PROSPECTUS
$25,000,000
ENERGY INCOME AND GROWTH FUND
SERIES B ENERGY NOTES, DUE MARCH 30, 2046
-------------------------
Energy Income and Growth Fund (the "Fund") is a non-diversified,
closed-end management investment company. The Fund's investment objective is to
achieve a high level of after-tax total return with an emphasis on current
distributions paid to shareholders.
The Fund is offering $25,000,000 aggregate principal amount of auction
rate senior notes, designated "Series B Energy Notes." The Fund will issue the
Series B Energy Notes without coupons in denominations of $25,000 and any
integral multiple thereof. The principal amount of the Series B Energy Notes
will be due and payable on March 30, 2046. Holders of the Series B Energy
Notes will receive interest payments at an annual rate that will vary for each
rate period. The interest rate for the initial rate period will be 4.40%. The
initial rate period is from the issue date through March 30, 2006. For
subsequent rate periods, the interest payable on the Series B Energy Notes will
vary based on a rate set at auction, usually held every seven days. Prospective
purchasers should review the auction procedures carefully.
The Series B Energy Notes are not listed on an exchange. You may buy or
sell your Series B Energy Notes only through an order placed at an auction with
or through a broker-dealer that has entered into an agreement with the auction
agent and the Fund, or in a secondary market that may be maintained by certain
broker-dealers. These broker-dealers are not required to maintain a market in
the Series B Energy Notes, and a secondary market, if one develops, may not
provide you with liquidity.
The Series B Energy Notes will be unsecured obligations of the Fund
and, upon liquidation, dissolution or winding up of the Fund, will rank: (1)
senior to all of the Fund's outstanding common shares and any preferred shares;
(2) on a parity with any unsecured creditors of the Fund and any unsecured
senior securities representing indebtedness of the Fund, including Series A
Energy Notes issued in $34,000,000 principal amount in 2005 and any additional
Energy Notes that may in the future be issued by the Fund; and (3) junior to any
secured creditors of the Fund. The Series B Energy Notes are redeemable prior to
their stated maturity in certain circumstances described in this prospectus.
(Continued on following page)
-------------------------
INVESTING IN THE SERIES B ENERGY NOTES INVOLVES CERTAIN RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 16.
THE SERIES B ENERGY NOTES DO NOT REPRESENT A DEPOSIT OR OBLIGATION OF,
AND ARE NOT GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY
INSTITUTION, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------------
PER $25,000
PRINCIPAL AMOUNT
SERIES B
ENERGY NOTES TOTAL
---------------- -----
Public offering price $25,000 $25,000,000
Underwriting discounts and commissions $ 250 $ 250,000
Proceeds to the Fund(1) $24,750 $24,750,000
--------------------
(1) Does not include offering expenses payable by the Fund estimated to
be $160,000, or $160 per $25,000 principal amount of Series B
Energy Notes.
The Underwriter is offering the Series B Energy Notes subject to
various conditions. The Underwriter expects to deliver the Series B Energy Notes
to an investor's broker-dealer in book-entry form through the facilities of The
Depository Trust Company, on or about March 23, 2006.
-------------------------
A.G. EDWARDS
-------------------------
The date of this prospectus is March 20, 2006.
The Fund seeks to provide its shareholders with a means of investing in
a portfolio of cash-generating securities of energy companies. The Fund invests
principally in publicly traded master limited partnerships ("MLPs") and related
public entities in the energy sector, which the Fund's sub-adviser believes
offer opportunities for income and growth. Due to the tax treatment of cash
distributions made by MLPs to their investors (such as the Fund, which has
elected to be treated as a regular C Corporation for tax purposes), the Fund
believes that a significant portion of its income will be tax deferred, thereby
maximizing cash available for distribution by the Fund to its shareholders.
There can be no assurance that the Fund will achieve its investment objective.
On January 28, 2005, the Fund issued $34,000,000 aggregate principal
amount auction rate senior notes, designated "Series A Energy Notes." The
Series A Energy Notes are rated "Aaa" by Moody's Investor Services, Inc.
("Moody's") and "AAA" by Fitch Ratings Services, Inc. ("Fitch"). As of November
30, 2005, the aggregate principal amount of Series A Energy Notes represented
approximately 18.97% of the Fund's Managed Assets (as such term is defined in
this prospectus). The Series A Energy Notes and the Series B Energy Notes are
collectively referred to as the "Energy Notes."
This offering is conditioned upon the Series B Energy Notes securing a
rating of "Aaa" from Moody's and "AAA" from Fitch.
First Trust Advisors L.P. (the "Adviser" or "First Trust Advisors") is
the Fund's investment adviser, responsible for supervising the Fund's
sub-adviser, monitoring the Fund's investment portfolio, managing the Fund's
business affairs and providing certain clerical and bookkeeping and other
administrative services. Fiduciary Asset Management, LLC (the "Sub-Adviser" or
"Fiduciary Asset Management") is the Fund's sub-adviser and is primarily
responsible for the day-to-day supervision and investment strategy of the Fund.
Fiduciary Asset Management serves as investment adviser, sub-adviser or
portfolio supervisor to investment portfolios with approximately $16.8 billion
in assets which it managed or supervised as of November 30, 2005. See the
Statement of Additional Information under "Investment Adviser."
You should read this prospectus, which contains important information
about the Fund, before deciding to invest, and retain it for future reference. A
Statement of Additional Information, dated March 20, 2006 (the "SAI"), as it may
be supplemented, containing additional information about the Fund and the Energy
Notes, has been filed with the Securities and Exchange Commission (the
"Commission") and is incorporated by reference in its entirety into this
prospectus, which means that it is part of this prospectus for legal purposes.
You can review the table of contents of the SAI on page 53 of this prospectus.
You may request a free copy of the SAI by calling (800) 988-5891 or by writing
to the Fund, or obtain a copy (and other information regarding the Fund) from
the Commission's web site (http://www.sec.gov).
Page 2
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this prospectus and in the Statement of Additional
Information (the "SAI"), including "Summary of Certain Provisions of the
Indenture" included in Appendix A to the SAI. Capitalized terms used but not
defined in this prospectus shall have the meanings given to such terms in
Appendix A to the SAI.
The Fund Energy Income and Growth Fund (the "Fund) is a
non-diversified, closed-end management investment
company. The Fund's common shares, $.01 par value,
are traded on the American Stock Exchange under
the symbol "FEN." See "Description of Shares." As
of November 30, 2005, the Fund had 6,446,995
common shares outstanding and net assets
attributable to common shares of approximately
$145,229,527. As of November 30, 2005, the Fund
had $34,000,000 aggregate principal amount auction
rate senior notes, designated "Series A Energy
Notes," outstanding.
Investment Adviser
and Sub-Adviser First Trust Advisors L.P. (the "Adviser" or "First
Trust Advisors") is the Fund's investment adviser,
responsible for supervising the Fund's
sub-adviser, monitoring the Fund's investment
portfolio, managing the Fund's business affairs
and providing certain clerical, bookkeeping and
other administrative services. The Adviser, in
consultation with the Sub-Adviser (as defined
below), also is responsible for determining the
Fund's overall investment strategy and overseeing
its implementation. Fiduciary Asset Management LLC
(the "Sub-Adviser" or "Fiduciary Asset
Management") is the Fund's sub-adviser and is
primarily responsible for the day-to-day
supervision and investment strategy of the Fund.
First Trust Advisors, a registered investment
adviser, is an Illinois limited partnership formed
in 1991. First Trust Advisors serves as investment
adviser or portfolio supervisor to investment
portfolios with approximately $23.0 billion in
assets which it managed or supervised as of
January 31, 2006. See the SAI under "Investment
Adviser."
Fiduciary Asset Management, a Missouri limited
liability company and a registered investment
adviser, manages a broad range of equity and fixed
income securities for institutional and private
wealth clients. Founded in 1994, Fiduciary Asset
Management serves as investment adviser,
sub-adviser or portfolio supervisor to investment
portfolios with approximately $16.8 billion of
assets, which it managed or supervised as of
November 30, 2005.
The Offering The Fund is offering $25,000,000 aggregate
principal amount of auction rate senior notes,
designated "Series B Energy Notes" in
denominations of $25,000 and any integral multiple
thereof. The Series B Energy Notes are being
offered by A.G. Edwards & Sons, Inc. ("A.G.
Edwards" or the "Underwriter"), as underwriter.
See "Underwriting." The Series A Energy Notes and
the Series B Energy Notes are collectively
referred to as the "Energy Notes."
Ratings It is a condition of the Underwriter's obligation
to purchase the Series B Energy Notes that the
Series B Energy Notes receive a rating of "Aaa"
from Moody's Investors Service, Inc. ("Moody's")
and "AAA" from Fitch Rating Services, Inc.
("Fitch").
Ranking The Series B Energy Notes will be unsecured
obligations of the Fund and, upon liquidation,
dissolution or winding up of the Fund, will rank:
(1) senior to all of the Fund's outstanding common
shares and any preferred shares; (2) on a parity
with any unsecured creditors of the Fund and any
unsecured senior securities representing
indebtedness of the Fund, including Series A
Page 3
Energy Notes issued in $34,000,000 principal
amount in 2005 and any additional Energy Notes
that may in the future be issued by the Fund; and
(3) junior to any secured creditors of the Fund.
Secondary Market The Series B Energy Notes will not be listed on an
exchange. Instead, you may buy or sell your Series
B Energy Notes at an auction, which is normally
held every seven days by submitting orders to a
broker-dealer that has entered into an agreement
with the Auction Agent and the Fund (a
"Broker-Dealer"), or to a broker-dealer that has
entered into a separate agreement with a
Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may
maintain a secondary trading market in the Series
B Energy Notes outside of auctions, but may
discontinue this activity at any time. There is no
assurance that a secondary market will develop or
that, if one develops, will provide you with
liquidity. You may transfer your Series B Energy
Notes outside of auctions only to or through a
Broker-Dealer, or a broker-dealer that has entered
into a separate agreement with a Broker-Dealer.
Interest and Rate Periods The table below shows the interest rate for the
initial rate period of the Series B Energy Notes.
For subsequent rate periods, the Series B Energy
Notes will bear interest at a rate set at
auctions, normally held every seven days. In most
instances, interest also is payable every seven
days, on the day following the end of the rate
period. See "Description of the Series B Energy
Notes--Interest and Rate Periods--Determination of
Interest Rate" and "ThE Auction."
The table also shows the date from which interest
on the Series B Energy Notes accrues at the
initial rate, the interest payment date for the
initial rate period and the day on which interest
normally will be paid. If interest is payable on a
Monday or Friday and that day is not a Business
Day, then interest generally will be paid on the
first Business Day thereafter. If interest is
payable on a Tuesday, Wednesday or Thursday and
that day is not a Business Day, then your interest
will generally be paid on the first Business Day
prior to that day. See "Description of the Series
B Energy Notes--Interest and Rate
Periods--Notification of Rate Period."
INITIAL DATE OF PAYMENT DATE SUBSEQUENT
INTEREST ACCUMULATION FOR INITIAL INTEREST
RATE AT INITIAL RATE RATE PERIOD PAYMENT DATE
-------- --------------- ------------ ------------
4.40% March 23, 2006 March 31, 2006 April 7, 2006
Auction Procedures In an auction, you may choose to buy, sell or hold
the Series B Energy Notes. The following is a
brief summary of the auction procedures, which we
describe in more detail elsewhere in this
prospectus and in the SAI. These Auction
Procedures are complicated, and there are
exceptions to these procedures. Many of the terms
in this section have a special meaning. Any terms
used but not defined in this section have the
meanings assigned to them in Appendix A to the
SAI.
The first Auction for the Series B Energy Notes
will be held on March 30, 2006 and each
subsequent Auction normally will be held on a
Thursday. Unless otherwise permitted by the
Fund, Beneficial Owners and Potential Beneficial
Owners of Series B Energy Notes may participate in
auctions only through their Broker-Dealers.
Broker-Dealers will submit the Orders of their
respective customers who are Beneficial Owners or
Potential Beneficial Owners to the Auction Agent,
designating themselves as "Existing Holders" in
respect of Series B Energy Notes subject to Orders
Page 4
submitted or deemed submitted to them by
Beneficial Owners and as "Potential Holders" in
respect of Series B Energy Notes subject to Orders
submitted to them by Potential Beneficial Owners.
On or prior to each Auction Date (usually the
Business Day immediately preceding the first day
of each Rate Period), each Beneficial Owner may
submit Orders to its Broker-Dealer as follows:
o Hold Order--indicating the Beneficial
Owner's desire to hold Series B Energy
Notes without regard to the Applicable
Rate for the next Rate Period.
o Bid--indicating the Beneficial Owner's
desire to purchase or hold the indicated
number of Series B Energy Notes if the
Applicable Rate for Series B Energy Notes
of such series for the next Rate Period
is not less than the rate or spread
specified in the bid and which shall be
deemed an irrevocable offer to sell
Series B Energy Notes if the Applicable
Rate for Series B Energy Notes for the
next Rate Period is less than the rate or
spread specified in the Bid.
o Sell Order--indicating the Beneficial
Owner's desire to sell Series B Energy
Notes without regard to the Applicable
Rate for the next Rate Period.
A Beneficial Owner may submit different Orders to
its Broker-Dealer with respect to the different
series of Series B Energy Notes it holds. If a
Beneficial Owner offers through its Broker-Dealer
to purchase Series B Energy Notes in an Auction,
the Beneficial Owner, for purposes of that offer
to purchase additional notes, will be treated as a
Potential Beneficial Owner. Bids by Beneficial
Owners through their Broker-Dealers specifying
rates higher than the Maximum Rate will be treated
as Sell Orders. A Beneficial Owner of the Series B
Energy Notes of a series that fails to submit an
Order with respect to such Series B Energy Notes
will be deemed to have submitted a Hold Order;
provided, however, that if a Beneficial Owner
fails to submit an Order with respect to Series B
Energy Notes relating to a Special Rate Period of
more than seven Rate Period Days, such Beneficial
Owner will be deemed to have submitted a Sell
Order with respect to such Series B Energy Notes.
Potential Beneficial Owners may submit Bids
through their Broker-Dealers in which they offer
to purchase Series B Energy Notes if the
Applicable Rate for the next Rate Period for these
notes is not less than the rate specified in the
Bid. A Bid by a Potential Beneficial Owner with a
rate higher than the Maximum Rate will not be
considered.
Neither the Fund nor the Auction Agent will be
responsible for a Broker-Dealer's failure to act
in accordance with the instructions of Beneficial
Owners or Potential Beneficial Owners or failure
to comply with any of the Auction Procedures.
A Broker-Dealer also may hold Series B Energy
Notes for its own account as a Beneficial Owner.
Thus, a Broker-Dealer may submit Orders to the
Auction Agent as a Beneficial Owner or a Potential
Beneficial Owner and participate in an Auction as
an Existing Holder or Potential Holder on both its
own behalf and on behalf of its customers. Any
Order placed with the Auction Agent by a
Broker-Dealer as or on behalf of a Beneficial
Owner or a Potential Beneficial Owner will be
treated in the same manner as an Order placed with
a Broker-Dealer by a Beneficial Owner or a
Potential Beneficial Owner. Similarly, any failure
by a Broker-Dealer to submit to the Auction Agent
an Order in respect of any Series B Energy Notes
held by it or its customers who are Beneficial
Owners will be treated in the same manner as a
Page 5
Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of Series B
Energy Notes held by it, as we describe above.
Inasmuch as a Broker-Dealer participates in an
Auction as an Existing Holder or a Potential
Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner,
whether a customer or itself, all discussion
herein relating to the consequences of an Auction
for Existing Holders and Potential Holders also
applies to the underlying beneficial ownership
interests represented thereby.
If Sufficient Clearing Bids exist in an Auction
for the Series B Energy Notes (that is, in
general, the number of Series B Energy Notes
subject to Bids by Potential Holders with rates
equal to or lower than the Maximum Rate is at
least equal to the number of Series B Energy Notes
subject to Sell Orders by Existing Holders), the
Applicable Rate will be the lowest rate specified
in the Submitted Bids which, taking into account
the rate per annum and all lower rates per annum
bid by Existing Holders and Potential Holders,
would result in Existing Holders and Potential
Holders owning all of the Series B Energy Notes
available for purchase in the auction.
If Sufficient Clearing Bids do not exist, the Rate
Period next following the Auction automatically
will be seven days in length and the Applicable
Rate will be the Maximum Rate. In such event,
Existing Holders that have submitted Sell Orders
will not be able to sell in the Auction all, and
may not be able to sell any, Series B Energy Notes
subject to the Sell Orders. As a result, in
certain circumstances, Existing Holders, and the
Beneficial Owners they represent, may not have
liquidity. If all Existing Holders submit, or are
deemed to have submitted, Hold Orders in an
Auction, the Rate Period next following the
Auction automatically shall be the same length as
the immediately preceding Rate Period, and the
Applicable Rate will be 80% of the Reference Rate.
The Auction Procedures include a pro rata
allocation of notes for purchase and sale, which
may result in an Existing Holder selling or
holding, or a Potential Holder purchasing, a
number of Series B Energy Notes different than the
number of Series B Energy Notes specified in its
Order. To the extent the allocation procedures
have this result, a Broker-Dealer will be required
to make appropriate pro rata allocations among its
customers.
