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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21549
Energy Income and Growth Fund
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(Exact name of registrant as specified in charter)
1001 Warrenville Road, Suite 300
Lisle, IL 60532
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
Lisle, IL 60532
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-241-4141
Date of fiscal year end: November 30
Date of reporting period: May 31, 2008
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
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ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
[FIRST TRUST LOGO]
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
MAY 31, 2008
ENERGY
INCOME AND GROWTH FUND
EIP
ENERGY INCOME PARTNERS, LLC
TABLE OF CONTENTS
ENERGY INCOME AND GROWTH FUND (FEN)
SEMI-ANNUAL REPORT
MAY 31, 2008
Shareholder Letter ......................................................... 1
At A Glance ................................................................ 2
Portfolio Commentary ....................................................... 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities ........................................ 10
Statement of Operations .................................................... 11
Statements of Changes in Net Assets ........................................ 12
Statement of Cash Flows .................................................... 13
Financial Highlights ....................................................... 14
Notes to Financial Statements .............................................. 15
Additional Information ..................................................... 23
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933. Forward-looking statements include
statements regarding the goals, beliefs, plans or current expectations of First
Trust Advisors L.P. ("First Trust" or the "Advisor") and/or Energy Income
Partners, LLC ("EIP" or the "Sub-Advisor") and their respective representatives,
taking into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Energy Income and Growth Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that the market
values of securities owned by the Fund will decline and that the value of the
Fund shares may therefore be less than what you paid for them. Accordingly, you
can lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee
of future results, and current performance may be lower or higher than the
figures shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate, and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your
investment. It includes details about the Fund and presents data and analysis
that provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of
the Fund. you may obtain an understanding of how the market environment affected
the Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel
of EIP are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, this report and other regulatory filings.
SHAREHOLDER LETTER
ENERGY INCOME AND GROWTH FUND (FEN)
SEMI-ANNUAL REPORT
MAY 31, 2008
Dear Shareholders:
The year 2007 and the first five months of calendar year 2008 were somewhat
challenging times for the financial markets and for many investors. Yet,
regardless of the market, First Trust Advisors L.P. ("First Trust") believes
that in order to be successful in reaching your financial goals, you should be
invested for the long-term. We also believe that investors should seek
professional help from a financial advisor who has been through many types of
markets, knows the range of investments available, and is committed to bringing
you investments suitable to your particular situation.
Our goal at First Trust has always been to offer a wide range of investment
products, including our family of closed-end funds, to help financial advisors
give you the opportunity to meet your financial objectives. We have continued to
expand our product line to ensure that you have many choices to fit your
investment needs.
The report you hold contains detailed information about your investment in
Energy Income and Growth Fund. It contains a portfolio commentary from the
Fund's portfolio management team that provides a market recap for the period, a
performance analysis and a market and Fund outlook. Additionally, the report
provides the Fund's unaudited financial statements for the period covered by
this report. I encourage you to read this document and discuss it with your
financial advisor.
As you may be aware, there is continuing uncertainty caused by the unprecedented
auction failures of auction rate securities over the past several months. This
Fund has issued this type of security, and First Trust believes that auction
rate securities may continue to experience failed auctions. I want you to know
that First Trust is seeking methods for refinancing the outstanding auction rate
securities that are experiencing failed auctions. The ability to obtain this
refinancing is contingent on finding third parties willing to provide such
financing on a cost effective basis. We will report to you in the next edition
of this report regarding this issue, or you may check with your financial
advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to giving you up-to-date information about
your investments so you and your financial advisor are always current on your
portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of Energy Income and Growth Fund
Page 1
ENERGY INCOME AND GROWTH FUND
"AT A GLANCE"
AS OF MAY 31, 2008 (UNAUDITED)
FUND STATISTICS
Symbol on American Stock Exchange FEN
Common Share Price $ 23.86
Common Share Net Asset Value $ 25.39
Premium (Discount) to NAV (6.03)%
Net Assets Applicable to Common Shares $163,714,761
Current Quarterly Distribution per Common Share (1) $ 0.395
Current Annualized Distribution per Common Share $ 1.580
Current Distribution Rate on Closing Common Share Price (2) 6.62%
Current Distribution Rate on NAV (2) 6.22%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(LINE GRAPH)
Market NAV
------ ------
5/31/2007 $28.11 $30.52
6/8/2007 $27.10 $29.82
6/15/2007 $27.84 $30.37
6/22/2007 $28.03 $30.46
6/29/2007 $27.90 $30.92
7/6/2007 $28.54 $31.27
7/13/2007 $29.05 $31.88
7/20/2007 $28.91 $31.41
7/27/2007 $27.93 $30.21
8/3/2007 $25.10 $28.25
8/10/2007 $24.80 $27.01
8/17/2007 $23.30 $27.01
8/24/2007 $25.76 $28.35
8/31/2007 $26.15 $27.83
9/7/2007 $26.90 $27.53
9/14/2007 $25.99 $27.47
9/21/2007 $25.40 $27.64
9/28/2007 $24.81 $26.69
10/5/2007 $25.24 $27.08
10/12/2007 $26.45 $27.82
10/19/2007 $25.27 $26.98
10/26/2007 $24.68 $27.64
11/2/2007 $24.60 $27.59
11/9/2007 $24.04 $26.82
11/16/2007 $23.32 $26.48
11/23/2007 $22.95 $26.61
11/30/2007 $23.82 $26.76
12/7/2007 $24.03 $25.94
12/14/2007 $22.58 $25.57
12/21/2007 $21.75 $26.06
12/28/2007 $23.85 $26.78
1/4/2008 $24.60 $26.18
1/11/2008 $23.87 $25.98
1/18/2008 $22.28 $24.49
1/25/2008 $22.44 $25.00
2/1/2008 $24.00 $25.60
2/8/2008 $24.46 $25.51
2/15/2008 $23.42 $25.16
2/22/2008 $23.30 $25.29
2/29/2008 $22.90 $25.26
3/7/2008 $22.44 $24.65
3/14/2008 $21.80 $23.68
3/20/2008 $21.27 $23.15
3/28/2008 $22.52 $23.69
4/4/2008 $22.65 $24.94
4/11/2008 $23.16 $24.25
4/18/2008 $23.32 $24.86
4/25/2008 $24.48 $24.83
5/2/2008 $24.71 $25.22
5/9/2008 $25.80 $25.46
5/16/2008 $25.07 $25.62
5/23/2008 $24.58 $25.14
5/30/2008 $23.86 $25.44
PERFORMANCE
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (6/24/04)
5/31/2008 5/31/08 to 5/31/2008
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Fund Performance
NAV (3) -2.00% -11.51% 13.84%
Market Value (4) 3.39% -9.71% 10.75%
Index Performance
S&P 500 Index -4.47% -6.70% 7.35%
Lehman Credit Index of Corporate Bonds 0.20% 3.82% 4.33%
Alerian MLP Index 1.27% -5.44% 17.33%
Wachovia Midstream MLP Index 1.10% -4.17% 16.97%
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Midstream Gas 40.6%
Midstream Oil 36.4%
Utility 6.8%
Oil & Gas 5.2%
Coal 4.6%
Propane 4.0%
Oil & Gas Service 2.2%
Diversified Energy 0.2%
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Total 100.0%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Magellan Midstream Partners, L.P. 6.2%
Kinder Morgan Energy Partners, L.P. 5.9
Enterprise Product Partners, L.P. 5.8
Energy Transfer Partners, L.P. 5.6
Plains All American Pipeline, L.P. 5.3
Crosstex Energy, L.P. 4.4
Holly Energy Partners, L.P. 4.1
Enbridge Energy Partners, L.P. 3.8
NuStar Energy, L.P. 3.3
ONEOK, Inc. 3.2
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Total 47.6%
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(1) Most recent distribution paid or of record through 5/31/08. This
distribution was increased subsequent to May 31, 2008. See Note 11 -
Subsequent Event in the Notes to Financial Statements.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or of record through the report date and then dividing
by market price or NAV, as applicable, as of 5/31/08.
(3) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gain distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load. Past performance is
not indicative of future results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
ENERGY INCOME PARTNERS, LLC
Energy Income Partners, LLC ("EIP"), Westport, CT, was appointed as the interim
Investment Sub-Advisor of the Energy Income and Growth Fund ("FEN" or the
"Fund") in September 2007 and approved by shareholders as Investment Sub-Advisor
in January 2008. EIP was founded in 2003 to provide professional asset
management services in the area of energy-related Master Limited Partnerships
("MLPs") and other high-payout securities such as Income Trusts and Royalty
Trusts. EIP mainly focuses on infrastructure assets such as pipelines, petroleum
storage and terminals that receive fee-based or regulated income from its
corporate customers. EIP manages or supervises approximately $720 million of
assets, as of May 31, 2008. While independent, EIP is affiliated with Ospraie
Management LLC ("Ospraie"), a $7 billion family of funds focused on the energy
and commodity industries. The relationship with Ospraie enhances EIP's access to
industry and company investment research. Lehman Brothers owns 20% of Ospraie.
