================================================================================
The information in this preliminary prospectus supplement is not complete and
may be changed. A registration statement relating to these securities has
been filed with and declared effective by the Securities and Exchange
Commission. This preliminary prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and are not soliciting
an offer to buy these securities in any jurisdiction where the offer or sale
is not permitted.
================================================================================
Filed pursuant to Rule 497(c) under
the Securities Act of 1933, as Amended
File no. 333-154254
Preliminary Prospectus Supplement Subject to Completion
(To Prospectus dated May 8, 2009) Dated February 11, 2010
Energy Income and Growth Fund
700,000 Common Shares
Energy Income and Growth Fund (the "Fund") is offering 700,000 of its
common shares of beneficial interest, par value $0.01 per share ("Common
Shares"), pursuant to this prospectus supplement and the accompanying prospectus
dated May 8, 2009. The Fund is a non-diversified, closed-end management
investment company which commenced investment operations in June 2004. 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 common shareholders with an efficient vehicle to invest in a
portfolio of cash-generating securities of publicly traded master limited
partnerships ("MLPs") and related public entities in the energy sector. This
prospectus supplement, together with the accompanying prospectus, sets forth the
information that you should know before investing.
The Fund's currently outstanding common shares of beneficial interest
are, and the Common Shares offered by this prospectus supplement and
accompanying prospectus, subject to notice of issuance, will be, listed on the
NYSE Amex (formerly the American Stock Exchange) under the symbol "FEN." The
last reported sale price of the Fund's common shares on February 10, 2010 was
$22.70 per share. The net asset value per share of the Fund's common shares at
the close of business on February 10, 2010 was $20.56.
This investment involves risks. See "Risks" beginning on page 37 of the
accompanying prospectus. You should consider carefully these risks together with
all of the other information contained in this prospectus supplement and the
accompanying prospectus before making a decision to purchase any Common Shares.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
Per Share Total
Public offering price $ $
Underwriting discount(1) $ $
Proceeds, before expenses, to us(2) $ $
----------------
(1) The Fund has also agreed to reimburse the underwriters for certain
out-of-pocket legal expenses incurred by them up to an aggregate of $60,000 with
respect to this offering.
(2) The aggregate offering expenses, including expenses agreed to be paid by the
Fund in footnote (1) above, are estimated to be $162,100, all of which will be
borne by the Fund.
The underwriters may also purchase up to an additional 105,000 Common
Shares at the public offering price, less the underwriting discount to cover
over-allotments, if any, within 30 days from the date of this prospectus
supplement. If the underwriters exercise the option in full, the total public
offering price will be $ , the total underwriting discount will be $ , and the
total proceeds, before expenses, to us will be $ .
The underwriters are offering the Common Shares as set forth under
"Underwriting" beginning on page S-9 of this prospectus supplement. Delivery of
the Common Shares is expected to be made on or about February , 2010.
Sole Book-Running Manager
RBC Capital Markets
Co-Managers
BB&T Capital Markets Oppenheimer & Co. Wunderlich Securities
a division of Scott & Stringfellow, LLC
Prospectus Supplement dated February , 2010
This prospectus supplement, together with the accompanying prospectus
and the SAI, as defined below, sets forth concisely the information that you
should know before investing. You should read the prospectus supplement and
prospectus, which contains important information about the Fund, before deciding
whether to invest in the Common Shares, and retain it for future reference. The
Statement of Additional Information (the "SAI"), dated May 8, 2009, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference in its entirety
into this prospectus supplement and the accompanying prospectus. This prospectus
supplement, the accompanying prospectus and the SAI are part of a "shelf"
registration statement on Form N-2 (the "Registration Statement") that the Fund
filed with the SEC. This prospectus supplement describes the specific details
regarding this offering, including the method of distribution. If information in
this prospectus supplement is inconsistent with the accompanying prospectus or
the SAI, you should rely on this prospectus supplement. You may request a free
copy of the SAI, the table of contents of which is on page 66 of the
accompanying prospectus, annual and semi-annual reports to shareholders, and
other information about the Fund, and make shareholder inquiries by calling
(800) 988-5891, by writing to the Fund or from the Fund's or the Advisor's (as
defined herein) website (http://www.ftportfolios.com). Please note that the
information contained in the Fund's or Advisor's website, whether currently
posted or posted in the future, is not part of this prospectus supplement, the
accompanying prospectus or the documents incorporated by reference in this
prospectus supplement and the accompanying prospectus. You also may obtain a
copy of the SAI (and other information regarding the Fund) from the SEC's
website (http://www.sec.gov).
- i -
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
PROSPECTUS SUPPLEMENT SUMMARY.................................................................S-1
SUMMARY OF FUND EXPENSES......................................................................S-5
CAPITALIZATION................................................................................S-7
MARKET AND NET ASSET VALUE INFORMATION........................................................S-8
USE OF PROCEEDS...............................................................................S-9
UNDERWRITING..................................................................................S-9
EXPERTS .....................................................................................S-12
LEGAL MATTERS................................................................................S-12
AVAILABLE INFORMATION........................................................................S-12
INDEX TO FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED NOVEMBER 30, 2009..................F-1
PROSPECTUS
PROSPECTUS SUMMARY..............................................................................1
SUMMARY OF FUND EXPENSES.......................................................................22
FINANCIAL HIGHLIGHTS...........................................................................24
SENIOR SECURITIES..............................................................................26
MARKET AND NET ASSET VALUE INFORMATION.........................................................27
THE FUND.......................................................................................28
USE OF PROCEEDS................................................................................28
THE FUND'S INVESTMENTS.........................................................................28
USE OF FINANCIAL LEVERAGE......................................................................33
RISKS 37
MANAGEMENT OF THE FUND.........................................................................50
NET ASSET VALUE................................................................................52
DISTRIBUTIONS..................................................................................53
DIVIDEND REINVESTMENT PLAN.....................................................................53
PLAN OF DISTRIBUTION...........................................................................54
DESCRIPTION OF SHARES..........................................................................55
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS.....................................58
STRUCTURE OF THE FUND; COMMON SHARE REPURCHASES AND CHANGE IN FUND STRUCTURE...................59
TAX MATTERS....................................................................................61
CORPORATE FINANCE SERVICES AND CONSULTING FEE..................................................65
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT....................................................65
LEGAL OPINIONS.................................................................................65
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION..................................66
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus in
making your investment decision. The Fund has not authorized any person to
provide you with different or inconsistent information. If anyone provides you
with different or inconsistent information, you should not rely on it. This
prospectus supplement and the accompanying prospectus do not constitute an offer
to sell or solicitation of an offer to buy any securities in any jurisdiction
where the offer or sale is not permitted. The information appearing in this
prospectus supplement and in the accompanying prospectus is accurate only as of
the dates on their covers or the dates of such information, as applicable. The
Fund's business, financial condition and prospects may have changed since such
dates.
- ii -
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the SAI,
including documents incorporated by reference, contain "forward-looking
statements." Forward-looking statements can be identified by the words "may,"
"will," "intend," "expect," "estimate," "continue," "plan," "anticipate," and
similar terms and the negative of such terms. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results
could differ materially from those contemplated by the forward-looking
statements. Many factors that could materially affect the Fund's actual results
are the performance of the portfolio of securities held by the Fund, the
conditions in the U.S. and international financial, petroleum and other markets,
the price at which the Fund's common shares will trade in the public markets and
other factors discussed in the Fund's periodic filings with the SEC.
Although the Fund believes that the expectations expressed in our
forward-looking statements are reasonable, actual results could differ
materially from those expressed or implied in our forward-looking statements.
The Fund's future financial condition and results of operations, as well as any
forward-looking statements, are subject to change and are subject to inherent
risks and uncertainties, such as those disclosed in the "Risks" section of the
accompanying prospectus. You are cautioned not to place undue reliance on these
forward-looking statements. All forward-looking statements contained or
incorporated by reference in this prospectus supplement or the accompanying
prospectus are made as of the date of this prospectus supplement or the
accompanying prospectus, as the case may be. Except for the Fund's ongoing
obligations under the federal securities laws, the Fund does not intend, and the
Fund undertakes no obligation, to update any forward-looking statement. The
forward-looking statements contained in this prospectus supplement, the
accompanying prospectus and the SAI are excluded from the safe harbor protection
provided by section 27A of the Securities Act of 1933, as amended (the
"Securities Act").
Currently known risk factors that could cause actual results to differ
materially from the Fund's expectations include, but are not limited to, the
factors described in the "Risks" section of the accompanying prospectus. The
Fund urges you to review carefully this section for a more detailed discussion
of the risks of an investment in our securities.
- iii -
PROSPECTUS SUPPLEMENT SUMMARY
The following summary contains basic information about the Fund and the
securities offered hereby. It is not complete and may not contain all of the
information you may want to consider. You should review the more detailed
information contained in this prospectus supplement and in the accompanying
prospectus and in the SAI, especially the information set forth under the
heading "Risks" beginning on page 37 of the accompanying prospectus.
The Fund
Energy Income and Growth Fund is a non-diversified, closed-end
management investment company. 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 common shareholders with an
efficient vehicle to invest in a portfolio of cash-generating securities of
publicly traded MLPs and related public entities in the energy sector. The Fund
commenced operations upon completion of its initial public offering of common
shares in June 2004, raising approximately $122 million in equity after the
payment of offering expenses.
Investment Advisor and Sub-Advisor
First Trust Advisors L.P. ("First Trust Advisors" or the "Advisor") is
the Fund's investment advisor, responsible for supervising the Fund's
sub-advisor, monitoring the Fund's investment portfolio, managing the Fund's
business affairs and providing certain clerical and bookkeeping and other
administrative services. The Advisor, in consultation with the Fund's
sub-advisor, is also responsible for determining the Fund's overall investment
strategy and overseeing its implementation. Energy Income Partners, LLC ("Energy
Income Partners" or the "Sub-Advisor") is the Fund's sub-advisor and is
primarily responsible for the day-to-day supervision and investment strategy of
the Fund.
First Trust Advisors, a registered investment advisor, is an Illinois
limited partnership formed in 1991. First Trust Advisors serves as investment
advisor or portfolio supervisor to investment portfolios with approximately $27
billion in assets which it managed or supervised as of December 31, 2009.
Energy Income Partners is a Delaware limited liability company and a
registered investment advisor, which provides professional asset management
services in the area of energy-related MLPs, and other high-payout securities.
Founded in 2003, Energy Income Partners serves as investment advisor to
investment portfolios with approximately $352 million in assets among three
separate funds which it managed as of December 31, 2009.
Pursuant to an investment management agreement between First Trust
Advisors and the Fund, the Fund pays for the services and facilities provided by
First Trust Advisors an annual management fee, payable on a monthly basis, equal
to 1.00% of the Fund's Managed Assets. For purposes of calculation of the
management fee, the Fund's "Managed Assets" means the average daily gross asset
value of the Fund (which includes assets attributable to the Fund's leverage),
minus the sum of the Fund's accrued and unpaid dividends on any outstanding
preferred shares and accrued liabilities (other than debt representing
leverage).
The Sub-Advisor receives a portfolio management fee equal to 0.50% of
the Fund's Managed Assets. The Sub-Advisor's fee is paid by the Advisor out of
the Advisor's management fee. See "Management of the Fund" on page 50 of the
accompanying prospectus.
Investment in Sub-Advisor Entities
First Trust Portfolios L.P., an affiliate of the Advisor, is in
discussions to purchase, through one or more wholly-owned subsidiaries, up to a
20% ownership interest in each of the Sub-Advisor and EIP Partners, LLC, a
Delaware limited liability company and affiliate of the Sub-Advisor. The
completion of these transactions are subject to a number of conditions,
including the entering into of definitive agreements with regard to each
transaction and closing of such transactions contemporaneously. There can be no
assurance that the transactions will be completed.
S-1
Portfolio Investments
The Fund's investments consist of equity and/or debt securities issued
by energy companies and energy sector MLPs and MLP-related entities. The
companies in which the Fund invests are generally involved in the business of
transporting, processing, storing, distributing or marketing natural gas,
natural gas liquids (including propane), crude oil, refined petroleum products,
coal or electricity, or exploring, developing, managing or producing such
commodities or products, or in supplying energy-related products and services.
Under normal market conditions, as a non-fundamental policy, the Fund
invests at least 85% of its Managed Assets (including assets obtained through
leverage) in securities of energy companies and energy sector MLPs and
MLP-related entities, and invests at least 65% of its Managed Assets in equity
securities of such MLPs and MLP-related entities.
The Fund has adopted the following additional non-fundamental
investment policies:
o The Fund may invest up to 35% of its Managed Assets in
unregistered or otherwise restricted securities (including up
to 10% of its Managed Assets in securities issued by private
companies). The types of unregistered or otherwise restricted
securities that the Fund may purchase consist of MLP common
units, MLP subordinated units and securities of public and
private energy companies.
o The Fund may invest up to 25% of its Managed Assets in debt
securities of energy companies, MLPs and MLP-related entities,
including below investment grade securities, which are
commonly referred to as "junk bonds." Below investment grade
debt securities will be rated at least "B3" by Moody's
Investors Service, Inc. and at least "B-" by Standard & Poor's
Ratings Group at the time of purchase, or comparably rated by
another nationally recognized statistical rating organization
or, if unrated, determined to be of comparable quality by the
Sub-Advisor.
o The Fund will not invest more than 10% of its Managed Assets
in any single issuer.
o The Fund will not engage in short sales, except to the extent
the Fund engages in derivative investments to seek to hedge
against interest rate risk in connection with the Fund's use
of Financial Leverage or market risks associated with the
Fund's portfolio.
o The Fund may invest up to 15% of its Managed Assets in
non-U.S. securities as well as hedge the currency risk of the
non-U.S. securities using derivative instruments.
To generate additional income, the Fund writes (or sells) covered call
options on the common stock of energy companies held in the Fund's portfolio.
See "The Fund's Investments" beginning on page 28 of the accompanying
prospectus.
As of November 30, 2009, the Fund's top 10 holdings by issuer were:
Percentage of
Name Total Investments
------------------------------------- ---------------------
Magellan Midstream Partners, L.P. 11.0%
Enterprise Products Partners, L.P. 7.8
Plains All American Pipeline, L.P. 6.6
Kinder Morgan Energy Partners, L.P. 6.1
Enterprise GP Holdings, L.P. 5.0
ONEOK Partners, L.P. 4.4
NuStar Energy, L.P. 3.9
Energy Transfer Partners, L.P. 3.8
Enbridge Energy Partners, L.P. 3.8
Sunoco Logistics Partners, L.P. 3.3
---------------------
Total 55.7%
S-2
Equity Sales Agreement
On May 19, 2009, the Fund entered into an equity sales agreement with a
registered broker-dealer, whereby the Fund may offer and sell up to 1,000,000 of
the Fund's common shares from time to time through such broker-dealer, as agent
for the offer and sale of the common shares (the "Equity Sales Agreement").
Under the Equity Sales Agreement, upon written instructions from the Fund, the
broker-dealer has agreed to use its commercially reasonable efforts to solicit
offers to purchase Fund common shares by means of ordinary brokers' transactions
on the NYSE Amex at market prices prevailing at the time of the sale or at
negotiated prices. While the Equity Sales Agreement contemplates an offering of
up to 1,000,000 common shares, the precise number of common shares to be sold
will depend primarily on future market conditions. The Fund will suspend sales
of common shares under the Equity Sales Agreement during the offering of the
Common Shares and may resume sales on the 45th day following the date of the
prospectus supplement which 45-day period may be extended in the event the Fund,
during the last 17 days of such period, issues an earnings release or material
news or a material event relating to the Fund, the Advisor or the Sub-Advisor
occurs. See "Underwriting" beginning on page S-9. As of November 30, 2009, the
Fund had sold 227,636 common shares pursuant to the Equity Sales Agreement.
Financial Leverage
On January 23, 2009, the Fund entered into a $60,000,000 committed
facility agreement with BNP Paribas Prime Brokerage Inc. (the "Commitment
Facility"). As of November 30, 2009, the principal amount of borrowings under
the Commitment Facility was $45,000,000, representing approximately 25% of the
Fund's Managed Assets. As of November 30, 2009, the Fund had $15,000,000 of
unutilized funds available for borrowing under the Commitment Facility.
Outstanding balances under the Commitment Facility generally accrue interest at
a variable annual rate equal to the three-month LIBOR plus 1.50%. As of November
30, 2009, the rate was 1.76%. The Commitment Facility also has an annual unused
fee of 0.80% on the unutilized funds available for borrowing. The total annual
interest and fee rate as of November 30, 2009 was 1.52%, based on the total
commitment of $60,000,000. Assuming that the Fund's leverage costs remain as
described above (at an assumed average annual cost of 1.52%) and leverage as a
percentage of the Fund's Managed Assets remains at 25%, the annual return that
the Fund's portfolio must experience (net of expenses) in order to cover its
leverage costs would be 0.50%.
Adjusted to reflect the impact of 700,000 Common Shares issued in the
offering contemplated by this prospectus supplement and accompanying prospectus
and an anticipated leverage percentage of approximately % of the Fund's Managed
Assets, the total annual interest and fee rate as of November 30, 2009 would be
% and the annual return that the Fund's portfolio must experience (net of
expenses) in order to cover its leverage costs would be %. The following table
is designed to illustrate the effect of leverage on common share total return
after the issuance of Common Shares contemplated by this prospectus supplement
and accompanying prospectus, assuming investment portfolio total returns
(comprised of income and changes in the value of securities held in the Fund's
portfolio) of (10%), (5%), 0%, 5% and 10%. These assumed investment portfolio
returns are hypothetical figures and are not necessarily indicative of the
investment portfolio returns experienced or expected to be experienced by the
Fund. See "Risks - Leverage Risk", beginning on page 42 of the accompanying
prospectus. The table further assumes leverage representing % of the Fund's
Managed Assets, net of expenses, and the Fund's current annual leverage interest
and fee rate of %.
Assumed Portfolio Total Return (Net of Expenses).......... -10% -5% 0% 5% 10%
Common Share Total Return................................ % % % % %
Distributions
The Fund has paid distributions to common shareholders every quarter
since inception. Payment of future distributions is subject to approval by the
Fund's Board of Trustees, as well as meeting the covenants of any senior debt
and the asset coverage requirements of the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund's next regularly scheduled quarterly
distribution will be for the quarter ending April 30, 2010 and, if approved by
our Board of Trustees, will be paid to common shareholders on or about April 30,
2010. The distributions the Fund has paid since inception are as follows:
S-3
Payment Date Distribution Per Share ($)
October 29, 2004 0.3250
January 31, 2005 0.3300
April 29, 2005 0.3300
July 29, 2005 0.3300
October 31, 2005 0.3350
January 31, 2006 0.3350
April 28, 2006 0.3400
July 31, 2006 0.3450
October 31, 2006 0.3550
January 31, 2007 0.3750
April 30, 2007 0.3800
July 31, 2007 0.3850
October 31, 2007 0.3850
January 31, 2008 0.3850
April 30, 2008 0.3950
July 31, 2008 0.4400
October 31, 2008 0.4400
January 30, 2009 0.4400
April 30, 2009 0.4400
July 31, 2009 0.4400
October 30, 2009 0.4400
January 29, 2010 0.4400
The Offering
Common Shares offered 700,000 shares(1)
Fund common shares outstanding
after this offering 7,504,755 shares(1)
Use of proceeds The Fund estimates that the net proceeds
from this offering after expenses
without exercise of the overallotment
option will be approximately $ . The
Fund intends to use these net proceeds
to acquire portfolio securities in
pursuit of its investment objectives and
policies or for general corporate
purposes. See "Use of Proceeds" on page
S-9.
Risk factors See the section entitled "Risks" and
other information included in the
accompanying prospectus for a discussion
of factors you should carefully consider
before deciding to invest in the Common
Shares.
NYSE Amex symbol "FEN"
--------------------
(1) The number of common shares of the Fund outstanding after the offering
assumes the underwriters' over-allotment option is not exercised. If the
over-allotment option is exercised in full, the Fund will issue and sell
an additional 105,000 Common Shares.
S-4
SUMMARY OF FUND EXPENSES
The following table contains information about the costs and expenses
that common shareholders will bear directly or indirectly. In accordance with
SEC requirements, the table below shows the Fund's expenses, including leverage
costs, as a percentage of the Fund's net assets as of November 30, 2009. As of
that date, the Fund had $45,000,000 of leverage outstanding pursuant to the
Commitment Facility. Such leverage represented 25% of Managed Assets as of
November 30, 2009. Additionally, the following table and example contain
information assuming the additional issuance of 700,000 Common Shares and
anticipated leverage of $ , or % of the Fund's Managed Assets.
Shareholder Transaction Expenses:
Underwriting Discount (as a percentage of offering price)(1)......... %
Offering Expenses Borne by the Fund
(as a percentage of offering price)............................... %
Dividend Reinvestment Plan Fees...................................... None(2)
Percentage of Net
Assets Attributable
to Common
Percentage of Net Shareholders at
Assets Attributable to November 30, 2009,
Common Shareholders (Assuming the
for the Year Ended issuance of 700,000
November 30, 2009 (25% Common Shares and
Leverage Outstanding as % Leverage
of November 30, 2009) Outstanding)
----------------------- -----------------------
Annual Expenses:
Management Fees(3).................................................. 1.34% %
Interest and Fees on Leverage(4).................................... 1.02% %
Offering Costs(5)................................................... 0.44% %
Other Expenses (exclusive of current and deferred income tax
expense (benefit))(6)............................................... 0.52% %
----- -----
Total Annual Expenses............................................... 3.32% %
Fee and Expense Reimbursement....................................... -- --
----- -----
Total Net Annual Expenses........................................... 3.32% %
===== =====
-----------------------------------------------------------------------------------------------------------------------
(1) The Fund will pay all offering costs of the Fund. The Fund has also agreed
to reimburse the underwriters for certain out-of-pocket legal expenses
incurred by them up to an aggregate of $60,000 with respect to this
offering.
(2) You will pay brokerage charges if you direct PNC Global Investment
Servicing (U.S.) Inc., as agent for the Common Shareholders Dividend
Reinstatement Plan, to sell your Common Shares held in a dividend
reinvestment account.
(3) Represents the aggregate fee payable to the Advisor (and by the Advisor to
the Sub-Advisor).
(4) Interest and fees on leverage in the first column of the table reflect the
actual cost to the Fund of borrowing, expressed as a percentage of the
Fund's average daily net assets, for the fiscal year ended November 30,
2009. Interest and fees on leverage in the second column of the table
reflect the cost to the Fund of borrowing, expressed as a percentage of the
Fund's average daily net assets as of November 30, 2009, assuming the
additional issuance of 700,000 Common Shares and leverage of % of the
Fund's Managed Assets, based upon interest rates in effect as of November
30, 2009.
(5) Offering costs in the first column of the table represent offering costs
associated with the Fund's Series B Energy Notes that were redeemed in full
on February 26, 2009 and amortized offering costs associated with the
Equity Sales Agreement. Offering costs in the second column of the table
represent the remaining unamortized offering costs associated with the
Equity Sales Agreement.
S-5
(6) Current and deferred income tax expense (benefit) varies based on the
Fund's net investment income and realized and unrealized investment gain
and losses, which cannot be predicted. Accordingly, other expenses do not
include current or deferred income tax expense (benefit). The Fund's
current and deferred income tax expense (benefit) as a percentage of
average net assets by fiscal year from inception through November 30, 2009
has been as follows:
Period June 24, 2004 (commencement of operations)
Through November 30, 2004................................ 16.18%
Year Ended November 30, 2005................................ 5.98%
Year Ended November 30, 2006................................ 10.84%
Year Ended November 30, 2007................................ 4.58%
Year Ended November 30, 2008................................ (24.83)%
Year Ended November 30, 2009................................ 22.47%
The purpose of the tables above and the example below is to help you
understand all fees and expenses that you, as a holder of Common Shares, would
bear directly or indirectly. The following example illustrates the expenses that
you would pay on a $1,000 investment in Common Shares, assuming: (i) an
underwriting discount of % and offering expenses of % of the offering price,
(ii) total annual expenses of % of net assets attributable to common shares
through year 10, (iii) a 5% annual return and (iv) all distributions are
reinvested at net asset value.(1)
1 Year 3 Years 5 Years 10 Years
$ $ $ $
-------------------------------------------------------------------------------
(1) The example should not be considered a representation of future expenses.
The example assumes that the estimated "Other Expenses" set forth in the
Annual Expenses table are accurate, that all dividends and distributions
are reinvested at net asset value and that the Fund is engaged in leverage
of % of Managed Assets, assuming interest and fees on leverage of %. The
interest and fees on leverage is expressed as an interest rate and
represents interest and fees payable on its current credit facility. Actual
expenses may be greater or less than those shown. Moreover, the Fund's
actual rate of return may be greater or less than the hypothetical 5%
return shown in the example.
S-6
CAPITALIZATION
The following table sets forth the Fund's capitalization at November 30,
2009:
o on a historical basis;
o pro forma to reflect (1) the sale of 32,326 common shares under the
Equity Sales Agreement since November 30, 2009, (2) the issuance of an
aggregate of 14,159 common shares pursuant to the Fund's dividend
reinvestment plan since November 30, 2009 and (3) the additional
borrowing of $9,800,000 under the Commitment Facility since November
30, 2009; and
o pro forma as adjusted to reflect (1) the assumed sale of 700,000
Common Shares at $ per share, in the offering contemplated by this
prospectus supplement, after deducting the underwriting discount
of $ and offering expenses payable by the Fund of approximately
$162,100 and (2) an anticipated leverage percentage of approximately
% of the Fund's Managed Assets.
Pro Forma
Actual Pro Forma As Adjusted(1)
Borrowings $45,000,000 $54,800,000 $
Shareholder's equity
Common Shares, $0.01 par value per share, unlimited
shares authorized, 6,758,270 shares outstanding
(actual), 6,804,755 shares outstanding (pro forma)
and shares outstanding (pro forma as adjusted) 106,250,167 107,306,549
Accumulated net investment income (loss), net of
income taxes (12,894,670) (12,894,670) (12,894,670)
Accumulated net realized gain (loss) on investments
and written options, net of income taxes (1,117,184) (1,117,184) (1,117,184)
Net unrealized appreciation (depreciation) of
investments and written options, net of income
taxes 44,282,176 44,282,176 44,282,176
-------------------- -------------------- --------------------
Net assets applicable to common shareholders 136,520,489 137,576,871
-------------------- -------------------- --------------------
Total Capitalization $181,520,489 $192,376,871 $
==================== ==================== ====================
-------------------------------------------------------------------------------
(1) Does not include the underwriters' over-allotment option of 105,000 Common
Shares.
S-7
MARKET AND NET ASSET VALUE INFORMATION
The Fund's currently outstanding common shares are, and the Common
Shares offered by this prospectus supplement and accompanying prospectus,
subject to notice of issuance, will be, listed on the NYSE Amex. The Fund's
common shares commenced trading on the NYSE Amex (formerly the American Stock
Exchange) on June 25, 2004.
The Fund's common shares have traded both at a premium and at a
discount in relation to net asset value. Shares of closed-end investment
companies frequently trade at a discount from net asset value. The Fund's
issuance of the Common Shares or additional common shares may have an adverse
effect on prices in the secondary market for the Fund's common shares by
increasing the number of common shares available, which may put downward
pressure on the market price for the Fund's common shares. The continued
development of alternatives as vehicles for investing in a portfolio of energy
infrastructure MLPs, including other publicly traded investment companies and
private funds, may reduce or eliminate any tendency of the Fund's common shares
to trade at a premium in the future. See "Risks - Market Discount From Net Asset
Value," beginning on page 49 of the accompanying prospectus.
The following table sets forth for each of the periods indicated the
high and low closing market prices for common shares of the Fund on the NYSE
Amex (formerly the American Stock Exchange), and the corresponding net asset
value per share and the premium or discount to net asset value per share at
which the Fund's common shares were trading. Net asset value is determined daily
as of the close of regular trading on the NYSE (normally 4:00 p.m. eastern
time). Prior to August 1, 2008, net asset value was determined on each Friday
and as of the end of each month. See "Net Asset Value" on page 52 of the
accompanying prospectus for information as to the determination of the Fund's
net asset value.
PREMIUM/(DISCOUNT)
MARKET PRICE(1) NET ASSET VALUE (2) TO NET ASSET VALUE
Quarter Ended High Low High Low High Low
March 31, 2008....................... $24.60 $21.16 $26.18 $24.49 (6.04)% (13.60)%
June 30, 2008........................ $25.80 $22.36 $25.46 $23.91 1.34% (6.48)%
September 30, 2008................... $23.33 $18.26 $22.18 $20.71 5.18% (11.83)%
December 31, 2008.................... $20.20 $11.21 $19.14 $12.71 5.54% (11.80)%
March 31, 2009....................... $19.04 $14.02 $15.89 $13.76 19.82% 1.89%
June 30, 2009........................ $20.75 $16.83 $18.04 $15.95 15.02% 5.52%
September 30, 2009................... $22.31 $18.40 $18.48 $16.95 20.73% 8.55%
December 31, 2009.................... $25.20 $21.17 $21.00 $19.69 20.00% 7.52%
--------------------------------------------------------------------------------
(1) Based on high and low closing market price for the respective quarter.
(2) Based on the net asset value calculated daily as of the close of regular
trading on the NYSE (normally 4:00 p.m. eastern time). Prior to August 1,
2008, net asset value was determined on each Friday and as of the end of
each month.
The last reported sale price, net asset value per share and percentage
premium to net asset value per share of the common shares as of February 10,
2010 were $22.70, $20.56 and 10.41%, respectively. As of February 10, 2010, the
Fund had 6,804,755 common shares outstanding and net assets of the Fund were
$196,233,436.
S-8
USE OF PROCEEDS
The Fund estimates that the net proceeds from this offering will be
approximately $ , after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Fund. If the underwriters exercise
their over-allotment option in full, the Fund estimates that net proceeds from
this offering will be approximately $ , after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the Fund.
The Fund intends to use the net proceeds of this offering to acquire
portfolio securities in accordance with our investment objective and policies
and for general corporate purposes. Pending such investments, the Fund
anticipates either investing the proceeds in short-term securities issued by the
U.S. government or its agencies or instrumentalities or in high quality,
short-term or long-term debt obligations or money market instruments. A delay in
the anticipated use of proceeds could lower returns and reduce the Fund's
distribution to common shareholders.
UNDERWRITING
RBC Capital Markets Corporation is acting as the representative of the
underwriters of this offering. Under the terms of an underwriting agreement
dated the date of this prospectus supplement, the underwriters set forth below
have agreed to purchase from the Fund the number of Common Shares set forth
opposite its name.
Name Number of Common Shares
-------------------------------
RBC Capital Markets Corporation
BB&T Capital Markets, a division of Scott & Stringfellow, LLC
Oppenheimer & Co. Inc.
Wunderlich Securities, Inc.
-------------------------------
Total
The underwriting agreement provides that the underwriters' obligations
to purchase the Common Shares depend on the satisfaction of the conditions
contained in the underwriting agreement and that if any of the Common Shares are
purchased by the underwriters, all of the Common Shares must be purchased. The
conditions contained in the underwriting agreement include the condition that
all the representations and warranties made by the Fund to the underwriters are
true, that there has been no material adverse change in the condition of the
Fund or in the financial markets and that the Fund deliver to the underwriters
customary closing documents.
The following table summarizes the underwriting discount the Fund will
pay to the underwriters in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional Common Shares. The underwriting discount is the difference
between the initial price to the public and the amount the underwriters pay the
Fund to purchase the Common Shares.
Full
No Exercise Exercise
Per Common Share $ $
Total $ $
S-9
The Fund will pay all expenses of the offering that it incurs. Total
remaining expenses of the offering payable by the Fund, other than the
underwriting discount, will be approximately $162,100. As a part of these
expenses, the Fund has agreed to reimburse the underwriters for certain
out-of-pocket legal expenses incurred by them up to an aggregate of $60,000 with
respect to this offering.
The Fund has been advised by the underwriters that the underwriters
propose to offer the Common Shares directly to the public at the initial price
to the public set forth on the cover page of this prospectus supplement.
The Fund has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments that may be required to be made with respect to these liabilities.
The Fund has granted to the underwriters an option to purchase up to an
aggregate of 105,000 additional Common Shares at the initial price to the public
less the underwriting discount set forth on the cover page of this prospectus
supplement exercisable solely to cover over-allotments, if any. Such option may
be exercised in whole or in part at any time until 30 days after the date of
this prospectus supplement. If this option is exercised, each underwriter will
be committed, subject to satisfaction of the conditions specified in the
underwriting agreement, to purchase a number of additional Common Shares
proportionate to each underwriter's initial commitment as indicated in the
preceding table, and the Fund will be obligated, pursuant to the option, to sell
these shares to the underwriters.
During a period of 60 days from the date of the prospectus supplement,
the Fund, the Advisor and the Sub-Advisor have agreed that subject to certain
exceptions, they will not, without the prior written consent of RBC Capital
Markets Corporation, (1) directly or indirectly, offer, pledge, sell, contract
to sell, sell any option, rights or warrant to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of the Fund's common shares or any securities convertible
into or exercisable or exchangeable for the Fund's common shares or file any
registration statement under the Securities Act with respect to any of the
foregoing or (2) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Fund's common shares, whether any such swap or
transaction described in clause (1) or (2) above is to be settled by delivery of
common shares or such other securities, in cash or otherwise. The restrictions
described above will apply to certain of the Fund's trustees and the sale of
common shares under the Equity Sales Agreement for a period of 45 days after the
date of this Prospectus Supplement. In connection with such Equity Sales
Agreement, the Fund will be permitted to file an amendment to its registration
statement notwithstanding the restrictions set forth in this paragraph for
purposes of updating necessary disclosure relating to the sale of common shares
from time to time under the Equity Sales Agreement. The restrictions described
in this paragraph do not apply to the sale of the Common Shares to the
underwriters or common shares issued or purchased in the open market pursuant to
the Fund's dividend reinvestment plan. In the event that either: (x) during the
last 17 days of the 60-day period, or the 45-day period, as applicable, referred
to above ("Lock-Up Period"), the Fund issues an earnings release or material
news or a material event relating to the Fund, the Advisor or the Sub-Advisor
occurs, or (y) prior to the expiration of such Lock-Up Period, the Fund
announces that it will release earnings results or becomes aware that material
news or a material event will occur during the 16-day period beginning on the
last day of such Lock-Up Period, the restrictions described above shall continue
to apply until the expiration of the 18-day period beginning on the date of the
earnings release or the occurrence of the material news or material event, as
applicable, unless the underwriters waive such extensions.
RBC Capital Markets Corporation, in its sole discretion, may release
the common shares subject to lock-up agreements in whole or in part at any time
with or without notice. When determining whether or not to release common shares
from lock-up agreements, RBC Capital Markets Corporation will consider, among
other factors, the shareholders' reasons for requesting the release, the number
of common shares for which the release is being requested and market conditions
at the time.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate covering
transactions and penalty bids in accordance with Regulation M under the Exchange
Act.
o Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
S-10
o Over-allotment transactions involve sales by the underwriters
of Common Shares in excess of the number of Common Shares the
underwriters are obligated to purchase, which creates a
syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered
short position, the number of Common Shares over-allotted by
the underwriters is not greater than the number of shares they
may purchase in their option to purchase additional Common
Shares. In a naked short position, the number of Common Shares
involved is greater than the number of Common Shares in the
underwriters' option to purchase additional Common Shares. The
underwriters may close out any short position by either
exercising their option and/or purchasing Common Shares in the
open market.
o Syndicate covering transactions involve purchases of the Common
Shares in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of the Common Shares to close out the
short position, the underwriters will consider, among other
things, the price of Common Shares available for purchase in
the open market as compared to the price at which they may
purchase Common Shares through their option. If the
underwriters sell more Common Shares than could be covered by
their option to purchase additional Common Shares, which is
referred to in this prospectus supplement as a naked short
position, the position can only be closed out by buying Common
Shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that
there could be downward pressure on the price of the Common
Shares in the open market after pricing that could adversely
affect investors who purchase in the offering.
o Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the Common Shares
originally sold by the syndicate member are purchased in a
stabilizing or syndicate covering transaction to cover
syndicate short positions.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales may have the effect of raising or maintaining
the market price of the Common Shares or preventing or retarding a decline in
the market price of the Common Shares. As a result, the price of the Common
Shares may be higher than the price that might otherwise exist in the open
market.
These stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the market price of
the Common Shares or preventing or retarding a decline in the market price of
the Common Shares. As a result, the price of the Common Shares may be higher
than the price that might otherwise exist in the open market. These transactions
may be effected on the NYSE Amex or otherwise and, if commenced, may be
discontinued at any time.
Neither the Fund, the Advisor, the Sub-Advisor nor any of the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Shares. In addition, neither the Fund, the Advisor, the
Sub-Advisor nor any of the underwriters make any representation that the
underwriters will engage in these stabilizing transactions or that any
transaction, if commenced, will not be discontinued without notice.
The underwriters and their affiliates have provided in the past to the
Fund, and may from time to time in the future provide, certain commercial
banking, financial advisory, investment banking and other services, for which
they will be entitled to receive separate fees. The underwriters and their
affiliates may from time to time in the future engage in transactions with the
Fund and perform services for the Fund or its portfolio companies in the
ordinary course of business.
The principal business address of RBC Capital Markets Corporation is
Three World Financial Center, 200 Vesey Street, 8th Floor, New York, NY 10281.
S-11
EXPERTS
The financial statements and financial highlights in this prospectus
supplement and the accompanying SAI have been audited by Deloitte & Touche LLP,
an independent registered public accounting firm, as stated in their reports
appearing herein and elsewhere in the Registration Statement. Such financial
statements and financial highlights are included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the Common Shares will be
passed upon for the Fund by Chapman and Cutler LLP, Chicago, Illinois and for
the underwriters by Troutman Sanders LLP. Chapman and Cutler LLP and Troutman
Sanders LLP may rely as to certain matters of Massachusetts law on the opinion
of Bingham McCutchen LLP.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the 1940 Act, as
amended, and is required to file reports, including annual and semi-annual
reports, proxy statements and other information with the SEC. The Fund's most
recent shareholder annual report filed with the SEC is for the period ended
November 30, 2009. This document is available on the SEC's IDEA system and can
be inspected and copied for a fee at the SEC's public reference room, 100 F
Street, N.E., Room 1580, Washington, D.C. 20549. Additional information about
the operation of the public reference room facilities may be obtained by calling
the SEC at (202) 551-5850.
This prospectus supplement and the accompanying prospectus do not
contain all of the information in the Registration Statement, including
amendments, exhibits, and schedules. Statements in this prospectus supplement
and the accompanying prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund can be found in the Registration
Statement (including amendments, exhibits, and schedules). The SEC maintains a
web site (http://www.sec.gov) that contains the Registration Statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the SEC, including proxy statements and reports filed under
the Exchange Act.
S-12
INDEX TO FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED NOVEMBER 30, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................... F-3
PORTFOLIO OF INVESTMENTS.................................................. F-4
STATEMENT OF ASSETS AND LIABILITIES....................................... F-8
STATEMENT OF OPERATIONS................................................... F-9
STATEMENTS OF CHANGES IN NET ASSETS....................................... F-10
STATEMENT OF CASH FLOWS................................................... F-11
FINANCIAL HIGHLIGHTS...................................................... F-12
NOTES TO FINANCIAL STATEMENTS............................................. F-13
F-1
This page is intentionally left blank.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of Energy Income and Growth Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Energy Income and Growth Fund (the "Fund") as
of November 30, 2009, and the related statements of operations and cash flows
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2009 by correspondence with the Fund's
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Energy
Income and Growth Fund as of November 30, 2009, the results of its operations
and its cash flows for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
the periods presented, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
January 27, 2010
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
SHARES/
UNITS DESCRIPTION VALUE
--------- ----------- ------------
MASTER LIMITED PARTNERSHIPS - 116.4%
OIL, GAS & CONSUMABLE FUELS - 114.8%
74,500 AmeriGas Partners, L.P. ................................... $ 2,795,240
110,000 Buckeye GP Holdings, L.P. (b) ............................. 3,081,100
25,000 Buckeye Partners, L.P. .................................... 1,317,500
465,471 Clearwater Natural Resources, L.P. (c) (d) (e) (f) ........ 0
124,300 Duncan Energy Partners, L.P. (b) .......................... 2,793,021
153,600 El Paso Pipeline Partners, L.P. (b) ....................... 3,640,320
150,947 Enbridge Energy Partners, L.P. (b) ........................ 7,440,178
7,582 Encore Energy Partners, L.P. (b) .......................... 134,429
159,000 Energy Transfer Equity, L.P. (b) .......................... 4,690,500
173,870 Energy Transfer Partners, L.P. (b) ........................ 7,526,832
267,803 Enterprise GP Holdings, L.P. (b) .......................... 9,908,711
515,998 Enterprise Products Partners, L.P. (b) .................... 15,371,580
40,709 EV Energy Partners, L.P. (b) .............................. 1,052,328
6,751 Exterran Partners, L.P. ................................... 130,497
74,874 Global Partners, L.P. (b) ................................. 1,758,790
100,700 Holly Energy Partners, L.P. (b) ........................... 3,695,690
112,836 Inergy Holdings, L.P. ..................................... 6,036,726
205,771 Kinder Morgan Energy Partners, L.P. (b) ................... 11,988,218
528,642 Magellan Midstream Partners, L.P. (b) ..................... 21,727,186
142,788 Natural Resource Partners, L.P. (b) ....................... 3,399,782
145,126 NuStar Energy, L.P. (b) ................................... 7,611,859
229,100 NuStar GP Holdings, LLC (b) ............................... 5,718,336
149,130 ONEOK Partners, L.P. (b) .................................. 8,752,440
70,000 Penn Virginia Resource Partners, L.P. (b) ................. 1,358,700
255,921 Plains All American Pipeline, L.P. (b) .................... 12,949,603
57,505 Quicksilver Gas Services, L.P. (b) ........................ 1,207,605
105,454 Sunoco Logistics Partners, L.P. (b) ....................... 6,511,785
27,000 TC Pipelines, L.P. ........................................ 977,130
70,000 TransMontaigne Partners, L.P. (b) ......................... 1,820,000
60,000 Williams Pipeline Partners, L.P. (b) ...................... 1,311,000
-------------
156,707,086
-------------
GAS UTILITIES - 1.6%
30,000 Spectra Energy Partners, L.P. ............................. 831,900
30,000 Suburban Propane Partners, L.P. ........................... 1,317,000
-------------
2,148,900
-------------
TOTAL MASTER LIMITED PARTNERSHIPS
(Cost $97,948,559) ..................................... 158,855,986
-------------
CANADIAN INCOME TRUSTS - 3.4%
OIL, GAS & CONSUMABLE FUELS - 2.7%
171,680 Keyera Facilities Income Fund ............................. 3,716,959
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.7%
90,000 Northland Power Income Fund ............................... 937,180
-------------
TOTAL CANADIAN INCOME TRUSTS
(Cost $3,266,024) ...................................... 4,654,139
-------------
See Notes to Financial Statements
F-4
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
SHARES DESCRIPTION VALUE
--------- ----------- -------------
COMMON STOCKS - 24.5%
OIL, GAS & CONSUMABLE FUELS - 17.4%
65,470 Enbridge Energy Management, LLC (b) (g) ................... $ 3,197,535
22,000 Enbridge, Inc. (h) ........................................ 940,720
119,037 Kinder Morgan Management, LLC (b) (g) ..................... 5,984,007
179,500 Spectra Energy Corp. (i) .................................. 3,484,095
160,000 TransCanada Corp. (i) ..................................... 5,163,200
250,000 Williams Cos., Inc. (h) ................................... 4,972,500
-------------
23,742,057
-------------
GAS UTILITIES - 7.0%
118,000 ONEOK, Inc. (i) ........................................... 4,722,360
205,000 UGI Corp. (i) ............................................. 4,813,400
-------------
9,535,760
-------------
CAPITAL MARKETS - 0.1%
20,000 NGP Capital Resources Co. (b) ............................. 153,800
-------------
TOTAL COMMON STOCKS
(Cost $28,604,923) ..................................... 33,431,617
-------------
RIGHTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
17 Clearwater Natural Resources, L.P. (c) (d) (e) (f) ........ 0
-------------
TOTAL RIGHTS
(Cost $0) .............................................. 0
-------------
WARRANTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
48,956 Abraxas Petroleum Corp., Expiration 05/25/12 (c) (d) (e) .. 23,034
-------------
TOTAL WARRANTS
(Cost $0) .............................................. 23,034
-------------
TOTAL INVESTMENTS - 144.3%
(Cost $129,819,506) (j) ................................ 196,964,776
-------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------- -------------
CALL OPTIONS WRITTEN - (0.8%)
Enbridge, Inc.
220 @ 45 due Apr 10 ........................................... (24,200)
-------------
ONEOK, Inc.
800 @ 35 due Jan 10 ........................................... (412,000)
-------------
Spectra Energy Corp.
900 @ 20 due Dec 09 ........................................... (13,500)
195 @ 22.5 due Mar 10 ........................................ (1,950)
-------------
(15,450)
-------------
See Notes to Financial Statements
F-5
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------- -------------
CALL OPTIONS WRITTEN - (CONTINUED)
TransCanada Corp.
600 @ 30 due Feb 10 ........................................... $ (192,000)
800 @ 35 due May 10 ........................................... (32,000)
-------------
(224,000)
-------------
UGI Corp.
800 @ 25 due Jan 10 ........................................... (10,000)
500 @ 30 due Jan 10 ........................................... (7,500)
-------------
(17,500)
-------------
Williams Cos., Inc.
800 @ 17.5 due Feb 10 ......................................... (228,000)
300 @ 20 due Dec 09 ........................................... (12,000)
600 @ 20 due Jan 10 ........................................... (48,000)
800 @ 22.5 due May 10 ......................................... (68,000)
-------------
(356,000)
-------------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $722,982) ........................... (1,049,150)
-------------
OUTSTANDING LOAN - (33.0)% ................................ (45,000,000)
NET OTHER ASSETS AND LIABILITIES - (10.5%) ................ (14,395,137)
-------------
NET ASSETS - 100.0% ....................................... $ 136,520,489
=============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All or a portion of this security is serving as collateral on the
outstanding loan.
(c) This security is restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended. Prior
to registration, restricted securities may only be resold in transactions
exempt from registration (see Note 2D - Restricted Securities in the Notes
to Financial Statements).
(d) This security is fair valued in accordance with procedures adopted by the
Fund's Board of Trustees.
(e) Non-income producing security.
(f) This partnership filed for protection in federal bankruptcy court on
January 7, 2009.
(g) Non-income producing security which pays regular in-kind distributions.
(h) Call options were written on this entire Common Stock position and are
fully covered by the Common Stock position.
(i) Call options were written on a portion of this Common Stock position and
are fully covered by the Common Stock position.
(j) Aggregate cost for federal income tax purposes is $117,713,175. As of
November 30, 2009, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$84,659,592 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$5,407,991.
See Notes to Financial Statements
F-6
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
NOVEMBER 30, 2009
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of November 30,
2009 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
11/30/09 PRICES INPUTS INPUTS
------------ ------------ ----------- ------------
Master Limited Partnerships* .. $158,855,986 $158,855,986 $ -- $--
Canadian Income Trusts* ....... 4,654,139 4,654,139 -- --
Common Stocks* ................ 33,431,617 33,431,617 -- --
Warrants* ..................... 23,034 -- 23,034 --
------------ ------------ ------- ---
Total Investments ............. $196,964,776 $196,941,742 $23,034 $--
============ ============ ======= ===
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
11/30/09 PRICES INPUTS INPUTS
------------ ----------- ----------- ------------
Call Options Written .......... $(1,049,150) $(1,049,150) $-- $--
=========== =========== === ===
* See the Portfolio of Investments for industry breakout.
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
presented.
INVESTMENTS AT FAIR VALUE TRANSFERS NET UNREALIZED
USING SIGNIFICANT UNOBSERVABLE BALANCE AS OF IN (OUT) APPRECIATION NET REALIZED BALANCE AS OF
INPUTS (LEVEL 3) NOVEMBER 30, 2008 OF LEVEL 3 (DEPRECIATION) GAINS (LOSSES) NOVEMBER 30, 2009
------------------------------ ----------------- ---------- -------------- -------------- -----------------
Master Limited Partnerships $2,792,826 $ -- $(2,792,826) $-- $--
Warrants 13,879 (23,034) 9,155 -- --
---------- -------- ----------- --- ---
Total Investments $2,806,705 $(23,034) $(2,783,671) $-- $--
========== ======== =========== === ===
Net change in unrealized depreciation from Level 3 investments held as of
November 30, 2009 was $2,792,826 and is included in "Net change in unrealized
appreciation (depreciation) before taxes on investments" on the Statement of
Operations.
See Notes to Financial Statements
F-7
ENERGY INCOME AND GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2009
ASSETS:
Investments, at value
(Cost $129,819,506) ................................................ $196,964,776
Cash .................................................................. 9,702,492
Prepaid expenses ...................................................... 180,131
Receivables:
Income taxes ....................................................... 1,875,113
Fund shares sold ................................................... 140,295
Dividends .......................................................... 111,183
Investment securities sold ......................................... 39,233
Interest ........................................................... 158
------------
Total Assets .................................................... 209,013,381
------------
LIABILITIES:
Outstanding loan ...................................................... 45,000,000
Deferred income taxes ................................................. 26,095,391
Options written, at value (Premiums received $722,982) ................ 1,049,150
Payables:
Investment advisory fees ........................................... 145,856
Audit and tax fees ................................................. 113,240
Printing fees ...................................................... 26,128
Legal fees ......................................................... 18,267
Administrative fees ................................................ 13,857
Interest and fees on loan .......................................... 8,778
Trustees' fees and expenses ........................................ 6,712
Custodian fees ..................................................... 3,775
Income taxes ....................................................... 3,342
Transfer agent fees ................................................ 2,532
Other liabilities ..................................................... 5,864
------------
Total Liabilities ............................................... 72,492,892
------------
NET ASSETS ............................................................ $136,520,489
============
NET ASSETS CONSIST OF:
Paid-in capital ....................................................... $106,182,584
Par value ............................................................. 67,583
Net unrealized appreciation (depreciation) on investments, written
options and foreign currency translation, net of income taxes ...... 44,282,176
Accumulated net realized gain (loss) on investments, written options
and foreign currency transactions, net of income taxes ............. (1,117,184)
Accumulated net investment income (loss), net of income taxes ......... (12,894,670)
------------
NET ASSETS ............................................................ $136,520,489
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .. $ 20.20
============
Number of Common Shares outstanding (unlimited number of Common Shares
has been authorized) ............................................... 6,758,270
============
See Notes to Financial Statements
F-8
ENERGY INCOME AND GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2009
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $58,864) ............... $ 1,047,431
Interest ............................................................ 1,710
------------
Total investment income .......................................... 1,049,141
------------
EXPENSES:
Investment advisory fees ............................................ 1,489,058
Interest and fees on loan ........................................... 1,105,915
Energy Notes offering costs ......................................... 324,047
Shelf offering costs ................................................ 170,391
Administrative fees ................................................. 141,460
Audit and tax fees .................................................. 106,963
Legal fees .......................................................... 94,348
Printing fees ....................................................... 75,929
Trustees' fees and expenses ......................................... 38,396
Transfer agent fees ................................................. 35,260
Insurance expense ................................................... 31,448
Custodian fees ...................................................... 22,475
Auction fees ........................................................ 19,965
Other ............................................................... 23,754
------------
Total expenses ................................................... 3,679,409
------------
NET INVESTMENT INCOME (LOSS) BEFORE TAXES ........................... (2,630,268)
------------
Current income tax benefit (expense) - foreign ................... 167,032
Current income tax benefit (expense) - state ..................... 24,119
Current federal income tax benefit (expense) ..................... (2,028,313)
Deferred federal income tax benefit (expense) .................... 2,867,200
-----------
Total income tax benefit (expense) ............................... 1,030,038
------------
NET INVESTMENT INCOME (LOSS) ........................................ (1,600,230)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) before taxes on:
Investments ...................................................... 3,213,323
Written options .................................................. 1,196,354
Foreign currency transactions .................................... 2,129
------------
Net realized gain (loss) before taxes ............................... 4,411,806
------------
Deferred federal income tax benefit (expense) .................... (1,525,524)
-----------
Total income tax benefit (expense) ............................... (1,525,524)
------------
Net realized gain (loss) on investments, written options and foreign
currency transactions ............................................ 2,886,282
------------
Net change in unrealized appreciation (depreciation) before taxes on:
Investments ...................................................... 70,922,148
Written options .................................................. (706,893)
Foreign currency translations .................................... 632
------------
Net change in unrealized appreciation (depreciation) before taxes ... 70,215,887
------------
Deferred federal income tax benefit (expense) .................... (24,242,951)
Deferred income tax benefit (expense) - state .................... (156,991)
-----------
Total income tax benefit (expense) ............................... (24,399,942)
------------
Net change in unrealized appreciation (depreciation) on investments,
written options and foreign currency translations ................ 45,815,945
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ............................. 48,702,227
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..... $ 47,101,997
============
See Notes to Financial Statements
F-9
ENERGY INCOME AND GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
11/30/2009 11/30/2008
------------ ------------
OPERATIONS:
Net investment income (loss) ............................................... $ (1,600,230) $ (3,714,353)
Net realized gain (loss) ................................................... 2,886,282 8,261,568
Net change in unrealized appreciation (depreciation) ....................... 45,815,945 (71,654,830)
------------ ------------
Net increase (decrease) in net assets resulting from operations ............ 47,101,997 (67,107,615)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain .......................................................... (2,319,211) (10,702,017)
Return of capital .......................................................... (9,207,189) --
------------ ------------
Total distributions to shareholders ........................................ (11,526,400) (10,702,017)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares sold through shelf offering .................... 4,804,981 --
Proceeds from Common Shares reinvested ..................................... 1,259,581 269,029
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions .. 6,064,562 269,029
------------ ------------
Total increase (decrease) in net assets .................................... 41,640,159 (77,540,603)
NET ASSETS:
Beginning of period ........................................................ 94,880,330 172,420,933
------------ ------------
End of period .............................................................. $136,520,489 $ 94,880,330
============ ============
Accumulated net investment income (loss), net of income taxes .............. $(12,894,670) $(11,294,440)
============ ============
CAPITAL SHARE TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ....................................... 6,462,221 6,446,995
Common Shares sold through shelf offering .................................. 227,636 --
Common Shares issued as reinvestment under the Dividend Reinvestment Plan .. 68,413 15,226
------------ ------------
Common Shares at end of period ............................................. 6,758,270 6,462,221
============ ============
See Notes to Financial Statements
F-10
ENERGY INCOME AND GROWTH FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ...... $ 47,101,997
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash used by operating activities:
Purchases of investments .......................................... (81,776,452)
Sales of investments .............................................. 68,439,475
Proceeds from written options ..................................... 1,395,514
Cost to close written options ..................................... (11,046)
Return of capital received from investments in MLPs ............... 11,496,906
Net realized gain/loss on investments and options ................. (4,409,677)
Net change in unrealized appreciation/depreciation on investments
and options .................................................... (70,215,255)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in income tax receivable ................................. 1,636,598
Decrease in interest receivable ................................... 227
Increase in dividends receivable (a) .............................. (38,408)
Decrease in prepaid expenses ...................................... 156,112
Decrease in interest and fees on loan payable ..................... (93,637)
Decrease in income tax payable .................................... (260,949)
Increase in investment advisory fees payable ...................... 36,062
Increase in audit and tax fees payable ............................ 6,240
Decrease in legal fees payable .................................... (23,739)
Increase in printing fees payable ................................. 4,040
Increase in administrative fees payable ........................... 3,427
Decrease in transfer agent fees payable ........................... (236)
Decrease in custodian fees payable ................................ (1,698)
Decrease in Trustees' fees and expenses payable ................... (785)
Increase in accrued expenses ...................................... 3,364
Increase in deferred income taxes ................................. 23,058,264
------------
CASH USED IN OPERATING ACTIVITIES .................................... $(3,493,656)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net realized gain ....... (2,319,211)
Return of capital distributions ................................... (9,207,189)
Proceeds of Common Shares sold .................................... 4,664,686
Proceeds of Common Shares reinvested .............................. 1,259,581
Issuance of loan .................................................. 47,850,000
Repayment of loan ................................................. (8,500,000)
Redemption of Series B Energy Notes ............................... (25,000,000)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES .......................... 8,747,867
-----------
Increase in cash ..................................................... 5,254,211
Cash at beginning of period .......................................... 4,448,281
-----------
CASH AT END OF PERIOD ................................................ $ 9,702,492
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees .................... $ 1,221,333
===========
Cash paid during the period for taxes ................................ $ 461,515
===========
----------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $632.
See Notes to Financial Statements
F-11
ENERGY INCOME AND GROWTH FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
11/30/2009 11/30/2008 11/30/2007(a) 11/30/2006 11/30/2005
---------- ---------- ------------- ---------- ----------
Net asset value, beginning of period ................. $ 14.68 $ 26.74 $ 25.88 $ 22.53 $ 21.34
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ......................... (0.24)(b) (0.57) (0.67) (0.50) (0.34)
Net realized and unrealized gain (loss) .............. 7.43 (9.83) 3.06 5.23 2.86
-------- -------- -------- -------- --------
Total from investment operations after income tax .... 7.19 (10.40) 2.39 4.73 2.52
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain .................................... (0.35) (1.66) (1.53) -- (0.88)
Return of capital .................................... (1.41) -- -- (1.38) (0.45)
-------- -------- -------- -------- --------
Total from distributions ............................. (1.76) (1.66) (1.53) (1.38) (1.33)
-------- -------- -------- -------- --------
Premiums from shares sold in at the market offering .. 0.09 -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of period ....................... $ 20.20 $ 14.68 $ 26.74 $ 25.88 $ 22.53
======== ======== ======== ======== ========
Market value, end of period .......................... $ 22.30 $ 14.40 $ 23.82 $ 24.49 $ 20.92
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (c) ............ 51.03% (40.70)% 9.38% 22.23% 11.96%(e)
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (d) ............... 70.20% (34.74)% 2.96% 24.57% 0.29%
======== ======== ======== ======== ========
Net assets, end of period (in 000's) ................. $136,520 $ 94,880 $172,421 $166,850 $145,230
------------------------------------------------------------------------
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes before
waiver (f) ........................................ 25.79% (20.03)% 8.52% 14.47% 8.62%
Including current and deferred income taxes after
waiver (f) ........................................ 25.79% (20.03)% 8.52% 14.29% 8.31%
Excluding current and deferred income taxes before
waiver ............................................ 3.32% 4.80% 3.94% 3.63% 2.64%
Excluding current and deferred income taxes after
waiver ............................................ 3.32% 4.80% 3.94% 3.45% 2.33%
Excluding current and deferred income taxes and
interest expense after waiver ..................... 2.32% 2.55% 1.89% 1.76% 1.57%
RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE
NET ASSETS:
Net investment income (loss) ratio before tax
expenses .......................................... (2.37)% (3.83)% (3.83)% (3.26)% (2.29)%
Net investment income (loss) ratio including tax
expenses (f) ...................................... (24.84)% 21.00% (8.41)% (14.10)% (8.27)%
Portfolio turnover rate .............................. 43% 38% 16% 17% 38%
SENIOR SECURITIES:
Total Energy Notes outstanding ($25,000 per note) .... N/A 1,000 2,360 2,360 1,360
Principal amount and market value per
Energy Note (g) ................................... N/A $ 25,006 $ 25,004 $ 25,069 $ 25,074
Asset coverage per Energy Note (h) ................... N/A $119,880 $ 98,060 $ 95,699 $131,786
Total loan outstanding (in 000's) .................... $ 45,000 $ 5,650 $ 15,250 N/A N/A
Asset coverage per $1,000 senior indebtedness ........ $ 4,034(j) $ 22,218(j) $ 12,306(i) N/A N/A
----------
(a) On September 14, 2007, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Energy Income Partners, LLC ("EIP"), and on
September 24, 2007, the Board of Trustees voted to approve EIP as
investment sub-advisor.
(b) Based on average shares outstanding.
(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in net
asset value per share and does not reflect sales load.
(d) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in Common
Share price.
(e) In 2005, the Fund received reimbursements from the investment advisor and
former sub-advisor. This reimbursement had no effect on the Fund's total
return.
(f) Includes current and deferred income taxes associated with each component
of the Statement of Operations.
(g) Includes accumulated and unpaid interest.
(h) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the Energy Notes) and dividing by the
outstanding Energy Notes in 000's.
(i) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
outstanding in 000's.
(j) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding and the Energy Notes) and
dividing by the loan outstanding in 000's. If this methodology had been
used historically, fiscal year 2007 would have been $16,175.
N/A Not applicable.
See Notes to Financial Statements
F-12
NOTES TO FINANCIAL STATEMENTS
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2009
1. FUND DESCRIPTION
Energy Income and Growth Fund (the "Fund") is a non-diversified, closed-end
management investment company organized as a Massachusetts business trust on
March 25, 2004, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund trades under the ticker symbol FEN on the NYSE Amex (formerly the
American Stock Exchange).
The Fund's investment objective is to seek a high level of after-tax total
return with an emphasis on current distributions paid to shareholders. The Fund
seeks to provide its shareholders with an efficient vehicle to invest in a
portfolio of cash-generating securities of energy companies. The Fund focuses on
investing in publicly-traded master limited partnerships ("MLPs") and related
public entities in the energy sector, which Energy Income Partners, LLC ("EIP"
or the "Sub-Advisor") believes offer opportunities for income and growth. Due to
the tax treatment of cash distributions made by MLPs to their investors, a
portion of the distributions received may be tax deferred, thereby maximizing
cash available for distribution by the Fund to its shareholders. There can be no
assurance that the Fund's investment objective will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Fund's Common Shares is determined daily as
of the close of regular trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. The
NAV per Common Share is calculated by dividing the value of all assets of the
Fund (including accrued dividends and interest), less all liabilities (including
accrued expenses, dividends declared but unpaid and deferred income taxes and
any borrowings of the Fund) by the total number of shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and other investments. Additionally, if events occur after the close of the
principal markets for particular securities (e.g., domestic debt and foreign
securities), but before the Fund values its assets, that could materially affect
NAV, First Trust may use a fair value method to value the Fund's securities and
other investments. The use of fair value pricing by the Fund is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Fixed-income securities with a
remaining maturity of 60 days or more will be valued by the Fund using a pricing
service. Short-term investments that mature in less than 60 days when purchased
are valued at amortized cost.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
F-13
- Quoted prices for identical or similar securities in markets that
are non-active. A non-active market is a market where
there are few transactions for the security, the prices are not
current, or price quotations vary substantially either over time
or among market makers, or in which little information is
released publicly.
- Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds,
loss severities, credit risks, and default rates).
- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's net assets as of November 30, 2009 is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
COVERED OPTIONS. The Fund is subject to equity price risk in the normal course
of pursuing its investment objective and may enter into options written to hedge
against changes in the value of equities. The Fund may write (sell) covered call
or put options ("options") on all or a portion of the common stock of energy
companies held in the Fund's portfolio as determined to be appropriate by the
Sub-Advisor. The number of options the Fund can write (sell) is limited by the
amount of common stock of energy companies the Fund holds in its portfolio. The
Fund will not write (sell) "naked" or uncovered options. By writing (selling)
options, the Fund seeks to generate additional income, in the form of premiums
received for writing (selling) the options, and may provide a partial hedge
against a market decline in the underlying equity security. Options are
marked-to-market daily and their value will be affected by changes in the value
and dividend rates of the underlying equity securities, changes in interest
rates, changes in the actual or perceived volatility of the securities markets
and the underlying equity securities and the remaining time to the options'
expiration. The value of options may also be adversely affected if the market
for the options becomes less liquid or smaller.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss. If the price
of the underlying equity security is less than the option's strike price, the
option will likely expire without being exercised. The option premium received
by the Fund will, in this case, be treated as short-term capital gain on the
expiration date of the option. The Fund may also elect to close out its position
in an option prior to its expiration by purchasing an option of the same series
as the option written (sold) by the Fund.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter ("OTC") options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is
recognized and recorded on the accrual basis, including amortization of premiums
and accretion of discounts. The Fund will rely to some extent on information
provided by the MLPs, which is not necessarily timely, to estimate taxable
income allocable to the MLP units held in the Fund's portfolio and to estimate
the associated deferred tax asset or liability. From time to time, the Fund will
F-14
modify its estimates and/or assumptions regarding its deferred tax liability as
new information becomes available. To the extent the Fund modifies its estimates
and/or assumptions, the NAV of the Fund will likely fluctuate.
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital from the MLP to the extent of the cost basis of
such MLP investments. Cumulative distributions received in excess of the Fund's
cost basis in an MLP generally are recorded as capital gain.
D. RESTRICTED SECURITIES:
The Fund may invest up to 35% of its Managed Assets, which is the gross asset
value of the Fund minus accrued liabilities (excluding the principal amount of
any borrowings), in restricted securities. Restricted securities are securities
that cannot be offered for public sale without first being registered under the
Securities Act of 1933, as amended. Prior to registration, restricted securities
may only be resold in transactions exempt from registration. The Fund holds the
restricted securities at November 30, 2009 shown in the following table. The
Fund does not have the right to demand that such securities be registered. These
securities are valued according to the valuation procedures as stated in the
Portfolio Valuation footnote (Note 2A) and are not expressed as a discount to
the value of a comparable unrestricted security.
ACQUISITION SHARES/ CARRYING % OF
SECURITY DATE UNITS PRICE COST VALUE NET ASSETS
-------- ----------- ------- ----- ---------- ------- ----------
Abraxas Petroleum Corp. - Warrants 05/25/07 48,956 $0.47 $ -- $23,034 0.02%
Clearwater Natural Resources, L.P. 08/01/05 465,471 -- 8,601,560 -- --
Clearwater Natural Resources, L.P. - Rights 08/01/05 17 -- -- -- --
---------- ------- ----
$8,601,560 $23,034 0.02%
========== ======= ====
E. DISTRIBUTIONS TO SHAREHOLDERS:
The Fund intends to make quarterly distributions to Common Shareholders. On
December 11, 2006, the Board of Trustees approved a managed distribution policy
to better align the Fund with its after-tax total return investment objective.
The Fund's distributions generally will consist of cash and paid-in-kind
distributions from MLPs or their affiliates, dividends from common stocks,
interest from debt instruments and income from other investments held by the
Fund less operating expenses, including taxes. Distributions to Common
Shareholders are recorded on the ex-date and are based on U.S. generally
accepted accounting principles, which may differ from their ultimate
characterization for federal income tax purposes.
Distributions made from current and accumulated earnings and profits of the Fund
will be taxable to shareholders as dividend income. Distributions that are in an
amount greater than the Fund's current and accumulated earnings and profits will
represent a tax-deferred return of capital to the extent of a shareholder's
basis in the Common Shares, and such distributions will correspondingly increase
the realized gain upon the sale of the Common Shares. Additionally,
distributions not paid from current and accumulated earnings and profits that
exceed a shareholder's tax basis in the Common Shares will be taxed as a capital
gain.
Distributions of $2,319,211 paid during the year ended November 30, 2009, are
anticipated to be characterized as taxable dividends for federal income tax
purposes. The remaining $9,207,189 in distributions paid during the year ended
November 30, 2009 is expected to be return of capital. However, the ultimate
determination of the character of the distributions will be made after the 2009
calendar year. Distributions of $10,702,017 paid during the year ended November
30, 2008, were characterized as taxable dividends for federal income tax
purposes. Distributions will automatically be reinvested in additional Common
Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
F. INCOME TAXES:
The Fund is treated as a regular C corporation for U.S. federal income tax
purposes and as such will be obligated to pay federal and applicable state and
foreign corporate taxes on its taxable income. The Fund's tax expense or benefit
is included in the Statement of Operations based on the component of income or
gains (losses) to which such expense or benefit relates. The current U.S.
federal maximum graduated income tax rate for corporations is 35%. In addition,
the U.S. imposes a 20% alternative minimum tax on the recalculated alternative
minimum taxable income of an entity treated as a corporation. This differs from
most investment companies, which elect to be treated as "regulated investment
companies" under the U.S. Internal Revenue Code of 1986, as amended. The various
investments of the Fund may cause the Fund to be subject to state income taxes
on a portion of its income at various rates.
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.
F-15
To the extent that the distributions received from the MLPs exceed the net
taxable income realized by the Fund from its investment, a tax liability
results. This tax liability is a deferred liability to the extent that MLP
distributions received have not exceeded the Fund's adjusted tax basis in the
respective MLPs. To the extent that distributions from an MLP exceed the Fund's
adjusted tax basis, the Fund will recognize a taxable capital gain. For the year
ended November 30, 2009, distributions of $11,496,906 received from MLPs have
been reclassified as a return of capital. The cost basis of applicable MLPs has
been reduced accordingly.
The Fund's provision for income taxes consists of the following:
Current federal income tax benefit (expense) ..... $ (2,028,313)
Current state tax expense benefit (expense) ...... 24,119
Current foreign tax benefit (expense) ............ 167,032
Deferred federal income tax benefit (expense) .... (22,901,275)
Deferred state income tax benefit (expense) ...... (156,991)
------------
Total income tax benefit (expense) ............... $(24,895,428)
============
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. At November 30, 2009, the Fund
had a net operating loss carry forward for federal and state income tax purposes
of $4,014,426 and $11,433,639, respectively. The Fund's 2009 income tax
provision includes a full valuation allowance against the deferred tax assets
associated with this state net operating loss. Components of the Fund's deferred
tax assets and liabilities as of November 30, 2009 are as follows:
DEFERRED TAX ASSETS:
Federal net operating loss ....................... $ 1,405,049
State net operating loss ......................... 659,574
State income taxes ............................... 53,474
Other ............................................ 181,656
------------
Total deferred tax assets ........................ 2,299,753
Less: valuation allowance ........................ (659,574)
------------
Net deferred tax assets .......................... $ 1,640,179
============
DEFERRED TAX LIABILITIES:
Unrealized gains on investment securities ........ $(27,735,570)
------------
Total deferred tax liabilities ................... (27,735,570)
------------
Total net deferred tax liabilities ............... $(26,095,391)
============
Total income taxes differ from the amount computed by applying the maximum
graduated federal income tax rate of 35% to net investment income and realized
and unrealized gains on investments.
Application of statutory income tax rate ......... $25,199,099
State income taxes, net .......................... (173,245)
Change in valuation allowance .................... 337,413
Other ............................................ (467,839)
-----------
Total ............................................ $24,895,428
===========
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2004, 2005,
2006, 2007 and 2008 remain open to federal and state audit. The Internal Revenue
Service initiated a corporate income tax audit during the first quarter of 2008
for the Fund's 2004 tax year. Subsequently, the audit was expanded to include
the 2005 and 2006 tax years. The audit is still ongoing and the Fund expects the
audit to last through the second quarter of 2010. As of November 30, 2009,
management has evaluated the application of these standards to the Fund, and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax provisions.
G. EXPENSES:
The Fund will pay all expenses directly related to its operations.
H. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investment securities and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
F-16
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase trade date and subsequent sale trade date is included in "Net
realized gain (loss) on foreign currency transactions" on the Statement of
Operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets (the value of the securities and other
investments the Fund holds plus cash or other assets, including interest accrued
but not yet received, minus accrued liabilities other than the principal amount
of any borrowings).
