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 811-22738
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First Trust MLP and Energy Income Fund
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(Exact name of registrant as specified in charter)
187 Danbury Road
Wilton, CT 06897
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2014
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
-----------
MLP AND
ENERGY
INCOME
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FUND
(FEI)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2014
FIRST TRUST
Energy Income Partners, LLC
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TABLE OF CONTENTS
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
ANNUAL REPORT
OCTOBER 31, 2014
Shareholder Letter .......................................................... 1
At a Glance ................................................................. 2
Portfolio Commentary ........................................................ 3
Portfolio of Investments .................................................... 5
Statement of Assets and Liabilities ......................................... 11
Statement of Operations ..................................................... 12
Statements of Changes in Net Assets ......................................... 13
Statement of Cash Flows ..................................................... 14
Financial Highlights ........................................................ 15
Notes to Financial Statements ............................................... 16
Report of Independent Registered Public Accounting Firm ..................... 24
Additional Information ...................................................... 25
Board of Trustees and Officers .............................................. 29
Privacy Policy .............................................................. 31
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Energy Income Partners, LLC ("EIP" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust MLP and Energy Income 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 by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of EIP
are just that: informed opinions. They should not be considered to be promises
or advice. The opinions, like the statistics, cover the period through the date
on the cover of this report. The risks of investing in the Fund are spelled out
in the prospectus, the statement of additional information, this report and
other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2014
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust MLP and Energy Income Fund (the "Fund"). This report provides detailed
information about the Fund, including a performance review and the financial
statements for the past 12 months. I encourage you to read this document and
discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period. In fact, the S&P 500(R) Index, as measured on
a total return basis, rose 17.27% during the period. First Trust Advisors L.P.
("First Trust") believes that staying invested in quality products through
different types of markets can benefit investors over the long term.
First Trust offers a variety of products that we believe could fit the financial
plans for many investors seeking long-term investment success. We invite you to
look at our investment products with your financial advisor to determine if any
of them might fit your financial goals. We believe that regularly discussing
your financial objectives and investment options with your financial advisor can
help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
"AT A GLANCE"
AS OF OCTOBER 31, 2014 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FEI
Common Share Price $21.61
Common Share Net Asset Value ("NAV") $23.27
Premium (Discount) to NAV (7.13)%
Net Assets Applicable to Common Shares $1,057,316,668
Current Monthly Distribution per Common Share (1) $0.1117
Current Annualized Distribution per Common Share $1.3404
Current Distribution Rate on Closing Common
Share Price (2) 6.20%
Current Distribution Rate on NAV (2) 5.76%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/13 19.63 20.78
19.49 20.67
18.79 20.51
19.07 20.67
18.53 20.72
11/13 19.17 20.67
18.62 20.25
18.86 20.09
18.92 20.45
12/13 19.47 20.83
19.25 20.62
19.83 20.52
19.53 20.52
19.13 20.64
1/14 19.48 20.94
19.20 20.94
19.40 21.17
19.12 20.99
2/14 19.29 21.06
19.36 21.02
19.57 20.97
19.34 20.92
3/14 19.59 21.17
19.65 21.48
19.83 21.56
20.04 21.84
4/14 20.15 21.80
20.19 22.12
20.27 22.10
20.72 22.26
20.70 22.42
5/14 20.80 22.49
20.93 22.67
20.74 22.49
21.12 22.79
6/14 21.63 23.32
21.19 23.08
21.29 23.01
21.47 23.13
7/14 21.46 23.26
20.61 22.42
20.73 22.47
21.79 23.63
21.67 23.75
8/14 22.15 24.09
21.81 23.98
21.45 23.56
21.21 24.02
9/14 20.89 23.53
20.97 23.27
19.79 22.07
20.90 22.43
21.23 23.12
10/14 21.61 23.27
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PERFORMANCE
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Average Annual Total Return
---------------------------
Inception
1 Year Ended (11/27/2012)
10/31/2014 to 10/31/2014
Fund Performance (3)
NAV 19.43% 17.52%
Market Value 17.52% 10.42%
Index Performance
S&P 500(R) Index 17.27% 23.49%
Alerian MLP Total Return Index 16.87% 20.11%
Wells Fargo Midstream MLP Total Return Index 23.89% 25.73%
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% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Pipelines 70.3%
Electric Power 9.5
Propane 5.5
Coal 4.8
Natural Gas Utility 3.9
Marine Transportation 2.8
Gathering & Processing 2.2
Other 1.0
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Total 100.0%
=======
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Enbridge Energy Partners, L.P. 7.4%
Enterprise Products Partners, L.P. 6.8
Kinder Morgan Management, LLC 6.5
Magellan Midstream Partners, L.P. 4.4
Williams (The) Cos., Inc. 4.4
Alliance Resource Partners, L.P. 3.6
Plains All American Pipeline, L.P. 3.4
Energy Transfer Equity, L.P. 3.3
ONEOK Partners, L.P. 3.1
TransCanada Corp. 3.1
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Total 46.0%
=======
(1) Most recent distribution paid or declared through 10/31/2014. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2014. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
ANNUAL REPORT
OCTOBER 31, 2014
SUB-ADVISOR
ENERGY INCOME PARTNERS, LLC
Energy Income Partners, LLC ("EIP"), Westport, CT, was founded in 2003 to
provide professional asset management services in the area of energy-related
master limited partnerships ("MLPs") and other high-payout securities such as
pipeline companies, power utilities and Canadian income equities. EIP mainly
focuses on investments in energy-related infrastructure assets such as
pipelines, power transmission and distribution, petroleum storage and terminals
that receive fee-based or regulated income from their corporate and individual
customers. As of October 31, 2014, EIP manages or supervises approximately $6.0
billion of assets. Private funds advised by EIP include a partnership for U.S.
high net worth individuals and a master-and-feeder fund for institutions. EIP
also manages separately managed accounts and provides its model portfolio to
unified managed accounts. Finally, EIP serves as a Sub-Advisor to three
closed-end management investment companies in addition to the First Trust MLP
and Energy Income Fund ("FEI" or the "Fund"), an actively managed
exchange-traded fund (ETF), a sleeve of an actively managed exchange-traded fund
and a sleeve of a series of a variable insurance trust. EIP is a registered
investment advisor with the Securities and Exchange Commission.
PORTFOLIO MANAGEMENT TEAM
JAMES J. MURCHIE EVA PAO
PORTFOLIO MANAGER CO-PORTFOLIO MANAGER
FOUNDER AND CEO OF PRINCIPAL OF
ENERGY INCOME PARTNERS, LLC ENERGY INCOME PARTNERS, LLC
COMMENTARY
FIRST TRUST MLP AND ENERGY INCOME FUND
The Fund's investment objective is to seek a high level of total return with an
emphasis on current distributions paid to common shareholders. The Fund pursues
its objective by investing in cash-generating securities, with a focus on
investing in MLPs and MLP-related entities in the energy sector and energy
utilities industries. There can be no assurance that the Fund's investment
objective will be achieved. The Fund may not be appropriate for all investors.
MARKET RECAP
As measured by the Alerian MLP Total Return Index ("AMZX") and the Wells Fargo
Midstream MLP Total Return Index ("WCHWMIDT") (collectively the "MLP
benchmarks"), the total return for energy-related MLPs over the fiscal year
ended October 31, 2014 was 16.87% and 23.89%, respectively. For AMZX, these
returns reflect a positive 5.9% from distribution payments, and the remaining
returns are due to share price appreciation. For WCHWMIDT, these returns reflect
a positive 5.5% from distribution payments, while the remaining returns are due
to share price appreciation. These figures are according to data collected from
several sources, including the MLP benchmarks and Bloomberg. While in the short
term market share price appreciation can be volatile, we believe that over the
long term share price appreciation will approximate growth in per share
quarterly cash distributions paid by MLPs. Growth in per share MLP distributions
has averaged about 7.4% per year over the last 10 years. The cash distributions
of MLPs increased by about 4.5% over the last 12 months (source: Alerian Capital
Management).
PERFORMANCE ANALYSIS
On a net asset value ("NAV") basis, for the fiscal year ended October 31, 2014,
the Fund provided a total return of 19.43%, including the reinvestment of
dividends.(1) This compares, according to collected data, to a total return of
17.27% for the S&P 500(R) Index, 16.87% for AMZX and 23.89% for WCHWMIDT. On a
market value basis, the Fund had a total return, including the reinvestment of
dividends, of 17.52% for the fiscal year ended October 31, 2014. At the end of
the period, the Fund was priced at $21.61, while the NAV was $23.27, a discount
of 7.13%. On October 31, 2013, the Fund was priced at $19.63, while the NAV was
$20.80, a discount of 5.63%.
The Fund increased its regular monthly Common Share distribution from $0.11 to
$.1117 in March 2014.
The Fund's NAV slightly underperformed the 20.38% average of the MLP benchmarks.
Contributing to this was underweight positions in MLPs that significantly
outperformed the MLP benchmarks. The non-MLP portion of the portfolio
contributed positively to performance. Income was enhanced by writing covered
calls on select portfolio positions.
Two important factors affecting the return of the Fund relative to the average
of the MLP benchmarks are its accrual for taxes and its use of financial
leverage through a line of credit. The Fund established a committed facility
agreement with The Bank of Nova Scotia with an initial maximum commitment amount
of $350,000,000. The maximum commitment was raised to $400,000,000 in August
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
ANNUAL REPORT
OCTOBER 31, 2014
2014. The Fund uses leverage because its managers believe that, over time,
leverage can enhance total return for common shareholders. However, the use of
leverage can also increase the volatility of the NAV and therefore the share
price. For example, if the prices of securities held by the Fund decline, the
effect of changes in common share NAV and common shareholder total return loss
is magnified by the use of leverage. Conversely, leverage may enhance common
share returns during periods when the prices of securities held by the Fund
generally are rising. Unlike the Fund, the MLP benchmarks are not leveraged, nor
are their returns net of an accrual for taxes. Leverage had a positive impact on
the performance of the Fund over this reporting period.