The other funds advised by EIP include a partnership for U.S. high net worth
individuals and a master-and-feeder fund for institutions. EIP is a Registered
Investment Advisor and serves as an advisor to one Registered Investment Company
other than the Fund.
PORTFOLIO MANAGEMENT TEAM
JAMES J. MURCHIE
FOUNDER AND CEO OF ENERGY INCOME PARTNERS, LLC
Mr. Murchie founded EIP in 2003 and is the portfolio manager for all funds
advised by EIP which focus on energy-related master limited partnerships, income
trusts and similar securities. From 2005 to mid-2006, Mr. Murchie and the EIP
investment team joined Pequot Capital Management. In July 2006, Mr. Murchie and
the EIP investment team left Pequot and re-established EIP. From 1998 to 2003 he
managed a long/short equity fund that invested in energy and cyclical equities
and commodities as head of Lawhill Capital LLC. From 1995 to 1997, he was a
managing director at Tiger Management where his primary responsibilities were
investments in energy, commodities and related equities. From 1990 to 1995, Mr.
Murchie was a principal at Sanford C. Bernstein where he was a top-ranked energy
analyst and sat on the Research Department's Recommendation Review Committee.
Before joining Bernstein, he spent 8 years at British Petroleum in 7 operating
and staff positions of increasing responsibility. He has served on the board of
Clark Refining and Marketing Company and as President and Treasurer of the Oil
Analysts Group of New York. Mr. Murchie holds degrees from Rice University and
Harvard University.
EVA PAO
PRINCIPAL OF ENERGY INCOME PARTNERS, LLC
Eva Pao has been with EIP since inception in 2003 and is co-portfolio manager
for all its funds. From 2005 to mid-2006, Ms. Pao joined Pequot Capital
Management during EIP's affiliation with Pequot. Prior to Harvard Business
School, Ms. Pao was a Manager at Enron Corp where she managed a portfolio in
Canadian oil and gas equities for Enron's internal hedge fund that specialized
in energy-related equities and managed a natural gas trading book. Ms. Pao holds
degrees from Rice University and Harvard Business School.
ENERGY INCOME AND GROWTH FUND
The investment objective of the Fund is to seek a high level of after-tax total
return with an emphasis on current distributions paid to shareholders. The Fund
pursues its objectives by investing in MLPs and related public entities in the
energy sector, which the Fund's Investment Sub-Advisor believes offer
opportunities for income and growth. There can be no assurance that investment
objectives will be achieved. The Fund may not be appropriate for all investors.
MARKET RECAP
As measured by the Alerian MLP Index and the Wachovia Midstream MLP Index, the
total return for energy-related MLPs over the semi-annual period ended May 31,
2008 was 1.27% and 1.10%, respectively. These returns reflect, for the Alerian
MLP Index 3.2% from income distributions and the remainder from share
depreciation. For the Wachovia Midstream MLP Index, 3.2% reflects the return
from income distributions while the remainder is from share depreciation. These
figures are according to data collected from several sources, including the
Alerian MLP Index, the Wachovia Midstream MLP Index and Bloomberg. While in the
short term, share appreciation can be volatile, we believe that over the longer
term, share appreciation will approximate growth in per share quarterly cash
distributions paid by MLPs. Over the last 12 months ended May 31, 2008, the
average growth in per share cash distributions of energy-related MLPs has been
approximately 12% (Source: Bloomberg, Factset). We continue to believe that the
growth rate of the dividend stream is supported by the
Page 3
PORTFOLIO COMMENTARY - CONTINUED
fundamentals of the underlying businesses of the Fund's portfolio holdings.
These businesses deal in predominately energy infrastructure such as pipelines,
terminals and storage which receive fees and tariffs that are not related to
commodity prices. The Fund's portfolio companies are enjoying above historic
levels of growth due to the increased amount of profitable organic investment
opportunities available in the energy infrastructure businesses.
In our view, the weakness in the performance of MLP shares continues to be
driven by concerns over the credit markets. Since MLPs pay out most or all of
their cash flow every quarter, growth opportunities need to be financed with the
issuance of new shares and new debt. Over the long term, this need to "get
approval" from the capital markets for new projects imposes a welcome extra
layer of scrutiny over these projects. However, there will be times when the
capital markets are tight and less willing to provide new funding. Today's
credit market is one of those times. Over the last six months, we have made
changes to the portfolio that we believe improve the Fund's ability to weather
this storm. These changes include reducing portfolio concentration, reducing
exposure to cyclical businesses, and increasing the average credit quality of
the companies in the portfolio.
PERFORMANCE ANALYSIS
On a net asset value ("NAV") basis, the Fund provided a total return of -2.00%,
including the reinvestment of dividends, for the semi-annual period ended May
31, 2008. This compares, according to collected data, to a total return of
-4.47% for the S&P 500 Index; 0.20% for the Lehman Credit Index of corporate
bonds; 1.27% for the Alerian MLP Index; and 1.10% for the Wachovia Midstream MLP
Index. On a market value basis, the Fund had a total return, including the
reinvestment of dividends for the semi-annual period ended May 31, 2008, of
3.39%. The Fund's discount to NAV narrowed over the semi-annual period covered
by this report. On November 30, 2007, the Fund was priced at $23.82, while the
NAV was $26.74, a discount of 10.9%. On May 31, 2008, the Fund was priced at
$23.86, while the NAV was $25.39, a discount of 6.0%.
While most of the Fund's portfolio companies are partnerships which do not pay
state or federal income tax, the Fund does pay tax when gains in the portfolio
are realized through the sale of appreciated securities. The NAV of the Fund
grows at a slower pace than the underlying securities because, as the securities
appreciate, the future tax liability from the eventual sale of those securities
is subtracted from the NAV. Thus, the NAV is lower than the net value of the
securities in the portfolio because those taxes have not yet been paid, and will
not be paid until the securities are actually sold (which could be many years in
the future). In the meantime, the Fund invests the value of this deferred tax
liability in the Fund's portfolio, earning a return and lowering the impact of
the Fund's taxable status.
The Fund raised its dividend once during the six months covered by this report.
The Fund paid 38.5 cents per share quarterly in October 2007 and again in
January 2008, and raised the distribution to 39.5 cents per share in April 2008.
The 39.5 cents represents a 3.9% increase over the prior April dividend and
reflects the growth in quarterly distributions from the Fund's portfolio
companies. While the underlying growth in MLP distributions continues, the Fund
paid a slightly higher rate for the leverage it employs as prevailing interest
rates for the Fund's borrowings increased. The Sub-Advisor's transition plan for
the Fund from its prior Sub-Advisor is complete, and we believe the Fund will
generate more income from a portfolio that is less concentrated, contains higher
credit quality coming from companies with superior management and business
models generating less cyclical cash flows, and has higher long-term growth
prospects.
OUTLOOK FOR THE MLP MARKET
The MLP asset class continues to grow. With 3 MLP initial public offerings
("IPOs") in 2008, energy-related MLPs now total 73, with approximately $140
billion of market capitalization as of May 31, 2008. In addition to the 3 IPOs,
15 MLP follow-on equity offerings so far in 2008 have raised approximately $2.8
billion of proceeds, according to Lehman Brothers. The growth in the asset class
is being partly driven by the market's demand for yield and the energy
industry's desire to finance its organic spending opportunities. Historically,
the energy industry was slow to sell its infrastructure assets (pipelines,
terminals, storage facilities, etc.) to MLPs or to create MLPs from portions of
their existing assets as they preferred to retain the more stable cash flows in
order to stabilize their overall business. But after years of under-investment,
coupled with finding new oil and gas supplies from less traditional areas,
energy infrastructure in North America is in need of much new capacity. Creating
new infrastructure MLPs provides a valuable financing tool to fund these new
projects. Very often, these assets will trade at a higher valuation once they
are spun out into a pure-play infrastructure MLP with an attractive yield. In
our view, this has spurred the energy industry to accelerate the creation of
MLPs.