Settlement of purchases and sales will be made on
the next Business Day (also an "Interest Payment
Date") after the Auction Date through the
Securities Depository. Purchasers will make
payment through their Agent Members in same-day
funds to the Securities Depository against
delivery by book-entry to their Agent Members. The
Securities Depository will make payment to the
sellers' Agent Members in accordance with the
Securities Depository's normal procedures, which
provide for payment in same-day funds. See "The
Auction."
Determination of
Maximum Rate Except during a Default Period, the Applicable
Rate for any Rate Period for Series B Energy Notes
will not be more than the Maximum Rate. The
Maximum Rate will depend on the credit rating
assigned to the Series B Energy Notes and on the
duration of the Rate Period. The Maximum Rate will
be the Applicable Percentage of the Reference
Rate, subject to upward but not downward
adjustment at the discretion of the Board of
Trustees after consultation with the
Broker-Dealers. The Applicable Percentage will be
determined based on the lower of the credit
ratings assigned on that date to the Series B
Energy Notes by Moody's and Fitch as follows:
Page 6
MOODY'S FITCH APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or above AA- or above 200%
A3 to A1 A- to A+ 250%
Baa3 to Baa1 BBB- to BBB+ 275%
Below Baa3 Below BBB- 300%
For Standard Rate Periods or less only, the
Applicable Rate resulting from an Auction will not
be less than the Minimum Rate. The Applicable Rate
for any Rate Period commencing during any Default
Period, and the Default Rate described under
"Description of the Series B Energy Notes -
Interest and Rate Periods," initially will be 300%
of the Reference Rate. The Reference Rate is the
greater of:
(1) the applicable AA Composite Commercial
Paper Rate (for a Rate Period of fewer
than 184 days) or the applicable Treasury
Index Rate (for a Rate Period of 184 days
or more), or
(2) the applicable London-InterBank Offered
Rate ("LIBOR").
Asset Maintenance The Fund must maintain Eligible Assets having an
aggregate Discounted Value at least equal to the
Energy Notes Basic Maintenance Amount as of each
Valuation Date. The Fund also must maintain the
1940 Act Energy Notes Asset Coverage, which
generally is asset coverage for the Energy Notes
on a non-discounted basis of at least 300% as of
the last Business Day of each month. See
"Description of the Series B Energy Notes--Asset
Maintenance." The Discount Factors and guidelines
for calculating the Discounted Value of the Fund's
portfolio for purposes of determining whether the
Energy Notes Basic Maintenance Amount has been
satisfied have been established by Moody's and
Fitch in connection with the Fund's receipt from
Moody's and Fitch of the "Aaa" and "AAA" credit
ratings, respectively, with respect to the Series
B Energy Notes on their issue date.
The Fund estimates that on the issue date the 1940
Act Energy Notes Asset Coverage, based on the
composition of its portfolio as of November 30,
2005 and after giving effect to the issuance of
the Series B Energy Notes offered hereby
($25,000,000), will be 346%.
In addition, there may be additional asset
coverage requirements imposed in connection with
any other "Borrowings," as defined below.
Redemption Although the Fund will not ordinarily redeem the
Series B Energy Notes prior to their Stated
Maturity, it may be required to redeem the Series
B Energy Notes if, for example, the Fund does not
meet an asset coverage ratio required by law or in
order to correct a failure to meet rating agency
guidelines in a timely manner. The Fund may
voluntarily redeem the Series B Energy Notes in
certain circumstances. See "Description of the
Series B Energy Notes--Redemption."
Risk Factors Before investing in the Series B Energy Notes you
should consider certain risks carefully. The
primary risks of investing in the Series B Energy
Notes are:
o the Fund may be unable to generate
sufficient income from operations to pay
interest on the Series B Energy Notes
when due and principal at maturity;
o if an Auction fails, you may not be able
to sell some or all of your Series B
Energy Notes;
Page 7
o you may receive less than the price you
paid for your Series B Energy Notes if
you sell them outside of an Auction,
especially when market interest rates are
rising;
o a rating agency could downgrade the
Series B Energy Notes, which could affect
liquidity; and
o the Fund may be forced to redeem your
Series B Energy Notes to meet regulatory
or rating agency requirements or may
voluntarily redeem your Series B Energy
Notes in certain circumstances, in which
case you may not be able to reinvest your
funds at the same or similar rates.
For additional risks of investing in the Series B
Energy Notes and risks of the Fund, see "Risk
Factors."
Events of Default;
Remedies Any one of the following events constitutes an
"event of default" under the Indenture:
o default in the payment of interest upon
any series of the Energy Notes when due
and payable and the continuance of such
default for 30 days;
o default in the payment of the principal
of any series of the Energy Notes at
maturity;
o default in the performance, or breach, of
any covenant or warranty of the Fund in
the Indenture, and continuance of such
default or breach for a period of 90 days
after notice has been given;
o certain voluntary or involuntary
proceedings involving the Fund and
relating to bankruptcy, insolvency or
other similar laws;
o if, on the last Business Day of each of
twenty-four consecutive calendar months,
the Energy Notes have an asset coverage
under the 1940 Act of less than 100%; or
o any other "event of default" provided
with respect to any series, including a
default in the payment of any redemption
price payable on the date scheduled for
redemption.
Upon the occurrence and continuance of an event of
default, the holders of a majority in principal
amount of outstanding Energy Notes of a series or
the Trustee may declare the principal amount of
the Energy Notes immediately due and payable. Upon
an event of default relating to bankruptcy,
insolvency or other similar laws, acceleration of
maturity occurs automatically. At any time after a
declaration of acceleration with respect to the
Energy Notes of any series has been made and
before a judgment or decree for payment of the
money due has been obtained by the Trustee, the
holders of a majority in principal amount of the
outstanding Energy Notes of that series, by
written notice to the Fund and the Trustee, may
rescind and annul such declaration and its
consequences if certain conditions are met. See
"Description of the Series B Energy Notes--Events
of Default and Acceleration of Maturity;
Remedies."
Payment Restrictions
on Share of
Beneficial Interest Upon issuance of the Series B Energy Notes, which
constitute senior securities representing
indebtedness under the Investment Company Act of
1940, the Fund will not be permitted to declare
any dividend (except a dividend payable in stock
of the Fund), or declare any other distribution,
upon any outstanding common or preferred shares of
the Fund (except as noted below), or repurchase
any such shares, unless, in every such case, the
Energy Notes have at the time of the declaration
Page 8
of any such dividend or distribution or at the
time of any such purchase an asset coverage of at
least 300% after deducting the amount of such
dividend, distribution, or purchase price, as the
case may be. Dividends or other distributions on,
or redemptions or repurchases of, common shares
and preferred shares also are prohibited at any
time that an event of default under the Energy
Notes (which includes a default in the payment of
interest on the Energy Notes, when due) has
occurred and is continuing.
Dividends may, however, be declared upon any
preferred shares provided the Energy Notes have an
asset coverage of at least 200% at the time of
declaration of the dividend after deducting the
amount of such dividend. See "Description of the
Series B Energy Notes--Payment Restrictions on
Shares of Beneficial Interest."
Use of Leverage The Fund intends to use financial leverage,
including issuing the Series B Energy Notes, for
investment purposes. In 2005, the Fund issued
$34,000,000 aggregate principal amount of Series A
Energy Notes that represented approximately 18.97%
of its Managed Assets (as defined below) as of
November 30, 2005. After giving effect to the
issuance of Series B Energy Notes, it is expected
that the Energy Notes will represent approximately
28.89% of the Fund's Managed Assets.
The Fund also may leverage through borrowings,
including the issuance of commercial paper,
additional notes or preferred shares. The timing
and terms of any leverage transactions will be
determined by the Fund's Board of Trustees.
Throughout this prospectus, the Energy Notes,
commercial paper, other notes and other
borrowings, including the issuance of preferred
shares, may be referred collectively to as
"Borrowings."
Hedging and Strategic
Transactions The Fund may, but is not required to, use various
hedging and strategic transactions to seek to
reduce interest rate risks arising from any use of
leverage, to facilitate portfolio management and
mitigate risks. The Fund anticipates that, on a
consistent and ongoing basis, it will write (or
sell) covered call options on the common stock of
energy companies held in the Fund's portfolio.
The Fund may purchase and sell derivative
investments such as exchange-listed and
over-the-counter put and call options on
securities, energy-related commodities, equity,
fixed income and interest rate indices, and other
financial instruments, purchase and sell financial
futures contracts and options thereon, and enter
into various interest rate transactions such as
swaps, caps, floors or collars or credit
transactions and credit default swaps. The Fund
also may purchase derivative investments that
combine features of these instruments.
The Fund generally seeks to use these instruments
and transactions as a portfolio management or
hedging technique to seek to protect against
possible adverse changes in the market value of
securities held in or to be purchased for the
Fund's portfolio, protect the value of the Fund's
portfolio, facilitate the sale of certain
securities for investment purposes, manage the
effective interest rate exposure of the Fund, or
establish positions in the derivatives markets as
a temporary substitute for purchasing or selling
particular securities.
Trustee and Auction Agent Deutsche Bank National Trust Company will serve
as the Trustee under the Indenture and Deutsche
Bank Trust Company Americas will serve as the
Auction Agent under the Auction Agency Agreement.
Page 9
Investment Objective
and Policies The Fund's investment objective is to seek a high
level of after-tax total return with an emphasis
on current distributions paid to shareholders. For
purposes of the Fund's investment objective, total
return includes capital appreciation of, and all
distributions received from, securities in which
the Fund invests, regardless of the tax character
of the distributions. The Fund seeks to provide
investors with exposure to a portfolio of
cash-generating securities of energy companies.
The Fund invests principally in master limited
partnerships ("MLPs") and related public entities
in the energy sector, which the Fund's Sub-Adviser
believes offer opportunities for income and
growth. Due to the tax treatment of cash
distributions made by MLPs to their investors
(such as the Fund), the Fund believes that a
significant portion of its income will be tax
deferred, thereby maximizing cash available for
distribution by the Fund to its shareholders.
Under normal market conditions, as a
non-fundamental policy, the Fund will invest at
least 85% of its Managed Assets (including assets
obtained through leverage) in securities of energy
companies, energy sector MLPs and MLP-related
entities, and will invest at least 65% of its
Managed Assets in equity securities of MLPs and
MLP-related entities.
The Fund has adopted the following additional
non-fundamental investment policies:
o The Fund may invest in unregistered or
otherwise restricted securities, which
may include MLP common units, MLP
subordinated units and securities of
public and private energy companies. The
Fund does not intend to invest more than
35% of its Managed Assets in restricted
securities, or no more than 10% of its
Managed Assets in private companies.
o The Fund may invest up to 25% of its
Managed Assets in debt securities of
energy companies, MLPs and MLP-related
entities, including securities rated
below investment grade (commonly referred
to as "junk bonds"). Below investment
grade debt securities will be rated at
least B3 by Moody's and at least B- by
S&P at the time of purchase, or
comparably rated by another statistical
rating organization or if unrated,
determined to be of comparable quality by
the Sub-Adviser.
o The Fund will not invest more than 10% of
its Managed Assets in any single issuer.
o The Fund will not engage in short sales,
except to the extent the Fund engages in
derivative investments to seek to
mitigate its interest rate risk in
connection with the Fund's use of
leverage or market risks associated with
the Fund's portfolio.
The Fund's investment objective is considered
fundamental and may not be changed without
shareholder approval. The remainder of the Fund's
investment policies, including its investment
strategy, are considered non-fundamental and may
be changed by the Board of Trustees without
shareholder approval; provided, that the Fund
provides investors with at least 60 days' prior
notice of any change in the Fund's investment
strategy. Unless otherwise stated, all investment
restrictions apply at the time of purchase and the
Fund will not be required to reduce a position due
solely to market fluctuations.
The term "Managed Assets" means the average daily
gross asset value of the Fund (which includes
assets attributable to the Fund's preferred
shares, if any, and the principal amount of
borrowings), minus the sum of the Fund's accrued
Page 10
and unpaid dividends on any outstanding preferred
shares and accrued liabilities (other than the
principal amount of any borrowings incurred,
commercial paper or notes or other forms of
indebtedness issued by the Fund and the
liquidation preference of any outstanding
preferred shares). There can be no assurance that
the Fund's investment objective will be achieved.
See "The Fund's Investments" and "Risks Factors"
in this prospectus and "Investment Policies and
Techniques" in the SAI.
The Fund's Investments The Fund's investments consist of equity and/or
debt securities issued by energy companies and
energy sector MLPs and MLP-related entities. The
companies in which the Fund will invest generally
are involved in the business of transporting,
processing, storing, distributing or marketing
natural gas, natural gas liquids (including
propane), crude oil, refined petroleum products,
coal or electricity, or exploring, developing,
managing or producing such commodities or
products, or in supplying energy-related products
and services.
The type of MLP and MLP-related entity equity
securities the Fund purchases include common
units, subordinated units and I-Shares. Unlike the
holders of common stock of a corporation,
investors in MLP common units, including the Fund,
have limited control and voting rights on matters
affecting the partnership. Investors in MLP common
units generally are entitled to minimum quarterly
distributions ("MQD") from the MLP, including
arrearage rights, which must be satisfied before
any distributions are paid to subordinated unit
holders or incentive payments are made to the
MLP's general partner. MLP common units typically
are listed and traded on a U.S. securities
exchange. While the Fund anticipates that it
generally will purchase MLP common units in open
market transactions, the Fund may purchase MLP
common units through direct placements.
MLP subordinated units provide for distributions
to be made to subordinated unit holders once the
MQD payable to common unit holders has been
satisfied but prior to incentive payments to the
MLP's general partner. MLP subordinated units do
not provide for arrearage rights and typically are
convertible into common units after a specified
period of time or upon the achievement of
specified financial goals. MLP subordinated units
typically are not listed or publicly traded, so
the Fund anticipates that it will purchase MLP
subordinated units directly from MLP affiliates or
holders of such shares.
I-Shares are similar in most respects to common
units except that distributions payable on
I-Shares are in the form of additional I-Shares
rather than cash. As a result, the Fund will
consider its own distribution targets and cash
holdings when making a determination whether to
purchase I-Shares.
The Fund also may invest in equity and debt
securities of MLP-related entities, such as
general partners or other affiliates of MLPs, and
equity and debt securities of energy companies
that are organized and/or taxed as corporations.
The Fund may invest up to 35% of its Managed
Assets in equity securities issued by energy
companies. The Fund intends to purchase these
equity securities in market transactions but also
may purchase securities directly from the issuers
in private placements.
Tax Considerations The Fund will be taxed as a regular corporation
for federal income tax purposes and as such will
be obligated to pay federal and applicable state
and foreign corporate taxes on its taxable income.
This differs from most public investment
Page 11
companies, which elect to be treated as "regulated
investment companies" under the Internal Revenue
Code of 1986, as amended, in order to avoid paying
entity level income taxes. Under current law, the
Fund does not expect to be eligible to elect
treatment as a regulated investment company due to
its investment of a substantial portion of its
managed assets in MLPs, which may only be invested
in by a regulated investment company to a limited
extent. As a result, the Fund will be obligated to
pay taxes on its taxable income unlike most other
investment companies which are not so obligated.
However, as discussed below, the Fund expects that
a substantial portion of the income it receives
from MLPs will be treated as a tax-deferred return
of capital, thus reducing the Fund's current tax
liability. Federal legislation enacted in 2004
allows limited investments by regulated investment
companies in certain types of publicly traded
partnerships. This legislation may put the Fund at
a competitive disadvantage compared to other funds
that elect to be treated as regulated investment
companies. If the Fund could qualify under this
legislation or future legislation as a regulated
investment company, the Fund may in the future
elect to be treated as a regulated investment
company. The taxation of Fund distributions is
discussed further under "Certain Federal Income
Tax Matters."
Page 12
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund was organized as a Massachusetts
business trust on March 25, 2004, pursuant to a Declaration of Trust governed by
the laws of the Commonwealth of Massachusetts. On June 29, 2004, the Fund issued
an aggregate of 5,400,000 common shares in its initial public offering. The
Fund's common shares are listed on the American Stock Exchange under the symbol
"FEN." On January 28, 2005, the Fund issued $34,000,000 aggregate principal
amount Series A Energy Notes. The Fund's principal office is located at 1001
Warrenville Road, Suite 300, Lisle, Illinois 60532, and its telephone number is
(630) 241-4141.
The following provides information about the Fund's outstanding
securities as of November 30, 2005:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common Shares Unlimited 0 6,446,995
Energy Notes, Series A $34,000,000 0 $34,000,000
Energy Notes, Series B $25,000,000 0 --
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements. Forward-
looking statements include statements regarding the goals, beliefs, plans or
current expectations of the Adviser and/or the Sub-Adviser 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 Fund's actual results,
performance or achievements 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 prospectus, you are
cautioned not to place undue reliance on these forward-looking statements, which
reflect the judgment of Adviser and/or Sub-Adviser 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.
Page 13
FINANCIAL HIGHLIGHTS
Information contained in the table below shows the operating
performance of the Fund from the commencement of the Fund's investment
operations on June 17, 2004 until November 30, 2004 and for the fiscal year
ended November 30, 2005. The information for these periods has been derived
from the financial statements for the Fund audited by Deloitte & Touche LLP,
whose report is contained in the SAI and is available upon request.
