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)
10 Westport Road, Suite C101a
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, 2016
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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 & ENERGY INCOME FUND (FEI)
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ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2016
ENERGY INCOME PARTNERS, LLC FIRST TRUST
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TABLE OF CONTENTS
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 10
Statement of Operations..................................................... 11
Statements of Changes in Net Assets......................................... 12
Statement of Cash Flows..................................................... 13
Financial Highlights........................................................ 14
Notes to Financial Statements............................................... 15
Report of Independent Registered Public Accounting Firm..................... 23
Additional Information...................................................... 24
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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. 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 material 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, 2016
Dear Shareholders:
Thank you for your investment in First Trust MLP and Energy Income Fund.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of October 31,
2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach 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, 2016 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FEI
Common Share Price $15.66
Common Share Net Asset Value ("NAV") $15.42
Premium (Discount) to NAV 1.56%
Net Assets Applicable to Common Shares $701,457,408
Current Monthly Distribution per Common Share (1) $0.1183
Current Annualized Distribution per Common Share $1.4196
Current Distribution Rate on Closing Common
Share Price (2) 9.07%
Current Distribution Rate on NAV (2) 9.21%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
---------------------------------------------------------------
Common Share Price NAV
10/15 16.86 17.30
15.76 16.91
14.41 16.05
14.15 16.00
11/15 14.33 15.94
12.93 13.92
11.50 13.00
11.56 12.86
13.59 14.54
12/15 13.22 14.40
12.00 13.36
10.36 11.93
10.60 12.33
1/16 11.48 13.07
11.46 12.84
9.96 11.54
11.31 12.54
2/16 12.47 13.07
13.40 13.78
13.33 13.83
13.63 14.33
3/16 13.19 13.82
13.28 13.56
13.33 13.73
13.63 13.97
14.78 15.13
4/16 15.13 15.23
14.27 14.92
14.41 14.97
14.89 15.31
5/16 15.14 15.24
15.39 15.41
15.30 15.43
15.27 15.37
6/16 15.26 15.52
15.58 15.64
15.28 15.63
15.36 15.93
15.81 15.99
7/16 15.81 15.93
15.45 15.68
15.86 15.81
16.30 15.80
8/16 15.99 15.64
15.90 15.62
15.98 15.56
15.68 15.33
16.19 15.80
9/16 16.56 15.86
15.90 15.53
15.76 15.65
16.02 15.76
15.68 15.50
10/16 15.66 15.42
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PERFORMANCE
---------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL
TOTAL RETURN
1 Year Ended Inception (11/27/12)
10/31/16 to 10/31/16
Fund Performance (3)
NAV -1.57% 1.91%
Market Value 2.98% 1.12%
Index Performance
S&P 500(R) Index 4.51% 13.62%
Alerian MLP Total Return Index -1.80% -0.58%
Wells Fargo Midstream MLP Total Return Index -2.33% 3.14%
---------------------------------------------------------------------------------------------------------
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% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Pipelines 75.4%
Electric Power 14.0
Coal 4.6
Propane 4.5
Natural Gas Utility 0.5
Gathering & Processing 0.5
Other 0.5
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Total 100.0%
======
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
----------------------------------------------------------
Enterprise Products Partners, L.P. 10.5%
Magellan Midstream Partners, L.P. 6.6
Enbridge Energy Partners, L.P. 6.3
Plains All American Pipeline, L.P. 6.1
TransCanada Corp. 5.9
Spectra Energy Partners, L.P. 5.9
EQT Midstream Partners, L.P. 4.4
Alliance Resource Partners, L.P. 3.8
ONEOK Partners, L.P. 3.6
Holly Energy Partners, L.P. 3.6
----------------------------------------------------------
Total 56.7%
======
(1) Most recent distribution paid or declared through 10/31/2016. 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 10/31/2016. 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 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, 2016 (UNAUDITED)
SUB-ADVISOR
ENERGY INCOME PARTNERS, LLC
Energy Income Partners, LLC ("EIP"), located in 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, Yield-Co's, and energy
infrastructure real estate investment trusts ("REITs"). 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, 2016, EIP manages or supervises approximately $5.3 billion of
assets. Private funds advised by EIP include a partnership for U.S. high net
worth individuals and an open-end mutual fund. 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 ETF 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 - CO-PORTFOLIO MANAGER, FOUNDER AND CEO OF
ENERGY INCOME PARTNERS, LLC
EVA PAO - CO-PORTFOLIO MANAGER, PRINCIPAL OF ENERGY INCOME PARTNERS, LLC
JOHN TYSSELAND - CO-PORTFOLIO MANAGER, PRINCIPAL OF 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. 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 that EIP believes offer opportunities for growth
and income. Under normal market conditions, the Fund will invest at least 65% of
its managed assets in equity securities issued by energy sector MLPs and energy
sector and energy utilities MLP-related entities. 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 MLP benchmarks over the fiscal
year ended October 31, 2016 was -1.80% and -2.33%, respectively. For AMZX, these
returns reflect a positive 7.53% from distribution payments, while the remaining
negative returns are due to share price depreciation. For WCHWMIDT, these
returns reflect a positive 7.10% from distribution payments, while the remaining
negative returns are due to share price depreciation. 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 2.3% per year over the
last 10 years(1). The cash distributions of MLPs, as represented by the AMZX,
decreased by about 11.6% over the last 12 months.
PERFORMANCE ANALYSIS
On a net asset value ("NAV") basis, for the fiscal year ended October 31, 2016,
the Fund provided a total return of -1.57%, including the reinvestment of
dividends(2). This compares, according to collected data, to a total return of
4.51% for the S&P 500(R) Index, -1.80% for AMZX and -2.33% for WCHWMIDT. On a
market value basis, the Fund had a total return, including the reinvestment of
dividends, of 2.98% for the fiscal year ended October 31, 2016. At the end of
the period, the Fund was priced at $15.66, while the NAV was $15.42, a premium
of 1.56%. On October 31, 2015, the Fund was priced at $16.86, while the NAV was
$17.37, a discount of 2.94%.
-----------------------------
(1) Source: Alerian Capital Management, EIP Calculations.
(2) 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 3
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PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
The Fund maintained its regular monthly Common Share distribution of $0.1183 for
the fiscal year ended October 31, 2016.
For the fiscal year ended October 31, 2016, the Fund's NAV outperformed the
-2.07% average of the MLP benchmarks by 50 basis points. We believe our
adherence to a strategy of owning non-cyclical energy infrastructure companies
in North America with high dividend payout ratios across a number of diverse
asset classes has helped the Fund outperform its benchmarks. We believe the MLP
structure and a high payout ratio are only suitable for a narrow set of
long-lived assets that have stable non-cyclical cash flows, such as regulated
pipelines or other infrastructure assets that are legal or natural monopolies.
Two important factors affecting the return of the Fund, relative to the average
of the MLP benchmarks, are the Fund's accrual for taxes and use of financial
leverage through a line of credit. The Fund established a committed facility
agreement with The Bank of Nova Scotia with a current maximum commitment amount
of $270,000,000. The Fund uses leverage because its portfolio 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 would be 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 negative impact on the performance of the Fund over the reporting
period. The accrual for taxes had a positive impact on the performance of the
Fund over the reporting period.
MARKET AND FUND OUTLOOK
MLPs continue to play an integral role in the restructuring of diversified
energy conglomerates. This restructuring includes the creation by these
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. We believe these diversified energy
conglomerates are restructuring so their regulated infrastructure assets with
predictable cash flows may be better valued by the market. In our opinion, the
result is a better financing tool to raise capital for new energy infrastructure
projects. This phenomenon has 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).