Page 4
PORTFOLIO COMMENTARY - CONTINUED
Along with the creation of new infrastructure MLPs, there are many MLPs whose
primary business is producing, shipping or refining oil and gas. While some of
these MLPs are attractive and have the potential for higher growth, they come
with more risk associated with the cyclical nature of their businesses. Looking
forward, we believe the MLP space will become less homogeneous and increasingly
include all aspects of the energy industry. We welcome the new mix of companies
as it provides opportunities for us to add value through our rigorous research
and portfolio construction discipline. However, we will continue to have the
bulk of the Fund's portfolio invested in companies whose primary business is
steady, fee-based energy infrastructure.
THE CURRENT MLP MARKET
The total return proposition of owning energy-related MLPs has been and
continues to be their yield plus their growth, which over the last ten years has
averaged about 7% annually. This average growth rate has accelerated to about
12% both last year and this year, as of May 31, 2008. The yield of the MLPs -
weighted by market capitalization - on May 31 was about 6.9%, based on our study
of the MLP energy-related universe.
The growth in MLP cash distributions is running above the long-term average
primarily because of the profitable organic growth opportunities available
today. They include the rapid growth of oil production out of Canada's oil sands
development, the growth in onshore natural gas production from the application
of new technologies in areas like the Rocky Mountains and the Fort Worth Basin
in Texas, increased imports of crude oil and liquid natural gas, and increased
demand for motor fuel additives like ethanol and bio-diesel. All these
developments require additional pipelines, storage and terminaling investment.
The MLPs as a group have been, and continue to be, quicker to capitalize on
these opportunities. By contrast, the pipeline divisions inside the utility and
oil companies are often viewed as cost centers and not profitable businesses in
their own right and, therefore, are not viewed as platforms for growth. With
higher oil and gas prices, the oil companies are inclined to spend their time
drilling up new reserves and are leaving the infrastructure building
opportunities open to companies like MLPs.
While the current market environment is choppy, the business of adding to North
America's energy infrastructure, backed by long-term contracts or regulated
returns, continues to grind on. While we do not know how long growth rates will
continue above their long-term averages, we believe there is currently no
slowdown on the horizon.
Page 5
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (A)
MAY 31, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------------- ----------------------------------------------- --------------
MASTER LIMITED PARTNERSHIPS - 133.6%
OIL, GAS & CONSUMABLE FUELS - 133.6%
12,500 Atlas Pipeline Partners, L.P. ................. $ 514,000
253,352 BreitBurn Energy Partners, L.P. ............... 5,447,070
95,000 Buckeye Partners, L.P. ........................ 4,540,050
465,471 Clearwater Natural Resources, L.P. (b) (c) .... 4,189,239
188,050 Copano Energy LLC ............................. 6,929,643
396,975 Crosstex Energy, L.P. ......................... 12,183,163
131,705 DCP Midstream Partners, L.P. .................. 4,093,391
84,300 Duncan Energy Partners, L.P. .................. 1,694,430
80,153 El Paso Pipeline Partners, L.P. ............... 1,836,305
206,747 Enbridge Energy Partners, L.P. ................ 10,399,374
52,100 Encore Energy Partners, L.P. .................. 1,354,079
320,370 Energy Transfer Partners, L.P. ................ 15,489,890
265,803 Enterprise GP Holdings, L.P. .................. 8,463,168
526,138 Enterprise Product Partners, L.P. ............. 15,926,197
143,709 EV Energy Partners, L.P. ...................... 4,490,906
56,293 Global Partners, L.P. ......................... 1,062,249
73,100 Hiland Partners, L.P. ......................... 3,654,269
250,000 Holly Energy Partners, L.P. ................... 11,337,500
147,836 Inergy Holdings, L.P. ......................... 5,876,481
138,864 Inergy, L.P. .................................. 3,903,467
277,871 Kinder Morgan Energy Partners, L.P. ........... 16,163,756
78,627 Linn Energy, LLC .............................. 1,782,474
223,239 Magellan Midstream Holdings, L.P. ............. 5,469,356
437,756 Magellan Midstream Partners, L.P. ............. 16,958,667
120,719 MarkWest Energy Partners, L.P. ................ 4,353,127
178,788 Natural Resource Partners, L.P. ............... 7,035,308
185,126 NuStar Energy, L.P. ........................... 9,071,174
40,000 NuStar GP Holdings, LLC ....................... 994,400
97,630 ONEOK Partners, L.P. .......................... 5,988,624
55,000 Penn Virginia Resource Partners, L.P. ......... 1,495,450
299,516 Plains All American Pipeline, L.P. ............ 14,634,352
56,500 Quest Energy Partners, L.P. ................... 946,375
15,000 Sunoco Logistics Partners, L.P. ............... 783,750
90,083 Targa Resources Partners, L.P. ................ 2,389,902
141,200 Williams Partners, L.P. ....................... 5,039,428
125,000 Williams Pipeline Partners, L.P. .............. 2,300,000
--------------
TOTAL MASTER LIMITED PARTNERSHIPS . ........... 218,791,014
--------------
(Cost $147,143,732)
CANADIAN INCOME TRUSTS - 6.0%
OIL, GAS & CONSUMABLE FUELS - 2.4%
50,000 AltaGas Income Trust .......................... 1,328,502
81,800 Keyera Facilities Income Fund ................. 1,835,890
40,000 Pembina Pipeline Income Fund .................. 715,378
--------------
3,879,770
--------------
See Notes to Financial Statements.
Page 6
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (A) -(CONTINUED)
MAY 31, 2008 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------------- --------------------------------------------------------------- --------------
CANADIAN INCOME TRUSTS - (CONTINUED)
ENERGY EQUIPMENT & SERVICES - 1.8%
105,000 Mullen Group Income Fund ........................................... $ 2,388,285
41,600 Phoenix Technology Income Fund ..................................... 621,739
--------------
3,010,024
--------------
COMMERCIAL SERVICES & SUPPLIES - 1.8%
146,900 Newalta Income Fund ................................................ 2,995,364
--------------
TOTAL CANADIAN INCOME TRUSTS ....................................... 9,885,158
--------------
(Cost $8,208,461)
COMMON STOCKS - 27.9%
OIL, GAS & CONSUMABLE FUELS - 19.6%
190,000 El Paso Corp. (f) .................................................. 3,714,500
124,488 Enbridge Energy Management, LLC (e) ................................ 6,629,006
112,400 Enbridge, Inc. (f) ................................................. 5,015,288
42,081 Kinder Morgan Management, LLC (e) .................................. 2,320,775
313,800 Spectra Energy Corp. (f) ........................................... 8,478,876
155,300 Williams Companies, Inc. (f) ....................................... 5,907,612
--------------
32,066,057
--------------
GAS UTILITIES - 7.9%
178,000 ONEOK, Inc. (f) ..................................................... 8,910,680
150,000 UGI Corp. (f) ...................................................... 4,047,000
--------------
12,957,680
--------------
CAPITAL MARKETS - 0.4%
36,100 NGP Capital Resources Co. .......................................... 596,733
--------------
TOTAL COMMON STOCKS ................................................ 45,620,470
--------------
(Cost $39,891,719)
RIGHTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
17 Clearwater Natural Resources, L.P. - Rights (b) (c) (d) ............ 0
--------------
TOTAL RIGHTS ....................................................... 0
--------------
(Cost $0)
WARRANTS - 0.1%
OIL, GAS & CONSUMABLE FUELS - 0.1%
48,956 Abraxas Petroleum Corp. - Warrants, Expiration 05/25/12 (b) (d) .... 126,835
--------------
TOTAL WARRANTS ..................................................... 126,835
--------------
(Cost $0)
See Notes to Financial Statements.
Page 7
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (A) -(CONTINUED)
MAY 31, 2008 (UNAUDITED)
DESCRIPTION VALUE
-------------------------------------------------------------- --------------
TOTAL INVESTMENTS - 167.6% ................................... $ 274,423,477
(Cost $195,243,912) (g)
CALL OPTIONS WRITTEN - (1.7)% ................................ (2,783,190)
(Premiums received $1,736,329)
NET OTHER ASSETS AND LIABILITIES - (21.8)%. .................. (35,675,526)
LOAN OUTSTANDING - (28.9)% ................................... (47,250,000)
SERIES B ENERGY NOTES PAYABLE - (15.2)%. ..................... (25,000,000)
--------------
NET ASSETS - 100.0% .......................................... $ 163,714,761
==============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Security is fair valued in accordance with procedures adopted by the
Fund's Board of Trustees.
(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 in the Notes to Financial
Statements).
(d) Non-income producing security.
(e) Non-income producing security which pays regular in-kind distributions.
(f) Call options were written on either this entire or partial Common Stock
position; all Common Stocks are pledged as collateral.
(g) Aggregate cost for federal income tax purposes is $180,697,280.