FOR THE JUNE 17, 2004-
YEAR ENDED NOVEMBER 30,
NOVEMBER 30, 2005 2004
----------------- ---------------
Net asset value, beginning of period................................... $21.34 $19.10
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss.................................................... (0.34) (0.13)
Net realized and unrealized gain on investments and interest
rate cap transaction.......................................... 2.86 2.74
------- -------
Total from investment operations after income tax expense.............. 2.52 2.61
------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain on investments...................................... (0.88) --
Return of capital...................................................... (0.45) (0.33)
------- -------
Total from distributions............................................... (1.33) (0.33)
------- -------
Common shares offering costs charges to paid-in capital................ -- (0.04)
------- -------
Net asset value, end of period......................................... $22.53 $21.34
------- -------
Market value, end of period............................................ $20.92 $22.12
------- -------
TOTAL RETURN BASED ON NET ASSET VALUE (1) ............................. 11.96% 13.53%
TOTAL RETURN BASED ON MARKET VALUE (2)................................. 0.29% 12.38%
Net assets, end of period (in thousands)............................... $145,230 $136,993
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Including tax expense, reimbursements, and interest expense......... 8.31% 18.09%(7)
Excluding interest expense and tax expense and including
reimbursements................................................. 1.57% 1.36%(7)
Excluding tax expense and reimbursements and including
interest expense............................................... 2.64% 2.20%(7)
Excluding tax expense and including interest expense and
reimbursments.................................................. 2.33% 1.91%(7)
RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS:
Net investment loss ratio before tax expenses....................... (2.29%) (1.49%)(7)
Net investment loss ratio including tax expenses (3)................ (8.27%) (17.67%)(7)
Portfolio turnover rate................................................ 38.18% 34.86%
DEBT:
Total Energy Notes outstanding ($25,000 per note)...................... 1,360 N/A
Principal amount and market value per Energy Note (4).................. $25,074 N/A
Asset coverage per Energy Note (5)..................................... $131,786 N/A
Total loan outstanding (in 000's)...................................... N/A $30,000
Asset coverage per $1,000 senior indebtedness (6)...................... N/A $5,566
-------------------------------------
(1) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if
any, at prices obtained by the Dividend Reinvestment Plan and changes in
net asset value per share and does not reflect sales load.
(2) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if
any, at prices obtained by the Dividend Reinvestment Plan and changes in
Common Share market price per share, all based on Common Share market
price per share.
(3) Includes tax expense associated with each component of the Statement of
Operations included in the Fund's financial statements.
(4) Includes accumulated and unpaid interest.
(5) Calculated by subtracting the Fund's total liabilities (not including the
Energy Notes) from the Fund's total assets and dividing this by the number
of Energy Notes outstanding.
(6) Calculated by subtracting the Fund's total liabilities (not including loan
outstanding) from the Fund's total assets and dividing this by the amount
of senior indebtedness.
(7) Annualized.
Page 14
USE OF PROCEEDS
The net proceeds of the offering of the Series B Energy Notes will be
approximately $24,590,000. The underwriting discounts and commissions and
estimated offering costs ($410,000) of the Series B Energy Notes will be
capitalized and amortized over the life of the Series B Energy Notes. The Fund
will use a portion of the net proceeds of the offering to reduce its outstanding
indebtedness, in the form of a revolving line of credit with a current
outstanding balance of approximately $6.5 million. Interest accrues on such
credit facility in the amount of LIBOR, plus 100 basis points. The remaining net
proceeds will be used to make investments consistent with the investment
strategy of the Fund.
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
November 30, 2005, and as adjusted to give effect to the issuance of the Series
B Energy Notes offered hereby.
ACTUAL AS ADJUSTED
NOVEMBER 30, 2005 NOVEMBER 30, 2005
----------------- -----------------
LONG-TERM DEBT
Energy Notes, Series B, denominations of $25,000(1) -- $25,000,000
Energy Notes, Series A, denominations of $25,000........................ $34,000,000 34,000,000
------------ ------------
Total long-term debt.................................. $34,000,000 $59,000,000
------------ ------------
COMMON SHAREHOLDERS' EQUITY:
Common shares, $.01 par value per share; unlimited shares authorized,
6,446,995 shares outstanding................................... $64,470 $64,470
Accumulated net realized loss on investments sold,
net of income taxes............................................ (2,632,588) (2,632,588)
Net unrealized appreciation of investments and interest
rate cap, net of income taxes.................................. 29,873,731 29,873,731
Paid-in capital.................................................... 117,923,914 117,923,914
------------ ------------
Net assets applicable to common shares............................. $145,229,527 $145,229,527
--------------------
(1) The underwriting discounts and commissions and estimated offering costs of
the Series B Energy Notes (to be paid by the Fund) will be capitalized and
amortized over the life of the Series B Energy Notes.
Page 15
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in the Series B Energy Notes.
RISKS OF INVESTING IN THE SERIES B ENERGY NOTES
Unsecured Investment. The Series B Energy Notes represent an unsecured
obligation of the Fund to pay interest and principal, when due. The Fund cannot
assure you that it will have sufficient funds or that it will be able to arrange
for additional financing to pay interest on the Series B Energy Notes when due
or to repay the Series B Energy Notes at maturity. The Fund's failure to pay
interest on the Series B Energy Notes when due or to repay the Series B Energy
Notes at maturity would constitute an event of default under the Indenture and
could cause a default under other agreements that the Fund may enter into from
time to time. There is no sinking fund with respect to the Series B Energy
Notes, and at maturity the entire outstanding principal amount of the Series B
Energy Notes will become due and payable. See "Description of the Series B
Energy Notes--Events of Default and Acceleration of Maturity; Remedies."
Interest Rate Risk. The Series B Energy Notes pay interest based on
short-term interest rates. If short-term interest rates rise, interest rates on
the Series B Energy Notes may rise so that the amount of interest payable to
holders of the Series B Energy Notes would exceed the current income from the
Fund's portfolio securities. While the Fund intends to manage this risk through
its portfolio investments in floating rate senior secured loans, there is no
guarantee these strategies will be implemented or will be successful in reducing
or eliminating this interest rate risk. In addition, rising market interest
rates could impact negatively the value of the Fund's investment portfolio,
reducing the amount of assets serving as asset coverage for the Series B Energy
Notes.
Auction Risk. You may not be able to sell your Series B Energy Notes at
an Auction if the Auction fails; that is, if there are more Series B Energy
Notes offered for sale than there are buyers for those Series B Energy Notes.
Also, if you place Hold Orders (orders to retain Series B Energy Notes) at an
Auction only at a specified rate, and that bid rate exceeds the rate set at the
Auction, you will not retain your Series B Energy Notes. Finally, if you buy
Series B Energy Notes or elect to retain Series B Energy Notes without
specifying a rate below which you would not wish to continue to hold those
Series B Energy Notes, and the Auction sets a below-market rate, you may receive
a lower rate of return on your Series B Energy Notes than the market rate. See
"Description of the Series B Energy Notes" and "The Auction--Auction
Procedures."
Secondary Market Risk. If you try to sell your Series B Energy Notes
between Auctions, you may not be able to sell any or all of your Series B Energy
Notes, or you may not be able to sell them in the $25,000 increments for which
they were purchased or $25,000 increments for which they were purchased plus
accrued interest. If the Fund has designated a Special Rate Period (a rate
period other than seven days), changes in interest rates could affect the price
you would receive if you sold your Series B Energy Notes in the secondary
market. Broker-dealers that maintain a secondary trading market for the Series B
Energy Notes are not required to maintain this market, and the Fund is not
required to redeem the Series B Energy Notes either if an Auction or an
attempted secondary market sale fails because of a lack of buyers. The Series B
Energy Notes are not registered on a stock exchange or The Nasdaq Stock Market.
If you sell your Series B Energy Notes to a broker-dealer between Auctions, you
may receive less than the price you paid for them, especially when market
interest rates have risen since the last Auction.
Ratings and Asset Coverage Risk. While Moody's and Fitch have assigned
ratings of "Aaa" and "AAA" respectively, to the Series B Energy Notes, ratings
do not completely reflect the risks associated with an investment in the notes.
The ratings do not eliminate or mitigate the risks of investing in the Series B
Energy Notes. A rating agency could downgrade the Series B Energy Notes, which
will make the Series B Energy Notes less liquid at an auction or in the
secondary market. If a rating agency downgrades the ratings assigned to the
Series B Energy Notes, the Fund may alter its portfolio or redeem the Series B
Energy Notes. In addition, the Fund may redeem voluntarily the Series B Energy
Notes under certain circumstances. See "Description of the Series B Energy Notes
--Asset Maintenance" for a description of the asset maintenance tests the Fund
must meet.
Inflation Risk. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of your Series B
Energy Notes investment or the income from that investment will be worth less in
the future. As inflation occurs, the real value of the Series B Energy Notes and
payments therefrom declines. For additional general risks that inflation may
pose to investors in the Fund, see "--General Risks of Investing in the
Fund--Inflation Risk."
Decline in Net Asset Value Risk. A material decline in the Fund's net
asset value may impair the Fund's ability to maintain required levels of asset
coverage. For a description of risks affecting the Fund, please see "-- General
Risks of Investing in the Fund" below.
Page 16
Leverage Risk. On January 28, 2005, the Fund completed an offering of
$34,000,000 aggregate principal amount in Series A Energy Notes. As of November
30, 2005, the Series A Energy Notes represented approximately 18.97% of the
Fund's Managed Assets. After giving effect to the issuance of Series B Energy
Notes, it is expected that the Energy Notes will represent approximately 28.89%
of its Managed Assets. The Fund also may leverage through Borrowings, including
the issuance of commercial paper, preferred stock or additional notes.
Upon issuance of the Series B Energy Notes, which constitute senior
securities representing indebtedness, under the requirements of the 1940 Act,
the value of the Fund's total assets, less all liabilities and indebtedness of
the Fund not represented by senior securities, must be at least equal to 300% of
the aggregate value of the Series B Energy Notes and any other such senior
securities representing indebtedness.
In order to maintain the ratings of "Aaa" and "AAA" by Moody's and
Fitch, respectively, of the Series B Energy Notes, asset coverage or portfolio
composition provisions in addition to and more stringent than those required by
the 1940 Act are imposed in connection with the issuance of such a rating. See
"Description of the Series B Energy Notes--Asset Maintenance." In addition,
restrictions may be imposed on certain investment practices in which the Fund
may otherwise engage. If the Fund seeks an investment grade rating from one or
more nationally recognized statistical rating organizations for any preferred
shares (which the Fund expects to do if it issues any such preferred shares),
additional asset coverage and portfolio composition requirements may be imposed
by such rating organizations.
In the event of a default under any secured Borrowings, the lenders may
have the right to cause a liquidation of the collateral (i.e., sell portfolio
securities) and if any such default is not cured, the lenders may be able to
control the liquidation.
The Fund reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt to maintain or
increase the Fund's current level of leverage to the extent permitted by the
1940 Act and existing agreements between the Fund and third parties.
Because the fee paid to the Advisers will be calculated on the basis of
Managed Assets, the fee will be higher when leverage is used, giving the
Advisers an incentive to use leverage.
GENERAL RISKS OF INVESTING IN THE FUND
Investment and Market Risk. An investment in the Fund's Series B Energy
Notes is subject to investment risk, including the possible loss of the entire
principal amount that you invest. Your investment in the Series B Energy Notes
represents an indirect investment in the securities owned by the Fund,
substantially all of which are traded on a national securities exchange or in
the over-the-counter market. An investment in the Fund's Series B Energy Notes
is not intended to constitute a complete investment program and should not be
viewed as such. The value of these securities, like other market investments,
may increase or decrease, sometimes rapidly and unpredictably. The Fund has been
designed primarily as a long-term investment vehicle and is not intended to be
used as a short-term trading vehicle.
Energy Sector-Related Risks. The Fund's investments generally will be
concentrated in the energy sector, with a particular concentration in energy
sector MLPs and MLP-related entities. Certain risks inherent in investing in the
energy business of these types of securities include the following:
o Commodity Pricing Risk. MLPs, MLP-related entities and energy
companies may be affected directly by energy commodity prices,
especially those energy companies who own the underlying energy
commodity. Commodity prices fluctuate for several reasons
including, changes in market and economic conditions, the impact
of weather on demand, levels of domestic production and imported
commodities, energy conservation, domestic and foreign
governmental regulation and taxation and the availability of
local, intrastate and interstate transportation systems.
Volatility of commodity prices, which leads to a reduction in
production or supply, also may impact the performance of MLPs,
MLP-related entities and energy companies involved solely in the
transportation, processing, storing, distribution or marketing of
commodities.
Volatility of commodity price also may make it more difficult for
MLPs, MLP-related entities and energy companies to raise capital
to the extent the market perceives that their performance may be
tied directly to commodity prices.
o Supply and Demand Risk. A decrease in the production of natural
gas, NGLs, crude oil, coal or other energy commodities or a
decrease in the volume of such commodities available for
transportation, processing, storage or distribution may impact
adversely the financial performance of MLPs, MLP-related entities
and energy companies. Production declines and volume decreases
could be caused by various factors, including catastrophic events
affecting production, depletion of resources, labor difficulties,
Page 17
environmental proceedings, increased regulations, equipment
failures and unexpected maintenance problems, import supply
disruption, increased competition from alternative energy sources
or depressed commodity prices. Alternatively, a sustained decline
in demand for these commodities also could impact the financial
performance of MLPs, MLP-related entities and energy companies.
Factors which could lead to a decline in demand include economic
recession or other adverse economic conditions, higher fuel taxes
or governmental regulations, increases in fuel economy, consumer
shifts to the use of alternative fuel sources, an increase in
commodity prices, or weather.
o Depletion and Exploration Risk. MLPs, MLP-related entities and
energy companies engaged in the production (exploration,
development, management or production) of natural gas, NGLs
(including propane), crude oil, refined petroleum products or coal
are subject to the risk that their commodity reserves naturally
deplete over time.
MLPs, MLP-related entities and energy companies generally increase
reserves through expansion of their existing business, through
exploration of new sources or development of existing sources,
through acquisitions or by securing long-term contracts to acquire
additional reserves, each of which entails risk. The financial
performance of these MLPs, MLP-related entities and energy
companies may be affected adversely if they are unable to acquire
additional reserves cost-effectively at a rate at least equal to
the rate of natural decline. A failure to maintain or increase
reserves could reduce the amount and change the characterization
of cash distributions paid by these MLPs, MLP-related entities and
energy companies.
o Regulatory Risk. MLPs, MLP-related entities and energy companies
are subject to significant federal, state and local government
regulation in virtually every aspect of their operations,
including how facilities are constructed, maintained and operated,
environmental and safety controls, and the prices these entities
may charge for their products and services. Various governmental
authorities have the power to enforce compliance with these
regulations and the permits issued under them and violators are
subject to administrative, civil and criminal penalties, including
civil fines, injunctions or both. Stricter laws, regulations or
enforcement policies could be enacted in the future which would
likely increase compliance costs and may affect adversely the
financial performance of MLPs, MLP-related entities and energy
companies.
o Interest Rate Risk. Rising interest rates could impact adversely
the financial performance of MLPs, MLP-related entities and energy
companies. Rising interest rates may increase an MLP's,
MLP-related entity's or energy company's cost of capital, which
would increase operating costs and reduce an MLP's, MLP-related
entity's or energy company's ability to execute acquisitions or
expansion projects in a cost-effective manner. Rising interest
rates also may impact the price of MLP units, MLP-related entity
securities and energy company shares as the yields on alternative
investments increase.
o Acquisition Risk. The ability of MLPs to grow and to increase
distributions to unitholders depends principally on their ability
to make acquisitions that result in an increase in adjusted
operating surplus per unit. MLPs' future growth and ability to
raise distributions will be limited if MLPs are unable to make
accretive acquisitions either because they are unable to identify
attractive acquisition candidates or negotiate acceptable purchase
contracts or because they are unable to raise financing for
acquisitions on economically acceptable terms or because they are
outbid by competitors.
Furthermore, even if MLPs consummate acquisitions that they
believe will be accretive, the acquisitions may in fact result in
a decrease in adjusted operating surplus per unit. As MLP general
partners typically receive a greater percentage of increased cash
distributions, in an effort to increase cash distributions the
general partner may make acquisitions which, due to various
factors, including increased debt obligations, as well as the
factors set forth below, may affect adversely the MLP. Any
acquisition involves risks, including, without limitation:
mistaken assumptions about revenues and costs, including
synergies; the assumption of unknown liabilities; limitations on
rights to indemnity from the seller; the diversion of management's
attention from other business concerns; unforeseen difficulties
operating in new product areas or new geographic areas; and
customer or key employee losses at the acquired businesses.
o Affiliated Party Risk. A few of the midstream MLPs depend on their
parents or sponsors for a majority of their revenues. Any failure
by the parents or sponsors to satisfy their payments or
obligations would impact the MLPs' revenues, cash flows and
ability to make distributions.
o Catastrophe Risk. The operations of MLPs, MLP-related entities and
energy companies are subject to many hazards inherent in
transporting, processing, storing, distributing or marketing of
natural gas, NGLs, crude oil, refined petroleum products or other
hydrocarbons, or in exploring, managing or producing these
Page 18
commodities, including: damage to pipelines, storage tanks or
related equipment and surrounding properties caused by hurricanes,
tornadoes, floods, fires and other natural disasters and acts of
terrorism; inadvertent damage from construction and farm
equipment; leaks of natural gas, NGLs, crude oil, refined
petroleum products or other hydrocarbons; fires and explosions.