MARKET AND FUND OUTLOOK
MLPs continue to play an integral role in the restructuring of more diversified
energy conglomerates. This restructuring includes the creation by these more
diversified conglomerates of MLP subsidiaries that contain assets such as
pipelines and storage terminals. It also includes the divestiture by some of
these parent companies of most or all of their cyclical businesses, leaving the
parent company looking very similar to an old-fashioned pipeline utility with a
large holding in a subsidiary MLP. In our view, these diversified energy
conglomerates are restructuring so their regulated infrastructure assets with
predictable cash flows may be better valued by the market. The result is a
better financing tool, in our opinion, to raise capital for the new energy
infrastructure projects related to the rapid growth of North American oil and
gas production. This phenomenon is beginning to spread to the power utility
industry but instead of spinning out an MLP, diversified power companies are
spinning out a regular "C" corporation with a higher dividend payout ratio
(relative to earnings). By EIP's count, nine such "Yield-Co's" have been created
and EIP expects more will be created.
As of October 31, 2014, the MLP asset class experienced 16 IPOs in 2014. There
also has been a healthy level of secondary financing activity for MLPs as they
continue to fund their ongoing investments in new pipelines, processing and
storage facilities. Through October 31, 2014, there have been 55 secondary
equity offerings for MLPs that raised $16.2 billion. This compares to $20.3
billion raised in calendar year 2013. Through October 31, 2014, MLPs also found
access to the public debt markets, raising $24.7 billion in 25 offerings. This
compares to $19.9 billion in calendar year 2013 (source: Barclays).
The Fund continues to aim to be invested primarily in MLPs and other energy
infrastructure companies with mostly non-cyclical cash flows, investment-grade
ratings, conservative balance sheets, modest and/or flexible organic growth
commitments and liquidity on their revolving lines of credit. Non-cyclical cash
flows are, in our opinion, a good fit with a steady dividend obligation that is
meant to be most or all of an energy infrastructure company's free cash flow.
-----------------------------
1 Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, changes in NAV per share for NAV returns
and changes in Common Share price for market value returns. Total returns
do not reflect a sales load. Past performance is not indicative of future
results.
Page 4
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2014
SHARES/
UNITS DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- --------------
MASTER LIMITED PARTNERSHIPS - 85.0%
GAS UTILITIES - 6.8%
879,374 AmeriGas Partners, L.P. (a) ................................................. $ 40,583,110
690,902 Suburban Propane Partners, L.P. (a) ......................................... 31,125,135
--------------
71,708,245
--------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 0.6%
100,000 Brookfield Renewable Energy Partners, L.P. (CAD) (a) ........................ 3,164,900
99,127 NextEra Energy Partners, L.P. (a) (b) ....................................... 3,624,083
--------------
6,788,983
--------------
OIL, GAS & CONSUMABLE FUELS - 77.6%
166,000 Access Midstream Partners, L.P. (a) ......................................... 10,340,140
207,534 Alliance Holdings GP, L.P. (a) .............................................. 14,249,285
1,129,260 Alliance Resource Partners, L.P. (a) ........................................ 54,306,113
3,065,770 Enbridge Energy Partners, L.P. (a) .......................................... 110,582,324
860,000 Energy Transfer Equity, L.P. (a) ............................................ 50,189,600
575,030 Energy Transfer Partners, L.P. (a) .......................................... 37,049,183
2,785,074 Enterprise Products Partners, L.P. (a) ...................................... 102,769,231
230,000 EQT Midstream Partners, L.P. (a) ............................................ 20,373,400
75,000 Golar LNG Partners, L.P. (a) ................................................ 2,714,250
50,000 Hoegh LNG Partners, L.P. (a) ................................................ 1,050,500
518,405 Holly Energy Partners, L.P. (a) ............................................. 17,345,831
129,800 Kinder Morgan Energy Partners, L.P. (a) ..................................... 12,175,240
810,000 Magellan Midstream Partners, L.P. (a) ....................................... 66,314,700
19,700 MPLX, L.P. .................................................................. 1,313,596
296,337 Natural Resource Partners, L.P. (a) ......................................... 3,695,322
635,772 NGL Energy Partners, L.P. (a) ............................................... 21,845,126
104,052 Oiltanking Partners, L.P. (a) ............................................... 4,742,690
909,000 ONEOK Partners, L.P. (a) .................................................... 46,449,900
101,000 Phillips 66 Partners, L.P.................................................... 7,038,690
909,000 Plains All American Pipeline, L.P. (a) ...................................... 51,222,150
44,900 Shell Midstream Partners, L.P. (b) .......................................... 1,512,681
849,811 Spectra Energy Partners, L.P. (a) ........................................... 45,889,794
702,500 TC Pipelines, L.P. (a) ...................................................... 43,800,875
986,624 Teekay LNG Partners, L.P. (a) ............................................... 38,774,323
262,700 TransMontaigne Partners, L.P. (a) ........................................... 9,838,115
860,019 Williams Partners, L.P. (a) ................................................. 44,333,980
--------------
819,917,039
--------------
TOTAL MASTER LIMITED PARTNERSHIPS ........................................... 898,414,267
(Cost $598,770,891) --------------
COMMON STOCKS - 57.2%
ELECTRIC UTILITIES - 7.5%
283,400 American Electric Power Co., Inc............................................. 16,533,556
163,000 Emera, Inc. (CAD) (a) ....................................................... 5,479,854
25,000 Exelon Corp.................................................................. 914,750
616,600 ITC Holdings Corp. (a) ...................................................... 24,423,526
65,000 NextEra Energy, Inc.......................................................... 6,514,300
See Notes to Financial Statements Page 5
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
SHARES DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
ELECTRIC UTILITIES (CONTINUED)
175,000 Northeast Utilities ......................................................... $ 8,636,250
327,500 NRG Yield, Inc., Class A (a) ................................................ 16,365,175
10,500 Southern (The) Co............................................................ 486,780
--------------
79,354,191
--------------
GAS UTILITIES - 2.0%
79,033 Atmos Energy Corp. (a) ...................................................... 4,188,749
144,077 Questar Corp................................................................. 3,473,696
40,000 South Jersey Industries, Inc................................................. 2,345,600
300,124 UGI Corp..................................................................... 11,311,674
--------------
21,319,719
--------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 0.5%
161,854 Pattern Energy Group, Inc. (a) .............................................. 4,658,158
--------------
MULTI-UTILITIES - 9.5%
142,000 ATCO, Ltd., Class I (CAD) (a) ............................................... 5,770,463
471,400 CMS Energy Corp.............................................................. 15,400,638
432,200 Dominion Resources, Inc...................................................... 30,815,860
34,500 National Grid PLC, ADR ...................................................... 2,566,455
414,400 NiSource, Inc................................................................ 17,429,664
255,000 Public Service Enterprise Group, Inc......................................... 10,534,050
40,000 Sempra Energy ............................................................... 4,400,000
276,300 Wisconsin Energy Corp........................................................ 13,721,058
--------------
100,638,188
--------------
OIL, GAS & CONSUMABLE FUELS - 37.4%
774,500 Enbridge Income Fund Holdings, Inc. (CAD) (a) ............................... 20,409,609
798,700 Enbridge, Inc................................................................ 37,826,432
1,045,500 Inter Pipeline, Ltd. (CAD) (a) .............................................. 32,940,602
117,000 Keyera Corp. (CAD) (a) ...................................................... 9,307,679
1,020,865 Kinder Morgan Management, LLC (a) (c) ....................................... 97,125,135
903,000 Kinder Morgan, Inc........................................................... 34,946,100
198,000 Pembina Pipeline Corp. (CAD) (a) ............................................ 8,214,791
1,092,400 Spectra Energy Corp.......................................................... 42,745,612
939,324 TransCanada Corp............................................................. 46,299,280
1,184,200 Williams (The) Cos., Inc..................................................... 65,734,942
--------------
395,550,182
--------------
REAL ESTATE INVESTMENT TRUSTS - 0.3%
465,867 CorEnergy Infrastructure Trust .............................................. 3,498,661
--------------
TOTAL COMMON STOCKS ......................................................... 605,019,099
(Cost $501,520,238) --------------
TOTAL INVESTMENTS - 142.2% .................................................. 1,503,433,366
(Cost $1,100,291,129) (d) --------------