EIP serves as the Fund's sub-advisor and manages the Fund's portfolio subject to
First Trust's supervision. The Sub-Advisor receives a monthly portfolio
management fee calculated at an annual rate of 0.50% of Managed Assets that is
paid by First Trust out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., an indirect majority-owned
subsidiary of The PNC Financial Services Group, serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. PFPC Trust Company, also an indirect, majority-owned subsidiary of
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each additional trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and Valuation Committee is
paid $2,500 annually to serve in such capacities, with such compensation paid by
the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings.The Lead
Independent Trustee and each Committee chairman served two-year terms which
ended on December 31, 2009, before rotating to serve as a chairman of another
committee or as Lead Independent Trustee. The officers and the "Interested"
Trustee receive no compensation from the Fund for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES AND OPTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the year ended November 30, 2009, were $79,897,822
and $66,886,196, respectively.
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
--------------- --------- ------------
Options outstanding at November 30, 2008 .. 4,546 $ 534,868
Options Written ........................... 20,069 2,808,613
Options Expired ........................... (7,173) (992,882)
Options Exercised ......................... (8,549) (1,413,099)
Options Closed ............................ (1,578) (214,518)
------ -----------
Options outstanding at November 30, 2009 .. 7,315 $ 722,982
====== ===========
5. ENERGY NOTES
The 1,000 Series B Energy Notes, at a principal value of $25,000 per note, were
redeemed in full on February 26, 2009 in the amount of $25,000,000. The high and
the low annual interest rates during the period December 1, 2008 through
February 26, 2009 were 3.75% and 0.74%, respectively, and the average interest
rate was 1.34%. The redemption of Series B Energy Notes was financed through a
credit agreement with BNP Paribas Prime Brokerage Inc. ("BNP") (see Note 7
below). At the time of the refinancing, the Fund had unamortized offering costs
F-17
of $92,378 and commissions of $231,669. Because the Series B Energy Notes were
redeemed prior to the maturity date of March 30, 2046, the combined amount of
$324,047 was expensed on February 26, 2009. This is shown on the Statement of
Operations under "Energy Notes offering costs."
6. CREDIT AGREEMENT WITH THE BANK OF NOVA SCOTIA
The Fund had a credit agreement with The Bank of Nova Scotia that had a maximum
commitment amount of $55,000,000. This credit agreement was scheduled to
terminate on March 26, 2009. On January 23, 2009, all outstanding borrowings, in
the amount of $8,150,000, were paid in full through a credit agreement with BNP
(see Note 7 below).
The average amount outstanding between December 1, 2008 and January 23, 2009 was
$6,734,906 with a weighted average interest rate of 3.05%. The high and low
annual interest rates during the period December 1, 2008 through January 23,
2009 were 4.81% and 2.17%, respectively.
7. COMMITTED FACILITY AGREEMENT WITH BNP PARIBAS PRIME BROKERAGE INC.
On January 23, 2009, the Fund entered into a committed facility agreement with
BNP that has a maximum commitment amount of $60,000,000. The committed facility
required an upfront payment from the Fund equal to $150,000. Absent certain
events of default or failure to maintain certain collateral requirements, BNP
may not terminate the committed facility agreement except upon 180 calendar days
prior notice. The borrowing rate under the facility is equal to the 3-month
LIBOR plus 150 basis points. In addition, under the facility, the Fund pays a
commitment fee of 0.80% on the undrawn amount of such facility.
On January 23, 2009, the committed facility was used to pay in full outstanding
borrowings under a credit agreement with The Bank of Nova Scotia in the amount
of $8,150,000. This committed facility was also used to redeem in full the
Series B Energy Notes in the principal amount of $25,000,000 on February 26,
2009.
The average amount outstanding between January 23, 2009 and November 30, 2009
was $36,554,521, with a weighted average interest rate of 2.11%. As of November
30, 2009, the Fund had outstanding borrowings of $45,000,000 under this
committed facility agreement. The high and low annual interest rates during the
period January 23, 2009 through November 30, 2009 were 2.83% and 1.76%,
respectively. The interest rate at November 30, 2009 was 1.76%.
8. AT THE MARKET OFFERING
On May 19, 2009, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with JonesTrading Institutional Services LLC ("JonesTrading") whereby
the Fund may offer and sell up to 1,000,000 Common Shares from time to time
through JonesTrading as agent for the offer and sale of the Common Shares. Sales
of Common Shares pursuant to the sales agreement may be made in negotiated
transactions or transactions that are deemed to be "at the market" as defined in
Rule 415 under the Securities Act of 1933, as amended, including sales made
directly on the NYSE Amex or sales made through a market maker other than on an
exchange, at an offering price equal to or in excess of the net asset value per
share of the Funds Common Shares at the time such Common Shares are initially
sold.
The Fund has used the net proceeds from the sale of the Common Shares in
accordance with it's investment objective and policies. Please see the
prospectus and the prospectus supplement related to this offering for additional
information. Transactions for the fiscal year ended November 30, 2009 related to
offerings under such sales agreement are as follows:
COMMON
SHARES NET PROCEEDS NET ASSET VALUE PROCEEDS RECEIVED IN
SOLD RECEIVED OF SHARES SOLD EXCESS OF NET ASSET VALUE
------ ------------ --------------- -------------------------
227,636 $4,804,981 $4,215,868 $589,113
Additionally, estimated offering costs of $319,000 related to this offering have
been recorded as a prepaid asset and are being amortized to expense by the Fund
on a straight line basis over the lesser of one year or until the fund sells all
1,000,000 Common Shares related to this offering.
9. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
10. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
F-18
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
INDUSTRY CONCENTRATION RISK: The Fund invests at least 85% of its Managed Assets
in securities issued by energy companies, energy sector MLPs and MLP-related
entities. Given this industry concentration, the Fund is more susceptible to
adverse economic or regulatory occurrences affecting that industry than an
investment company that is not concentrated in a single industry. Energy issuers
may be subject to a variety of factors that may adversely affect their business
or operations, including high interest costs in connection with capital
construction programs, high leverage costs associated with environmental and
other regulations, the effects of economic slowdown, surplus capacity, increased
competition from other providers of services, uncertainties concerning the
availability of fuel at reasonable prices, the effects of energy conservation
policies and other factors.
MLP RISK: An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. If the Fund is not in compliance with certain credit facility
provisions, the Fund may not be permitted to declare dividends or other
distributions.
RESTRICTED SECURITIES RISK: The Fund may invest in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that are unregistered or are held by control persons of the issuer and
securities that are subject to contractual restrictions on their resale. As a
result, restricted securities may be more difficult to value and the Fund may
have difficulty disposing of such assets either in a timely manner or for a
reasonable price. In order to dispose of an unregistered security, the Fund,
where it has contractual rights to do so, may have to cause such security to be
registered. A considerable period may elapse between the time the decision is
made to sell the security and the time the security is registered so that the
Fund could sell it. Contractual restrictions on the resale of securities vary in
length and scope and are generally the result of a negotiation between the
issuer and acquirer of the securities. The Fund would, in either case, bear
market risks during that period.
NON-DIVERSIFICATION RISK: Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.
11. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events on the Fund through
January 27, 2010, the date the financial statements were issued, and has
determined that there was the following subsequent event:
On January 12, 2010, the Fund declared a dividend of $0.44 per share to Common
Shareholders of record January 25, 2010, payable January 29, 2010.
F-19
[BLANK BACK COVER]
BASE PROSPECTUS
ENERGY INCOME AND GROWTH FUND
UP TO 3,348,960 COMMON SHARES
--------------------------------------------------------------------------------
The Fund. Energy Income and Growth Fund (the "Fund") is a non-diversified,
closed-end management investment company which commenced operations in June,
2004.
Investment Objective. 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 common 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 the Fund's Sub-Adviser (as defined below) believes offer opportunities for
income and growth. As used in this prospectus, unless the context requires
otherwise, MLPs are those MLPs in the energy sector. Due to the tax treatment
under current law of cash distributions made by MLPs to their investors (such as
the Fund), the Fund believes that a portion of its income may be tax deferred,
thereby increasing cash available for distribution by the Fund to its
shareholders. There can be no assurance that the Fund's investment objective
will be achieved.
Investment Strategy. Under normal market conditions, the Fund invests at
least 85% of its Managed Assets (as defined below) (including assets obtained
through leverage) in securities of energy companies and energy sector MLPs and
MLP-related entities and invests at least 65% of its Managed Assets in equity
securities of such MLPs and MLP-related entities. The Fund may also invest up to
35% of its Managed Assets in unregistered or otherwise restricted securities
(including up to 10% of its Managed Assets in securities issued by private
companies) and up to 25% of its Managed Assets in debt securities of energy
companies, MLPs and MLP-related entities, including securities rated below
investment grade (commonly referred to as "junk bonds"). To generate additional
income, the Fund writes (or sells) covered call options on the common stock of
energy companies held in the Fund's portfolio. The Fund anticipates that it will
be able to invest substantially all of the net proceeds of any offering of
common shares pursuant to this prospectus in securities that meet the Fund's
investment objective and policies within one month after the completion of any
offering. See "Risks" for a discussion of the risks involved in investing in
both MLPs and junk bonds.
The Fund's currently outstanding common shares are, and the common shares
offered in this prospectus will be, subject to notice of issuance, listed on the
NYSE Amex (formerly the American Stock Exchange) under the trading or "ticker"
symbol "FEN." The net asset value of the Fund's common shares on February 28,
2009 was $14.86 per common share, and the last sale price of the common shares
on the NYSE Amex on such date was $17.58.
The Fund may offer, on an immediate, continuous or delayed basis, up to
3,348,960 of the Fund's common shares in one or more offerings. The Fund may
offer its common shares in amounts, at prices and on terms set forth in a
prospectus supplement to this prospectus. You should read this prospectus and
the related prospectus supplement carefully before you decide to invest in any
of the common shares.
The Fund may offer the common shares directly to one or more purchasers,
through agents that the Fund or the purchasers designate from time to time, or
to or through underwriters or dealers. The prospectus supplement relating to the
particular offering will identify any agents or underwriters involved in the
sale of the common shares, and will set forth any applicable purchase price,
fee, commission or discount arrangement between the Fund and such agents or
underwriters or among the underwriters or the basis upon which such amount may
be calculated. For more information about the manner in which the Fund may offer
the common shares, see "Plan of Distribution." The common shares may not be sold
through agents, underwriters or dealers without delivery of a prospectus
supplement.
INVESTING IN COMMON SHARES INVOLVES CERTAIN RISKS. YOU COULD LOSE SOME OR
ALL OF YOUR INVESTMENT. SEE "RISKS" BEGINNING ON PAGE 37.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
(continued on the following page)
(continued from previous page)
Due to the nature of the Fund's MLP investments, under current law the Fund
is not eligible to elect to be treated as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), as
is common for most investment companies. Rather, the Fund has elected to be
treated as a regular corporation for federal income tax purposes and, as such,
unlike most investment companies, it will be subject to corporate income tax to
the extent the Fund recognizes taxable income.
Investment Adviser and Sub-Adviser. First Trust Advisors L.P. ("First Trust
Advisors" or the "Adviser") is the Fund's investment adviser, responsible for
supervising the Fund's Sub-Adviser, monitoring the Fund's investment portfolio,
managing the Fund's business affairs and providing certain clerical and
bookkeeping and other administrative services. The Adviser, in consultation with
the Sub-Adviser, is also responsible for determining the Fund's overall
investment strategy and overseeing its implementation. Energy Income Partners,
LLC ("Energy Income Partners" or the "Sub-Adviser") is the Fund's sub-adviser
and is primarily responsible for the day-to-day supervision and investment
strategy of the Fund.
First Trust Advisors serves as investment adviser or portfolio supervisor
to investment portfolios with approximately $15.47 billion in assets which it
managed or supervised as of February 28, 2009. Energy Income Partners serves as
investment adviser or portfolio supervisor to investment portfolios with
approximately $260 million in assets, which it managed or supervised as of
February 28, 2009. See "Management of the Fund."
Use of Financial Leverage. The Fund is currently engaged in, and may in the
future engage in, the use of financial leverage to seek to enhance the level of
its current distributions to common shareholders. The Fund may use leverage
through the issuance of preferred shares ("Preferred Shares") and/or through the
issuance of commercial paper or notes and/or other borrowings ("Borrowings") by
the Fund. As of February 28, 2009, aggregate financial leverage through
Borrowings (collectively, "Financial Leverage") was approximately 25.60% of the
Fund's Managed Assets (as defined below) (including the proceeds of the
Financial Leverage). The term "Managed Assets" means the average daily gross
asset value of the Fund (which includes assets attributable to the Fund's
Preferred Shares, if any, and the principal amount of Borrowings), minus the sum
of the Fund's accrued and unpaid dividends on any outstanding Preferred Shares
and accrued liabilities (other than the principal amount of any Borrowings
incurred and the liquidation preference of any outstanding Preferred Shares).
The determination to use Financial Leverage is subject to the approval of the
Fund's Board of Trustees ("Board of Trustees").
You should read this prospectus and any prospectus supplement, which
contains important information about the Fund, before deciding whether to invest
in the common shares, and retain it for future reference. This prospectus,
together with any prospectus supplement, sets forth concisely the information
about the Fund that a prospective investor ought to know before investing. The
Statement of Additional Information (the "SAI"), dated May 8, 2009,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the SAI, the table
of contents of which is on page 66 of this prospectus, annual and semi-annual
reports to shareholders, and other information about the Fund, and make
shareholder inquiries by calling (800) 988-5891, by writing to the Fund or from
the Fund's website (http://www.ftportfolios.com). Please note that the
information contained in the Fund's website, whether currently posted or posted
in the future, is not part of this prospectus or the documents incorporated by
reference in this prospectus. You also may obtain a copy of the SAI (and other
information regarding the Fund) from the Securities and Exchange Commission's
web site (http://www.sec.gov).
Shares of common stock of closed-end investment companies, like the Fund,
frequently trade at discounts to their net asset values. If the Fund's common
shares trade at a discount to net asset value, the risk of loss may increase for
purchasers in this offering, especially for those investors who expect to sell
their common shares in a relatively short period after purchasing shares in this
offering. See "Risks - Market Discount From Net Asset Value." The Fund's
common shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
Prospectus dated May 8, 2009
-ii-
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, any accompanying prospectus supplement and the SAI,
including documents incorporated by reference, contain "forward-looking
statements." Forward-looking statements can be identified by the words "may,"
"will," "intend," "expect," "estimate," "continue," "plan," "anticipate," and
similar terms and the negative of such terms. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results
could differ materially from those contemplated by the forward-looking
statements. Several factors that could materially affect the Fund's actual
results are the performance of the portfolio of securities held by the Fund, the
conditions in the U.S. and international financial, petroleum and other markets,
the price at which the Fund's common shares will trade in the public markets and
other factors discussed in the Fund's periodic filings with the Securities and
Exchange Commission (the "SEC").
Although we believe that the expectations expressed in these
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in these forward-looking statements.
The Fund's future financial condition and results of operations, as well as any
forward-looking statements, are subject to change and are subject to inherent
risks and uncertainties, such as those disclosed in the "Risks" section
of this prospectus. All forward-looking statements contained or incorporated by
reference in this prospectus or any accompanying prospectus supplement are made
as of the date of this prospectus or the accompanying prospectus supplement, as
the case may be. We do not intend, and we undertake no obligation, to update any
forward-looking statement. The forward-looking statements contained in this
prospectus and any accompanying prospectus supplement are excluded from the safe
harbor protection provided by Section 27A of the Securities Act of 1933, as
amended (the "1933 Act").
Currently known risk factors that could cause actual results to differ
materially from the Fund's expectations include, but are not limited to, the
factors described in the "Risks" section of this prospectus. We urge you to
review carefully that section for a more detailed discussion of the risks of an
investment in the Fund's securities.
-iii-
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the Fund's common shares. You should carefully read the
entire prospectus, any related prospectus supplement and the SAI, including
the documents incorporated by reference, particularly the section entitled
"Risks" beginning on page 37.
THE FUND......................... Energy Income and Growth Fund is a non-
diversified, closed-end management
investment company which commenced
operations in June, 2004. The Fund's
investment objective is to seek a high level
of after-tax total return with an emphasis
on current distributions paid to common
shareholders. The Fund seeks to provide its
common shareholders with an efficient
vehicle to invest in a portfolio of
cash-generating securities of energy
companies. The Fund completed its initial
public offering of common shares in June,
2004, raising approximately $122 million in
equity after the payment of offering
expenses. As of February 28, 2009, the Fund
had 6,481,182 common shares outstanding and
net assets applicable to common shares of
$96,337,536. The common shares of beneficial
interest offered by this prospectus are
called "Common Shares" and the holders of
Common Shares are called "Common
Shareholders" in this prospectus. As used in
this prospectus, unless the context requires
otherwise, "common shares" refers to the
Fund's common shares of beneficial interest
currently outstanding as well as those
Common Shares offered by this prospectus and
the holders of common shares are called
"common shareholders."
INVESTMENT ADVISER
AND SUB-ADVISER.................. First Trust Advisors L.P. ("First Trust
Advisors" or the "Adviser") is the Fund's
investment adviser, responsible for
supervising the Fund's Sub-Adviser (as
defined below), monitoring the Fund's
investment portfolio, managing the Fund's
business affairs and providing certain
clerical and bookkeeping and other
administrative services. The Adviser, in
consultation with the Sub-Adviser, is also
responsible for determining the Fund's
overall investment strategy and overseeing
its implementation. Energy Income Partners,
LLC ("Energy Income Partners" or the
"Sub-Adviser") is the Fund's sub-adviser and
is primarily responsible for the day-to-day
supervision and investment strategy of the
Fund.
First Trust Advisors, a registered
investment adviser, is an Illinois limited
partnership formed in 1991. First Trust
Advisors serves as investment adviser or
portfolio supervisor to investment
portfolios with approximately $15.47 billion
in assets which it managed or supervised as
of February 28, 2009.
Energy Income Partners is a limited
liability company and a registered
investment adviser, which provides
professional asset management services in
the area of energy-related MLPs, and other
high-payout securities. Founded in 2003,
Energy Income Partners serves as investment
adviser to investment portfolios with
approximately $260 million of assets which
it managed as of February 28, 2009.
THE OFFERING....................... The Fund may offer, on an immediate,
continuous or delayed basis, up to 3,348,960
Common Shares on terms to be determined at
the time of the offering. The Common Shares
will be offered at prices and on terms to be
set forth in one or more prospectus
supplements to this prospectus. Offerings of
the Common Shares will be subject to the
provisions of the Investment Company Act of
1940, as amended (the "1940 Act") which
generally require that the public offering
price of common shares of a closed-end
investment company (exclusive of
distribution commissions and discounts) must
equal or exceed the net asset value per
share of a company's common stock
(calculated within 48 hours of pricing),
absent shareholder approval or under certain
other circumstances. The Fund has received
shareholder approval to engage in offerings
at a price less than net asset value under
certain conditions. See "Description of
Shares."
The Fund may offer the Common Shares
directly to one or more purchasers, through
agents that the Fund or the purchasers
designate from time to time, or to or
through underwriters or dealers. The
prospectus supplement relating to the
offering will identify any agents or
underwriters involved in the sale of the
Common Shares, and will set forth any
applicable purchase price, fee, commission
or discount arrangement between us and such
agents or underwriters or among underwriters
or the basis upon which such amount may be
calculated. See "Plan of Distribution." The
Common Shares may not be sold through
agents, underwriters or dealers without
delivery of a prospectus supplement
describing the method and terms of the
offering of the Common Shares.
USE OF PROCEEDS.................. Unless otherwise specified in a prospectus
supplement, the Fund will use the net
proceeds from the sale of the Common Shares
primarily to invest in accordance with its
investment objective and policies, or use
such proceeds for other general corporate
purposes.
DISTRIBUTIONS.................... The Fund's distributions generally consist
of (i) 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 (ii)
current or accrued operating expenses of the
Fund, including taxes on Fund taxable income
and leverage costs. Due to the tax treatment
under current law of cash distributions made
by MLPs in which the Fund invests, a portion
of distributions the Fund makes to common
shareholders may consist of a tax-deferred
return of capital. The Fund intends to make
quarterly distributions to common
shareholders. There is no assurance that the
Fund will continue to make regular
distributions. See "Tax Considerations" in
this Summary and "Tax Matters."
Unless a shareholder elects to receive
distributions in cash, distributions will be
used to purchase additional common shares of
the Fund. See "Dividend Reinvestment Plan."
INVESTMENT OBJECTIVE
AND POLICIES..................... The Fund's investment objective is to seek
a high level of after-tax total return with
an emphasis on current distributions paid to
common shareholders. For purposes of the
Fund's investment objective, total return
includes capital appreciation of, and all
distributions received from, securities in
which the Fund invests regardless of the tax
character of the distributions. The Fund
seeks to provide its common shareholders
with an efficient vehicle to invest in a
portfolio of cash-generating securities of
energy companies. The Fund focuses on
investing in MLPs and related public
entities in the energy sector which the
Sub-Adviser believes offer opportunities for
income and growth. As used in this
prospectus, unless the context requires
otherwise, MLPs are those MLPs in the energy
sector. Due to the tax treatment under
current law of cash distributions made by
MLPs to their investors (such as the Fund),
the Fund believes that a portion of its
income may be tax deferred, thereby
increasing cash available for distribution
by the Fund to its common shareholders.
There can be no assurance that the Fund's
investment objective will be achieved.
Under normal market conditions, as a
non-fundamental policy, the Fund invests at
least 85% of its Managed Assets (including
assets obtained through leverage) in
securities of energy companies and energy
-2-
sector MLPs and MLP-related entities, and
invests at least 65% of its Managed Assets
in equity securities of such MLPs and
MLP-related entities.
The Fund has adopted the following
additional non-fundamental investment
policies:
o The Fund may invest up to 35% of its
Managed Assets in unregistered or
otherwise restricted securities
(including up to 10% of its Managed
Assets in securities issued by private
companies). The types of unregistered
or otherwise restricted securities that
the Fund may purchase consist of MLP
common units, MLP subordinated units
and securities of public and private
energy companies.
o The Fund may invest up to 25% of its
Managed Assets in debt securities of
energy companies, MLPs and MLP-related
entities, including below investment
grade securities, which are commonly
referred to as "junk bonds." Below
investment grade debt securities will
be rated at least "B3" by Moody's
Investors Service, Inc. ("Moody's") and
at least "B-" by Standard & Poor's
Ratings Group ("S&P") at the time of
purchase, or comparably rated by
another nationally recognized
statistical rating organization
("NRSRO") or, if unrated, determined to
be of comparable quality by the
Sub-Adviser.
o The Fund will not invest more than 10%
of its Managed Assets in any single
issuer.
o The Fund will not engage in short
sales, except to the extent the Fund
engages in derivative investments to
seek to hedge against interest rate
risk in connection with the Fund's use
of Financial Leverage or market risks
associated with the Fund's portfolio.
o The Fund may invest up to 15% of its
Managed Assets in non-U.S. securities
as well as hedge the currency risk of
the non-U.S. securities using
derivative instruments.
To generate additional income, the Fund
writes (or sells) covered call options on
the common stock of energy companies held in
the Fund's portfolio. The Fund anticipates
that it will be able to invest substantially
all of the net proceeds of any offering of
Common Shares pursuant to this prospectus
and applicable prospectus supplement in
securities that meet the Fund's investment
objective and policies within one month
after the completion of any such offering.
The Fund's investment objective and the
investment restrictions listed in the SAI
are considered fundamental and may not be
changed without approval by holders of a
majority of the outstanding voting
securities of the Fund, as defined in the
1940 Act, which includes common shares and
Preferred Shares, if any, voting together as
a single class, and the holders of the
outstanding Preferred Shares, if any, voting
as a single class. The remainder of the
Fund's investment policies, including its
investment strategy, are considered
non-fundamental and may be changed by the
Board of Trustees without shareholder
approval. The Fund will provide investors
with at least 60 days prior notice of any
change in the Fund's investment strategy.
Unless otherwise stated, all investment
restrictions apply at the time of purchase
and the Fund will not be required to reduce
a position due solely to market
fluctuations. There can be no assurance that
the Fund's investment objective will be
achieved. See "The Fund's Investments" and
"Risks" in this prospectus and "Investment
Policies and Techniques" in the Fund's SAI.
-3-
THE FUND'S INVESTMENTS........... The Fund's investments consist of equity
and/or debt securities issued by energy
companies and energy sector MLPs and
MLP-related entities. The companies in which
the Fund invests are generally involved in
the business of transporting, processing,
storing, distributing or marketing natural
gas, natural gas liquids ("NGLs") (including
propane), crude oil, refined petroleum
products, coal or electricity, or exploring,
developing, managing or producing such
commodities or products, or in supplying
energy-related products and services.
The types of MLP and MLP-related entity
equity securities the Fund purchases include
common units, subordinated units and
I-Shares. Unlike the holders of common stock
of a corporation, investors in MLP common
units, including the Fund, have limited
control and voting rights on matters
affecting the partnership. Investors in MLP
common units are generally entitled to
minimum quarterly distributions ("MQD") from
the MLP, including arrearage rights, which
must be satisfied before any distributions
are paid to subordinated unit holders or
incentive payments are made to the MLP's
general partner. MLP common units are
typically listed and traded on a U.S.
securities exchange. While the Fund
anticipates that it will generally purchase
MLP common units in open market
transactions, the Fund has purchased in the
past, and may purchase in the future, MLP
common units through direct placements. MLP
subordinated units provide for distributions
to be made to holders once the MQD payable
to common unit holders have been satisfied
but prior to incentive payments to the MLP's
general partner. MLP subordinated units do
not provide for arrearage rights and are
typically convertible into common units
after a specified period of time or upon the
achievement of specified financial goals. As
MLP subordinated units are not typically
listed or publicly traded, the Fund
anticipates that it will purchase MLP
subordinated units directly from MLP
affiliates or holders of such shares.
I-Shares are similar in most respects to
common units except that distributions
payable on I-Shares are in the form of
additional I-Shares rather than cash
distributions. As a result, the Fund will
consider its own distribution targets and
cash holdings when making a determination as
to whether to purchase I-Shares.
The Fund may also invest in equity and debt
securities of MLP-related entities, such as
general partners or other affiliates of MLPs
and equity and debt securities of energy
companies that are organized and/or taxed as
corporations.
The Fund may invest up to 35% of its Managed
Assets in equity securities issued by energy
companies. The Fund intends to purchase
these equity securities in market
transactions but may also purchase
securities directly from the issuers in
private placements. To generate additional
income, the Fund has in the past written (or
sold), and may in the future write (or
sell), covered call options on the common
stock of energy companies held in the Fund's
portfolio.
HEDGING AND STRATEGIC
TRANSACTIONS..................... The Fund may, but is not required to, use
various hedging and strategic transactions
to seek to reduce interest rate risks
arising from any use of Financial Leverage,
to facilitate portfolio management and to
mitigate risks, including interest rate,
currency and credit risks. The Fund also may
write (or sell) covered call options on the
common stock of energy companies held in the
Fund's portfolio. Call options are contracts
representing the right to purchase a common
stock at a specified price (the "strike
price") at a specified future date (the
"expiration date"). The price of the option
is determined from trading activity in the
broad options market, and generally reflects
the relationship between the current market
price for the underlying common stock and
the strike price, as well as the time
remaining until the expiration date. The
Fund will write call options only if they
are "covered." In the case of a call option
on a common stock or other security, the
option is "covered" if the Fund owns the
security underlying the call or has an
absolute and immediate right to acquire that
-4-
security without additional cash
consideration (or, if additional cash
consideration is required, cash or other
assets determined to be liquid by the
Sub-Adviser (in accordance with procedures
established by the Board of Trustees) in
such amount are segregated by the Fund's
custodian) upon conversion or exchange of
other securities held by the Fund. The Fund
may purchase and sell derivative investments
such as exchange-listed and over-the-counter
put and call options on securities,
energy-related commodities, equity, fixed
income and interest rate indices,
currencies, and other financial instruments,
purchase and sell financial futures
contracts and options thereon, and enter
into various interest rate transactions such
as swaps, caps, floors or collars or credit
transactions and credit default swaps. The
Fund also may purchase derivative
investments that combine features of these
instruments. Collectively, all of the above
are referred to as "Strategic Transactions."
The Fund generally seeks to use these
instruments and transactions as a portfolio
management or hedging technique to seek to
protect against possible adverse changes in
the market value of securities held in or to
be purchased for the Fund's portfolio,
protect the value of the Fund's portfolio,
facilitate the sale of certain securities
for investment purposes, manage the
effective interest rate and currency
exposure of the Fund, or establish positions
in the derivatives markets as a temporary
substitute for purchasing or selling
particular securities.
USE OF FINANCIAL LEVERAGE........ The Fund is currently engaged in, and may
in the future engage in, the use of
Financial Leverage to seek to enhance the
level of its current distributions to common
shareholders. On January 28, 2005, the Fund
issued $34 million principal amount of
auction rate senior notes due March 2, 2045
(the "Series A Notes") and on March 26,
2006, issued $25 million principal amount of
auction rate senior notes due March 20, 2046
(the "Series B Notes"), which were rated
"Aaa" and "AAA" by Moody's and Fitch Ratings
Services, Inc. ("Fitch"), respectively. On
March 26, 2008, the Fund entered into a $55
million senior revolving credit facility
with The Bank of Nova Scotia (the "Credit
Facility"), of which $34 million was
utilized to redeem the issued and
outstanding Series A Notes. On January 23,
2009, the Fund entered into a $60,000,000
commitment facility agreement with BNP
Paribas Prime Brokerage Inc. (the
"Commitment Facility"), which was used to
repay in full outstanding borrowings under
the Credit Facility and, on February 26,
2009, to deposit funds to redeem the issued
and outstanding Series B Notes. All of the
issued and outstanding Series B Notes were
redeemed on March 13, 2009. As of February
28, 2009, the principal amount of Borrowings
under the Commitment Facility were
$31,150,000, representing approximately
25.60% of the Fund's Managed Assets. As of
February 28, 2009, the Fund had $28,850,000
million of unutilized funds available for
Borrowing under the Commitment Facility.
The Fund's common shares are junior in
liquidation and distribution rights to
amounts owed pursuant to the Commitment
Facility. The issuance of Preferred Shares
and/or Borrowings (each a "Leverage
Instrument" and collectively, the "Leverage
Instruments"), represent the leveraging of
the Fund's common shares. The issuance of
additional Common Shares offered by this
prospectus will enable the Fund to increase
the aggregate amount of its leverage. The
use of Financial Leverage creates an
opportunity for increased income and capital
appreciation for common shareholders, but at
the same time, it creates special risks that
may adversely affect common shareholders.
Because both the Adviser's and Sub-Adviser's
fees are based on Managed Assets (including
assets obtained through leverage), both the
Adviser's and Sub-Adviser's fees are higher
when the Fund is leveraged. There can be no
assurance that a leveraging strategy will be
successful during any period in which it is
-5-
used. Leverage creates a greater risk of
loss, as well as potential for more gain,
for the common shares than if leverage is
not used. The determination to use Financial
Leverage is subject to the Board of
Trustees' approval and the ability of the
Fund to obtain Financial Leverage. Leverage
Instruments will have seniority over the
common shares. The use of Leverage
Instruments will leverage your investment in
the Common Shares. The Fund expects to issue
additional Leverage Instruments to extent
such Financial Leverage is available. If the
Fund uses additional Leverage Instruments,
associated costs, if any, will be borne
immediately by common shareholders and
result in a reduction of the net asset value
of the common shares.
Preferred Shares, if any, may pay dividends
based on short-term rates, which may be
reset frequently. Borrowings may be at a
fixed or floating rate and generally will be
based upon short-term rates. So long as the
rate of return, net of applicable Fund
expenses, on the Fund's portfolio
investments purchased with leverage exceeds
the then current interest rate or dividend
rate on the Leverage Instruments, the Fund
will generate more return or income than
will be needed to pay such dividends or
interest payments. In this event, the excess
will be available to pay higher
distributions to common shareholders.
Conversely, if the income or gains from the
securities and investments purchased with
such proceeds does not cover the cost of
leverage, the return to the common shares
will be less than if leverage had not been
used. When leverage is employed, the net
asset value and market prices of the common
shares and the yield to common shareholders
will be more volatile.
There is no assurance that the Fund will
utilize Financial Leverage in addition to
the Commitment Facility or, if additional
Financial Leverage is utilized, that it will
be successful in enhancing the level of the
Fund's current distributions.
The Fund may make further use of Financial
Leverage through the issuance of notes or
other senior securities to the extent
permitted by the 1940 Act. However, it is
possible that the Fund will be unable to
obtain additional Financial Leverage. In the
current economic environment, it has become
more difficult for borrowers, including the
Fund, to find third parties willing to
extend credit or purchase securities that
would constitute Financial Leverage. If the
Fund is unable to increase Financial
Leverage after the issuance of additional
Common Shares pursuant to this prospectus,
there could be an adverse impact on the
return to common shareholders. In addition,
to the extent additional Financial Leverage
is utilized, the Fund may consequently be
subject to certain financial covenants and
restrictions that are not currently imposed
on the Fund. See "Use of Financial Leverage"
and "Risks -- Leverage Risk."
TAX CONSIDERATIONS............... Fund Status. The Fund is taxed as a regular
corporation for federal income tax purposes
and as such is obligated to pay federal and
applicable state and foreign corporate taxes
on its taxable income. This differs from
most investment companies, which elect to be
treated as "regulated investment companies"
under the Internal Revenue Code in order to
avoid paying entity level income taxes.
Under current law, the Fund is not eligible
to elect treatment as a regulated investment
company due to its investment of a
substantial portion of its Managed Assets in
MLPs invested in energy assets. As a result,
the Fund is obligated to pay taxes on its
taxable income as opposed to most other
investment companies which are not so
obligated. However, as discussed below, the
Fund expects that a portion of the
distributions it receives from MLPs may be
treated as a tax-deferred return of capital,
thus reducing the Fund's current tax
liability. For purposes of computing net
asset value, the Fund accrues deferred
-6-
income taxes for its future tax liability
associated with that portion of MLP
distributions considered to be tax-deferred
return of capital as well as capital
appreciation of its investments. The Fund
relies to some extent on information
provided by MLPs, which is usually not
timely, to estimate deferred tax liability
for purposes of financial statement
reporting and determining the Fund's net
asset value. From time to time the Fund will
modify its estimates and/or assumptions
regarding its deferred tax liability as new
information becomes available. The taxation
of Fund distributions is discussed further
under "Tax Matters."
Fund Assets.
o Investments in MLPs. The Fund invests
primarily in MLPs and MLP-related
entities. The benefit the Fund derives
from its investment in MLPs is largely
dependent on MLPs being 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 is
allocated its pro rata share of income,
gains, losses, deductions and expenses
from the MLPs. A significant portion of
MLP income has historically been offset
by tax deductions. In this situation,
the Fund will incur a current tax
liability on that portion of a
distribution not offset by tax
deductions with the remaining portion
of the distribution being treated as a
tax-deferred return of capital. The
Fund's tax basis in its MLP units would
be reduced by amounts treated as
tax-deferred return of capital, which
would likely increase the Fund's
taxable gain (or reduce the Fund's
loss) recognized upon the sale of an
MLP. The percentage of an MLP's
distribution which is offset by tax
deductions will fluctuate over time for
various reasons. A significant slowdown
in acquisition activity by MLPs held by
the Fund could result in a reduction of
accelerated depreciation or other
deductions generated by new
acquisitions, which may result in
increased current tax liability to the
Fund. Certain energy related deductions
are also not allowed for alternative
minimum tax purposes, which may cause
the Fund to be subject to the
alternative minimum tax depending upon
the nature of the assets of the MLPs. A
reduction in the percentage of a
distribution offset by tax deductions
or an increase in the Fund's portfolio
turnover will reduce that portion of
the Fund's distribution treated as a
tax-deferred return of capital and
increase that portion treated as
dividend income, resulting in reduced
Fund distributions and lower after-tax
distributions to the Fund's common
shareholders.
o Investments in Other Securities. The
Fund may also invest in equity and debt
securities of energy companies that are
organized and/or taxed as corporations.
