UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21549
ENERGY INCOME AND GROWTH FUND
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: NOVEMBER 30
Date of reporting period: MAY 31, 2009
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
(FIRST TRUST LOGO)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
MAY 31, 2009
ENERGY
INCOME AND GROWTH FUND
EIP
ENERGY INCOME PARTNERS, LLC
TABLE OF CONTENTS
ENERGY INCOME AND GROWTH FUND (FEN)
SEMI-ANNUAL REPORT
MAY 31, 2009
Shareholder Letter ........................................................ 1
At A Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 6
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statements of Changes in Net Assets ....................................... 12
Statement of Cash Flows ................................................... 13
Financial Highlights ...................................................... 14
Notes to Financial Statements ............................................. 15
Additional Information .................................................... 22
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)
SEMI-ANNUAL REPORT
MAY 31, 2009
Dear Shareholders:
2008 brought all sorts of challenges to investors. Throughout the year, the
financial sector was plagued with failures in banking, insurance and brokerage
firms. By year's end, after a meltdown in the credit markets, historically high
levels of volatility in the stock market, and the resulting turmoil to the
overall economy, the Dow Jones Industrial Average's total return was -31.92% (as
of 12/31/08). In fact, 2008 was the Dow's third worst calendar year since its
inception in 1896. For the year, the negative total return performance of the
Dow was surpassed only by 1931 and 1907, two years in which the U.S. was also
enduring a major banking crisis. Of the thirty stocks in the Dow, only two were
up in 2008. However, many economists believe the recession that began in
December, 2007 ended in March, 2009. In fact, the Dow's total return from March
9 (the statistical end of the bear market) to May 31, 2009, was 30.83%. Of
course, no one can predict that this trend will continue.
Yet, regardless of the market, First Trust Advisors L.P. ("First Trust") has
always believed that in order to be successful in reaching your financial goals,
you should be invested for the long term. A long-term investor understands that
the market, from a historical perspective, has always experienced ups and downs.
But history has shown that the patient investor is typically rewarded over the
long term. While no one has the ability to predict when the markets will
recover, we believe that staying invested in quality products and having a
long-term perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in
Energy Income and Growth Fund (the "Fund"). It contains a portfolio commentary
from the Fund's portfolio management team that provides a market recap for the
period, a performance analysis and a market and Fund outlook. Additionally, the
report provides the Fund's financial statements for the period covered by the
report. I encourage you to read this document and discuss it with your financial
advisor.
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 information
about your investments so you and your financial advisor have current
information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of Energy Income and Growth Fund
Page 1
ENERGY INCOME AND GROWTH FUND
"AT A GLANCE"
AS OF MAY 31, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on NYSE Amex FEN
Common Share Price $ 20.45
Common Share Net Asset Value ("NAV") $ 17.54
Premium (Discount) to NAV 16.59%
Net Assets Applicable to Common Shares $114,289,681
Current Quarterly Distribution per Common Share (1) $ 0.4400
Current Annualized Distribution per Common Share $ 1.7600
Current Distribution Rate on Closing Common Share Price(2) 8.61%
Current Distribution Rate on NAV (2) 10.03%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Market NAV
------ -----
5/30/2008 23.86 25.44
6/6/2008 23.76 25.17
6/13/2008 24.23 24.94
6/20/2008 23.85 24.42
6/27/2008 23 23.95
7/3/2008 22.18 23.33
7/11/2008 22.1 23.28
7/18/2008 21.89 21.95
7/25/2008 20.92 22.15
8/1/2008 21.64 22.76
8/8/2008 21.42 21.93
8/15/2008 22.05 22.33
8/22/2008 23.01 22.82
8/29/2008 24.05 23.17
9/5/2008 23.2 22.11
9/12/2008 22.8 21.59
9/19/2008 23.5 21.18
9/26/2008 19.85 19.64
10/3/2008 20.15 18.06
10/10/2008 13.5 13.73
10/17/2008 19 16.87
10/24/2008 17.9 16.7
10/31/2008 18.12 17.67
11/7/2008 17.57 16.82
11/14/2008 15.01 15.39
11/21/2008 12.25 12.88
11/28/2008 14.4 14.7
12/5/2008 14.13 13.69
12/12/2008 13.37 14.57
12/19/2008 14.58 14.25
12/26/2008 13.11 13.93
1/2/2009 14.62 15.21
1/9/2009 16.11 15.5
1/16/2009 16.47 15.21
1/23/2009 16.15 15.01
1/30/2009 17.85 15.61
2/6/2009 18.9 15.82
2/13/2009 18.75 16.12
2/20/2009 17.35 14.77
2/27/2009 17.58 14.86
3/6/2009 14.1 13.58
3/13/2009 17.3 14.66
3/20/2009 18 14.88
3/27/2009 18.49 15.12
4/3/2009 18.3 15.46
4/9/2009 18.3 15.62
4/17/2009 17.53 16.12
4/24/2009 16.85 15.72
5/1/2009 17.8 16.41
5/8/2009 19.16 16.88
5/15/2009 19.43 16.34
5/22/2009 19.95 16.86
5/31/2009 20.45 17.55
PERFORMANCE
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (6/24/04)
5/31/2009 5/31/2009 to 5/31/2009
-------------- ------------ -------------------
Fund Performance
NAV(3) 25.74% -24.01% 4.93%
Market Value(4) 49.57% -5.59% 7.23%
Index Performance
S&P 500 Index 4.05% -32.57% -2.20%
Barclays Capital Credit Index of
Corporate Bonds 10.89% 1.08% 3.66%
Alerian MLP Index 29.96% -15.28% 9.78%
Wachovia Midstream MLP Index 26.40% -15.40% 9.50%
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
----------------------- -----------
Midstream Oil 46.3%
Midstream Gas 35.9
Utility 6.2
Propane 5.3
Coal 3.4
Oil & Gas 2.4
Diversified Energy 0.4
Midstream Propane 0.1
-----
Total 100.0%
=====
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Enterprise Products Partners, L.P. 7.7%
Energy Transfer Partners, L.P. 6.5
Magellan Midstream Partners, L.P. 6.4
Kinder Morgan Energy Partners, L.P. 6.4
Plains All American Pipeline, L.P. 6.3
Magellan Midstream Holdings, L.P. 5.1
ONEOK, Inc. 5.0
NuStar Energy, L.P. 4.1
Enterprise GP Holdings, L.P. 4.1
ONEOK Partners, L.P. 4.0
----
Total 55.6%
====
(1) Most recent distribution paid or declared through 5/31/2009. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 5/31/2009. Subject to
change in the future.
(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 ("EIP" or the "Sub-Advisor"), 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 their corporate customers. EIP
manages or supervises approximately $267 million of assets, as of May 31, 2009.