Page 6 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.8%)
American Electric Power Co. Calls
900 @ $55.00 due November 2014 .................................................. $ (297,000)
1,900 @ 55.00 due January 2015 ................................................... (693,500)
--------------
(990,500)
--------------
CMS Energy Corp. Calls
1,700 @ 30.00 due December 2014 .................................................. (408,000)
1,500 @ 31.50 due January 2015 ................................................... (228,829)
1,500 @ 33.50 due February 2015 .................................................. (87,990)
--------------
(724,819)
--------------
Dominion Resources, Inc. Calls
2,000 @ 70.00 due November 2014 .................................................. (364,000)
2,000 @ 72.50 due January 2015 ................................................... (210,000)
300 @ 75.00 due January 2015 ................................................... (13,200)
--------------
(587,200)
--------------
Enbridge Energy Partners, L.P. Call
2,200 @ 37.50 due January 2015 ................................................... (187,000)
Enbridge, Inc. Calls
1,740 @ 50.00 due December 2014 .................................................. (104,400)
830 @ 50.00 due January 2015 ................................................... (74,700)
5,410 @ 55.00 due January 2015 ................................................... (81,150)
--------------
(260,250)
--------------
Energy Transfer Partners, L.P. Calls
250 @ 60.00 due December 2014 .................................................. (144,500)
630 @ 67.50 due December 2014 .................................................. (94,500)
--------------
(239,000)
--------------
Enterprise Poducts Partners, L.P. Calls
6,950 @ 42.50 due December 2014 .................................................. (69,500)
2,000 @ 41.25 due January 2015 ................................................... (50,000)
--------------
(119,500)
--------------
Exelon Corp. Call
250 @ 37.00 due December 2014 .................................................. (18,750)
--------------
Kinder Morgan, Inc. Calls
1,500 @ 45.00 due December 2014 .................................................. (11,250)
1,060 @ 42.50 due January 2015 ................................................... (44,520)
1,142 @ 40.00 due March 2015 ..................................................... (161,022)
2,000 @ 42.50 due March 2015 ..................................................... (150,000)
2,000 @ 45.00 due March 2015 ..................................................... (61,000)
--------------
(427,792)
--------------
National Grid PLC, ADR Call
300 @ 80.00 due December 2014 .................................................. (12,000)
--------------
NextEra Energy, Inc. Calls
250 @ 97.50 due November 2014 .................................................. (80,000)
400 @ 105.00 due December 2014 .................................................. (25,000)
--------------
(105,000)
--------------
See Notes to Financial Statements Page 7
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN (CONTINUED)
NiSource, Inc. Calls
980 @ $43.00 due November 2014 .................................................. $ (44,100)
940 @ 43.00 due December 2014 .................................................. (75,200)
2,218 @ 42.00 due January 2015 ................................................... (343,790)
--------------
(463,090)
--------------
Northeast Utilities Call
1,740 @ 50.00 due November 2014 .................................................. (78,300)
--------------
Plains All American Pipeline, L.P. Calls
1,000 @ 60.00 due November 2014 .................................................. (20,000)
370 @ 62.50 due November 2014 .................................................. (1,850)
800 @ 60.00 due December 2014 .................................................. (44,000)
--------------
(65,850)
--------------
Public Service Enterprise Group, Inc. Calls
800 @ 40.00 due December 2014 .................................................. (112,000)
1,000 @ 40.00 due March 2015 ..................................................... (225,000)
--------------
(337,000)
--------------
Questar Corp. Calls
170 @ 25.00 due January 2015 ................................................... (5,100)
--------------
Sempra Energy Call
400 @ 115.00 due January 2015 ................................................... (53,000)
--------------
Southern (The) Co. Call
105 @ 45.00 due November 2014 .................................................. (14,280)
--------------
Spectra Energy Corp. Calls
1,500 @ 39.00 due November 2014 .................................................. (112,500)
3,500 @ 40.00 due November 2014 .................................................. (122,500)
2,500 @ 41.00 due December 2014 .................................................. (100,000)
1,570 @ 42.00 due December 2014 .................................................. (31,400)
360 @ 45.00 due December 2014 .................................................. (3,600)
1,400 @ 41.00 due March 2015 ..................................................... (122,500)
--------------
(492,500)
--------------
TransCanada Corp. Calls
3,300 @ 50.00 due November 2014 .................................................. (379,500)
1,500 @ 55.00 due November 2014 .................................................. (34,500)
500 @ 55.00 due December 2014 .................................................. (27,500)
1,520 @ 50.00 due January 2015 ................................................... (349,600)
2,000 @ 55.00 due January 2015 ................................................... (170,000)
500 @ 55.00 due February 2015 .................................................. (62,500)
--------------
(1,023,600)
--------------
UGI Corp. Call
3,000 @ 35.00 due November 2014 .................................................. (892,500)
--------------
Williams (The) Cos., Inc. Calls
18 @ 50.00 due November 2014 .................................................. (10,350)
500 @ 55.00 due November 2014 .................................................. (97,000)
2,300 @ 62.50 due November 2014 .................................................. (16,100)
2,490 @ 57.50 due December 2014 .................................................. (343,620)
Page 8 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN (CONTINUED)
Williams (The) Cos., Inc. Calls (Continued)
1,500 @ $60.00 due December 2014 .................................................. $ (105,000)
1,500 @ 60.00 due January 2015 ................................................... (165,000)
2,144 @ 62.50 due January 2015 ................................................... (132,928)
1,300 @ 62.50 due February 2015 .................................................. (133,900)
--------------
(1,003,898)
--------------
Wisconsin Energy Corp. Calls
17 @ 50.00 due December 2014 .................................................. (1,292)
2,700 @ 50.00 due January 2015 ................................................... (283,500)
--------------
(284,792)
--------------
TOTAL CALL OPTIONS WRITTEN .................................................. (8,385,721)
(Premiums received $5,322,013) --------------
OUTSTANDING LOAN - (33.1%) .................................................. (350,000,000)
NET OTHER ASSETS AND LIABILITIES - (8.3%) ................................... (87,730,977)
--------------
NET ASSETS - 100.0% ......................................................... $1,057,316,668
==============
-----------------------------
(a) All or a portion of this security serves as collateral on the outstanding
loan.
(b) Non-income producing security.
(c) Non-income producing security which pays in-kind ("PIK") distributions.
For the year ended October 31, 2014, the Fund received 66,859 PIK shares
of Kinder Morgan Management, LLC.
(d) Aggregate cost for federal income tax purposes is $1,039,308,707. As of
October 31, 2014, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$465,610,383 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$1,485,724.
ADR American Depositary Receipt
CAD Canadian Dollar - Security is denominated in Canadian Dollars and is
translated into U.S. Dollars based upon the current exchange rate.
INTEREST RATE SWAP AGREEMENTS:
NOTIONAL
COUNTERPARTY FLOATING RATE (1) EXPIRATION DATE AMOUNT FIXED RATE (1) VALUE
-------------------- ----------------- ------------------ ------------- ----------------- -----------------
Bank of Nova Scotia 1 month LIBOR 10/08/23 $ 77,250,000 2.734% $ (3,408,517)
Bank of Nova Scotia 1 month LIBOR 09/03/24 97,000,000 2.367% (581,468)
------------- -----------------
$ 174,250,000 $ (3,989,985)
============= =================
(1) The Fund pays the fixed rate and receives the floating rate. The floating
rates on October 31, 2014 were 0.15%.
See Notes to Financial Statements Page 9
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2014
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2014 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Master Limited Partnerships*................... $ 898,414,267 $ 898,414,267 $ -- $ --
Common Stocks*................................. 605,019,099 605,019,099 -- --
--------------- --------------- --------------- ---------------
TOTAL.......................................... $ 1,503,433,366 $ 1,503,433,366 $ -- $ --
=============== =============== =============== ===============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2014 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Call Options Written........................... $ (8,385,721) $ (8,385,721) $ -- $ --
Interest Rate Swap**........................... (3,989,985) -- (3,989,985) --
--------------- --------------- --------------- ---------------
TOTAL.......................................... $ (12,375,706) $ (8,385,721) $ (3,989,985) $ --
=============== =============== =============== ===============
* See Portfolio of Investments for industry breakout.