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------- ---------------------------------------------- ----------
CALL OPTIONS WRITTEN - (1.7%)
El Paso Corp. Calls
300 @ 18 due Jul 08 .................................. $ (58,500)
800 @ 18 due Oct 08 .................................. (200,000)
800 @ 17.50 due Jan 09 ............................... (264,000)
----------
(522,500)
----------
Enbridge, Inc. Calls
380 @ 40 due Jul 08 .................................. (188,100)
230 @ 45 due Jul 08 .................................. (31,050)
514 @ 45 due Oct 08 .................................. (129,785)
----------
(348,935)
----------
ONEOK, Inc. Calls
600 @ 45 due Jul 08 .................................. (321,000)
300 @ 50 due Jul 08 .................................. (50,250)
880 @ 50 due Oct 08 .................................. (255,200)
----------
(626,450)
----------
Spectra Energy Corp. Calls
1,872 @ 25 due Jun 08 .................................. (355,680)
225 @ 30 due Jun 08 .................................. (2,250)
540 @ 25 due Sep 08 .................................. (141,750)
500 @ 25 due Jan 09 .................................. (160,000)
----------
(659,680)
----------
See Notes to Financial Statements.
Page 8
ENERGY INCOME AND GROWTH FUND
PORTFOLIO OF INVESTMENTS (A) -(CONTINUED)
MAY 31, 2008 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
---------- ------------------------------------------------ -----------
CALL OPTIONS WRITTEN - (CONTINUED)
UGI Corp. Calls
450 @ 25 due Jul 08 .................................. $ (87,750)
300 @ 25 due Oct 08 .................................. (71,250)
750 @ 30 due Jan 09 .................................. (61,875)
-----------
(220,875)
-----------
Williams Companies, Inc. Calls
1,150 @ 37.50 due Aug 08 ............................... (304,750)
400 @ 40 due Nov 08 .................................. (100,000)
-----------
(404,750)
-----------
TOTAL CALL OPTIONS WRITTEN .................. $(2,783,190)
===========
(Premiums received $1,736,329)
See Notes to Financial Statements.
Page 9
ENERGY INCOME AND GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2008 (UNAUDITED)
ASSETS
Investments, at value
(Cost $195,243,912) ............................................................. $ 274,423,477
Cash ............................................................................... 1,978,170
Interest rate cap (Cost $212,292) .................................................. 65,095
Prepaid expenses ................................................................... 337,558
Receivables:
Income taxes .................................................................... 18,300
Dividends ....................................................................... 168,062
----------------
Total Assets .................................................................. 276,990,662
----------------
LIABILITIES:
Deferred income tax liability ...................................................... 32,906,205
Series B Energy Notes payable ...................................................... 25,000,000
Outstanding loan ................................................................... 47,250,000
Options written, at value (Premiums received $1,736,329) ........................... 2,783,190
Payables:
Income taxes .................................................................... 2,825,704
Investment securities purchased ................................................. 1,720,506
Interest and fees due on loan and Energy Notes .................................. 392,810
Investment advisory fees ........................................................ 202,035
Audit and tax fees .............................................................. 127,475
Administration fees ............................................................. 19,519
Legal fees ...................................................................... 9,863
Custodian fees .................................................................. 4,321
Printing fees ................................................................... 3,933
Transfer agent fees ............................................................. 2,907
Trustees' fees and expenses ..................................................... 1,634
Accrued expenses and other liabilities ............................................. 25,799
----------------
Total Liabilities ............................................................. 113,275,901
----------------
NET ASSETS ......................................................................... $ 163,714,761
================
NET ASSETS CONSIST OF:
Paid-in capital .................................................................... $ 109,059,295
Par value 64,470
Accumulated net investment loss, net of income taxes ............................... (9,187,869)
Accumulated net realized gain on investments and written options, net of income
taxes .............................................................................. 12,628,666
Net unrealized appreciation of investments, written options and interest rate
cap, net of income taxes ........................................................... 51,150,199
----------------
Total Net Assets .............................................................. $ 163,714,761
================
NET ASSET VALUE, PER COMMON SHARE (PAR VALUE $0.01 per Common Share) ............... $ 25.39
================
Number of Common Shares outstanding (unlimited number of Common Shares has been
authorized) ........................................................................ 6,446,995
================
See Notes to Financial Statements.
Page 10
ENERGY INCOME AND GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2008 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $68,474) ............... $ 839,998
Interest ............................................................ 6,588
------------
Total investment income ........................................ 846,586
------------
EXPENSES:
Interest expense .................................................... 2,130,509
Investment advisory fees ............................................ 1,178,374
Administration fees ................................................. 116,398
Legal fees .......................................................... 108,635
Auction fees ........................................................ 74,979
Energy Notes offering costs ......................................... 436,140
Audit and tax fees .................................................. 62,978
Custodian fees ...................................................... 23,508
Trustees' fees and expenses ......................................... 20,496
Printing fees ....................................................... 19,905
Transfer agent fees ................................................. 18,957
Other ............................................................... 164,334
------------
Total expenses ................................................. 4,355,213
------------
NET INVESTMENT INCOME (LOSS) BEFORE TAXES ........................... (3,508,627)
------------
Current federal income tax expense ............................. (6,907,613)
Current income tax expense - other ............................. (40,277)
Deferred federal income tax benefit ............................ 8,853,214
Deferred income tax expense - other ............................ (4,479)
------------
Total income tax benefit (expense) ............................. 1,900,845
------------
NET INVESTMENT LOSS ................................................. (1,607,782)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) before taxes on:
Investments ...................................................... 27,260,227
Written options .................................................. 36,465
Foreign currency ................................................. (10,453)
------------
Net realized gain (loss) before taxes ............................... 27,286,239
Deferred federal income tax expense ............................ (10,385,110)
------------
Net realized gain (loss) ............................................ 16,901,129
------------
Net change in unrealized appreciation (depreciation) before taxes on:
Investments .................................................... (28,421,221)
Written options ................................................ (1,046,861)
Foreign currency ............................................... (8,596)
Interest rate cap .............................................. 43,827
------------
Net change in unrealized appreciation (depreciation) before taxes ... (29,432,851)
------------
Deferred federal income tax benefit ............................ 10,316,838
Deferred income tax benefit - other ............................ 145,151
------------
Total income tax benefit ....................................... 10,461,989
------------
Net change in unrealized appreciation (depreciation) ................ (18,970,862)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ............................. (2,069,733)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..... $ (3,677,515)
============
See Notes to Financial Statements.
Page 11
ENERGY INCOME AND GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
5/31/2008 ENDED
(UNAUDITED) 11/30/2007
------------- -------------
OPERATIONS:
Net investment income (loss) .................................... $ (1,607,782) $ (4,351,425)
Net realized gain (loss) ........................................ 16,901,129 12,549,338
Net change in unrealized appreciation (depreciation) ............ (18,970,862) 7,204,535
------------- -------------
Net increase (decrease) in net assets resulting from
operations ...................................................... (3,677,515) 15,402,448
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain on investments ................................ (5,028,657) (9,831,668)
------------- -------------
Total distributions to shareholders ............................. (5,028,657) (9,831,668)
------------- -------------
Net increase (decrease) in net assets ........................... (8,706,172) 5,570,780
NET ASSETS:
Beginning of period ............................................. 172,420,933 166,850,153
------------- -------------
End of period ................................................... $ 163,714,761 $ 172,420,933
============= =============
Accumulated net investment income (loss), net of income taxes ... $ (9,187,869) $ (7,580,087)
============= =============
See Notes to Financial Statements.
