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
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive
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, 2008
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, 2008
ENERGY
Income and Growth
Fund
EIP
Energy Income Partners, LLC
TABLE OF CONTENTS
ENERGY INCOME AND GROWTH FUND (FEN)
ANNUAL REPORT
NOVEMBER 30, 2008
Shareholder Letter ........................................................ 1
At A Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 6
Statement of Assets and Liabilities ....................................... 9
Statement of Operations ................................................... 10
Statements of Changes in Net Assets ....................................... 11
Statement of Cash Flows ................................................... 12
Financial Highlights ...................................................... 13
Notes to Financial Statements ............................................. 14
Report of Independent Registered Public Accounting Firm ................... 22
Additional Information .................................................... 23
Board of Trustees and Officers ............................................ 25
Privacy Policy ............................................................ 29
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, 2008
Dear Shareholders:
The year ended November 30, 2008 has been challenging for the financial markets
and for many investors. Yet, regardless of the market, First Trust Advisors L.P.
("First Trust") believes that in order to be successful in reaching your
financial goals, you should be invested for the long term. We also believe that
investors should seek professional help from a financial advisor who has been
through many types of markets, knows the range of investments available, and is
committed to bringing you investments suitable to your particular situation.
Our goal at First Trust has always been to offer a wide range of investment
products, including our family of closed-end funds, to help financial advisors
give you the opportunity to meet your financial objectives. We have continued to
expand our product line to ensure that you have many choices to fit your
investment needs.
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.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date reports 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" (UNAUDITED)
AS OF NOVEMBER 30, 2008
FUND STATISTICS
Symbol on NYSE Alternext US FEN
Common Share Price $ 14.40
Common Share Net Asset Value ("NAV") $ 14.68
Premium (Discount) to NAV (1.91)%
Net Assets Applicable to Common Shares $94,880,330
Current Quarterly Distribution per Common Share (1) $ 0.440
Current Annualized Distribution per Common Share $ 1.7600
Current Distribution Rate on Closing Common Share Price (2) 12.22%
Current Distribution Rate on NAV (2) 11.99%
COMMON SHARES PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Market NAV
------ -----
11/30/07 23.82 26.76
12/7/07 24.03 25.94
12/14/07 22.58 25.57
12/21/07 21.75 26.06
12/28/07 23.85 26.78
1/4/08 24.6 26.18
1/11/08 23.87 25.98
1/18/08 22.28 24.49
1/25/08 22.44 25
2/1/08 24 25.6
2/8/08 24.46 25.51
2/15/08 23.42 25.16
2/22/08 23.3 25.29
2/29/08 22.9 25.26
3/7/08 22.44 24.65
3/14/08 21.8 23.68
3/20/08 21.27 23.15
3/28/08 22.52 23.69
4/4/08 22.65 24.94
4/11/08 23.16 24.25
4/18/08 23.32 24.86
4/25/08 24.48 24.83
5/2/08 24.71 25.22
5/9/08 25.8 25.46
5/16/08 25.07 25.62
5/23/08 24.58 25.14
5/30/08 23.86 25.44
6/6/08 23.76 25.17
6/13/08 24.23 24.94
6/20/08 23.85 24.42
6/27/08 23 23.95
7/3/08 22.18 23.33
7/11/08 22.1 23.28
7/18/08 21.89 21.95
7/25/08 20.92 22.15
8/1/08 21.64 22.76
8/8/08 21.42 21.93
8/15/08 22.05 22.33
8/22/08 23.01 22.82
8/29/08 24.05 23.17
9/5/08 23.2 22.11
9/12/08 22.8 21.59
9/19/08 23.5 21.18
9/26/08 19.85 19.64
10/3/08 20.15 18.06
10/10/08 13.5 13.73
10/17/08 19 16.87
10/24/08 17.9 16.7
10/31/08 18.12 17.67
11/7/08 17.57 16.82
11/14/08 15.01 15.39
11/21/08 12.25 12.88
11/30/08 14.4 14.67
PERFORMANCE
Average Annual
Total Return
Inception
Year Ended (6/24/2004)
11/30/2008 to 11/30/2008
---------- --------------
Fund Performance
NAV (3) -40.70% 0.19%
Market Value (4) -34.74% -1.30%
Index Performance
S&P 500 Index -38.08% -3.45%
Barclays Capital Credit Index of Corporate Bonds -8.66% 1.69%
Alerian MLP Index -33.98% 4.64%
Wachovia Midstream MLP Index -32.33% 4.98%
INDUSTRY % OF TOTAL
CLASSIFICATION INVESTMENTS
-------------- -----------
Midstream Oil 44.1%
Midstream Gas 39.3
Utility 6.0
Propane 4.9
Coal 4.5
Oil & Gas 1.0
Diversified Energy 0.2
-----
Total 100.0%
=====
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Magellan Midstream Partners, L.P. 9.3%
Kinder Morgan Energy Partners, L.P. 8.2
Enterprise Product Partners, L.P. 8.1
Energy Transfer Partners, L.P. 7.8
Plains All American Pipeline, L.P. 7.7
NuStar Energy, L.P. 6.2
ONEOK, Inc. 5.3
ONEOK Partners, L.P. 4.0
Holly Energy Partners, L.P. 4.0
Enterprise GP Holdings, L.P. 3.6
----
Total 64.2%
====
(1) Most recent distribution paid or of record through 11/30/08. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or of record through the report date and then dividing by
Common Share price or NAV, as applicable, as of 11/30/08.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain 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 - (UNAUDITED)
SUB-ADVISOR
ENERGY INCOME PARTNERS, LLC
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 mainly focuses on infrastructure assets
such as pipelines, petroleum storage and terminals that receive fee-based or
regulated income from its corporate customers. EIP manages or supervises
approximately $340 million of assets, as of November 30, 2008. 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 is a registered investment advisor
and serves as an advisor to one registered investment company other than the
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 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 equity fund that invested in energy and
cyclical equities and commodities as head of Lawhill Capital, LLC. 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 the funds advised by EIP. From 2005 to mid-2006, Ms. Pao joined
Pequot Capital Management during EIP's affiliation with Pequot. 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.
Ms. Pao holds degrees from Rice University and Harvard Business School.
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 objectives 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 investment objectives will be achieved. The Fund may not be
appropriate for all investors.
MARKET RECAP
As measured by the Alerian MLP Index and the Wachovia Midstream MLP Index, the
total return for energy-related MLPs over the fiscal year ended November 30,
2008 was -34.0% and -32.3%, respectively. These returns reflect (for the Alerian
MLP Index) a positive 6.4% from income distribution and the remainder from share
depreciation. For the Wachovia MLP Index, 6.5% reflects the percentage points
from income distribution while the remainder is from share depreciation. These
figures are according to data collected from several sources, including the
Alerian MLP Index, the Wachovia 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. Over the last 12 months, the average growth in per
share cash distributions of energy-related MLPs has been approximately 10%. We
continue to believe that the growth rate of the dividend stream is supported by
the fundamentals of underlying businesses of the Fund's portfolio companies.
These businesses are predominately energy infrastructure companies, such as
pipelines, terminals and storage, which receive fees and tariffs that are not
related to commodity prices. The Fund's portfolio companies have enjoyed
above-historic levels of growth due to the increased amount of profitable
organic investment opportunities now available in the energy infrastructure
businesses.
Page 3
PORTFOLIO COMMENTARY (UNAUDITED) - CONTINUED
The weakness in the performance of MLP shares continues to be driven by hedge
fund selling and concerns over the credit markets. Since MLPs pay out most or
all of their cash flow every quarter, growth opportunities need to be financed
with the issuance of new shares and new debt. During most years, when the credit
markets are functioning normally, this need to "get approval" from the capital
markets for new projects imposes a welcome extra layer of scrutiny over these
projects. However, there will be times when the capital markets are tight and
less willing to provide new funding. The current credit market is one of those
times. Over the last year, we have made changes to the portfolio that we believe
improve the Fund's ability to weather this storm. These changes include reducing
portfolio concentration, reducing exposure to cyclical businesses, and
increasing the average credit quality of the companies in the portfolio.
PERFORMANCE ANALYSIS
On a net asset value ("NAV") basis, the Fund provided a total return of -40.70%,
including the reinvestment of dividends for the fiscal year ended November 30,
2008. This compares, according to collected data, to a total return of -38.08%
for the S&P 500, -8.66% for the Barclays Capital Credit Index of Corporate
Bonds, -33.98% for the Alerian MLP Index and -32.33% for the Wachovia 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
-34.74%. The Fund's discount to NAV narrowed over the fiscal year. On November
30, 2007, the Fund was priced at $23.82 while the NAV was $26.74, a discount of
10.88%. On November 30, 2008, the Fund was priced at $14.40 while the NAV was
$14.68, a discount of 1.91%.
The Fund raised its dividend twice during the fiscal year. The Fund paid 38.5
cents per quarter in October, 2007 and again in January 2008 and raised the
distribution to 39.5 cents for the April 2008 dividend and again in July 2008,
to 44 cents. The Fund maintained this level for October 2008. The 44 cents
represents a 14.29% increase over the prior October dividend and reflects the
growth in quarterly distributions from the Fund's portfolio companies as well as
the additional income generated by selling covered calls against a small portion
of the portfolio. Our transition plan for the Fund was completed in mid-2008. We
plan to maintain a portfolio that generates more income from a portfolio that is
less concentrated, of higher credit quality coming from companies with superior
business models generating less cyclical cash flows and higher long-term growth
prospects.
The underperformance of the Fund's NAV relative to the MLP benchmarks is driven
most by our use of leverage which magnifies the declines in share prices
relative to an un-levered index. What we did not expect was the decline in MLP
valuations relative to the broader market. In the past, MLPs have acted
defensively in market downturns as the cash flows of most energy infrastructure
tend to be less sensitive to the economy. We suspect the inflow of hedge fund
investors into the MLP asset class over the last two years, and their subsequent
exit, has contributed to these declines. As hedge fund money came into the asset
class over the last two years, there was a lot of share issuance coming from MLP
initial public offerings ("IPOs") and secondary offerings that acted to absorb
this new buying. There was no corresponding cushion, however, when these new
buyers started to sell in late 2007 and continued to sell into 2008.