** See Interest Rate Swap Agreements for contract detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2014.
Page 10 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2014
ASSETS:
Investments, at value
(Cost $1,100,291,129)...................................................................... $1,503,433,366
Cash .......................................................................................... 39,607,792
Cash segregated as collateral for open swap contracts ......................................... 12,950,270
Foreign currency (Cost $63).................................................................... 63
Receivables:
Investment securities sold ................................................................ 21,801,355
Dividends ................................................................................. 7,887,214
Income tax ................................................................................ 554,837
Prepaid expenses .............................................................................. 27,083
--------------
Total Assets .............................................................................. 1,586,261,980
--------------
LIABILITIES:
Outstanding loan .............................................................................. 350,000,000
Deferred income taxes ......................................................................... 156,221,316
Options written, at value (Premiums received $5,322,013)....................................... 8,385,721
Swap contracts, at value (Cost $968)........................................................... 3,989,985
Payables:
Investment securities purchased............................................................ 8,629,312
Investment advisory fees................................................................... 1,175,658
Interest and fees on loan.................................................................. 235,453
Audit and tax fees......................................................................... 99,000
Administrative fees........................................................................ 95,227
Printing fees.............................................................................. 40,195
Custodian fees............................................................................. 32,338
Legal fees................................................................................. 19,377
Transfer agent fees........................................................................ 5,038
Trustees' fees and expenses................................................................ 2,618
Financial reporting fees................................................................... 771
Other liabilities ............................................................................. 13,303
--------------
Total Liabilities.......................................................................... 528,945,312
--------------
NET ASSETS .................................................................................... $1,057,316,668
==============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... $ 772,830,352
Par value ..................................................................................... 454,395
Accumulated net investment income (loss), net of income taxes ................................. (3,842,729)
Accumulated net realized gain (loss) on investments, written options, swap
contracts and foreign currency transactions, net of income taxes .......................... 30,867,669
Net unrealized appreciation (depreciation) on investments, written options, swap
contracts and foreign currency translation, net of income taxes ........................... 257,006,981
--------------
NET ASSETS .................................................................................... $1,057,316,668
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .......................... $ 23.27
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 45,439,454
==============
See Notes to Financial Statements Page 11
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2014
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $808,111)......................................... $ 15,426,991
Interest....................................................................................... 2,551
Other.......................................................................................... 363
--------------
Total investment income..................................................................... 15,429,905
--------------
EXPENSES:
Investment advisory fees....................................................................... 13,333,193
Interest and fees on loan...................................................................... 2,775,218
Administrative fees............................................................................ 1,040,766
Custodian fees................................................................................. 161,351
Printing fees.................................................................................. 159,599
Audit and tax fees............................................................................. 100,704
Legal fees..................................................................................... 84,180
Trustees' fees and expenses.................................................................... 33,169
Transfer agent fees............................................................................ 27,546
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 111,881
--------------
Total expenses............................................................................. 17,836,857
--------------
NET INVESTMENT INCOME (LOSS) BEFORE TAXES...................................................... (2,406,952)
--------------
Current state income tax benefit (expense)................................... 342,538
Current federal income tax benefit (expense)................................. 20,631
Current foreign income tax benefit (expense)................................. --
Deferred federal income tax benefit (expense)................................ 579,003
Deferred state income tax benefit (expense).................................. --
-----------
Total income tax benefit (expense)............................................................. 942,172
--------------
NET INVESTMENT INCOME (LOSS)................................................................... (1,464,780)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) before taxes on:
Investments................................................................................ 51,651,509
Written options............................................................................ (2,153,124)
Swap contracts............................................................................. (2,195,185)
Foreign currency transactions.............................................................. (17,149)
--------------
Net realized gain (loss) before taxes.......................................................... 47,286,051
--------------
Deferred federal income tax benefit (expense)................................ (16,772,941)
Deferred state income tax benefit (expense).................................. (630,559)
-----------
Total income tax benefit (expense)......................................................... (17,403,500)
--------------
Net realized gain (loss) on investments, written options, swap contracts and foreign currency
transactions .............................................................................. 29,882,551
--------------
Net change in unrealized appreciation (depreciation) before taxes on:
Investments................................................................................ 228,964,385
Written options............................................................................ (3,782,530)
Swap contracts............................................................................. (2,671,687)
Foreign currency translation............................................................... 239
--------------
Net change in unrealized appreciation (depreciation) before taxes.............................. 222,510,407
--------------
Deferred federal income tax benefits (expense)............................... (74,396,410)
Deferred state income tax benefits (expense)................................. (3,766,436)
-----------
Total income tax benefit (expense)......................................................... (78,162,846)
--------------
Net change in unrealized appreciation (depreciation) on investments, written
options, swap contracts and foreign currency translation................................... 144,347,561
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 174,230,112
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 172,765,332
==============
Page 12 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
STATEMENT OF CHANGES IN NET ASSETS
YEAR PERIOD
ENDED ENDED
10/31/2014 10/31/2013 (a)
---------------- ----------------
OPERATIONS:
Net investment income (loss)....................................................... $ (1,464,780) $ (2,377,949)
Net realized gain (loss)........................................................... 29,882,551 12,363,967
Net change in unrealized appreciation (depreciation)............................... 144,347,561 112,659,420
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................... 172,765,332 122,645,438
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. -- --
Net realized gain.................................................................. -- (11,378,849)
Return of capital.................................................................. (60,598,056) (32,981,641)
-------------- --------------
Total distributions to shareholders................................................ (60,598,056) (44,360,490)
-------------- --------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares sold................................................... -- 867,489,568 (b)
Proceeds from Common Shares reinvested............................................. -- 439,196
Offering costs..................................................................... -- (1,064,320)
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions.......... -- 866,864,444
-------------- --------------
Total increase (decrease) in net assets............................................ 112,167,276 945,149,392
NET ASSETS:
Beginning of period................................................................ 945,149,392 --
-------------- --------------
End of period...................................................................... $1,057,316,668 $ 945,149,392
============== ==============
Accumulated net investment income (loss), net of income taxes...................... $ (3,842,729) $ (2,377,949)
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 45,439,454 --
Common Shares sold................................................................. -- 45,418,302 (b)
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... -- 21,152
-------------- --------------
Common Shares at end of period..................................................... 45,439,454 45,439,454
============== ==============
-----------------------------
(a) The Fund was seeded on October 11, 2012 and commenced operations on
November 27, 2012.
(b) Includes 3,913,066 shares sold from the over allotment option of the
initial public offering. The shares were sold on January 11, 2013, the
trade date, at the initial offering price of $19.10, which differed from
the closing common share price of $20.34 and the closing NAV per share of
$19.74 on that date.
See Notes to Financial Statements Page 13
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................. $ 172,765,332
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments..................................................... (474,449,216)
Sales of investments......................................................... 483,193,494
Proceeds from written options................................................ 15,588,857
Amount paid to close written options......................................... (12,253,264)
Return of capital received from investment in MLPs........................... 47,411,834
Net realized gain/loss on investments and written options.................... (49,498,385)
Net change in unrealized appreciation/depreciation on investments
and written options........................................................ (225,181,855)
Net change in unrealized appreciation/depreciation on swap contracts 2,671,687
Increase in cash segregated as collateral for open swap contracts............ (9,076,238)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable.............................................. 160
Increase in dividends receivable (a)......................................... (1,365,782)
Increase in income tax receivable............................................ (554,837)
Decrease in prepaid expenses................................................. 4,342
Decrease in interest and fees on loan payable................................ (1,030)
Increase in investment advisory fees payable................................. 106,553
Decrease in audit and tax fees payable....................................... (10,000)
Decrease in legal fees payable............................................... (15,591)
Decrease in income tax payable............................................... (841,361)
Increase in printing fees payable............................................ 1,267
Increase in administrative fees payable...................................... 10,459
Decrease in custodian fees payable........................................... (39,162)
Increase in transfer agent fees payable...................................... 2,722
Decrease in Trustees' fees and expenses payable.............................. (732)
Decrease in financial reporting fees payable................................. (70)
Increase in deferred income tax payable...................................... 94,987,342
Increase in other liabilities payable........................................ 11,278
----------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................ $ 43,467,804
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from return of capital.................. (60,598,056)
Proceeds from borrowing...................................................... 36,000,000
Repayment of borrowing....................................................... (20,000,000)
----------------
CASH USED IN FINANCING ACTIVITIES................................................ (44,598,056)
----------------
Decrease in cash and foreign currency............................................ (1,130,252)
Cash at beginning of period...................................................... 40,738,107
----------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD....................................... $ 39,607,855
================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................ $ 2,776,248
================
Cash paid during the period for taxes............................................ $ 1,033,030
================
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $239.
Page 14 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR PERIOD
ENDED ENDED
10/31/2014 10/31/2013 (a)
--------------- ---------------
Net asset value, beginning of period............... $ 20.80 $ 19.10 (b)
----------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)....................... (0.03) (0.05)
Net realized and unrealized gain (loss)............ 3.83 2.81
----------- -----------
Total from investment operations................... 3.80 2.76
----------- -----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.............................. -- --
Net realized gain.................................. -- (0.25)
Return of capital.................................. (1.33) (0.73)
----------- -----------
Total distributions................................ (1.33) (0.98)
----------- -----------
Common Shares offering costs charged to paid-in
capital........................................ -- (0.02)
----------- -----------
Capital reduction resulting from issuance of
Common Shares related to over-allotment........ -- (0.06)
----------- -----------
Net asset value, end of period..................... $ 23.27 $ 20.80
=========== ===========
Market value, end of period........................ $ 21.61 $ 19.63
=========== ===========
TOTAL RETURN BASED ON NET ASSET VALUE (c).......... 19.43% 14.27%
=========== ===========
TOTAL RETURN BASED ON MARKET VALUE (c)............. 17.52% 2.99%
=========== ===========
-----------------------------
Net assets, end of period (in 000's)............... $ 1,057,317 $ 945,149
Portfolio turnover rate............................ 34% 35%
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes (d).... 11.28% 9.53% (e)
Excluding current and deferred income taxes........ 1.79% 1.67% (e)
Excluding current and deferred income taxes
and interest expense........................... 1.51% 1.43% (e)
RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS:
Net investment income (loss) ratio before tax
expenses....................................... (0.24)% (0.42)% (e)
Net investment income (loss) ratio including
tax expenses (d)............................... (9.74)% (8.28)% (e)
INDEBTEDNESS:
Total loan outstanding (in 000's).................. $ 350,000 $ 334,000
Asset coverage per $1,000 of indebtedness (f)...... $ 4,021 $ 3,830
-----------------------------
(a) The Fund was seeded on October 11, 2012 and commenced operations on
November 27, 2012.
(b) Beginning net asset value is net of sales load of $0.90 per share from the
initial offering.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) Includes current and deferred income taxes associated with each component
of the Statement of Operations.
(e) Annualized.
(f) 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.
See Notes to Financial Statements Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014
1. ORGANIZATION
First Trust MLP and Energy Income Fund (the "Fund") is a non-diversified,
closed-end management investment company organized as a Massachusetts business
trust on August 17, 2012 and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund trades under the ticker symbol FEI on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to seek a high level of total return with an
emphasis on current distributions paid to common shareholders. The Fund seeks to
provide its shareholders with an efficient vehicle to invest in a portfolio of
cash generating securities of energy companies. The Fund focuses on investing in
equity and debt securities of master limited partnerships ("MLPs"), MLP-related
entities and other energy sector and energy utilities companies, which Energy
Income Partners, LLC ("EIP" or the "Sub-Advisor") believes offer opportunities
for income and growth. There can be no assurance that the Fund will achieve its
investment objective. The Fund may not be appropriate for all investors.
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 ("U.S. GAAP") 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 Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Foreign securities are
priced using data reflecting the earlier closing of the principal markets for
those securities. The NAV per Common Share is calculated by dividing the value
of all assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses, dividends declared but unpaid, deferred
income taxes and any borrowings of the Fund) by the total number of Common
Shares outstanding.