Interest and dividend payments received
by the Fund with respect to such
securities generally are included in
the Fund's corporate taxable income in
the year in which they are received,
although the Fund may qualify for the
dividends-received deduction with
respect to dividends on certain of the
equity securities owned by the Fund.
Shareholder Tax Aspects.
o Current Distributions on Shares.
Common shareholders of the Fund hold
common shares of a Massachusetts
business trust which has elected for
federal income tax purposes to be taxed
as a corporation. There is a
significant difference, for federal
income tax purposes, between owning
common shares of a taxable entity
treated as a corporation for federal
-7-
income tax purposes (such as the Fund)
versus owning partnership interests in
the MLPs in which the Fund invests.
Common shareholders of the Fund will be
subject to potential income tax only if
the Fund pays out distributions.
Depending on the nature of the
distribution made by the Fund, the tax
character of such distribution to
common shareholders will vary.
Distributions made from current and
accumulated earnings and profits of the
Fund will be taxable to common
shareholders as dividend income.
Dividend income generally will qualify
for treatment as "qualified dividend
income" for federal income tax purposes
if holding period and other
requirements are satisfied by the
common shareholder receiving such
dividend income. Qualified dividend
income received by individual
shareholders is taxed at long-term
capital gains rates, which reach a
maximum of 15%. The special tax
treatment afforded to qualified
dividend income is set to end as of
December 31, 2010 (assuming such
special tax treatment is not repealed
by Congress before then). Higher tax
rates will apply in 2011 unless further
legislative action is taken by
Congress. 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 common
shareholder's basis in its common
shares, and such distributions would
correspondingly reduce the common
shareholder's basis in its common
shares. A reduction in the common
shareholder's basis would potentially
increase the common shareholder's gain
(or reduce the common shareholder's
loss) recognized upon the sale of the
common shares. Additionally, excess
distributions that exceed a common
shareholder's tax basis in its common
shares will generally be taxed as gain.
The past performance of MLPs indicates
that a significant portion of the
Fund's distributions to common
shareholders will likely represent a
tax-deferred return of capital.
However, there can be no guarantee that
the Fund's expectation regarding the
tax character of its distributions will
be realized or that the Fund will make
regular distributions. See
"Distributions."
o Sale of Shares. Common shareholders
generally will recognize a gain or loss
upon the sale of their common shares.
Such gain or loss is equal to the
difference between the common
shareholder's federal income tax basis
in its common shares sold (as adjusted
to reflect return of capital) and the
sale proceeds received by the common
shareholder upon the disposition of
common shares. As a general rule, the
sale of a capital asset, like common
shares, held for more than a year will
result in a long-term capital gain or
loss. See "Tax Matters."
COMPARISON WITH DIRECT
INVESTMENTS IN MLPS.............. The Fund seeks to provide an efficient
method for investing in MLPs, MLP-related
entities and other energy companies. Some of
the benefits of investing in the Fund as
opposed to directly investing in MLPs
include:
o The Fund provides, through a single
investment vehicle, an investment in a
portfolio of a number of MLPs,
MLP-related entities and other energy
companies;
o Direct investors in MLPs receive a
partnership statement (a Form K-1
statement) from each MLP they own and
may be required to file income tax
returns in each state in which the MLPs
operate. Common shareholders of the
Fund will receive a single Form 1099
and will only be required to file
income tax returns in states in which
they would ordinarily file;
-8-
o Direct investors in MLPs are limited in
their ability to use losses to offset
other gains by the passive activity
income and loss rules, whereas common
shareholders of the Fund are not so
limited; and
o Income received by tax-exempt
investors, including employee benefit
plans and IRA accounts, from MLPs is
generally treated as unrelated business
taxable income ("UBTI"), whereas
distributions these investors receive
from an entity treated for federal
income tax purposes as a corporation
(such as the Fund) will generally not
be treated as UBTI, unless the stock is
debt-financed.
LISTING.......................... The Fund's currently outstanding common
shares are, and the Common Shares offered in
this prospectus and any applicable
prospectus supplement will be, subject to
notice of issuance, listed on the NYSE Amex
under the trading or "ticker" symbol "FEN."
The net asset value of the Fund's common
shares at the close of business on February
28, 2009 was $14.86 per common share, and
the last sale price of the common shares on
the NYSE Amex on such date was $17.58.
CORPORATE FINANCE SERVICES
AND CONSULTING AGENT............. Wachovia Securities LLC, as successor to
A.G. Edwards, serves as corporate finance
services and consulting agent to the
Adviser, pursuant to a Corporate Finance
Services and Consulting Agreement between
A.G. Edwards and the Adviser. See "Corporate
Finance Services and Consulting Fee."
CUSTODIAN, ADMINISTRATOR
AND TRANSFER AGENT............... PNC Global Investment Servicing (U.S.) Inc.,
formerly known as PFPC Inc., an indirect,
majority-owned subsidiary of The PNC
Financial Services Group, Inc., serves as
the Fund's Administrator, Fund Accountant,
Transfer Agent and Board Administrator in
accordance with certain fee arrangements.
PFPC Trust Company (which will be renamed
PNC Trust Company effective June 7, 2010),
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.
CLOSED-END STRUCTURE............. Closed-end funds differ from open-end
management investment companies (commonly
referred to as mutual funds) in that
closed-end funds generally list their shares
for trading on a securities exchange and do
not redeem their shares at the option of the
shareholder. By comparison, mutual funds
issue securities redeemable at net asset
value at the option of the shareholder and
typically engage in a continuous offering of
their shares. Mutual funds are subject to
continuous asset in-flows and out-flows that
can complicate portfolio management, whereas
closed-end funds generally can stay more
fully invested in securities consistent with
the closed-end fund's investment objective
and policies. In addition, in comparison to
open-end funds, closed-end funds have
greater flexibility in their ability to make
certain types of investments, including
investments in illiquid securities.
Shares of closed-end investment companies
listed for trading on a securities exchange
frequently trade at a discount from net
asset value, but in some cases trade at a
premium. The market price may be affected by
net asset value, dividend or distribution
levels (which are dependent, in part, on
-9-
expenses), supply of and demand for the
shares, stability of dividends or
distributions, trading volume of the shares,
general market and economic conditions and
other factors beyond the control of the
closed-end fund. The foregoing factors may
result in the market price of the common
shares of the Fund being greater than, less
than or equal to, net asset value. The Board
of Trustees has reviewed the structure of
the Fund in light of its investment
objective and policies and has determined
that the closed-end structure is
appropriate. As described in this
prospectus, however, the Board of Trustees
may review periodically the trading range
and activity of the Fund's common shares
with respect to their net asset value and
may take certain actions to seek to reduce
or eliminate any such discount. Such actions
may include open market repurchases or
tender offers for the common shares at net
asset value or the possible conversion of
the Fund to an open-end investment company.
There can be no assurance that the Board of
Trustees will decide to undertake any of
these actions or that, if undertaken, such
actions would result in the common shares
trading at a price equal to or close to net
asset value per common share. In addition,
as noted above, the Board of Trustees
determined in connection with the initial
offering of common shares of the Fund that
the closed-end structure is desirable, given
the Fund's investment objective and
policies. Investors should assume,
therefore, that it is highly unlikely that
the Board of Trustees would vote to convert
the Fund to an open-end investment company.
See "Structure of the Fund; Common Share
Repurchases and Change in Fund Structure."
SPECIAL RISK
CONSIDERATIONS................... Investment and Market Risk. An investment
in the Fund's Common Shares is subject to
investment risk, including the possible loss
of the entire amount that you invest. Your
investment in Common Shares represents an
indirect investment in the securities owned
by the Fund, substantially all of which are
traded on a national securities exchange or
in the over-the-counter markets. The value
of these securities, like other market
investments, may move up or down, sometimes
rapidly and unpredictably. The value of the
securities in which the Fund invests will
affect the value of the Common Shares. Your
Common Shares at any point in time may be
worth less than your original investment,
even after taking into account the
reinvestment of Fund dividends and
distributions.
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
value 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. If the Fund's net
asset value declines or remains volatile,
there is an increased risk that the Fund may
be required to reduce outstanding leverage,
which could adversely affect the price of
the Fund's common shares and ability to pay
distributions at historical levels. A
sustained economic slowdown may adversely
affect the ability of MLPs to sustain their
historical distribution levels, which in
turn, may adversely affect the Fund's
ability to sustain distributions at
historical levels. MLPs that have
historically relied heavily on outside
capital to fund their growth have been
impacted by the slowdown in the capital
markets. The recovery of the MLP sector is
dependent on several factors, including the
recovery of the financial sector, the
general economy and the commodity markets.
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
-10-
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,
the performance of the Fund's investments
and the trading price of the Fund's common
shares.
Market Impact Risk. The sale of the Common
Shares (or the perception that such sales
may occur) may have an adverse effect on
prices in the secondary market for the
Fund's common shares by increasing the
number of shares available, which may put
downward pressure on the market price for
the Fund's common shares. These sales also
might make it more difficult for the Fund to
sell additional equity securities in the
future at a time and price the Fund deems
appropriate.
Management Risk. The Fund is subject to
management risk because it is an actively
managed portfolio. The Adviser and
Sub-Adviser apply investment techniques and
risk analyses in making investment decisions
for the Fund, but there can be no guarantee
that these will produce the desired results.
Energy Sector Risk. The Fund's investments
are generally concentrated in the energy
sector, with a particular concentration in
energy sector MLPs and MLP-related entities.
Certain risks inherent in investing in the
energy business of these types of securities
include the following:
o Commodity Pricing Risk. MLPs,
MLP-related entities and energy
companies may be directly affected by
energy commodity prices, especially
those MLPs, MLP-related entities and
energy companies which own the
underlying energy commodity. Commodity
prices fluctuate for several reasons,
including changes in market and
economic conditions, the impact of
weather on demand, levels of domestic
production and imported commodities,
energy conservation, domestic and
foreign governmental regulation and
taxation and the availability of local,
intrastate and interstate
transportation systems. Volatility of
commodity prices which leads to a
reduction in production or supply may
also impact the performance of MLPs,
MLP-related entities and energy
companies that are solely involved in
the transportation, processing,
storing, distribution or marketing of
commodities. Volatility of commodity
prices may also make it more difficult
for MLPs, MLP-related entities and
energy companies to raise capital to
the extent the market perceives that
their performance may be directly tied
to commodity prices.
o Supply and Demand Risk. A decrease in
the production of natural gas, NGLs,
crude oil, coal or other energy
commodities or a decrease in the volume
of such commodities available for
transportation, processing, storage or
distribution may adversely impact the
financial performance of MLPs,
MLP-related entities and energy
companies. Production declines and
volume decreases could be caused by
various factors, including catastrophic
events affecting production, depletion
of resources, labor difficulties,
environmental proceedings, increased
regulations, equipment failures and
unexpected maintenance problems, import
supply disruption, increased
competition from alternative energy
sources or depressed commodity prices.
Alternatively, a sustained decline in
demand for such commodities could also
impact the financial performance of
MLPs, MLP-related entities and energy
companies. Factors which could lead to
a decline in demand include economic
recession or other adverse economic
conditions, higher fuel taxes or
governmental regulations, increases in
fuel economy, consumer shifts to the
-11-
use of alternative fuel sources, an
increase in commodity prices, or
weather. A continuation of reduced
demand for energy commodities as a
result of the economic recession may
further reduce the financial
performance of the entities in which
the Fund invests.
o Depletion and Exploration Risk. MLPs,
MLP-related entities and energy
companies engaged in the production
(exploration, development, management
or production) of natural gas, NGLs
(including propane), crude oil, refined
petroleum products or coal are subject
to the risk that their commodity
reserves naturally deplete over time.
MLPs, MLP-related entities and energy
companies generally increase reserves
through expansion of their existing
business, through exploration of new
sources or development of existing
sources, through acquisitions or by
securing long-term contracts to acquire
additional reserves, each of which
entails risk. The financial performance
of these issuers may be adversely
affected if they are unable to acquire,
cost-effectively, additional reserves
at a rate at least equal to the rate of
natural decline. A failure to maintain
or increase reserves could reduce the
amount and change the characterization
of cash distributions paid by these
MLPs, MLP-related entities and energy
companies.
o Regulatory Risk. MLPs, MLP-related
entities and energy companies are
subject to significant federal, state
and local government regulation in
virtually every aspect of their
operations, including how facilities
are constructed, maintained and
operated, environmental and safety
controls, and the prices they may
charge for products and services.
Various governmental authorities have
the power to enforce compliance with
these regulations and the permits
issued under them and violators are
subject to administrative, civil and
criminal penalties, including civil
fines, injunctions or both. Stricter
laws, regulations or enforcement
policies could be enacted in the future
which would likely increase compliance
costs and may adversely affect the
financial performance of MLPs,
MLP-related entities and energy
companies.
o Interest Rate Risk. Rising interest
rates could adversely impact the
financial performance of MLPs,
MLP-related entities and energy
companies. Rising interest rates may
increase an MLP's, MLP-related entity's
or energy company's cost of capital,
which would increase operating costs
and may reduce an MLP's, MLP-related
entity's or energy company's ability to
execute acquisitions or expansion
projects in a cost-effective manner.
Rising interest rates may also impact
the price of MLP units, MLP-related
entity securities and energy company
shares as the yields on alternative
investments increase.
o Acquisition Risk. The ability of MLPs
to grow and to increase distributions
to unitholders is dependent principally
on their ability to make acquisitions
that result in an increase in adjusted
operating surplus per unit. In the
event that MLPs are unable to make such
accretive acquisitions either because
they are unable to identify attractive
acquisition candidates or negotiate
acceptable purchase contracts or
because they are unable to raise
financing for such acquisitions on
economically acceptable terms or
because they are outbid by competitors,
their future growth and ability to
raise distributions will be limited.
Furthermore, even if MLPs do consummate
acquisitions that they believe will be
accretive, the acquisitions may in fact
turn out to result in a decrease in
adjusted operating surplus per unit. As
MLP general partners typically receive
a greater percentage of increased cash
distributions, in an effort to increase
cash distributions the general partner
may make acquisitions which, due to
-12-
various factors, including increased
debt obligations as well as the factors
set forth below, may adversely affect
the MLP. Any acquisition involves
risks, including among other things:
mistaken assumptions about revenues and
costs, including synergies; the
assumption of unknown liabilities;
limitations on rights to indemnity from
the seller; the diversion of
management's attention from other
business concerns; unforeseen
difficulties operating in new product
areas or new geographic areas; and
customer or key employee losses at the
acquired businesses.
o Affiliated Party Risk. A few of the
midstream MLPs are dependent on their
parents or sponsors for a majority of
their revenues. Any failure by the
parents or sponsors to satisfy their
payments or obligations would impact
the MLPs' revenues and cash flows and
ability to make distributions.
o Catastrophe Risk. The operations of
MLPs, MLP-related entities and energy
companies are subject to many hazards
inherent in transporting, processing,
storing, distributing or marketing
natural gas, NGLs, crude oil, refined
petroleum products or other
hydrocarbons, or in exploring, managing
or producing such commodities or
products, including: damage to
pipelines, storage tanks or related
equipment and surrounding properties
caused by hurricanes, tornadoes,
floods, fires and other natural
disasters and acts of terrorism;
inadvertent damage from construction
and farm equipment; leaks of natural
gas, NGLs, crude oil, refined petroleum
products or other hydrocarbons; fires
and explosions. These risks could
result in substantial losses due to
personal injury and/or loss of life,
severe damage to and destruction of
property and equipment and pollution or
other environmental damage and may
result in the curtailment or suspension
of their related operations. Not all
MLPs, MLP-related entities and energy
companies are fully insured against all
risks inherent to their businesses. If
a significant accident or event occurs
that is not fully insured, it could
adversely affect their operations and
financial condition.
o Terrorism/Market Disruption Risk. The
terrorist attacks in the United States
on September 11, 2001 had a disruptive
effect on the securities markets. U.S.
military and related action in Iraq is
ongoing and events in the Middle East
could have significant adverse effects
on the U.S. economy and the stock
market. Uncertainty surrounding
retaliatory military strikes or a
sustained military campaign may affect
energy company operations in
unpredictable ways, including
disruptions of fuel supplies and
markets, and transmission and
distribution facilities could be direct
targets, or indirect casualties, of an
act of terror. Since the September 11th
attacks, the U.S. government has issued
warnings that energy assets,
specifically the U.S. pipeline
infrastructure, may be the future
target of terrorist organizations. In
addition, changes in the insurance
markets attributable to the September
11th attacks have made certain types of
insurance more difficult, if not
impossible, to obtain and have
generally resulted in increased premium
costs.
o MLP Risks. An investment in MLP units
involves risks which differ from an
investment in common stock of a
corporation. Holders of MLP units have
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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.
o Industry Specific Risk. MLPs,
MLP-related entities and energy
companies are also subject to risks
that are specific to the industry they
serve.
o Midstream MLPs, MLP-related entities
and energy companies that provide crude
oil, refined product and natural gas
services are subject to supply and
demand fluctuations in the markets they
serve which will be impacted by a wide
range of factors including, fluctuating
commodity prices, weather, increased
conservation or use of alternative fuel
sources, increased governmental or
environmental regulation, depletion,
rising interest rates, declines in
domestic or foreign production,
accidents or catastrophic events, and
economic conditions, among others.
o Propane MLPs and MLP-related entities
are subject to earnings variability
based upon weather conditions in the
markets they serve, fluctuating
commodity prices, increased use of
alternative fuels, increased
governmental or environmental
regulation, and accidents or
catastrophic events, among others.
o MLPs, MLP-related entities and energy
companies with coal assets are subject
to supply and demand fluctuations in
the markets they serve which will be
impacted by a wide range of factors
including, fluctuating commodity
prices, the level of their customers'
coal stockpiles, weather, increased
conservation or use of alternative fuel
sources, increased governmental or
environmental regulation, depletion,
rising interest rates, transportation
issues, declines in domestic or foreign
production, mining accidents or
catastrophic events, health claims and
economic conditions, among others.
Cash Flow Risk. A substantial portion of the
cash flow received by the Fund is derived
from its investment in equity securities of
MLPs and MLP-related entities. The amount of
cash an MLP or MLP-related entity has
available for distributions and the tax
character of such distributions is dependent
upon the amount of cash generated by the
MLP's or MLP-related entity's operations.
Cash available for distribution varies from
quarter to quarter and is largely dependent
on factors affecting the MLP's or
MLP-related entity's operations and factors
affecting the energy industry in general. In
addition to the risk factors described
above, other factors which may reduce the
amount of cash an MLP or MLP-related entity
has available for distribution include
increased operating costs, capital
expenditures, acquisition costs, expansion,
construction or exploration costs and
borrowing costs.
Tax Risk. The Fund's ability to meet its
investment objective depends on the level of
taxable income and distributions it receives
from the MLP, MLP-related entities and
energy company securities in which the Fund
invests, a factor over which the Fund has no
control. The benefit the Fund derives from
its investment in MLPs is largely dependent
on their being treated as partnerships for
federal income tax purposes. As a
partnership, an MLP has no income tax
liability at the entity level. If, as a
result of a change in an MLP's business, an
MLP were treated as a corporation for
federal income tax purposes, such MLP would
be obligated to pay federal income tax on
its income at the applicable corporate tax
rate. If an MLP was classified as a
corporation for federal income tax purposes,
the amount of cash available for
-14-
distribution with respect to its units would
be reduced and any such distributions
received by the Fund would be taxed entirely
as dividend income. Therefore, treatment of
an MLP as a corporation for federal income
tax purposes would result in a material
reduction in the after-tax return to the
Fund, likely causing a substantial reduction
in the value of the common shares.
Tax Law Change Risk. Changes in tax laws or
regulations, or interpretations thereof in
the future, could adversely affect the Fund
or the MLPs in which it invests. Any such
changes could negatively impact the Fund and
its common shareholders. For example, if, by
reason of a change in law or otherwise, an
MLP in which the Fund invests is treated as
a corporation rather than a partnership, the
MLP would be subject to entity level
corporate taxation and any distributions
received by the Fund would be treated as
dividend income. This would negatively
impact the amount and tax characterization
of distributions received by common
shareholders.
Deferred Tax Risk. As a limited partner in
the MLPs in which it invests, the Fund is
allocated its pro rata share of income,
gains, losses, deductions and expenses from
the MLPs. A significant portion of MLP
income has historically been offset by tax
deductions. The Fund will incur a current
tax liability on that portion of a
distribution that is not offset by tax
deductions, with the remaining portion of
the distribution being treated as a
tax-deferred return of capital. The
percentage of an MLP's distribution which is
offset by tax deductions will fluctuate over
time for various reasons. A significant
slowdown in acquisition activity by MLPs
held in the Fund's portfolio could result in
a reduction of accelerated depreciation or
other deductions generated by new
acquisitions, which may result in increased
current tax liability to the Fund. A
reduction in the percentage of a
distribution offset by tax deductions or an
increase in the Fund's portfolio turnover
will reduce that portion, if any, of the
Fund's distribution treated as a
tax-deferred return of capital and increase
that portion treated as dividend income,
resulting in reduced Fund distributions and
lower after-tax distributions to the Fund's
common shareholders. For purposes of
computing net asset value, the Fund will
accrue deferred income taxes for its future
tax liability associated with that portion
of MLP distributions considered to be
tax-deferred return of capital as well as
capital appreciation of its investments. The
Fund will rely to some extent on information
provided by MLPs, which is usually not
timely, to estimate deferred tax liability
for purposes of financial statement
reporting and determining the Fund's net
asset value. From time to time the Fund will
modify its estimates and/or assumptions
regarding its deferred tax liability as new
information becomes available.
Delay in Investing the Proceeds of this
Offering. Although the Fund currently
intends to invest the proceeds from any sale
of the Common Shares as soon as practicable
following the completion of such offering,
such investments may be delayed if suitable
investments are unavailable at the time. The
trading market and volumes for MLP,
MLP-related entity and energy company shares
may at times be less liquid than the market
for other securities. Prior to the time the
proceeds of any offering are invested, such
proceeds may be invested in cash, cash
equivalents or other securities, pending
investment in MLP, MLP-related entity or
energy company securities. Income received
by the Fund from these securities would
subject the Fund to corporate tax before any
distributions to Common Shareholders. As a
result, the return and yield on the Common
Shares in the year following any offering
pursuant to this prospectus and an
applicable prospectus supplement may be
lower than when the Fund is fully invested
in accordance with its objective and
policies. See "Use of Proceeds."
-15-
Equity Securities Risk. MLP units and other
equity securities are sensitive to general
movements in the stock market and a drop in
the stock market may depress the price of
securities to which the Fund has exposure.
MLP units and other equity securities prices
fluctuate for several reasons including
changes in the financial condition of a
particular issuer (generally measured in
terms of distributable cash flow in the case
of MLPs), investors' perceptions of MLPs and
energy companies, the general condition of
the relevant stock market, such as the
current market volatility, or when political
or economic events affecting the issuers
occur. In addition, the price of MLP units
and other equity securities may be
particularly sensitive to rising interest
rates, as the cost of capital rises and
borrowing costs increase.
Certain of the energy companies in which the
Fund invests and may in the future invest
may have comparatively smaller
capitalizations. Investing in securities of
smaller MLPs, MLP-related entities and
energy companies presents some unique
investment risks. These companies may have
limited product lines and markets, as well
as shorter operating histories, less
experienced management and more limited
financial resources than larger MLPs,
MLP-related entities and energy companies
and may be more vulnerable to adverse
general market or economic developments.
Stocks of smaller MLPs, MLP-related entities
and energy companies may be less liquid than
those of larger MLPs, MLP-related entities
and energy companies and may experience
greater price fluctuations than larger MLPs,
MLP-related entities and energy companies.
In addition, small-cap securities may not be
widely followed by the investment community,
which may result in reduced demand.
MLP subordinated units in which the Fund
invests and may in the future invest
generally convert to common units at a
one-to-one ratio. The purchase or sale price
is generally tied to the common unit price
less a discount. The size of the discount
varies depending on the likelihood of
conversion, the length of time remaining to
conversion, the size of the block purchased
and other factors.
The Fund invests, and may in the future
invest, in I-Shares which represent an
indirect investment in MLP i-units. While
not precise, the price of I-Shares and their
volatility tend to be correlated to the
price of common units. I-Shares are subject
to the same risks as MLP common units.
Leverage Risk. The Fund currently utilizes
leverage in the form of Borrowings under the
Commitment Facility, and may in the future
use additional leverage for investment
purposes, to finance the repurchase of its
common shares, and to meet cash
requirements. Although the use of leverage
by the Fund creates an opportunity for
increased return for the common shares, it
also results in additional risks and can
magnify the effect of any losses. If the
income and gains earned on the securities
and investments purchased with leverage
proceeds are greater than the cost of the
leverage, the common shares' return will be
greater than if leverage had not been used.
Conversely, if the income or gains from the
securities and investments purchased with
such proceeds does not cover the cost of
leverage, the return to the common shares
will be less than if leverage had not been
used. There is no assurance that a
leveraging strategy will be successful. In
addition, certain types of leverage may
result in the Fund being subject to
covenants relating to asset coverage and the
Fund's portfolio composition and may impose
special restrictions on the Fund's use of
various investment techniques or strategies
or in its ability to pay dividends and other
distributions on common shares in certain
instances. Under the Commitment Facility,
the Fund is also required to pledge assets
to the lenders. Leverage involves risks and
special considerations for common
shareholders including:
-16-
o the likelihood of greater volatility of
net asset value and market price of the
common shares than a comparable
portfolio without leverage;
o the risk that fluctuations in interest
rates on borrowings and short-term debt
or in the dividend rates on any
Preferred Shares that the Fund may pay
will reduce the return to the common
shareholders or will result in
fluctuations in the distributions paid
on the common shares;
o the effect of leverage in a declining
market, which is likely to cause a
greater decline in the net asset value
of the common shares than if the Fund
were not leveraged, which may result in
a greater decline in the market price
of the common shares; and
o when the Fund uses leverage, the
investment advisory fee payable to the
Adviser, and the sub-advisory fee
payable by the Adviser to the
Sub-Adviser, will be higher than if the
Fund did not use leverage.
The issuance of Leverage Instruments by the
Fund, in addition to Borrowings under the
Commitment Facility, involve offering
expenses and other costs, including interest
or dividend payments, which would be borne
indirectly by the common shareholders.
Increased operating costs, including the
financing cost associated with any leverage,
may reduce the Fund's total return.
Certain types of Borrowings may result in
the Fund being subject to covenants in
credit agreements relating to asset coverage
and portfolio composition requirements. The
Fund may be subject to certain restrictions
on investments imposed by guidelines of one
or more rating agencies, which may issue
ratings for the short-term corporate debt
securities or Preferred Shares issued by the
Fund. These guidelines may impose asset
coverage or portfolio composition
requirements that are more stringent than
those imposed by the 1940 Act. In addition,
the loan documents under the Commitment
Facility include customary provisions
including a restriction on the Fund's
ability to pledge its assets and contains
customary events of default including
failure of the Fund to meet the asset
coverage test of the 1940 Act. There is no
assurance that the Fund will not violate
financial covenants relating to the
Commitment Facility or other Financial
Leverage in the future. In such event, the
Fund may be required to repay all
outstanding Borrowings immediately. In order
to repay such amounts the Fund may be
required to sell assets quickly which could
have a material adverse effect on the Fund
and could trigger negative tax implications.
In addition, the Fund would be precluded
from declaring or paying any distribution on
the common shares during the continuance of
such event of default.
It is possible that the Fund will be unable
to obtain additional leverage. If the Fund
is unable to increase Financial Leverage
after the issuance of additional Common
Shares, there could be an adverse impact on
the return to common shareholders.
Derivatives Risk. The Fund's Strategic
Transactions have risks, including the
imperfect correlation between the value of
such instruments and the underlying assets
of the Fund, the possible default of the
other party to the transaction or
illiquidity of the derivative investments.
Furthermore, the ability to successfully use
hedging and interest rate transactions
depends on the Sub-Adviser's ability to
predict pertinent market movements, which
cannot be assured. Thus, the use of
derivatives for hedging and interest rate
management purposes may result in losses
greater than if they had not been used, may
require the Fund to sell or purchase
portfolio securities at inopportune times or
for prices other than current market values,
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. Additionally, amounts
paid by the Fund as premiums and cash or
other assets held in margin accounts with
-17-
respect to hedging and strategic
transactions are not otherwise available to
the Fund for investment purposes. As the
writer of a covered call option, the Fund
forgoes, during the option's life, the
opportunity to profit from increases in the
market value of the security covering the
call option above the sum of the premium and
the strike price of the call, but has
retained the risk of loss should the price
of the underlying security decline. The
writer of an option has no control over the
time when it may be required to fulfill its
obligation as a writer of the option. Once
an option writer 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 at the exercise
price. See "Risks-Derivatives Risk."
Portfolio Turnover Risk. The Fund's annual
portfolio turnover rate may vary greatly
from year to year. Although the Fund cannot
accurately predict its annual portfolio
turnover rate, it is not expected to exceed
30% under normal circumstances, but may be
higher or lower in certain periods. For the
fiscal year ended November 30, 2008,
portfolio turnover was approximately 38%.
Portfolio turnover rate is not considered a
limiting factor in the execution of
investment decisions for the Fund. High
portfolio turnover may result in the Fund's
recognition of gains that will be taxable as
ordinary income to the Fund. A high
portfolio turnover may increase the Fund's
current and accumulated earnings and
profits, resulting in a greater portion of
the Fund's distributions being treated as a
dividend to the Fund's common shareholders.
In addition, a higher portfolio turnover
rate results in correspondingly greater
brokerage commissions and other
transactional expenses that are borne by the
Fund. See "The Fund's Investments-
Investment Practices-Portfolio Turnover"
and "Tax Matters."
Restricted Securities. The Fund invests, and
may in the future invest, in unregistered or
otherwise restricted securities. The term
"restricted securities" refers to securities
that have not been registered under the 1933
Act 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. Absent an exemption from
registration, the Fund will be required to
hold the securities until they are
registered by the issuer. 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.
Liquidity Risk. Although common units of
MLPs, I-Shares of MLP-related entities, and
common stock of certain energy companies
trade on the New York Stock Exchange
("NYSE"), NYSE Amex, and The NASDAQ Stock
Market, certain securities may trade less
frequently, particularly those of issuers
with smaller capitalizations. Securities
with limited trading volumes may display
volatile or erratic price movements. Larger
purchases or sales of these securities by
the Fund in a short period of time may
result in abnormal movements in the market
price of these securities. This may affect
the timing or size of Fund transactions and
may limit the Fund's ability to make
-18-
alternative investments. If the Fund
requires significant amounts of cash on
short notice in excess of normal cash
requirements or is required to post or
return collateral in connection with the
Fund's investment portfolio, derivatives
transactions or leverage restrictions, the
Fund may have difficulty selling these
investments in a timely manner, be forced to
sell them for less than it otherwise would
have been able to realize, or both. The
reported value of some of the Fund's
relatively illiquid types of investments
and, at times, the Fund's high quality,
generally liquid asset classes, may not
necessarily reflect the lowest current
market price for the asset. If the Fund was
forced to sell certain of its assets in the
current market, there can be no assurance
that the Fund will be able to sell them for
the prices at which the Fund has recorded
them and the Fund may be forced to sell them
at significantly lower prices. See "The
Fund's Investments-Investment Philosophy and
Process."
Valuation Risk. Market prices generally will
not be available for subordinated units,
direct ownership of general partner
interests, restricted securities or
unregistered securities of certain MLPs,
MLP-related entities or private companies,
and the value of such investments will
ordinarily be determined based on fair
valuations determined pursuant to procedures
adopted by the Board of Trustees. The value
of these securities typically requires more
reliance on the judgment of the Sub-Adviser
than that required for securities for which
there is an active trading market. In
addition, the Fund will rely on information
provided by the MLPs, which is usually not
timely, to calculate taxable income
allocable to the MLP units held in the
Fund's portfolio and to calculate associated
deferred tax liability for purposes of
financial statement reporting and
determining the Fund's net asset value. 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 net asset value of the Fund would likely
fluctuate. See "Net Asset Value."
Interest Rate Risk. Interest rate risk is
the risk that equity and debt securities
will decline in value because of changes in
market interest rates. When market interest
rates rise, the market value of the
securities in which the Fund invests
generally will fall. The Fund's investment
in such securities means that the net asset
value and market price of the common shares
will tend to decline if market interest
rates rise. Interest rates are at or near
historic lows, and as a result, they are
likely to rise over time. Certain debt
instruments, particularly below investment
grade securities, may contain call or
redemption provisions which would allow the
issuer thereof to prepay principal prior to
the debt instrument's stated maturity. This
is known as prepayment risk. Prepayment risk
is greater during a falling interest rate
environment as issuers can reduce their cost
of capital by refinancing higher yielding
debt instruments with lower yielding debt
instruments. An issuer may also elect to
refinance its debt instruments with lower
yielding debt instruments if the credit
standing of the issuer improves. To the
extent the Fund's debt securities are called
or redeemed, the Fund may be forced to
reinvest in lower yielding securities.
Below Investment Grade Securities. Below
investment grade debt securities are
commonly referred to as "junk bonds." Below
investment grade quality securities are
considered speculative with respect to an
issuer's capacity to pay interest and repay
principal. They involve greater risk of
loss, are subject to greater price
volatility and are less liquid, especially
during periods of economic uncertainty or
change, than higher rated debt instruments.
Below investment grade securities may also
-19-
be more susceptible to real or perceived
adverse economic and competitive industry
conditions than higher rated debt
instruments. The Fund does not intend to
invest in securities issued by a partnership
or company in bankruptcy reorganization,
subject to a public or private debt
restructuring or otherwise in default or in
significant risk of default in the payment
of interest and principal ("distressed
securities"). In the event any security held
by the Fund becomes distressed, the Fund may
be required to incur extraordinary expenses
in order to attempt to protect and/or
recover its investment. In such situations,
there can be no assurance as to when or if
the Fund will recover any of its investment
in such distressed securities, or the value
thereof. As of February 28, 2009, the Fund
did not invest in any below investment grade
debt securities.
Non-Diversification. The Fund is a
non-diversified investment company under the
1940 Act and will not be treated as a
regulated investment company under the
Internal Revenue Code. Accordingly, there
are no regulatory requirements under the
1940 Act or the Internal Revenue Code on the
minimum number or size of securities held by
the Fund. As of February 28, 2009, there
were approximately seventy-three (73)
publicly traded MLPs, approximately 80% of
which operate energy assets. The Fund
intends to select its MLP investments from
this small pool of issuers. The Fund may
invest in securities of MLP-related entities
and non-MLP securities of other energy
companies, consistent with its investment
objective and policies. As of February 28,
2009 the Fund held investments in fifty-two
(52) issuers.
Market Disruption Risk. The terrorist
attacks in the United States on September
11, 2001 had a disruptive effect on the
securities markets. U.S. military and
related action in Iraq is ongoing and events
in the Middle East, as well as the
continuing threat of terrorist attacks,
could have significant adverse effects on
the U.S. economy and the stock market. The
Fund cannot predict the effects of similar
events in the future on the U.S. economy.
Anti-Takeover Provisions. The Fund's
Declaration of Trust includes provisions
that could limit the ability of other
entities or persons to acquire control of
the Fund or convert the Fund to open-end
status. These provisions could have the
effect of depriving the common shareholders
of opportunities to sell their common shares
at a premium over the then current market
price of the common shares. See "Certain
Provisions in the Declaration of Trust and
By-Laws" and "Risks-Anti-Takeover
Provisions."
Competition Risk. There exist other
alternatives to the Fund as a vehicle for
investment in a portfolio of MLPs, including
other publicly traded investment companies
and private funds. In addition, recent tax
law changes or future tax law changes may
increase the ability of regulated investment
companies or other institutions to invest in
MLPs. Because of the limited number of MLP
issuers, these competitive conditions may
adversely impact the Fund's ability to make
investments in the MLP market and could
adversely impact the Fund's distributions to
common shareholders.