These risks could result in substantial losses due to personal
injury and/or loss of life, severe damage to, and destruction of,
property and equipment and pollution or other environmental damage
and may result in the curtailment or suspension of their related
operations. Not all MLPs, MLP-related entities and energy
companies are fully insured against all risks inherent to their
businesses. If a significant accident or event occurs that is not
fully insured, an MLP, MLP-related entity or energy company's
operations and financial condition could be impacted adversely.
o MLP Risks. An investment in MLP units involves risks which differ
from an investment in common stock of a corporation. Holders of
MLP units have limited control and voting rights on matters
affecting the partnership. In addition, there are 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.
MLPs, MLP-related entities and energy companies also are subject to
risks specific to the industry they serve.
o Midstream MLPs, MLP-related entities and energy companies that
provide crude oil, refined product and natural gas services are
subject to supply and demand fluctuations in the markets they
serve which are impacted by a wide range of factors, including
fluctuating commodity prices, weather, increased conservation or
use of alternative fuel sources, increased governmental or
environmental regulation, depletion, rising interest rates,
declines in domestic or foreign production, accidents or
catastrophic events, and economic conditions, among others.
o Propane MLPs and MLP-related entities are subject to earnings
variability based upon weather conditions in the markets they
serve, fluctuating commodity prices, increased use of alternative
fuels, increased governmental or environmental regulation, and
accidents or catastrophic events, among others.
o MLPs, MLP-related entities and energy companies with coal assets
are subject to supply and demand fluctuations in the markets they
serve which are impacted by a wide range of factors including,
fluctuating commodity prices, the level of their customers' coal
stockpiles, weather, increased conservation or use of alternative
fuel sources, increased governmental or environmental regulation,
depletion, rising interest rates, declines in domestic or foreign
production, mining accidents or catastrophic events, health claims
and economic conditions, among others.
Cash Flow Risk. The Fund will derive a substantial portion of its cash
flow from its investment in equity securities of MLPs and MLP-related entities.
The amount of cash an MLP or MLP-related entity has available for distributions
and the tax character of those distributions depends upon the amount of cash
generated by the MLP's or MLP-related entity's operations. Cash available for
distribution varies from quarter to quarter and depends primarily on factors
affecting the MLP's or MLP-related entity's operations and factors affecting the
energy industry generally. In addition to the risk factors described above,
other factors which may reduce the amount of cash an MLP or MLP-related entity
has available for distribution include increased operating costs, capital
expenditures, acquisition costs, expansion, construction or exploration costs
and borrowing costs.
Tax Risk. The Fund's ability to meet its investment objective depends
on the level of taxable income and distributions it receives from the securities
in which the Fund invests, a factor over which the Fund has no control. The
benefit the Fund derives from its investment in MLPs depends on their being
treated as partnerships for federal income tax purposes. As a partnership, an
MLP has no income tax liability at the entity level. If, as a result of a change
in an MLP's business, an MLP were treated as a corporation for federal income
tax purposes, the MLP would be obligated to pay federal income tax on its income
at the corporate tax rate. If an MLP was classified as a corporation for federal
income tax purposes, the amount of cash available for distribution would be
reduced and distributions received by the Fund would be taxed entirely as
dividend income. Therefore, treatment of an MLP as a corporation for federal
income tax purposes would result in a material reduction in the after-tax return
to the Fund.
Tax Law Change Risk. Changes in tax laws or regulations, or
interpretations thereof in the future, could affect adversely the Fund or the
MLPs in which it invests. For example, if, by reason of a change in law or
otherwise, an MLP in which the Fund invests is treated as a corporation rather
than a partnership, the MLP would be subject to entity level corporate taxation
and any distributions received by the Fund would be treated as dividend income.
Federal legislation enacted in 2004 allows limited investment by regulated
investment companies in certain types of publicly traded partnerships. This
Page 19
legislation may put the Fund at a competitive disadvantage compared to other
funds that elect to be treated as regulated investment companies. If the Fund
could qualify under this legislation or future legislation as a regulated
investment company, the Fund may in the future elect to be treated as a
regulated investment company.
Deferred Tax Risk. 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 expenses from the MLPs. A significant portion of MLP income
historically has been offset by tax deductions. The Fund will incur a current
tax liability on that portion of a distribution that is not offset by tax
deductions, with the remaining portion of the distribution being treated as a
tax-deferred return of capital. The percentage of an MLP's distribution which is
offset by tax deductions will fluctuate over time for various reasons.
A significant slowdown in acquisition activity by MLPs held in the
Fund's portfolio could result in a reduction of accelerated depreciation or
other deductions generated by new acquisitions, which may result in increased
current tax liability to the Fund. A reduction in the percentage of a
distribution offset by tax deductions or an increase in the Fund's portfolio
turnover will reduce that portion of the Fund's distribution to its common
shareholders treated as a tax-deferred return of capital and increase that
portion treated as dividend income. For purposes of computing net asset value,
the Fund will accrue deferred income taxes for its future tax liability
associated with that portion of MLP distributions considered to be tax-deferred
return of capital, as well as capital appreciation of its investments. The Fund
will rely to some extent on information provided by MLPs, which is not
necessarily timely, to estimate deferred tax liability for purposes of financial
statement reporting and determining the Fund's net asset value. From time to
time the Fund will modify its estimates and/or assumptions regarding its
deferred tax liability as new information becomes available.
Equity Securities Risk. MLP common units and other equity securities
are sensitive to general movements in the stock market and a drop in the stock
market may depress the price of securities to which the Fund has exposure. MLP
units and other equity securities prices fluctuate for several reasons including
changes in the financial condition of a particular issuer (generally measured in
terms of distributable cash flow in the case of MLPs), investors' perceptions of
MLPs and energy companies, the general condition of the relevant stock market,
or when political or economic events affecting the issuers occur. In addition,
the price of MLP units and other equity securities may be particularly sensitive
to rising interest rates given their yield-based nature.
Certain of the MLPs, MLP-related entities and other energy companies in
which the Fund may invest may have comparatively smaller capitalizations than
other companies. Investing in securities of smaller MLPs, MLP-related entities
and energy companies presents some unique investment risks. These MLPs,
MLP-related entities and energy companies may have limited product lines and
markets, as well as shorter operating histories, less experienced management and
more limited financial resources than larger MLPs, MLP-related entities and
energy companies and may be more vulnerable to adverse general market or
economic developments. Stocks of smaller MLPs, MLP-related entities and energy
companies may be less liquid than those of larger MLPs, MLP-related entities and
energy companies and may experience greater price fluctuations than larger
energy companies. In addition, small-cap securities may not be widely followed
by the investment community, which may result in reduced demand.
A few of the midstream MLPs depend on their parents or sponsors for a
majority of their revenues. Any failure by the parents or sponsors to satisfy
their payments or obligations would impact the MLPs' revenues and cash flows and
ability to make distributions.
MLP subordinated units in which the Fund will invest generally convert
to common units at a one-to-one ratio. The purchase or sale price of
subordinated units generally is tied to the common unit price less a discount.
The size of the discount varies depending on the likelihood of conversion, the
length of time remaining to conversion, the size of the block purchased and
other factors.
While not precise, the price of I-Shares and their volatility tend to
correlate to the price of MLP common units.
Leverage Risk. The Fund may borrow an amount up to 33-1/3% (or such
other percentage as permitted by law) of its Managed Assets (including the
amount borrowed) less all liabilities other than borrowings. The Fund also may
issue preferred shares in an amount up to 50% of the Fund's Managed Assets
(including the proceeds of the preferred shares and any borrowings). On January
28, 2005, the Fund issued $34,000,000 aggregate principal amount of Series A
Energy Notes. As of November 30, 2005, such Series A Energy Notes represented
approximately 18.97% of the Fund's Managed Assets. After giving effect to the
issuance of Series B Energy Notes, it is expected that the Energy Notes will
represent approximately 28.89% of the Fund's Managed Assets. The successful use
of leverage depends on the Sub-Adviser's ability to predict or hedge correctly
interest rate and market movements. The use of leverage by the Fund results in
additional risks and can magnify the effect of any losses.
Page 20
The funds borrowed pursuant to a leverage borrowing program (such as a
credit line or commercial paper program) in addition to that from the Series A
Energy Notes and the Series B Energy Notes, or obtained through the issuance of
preferred shares, constitute a substantial lien and burden because of their
prior claim against the income of the Fund and against the net assets of the
Fund in liquidation. The rights of lenders to receive payments of interest on
and repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of common shares and the
holders of preferred shares, with respect to the payment of dividends or upon
liquidation. The Fund may not be permitted to declare dividends or other
distributions, including dividends and distributions with respect to common
shares or preferred shares or purchase common shares or preferred shares unless
at the time thereof, the Fund meets certain asset coverage requirements and no
event of default exists under any leverage borrowing program. In addition, the
Fund may not be permitted to pay dividends on common shares unless all dividends
on the preferred shares and/or accrued interest on borrowings have been paid, or
set aside for payment. In an event of default under a leverage borrowing
program, the lenders have the right to cause a liquidation of collateral (i.e.,
sell MLP units and other assets of the Fund) and, if any such default is not
cured, the lenders may be able to control the liquidation as well. Certain types
of leverage may result in the Fund being subject to covenants relating to asset
coverage and the Fund's portfolio composition and may impose special
restrictions on the Fund's use of various investment techniques or strategies or
in its ability to pay dividends and other distributions on common shares in
certain instances. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more rating agencies, which may
issue ratings for the preferred shares or other leverage securities issued by
the Fund. These guidelines may impose asset coverage or Fund composition
requirements that are more stringent than those imposed by the 1940 Act. The
Sub-Adviser does not believe that these covenants or guidelines will impede it
from managing the Fund's portfolio in accordance with the Fund's investment
objective and policies.
Restrictive Covenants and 1940 Act Restrictions. With respect to a
borrowing program instituted by the Fund in addition to the issuance of the
Series A Energy Notes and the Series B Energy Notes, the credit agreements
governing such a program (the "Credit Agreements") likely will include usual and
customary covenants for this type of transaction, including, but not limited to,
limits on the Fund's ability to: (1) issue preferred shares; (2) incur liens or
pledge portfolio securities or investments; (3) change its investment objective
or fundamental investment restrictions without the approval of lenders; (4) make
changes in any of its business objectives, purposes or operations that could
result in a material adverse effect; (5) make any changes in its capital
structure; (6) amend the Fund documents in a manner which could affect adversely
the rights, interests or obligations of any of the lenders; (7) engage in any
business other than the business currently engaged in; (8) create, incur, assume
or permit to exist certain debt except for certain specific types of debt; and
(9) permit any of its Employment Retirement Income Security Act ("ERISA")
affiliates to cause or permit to occur an event that could result in the
imposition of a lien under the Code or ERISA. In addition, the Credit Agreements
would not permit the Fund's asset coverage ratio (as defined in the Credit
Agreements) to fall below 300% at any time.
Under the requirements of the 1940 Act, the Fund must have asset
coverage of at least 300% immediately after any borrowing, including borrowing
under any borrowing program the Fund implements. For this purpose, asset
coverage means the ratio which the value of the total assets of the Fund, less
liabilities and indebtedness not represented by senior securities, bears to the
aggregate amount of borrowings represented by senior securities issued by the
Fund. The Credit Agreements would limit the Fund's ability to pay dividends or
make other distributions on the Fund's common shares, unless the Fund complies
with the Credit Agreements' 300% asset coverage test. In addition, the Credit
Agreements will not permit the Fund to declare dividends or other distributions
or purchase or redeem common shares or preferred shares: (1) at any time that
any event of default under the Credit Agreements has occurred and is continuing;
or (2) if, after giving effect to such declaration, the Fund would not meet the
Credit Agreements' 300% asset coverage test set forth in the Credit Agreements.
To the extent necessary, the Fund intends to repay indebtedness to maintain the
required asset coverage. Doing so may require the Fund to liquidate portfolio
securities at a time when it would not otherwise be desirable to do so.
Derivatives. Strategic Transactions have risks, including the imperfect
correlation between the value of such instruments and the underlying assets, the
possible default of the other party to the transaction or illiquidity of the
derivative investments. Furthermore, the ability to use Strategic Transactions
successfully depends on the Sub-Adviser's ability to predict pertinent market
movements, which cannot be assured. Thus, the use of Strategic Transactions may:
o result in losses greater than if they had not been used;
Page 21
o require the Fund to sell or purchase portfolio securities at
inopportune times or for prices other than current market values;
o limit the amount of appreciation the Fund can realize on an
investment; or
o cause the Fund to hold a security that it might otherwise sell.
Additionally, amounts paid by the Fund as premiums and cash or other
assets held in margin accounts with respect to Strategic Transactions are not
otherwise available to the Fund for investment purposes.
There are several risks associated with transactions in options on
securities. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. As
the writer of a covered call option, the Fund forgoes, during the option's life,
the opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the strike price of
the call but has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying security at the exercise price.
There are several risks associated with the use of futures contracts
and futures options. The purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. While the Fund
may enter into futures contracts and options on futures contracts for hedging
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Fund than if the Fund had not
engaged in any such transactions. There may be an imperfect correlation between
the Fund's portfolio holdings and futures contracts or options on futures
contracts entered into by the Fund, which may prevent the Fund from achieving
the intended hedge or expose the Fund to risk of loss. The degree of
imperfection of correlation depends on circumstances such as variations in
market demand for futures, options on futures and their related securities,
including technical influences in futures and futures options trading, and
differences between the securities markets and the securities underlying the
standard contracts available for trading. Further, the Fund's use of futures
contracts and options on futures contracts to reduce risk involves costs and
will be subject to the Sub-Adviser's ability to predict correctly changes in
interest rate relationships or other factors.
If the Fund fails to maintain any required asset coverage ratios in
connection with any use by the Fund of leverage, the Fund may be required to
redeem or prepay some or all of the leverage. Such redemption or prepayment
would likely result in the Fund seeking to terminate early all or a portion of
any swap or cap transactions. Early termination of a swap could result in a
termination payment by or to the Fund. Early termination of a cap could result
in a termination payment to the Fund. The Fund intends to maintain, in a
segregated account, cash or liquid securities having a value at least equal to
the Fund's net payment obligations under any swap transaction, marked to market
daily. The Fund will not enter into interest rate swap or cap transactions
having a notional amount that exceeds the outstanding amount of the Fund's
leverage.
The use of interest rate and commodity swaps and caps is a highly
specialized activity that involves investment techniques and risks different
from those associated with ordinary portfolio security transactions. Interest
rate and commodity swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate and commodity swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make. If the counterparty
defaults, the Fund would not be able to use the anticipated net receipts under
the swap or cap to offset any declines in the value of the Fund's portfolio
assets being hedged or the increase in the Fund's cost of leverage.
Portfolio Turnover Risk. The Fund's annual portfolio turnover rate may
vary greatly from year to year. Although the Fund cannot predict accurately its
annual portfolio turnover rate, it is not expected to exceed 40% under normal
circumstances. However, portfolio turnover rate is not considered a limiting
factor in the execution of investment decisions for the Fund. High portfolio
turnover may result in the Fund's recognition of gains that will be taxable as
ordinary income to the Fund. A high portfolio turnover may increase the Fund's
current and accumulated earnings and profits, resulting in a greater portion of
the Fund's distributions being treated as a dividend to the Fund's common
shareholders. In addition, a higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. See "The Fund's Investments--Investment
Practices--Portfolio Turnover" and "Certain Federal Income Tax Matters."
Restricted Securities. The Fund may invest in unregistered or otherwise
restricted securities. The term "restricted securities" refers to securities
that are unregistered, are held by control persons of the issuer, or are subject
Page 22
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 or 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 to allow for the sale. Contractual restrictions on
the resale of securities vary in length and scope and are generally the result
of a negotiation between the issuer and acquirer of the securities. The Fund
would, in either case, bear market risks during that period.
Liquidity Risk. Although common units of MLPs, I-Shares of MLP-related
entities, and common stocks of energy companies trade, as the case may be, on
the New York Stock Exchange, the American Stock Exchange, and The Nasdaq Stock
Market, certain securities may trade less frequently, particularly those with
smaller capitalizations. Securities with limited trading volumes may display
volatile or erratic price movements. Larger purchases or sales of these
securities by the Fund in a short period of time may result in abnormal
movements in the market price of these securities. This may affect the timing or
size of Fund transactions and may limit the Fund's ability to make alternative
investments.