EIP became the Fund's Sub-Advisor on January 8, 2008. 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
James Murchie founded EIP in 2003 and is the portfolio manager for all of its
funds which focus on energy-related master limited partnerships, income trusts
and similar securities. From December 2004 to mid-2006, Mr. Murchie and the EIP
investment team was affiliated with Pequot Capital Management Inc. In July 2006,
EIP re-established its independence and began an affiliation with the Ospraie
Wingspan portfolio of managers. From 1998 to 2003 he managed a long/short equity
fund that invested in energy and cyclical equities and commodities as head of
Lawhill Capital Partners, LLC. From 1995 to 1997, he was a managing director at
Tiger Management, LLC where his primary responsibility was investments in
energy, commodities and related equities. From 1990-1995 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, PLC 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 a BA in History and Anthropology
from Rice University and an MA in Energy Planning from Harvard University.
EVA PAO
PRINCIPAL OF ENERGY INCOME PARTNERS, LLC
Eva Pao joined EIP in 2003 after graduating from Harvard Business School,
serving as Managing Director of EIP until the EIP investment team joined Pequot
Capital Management Inc. Ms. Pao served as Vice President of Pequot Capital
Management Inc. from 2005 to mid-2006. In July 2006, EIP re-established its
independence and began an affiliation with the Ospraie Wingspan portfolio of
managers. 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 a BA in Economics from Rice University
and an MBA from Harvard University.
COMMENTARY
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 the Fund's 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 semi-annual period ended May 31,
2009 was 29.96% and 26.40%, respectively. These returns reflect (for the Alerian
MLP Index) 5.9% (11.7% annual equivalent yield) from income distributions and
the remainder from share appreciation. For the Wachovia Midstream MLP Index,
5.6% (11.1% annual equivalent yield) reflects the percentage points from income
distributions while the remainder is from share appreciation. These figures are
according to data collected from several sources, including the Alerian MLP
Index, the Wachovia Midstream MLP Index and Bloomberg. While in the short term,
share appreciation can be volatile, we believe that over the longer term, share
appreciation will approximate growth in per share quarterly cash distributions
paid by MLPs. Over the last 12 months, the market capitalization weighted
average growth in per share cash distributions of energy-related MLPs has been
about 3%. We continue to believe that the growth rate of the dividend stream is
supported by the fundamentals of the underlying businesses of the Fund's
companies.
Page 3
PORTFOLIO COMMENTARY (UNAUDITED) - CONTINUED
These businesses are predominately energy infrastructure such as pipelines,
terminals and storage and receive fees and tariffs that are generally not
related to commodity prices. While slowing recently due to caution on the part
of their customers, the Fund's portfolio companies are enjoying above historic
levels of organic growth due to the increased amount of profitable investment
opportunities in new pipelines, terminals and storage facilities.
The strong performance of energy-related MLPs over the last six months, in our
view, has resulted from a cessation of liquidations and de-leveraging by hedge
funds that had come into the MLP asset class over the previous two years. Among
these was a fund run by Lehman Brothers that was liquidated due to the Lehman
bankruptcy. But there were numerous others, some of which used a substantial
amount of leverage. Of course, for every share sold, a share is purchased and as
the shareholder data come in we suspect that the buyers of these shares will
tend to be more retail-oriented and less levered than the sellers. We also
believe there has been a partial recovery in market sentiment as the energy
MLPs, on average, have continued to grow their quarterly cash distributions,
albeit at a slower pace than a year ago. This average performance, however,
masks the tremendous differences between the MLPs. Since the beginning of 2008,
13 energy-related MLPs have cut or eliminated their cash distributions. This
compares to just 4 such cuts in the prior ten years. It is the lower-quality,
commodity-sensitive MLPs that have cut their distributions. Generally, MLPs
whose cash flows are derived by steady fee-based businesses have not cut their
distributions; in fact, many of these continue to grow.
PERFORMANCE ANALYSIS
On a net asset value ("NAV") basis, the Fund provided a total return(1) of
25.74%, including the reinvestment of dividends, for the semi-annual period
ended May 31, 2009. This compares, according to collected data, to a total
return of 4.05% for the Standard & Poor's 500 Index ("S&P 500"); 10.89% for the
Barclays Capital Credit Index of Corporate Bonds; 29.96% for the Alerian MLP
Index; and 26.40% for the Wachovia Midstream MLP Index. On a market value basis,
the Fund had a total return(2), including the reinvestment of dividends, for the
semi-annual period ending May 31, 2009, of 49.57%. Over the semi-annual period,
the Fund's discount to NAV reversed and the Fund began trading at a premium to
NAV. On November 30, 2008, the Fund's Common Share price was $14.40 while the
NAV was $14.68, a discount of 1.91%. On May 31, 2009, the Fund's Common Share
price was $20.45 while the NAV was $17.54, a premium of 16.59%.
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 is 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.
The Fund has maintained its dividend over the period covered by this report. The
Fund paid dividends of $0.44 per quarter in October 2008, January 2009 and April
2009. While the Fund's portfolio companies have, on average, grown their
distributions, the Fund had to sell shares as their prices declined in order to
maintain its desired leverage ratios. Because there was a cushion between the
portfolio's cash generation and its dividend obligation, the Fund was able to
maintain its dividend.
MARKET & FUND OUTLOOK
OVERALL OUTLOOK FOR THE MLP MARKET
While there have been no MLP IPOs over the last six months, the MLP asset class
continues to grow with secondary offerings of equity and debt used to fund
growth projects and some acquisitions. So far in 2009, there have been 19 MLP
follow-on equity offerings that have raised approximately $2.9 billion of
proceeds (Source: Barclays).
----------
(1) 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.
(2) 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.
Page 4
PORTFOLIO COMMENTARY (UNAUDITED) - CONTINUED
We maintain our view that the best long-term investments in the MLP asset class
are companies that operate fee-for-service infrastructure assets.
Since 2005, about two-thirds of the MLP IPOs were companies whose primary
businesses depend on cyclical commodities like oil and gas or cyclical margins
from natural gas gathering, refining and marine day-rates. Prior to 2005, only
one-third of MLP IPOs had these characteristics. We have said for some time now
that while some of these MLPs may have quality assets and good management teams,
they come with more risk associated with the cyclical nature of their
businesses. We believe this view has now been validated as it is these types of
MLPs that have cut their quarterly cash distributions over the last 18 months.
THE CURRENT MLP MARKET
The total return proposition of owning energy-related MLPs has been and
continues to be their current yield plus their growth in quarterly cash
distributions, which over the last ten years has averaged about 7% annually.
This average growth rate accelerated to about 12% in 2008 and we expect it to
decline to mid single digits for the next year or so. The yield of the MLPs - as
measured by the Alerian MLP Index - on May 31, 2009 was approximately 8.9%.