Market Discount From Net Asset Value. The
Fund's common shares have been publicly
traded since June 24, 2004 and have traded
both at a premium and at a discount relative
to net asset value. There is no assurance
that any premium of the public offering
price for the Common Shares over net asset
value with respect to any offering hereunder
will continue after such offering or that
the common shares will not again trade at a
discount. Shares of closed-end investment
companies frequently trade at a discount
from their net asset value. This
characteristic is a risk separate and
distinct from the risk that the Fund's net
asset value could decrease as a result of
its investment activities and may be greater
for investors expecting to sell their Common
Shares in a relatively short period
following completion of any offering
hereunder. Although the value of the Fund's
net assets is generally considered by market
-20-
participants in determining whether to
purchase or sell shares, whether investors
will realize gains or losses upon the sale
of the common shares will depend entirely
upon whether the market price of the common
shares at the time of sale is above or below
the investor's purchase price for the common
shares. Because the market price of the
common shares will be affected by factors
such as net asset value, dividend or
distribution levels (which are dependent, in
part, on expenses), supply of and demand for
the common shares, stability of dividends or
distributions, trading volume of the common
shares, general market and economic
conditions, and other factors beyond the
control of the Fund, the Fund cannot predict
whether the Common Shares will trade at,
below or above net asset value or at, below
or above the public offering price with
respect to any offering hereunder.
Inflation Risk. Inflation risk is the risk
that the value of assets or income from
investment will be worth less in the future
as inflation decreases the value of money.
As inflation increases, the real value of
the common shares and distributions can
decline.
Certain Affiliations. Certain broker-dealers
may be considered to be affiliated persons
of the Fund, First Trust Advisors or Energy
Income Partners. Absent an exemption from
the SEC or other regulatory relief, the Fund
is generally precluded from effecting
certain principal transactions with
affiliated brokers, and its ability to
utilize affiliated brokers for agency
transactions, is subject to restrictions.
This could limit the Fund's ability to
engage in securities transactions and take
advantage of market opportunities.
-21-
SUMMARY OF FUND EXPENSES
The following table and example contains information about the costs and
expenses that common shareholders will bear directly or indirectly. In
accordance with SEC requirements, the table below shows the Fund's expenses,
including leverage costs, as a percentage of the Fund's net assets as of March
10, 2009, and not as a percentage of gross assets or Managed Assets. By showing
expenses as a percentage of net assets, expenses are not expressed as a
percentage of all the assets the Fund invests. The table and example are based
on the Fund's capital structure as of March 10, 2009. As of that date, the Fund
had $31,150,000 of leverage outstanding pursuant to the Commitment Facility.
Such leverage represented 26% of total assets as of March 10, 2009.
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load (as a percentage of offering price) ............................................................ %*
Offering Expenses Borne by the Fund (as a percentage of offering price)(1)................................. %*
Dividend Reinvestment Plan Fees............................................................................ None(2)
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES,
(ASSUMES 26% LEVERAGE IS OUTSTANDING)
ANNUAL EXPENSES:
Management Fees(3)......................................................................................... 1.35%
Interest and Fees on Leverage(4)........................................................................... 1.24%
Other Expenses (exclusive of current and deferred income tax expense (benefit))(5)......................... 0.89%
Total Annual Expenses...................................................................................... 3.48%
=====
Fee and Expense Reimbursement.............................................................................. %
-----
Total Net Annual Expenses............................................................................. 3.48%
=====
-------------------------------------------------------------------------------
* The applicable prospectus supplement to be used in connection with any
sales of Common Shares will set forth any applicable sales load and the
estimated offering expenses borne by the Fund.
(1) The Fund will pay all offering costs other than the sales load.
(2) You will pay brokerage charges if you direct PNC Global Investment
Servicing (U.S.) Inc., as agent for the Common Shareholders Dividend
Reinvestment Plan, to sell your Common Shares held in a dividend
reinvestment account.
(3) Represents the aggregate fee payable to the Adviser (and by the Adviser to
the Sub-Adviser).
(4) Interest and fees on leverage in the table reflect the cost to the Fund of
Borrowings, expressed as a percentage of the Fund's net assets as of
March 10, 2009, based on interest rates in effect as of March 10, 2009.
The table assumes total Borrowings of $31 million, which reflects leverage
in an amount representing 26% of total assets. The Borrowings bear
interest at variable rates.
(5) Current and deferred income tax expense (benefit) varies based on the
Fund's net investment income and realized and unrealized investment gain
and losses, which cannot be predicted. Accordingly, other expenses do not
include current or deferred income tax expense (benefit). The Fund's
current and deferred income tax expense (benefit) as a percentage of
average net assets by fiscal year from inception through November 30, 2008
has been as follows:
Period June 24, 2004 (commencement of operations)
Through November 30, 2004 16.18%
Year Ended November 30, 2005 5.98%
Year Ended November 30, 2006 10.84%
Year Ended November 30, 2007 4.58%
Year Ended November 30, 2008 (24.83)%
The purpose of the tables above and the example below is to help you
understand all fees and expenses that you, as a holder of Common Shares, would
bear directly or indirectly. The expenses shown in the tables under "Other
Expenses" and "Total Net Annual Expenses" are based on estimated amounts for the
Fund's 12 months of operations after March 10, 2009 unless otherwise indicated
and assumes that the Fund has not issued any additional common shares.
-22-
The following examples illustrate the expenses that you would pay on a
$1,000 investment in Common Shares, assuming: (i) total annual expenses of 3.48%
of net assets attributable to Common Shares through year 10, (ii) a 5% annual
return and (iii) all distributions are reinvested at net asset value:(1)
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$35 $107 $181 $376
-------------------------------------------------------------------------------
(1) This example does not include sales load or estimated offering costs. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES. The
example assumes that the estimated "Other Expenses" set forth in the Annual
Expenses table are accurate, that all dividends and distributions are
reinvested at net asset value and that the Fund is engaged in leverage of
26% of total assets, assuming interest and fees on leverage of 1.24%. The
interest and fees on leverage is expressed as an interest rate and
represents interest and fees payable on the Commitment Facility. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, the Fund's
actual rate of return may be greater or less than the hypothetical 5%
return shown in the example.
-23-
FINANCIAL HIGHLIGHTS
The information in this table is derived from the Fund's financial
statements audited by Deloitte & Touche LLP, whose report on certain of such
financial statements is contained in the Fund's 2008 Annual Report and is
incorporated by reference into the Fund's SAI, both of which are available from
the Fund upon request.
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
NOVEMBER NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
30, 2008 2007 (a) 2006 2005 2004 (b)
Net asset value, beginning of period............. $ 26.74 $ 25.88 $ 22.53 $ 21.34 $ 19.10 (c)
-------- ---------- ---------- --------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss.............................. (0.57) (0.67) (0.50) (0.34) (0.13)
Net realized and unrealized gain (loss).......... (9.83) 3.06 5.23 2.86 2.74
-------- -------- -------- -------- --------
Total from investment operations after income
tax.............................................. (10.40) 2.39 4.73 2.52 2.61
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain................................ (1.66) (1.53) -- (0.88) --
Return of capital................................ -- -- (1.38) (0.45) (0.33)
---------- ---------- ----------
Total from distributions.......................... (1.66) (1.53) (1.38) (1.33) (0.33)
-------- --------- --------- --------- ---------
Common Share offering costs charges to paid-in
capital...................................... -- -- -- -- (0.04)
---------
Net asset value, end of period................... $ 14.68 $ 26.74 $ 25.88 $ 22.53 $ 21.34
Market value, end of period...................... $ 14.40 $ 23.82 $ 24.49 $ 20.92 $ 22.12
TOTAL RETURN BASED ON NET ASSET VALUE (D) (E)... (40.70)% 9.38% 22.23% 11.96%(g) 13.53%
-------- --------- --------- --------- ---------
TOTAL RETURN BASED ON MARKET VALUE (E) (F)....... (34.74)% 2.96% 24.57% 0.29% 12.38%
-------- --------- --------- --------- ---------
Net assets, end of period (in 000's)............. $94,880 $172,421 $166,850 $145.230 $136,993
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes
before waiver (h)................................ (20.03)% (i) 8.52% 14.47% 8.62% 18.38% (i)
Including current and deferred income taxes
after waiver (h)................................. (20.03)% (i) 8.52% 14.29% 8.31% 18.09% (i)
Excluding current and deferred income taxes
before waiver.................................... 4.80% (i) 3.94% 3.63% 2.64% 2.20% (i)
Excluding current and deferred income taxes
after waiver..................................... 4.80% (i) 3.94% 3.45% 2.33% 1.91% (i)
Excluding current and deferred income taxes
and interest expense after waiver................ 2.55% (i) 1.89% 1.76% 1.57% 1.36% (i)
RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS:
Net investment loss ratio before tax expenses.... (3.83)% (i) (3.83)% (3.26)% (2.29)% (1.49)% (i)
Net investment income (loss) ratio including
tax expenses (j)................................. 21.00% (i) (8.41)% (14.10)% (8.27)% (17.67)% (i)
Portfolio turnover rate.......................... 38% 16% 17% 38% 35%
DEBT:
Total Energy Notes outstanding ($25,000 per
note) ........................................... 1,000 2,360 2,360 1,360 N/A
Principal amount and market value per Energy
Note (k)......................................... $25,006 $25,004 $25,069 $ 25,074 N/A
Asset coverage per Energy Note (l)............... $119,880 $98,060 $95,699 $131,786 N/A
Total loan outstanding (in 000's)................ $5,650 $15,250 N/A N/A $30,000
Asset coverage per $1,000 senior indebtedness
.................................................. $22,218 (m) $12,306 (n) N/A N/A $ 5,566 (n)
See notes to this table on the next page.
-24-
(a) On September 14, 2007, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Energy Income Partners, LLC. On September 14,
2007, Energy Income Partners, LLC began serving as Sub-Adviser to the Fund.
(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 Adviser and former
sub-advisor. This reimbursement had no effect on the Fund's total return.
(h) Includes current and deferred income taxes associated with each component
of the Statement of Operations.
(i) Annualized.
(j) Includes tax expenses associated with each component of the Statement of
Operations.
(k) Includes accumulated and unpaid interest.
(l) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the Energy Notes) and dividing by the
outstanding Energy Notes in 000's.
(m) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding and the Energy Notes)
and dividing by the loan outstanding in 000's. If this methodology had
been used historically, fiscal year 2007 would have been $16,175 and
fiscal year 2004 remains unchanged.
(n) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
outstanding in 000's.
N/A Not applicable.
-25-
SENIOR SECURITIES
The following table sets forth information about the Fund's outstanding
senior securities as of each fiscal year ended November 30 since the Fund's
inception:
Total Principal
Amount/Liquidation Asset Coverage per Asset Coverage Principal Amount
Preference $1,000 Senior per and Market Value
Year Title of Security Outstanding Indebtedness Energy Note (b) Per Energy Note (d)
---- ----------------- ----------- ---------------- --------------- -------------------
2004 Borrowings
Total Loan Outstanding $ 30,000,000 $ 5,566 (a) ____ ____
2005 Energy Notes
Series A (1,360 Notes) $ 34,000,000 ____ $131,786 $ 25,074
2006 Energy Notes
Series A (1,360 Notes)
Series B (1,000 Notes) $ 59,000,000 ____ $ 95,699 $ 25,069
2007 Energy Notes
Series A (1,360 Notes)(e) $ 59,000,000 ____ $ 98,060 $ 25,004
Series B (1,000 Notes)
Borrowings
Credit Facility $ 15,250,000 $12,306 (a) ____ ____
2008 Energy Notes
Series B (1,000 Notes)(f) 25,000,000 ____ $119,880 $25,006
Borrowings
Credit Facility (g) 5,650,000 $22,218 (c) ____ ____
(a) 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 000s).
(b) 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 000s).
(c) 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.
(d) Includes accumulated and unpaid interest.
(e) On April 18, 2008, the Fund redeemed all of the issued and outstanding
Series A Notes.
(f) On March 13, 2009, the Fund redeemed all of the issued and outstanding
Series B Notes.
(g) On January 23, 2009, the Fund repaid in full outstanding borrowings under
the Credit Facility with borrowings under the Commitment Facility.
-26-
MARKET AND NET ASSET VALUE INFORMATION
The Fund's currently outstanding common shares are, and the Common Shares
offered by this prospectus and the applicable prospectus supplement, subject to
notice of issuance, will be, listed on NYSE Amex (formerly the American Stock
Exchange). The Fund's common shares commenced trading on NYSE Amex on June 25,
2004.
The Fund's common shares have traded both at a premium and at a discount in
relation to net asset value. Shares of closed-end investment companies
frequently trade at a discount from net asset value. The Fund's issuance of the
Common Shares may have an adverse effect on prices in the secondary market for
the Fund's common shares by increasing the number of common shares available,
which may put downward pressure on the market price for the Fund's common
shares. The continued development of alternatives as vehicles for investing in a
portfolio of energy infrastructure MLPs, including other publicly traded
investment companies and private funds, may reduce or eliminate any tendency of
the Fund's common shares to trade at a premium in the future. Shares of common
stock of closed-end investment companies frequently trade at a discount from Net
Asset Value. See "Risks - Market Discount from Net Asset Value."
The following table sets forth for each of the periods indicated the high
and low closing market prices for common shares of the Fund on NYSE Amex, the
net asset value per share and the premium or discount to net asset value per
share at which the Fund's common shares were trading. Net asset value is
determined daily as of the close of regular trading on the NYSE (normally 4:00
p.m. eastern time). Prior to August 1, 2008, net asset value was determined on
each Friday and as of the end of each month. See "Net Asset Value" for
information as to the determination of the Fund's net asset value.
PREMIUM/(DISCOUNT)
MARKET PRICE (1) NET ASSET VALUE (2) TO NET ASSET VALUE
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
September 30, 2004..............................$22.20 $19.60 $20.44 $19.06 8.61% 2.83%
December 31, 2004...............................$22.98 $20.60 $21.01 $20.16 9.38% 2.18%
March 31, 2005..................................$24.05 $21.50 $23.12 $21.68 4.02% (0.83)%
June 30, 2005...................................$23.69 $21.49 $22.35 $21.46 6.00% 0.14%
September 30, 2005..............................$24.77 $22.74 $24.23 $24.09 2.23% (5.60)%
December 30, 2005...............................$23.85 $20.82 $23.99 $23.34 (0.58)% (10.80)%
March 31, 2006..................................$22.42 $20.40 $23.01 $22.86 (2.56)% (10.76)%
June 30, 2006...................................$21.36 $20.15 $23.33 $23.16 (8.44)% (13.00)%
September 30, 2006..............................$22.56 $20.50 $24.38 $23.41 (7.47)% (12.43)%
December 30, 2006...............................$25.55 $21.70 $26.39 $23.92 (3.18)% (9.28)%
March 31, 2007..................................$29.26 $24.22 $28.99 $26.04 0.93% (6.99)%
June 29, 2007...................................$29.90 $27.00 $29.70 $29.82 0.67% (9.46)%
September 28, 2007..............................$29.55 $22.65 $31.27 $27.01 (5.50)% (16.14)%
December 31, 2007...............................$26.45 $21.71 $27.82 $25.57 (4.92)% (15.10)%
March 31, 2008..................................$24.60 $21.16 $26.18 $24.49 (6.04)% (13.60)%
June 30, 2008...................................$25.80 $22.36 $25.46 $23.91 1.34% (6.48)%
September 30, 2008..............................$23.33 $18.26 $22.18 $20.71 5.18% (11.83)%
December 31, 2008...............................$20.20 $16.21 $19.14 $12.71 5.54% (11.80)%
The last reported sale price, net asset value per share and percentage
premium to net asset value per share of the common shares as of February 28,
2009 were $17.58, $14.86 and 18.30%, respectively. As of February 28, 2009, the
Fund had 6,481,182 common shares outstanding and net assets of the Fund were
$96,337,536.
-------------------------------------------------------------------------------
(1) Based on high and low closing market price for the respective quarter.
(2) Based on the net asset value calculated daily as of the close of regular
trading on the NYSE (normally 4:00 p.m. eastern time). Prior to August 1,
2008, net asset value was determined on each Friday and as of the end of
each month.
-27-
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund was organized as a Massachusetts
business trust on March 25, 2004, pursuant to a Declaration of Trust governed by
the laws of the Commonwealth of Massachusetts. The Fund's investment objective
is to seek a high level of after-tax total return with an emphasis on current
distributions paid to common shareholders. The Fund seeks to provide its common
shareholders with an efficient vehicle to invest in a portfolio of
cash-generating securities of energy companies. On June 29, 2004, the Fund
issued an aggregate of 6,400,000 common shares in its initial public offering.
The Fund's currently outstanding common shares are, and the Common Shares
offered in this prospectus and applicable prospectus supplement will be, listed
on the NYSE Amex under the symbol "FEN." The Fund's principal office is located
at 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187.
The following table provides information about the Fund's outstanding
securities as of February 28, 2009(1):
AMOUNT HELD BY
AMOUNT THE FUND OR FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
Common shares................... Unlimited 0 6,481,182
--------------------------
(1) On February 26, 2009, the Fund deposited funds to redeem all of the issued
and outstanding Series B Notes. All of the issued and outstanding Series B
Notes were redeemed on March 13, 2009.
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement, the Fund will invest
the net proceeds from any sales of Common Shares in accordance with the Fund's
investment objective and policies as stated below, or use such proceeds for
other general corporate purposes. Pending any such use, the proceeds may be
invested in cash, cash equivalents or other securities.
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high level of after-tax total
return with an emphasis on current distributions paid to common shareholders.
For purposes of the Fund's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Fund will invest regardless of the tax character of the distributions. The Fund
seeks to provide its common 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 MLPs and related public entities in the energy
sector which the Fund's Sub-Adviser believes offer opportunities for income and
growth. As used in this prospectus, unless the context requires otherwise, MLPs
are those MLPs in the energy sector. Due to the tax treatment under current law
of cash distributions made by MLPs to their investors (such as the Fund), the
Fund believes that a portion of its income may be tax deferred thereby
increasing cash available for distribution by the Fund to its common
shareholders. There can be no assurance that the Fund will achieve its
investment objective.
The Fund's investment objective is considered fundamental and may not be
changed without common shareholder approval. The remainder of the Fund's
investment policies, including its investment strategy, are considered
non-fundamental and may be changed by the Board of Trustees without the approval
of the holders of a "majority of the outstanding" common shares, provided that
common shareholders receive at least 60 days prior written notice of any change.
When used with respect to particular shares of the Fund, a "majority of the
outstanding" shares means (i) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the shares are present or represented by proxy,
or (ii) more than 50% of the shares, whichever is less.
The Fund seeks to achieve its investment objective by investing primarily
in securities of MLPs and MLP-related entities in the energy sector that the
-28-
Sub-Adviser believes offer attractive distribution rates and capital
appreciation potential. The Fund also may invest in other securities set forth
below if the Sub-Adviser expects to achieve the Fund's objective with such
investments.
The Fund's policy of investing at least 85% of its Managed Assets
(including assets obtained through leverage) in securities of energy companies,
MLPs and MLP-related entities in the energy sector is non-fundamental.
The Fund has adopted the following additional non-fundamental policies:
o Under normal market conditions, the Fund invests at least 65% and
up to 100% of its Managed Assets in equity securities issued by
energy sector MLPs and MLP-related entities. Equity securities
currently consist of common units and subordinated units of MLPs,
I-Shares of MLP-related entities and common stock of MLP-related
entities, such as general partners or other affiliates of the
MLPs.
o The Fund may invest in unregistered or otherwise restricted
securities. The types of unregistered or otherwise restricted
securities that the Fund may purchase consist of MLP common units,
MLP subordinated units and securities of public and private energy
companies. The Fund does not intend to invest more than 35% of its
Managed Assets in such restricted securities, including up to 10%
of its Managed Assets in private companies.
o The Fund may invest up to 25% of its Managed Assets in debt
securities of energy companies, MLPs and MLP related entities,
including certain securities rated below investment grade. Below
investment grade debt securities will be rated at least "B3" by
Moody's and at least "B-" by S&P at the time of purchase, or
comparably rated by another NRSRO or, if unrated, determined to be
of comparable quality by the Sub-Adviser.
o The Fund will not invest more than 10% of its Managed Assets in
any single issuer.
o The Fund will not engage in short sales, except to the extent the
Fund engages in derivative investments to seek to hedge against
interest rate risk in connection with the Fund's use of Financial
Leverage or market risks associated with the Fund's portfolio.
o The Fund may invest up to 15% of its Managed Assets in non-U.S.
securities as well as hedge the currency risk of the non-U.S.
securities using derivative instruments.
Unless otherwise stated, all investment restrictions apply at the time of
purchase and the Fund will not be required to reduce a position due solely to
market value fluctuations.
For a more complete discussion of the Fund's portfolio composition, see
"Portfolio Composition."
INVESTMENT PHILOSOPHY AND PROCESS
Under normal market conditions, the Fund invests at least 85% of its
Managed Assets in securities of energy companies and energy sector MLPs and
MLP-related entities. The Sub-Adviser seeks securities that offer a combination
of quality, growth and yield intended to result in superior total returns over
the long run. The Sub-Adviser's securities selection process includes a
comparison of quantitative, qualitative, and relative value factors. While the
Sub-Adviser maintains an active dialogue with several research analysts in the
energy sector, the Sub-Adviser's primary emphasis is placed on proprietary
analysis and valuation models conducted and maintained by its in-house
investment analysts. To determine whether a company meets its criteria, the
Sub-Adviser generally considers, among other things, a proven track record, a
strong record of distribution or dividend growth, solid ratios of debt to cash
flow, coverage ratios with respect to distributions to unit holders, incentive
structure, and management team.
The Fund concentrates its investments in the energy sector. The Fund
pursues its objective by investing principally in a portfolio of equity
securities issued by MLPs and MLP-related entities. MLP common units
historically have generated higher average total returns than domestic common
stock (as measured by the S&P 500) and fixed income securities. A more detailed
description of investment policies and restrictions and more detailed
information about portfolio investments is contained in the Fund's SAI.
Energy Companies. The Fund's investments consist of equity and debt
securities issued by energy companies and energy sector MLPs and MLP-related
-29-
entities. The companies in which the Fund invests are generally involved in the
business of transporting, processing, storing, distributing or marketing natural
gas, NGLs (including propane), crude oil, refined petroleum products, coal or
electricity, or exploring, developing, managing or producing such commodities or
products, or in supplying energy-related products and services.
Some energy companies operate as "public utilities" or "local distribution
companies," and are therefore subject to rate regulation by state or federal
utility commissions. However, other energy companies may be subject to greater
competitive factors than utility companies, including competitive pricing in the
absence of regulated tariff rates, which could cause a reduction in revenue and
which could adversely affect profitability. Most Midstream MLPs with pipeline
assets are subject to government regulation concerning the construction, pricing
and operation of pipelines. In many cases, the rules and tariffs charged by
these pipelines are monitored by the Federal Energy Regulatory Commission
("FERC") or various state regulatory agencies.
Master Limited Partnerships. MLPs are limited partnerships whose shares (or
units) are listed and traded on a U.S. securities exchange, just like common
stock. To qualify as an MLP, a partnership must receive at least 90% of its
income from qualifying sources such as natural resource activities. Natural
resource activities include the exploration, development, mining, production,
processing, refining, transportation, storage and marketing of mineral or
natural resources. MLPs generally have two classes of owners, the general
partner and limited partners. The general partner, which is generally a major
energy company, investment fund or the management of the MLP, typically controls
the MLP through a 2% general partner equity interest in the MLP plus common
units and subordinated units. Limited partners own the remainder of the
partnership, through ownership of common units, and have a limited role in the
partnership's operations and management.
MLPs are typically structured such that common units have first priority to
receive quarterly cash distributions up to an established MQD. Common units also
accrue arrearages in distributions to the extent the MQD is not paid. Once
common units have been paid, subordinated units receive distributions of up to
the MQD, but subordinated units do not accrue arrearages. Distributable cash in
excess of the MQD paid to both common and subordinated units is distributed to
both common and subordinated units generally on a pro rata basis. The general
partner is also eligible to receive incentive distributions if the general
partner operates the business in a manner which maximizes value to unit holders.
As the general partner increases cash distributions to the limited partners, the
general partner receives an increasingly higher percentage of the incremental
cash distributions. A common arrangement provides that the general partner can
reach a tier where the general partner is receiving 50% of every incremental
dollar paid to common and subordinated unit holders. By providing for incentive
distributions the general partner is encouraged to streamline costs and acquire
assets in order to grow the partnership, increase the partnership's cash flow,
and raise the quarterly cash distribution in order to reach higher tiers. Such
results benefit all security holders of the MLP.
Energy MLPs in which the Fund invests can generally be classified as
Midstream MLPs, Propane MLPs and Coal MLPs.
o Midstream MLP natural gas services include the treating,
gathering, compression, processing, transmission and storage of
natural gas and the transportation, fractionation and storage of
NGLs (primarily propane, ethane, butane and natural gasoline).
Midstream MLP crude oil services include the gathering,
transportation, storage and terminalling of crude oil. Midstream
MLP refined petroleum product services include the transportation
(usually via pipelines, barges, rail cars and trucks), storage and
terminalling of refined petroleum products (primarily gasoline,
diesel fuel and jet fuel) and other hydrocarbon by-products.
Midstream MLPs may also operate ancillary businesses including the
marketing of the products and logistical services.
o Propane MLP services include the distribution of propane to
homeowners for space and water heating and to commercial,
industrial and agricultural customers. Propane serves
approximately 3% of the household energy needs in the United
States, largely for homes beyond the geographic reach of natural
gas distribution pipelines. Volumes are weather dependent and a
majority of annual cash flow is earned during the winter heating
season (October through March).
o Coal MLP services include the owning, leasing, managing,
production and sale of coal and coal reserves. Electricity
generation is the primary use of coal in the United States. Demand
for electricity and supply of alternative fuels to generators are
the primary drivers of coal demand.
-30-
The Fund also may invest in equity and debt securities of energy companies
that are organized and/or taxed as corporations, including Canadian income
trusts, and may invest in equity and debt securities of MLP-related entities,
such as general partners or other affiliates of MLPs, and in private companies
that operate energy assets.
PORTFOLIO COMPOSITION
The Fund's portfolio is composed principally of the following investments.
A more detailed description of the Fund's investment policies and restrictions
and more detailed information about the Fund's portfolio investments are
contained in the SAI.
Equity Securities of MLPs and MLP-Related Entities. Consistent with its
investment objective, the Fund may invest up to 100% of its Managed Assets in
equity securities issued by energy sector MLPs and MLP-related entities,
including common units and subordinated units of MLPs, I-Shares of MLP-related
entities and common stock of MLP-related entities, such as general partners or
other affiliates of the MLPs.
MLP Common Units. MLP common units represent a limited partnership interest
in the MLP. Common units are listed and traded on U.S. securities exchanges or
over-the-counter, with their value fluctuating predominantly based on the
success of an MLP. The Fund intends to purchase common units in market
transactions but may also purchase securities directly from the MLP or other
parties in private placements. Unlike owners of common stock of a corporation,
owners of common units have limited voting rights and have no ability to
annually elect directors. MLPs generally distribute all available cash flow
(cash flow from operations less maintenance capital expenditures) in the form of
a quarterly distribution. Common unit holders have first priority to receive
quarterly cash distributions up to the MQD and have arrearage rights. In the
event of liquidation, common unit holders have preference over subordinated
units, but not debt holders or preferred unit holders, to the remaining assets
of the MLP.
MLP Subordinated Units. MLP subordinated units are typically issued by MLPs
to their original sponsors, such as their founders, corporate general partners
of MLPs, entities that sell assets to the MLP, and institutional investors. The
Fund expects to purchase subordinated units directly from these persons.
Subordinated units have similar voting rights as common units and are generally
not publicly traded. Once the MQD on the common units, including any arrearages,
has been paid, subordinated units will receive cash distributions up to the MQD
prior to any incentive payments to the MLP's general partner. Unlike common
units, subordinated units do not have arrearage rights. In the event of
liquidation, common units have priority over subordinated units. Subordinated
units are typically converted into common units on a one-to-one basis after
certain time periods and/or performance targets have been satisfied.
Subordinated units are generally valued based on the price of the common units,
discounted to reflect the timing or likelihood of their conversion to common
units.
MLP I-Shares. I-Shares represent an ownership interest issued by an
affiliated party of an MLP. The MLP affiliate uses the proceeds from the sale of
I-Shares to purchase limited partnership interests in the MLP in the form of
i-units. I-units have similar features as MLP common units in terms of voting
rights, liquidation preference and distributions. However, rather than receiving
cash, the MLP affiliate receives additional i-units in an amount equal to the
cash distributions received by MLP common units. Similarly, holders of I-Shares
will receive additional I-Shares, in the same proportion as the MLP affiliates'
receipt of i-units, rather than cash distributions. I-Shares themselves have
limited voting rights which are similar to those applicable to MLP common units.
The MLP affiliate issuing the I-Shares is structured as a corporation for
federal income tax purposes. As a result, I-Shares holders, such as the Fund,
will receive a Form 1099 rather than a Form K-1 statement. I-Shares are traded
on the NYSE and the NYSE Amex.
Equity Securities of Energy Companies. The Fund may invest up to 35% of its
Managed Assets in equity securities issued by energy companies. The Fund intends
to purchase these equity securities in market transactions but may also purchase
securities directly from the issuers in private placements.
Debt Securities. The Fund may invest up to 25% of its Managed Assets in
debt securities of energy companies, MLPs and MLP-related entities, including
securities rated below investment grade. The debt securities in which the Fund
may invest may provide for fixed or variable principal payments and various
types of interest rate and reset terms including, fixed rate, adjustable rate,
zero coupon, contingent, deferred, payment-in-kind and auction rate features.
Certain debt securities are "perpetual" in that they have no maturity date.
Certain debt securities are zero coupon bonds. A zero coupon bond is a bond that
-31-
does not pay interest either for the entire life of the obligation or for an
initial period after the issuance of the obligation. To the extent that the Fund
invests in below investment grade debt securities, such securities will be
rated, at the time of investment, at least "B-" by S&P or "B3" by Moody's or a
comparable rating by another NRSRO or, if unrated, determined to be of
comparable quality by the Sub-Adviser. If a security satisfies the Fund's
minimum rating criteria at the time of purchase and is subsequently downgraded
below such rating, the Fund will not be required to dispose of such security. If
a downgrade occurs, the Sub-Adviser will consider what action, including the
sale of such security, is in the best interest of the Fund and its common
shareholders. In light of the risks of below investment grade securities, the
Sub-Adviser, in evaluating the creditworthiness of an issue, whether rated or
unrated, will take various factors into consideration, which may include, as
applicable, the issuer's operating history, financial resources and its
sensitivity to economic conditions and trends, the market support for the
facility financed by the issue (if applicable), the perceived ability and
integrity of the issuer's management and regulatory matters.
Short-Term Debt Securities; Temporary Defensive Position; Invest-Up Period.
During the period in which the net proceeds of any offering of Common Shares
offered hereby are being invested, or during periods in which the Sub-Adviser
determines that it is temporarily unable to follow the Fund's investment
strategy or that it is impractical to do so, the Fund may deviate from its
investment strategy and invest all or any portion of its net assets in cash,
cash equivalents or other securities. The Sub-Adviser's determination that it is
temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so will generally occur only in situations in which a market
disruption event has occurred and where trading in the securities selected
through application of the Fund's investment strategy is extremely limited or
absent. In such a case, shares of the Fund may be adversely affected and the
Fund may not pursue or achieve its investment objective.
INVESTMENT PRACTICES
Covered Call Option Transactions. Call options are contracts representing
the right to purchase a common stock at a specified price (the "strike price")
at a specified future date (the "expiration date"). The price of the option is
determined from trading activity in the broad options market, and generally
reflects the relationship between the current market price for the underlying
common stock and the strike price, as well as the time remaining until the
expiration date. The Fund writes call options only if they are "covered." In the
case of a call option on a common stock or other security, the option is
"covered" if the Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or other
assets determined to be liquid by the Sub-Adviser (in accordance with procedures
approved by the Board of Trustees) in such amount are segregated by the Fund's
custodian) upon conversion or exchange of other securities held by the Fund.
If an option written by the Fund expires unexercised, the Fund realizes on
the expiration date a capital gain equal to the premium received by the Fund at
the time the option was written. If an option purchased by the Fund expires
unexercised, the Fund realizes a capital loss equal to the premium paid at the
time the option expires. Prior to the earlier of exercise or expiration, an
exchange-traded option may be closed out by an offsetting purchase or sale of an
option of the same series (type, underlying security, exercise price, and
expiration). There can be no assurance, however, that a closing purchase or sale
transaction can be effected when the Fund desires. The Fund may sell put or call
options it has previously purchased, which could result in a net gain or loss
depending on whether the amount realized on the sale is more or less than the
premium and other transaction costs paid on the put or call option purchased.
See "Tax Matters."
Strategic Transactions. The Fund may, but is not required to, use various
hedging and strategic transactions described below to seek to reduce interest
rate risks arising from any use of Financial Leverage by the Fund, to facilitate
portfolio management and mitigate risks, including interest rate, currency and
credit risks. The Fund may write (or sell) covered call options on the common
stock of energy companies held in the Fund's portfolio. Hedging and strategic
transactions are generally accepted under modern portfolio management theory and
are regularly used by many investment companies and other institutional
investors. Although the Sub-Adviser seeks to use such practices to further the
Fund's investment objective, no assurance can be given that these practices will
achieve this result.
The Fund may purchase and sell derivative investments such as
exchange-listed and over-the-counter put and call options on currencies,
-32-
securities, energy-related commodities, equity, fixed income and interest rate
indices, and other financial instruments, purchase and sell financial futures
contracts and options thereon, enter into various interest rate transactions
such as swaps, caps, floors or collars or credit transactions and credit default
swaps. The Fund also may purchase derivative investments that combine features
of these instruments. Collectively, all of the above are referred to as
"Strategic Transactions." The Fund generally seeks to use Strategic Transactions
as a portfolio management or hedging technique to seek to protect against
possible adverse changes in the market value of securities held in or to be
purchased for the Fund's portfolio, protect the value of the Fund's portfolio,
facilitate the sale of certain securities for investment purposes, manage the
effective interest rate and currency exposure of the Fund, including the
effective yield paid on any Financial Leverage issued by the Fund, or establish
positions in the derivatives markets as a temporary substitute for purchasing or
selling particular securities.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transactions or illiquidity of the derivative
investments. Furthermore, the ability to successfully use Strategic Transactions
depends on the Sub-Adviser's ability to predict pertinent market movements,
which cannot be assured. Thus, the use of Strategic Transactions may result in
losses greater than if they had not been used, may require the Fund to sell or
purchase portfolio securities at inopportune times or for prices other than
current market values, 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. Additionally, amounts paid by the Fund as premiums and cash or
other assets held in margin accounts with respect to Strategic Transactions are
not otherwise available to the Fund for investment purposes.
See "Risks - Derivatives Risk" in the prospectus and "Investment Policies
and Techniques" in the Fund's SAI for a more complete discussion of Strategic
Transactions and their risks.
Portfolio Turnover. The Fund's annual portfolio turnover rate may vary
greatly from year to year. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is not expected to exceed 30% under normal
circumstances, but may be higher or lower in certain periods. For the fiscal
year ended November 30, 2008, the Fund's portfolio turnover rate was
approximately 38%. However, portfolio turnover rate is not considered a limiting
factor in the execution of investment decisions for the Fund. A higher turnover
rate results in correspondingly greater brokerage commissions and other
transactional expenses that are borne by the Fund. High portfolio turnover may
result in the Fund's recognition of gains that will increase the Fund's tax
liability and thereby lower the after-tax dividends of the Fund. In addition,
high portfolio turnover may increase the Fund's current and accumulated earnings
and profits, resulting in a greater portion of the Fund's distributions being
treated as taxable dividends for federal income tax purposes. See "Tax Matters."