Valuation Risk. Market prices may not be readily available for
subordinated units, direct ownership of general partner interests, restricted
securities or unregistered securities of certain MLPs, MLP-related entities or
private companies, and the value of such investments ordinarily will be
determined based on fair valuations determined by the Board of Trustees or its
designee pursuant to procedures adopted by the Board of Trustees. The value of
these securities typically requires more reliance on the judgment of the
Sub-Adviser than that required for securities for which there is an active
trading market. In addition, the Fund will rely to some extent on information
provided by the MLPs, which is not necessarily timely, to estimate taxable
income allocable to the MLP units held in the Fund's portfolio and to estimate
associated deferred tax liability for purposes of financial statement reporting
and determining the Fund's net asset value. From time to time the Fund will
modify its estimates and/or assumptions regarding its deferred tax liability as
new information becomes available. To the extent the Fund modifies its estimates
and/or assumptions, the net asset value of the Fund would likely fluctuate. See
"Net Asset Value" in the SAI.
Interest Rate Risk. Interest rate risk is the risk that equity and debt
securities will decline in value because of changes in market interest rates.
The Fund's investment in such securities means that the net asset value and
market price of the common shares will tend to decline if market interest rates
rise. Interest rates are at or near historic lows, and as a result, they are
likely to rise over time. Certain debt instruments, particularly below
investment grade securities, may contain call or redemption provisions which
would allow the issuer thereof to prepay principal prior to the debt
instrument's stated maturity. This is known as prepayment risk. Prepayment risk
is greater during a falling interest rate environment as issuers can reduce
their cost of capital by refinancing higher yielding debt instruments with lower
yielding debt instruments. An issuer also may elect to refinance their debt
instruments with lower yielding debt instruments if the credit standing of the
issuer improves. To the extent the Fund's debt securities are called or
redeemed, the Fund may be forced to reinvest in lower yielding securities.
Below Investment Grade Securities Risk. Below investment grade
securities are rated Ba1 or lower by Moody's, BB+ or lower by S&P, or comparably
rated by another NRSRO or, if unrated, are of comparable credit quality. Below
investment grade securities, also sometimes referred to as "junk bonds,"
generally pay a premium above the yields of U.S. government securities or debt
securities of investment grade issuers because they are subject to greater risks
than these securities. These risks, which reflect their speculative character,
include the following:
o greater yield and price volatility;
o greater credit risk and risk of default;
o potentially greater sensitivity to general economic or industry
conditions;
o potential lack of attractive resale opportunities (illiquidity);
and
o additional expenses to seek recovery from issuers who default.
In addition, the prices of these below investment grade securities are
more sensitive to negative developments, such as a decline in the issuer's
revenues, downturns in profitability in the energy industry or a general
economic downturn, than are the prices of higher grade securities. Below
investment grade securities tend to be less liquid than investment grade
securities and the market for below investment grade securities could contract
further under adverse market or economic conditions. In such a scenario, it may
be more difficult for the Fund to sell these securities in a timely manner or
for as high a price as could be realized if such securities were more widely
traded. The market value of below investment grade securities may be more
volatile than the market value of investment grade securities and generally
tends to reflect the market's perception of the creditworthiness of the issuer
and short-term market developments to a greater extent than investment grade
securities, which primarily reflect fluctuations in general levels of interest
Page 23
rates. In the event of a default by a below investment grade security held in
the Fund's portfolio in the payment of principal or interest, the Fund may incur
additional expense to the extent it is required to seek recovery of such
principal or interest.
Ratings are relative and subjective and not absolute standards of
quality. Securities ratings are based largely on an issuer's historical
financial condition and the rating agencies' analyses at the time of rating.
Consequently, the rating assigned to any particular security or instrument is
not necessarily a reflection of an issuer's current financial condition.
Subsequent to its purchase by the Fund, the security or instrument may cease to
be rated or its rating may be reduced. In addition, it is possible that NRSROs
might not change their ratings of a particular security or instrument to reflect
subsequent events on a timely basis. Moreover, such ratings do not assess the
risk of a decline in market value. None of these events will require the sale of
such securities or instruments by the Fund, although the Sub-Adviser will
consider these events in determining whether the Fund should continue to hold
the securities.
The market for below investment grade and comparable unrated securities
has experienced periods of significantly adverse price and liquidity,
particularly at or around times of economic recession. Past market recessions
have affected adversely the value of such securities as well as the ability of
certain issuers of such securities to repay principal and pay interest thereon
or to refinance such securities. The market for these securities may react in a
similar fashion in the future.
For a further description of below investment grade securities and the
risks associated therewith, see "Other Investment Policies and Techniques" in
the SAI. For a description of the ratings categories of certain NRSROs, see
Appendix A to the SAI.
Non-Diversification. The Fund is a non-diversified, closed-end
management investment company under the 1940 Act and will not be treated as a
regulated investment company under the Code. Accordingly, there are no
regulatory requirements under the 1940 Act or the Code on the minimum number or
size of securities held by the Fund. There currently are approximately 55
publicly traded MLPs, approximately half of which operate energy assets. The
Fund intends to select its MLP investments from this small pool of issuers. The
Fund may invest in securities of MLP-related entities and non-MLP securities
issued by energy companies, consistent with its investment objective and
policies.
Market Disruption Risk. The terrorist attacks in the United States on
September 11, 2001 had a disruptive effect on the securities markets. U.S.
military and related action in Iraq is ongoing and events in the Middle East
could have significant adverse effects on the U.S. economy and the stock market.
The Fund cannot predict the effects of similar events in the future on the U.S.
economy.
Certain Affiliations. Certain broker-dealers may be considered
affiliated persons of the Fund, First Trust Advisors or Fiduciary Asset
Management. Absent an exemption from the Commission or other regulatory relief,
the Fund is generally precluded from effecting certain principal transactions
with affiliated brokers, and its ability to utilize affiliated brokers for
agency transactions, is subject to restrictions. This could limit the Fund's
ability to engage in securities transactions and take advantage of market
opportunities.
Page 24
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to provide its shareholders with an efficient vehicle to
invest in a portfolio of cash-generating securities of energy companies. The
Fund focuses on investing in publicly traded MLPs and related public entities in
the energy sector which the Fund's Sub-Adviser believes offer opportunities for
income and growth. Due to the tax treatment of cash distributions made by MLPs
to their investors (such as the Fund) relative to the taxable income allocable
to such investors, the Fund believes that a significant portion of its income
will be tax deferred and that any cash distributions made by the Fund to its
shareholders will be associated with relatively high levels of deferred taxable
income. There can be no assurance that the Fund will achieve its investment
objective.
The Fund's investment objective is considered fundamental and may not
be changed without shareholder approval. The remainder of the Fund's investment
policies, including its investment strategy, are considered non-fundamental and
may be changed by the Board of Trustees without shareholder approval, provided
that shareholders receive at least 60 days' prior written notice of any change.
The Fund seeks to achieve its investment objective by investing
primarily in securities of MLPs and MLP-related entities in the energy sector
that the Sub-Adviser believes offer attractive distribution rates and capital
appreciation potential. The Fund also may invest in other securities set forth
below if the Sub-Adviser expects to achieve the Fund's objective with such
investments.
The Fund's policy of investing at least 85% of its Managed Assets in
securities of energy companies, MLPs and MLP-related entities in the energy
sector is non-fundamental.
The Fund has adopted the following additional non-fundamental policies:
o Under normal market conditions, the Fund intends to invest at
least 65% and up to 100% of its Managed Assets in equity
securities issued by energy sector MLPs and MLP-related entities.
Equity securities currently consist of common units and
subordinated units of MLPs, I-Shares of MLP-related entities and
common stock of MLP-related entities, such as general partners or
other affiliates of the MLPs.
o The Fund may invest in unregistered or otherwise restricted
securities. The types of unregistered or otherwise restricted
securities that the Fund may purchase consist of MLP common units,
MLP subordinated units and securities of public and private energy
companies. The Fund does not intend to invest more than 35% of its
Managed Assets in such restricted securities, including no more
than 10% of its Managed Assets in private companies.
o The Fund may invest up to 25% of its Managed Assets in debt
securities of energy companies, MLPs and MLP-related entities,
including certain securities rated below investment grade ("junk
bonds"). Below investment grade debt securities will be rated at
least B3 by Moody's and at least B- by S&P at the time of
purchase, or comparably rated by another statistical rating
organization or if unrated, determined to be of comparable quality
by the Sub-Adviser.
o The Fund will not invest more than 10% of its Managed Assets in
any single issuer.
o The Fund will not engage in short sales, except to the extent the
Fund engages in derivative investments to mitigate interest rate
risk in connection with the Fund's use of Financial Leverage or
market risks associated with the Fund's portfolio.
Unless otherwise stated, all investment restrictions apply at the time
of purchase and the Fund will not be required to reduce a position due solely to
market value fluctuations.
For a more complete discussion of the Fund's initial portfolio
composition, see "Portfolio Composition."
INVESTMENT PHILOSOPHY AND PROCESS
Under normal market conditions, the Fund invests at least 85% of its
Managed Assets in securities of energy companies, MLPs and MLP-related entities.
The Sub-Adviser intends to seek securities that offer a combination of quality,
growth and yield intended to result in superior total returns over the long run.
The Sub-Adviser's securities selection process will include a comparison of
quantitative, qualitative, and relative value factors. While the Sub-Adviser
maintains an active dialogue with several research analysts in the energy
sector, the Sub-Adviser's primary emphasis will be on proprietary analysis and
valuation models conducted and maintained by its in-house investment analysts.
To determine whether a company meets its criteria, the Sub-Adviser generally
will consider, among other things, a proven track record, a strong record of
distribution or dividend growth, solid ratios of debt to cash flow, coverage
ratios with respect to distributions to unit holders, incentive structure, and
management team.
Page 25
The Fund will concentrate its investments in the energy sector. The
Fund will pursue its objective by investing principally in a portfolio of equity
securities issued by MLPs and MLP-related entities. MLP common units
historically have generated higher average total returns than domestic common
stock (as measured by the S&P 500) and fixed income securities. A more detailed
description of investment policies and restrictions and more detailed
information about portfolio investments are contained in the SAI.
Energy Companies. The Fund's investments will consist of equity and/or
debt securities issued by energy companies, energy sector MLPs and MLP-related
entities. The companies in which the Fund will invest generally are involved in
the business of transporting, processing, storing, distributing or marketing
natural gas, NGLs (including propane), crude oil, refined petroleum products,
coal or electricity, or exploring, developing, managing or producing such
commodities or products, or in supplying energy-related products and services.
To generate additional income, the Fund intends, on a consistent and ongoing
basis, to write (or sell) covered call options on the common stock of energy
companies held in the Fund's portfolio.
Some energy companies operate as "public utilities" or "local
distribution companies," and therefore are subject to rate regulation by state
or federal utility commissions. However, other energy companies may be subject
to greater competitive factors than utility companies, including competitive
pricing in the absence of regulated tariff rates, which could cause a reduction
in revenue and which could affect adversely profitability. Most midstream MLPs
with pipeline assets are subject to government regulation concerning the
construction, pricing and operation of pipelines. In many cases, the rules and
tariffs charged by these pipelines are monitored by the Federal Energy
Regulatory Commission ("FERC") or various state regulatory agencies.
Master Limited Partnerships. MLPs are limited partnerships whose shares
(or units) are listed and traded on a U.S. securities exchange, just like common
stock. To qualify as an MLP, a partnership must receive at least 90% of its
income from qualifying sources such as natural resource activities. Natural
resource activities include the exploration, development, mining, production,
processing, refining, transportation, storage and marketing of mineral or
natural resources. MLPs generally have two classes of owners, the general
partner and limited partners. The general partner, which generally is a major
energy company, investment fund or the management of the MLP, typically controls
the MLP through a 2% general partner equity interest in the MLP plus common
units and subordinated units. Limited partners own the remainder of the
partnership, through ownership of common units, and have a limited role in the
partnership's operations and management.
MLPs typically are structured such that common units have first
priority to receive quarterly cash distributions up to MQD. Common units also
accrue arrearages in distributions to the extent the MQD is not paid. Once
common units have been paid, subordinated units receive distributions of up to
the MQD, but subordinated units do not accrue arrearages. Distributable cash in
excess of the MQD paid to both common and subordinated units is distributed to
both common and subordinated units generally on a pro rata basis. The general
partner is also eligible to receive incentive distributions if the general
partner operates the business in a manner which maximizes value to unit holders.
As the general partner increases cash distributions to the limited partners, the
general partner receives an increasingly higher percentage of the incremental
cash distributions. A common arrangement provides that the general partner can
reach a tier where the general partner is receiving 50% of every incremental
dollar paid to common and subordinated unit holders. By providing for incentive
distributions the general partner is encouraged to streamline costs and acquire
assets in order to grow the partnership, increase the partnership's cash flow,
and raise the quarterly cash distribution in order to reach higher tiers. Such
results benefit all security holders of the MLP.
Energy MLPs in which the Fund will invest generally can be classified
as Midstream MLPs, Propane MLPs and Coal MLPs.
o Midstream MLP natural gas services include the treating,
gathering, compression, processing, transmission and storage of
natural gas and the transportation, fractionation and storage of
NGLs (primarily propane, ethane, butane and natural gasoline).
Midstream MLP crude oil services include the gathering,
transportation, storage and terminaling of crude oil. Midstream
MLP refined petroleum product services include the transportation
(usually via pipelines, barges, rail cars and trucks), storage and
terminaling of refined petroleum products (primarily gasoline,
diesel fuel and jet fuel) and other hydrocarbon by-products.
Midstream MLPs also may operate ancillary businesses including the
marketing of the products and logistical services.
o Propane MLP services include the distribution of propane to
homeowners for space and water heating and to commercial,
industrial and agricultural customers. Propane serves
approximately 3% of the household energy needs in the United
States, largely for homes beyond the geographic reach of natural
gas distribution pipelines. Volumes are weather dependent and a
majority of annual cash flow is earned during the winter heating
season (October through March).
Page 26
o Coal MLP services include the owning, leasing, managing,
production and sale of coal and coal reserves. Electricity
generation is the primary use of coal in the United States. Demand
for electricity and supply of alternative fuels to generators are
the primary drivers of coal demand.
The Fund also may invest in equity and debt securities of energy
companies that are organized and/or taxed as corporations and may invest in
equity and debt securities of MLP-related entities, such as general partners or
other affiliates of MLPs, and in private companies that operate energy assets.
PORTFOLIO COMPOSITION
The Fund's portfolio will be composed principally of the investments
discussed below. A more detailed description of the Fund's investment policies
and restrictions and more detailed information about the Fund's portfolio
investments are contained in the SAI.
Equity Securities of MLPs and MLP-Related Entities. Consistent with its
investment objective, the Fund may invest up to 100% of its Managed Assets in
equity securities issued by energy MLPs, including common units and subordinated
units and by MLP-related entities, including common stock and I-Shares.
MLP Common Units. MLP common units represent a limited partnership
interest in the MLP. Common units are listed and traded on U.S. securities
exchanges or over-the-counter with their value fluctuating predominantly based
on the success of the MLP. The Fund intends to purchase common units in market
transactions but also may purchase securities directly from the MLP or other
parties in private placements. Unlike owners of common stock of a corporation,
owners of common units have limited voting rights and have no ability to
annually elect directors. MLPs generally distribute all available cash flow
(cash flow from operations less maintenance capital expenditures) in the form of
a quarterly distribution. Common unit holders have first priority to receive
quarterly cash distributions up to the MQD and have arrearage rights. In the
event of liquidation, common unit holders have preference over subordinated
units, but not debt holders or preferred unit holders, to the remaining assets
of the MLP.
MLP Subordinated Units. MLP subordinated units typically are issued by
MLPs to their original sponsors, such as their founders, corporate general
partners of MLPs, entities that sell assets to the MLP, and institutional
investors. The Fund expects to purchase subordinated units directly from these
persons. Subordinated units have similar voting rights as common units and
generally are not publicly traded. Once the MQD on the common units, including
any arrearages, has been paid, subordinated units will receive cash
distributions up to the MQD prior to any incentive payments to the MLP's general
partner. Unlike common units, subordinated units do not have arrearage rights.
In the event of liquidation, common units have priority over subordinated units.
Subordinated units typically are converted into common units on a one-to-one
basis after certain time periods and/or performance targets have been satisfied.
Subordinated units generally are valued based on the price of the common units,
discounted to reflect the timing or likelihood of their conversion to common
units.
MLP I-Shares. I-Shares represent an ownership interest issued by an
affiliated party of an MLP. The MLP affiliate uses the proceeds from the sale of
I-Shares to purchase limited partnership interests in the MLP in the form of
I-units. I-units have similar features to MLP common units in terms of voting
rights, liquidation preference and distributions. However, rather than receiving
cash, the MLP affiliate receives additional I-units in an amount equal to the
cash distributions received by MLP common units. Similarly, holders of I-Shares
will receive additional I-Shares, in the same proportion as the MLP affiliates
receipt of I-units, rather than receiving cash distributions. I-Shares
themselves have limited voting rights which are similar to those applicable to
MLP common units. The MLP affiliate issuing the I-Shares is structured as a
corporation for federal income tax purposes. As a result, I-Shares holders, such
as the Fund, will receive a Form 1099 rather than a Form K-1 statement. I-Shares
are traded on the New York Stock Exchange.