The growth in MLP cash distributions had been running above the long-term
average primarily because of the profitable organic growth opportunities
available today. They include 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 liquefied natural gas,
and increased demand for motor fuel additives like ethanol and bio-diesel. All
these developments require additional pipelines, storage and terminalling
investment. In our opinion, the MLPs as a group have done a great job
capitalizing on these opportunities.
The recent decline in growth, we believe, is related to a number of factors. A
primary one is the commodity exposure of many MLPs, which in a number of cases,
has led to the elimination or reduction of quarterly distributions. In addition,
slower economic growth and concern about volumes and access to capital markets
has made the managements of the MLPs more cautious. Slowing the growth of cash
distributions will help conserve cash and reduce the need to access capital
markets to fund growth. While the initiation of new growth projects has slowed
down, the vast majority of existing projects continue to move forward at the
same pace as before the outbreak of the credit crisis.
Page 5
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) (b)
MAY 31, 2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
MASTER LIMITED PARTNERSHIPS - 114.5%
OIL, GAS & CONSUMABLE FUELS - 114.5%
56,000 AmeriGas Partners, L.P. ............................. $ 1,790,880
110,000 Buckeye GP Holdings, L.P. ........................... 2,189,000
465,471 Clearwater Natural Resources, L.P. (c) (d) (e) (j) .. 465,471
74,300 Duncan Energy Partners, L.P. ........................ 1,430,275
20,000 El Paso Pipeline Partners, L.P. ..................... 384,000
155,947 Enbridge Energy Partners, L.P. ...................... 6,292,461
7,582 Encore Energy Partners, L.P. ........................ 119,492
199,000 Energy Transfer Equity, L.P. ........................ 5,229,720
253,870 Energy Transfer Partners, L.P. ...................... 10,741,240
247,803 Enterprise GP Holdings, L.P. ........................ 6,708,027
484,998 Enterprise Products Partners, L.P. .................. 12,609,948
70,709 EV Energy Partner, L.P. ............................. 1,501,152
39,928 Exterran Partners, L.P. ............................. 541,024
88,393 Global Partners, L.P. ............................... 1,458,484
157,700 Holly Energy Partners, L.P. ......................... 4,746,770
142,836 Inergy Holdings, L.P. ............................... 5,499,186
205,771 Kinder Morgan Energy Partners, L.P. ................. 10,523,129
398,239 Magellan Midstream Holdings, L.P. ................... 8,374,966
302,756 Magellan Midstream Partners, L.P. ................... 10,581,322
102,788 Natural Resource Partners, L.P. ..................... 2,431,964
125,126 NuStar Energy, L.P. ................................. 6,760,558
200,000 NuStar GP Holdings, LLC ............................. 4,734,000
136,630 ONEOK Partners, L.P. ................................ 6,611,526
180,000 Penn Virginia Resource Partners, L.P. ............... 2,745,000
235,921 Plains All American Pipeline, L.P. .................. 10,446,582
59,500 Quicksilver Gas Services, L.P. ...................... 773,500
30,000 Sunoco Logistics Partners, L.P. ..................... 1,572,600
27,000 TC Pipelines, L.P. .................................. 936,630
5,000 TEPPCO Partners, L.P. ............................... 149,150
60,000 TransMontaigne Partners, L.P. ....................... 1,371,600
60,000 Williams Pipeline Partners, L.P. .................... 1,161,000
------------
TOTAL MASTER LIMITED PARTNERSHIPS
(Cost $93,703,006) ............................... 130,880,657
------------
CANADIAN INCOME TRUSTS - 2.0%
OIL, GAS & CONSUMABLE FUELS - 2.0%
140,000 Keyera Facilities Income Fund ....................... 2,308,221
------------
TOTAL CANADIAN INCOME TRUSTS
(Cost $1,691,385) ................................ 2,308,221
------------
COMMON STOCKS - 27.6%
OIL, GAS & CONSUMABLE FUELS - 17.1%
72,427 Enbridge Energy Management, LLC (f) ................. 2,773,948
184,800 Enbridge, Inc. (g) .................................. 6,562,248
16,605 Kinder Morgan Management, LLC (f) ................... 745,405
See Notes to Financial Statements
Page 6
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) (b) - (CONTINUED)
MAY 31, 2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - (CONTINUED)
179,500 Spectra Energy Corp. (g) ............................ $ 2,880,975
390,300 Williams Companies, Inc. (g) ........................ 6,549,234
------------
19,511,810
------------
GAS UTILITIES - 10.4%
283,000 ONEOK, Inc. (h) ..................................... 8,291,900
149,800 UGI Corp. (g) ....................................... 3,611,678
------------
11,903,578
------------
CAPITAL MARKETS - 0.1%
20,000 NGP Capital Resources Co. ........................... 157,600
------------
TOTAL COMMON STOCKS
(Cost $35,673,247) ............................... 31,572,988
------------
RIGHTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
17 Clearwater Natural Resources, L.P. (c) (d) (e) (j) .. 0
------------
TOTAL RIGHTS
(Cost $0) ........................................ 0
------------
WARRANTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
48,956 Abraxas Petroleum Corp., Expiration
05/25/12 (c) (d) (e) ............................. 10,291
------------
TOTAL WARRANTS
(Cost $0) ........................................ 10,291
------------
TOTAL INVESTMENTS - 144.1%
(Cost $131,067,638) (i) .......................... 164,772,157
------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (1.1)%
Enbridge, Inc.
900 @ 30 due Oct 09 ..................................... (522,000)
350 @ 35 due July 09 .................................... (53,375)
350 @ 35 due Oct 09 ..................................... (74,375)
------------
(649,750)
------------
ONEOK, Inc.
500 @ 25 due Oct 09 ..................................... (232,500)
1,150 @ 30 due July 09 .................................... (69,000)
1,180 @ 32.5 due July 09 .................................. (17,700)
------------
(319,200)
------------
Spectra Energy Corp.
200 @ 15 due Sep 09 ..................................... (33,500)
945 @ 17.5 due June 09 .................................. (3,780)
500 @ 17.5 due Sep 09 ................................... (20,000)
------------
(57,280)
------------
See Notes to Financial Statements
Page 7
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) (b) - (CONTINUED)
MAY 31, 2009 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
1,198 UGI Corp.
@ 25 due July 09 .................................... $ (59,900)
------------
753 Williams Companies, Inc.
@ 17.5 due Nov 09 ................................... (139,305)
------------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $1,704,765) ................... (1,225,435)
OUTSTANDING LOAN - (33.4)% .......................... (38,200,000)
NET OTHER ASSETS AND LIABILITIES - (9.6)% ........... (11,057,041)
------------
NET ASSETS - 100.0% ................................. $114,289,681
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All or a portion of the securities are available to serve as collateral on
the outstanding loan.
(c) This security is restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended. Prior
to registration, restricted securities may only be resold in transactions
exempt from registration. (see Note 2D - Restricted Securities in the Notes
to Financial Statements).
(d) This security is fair valued in accordance with procedures adopted by the
Fund's Board of Trustees.
