resolution;
- The quality of the company's disclosure on GE product labeling,
related voluntary initiatives, and how this disclosure compares with
industry peer disclosure; and
- Company's current disclosure on the feasibility of GE product
labeling, including information on the related costs.
Generally vote AGAINST proposals seeking a report on the social, health, and
environmental effects of genetically modified organisms (GMOs). Studies of this
sort are better undertaken by regulators and the scientific community.
Generally vote AGAINST proposals to completely phase out GE ingredients from the
company's products or proposals asking for reports outlining the steps necessary
to eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to regulators) that may outweigh the economic benefits derived from
biotechnology.
PHARMACEUTICAL PRICING, ACCESS TO MEDICINES, AND PRODUCT REIMPORTATION
Generally vote AGAINST proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing.
Vote CASE-BY-CASE on proposals requesting that the company report on their
product pricing policies or their access to medicine policies, considering:
- The nature of the company's business and the potential for
reputational and market risk exposure;
- The existing disclosure of relevant policies;
- Deviation from established industry norms;
- The company's existing, relevant initiatives to provide research
and/or products to disadvantaged consumers;
- Whether the proposal focuses on specific products or geographic
regions; and
- The potential cost and scope of the requested report.
Generally vote FOR proposals requesting that companies report on the financial
and legal impact of their prescription drug reimportation policies unless such
information is already publicly disclosed.
Generally vote AGAINST proposals requesting that companies adopt specific
policies to encourage or constrain prescription drug reimportation. Such matters
are more appropriately the province of legislative activity and may place the
company at a competitive disadvantage relative to its peers.
GENDER IDENTITY, SEXUAL ORIENTATION, AND DOMESTIC PARTNER BENEFITS
Generally vote FOR proposals seeking to amend a company's EEO statement or
diversity policies to prohibit discrimination based on sexual orientation and/or
gender identity, unless the change would result in excessive costs for the
company.
Generally vote AGAINST proposals to extend company benefits to, or eliminate
benefits from domestic partners. Decisions regarding benefits should be left to
the discretion of the company.
CLIMATE CHANGE
Generally vote FOR resolutions requesting that a company disclose information on
the impact of climate change on the company's operations and investments
considering whether:
- The company already provides current, publicly-available information
on the impacts that climate change may have on the company as well as
associated company policies and procedures to address related risks
and/or opportunities;
- The company's level of disclosure is at least comparable to that of
industry peers; and
- There are no significant, controversies, fines, penalties, or
litigation associated with the company's environmental performance.
LOBBYING EXPENDITURES/INITIATIVES
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
initiatives, considering:
- Significant controversies, fines, or litigation surrounding a
company's public policy activities,
- The company's current level of disclosure on lobbying strategy, and
- The impact that the policy issue may have on the company's business
operations.
POLITICAL CONTRIBUTIONS AND TRADE ASSOCIATION SPENDING
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
- There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
- The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees (PACs)
are strictly voluntary and prohibits coercion.
Vote AGAINST proposals to publish in newspapers and public media the company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
Vote CASE-BY-CASE on proposals to improve the disclosure of a company's
political contributions and trade association spending, considering:
- Recent significant controversy or litigation related to the company's
political contributions or governmental affairs; and
- The public availability of a company policy on political contributions
and trade association spending including information on the types of
organizations supported, the business rationale for supporting these
organizations, and the oversight and compliance procedures related to
such expenditures of corporate assets.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level
and barring political contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
LABOR AND HUMAN RIGHTS STANDARDS
Generally vote FOR proposals requesting a report on company or company supplier
labor and/or human rights standards and policies unless such information is
already publicly disclosed.
Vote CASE-BY-CASE on proposals to implement company or company supplier labor
and/or human rights standards and policies, considering:
- The degree to which existing relevant policies and practices are
disclosed;
- Whether or not existing relevant policies are consistent with
internationally recognized standards;
- Whether company facilities and those of its suppliers are monitored
and how;
- Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
- Scope and nature of business conducted in markets known to have higher
risk of workplace labor/human rights abuse;
- Recent, significant company controversies, fines, or litigation
regarding human rights at the company or its suppliers;
- The scope of the request; and
- Deviation from industry sector peer company standards and practices.
SUSTAINABILITY REPORTING
Generally vote FOR proposals requesting the company to report on its policies,
initiatives, and oversight mechanisms related to social, economic, and
environmental sustainability, unless:
- The company already discloses similar information through existing
reports or policies such as an Environment, Health, and Safety (EHS)
report; a comprehensive Code of Corporate Conduct; and/or a Diversity
Report; or
- The company has formally committed to the implementation of a
reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Information provided as of January 26, 2010.
James Murchie, Chief Executive Officer and Founder of Energy Income Partners,
LLC ("EIP" or "Sub-Advisor"), and Eva Pao, principal of EIP, are co-portfolio
managers responsible for the day-to-day management of the registrant's
portfolio. Both portfolio managers have served in such capacity for the Fund for
23 months.