While most of the Fund's portfolio companies are partnerships which do not pay
state or federal income tax, the Fund does pay tax when gains in the portfolio
are realized through the sale of appreciated securities. But before the shares
are sold, as they appreciate, the NAV of the Fund grows at a slower pace than
the underlying shares because we subtract from the NAV the future tax liability
from the eventual sale of those securities. Thus, the NAV can be lower than the
net value of the securities in the portfolio because those taxes have not yet
been paid, and will not be until the securities are actually sold (which could
be many years in the future). In the meantime, the Fund invests the value of
this deferred tax liability in the Fund's portfolio, earning a return and
lowering the impact of the Fund's taxable status.
MARKET AND FUND OUTLOOK
The MLP asset class continued to grow in 2008. However, the growth in the asset
class has slowed dramatically in 2008 compared to recent years. With 3 MLP IPOs
in 2008, energy-related MLPs now number 73 with approximately $88 billion of
market capitalization as of November 30, 2008. In addition to the 3 IPOs, 19 MLP
secondary equity offerings so far in 2008 raised approximately $3.7 billion of
proceeds. In 2007 there were 14 IPOs. In addition, there were 52 secondary
equity offerings that raised $12.5 billion. (Source: Lehman/Barclays and Morgan
Stanley). The de-leveraging in the U.S. and overseas financial markets has
constrained the ability of the asset class to increase its overall size through
the issuance of new equity.
We believe the better positioned MLPs have conservative balance sheets, modest
and or flexible organic growth commitments and spare liquidity on their
revolving lines of credit. Some MLPs have parent companies or sponsors that
stand willing to buy new shares issued to finance growth projects while others
do not. We believe the MLPs that stand to suffer the most from the current
environment have higher levels of debt, have used up most of their credit lines
and/or have very large capital spending obligations.
Page 4
PORTFOLIO COMMENTARY (UNAUDITED) - CONTINUED
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 and processing. 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 this trend in the past and the recent declines in energy commodity prices
will likely have an adverse impact on the ability of many of these companies to
grow or even sustain their dividends. In fact, we believe that if commodity
prices do not rise from current levels, some MLPs whose income depends on
commodity prices will be forced to cut their dividends over the next two years
as the commodity price hedges they currently have in place expire. The
transition plan we undertook in late 2007 when we took over the management of
FEN dramatically reduced the portfolio's exposure to these businesses.
The total return proposition of owning energy-related MLPs has been and
continues to be their yield plus their growth. The yield of the MLPs - weighted
by market capitalization - on November 30, 2008, was about 12%, based on our
study of the energy-related MLP universe. The growth in the quarterly cash
distributions that make up this yield has averaged about 7% annually over the
last ten years. This average growth rate was about 12% in 2007 and 10% in 2008.
We believe the growth in MLP cash distributions has been higher than the
long-term average primarily because of the profitable organic growth
opportunities available today, including the construction of new pipeline and
storage infrastructure to serve the rapid growth of oil production out of
Canada's oil sands development, the growth in onshore natural gas production
from the application of new technologies in areas like the Rocky Mountains and
the Fort Worth Basin in Texas, increased imports of crude oil and liquid natural
gas, and increased demand for motor fuel additives like ethanol and bio-diesel.
The MLPs as a group have done a great job capitalizing on these opportunities.
Nonetheless, the credit crisis, combined with slower capital spending by the
customers of infrastructure MLPs (oil and gas producers and refiners) have
caused many MLPs to slow their own capital spending plans. We think this will
cause recent growth rates to slow down to more historic levels.
The market is only now beginning to discern the differences in the underlying
cash flows of MLPs. We believe the MLPs with stable fee-for-service revenues,
conservative balance sheets and payout ratios, quality assets and perhaps most
importantly, quality managements, will generate superior returns. Our view is
that a current yield of over 10% combined with growth that has averaged over 7%
for the last ten years is attractive relative to the risks.
Page 5
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) (i)
NOVEMBER 30, 2008
SHARES DESCRIPTION VALUE
--------- ------------------------------------------------- ------------
MASTER LIMITED PARTNERSHIPS - 109.0%
OIL, GAS & CONSUMABLE FUELS - 109.0%
25,000 Buckeye GP Holdings, L.P. ....................... $ 352,500
465,471 Clearwater Natural Resources, L.P. (b) (c) (f) .. 2,792,826
168,050 Copano Energy, LLC .............................. 2,018,280
140,065 Crosstex Energy, L.P. ........................... 837,589
74,300 Duncan Energy Partners, L.P. .................... 959,956
130,947 Enbridge Energy Partners, L.P. .................. 3,699,253
7,582 Encore Energy Partners, L.P. .................... 109,105
70,000 Energy Transfer Equity, L.P. .................... 1,154,300
283,870 Energy Transfer Partners, L.P. .................. 9,404,613
232,803 Enterprise GP Holdings, L.P. .................... 4,348,760
459,998 Enterprise Product Partners, L.P. ............... 9,830,157
83,709 EV Energy Partner, L.P. ......................... 1,104,959
56,293 Global Partners, L.P. ........................... 641,740
53,100 Hiland Partners, L.P. ........................... 552,240
242,700 Holly Energy Partners, L.P. ..................... 4,856,427
147,836 Inergy Holdings, L.P. ........................... 3,030,638
138,864 Inergy, L.P. .................................... 2,310,697
205,771 Kinder Morgan Energy Partners, L.P. ............. 9,977,836
238,239 Magellan Midstream Holdings, L.P. ............... 3,287,698
377,756 Magellan Midstream Partners, L.P. ............... 11,340,235
114,719 MarkWest Energy Partners, L.P. .................. 1,464,962
102,788 Natural Resource Partners, L.P. ................. 1,708,336
190,126 NuStar Energy, L.P. ............................. 7,567,015
50,000 NuStar GP Holdings, LLC ......................... 812,000
104,630 ONEOK Partners, L.P. ............................ 4,878,897
70,000 Penn Virginia Resource Partners, L.P. ........... 910,000
273,921 Plains All American Pipeline, L.P. .............. 9,365,359
10,000 Quicksilver Gas Services, L.P. .................. 87,400
15,000 Sunoco Logistics Partners, L.P. ................. 667,050
168,200 Targa Resources Partners, L.P. .................. 1,458,294
76,200 Williams Partners, L.P. ......................... 1,069,848
60,000 Williams Pipeline Partners, L.P. ................ 885,000
------------
TOTAL MASTER LIMITED PARTNERSHIPS ............... 103,483,970
------------
(Cost $99,681,243)
COMMON STOCKS - 18.8%
GAS UTILITIES - 10.4%
218,000 ONEOK, Inc. ..................................... 6,396,120
149,800 UGI Corp. (d) ................................... 3,499,328
------------
9,895,448
------------
OIL, GAS & CONSUMABLE FUELS - 8.2%
53,014 Enbridge Energy Management, LLC (e) ............. 1,495,525
1,528 Kinder Morgan Management, LLC (e) ............... 63,027
144,500 Spectra Energy Corp. (d) ........................ 2,349,570
235,300 Williams Companies, Inc. (h) .................... 3,816,566
------------
7,724,688
------------
See Notes to Financial Statements.
Page 6
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) (i) - (CONTINUED)
NOVEMBER 30, 2008
SHARES DESCRIPTION VALUE
--------- ------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
CAPITAL MARKETS - 0.2%
20,000 NGP Capital Resources Co. ....................... $ 196,600
------------
TOTAL COMMON STOCKS ............................. 17,816,736
------------
(Cost $25,410,220)
RIGHTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
17 Clearwater Natural Resources, L.P. - Rights
(b) (c) (f) .................................. 0
------------
TOTAL RIGHTS .................................... 0
------------
(Cost $0)
WARRANTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
48,956 Abraxas Petroleum Corp. - Warrants, Expiration
05/25/12 (b) (c) (f) ......................... 13,879
------------
TOTAL WARRANTS .................................. 13,879
------------
(Cost $0)
TOTAL INVESTMENTS - 127.8% ...................... 121,314,585
(Cost $125,091,463) (g)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (0.2%)
Spectra Energy Corp.
23 @ 20 due Dec 08 ................................. (230)
922 @ 30 due Dec 08 ................................. (4,610)
500 @ 25 due Jan 09 ................................. (5,000)
------------
(9,840)
------------
UGI Corp.
1, 198 @ 30 due Jan 09 ................................. (29,950)
300 @ 25 due Apr 09 ................................. (52,500)
------------
(82,450)
------------
Williams Companies, Inc.
1,150 @ 32.5 due Feb 09 ............................... (8,625)
453 @ 25 due May 09 ................................. (53,228)
------------
(61,853)
------------
TOTAL CALL OPTIONS WRITTEN ...................... (154,143)
(Premiums received $534,868)
NET OTHER ASSETS AND LIABILITIES - 4.6% ......... 4,369,888
LOAN OUTSTANDING - (5.9)% ....................... (5,650,000)
SERIES B ENERGY NOTES PAYABLE - (26.3)% ......... (25,000,000)
------------
NET ASSETS - 100.0% ............................. $ 94,880,330
============
See Notes to Financial Statements.
Page 7
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) (i) - (CONTINUED)
NOVEMBER 30, 2008
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Securities are 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 in the Notes to Financial
Statements).
(c) This security is fair valued in accordance with procedures adopted by the
Fund's Board of Trustees.
(d) Call options were written on this entire Common Stock position. All Common
Stock relating to this call position are pledged as collateral.
(e) Non-income producing security which pays regular in-kind distributions.
(f) Non-income producing security.
(g) Aggregate cost for federal income tax purposes is $111,877,690. As of
November 30, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$35,277,082 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$25,840,187.
(h) Call options were written on a portion of the Common Stock position. The
underlying portion of this Common Stock position is pledged as collateral.
(i) All or a portion of the securities are available to serve as collateral on
loans outstanding.
SECURITY VALUATION INPUTS
A summary of the inputs used to value the Fund's total investments as of
November 30, 2008 is as follows (See Note 2A -Portfolio Valuation in Notes to
Financial Statements):
VALUATION INPUTS INVESTMENTS
---------------- ------------
Level 1 - Quoted Prices - Investments $118,507,880
Level 1 - Written Options (154,143)
Level 2 - Other Significant Observable Inputs --
Level 3 - Significant Unobservable Inputs 2,806,705
------------
TOTAL $121,160,442
============
The following table presents the activity of 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 USING
UNOBSERVABLE INPUTS INVESTMENTS
------------------------------- ------------
Balance as of November 30, 2007 $ 6,607,540
Change in unrealized appreciation (depreciation) (3,800,835)
------------
BALANCE AS OF NOVEMBER 30, 2008 $ 2,806,705
============
See Notes to Financial Statements.