Page 12
ENERGY INCOME AND GROWTH FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2008 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations, after income tax
expense ...................................................................... $ (3,677,515)
Adjustments to reconcile net decrease in net assets resulting from operations,
after income tax expense, to net cash provided for operating activities:
Purchases of investments ................................................ (77,494,920)
Sales of investments .................................................... 81,859,404
Proceeds from options written ........................................... 2,221,618
Cost to close written options ........................................... (355,342)
Return of capital received from investments in MLPs ..................... 7,455,805
Net realized gain on investments and options ............................ (27,296,692)
Net change in unrealized (appreciation) depreciation on investments and
options ................................................................. 29,468,082
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest rate cap (a) ....................................... 11,514
Decrease in income tax receivable ....................................... 94,905
Increase in dividends receivable ........................................ (79,680)
Decrease in prepaid expenses ............................................ 409,882
Decrease in receivable for investment securities sold ................... 6,453,915
Decrease in payable for investment securities purchased ................. (7,041,972)
Increase in interest and fees due on loan and Energy Notes .............. 243,162
Increase in income tax payable .......................................... 2,766,754
Decrease in investment advisory fees payable ............................ (1,216)
Increase in audit and tax fees payable .................................. 12,477
Decrease in legal fees payable .......................................... (5,028)
Decrease in printing fees payable ....................................... (22,910)
Increase in administrative fees payable ................................. 2,131
Decrease in transfer agent fees payable ................................. (180)
Increase in custodian fees payable ...................................... 1,107
Decrease in Trustees' fees and expenses payable ......................... (8,896)
Increase in accrued expenses and other liabilities ...................... 25,267
Decrease in deferred income tax liability ............................... (8,930,839)
------------
CASH PROVIDED BY OPERATING ACTIVITIES ........................................ $ 6,110,833
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Distributions paid ...................................................... (5,028,657)
Issuances of loan ....................................................... 32,000,000
Repayment of Energy Notes Series A ...................................... (34,000,000)
------------
CASH FLOWS FROM FINANCING ACTIVITIES ......................................... (7,028,657)
------------
Decrease in cash ............................................................. (917,824)
Cash at beginning of period .................................................. 2,895,994
------------
Cash at end of period ........................................................ $ 1,978,170
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ..................................... $ 1,887,347
============
----------
(a) Includes net changes in unrealized appreciation (depreciation) on interest
rate cap of $43,827.
See Notes to Financial Statements.
Page 13
ENERGY INCOME AND GROWTH FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR PERIOD
5/31/2008 ENDED ENDED ENDED ENDED
(UNAUDITED) 11/30/2007 (a) 11/30/2006 11/30/2005 11/30/2004 (b)
-------------- --------------- -------------- -------------- -------------
Net asset value, beginning of period ......... $ 26.74 $ 25.88 $ 22.53 $ 21.34 $ 9.10 (c)
------------ ------------ ------------ ------------ -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss .......................... (0.25) (0.67) (0.50) (0.34) (0.13)
Net realized and unrealized gain (loss) ...... (0.32) 3.06 5.23 2.86 2.74
------------ ------------ ------------ ------------ -----------
Total from investment operations
after income tax ........................... (0.57) 2.39 4.73 2.52 2.61
------------ ------------ ------------ ------------ -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain ............................ (0.78) (1.53) -- (0.88) --
Return of capital ............................ -- -- (1.38) (0.45) (0.33)
------------ ------------ ------------ ------------ -----------
Total from distributions ..................... (0.78) (1.53) (1.38) (1.33) (0.33)
------------ ------------ ------------ ------------ -----------
Common Share offering costs charged to
paid-in capital ............................ -- -- -- -- (0.04)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period ............... $ 25.39 $ 26.74 $ 25.88 $ 22.53 $ 21.34
============ ============ ============ ============ ===========
Market value, end of period .................. $ 23.86 $ 23.82 $ 24.49 $ 20.92 $ 22.12
============ ============ ============ ============ ===========
TOTAL RETURN BASED ON NET ASSET
VALUE (d) (E) ................................ (2.00)% 9.38% 22.23% 11.96%(g) 13.53%
============ ============ ============ ============ ===========
TOTAL RETURN BASED ON MARKET VALUE (E) (F) ... 3.39% 2.96% 24.57% 0.29% 12.38%
============ ============ ============ ============ ===========
Net assets, end of period (in 000's).......... $ 163,715 $ 172,421 $ 166,850 $ 145,230 $ 136,993
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes
before waiver (h) ....................... 2.92%(i) 8.52% 14.47% 8.62% 18.38%(i)
Including current and deferred income taxes
after waiver (h) ........................ 2.92%(i) 8.52% 14.29% 8.31% 18.09%(i)
Excluding current and deferred income taxes
before waiver ........................... 5.36%(i) 3.94% 3.63% 2.64% 2.20%(i)
Excluding current and deferred income taxes
after waiver ............................ 5.36%(i) 3.94% 3.45% 2.33% 1.91%(i)
Excluding current and deferred income taxes
and interest expense after waiver ...... 2.74%(i) 1.89% 1.76% 1.57% 1.36%(i)
RATIOS OF NET INVESTMENT LOSS TO AVERAGE NET
ASSETS:
Net investment loss ratio before
tax expenses ............................ (4.32)%(i) (3.83)% (3.26)% (2.29)% (1.49)%(i)
Net investment loss ratio including
tax expenses (j) ........................ (1.88)%(i) (8.41)% (14.10)% (8.27)% (17.67)%(i)
Portfolio turnover rate ................... 28% 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) .................... $ 25,016 $ 25,004 $ 25,069 $ 25,074 N/A
Asset coverage per Energy Note (l) ........... $ 188,715 $ 98,060 $ 95,699 $ 131,786 N/A
Total loan outstanding (in 000's)............. $ 47,250 $ 15,250 N/A N/A $ 30,000
Asset coverage per $1,000 senior
indebtedness (m) ........................ $ 4,465 $ 12,306 N/A N/A $ 5,566
----------
(a) On Sepember 14, 2007, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Energy Income Partners, LLC.
(c) Net of sales load of $0.90 per Common Share on initial offering.
(d) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in net
asset value per share and does not reflect sales load.
(e) Total return is not annualized for periods less than one year.
(f) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in
Common Share price.
(g) In 2005, the Fund received reimbursements from the investment advisor and
former sub-advisor. This reimbursement had no effect on the Fund's total
return.
(h) Includes current and deferred income taxes associated with each component
of the Statement of Operations.
(i) Annualized.
(j) Includes tax expenses associated with each component of the Statement of
Operations.
(k) Includes accumulated and unpaid interest.
(l) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the Energy Notes) and dividing by the
outstanding Energy Notes in 000's.
(m) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
outstanding in 000's.
N/A Not applicable.
See Notes to Financial Statements.
Page 14
NOTES TO FINANCIAL STATEMENTS
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
1. FUND DESCRIPTION
Energy Income and Growth Fund (the "Fund") is a non-diversified, closed-end
management investment company organized as a Massachusetts business trust on
March 25, 2004, and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act").
The Fund trades under the ticker symbol FEN on the 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 will focus
on investing in publicly-traded master limited partnerships ("MLPs") and related
public entities in the energy sector, which Energy Income Partners, LLC (the
"Sub-Advisor") believes offer opportunities for income and growth. Due to the
tax treatment of cash distributions made by MLPs to their investors, a portion
of the distributions received may be tax deferred, thereby maximizing cash
available for distribution by the Fund to its shareholders. There can be no
assurance that the Fund's investment objective will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Fund's Common Shares is determined as of the
close of regular trading on the New York Stock Exchange ("NYSE"), normally 4:00
p.m. Eastern time, no less frequently than weekly on Friday of each week.
Beginning Friday, August 1, 2008, the NAV of the Fund's Common Share will be
determined daily rather than weekly. The NAV per Common Share is calculated by
dividing the value of all assets of the Fund (including accrued dividends and
interest), less all liabilities (including accrued expenses, dividends declared
but unpaid and deferred income taxes and any borrowings of the Fund) by the
total number of shares outstanding. The Fund will rely to some extent on
information provided by the MLPs, which is not necessarily timely, to estimate
taxable income allocable to the MLP units held in the Fund's portfolio and to
estimate the associated deferred tax liability. From time to time, the Fund will
modify its estimates and/or assumptions regarding its deferred tax liability as
new information becomes available. To the extent the Fund modifies its estimates
and/or assumptions, the NAV of the Fund will likely fluctuate.
The Fund's investments are valued at market value or, in the absence of market
value with respect to any portfolio securities, at fair value according to
procedures adopted by the Fund's Board of Trustees. Portfolio securities listed
on any exchange other than the NASDAQ National Market ("NASDAQ") are valued at
the last sale price on the business day as of which such value is being
determined. If there has been no sale on such day, the securities are valued at
the mean of the most recent bid and asked prices on such day. Securities traded
on the NASDAQ are valued at the NASDAQ Official Closing Price as determined by
NASDAQ. Portfolio securities traded on more than one securities exchange are
valued at the last sale price on the business day as of which such value is
being determined at the close of the exchange representing the principal market
for such securities. Portfolio securities traded in the over-the-counter market,
but excluding securities traded on the NASDAQ, are valued at the closing bid
prices. Fixed-income securities with a remaining maturity of 60 days or more
will be valued by the Fund using a pricing service. Short-term investments that
mature in less than 60 days when purchased are valued at amortized cost.