USE OF FINANCIAL LEVERAGE
The Fund is currently engaged in, and may in the future engage in, the use
of Financial Leverage to seek to enhance the level of its current distributions
to common shareholders. The Fund may borrow (by use of commercial paper, notes
and/or other Borrowings) an amount up to 33-1/3% (or such other percentage to
the extent permitted by the 1940 Act) of its Managed Assets (including the
amount borrowed) less all liabilities other than borrowings. The Fund may also
issue Preferred Shares in an amount up to 50% of the Fund's Managed Assets
(including the proceeds of the Preferred Shares and any borrowings). As of
February 28, 2009, the Fund utilized leverage in an amount equal to
approximately 25.60% of the Fund's Managed Assets. Borrowings, commercial paper
or notes and Preferred Shares are each considered a "Leverage Instrument" and
collectively, the "Leverage Instruments." Leverage Instruments have seniority in
liquidation and distribution rights over the Fund's common shares.
On January 28, 2005, the Fund issued $34 million principal amount of
auction rate senior notes due March 2, 2045 (the "Series A Notes") and on March
26, 2006, issued $25 million principal amount of auction rate senior notes due
March 20, 2046 (the "Series B Notes") each of which were rated "Aaa" and "AAA"
by Moody's and Fitch, respectively. On March 26, 2008, the Fund established a
Credit Facility with The Bank of Nova Scotia, of which $34 million was used to
redeem the issued and outstanding Series A Notes. On January 23, 2009, the Fund
entered into a $60,000,000 commitment facility agreement with BNP Paribas Prime
Brokerage Inc. (the "Commitment Facility"), which was used to repay in full
outstanding borrowings under the Credit Facility and, on February 26, 2009, to
deposit funds to redeem the issued and outstanding Series B Notes. All of the
issued and outstanding Series B Notes were redeemed on March 13, 2009.
-33-
The Fund may, in the future, incur additional Borrowings, issue additional
series of notes or other senior securities to the extent permitted by the 1940
Act. The Fund's common shares, including the Common Shares, are junior in
liquidation and distribution rights to Borrowings under the Commitment Facility.
The issuance of debt and Preferred Shares, including Borrowings under the
Commitment Facility, represent the leveraging of the Fund's common shares. The
issuance of additional Common Shares offered by this prospectus and an
applicable prospectus supplement will enable the Fund to increase the aggregate
amount of its leverage. The use of leverage creates an opportunity for increased
income and capital appreciation for common shareholders, but at the same time,
it creates special risks that may adversely affect common shareholders. Because
both the Adviser's and Sub-Adviser's fees are based on Managed Assets (including
assets obtained through leverage), both the Adviser's and Sub-Adviser's fees are
higher when the Fund is leveraged. There can be no assurance that a leveraging
strategy will be successful during any period in which it is used.
It is possible that the Fund will be unable to obtain additional Financial
Leverage. The capital and credit markets have been experiencing extreme
volatility and disruption for more than twelve months. The volatility and
disruption has generally reduced the availability of credit. The availability of
Financial Leverage will depend on a variety of factors, such as market
conditions, the general availability of credit, the volume of trading
activities, the overall availability of credit to the closed-end management
investment companies, the Fund's credit ratings and credit capacity, the Fund's
asset class, as well as the possibility that lenders could develop a negative
perception of the Fund's long- or short-term financial prospects if the Fund
incurs large investment losses due to a market downturn. Similarly, the Fund's
access to Financial Leverage may be impaired if regulatory authorities or rating
agencies take negative actions against the Fund. The Fund may not be able to
successfully obtain additional Financial Leverage on favorable terms, or at all.
In the current economic environment, it has become more difficult for borrowers,
including the Fund, to find third parties willing to extend credit or purchase
securities that would constitute Financial Leverage. If the Fund is unable to
increase Financial Leverage after the issuance of additional Common Shares
pursuant to this prospectus and an applicable prospectus supplement, there could
be an adverse impact on the return to common shareholders.
Leverage creates a greater risk of loss, as well as potential for more
gain, for the common shares than if leverage is not used. The Leverage
Instruments have complete priority upon distribution of assets over common
shares. The issuance of Leverage Instruments leverages the common shares.
Although based on recommendations by the Adviser and the Sub-Adviser, the
determination of whether to utilize Financial Leverage as well as timing and
other terms of the offering of Leverage Instruments and the terms of the
Leverage Instruments, would be determined by the Fund's Board of Trustees. The
Fund expects to invest the net proceeds derived from any future Leverage
Instrument offering according to the investment program described in this
prospectus. So long as the Fund's portfolio is invested in securities that
provide a higher rate of return than the dividend rate or interest rate of the
Leverage Instrument, after taking expenses into consideration, the leverage will
cause common shareholders to receive a higher rate of income than if the Fund
were not leveraged.
Leverage creates risk for holders of the common shares, including the
likelihood of greater volatility of net asset value and market price of the
common shares, and the risk that fluctuations in interest rates on borrowings
and debt or in the dividend rates on any Preferred Shares may affect the return
to the holders of the common shares or will result in fluctuations in the
dividends paid on the common shares. To the extent total return exceeds the cost
of leverage, the Fund's return will be greater than if leverage had not been
used. Conversely, if the total return derived from securities purchased with
funds received from the use of leverage is less than the cost of leverage, the
Fund's return will be less than if leverage had not been used, and therefore the
amount available for distribution to common shareholders as dividends and other
distributions will be reduced. In the latter case, the Sub-Adviser in its best
judgment nevertheless may determine to maintain the Fund's leveraged position if
it expects that the benefits to the Fund's common shareholders of maintaining
the leveraged position will outweigh the current reduced return. Under normal
market conditions, the Fund anticipates that it will be able to invest the
proceeds from leverage at a higher rate than the costs of leverage, which would
enhance returns to common shareholders. The fees paid to the Adviser and
Sub-Adviser will be calculated on the basis of the Fund's Managed Assets
including proceeds from Borrowings for leverage and the issuance of Preferred
Shares. During periods in which the Fund is utilizing Financial Leverage, the
investment advisory fee payable to the Adviser, and the sub-advisory fee payable
by the Adviser to the Sub-Adviser, will be higher than if the Fund did not
utilize a leveraged capital structure. The use of leverage creates risks and
involves special considerations. See "Risks-Leverage Risk."
-34-
The Fund's Declaration of Trust authorizes the Fund, without prior approval
of the common shareholders, to borrow money. In this connection, the Fund may
issue notes or other evidence of indebtedness (including bank borrowings or
commercial paper) and may secure any such borrowings by mortgaging, pledging or
otherwise subjecting as security the Fund's assets. In connection with such
borrowing, the Fund may be required to maintain minimum average balances with
the lender or to pay a commitment or other fee to maintain a line of credit. Any
such requirements will increase the cost of borrowing over the stated interest
rate. Under the requirements of the 1940 Act, the Fund, immediately after any
such borrowings, must have an "asset coverage" of at least 300% (33-1/3% of
Managed Assets after borrowings). With respect to such borrowings, asset
coverage means the ratio which the value of the Managed Assets of the Fund, less
all liabilities and indebtedness not represented by senior securities (as
defined in the 1940 Act), bears to the aggregate amount of such borrowing
represented by senior securities issued by the Fund.
The rights of lenders to the Fund to receive interest on and repayment of
principal of any such Borrowings will be senior to those of the common
shareholders, and the terms of any such Borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
common shareholders in certain circumstances. Further, the 1940 Act does (in
certain circumstances) grant to the lenders to the Fund certain voting rights in
the event of default in the payment of interest on or repayment of principal. In
the event that the Fund elects to be treated as a regulated investment company,
and that such provisions would impair the Fund's status as a regulated
investment company under the Internal Revenue Code, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings.
Certain types of Borrowings may result in the Fund being subject to
covenants in credit agreements including covenants relating to asset coverage
and portfolio composition requirements. The Fund may be subject to certain
restrictions on investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the short-term corporate debt securities
or Preferred Shares issued by the Fund. These guidelines may impose asset
coverage or portfolio composition requirements that are more stringent than
those imposed by the 1940 Act. In addition, the loan documents under the
Commitment Facility include customary provisions including a restriction on the
Fund's ability to pledge its assets and contains customary events of default
including failure of the Fund to meet the asset coverage test of the 1940 Act
described below. There is no assurance that the Fund will not violate asset
coverage covenants relating to the Commitment Facility in the future. In such
event, the Fund may be required to repay all outstanding Borrowings immediately.
In order to repay such amounts the Fund may be required to sell assets quickly
which could have a material adverse effect on the Fund and could trigger
negative tax implications. In addition, the Fund would be precluded from
declaring or paying any distribution on the common shares during the continuance
of such event of default.
The Commitment Facility can be used by the Fund for general corporate
purposes, including for financing a portion of the Fund's investments. The
Commitment Facility is secured by a first priority perfected security interest
in the assets of the Fund. In addition, the loan documents under the Commitment
Facility restrict the Fund's ability to change its investment adviser,
sub-adviser or custodian, amend its fundamental investment policies or
fundamental investment objectives, or take on additional indebtedness without
prior consent from the provider of the Commitment Facility.
If Preferred Shares are issued they could pay adjustable rate dividends
based on shorter-term interest rates or a fixed rate. In the event the dividends
are paid at adjustable rates, the adjustment period for Preferred Shares
dividends could be as short as one day or as long as a year or more.
Under the 1940 Act, the Fund is not permitted to issue Preferred Shares
unless immediately after such issuance the value of the Fund's managed assets is
at least 200% of the liquidation value of the outstanding Preferred Shares
(i.e., the liquidation value may not exceed 50% of the Fund's Managed Assets).
In addition, the Fund is not permitted to declare any cash dividend or other
distribution on its common shares unless, at the time of such declaration, the
value of the Fund's Managed Assets is at least 200% of such liquidation value.
If Preferred Shares are issued, the Fund intends, to the extent possible, to
purchase or redeem Preferred Shares from time to time to the extent necessary in
order to maintain coverage of any Preferred Shares of at least 200%. In
addition, as a condition to obtaining ratings on the Preferred Shares, the terms
of any Preferred Shares issued are expected to include asset coverage
-35-
maintenance provisions which will require the redemption of the Preferred Shares
in the event of non-compliance by the Fund and may also prohibit dividends and
other distributions on the common shares in such circumstances. In order to meet
redemption requirements, the Fund may have to liquidate portfolio securities.
Such liquidations and redemptions would cause the Fund to incur related
transaction costs and could result in capital losses to the Fund. If the Fund
has Preferred Shares outstanding, two of the Fund's trustees will be elected by
the holders of Preferred Shares as a class. The remaining trustees of the Fund
will be elected by holders of common shares and Preferred Shares, if any, voting
together as a single class. In the event the Fund failed to pay dividends on
Preferred Shares for two years, holders of Preferred Shares would be entitled to
elect a majority of the trustees of the Fund.
The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.
EFFECTS OF LEVERAGE
The aggregate principal amount of Borrowings under the Commitment Facility
represented approximately 26% of Managed Assets as of March 10, 2009. Asset
coverage with respect to the Borrowings under the Commitment Facility was 388%
and the Fund had $28,850,000 of unutilized funds available for Borrowing under
the Commitment Facility as of that date. Outstanding balances under the
Commitment Facility generally accrue interest at a variable annual rate equal to
the three-month LIBOR plus 1.50%. As of March 10, 2009, the rate was 2.83%. As
of March 10, 2009, the Fund had $31,150,000 outstanding under the Commitment
Facility. The Commitment Facility also has an annual unused fee of 0.80% on the
unutilized funds available for borrowing. The total annual interest and fee rate
as of March 10, 2009 was 3.63%.
Assuming that the Fund's leverage costs remain as described above (at an
assumed average annual cost of 3.63%), the annual return that the Fund's
portfolio must experience (net of expenses) in order to cover its leverage costs
would be 0.92%.
The following table is furnished in response to requirements of the SEC. It
is designed to illustrate the effect of leverage on common share total return,
assuming investment portfolio total returns (comprised of income and changes in
the value of securities held in the Fund's portfolio) of (10%), (5%), 0%, 5% and
10%. These assumed investment portfolio returns are hypothetical figures and are
not necessarily indicative of the investment portfolio returns experienced or
expected to be experienced by the Fund. See "Risks."
The table further assumes leverage representing 26% of the Fund's Managed
Assets, net of expenses, and the Fund's current annual leverage interest and fee
rate of 3.63%.
Assumed Portfolio Total Return (Net of Expenses) ........ -10% -5% 0% 5% 10%
Common Share Total Return ............................... -14.70% -7.97% -1.24% 5.49% 12.23%
Common share total return is composed of two elements: the common share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying dividends or interest on its Leverage
Instruments) and gains or losses on the value of the securities the Fund owns.
As required by SEC rules, the table above assumes that the Fund is more likely
to suffer capital losses than to enjoy capital appreciation. For example, to
assume a total return of 0% the Fund must assume that the distributions it
receives on its investments is entirely offset by losses in the value of those
securities.
While the Fund is using leverage, the amount of the fees paid to both the
Adviser and the Sub-Adviser for investment advisory and management services are
higher than if the Fund did not use leverage because the fees paid are
calculated based on the Fund's Managed Assets, which include assets purchased
with leverage. Therefore, the Adviser and the Sub-Adviser have a financial
incentive to leverage the Fund, which may create a conflict of interest between
the Adviser and Sub-Adviser on the one hand and the common shareholders on the
other. Because payments on any leverage would be paid by the Fund at a specified
rate, only the Fund's common shareholders would bear the Fund's management fees
and other expenses.
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RISKS
GENERAL
Risk is inherent in all investing. The following discussion summarizes some
of the risks that a Common Shareholder should consider before deciding whether
to invest in the Fund. For additional information about the risks associated
with investing in the Fund, see "Additional Information About the Fund's
Investments and Investment Risks" in the Fund's SAI.
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 amount that you invest. Your
investment in Common Shares represents an indirect investment in the securities
owned by the Fund, substantially all of which are traded on a national
securities exchange or in the over-the-counter markets. An investment in the
Fund's Common Shares is not intended to constitute a complete investment program
and should not be viewed as such. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
The value of the securities in which the Fund invests will affect the value of
the Common Shares. Your Common Shares at any point in time may be worth less
than your original investment, even after taking into account the reinvestment
of Fund dividends and distributions. The Fund has been designed primarily as a
long-term investment vehicle and is not intended to be used as a short-term
trading vehicle.
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 value 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. If
the Fund's net asset value declines or remains volatile, there is an increased
risk that the Fund may be required to reduce outstanding leverage, which could
adversely affect the price of the Fund's common shares and ability to pay
distributions at historical levels. A sustained economic slowdown may adversely
affect the ability of MLPs to sustain their historical distribution levels,
which in turn, may adversely affect the Fund's ability to sustain distributions
at historical levels. MLPs that have historically relied heavily on outside
capital to fund their growth have been impacted by the slowdown in the capital
markets. The recovery of the MLP sector is dependent on several factors,
including the recovery of the financial sector, the general economy and the
commodity markets.
In response to the financial crises affecting the banking system and
financial markets and going concern threats to investment banks and other
financial institutions, 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 Fund's financial condition, the performance of its investments and
the trading price of its common shares.
MARKET IMPACT RISK
The sale of the Common Shares (or the perception that such sales may
occur) may have an adverse effect on prices in the secondary market for the
Fund's common shares by increasing the number of shares available, which may put
downward pressure on the market price for the Fund's common shares. These sales
also might make it more difficult for us to sell additional equity securities in
the future at a time and price the Fund deems appropriate.
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MANAGEMENT RISK
The Fund is subject to management risk because it is an actively
managed portfolio. The Adviser and Sub-Adviser will apply investment techniques
and risk analyses in making investment decisions for the Fund, but there can be
no guarantee that these will produce the desired results.
ENERGY SECTOR RISK
The Fund's investments will generally be concentrated in the energy sector,
with a particular concentration in energy sector MLPs and MLP-related entities.
Certain risks inherent in investing in the energy business of these types of
securities include the following:
o Commodity Pricing Risk. MLPs, MLP-related entities and energy
companies may be directly affected by energy commodity prices,
especially those energy companies who own the underlying energy
commodity. Commodity prices fluctuate for several reasons
including, changes in market and economic conditions, the impact
of weather on demand, levels of domestic production and imported
commodities, energy conservation, domestic and foreign
governmental regulation and taxation and the availability of
local, intrastate and interstate transportation systems.
Volatility of commodity prices which leads to a reduction in
production or supply may also impact the performance of MLPs,
MLP-related entities and energy companies that are solely involved
in the transportation, processing, storing, distribution or
marketing of commodities. Volatility of commodity price may also
make it more difficult for MLPs, MLP-related entities and energy
companies to raise capital to the extent the market perceives that
their performance may be directly tied to commodity prices.
o Supply and Demand Risk. A decrease in the production of natural
gas, NGLs, crude oil, coal or other energy commodities or a
decrease in the volume of such commodities available for
transportation, processing, storage or distribution may adversely
impact the financial performance of MLPs, MLP-related entities and
energy companies. Production declines and volume decreases could
be caused by various factors including, catastrophic events
affecting production, depletion of resources, labor difficulties,
environmental proceedings, increased regulations, equipment
failures and unexpected maintenance problems, import supply
disruption, increased competition from alternative energy sources
or depressed commodity prices. Alternatively, a sustained decline
in demand for such commodities could also impact the financial
performance of MLPs, MLP-related entities and energy companies.
Factors which could lead to a decline in demand include economic
recession or other adverse economic conditions, higher fuel taxes
or governmental regulations, increases in fuel economy, consumer
shifts to the use of alternative fuel sources, an increase in
commodity prices, or weather. A continuation of reduced demand for
energy commodities as a result of the economic recession may
further reduce the financial performance of the entities in which
the Fund invests.
o Depletion and Exploration Risk. MLPs, MLP-related entities and
energy companies engaged in the production (exploration,
development, management or production) of natural gas, NGLs
(including propane), crude oil, refined petroleum products or coal
are subject to the risk that their commodity reserves naturally
deplete over time. MLPs, MLP-related entities and energy companies
generally increase reserves through expansion of their existing
business, through exploration of new sources or development of
existing sources, through acquisitions or by securing long-term
contracts to acquire additional reserves, each of which entails
risk. The financial performance of these issuers may be adversely
affected if they are unable to acquire, cost-effectively,
additional reserves at a rate at least equal to the rate of
natural decline. A failure to maintain or increase reserves could
reduce the amount and change the characterization of cash
distributions paid by these MLPs, MLP-related entities and energy
companies.
o Regulatory Risk. MLPs, MLP-related entities and energy companies
are subject to significant federal, state and local government
regulation in virtually every aspect of their operations,
including how facilities are constructed, maintained and operated,
environmental and safety controls, and the prices they may charge
for products and services. Various governmental authorities have
the power to enforce compliance with these regulations and the
permits issued under them and violators are subject to
administrative, civil and criminal penalties, including civil
fines, injunctions or both. Stricter laws, regulations or
-38-
enforcement policies could be enacted in the future which would
likely increase compliance costs and may adversely affect the
financial performance of MLPs, MLP-related entities and energy
companies.
o Interest Rate Risk. Rising interest rates could adversely impact
the financial performance of MLPs, MLP-related entities and energy
companies. Rising interest rates may increase an MLP's,
MLP-related entity's or energy company's cost of capital, which
would increase operating costs and may reduce an MLP's,
MLP-related entity's or energy company's ability to execute
acquisitions or expansion projects in a cost-effective manner.
Rising interest rates may also impact the price of MLP units,
MLP-related entity securities and energy company shares as the
yields on alternative investments increase.
o Acquisition Risk. The ability of MLPs to grow and to increase
distributions to unitholders is dependent principally on their
ability to make acquisitions that result in an increase in
adjusted operating surplus per unit. In the event that MLPs are
unable to make such accretive acquisitions either because they are
unable to identify attractive acquisition candidates or negotiate
acceptable purchase contracts or because they are unable to raise
financing for such acquisitions on economically acceptable terms
or because they are outbid by competitors, their future growth and
ability to raise distributions will be limited. Furthermore, even
if MLPs do consummate acquisitions that they believe will be
accretive, the acquisitions may in fact turn out to result in a
decrease in adjusted operating surplus per unit. As MLP general
partners typically receive a greater percentage of increased cash
distributions, in an effort to increase cash distributions the
general partner may make acquisitions which, due to various
factors, including increased debt obligations as well as the
factors set forth below, may adversely affect the MLP. Any
acquisition involves risks, including among other things: mistaken
assumptions about revenues and costs, including synergies; the
assumption of unknown liabilities; limitations on rights to
indemnity from the seller; the diversion of management's attention
from other business concerns; unforeseen difficulties operating in
new product areas or new geographic areas; and customer or key
employee losses at the acquired businesses.
o Affiliated Party Risk. A few of the Midstream MLPs are dependent
on their parents or sponsors for a majority of their revenues. Any
failure by the parents or sponsors to satisfy their payments or
obligations would impact the MLPs' revenues and cash flows and
ability to make distributions.
o Catastrophe Risk. The operations of MLPs, MLP-related entities and
energy companies are subject to many hazards inherent in
transporting, processing, storing, distributing or marketing
natural gas, NGLs, crude oil, refined petroleum products or other
hydrocarbons, or in the exploring, managing or producing of such
commodities, including: damage to pipelines, storage tanks or
related equipment and surrounding properties caused by hurricanes,
tornadoes, floods, fires and other natural disasters and acts of
terrorism; inadvertent damage from construction and farm
equipment; leaks of natural gas, NGLs, crude oil, refined
petroleum products or other hydrocarbons; fires and explosions.
These risks could result in substantial losses due to personal
injury and/or loss of life, severe damage to and destruction of
property and equipment and pollution or other environmental damage
and may result in the curtailment or suspension of their related
operations. Not all MLPs, MLP-related entities and energy
companies are fully insured against all risks inherent to their
businesses. If a significant accident or event occurs that is not
fully insured, it could adversely affect their operations and
financial condition.
o Terrorism/Market Disruption Risk. The terrorist attacks in the
United States on September 11, 2001 had a disruptive effect on the
securities markets. U.S. military and related action in Iraq is
ongoing and events in the Middle East could have significant
adverse effects on the U.S. economy and the stock market.
Uncertainty surrounding retaliatory military strikes or a
sustained military campaign may affect energy company operations
in unpredictable ways, including disruptions of fuel supplies and
markets, and transmission and distributions facilities could be
direct targets, or indirect casualties, of an act of terror. Since
the September 11th attacks, the U.S. government has issued
warnings that energy assets, specifically the U.S. pipeline
infrastructure, may be the future target of terrorist
organizations. In addition, changes in the insurance markets
attributable to the September 11th attacks have made certain types
of insurance more difficult, if not impossible, to obtain and have
generally resulted in increased premium costs.
o MLP Risks. An investment in MLP units involves risks which differ
from an investment in common stock of a corporation. Holders of
-39-
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.
INDUSTRY SPECIFIC RISK
MLPs, MLP-related entities and energy companies are also subject to risks
that are specific to the industry they serve.
o Midstream MLPs, MLP-related entities and energy companies that
provide crude oil, refined product and natural gas services are
subject to supply and demand fluctuations in the markets they
serve which will be impacted by a wide range of factors including,
fluctuating commodity prices, weather, increased conservation or
use of alternative fuel sources, increased governmental or
environmental regulation, depletion, rising interest rates,
declines in domestic or foreign production, accidents or
catastrophic events, and economic conditions, among others.
o Propane MLPs and MLP-related entities are subject to earnings
variability based upon weather conditions in the markets they
serve, fluctuating commodity prices, increased use of alternative
fuels, increased governmental or environmental regulation, and
accidents or catastrophic events, among others.
o MLPs, MLP-related entities and energy companies with coal assets
are subject to supply and demand fluctuations in the markets they
serve which will be impacted by a wide range of factors including,
fluctuating commodity prices, the level of their customers' coal
stockpiles, weather, increased conservation or use of alternative
fuel sources, increased governmental or environmental regulation,
depletion, rising interest rates, transportation issues, declines
in domestic or foreign production, mining accidents or
catastrophic events, health claims and economic conditions, among
others.
CASH FLOW RISK
A substantial portion of the cash flow received by the Fund is derived from
its investment in equity securities of MLPs and MLP-related entities. The amount
of cash an MLP or MLP-related entity has available for distributions and the tax
character of such distributions is dependent upon the amount of cash generated
by the MLP's or MLP-related entity's operations. Cash available for distribution
will vary from quarter to quarter and is largely dependent on factors affecting
the MLP's or MLP-related entity's operations and factors affecting the energy
industry in general. In addition to the risk factors described above, other
factors which may reduce the amount of cash an MLP or MLP-related entity has
available for distribution include increased operating costs, capital
expenditures, acquisition costs, expansion, construction or exploration costs
and borrowing costs.
TAX RISK
The Fund's ability to meet its investment objective depends on the level of
taxable income and distributions it receives from the MLP, MLP-related entities
and energy company securities in which the Fund invests, a factor over which the
Fund has no control. The benefit the Fund derives from its investment in MLPs is
largely dependent on their being treated as partnerships for federal income tax
purposes. As a partnership, an MLP has no income tax liability at the entity
level. If, as a result of a change in an MLP's business, an MLP were treated as
a corporation for federal income tax purposes, such MLP would be obligated to
pay federal income tax on its income at the applicable corporate tax rate. If an
MLP was classified as a corporation for federal income tax purposes, the amount
of cash available for distribution with respect to the units would be reduced
and any such distributions received by the Fund would be taxed entirely as
dividend income. Therefore, treatment of an MLP as a corporation for federal
income tax purposes would result in a material reduction in the after-tax return
to the Fund, likely causing a substantial reduction in the value of the common
shares.
-40-
TAX LAW CHANGE RISK
Changes in tax laws or regulations, or interpretations thereof in the
future, could adversely affect the Fund or the MLPs in which it invests. Any
such changes could negatively impact the Fund and its common shareholders. For
example, if, by reason of a change in law or otherwise, an MLP in which the Fund
invests is treated as a corporation rather than a partnership, the MLP would be
subject to entity level corporate taxation and any distributions received by the
Fund would be treated as dividend income. This would negatively impact the
amount and tax characterization of distributions received by common
shareholders.
DEFERRED TAX RISK
As a limited partner in the MLPs in which it invests, the Fund is allocated
its pro rata share of income, gains, losses, deductions and expenses from the
MLPs. A significant portion of MLP income has historically been offset by tax
deductions. The Fund will incur a current tax liability on that portion of a
distribution that is not offset by tax deductions, with the remaining portion of
the distribution being treated as a tax-deferred return of capital. The
percentage of an MLP's distribution which is offset by tax deductions will
fluctuate over time for various reasons. A significant slowdown in acquisition
activity by MLPs held in the Fund's portfolio could result in a reduction of
accelerated depreciation or other deductions generated by new acquisitions,
which may result in increased current tax liability to the Fund. A reduction in
the percentage of a distribution offset by tax deductions or an increase in the
Fund's portfolio turnover will reduce that portion of the Fund's distribution
treated as a tax-deferred return of capital and increase that portion treated as
dividend income, resulting in reduced Fund distributions and lower after-tax
distributions to the Fund's common shareholders. For purposes of computing net
asset value, the Fund will accrue deferred income taxes for its future tax
liability associated with that portion of MLP distributions considered to be
tax-deferred return of capital as well as capital appreciation of its
investments. The Fund will rely to some extent on information provided by MLPs,
which is usually not timely, to estimate deferred tax liability for purposes of
financial statement reporting and determining the Fund's net asset value. From
time to time the Fund will modify its estimates and/or assumptions regarding its
deferred tax liability as new information becomes available.
DELAY IN INVESTING THE PROCEEDS OF THIS OFFERING
Although the Fund currently intends to invest the proceeds of any sales of
Common Shares as soon as practicable following the completion of the offering,
such investments may be delayed if suitable investments are unavailable at the
time or if the Fund is unable to secure firm commitments for direct placements.
The trading market and volumes for MLP, MLP-related entity and energy company
shares may at times be less liquid than the market for other securities. As a
result, it is not anticipated that the Fund will be fully invested immediately
after the completion of the offering and it may take a period of time before the
Fund is able to accumulate positions in certain securities. Prior to the time
the proceeds of this offering are fully invested, such proceeds may be invested
in cash, cash equivalents or other securities, pending investment in MLP,
MLP-related entity or energy company securities. Income received by the Fund
from these securities would subject the Fund to corporate tax before any
distributions to Common Shareholders. As a result, the return and yield on the
Common Shares in the period following any offering pursuant to this prospectus
and applicable prospectus supplement may be lower than when the Fund is fully
invested in accordance with its objective and policies. See "Use of Proceeds."
EQUITY SECURITIES RISK
MLP common units and other equity securities are sensitive to general
movements in the stock market and a drop in the stock market may depress the
price of securities to which the Fund has exposure. MLP units and other equity
securities prices fluctuate for several reasons including changes in the
financial condition of a particular issuer (generally measured in terms of
distributable cash flow in the case of MLPs), investors' perceptions of MLPs and
energy companies, the general condition of the relevant stock market, such as
the current market volatility, or when political or economic events affecting
the issuers occur. In addition, the price of MLP units and other equity
securities may be particularly sensitive to rising interest rates given their
yield-based nature.
Certain of the MLPs, MLP-related entity and other energy companies in which
the Fund may invest may have comparatively smaller capitalizations than other
companies. Investing in securities of smaller MLPs, MLP-related entities and
-41-
energy companies presents some unique investment risks. These MLPs, MLP-related
entities and energy companies may have limited product lines and markets, as
well as shorter operating histories, less experienced management and more
limited financial resources than larger MLPs, MLP-related entities and energy
companies and may be more vulnerable to adverse general market or economic
developments. Stocks of smaller MLPs, MLP-related entities and energy companies
may be less liquid than those of larger MLPs, MLP-related entities and energy
companies and may experience greater price fluctuations than larger energy
companies. In addition, small-cap securities may not be widely followed by the
investment community, which may result in reduced demand.
A few of the Midstream MLPs are dependent on their parents or sponsors for
a majority of their revenues. Any failure by the parents or sponsors to satisfy
their payments or obligations would impact the MLPs' revenues and cash flows and
ability to make distributions.
MLP subordinated units in which the Fund will invest generally convert to
common units at a one-to-one ratio. The purchase or sale price of subordinated
units is generally tied to the common unit price less a discount. The size of
the discount varies depending on the likelihood of conversion, the length of
time remaining to conversion, the size of the block purchased and other factors.
The Fund invests, and may in the future invest, in I-Shares which represent
an indirect investment in MLP i-units. While not precise, the price of I-Shares
and their volatility tend to be correlated to the price of common units.
I-Shares are subject to the same risks as MLP common units.
LEVERAGE RISK
The Fund may borrow an amount up to 33-1/3% (or such other percentage to
the extent permitted by the 1940 Act) of its Managed Assets (including the
amount borrowed) less all liabilities other than borrowings. The Fund may also
issue Preferred Shares in an amount up to 50% of the Fund's Managed Assets
(including the proceeds of the Preferred Shares and any borrowings). As of
February 28, 2009, the principal amount of Borrowings under the Commitment
Facility represented approximately 25.60% of the Fund's Managed Assets. As of
February 28, 2009, the Fund had $28.85 million of unutilized funds available for
Borrowing under the Commitment Facility. Such Borrowings and the issuance of
Preferred Shares are referred to in this prospectus collectively as "leverage."
The successful use of leverage depends on the Sub-Adviser's ability to predict
or hedge correctly interest rate and market movements. Although the use of
leverage by the Fund may create an opportunity for increased returns for the
common shares, it also results in additional risks and can magnify the effect of
any losses. If the income and gains earned on the securities and investments
purchased with leverage proceeds are greater than the cost of the leverage, the
common shares' return will be greater than if leverage had not been used.
Conversely, if the income or gains from the securities and investments purchased
with such proceeds does not cover the cost of leverage, the return to the common
shares will be less than if leverage had not been used. There is no assurance
that a leveraging strategy will continue to be used or will be successful.
Leverage involves risks and special considerations for common shareholders
including:
o the likelihood of greater volatility of net asset value and market
price of the common shares than a comparable portfolio without
leverage;
o the risk that fluctuations in interest rates on borrowings and
short-term debt or in the dividend rates on any Preferred Shares
that the Fund may pay will reduce the return to the common
shareholders or will result in fluctuations in the dividends paid
on the common shares;
o the effect of leverage in a declining market, which is likely to
cause a greater decline in the net asset value of the common
shares than if the Fund were not leveraged, which may result in a
greater decline in the market price of the common shares; and
o when the Fund uses financial leverage, the investment advisory fee
payable to the Adviser, and the sub-advisory fee payable by the
Adviser to the Sub-Adviser, will be higher than if the Fund did
not use leverage.
The issuance of Leverage Instruments by the Fund, in addition to Borrowings
under the Commitment Facility, would involve offering expenses and other costs,
-42-
including interest or dividend payments, which would be borne indirectly by the
common shareholders. Increased operating costs, including the financing cost
associated with any leverage, may reduce the Fund's total return.
The Board of Trustees, in its judgment, nevertheless may determine to
continue to use leverage if it expects that the benefits to the Fund's common
shareholders of maintaining the leveraged position will outweigh the current
reduced return.
The funds borrowed pursuant to a borrowing program (such as a credit line
or commercial paper program), or obtained through the issuance of Preferred
Shares, constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal of any borrowings made by the Fund under a borrowing
program are senior to the rights of holders of common shares and the holders of
Preferred Shares, with respect to the payment of dividends or upon liquidation.
The Fund may not be permitted to declare dividends or other distributions,
including dividends and distributions with respect to common shares or Preferred
Shares or purchase common shares or Preferred Shares unless at the time thereof,
the Fund meets certain asset coverage requirements and no event of default
exists under any borrowing program. In addition, the Fund may not be permitted
to pay dividends on common shares unless all dividends on the Preferred Shares
and/or accrued interest on borrowings have been paid, or set aside for payment.
In an event of default under a borrowing program, the lenders have the right to
cause a liquidation of collateral (i.e., sell MLP units and other assets of the
Fund) and, if any such default is not cured, the lenders may be able to control
the liquidation as well. Certain types of leverage may result in the Fund being
subject to covenants relating to asset coverage and the Fund's portfolio
composition and may impose special restrictions on the Fund's use of various
investment techniques or strategies or in its ability to pay dividends and other
distributions on common shares in certain instances. The Fund may be subject to
certain restrictions on investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the Preferred Shares or other leverage
securities issued by the Fund. These guidelines may impose asset coverage or
Fund composition requirements that are more stringent than those imposed by the
1940 Act. The Sub-Adviser does not believe that these covenants or guidelines
will impede it from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the common
shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to common shareholders relative to the
circumstance if the Fund had not reduced leverage. The Fund may decide that this
risk outweighs the likelihood of achieving the desired reduction to volatility
in income and common share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.
In addition, recent turmoil in the credit markets have adversely impacted
borrowing availability and costs. These market developments have increased, and
may continue to increase, the financing costs of the Fund. Because common
shareholders indirectly bear the cost of leverage, an increase in interest and
dividend obligations on the Fund's Financial Leverage may reduce the total
return to common shareholders.
Certain types of Borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more rating agencies, which may
issue ratings for the short-term corporate debt securities or Preferred Shares
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the 1940
Act. In addition, the loan documents under the Commitment Facility include
customary provisions including a restriction on the Fund's ability to pledge its
assets and contains customary events of default including failure of the Fund to
meet the asset coverage test of the 1940 Act described below. There is no
assurance that the Fund will not violate financial covenants relating to the
Commitment Facility or other Financial Leverage in the future. In such event,
the Fund may be required to repay all outstanding Borrowings immediately. In
order to repay such amounts the Fund may be required to sell assets quickly
which could have a material adverse effect on the Fund and could trigger
-43-
negative tax implications. In addition, the Fund would be precluded from
declaring or paying any distribution on the common shares during the continuance
of such event of default.