Page 8
ENERGY INCOME AND GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2008
ASSETS:
Investments, at value
(Cost $125,091,463) ......................................................... $121,314,585
Cash ........................................................................... 4,448,281
Prepaid expenses ............................................................... 336,243
Receivables:
Investment securities sold .................................................. 1,592,512
Income taxes ................................................................ 3,511,711
Interest .................................................................... 385
Dividends ................................................................... 72,775
------------
Total Assets ............................................................. 131,276,492
------------
LIABILITIES:
Deferred income tax liability .................................................. 3,037,127
Series B Energy Notes payable .................................................. 25,000,000
Outstanding loan ............................................................... 5,650,000
Options written, at value (Premiums received $534,868) ......................... 154,143
Payables:
Investment securities purchased ............................................. 1,878,630
Investment advisory fees .................................................... 109,794
Audit and tax fees .......................................................... 107,000
Interest and fees due on loan and Energy Notes .............................. 102,415
Legal fees .................................................................. 42,006
Printing fees ............................................................... 22,088
Administration fees ......................................................... 10,430
Trustees' fees and expenses ................................................. 7,497
Custodian fees .............................................................. 5,473
Transfer agent fees ......................................................... 2,768
Income taxes ................................................................ 264,291
Accrued expenses and other liabilities ......................................... 2,500
------------
Total Liabilities ........................................................ 36,396,162
------------
NET ASSETS ..................................................................... $ 94,880,330
============
NET ASSETS CONSIST OF:
Paid-in capital ................................................................ $109,328,172
Par value ...................................................................... 64,622
Accumulated net investment income (loss), net of income taxes .................. (11,294,440)
Accumulated net realized gain (loss) on investments and written options, net of
income taxes ................................................................ (1,684,255)
Net unrealized appreciation (depreciation) of investments and written options,
net of income taxes ......................................................... (1,533,769)
------------
Total Net Assets ......................................................... $ 94,880,330
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) ........... $ 14.68
============
Number of Common Shares outstanding (unlimited number of Common Shares has been
authorized) ................................................................. 6,462,221
============
See Notes to Financial Statements.
Page 9
ENERGY INCOME AND GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2008
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $102,994) ......................... $ 1,388,814
Interest ....................................................................... 41,883
-------------
Total investment income .................................................. 1,430,697
-------------
EXPENSES:
Interest expense ............................................................... 3,317,272
Investment advisory fees ....................................................... 2,125,192
Insurance expense .............................................................. 289,553
Legal fees ..................................................................... 232,611
Administration fees ............................................................ 205,401
Auction fees ................................................................... 90,459
Audit and tax fees ............................................................. 89,503
Energy Notes offering costs .................................................... 436,140
Printing fees .................................................................. 61,787
Custodian fees ................................................................. 41,105
Transfer agent fees ............................................................ 37,601
Trustees' fees and expenses .................................................... 36,174
Other .......................................................................... 113,795
-------------
Total expenses ........................................................... 7,076,593
-------------
NET INVESTMENT INCOME (LOSS) BEFORE TAXES ...................................... (5,645,896)
-------------
Current federal income tax expense ....................................... (1,877,031)
Current state and foreign income tax expense ............................. (335,499)
Deferred federal income tax benefit ...................................... 4,144,073
----------
Total income tax benefit (expense) ....................................... 1,931,543
-------------
NET INVESTMENT LOSS ............................................................ (3,714,353)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) before taxes on:
Investments ................................................................. 11,806,528
Written options ............................................................. 976,955
Foreign currency ............................................................ (17,725)
-------------
Net realized gain (loss) before taxes .......................................... 12,765,758
-------------
Deferred federal income tax expense ...................................... (4,504,190)
----------
Total income tax expense ................................................. (4,504,190)
-------------
Net realized gain (loss) on investments, written options and foreign currency .. 8,261,568
-------------
Net change in unrealized appreciation (depreciation) before taxes on:
Investments .............................................................. (111,377,664)
Written options .......................................................... 380,726
Foreign currency ......................................................... (8,493)
Interest rate cap ........................................................ 191,024
-------------
Net change in unrealized appreciation (depreciation) before taxes .............. (110,814,407)
-------------
Deferred federal income tax benefit ...................................... 38,779,690
Deferred state and foreign income tax benefit ............................ 379,887
----------
Total income tax benefit ................................................. 39,159,577
-------------
Net change in unrealized appreciation (depreciation) ........................... (71,654,830)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ........................................ (63,393,262)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................ $ (67,107,615)
=============
See Notes to Financial Statements.
Page 10
ENERGY INCOME AND GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
11/30/2008 11/30/2007
------------ ------------
OPERATIONS:
Net investment income (loss) ............................................... $ (3,714,353) $ (4,351,425)
Net realized gain (loss) ................................................... 8,261,568 12,549,338
Net change in unrealized appreciation (depreciation) ....................... (71,654,830) 7,204,535
------------ ------------
Net increase (decrease) in net assets resulting from operations ............ (67,107,615) 15,402,448
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain on investments ........................................... (10,702,017) (9,831,668)
------------ ------------
Total distributions to shareholders ........................................ (10,702,017) (9,831,668)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested ..................................... 269,029 --
------------ ------------
Total capital transactions ................................................. 269,029 --
------------ ------------
Net increase (decrease) in net assets ...................................... (77,540,603) 5,570,780
NET ASSETS:
Beginning of year .......................................................... 172,420,933 166,850,153
------------ ------------
End of year ................................................................ $ 94,880,330 $172,420,933
============ ============
Accumulated net investment income (loss), net of income taxes .............. $(11,294,440) $ (7,580,087)
============ ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of year ......................................... 6,446,995 6,446,995
Common Shares issued as reinvestment under the Dividend Reinvestment Plan .. 15,226 --
------------ ------------
Common Shares at end of year ............................................... 6,462,221 6,446,995
------------ ------------
See Notes to Financial Statements.
Page 11
ENERGY INCOME AND GROWTH FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations ................. $(67,107,615)
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided from operating
activities:
Purchases of investments .......................................... (90,528,702)
Sales of investments .............................................. 142,784,249
Proceeds from options written ..................................... 2,951,598
Cost to close written options ..................................... (1,439,774)
Return of capital received from investments in MLPs ............... 14,356,974
Net realized gain on investments and options ...................... (12,783,483)
Net change in unrealized appreciation (depreciation) on investments
and options .................................................... 110,996,938
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest rate cap (a) ................................. 76,609
Increase in income tax receivable ................................. (3,398,506)
Increase in interest receivable ................................... (385)
Decrease in dividends receivable .................................. 15,607
Decrease in prepaid expenses ...................................... 411,197
Decrease in receivable for investment securities sold ............. 4,861,403
Decrease in payable for investment securities purchased ........... (6,883,848)
Decrease in interest and fees due on loan and Energy Notes ........ (47,233)
Increase in income tax payable .................................... 205,341
Decrease in investment advisory fees payable ...................... (93,457)
Decrease in audit and tax fees payable ............................ (7,998)
Decrease in legal fees payable .................................... 27,115
Decrease in printing fees payable ................................. (4,755)
Decrease in administrative fees payable ........................... (6,958)
Decrease in transfer agent fees payable ........................... (319)
Increase in custodian fees payable ................................ 2,259
Decrease in Trustees' fees and expenses payable ................... (3,033)
Increase in accrued expenses ...................................... 1,968
Decrease in deferred income tax liability ......................... (38,799,917)
------------
CASH PROVIDED FROM OPERATING ACTIVITIES .............................. $ 55,585,275
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Distributions paid ................................................ (10,702,017)
Proceeds of Common Shares reinvested .............................. 269,029
Issuance of loan .................................................. 47,000,000
Repayment of loan ................................................. (56,600,000)
Redemption of Series A Energy Notes ............................... (34,000,000)
------------
CASH FLOWS FROM FINANCING ACTIVITIES ................................. (54,032,988)
------------
Increase in cash ..................................................... 1,552,287
Cash at beginning of year ............................................ 2,895,994
------------
Cash at end of year .................................................. $ 4,448,281
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ............................. $ 3,364,505
============
Cash paid during the period for taxes ................................ $ 5,508,690
============
----------
(a) Includes net changes in unrealized appreciation (depreciation) on interest
rate cap of $191,024.
See Notes to Financial Statements.
Page 12
ENERGY INCOME AND GROWTH FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
11/30/2008 11/30/2007 (a) 11/30/2006 11/30/2005 11/30/2004 (b)
---------- -------------- ---------- ---------- --------------
Net asset value, beginning of period ............ $ 26.74 $ 25.88 $ 22.53 $ 21.34 $ 19.10(c)
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss ............................. (0.57) (0.67) (0.50) (0.34) (0.13)
Net realized and unrealized gain (loss) ......... (9.83) 3.06 5.23 2.86 2.74
-------- -------- -------- -------- --------
Total from investment operations after income
tax .......................................... (10.40) 2.39 4.73 2.52 2.61
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain ............................... (1.66) (1.53) -- (0.88) --
Return of capital ............................... -- -- (1.38) (0.45) (0.33)
-------- -------- -------- -------- --------
Total from distributions ........................ (1.66) (1.53) (1.38) (1.33) (0.33)
-------- -------- -------- -------- --------
Common Share offering costs charged to paid-in
capital ...................................... -- -- -- -- (0.04)
-------- -------- -------- -------- --------
Net asset value, end of period .................. $ 14.68 $ 26.74 $ 25.88 $ 22.53 $ 21.34
======== ======== ======== ======== ========
Market value, end of period ..................... $ 14.40 $ 23.82 $ 24.49 $ 20.92 $ 22.12
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (d) (e) ... (40.70)% 9.38% 22.23% 11.96%(g) 13.53%
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (e) (f) ...... (34.74)% 2.96% 24.57% 0.29% 12.38%
======== ======== ======== ======== ========
Net assets, end of year (in 000's) .............. $ 94,880 $172,421 $166,850 $145,230 $136,993
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes
before waiver (h) ............................ (20.03)% 8.52% 14.47% 8.62% 18.38%(i)
Including current and deferred income taxes
after waiver (h) ............................. (20.03)% 8.52% 14.29% 8.31% 18.09%(i)
Excluding current and deferred income taxes
before waiver ................................ 4.80% 3.94% 3.63% 2.64% 2.20%(i)
Excluding current and deferred income taxes
after waiver ................................. 4.80% 3.94% 3.45% 2.33% 1.91%(i)
Excluding current and deferred income taxes
and interest expense after waiver ............ 2.55% 1.89% 1.76% 1.57% 1.36%(i)
RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE
NET ASSETS:
Net investment loss ratio before tax expenses ... (3.83)% (3.83)% (3.26)% (2.29)% (1.49)%(i)
Net investment income (loss) ratio including tax
expenses (j) ................................. 21.00% (8.41)% (14.10)% (8.27)% (17.67)%(i)
Portfolio turnover rate ......................... 38% 16% 17% 38% 35%
SENIOR SECURITIES:
Total Energy Notes outstanding ($25,000 per
note) ........................................ 1,000 2,360 2,360 1,360 N/A
Principal amount and market value per Energy
Note (k) ..................................... $ 25,006 $ 25,004 $ 25,069 $ 25,074 N/A
Asset coverage per Energy Note (l) .............. $119,880 $ 98,060 $ 95,699 $131,786 N/A
Total loan outstanding (in 000's) ............... $ 5,650 $ 15,250 N/A N/A $ 30,000
Asset coverage per $1,000 senior indebtedness ... $ 22,218(m) $ 12,306(n) N/A N/A $ 5,566(n)
----------
(a) On September 14, 2007, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Energy Income Partners, LLC.