From January 1, 2016 through October 31, 2016, the MLP asset class experienced
one IPO that raised $0.3 billion compared to nine IPOs that raised $4.9 billion
during the same time period in 2015. Reduced activity may be attributed to weak
MLP equity markets as many indexes were down sharply during the trailing 12
months. From January 1, 2016 through October 31, 2016, total MLP equity issuance
was down 33% to $10.9 billion compared to $16.2 billion over the same time
period in 2015. Total MLP debt transactions were down 48% to $18.9 billion from
January 1, 2016 through October 31, 2016, which compares to $36.4 billion over
the same time period in 2015. (Barclays MLP Weekly)
The Fund continues to seek to invest 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 anticipated dividend
distribution that is meant to be most or all of an energy infrastructure
company's free cash flow.
Page 4
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
SHARES/
UNITS DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- ------------
MASTER LIMITED PARTNERSHIPS - 94.7%
CHEMICALS - 0.1%
43,000 Westlake Chemical Partners, L.P. (a)......................................... $ 907,300
------------
GAS UTILITIES - 6.0%
524,974 AmeriGas Partners, L.P. (a).................................................. 25,067,509
523,902 Suburban Propane Partners, L.P. (a).......................................... 16,864,405
------------
41,931,914
------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 2.5%
30,011 Brookfield Renewable Energy Partners, L.P. (CAD) (a)......................... 915,791
601,001 NextEra Energy Partners, L.P. (a) (b)........................................ 16,437,377
------------
17,353,168
------------
OIL, GAS & CONSUMABLE FUELS - 86.1%
226,534 Alliance Holdings GP, L.P. (a)............................................... 6,877,572
1,437,260 Alliance Resource Partners, L.P. (a)......................................... 35,931,500
306,500 Buckeye Partners, L.P. (a)................................................... 19,781,510
683,900 Columbia Pipeline Partners, L.P. (a)......................................... 10,942,400
2,399,625 Enbridge Energy Partners, L.P. (a)........................................... 59,150,756
3,889,441 Enterprise Products Partners, L.P. (a)....................................... 98,169,491
546,700 EQT Midstream Partners, L.P. (a)............................................. 40,931,429
1,106,305 Holly Energy Partners, L.P. (a).............................................. 33,797,618
920,800 Magellan Midstream Partners, L.P. (a)........................................ 61,905,384
262,000 NGL Energy Partners, L.P. (a)................................................ 4,663,600
860,300 ONEOK Partners, L.P. (a)..................................................... 34,188,322
51,000 Phillips 66 Partners, L.P.................................................... 2,254,200
1,894,467 Plains All American Pipeline, L.P. (a)....................................... 57,516,018
17,400 Shell Midstream Partners, L.P................................................ 472,062
1,296,911 Spectra Energy Partners, L.P. (a)............................................ 55,300,285
350,210 Tallgrass Energy Partners, L.P. (a).......................................... 15,839,998
624,600 TC PipeLines, L.P. (a)....................................................... 32,579,136
108,200 TransMontaigne Partners, L.P. (a)............................................ 4,221,964
815,307 Williams Partners, L.P. (a).................................................. 29,204,297
------------
603,727,542
------------
TOTAL MASTER LIMITED PARTNERSHIPS............................................ 663,919,924
(Cost $535,074,095) ------------
COMMON STOCKS - 37.9%
ELECTRIC UTILITIES - 9.2%
148,400 American Electric Power Co., Inc............................................. 9,622,256
172,600 Duke Energy Corp............................................................. 13,811,452
153,700 Emera, Inc. (CAD) (a)........................................................ 5,360,535
179,500 Eversource Energy (a)........................................................ 9,883,270
582,750 Exelon Corp.................................................................. 19,854,293
8,599 Hydro One Ltd. (CAD) (a) (c)................................................. 156,876
31,900 NextEra Energy, Inc.......................................................... 4,083,200
31,200 Southern (The) Co............................................................ 1,608,984
4,300 Xcel Energy, Inc............................................................. 178,665
------------
64,559,531
------------
See Notes to Financial Statements Page 5
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
GAS UTILITIES - 0.8%
13,633 Atmos Energy Corp. (a)....................................................... $ 1,014,159
62,000 Chesapeake Utilities Corp. (a)............................................... 3,971,100
9,624 UGI Corp. (a)................................................................ 445,495
------------
5,430,754
------------
MULTI-UTILITIES - 6.4%
111,500 CMS Energy Corp.............................................................. 4,699,725
138,200 National Grid PLC, ADR (a)................................................... 9,041,044
305,200 Public Service Enterprise Group, Inc......................................... 12,842,816
61,500 SCANA Corp................................................................... 4,511,640
126,500 Sempra Energy................................................................ 13,548,150
------------
44,643,375
------------
OIL, GAS & CONSUMABLE FUELS - 21.5%
630,000 Enbridge Income Fund Holdings, Inc. (CAD) (a)................................ 15,988,370
228,900 Enbridge, Inc................................................................ 9,881,613
479,800 Inter Pipeline, Ltd. (CAD) (a)............................................... 9,947,989
493,296 Keyera Corp. (CAD) (a)....................................................... 14,806,603
556,443 Kinder Morgan, Inc. (a)...................................................... 11,368,131
106,000 ONEOK, Inc................................................................... 5,133,580
153,000 Spectra Energy Corp.......................................................... 6,396,930
1,222,186 TransCanada Corp. (a)........................................................ 55,340,582
765,887 Williams (The) Cos., Inc..................................................... 22,363,900
------------
151,227,698
------------
TOTAL COMMON STOCKS.......................................................... 265,861,358
(Cost $250,094,276) ------------
REAL ESTATE INVESTMENT TRUSTS - 1.0%
EQUITY REAL ESTATE INVESTMENT TRUSTS - 1.0%
104,540 CorEnergy Infrastructure Trust, Inc.......................................... 2,830,943
265,690 InfraREIT, Inc. (a).......................................................... 4,415,768
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS.......................................... 7,246,711
(Cost $9,843,735) ------------
TOTAL INVESTMENTS - 133.6%................................................... 937,027,993
(Cost $795,012,106) (d) ------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (0.4%)
American Electric Power Co., Inc. Calls
600 @ $65.00 due November 2016................................................... (51,000)
500 @ 72.50 due November 2016 (e)............................................... (2,500)
------------
(53,500)
------------
Page 6 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- ------------
CALL OPTIONS WRITTEN (CONTINUED)
Enbridge Energy Partners, L.P. Call
8,300 @ $30.00 due April 2017 (e).................................................. $ (373,500)
------------
Enbridge, Inc. Calls
1,500 @ 45.00 due December 2016................................................... (99,000)
200 @ 45.00 due January 2017.................................................... (19,000)
------------
(118,000)
------------
Enterprise Products Partners, L.P. Calls
4,000 @ 29.00 due November 2016 (e)............................................... (80,000)
5,000 @ 28.00 due December 2016................................................... (50,000)
3,500 @ 29.00 due December 2016................................................... (28,000)
600 @ 31.00 due December 2016 (e)............................................... (1,200)
4,000 @ 29.00 due January 2017.................................................... (56,000)
1,100 @ 30.00 due January 2017.................................................... (5,500)
400 @ 29.00 due March 2017...................................................... (10,000)
------------
(230,700)
------------
Exelon Corp. Calls
1,200 @ 34.00 due November 2016................................................... (66,000)
100 @ 36.00 due November 2016 (e)............................................... (500)
1,900 @ 34.00 due December 2016................................................... (171,000)
1,100 @ 35.00 due January 2017.................................................... (89,100)
------------
(326,600)
------------
Kinder Morgan, Inc. Calls
2,600 @ 24.00 due November 2016................................................... (5,200)
100 @ 23.00 due December 2016................................................... (1,600)
------------
(6,800)
------------
Magellan Midstream Partners, L.P. Calls
1,800 @ 72.50 due November 2016................................................... (36,000)
2,500 @ 75.00 due November 2016 (e)............................................... (12,500)
100 @ 75.00 due January 2017.................................................... (2,000)
------------
(50,500)
------------
NextEra Energy, Inc. Call
200 @ 135.00 due December 2016................................................... (8,000)
------------
ONEOK, Inc. Calls
300 @ 50.00 due November 2016................................................... (28,500)
400 @ 52.50 due December 2016................................................... (31,000)
------------
(59,500)
------------
Plains All American Pipeline, L.P. Calls
998 @ 30.00 due November 2016................................................... (129,740)
600 @ 31.00 due November 2016................................................... (45,000)
1,200 @ 33.00 due December 2016................................................... (67,200)