In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements ("FAS 157")
effective for fiscal years beginning after November 15, 2007. This standard
clarifies the definition of fair value for financial reporting, establishes a
framework for measuring fair value and requires additional disclosures about the
use of fair value measurements. FAS 157 became effective for the Fund as of
December 1, 2007, the beginning of its current fiscal year. The three levels of
the fair value hierarchy under FAS 157 are described below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted
prices for similar securities, interest rates, prepayment
speeds, credit risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's net assets as of May 31, 2008 is as
follows:
VALUATION INPUTS INVESTMENTS IN SECURITIES
---------------- -------------------------
Level 1 - Quoted Prices- Investments ............. $ 270,107,403
Level 1 - Written Options ........................ (2,783,190)
Level 2 - Other Significant Observable Inputs .... 126,835
Level 3 - Significant Unobservable Inputs ........ 4,189,239
-------------
TOTAL ............................................ $ 271,640,287
=============
Following is a reconciliation of Level 3 investments for which significant
unobservable inputs were used to determine fair value:
INVESTMENTS IN SECURITIES
-------------------------
BALANCE AS OF 11/30/07 ............ $ 6,516,594
Change in unrealized
appreciation (depreciation) ....... (2,327,355)
-----------
BALANCE AS OF 5/31/08 ............. $ 4,189,239
===========
B. OPTION CONTRACTS:
COVERED OPTIONS. The Fund may write (sell) covered call or put options
("options") on all or a portion of the common stock of energy companies held in
the Fund's portfolio as determined to be appropriate by the Sub-Advisor. The
number of options the Fund can write (sell) is limited by the amount of common
stock of energy companies the Fund holds in its portfolio. The Fund will not
write (sell) "naked" or uncovered options. By writing (selling) options, the
Fund seeks to generate additional income, in the form of premiums received for
writing (selling) the options, and provide a partial hedge against a market
decline in the underlying equity security. Options are marked-to-market daily
and their value will be affected by changes in the value and dividend rates of
the underlying equity securities, changes in interest rates, changes in the
actual or perceived volatility of the securities markets and the underlying
equity securities and the remaining time to the options' expiration. The value
of options may also be adversely affected if the market for the options becomes
less liquid or smaller.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss. If the price
of the underlying equity security is less than the option's strike price, the
option will likely expire without being exercised. The option premium received
by the Fund will, in this case, be treated as short-term capital gain on the
expiration date of the option. The Fund may also elect to close out its position
in an option prior to its expiration by purchasing an option of the same series
as the option written (sold) by the Fund.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is
recognized and recorded on the accrual basis, including amortization of premiums
and accretion of discounts.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital from the MLP to the extent of the cost basis of
such MLP investments. Cumulative distributions received in excess of the Fund's
cost basis in an MLP generally are recorded as dividend income.
D. RESTRICTED SECURITIES:
The Fund may invest up to 35% of its Managed Assets, which is the gross asset
value of the Fund minus accrued liabilities (excluding the principal amount of
any borrowings), in restricted securities. Restricted securities are securities
that cannot be offered for public sale without first being registered under the
Securities Act of 1933, as amended. Prior to registration, restricted securities
may only be resold in transactions exempt from registration. The Fund holds the
restricted securities at May 31, 2008 shown in the following table. The Fund
does not have the right to demand that such securities be registered. Restricted
securities are valued at fair value in accordance with procedures adopted by the
Fund's Board of Trustees and in accordance with provisions of the 1940 act.
ACQUISITION VALUE PER CARRYING % OF
SECURITY DATE SHARES SHARE COST VALUE NET ASSETS
-------- ------------ ---------- -------------- ----------- ----------- ----------
Clearwater Natural Resources, L.P. 08/01/05 465,471 $ 9.00 $ 8,601,560 $ 4,189,239 2.56%
Clearwater Natural Resources, L.P.
Rights 08/01/05 17 0.00 0 0 0.00
---------- ----------- ----------- ----------
465,488 $ 8,601,560 $ 4,189,239 2.56%
========== =========== =========== ==========
E. DISTRIBUTIONS TO SHAREHOLDERS:
The Fund intends to make quarterly distributions to Common Shareholders. On
December 11, 2006, the Board of Trustees approved a managed distribution policy
to better align the Fund with its after-tax total return investment objective.
The Fund's distributions generally will consist of cash and paid-in-kind
distributions from MLPs or their affiliates, dividends from common stocks,
interest from debt instruments and income from other investments held by the
Fund less operating expenses, including taxes. Distributions to Common
Shareholders are recorded on the ex-date and are determined based on U.S.
generally accepted accounting principles, which may differ from their ultimate
characterization for federal income tax purposes.
Distributions made from current and accumulated earnings and profits of the Fund
will be taxable to shareholders as dividend income. Distributions that are in an
amount greater than the Fund's current and accumulated earnings and profits will
represent a tax-deferred return of capital to the extent of a shareholder's
basis in the Common Shares, and such distributions will correspondingly increase
the realized gain upon the sale of the Common Shares. Additionally,
distributions not paid from current and accumulated earnings and profits that
exceed a shareholder's tax basis in the Common Shares will be taxed as a capital
gain.
Distributions of $5,028,657 paid during the six months ended May 31, 2008, are
anticipated to be characterized as a taxable dividend for federal income tax
purposes. However, the ultimate determination of the character of the
distributions will be made after the 2008 calendar year. Distributions will
automatically be reinvested in additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
F. INCOME TAXES:
The Fund is treated as a regular C corporation for U.S. federal income tax
purposes and as such will be obligated to pay federal and applicable state and
foreign corporate taxes on its taxable income. The Fund's tax expense or benefit
is included in the Statement of Operations based on the component of income or
gains (losses) to which such expense or benefit relates. The current U.S.
federal maximum graduated income tax rate for corporations is 35%. In addition,
the U.S. imposes a 20% alternative minimum tax on the recalculated alternative
minimum taxable income of an entity treated as a corporation. This differs from
most investment companies, which elect to be treated as "regulated investment
companies" under the U.S. Internal Revenue Code of 1986, as amended. The various
investments of the Fund may cause the Fund to be subject to state income taxes
on a portion of its income at various rates.
The tax deferral benefit the Fund derives from its investment in MLPs results
largely because the MLPs are treated as partnerships for federal income tax
purposes. As a partnership, an MLP has no income tax liability at the entity
level. As a limited partner in the MLPs in which it invests, the Fund will be
allocated its pro rata share of income, gains, losses, deductions and credits
from the MLPs, regardless of whether or not any cash is distributed from the
MLPs.
To the extent that the distributions received from the MLPs exceed the net
taxable income realized by the Fund from its investment, a tax liability
results. This tax liability is a deferred liability to the extent that MLP
distributions received have not exceeded the Fund's adjusted tax basis in the
respective MLPs. To the extent that distributions from an MLP exceed the Fund's
adjusted tax basis, the Fund will recognize a taxable capital gain.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
For the six months ended May 31, 2008, distributions of $7,455,805 received from
MLPs have been reclassified as a return of capital. The cost basis of applicable
MLPs has been reduced accordingly.
The Fund's provision for income taxes is calculated in accordance with SFAS No.
109 Accounting for Income Taxes and consists of the following:
Current federal income tax expense...... $ 6,907,613
Current other tax expense .............. 40,277
Deferred federal income tax benefit..... (8,784,942)
Deferred other income tax benefit ...... (140,672)
-----------
Total income tax benefit ............... $(1,977,724)
===========
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, 2007, the Fund
had a net operating loss for federal and state income tax purposes of $2,209,998
and $4,119,398, respectively. The Fund's 2007 income tax provision includes a
full valuation allowance against the deferred tax assets associated with this
state net operating loss. Components of the Fund's deferred tax assets and
liabilities as of May 31, 2008 are as follows:
DEFERRED TAX ASSETS:
Federal net operating loss .................. $ --
State net operating loss .................... 336,413
State income taxes .......................... 82,257
Other ....................................... 53,662
------------
Total deferred tax assets ................... 472,332
Less: valuation allowance ................... (336,413)
------------
Net deferred tax assets ..................... $ 135,919
============
DEFERRED TAX LIABILITIES:
Unrealized gains on investment securities.... $ 33,042,124
------------
Total deferred tax liabilities .............. 33,042,124
------------
Total net deferred tax liabilities .......... $ 32,906,205
============
Total income taxes differ from the amount computed by applying the federal
statutory income tax rate of 35% to net investment income and realized and
unrealized gains on investments.
Application of statutory income tax rate..... $ (1,979,334)
State income taxes, net ..................... (9,127)
Change in valuation allowance ............... 96,874
Other ....................................... (86,137)
------------
Total ....................................... $ (1,977,724)
============
In June 2006, the Financial Accounting Standards Board ("FASB") Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement 109 ("FIN 48"), was issued and is effective for fiscal years beginning
after December 15, 2006. This interpretation prescribes a minimum threshold for
financial statement recognition of the benefit of a tax position taken or
expected to be taken in a tax return. As of May 31, 2008, management has
evaluated the application of FIN 48 to the Fund, and has determined that there
is no material impact resulting from the adoption of this Interpretation on the
Fund's financial statements.