(b) Initial seed date of June 17, 2004. The Fund commenced operations on
June 24, 2004.
(c) Net of sales load of $0.90 per Common Share on initial offering.
(d) 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.
(e) Total return is not annualized for periods less than one year.
(f) 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.
(g) 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.
(h) Includes current and deferred income taxes associated with each component
of the Statement of Operations.
(i) Annualized.
(j) Includes tax expenses associated with each component of the Statement of
Operations.
(k) Includes accumulated and unpaid interest.
(l) 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.
(m) 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 and fiscal year
2004 remains unchanged.
(n) 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.
N/A Not applicable.
See Notes to Financial Statements
Page 13
NOTES TO FINANCIAL STATEMENTS
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008
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 Alternext US (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 (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. Prior
to August 1, 2008, the NAV was calculated at least weekly on Friday of each week
and on each month-end rather than daily. 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 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 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.
The Fund's investments are valued 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. 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.
In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements ("FAS 157")
effective for fiscal years beginning after November 15, 2007. This standard
clarifies the definition of fair value for financial reporting, establishes a
framework for measuring fair value and requires additional disclosures about the
use of fair value measurements. FAS 157 became effective for the Fund as of
December 1, 2007, the beginning of its current fiscal year. The three levels of
the fair value hierarchy under FAS 157 are described below:
- Level 1 - quoted prices in active markets for identical investments
- Level 2 - other significant observable inputs (including quoted prices
for similar investments, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
Page 14
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008
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, 2008 is
included in the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
COVERED OPTIONS. 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 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.
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.
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 dividend income.
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, 2008 shown in the following table. The
Fund does not have the right to demand that such securities be registered.
Restricted securities are valued at fair value in accordance with procedures
adopted by the Fund's Board of Trustees and in accordance with provisions of the
1940 Act.
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008
ACQUISITION VALUE PER CARRYING % OF
SECURITY DATE SHARES SHARE COST VALUE NET ASSETS
-------- ----------- ------- --------- ---------- ---------- ----------
Clearwater Natural Resources, L.P. 08/01/05 465,471 $6.00 $8,601,560 $2,792,826 2.94%
Clearwater Natural Resources, L.P.
Rights 08/01/05 17 0.00 0 0 0.00
Abraxas Petroleum Corp. - Warrants 05/25/07 48,956 0.28 0 13,879 0.01
------- ---------- ---------- ----
514,444 $8,601,560 $2,806,705 2.95%
======= ========== ========== ====
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 determined 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 $10,702,017 and $9,831,668 paid during the years ended November
30, 2008 and 2007, respectively, are anticipated to be characterized as a
taxable dividend for federal income tax purposes. However, the ultimate
determination of the character of the distributions will be made after the 2008
calendar year. 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.
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, 2008, distributions of $14,356,974 received from MLPs have
been reclassified as a return of capital. The cost basis of applicable MLPs has
been reduced accordingly.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008
The Fund's provision for income taxes is calculated in accordance with SFAS No.
109 Accounting for Income Taxes and consists of the following:
Current federal income tax expense ...... $(1,877,031)
Current other tax expense ............... (335,499)
Deferred federal income tax benefit ..... 38,419,573
Deferred other income tax benefit ....... 379,887
-----------
Total income tax benefit ................ $36,586,930
===========
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, 2008, the Fund
had a net operating loss for federal and state income tax purposes of $0 and
$5,594,182, respectively. The Fund's 2008 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, 2008 are as follows:
DEFERRED TAX ASSETS:
Federal net operating loss ................. $ --
State net operating loss ................... 323,241
Other ...................................... 372,011
----------
Total deferred tax assets .................. 695,252
Less: valuation allowance .................. (323,241)
----------
Net deferred tax assets .................... $ 372,011
==========
DEFERRED TAX LIABILITIES:
Unrealized gains on investment securities .. $3,407,666
State income taxes ......................... 1,472
----------
Total deferred tax liabilities ............. 3,409,138
----------
Total net deferred tax liabilities ......... $3,037,127
==========
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 .... $(36,293,091)
State income taxes, net ..................... 28,883
Change in valuation allowance ............... (83,702)
Other ....................................... (239,020)
------------
Total ....................................... $(36,586,930)
============
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes.
FIN 48 establishes 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. Tax years 2004, 2005 and 2006 remain open to federal and state
examination. The Internal Revenue Service initiated a corporate income tax audit
during the first quarter of 2008 for the Company's 2004 tax year. The audit is
still ongoing. No adjustments have been proposed to date, and the Company
expects the examination to last through the second quarter of 2009. As of
November 30, 2008, management has evaluated the application of FIN 48 to the
Fund, and has determined that no provision for income tax is required in the
Fund's financial statements relative to uncertain tax positions.
G. EXPENSES:
The Fund will pay all expenses directly related to its operations.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008
H. INTEREST RATE CAP:
The Fund had an interest rate cap transaction with Lehman Brothers Special
Financing Inc. for the purpose of limiting the impact that higher short-term
interest rates would have on the leverage costs of the Fund. The transaction had
a notional amount of $34,000,000 and a cap rate of 5.00% per annum based upon
one-month LIBOR, which reset monthly. The termination date was May 3, 2010. The
interest rate cap was marked to market with the change in value reflected in
"Net change in unrealized appreciation (depreciation) before taxes on interest
rate cap" on the Statement of Operations. The initial cost of the transaction,
$552,500, was capitalized and was being amortized to expense on a straight line
basis over the term of the transaction. This interest rate cap transaction was
terminated on November 5, 2008.
I. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161
("FAS 161"), "Disclosures about Derivative Instruments and Hedging Activities".
FAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit
risk-related contingent features in derivative agreements. The application of
FAS 161 is required for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. Management is currently evaluating
the impact the adoption of FAS 161 will have on the Fund's financial statement
disclosures, if any.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
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 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.
Energy Income Partners, LLC serves as the Fund's Sub-Advisor and manages the
Fund's portfolio subject to First Trust's supervision. The Sub-Advisor receives
an annual portfolio management fee of 0.50% of Managed Assets that is paid
monthly by First Trust.
PNC Global Investment Servicing (U.S.) Inc., formerly known as PFPC Inc., an
indirect majority-owned subsidiary of the PNC Financial Services Group, serves
as the Fund's Administrator, Fund Accountant, Transfer Agent and Board
Administrator 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, and the
Audit Committee Chairman is paid $5,000 annually, 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. Effective
January 1, 2008, each of the chairmen of the Nominating and Governance Committee
and the Valuation Committee are paid $2,500 to serve in such capacities, with
such compensation paid by the trusts in the First Trust Fund Complex and divided
among those trusts. Also effective January 1, 2008, the Lead Independent Trustee
and each committee chairman will serve two-year terms. The officers and
"Interested" Trustee received 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, 2008, were $90,528,702
and $142,784,249, respectively.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
--------------- --------- -----------
Options outstanding at November 30, 2007 -- $ --
Options written 19,098 2,951,598
Options expired (5,553) (863,388)
Options exercised (948) (138,841)
Options closed (8,051) (1,414,501)
------- -----------
Options outstanding at November 30, 2008 4,546 $ 534,868
------- -----------
5. COMMON SHARES
As of November 30, 2008, 6,462,221 of $0.01 par value Common Shares were issued
and outstanding. An unlimited number of Common Shares has been authorized for
the Fund's Dividend Reinvestment Plan.
6. ENERGY NOTES
The Fund's Declaration of Trust authorizes the issuance of notes as determined
by the Board of Trustees without the approval of Common Shareholders. As of
November 30, 2008, the Fund has 1,000 Series B Energy Notes outstanding at a
principal value of $25,000 per note. The principal amount of the Series B Energy
Notes will be due and payable on March 30, 2046.
An auction of the Series B Energy Notes is generally held every 7 days. The
Series B Energy Notes will pay interest at annual rates that may vary for each
auction rate period. Existing note holders may submit an order to buy, sell or
hold such notes on each auction date.
The markets for auction rate securities have continued to experience a number of
failed auctions, including auctions relating to the Series B Energy Notes. A
failed auction results when there are not enough bidders in the auction at rates
below the maximum rate as prescribed by the terms of the security. When an
auction fails, the rate is automatically set at the maximum rate. A failed
auction does not cause an acceleration of, or otherwise have any impact on,
outstanding principal amounts due. In the case of the Fund's outstanding Series
B Notes, the maximum rate under the terms of those securities has been two
hundred percent (and could be up to three hundred percent, depending on the
ratings of the Series B Energy Notes) of the greater of: (1) the applicable AA
composite commercial paper rate (for a rate period of fewer than 184 days) or
the applicable U.S. Treasury index rate (for a rate period of 184 days or more),
or (2) the applicable London-InterBank Offered Rate.