(e) Non-income producing security.
(f) Non-income producing security which pays regular in-kind distributions.
(g) Call options were written on a portion of the Common Stock position. The
underlying portion of this Common Stock position is pledged as collateral.
(h) Call options were written on this entire Common Stock position. All Common
Stock relating to this call position are pledged as collateral.
(i) Aggregate cost for federal income tax purposes is $119,709,273. As of May
31, 2009, the aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $56,682,446 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $11,619,562.
(j) This partnership has filed for protection in federal bankruptcy court.
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of May 31, 2009
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
VALUATION INPUTS INVESTMENTS
---------------- ------------
Level 1 - Quoted Prices ......................... $164,296,395
Level 1 - Written Options ....................... (1,225,435)
Level 2 - Other Significant Observable Inputs ... --
Level 3 - Significant Unobservable Inputs ....... 475,762
------------
TOTAL $163,546,722
============
See Notes to Financial Statements
Page 8
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) (b) - (CONTINUED)
MAY 31, 2009 (UNAUDITED)
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
presented.
INVESTMENTS AT FAIR VALUE USING SIGNIFICANT
UNOBSERVABLE INPUTS INVESTMENTS
------------------------------------------- -----------
Balance as of November 30, 2008 ................... $ 2,806,705
Change in unrealized appreciation (depreciation) .. (2,330,943)
-----------
Balance as of May 31, 2009 ........................ $ 475,762
===========
Net change in unrealized depreciation from Level 3 investments held as of May
31, 2009 was $(2,330,943) and is included in "Net change in unrealized
appreciation (depreciation) on investments" on the Statement of Operations.
See Notes to Financial Statements
Page 9
ENERGY INCOME AND GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2009 (UNAUDITED)
ASSETS
Investments, at value
(Cost $131,067,638) ............................................... $164,772,157
Cash ................................................................. 1,903,646
Prepaid expenses ..................................................... 123,356
Receivables:
Income taxes ...................................................... 3,247,481
Fund shares sold .................................................. 158,802
Dividends ......................................................... 125,012
Interest .......................................................... 61
------------
Total Assets .................................................... 170,330,515
------------
LIABILITIES:
Deferred income tax liability ........................................ 15,756,872
Outstanding loan ..................................................... 38,200,000
Options written, at value (Premiums received $1,704,765) ............. 1,225,435
Payables:
Investment securities purchased ................................... 304,228
Investment advisory fees .......................................... 124,561
Audit and tax fees ................................................ 102,420
Legal fees ........................................................ 40,184
Printing fees ..................................................... 21,340
Administrative fees ............................................... 11,833
Interest and fees due on loan ..................................... 9,227
Custodian fees .................................................... 3,978
Transfer agent fees ............................................... 3,632
Income taxes ...................................................... 229,561
Accrued expenses and other liabilities ............................... 7,563
------------
Total Liabilities ............................................... 56,040,834
------------
NET ASSETS ........................................................... $114,289,681
============
NET ASSETS CONSIST OF:
Paid-in capital ...................................................... $110,265,993
Par value ............................................................ 65,153
Accumulated net investment income (loss), net of income taxes ........ (12,183,591)
Accumulated net realized gain (loss) on investments, written
options and foreign currency transactions, net of income taxes .... (6,617,252)
Net unrealized appreciation (depreciation) on investments, written
options and foreign currency translation .......................... 22,759,378
------------
NET ASSETS ........................................................... $114,289,681
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common
Share) ............................................................ $ 17.54
============
Number of Common Shares outstanding (unlimited number of Common Shares
has been authorized) .............................................. 6,515,325
============
See Notes to Financial Statements
Page 10
ENERGY INCOME AND GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2009 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $17,427) ................ $ 481,637
Interest ............................................................. 1,040
------------
Total investment income ........................................... 482,677
------------
EXPENSES:
Investment advisory fees ............................................. 662,401
Interest expense ..................................................... 497,919
Energy Notes offering costs .......................................... 324,047
Insurance expense .................................................... 73,656
Administrative fees .................................................. 62,928
Audit and tax fees ................................................... 55,622
Legal fees ........................................................... 53,132
Printing fees ........................................................ 46,230
Auction fees ......................................................... 19,965
Trustees' fees and expenses .......................................... 19,165
Transfer agent fees .................................................. 17,038
Custodian fees ....................................................... 11,095
Other ................................................................ 16,619
------------
Total expenses .................................................... 1,859,817
------------
NET INVESTMENT INCOME (LOSS) BEFORE TAXES ............................ (1,377,140)
------------
Current federal income tax expense ................................ (403,154)
Current income tax expense - other ................................ (93,515)
Deferred federal income tax benefit ............................... 984,658
------------
Total income tax benefit (expense) ................................ 487,989
------------
NET INVESTMENT INCOME (LOSS) ......................................... (889,151)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) before taxes on:
Investments ....................................................... 604,968
Written options ................................................... 573,172
Foreign currency transactions ..................................... 752
------------
Net realized gain (loss) before taxes ................................ 1,178,892
------------
Deferred federal income tax expense ............................... (416,792)
------------
Total income tax expense .......................................... (416,792)
------------
Net realized gain (loss) on investments, written options and foreign
currency transactions ............................................. 762,100
------------
Net change in unrealized appreciation (depreciation) before taxes on:
Investments ....................................................... 37,481,397
Written options ................................................... 98,605
Foreign currency translations ..................................... 759
------------
Net change in unrealized appreciation (depreciation) before taxes .... 37,580,761
------------
Deferred federal income tax expense ............................... (13,241,325)
Deferred income tax expense - other ............................... (46,289)
------------
Total income tax expense .......................................... (13,287,614)
------------
Net change in unrealized appreciation (depreciation) on investments,
written options and foreign currency translations ................. 24,293,147
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) .............................. 25,055,247
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ...... $ 24,166,096
============
See Notes to Financial Statements
Page 11
ENERGY INCOME AND GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
5/31/2009 ENDED
(UNAUDITED) 11/30/2008
------------ ------------
OPERATIONS:
Net investment income (loss) ................................................. $ (889,151) $ (3,714,353)
Net realized gain (loss) ..................................................... 762,100 8,261,568
Net change in unrealized appreciation (depreciation) ......................... 24,293,147 (71,654,830)
------------ ------------
Net increase (decrease) in net assets resulting from operations .............. 24,166,096 (67,107,615)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain on investments ............................................. (5,695,097) (10,702,017)