The Fund's investments are valued daily at market value or, in absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e. a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor") in accordance with
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
Common stocks, MLPs and other equity securities listed on any national or
foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last price on the exchange on which they are principally
traded or, for NASDAQ and AIM securities, the official closing price.
Securities traded on more than one securities exchange are valued at the
last sale price or official closing price, as applicable, at the close of
the securities exchange representing the principal market for such
securities.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price. Over-the-counter options contracts are fair
valued at the mean of their most recent bid and asked price, if available,
and otherwise at their closing bid price.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Swaps are fair valued utilizing quotations provided by a third party
pricing service or, if the pricing service does not provide a value, by
quotes provided by the selling dealer or financial institution.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2014, is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective and may write (sell) options to hedge against changes in
the value of equities. Also, the Fund seeks to generate additional income, in
the form of premiums received, from writing (selling) the options. The Fund may
write (sell) covered call or put options ("options") on all or a portion of the
common stock and MLPs 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 and MLPs the Fund holds in its
portfolio. The Fund will not write (sell) "naked" or uncovered options. When the
Fund writes (sells) an option, an amount equal to the premium received by the
Fund is included in "Options written, at value" on the Fund's Statement of
Assets and Liabilities. 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 trading
volume diminishes.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014
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 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. Gain or loss on options is presented
separately as "Net realized gain (loss) before taxes on written options" on the
Statement of Operations.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. SWAP AGREEMENTS:
The Fund may enter into total return equity swap and interest rate swap
agreements. A swap is a financial instrument that typically involves the
exchange of cash flows between two parties ("Counterparties") on specified dates
(settlement dates) where the cash flows are based on agreed upon prices, rates,
etc. Swap agreements are individually negotiated and involve the risk of the
potential inability of the Counterparties to meet the terms of the agreement. In
connection with these agreements, cash and securities may be identified as
collateral in accordance with the terms of the respective swap agreements to
provide assets of value and recourse in the event of default under the swap
agreement or bankruptcy/insolvency of a party to the swap agreement. In the
event of a default by the Counterparty, the Fund will seek withdrawal of this
collateral and may incur certain costs exercising its right with respect to the
collateral. If a Counterparty becomes bankrupt or otherwise fails to perform its
obligations due to financial difficulties, the Fund may experience significant
delays in obtaining any recovery in a bankruptcy or other reorganization
proceeding. The Fund may obtain only limited recovery or may obtain no recovery
in such circumstances.
Swap agreements may increase or decrease the overall volatility of the
investments of the Fund. The performance of swap agreements may be affected by a
change in the specific interest rate, security, currency, or other factors that
determine the amounts of payments due to and from the Fund. The Fund's maximum
equity price risk to meet its future payments under swap agreements outstanding
at October 31, 2014 is equal to the total notional amount as shown on the
Portfolio of Investments. The notional amount represents the U.S. dollar value
of the contract as of the day of the opening transaction or contract reset. When
the Fund enters into a swap agreement, any premium paid is included in "Swap
contracts, at value" on the Statement of Assets and Liabilities.
The Fund held interest rate swap agreements at October 31, 2014. An interest
rate swap agreement involves the Fund's agreement to exchange a stream of
interest payments for another party's stream of cash flows. Interest rate swaps
do not involve the delivery of securities or other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate swaps is
limited to the net amount of interest payments that the Fund is contractually
obligated to make.
D. 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 recorded
daily on the accrual basis, including amortization of premiums and accretion of
discounts. The Fund will rely to some extent on information provided by the
MLPs, which is not necessarily timely, to estimate taxable income allocable to
the MLP units held in the Fund's portfolio and to estimate the associated
deferred tax asset or liability. From time to time, the Fund will 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.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014
Distributions received from the Fund's investments in MLPs generally are
comprised of return of capital and investment income. The Fund records estimated
return of capital and investment income based on historical information
available from each MLP. These estimates may subsequently be revised based on
information received from the MLPs after their tax reporting periods are
concluded.
E. DISTRIBUTIONS TO SHAREHOLDERS:
The Fund intends to make monthly distributions to Common Shareholders. The
Fund's distributions generally will consist of cash and paid-in-kind
distributions from MLPs or their affiliates, dividends from common stocks, and
income from other investments held by the Fund less operating expenses,
including taxes. Distributions to Common Shareholders are recorded on the
ex-date and are based on U.S. GAAP, which may differ from their ultimate
characterization for federal income tax purposes.
Distributions made from current or 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 or accumulated earnings and profits that
exceed a shareholder's tax basis in the Common Shares will generally be taxed as
a capital gain.
Distributions of $60,598,056 paid during the year ended October 31, 2014, are
anticipated to be characterized as return of capital for federal income tax
purposes. However, the ultimate determination of the character of the
distributions will be made after the 2014 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%. The Fund may
be subject to a 20% federal alternative minimum tax on its federal alternative
minimum taxable income to the extent that its alternative minimum tax exceeds
its regular federal income tax. This differs from most investment companies,
which elect to be treated as "regulated investment companies" under the U.S.
Internal Revenue Code of 1986, as amended. The various investments of the Fund
may cause the Fund to be subject to state income taxes on a portion of its
income at various rates.
The tax deferral benefit the Fund derives from its investment in MLPs results
largely because the MLPs are treated as partnerships for federal income tax
purposes. As a partnership, an MLP has no income tax liability at the entity
level. As a limited partner in the MLPs in which it invests, the Fund will be
allocated its pro rata share of income, gains, losses, deductions and credits
from the MLPs, regardless of whether or not any cash is distributed from the
MLPs.
To the extent that the distributions received from the MLPs exceed the net
taxable income realized by the Fund from its investment, a tax liability
results. This tax liability is a deferred liability to the extent that MLP
distributions received have not exceeded the Fund's adjusted tax basis in the
respective MLPs. To the extent that distributions from an MLP exceed the Fund's
adjusted tax basis, the Fund will recognize a taxable capital gain. For the year
ended October 31, 2014, distributions of $47,957,182 received from MLPs have
been reclassified as a return of capital. The cost basis of applicable MLPs has
been reduced accordingly.
The Fund's provision for income taxes consists of the following:
Current federal income tax benefit (expense)...... $ 20,631
Current state income tax benefit (expense)........ 342,538
Current foreign income tax benefit (expense)...... --
Deferred federal income tax benefit (expense)..... (90,590,348)
Deferred state income tax benefit (expense)....... (4,396,996)
----------------
Total income tax benefit (expense)................ $ (94,624,175)
================
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014
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. The Fund's 2014 income tax
provision includes a full valuation allowance against the deferred tax assets
associated with the state net operating loss. Components of the Fund's deferred
tax assets and liabilities as of October 31, 2014 are as follows:
Deferred tax assets:
Federal net operating loss........................ $ 7,194,842
State net operating loss.......................... 1,901,768
State income taxes................................ 2,126,492
Capital loss carryforward......................... --
Other .......................................... --
----------------
Total deferred tax assets......................... 11,223,102
Less: valuation allowance......................... (1,901,768)
----------------
Net deferred tax assets........................... $ 9,321,334
================
Deferred tax liabilities:
Unrealized gains on investment securities......... $ (165,542,650)
----------------
Total deferred tax liabilities.................... (165,542,650)
----------------
Total net deferred tax liabilities................ $ (156,221,316)
================
Total income taxes differ from the amount computed by applying the maximum
graduated federal income tax rate of 35% to net investment income and realized
and unrealized gains on investments.
Application of statutory income tax rate.......... $ 93,586,327
State income taxes, net.......................... 1,638,095
Change in valuation allowance..................... 1,211,211
Other............................................. (1,811,458)
----------------
Total............................................. $ 94,624,175
================
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2013 and
2014 remain open to federal and state audit. As of October 31, 2014, management
has evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
G. EXPENSES:
The Fund will pay all expenses directly related to its operations.
H. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) before taxes on foreign
currency translation" on the Statement of Operations. Unrealized gains and
losses on investments in securities which result from changes in foreign
exchange rates are included with fluctuations arising from changes in market
price and are shown in "Net change in unrealized appreciation (depreciation)
before taxes on investments" on the Statement of Operations. Net realized
foreign currency gains and losses include the effect of changes in exchange
rates between trade date and settlement date on investment security
transactions, foreign currency transactions and interest and dividends received.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) before taxes on investments"
on the Statement of Operations.
I. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES:
In December 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). This disclosure requirement is intended to help
investors and other financial statement users better assess the effect or
potential effect of offsetting arrangements on a fund's financial position. ASU
2011-11 requires entities to disclose both gross and net information about both
instruments and transactions eligible for offset on the Statement of Assets and
Liabilities, and disclose instruments and transactions subject to master netting
or similar agreements. In addition, in January 2013, FASB issued Accounting
Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and
Liabilities" ("ASU 2013-1"), specifying exactly which transactions are subject
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014
to offsetting disclosures. The scope of the disclosure requirements is limited
to derivative instruments, repurchase agreements and reverse repurchase
agreements, and securities borrowing and securities lending transactions. ASU
2011-11 and ASU 2013-1 are effective for financial statements with fiscal years
beginning on or after January 1, 2013, and interim periods within those fiscal
years.
The Fund adopted the disclosure requirement on netting for the current reporting
period. For financial reporting purposes, the Fund does not offset financial
assets and financial liabilities that are subject to master netting arrangements
or similar agreements on the Statement of Assets and Liabilities. The Fund's
right to setoff may be restricted or prohibited by the bankruptcy or insolvency
laws of the particular jusisdiction to which a specific master netting or
similar agreement counterparty is subject.