G. EXPENSES:
The Fund will pay all expenses directly related to its operations.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
H. INTEREST RATE CAP:
The Fund has entered into an interest rate cap transaction with Lehman Brothers
Special Financing Inc. for the purpose of limiting the impact that higher
short-term interest rates would have on the leverage costs of the Fund. The
transaction has a notional amount of $34,000,000 and a cap rate of 5.00% per
annum based upon one-month LIBOR, which resets monthly. The termination date is
May 3, 2010. The interest rate cap is marked to market with the change in value
reflected in "Net change in unrealized appreciation (depreciation) on interest
rate cap" on the Statement of Operations. The initial cost of the transaction,
$552,500, was capitalized and is being amortized to expense on a straight line
basis over the term of the transaction.
I. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161
("SFAS 161"), Disclosures about Derivative Instruments and Hedging Activities.
SFAS 161 is effective for fiscal years and interim periods beginning after
November 15, 2008. SFAS 161 requires enhanced disclosures about funds'
derivative and hedging activities. Management is currently evaluating the impact
the adoption of SFAS 161 will have on the Funds' financial statement
disclosures, if any.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets.
Energy Income Partners, LLC serves as the Fund's Sub-Advisor and manages the
Fund's portfolio subject to First Trust's supervision. The Sub-Advisor receives
an annual portfolio management fee of 0.50% of Managed Assets that is paid
monthly by First Trust.
PNC Global Investment Servicing (U.S.) Inc., formerly known as PFPC Inc., serves
as the Fund's Administrator and Transfer Agent in accordance with certain fee
arrangements. PFPC Trust Company, 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 subsequent trust added to the
First Trust Fund Complex. The annual retainer is allocated equally among each of
the trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually and the
Chairman of the Audit Committee is paid $5,000 annually, with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
Effective January 1, 2008, each of the chairmen of the Nominating and Governance
Committee and the Valuation Committee 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. Also effective January 1, 2008, the Lead
Independent Trustee and each committee chairman will serve two-year terms.
4. PURCHASES AND SALES OF SECURITIES AND OPTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the six months ended May 31, 2008, were $77,494,920
and $81,859,404, respectively.
As of May 31, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $100,640,638
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $6,914,441.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
--------------- ----------- -----------
Options outstanding at November 30, 2007 -- $ --
Options written 13,399 2,221,618
Options expired (345) (16,905)
Options exercised (429) (93,482)
Options closed (1,634) (374,902)
----------- -----------
Options outstanding at May 31, 2008 10,991 $ 1,736,329
=========== ===========
5. COMMON SHARES
As of May 31, 2008, 6,446,995 of $0.01 par value Common Shares were issued and
outstanding. An unlimited number of Common Shares has been authorized for the
Fund's Dividend Reinvestment Plan.
6. ENERGY NOTES
The Fund's Declaration of Trust authorizes the issuance of notes as determined
by the Board of Trustees without the approval of Common Shareholders. As of May
31, 2008, the Fund has 1,000 Series B Energy Notes outstanding at a principal
value of $25,000 per note. The principal amount of the Series B Energy Notes
will be due and payable on March 30, 2046. The Series B Energy Notes offering
costs of $99,326 and commissions of $250,000 were capitalized and are being
amortized to expense on a straight line basis over the term of these notes.
An auction of the Series B Energy Notes is generally held every 7 days. The
Series B Energy Notes will pay interest at annual rates that may vary for each
auction rate period. Existing note holders may submit an order to buy, sell or
hold such notes on each auction date.
The markets for auction rate securities have continued to experience a number of
failed auctions, including auctions relating to the Series B Notes. A failed
auction results when there are not enough bidders in the auction at rates below
the maximum rate as prescribed by the terms of the security. When an auction
fails, the rate is automatically set at the maximum rate. A failed auction does
not cause an acceleration of, or otherwise have any impact on, outstanding
principal amounts due. In the case of the Fund's outstanding Series B Notes, the
maximum rate under the terms of those securities has been two hundred percent
(and could be up to three hundred percent, depending on the ratings of the
Series B Notes) of the greater of: (1) the applicable AA composite commercial
paper rate (for a rate period of fewer than 184 days) or the applicable U.S.
Treasury index rate (for a rate period of 184 days or more), or (2) the
applicable London-InterBank Offered Rate.
The Series B Energy Notes annual interest rate in effect as of May 31, 2008 was
4.92%. The interest rate, as set by the auction process, is generally expected
to vary with short-term interest rates. The high and low annual interest rates
during the six months ended May 31, 2008 were 6.27% and 4.00%, respectively, and
the average interest rate was 5.35%.
The Series A Energy Notes were redeemed in full on April 18, 2008 in the
principal amount of $34,000,000. The redemption of Series A Energy Notes was
financed through a credit agreement with The Bank of Nova Scotia (see Note 8
below). At the time of the refinancing, the Fund had unamortized offering costs
of $123,205 and commissions of $312,935, respectively. Because the Series A
Energy Notes were redeemed prior to the maturity date of March 2, 2045, the
combined amount of $436,140 was expensed on April 18, 2008. This is shown on the
Statement of Operations under "Energy Notes Offering Costs."
The Advisor is seeking methods for refinancing the outstanding Series B Energy
Notes. The ability to obtain this refinancing is contingent on finding third
parties willing to provide such financing on a cost effective basis. There is no
assurance that the Advisor will be successful in finding such financing and any
such financing arrangements would be subject to approval of the Fund's Board of
Trustees.
7. LINE OF CREDIT WITH CUSTODIAL TRUST COMPANY
The Fund has an uncommitted line of credit with the Custodial Trust Company
pursuant to a loan and pledge agreement, under which the Fund may borrow from
the Custodial Trust Company an aggregate amount of up to the lesser of
$30,000,000 or the maximum amount the Fund is permitted to borrow under the 1940
Act. The loan and pledge agreement has no maturity date and can be paid or
called at any time.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
On March 26, 2008, the line of credit was paid in full in the amount of
$11,250,000, which was the outstanding principal balance. This was funded
through a credit agreement with The Bank of Nova Scotia (see Note 8 below). For
the six months ended May 31, 2008, the average amount outstanding was
$15,215,517 with a weighted average interest rate of 5.03%. As of May 31, 2008,
the Fund had no outstanding borrowings under this loan and pledge agreement. The
high and low annual interest rates during the six months ended May 31, 2008 were
5.87% and 3.61%, respectively.
8. CREDIT AGREEMENT WITH THE BANK OF NOVA SCOTIA
On March 26, 2008, the Fund entered into a credit agreement with The Bank of
Nova Scotia that has a maximum commitment amount of $55,000,000. This credit
agreement is scheduled to terminate on March 26, 2009 and may be renewed
annually.
This credit facility was used to repay the Custodial Trust Company line of
credit in full in the amount of $11,250,000 on March 26, 2008. In addition, The
Bank of Nova Scotia credit facility was used to redeem in full the Series A
Energy Notes in the principal amount of $34,000,000 on April 18, 2008.
For the six months ended May 31, 2008, the average amount outstanding was
$41,906,716 with a weighted average interest rate of 3.50%. As of May 31, 2008,
the Fund had $47,250,000 outstanding borrowings under this credit agreement,
which had an interest rate of 3.42% as of May 31, 2008. The high and low annual
interest rates during the period March 26, 2008 through May 31, 2008 were 6.00%
and 3.42%, respectively.
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
INDUSTRY CONCENTRATION RISK. The Fund intends to invest 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 will be 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, or obtained through the issuance of Energy Notes, constitute a
substantial lien and burden by reason of their prior claim against the income of
the Fund and against the net assets of the Fund in liquidation. The rights of
lenders to receive payments of interest on and repayments of principal on any
borrowings made by the Fund under a leverage borrowing program are senior to the
rights of holders of Common Shares and the holders of Energy Notes, with respect
to the payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or Energy Notes or purchase Common
Shares or Energy Notes.
RESTRICTED SECURITIES RISK. The Fund may invest in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that are unregistered or are held by control persons of the issuer and
securities that are subject to contractual restrictions on their resale. As a
result, restricted securities may be more difficult to value and the Fund may
have difficulty disposing of such assets either in a timely manner or for a
reasonable price. In order to dispose of an unregistered security, the Fund,
where it has contractual rights to do so, may have to cause such security to be
registered. A considerable period may elapse between the time the decision is
made to sell the security and the time the security is registered so that the
Fund could sell it. Contractual restrictions on the resale of securities vary in
length and scope and are generally the result of a negotiation between the
issuer and acquirer of the securities. The Fund would, in either case, bear
market risks during that period.