It is possible that the Fund will be unable to obtain additional Financial
Leverage. The capital and credit markets have been experiencing extreme
volatility and disruption for more than twelve months. The availability of
Financial Leverage will depend on a variety of factors, such as market
conditions, the general availability of credit, the volume of trading
activities, the overall availability of credit to the closed-end management
investment companies, the Fund's credit ratings and credit capacity, the Fund's
asset class, as well as the possibility that lenders could develop a negative
perception of the Fund's long- or short-term financial prospects if the Fund
incurs large investment losses due to a market downturn. Similarly, the Fund's
access to Financial Leverage may be impaired if regulatory authorities or rating
agencies take negative actions against the Fund. The Fund may not be able to
successfully obtain additional Financial Leverage on favorable terms, or at all.
In the current economic environment, it has become more difficult for borrowers,
including the Fund, to find third parties willing to extend credit or purchase
securities that would constitute Financial Leverage. If the Fund is unable to
increase Financial Leverage after the issuance of additional Common Shares
pursuant to this prospectus and applicable prospectus supplement, there could be
an adverse impact on the return to common shareholders.
With respect to a borrowing program instituted by the Fund, the credit
agreements governing such a program, including the Commitment Facility, includes
usual and customary covenants for this type of transaction, including, but not
limited to, limits on the Fund's ability to: (i) issue Preferred Shares; (ii)
incur liens or pledge portfolio securities or investments; (iii) change its
investment objective or fundamental investment restrictions without the approval
of lenders; (iv) make changes in any of its business objectives, purposes or
operations that could result in a material adverse effect; (v) make any changes
in its capital structure; (vi) amend the Fund documents in a manner which could
adversely affect the rights, interests or obligations of any of the lenders;
(vii) engage in any business other than the business currently engaged in;
(viii) create, incur, assume or permit to exist certain debt except for certain
specific types of debt; and (ix) permit any of its Employee Retirement Income
Security Act ("ERISA") affiliates to cause or permit to occur an event that
could result in the imposition of a lien under the Internal Revenue Code or
ERISA. In addition, the Commitment Facility does not permit the Fund's asset
coverage ratio (as defined in the Commitment Facility) to fall below 300% at any
time.
Under the requirements of the 1940 Act, the Fund must have asset coverage
of at least 300% immediately after any borrowing, including borrowing under any
borrowing program the Fund implements. For this purpose, asset coverage means
the ratio which the value of the total assets of the Fund, less liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount
of borrowings represented by senior securities issued by the Fund. The
Commitment Facility limits the Fund's ability to pay dividends or make other
distributions on the Fund's common shares unless the Fund complies with the 300%
asset coverage test. In addition, the Commitment Facility does not permit the
Fund to declare dividends or other distributions or purchase or redeem common
shares or Preferred Shares: (i) at any time that any event of default under the
Commitment Facility has occurred and is continuing; or (ii) if, after giving
effect to such declaration, the Fund would not meet the Commitment Facility's
300% asset coverage test set forth in the credit agreements governing the
Commitment Facility. To the extent necessary, the Fund intends to repay
indebtedness to maintain the required asset coverage. Doing so may require the
Fund to liquidate portfolio securities at a time when it would not otherwise be
desirable to do so.
DERIVATIVES RISK
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transaction or illiquidity of the derivative
investments. Furthermore, the ability to successfully use Strategic Transactions
depends on the Sub-Adviser's ability to predict pertinent market movements,
which cannot be assured. Thus, the use of Strategic Transactions may result in
losses greater than if they had not been used, may require the Fund to sell or
purchase portfolio securities at inopportune times or for prices other than
current market values, 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. Additionally, amounts paid by the Fund as premiums and cash or
other assets held in margin accounts with respect to Strategic Transactions are
not otherwise available to the Fund for investment purposes.
-44-
There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. As
the writer of a covered call option, the Fund forgoes, during the option's life,
the opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the strike price of
the call but has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer 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 at the exercise price.
There are several risks associated with the use of futures contracts and
futures options. The purchase or sale of a futures contract may result in losses
in excess of the amount invested in the futures contract. While the Fund may
enter into futures contracts and options on futures contracts for hedging
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. There may be an imperfect correlation between the
Fund's portfolio holdings and futures contracts or options on futures contracts
entered into by the Fund, which may prevent the Fund from achieving the intended
hedge or expose the Fund to risk of loss. The degree of imperfection of
correlation depends on circumstances such as variations in market demand for
futures, options on futures and their related securities, including technical
influences in futures and futures options trading, and differences between the
securities markets and the securities underlying the standard contracts
available for trading. Further, the Fund's use of futures contracts and options
on futures contracts to reduce risk involves costs and will be subject to the
Sub-Adviser's ability to predict correctly changes in interest rate
relationships or other factors.
Depending on whether the Fund would be entitled to receive net payments
from the counterparty on a swap or cap, which in turn would depend on the
general state of short-term interest rates at that point in time, a default by a
counterparty could negatively impact the performance of the common shares. In
addition, at the time an interest rate or commodity swap or cap transaction
reaches its scheduled termination date, there is a risk that the Fund would not
be able to obtain a replacement transaction or that the terms of the replacement
would not be as favorable as on the expiring transaction. If this occurs, it
could have a negative impact on the performance of the common shares. If the
Fund fails to maintain any required asset coverage ratios in connection with any
use by the Fund of Financial Leverage, the Fund may be required to redeem or
prepay some or all of the Financial Leverage. Such redemption or prepayment
would likely result in the Fund seeking to terminate early all or a portion of
any swap or cap transactions. Early termination of a swap could result in a
termination payment by or to the Fund. Early termination of a cap could result
in a termination payment to the Fund. The Fund intends to maintain, in a
segregated account, cash or liquid securities having a value at least equal to
the Fund's net payment obligations under any swap transaction, marked to market
daily. The Fund will not enter into interest rate swap or cap transactions
having a notional amount that exceeds the outstanding amount of the Fund's
leverage.
The Fund may enter into currency exchange transactions to hedge the Fund's
exposure to foreign currency exchange rate risk to the extent the Fund invests
in non-U.S. dollar denominated securities of non-U.S. issuers. The Fund's
currency transactions will be limited to portfolio hedging involving portfolio
positions. Portfolio hedging is the use of a forward contract with respect to a
portfolio security position denominated or quoted in a particular currency. A
forward contract is an agreement to purchase or sell a specified currency at a
specified future date (or within a specified time period) and price set at the
time of the contract. Forward contracts are usually entered into with banks,
foreign exchange dealers or broker-dealers, are not exchange-traded, and are
usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
-45-
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
The use of interest rate and commodity swaps and caps is a highly
specialized activity that involves investment techniques and risks different
from those associated with ordinary portfolio security transactions. Depending
on market conditions in general, the Fund's use of swaps or caps could enhance
or harm the overall performance of the common shares. For example, the Fund may
utilize interest rate swaps and caps in connection with the Fund's use of
Financial Leverage. To the extent there is a decline in interest rates, the
value of the interest rate swap or cap could decline, and could result in a
decline in the net asset value of the common shares. In addition, if short-term
interest rates are lower than the Fund's fixed rate of payment on the interest
rate swap, the swap will reduce common share net earnings. If, on the other
hand, short-term interest rates are higher than the fixed rate of payment on the
interest rate swap, the swap will enhance common share net earnings. Buying
interest rate caps could enhance the performance of the common shares by
providing a maximum leverage expense. Buying interest rate caps could also
decrease the net earnings of the common shares in the event that the premium
paid by the Fund to the counterparty exceeds the additional amount the Fund
would have been required to pay had it not entered into the cap agreement. The
Fund has no current intention of selling an interest rate swap but is expected
to enter into an interest rate cap.
Interest rate and commodity swaps and caps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate and commodity swaps is limited to the net
amount of interest payments that the Fund is contractually obligated to make. If
the counterparty defaults, the Fund would not be able to use the anticipated net
receipts under the swap or cap to offset any declines in the value of the Fund's
portfolio assets being hedged or the increase in the Fund's cost of Financial
Leverage. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of the market rates at that point in time, such a default
could negatively impact the performance of the common shares.
PORTFOLIO TURNOVER RISK
The Fund's annual portfolio turnover rate may vary greatly from year to
year. Although the Fund cannot accurately predict its annual portfolio turnover
rate, it is not expected to exceed 30% under normal circumstances, but may be
higher or lower in certain periods. For the fiscal year ended November 30, 2008,
portfolio turnover was approximately 38%. Portfolio turnover rate is not
considered a limiting factor in the execution of investment decisions for the
Fund. High portfolio turnover may result in the Fund's recognition of gains that
will be taxable as ordinary income to the Fund. A high portfolio turnover may
-46-
increase the Fund's current and accumulated earnings and profits, resulting in a
greater portion of the Fund's distributions being treated as a dividend to the
Fund's common shareholders. In addition, a higher portfolio turnover rate
results in correspondingly greater brokerage commissions and other transactional
expenses that are borne by the Fund. See "The Fund's Investments--Investment
Practices - Portfolio Turnover" and "Tax Matters."
RESTRICTED SECURITIES
The Fund invests, and may in the future invest, in unregistered or
otherwise restricted securities. The term "restricted securities" refers to
securities that have not been registered under the 1933 Act 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. Absent an exemption from
registration, the Fund will be required to hold the securities until they are
registered by the issuer. 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 acquiror of the securities. The Fund would, in either case, bear
market risks during that period.
LIQUIDITY RISK
Although common units of MLPs, I-Shares of MLP-related entities and common
stocks of certain energy companies trade on the NYSE, NYSE Amex and The NASDAQ
Stock Market, certain securities may trade less frequently, particularly those
with smaller capitalizations. Securities with limited trading volumes may
display volatile or erratic price movements. Larger purchases or sales of these
securities by the Fund in a short period of time may result in abnormal
movements in the market price of these securities. This may affect the timing or
size of Fund transactions and may limit the Fund's ability to make alternative
investments.
If the Fund requires significant amounts of cash on short notice in excess
of normal cash requirements or is required to post or return collateral in
connection with the Fund's investment portfolio, derivatives transactions or
leverage restrictions, the Fund may have difficulty selling these investments in
a timely manner, be forced to sell them for less than the Fund otherwise would
have been able to realize, or both. The reported value of some of the Fund's
relatively illiquid types of investments and, at times, the Fund's high quality,
generally liquid asset classes, may not necessarily reflect the lowest current
market price for the asset. If the Fund was forced to sell certain of its assets
in the current market, there can be no assurance that the Fund will be able to
sell them for the prices at which the Fund has recorded them and the Fund may be
forced to sell them at significantly lower prices.
VALUATION RISK
Market prices may not be readily available for subordinated units, direct
ownership of general partner interests, restricted securities or unregistered
securities of certain MLPs, MLP-related entities or private companies, and the
value of such investments will ordinarily be determined based on fair valuations
determined pursuant to procedures adopted by the Board of Trustees. The value of
these securities typically requires more reliance on the judgment of the
Sub-Adviser than that required for securities for which there is an active
trading market. In addition, the Fund will rely to some extent on information
provided by the MLPs, which is usually not timely, to estimate taxable income
allocable to the MLP units held in the Fund's portfolio and to estimate
associated deferred tax liability for purposes of financial statement reporting
and determining the Fund's net asset value. 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 net asset value of the Fund would likely fluctuate. See
"Net Asset Value."
-47-
INTEREST RATE RISK
Interest rate risk is the risk that equity and debt securities will decline
in value because of changes in market interest rates. The Fund's investment in
such securities means that the net asset value and market price of the common
shares will tend to decline if market interest rates rise. Interest rates are at
or near historic lows, and as a result, they are likely to rise over time.
Certain debt instruments, particularly below investment grade securities, may
contain call or redemption provisions which would allow the issuer thereof to
prepay principal prior to the debt instrument's stated maturity. This is known
as prepayment risk. Prepayment risk is greater during a falling interest rate
environment as issuers can reduce their cost of capital by refinancing higher
yielding debt instruments with lower yielding debt instruments. An issuer may
also elect to refinance their debt instruments with lower yielding debt
instruments if the credit standing of the issuer improves. To the extent the
Fund's debt securities are called or redeemed, the Fund may be forced to
reinvest in lower yielding securities.
BELOW INVESTMENT GRADE SECURITIES RISK
Below investment grade securities are rated "Ba1" or lower by Moody's,
"BB+" or lower by S&P, or comparably rated by another NRSRO or, if unrated,
determined to be of comparable quality by the Sub-Adviser. As of February 28,
2009, the Fund did not invest in any below investment grade securities. Below
investment grade securities, also sometimes referred to as "junk bonds,"
generally pay a premium above the yields of U.S. government securities or debt
securities of investment grade issuers because they are subject to greater risks
than these securities. These risks, which reflect their speculative character,
include the following:
o greater yield and price volatility;
o greater credit risk and risk of default;
o potentially greater sensitivity to general economic or industry
conditions;
o potential lack of attractive resale opportunities (illiquidity);
and
o additional expenses to seek recovery from issuers who default.
In addition, the prices of these below investment grade securities are more
sensitive to negative developments, such as a decline in the issuer's revenues,
downturns in profitability in the energy industry or a general economic
downturn, than are the prices of higher grade securities. Below investment grade
securities tend to be less liquid than investment grade securities and the
market for below investment grade securities could contract further under
adverse market or economic conditions. In such a scenario, it may be more
difficult for the Fund to sell these securities in a timely manner or for as
high a price as could be realized if such securities were more widely traded.
The market value of below investment grade securities may be more volatile than
the market value of investment grade securities and generally tends to reflect
the market's perception of the creditworthiness of the issuer and short-term
market developments to a greater extent than investment grade securities, which
primarily reflect fluctuations in general levels of interest rates. In the event
of a default by a below investment grade security held in the Fund's portfolio
in the payment of principal or interest, the Fund may incur additional expense
to the extent it is required to seek recovery of such principal or interest.
Ratings are relative and subjective and not absolute standards of quality.
Securities ratings are based largely on an issuer's historical financial
condition and the rating agencies' analyses at the time of rating. Consequently,
the rating assigned to any particular security or instrument is not necessarily
a reflection of an issuer's current financial condition. Subsequent to its
purchase by the Fund, the security or instrument may cease to be rated or its
rating may be reduced. In addition, it is possible that NRSROs might not change
their ratings of a particular security or instrument to reflect subsequent
events on a timely basis. Moreover, such ratings do not assess the risk of a
decline in market value. None of these events will require the sale of such
securities or instruments by the Fund, although the Sub-Adviser will consider
these events in determining whether the Fund should continue to hold the
securities.
The market for below investment grade and comparable unrated securities has
experienced periods of significantly adverse price and liquidity several times,
particularly at or around times of economic recession. Past market recessions
have adversely affected the value of such securities as well as the ability of
-48-
certain issuers of such securities to repay principal and pay interest thereon
or to refinance such securities. The market for these securities may react in a
similar fashion in the future.
For a further description of below investment grade securities and the
risks associated therewith, see "Other Investment Policies and Techniques" in
the SAI. For a description of the ratings categories of certain NRSROs, see
Appendix A to the SAI.
NON-DIVERSIFICATION
The Fund is a non-diversified, closed-end management investment company
under the 1940 Act and will not be treated as a regulated investment company
under the Internal Revenue Code. Accordingly, there are no regulatory
requirements under the 1940 Act or the Internal Revenue Code on the minimum
number or size of securities held by the Fund. As of February 28, 2009, there
were approximately seventy-three (73) publicly traded MLPs, approximately 80% of
which operate energy assets. The Fund intends to select its MLP investments from
this small pool of issuers. The Fund may invest in securities of MLP-related
entities and non-MLP securities issued by energy companies, consistent with its
investment objective and policies. As of February 28, 2009, the Fund held
investments in thirty-two (32) MLP issuers.
MARKET DISRUPTION RISK
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. U.S. military and related action in
Iraq is ongoing and events in the Middle East could have significant adverse
effects on the U.S. economy and the stock market. The Fund cannot predict the
effects of similar events in the future on the U.S. economy.
ANTI-TAKEOVER PROVISIONS
The Fund's Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or convert the Fund to
open-end status. These provisions could have the effect of depriving the common
shareholders of opportunities to sell their common shares at a premium over the
then current market price of the common shares. See "Certain Provisions in the
Declaration of Trust and By-Laws."
COMPETITION RISK
There exist other alternatives to the Fund as a vehicle for investment in a
portfolio of MLPs, including other publicly traded investment companies and
private funds. In addition, recent tax law changes or future tax law changes may
increase the ability of regulated investment companies or other institutions to
invest in MLPs. Because of the limited number of MLP issuers, these competitive
conditions may adversely impact the Fund's ability to make investments in the
MLP market and could adversely impact the Fund's distributions to common
shareholders.
POTENTIAL TAX CHANGES
In addition to the specific tax risks and matters discussed elsewhere in
this prospectus, the President of the United States has indicated a desire to
make significant changes to the Internal Revenue Code. The Fund has no way of
knowing whether such changes of the Internal Revenue Code might occur or, if
enacted, what effect such changes might have on the Fund's common shareholders
or the MLPs and MLP-related entities in which the Fund invests.
MARKET DISCOUNT FROM NET ASSET VALUE
The Fund's common shares have been publicly traded since June 24, 2004 and
have traded both at a premium and at a discount relative to net asset value.
There is no assurance that any premium of the public offering price for the
Common Shares in any offering made hereby will continue after such offering or
that the common shares will not again trade at a discount. Shares of closed-end
investment companies frequently trade at a discount from their net asset value.
This characteristic is a risk separate and distinct from the risk that the
Fund's net asset value could decrease as a result of its investment activities
and may be greater for investors expecting to sell their Common Shares in a
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relatively short period following completion of this offering. Although the
value of the Fund's net assets is generally considered by market participants in
determining whether to purchase or sell shares, whether investors will realize
gains or losses upon the sale of the common shares will depend entirely upon
whether the market price of the common shares at the time of sale is above or
below the investor's purchase price for the common shares. Because the market
price of the common shares will be affected by factors such as net asset value,
dividend or distribution levels (which are dependent, in part, on expenses),
supply of and demand for the common shares, stability of dividends or
distributions, trading volume of the common shares, general market and economic
conditions, and other factors beyond the control of the Fund, the Fund cannot
predict whether the Common Shares will trade at, below or above net asset value
or at, below or above the price at which shares may be offered in any offering
pursuant to this prospectus.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the common shares and
distributions can decline.
CERTAIN AFFILIATIONS
Certain broker-dealers may be considered to be affiliated persons of the
Fund, First Trust Advisors or Energy Income Partners. Absent an exemption from
the SEC or other regulatory relief, the Fund is generally precluded from
effecting certain principal transactions with affiliated brokers, and its
ability to utilize affiliated brokers for agency transactions, is subject to
restrictions. This could limit the Fund's ability to engage in securities
transactions and take advantage of market opportunities. In addition, until the
underwriting syndicate is broken in connection with any public offering of the
Common Shares offered by this prospectus, the Fund will be precluded from
effecting principal transactions with brokers who are members of the syndicate.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
duties performed by the Adviser and the Sub-Adviser. The names and business
addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the SAI.
INVESTMENT ADVISER
First Trust Advisors, 120 East Liberty Drive, Suite 400, Wheaton, Illinois
60187, is the investment adviser to the Fund and is responsible for supervising
the Sub-Adviser. First Trust Advisors serves as investment adviser or portfolio
supervisor to investment portfolios with approximately $15.47 billion in assets
which it managed or supervised as of February 28, 2009.
First Trust Advisors is also responsible for the ongoing monitoring of the
Fund's investment portfolio, managing the Fund's business affairs and providing
certain clerical, bookkeeping and other administrative services.
First Trust Advisors is an Illinois limited partnership formed in 1991 and
an investment adviser registered with the SEC under the Investment Advisers Act
of 1940, as amended. First Trust Advisors is a limited partnership with one
limited partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one
general partner, The Charger Corporation. Grace Partners is a limited
partnership with one general partner, The Charger Corporation, and a number of
limited partners. Grace Partners' and The Charger Corporation's primary business
is investment advisory and broker/dealer services through their interests. The
Charger Corporation is an Illinois corporation controlled by the Robert Donald
Van Kampen family. First Trust Advisors is controlled by Grace Partners and The
Charger Corporation.
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For additional information concerning First Trust Advisors, including a
description of the services provided, see the SAI under "Investment Adviser."
SUB-ADVISER
Energy Income Partners serves as the Fund's Sub-Adviser. In this capacity,
Energy Income Partners is responsible for the selection and on-going monitoring
of the securities in the Fund's investment portfolio.
Energy Income Partners, located at 49 Riverside Avenue, Westport,
Connecticut 06880, is a registered investment adviser and serves as investment
adviser to investment portfolios with approximately $260 million of assets as of
February 28, 2009.
Energy Income Partners is a Delaware limited liability company and an
SEC-registered investment adviser, founded in October 2003 by James J. Murchie
to provide professional asset management services in the area of energy related
MLPs and other high payout securities in the energy sector. In addition to
serving as sub-adviser to the Fund, Energy Income Partners serves as the
investment manager to three unregistered investment companies and one private
registered investment company for high net worth individuals and institutions.
Energy Income Partners mainly focuses on portfolio companies that operate
infrastructure assets such as pipelines, storage and terminals that receive
fee-based or regulated income from their customers.
James J. Murchie is the Founder, Chief Executive Officer, co-portfolio
manager and a Principal of Energy Income Partners. After founding Energy Income
Partners in October 2003, Mr. Murchie and the Energy Income Partners investment
team joined Pequot Capital Management Inc. ("Pequot Capital") in December 2004.
In August 2006, Mr. Murchie and the Energy Income Partners investment team left
Pequot Capital and re-established Energy Income Partners. Prior to founding
Energy Income Partners, Mr. Murchie was a Portfolio Manager at Lawhill Capital
Partners, LLC ("Lawhill Capital"), a long/short equity hedge fund investing in
commodities and equities in the energy and basic industry sectors. Before
Lawhill Capital, Mr. Murchie was a Managing Director at Tiger Management, LLC,
where his primary responsibility was managing a portfolio of investments in
commodities and related equities. Mr. Murchie was also a Principal at Sanford C.
Bernstein. He began his career at British Petroleum, PLC. Mr. Murchie holds a BA
from Rice University and an MA from Harvard University.
Eva Pao is a Principal of Energy Income Partners and is co-portfolio
manager for all its funds. She has been with EIP since inception in 2003. From
2005 to mid-2006, Ms. Pao joined Pequot Capital Management during EIP's
affiliation with Pequot. Prior to Harvard Business School, Ms. Pao was a Manager
at Enron Corp where she managed a portfolio in Canadian oil and gas equities for
Enron's internal hedge fund that specialized in energy-related equities and
managed a natural gas trading book. Ms. Pao holds degrees from Rice University
and Harvard Business School.
Linda Longville is the Research Director and a Principal of Energy Income
Partners. Ms. Longville has been with Energy Income Partners since its inception
in 2003, including the time the Energy Income Partners investment team spent at
Pequot Capital between December 2004 and July 2006. From April 2001 through
September 2003, she was a research analyst for Lawhill Capital. Prior to Lawhill
Capital, Ms. Longville held positions in finance and business development at
British Petroleum, PLC and Advanced Satellite Communications, Inc. She has a BAS
from Miami University (Ohio) and an MA from Case Western Reserve University.
Saul Ballesteros is the Head of Trading and a Principal of Energy Income
Partners. Mr. Ballesteros joined Energy Income Partners in 2006 after six years
as a proprietary trader at FPL Group and Mirant Corp. From 1994 through 1999, he
was with Enron's internal hedge fund in various positions of increased
responsibility, and, from 1991 through 1994, Mr. Ballesteros was a manager of
financial planning at IBM. Mr. Ballesteros holds a BS from Duke University and
an MBA from Northwestern University.
For additional information concerning Energy Income Partners, including a
description of the services provided and additional information about the Fund's
portfolio managers, including the portfolio managers' compensation, other
accounts managed by the portfolio managers and the portfolio managers' ownership
of Fund shares, see "Sub-Adviser" in the SAI.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement (the "Investment Management
Agreement") between First Trust Advisors and the Fund, the Fund has agreed to
pay for the services and facilities provided by First Trust Advisors an annual
management fee, payable on a monthly basis, equal to 1.00% of the Fund's Managed
Assets.
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For purposes of calculation of the management fee, the Fund's "Managed
Assets" means the average daily gross asset value of the Fund (which includes
assets attributable to the Fund's Preferred Shares, if any, and the principal
amount of Borrowings), minus the sum of the Fund's accrued and unpaid dividends
on any outstanding Preferred Shares and accrued liabilities (other than the
principal amount of any Borrowings incurred and the liquidation preference of
any outstanding Preferred Shares).
In addition to the management fee of First Trust Advisors, the Fund pays
all other costs and expenses of its operations, including compensation of its
trustees (other than those affiliated with First Trust Advisors), custodian,
transfer agency, administrative, accounting and dividend disbursing expenses,
legal fees, leverage expenses, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
The Sub-Adviser receives a portfolio management fee equal to 0.50% of the
Fund's Managed Assets. The Sub-Adviser's fee is paid by the Adviser out of the
Adviser's management fee.
Because the fee paid to the Adviser (and by the Adviser to the Sub-Adviser)
will be calculated on the basis of the Fund's Managed Assets, which include the
proceeds of leverage, the dollar amount of the Adviser's fees from the Fund (and
Sub-Adviser's fees from the Adviser) will be higher (and the Adviser and
Sub-Adviser will be benefited to that extent) when leverage is utilized. In this
regard, if the Fund uses leverage in the amount equal to 29% of the Fund's
Managed Assets (after their issuance), the Fund's management fee would be 1.42%
of net assets attributable to common shares. See "Summary of Fund Expenses."
NET ASSET VALUE
The Fund determines the net asset value of its common shares daily as of
the close of regular session trading on the NYSE (normally 4:00 p.m. eastern
time). Net asset value is computed by dividing the value of all assets of the
Fund (including option premiums, accrued interest and dividends), less all Fund
liabilities (including accrued expenses, dividends payable, current and deferred
income taxes, any borrowings of the Fund and the market value of written call
options) and the liquidation value of any outstanding Preferred Shares, by the
total number of shares outstanding. The Fund will rely to some extent on
information provided by the MLPs, which is usually not timely, to estimate
taxable income allocable to the MLP units held in the Fund's portfolio and to
estimate the associated deferred tax 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 net asset value of the Fund would likely fluctuate.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on any exchange other than The Nasdaq
Stock Market are valued, except as indicated below, 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 admitted to trade on The Nasdaq
Stock Market 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.
Equity securities traded in the over-the-counter market, but excluding
securities admitted to trading on The Nasdaq Stock Market, 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. When price quotes
are not available, fair market value is based on prices of comparable
securities. Fixed income securities maturing within 60 days are valued by the
Fund on an amortized cost basis. The value of any portfolio security held by the
Fund for which reliable market quotations are not readily available, including
illiquid securities, or if a valuation is deemed inappropriate, will be
determined under procedures adopted by the Board of Trustees in a manner that
reflects fair market value of the security on the valuation date.
Any derivative transaction that the Fund enters into may, depending on the
applicable market environment, have a positive or negative value for purposes of
calculating net asset value. Any option transaction that the Fund enters into
may, depending on the applicable market environment, have no value or a positive
value. Exchange traded options and futures contracts are valued at the closing
price in the market where such contracts are principally traded.
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DISTRIBUTIONS
The Fund intends to make quarterly distributions to common shareholders.
Fund distributions will generally consist of (i) cash or paid-in-kind
distributions from MLPs or their affiliates, interest payments received on debt
securities owned by the Fund and dividend or other payments on equity securities
owned by the Fund, less (ii) current or accrued operating expenses of the Fund,
including taxes on Fund taxable income and leverage costs. The Fund anticipates
that, due to the tax treatment under current law of cash distributions made by
MLPs in which the Fund will invest, a portion of distributions the Fund makes to
common shareholders may consist of a tax-deferred return of capital.
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.
All realized capital gains, if any, net of applicable taxes, will be
retained by the Fund. Unless you elect to receive cash distributions, your
distributions of net investment income will automatically be reinvested into
additional common shares pursuant to the Fund's Dividend Reinvestment Plan.
Distributions by the Fund, whether paid in cash or in additional common
shares, will be taken into account in measuring the performance of the Fund with
respect to its investment objective.
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, unless you elect to receive cash distributions, all
dividends and distributions on your common shares will be automatically
reinvested by the Plan Agent, PNC Global Investment Servicing (U.S.) Inc., in
additional common shares under the Dividend Reinvestment Plan (the "Plan"). If
you elect to receive cash distributions, you will receive all distributions in
cash paid by check mailed directly to you by PNC Global Investment Servicing
(U.S.) Inc., as dividend paying agent.
You are automatically enrolled in the Plan when you become a shareholder of
the Fund. As a participant in the Plan, the number of common shares you will
receive will be determined as follows:
(1) If the common shares are trading at or above net asset value at the
time of valuation, the Fund will issue new shares at a price equal to the
greater of (i) net asset value per common share on that date or (ii) 95% of the
market price on that date.
(2) If common shares are trading below net asset value 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 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 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 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
-53-
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. See "Tax Matters."
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. Consult your financial advisor for more information.
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 from PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PLAN OF DISTRIBUTION
The Fund may sell the Common Shares being offered under this prospectus in
any one or more of the following ways:
o directly to purchasers;
o through agents;
o to or through underwriters; or
o through dealers.
The Fund may distribute the Common Shares from time to time in one or more
transactions at:
o a fixed price or prices, which may be changed;
o market prices prevailing at the time of sale;
o prices related to prevailing market prices; or
o negotiated prices.
The Fund may directly solicit offers to purchase Common Shares, or the Fund
may designate agents to solicit such offers. The Fund will, in a prospectus
supplement relating to such offering, name any agent that could be viewed as an
underwriter under the Securities Act of 1933 and describe any commissions the
Fund must pay. Any such agent will be acting on a best efforts basis for the
period of its appointment or, if indicated in the applicable prospectus
supplement or other offering materials, on a firm commitment basis. Agents,
dealers and underwriters may be customers of, engage in transactions with, or
perform services for the Fund in the ordinary course of business.
If any underwriters or agents are utilized in the sale of Common Shares in
respect of which this prospectus is delivered, the Fund will enter into an
underwriting agreement or other agreement with them at the time of sale to them,
and the Fund will set forth in the prospectus supplement relating to such
offering their names and the terms of the Fund's agreement with them.
If a dealer is utilized in the sale of Common Shares in respect of which
this prospectus is delivered, the Fund will sell such Common Shares to the
dealer, as principal. The dealer may then resell such Common Shares to the
public at varying prices to be determined by such dealer at the time of resale.
The Fund may engage in at-the-market offerings to or through a market maker
or into an existing trading market, on an exchange or otherwise, in accordance
with Rule 415(a)(4). An at-the-market offering may be through an underwriter or
underwriters acting as principal or agent for the Fund.
Agents, underwriters and dealers may be entitled under agreements which
they may enter into with the Fund to indemnification by the Fund against certain
civil liabilities, including liabilities under the Securities Act, and may be
customers of, engage in transactions with or perform services for the Fund in
the ordinary course of business.
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In order to facilitate the offering of the Common Shares, any underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares or any other Common Shares the prices of which may be
used to determine payments on the Common Shares. Specifically, any underwriters
may over-allot in connection with the offering, creating a short position for
their own accounts. In addition, to cover over-allotments or to stabilize the
price of the Common Shares or of any such other Common Shares, the underwriters
may bid for, and purchase, the Common Shares or any such other Common Shares in
the open market. Finally, in any offering of the Common Shares through a
syndicate of underwriters, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Shares in the offering if the syndicate repurchases previously distributed
Common Shares in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Shares above independent market
levels. Any such underwriters are not required to engage in these activities and
may end any of these activities at any time.
The Fund may enter into derivative transactions with third parties, or sell
Common Shares not covered by this prospectus to third parties in privately
negotiated transactions. If the applicable prospectus supplement indicates, in
connection with those derivatives, the third parties may sell Common Shares
covered by this prospectus and the applicable prospectus supplement or other
offering materials, including in short sale transactions. If so, the third
parties may use Common Shares pledged by the Fund or borrowed from the Fund or
others to settle those sales or to close out any related open borrowings of
stock, and may use Common Shares received from the Fund in settlement of those
derivatives to close out any related open borrowings of stock. The third parties
in such sale transactions will be underwriters and, if not identified in this
prospectus, will be identified in the applicable prospectus supplement or other
offering materials (or a post-effective amendment).
The Fund or one of the Fund's affiliates may loan or pledge Common Shares
to a financial institution or other third party that in turn may sell the Common
Shares using this prospectus. Such financial institution or third party may
transfer its short position to investors in our Common Shares or in connection
with a simultaneous offering of other Common Shares offered by this prospectus
or otherwise.
The maximum commission or discount to be received by any member of the
Financial Industry Regulatory Authority will not be greater than eight percent
of the initial gross proceeds from the sale of any security being sold.
Any underwriter, agent or dealer utilized in the initial offering of Common
Shares will not confirm sales to accounts over which it exercises discretionary
authority without the prior specific written approval of its customer.
DESCRIPTION OF SHARES
COMMON SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of common shares. The Common Shares being offered in this offering have a par
value of $0.01 per share and, subject to the rights of holders of Preferred
Shares, if any, have equal rights to the payment of dividends and the
distribution of assets upon liquidation. As of February 28, 2009, the Fund had
6,481,182 common shares outstanding. The Common Shares being offered by this
prospectus will, when issued, be fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust and By-Laws," non-assessable,
and currently have no preemptive or conversion rights (except as may otherwise
be determined by the Trustees in their sole discretion) or rights to cumulative
voting.
The Fund's currently outstanding common shares are, and the Common
Shares offered in this prospectus will be, subject to notice of issuance, listed
on the NYSE Amex (formerly the American Stock Exchange) under the trading or
"ticker" symbol "FEN."
Section 23(b) of the 1940 Act, in relevant part, provides that a
registered closed-end fund may not sell any of its common stock at a price below
the current net asset value of such stock, exclusive of any distribution
commission or discount, except with the consent of a majority of its common
stockholders, or under certain other circumstances. At a special meeting of
shareholders of the Fund held on January 8, 2008, the Fund obtained authority
from its shareholders to issue and sell common shares at a net price less than
its then-current net asset value per share, subject to the following conditions:
o The per share offering price, before the deduction of
underwriting fees, commissions and offering expenses, will not be
-55-
less than the net asset value per share of the Fund's common
shares, as determined at any time within two business days prior
to the pricing of the common shares to be sold in the offering.
o Immediately following each offering of such common shares, after
deducting underwriting fees, commissions and offering expenses,
the net asset value per share of the Fund's common shares, as
determined at any time within two business days prior to the
pricing of the common shares to be sold, would not have been
diluted by greater than a total of 1% of the net asset value per
share of all of the Fund's outstanding common shares. The Fund
will not be subject to a maximum number of common shares that can
be sold or a defined minimum sales price per share in any
offering so long as for each offering the number of common shares
offered and the price at which such common shares are sold
together would not result in dilution of the net asset value per
share of the Fund's common shares in excess of the 1% limitation
described above.
o A majority of the Independent Trustees makes a determination,
based on information and a recommendation from the Adviser, that
they reasonably expect that the investments to be made with the
net proceeds of such issuance will lead to a long-term increase
in the Fund's net asset value or a long-term increase in the
level of the Fund's distributions to shareholders.
In connection with any sale of Common Shares below net asset value as
described above, the Adviser and Sub-Adviser have committed to waive a portion
of their investment advisory fees and sub-advisory fees following any such
offering of Common Shares in the following manner:
o the Adviser and Sub-Adviser will waive all investment advisory
fees and sub-advisory fees with respect to the Fund's assets
attributable to such newly issued Common Shares (including any
assets attributable to associated financial leverage) for the
first three-month period following any offering of Common Shares;
and
o the Adviser and Sub-Adviser will waive 50% of investment advisory
fees and sub-advisory fees with respect to the Fund's assets
attributable to such newly issued Common Shares (including such
assets attributable to associated financial leverage) for the
second three-month period following such offering of Common
Shares.