At October 31, 2014, derivative assets and liabilities (by type) on a gross
basis are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Amounts Liabilities Presented ----------------------------
Gross Amounts of Offset in the in the Statement Cash
Recognized Statement of Assets of Assets and Financial Segregated as Net
Liabilities and Liabilities Liabilities Instruments Collateral Amount
-------------------------------------------------------------------------------------------------------------------------------
Interest Rate Swap
Contracts $ (3,989,985) $ -- $ (3,989,985) $ -- $ 3,989,985 $ --
J. ORGANIZATION AND OFFERING COSTS:
Organization costs consisted of costs incurred to establish the Fund and enable
it to legally conduct business. These costs included filing fees, listing fees,
legal services pertaining to the organization of the business and audit fees
relating to the initial registration and auditing the initial statement of
assets and liabilities, among other fees. Offering costs consisted of legal fees
pertaining to the Fund's shares offered for sale, registration fees,
underwriting fees, and printing of the initial prospectus, among other fees.
First Trust and the Sub-Advisor paid all organization expenses. The Fund's
Common Share offering costs of $1,064,320 were recorded as a reduction of the
proceeds from the sale of Common Shares during the period ended October 31,
2013.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets (the average
daily total asset value of the Fund minus the sum of the Fund's liabilities
other than the principal amount of borrowings). First Trust also provides fund
reporting services to the Fund for a flat annual fee in the amount of $9,250.
EIP serves as the Fund's Sub-Advisor and manages the Fund's portfolio subject to
First Trust's supervision. The Sub-Advisor receives a monthly sub-advisory fee
calculated at an annual rate of 0.50% of the Fund's Managed Assets that is paid
by First Trust out of its investment advisory fee.
First Trust Capital Partners, LLC ("FTCP"), an affiliate of First Trust, owns,
through a wholly-owned subsidiary, a 15% ownership interest in each of EIP and
EIP Partners, LLC, an affiliate of EIP. In addition, as of March 27, 2014, FTCP,
through a wholly-owned subsidiary, purchased a preferred interest in EIP. The
preferred interest is non-voting and does not share in the profits or losses of
EIP. EIP may buy back any or all of FTCP's preferred interest at any time and
FTCP may sell back to EIP up to 50% of its preferred interest on or after
September 25, 2015, and any or all of its preferred interest after March 27,
2017.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any Sub-Advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended October 31, 2014, were $483,078,528 and
$498,853,317, respectively.
5. DERIVATIVES TRANSACTIONS
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-----------------------------------------------------------------------------
Options outstanding at October 31, 2013...... $ 80,668 $ 4,580,588
Options Written.............................. 278,384 15,588,857
Options Expired.............................. (129,643) (6,148,724)
Options Exercised............................ (83,418) (4,747,292)
Options Closed............................... (61,732) (3,951,416)
Options Split................................ 4,595 0
--------- ------------
Options outstanding at October 31, 2014...... 88,854 $ 5,322,013
========= ============
The following table presents the types of derivatives held by the Fund at
October 31, 2014, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------- ---------------------------------------
DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT EXPOSURE LIABILITIES LOCATION FAIR VALUE LIABILITIES LOCATION FAIR VALUE
--------------- ----------- ------------------------- ----------- ------------------------- -----------
Written Options Equity Risk -- -- Options written, at value $ 8,385,721
Interest Rate Interest
Swap Agreement Rate Risk Swap contracts, at value -- Swap contracts, at value 3,989,985
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
October 31, 2014, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
---------------------------------------------------------------------------------------------------
EQUITY RISK
Net realized gain (loss) before taxes on written options $ (2,153,124)
Net change in unrealized appreciation (depreciation) before taxes on written options (3,782,530)
INTEREST RATE RISK
---------------------------------------------------------------------------------------------------
Net realized gain (loss) before taxes on swap contracts $ (2,195,185)
Net change in unrealized appreciation (depreciation) before taxes on swap contracts (2,671,687)
The average volume of interest rate swaps was $99,634,615 for the year ended
October 31, 2014.
6. BORROWINGS
The Fund has a committed facility agreement with The Bank of Nova Scotia
("Scotia") that has a maximum commitment amount of $400,000,000. The borrowing
rate under the facility is equal to the 1-month LIBOR plus 65 basis points. In
addition, under the facility, the Fund pays a commitment fee of 0.15% on the
undrawn amount of such facility when the utilization is below 50% of a maximum
commitment amount. The average amount outstanding for the year ended October 31,
2014 was $336,791,781 with a weighted average interest rate of 0.81%. As of
October 31, 2014, the Fund had outstanding borrowings of $350,000,000 under this
committed facility agreement. The high and low annual interest rates for the
year ended October 31, 2014 were 0.82% and 0.80%, respectively. The interest
rate at October 31, 2014 was 0.81%.
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014
7. 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.
8. INDUSTRY CONCENTRATION RISK
Under normal market conditions, the Fund will invest at least 85% of its Managed
Assets in equity and debt securities of MLPs, MLP-related entities and other
energy sector and energy utilities companies and at least 65% of its Managed
Assets in equity securities issued by energy sector MLPs and energy sector and
energy utilities MLP-related entities. Given this industry concentration, the
Fund is more susceptible to adverse economic or regulatory occurrences affecting
that industry than an investment company that is not concentrated in a single
industry. Energy issuers may be subject to a variety of factors that may
adversely affect their business or operations, including high interest costs in
connection with capital construction programs, high leverage costs associated
with environmental and other regulations, the effects of economic slowdown,
surplus capacity, increased competition from other providers of services,
uncertainties concerning the availability of fuel at reasonable prices, the
effects of energy conservation policies and other factors.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On November 20, 2014, the Fund declared a distribution of $0.1117 per share to
Common Shareholders of record on December 3, 2014, payable December 10, 2014.
Page 23
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST MLP AND ENERGY INCOME
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust MLP and Energy Income Fund (the "Fund"), including the portfolio of
investments, as of October 31, 2014, and the related statements of operations
and cash flows for the year then ended, and the statements of changes in net
assets and the financial highlights for each of the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2014 by correspondence with the Fund's
custodian and brokers; where replies were not received, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust MLP and Energy Income Fund as of October 31, 2014, and the results
of its operations and its cash flows for the year then ended, and the changes in
its net assets and the financial highlights for each of the periods presented,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 23, 2014
Page 24
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014 (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 BNY
Mellon Investment Servicing (US) 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 the 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 net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE 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 (866) 340-1104, 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 BNY Mellon Investment
Servicing (US) 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 investments 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 ("SEC") website located at
http://www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the 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.
Page 25
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014 (UNAUDITED)
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 28, 2014, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS, and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income
Fund and First Trust Intermediate Duration Preferred & Income Fund was held on
April 23, 2014 (the "Annual Meeting"). At the Annual Meeting, Robert F. Keith
was elected by the Common Shareholders of the First Trust MLP and Energy Income
Fund as a Class I Trustee for a three-year term expiring at the Fund's annual
meeting of shareholders in 2017. The number of votes cast in favor of Mr. Keith
was 37,899,519, the number of votes against Mr. Keith was 681,485, and the
number of broker non-votes was 6,858,450. James A. Bowen, Richard E. Erickson,
Thomas R. Kadlec and Niel B. Nielson are the other current and continuing
Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INDUSTRY CONCENTRATION RISK: Under normal market conditions, the Fund will
invest at least 85% of its Managed Assets in equity and debt securities of MLPs,
MLP-related entities and other energy sector and energy utilities companies and
at least 65% of its Managed Assets in equity securities issued by energy sector
MLPs and energy sector and energy utilities MLP-related entities. Given this
industry concentration, the Fund is more susceptible to adverse economic or
regulatory occurrences affecting that industry than an investment company that
is not concentrated in a single industry. Energy issuers may be subject to a
variety of factors that may adversely affect their business or operations,
including high interest costs in connection with capital construction programs,
high leverage costs associated with environmental and other regulations, the
effects of economic slowdown, surplus capacity, increased competition from other
providers of services, uncertainties concerning the availability of fuel at
reasonable prices, the effects of energy conservation policies and other
factors.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
MLP RISK: An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. If the Fund is not in compliance with certain credit facility
provisions, the Fund may not be permitted to declare dividends or other
distributions.
RESTRICTED SECURITIES RISK: The Fund may invest in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that are unregistered or are held by control persons of the issuer and
securities that are subject to contractual restrictions on their resale. As a
result, restricted securities may be more difficult to value and the Fund may
have difficulty disposing of such assets either in a timely manner or for a
reasonable price. In order to dispose of an unregistered security, the Fund,
where it has contractual rights to do so, may have to cause such security to be
registered. A considerable period may elapse between the time the decision is
made to sell the security and the time the security is registered so that the
Fund could sell it. Contractual restrictions on the resale of securities vary in
length and scope and are generally the result of a negotiation between the
issuer and acquirer of the securities. The Fund would, in either case, bear
market risks during that period.
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014 (UNAUDITED)
NON-DIVERSIFICATION RISK: The Fund is a non-diversified investment company under
the 1940 Act and will not be treated as a regulated investment company under the
Internal Revenue Code. Accordingly, there are no regulatory requirements under
the 1940 Act or the Internal Revenue Code on the minimum number or size of
securities held by the Fund.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
NON-U.S. RISK: The Fund may invest a portion of its assets in the equity
securities of issuers domiciled in jurisdictions other than the U.S. Investments
in the securities and instruments of non-U.S. issuers involve certain
considerations and risks not ordinarily associated with investments in
securities and instruments of U.S. issuers. Non-U.S. companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be
subject to withholding and other non-U.S. taxes, which may adversely affect the
net return on such investments. A related risk is that there may be difficulty
in obtaining or enforcing a court judgment abroad.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AND INVESTMENT SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust MLP and Energy Income Fund (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Energy Income
Partners, LLC (the "Sub-Advisor"), at a meeting held on June 8-9, 2014. The
Board of Trustees determined that the continuation of the Agreements is in the
best interests of the Fund in light of the extent and quality of the services
provided and such other matters as the Board considered to be relevant in the
exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs.