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
NON-DIVERSIFICATION RISK. Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.
11. SUBSEQUENT EVENT
On July 9, 2008, the Fund declared a quarterly distribution of $0.44 per share,
or $1.76 per share on an annualized basis, to Common Shareholders of record on
July 22, 2008, payable July 31, 2008. This quarterly distribution represents a
$0.045 per share, or 11.39% increase, over the $0.395 per share distribution
paid in the prior quarter and a 14% increase over the $0.385 per share
distribution paid in the same quarter 2007.
Page 22
ADDITIONAL INFORMATION
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above NAV at the time of
valuation, the Fund will issue new shares at a price equal to the
greater of (i) NAV per Common Share on that date or (ii) 95% of the
market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the American
Stock Exchange or elsewhere, for the participants' accounts. It is
possible that the market price for the Common Shares may increase
before the Plan Agent has completed its purchases. Therefore, the
average purchase price per share paid by the Plan Agent may exceed
the market price at the time of valuation, resulting in the purchase
of fewer shares than if the dividend or distribution had been paid
in Common Shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase Common
Shares in the open market within 30 days of the valuation date
except where temporary curtailment or suspension of purchases is
necessary to comply with federal securities laws. Interest will not
be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 23
ADDITIONAL INFORMATION - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
A Special Meeting of Shareholders of the Common Shares of the Fund was held on
January 8, 2008. At the meeting Shareholders approved a new investment
sub-advisory agreement with EIP. EIP had been serving as investment sub-advisor
to the Fund pursuant to an interim sub-advisory agreement among the Fund, First
Trust and EIP since September 14, 2007. The number of votes cast in favor of the
new investment sub-advisory agreement was 2,986,720, the number of votes cast
against the new investment sub-advisory agreement was 182,668, and the number of
abstentions was 134,526.
The Special Meeting was adjourned until February 20, 2008, at which time
Shareholders approved a proposal to authorize the sale of Common Shares at a net
price less than the then-current NAV per Common Share, subject to certain
conditions. The number of Common Share votes cast in favor of the proposal was
3,279,325, the number of Common Share votes cast against the proposal was
487,801, and the number of abstentions was 166,813. The number of accounts that
voted in favor of the proposal was 4,443, the number of accounts that voted
against the proposal was 669, and the number of abstained accounts was 251.
The Joint Annual Meetings of Shareholders of Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High
Income Fund, First Trust Strategic High Income Fund II, First Trust
Tax-Advantaged Preferred Income Fund, First Trust/Aberdeen Emerging Opportunity
Fund, First Trust/Gallatin Specialty Finance and Financial Opportunities Fund
and First Trust Active Dividend Income Fund was held on April 14, 2008. At the
Annual Meeting, Trustee Keith was elected for a three-year term. The number of
votes cast in favor of Robert F. Keith was 5,656,037, the number of votes
against was 98,524 and the number of abstentions was 692,435.
INVESTMENT MANAGEMENT AGREEMENT
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees of Energy Income and Growth Fund (the "Fund"), including
the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Agreement") between the Fund and First
Trust Advisors L.P. (the "Advisor") at a meeting held on March 3, 2008. The
Board determined that the terms of the Agreement are fair and reasonable and
that the Agreement continues to be in the best interests of the Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreement, the
Independent Trustees received a report from the Advisor in advance of the Board
meeting responding to a request for information from counsel to the Independent
Trustees. The report, among other things, outlined the services provided by the
Advisor (including the relevant personnel responsible for these services and
their experience); the advisory fees for the Fund as compared to fees charged by
investment advisors to comparable funds and as compared to fees charged to other
clients of the Advisor; expenses of the Fund as compared to expense ratios of
comparable funds; the nature of expenses incurred in providing services to the
Fund and the potential for economies of scale, if any; financial data on the
Advisor; any fall out benefits to the Advisor; and information on the Advisor's
compliance program. The Independent Trustees also met separately with their
independent legal counsel to discuss the information provided by the Advisor.
The Board applied its business judgment to determine whether the arrangement
between the Fund and the Advisor is a reasonable business arrangement from the
Fund's perspective as well as from the perspective of shareholders.
In reviewing the Agreement, the Board considered the nature, quality and extent
of services provided by the Advisor under the Agreement. The Board considered
that the Advisor is responsible for the overall management and administration of
the Fund, including the oversight of EIP, the Fund's sub-advisor. The Board
considered that shareholders had approved a new sub-advisory agreement with EIP
on January 8, 2008, as recommended by the Board. The Board considered the work
that had been performed by the Advisor in
Page 24
ADDITIONAL INFORMATION - (CONTINUED)
ENERGY INCOME AND GROWTH FUND
MAY 31, 2008 (UNAUDITED)
connection with the transition to EIP. The Board noted the compliance program
that had been developed by the Advisor and considered that the compliance
program includes policies and procedures for monitoring EIP's compliance with
the 1940 Act and the Fund's investment objectives and policies. In light of the
information presented and the considerations made, the Board concluded that the
nature, quality and extent of services provided to the Fund by the Advisor under
the Agreement have been and are expected to remain satisfactory.
The Board considered the advisory fees paid under the Agreement. The Board
reviewed data prepared by Lipper Inc. ("Lipper"), an independent source, showing
the management fees and expense ratios of the Fund as compared to the management
fees and expense ratios of one peer group selected by Lipper and a second peer
group selected by the Advisor. The Board discussed with representatives of the
Advisor the differences between the two peer groups, noting that the Advisor
peer group contained only three peer funds, and also discussed the limitations
in creating a relevant peer group for the Fund, including the difficulties in
comparing funds using different types of leverage. Based on the information
provided, the Board noted that the Fund's management fees were the highest and
the second highest in the Lipper peer group and Advisor peer group,
respectively, and also noted that the Fund's expense ratio was the highest and
the second highest in the Lipper peer group and Advisor peer group,
respectively. The Board also considered the advisory fees paid to the Advisor by
similar funds, and noted that the Advisor does not provide advisory services to
other clients with investment objectives and policies similar to the Fund's.
The Board also considered the Fund's performance for the one-year, two year and
three-year periods ended September 30, 2007, as compared to a performance group
selected by Lipper. The Board considered the difficulty in creating a relevant
performance group for the Fund given its unique strategy and asset mix. The
Board noted that EIP became the sub-advisor for the Fund on September 14, 2007,
and that prior thereto, another sub-advisor managed the Fund's portfolio. The
Board also considered performance data provided by the Advisor for the one-year
and since-inception periods ended December 31, 2007, and considered an analysis
prepared by the Advisor on benefits provided by the Fund's leverage. In
addition, the Board considered the market price and NAV performance of the Fund
since inception, and compared the Fund's premium/discount to the average and
median premium/discount of the Lipper peer group, noting that the Fund's
premium/discount was generally indicative of the asset class and market events.
The Board concluded that the Fund's performance, particularly from EIP's
transition plan, was reasonable.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory fees were
reasonable and appropriate in light of the nature, quality and extent of
services provided by the Advisor under the Agreement.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2007, as
set forth in the materials provided to the Board. The Board noted the inherent
limitations in the profitability analysis, and concluded that the Advisor's
profitability appeared to be not excessive in light of the services provided to
the Fund. In addition, the Board considered and discussed any ancillary benefits
derived by the Advisor from its relationship with the Fund and noted that the
typical fall out benefits to the Advisor such as soft dollars are not present.
The Board concluded that any other fall out benefits received by the Advisor or
its affiliates would appear to be attenuated.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreement continue to be fair and reasonable and that the continuation of the
Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 25
[FIRST TRUST LOGO]
INVESTMENT ADVISOR
First Trust Advisors L.P.
1001 Warrenville Road
Lisle, IL 60532
INVESTMENT SUB-ADVISOR
Energy Income Partners, LLC
49 Riverside Avenue
Westport, CT 06880
ADMINISTRATOR,
FUND ACCOUNTANT,
TRANSFER AGENT &
BOARD ADMINISTRATOR
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There has been no change, as of the date of this filing, in any of
the portfolio managers identified in response to paragraph (a)(1) of
this Item in the registrant's most recently filed annual report on
Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of trustees, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) Energy Income and Growth Fund
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date July 17, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date: July 17, 2008
-------------
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date: July 17, 2008
-------------
* Print the name and title of each signing officer under his or her
signature.