Equity Securities of Energy Companies. The Fund may invest up to 35% of
its Managed Assets in equity securities issued by energy companies. The Fund
intends to purchase these equity securities in market transactions but also may
purchase securities directly from the issuers in private placements. To generate
additional income, the Fund intends, on a consistent and ongoing basis, to write
(or sell) covered call options on the common stock of energy companies held in
the Fund's portfolio.
Debt Securities. The Fund may invest up to 25% of its managed assets in
debt securities of energy companies, MLPs and MLP-related entities, including
securities rated below investment grade. The debt securities in which the Fund
may invest may provide for fixed or variable principal payments and various
types of interest rate and reset terms including, fixed rate, adjustable rate,
zero coupon, contingent, deferred, payment-in-kind and auction rate features.
Certain debt securities are "perpetual" in that they have no maturity date.
Certain debt securities are zero coupon bonds. A zero coupon bond is a bond that
does not pay interest either for the entire life of the obligations or for an
initial period after the issuance of the obligation. To the extent that the Fund
invests in below investment grade debt securities, such securities will be
rated, at the time of investment, at least B- by S&P's or B3 by Moody's or a
comparable rating by at least one other rating agency or, if unrated, determined
by the Sub-Adviser to be of comparable quality. If a security satisfies the
Fund's minimum rating criteria at the time of purchase and is subsequently
Page 27
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Sub-Adviser will consider what action,
including the sale of such security, is in the best interest of the Fund and its
shareholders. In light of the risks of below investment grade securities, the
Sub-Adviser, in evaluating the creditworthiness of an issue, whether rated or
unrated, will take various factors into consideration, which may include, as
applicable, the issuer's operating history, financial resources and its
sensitivity to economic conditions and trends, the market support for the
facility financed by the issue (if applicable), the perceived ability and
integrity of the issuer's management and regulatory matters.
Short-Term Debt Securities; Temporary Defensive Position. During
periods in which the Sub-Adviser determines that it is temporarily unable to
follow the Fund's investment strategy or that it is impractical to do so, the
Fund may deviate from its investment strategy and invest all or any portion of
its net assets in cash, cash equivalents or other securities. The Sub-Adviser's
determination that it is temporarily unable to follow the Fund's investment
strategy or that it is impractical to do so will generally occur only in
situations in which a market disruption event has occurred and where trading in
the securities selected through application of the Fund's investment strategy is
extremely limited or absent. In such a case, shares of the Fund may be affected
adversely and the Fund may not pursue or achieve its investment objective.
INVESTMENT PRACTICES
Covered Call Option Transactions. Call options are contracts
representing the right to purchase a specified number of shares of common stock
at a specified price (the "strike price") at a specified future date (the
"expiration date"). The price of the option is determined from trading activity
in the broad options market, and generally reflects the relationship between the
current market price for the underlying common stock and the strike price, as
well as the time remaining until the expiration date. The Fund will write call
options only if they are "covered." In the case of a call option on a common
stock or other security, the option is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, cash or other assets determined to be liquid by the
Sub-Adviser (in accordance with procedures established by the Board of Trustees)
in such amount are segregated by the Fund's custodian) upon conversion or
exchange of other securities held by the Fund.
If an option written by the Fund expires unexercised, the Fund
realizes, on the expiration date a capital gain equal to the premium received by
the Fund at the time the option was written. If an option purchased by the Fund
expires unexercised, the Fund realizes a capital loss equal to the premium paid
by the Fund at the time the option expires. Prior to the earlier of exercise or
expiration, an exchange-traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, underlying security,
exercise price, and expiration). There can be no assurance, however, that a
closing purchase or sale transaction can be effected when the Fund desires. The
Fund may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale of the put or call option is more or less than the premium and other
transaction costs paid by the Fund in connection with the put or call option
purchased.
Hedging and Interest Rate Transactions. The Fund may, but is not
required to, use various hedging and strategic transactions described below to
mitigate interest rate risks arising from any leverage by the Fund and to
facilitate portfolio management. Hedging and strategic transactions generally
are accepted under modern portfolio management theory and are used regularly by
many mutual funds and other institutional investors. Although the Sub-Adviser
seeks to use such practices to further the Fund's investment objective, no
assurance can be given that these practices will achieve this result.
The Fund may purchase and sell derivative investments such as
exchange-listed and over-the-counter put and call options on securities,
energy-related commodities, equity, fixed income and interest rate indices, and
other financial instruments, and purchase and sell financial futures contracts
and options thereon, enter into various interest rate transactions such as
swaps, caps, floors or collars or credit transactions and credit default swaps.
The Fund also may purchase derivative investments that combine features of these
instruments. Collectively, all of the above are referred to as "Strategic
Transactions." The Fund generally seeks to use Strategic Transactions as a
portfolio management or hedging technique to seek to protect against possible
adverse changes in the market value of securities held in or to be purchased for
the Fund's portfolio, facilitate the sale of certain securities for investment
purposes, manage the effective interest rate exposure of the Fund, including the
effective yield paid on any leverage issued by the Fund, or establish positions
in the derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transactions and the illiquidity of the
derivative investments. Furthermore, the ability to use Strategic Transactions
successfully depends on the Sub-Adviser's ability to predict pertinent market
movements, which cannot be assured. Thus, the use of Strategic Transactions may
Page 28
result in losses greater than if the Strategic Transactions had not been used,
may require the Fund to sell or purchase portfolio securities at inopportune
times or for prices lower than current market values, may limit the amount of
appreciation the Fund can realize on an investment, or may cause the Fund to
hold a security that it might otherwise sell. Additionally, amounts paid by the
Fund as premiums and cash or other assets held in margin accounts with respect
to Strategic Transactions are not otherwise available to the Fund for investment
purposes.
See "Risks--Derivatives" in the Prospectus and "Investment Policies and
Techniques" in the SAI for a more complete discussion of Strategic Transactions
and their risks.
Portfolio Turnover. The Fund's annual portfolio turnover rate may vary
greatly from year to year. Although the Fund cannot predict accurately its
annual portfolio turnover rate, it is not expected to exceed 40% under normal
circumstances. However, portfolio turnover rate is not considered a limiting
factor in the execution of investment decisions for the Fund. A higher turnover
rate results in correspondingly greater brokerage commissions and other
transactional expenses borne by the Fund. High portfolio turnover may result in
the Fund's recognition of gains that will increase the Fund's tax liability and
thereby lower the after-tax dividends of the Fund. In addition, high portfolio
turnover may increase the Fund's current and accumulated earnings and profits,
resulting in a greater portion of the Fund's distributions being treated as
taxable dividends for federal income tax purposes.
USE OF LEVERAGE
On January 28, 2005, the Fund issued $34,000,000 aggregate principal
amount of Series A Energy Notes. As of November 30, 2005, such Series A Energy
Notes represented approximately 18.97% of the Fund's Managed Assets. After
giving effect to the issuance of Series B Energy Notes, it is expected that the
Energy Notes will represent approximately 28.89% of the Fund's Managed Assets.
The Fund also may leverage through Borrowings, including the issuance
of commercial paper, additional notes or the issuance of preferred stock. The
Fund employs financial leverage for the purpose of acquiring additional
income-producing investments when the Adviser believes that such use of proceeds
will enhance the Fund's net income. The timing and terms of any leverage
transactions will be determined by the Fund's Board of Trustees. Leverage
entails special risks. The management fee paid to the Advisers will be
calculated on the basis of the Fund's Managed Assets (which includes the
proceeds of any financial leverage), so the fee will be higher when leverage is
used.
DESCRIPTION OF THE SERIES B ENERGY NOTES
The Series B Energy Notes will be issued pursuant to the terms of an
Indenture dated as of January 15, 2005 (the "Original Indenture"), and a
Supplemental Indenture dated March 23, 2006 (the "Supplemental Indenture,"
and together with the Supplemental Indenture dated January 28, 2005 (the "First
Supplemental Indenture") and the Original indenture, referred to herein
collectively as the "Indenture") between the Fund and Deutsche Bank National
Trust Company, as Trustee. The following summaries of certain significant
provisions of the Indenture are not complete and are qualified in their entirety
by the provisions of the Indenture, a more detailed summary of which is
contained in Appendix A to the SAI, which is on file with the Commission and is
incorporated herein by reference. Whenever defined terms are used, but not
defined in this prospectus, the terms have the meaning given to them in Appendix
A to the SAI.
GENERAL
Pursuant to the Fund's Declaration of Trust, the Board of Trustees has
authority on behalf of the Fund to issue notes representing indebtedness, with
such rights as determined by the Board of Trustees without shareholder approval.
On January 28, 2005, the Fund issued $34,000,000 aggregate principal amount
Series A Energy Notes under the Original Indenture and the First Supplemental
Indenture. The Indenture provides for the issuance of $25,000,000 aggregate
principal amount of Series B Energy Notes. The principal amount of the Series B
Energy Notes is due and payable on March 30, 2046. The Series B Energy Notes,
when issued and sold pursuant to the terms of the Indenture, will be issued in
fully registered form without coupons in denominations of $25,000 and any
integral multiple thereof, unless otherwise provided in the Indenture.
The Series B Energy Notes will be unsecured obligations of the Fund
and, upon liquidation, dissolution or winding up of the Fund, will rank: (1)
senior to all of the Fund's outstanding common shares and any preferred shares;
(2) on a parity with any unsecured creditors of the Fund and any unsecured
senior securities representing indebtedness of the Fund, including Series A
Energy Notes issued in $34,000,000 aggregate principal amount in 2005 and any
additional Energy Notes that may in the future be issued by the Fund; and (3)
junior to any secured creditors of the Fund. The Series B Energy Notes will be
subject to optional and mandatory redemption as described below under
Page 29
"--Redemption" and acceleration of maturity, as described below under "--Events
of Default and Acceleration of Maturity; Remedies."
Holders of the Series B Energy Notes will not receive certificates
representing their ownership interest in such securities. DTC will initially act
as Securities Depository for the Agent Members with respect to the Series B
Energy Notes.
In addition to serving as the Trustee under the Indenture and the
Auction Agent in connection with the Auction Procedures described below,
Deutsche Bank Trust Company Americas will act as the transfer agent, registrar,
and paying agent for the Series B Energy Notes. However, Deutsche Bank Trust
Company Americas generally will serve as the agent of the Fund, acting in
accordance with the Fund's instructions.
The Fund has the right, to the extent permitted by applicable law, to
purchase or otherwise acquire any Series B Energy Notes, so long as the Fund is
current in the payment of interest on the Series B Energy Notes and on any other
notes of the Fund ranking on a parity with the Series B Energy Notes with
respect to the payment of interest.
The Series B Energy Notes have no voting rights, except to the extent
required by law or as otherwise provided in the Indenture relating to the
acceleration of maturity upon the occurrence and continuance of an event of
default.
INTEREST AND RATE PERIODS
General. The Series B Energy Notes will bear interest at the Applicable
Rate determined as set forth below under "--Determination of Interest Rate."
Interest on the Series B Energy Notes shall be payable when due as described
below. If the Fund does not pay interest when due, it will trigger an event of
default under the Indenture, subject to the cure provisions, and the Fund will
be restricted from declaring dividends and making other distributions with
respect to its common shares and any preferred shares.
On the Business Day next preceding each Interest Payment Date, the Fund
is required to deposit with the Paying Agent sufficient funds for the payment of
interest. The Fund does not intend to establish any reserves for the payment of
interest.
All moneys paid to the Paying Agent for the payment of interest shall
be held in trust for the payment of interest to Holders. Interest will be paid
by the Paying Agent to Holders as their names appear on the securities ledger or
securities records of the Fund, which Holder is expected to be the nominee of
the Securities Depository. The Securities Depository will credit the accounts of
the Agent Members of the Beneficial Owners in accordance with the Securities
Depository's normal procedures. The Securities Depository's current procedures
provide for it to distribute interest in same-day funds to Agent Members who
are, in turn, expected to distribute such interest to the persons for whom they
are acting as agents. The Agent Member of a Beneficial Owner will be responsible
for holding or disbursing such payments on the applicable Interest Payment Date
to such Beneficial Owner in accordance with the instructions of such Beneficial
Owner.
Interest in arrears for any past Rate Period may be subject to a
Default Rate of interest as described below and may be paid at any time, without
reference to any regular Interest Payment Date, to Holders as their names appear
on the securities ledger or securities records of the Fund on such date, not
exceeding 15 days preceding the payment date thereof, as may be fixed by the
Board of Trustees. Any interest payment shall be credited first against the
earliest accrued interest. No interest will be payable in respect of any payment
or payments which may be in arrears. See "--Default Period" below.
The amount of interest payable on each Interest Payment Date of each
Rate Period of less than one year (or in respect of interest on another date in
connection with a redemption during such Rate Period) shall be computed by
multiplying the Applicable Rate (or the Default Rate) for such Rate Period (or a
portion thereof) by a fraction, the numerator of which will be the number of
days in such Rate Period (or portion thereof) that such Series B Energy Notes
were outstanding and for which the Applicable Rate or the Default Rate was
applicable and the denominator of which will be 365, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest cent.
During any Rate Period of one year or more, the amount of interest per Energy
Note payable on any Interest Payment Date (or in respect of interest on another
date in connection with a redemption during such Rate Period) shall be computed
as described in the preceding sentence, except that it will be determined on the
basis of a year consisting of twelve 30-day months.
Determination of Interest Rate. The interest rate for the initial Rate
Period (i.e., the period from and including the Original Issue Date to and
including the initial Auction Date) and the initial Auction Date are set forth
on the cover page of this prospectus. After the initial Rate Period, subject to
certain exceptions, the Series B Energy Notes will bear interest at the
Applicable Rate that the Auction Agent advises the Fund has resulted from an
Auction. The initial Rate Period for the Series B Energy Notes shall be seven
days for Series B Energy Notes. Rate Periods after the initial Rate Period shall
Page 30
either be Standard Rate Periods or, subject to certain conditions and with
notice to Holders, Special Rate Periods.
A Special Rate Period will not be effective unless, among other things,
Sufficient Clearing Bids exist at the Auction in respect of such Special Rate
Period (that is, in general, the aggregate amount of Series B Energy Notes
subject to Buy Orders by Potential Holders is at least equal to the aggregate
amount of Series B Energy Notes subject to Sell Orders by Existing Holders).
Interest will accrue at the Applicable Rate from the Original Issue
Date and shall be payable on each Interest Payment Date thereafter. For Rate
Periods of less than 30 days, Interest Payment Dates shall occur on the first
Business Day following such Rate Period and, if greater than 30 days, then on a
monthly basis on the first Business Day of each month within such Rate Period,
not including the initial Rate Period, and on the Business Day following the
last day of such Rate Period. Interest will be paid through the Securities
Depository on each Interest Payment Date.
Except during a Default Period as described below, the Applicable Rate
resulting from an Auction will not be greater than the Maximum Rate, which is
equal to the Applicable Percentage of the Reference Rate, subject to upward but
not downward adjustment in the discretion of the Board of Trustees after
consultation with the Broker-Dealers. The Applicable Percentage will be
determined based on the lower of the credit ratings assigned on that date to the
Series B Energy Notes by Moody's and Fitch, as follows:
MOODY'S FITCH APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or above AA- or above 200%
A3 to A1 A- to A+ 250%
Baa3 to Baa1 BBB- to BBB+ 275%
Below Baa3 Below BBB- 300%
The Reference Rate is the greater of (1) the applicable AA Composite
Commercial Paper Rate (for a Rate Period of fewer than 184 days) or the
applicable Treasury Index Rate (for a Rate Period of 184 days or more), or (2)
the applicable LIBOR. For Standard Rate Periods or less only, the Applicable
Rate resulting from an Auction will not be less than the Minimum Rate, which is
70% of the applicable AA Composite Commercial Paper Rate. No Minimum Rate is
specified for Auctions in respect to Rate Periods of more than the Standard Rate
Period.
The Maximum Rate for the Series B Energy Notes will apply automatically
following an Auction for the Series B Energy Notes in which Sufficient Clearing
Bids have not been made (other than because all Series B Energy Notes were
subject to Submitted Hold Orders). If an Auction for any subsequent Rate Period
is not held for any reason, including because there is no Auction Agent or
Broker-Dealer, then the Interest Rate on the Series B Energy Notes for any such
Rate Period shall be the Maximum Rate (except for circumstances in which the
Interest Rate is the Default Rate, as described below).
The All Hold Rate will apply automatically following an Auction in
which all of the outstanding Series B Energy Notes are subject to (or are deemed
to be subject to) Submitted Hold Orders. The All Hold Rate is 80% of the
applicable AA Composite Commercial Paper Rate.
Prior to each Auction, Broker-Dealers will notify Holders and the
Trustee of the term of the next succeeding Rate Period as soon as practicable
after the Broker-Dealers have been so advised by the Fund. After each Auction,
on the Auction Date, Broker-Dealers will notify Holders of the Applicable Rate
for the next succeeding Rate Period and of the Auction Date of the next
succeeding Auction.