The Series B Energy Notes' annual interest rate in effect as of November 30,
2008 was 2.90%. The interest rate, as set by the auction process, is generally
expected to vary with short-term interest rates. The high and low annual
interest rates during the year ended November 30, 2008 were 9.03% and 2.80%,
respectively, and the average interest rate was 5.35%.
The Series A Energy Notes were redeemed in full on April 18, 2008 in the
principal amount of $34,000,000. The redemption of Series A Energy Notes was
financed through a credit agreement with The Bank of Nova Scotia (see Note 8
below). At the time of the refinancing, the Fund had unamortized offering costs
of $123,205 and commissions of $312,935, respectively. Because the Series A
Energy Notes were redeemed prior to the maturity date of March 2, 2045, the
combined amount of $436,140 was expensed on April 18, 2008. This is shown on the
Statement of Operations under "Energy Notes Offering Costs."
7. LINE OF CREDIT WITH CUSTODIAL TRUST COMPANY
The Fund had an uncommitted line of credit with the Custodial Trust Company
pursuant to a loan and pledge agreement, under which the Fund may borrow from
the Custodial Trust Company an aggregate amount of up to the lesser of
$30,000,000 or the maximum amount the Fund is permitted to borrow under the 1940
Act. The loan and pledge agreement had no maturity date and could be paid or
called at any time.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008
On March 26, 2008, the line of credit was paid in full in the amount of
$11,250,000, which was the outstanding principal balance. This was funded
through a credit agreement with The Bank of Nova Scotia (see Note 8 below). For
the year ended November 30, 2008, the average amount outstanding between
December 1, 2007 and March 25, 2008 was $15,215,517 with a weighted average
interest rate of 5.03%. As of November 30, 2008, the Fund had no outstanding
borrowings under this loan and pledge agreement. The high and low annual
interest rates during the year ended November 30, 2008 were 5.87% and 3.61%,
respectively.
8. CREDIT AGREEMENT WITH THE BANK OF NOVA SCOTIA
On March 26, 2008, the Fund entered into a credit agreement with The Bank of
Nova Scotia that has a maximum commitment amount of $55,000,000. This credit
agreement is scheduled to terminate on March 26, 2009 and may be renewed
annually.
This credit facility was used to repay the Custodial Trust Company line of
credit in full in the amount of $11,250,000 on March 26, 2008. In addition, The
Bank of Nova Scotia credit facility was used to redeem in full the Series A
Energy Notes in the principal amount of $34,000,000 on April 18, 2008.
For the year ended November 30, 2008, the average amount outstanding between
March 26, 2008 and November 30, 2008 was $35,523,600 with a weighted average
interest rate of 3.80%. As of November 30, 2008, the Fund had $5,650,000
outstanding borrowings under this credit agreement, of which $4,150,000 had an
interest rate of 4.51% and $1,500,000 had an interest rate of 4.81%. The high
and low annual interest rates during the period March 26, 2008 through November
30, 2008 were 6.00% and 3.24%, respectively. On January 23, 2009, outstanding
borrowings under the credit agreement were paid in full in the amount of
$8,150,000. This was funded through proceeds made available from the committed
facility agreement with BNP Paribas Prime Brokerage Inc. (See Note 11).
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.
In 2008, securities markets have been significantly negatively affected by the
financial crisis that initially resulted from the downturn in the subprime
mortgage market in the United States. The potential impact of the financial
crisis on securities markets may prove to be significant and long-lasting and
may have a substantial impact on the value of the Fund.
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.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008
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, or obtained through the issuance of Energy Notes, 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. The rights of
lenders to receive payments of interest on and repayments of principal on any
borrowings made by the Fund under a leverage borrowing program are senior to the
rights of holders of Common Shares and the holders of Energy Notes, with respect
to the payment of dividends or upon 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, including dividends and
distributions with respect to Common Shares or Energy Notes or purchase Common
Shares or Energy Notes.
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 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
On January 12, 2009, the Fund declared a dividend of $0.44 per share to Common
Shareholders of record January 23, 2009, payable January 30, 2009.
On January 23, 2009, the Fund entered into a committed facility agreement with
BNP Paribas Prime Brokerage Inc. that has a maximum commitment of $60,000,000.
The committed facility required an up front payment from the Fund equal to
$150,000. Absent certain events of default or failure to maintain certain
collateral requirements, BNP Paribas Prime Brokerage Inc. may not terminate the
facility agreement except upon 180 calendar days prior notice. The borrowing
rate under the facility will be equal to the 3-month LIBOR plus 150 basis
points. On January 23, 2009, the committed facility was used to repay in full
outstanding borrowings under a credit agreement with The Bank of Nova Scotia in
the amount of $8,150,000.
Page 21
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 of Energy
Income and Growth Fund (the "Fund"), including the portfolio of investments, as
of November 30, 2008, the related statements of operations and cash flows for
the year then ended, the statement 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, 2008, by correspondence with the Fund's
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. 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, 2008, the results of its operations
and cash flows for the year then ended, 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 23, 2009
Page 22
ADDITIONAL INFORMATION
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008 (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 Alternext US
(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 23
ADDITIONAL INFORMATION - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008 (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
A Special Meeting of Shareholders of the Common Shares of the Fund was held on
January 8, 2008. At the meeting Shareholders approved a new investment
sub-advisory agreement with EIP. EIP had been serving as investment sub-advisor
to the Fund pursuant to an interim sub-advisory agreement among the Fund, First
Trust and EIP since September 14, 2007. The number of votes cast in favor of the
new investment sub-advisory agreement was 2,986,720, the number of votes cast
against the new investment sub-advisory agreement was 182,668, and the number of
abstentions was 134,526.
The Special Meeting of Shareholders was adjourned until February 20, 2008, at
which time Shareholders approved a proposal to authorize the sale of Common
Shares at a net price less than the then-current NAV per Common Share, subject
to certain conditions. The number of Common Share votes cast in favor of the
proposal was 3,279,325, the number of Common Share votes cast against the
proposal was 487,801, and the number of abstentions was 166,813. The number of
accounts that voted in favor of the proposal was 4,443, the number of accounts
that voted against the proposal was 669, and the number of abstained accounts
was 251.
The Joint Annual Meetings 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/Aberdeen Emerging Opportunity
Fund, First Trust/Gallatin Specialty Finance and Financial Opportunities Fund
and First Trust Active Dividend Income Fund was held on April 14, 2008. At the
Annual Meeting, Trustee Keith was elected for a three-year term. The number of
votes cast in favor of Robert F. Keith was 5,656,037, the number of votes
against was 98,524 and the number of abstentions was 692,435. James A. Bowen,
Richard E. Erickson, Thomas R. Kadlec and Niel B. Nielson are the current and
continuing Trustees.
Page 24
BOARD OF TRUSTEES AND OFFICERS
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN
PRINCIPAL THE FIRST TRUST OTHER
NAME, ADDRESS, OCCUPATIONS FUND COMPLEX TRUSTEESHIPS OR
DATE OF BIRTH AND TERM OF OFFICE AND DURING OVERSEEN BY DIRECTORSHIPS
POSITION WITH THE FUND LENGTH OF SERVICE(1) PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
----------------------------- -------------------- -------------------------- --------------- ------------------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - Two Year Term Physician; President, 60 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 - Two Year Term Senior Vice President and 60 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 Director of Archer
Suite 400 Vice President and Chief Financial Services, Inc.
Wheaton, IL 60187 Financial Officer (1990 to
D.O.B.: 11/57 May 2007), ADM
Investor Services, Inc.
(Futures Commission
Merchant); President
(May 2005 to Present),
ADM Derivatives, Inc.;
Registered Representative
(2000 to Present),
Segerdahl & Company,
Inc., a FINRA member
(Broker-Dealer)
Robert F. Keith, Trustee - Three Year Term President (2003 to 60 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 President (2001 to 2003),
D.O.B.: 11/56 Aramark Management
Services LP; President
and Chief Operating
Officer (1998 to 2003),
ServiceMaster
Management Services LP
----------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2011 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are each serving as trustees
until the Fund's 2009 annual meeting of shareholders. James A. Bowen and
Niel B. Nielson, as Class III Trustees, are each serving as trustees until
the Fund's 2010 annual meeting. Officers of the Fund have an indefinite
term.
Page 25
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN
PRINCIPAL THE FIRST TRUST OTHER
NAME, ADDRESS, OCCUPATIONS FUND COMPLEX TRUSTEESHIPS OR
DATE OF BIRTH AND TERM OF OFFICE AND DURING OVERSEEN BY DIRECTORSHIPS
POSITION WITH THE FUND LENGTH OF SERVICE(1) PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
----------------------------- ------------------------ -------------------------- --------------- ------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Niel B. Nielson, Trustee - Three Year Term President (June 2002 to 60 Director of Covenant
c/o First Trust Advisors L.P. - Since Fund Present), Covenant Transport Inc.
120 E. Liberty Drive, Inception College
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
INTERESTED TRUSTEE
James A. Bowen(2), Trustee, - Three Year Trustee President, First Trust 60 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/Broker-
Dealer/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,
120 E. Liberty Drive, Chief Financial Officer - Since Fund First Trust Advisors L.P.
Suite 400 and Chief Accounting Inception and First Trust Portfolios
Wheaton, IL 60187 Officer L.P.; Chief Financial
D.O.B.: 11/57 Officer, BondWave LLC
(Software Development
Company/Broker-
Dealer/Investment Advisor)
and Stonebridge Advisors
LLC (Investment Advisor)
----------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2011 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are each serving as trustees
until the Fund's 2009 annual meeting of shareholders. James A. Bowen and
Niel B. Nielson, as Class III Trustees, are each serving as trustees until
the Fund's 2010 annual meeting. 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 26
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008 (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)
James M. Dykas Assistant Treasurer - Indefinite Term Senior Vice President (April 2007 to
120 E. Liberty Drive, - Since December 2005 Present), Vice President (January 2005
Suite 400 to April 2007), First Trust Advisors
Wheaton, IL 60187 L.P. and First Trust Portfolios L.P.;
D.O.B.: 01/66 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 2006
120 E. Liberty Drive, - Since December 2006 to Present), Associate (January 2005
Suite 400 to August 2006), First Trust Advisors
Wheaton, IL 60187 L.P. and First Trust Portfolios L.P.;
D.O.B.: 04/79 Municipal Bond Trader (July 2001 to
January 2005), BondWave LLC
(Software Development Company/
Broker-Dealer/Investment Advisor)
W. Scott Jardine Secretary and Chief - Indefinite Term General Counsel, First Trust Advisors
120 E. Liberty Drive, Compliance Officer - Since Fund L.P. and First Trust Portfolios L.P.;
Suite 400 Inception Secretary, BondWave LLC (Software
Wheaton, IL 60187 Development Company/Broker-
D.O.B.: 05/60 Dealer/Investment Advisor) and
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 (April
Suite 400 2004 to September 2005), First Trust
Wheaton, IL 60187 Advisors L.P. and First Trust
D.O.B.: 02/70 Portfolios L.P.; Chief Operating
Officer (January 2004 to April 2004),
Mina Capital Management, LLC;
Chief Operating Officer (April 2000
to January 2004), Samaritan Asset
Management Services, Inc.