------------ ------------
Total distributions to shareholders .......................................... (5,695,097) (10,702,017)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares sold through shelf offering ...................... 306,598 --
Proceeds from Common Shares reinvested ....................................... 631,754 269,029
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions .... 938,352 269,029
------------ ------------
Total increase (decrease) in net assets ...................................... 19,409,351 (77,540,603)
NET ASSETS:
Beginning of period .......................................................... 94,880,330 172,420,933
------------ ------------
End of period ................................................................ $114,289,681 $ 94,880,330
============ ============
Accumulated net investment income (loss), net of income taxes ................ $(12,183,591) $(11,294,440)
============ ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ......................................... 6,462,221 6,446,995
Common Shares sold through shelf offering .................................... 15,390 --
Common Shares issued as reinvestment under the Dividend Reinvestment Plan .... 37,714 15,226
------------ ------------
Common Shares at end of period ............................................... 6,515,325 6,462,221
============ ============
See Notes to Financial Statements
Page 12
ENERGY INCOME AND GROWTH FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2009 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations .............. $ 24,166,096
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used by operating activities:
Purchases of investments .................................................. (32,903,116)
Sales of investments ...................................................... 21,851,844
Proceeds from written options ............................................. 1,754,115
Cost to close written options ............................................. (11,046)
Return of capital received from investments in MLPs ....................... 5,680,065
Net realized gain/loss on investments and options ......................... (1,178,140)
Net change in unrealized appreciation/depreciation on investments and
options ................................................................ (37,580,002)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in income tax receivable ......................................... 264,230
Decrease in interest receivable ........................................... 324
Increase in dividends receivable .......................................... (52,237)
Decrease in prepaid expenses .............................................. 212,887
Decrease in receivable for investment securities sold ..................... 1,592,512
Decrease in payable for investment securities purchased ................... (1,574,402)
Decrease in interest and fees due on loan and Energy Notes ................ (93,188)
Decrease in income tax payable ............................................ (34,730)
Increase in investment advisory fees payable .............................. 14,767
Decrease in audit and tax fees payable .................................... (4,580)
Decrease in legal fees payable ............................................ (1,822)
Decrease in printing fees payable ......................................... (748)
Increase in administrative fees payable ................................... 1,403
Increase in transfer agent fees payable ................................... 864
Decrease in custodian fees payable ........................................ (1,495)
Decrease in Trustees' fees and expenses payable ........................... (7,497)
Increase in accrued expenses .............................................. 5,063
Increase in deferred income tax liability ................................. 12,719,745
------------
CASH USED BY OPERATING ACTIVITIES ............................................ $ (5,179,088)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid ........................................................ (5,695,097)
Proceeds of Common Shares sold ............................................ 147,796
Proceeds of Common Shares reinvested ...................................... 631,754
Issuance of loans ......................................................... 45,200,000
Repayment of loans ........................................................ (12,650,000)
Redemption of Series B Energy Notes ....................................... (25,000,000)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES .................................. 2,634,453
------------
Decrease in cash ............................................................. (2,544,635)
Cash at beginning of period .................................................. 4,448,281
------------
CASH AT END OF PERIOD ........................................................ $ 1,903,646
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ..................................... $ 591,107
============
See Notes to Financial Statements
Page 13
ENERGY INCOME AND GROWTH FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR PERIOD
5/31/2009 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 11/30/2008 11/30/2007 (a) 11/30/2006 11/30/2005 11/30/2004 (b)
----------- ---------- -------------- ---------- ---------- --------------
Net asset value, beginning of period ............ $ 14.68 $ 26.74 $ 25.88 $ 22.53 $ 21.34 $ 19.10(c)
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... (0.14)(n) (0.57) (0.67) (0.50) (0.34) (0.13)
Net realized and unrealized gain (loss) ......... 3.88 (9.83) 3.06 5.23 2.86 2.74
-------- -------- -------- -------- -------- --------
Total from investment operations after income
tax .......................................... 3.74 (10.40) 2.39 4.73 2.52 2.61
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain ............................... (0.88) (1.66) (1.53) -- (0.88) --
Return of capital ............................... -- -- -- (1.38) (0.45) (0.33)
-------- -------- -------- -------- -------- --------
Total from distributions ........................ (0.88) (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 .................. $ 17.54 $ 14.68 $ 26.74 $ 25.88 $ 22.53 $ 21.34
======== ======== ======== ======== ======== ========
Market value, end of period ..................... $ 20.45 $ 14.40 $ 23.82 $ 24.49 $ 20.92 $ 22.12
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (d) (e) ... 25.74% (40.70)% 9.38% 22.23% 11.96%(g) 13.53%
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (e) (f) ...... 49.57% (34.74)% 2.96% 24.57% 0.29% 12.38%
======== ======== ======== ======== ======== ========
Net assets, end of period (in 000's) ............ $114,290 $ 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) ............................ 30.52%(i) (20.03)% 8.52% 14.47% 8.62% 18.38%(i)
Including current and deferred income taxes
after waiver (h) ............................. 30.52%(i) (20.03)% 8.52% 14.29% 8.31% 18.09%(i)
Excluding current and deferred income taxes
before waiver ................................ 3.76%(i) 4.80% 3.94% 3.63% 2.64% 2.20%(i)
Excluding current and deferred income taxes
after waiver ................................. 3.76%(i) 4.80% 3.94% 3.45% 2.33% 1.91%(i)
Excluding current and deferred income taxes
and interest expense after waiver ............ 2.76%(i) 2.55% 1.89% 1.76% 1.57% 1.36%(i)
RATIOS OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS:
Net investment income (loss) ratio before tax
expenses ..................................... (2.79)%(i) (3.83)% (3.83)% (3.26)% (2.29)% (1.49)%(i)
Net investment income (loss) ratio including tax
expenses (h) ................................. (29.54)%(i) 21.00% (8.41)% (14.10)% (8.27)% (17.67)%(i)
Portfolio turnover rate ...................... 16% 38% 16% 17% 38% 35%
SENIOR SECURITIES:
Total Energy Notes outstanding
($25,000 per note) ........................... N/A 1,000 2,360 2,360 1,360 N/A
Principal amount and market value per
Energy Note (j) .............................. N/A $ 25,006 $ 25,004 $ 25,069 $ 25,074 N/A
Asset coverage per Energy Note (k) .............. N/A $119,880 $ 98,060 $ 95,699 $131,786 N/A
Total loan outstanding (in 000's) ............... $ 38,200 $ 5,650 $ 15,250 N/A N/A $ 30,000
Asset coverage per $1,000 senior indebtedness ... $ 3,992(m) $ 22,218(l) $ 12,306(m) N/A N/A $ 5,566(m)
----------
(a) On September 14, 2007, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Energy Income Partners, LLC ("EIP"), and on
September 24, 2007, the Board of Trustees voted to approve EIP as
investment sub-advisor.
(b) 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 accumulated and unpaid interest.
(k) 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.
(l) 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.
(m) 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) Based on average shares outstanding.
N/A Not applicable.
See Notes to Financial Statements
Page 14
NOTES TO FINANCIAL STATEMENTS
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
1. FUND DESCRIPTION
Energy Income and Growth Fund (the "Fund") is a non-diversified, closed-end
management investment company organized as a Massachusetts business trust on
March 25, 2004, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund trades under the ticker symbol FEN on the NYSE Amex (formerly the
American Stock Exchange).