6,000 @ 35.00 due December 2016................................................... (150,000)
200 @ 35.00 due February 2017................................................... (12,500)
------------
(404,440)
------------
Public Service Enterprise Group, Inc. Call
2,200 @ 50.00 due December 2016................................................... (11,000)
------------
See Notes to Financial Statements Page 7
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ ----------------------------------------------------------------------------- ------------
CALL OPTIONS WRITTEN (CONTINUED)
Sempra Energy Calls
600 @ $115.00 due November 2016 (e).............................................. $ (15,000)
300 @ 110.00 due January 2017................................................... (69,000)
------------
(84,000)
------------
Southern (The) Co. Call
200 @ 57.50 due November 2016 (e)............................................... (1,000)
------------
Spectra Energy Corp. Call
1,500 @ 38.00 due December 2016................................................... (615,000)
------------
TransCanada Corp. Calls
400 @ 45.00 due November 2016................................................... (50,000)
1,300 @ 50.00 due November 2016 (e)............................................... (26,000)
6,800 @ 50.00 due January 2017.................................................... (204,000)
600 @ 50.00 due February 2017................................................... (27,000)
------------
(307,000)
------------
Williams (The) Cos., Inc. Calls
800 @ 31.00 due November 2016................................................... (36,000)
3,400 @ 32.00 due November 2016................................................... (81,600)
600 @ 33.00 due November 2016................................................... (600)
------------
(118,200)
------------
TOTAL CALL OPTIONS WRITTEN................................................... (2,767,740)
(Premiums received $3,160,531) ------------
OUTSTANDING LOAN - (31.7%)................................................... (222,500,000)
NET OTHER ASSETS AND LIABILITIES - (1.5%).................................... (10,302,845)
------------
NET ASSETS - 100.0%.......................................................... $701,457,408
============
-----------------------------
(a) All or a portion of this security serves as collateral on the outstanding
loan.
(b) NextEra Energy Partners, L.P. is taxed as a "C" corporation for federal
income tax purposes.
(c) This security is restricted in the U.S. and cannot be offered for public
sale without first being registered under the Securities Act of 1933, as
amended. This security is not restricted on the foreign exchange where it
trades freely without any additional registration. As such, it does not
require the additional disclosure required of restricted securities.
(d) Aggregate cost for federal income tax purposes is $690,296,505. As of
October 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$255,831,702 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$9,100,214.
(e) This investment is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the Investment Company Act of 1940, as
amended. At October 31, 2016, investments noted as such are valued at
$(512,200) or (0.1)% of net assets.
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.
Page 8 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
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% $ (7,431,939)
Bank of Nova Scotia 1 month LIBOR 09/03/24 97,000,000 2.367% (7,209,506)
------------- -----------------
$ 174,250,000 $ (14,641,445)
============= =================
(1) The Fund pays the fixed rate and receives the floating rate. The floating
rates on October 31, 2016 were 0.530% and 0.528%, respectively.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2016 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
10/31/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Master Limited Partnerships*................... $ 663,919,924 $ 663,919,924 $ -- $ --
Common Stocks*................................. 265,861,358 265,861,358 -- --
Real Estate Investment Trusts*................. 7,246,711 7,246,711 -- --
--------------- --------------- --------------- ---------------
Total Investments.............................. $ 937,027,993 $ 937,027,993 $ -- $ --
=============== =============== =============== ===============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Call Options Written........................... $ (2,767,740) $ (1,447,040) $ (1,320,700) $ --
Interest Rate Swaps**.......................... (14,641,445) -- (14,641,445) --
--------------- --------------- --------------- ---------------
Total Investments.............................. $ (17,409,185) $ (1,447,040) $ (15,962,145) $ --
=============== =============== =============== ===============
* 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. As of October
31, 2016, the Fund transferred a common stock valued at $156,876 from Level 2 to
Level 1 of the fair value hierarchy. The common stock that transferred from
Level 2 to Level 1 did so as a result of being valued based on quoted prices.
Previously, this common stock was fair valued because a price was not available
from a third-party pricing service.
See Notes to Financial Statements Page 9
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value
(Cost $795,012,106)................................................................................. $ 937,027,993
Cash..................................................................................................... 9,372,333
Foreign currency (Cost $384,704)......................................................................... 382,940
Cash segregated as collateral for open swap contracts.................................................... 22,534,477
Receivables:
Dividends........................................................................................... 6,491,997
Income Taxes........................................................................................ 895,889
Interest............................................................................................ 438
--------------
Total Assets........................................................................................ 976,706,067
--------------
LIABILITIES:
Outstanding loan......................................................................................... 222,500,000
Deferred income taxes.................................................................................... 29,132,697
Options written, at value (Premiums received $3,160,531)................................................. 2,767,740
Swap contracts, at value ($968).......................................................................... 14,641,445
Payables:
Investment securities purchased..................................................................... 4,900,668
Investment advisory fees............................................................................ 792,553
Interest and fees on loan........................................................................... 264,617
Audit and tax fees.................................................................................. 99,000
Printing fees....................................................................................... 52,636
Custodian fees...................................................................................... 42,547
Administrative fees................................................................................. 37,029
Legal fees.......................................................................................... 5,704
Transfer agent fees................................................................................. 4,234
Trustees' fees and expenses......................................................................... 1,818
Financial reporting fees............................................................................ 773
Other liabilities........................................................................................ 5,198
--------------
Total Liabilities................................................................................... 275,248,659
--------------
NET ASSETS............................................................................................... $ 701,457,408
==============
NET ASSETS CONSIST OF:
Paid-in capital.......................................................................................... $ 646,459,680
Par value................................................................................................ 454,853
Accumulated net investment income (loss), net of income taxes............................................ (3,010,343)
Accumulated net realized gain (loss) on investments, written options, swap
contracts and foreign currency transactions, net of income taxes....................................... (28,830,177)
Net unrealized appreciation (depreciation) on investments, written options, swap
contracts and foreign currency translation, net of income taxes........................................ 86,383,395
--------------
NET ASSETS............................................................................................... $ 701,457,408
==============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)..................................... $ 15.42
==============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).............. 45,485,318
==============
Page 10 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $719,257)................................................ $ 11,490,523
Interest.............................................................................................. 4,256
--------------
Total investment income............................................................................ 11,494,779
--------------
EXPENSES:
Investment advisory fees.............................................................................. 8,952,394
Interest and fees on loan............................................................................. 2,766,636
Administrative fees................................................................................... 407,054
Printing fees......................................................................................... 159,249
Audit and tax fees.................................................................................... 103,151
Custodian fees........................................................................................ 83,170