----------
(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, 2008 (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 Advisors
Suite 400 L.P. and First Trust Portfolios L.P.;
Wheaton, IL 60187 Vice President (May 1998 to January
D.O.B.: 07/58 2008), Van Kampen Asset
Management and Morgan Stanley
Investment Management
Kristi A. Maher Assistant Secretary - Indefinite Term Deputy General Counsel (May 2007 to
120 E. Liberty Drive, - Since July 2004 Present), Assistant General Counsel
Suite 400 (March 2004 to May 2007), First Trust
Wheaton, IL 60187 Advisors L.P. and First Trust
D.O.B.: 12/66 Portfolios L.P.; Associate (December
1995 to March 2004), Chapman and
Cutler LLP
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 28
PRIVACY POLICY
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2008 (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 29
(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 &
BOARD ADMINISTRATOR
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
301 Bellevue Parkway
Wilmington, DE 19809
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) There have been no amendments, during the period covered by this
report, to 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, and that relates to any
element of the code of ethics definition enumerated in paragraph (b)
of this item's instructions.
(d) The registrant has not, during the period covered by this report,
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
$93,500 for the fiscal year ended November 30, 2007 and $0 for the fiscal year
ended November 30, 2008.
(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 $3,000 for the fiscal year ended November 30, 2007 and $0 for
the fiscal year ended November 30, 2008. These fees were for additional audit
work.
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 $3,000 for the fiscal year ended November 30, 2007 and
$2,000 for the fiscal year ended November 30, 2008. These fees were for
additional audit work.
(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 $79,500
for the fiscal year ended November 30, 2007 and $47,000 for the fiscal year
ended November 30, 2008. 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, 2007 and $0 for the
fiscal year ended November 30, 2008.
(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, 2007 and
$0 for the fiscal year ended November 30, 2008.
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, 2007 and $0 for the fiscal year ended November
30, 2008.
(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, 2007, were $79,500 for the registrant and $7,000 for the
registrant's investment adviser, and for the fiscal year ended November 30,
2008, were $47,000 for the registrant and $14,143 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.
(a) 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
1.1. POLICY
EIP recognizes that voting rights have economic value and that the exercise
of such voting rights is part of its fiduciary duty. As such, it is EIP's policy
to monitor corporate actions and vote proxies on behalf of its discretionary
clients generally in accordance with these policies and procedures. EIP will
evaluate and vote issues in the best interest of its clients with a view toward
maximizing the ultimate economic value of the investment. A proxy must be voted
on behalf of all discretionary clients in a prudent manner, considering the
prevailing circumstances, and in accordance with EIP's fiduciary duty. With
respect to ERISA clients for which EIP is an investment manager, EIP will act
prudently and solely in the interest of the participants and beneficiaries of
such ERISA client. If a proxy is received after termination of EIP's services,
then the proxy will not be voted, but will be forwarded directly to the client.
EIP has contracted with Institutional Shareholder Services, Inc. ("ISS") to
provide it with proxy voting services, including, but not limited to, analyses,
research, recommendations and guidelines to assist EIP in monitoring corporate
actions and voting proxies on behalf of its clients. EIP has adopted the ISS
Proxy Voting Manual and ISS Global Proxy Voting Guidelines (hereafter, "Proxy
Voting Guidelines") as part of these policies and procedures. In addition, on an
ongoing basis, EIP will identify material conflicts of interest, if any, which
may arise between EIP and its clients as it relates to voting proxies to ensure
that all proxies are voted in the best interest of its clients. Furthermore, EIP
will review ISS's conflict procedures periodically to ascertain their adequacy.
As further described herein, EIP has assigned a Proxy Voting Administrator
to be responsible for monitoring corporate actions, conduct administrative
functions with regards to proxies, and generally vote on routine matters. In
addition, EIP has established a Proxy Voting Committee to be responsible for
resolving proxy voting issues, for making proxy voting decisions where material
conflicts of interest exist and setting policy.
1.2. PROXY VOTING GUIDELINES
EIP will generally vote proxies in accordance with the Proxy Voting
Guidelines in Appendix A. These guidelines generally provide that: (i) when
EIP's view of the issuer's management is favorable, EIP will generally support
current management initiatives with the exceptions as noted below and (ii) when
EIP's view is that changes to the management structure would probably increase
shareholder value, EIP will not support management on a variety of proposals.
- Where there is a clear conflict between management and
shareholder interests, EIP may elect to vote against management.
- In general, EIP opposes proposals, which in its view, act to
entrench management.
- In some instances, even though EIP may support management, there
are some corporate governance issues that, in spite of
management objections, EIP believes should be subject to
shareholder approval.
Furthermore, with regards to certain issues including, but not limited to,
option re-pricing and the terms and conditions of members of the Board of
Directors, EIP will vote on a case-by-case basis, which may be different than
the recommendations set forth in the Proxy Voting Guidelines. Nevertheless, in
voting all proxies, EIP will take into account what is in the best economic
interest of its clients. EIP will maintain documentation memorializing the
decision to vote a proxy in a manner different than what is stated in the Proxy
Voting Guidelines. In addition, the Proxy Voting Committee will be periodically
informed of all proxies that were not voted in accordance with the Proxy Voting
Guidelines.
There may be times when EIP believes that abstaining from voting a proxy is
in its client's best economic interest, such as when it is determined that the
cost of voting the proxy exceeds the expected benefit to the client. As an
example, voting on a foreign security may involve additional costs such as a
translator or traveling to a foreign country to vote in person. Documentation
will be maintained of all proxies that are not voted and the reasons thereof.
Any person receiving an inquiry directly from a company regarding a
particular proxy issue should immediately notify (via e-mail or other
appropriate means) the Research Coordinator. It is EIP's general policy not to
disclose its clients' ownership interests in securities or EIP's view on a
specific proxy issue.
1.3. PROXY BALLOT INFORMATION
EIP will receive proxy ballot information directly from ISS through its
VoteX platform. In the event that EIP receives any proxy ballots directly, EIP
will send such ballots to ISS to be incorporated into their electronic database.
All proxy ballots should be sent to the Proxy Voting Administrator who will be
responsible to:
1. Monitor all corporate actions.
2. Determine which clients currently hold securities of the company
subject to the proxy and the total number of shares voting authority is
held on behalf of EIP's clients as of the record date.
3. As necessary, reconcile the information obtained from ISS with the
client's positions recorded in EIP's internal accounting system. Any
discrepancies should be noted and documentation as to the resolution of
such discrepancies should be maintained.
4. Maintain a record of any proxy ballot information received. A
record of the proxies EIP receives through ISS will be maintained in the
ISS database.
5. Review the proxy ballot information.
6. Determine whether the company is on the Proxy Watch List (See
Section 1.5). If so, the proxy ballot information should be forwarded to
the Proxy Voting Committee for their review and decision.
7. Submit all instructions through the ISS VoteX platform in a timely
manner (unless submitted by the research analyst or portfolio manager).
8. Maintain a record of the votes cast. A record of the votes cast
through ISS will be maintained in the ISS database.
9. Maintain any documentation or data that was material in making a
decision regarding how to vote a proxy issue, or that memorializes the
basis for the decision, including proxies that were not voted.
1.4. PROXY VOTING RESPONSIBILITIES
The Proxy Voting Administrator will be responsible for making proxy voting
decisions on routine matters where no material conflicts of interest exist. In
making decisions, the Proxy Voting Administrator may either vote in accordance
with the Proxy Voting Guidelines or forward the proxy ballot information to the
Research Coordinator. The Research Coordinator will coordinate the proxy voting
decision-making process by providing the proxy ballot information to the
appropriate research analysts or portfolio managers (as the case may be)
responsible for covering the company. The research analysts or portfolio
managers will then be responsible for making a unanimous decision as to how the
proxy should be voted. If the research analysts or portfolio managers do not
reach a unanimous decision regarding any specific proxy issue, that proxy issue
shall be forwarded to the Proxy Voting Committee for further analysis and voting
resolution.
1.5. MATERIAL CONFLICTS OF INTEREST
Given the nature of EIP's business activities, material conflicts of
interest may arise between EIP and its clients with regards to voting proxies.
The Proxy Voting Committee will be responsible for identifying potential
material conflicts of interest. These conflicts of interest may include, but are
not limited to the following:
1. Directorships: Certain employees and/or members of such employee's
immediate household may be on the Board of Directors of public or private
companies in which EIP may invest on behalf of its clients. However, a
material conflict of interest will generally not exist in the case where
certain employees are on the Board of Directors of public or private
companies on behalf, or at the direction, of EIP. Nevertheless, EIP will
review each of these situations on a case-by-case basis to confirm that no
material conflicts of interest exist.
2. Management of Pension Plans: EIP may provide portfolio management
services, for which it may receive compensation, to the pension plan of a
public or private company in which EIP may invest on behalf of its clients.
3. Other Services: EIP may provide other services, for which it may
receive compensation, to public or private companies in which EIP may
invest on behalf of its clients.
The Proxy Voting Committee will maintain a list entitled, Proxy Watch
List, of companies in which it believes EIP may have a potential material
conflict of interest as it relates to voting proxies on behalf of its
clients. The Proxy Watch List will be updated periodically to reflect any
changes. The Proxy Voting Administrator will be provided with a copy of
this list so that he/she can properly identify these companies and forward
their proxy ballot information to the Proxy Committee.