The Fund's investment objective is to seek a high level of after-tax total
return with an emphasis on current distributions paid to shareholders. The Fund
seeks to provide its shareholders with an efficient vehicle to invest in a
portfolio of cash-generating securities of energy companies. The Fund focuses on
investing in publicly-traded master limited partnerships ("MLPs") and related
public entities in the energy sector, which Energy Income Partners, LLC ("EIP"
or the "Sub-Advisor") believes offer opportunities for income and growth. Due to
the tax treatment of cash distributions made by MLPs to their investors, a
portion of the distributions received may be tax deferred, thereby maximizing
cash available for distribution by the Fund to its shareholders. There can be no
assurance that the Fund's investment objective will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Fund's Common Shares is determined daily as
of the close of regular trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. The
NAV per Common Share is calculated by dividing the value of all assets of the
Fund (including accrued dividends and interest), less all liabilities (including
accrued expenses, dividends declared but unpaid and deferred income taxes and
any borrowings of the Fund) by the total number of shares outstanding. The Fund
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 daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and investments. Additionally, if events occur after the close of the principal
markets for particular securities (e.g., domestic debt and foreign securities),
but before the Fund values its assets, that could materially affect NAV, First
Trust may use a fair value method to value the Fund's securities and
investments. The use of fair value pricing by the Fund is governed by valuation
procedures adopted by the Fund's Board of Trustees and in accordance with the
provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Fixed-income securities with a
remaining maturity of 60 days or more will be valued by the Fund using a pricing
service. Short-term investments that mature in less than 60 days when purchased
are valued at amortized cost.
In September 2006, the Financial Accounting Standards Board ("FASB") 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. The three levels of the
fair value hierarchy under FAS 157 are described as follows:
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
- 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)
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 May 31, 2009 is included
in the Fund's Portfolio of Investments.
In April 2009, FASB issued FASB Staff Position No. 157-4, "Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP
157-4"). FSP 157-4 is effective for fiscal years and interim periods ending
after June 15, 2009. FSP 157-4 provides additional guidance for estimating fair
value in accordance with FAS 157, when the volume and level of activity for the
asset or liability have significantly decreased. FSP 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. Management is currently evaluating the impact the implementation of FSP
157-4 will have on the Fund's financial statement disclosures, if any.
B. OPTION CONTRACTS:
The Fund has adopted Statement of Financial Accounting Standards No. 161,
"Disclosures about Derivative Instruments and Hedging Activities" ("FAS 161"),
an amendment of FASB Statement 133, which was issued in March of 2008 and is
effective for fiscal years and interim periods beginning after November 15,
2008. The Fund has written option contracts outstanding at May 31, 2009, which
are considered derivative instruments under FAS 161.
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 may provide a partial hedge against a market
decline in the underlying equity security. Options are marked-to-market daily
and their value will be affected by changes in the value and dividend rates of
the underlying equity securities, changes in interest rates, changes in the
actual or perceived volatility of the securities markets and the underlying
equity securities and the remaining time to the options' expiration. The value
of options may also be adversely affected if the market for the options becomes
less liquid or smaller.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss. If the price
of the underlying equity security is less than the option's strike price, the
option will likely expire without being exercised. The option premium received
by the Fund will, in this case, be treated as short-term capital gain on the
expiration date of the option. The Fund may also elect to close out its position
in an option prior to its expiration by purchasing an option of the same series
as the option written (sold) by the Fund.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
The Fund is subject to equity price risk in the normal course of pursuing its
investment objectives. OTC options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is
recognized and recorded on the accrual basis, including amortization of premiums
and accretion of discounts.
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 May 31, 2009 shown in the following table. The Fund
does not have the right to demand that such securities be registered. These
securities are valued according to the valuation procedures as stated in the
Portfolio Valuation footnote (Note 2A) and are not expressed as a discount to
the value of a comparable unrestricted security.
ACQUISITION VALUE PER CARRYING % OF
SECURITY DATE SHARES SHARE COST VALUE NET ASSETS
-------- ----------- ------- --------- ---------- -------- ----------
Clearwater Natural Resources, L.P. 08/01/05 465,471 $1.00 $8,601,560 $465,471 0.41%
Clearwater Natural Resources, L.P. -
Rights 08/01/05 17 -- -- -- --
Abraxas Petroleum Corp. - Warrants 05/25/07 48,956 0.21 -- 10,291 0.01
------- ---------- -------- ----
514,444 $8,601,560 $475,762 0.42%
======= ========== ======== ====
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 $5,695,097 paid during the six months ended May 31, 2009 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 2009 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
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
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 six
months ended May 31, 2009, distributions of $5,680,065 received from MLPs have
been reclassified as a return of capital. The cost basis of applicable MLPs has
been reduced accordingly.
The Fund's provision for income taxes is calculated in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and
consists of the following:
Current federal income tax expense ............ $ 403,154
Current other tax expense ..................... 93,515
Deferred federal income tax expense ........... 12,673,459
Deferred other income tax expense ............. 46,289
-----------
Total income tax expense ...................... $13,216,417
===========
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 May 31, 2009 are as follows:
DEFERRED TAX ASSETS:
Federal net operating loss .................... $ --
State net operating loss ...................... 407,376
State income taxes ............................ 14,727
Other ......................................... 282,083
-----------
Total deferred tax assets ..................... 704,186
Less: valuation allowance ..................... (407,376)
-----------
Net deferred tax assets ....................... $ 296,810
===========
DEFERRED TAX LIABILITIES:
Unrealized gains on investment securities ..... $16,053,682
-----------
Total deferred tax liabilities ................ 16,053,682
-----------
Total net deferred tax liabilities ............ $15,756,872
===========
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 ...... $13,083,880
State income taxes, net ....................... 22,315
Change in valuation allowance ................. 84,135
Other ......................................... 26,087
-----------
Total ......................................... $13,216,417
===========
In June 2006, FASB issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"). 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, 2006 and 2007 remain
open to federal and state audit. The Internal Revenue Service initiated a
corporate income tax audit during the first quarter of 2008 for the Fund's 2004
tax year. Subsequently, the audit was expanded to include the 2005
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
and 2006 tax years. The audit is still ongoing and the Fund expects the audit to
last through the fourth quarter of 2009. As of May 31, 2009, 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.
H. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investment securities and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses which result from changes in foreign currency exchange rates have been
included in "Net change in unrealized appreciation (depreciation) on foreign
currency translation" on the Statement of Operations. Net realized foreign
currency gains and losses include the effect of changes in exchange rates
between trade date and settlement date on investment security transactions,
foreign currency transactions and interest and dividends received. The portion
of foreign currency gains and losses related to fluctuation in exchange rates
between the initial purchase trade date and subsequent sale trade date is
included in "Net realized gain (loss) on foreign currency transactions" on the
Statement of Operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets (the value of the securities and other
investments the Fund holds plus cash or other assets, including interest accrued
but not yet received, minus accrued liabilities other than the principal amount
of any borrowings).