See "Management of the Fund - Investment Management Agreement" for a
description of the investment advisory and sub-advisory fees payable to the
Adviser and the Sub-Adviser.
The Fund will not issue and sell Common Shares at a price less than its
then-current net asset value per share in accordance with the above conditions
unless set forth in an amendment to the registration statement relating to this
prospectus.
Unlike open-end funds, closed-end funds like the Fund do not
continuously offer shares and do not provide daily redemptions. Rather, if a
shareholder determines to buy additional common shares or sell shares already
held, the shareholder may conveniently do so by trading on the exchange through
a broker or otherwise. Shares of closed-end investment companies may frequently
trade on an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund have during some periods traded at prices
higher than net asset value and during other periods have traded at prices lower
than net asset value. Because the market value of the common shares may be
influenced by such factors as dividend levels (which are in turn affected by
expenses), dividend stability, portfolio credit quality, net asset value,
relative demand for and supply of such shares in the market, general market and
economic conditions, and other factors beyond the control of the Fund, the Fund
cannot assure you that the common shares will trade at a price equal to or
higher than net asset value in the future. The common shares are designed
primarily for long-term investors, and investors in the common shares should not
view the Fund as a vehicle for trading purposes. See "Structure of the Fund;
Common Share Repurchases and Change in Fund Structure."
PREFERRED SHARES
The Declaration of Trust provides that the Fund's Board of Trustees may
authorize and issue Preferred Shares with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the holders
of the common shareholders. Holders of common shares have no preemptive right to
purchase any Preferred Shares that might be issued.
-56-
The Fund may elect to issue Preferred Shares as part of its leverage
strategy. The Board of Trustees also reserves the right to issue Preferred
Shares to the extent permitted by the 1940 Act, which currently limits the
aggregate liquidation preference of all outstanding Preferred Shares to 50% of
the value of the Fund's Managed Assets less liabilities and indebtedness of the
Fund. The Fund cannot assure you, however, that any Preferred Shares will be
issued. Although the terms of any Preferred Shares, including dividend rate,
liquidation preference and redemption provisions, will be determined by the
Board of Trustees, subject to applicable law and the Declaration of Trust, it is
likely that the Preferred Shares will be structured to carry a relatively
short-term dividend rate reflecting interest rates on short-term bonds, by
providing for the periodic redetermination of the dividend rate at relatively
short intervals through an auction, remarketing or other procedure. The Fund
also believes that it is likely that the liquidation preference, voting rights
and redemption provisions of the Preferred Shares will be similar to those
stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of Preferred
Shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per Preferred Share plus
accrued and unpaid dividends, whether or not declared, before any distribution
of assets is made to holders of common shares. After payment of the full amount
of the liquidating distribution to which they are entitled, the holders of
Preferred Shares will not be entitled to any further participation in any
distribution of assets by the Fund.
Voting Rights. The 1940 Act requires that the holders of any Preferred
Shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The remaining trustees will be elected by holders of
common shares and Preferred Shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any Preferred Shares have the
right to elect a majority of the trustees of the Fund at any time two years'
dividends on any Preferred Shares are unpaid. The 1940 Act also requires that,
in addition to any approval by shareholders that might otherwise be required,
the approval of the holders of a majority of any outstanding Preferred Shares,
voting separately as a class, would be required to (1) adopt any plan of
reorganization that would adversely affect the Preferred Shares, and (2) take
any action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, changes in the Fund's subclassification as a
closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Declaration of Trust and By-Laws."
As a result of these voting rights, the Fund's ability to take any such actions
may be impeded to the extent that there are any Preferred Shares outstanding.
The Board of Trustees presently intends that, except as otherwise indicated in
this prospectus and except as otherwise required by applicable law, holders of
Preferred Shares will have equal voting rights with holders of common shares
(one vote per share, unless otherwise required by the 1940 Act) and will vote
together with holders of common shares as a single class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Fund. The terms of
any Preferred Shares issued are expected to provide that (1) they are redeemable
by the Fund in whole or in part at the original purchase price per share plus
accrued dividends per share, (2) the Fund may tender for or purchase Preferred
Shares and (3) the Fund may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of Preferred Shares by the Fund will
reduce the leverage applicable to the common shares, while any resale of shares
by the Fund will increase that leverage.
The discussion above describes the possible offering of Preferred Shares by
the Fund. If the Board of Trustees determines to proceed with such an offering,
the terms of the Preferred Shares may be the same as, or different from, the
terms described above, subject to applicable law and the Fund's Declaration of
Trust. The Board of Trustees, without the approval of the holders of common
shares, may authorize an offering of Preferred Shares or may determine not to
authorize such an offering, and may fix the terms of the Preferred Shares to be
offered.
DESCRIPTION OF BORROWINGS
The Fund's Declaration of Trust authorizes the Fund, without prior approval
of the common shareholders, to borrow money. In this connection, the Fund may
issue notes or other evidence of indebtedness (including bank borrowings or
commercial paper) and may secure any such borrowings by mortgaging, pledging or
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otherwise subjecting as security the Fund's assets. In connection with such
borrowing, the Fund may be required to maintain minimum average balances with
the lender or to pay a commitment or other fee to maintain a line of credit. Any
such requirements will increase the cost of borrowing over the stated interest
rate. Under the requirements of the 1940 Act, the Fund, immediately after any
such borrowings, must have an "asset coverage" of at least 300% (33-1/3% of
Managed Assets after borrowings). With respect to such borrowing, asset coverage
means the ratio which the value of the Managed Assets of the Fund, less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act), bears to the aggregate amount of such borrowing represented by
senior securities issued by the Fund.
The rights of lenders to the Fund to receive interest on and repayment of
principal of any such borrowings will be senior to those of the common
shareholders, and the terms of any such borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
common shareholders in certain circumstances. Further, the 1940 Act does (in
certain circumstances) grant to the lenders to the Fund certain voting rights in
the event of default in the payment of interest on or repayment of principal. In
the event that the Fund elects to be treated as a regulated investment company,
and that such provisions would impair the Fund's status as a regulated
investment company under the Internal Revenue Code, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Any borrowing will likely be ranked equal to all other existing and
future borrowings of the Fund.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more rating agencies, which may
issue ratings for the short-term corporate debt securities or Preferred Shares
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the 1940
Act. It is not anticipated that these covenants or guidelines will impede the
Sub-Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
The Commitment Facility can be used by the Fund for general corporate
purposes, including for financing a portion of the Fund's investments. The
Commitment Facility is secured by a first priority perfected security interest
in the assets of the Fund. In addition, the loan documents under the Commitment
Facility restrict the Fund's ability to change its investment adviser,
sub-adviser or custodian, amend its fundamental investment policies or
investment objective, or take on additional indebtedness without prior consent
from the provider of the Commitment Facility.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS
Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
of Trust contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Board of Trustees. The Declaration of Trust further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Fund believes that the likelihood of such circumstances is remote.
The Declaration of Trust and By-Laws include provisions that could limit
the ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status. The number of trustees is currently five,
but by action of two-thirds of the trustees, the Board of Trustees may from time
to time be increased or decreased. The Board of Trustees is divided into three
classes of trustees serving staggered three-year terms, with the terms of one
class expiring at each annual meeting of shareholders. If the Fund issues
Preferred Shares, the Fund may establish a separate class for the trustees
elected by the holders of the Preferred Shares. Subject to applicable provisions
of the 1940 Act, vacancies on the Board of Trustees may be filled by a majority
action of the remaining trustees. Such provisions may work to delay a change in
the majority of the Board of Trustees. The provisions of the Declaration of
Trust relating to the election and removal of trustees may be amended only by a
vote of two-thirds of the trustees then in office. Generally, the Declaration of
Trust requires a vote by holders of at least two-thirds of the common shares and
Preferred Shares, if any, voting together as a single class, except as described
below and in the Declaration of Trust, to authorize: (1) a conversion of the
Fund from a closed-end to an open-end investment company; (2) a merger or
consolidation of the Fund with any corporation, association, trust or other
organization, including a series or class of such other organization (subject to
a limited exception if the acquiring fund is not an operating entity immediately
prior to the transaction); (3) a sale, lease or exchange of all or substantially
all of the Fund's assets (other than in the regular course of the Fund's
investment activities, in connection with the termination of the Fund, and other
limited circumstances set forth in the Declaration of Trust); (4) in certain
circumstances, a termination of the Fund; (5) a removal of trustees by common
shareholders; or (6) certain transactions in which a Principal Shareholder (as
defined in the Declaration of Trust) is a party to the transaction. However,
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with respect to (1) above, if there are Preferred Shares outstanding, the
affirmative vote of the holders of two-thirds of the Preferred Shares voting as
a separate class shall also be required. With respect to (2) above, except as
otherwise may be required, if the transaction constitutes a plan of
reorganization which adversely affects Preferred Shares, if any, then an
affirmative vote of two-thirds of the Preferred Shares voting together as a
separate class is required as well. With respect to (1) through (3), if such
transaction has already been authorized by the affirmative vote of two-thirds of
the trustees, then the affirmative vote of the majority of the outstanding
voting securities, as defined in the 1940 Act (a "Majority Shareholder Vote"),
is required, provided that when only a particular class is affected (or, in the
case of removing a trustee, when the trustee has been elected by only one
class), only the required vote of the particular class will be required. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the Fund's shares otherwise required by law or any agreement between
the Fund and any national securities exchange. Approval of Fund shareholders is
not required, however, for any transaction, whether deemed a merger,
consolidation, reorganization, exchange of shares or otherwise whereby the Fund
issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the common shares and Preferred Shares, if any, outstanding and
entitled to vote. See the SAI under "Certain Provisions in the Declaration of
Trust and By-Laws."
The provisions of the Declaration of Trust and By-Laws described above
could have the effect of depriving the common shareholders of opportunities to
sell their common shares at a premium over the then current market price of the
common shares by discouraging a third party from seeking to obtain control of
the Fund in a tender offer or similar transaction. The overall effect of these
provisions is to render more difficult the accomplishment of a merger or the
assumption of control by a third party. They provide, however, the advantage of
potentially requiring persons seeking control of the Fund to negotiate with its
management regarding the price to be paid and facilitating the continuity of the
Fund's investment objective and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interests of the Fund and its common shareholders.
Reference should be made to the Declaration of Trust on file with the SEC
for the full text of these provisions.
STRUCTURE OF THE FUND; COMMON SHARE REPURCHASES
AND CHANGE IN FUND STRUCTURE
CLOSED-END STRUCTURE
Closed-end funds differ from open-end management investment companies
(commonly referred to as mutual funds) in that closed-end funds generally list
their shares for trading on a securities exchange and do not redeem their shares
at the option of the shareholder. By comparison, mutual funds issue securities
redeemable at net asset value at the option of the shareholder and typically
engage in a continuous offering of their shares. Mutual funds are subject to
continuous asset in-flows and out-flows that can complicate portfolio
management, whereas closed-end funds generally can stay more fully invested in
securities consistent with the closed-end fund's investment objective and
policies. In addition, in comparison to open-end funds, closed-end funds have
greater flexibility in their ability to make certain types of investments,
including investments in illiquid securities.
However, shares of closed-end investment companies listed for trading on a
securities exchange frequently trade at a discount from net asset value, but in
some cases trade at a premium. The market price may be affected by trading
volume of the shares, general market and economic conditions and other factors
beyond the control of the closed-end fund. The foregoing factors may result in
the market price of the common shares being greater than, less than or equal to
net asset value. The Board of Trustees has reviewed the structure of the Fund in
light of its investment objective and policies and has determined that the
closed-end structure is in the best interests of the shareholders. As described
below, however, the Board of Trustees will review periodically the trading range
and activity of the Fund's shares with respect to its net asset value and the
Board may take certain actions to seek to reduce or eliminate any such discount.
Such actions may include open market repurchases or tender offers for the common
shares at net asset value or the possible conversion of the Fund to an open-end
fund. There can be no assurance that the Board will decide to undertake any of
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these actions or that, if undertaken, such actions would result in the common
shares trading at a price equal to or close to net asset value per common share.
In addition, as noted above, the Board of Trustees determined in connection with
the initial offering of common shares of the Fund that the closed-end structure
is desirable, given the Fund's investment objective and policies. Investors
should assume, therefore, that it is highly unlikely that the Board of Trustees
would vote to convert the Fund to an open-end investment company.
REPURCHASE OF COMMON SHARES AND TENDER OFFERS
In recognition of the possibility that the common shares might trade at a
discount to net asset value and that any such discount may not be in the
interest of shareholders, the Fund's Board of Trustees, in consultation with the
Adviser, Sub-Adviser and the corporate finance services and consulting agent
that the Adviser has retained, from time to time will review possible actions to
reduce any such discount. The Board of Trustees of the Fund will consider from
time to time open market repurchases of and/or tender offers for common shares
to seek to reduce any market discount from net asset value that may develop. In
connection with its consideration from time to time of open-end repurchases of
and/or tender offers for common shares, the Board of Trustees of the Fund will
consider whether to commence a tender offer or share-repurchase program at the
first quarterly board meeting following a calendar year in which the Fund's
common shares have traded at an average weekly discount from net asset value of
more than 10% in the last 12 weeks of that calendar year. After any
consideration of potential actions to seek to reduce any significant market
discount, the Board may, subject to its fiduciary obligations and compliance
with applicable state and federal laws, authorize the commencement of a
share-repurchase program or tender offer. The size and timing of any such share
repurchase program or tender offer will be determined by the Board of Trustees
in light of the market discount of the common shares, trading volume of the
common shares, information presented to the Board of Trustees regarding the
potential impact of any such share repurchase program or tender offer, and
general market and economic conditions. There can be no assurance that the Fund
will in fact effect repurchases of or tender offers for any of its common
shares. The Fund may, subject to its investment limitation with respect to
borrowings and limitations on seniority within the Fund's capital structure if
the Fund has other borrowings outstanding at such time, incur debt to finance
such repurchases or a tender offer or for other valid purposes. Interest on any
such borrowings would increase the Fund's expenses and reduce the Fund's net
income.
There can be no assurance that repurchases of common shares or tender
offers, if any, will cause the common shares to trade at a price equal to or in
excess of their net asset value. Nevertheless, the possibility that a portion of
the Fund's outstanding common shares may be the subject of repurchases or tender
offers may reduce the spread between market price and net asset value that might
otherwise exist. In the opinion of the Fund, sellers may be less inclined to
accept a significant discount in the sale of their common shares if they have a
reasonable expectation of being able to receive a price of net asset value for a
portion of their common shares in conjunction with an announced repurchase
program or tender offer for the common shares.
Although the Board of Trustees believes that repurchases or tender offers
generally would have a favorable effect on the market price of the common
shares, the acquisition of common shares by the Fund will decrease the Managed
Assets of the Fund and therefore will have the effect of increasing the Fund's
expense ratio and decreasing the asset coverage with respect to any Preferred
Shares outstanding. Because of the nature of the Fund's investment objective,
policies and portfolio, the Adviser and the Sub-Adviser do not anticipate that
repurchases of common shares or tender offers should interfere with the ability
of the Fund to manage its investments in order to seek its investment objective,
and does not anticipate any material difficulty in borrowing money or disposing
of portfolio securities to consummate repurchases of or tender offers for common
shares, although no assurance can be given that this will be the case.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time if
approved by the holders of two-thirds of the Fund's common shares outstanding
and entitled to vote; provided, however, that such vote shall be by Majority
Shareholder Vote if the action in question was previously approved by the
affirmative vote of two-thirds of the Trustees. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of the shares
otherwise required by law or any agreement between the Fund and any national
securities exchange. In the event of conversion, the common shares would cease
to be listed on the NYSE Amex or other national securities exchange or market
system. Any Preferred Shares would need to be redeemed and any Borrowings may
need to be repaid upon conversion to an open-end investment company.
Additionally, the 1940 Act imposes limitations on open-end funds' investments in
illiquid securities, which could restrict the Fund's ability to invest in
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certain securities discussed in this prospectus to the extent discussed herein.
Such limitations could adversely affect distributions to Fund common
shareholders in the event of conversion to an open-end fund. The Board of
Trustees believes, however, that the closed-end structure is desirable, given
the Fund's investment objective and policies. Investors should assume,
therefore, that it is unlikely that the Board of Trustees would vote to convert
the Fund to an open-end investment company. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. The Fund would expect to pay all such
redemption requests in cash, but intends to reserve the right to pay redemption
requests in a combination of cash or securities. If such partial payment in
securities were made, investors may incur brokerage costs in converting such
securities to cash. If the Fund were converted to an open-end fund, it is likely
that new common shares would be sold at net asset value plus a sales load.
TAX MATTERS
The following discussion of federal income tax matters is based on the
advice of Chapman and Cutler LLP, counsel to the Fund.
MATTERS ADDRESSED
This section and the discussion in the SAI provide a general summary of the
material U.S. federal income tax consequences to the persons who purchase, own
and dispose of the common shares. It does not address all federal income tax
consequences that may apply to investment in the common shares. Unless otherwise
indicated, this discussion is limited to taxpayers who are U.S. persons, as
defined herein. The discussion that follows is based on the provisions of the
Internal Revenue Code, on treasury regulations promulgated thereunder as in
effect on the date hereof and on existing judicial and administrative
interpretations thereof. These authorities are subject to change and to
differing interpretations, which could apply retroactively. Potential investors
should consult their own tax advisors in determining the federal, state, local,
foreign and any other tax consequences to them of the purchase, ownership and
disposition of the common shares. This discussion does not address all tax
consequences that may be applicable to a U.S. person that is a beneficial owner
of common shares, nor does it address, unless specifically indicated, the tax
consequences to, among others, (i) persons that may be subject to special
treatment under U.S. federal income tax law, including, but not limited to,
banks, insurance companies, thrift institutions, regulated investment companies,
real estate investment trusts, tax-exempt organizations and dealers in
securities or currencies, (ii) persons that will hold common shares as part of a
position in a "straddle" or as part of a "hedging," "conversion" or other
integrated investment transaction for U.S. federal income tax purposes, (iii)
persons whose functional currency is not the U.S. dollar or (iv) persons that do
not hold common shares as capital assets within the meaning of Section 1221 of
the Internal Revenue Code.
For purposes of this discussion, a "U.S. person" is (i) an individual
citizen or resident of the United States, (ii) a corporation or partnership
organized in or under the laws of the United States or any state thereof or the
District of Columbia (other than a partnership that is not treated as a U.S.
person under any applicable treasury regulations), (iii) an estate the income of
which is subject to U.S. federal income taxation regardless of its source, or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more U.S. persons
have the authority to control all the substantial decisions of such trust.
Notwithstanding clause (iv) above, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as U.S. persons prior
to such date that elect to continue to be so treated also shall be considered
U.S. persons.
TAX CHARACTERIZATION OF THE FUND FOR U.S. FEDERAL INCOME TAX PURPOSES
The Fund has elected to be treated as a regular C corporation for U.S.
federal income tax purposes. Thus, the Fund is subject to U.S. corporate income
tax on its U.S. taxable income. Such taxable income would generally include all
of the Fund's net income from the MLPs. The current U.S. federal maximum
graduated income tax rate for corporations is 35%. In addition, the United
States also imposes a 20% alternative minimum tax on the recalculated
alternative minimum taxable income of an entity treated as a corporation. Any
such U.S. corporate income tax or alternative minimum tax could materially
reduce cash available to make payments on the common shares. The Fund will also
be obligated to pay state income tax on its taxable income, either because the
states follow the federal election or because the states separately impose a tax
on the Fund.
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The MLPs in which the Fund intends to invest are generally treated as
partnerships for U.S. federal income tax purposes. As a partner in the MLPs, the
Fund will be required to report its allocable share of MLP income, gain, loss,
deduction and expense, whether or not any cash is distributed from the MLPs.
The Fund intends to invest in energy MLPs, so the Fund anticipates that the
majority of the Fund's items of income, gain, loss, deduction and expense will
be related to energy ventures. However, some items are likely to relate to the
temporary investment of the Fund's capital, which may be unrelated to energy
ventures.
Although the Fund intends to hold the interests in the MLPs for investment,
the Fund is likely to sell interests in a particular MLP from time to time. On
any such sale, the Fund will recognize gain or loss based upon the difference
between the consideration received for tax purposes on the sale and the Fund's
tax basis in the interest sold. The consideration received is generally the
amount paid by the purchaser plus any debt of the MLP allocated to the Fund that
will shift to the purchaser on the sale. The Fund's tax basis in an MLP is the
amount paid for the interest, decreased for any distributions of cash received
by the Fund in excess of the Fund's allocable share of taxable income and
decreased by the Fund's allocable share of net losses. Thus, although cash in
excess of taxable income and net tax losses may create a temporary economic
benefit to the Fund, they will increase the amount of gain (or decrease the
amount of loss) on the sale of an interest in an MLP. No favorable federal
income tax rate applies to long-term capital gains for entities treated as
corporations for federal income tax purposes, such as the Fund. Thus, the Fund
will be subject to federal income tax on its long-term capital gains, like
ordinary income, at rates of up to 35%.
In calculating the Fund's alternative minimum taxable income, certain
percentage depletion deductions and intangible drilling costs may be treated as
items of tax preference. Items of tax preference increase alternative minimum
taxable income and increase the likelihood that the Fund may be subject to the
alternative minimum tax.
The Fund is not treated as a regulated investment company for federal
income tax purposes. In order to qualify as a regulated investment company, the
income and assets of the company must meet certain minimum threshold tests.
Because the Fund invests a substantial portion of its Managed Assets in MLPs
that invest in energy ventures, the Fund does not meet such tests. In contrast
to the tax rules that will apply to the Fund, a regulated investment company
generally does not pay corporate income tax. Thus, the regulated investment
company taxation rules have no application to the Fund or Common Shareholders of
the Fund.
TAXATION OF THE SHAREHOLDERS
Distributions. The Fund's distributions will be treated as dividends to
common shareholders to the extent of the Fund's current or accumulated earnings
and profits as determined for federal income tax purposes.
As discussed in greater detail below, prior to 2011, dividends that qualify
as "qualified dividend income" are generally taxed to individuals at a maximum
15% rate if certain holding period and other requirements are met by the common
shareholder receiving such dividend. Corporations are generally subject to tax
on dividends at a maximum 35% rate, but corporations may be eligible to exclude
70% of the dividends if certain holding period requirements are met. Common
shareholders that are not U.S. persons are generally subject to a 30%
withholding tax, unless (i) the common shareholder's interest in the Fund is
effectively connected to a U.S. trade or business and the common shareholder
provides the Fund with a Form W8ECI signed under penalties of perjury (in which
case, the common shareholder will be subject to the normal U.S. graduated rates)
or (ii) the common shareholder is eligible for the benefits of a U.S. income tax
treaty and provides the Fund with a Form W-8BEN signed under penalties of
perjury (in which case, the common shareholder will be subject to the rate of
withholding provided for in the relevant treaty).
If a Fund distribution exceeds the Fund's current and accumulated earnings
and profits, the distribution will be treated as a non-taxable adjustment to the
basis of the common shares to the extent of such basis, and then as capital gain
to the extent of the excess distribution. Such gain will be long-term capital
gain if the holding period for the common shares is more than one year.
Individuals are currently subject to a maximum tax rate of 15% on long-term
capital gains. This rate is currently scheduled to increase to 20% for tax years
beginning after December 31, 2010. Corporations are taxed on capital gains at
their ordinary graduated rates.
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Because unsevered natural resources are viewed as interests in real
property for some purposes of the Internal Revenue Code, depending upon the
nature and location of the MLPs' assets, the Fund could from time to time be
classified as a U.S. real property holding corporation. If the Fund is
classified as a U.S. real property holding corporation, dispositions of
interests in the Fund by a non-U.S. common shareholder and distributions in
excess of a non-U.S. common shareholder's basis may be subject to 10%
withholding.
A corporation's earnings and profits are generally calculated by making
certain adjustments to the corporation's reported taxable income. Based upon the
historic performance of similar MLPs, the Fund anticipates that the distributed
cash from the MLPs in its portfolio will exceed the Fund's earnings and profits.
Thus, the Fund anticipates that only a portion of its distributions will be
treated as dividends to its common shareholders for federal income tax purposes.
Special rules apply to the calculation of earnings and profits for
corporations invested in energy ventures. The Fund's earnings and profits will
be calculated using (i) straight-line depreciation rather than a percentage
depletion method and (ii) five-year and ten-year amortization of drilling costs
and exploration and development costs, respectively. Thus, these deductions may
be significantly lower for purposes of calculating earnings and profits than
they are for purposes of calculating taxable income. Because of these
differences, the Fund may make distributions out of earnings and profits,
treated as dividends, in years in which Fund distributions exceed the Fund's
taxable income.
The maximum federal income tax rate for individuals on qualified dividend
income is currently generally 15% for tax years ending on or before December 31,
2010, unless such favorable treatment is repealed sooner by new legislation. The
portion of the Fund's distributions treated as a dividend for federal income tax
purposes should be treated as qualified dividend income for federal income tax
purposes, subject to certain holding period and other requirements. This rate of
tax on dividends is currently scheduled to increase back to ordinary income
rates after December 31, 2010, with the maximum marginal federal income tax rate
being 39.6% at such time.
A common shareholder participating in the Fund's automatic dividend
reinvestment plan will be taxed upon the reinvested amount as if actually
received by the participating common shareholder and the participating common
shareholder reinvested such amount in additional Fund common shares.
The Fund will notify common shareholders annually as to the federal income
tax status of Fund distributions to them.
Sale of Shares. Upon the sale of common shares, a common shareholder will
generally recognize capital gain or loss measured by the difference between the
amount received on the sale and the common shareholder's tax basis of common
shares sold. As discussed above, such tax basis may be less than the price paid
for the common shares as a result of Fund distributions in excess of the Fund's
earnings and profits. Such capital gain or loss will generally be long-term
capital gain or loss, if such common shares were capital assets held for more
than one year.
Information Reporting and Withholding. The Fund will be required to report
annually to the IRS, and to each common shareholder, the amount of distributions
and consideration paid in redemptions, and the amount withheld for federal
income taxes, if any, for each calendar year, except as to exempt holders
(including certain corporations, tax-exempt organizations, qualified pension and
profit-sharing trusts, and individual retirement accounts). Each common
shareholder (other than common shareholders who are not subject to the reporting
requirements without supplying any documentation) will be required to provide
the Fund, under penalties of perjury, an IRS Form W-9, Form W-8BEN, Form W-8ECI
or an equivalent form containing the common shareholder's name, address, correct
federal taxpayer identification number and a statement that the common
shareholder is not subject to backup withholding. Should a non-exempt common
shareholder fail to provide the required certification, backup withholding will
apply. The current backup withholding rate for domestic persons is 28%, but such
rate is scheduled to increase to 31% after December 31, 2010. As mentioned
above, non-U.S. persons may be subject to withholding tax at a rate of 30%, if
appropriate documentation demonstrating eligibility for a lower rate is not
provided. Backup withholding is not an additional tax. Any such withholding will
be allowed as a credit against the common shareholder's federal income tax
liability provided the required information is furnished to the IRS.
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TAX CONSEQUENCES OF CERTAIN INVESTMENTS
Federal Income Taxation of MLPs. MLPs are generally intended to be taxed as
partnerships for federal income tax purposes. As a partnership, an MLP is
treated as a pass-through entity for federal income tax purposes. This means
that the federal income items of the MLP, though calculated and determined at
the partnership level, are allocated among the partners in the MLP and are
included directly in the calculation of the taxable income of the partners
whether or not cash flow is distributed from the MLP. The MLP files an
information return, but normally pays no federal income tax.
MLPs are often publicly traded. Publicly traded partnerships are generally
treated as corporations for federal income tax purposes. However, if an MLP
satisfies certain income character requirements, the MLP will generally continue
to be treated as partnership for federal income tax purposes. Under these
requirements, an MLP must receive at least 90% of its gross income from certain
"qualifying income" sources.
Qualifying income for this purpose generally includes interest, dividends,
real property rents, real property gains, and income and gain from the
exploration, development, mining or production, processing, refining,
transportation or marketing of any mineral or natural resource (including
fertilizer, geothermal energy, and timber). As discussed above, the Fund
currently invests in energy MLPs, so the income of the MLPs should qualify as
qualifying income.
As discussed above, the tax items of an MLP are allocated through to the
partners of the MLP whether or not an MLP makes any distributions of cash. In
part because estimated tax payments are payable quarterly, partnerships often
make quarterly cash distributions. A distribution from a partnership will
generally be treated as a non-taxable adjustment to the basis of the Fund's
interest in the partnership to the extent of such basis, and then as gain to the
extent of the excess distribution. The gain will generally be capital gain, but
a variety of rules could potentially recharacterize the gain as ordinary income.
The Fund's initial tax basis is the price paid for the MLP interest plus any
debt of the MLP allocated to the Fund. The tax basis is decreased for
distributions and allocations of deductions (such as percentage depletion) and
losses, and increased for capital contributions and allocations of net income
and gains.
When interests in a partnership are sold, the difference between (i) the
sum of the sales price and the Fund's share of debt of the partnership that will
be allocated to the purchaser and (ii) the Fund's adjusted tax basis will be
taxable gain or loss, as the case may be.
The Fund should receive a Form K-1 from each MLP, showing its share of each
item of MLP income, gain, loss, deductions and expense. The Fund will use that
information to calculate its taxable income and its earnings and profits.
Because the Fund has elected to be taxed as a corporation, the Fund will
report the tax items of the MLPs and any gain or loss on the sale of interests
in the MLPs. The Fund's common shareholders will be viewed for federal income
tax purposes as having income or loss on their investment in the Fund rather
than in the underlying MLPs. Common shareholders will receive a Form 1099 from
the Fund based upon the distributions made (or deemed to have been made) rather
than based upon the income, gain, loss or deductions of the MLPs in which the
Fund invests.
Other Investments. The Fund has in the past, and may in the future, attempt
to generate premiums from the sale of call options. These premiums typically
will result in short-term capital gains to the Fund. Transactions involving the
disposition of the Fund's underlying securities (whether pursuant to the
exercise of a call option, put option or otherwise) will give rise to capital
gains or losses. Because the Fund does not have control over the exercise of the
call options it writes, such exercises or other required sales of the underlying
stocks may cause the Fund to realize capital gains or losses at inopportune
times.
Certain of the Fund's investment practices may be subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert an ordinary loss or a deduction into a capital loss
(the deductibility of which is more limited) or (iii) cause the Fund to
recognize income or gain without a corresponding receipt of cash. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these provisions, if possible.
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CORPORATE FINANCE SERVICES AND CONSULTING FEE
First Trust Advisors (and not the Fund) has entered into a Corporate
Finance Services and Consulting Agreement with Wachovia Securities, LLC, as
successor to A.G. Edwards (the "Consultant"), and has agreed to pay from its own
assets a fee to the Consultant. This fee was payable quarterly at the annual
rate of 0.10% of the Fund's Managed Assets through June 29, 2006 and is payable
quarterly at the annual rate of 0.15% of the Fund's Managed Assets after June
29, 2006 and will be payable only so long as the Investment Management Agreement
remains in effect between the Fund and First Trust Advisors or any successor in
interest or affiliate of First Trust Advisors, as and to the extent that such
Investment Management Agreement is renewed or continued periodically in
accordance with the 1940 Act. Pursuant to the Corporate Finance Services and
Consulting Agreement, the Consultant will: (i) provide relevant information,
studies or reports regarding closed-end investment companies with similar
investment objectives and/or strategies as the Fund as well as general trends in
the closed-end investment company and asset management industries, and consult
with representatives of First Trust Advisors in connection therewith; (ii) at
the request of First Trust Advisors, provide certain economic research and
statistical information and reports on behalf of First Trust Advisors or the
Fund and consult with representatives of First Trust Advisors or the Fund,
and/or Trustees of the Fund in connection therewith, which information and
reports shall include: (a) statistical and financial market information with
respect to the Fund's market performance; and (b) comparative information
regarding the Fund and other closed-end management investment companies with
respect to (x) the net asset value of their respective shares (as made publicly
available by the Fund and such investment companies), (y) the respective market
performance of the Fund and such other companies, and (z) other relevant
performance indicators; and (iii) provide First Trust Advisors with such other
services in connection with the Common Shares relating to the trading price and
market price thereof upon which First Trust Advisors and the Consultant shall,
from time to time, agree, including after-market services designed to maintain
the visibility of the Fund in the market. The incremental additional amounts
paid as service fees applicable to daily assets of the Fund attributable to the
common shares initially offered by the Fund will not exceed 4.461% of the
offering price of such common shares.
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
The custodian of the assets of the Fund is PFPC Trust Company (which will
be renamed PNC Trust Company effective June 7, 2010) ("Custodian"), 301 Bellevue
Parkway, Wilmington, Delaware 19809. The Fund's transfer, shareholder services
and dividend paying agent is PNC Global Investment Servicing (U.S.) Inc., 301
Bellevue Parkway, Wilmington, Delaware 19809. Pursuant to an Administration and
Accounting Services Agreement, PNC Global Investment Servicing (U.S.) Inc. also
provides certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records; acting as liaison with the
Fund's independent registered public accounting firm providing such independent
registered public accounting firm with various audit-related information with
respect to the Fund; and providing other continuous accounting and
administrative services. As compensation for accounting and administrative
services, the Fund has agreed to pay PNC Global Investment Servicing (U.S.) Inc.
an annual fee, calculated daily and payable on a monthly basis, of 0.095% of the
Fund's first $200 million of average Managed Assets, subject to decrease with
respect to additional Fund Managed Assets.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Chapman and Cutler LLP, Chicago, Illinois. Chapman and
Cutler LLP may rely as to certain matters of Massachusetts law on the opinion of
Bingham McCutchen LLP. If certain legal matters in connection with an offering
of Common Shares are passed upon by counsel for the underwriters or sales agent
of such offering, such counsel will be named in a prospectus supplement.
-65-
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
PAGE
Use of Proceeds ........................................................... 1
Investment Objective ...................................................... 1
Investment Restrictions ................................................... 2
Investment Policies and Techniques ........................................ 4
Additional Information About the Fund's Investments and Investment Risks... 6
Other Investment Policies and Techniques .................................. 25
Management of the Fund .................................................... 34
Investment Adviser ........................................................ 40
Sub-Adviser ............................................................... 43
Portfolio Transactions and Brokerage ...................................... 46
Certain Provisions in the Declaration of Trust and By-Laws................. 48
Repurchase of Fund Shares; Conversion to Open-End Fund .................... 50
Net Asset Value ........................................................... 52
Tax Matters ............................................................... 55
Performance Related and Comparative Information ........................... 61
Experts ................................................................... 63
Custodian, Administrator and Transfer Agent ............................... 63
Additional Information .................................................... 64
Financial Statements ...................................................... F-1
Appendix A -- Ratings of Investments ...................................... A-1
Appendix B -- Energy Income Partners, LLC Proxy Voting Policy ............. B-1
-66-
THIS PAGE IS INTENTIONALLY LEFT BLANK.
-67-
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED.
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TABLE OF CONTENTS
PAGE
Prospectus Summary ..................................... 1
Summary of Fund Expenses ............................... 24
Financial Highlights.................................... 26
Senior Securities....................................... 28
Market and Net Asset Value Information.................. 29
The Fund ............................................... 30
Use of Proceeds ........................................ 30
The Fund's Investments ................................. 30
Use of Financial Leverage............................... 36
Risks .................................................. 39
Management of the Fund.................................. 54
Net Asset Value......................................... 56
Distributions .......................................... 57
Dividend Reinvestment Plan ............................. 57
Plan of Distribution.................................... 58
Description of Shares .................................. 60
Certain Provisions in the Declaration
of Trust and By-Laws ................................ 63
Structure of the Fund; Common Share
Repurchases and Change in Fund Structure............. 64
Tax Matters............................................. 66
Corporate Finance Services and Consulting Fee........... 70
Custodian, Administrator and Transfer Agent............. 71
Legal Opinions.......................................... 71
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-68-
ENERGY INCOME AND GROWTH FUND
UP TO 3,348,960 COMMON SHARES
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PROSPECTUS
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May 8, 2009