If it is determined that a material conflict of interest exists, the
Proxy Voting Committee will vote the proxies of that company in accordance
with the Proxy Voting Guidelines unless, the Proxy Voting Committee
determines that it would not be in the best interest of EIP's clients. If a
proxy of a company where a material conflict of interest exists is not
voted in accordance with the Proxy Voting Guidelines, the Proxy Voting
Committee will be required to document the basis for their decision.
If a member of the Proxy Voting Committee has a material conflict of
interest with regards to a company for which a proxy is to be voted, they shall
refrain from participating in making a decision on such proxy. A majority vote
of the Proxy Voting Committee members is required for a final ruling on proxy
issues.
1.6. DISCLOSURE
A. Form ADV
EIP will include the following disclosures in Part II of its Form ADV:
1. A concise summary of these policies and procedures, and any
amendments thereto;
2. An offer to provide clients with a copy of these policies and
procedures upon request.
3. Information, including contact details (Investor Relations
[(___) ___ - ___] or Investor_Relations@energymlp.com), as to how clients
can obtain information regarding how securities held in their account were
voted.
B. Clients
EIP will provide its clients with the disclosures included in its Form ADV
and any material amendments to such disclosures. If a client requests
information on how securities held in their accounts were voted, EIP will
provide, at a minimum, the following information: (i) the name of the issuer;
(ii) the proposal voted upon and (iii) how EIP voted the proxy.
Client requests for information as to EIP's intentions to vote a particular
proxy prior to the deadline date will be handled on a case-by-case basis. If the
proxy is of a controversial nature, EIP's intentions may not be disclosed to the
client.
1.7. RECORD-KEEPING
1. EIP must maintain the following documents for a period of not less than
five years, the first two years in its offices:
2. EIP's proxy voting policies and procedures, and any amendments thereto.
3. Proxy ballot information regarding client securities will generally be
maintained in the ISS database. However, any proxy ballot information received
by EIP, which is not otherwise maintained in the ISS database, will be
maintained by EIP.
4. Records of the votes that are cast by EIP on behalf of its clients.
5. Written records of client/investor requests for proxy information and
any written response to any (written or oral) client/investor request for
information on how EIP voted the proxies, including any e-mails.
6. Any documents prepared by EIP that were material in making a decision
regarding how to vote a proxy issue, or that memorializes the basis for the
decision, including e-mails.
7. A copy of the written disclosure provided to clients/investors, which
describe EIP's proxy voting policies and procedures and any related
correspondence sent to clients/investors, including e-mails.
1.8. REVIEW
These policies and procedures will be reviewed periodically in light of
regulatory developments and will be amended as needed.
In addition, EIP will periodically evaluate the services provided by ISS
and the Proxy Voting Guidelines to ensure compliance with current applicable
regulatory requirements.
1.9. IDENTIFICATION OF PERSONS
The Proxy Voting Administrator, Research Coordinators and members of
the Proxy Voting Committee are identified in Appendix B, which may be amended
from time to time.
APPENDIX A
PROXY VOTING GUIDELINES
ISS PROXY VOTING GUIDELINES SUMMARY
The following is a concise summary of ISS's proxy voting policy guidelines.
1. AUDITORS
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
- Fees for non-audit services are excessive, or
- 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.
2. BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be made on a CASE-BY-CASE basis,
examining the following factors: independence of the board and key board
committees, attendance at board meetings, corporate governance provisions and
takeover activity, long-term company performance, responsiveness to shareholder
proposals, any egregious board actions, and any excessive non-audit fees or
other potential auditor conflicts.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote AGAINST proposals to classify the board. Vote FOR proposals to repeal
classified boards and to elect all directors annually.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Vote on a CASE-BY-CASE basis shareholder proposals requiring that the
positions of chairman and CEO be held separately. Because some companies have
governance structures in place that counterbalance a combined position, certain
factors should be taken into account in determining whether the proposal
warrants support. These factors include the presence of a lead director, board
and committee independence, governance guidelines, company performance, and
annual review by outside directors of CEO pay.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors
be independent unless the board composition already meets the proposed threshold
by ISS's definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation,
and/or nominating committees be composed exclusively of independent directors if
they currently do not meet that standard.
3. SHAREHOLDER RIGHTS
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written
consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote against proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote for proposals that remove restrictions on the right of shareholders to
act independently of management.
SUPERMAJORITY VOTE REQUIREMENTS
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR proposals to lower supermajority vote requirements.
CUMULATIVE VOTING
Vote against proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a case-by-case
basis relative to the company's other governance provisions.
CONFIDENTIAL VOTING
Vote FOR shareholder proposals requesting that corporations adopt
confidential voting, use independent vote tabulators and use independent
inspectors of election, as long as the proposal includes a provision for proxy
contests as follows: In the case of a contested election, management should be
permitted to request that the dissident group honor its confidential voting
policy. If the dissidents agree, the policy remains in place. If the dissidents
will not agree, the confidential voting policy is waived.
Vote FOR management proposals to adopt confidential voting.
4. PROXY CONTESTS
Voting for Director Nominees in Contested Elections
Votes in a contested election of directors must be evaluated on a
CASE-BY-CASE basis, considering the factors that include the long-term financial
performance, management's track record, qualifications of director nominees
(both slates), and an evaluation of what each side is offering shareholders.
Reimbursing Proxy Solicitation Expenses
Vote CASE-BY-CASE. Where ISS recommends in favor of the dissidents, we also
recommend voting for reimbursing proxy solicitation expenses.
5. POISON PILLS
Vote for shareholder proposals that ask a company to submit its poison pill
for shareholder ratification. Review on a case-by-case basis shareholder
proposals to redeem a company's poison pill and management proposals to ratify a
poison pill.
6. MERGERS AND CORPORATE RESTRUCTURINGS
Vote CASE-BY-CASE on mergers and corporate restructurings based on such
features as the fairness opinion, pricing, strategic rationale, and the
negotiating process.
7. REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be evaluated
on a CASE-BY-CASE basis, giving consideration to both financial and corporate
governance concerns, including the reasons for reincorporating, a comparison of
the governance provisions, and a comparison of the jurisdictional laws. Vote FOR
reincorporation when the economic factors outweigh any neutral or negative
governance changes.
8. CAPITAL STRUCTURE
COMMON STOCK AUTHORIZATION
Votes on proposals to increase the number of shares of common stock
authorized for issuance are determined on a CASE-BY-CASE basis using a model
developed by ISS.
Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.
Vote FOR proposals to approve increases beyond the allowable increase 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.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
Vote FOR proposals to create a new class of nonvoting or subvoting common
stock if:
- It is intended for financing purposes with minimal or no dilution
to current shareholders
- It is not designed to preserve the voting power of an insider or
significant shareholder
9. EXECUTIVE AND DIRECTOR COMPENSATION
Votes with respect to compensation plans should be determined on a
CASE-BY-CASE basis. Our methodology for reviewing compensation plans primarily
focuses on the transfer of shareholder wealth (the dollar cost of pay plans to
shareholders instead of simply focusing on voting power dilution). Using the
expanded compensation data disclosed under the SEC's rules, ISS will value every
award type. ISS will include in its analyses an estimated dollar cost for the
proposed plan and all continuing plans. This cost, dilution to shareholders'
equity, will also be expressed as a percentage figure for the transfer of
shareholder wealth, and will be considered long with dilution to voting power.
Once ISS determines the estimated cost of the plan, we compare it to a
company-specific dilution cap.
Vote AGAINST equity plans that explicitly permit repricing or where the
company has a history of repricing without shareholder approval.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Votes on management proposals seeking approval to reprice options are
evaluated on a CASE-BY-CASE basis giving consideration to the following:
- Historic trading patterns
- Rationale for the repricing
- Value-for-value exchange
- Option vesting
- Term of the option
- Exercise price
- Participation
EMPLOYEE STOCK PURCHASE PLANS
VOTES ON EMPLOYEE STOCK PURCHASE PLANS SHOULD BE DETERMINED ON A CASE-BY-CASE
BASIS.
Vote FOR employee stock purchase plans where all of the following apply:
- Purchase price is at least 85 percent of fair market value
- Offering period is 27 months or less, and
- Potential voting power dilution (VPD) is ten percent or less.
Vote AGAINST employee stock purchase plans where any of the opposite
conditions obtain.
SHAREHOLDER PROPOSALS ON COMPENSATION
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding
executive and director pay, taking into account company performance, pay level
versus peers, pay level versus industry, and long term corporate outlook.
10. SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics, including consumer and public
safety, environment and energy, general corporate issues, labor standards and
human rights, military business, and workplace diversity.
In general, vote CASE-BY-CASE. While a wide variety of factors goes into
each analysis, the overall principal guiding all vote recommendations focuses on
how the proposal will enhance the economic value of the company.
GLOBAL PROXY VOTING GUIDELINES
Following is a concise summary of general policies for voting global
proxies. In addition, ISS has country- and market-specific policies, which are
not captured below.
FINANCIAL RESULTS/DIRECTOR AND AUDITOR REPORTS
Vote FOR approval of financial statements and director and auditor reports,
unless:
- there are concerns about the accounts presented or audit
procedures used; or
- the company is not responsive to shareholder questions about
specific items that should be publicly disclosed.
APPOINTMENT OF AUDITORS AND AUDITOR COMPENSATION
Vote FOR the reelection of auditors and proposals authorizing the board to
fix auditor fees, unless:
- there are serious concerns about the accounts presented or the
audit procedures used;
- the auditors are being changed without explanation; or
- nonaudit-related fees are substantial or are routinely in excess
of standard annual audit fees.
Vote AGAINST the appointment of external auditors if they have previously
served the company in an executive capacity or can otherwise be considered
affiliated with the company.
ABSTAIN if a company changes its auditor and fails to provide shareholders
with an explanation for the change.
APPOINTMENT OF INTERNAL STATUTORY AUDITORS
Vote FOR the appointment or reelection of statutory auditors, unless:
- there are serious concerns about the statutory reports presented
or the audit procedures used;
- questions exist concerning any of the statutory auditors being
appointed; or
- the auditors have previously served the company in an executive
capacity or can otherwise be considered affiliated with the
company.
ALLOCATION OF INCOME
Vote FOR approval of the allocation of income, unless:
- the dividend payout ratio has been consistently below 30 percent
without adequate explanation; or
- the payout is excessive given the company's financial position.
STOCK (SCRIP) DIVIDEND ALTERNATIVE
Vote FOR most stock (scrip) dividend proposals.