JAMES J. MURCHIE
FOUNDER AND CEO OF ENERGY INCOME PARTNERS, LLC
Mr. Murchie founded EIP in 2003 and is the portfolio manager for all funds
advised by EIP which focus on energy-related master limited partnerships, income
trusts and similar securities. From 2005 to mid-2006, Mr. Murchie and the EIP
investment team joined Pequot Capital Management. In July 2006, Mr. Murchie and
the EIP investment team left Pequot and re-established EIP. From 1998 to 2003,
Mr. Murchie managed a long/short fund that invested in energy and cyclical
equities and commodities. From 1995 to 1997, he was a managing director at Tiger
Management where his primary responsibilities were investments in energy,
commodities and related equities. From 1990 to 1995, Mr. Murchie was a principal
at Sanford C. Bernstein where he was a top-ranked energy analyst and sat on the
Research Department's Recommendation Review Committee. Before joining Bernstein,
he spent 8 years at British Petroleum in 7 operating and staff positions of
increasing responsibility. He has served on the board of Clark Refining and
Marketing Company and as President and Treasurer of the Oil Analysts Group of
New York. Mr. Murchie holds degrees from Rice University and Harvard University.
EVA PAO
PRINCIPAL OF ENERGY INCOME PARTNERS, LLC
Ms. Pao has been with EIP since its inception in 2003 and is co-portfolio
manager for all of the funds advised by EIP. She joined EIP in 2003, serving as
Managing Director of EIP until the EIP investment team joined Pequot Capital
Management. From 2005 to mid-2006, Ms. Pao served as Vice President of Pequot
Capital Management. Prior to Harvard Business School, Ms. Pao was a Manager at
Enron Corp where she managed a portfolio in Canadian oil and gas equities for
Enron's internal hedge fund that specialized in energy-related equities and
managed a natural gas trading book. She received a B.A. from Rice University in
1996. She received an M.B.A. from the Harvard Business School in 2002.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER AND POTENTIAL CONFLICTS OF
INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER
Information provided as of November 30, 2009.
Total Assets for
Total # of # of Accounts Managed which Advisory Fee is
Name of Portfolio Type of Accounts Total Assets for which Advisory Fee Based on Performance
Manager or Team Member Accounts Managed (millions) is Based on Performance (millions)
---------------------- --------------- ---------- ------------ ----------------------- ---------------------
1. James Murchie Registered
Investment
Companies: 1 $97 mill 0 $0
Other Pooled
Investment
Vehicles: 3 $104 mill 0 $0
Other Accounts: 4 $5 mill 0 $0
2. Eva Pao Registered
Investment
Companies: 1 $97 mill 0 $0
Other Pooled
Investment
Vehicles: 3 $104 mill 0 $0
Other Accounts: 4 $5 mill 0 $0
POTENTIAL CONFLICTS OF INTERESTS
The EIP investment professionals that serve as portfolio managers of the
registrant also serve as portfolio managers to three private investment funds
(the "Private Funds"), each of which has a performance-based fee, one open-ended
mutual fund, and four separately managed accounts which do not have a
performance-based fee.
EIP has written policies and procedures regarding Order Aggregation and
Allocation to ensure that all accounts are treated fairly and equitably and that
no account is disadvantaged. EIP will generally execute client transactions on
an aggregated basis when the Firm believes that to do so will allow it to obtain
best execution and to negotiate more favorable commission rates or avoid certain
transaction costs that might have otherwise been paid had such orders been
placed independently. EIP's ability to
implement this may be limited by an Account's custodian, directed brokerage
arrangements or other constraints limiting EIP's use of a common executing
broker.
An aggregated order may be allocated on a basis different from that specified
herein provided all clients receive fair and equitable treatment and there is a
legitimate reason for the different allocation. Reasons for deviation may
include (but are not limited to): a client's investment guidelines and
restrictions, available cash, liquidity requirements, leverage targets,
rebalancing total risk exposure across all clients, tax or legal reasons, and to
avoid odd-lots or in cases when a normal allocation would result in a de minimis
allocation to one or more clients.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Information provided as of January 26, 2010.
The portfolio managers are compensated by a competitive minimum base salary and
share in the profits of EIP in relationship to their ownership of EIP. The
profits of EIP are influenced by the assets managed by the funds and the
performance of the funds. While a portion of the portfolio manager's
compensation is tied to performance through incentive fees earned through the
Private Funds, the portfolio managers are not incentivized to take undue risk in
circumstances when the funds' performance lags as their investment fees may
sometimes have a high water mark or be subject to a hurdle rate. Moreover, the
Registrant's portfolio managers are the principal owners of EIP and are
incentivized to maximize the long-term performance of all of its funds. The
compensation of the Portfolio team members is determined according to prevailing
rates within the industry for similar positions. EIP wishes to attract, retain
and reward high quality personnel through competitive compensation.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of November 30, 2009.
Dollar Range of Fund Shares
Name Beneficially Owned
----- ---------------------------
James Murchie $0
Eva Pao $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the Registrant's board of trustees, where those
changes were implemented after the Registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
Registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the Registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) Energy Income and Growth Fund
By (Signature and Title)* /s/ James A. Bowen
----------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date January 25, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
----------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date January 25, 2010
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, Treasurer,
Controller, Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date January 25, 2010
* Print the name and title of each signing officer under his or her
signature.