Notification of Rate Period. The Fund will designate the duration of
subsequent Rate Periods the Series B Energy Notes; provided, however, that no
such designation is necessary for a Standard Rate Period and, provided further,
that any designation of a Special Rate Period shall be effective only if (1)
notice thereof shall have been given as provided in the Indenture, (2) any
failure to pay in a timely manner to the Trustee the full amount of any interest
on, or the redemption price of, the Series B Energy Notes shall have been cured
as provided above, (3) Sufficient Clearing Bids shall have existed in an Auction
held on the Auction Date immediately preceding the first day of such proposed
Special Rate Period, (4) if the Fund shall have mailed a Notice of Redemption
with respect to any such Series B Energy Notes, the redemption price with
respect to such Series B Energy Notes shall have been deposited with the Paying
Agent, and (5) the Fund has confirmed that as of the Auction Date next preceding
the first day of such Special Rate Period, it has Eligible Assets with an
aggregate Discounted Value at least equal to the Series B Energy Notes Basic
Maintenance Amount, and the Fund has consulted with the Broker-Dealers and has
provided notice of such designation and otherwise complied with the Rating
Agency Guidelines.
Page 31
Designation of a Special Rate Period. If the Fund proposes to designate
any Special Rate Period, not fewer than seven (or two Business Days in the event
the duration of the Rate Period prior to such Special Rate Period is fewer than
eight days) nor more than 30 Business Days prior to the first day of such
Special Rate Period, notice shall be (1) made by press release and (2)
communicated by the Fund by telephonic or other means to the Trustee and the
Auction Agent and confirmed in writing promptly thereafter. Each such notice
shall state:
(A) that the Fund proposes to exercise its option to
designate a succeeding Special Rate Period, specifying the first and
last days thereof, and
(B) that the Fund will by 3:00 p.m., New York City time, on
the second Business Day next preceding the first day of such Special
Rate Period, notify the Auction Agent and the Trustee, and the Auction
Agent will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such
Special Rate Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special
Rate Period, in which latter event the succeeding Rate Period shall be
a Standard Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Fund shall
deliver to the Trustee and the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(1) a notice stating
(A) that the Fund has determined to designate the
next succeeding Rate Period as a Special Rate Period,
specifying the first and last days thereof; and
(B) the terms of any Specific Redemption Provisions;
or
(2) a notice stating that the Fund has determined not to
exercise its option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the required confirmation described above by 3:00 p.m., New York
City time, on the second Business Day next preceding the first day of such
proposed Special Rate Period, the Fund shall be deemed to have delivered a
notice to the Auction Agent with respect to such Rate Period to the effect set
forth in clause (2) above, thereby resulting in a Standard Rate Period.
Default Period. Subject to cure provisions, a "Default Period" with
respect to the Series B Energy Notes will commence on any date the Fund fails to
deposit irrevocably in trust in same-day funds, with the Paying Agent by 12:00
noon, New York City time,
(A) the full amount of any declared interest on that series
payable on the Interest Payment Date (an "Interest Default"); or
(B) the full amount of any redemption price (the "Redemption
Price") payable on the date fixed for redemption (the "Redemption
Date") (a "Redemption Default" and together with an Interest Default,
hereinafter referred to as "Default").
Subject to cure provisions, a Default Period with respect to an
Interest Default or a Redemption Default shall end on the Business Day on which,
by 12:00 noon, New York City time, all unpaid interest and any unpaid Redemption
Price shall have been deposited irrevocably in trust in same-day funds with the
Paying Agent. In the case of an Interest Default, the Applicable Rate for each
Rate Period commencing during a Default Period will equal the Default Rate, and
each subsequent Rate Period commencing after the beginning of a Default Period
shall be a Standard Rate Period; provided, however, that the commencement of a
Default Period will not by itself cause the commencement of a new Rate Period.
No Auction shall be held during a Default Period with respect to an
Interest Default applicable to the Series B Energy Notes. No Default Period with
respect to an Interest Default or Redemption Default shall be deemed to commence
if the amount of any interest or any Redemption Price due (if such default is
not solely due to the willful failure of the Fund) is deposited irrevocably in
trust, in same-day funds with the Paying Agent by 12:00 noon, New York City time
within three Business Days after the applicable Interest Payment Date or
Redemption Date, together with an amount equal to the Default Rate applied to
the amount of such non-payment based on the actual number of days comprising
such period divided by 365 for each series. The Default Rate shall be equal to
the Reference Rate multiplied by three.
Page 32
REDEMPTION
Optional Redemption. Subject to the provisions of the Indenture, and,
to the extent permitted under the 1940 Act, the Fund at its option may redeem
the Series B Energy Notes having a Rate Period of one year or less, in whole or
in part, out of funds legally available therefore, on the Interest Payment Date
upon not less than 15 days' and not more than 40 days' prior notice. The
optional redemption price shall be equal to the aggregate principal amount of
the Series B Energy Notes to be redeemed, plus an amount equal to accrued
interest to the date fixed for redemption. The Series B Energy Notes having a
Rate Period of more than one year are redeemable at the option of the Fund, in
whole or in part, out of funds legally available therefore, prior to the end of
the relevant Rate Period, subject to any Specific Redemption Provisions, which
may include the payment of redemption premiums to the extent required under any
applicable Specific Redemption Provisions. The Fund shall not effect any
optional redemption unless after giving effect thereto (1) the Fund has
available on such date fixed for the redemption certain Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to Holders of the Series B Energy Notes by reason of the
redemption of the Series B Energy Notes and (2) the Fund would have Eligible
Assets with an aggregate Discounted Value at least equal to the Series B Energy
Notes Basic Maintenance Amount immediately subsequent to such redemption.
The Fund also reserves the right to repurchase the Series B Energy
Notes in market or other transactions from time to time in accordance with
applicable law and at a price that may be more or less than the principal amount
of the Series B Energy Notes, but is under no obligation to do so.
Mandatory Redemption. If the Fund fails to maintain, as of any
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the Energy Notes Basic Maintenance Amount or, as of the last Business
Day of any month, the 1940 Act Energy Notes Asset Coverage, and such failure is
not cured within ten Business Days following such Valuation Date in the case of
a failure to maintain the Energy Notes Basic Maintenance Amount or on the last
Business Day of the following month in the case of a failure to maintain the
1940 Act Energy Notes Asset Coverage as of such last Business Day (each an
"Asset Coverage Cure Date"), then the Series B Energy Notes will be subject to
mandatory redemption out of funds legally available therefor. See "--Asset
Maintenance" below.
The principal amount of the Series B Energy Notes to be redeemed in
such circumstances will be equal to the lesser of:
(1) the minimum principal amount of the Series B Energy Notes the
redemption of which, if deemed to have occurred immediately prior to the opening
of business on the relevant Asset Coverage Cure Date, would result in the Fund
having Eligible Assets with an aggregated Discounted Value at least equal to the
Energy Notes Basic Maintenance Amount or sufficient to satisfy the 1940 Act
Energy Notes Asset Coverage, as the case may be, in either case as of the
relevant Asset Coverage Cure Date (provided that, if there is no such minimum
principal amount of the Series B Energy Notes the redemption of which would have
such result, all the Series B Energy Notes then outstanding will be redeemed),
and
(2) the maximum principal amount of the Series B Energy Notes that can
be redeemed out of funds expected to be available therefor on the Mandatory
Redemption Date (as defined below) at the Mandatory Redemption Price (as defined
below).
The Fund shall allocate the principal amount of the Series B Energy
Notes required to be redeemed to satisfy the Energy Notes Basic Maintenance
Amount or the 1940 Act Energy Notes Asset Coverage, as the case may be, pro rata
among the Holders of the Series B Energy Notes in proportion to the principal
amount of the Series B Energy Notes they hold, by lot or by such other method as
the Fund shall deem fair and equitable, subject to mandatory redemption
provisions, if any.
The Fund is required to effect such a mandatory redemption not later
than 40 days after the Asset Coverage Cure Date, as the case may be (the
"Mandatory Redemption Date"), except that if the Fund does not have funds
legally available for the redemption of, or is not otherwise legally permitted
to redeem, all of the outstanding Series B Energy Notes of a series which are
subject to mandatory redemption, or the Fund otherwise is unable to effect such
redemption on or prior to such Mandatory Redemption Date, the Fund will redeem
those Series B Energy Notes on the earliest practicable date on which the Fund
will have such funds available, upon notice to record owners of the Series B
Energy Notes and the Paying Agent. The Fund's ability to make a mandatory
redemption may be limited by the provisions of the 1940 Act or Massachusetts
law. The redemption price of the Series B Energy Notes in the event of any
mandatory redemption will be the principal amount, plus an amount equal to
accrued interest to the date fixed for redemption, plus (in the case of a Rate
Period of more than one year) redemption premium, if any, determined by the
Board of Trustees after consultation with the Broker-Dealers and set forth in
any applicable Specific Redemption Provisions (the "Mandatory Redemption
Price").
Page 33
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the
Fund will file a notice of its intention to redeem the Series B Energy Notes
with the Commission so as to provide at least the minimum notice required by
such Rule or any successor provision (notice currently must be filed with the
Commission generally at least 30 days prior to the redemption date). The Fund
shall deliver a notice of redemption to the Trustee and the Auction Agent
containing the information described below one Business Day prior to the giving
of notice to Holders in the case of optional redemptions as described above and
on or prior to the 30th day preceding the Mandatory Redemption Date in the case
of a mandatory redemption as described above. The Trustee will use its
reasonable efforts to provide notice to each holder of the Series B Energy Notes
called for redemption by electronic means not later than the close of business
on the Business Day immediately following the Business Day on which the Trustee
determines the principal amount of the Series B Energy Notes to be redeemed (or,
during a Default Period with respect to such Series B Energy Notes, not later
than the close of business on the Business Day immediately following the day on
which the Trustee receives notice of redemption from the Fund). Such notice will
be confirmed promptly by the Trustee in writing not later than the close of
business on the third Business Day preceding the redemption date by providing
the notice to each holder of record of the Series B Energy Notes called for
redemption, the Paying Agent (if different from the Trustee) and the Securities
Depository ("Notice of Redemption"). The Notice of Redemption will be addressed
to the registered owners of the Series B Energy Notes at their addresses
appearing on the books or share records of the Fund. Such notice will set forth
(1) the redemption date, (2) the principal amount and identity of the Series B
Energy Notes to be redeemed, (3) the redemption price (specifying the amount of
accrued interest to be included therein), (4) that interest on the Series B
Energy Notes to be redeemed will cease to accrue on such redemption date, and
(5) the provision under which redemption shall be made. No defect in the Notice
of Redemption or in the transmittal or mailing thereof will affect the validity
of the redemption proceedings, except as required by applicable law.
If less than all of the outstanding Series B Energy Notes are redeemed
on any date, the amount of the Series B Energy Notes per Holder to be redeemed
on such date will be selected by the Fund on a pro rata basis in proportion to
the principal amounts of the Series B Energy Notes held by such holders, by lot
or by such other method as is determined by the Fund to be fair and equitable,
subject to the terms of any Specific Redemption Provisions. In no event will any
redemption of less than all the outstanding Series B Energy Notes be for less
than $25,000 or integral multiples thereof. The Series B Energy Notes may be
subject to mandatory redemption as described herein notwithstanding the terms of
any Specific Redemption Provisions. The Trustee will give notice to the
Securities Depository, whose nominee will be the record holder of all of the
Series B Energy Notes, and the Securities Depository will determine the Series B
Energy Notes to be redeemed from the account of the Agent Member of each
beneficial owner. Each Agent Member will determine the principal amounts of the
Series B Energy Notes to be redeemed from the account of each Beneficial Owner
for which it acts as agent. An Agent Member may select for redemption the Series
B Energy Notes from the accounts of some Beneficial Owners without selecting for
redemption any such Series B Energy Notes from the accounts of other Beneficial
Owners. Notwithstanding the foregoing, if neither the Securities Depository nor
its nominee is the record holder of all of the Series B Energy Notes, the
particular principal amount to be redeemed shall be selected by the Fund by lot,
on a pro rata basis between each series or by such other method as the Fund
shall deem fair and equitable, as contemplated above.
If a Notice of Redemption has been given, then upon the deposit of
funds with the Paying Agent sufficient to effect such redemption, interest on
such Series B Energy Notes will cease to accrue and such Series B Energy Notes
will no longer be deemed to be outstanding for any purpose and all rights of the
owners of the Series B Energy Notes so called for redemption will cease and
terminate, except the right of the owners of such Series B Energy Notes to
receive the redemption price, but without any interest or additional amount. The
Fund shall be entitled to receive from the Paying Agent, promptly after the date
fixed for redemption, any cash deposited with the Paying Agent in excess of (1)
the aggregate redemption price of the Series B Energy Notes called for
redemption on such date and (2) such other amounts, if any, to which holders of
the Series B Energy Notes called for redemption may be entitled. The Fund will
be entitled to receive, from time to time after the date fixed for redemption,
from the Paying Agent the interest, if any, earned on such funds deposited with
the Paying Agent and the owners of the Series B Energy Notes so redeemed will
have no claim to any such interest. Any funds so deposited which are unclaimed
two years after such redemption date will be paid, to the extent permitted by
law, by the Paying Agent to the Fund upon its request. After such payment,
Holders of the Series B Energy Notes called for redemption may look only to the
Fund for payment.
So long as any such Series B Energy Notes are held of record by the
nominee of the Securities Depository, the Redemption Price for such Series B
Energy Notes will be paid on the Redemption Date to the nominee of the
Securities Depository. The Securities Depository's normal procedures provide for
it to distribute the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for whom they are
acting as agent.
Notwithstanding the provisions for redemption described above, no such
Series B Energy Notes may be redeemed unless all interest in arrears on the
outstanding Series B Energy Notes, and any indebtedness of the Fund ranking on a
Page 34
parity with the Series B Energy Notes, have been or are being contemporaneously
paid or set aside for payment, except in connection with the liquidation of the
Fund in which case all the Series B Energy Notes and all indebtedness ranking on
a parity with the Series B Energy Notes must receive proportionate amounts and
that the foregoing shall not prevent the purchase or acquisition of all the
outstanding Series B Energy Notes pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, Holders of all the outstanding Series B Energy Notes.
Except for the provisions described above, nothing contained in the
Indenture limits any legal right of the Fund to purchase or otherwise acquire
any such Series B Energy Notes outside of an Auction at any price, whether
higher or lower than the price that would be paid in connection with an optional
or mandatory redemption, so long as, at the time of any such purchase, there is
no arrearage in the payment of interest on or the mandatory or optional
redemption price with respect to, any such Series B Energy Notes for which
Notice of Redemption has been given and the Fund is in compliance with the 1940
Act Energy Notes Asset Coverage and has Eligible Assets with an aggregate
Discounted Value at least equal to the Energy Notes Basic Maintenance Amount
after giving effect to such purchase or acquisition on the date thereof. If less
than all the outstanding Series B Energy Notes are redeemed or otherwise
acquired by the Fund, the Fund shall give notice of such transaction to the
Trustee, in accordance with the procedures agreed upon by the Board of Trustees.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset maintenance
requirements in respect of the Series B Energy Notes: (1) the Fund must maintain
assets in its portfolio that have a value, discounted in accordance with
guidelines set forth by a Rating Agency, at least equal to the Energy Notes
Basic Maintenance Amount; and (2) the Fund must maintain asset coverage under
the 1940 Act for Energy Notes of at least 300%, referred to as the "1940 Act
Energy Notes Asset Coverage."
The Energy Notes Basic Maintenance Amount. The Fund must maintain, as
of each Valuation Date on which any such Series B Energy Notes are outstanding,
Eligible Assets having an aggregate Discounted Value at least equal to the
Energy Notes Basic Maintenance Amount. The Energy Notes Basic Maintenance Amount
is calculated separately for each Rating Agency which is then rating the Series
B Energy Notes and so requires. If the Fund fails to maintain Eligible Assets
having an aggregated Discounted Value at least equal to the Energy Notes Basic
Maintenance Amount as of any Valuation Date and the failure is not cured on or
before the related Asset Coverage Cure Date, the Fund will be required in
certain circumstances to redeem certain of the Series B Energy Notes. See
"--Redemption--Mandatory Redemption."
The "Energy Notes Basic Maintenance Amount" as of any Valuation Date
currently is defined in the Rating Agency Guidelines as the dollar amount equal
to:
(1) the sum of:
(A) the aggregate principal amount of the
outstanding Energy Notes of each series on such date (and
redemption premium, if any);
(B) the aggregate amount of accrued interest to, and
including, the first Interest Payment Date that follows such
Valuation Date (or to the 30th day after such Valuation Date,
if such 30th day occurs before the first following Interest
Payment Date);
(C) the amount of anticipated Fund non-interest
expenses for the 90 days subsequent to such Valuation Date;
(D) the amount of the current outstanding balances
of any indebtedness senior to the Energy Notes plus interest
actually accrued together with 30 days' additional interest on
the current outstanding balances calculated at the current
rate; and
(E) any current liabilities, payable during the 30
days subsequent to such Valuation Date, including, without
limitation, indebtedness due within one year and any
redemption premium due with respect to the Energy Notes for
which a Notice of Redemption has been given, as of such
Valuation Date, to the extent not reflected in any of (1)(A)
through (1)(D); less
(2) the sum of any cash plus the value of any of the Fund's
assets irrevocably deposited by the Fund for the payment of any (1)(B)
through (1)(E) ("value," for purposes of this clause (2), means the
Discounted Value of the security, except that if the security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated at least P-1 by Moody's,
it will be valued at its face value).
Each Rating Agency may amend the definition of "The Energy Notes Basic
Maintenance Amount" from time to time.