Transfer agent fees................................................................................... 26,479
Legal fees............................................................................................ 20,685
Trustees' fees and expenses........................................................................... 19,775
Financial reporting fees.............................................................................. 9,250
Other................................................................................................. 104,282
--------------
Total expenses..................................................................................... 12,652,125
--------------
NET INVESTMENT INCOME (LOSS) BEFORE TAXES............................................................. (1,157,346)
--------------
Current state income tax benefit (expense)..................................... (19,144)
Current federal income tax benefit (expense)................................... 706,092
Current foreign income tax benefit (expense)................................... --
Deferred federal income tax benefit (expense).................................. (141,684)
Deferred state income tax benefit (expense).................................... (1,821,854)
--------------
Total income tax benefit (expense).................................................................... (1,276,590)
--------------
NET INVESTMENT INCOME (LOSS).......................................................................... (2,433,936)
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) before taxes on:
Investments........................................................................................ (109,596,248)
Written options.................................................................................... 8,034,900
Swap contracts..................................................................................... (3,736,245)
Foreign currency transactions...................................................................... (240,431)
--------------
Net realized gain (loss) before taxes................................................................. (105,538,024)
--------------
Deferred federal income tax benefit (expense).................................. 38,408,533
Deferred state income tax benefit (expense).................................... 1,724,685
--------------
Total income tax benefit (expense)................................................................. 40,133,218
--------------
Net realized gain (loss) on investments, written options, swap contracts and
foreign currency transactions...................................................................... (65,404,806)
--------------
Net increase from payment by the sub-advisor before taxes............................................. 23,511
--------------
Deferred federal income tax benefit (expense).................................. (8,557)
Deferred state income tax benefit (expense).................................... (385)
--------------
Total income tax benefit (expense)................................................................. (8,942)
--------------
Net increase from payment by the sub-advisor.......................................................... 14,569
--------------
Net change in unrealized appreciation (depreciation) before taxes on:
Investments........................................................................................ 75,435,515
Written options.................................................................................... (1,776,856)
Swap contracts..................................................................................... (4,188,471)
Foreign currency translation....................................................................... 1,123
--------------
Net change in unrealized appreciation (depreciation) before taxes..................................... 69,471,311
--------------
Deferred federal income tax benefits (expense)................................. (24,314,959)
Deferred state income tax benefits (expense)................................... (1,135,288)
--------------
Total income tax benefit (expense)................................................................. (25,450,247)
--------------
Net change in unrealized appreciation (depreciation) on investments, written
options, swap contracts and foreign currency translation........................................... 44,021,064
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................... (21,369,173)
--------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS....................................... $ (23,803,109)
==============
See Notes to Financial Statements Page 11
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2016 10/31/2015
---------------- ----------------
OPERATIONS:
Net investment income (loss)........................................................ $ (2,433,936) $ 3,266,322
Net realized gain (loss)............................................................ (65,404,806) 5,692,391
Net increase from payment by the sub-advisor........................................ 14,569 --
Net change in unrealized appreciation (depreciation)................................ 44,021,064 (214,644,650)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... (23,803,109) (205,685,937)
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... -- --
Return of capital................................................................... (64,513,936) (62,570,128)
-------------- --------------
Total distributions to shareholders................................................. (64,513,936) (62,570,128)
-------------- --------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested.............................................. 713,850 --
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions........... 713,850 --
-------------- --------------
Total increase (decrease) in net assets............................................. (87,603,195) (268,256,065)
-------------- --------------
NET ASSETS:
Beginning of period................................................................. 789,060,603 1,057,316,668
-------------- --------------
End of period....................................................................... $ 701,457,408 $ 789,060,603
============== ==============
Accumulated net investment income (loss), net of income taxes at end of period...... $ (3,010,343) $ (576,407)
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period................................................ 45,439,454 45,439,454
Common Shares issued as reinvestment under the Dividend Reinvestment Plan........... 45,864 --
-------------- --------------
Common Shares at end of period...................................................... 45,485,318 45,439,454
============== ==============
Page 12 See Notes to Financial Statements
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................... $ (23,803,109)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments....................................................... (605,412,246)
Sales of investments........................................................... 667,660,865
Proceeds from written options.................................................. 16,078,851
Amount paid to close written options........................................... (2,452,305)
Return of capital received from investment in MLPs............................. 45,421,811
Net realized gain/loss on investments and written options...................... 101,561,348
Net change in unrealized appreciation/depreciation on investments
and written options......................................................... (73,658,659)
Net change in unrealized appreciation/depreciation on swap contracts........... 4,188,471
Increase in cash segregated as collateral for open swap contracts.............. (5,113,755)
Net increase from payment from sub-advisor..................................... (23,511)
CHANGES IN ASSETS AND LIABILITIES:
Increase in income tax receivable.............................................. (328,840)
Increase in interest receivable................................................ (368)
Decrease in dividends receivable............................................... 3,541,985
Decrease in prepaid expenses................................................... 20,926
Increase in interest and fees on loan payable.................................. 64,990
Decrease in investment advisory fees payable................................... (111,524)
Increase in legal fees payable................................................. 1,012
Increase in printing fees payable.............................................. 11,870
Decrease in administrative fees payable........................................ (177,933)
Increase in custodian fees payable............................................. 12,978
Increase in transfer agent fees payable........................................ 1,975
Decrease in Trustees' fees and expenses payable................................ (304)
Increase in financial reporting fees payable................................... 2
Decrease in deferred income tax payable........................................ (12,710,479)
Increase in other liabilities payable.......................................... 4,356
----------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................. $ 114,778,407
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested......................................... 713,850
Distributions to Common Shareholders from return of capital.................... (64,513,936)
Proceeds from borrowing........................................................ 20,000,000
Repayment of borrowing......................................................... (72,500,000)
----------------
CASH USED IN FINANCING ACTIVITIES................................................. (116,300,086)
----------------
Decrease in cash and foreign currency (a)......................................... (1,521,679)
Cash and foreign currency at beginning of period.................................. 11,276,952
----------------
Cash and foreign currency at end of period........................................ $ 9,755,273
================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................. $ 2,701,646
================
Cash paid during the period for taxes............................................. $ --
================
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $1,123.