EIP serves as the Fund's sub-advisor and manages the Fund's portfolio subject to
First Trust's supervision. The Sub-Advisor receives a monthly portfolio
management fee calculated at an annual rate of 0.50% of Managed Assets that is
paid by First Trust out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., an indirect majority-owned
subsidiary of The PNC Financial Services Group, serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. PFPC Trust Company, also an indirect, majority-owned subsidiary of
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each additional trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and Valuation Committee are
paid $2,500 annually to serve in such capacities, with such compensation paid by
the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. The Lead
Independent Trustee and each Committee chairman will serve two-year terms ending
December 31, 2009, before rotating to serve as a chairman of another committee
or as Lead Independent Trustee. The officers and the "Interested" Trustee
receive no compensation from the Fund for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES AND OPTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the six months ended May 31, 2009, were $32,903,116
and $21,851,844, respectively.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
--------------- --------- ----------
Options outstanding at November 30,
2008 ............................... 4,546 $ 534,868
Options Written ....................... 8,326 1,754,115
Options Expired ....................... (3,268) (369,700)
Options Closed ........................ (1,578) (214,518)
------ ----------
Options outstanding at May 31, 2009 ... 8,026 $1,704,765
====== ==========
5. ENERGY NOTES
The 1,000 Series B Energy Notes, at a principal value of $25,000 per note, were
redeemed in full on February 26, 2009 in the amount of $25,000,000. The high and
the low annual interest rates during the period December 1, 2008 through
February 26, 2009 were 3.75%, and 0.74% respectively, and the average interest
rate was 1.34%. The redemption of Series B Energy Notes was financed through a
credit agreement with BNP Paribas Prime Brokerage Inc. (see Note 7 below). At
the time of the refinancing, the Fund had unamortized offering costs of $92,378
and commissions of $231,669. Because the Series B Energy Notes were redeemed
prior to the maturity date of March 30, 2046, the combined amount of $324,047
was expensed on February 26, 2009. This is shown on the Statement of Operations
under "Energy Notes offering costs."
6. CREDIT AGREEMENT WITH THE BANK OF NOVA SCOTIA
The Fund had a credit agreement with The Bank of Nova Scotia that had a maximum
commitment amount of $55,000,000. This credit agreement was scheduled to
terminate on March 26, 2009. On January 23, 2009, all outstanding borrowings, in
the amount of $8,150,000, were paid in full through a credit agreement with BNP
Paribas Prime Brokerage Inc. (see Note 7 below).
The average amount outstanding between December 1, 2008 and January 23, 2009 was
$6,734,906 with a weighted average interest rate of 3.05%. The high and low
annual interest rates during the period December 1, 2008 through January 23,
2009 were 4.81% and 2.17%, respectively.
7. COMMITTED FACILITY AGREEMENT WITH BNP PARIBAS PRIME BROKERAGE INC.
On January 23, 2009, the Fund entered into a committed facility agreement with
BNP Paribas Prime Brokerage Inc. ("BNP") that has a maximum commitment amount of
$60,000,000. The committed facility required an upfront payment from the Fund
equal to $150,000. Absent certain events of default or failure to maintain
certain collateral requirements, BNP may not terminate the credit agreement
except upon 180 calendar days prior notice. The borrowing rate under the
facility is equal to the 3-month LIBOR plus 150 basis points. In addition, under
the facility, the Fund pays a commitment fee of 0.80% on the undrawn amount of
such facility.
On January 23, 2009, the committed facility was used to pay in full outstanding
borrowings under a credit agreement with The Bank of Nova Scotia in the amount
of $8,150,000. This committed facility was also used to redeem in full the
Series B Energy Notes in the principal amount of $25,000,000 on February 26,
2009.
The average amount outstanding between January 23, 2009 and May 31, 2009 was
$28,210,159 with a weighted average interest rate of 2.59%. As of May 31, 2009,
the Fund had outstanding borrowings of $38,200,000 under this committed facility
agreement. The high and low annual interest rates during the period January 23,
2009 through May 31, 2009 were 2.83% and 2.16%, respectively.
8. 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.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
9. 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.
The Fund's performance was adversely impacted by the weakness in the credit
markets and broad stock market, and the resulting rapid and dramatic declines in
the values of MLPs that occurred beginning in late 2008, and may continue to be
adversely affected if the weakness in the credit and stock markets continue. In
response to the financial crises affecting the banking system and financial
markets, the U.S. and foreign governments have intervened to an unprecedented
degree in the financial and credit markets. Among other things, U.S. government
regulators have encouraged, and in some cases structured and provided financial
assistance for, banks, securities firms, insurers and other financial companies.
Additional intervention programs have been adopted and proposed which will have
a further impact on the securities markets. Many of the recently enacted or
proposed government measures are far-reaching and without historical precedent.
Furthermore, the U.S. government has stated its willingness to implement
additional measures as it may see fit to address changes in market conditions.
There can be no assurance that any or all of these measures will succeed in
stabilizing and providing liquidity to the U.S. financial markets, including the
extreme levels of volatility currently being experienced. Such continued
volatility could materially and adversely affect the financial condition 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.
MLP RISK: An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. If the Fund is not in compliance with certain credit facility
provisions, the Fund may not be permitted to declare dividends or other
distributions.
RESTRICTED SECURITIES RISK: The Fund may invest in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that are unregistered or are held by control persons of the issuer and
securities that are subject to contractual restrictions on their resale. As a
result, restricted securities may be more difficult to value and the Fund may
have difficulty disposing of such assets either in a timely manner or for a
reasonable price. In order to dispose of an unregistered security, the Fund,
where it has contractual rights to do so, may have to cause such security to be
registered. A considerable period may elapse between the time the decision is
made 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.
Page 21
ADDITIONAL INFORMATION
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
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.
10. SUBSEQUENT EVENT
On July 13, 2009, the Fund declared a dividend of $0.44 per share to Common
Shareholders of record July 24, 2009, payable July 31, 2009.
Page 22
ADDITIONAL INFORMATION - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above NAV at the time of valuation,
the Fund will issue new shares at a price equal to the greater of (i)
NAV per Common Share on that date or (ii) 95% of the market price on
that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the NYSE Amex (formerly
the American Stock Exchange) or elsewhere, for the participants'
accounts. It is possible that the market price for the Common Shares
may increase before the Plan Agent has completed its purchases.