Following receipt of this information, counsel to the Independent Trustees posed
follow-up questions to the Advisor, and the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor and
the Sub Advisor, including the supplemental responses. The Board applied its
business judgment to determine whether the arrangements between the Fund and the
Advisor and among the Fund, the Advisor and the Sub-Advisor are reasonable
business arrangements from the Fund's perspective as well as from the
perspective of shareholders. The Board considered that shareholders chose to
invest or remain invested in the Fund knowing that the Advisor and the
Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objective and policies. With respect to the Sub-Advisory Agreement,
the Board noted the background and experience of the Sub-Advisor's portfolio
management team. At the meeting, the Board received a presentation from
representatives of the Sub Advisor, including the portfolio managers, discussing
the services that the Sub-Advisor provides to the Fund and how the Sub-Advisor
manages the Fund's investments. In light of the information presented and the
considerations made, the Board concluded that the nature, extent and quality of
services provided to the Fund by the Advisor and the Sub-Advisor under the
Agreements have been and are expected to remain satisfactory and that the
Sub-Advisor, under the oversight of the Advisor, has managed the Fund consistent
with its investment objective and policies.
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014 (UNAUDITED)
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, noting that the Advisor provides
advisory services to three other closed-end funds and one actively managed
exchange-traded fund ("ETF") sub-advised by the Sub-Advisor and certain
separately managed accounts that may have investment objectives and policies
similar to the Fund's. The Board noted that the Advisor charges the same
advisory fee rate to the Fund and the other closed-end funds sub-advised by the
Sub-Advisor and a lower advisory fee rate to the actively managed ETF and the
separately managed accounts. The Board noted the Advisor's statement that the
nature of the services provided to the separately managed accounts is not
comparable to those provided to the Fund. The Board considered the sub-advisory
fee and how it relates to the Fund's overall advisory fee structure and noted
that the sub-advisory fee is paid by the Advisor from its advisory fee. The
Board noted that the Sub-Advisor provides sub-advisory services to the other
closed-end funds and the actively managed ETF noted above and that the
sub-advisory fee rate for the other closed-end funds is the same as that
received from the Advisor for the Fund. The Board also considered information
provided by the Sub-Advisor as to the fees it charges to other similar clients,
noting that the sub-advisory fee rate is generally lower than the fee rate
charged by the Sub-Advisor to other similar clients. In addition, the Board
reviewed data prepared by Lipper Inc. ("Lipper"), an independent source, showing
the advisory fees and expense ratios of the Fund as compared to the advisory
fees and expense ratios of an expense peer group selected by Lipper and similar
data from the Advisor for a separate peer group selected by the Advisor. The
Board noted that the Lipper and Advisor peer groups included five overlapping
peer funds. The Board discussed with representatives of the Advisor the
limitations in creating a relevant peer group for the Fund, including that (i)
the Fund is unique in its composition, which makes assembling peers with similar
strategies and asset mix difficult; (ii) peer funds may use different amounts
and types of leverage with different costs associated with them or may use no
leverage; and (iii) most peer funds do not employ an advisor/sub-advisor
management structure. The Board took these limitations into account in
considering the peer data. In reviewing the peer data, the Board noted that the
Fund's contractual advisory fee was below the median of the Lipper peer group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also received
data prepared by Lipper comparing the Fund's performance to a performance peer
universe selected by Lipper and to two benchmarks. In reviewing the Fund's
performance as compared to the performance of the Lipper performance peer
universe, the Board took into account the limitations described above with
respect to creating a relevant peer group for the Fund. The Board also noted
that because the Fund launched in November 2012, it only had one full calendar
year of performance. The Board also considered the Fund's dividend yield as of
March 31, 2014 and information provided by the Advisor on the Fund's leverage,
including that leverage was accretive to the Fund's total return in 2013. In
addition, the Board compared the Fund's premium/discount over the four quarters
to the average and median premium/discount of the Advisor peer group over the
same period and considered the factors that may impact a fund's
premium/discount.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board determined that due to the Fund's
closed-end structure, the potential for realization of economies of scale as
Fund assets grow was not a material factor to be considered. The Board also
considered the costs of the services provided and profits realized by the
Advisor from serving as investment advisor to the Fund for the twelve months
ended December 31, 2013, as well as product-line profitability data for the same
period, 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 estimated profitability appeared to be not excessive in light of the
services provided to the Fund. In addition, the Board considered fall-out
benefits described by the Advisor that may be realized from its relationship
with the Fund, including the Advisor's compensation for fund reporting services
pursuant to a separate Fund Reporting Services Agreement. The Board considered
the ownership interest of an affiliate of the Advisor in the Sub-Advisor and
potential fall-out benefits to the Advisor from such ownership interest.
The Board considered that the Sub-Advisor's investment services expenses are
primarily fixed, and that the Sub-Advisor has made recent investments in
infrastructure and personnel. The Board considered that the sub advisory fee
rate was negotiated at arm's length between the Advisor and the Sub-Advisor. The
Board also considered data provided by the Sub Advisor as to the profitability
of the Sub Advisory Agreement to the Sub Advisor. The Board noted the inherent
limitations in the profitability analysis and concluded that the profitability
analysis for the Advisor was more relevant, although the profitability of the
Sub-Advisory Agreement appeared to be not excessive in light of the services
provided to the Fund. The Board considered fall-out benefits realized by the
Sub-Advisor from its relationship with the Fund, including soft-dollar
arrangements, and considered a summary of such arrangements. The Board also
considered the potential fall-out benefits to the Sub-Advisor from the ownership
interest of the Advisor's affiliate in the Sub-Advisor.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 28
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE(1) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 111 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member,
Suite 400 Inception Sportsmed LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), Senior 111 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), ADM Investor Inc., ADM
Suite 400 Inception Services, Inc.(Futures Commission Investor Services
Wheaton, IL 60187 Merchant) International,
D.O.B.: 11/57 and Futures
Industry
Association
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 111 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since Fund Consulting) Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 111 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014), Servant
Interactive LLC (Educational Products and
Services); President and Chief Executive
Officer (June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(2), Trustee, o Three-Year Term Chief Executive Officer (December 2010 111 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund 2010), First Trust Advisors L.P. and First
Suite 400 Inception Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-----------------------------
(1) Currently, Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees,
are serving as trustees until the Fund's 2015 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, as Class III Trustees,
are serving as trustees until the Fund's 2016 annual meeting of
shareholders. Robert F. Keith, as a Class I Trustee, is serving as a
trustee until the Fund's 2017 annual meeting of shareholders.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
Page 29
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since Fund L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Inception Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to Present), First Trust
Suite 400 Accounting Officer o Since Fund Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187 Inception
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General Counsel,
Suite 400 o Since Fund BondWave LLC (Software Development Company/
Wheaton, IL 60187 Inception Investment Advisor); Secretary of Stonebridge
D.O.B.: 05/60 Advisors LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Fund First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Inception Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Since Fund
Wheaton, IL 60187 Inception
D.O.B.: 12/66
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 30
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Energy Income Partners, LLC
49 Riverside Avenue
Westport, CT 06880
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
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
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by
the registrant or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and
that relates to any element of the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of
this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas
R. Kadlec and Robert F. Keith are qualified to serve as audit committee
financial experts serving on its audit committee and that each of them is
"independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's annual
financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were $57,000 for the fiscal year
ended October 31, 2014 and $78,000 for the fiscal year ended
beginning from Registrant's inception on November 27, 2012 through
October 31, 2013.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed for
each of the last two fiscal years for assurance and related services
by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements
and are not reported under paragraph (a) of this Item were $0 for
the fiscal year ended October 31, 2014 and $0 for the fiscal year
ended beginning from Registrant's inception on November 27, 2012
through October 31, 2013.
Audit-Related Fees (Investment Advisor) -- The aggregate fees billed for
each of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item were $0 for the fiscal year ended October
31, 2014 and $7,000 for the fiscal year ended beginning from Registrant's
inception on November 27, 2012 through October 31, 2013.
(c) Tax Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax
planning were $52,000 for the fiscal year ended October 31, 2014 and
$0 for the fiscal year ended beginning from Registrant's inception
on November 27, 2012 through October 31, 2013.
Tax Fees (Investment Advisor) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $0 for
the fiscal year ended October 31, 2014 and $0 for the fiscal year ended
beginning from Registrant's inception on November 27, 2012 through October
31, 2013.
(d) All Other Fees (Registrant) -- The aggregate fees billed for each of
the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $52,000 for
the fiscal year ended October 31, 2014 and $0 for the fiscal year
ended beginning from Registrant's inception on November 27, 2012
through October 31, 2013.
All Other Fees (Investment Adviser) The aggregate fees billed for each of
the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services reported
in paragraphs (a) through (c) of this Item were $0 for the fiscal year
ended October 31, 2014 and $0 for the fiscal year ended beginning from
Registrant's inception on November 27, 2012 through October 31, 2013.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the Registrant and the Registrant's investment
adviser of this Item that were approved by the audit committee
pursuant to the pre-approval exceptions included in paragraph
(c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X
are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the
most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent
employees was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant
for services rendered to the registrant, and rendered to the
registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the adviser that
provides ongoing services to the registrant for the Registrant's
fiscal year ended October 31, 2014 were $52,000 for the Registrant
and $43,500 for the Registrant's investment advisor and for the
Registrant's fiscal year ended beginning from Registrant's inception
on November 27, 2012 through October 31, 2013, were $0 for the
Registrant and $3,000 for the Registrant's investment adviser.