See Notes to Financial Statements Page 13
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 11/27/2012
------------------------------------------------ THROUGH
2016 2015 2014 10/31/2013 (a)
-------------- -------------- -------------- ---------------
Net asset value, beginning of period.............. $ 17.37 $ 23.27 $ 20.80 $ 19.10 (b)
---------- ---------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)...................... (0.05) 0.07 (0.03) (0.05)
Net realized and unrealized gain (loss)........... (0.48) (4.59) 3.83 2.81
---------- ---------- ---------- ---------
Total from investment operations.................. (0.53) (4.52) 3.80 2.76
---------- ---------- ---------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain................................. -- -- -- (0.25)
Return of capital................................. (1.42) (1.38) (1.33) (0.73)
---------- ---------- ---------- ---------
Total distributions............................... (1.42) (1.38) (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.................... $ 15.42 $ 17.37 $ 23.27 $ 20.80
========== ========== ========== =========
Market value, end of period....................... $ 15.66 $ 16.86 $ 21.61 $ 19.63
========== ========== ========== =========
TOTAL RETURN BASED ON NET ASSET VALUE (c)......... (1.57)% (d) (19.82)% 19.43% 14.27%
========== ========== ========== =========
TOTAL RETURN BASED ON MARKET VALUE (c)............ 2.98% (16.20)% 17.52% 2.99%
========== ========== ========== =========
-----------------------------
Net assets, end of period (in 000's).............. $ 701,457 $ 789,061 $1,057,317 $ 945,149
Portfolio turnover rate........................... 68% 32% 34% 35%
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Including current and deferred income taxes (e)... (0.11)% (10.66)% 11.28% 9.53% (f)
Excluding current and deferred income taxes....... 1.88% 1.74% 1.79% 1.67% (f)
Excluding current and deferred income taxes
and interest expense........................... 1.47% 1.45% 1.51% 1.43% (f)
RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS:
Net investment income (loss) ratio before tax
expenses....................................... (0.17)% 0.54% (0.24)% (0.42)% (f)
Net investment income (loss) ratio including
tax expenses (e)............................... 1.82% 12.93% (9.74)% (8.28)% (f)
INDEBTEDNESS:
Total loan outstanding (in 000's)................. $ 222,500 $ 275,000 $ 350,000 $ 334,000
Asset coverage per $1,000 of indebtedness (g)..... $ 4,153 $ 3,869 $ 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 of less than one year. Past performance is not
indicative of future results.
(d) The Fund received a reimbursement from the sub-advisor in the amount of
$23,511 in connection with a trade error. The reimbursement from the
sub-advisor represents less than $0.01 per share and had no effect on the
Fund's total return.
(e) Includes current and deferred income taxes associated with each component
of the Statement of Operations.
(f) Annualized.
(g) 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.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016
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 (the "SEC") 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, under normal market
conditions, invests at least 85% of its managed assets in equity and debt
securities of master limited partnerships ("MLPs"), MLP-related entities and
other energy sector and energy utilities companies that Energy Income Partners,
LLC ("EIP" or the "Sub-Advisor") believes offer opportunities for growth and
income. Under normal market conditions, the Fund invests at least 65% of its
managed assets in equity securities issued by energy sector MLPs and energy
sector and energy utilities MLP-related entities. 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 Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." 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 Fund's 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 the 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, real estate investment trusts and other equity
securities listed on any national or foreign exchange (excluding The
Nasdaq Stock Market LLC ("Nasdaq") and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale 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 third-party 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 third-party 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
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016
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 third-party 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 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 third-party 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 methodologies 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, 2016, 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 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016
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. Payments received or made by the Fund for interest rate swaps are recorded
in the Statement of Operations as "Net realized gain (loss) before taxes on swap
contracts." When a swap is terminated, the Fund will record a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transaction and the Fund's basis in the contract, if any. Generally, the basis
of the contracts, if any, is the premium received or paid. 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, 2016 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, 2016 to hedge against
changes in borrowing rates under the Fund's committed facility agreement. 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.
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, 2016
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.
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 $64,513,936 paid during the year ended October 31, 2016, 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 2016 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, 2016, distributions of $45,611,126 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)...... $ 706,092
Current state income tax benefit (expense)........ (19,144)
Current foreign income tax benefit (expense)...... --
Deferred federal income tax benefit (expense)..... 13,943,333
Deferred state income tax benefit (expense)....... (1,232,842)
----------------
Total income tax benefit (expense)................ $ 13,397,439
================
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. At October 31, 2016, the Fund
had a net operating loss carryforward for federal and state income tax purposes
of $78,590,508 and $111,245,259, respectively. The Fund's 2016 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, 2016 are as follows:
Deferred tax assets:
Federal net operating loss........................ $ 27,506,678
State net operating loss.......................... 8,125,991
State income taxes................................ 1,332,041
Capital loss carryforward......................... 27,030,903
Other............................................. 314,620
----------------
Total deferred tax assets......................... 64,310,233
Less: valuation allowance......................... (8,125,991)
----------------
Net deferred tax assets........................... $ 56,184,242
================
Deferred tax liabilities:
Unrealized gains on investment securities......... $ (85,316,939)
----------------
Total deferred tax liabilities.................... (85,316,939)
----------------
Total net deferred tax liabilities................ $ (29,132,697)
================
Total income taxes differ from the amount computed by applying the maximum
graduated federal income tax rate of 35% to net investment income and realized
and unrealized gains on investments.
Application of statutory income tax rate.......... $ (13,020,192)
State income taxes, net........................... (752,153)
Change in valuation allowance..................... 1,438,761
Other............................................. (1,063,855)
----------------
Total............................................. $ (13,397,439)
================
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry realized capital losses forward for five years following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2016, the
Fund had a capital loss carryforward of $77,231,151 that will expire according
to the following schedule:
Fiscal Year Amount Generated Amount Utilized Amount Expired Remaining Expiration
---------------- ---------------- --------------- -------------- ----------- ----------------
10/31/2015 $11,494,135 $ -- $ -- $11,494,135 10/31/2020
10/31/2016 65,737,016 -- -- 65,737,016 10/31/2021
----------- --------- ---------- -----------
$77,231,151 $ -- $ -- $77,231,151
=========== ========= ========== ===========
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 2014, 2015
and 2016 remain open to federal and state audit. As of October 31, 2016,
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
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016
transactions, foreign currency transactions and interest and dividends received
and are shown in "Net realized gain (loss) before taxes on Foreign currency
transactions" on the Statement of Operation. 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
Offsetting Assets and Liabilities require entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statements of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are 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. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statement of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency), for
the non-defaulting counterparty to liquidate the collateral and calculate the
net exposure to the defaulting party or request additional collateral.
At October 31, 2016, derivative assets and liabilities (by type) on a gross
basis are as follows:
Gross Amounts not Offset
in the Statement of
Assets and Liabilities
Gross Amounts Net Amounts of --------------------------
Gross Amounts of Offset in the Liabilities Presented Cash
Recognized Statement of Assets in the Statement Financial Segregated Net
Liabilities and Liabilities of Assets and Liabilities Instruments as Collateral Amount
--------------------------------------------------------------------------------------------------------------------------
Interest Rate
Swap Contracts $ (14,641,445) $ -- $ (14,641,445) $ -- $ 14,641,445 $ --
J. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
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.
During the year ended October 31, 2016, the Fund received a reimbursement from
the Sub-Advisor of $23,511 in connection with trade errors.
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.
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. BNYM IS and BNYM are subsidiaries of the Bank of New York Mellon
Corporation, a financial holding company.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016
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 equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's 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.
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.
Independent 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, 2016, were $608,710,730 and
$666,942,578, respectively.
5. DERIVATIVE TRANSACTIONS
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-----------------------------------------------------------------------------
Options outstanding at October 31, 2015.... 88,110 $ 4,684,788
Options Written............................ 312,922 16,078,851
Options Expired............................ (188,900) (9,433,076)
Options Exercised.......................... (124,929) (7,115,903)
Options Closed............................. (17,505) (1,054,129)
----------- -------------
Options outstanding at October 31, 2016.... 69,698 $ 3,160,531
=========== =============
The following table presents the types of derivatives held by the Fund at
October 31, 2016, 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 VALUE LIABILITIES LOCATION VALUE
--------------- ----------- ------------------------- ----------- ------------------------- -----------
Written Options Equity Risk -- -- Options written, at value $ 2,767,740
Interest Rate Interest
Swap Agreement Rate Risk Swap contracts, at value -- Swap contracts, at value 14,641,445
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, 2016, 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 $ 8,034,900
Net change in unrealized appreciation (depreciation) before taxes on written options (1,776,856)
INTEREST RATE RISK
Net realized gain (loss) before taxes on swap contracts (3,736,245)
Net change in unrealized appreciation (depreciation) before taxes on swap contracts (4,188,471)
The average notional value of interest rate swaps was $174,250,000 for the year
ended October 31, 2016.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016
6. BORROWINGS
The Fund has a committed facility agreement (the "Agreement") with The Bank of
Nova Scotia ("Scotia") that has a maximum commitment amount of $270,000,000.