Therefore, the average purchase price per share paid by the Plan Agent
may exceed the market price at the time of valuation, resulting in the
purchase of fewer shares than if the dividend or distribution had been
paid in Common Shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase Common Shares
in the open market within 30 days of the valuation date except where
temporary curtailment or suspension of purchases is necessary to
comply with federal securities laws. Interest will not be paid on any
uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 23
ADDITIONAL INFORMATION - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High
Income Fund, First Trust Strategic High Income Fund II, First Trust
Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance and
Financial Opportunities Fund and First Trust Active Dividend Income Fund was
held on April 16, 2009. At the Annual Meeting, Independent Trustees Richard E.
Erickson and Thomas R. Kadlec were elected by holders of the Common Shares of
the Fund as Class II Trustees for three-year terms expiring at the Fund's annual
meeting of shareholders in 2012. The number of votes cast in favor of Dr.
Erickson was 5,378,900, the number of votes against was 241,695 and the number
of abstentions was 841,626. The number of votes cast in favor of Mr. Kadlec was
5,383,317, the number of votes against was 237,278 and the number of abstentions
was 841,626. James A. Bowen, Robert F. Keith and Niel B. Nielson are the current
and continuing Trustees.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of Energy Income and Growth Fund (the "Fund"), including
the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Energy Income
Partners, LLC (the "Sub-Advisor"), at a meeting held on March 1-2, 2009. The
Board determined that the terms of the Agreements are fair and reasonable and
that the Agreements continue to be in the best interests of the Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund, including
the oversight of the Sub-Advisor. The Board noted the compliance program that
had been developed by the Advisor and considered that the compliance program
includes policies and procedures for monitoring the Sub-Advisor's compliance
with the 1940 Act and the Fund's investment objective and policies. The Board
also noted the enhancements made by the Advisor to the compliance program in
2008. With respect to the Sub-Advisory Agreement, the Board received a
presentation from representatives of the Sub-Advisor discussing the services
that the Sub-Advisor provides to the Fund
Page 24
ADDITIONAL INFORMATION - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
and how the Sub-Advisor manages the Fund's investments. The Board noted that
shareholders had approved the Sub-Advisory Agreement with the Sub-Advisor at a
special meeting held on January 8, 2008, and that the Sub-Advisor had begun
serving as such on September 14, 2007. In light of the information presented and
the considerations made, the Board concluded that the nature, quality and extent
of services provided to the Fund by the Advisor and the Sub-Advisor under the
Agreements have been and are expected to remain satisfactory and that the
Sub-Advisor, under the oversight of the Advisor, has managed the Fund consistent
with its investment objective and policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees paid to the Advisor by
similar funds, and noted that the Advisor does not provide advisory services to
other clients with investment objectives and policies similar to the Fund's. The
Board also considered information provided by the Sub-Advisor as to the fees it
charges to other similar clients, noting that the sub-advisory fee rate is lower
than the fee rate charged by the Sub-Advisor to the other investment companies
it manages. In addition, the Board received data prepared by Lipper Inc.
("Lipper"), an independent source, showing the management fees and expense
ratios of the Fund as compared to the management fees and expense ratios of a
combined peer group selected by Lipper and the Advisor. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that (i) the peer funds may use different types of
leverage which have different costs associated with them; (ii) most peer funds
do not employ an advisor/sub-advisor management structure; (iii) the peer funds
may not have the same fiscal year as the Fund, which may cause the expense data
used by Lipper to be measured over different time periods; (iv) many of the peer
funds are larger than the Fund; and (v) many of the peer funds have an inception
date prior to the Fund's inception date and their fee and expense structures may
not reflect newer pricing practices in the market. The Board reviewed the Lipper
materials, but based on its discussions with the Advisor, the Board determined
that the Lipper data was of limited value for purposes of its consideration of
the renewal of the Agreements.
The Board also considered performance information for the Fund, noting that,
similar to almost all other funds, the Fund's performance was impacted by the
severe market downturn in 2008. The Board noted that the performance information
included the Fund's quarterly performance report, which is part of the process
that the Board has established for monitoring the Fund's performance on an
ongoing basis. The Board determined that this process continues to be effective
for reviewing the Fund's performance. In addition to the Board's ongoing review
of performance, the Board also received data prepared by Lipper comparing the
Fund's performance to the combined peer group selected by Lipper and the
Advisor, as well as to a larger group and to a benchmark. The Board reviewed the
Lipper materials, but for similar reasons to those described above, the Board
determined that the performance data provided by Lipper was of limited value.
The Board considered changes made to the Fund's leverage arrangements in 2008 as
a result of market events and considered an analysis prepared by the Advisor on
the continued benefits provided by the Fund's leverage. The Board also
considered the impact of the changes made to the Fund's portfolio since the
Sub-Advisor began managing the Fund. In addition, the Board considered the
market price and net asset value performance of the Fund since inception, and
compared the Fund's premium/discount to the average and median premium/discount
of the combined peer group, noting that the Fund's premium/discount was
generally indicative of the asset class and market events. Based on the
information provided and the Board's ongoing review of the Fund's performance,
and taking into account the historic market events of 2008, the Board concluded
that the Fund's performance was reasonable.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, quality and extent
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2008, as
set forth in the materials provided to the Board. The Board noted the inherent
limitations in the profitability analysis, and concluded that the Advisor's
profitability appeared to be not excessive in light of the services provided to
the Fund. In addition, the Board considered and discussed any ancillary benefits
derived by the Advisor from its relationship with the Fund and noted that the
typical fall out benefits to the Advisor such as soft dollars are not present.
The Board concluded that any other fall-out benefits received by the Advisor or
its affiliates would appear to be limited.
Page 25
ADDITIONAL INFORMATION - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2009 (UNAUDITED)
The Board considered that the Sub-Advisor's investment services expenses are
primarily fixed, and that the Sub-Advisor expects that additional investments in
infrastructure will be made over the course of the next twelve months. The Board
considered that the sub-advisory fee rate was negotiated at arm's length between
the Advisor and the Sub-Advisor, an unaffiliated third party. The Board also
considered information provided by the Sub-Advisor as to the estimated revenues
the Sub-Advisor expects from the Sub-Advisory Agreement at the Fund's managed
asset level as of February 2009. The Board concluded that its consideration of
the Advisor's profitability was more relevant. The Board considered the fall-out
benefits realized by the Sub-Advisor from its relationship with the Fund,
including soft-dollar arrangements, and considered a summary of such
arrangements.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements continue to be fair and reasonable and that the continuation of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 26
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Energy Income Partners, LLC
49 Riverside Avenue
Westport, CT 06880
ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
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.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There has been no change, as of the date of this filing, in any of the
portfolio managers identified in response to paragraph (a)(1) of this
Item in the registrant's most recently filed annual report on Form
N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the Registrant's board of trustees, where those
changes were implemented after the Registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
Registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the Registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) ENERGY INCOME AND GROWTH FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date JULY 23, 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
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date JULY 23, 2009
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date JULY 23, 2009
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.