(h) The registrant's audit committee of the board of directors has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) IDENTIFICATION OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
Information provided as of January 5, 2015.
Energy Income Partners, LLC
Energy Income Partners, LLC ("EIP"), Westport, CT, was founded in 2003 to
provide professional asset management services in the area of energy-related
master limited partnerships ("MLPs") and other high-payout securities such as
pipeline companies, power utilities and Canadian income equities. EIP mainly
focuses on investments in energy-related infrastructure assets such as
pipelines, power transmission and distribution, petroleum storage and terminals
that receive fee-based or regulated income from their corporate and individual
customers. As of October 31, 2104, EIP manages or supervises approximately $6.0
billion of assets. Private funds advised by EIP include a partnership for U.S.
high net worth individuals and a master-and-feeder fund for institutions. EIP
also manages separately managed accounts and provides its model portfolio to
unified managed accounts. Finally, EIP serves as a sub-advisor to three
closed-end management investment companies in addition to the First Trust MLP
and Energy Income Fund ("FEI" or the "Fund"), an actively managed
exchange-traded fund ("ETF") and a sleeve of a series of a variable insurance
trust. EIP is a registered investment advisor with the Securities and Exchange
Commission.
James J. Murchie, Portfolio Manager James J. Murchie is the Founder, Chief
Executive Officer, co-portfolio manager and a Principal of Energy Income
Partners. After founding Energy Income Partners in October 2003, Mr. Murchie and
the Energy Income Partners investment team joined Pequot Capital Management Inc.
("Pequot Capital") in December 2004. In August 2006, Mr. Murchie and the Energy
Income Partners investment team left Pequot Capital and re-established Energy
Income Partners. Prior to founding Energy Income Partners, Mr. Murchie was a
Portfolio Manager at Lawhill Capital Partners, LLC ("Lawhill Capital"), a
long/short equity hedge fund investing in commodities and equities in the energy
and basic industry sectors. Before Lawhill Capital, Mr. Murchie was a Managing
Director at Tiger Management, LLC, where his primary responsibility was managing
a portfolio of investments in commodities and related equities. Mr. Murchie was
also a Principal at Sanford C. Bernstein. He began his career at British
Petroleum, PLC. Mr. Murchie holds a BA from Rice University and an MA from
Harvard University.
Eva Pao, Co-Portfolio Manager
Eva Pao is a Principal of Energy Income Partners and is co-portfolio manager for
all its funds. She has been with EIP since inception in 2003. From 2005 to
mid-2006, Ms. Pao joined Pequot Capital Management during EIP's affiliation with
Pequot. Prior to Harvard Business School, Ms. Pao was a Manager at Enron Corp
where she managed a portfolio in Canadian oil and gas equities for Enron's
internal hedge fund that specialized in energy-related equities and managed a
natural gas trading book. Ms. Pao holds degrees from Rice University and Harvard
Business School.
(a)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
Information provided as of October 31, 2014.
# of Accounts Total Assets
Managed for which for which
Total Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Total Based on is Based on
Team Member Type of Accounts* Managed Assets Performance Performance
----------------------------- --------------------------------- ------------- ------------ ------------------ ------------
1. James J. Murchie Registered Investment Companies 6 $2,614.9M 0 0
Other Pooled Investment Vehicles 3 $ 201.6M 3 $201.6
Other Accounts 2,084 $1,113.8M 1 $ 5.3
2. Eva Pao Registered Investment Companies 4 $2,614.9M 0 0
Other Pooled Investment Vehicles 3 $ 201.6M 3 $201.6
Other Accounts 800 $1,113.8M 1 $ 5.3
PORTFOLIO MANAGER POTENTIAL CONFLICTS OF INTERESTS
Potential conflicts of interest may arise when a fund's portfolio manager has
day-to-day management responsibilities with respect to one or more other funds
or other accounts, as is the case for the portfolio managers of the Fund. These
potential conflicts may include:
Besides the Fund, the EIP investment professionals who serve as portfolio
managers of the Fund also serve as portfolio managers to 2,084 separately
managed accounts, one of which has a performance fee, and provides its model
portfolio to unified managed accounts. EIP serves as sub-advisor to three two
closed ended mutual funds in addition to the Fund, an open-end privately offered
management investment company, an actively-managed exchange-traded fund (ETF)
and a sleeve of a series of a variable insurance trust.
EIP has written policies and procedures regarding Order Aggregation and
Allocation to ensure that all accounts are treated fairly and equitably and that
no account is disadvantaged. EIP will generally execute client transactions on
an aggregated basis when the Firm believes that to do so will allow it to obtain
best execution and to negotiate more favorable commission rates or avoid certain
transaction costs that might have otherwise been paid had such orders been
placed independently. EIP's ability to implement this may be limited by an
Account's custodian, directed brokerage arrangements or other constraints
limiting EIP's use of a common executing broker.
An aggregated order may be allocated on a basis different from that specified
herein provided that all clients receive fair and equitable treatment and there
is a legitimate reason for the different allocation. Reasons for deviation may
include (but are not limited to): a client's investment guidelines and
restrictions, available cash, liquidity or legal reasons, and to avoid odd-lots
or in cases when a normal allocation would result in a de minimis allocation to
one or more clients.
Notwithstanding the above, due to differing tax ramifications and compliance
ratios, as well as dissimilar risk constraints and tolerances, accounts with
similar investment mandates may trade the same securities at differing points in
time. Additionally, for the reasons noted above, certain accounts, including
Funds in which EIP, its affiliates and/or employees ("EIP Funds") have a
financial interest, may trade separately from other accounts and participate in
transactions which are deemed to be inappropriate for other accounts with
similar investment mandates. Further, during periods in which EIP intends to
trade the same securities across multiple accounts, transactions for those
accounts that must be traded through specific brokers and/or platforms will
often be executed after those for accounts over which EIP exercises full
brokerage discretion, including the EIP Funds.
(a)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
PORTFOLIO MANAGER COMPENSATION
Information provided as of October 31, 2014.
The portfolio managers are compensated by a competitive minimum base salary and
share in the profits of EIP in relationship to their ownership of EIP. EIP's
profits are based on the assets under management and performance. While a
portion of the portfolio manager's compensation is tied to the Funds'
performance through performance fees earned through the Private Funds'
performance, the portfolio managers are not incentivized to take undue risk in
circumstances when the Private Funds' performance lags because their performance
fee structures may sometimes have a high watermark or be subject to a hurdle
rate. Moreover, the portfolio managers are the principal owners of EIP and are
incentivized to maximize the long-term performance of all of its clients,
including the Fund, other funds and managed accounts.
The compensation of the Portfolio team members is determined according to
prevailing rates within the industry for similar positions. EIP wishes to
attract, retain and reward high quality personnel through competitive
compensation.
(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of October 31, 2014.
Dollar Range of Fund Shares
Name Beneficially Owned
------------------------------ -----------------------------
James J. Murchie $0
Eva Pao $0
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the registrant's organizational meeting the registrant's Board of Trustees
adopted a Nominating and Governance Committee Charter which includes procedures
by which shareholders may recommend nominees to the registrant's board of
trustees as described below:
When a vacancy on the Board of Trustees of a First Trust Fund occurs and
nominations are sought to fill such vacancy, the Nominating and Governance
Committee may seek nominations from those sources it deems appropriate in
its discretion, including shareholders of the Fund. A shareholder may
recommend a person for nomination as a candidate at any time. If a
recommendation is received with satisfactorily completed information (as
set forth below) regarding a candidate during a time when a vacancy exists
on the Board or during such other time as the Committee is accepting
recommendations, the recommendation will be forwarded to the Chair of the
Committee and the outside counsel to the independent trustees.
Recommendations received at any other time will be kept on file until such
time as the Committee is accepting recommendations, at which point they
may be considered for nomination.
To submit a recommendation for nomination as a candidate for a position on
the Board of Trustees, shareholders of the Fund shall mail such
recommendation to W. Scott Jardine, Secretary, at the Fund's address, 120
East Liberty Drive, Suite 400, Wheaton, Illinois 60187. Such
recommendation shall include the following information: (i) a statement in
writing setting forth (A) the name, age, date of birth, business address,
residence address and nationality of the person or persons to be
nominated; (B) the class or series and number of all shares of the
Registrant owned of record or beneficially by each such person or persons,
as reported to such shareholder by such nominee(s); (C) any other
information regarding each such person required by paragraphs (a), (d),
(e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of
Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (or any successor provision thereto); (D) any
other information regarding the person or persons to be nominated that
would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitation of proxies for
election of trustees or directors pursuant to Section 14 of the Exchange
Act and the rules and regulations promulgated thereunder; and (E) whether
such shareholder believes any nominee is or will be an "interested person"
of the Registrant (as defined in the Investment Company Act of 1940) and,
if not an "interested person," information regarding each nominee that
will be sufficient for the Registrant to make such determination; and (ii)
the written and signed consent of any person to be nominated to be named
as a nominee and to serve as a trustee if elected. In addition, the
trustees may require any proposed nominee to furnish such other
information as they may reasonably require or deem necessary to determine
the eligibility of such proposed nominee to serve as a trustee. The
Committee will not consider new trustee candidates who are 72 years of age
or older.
A copy of the Nominating and Governance Committee Charter is available on the
Registrant's website at www.ftportfolios.com.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the Registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the Registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust MLP and Energy Income Fund
--------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 23, 2014
---------------------
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/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 23, 2014
---------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 23, 2014
---------------------
* Print the name and title of each signing officer under his or her signature.