Absent certain events of default or failure to maintain certain collateral
requirements, Scotia may not terminate the Agreement except upon 180 calendar
days' prior notice. The borrowing rate under the facility is equal to the
1-month LIBOR plus 85 basis points. Prior to March 1, 2016, the maximum
commitment amount was $400,000,000 and the borrowing rate was 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 the maximum commitment amount. The average amount outstanding for the
year ended October 31, 2016 was $223,890,710 with a weighted average interest
rate of 1.22%. As of October 31, 2016, the Fund had outstanding borrowings of
$222,500,000 under this committed facility Agreement. The high and low annual
interest rates for the year ended October 31, 2016 were 1.40% and 0.84%,
respectively. The interest rate at October 31, 2016 was 1.38%.
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 was
the following subsequent event:
On November 21, 2016, the Fund declared a distribution of $0.1183 per share to
Common Shareholders of record on December 5, 2016, payable December 12, 2016.
Page 22
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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, 2016, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for 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 audit 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, 2016, by correspondence with the Fund's
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust MLP and Energy Income Fund as of October 31, 2016, the results of
its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for 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 22, 2016
Page 23
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ADDITIONAL INFORMATION
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016 (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 Form N-Qs
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 24
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016 (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 26, 2016, 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 High Income Long/Short Fund, First Trust Energy Infrastructure
Fund, First Trust MLP and Energy Income Fund, First Trust Intermediate Duration
Preferred & Income Fund and First Trust New Opportunities MLP & Energy Fund was
held on April 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust MLP and Energy Income Fund as Class III Trustees for a three-year term
expiring at the Fund's annual meeting of shareholders in 2019. The number of
votes cast in favor of Mr. Bowen was 36,096,642, the number of votes against Mr.
Bowen was 604,317, and the number of broker non-votes was 8,738,495. The number
of votes cast in favor of Mr. Nielson was 36,076,405, the number of votes
against Mr. Nielson was 624,554, and the number of broker non-votes was
8,738,495. Richard E. Erickson, Thomas R. Kadlec and Robert F. Keith are the
other current and continuing Trustees.
CLARIFICATION TO INVESTMENT STRATEGY RELATING TO CANADIAN INCOME EQUITIES
On March 7, 2016, the Board of Trustees for the Fund (the "Board") approved a
clarification to the Fund's investment strategy relating to the Fund's
investment in Canadian Income Equities. The Fund's investment strategy outlined
in the Fund's prospectus provides as follows:
The Fund currently expects that its investments in Canadian Income
Equities will be, under normal market conditions, between 10% to 20% of
its Managed Assets.
The extent to which the Fund invests in Canadian Income Equities has evolved
over time. Accordingly, the Board approved the following clarification to the
Fund's investment strategy:
The Fund expects that its investments in Canadian Income Equities will be,
under normal market conditions, up to 20% of its Managed Assets.
Subsequently, on July 19, 2016, the Board approved an investment strategy change
to eliminate the 20% Canadian Income Equity prospectus limitation.
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.
Page 25
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016 (UNAUDITED)
MLP RISK: An investment in MLP units involves risks which differ from an
investment in common stock of a corporation. Holders of MLP units have limited
control and voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP units and
conflicts of interest exist between common unit holders and the general partner,
including those arising from incentive distribution payments.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. If the Fund is not in compliance with certain credit facility
provisions, the Fund may not be permitted to declare dividends or other
distributions.
RESTRICTED SECURITIES RISK: The Fund may invest in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that are unregistered or are held by control persons of the issuer and
securities that are subject to contractual restrictions on their resale. As a
result, restricted securities may be more difficult to value and the Fund may
have difficulty disposing of such assets either in a timely manner or for a
reasonable price. In order to dispose of an unregistered security, the Fund,
where it has contractual rights to do so, may have to cause such security to be
registered. A considerable period may elapse between the time the decision is
made to sell the security and the time the security is registered so that the
Fund could sell it. Contractual restrictions on the resale of securities vary in
length and scope and are generally the result of a negotiation between the
issuer and acquirer of the securities. The Fund would, in either case, bear
market risks during that period.
NON-DIVERSIFICATION RISK: 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 (the "Board") 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") for a one-year period ending
June 30, 2017 at a meeting held on June 13, 2016. The Board 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. At meetings held on April 22, 2016 and June 13, 2016, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor to the Fund (including the relevant
personnel responsible for these services and their experience); the advisory fee
rate payable by the Fund and the sub-advisory fees for the Fund as compared to
fees charged to a peer group of funds compiled by Management Practice, Inc.
("MPI"), an independent source (the "MPI Peer Group"), and as compared to fees
charged to other clients of the Advisor and the Sub-Advisor; expenses of the
Fund as compared to expense ratios of the funds in the MPI Peer Group;
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016 (UNAUDITED)
performance information for the Fund; 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 its affiliate, First Trust Capital Partners, LLC ("FTCP"), and the
Sub-Advisor; and information on the Advisor's and the Sub-Advisor's compliance
programs. The Board reviewed initial materials with the Advisor at a special
meeting held on April 22, 2016, prior to which the Independent Trustees and
their counsel met separately to discuss the information provided by the Advisor
and the Sub-Advisor. Following the April meeting, independent legal counsel on
behalf of the Independent Trustees requested certain clarifications and
supplements to the materials provided, and the information provided in response
to those requests was considered at an executive session of the Independent
Trustees and independent legal counsel held prior to the June 13, 2016 meeting,
as well as at the meeting held that day. 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 continue to be reasonable business
arrangements from the Fund's perspective as well as from the perspective of
shareholders. The Board determined that, given the totality of the information
provided with respect to the Agreements, the Board had received sufficient
information to renew the Agreements. 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 the services provided by the Advisor and the Sub-Advisor under the
Agreements. 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 all of the services provided by the Advisor to the Fund,
including the oversight of the Sub-Advisor, as well as the background and
experience of the persons responsible for such services. In reviewing the
services provided, the Board noted the compliance program that had been
developed by the Advisor and considered that it includes a robust program for
monitoring the Advisor's, the Sub-Advisor's and the Fund's compliance with the
1940 Act, as well as the Fund's compliance with its investment objective and
policies. In addition, as part of the Board's consideration of the Advisor's
services, the Advisor, in its written materials and at the April 22, 2016
meeting, described to the Board the scope of its ongoing investment in
additional infrastructure and personnel to maintain and improve the quality of
services provided to the Fund and the other funds in the First Trust Fund
Complex. With respect to the Sub-Advisory Agreement, the Board reviewed the
materials provided by the Sub-Advisor and considered the services that the
Sub-Advisor provides to the Fund, including the Sub-Advisor's day-to-day
management of the Fund's investments. In considering the Sub-Advisor's
management of the Fund, the Board noted the background and experience of the
Sub-Advisor's portfolio management team. In light of the information presented
and the considerations made, the Board concluded that the nature, extent and
quality of the services provided to the Fund by the Advisor and the Sub-Advisor
under the Agreements have been and are expected to remain satisfactory and that
the Sub-Advisor, under the oversight of the Advisor, has managed the Fund
consistent with its investment objective and policies.