Vote AGAINST proposals that do not allow for a cash option unless
management demonstrates that the cash option is harmful to shareholder value.
AMENDMENTS TO ARTICLES OF ASSOCIATION
Vote amendments to the articles of association on a CASE-BY-CASE basis.
CHANGE IN COMPANY FISCAL TERM
Vote FOR resolutions to change a company's fiscal term unless a company's
motivation for the change is to postpone its AGM.
LOWER DISCLOSURE THRESHOLD FOR STOCK OWNERSHIP
Vote AGAINST resolutions to lower the stock ownership disclosure threshold
below five percent unless specific reasons exist to implement a lower threshold.
AMEND QUORUM REQUIREMENTS
Vote proposals to amend quorum requirements for shareholder meetings on a
CASE-BY-CASE basis.
TRANSACT OTHER BUSINESS
Vote AGAINST other business when it appears as a voting item.
DIRECTOR ELECTIONS
Vote FOR management nominees in the election of directors, unless:
- there are clear concerns about the past performance of the
company or the board; or
- the board fails to meet minimum corporate governance standards.
Vote FOR individual nominees unless there are specific concerns about the
individual, such as criminal wrongdoing or breach of fiduciary responsibilities.
Vote AGAINST shareholder nominees unless they demonstrate a clear ability
to contribute positively to board deliberations.
Vote AGAINST individual directors if they cannot provide an explanation for
repeated absences at board meetings (in countries where this information is
disclosed)
DIRECTOR COMPENSATION
Vote FOR proposals to award cash fees to nonexecutive directors unless the
amounts are excessive relative to other companies in the country or industry.
Vote nonexecutive director compensation proposals that include both cash
and share-based components on a CASE-BY-CASE basis.
Vote proposals that bundle compensation for both nonexecutive and executive
directors into a single resolution on a CASE-BY-CASE basis.
Vote AGAINST proposals to introduce retirement benefits for nonexecutive
directors.
DISCHARGE OF BOARD AND MANAGEMENT
Vote FOR discharge of the board and management, unless:
- there are serious questions about actions of the board or
management for the year in question; or
- legal action is being taken against the board by other
shareholders.
DIRECTOR, OFFICER, AND AUDITOR INDEMNIFICATION AND LIABILITY PROVISIONS
Vote proposals seeking indemnification and liability protection for
directors and officers on a CASE-BY-CASE basis.
Vote AGAINST proposals to indemnify auditors.
BOARD STRUCTURE
Vote FOR proposals to fix board size.
Vote AGAINST the introduction of classified boards and mandatory retirement
ages for directors.
Vote AGAINST proposals to alter board structure or size in the context of a
fight for control of the company or the board.
SHARE ISSUANCE REQUESTS
General Issuances:
Vote FOR issuance requests with preemptive rights to a maximum of 100
percent over currently issued capital.
Vote FOR issuance requests without preemptive rights to a maximum of 20
percent of currently issued capital.
Specific Issuances:
Vote on a CASE-BY-CASE basis on all requests, with or without preemptive
rights.
INCREASES IN AUTHORIZED CAPITAL
Vote FOR nonspecific proposals to increase authorized capital up to 100
percent over the current authorization unless the increase would leave the
company with less than 30 percent of its new authorization outstanding.
Vote FOR specific proposals to increase authorized capital to any amount,
unless:
- the specific purpose of the increase (such as a share-based
acquisition or merger) does not meet ISS guidelines for the
purpose being proposed; or
- the increase would leave the company with less than 30 percent of
its new authorization outstanding after adjusting for all
proposed issuances (and less than 25 percent for companies in
Japan).
Vote AGAINST proposals to adopt unlimited capital authorizations.
REDUCTION OF CAPITAL
Vote FOR proposals to reduce capital for routine accounting purposes unless
the terms are unfavorable to shareholders.
Vote proposals to reduce capital in connection with corporate restructuring
on a CASE-BY-CASE basis.
CAPITAL STRUCTURES
Vote FOR resolutions that seek to maintain or convert to a one share, one
vote capital structure.
Vote AGAINST requests for the creation or continuation of dual class
capital structures or the creation of new or additional supervoting shares.
PREFERRED STOCK
Vote FOR the creation of a new class of preferred stock or for issuances of
preferred stock up to 50 percent of issued capital unless the terms of the
preferred stock would adversely affect the rights of existing shareholders.
Vote FOR the creation/issuance of convertible preferred stock as long as
the maximum number of common shares that could be issued upon conversion meets
ISS's guidelines on equity issuance requests.
Vote AGAINST the creation of a new class of preference shares that would
carry superior voting rights to the common shares.
Vote AGAINST the creation of blank check preferred stock unless the board
clearly states that the authorization will not be used to thwart a takeover bid.
Vote proposals to increase blank check preferred authorizations on a
CASE-BY-CASE basis.
DEBT ISSUANCE REQUESTS
Vote nonconvertible debt issuance requests on a CASE-BY-CASE basis, with or
without preemptive rights.
Vote FOR the creation/issuance of convertible debt instruments as long as
the maximum number of common shares that could be issued upon conversion meets
ISS's guidelines on equity issuance requests.
Vote FOR proposals to restructure existing debt arrangements unless the
terms of the restructuring would adversely affect the rights of shareholders.
PLEDGING OF ASSETS FOR DEBT
Vote proposals to approve the pledging of assets for debt on a CASE-BY-CASE
basis.
INCREASE IN BORROWING POWERS
Vote proposals to approve increases in a company's borrowing powers on a
CASE-BY-CASE basis.
SHARE REPURCHASE PLANS
Vote FOR share repurchase plans, unless:
- clear evidence of past abuse of the authority is available; or
- the plan contains no safeguards against selective buybacks.
REISSUANCE OF SHARES REPURCHASED
Vote FOR requests to reissue any repurchased shares unless there is clear
evidence of abuse of this authority in the past.
Capitalization of Reserves for Bonus Issues/Increase In Par Value:
Vote FOR requests to capitalize reserves for bonus issues of shares or to
increase par value.
REORGANIZATIONS/RESTRUCTURINGS
Vote reorganizations and restructurings on a CASE-BY-CASE basis.
MERGERS AND ACQUISITIONS
Vote FOR mergers and acquisitions, unless:
- the impact on earnings or voting rights for one class of
shareholders is disproportionate to the relative contributions of
the group; or
- the company's structure following the acquisition or merger does
not reflect good corporate governance.
Vote AGAINST if the companies do not provide sufficient information upon
request to make an informed voting decision.
ABSTAIN if there is insufficient information available to make an informed
voting decision.
MANDATORY TAKEOVER BID WAIVERS
Vote proposals to waive mandatory takeover bid requirements on a
CASE-BY-CASE basis.
REINCORPORATION PROPOSALS
Vote reincorporation proposals on a CASE-BY-CASE basis.
EXPANSION OF BUSINESS ACTIVITIES
Vote FOR resolutions to expand business activities unless the new business
takes the company into risky areas.
RELATED-PARTY TRANSACTIONS
Vote related-party transactions on a CASE-BY-CASE basis.
COMPENSATION PLANS
Vote compensation plans on a CASE-BY-CASE basis.
ANTITAKEOVER MECHANISMS
Vote AGAINST all antitakeover proposals unless they are structured in such
a way that they give shareholders the ultimate decision on any proposal or
offer.
SHAREHOLDER PROPOSALS
Vote all shareholder proposals on a CASE-BY-CASE basis.
Vote FOR proposals that would improve the company's corporate governance or
business profile at a reasonable cost.
Vote AGAINST proposals that limit the company's business activities or
capabilities or result in significant costs being incurred with little or no
benefit.
APPENDIX B
IDENTIFICATION OF PERSONS
This information is as of July 31, 2006:
I. Proxy Administrator:
James Murchie
Eva Pao (backup)
Linda Longville (backup)
II. Research Coordinators:
Linda Longville
Eva Pao
III. Members of the Proxy Voting Committee:
Eva Pao - Chief Compliance Officer
Linda Longville - Research Coordinator
James Murchie - Proxy Administrator
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
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.
Length of Service
Name Title with Registrant Business Experience Past 5 Years
------------- -------------------- ----------------- --------------------------------
James Murchie Co-Portfolio Manager 15 months Portfolio Manager, EIP
Eva Pao Co-Portfolio Manager 15 months Portfolio Manager, EIP
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER AND POTENTIAL CONFLICTS OF
INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER AS OF NOVEMBER 30, 2008
# of Accounts Managed Total Assets for
Name of Portfolio for which Advisory Fee which Advisory Fee
Manager or Total # of Total Assets is Based on is Based on
Team Member Type of Accounts Accounts Managed (millions) Performance Performance (millions)
----------------- ----------------------- ---------------- ------------ ---------------------- ----------------------
1. James Murchie Registered Investment
Companies: 1 $188 mill 0 $ 0
Other Pooled Investment
Vehicles: 3 $123 mill 3 $123
Other Accounts: 0 $ 0 0 $ 0
2. Eva Pao Registered Investment
Companies: 1 $188 mill 0 $ 0
Other Pooled Investment
Vehicles: 3 $123 mill 3 $123
Other Accounts: 0 $ 0 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 and one
open-ended Mutual Fund which does not have a performance-based fee.
Decisions to buy and sell securities for the registrant are made by EIP.
Although investment decisions of each fund managed by EIP are made independently
from those of other accounts managed by EIP, investments similar to those the
Registrant makes may also be made for the other accounts. When the registrant
and one or more other accounts managed by EIP are prepared to invest, or desire
to dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by EIP to be equitable to each
account.
EIP has written policies and procedures regarding Trade Aggregation and
Allocation to ensure that all accounts are treated fairly and equitably and that
no account is disadvantaged. A number of factors are taken into consideration
when allocating investment opportunities among EIP's clients, including
investment objectives and strategies, compliance with securities regulations,
risk tolerances, tax status, size of client accounts, size of available
positions, current market conditions, total portfolio invested positions and the
nature of the security to be allocated. In addition, the CCO monitors conflicts
that may arise in managing its accounts, including reviewing trade allocations
and performance data of similarly managed accounts.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
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, 2008
Name Dollar Range of Fund Shares 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 directors, 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
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James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date January 26, 2009
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
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James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date January 26, 2009
By (Signature and Title)* /s/ Mark R. Bradley
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Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date January 26, 2009
* Print the name and title of each signing officer under his or her
signature.