The Board considered the advisory and sub-advisory fee rates payable under the
Agreements for the services provided. The Board noted that the sub-advisory fee
is paid by the Advisor from its advisory fee. The Board received and reviewed
information showing the advisory fee rates and expense ratios of the peer funds
in the MPI Peer Group, as well as advisory fee rates charged by the Advisor and
the Sub-Advisor to other fund and non-fund clients, as applicable. With respect
to the MPI Peer Group, 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; (iii) only half of the peer funds employ an advisor/sub-advisor
management structure, and only three of those peer funds employ an unaffiliated
sub-advisor; and (iv) some of the peer funds are part of a larger fund complex
that may allow for additional economies of scale. The Board took these
limitations into account in considering the peer data, and noted that the
advisory fee rate payable by the Fund, based on average net assets, was equal to
the median of the MPI Peer Group. With respect to fees charged to other clients,
the Board considered differences between the Fund and other clients that limited
their comparability. In considering the advisory fee rate overall, the Board
also considered the Advisor's statement that it seeks to meet investor needs
through innovative and value-added investment solutions and the Advisor's
description of its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor and Sub-Advisor for the Fund. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
received and reviewed information comparing the Fund's performance for periods
ended December 31, 2015 to the performance of the MPI Peer Group and to two
benchmark indexes. In reviewing the Fund's performance as compared to the
performance of the MPI Peer Group, the Board took into account the limitations
described above with respect to creating a relevant peer group for the Fund.
Based on the information provided on net asset value performance, the Board
noted that the Fund outperformed the MPI Peer Group average for the one- and
three-year periods ended December 31, 2015. The Board also noted that the Fund
underperformed the Wells Fargo Midstream MLP Total Return Index for the one- and
three-year periods, but outperformed the Alerian MLP Total Return Index for the
one- and three-year periods ended December 31, 2015. In addition, the Board
considered information provided by the Advisor on the impact of leverage on the
Fund's returns. The Board also received information on the Fund's annual
distribution rate as of December 31, 2015 and the Fund's average trading
discount during 2015 and comparable information for the peer group.
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016 (UNAUDITED)
On the basis of all the information provided on the fees, expenses and
performance of the Fund and the ongoing oversight by the Board, the Board
concluded that the advisory and sub-advisory fees continue to be reasonable and
appropriate in light of the nature, extent and quality of the services provided
by the Advisor and the Sub-Advisor to the Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. 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
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2015 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data for the same period. The Board noted the
inherent limitations in the profitability analysis, and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was not
unreasonable. In addition, the Board considered fall-out benefits described by
the Advisor that may be realized from its relationship with the Fund. The Board
considered the ownership interest of FTCP in the Sub-Advisor and potential
fall-out benefits to the Advisor from such ownership interest. The Board noted
that in addition to the advisory fees paid by the Fund, the Advisor is
compensated for fund reporting services pursuant to a separate Fund Reporting
Services Agreement.
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 information 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. The Board considered
fall-out benefits that may be 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 FTCP's ownership interest 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, 2016 (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 PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND OF SERVICE (1) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 137 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member, Sportsmed LLC
Suite 400 Inception (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Investor Services, Inc. 137 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 East Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises 137 Director of Trust
c/o First Trust Advisors L.P. (Financial and Management Consulting) Company of
120 East Liberty Drive, o Since Fund 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 137 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, First Trust 137 None
Chairman of the Board Advisors L.P. and First Trust Portfolios
120 East Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company) and Stonebridge Advisors LLC
D.O.B.: 09/55 (Investment Advisor)
-----------------------------
(1) 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.
(2) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2017 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2018 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2019 annual meeting of shareholders.
Page 29
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016 (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(3)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial
120 E. Liberty Drive, Executive Officer Officer (January 2016 to Present), Controller
Suite 400 o Since January 2016 (January 2011 to January 2016), Senior Vice
Wheaton, IL 60187 President (April 2007 to January 2016), First
D.O.B.: 01/66 Trust Advisors L.P. and First Trust
Portfolios L.P.; Chief Financial Officer,
BondWave LLC (Software Development
Company) (January 2016 to Present) and
Stonebridge Advisors LLC (Investment Advisor)
(January 2016 to Present)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present),
120 E. Liberty Drive, Officer and Chief Vice President (April 2012 to July 2016), First
Suite 400 Accounting Officer o Since January 2016 Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.; Vice President (September
D.O.B.: 08/72 2006 to April 2012), Guggenheim Funds
Investment Advisors, LLC/Claymore
Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Fund Counsel, BondWave LLC; Secretary of
Wheaton, IL 60187 Inception Stonebridge Advisors LLC
D.O.B.: 05/60
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
120 E. Liberty Drive, and Assistant Secretary Advisors L.P. 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
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FIRST TRUST MLP AND ENERGY INCOME FUND (FEI)
OCTOBER 31, 2016 (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).
March 2016
Page 31
This Page Left Blank Intentionally.
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
10 Wright Street
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, 2016 and $57,000
for the fiscal year ended October 31, 2015.
(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 $3,000 for the fiscal year ended October
31, 2016 and $0 for the fiscal year ended October 31, 2015.
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, 2016 and $0 for the fiscal year ended October 31, 2015.
(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 $42,000
for the fiscal year ended October 31, 2016 and $42,000 for the fiscal year
ended October 31, 2015.
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, 2016 and $0 for the fiscal year ended
October 31, 2015.
(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 $0 for the fiscal year ended
October 31, 2016 and $0 for the fiscal year ended October 31, 2015.
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, 2016 and $0 for the fiscal year ended October 31, 2015.
(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, 2016 were
$42,000 for the Registrant and $13,000 for the Registrant's investment
advisor and for the fiscal year ended October 31, 2015 were $42,000 for
the Registrant and $12,500 for the Registrant's investment advisor.
(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.
PROXY VOTING POLICIES AND PROCEDURES
If an adviser exercises voting authority with respect to client securities,
Advisers Act Rule 206(4)-6 requires the adviser to adopt and implement written
policies and procedures reasonably designed to ensure that client securities are
voted in the best interest of the client. This is consistent with legal
interpretations which hold that an adviser's fiduciary duty includes handling
the voting of proxies on securities held in client accounts over which the
adviser exercises investment or voting discretion, in a manner consistent with
the best interest of the client.
Absent unusual circumstances, EIP exercises voting authority with respect to
securities held in client accounts pursuant to provisions in its advisory
agreements. Accordingly, EIP has adopted these policies and procedures with the
aim of meeting the following requirements of Rule 206(4)-6:
o ensuring that proxies are voted in the best interest of clients;
o addressing material conflicts that may arise between EIP's interests
and those of its clients in the voting of proxies;
o disclosing to clients how they may obtain information on how EIP
voted proxies with respect to the client's securities;
o describing to clients EIP's proxy voting policies and procedures
and, upon request, furnishing a copy of the policies and procedures
to the requesting client.
ENGAGEMENT OF INSTITUTIONAL SHAREHOLDER SERVICES INC.
With the aim of ensuring that proxies are voted in the best interest of EIP
clients, EIP has engaged Institutional Shareholder Services Inc. ("ISS"), as its
independent proxy voting service to provide EIP with proxy voting
recommendations, as well as to handle the administrative mechanics of proxy
voting. EIP has directed ISS to utilize its Proxy Voting Guidelines in making
recommendations to vote, as those guidelines may be amended from time to time.
CONFLICTS OF INTEREST IN PROXY VOTING
There may be instances where EIP's interests conflict, or appear to conflict,
with client interests in the voting of proxies. For example, EIP may provide
services to, or have an investor who is a senior member of, a company whose
management is soliciting proxies. There may be a concern that EIP would vote in
favor of management because of its relationship with the company or a senior
officer. Or, for example, EIP (or its senior executive officers) may have
business or personal relationships with corporate directors or candidates for
directorship.
EIP addresses these conflicts or appearances of conflicts by ensuring that
proxies are voted in accordance with the recommendations made by ISS, an
independent third party proxy voting service. As previously noted, in most
cases, proxies will be voted in accordance with ISSs's own pre-existing proxy
voting guidelines.
DISCLOSURE ON HOW PROXIES WERE VOTED
EIP discloses to clients in its Form ADV how clients can obtain information on
how their proxies were voted, by contacting EIP at its office in Westport, CT.
EIP also discloses in the ADV a summary of these proxy voting policies and
procedures and that upon request, clients will be furnished a full copy of these
policies and procedures.
It is the responsibility of the CCO to ensure that any requests made by clients
for proxy voting information are responded to in a timely fashion and that a
record of requests and responses are maintained in EIP's books and records.
PROXY MATERIALS
EIP personnel instructs custodians to forward to ISS all proxy materials
received on securities held in EIP client accounts.
LIMITATIONS
In certain circumstances, where EIP has determined that it is consistent with
the client's best interest, EIP will not take steps to ensure that proxies are
voted on securities in the client's account. The following are circumstances
where this may occur:
* Limited Value: Proxies will not be required to be voted on securities in a
client's account if the value of the client's economic interest in the
securities is indeterminable or insignificant (less than $1,000). Proxies
will also not be required to be voted for any securities that are no
longer held by the client's account.
* Securities Lending Program: When securities are out on loan, they are
transferred into the borrower's name and are voted by the borrower, in its
discretion. In most cases, EIP will not take steps to see that loaned
securities are voted. However, where EIP determines that a proxy vote, or
other shareholder action, is materially important to the client's account,
EIP will make a good faith effort to recall the security for purposes of
voting, understanding that in certain cases, the attempt to recall the
security may not be effective in time for voting deadlines to be met.
* Unjustifiable Costs: In certain circumstances, after doing a cost-benefit
analysis, EIP may choose not to vote where the cost of voting a client's
proxy would exceed any anticipated benefits to the client of the proxy
proposal.
OVERSIGHT OF POLICY
The CCO is responsible for overseeing these proxy voting policies and
procedures. In addition, the CCO will review these policies and procedures not
less than annually with a view to determining whether their implementation has
been effective and that they are operating as intended and in such a fashion as
to maintaining EIP's compliance with all applicable requirements.
RECORDKEEPING ON PROXIES
In it the responsibility of EIP's CCO to ensure that the following proxy voting
records are maintained:
o a copy of EIP's proxy voting policies and procedures;
o a copy of all proxy statements received on securities in client
accounts (EIP may rely on ISS or the SEC's EDGAR system to satisfy
this requirement);
o a record of each vote cast on behalf of a client (EIP relies on ISS
to satisfy this requirement);
o a copy of any document prepared by EIP that was material to making a
voting decision or that memorializes the basis for that decision;
o a copy of each written client request for information on how proxies
were voted on the client's behalf or for a copy of EIP's proxy
voting policies and procedures, and
o a copy of any written response to any client request for information
on how proxies were voted on their behalf or furnishing a copy of
EIP's proxy voting policies and procedures.
The CCO will see that these books and records are made and maintained
in accordance with the requirements and time periods provided in Rule 204-2 of
the Advisers Act.
For any registered investment companies advised by EIP, votes made on its behalf
will be stored electronically or otherwise recorded so that they are available
for preparation of the Form N-PX, Annual Report of Proxy Voting Record of
Registered Management Investment Company.
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, 2016.
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, Yield-Co's, and energy infrastructure real
estate investment trusts ("REITs"). 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, 2105, EIP manages or supervises approximately $4.9 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 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.
John K. Tysseland
John Tysseland is a Senior Research Analyst. From 2005 to 2014, he worked at
Citi Research most currently serving as a Managing Director where he covered
midstream energy companies and MLPs. From 1998 to 2005, he worked at Raymond
James & Associates as a Vice President who covered the oilfield service industry
and established the firm's initial coverage of MLPs in 2001. Prior to that, he
was an Equity Trader at Momentum Securities from 1997 to 1998 and an Assistant
Executive Director at Sumar Enterprises from 1996 to 1997. He graduated from The
University of Texas at Austin in 1996 with a BA in economics.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
Information provided as of October 31, 2016.
# of Accounts Total Assets
Managed for which for which
Total Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Based on is Based on
Team Member Type of Accounts* Managed** Total Assets Performance Performance
----------------------------- ---------------------------------- ------------- ------------ ------------------ ------------
1. James Murchie Registered Investment Companies: 7 $ 2,933.8 0 $ 0
Other Pooled Investment Vehicles: 1 $ 188.4 1 $ 188.4
Other Accounts: 653 $ 1,298.6 1 $ 2.2
2. Eva Pao Registered Investment Companies: 7 $ 2,933.8 0 $ 0
Other Pooled Investment Vehicles: 1 $ 188.4 1 $ 188.4
Other Accounts: 653 $ 1,298.6 1 $ 2.2
3. John Tysseland Registered Investment Companies: 7 $ 2,933.8 0 $ 0
Other Pooled Investment Vehicles: 1 $ 188.4 1 $ 188.4
Other Accounts: 653 $ 1,298.6 2 $ 2.2
* Examples for Types of Accounts:
Other Registered Investment Companies: Any investment vehicle which is
registered with the SEC, such as mutual funds of registered hedge
funds.
Other Pooled Investment Vehicles: Any unregistered account for which
investor assets are pooled together, such as an unregistered hedge
fund.
Other Accounts: Any accounts managed not covered by the other two
categories, such as privately managed accounts.
** Core Component FEI: $ 0
Senior Loan Component FEI: $ 0
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, Energy Income Partners, LLC ("EIP") portfolio managers
serves as portfolio managers to separately managed accounts, one of which has a
performance fee, and provides its model portfolio to unified managed accounts
and serve as portfolio managers to three closed-end management investment
companies other than the Fund, an actively managed exchange-traded fund (ETF), a
sleeve of an ETF and a sleeve of a series of a variable insurance trust.
The portfolio managers also serve as portfolio managers to one private
investment fund (the "Private Fund"), which charges a performance fee and an
open end registered mutual fund.
EIP has written policies and procedures regarding order aggregation and
allocation that seek to ensure that all accounts are treated fairly and
equitably and that no account is at a disadvantage. EIP will generally execute
client transactions on an aggregated basis when EIP 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 an 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, 2016.
The Fund's portfolio managers are compensated by a competitive minimum
base salary and share in the profits of EIP in relation to their ownership of
EIP. The profits of EIP are influenced by the assets under management and the
performance of the Funds (i.e. all Funds managed or sub-advised by EIP) as
described above. Therefore, their success is based on the growth and success for
all the funds, not just the funds that charge an incentive fee. The Fund's
portfolio managers understand that you cannot have asset growth without the
trust and confidence of investors, therefore, they do not engage in taking undue
risk to generate performance.
The compensation of the EIP 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 a competitive
compensation package.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of October 31, 2016.
Dollar Range of Fund Shares
Name Beneficially Owned
James J. Murchie $0
Eva Pao $0
John Tysseland $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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2016
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2016
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 20, 2016
-------------------
* Print the name and title of each signing officer under his or her signature.