Page 35
The Market Value of the Fund's portfolio securities (used in
calculating the Discounted Value of Eligible Assets) is calculated in the same
manner as the Fund calculates its net asset value. See "Net Asset Value" in the
SAI.
Each Rating Agency's Discount Factors, the criteria used to determine
whether the assets held in the Fund's portfolio are Eligible Assets, and the
guidelines for determining the Discounted Value of the Fund's portfolio holdings
to determine compliance with the Energy Notes Basic Maintenance Amount are based
on Rating Agency Guidelines established by each Rating Agency in connection with
its rating of the Series B Energy Notes. The Discount Factor relating to any
asset of the Fund, the Energy Notes Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the Discounted Value of the Fund's
portfolio and certain definitions and methods of calculation relating thereto
may be changed from time to time by the applicable Rating Agency, without the
approval of the Fund, Board of Trustees, shareholders or holders of the Series B
Energy Notes.
A Rating Agency's Guidelines will apply to the Series B Energy Notes
only so long as that Rating Agency is rating the Series B Energy Notes. The Fund
will pay certain fees to Moody's and Fitch and any Other Rating Agency which may
provide a rating for the Series B Energy Notes for rating the Series B Energy
Notes. The ratings assigned to the Series B Energy Notes are not recommendations
to buy, sell or hold the Series B Energy Notes. Such ratings may be subject to
revision or withdrawal by the assigning Rating Agency at any time. Any rating of
the Series B Energy Notes should be evaluated independently of any other rating.
1940 Act Energy Notes Asset Coverage. The Fund also is required to
maintain, with respect to the Energy Notes, as of the last Business Day on any
month in which any such Energy Notes are outstanding, asset coverage of at least
300% (or such other percentage as may in the future be specified in or under the
1940 Act as the minimum asset coverage for senior securities representing
indebtedness of a closed-end investment company as a condition of declaring
dividends on its common shares) ("1940 Act Energy Notes Asset Coverage"). If the
Fund fails to maintain the 1940 Act Energy Notes Asset Coverage as of the last
Business Day of any month and such failure is not cured as of the related Asset
Coverage Cure Date, the Fund will be required to redeem certain such Series B
Energy Notes. See "--Redemption--Mandatory Redemption."
The Fund estimates that based on the composition of its portfolio as of
November 30, 2005, assuming the issuance of all such Series B Energy Notes
offered hereby (the sales load and estimated offering costs of the Series B
Energy Notes will be capitalized and amortized over the life of the Series B
Energy Notes), the 1940 Act Energy Notes Asset Coverage would be:
Value of Fund assets less all liabilities and indebtedness
not represented by senior securities $204,229,527
--------------------------------------------------------------- = ------------- = 346%
Senior securities representing indebtedness, including $59,000,000
$34,000,000 aggregate principal amount of Series A Energy Notes
and $25,000,000 aggregate principal amount of Series B Energy Notes
Notices. Under the current Rating Agency Guidelines, after the Issue
Date and in certain other circumstances, the Fund is required to deliver to any
Rating Agency which is then rating the Series B Energy Notes (1) a certificate
with respect to the calculation of the Energy Notes Basic Maintenance Amount;
(2) a certificate with respect to the calculation of the 1940 Act Energy Notes
Asset Coverage and the value of the portfolio holdings of the Fund; and (3) a
letter prepared by the Fund's independent accountants regarding the accuracy of
such calculations.
EVENTS OF DEFAULT AND ACCELERATION OF MATURITY; REMEDIES
Any one of the following events constitutes an "event of default" under
the Indenture:
- default in the payment of any interest upon any series of the
Energy Notes when it becomes due and payable and the continuance
of such default for 30 days;
- default in the payment of the principal of any series of the
Energy Notes at maturity;
- default in the performance, or breach, of any covenant or warranty
of the Fund in the Indenture, and continuance of such default or
breach for a period of 90 days after written notice has been
given;
- certain voluntary or involuntary proceedings involving the Fund
and relating to bankruptcy, insolvency or other similar laws;
- if, on the last business day of each of twenty-four consecutive
calendar months, the Energy Notes have an asset coverage under the
1940 Act of less than 100%; and
- any other "event of default" provided with respect to any series,
including a default in the payment of any redemption price on an
applicable redemption date.
Page 36
Upon the occurrence and continuance of an event of default, the holders
of a majority in principal amount of the outstanding Energy Notes of a series or
the Trustee may declare the principal amount of the Energy Notes of such series
immediately due and payable upon written notice to the Fund. Upon an event of
default relating to bankruptcy, insolvency or other similar laws, acceleration
of maturity occurs automatically. At any time after a declaration of
acceleration with respect to the Energy Notes has been made, and before a
judgment or decree for payment of the money due has been obtained, the holders
of a majority in principal amount of the outstanding Energy Notes, by written
notice to the Fund and the Trustee, may rescind and annul the declaration of
acceleration and its consequences if all events of default with respect to the
Energy Notes, other than the non-payment of the principal of the Energy Notes
which have become due solely by such declaration of acceleration, have been
cured or waived.
At any time after a declaration of acceleration with respect to the
Energy Notes of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in principal amount of the outstanding Energy Notes, by written notice
to the Fund and the Trustee, may rescind and annul such declaration and its
consequences if certain conditions are met.
PAYMENT OF PROCEEDS UPON DISSOLUTION, ETC.
In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to the Fund or to its creditors, as
such, or to its assets, or (b) any liquidation, dissolution or other winding up
of the Fund, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or
any other marshalling of assets and liabilities of the Fund, then (after any
payments with respect to any secured creditor of the Fund outstanding at such
time) and in any such event the holders of the Series B Energy Notes shall be
entitled to receive payment in full of all amounts due or to become due on or in
respect of all such Series B Energy Notes (including any interest accruing
thereon after the commencement of any such case or proceeding), or provision
shall be made for such payment in cash or cash equivalents or otherwise in a
manner satisfactory to the holders of the Series B Energy Notes, before the
holders of any shares of beneficial interest of the Fund are entitled to receive
any payment on account of any redemption proceeds, liquidation preference or
dividends from such shares, and to that end the holders of the Series B Energy
Notes shall be entitled to receive, for application to the payment thereof, any
payment or distribution of any kind or character, whether in cash, property or
securities, including any such payment or distribution which may be payable or
deliverable by reason of the payment of any other indebtedness of the Fund being
subordinated to the payment of the Series B Energy Notes, which may be payable
or deliverable in respect of the Series B Energy Notes in any such case,
proceeding, dissolution, liquidation or other winding up event.
Unsecured creditors of the Fund, in addition to Holders of the Series B
Energy Notes, may include, without limitation, service providers to the Fund,
including the Adviser, Sub-Adviser, Custodian, Auction Agent, Broker-Dealers and
the Trustee, pursuant to the terms of various contracts with the Fund. Secured
creditors of the Fund may include, without limitation, parties entering into any
futures contracts or options thereon, interest rate swap or cap transactions,
forward rate transactions, put or call options, or other similar transactions
with the Fund that create liens, pledges, charges, security interests, security
agreements or other encumbrances on the assets of the Fund.
A consolidation, reorganization or merger of the Fund with or into any
other fund, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another fund shall not be deemed to be a liquidation, dissolution or winding up
of the Fund.
SUPPLEMENT; WAIVER OF PAST DEFAULT
Without the consent of any Holders of the Series B Energy Notes, the
Fund, when authorized by a board resolution, and the Trustee, at any time and
from time to time, may enter into one or more supplemental indentures:
(1) to evidence the succession of another person to the Fund
and the assumption by any such successor of the covenants of the Fund
in the Indenture and in the Series B Energy Notes,
(2) to add to the covenants of the Fund for the benefit of
the Holders or to surrender any right or power conferred upon the Fund
by the Indenture,
(3) to add any additional Events of Default for the benefit
of the Holders,
(4) to permit or facilitate the issuance of the Series B
Energy Notes in bearer form or to permit or facilitate the issuance of
the Series B Energy Notes in uncertificated form,
(5) to add to, change or eliminate any of the provisions of
the Indenture in respect of the Series B Energy Notes, provided that
any such addition, change or elimination (A) shall neither (1) apply to
any such Series B Energy Notes created prior to the execution of such
supplemental indenture and entitled to the benefit of such provision
nor (2) modify the rights of the Holder of any such Series B Energy
Page 37
Notes with respect to such provision or (B) shall become effective only
when there are no such Series B Energy Notes outstanding,
(6) to establish the form or terms of the Series B Energy
Notes and to increase the aggregate principal amount of any outstanding
the Series B Energy Notes as permitted by the Indenture,
(7) to evidence and provide for the acceptance of appointment
under the Indenture of a successor Trustee and to add to or change any
of the provisions of the Indenture as shall be necessary to provide for
or facilitate the administration of the trusts under the Indenture by
more than one Trustee, or
(8) to cure any ambiguity, to correct or supplement any
provision in the Indenture which may be defective or inconsistent with
any other provision therein, or to make any other provisions with
respect to matters or questions arising under the Indenture; provided
that such actions shall not affect adversely the interests of the
Holders of the Series B Energy Notes in any material respect.
With the consent of the Holders of at least a majority in principal
amount of the outstanding Series B Energy Notes affected thereby, the Fund, when
authorized by a board resolution, and the Trustee may enter into an indenture or
supplemental indentures for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the Indenture or of
modifying in any manner the rights of the Holders of the Series B Energy Notes
under the Indenture; provided, however, that no such supplemental indenture
shall, without the consent of each of the Holders of the outstanding Series B
Energy Notes affected thereby, (1) change the Stated Maturity of the principal
of, or any installment of principal of or interest on, any Energy Note, or
reduce the principal amount thereof or the rate of interest thereon, or permit
the Fund to redeem any such Series B Energy Notes if, absent such supplemental
indenture, the Fund would not be permitted to do so, or change any place of
payment where, or the coin or currency in which, any such Series B Energy Notes
or any interest thereon is payable, or impair the right to institute suit for
the enforcement of any such payment on or after the Stated Maturity thereof (or,
in the case of redemption, on or after the Redemption Date), (2) reduce the
percentage in principal amount of the outstanding Series B Energy Notes, the
consent of whose Holders is necessary for such supplemental indenture or
required for waiver of compliance with certain provisions of the Indenture, or
(3) modify any of the provisions of this paragraph or any provisions of the
Indenture relating to waiver of past defaults and covenants (except to increase
any percentage or to provide that certain other provisions of the Indenture
cannot be modified or waived without the consent of the Holders of the
outstanding Series B Energy Notes).
The Holders of not less than a majority in principal amount of the
outstanding Series B Energy Notes may on behalf of the Holders of all the Series
B Energy Notes waive any past default under the Indenture with respect to such
series and its consequences, except a default (1) in the payment of the
principal of or interest on any Security of such series, or (2) in respect of a
covenant or provision of the Indenture cannot be modified or amended without the
consent of each Holder of the outstanding Series B Energy Notes affected.
SATISFACTION AND DISCHARGE; DEFEASANCE
The Fund may discharge its obligations under the Indenture when (1)
either (A) all such Series B Energy Notes have been delivered to the Trustee for
cancellation or (B) all such Series B Energy Notes not delivered to the Trustee
for cancellation have become due and payable, will become due and payable at
their Stated Maturity within one year, or are to be called for redemption within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Fund, and
the Fund has deposited or caused to be deposited with the Trustee as trust,
funds in an amount sufficient to pay and discharge the entire indebtedness on
such Series B Energy Notes for principal and interest to the date of such
deposit (in the case of the Series B Energy Notes which have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be; (2)
the Fund has paid or caused to be paid all other sums payable under the
Indenture by the Fund; and (3) the Fund has delivered to the Trustee an
officers' certificate and an opinion of counsel relating to compliance with the
provisions of the Indenture.
The Fund, at its election, shall:
(1) be deemed to have paid and discharged its debt on the
Series B Energy Notes and the Indenture shall cease to be of further
effect as to all outstanding Series B Energy Notes (except as to (A)
rights of Holders to receive payments of principal of and interest on
such Series B Energy Notes, (B) rights of registration of transfer and
exchange of the Series B Energy Notes, (C) the rights, powers, duties
and immunities of the Trustee under the Indenture and (D) certain other
specified provisions in the Indenture) or
(2) cease to be under any obligation to comply with certain
covenants contained in the Indenture, after the irrevocable deposit by
the Fund with the Trustee, in trust for the benefit of the Holders, at
any time prior to the maturity of the Series B Energy Notes, of (A)
money in an amount, (B) U.S. Government Obligations, which through the
Page 38
scheduled payment of principal and interest will provide, not later
than one day before the due date of any payment, money in an amount, or
(C) a combination thereof, in each case sufficient to pay and discharge
the principal of and interest on the Series B Energy Notes then
outstanding on the dates on which any such payments are due in
accordance with the terms of the Indenture and the Series B Energy
Notes. Such defeasance or covenant defeasance shall be deemed to occur
only if certain conditions are satisfied, including, among other
things, delivery by the Fund to the Trustee of an opinion of counsel
and officers' certificates as to compliance with the requirements of
the Indenture relating to defeasance.
PAYMENT RESTRICTIONS ON SHARES OF BENEFICIAL INTEREST
Under the 1940 Act, the Fund may not declare any dividend or make any
distribution with respect to the common shares and any preferred shares of the
Fund, except as noted below, or purchase or redeem any common or preferred
shares if, at the time of such declaration (and after giving effect thereto),
asset coverage with respect to the Series B Energy Notes and any other senior
securities representing indebtedness (as defined in the 1940 Act), would be less
than 300% (or such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
declaring distributions, purchases or redemptions of its shares of beneficial
interest). Dividends may, however, be declared upon any preferred shares if the
Series B Energy Notes and any other senior securities representing indebtedness
have an asset coverage of at least 200% at the time of declaration after
deducting the amount of such dividend. "Senior securities representing
indebtedness" generally means any bond, debenture, note or similar obligation or
instrument constituting a security (other than shares of beneficial interest)
and evidencing indebtedness and could include the Fund's obligations under any
Borrowings. For purposes of determining asset coverage for senior securities
representing indebtedness in connection with the payment of dividends or other
distributions on or purchases or redemptions of stock, the term "senior
security" does not include any promissory note or other evidence of indebtedness
issued in consideration of any loan, extension or renewal thereof, made by a
bank or other person and privately arranged, and not intended to be publicly
distributed. The term "senior security" also does not include any such
promissory note or other evidence of indebtedness in any case where such a loan
is for temporary purposes only and in an amount not exceeding 5% of the value of
the total assets of the Fund at the time when the loan is made; a loan is
presumed under the 1940 Act to be for temporary purposes if it is repaid within
60 days and is not extended or renewed; otherwise it is presumed not to be for
temporary purposes. For purposes of determining whether the 200% and 300% asset
coverage requirements described above apply in connection with interest payments
or distributions on or purchases or redemptions of the Series B Energy Notes and
shares of beneficial interest, such asset coverages may be calculated on the
basis of values calculated as of a time within 48 hours (not including Sundays
or holidays) next preceding the time of the applicable determination.
In addition, a declaration of a dividend or other distribution on or
purchase or redemption of common or preferred shares is restricted (1) at any
time that an event of default under the Series B Energy Notes or any other
Borrowings has occurred and is continuing; or (2) if after giving effect to such
declaration, the Fund would not have eligible portfolio holdings with an
aggregated Discounted Value at least equal to any asset coverage requirements
associated with such Series B Energy Notes or other Borrowings; or (3) the Fund
has not redeemed the full amount of the Series B Energy Notes or other
Borrowings, if any, required to be redeemed by any provision for mandatory
redemption.
GOVERNING LAW
The Indenture and the Series B Energy Notes will be governed by the
laws of the State of New York.
THE TRUSTEE
Deutsche Bank National Trust Company will be the Trustee under the
Indenture. The Indenture provides that, except during the continuance of an
event of default, the Trustee will perform only such duties as are specifically
set forth in the Indenture. In case an event of default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by the Indenture, and use the same degree of care and skill in their
exercise, as a prudent person would exercise or use under the circumstances in
the conduct of his or her own affairs.
Page 39
THE AUCTION
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Deutsche Bank Trust Company Americas) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of determining
the Applicable Rate for each series of the Energy Notes so long as the
Applicable Rate for the Energy Notes of such series is to be based on the
results of an Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice or upon
notice to the Fund on a date specified in such notice if the Fund shall have
failed to pay the amounts due to the Auction Agent within 30 days of invoice. If
the Auction Agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor Auction Agent containing substantially the
same terms and conditions as the Auction Agency Agreement. The Fund may remove
the Auction Agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for the Energy Notes.
The Auction Agent after each Auction for the Energy Notes will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge (i) in the
case of any Auction immediately preceding a Rate Period of less than one year,
the product of (A) a fraction the numerator of which is the number of days in
the Rate Period (calculated by counting the first day of such Rate Period but
excluding the last day thereof) and the denominator of which is 360, times (B)
1/4 of 1%, times (C) $25,000 times (D) the sum of the aggregate number of Energy
Notes placed by such Broker-Dealer, or (ii) the amount mutually agreed upon by
the Fund and the Broker-Dealers in the case of any Auction immediately preceding
a Rate Period of one year or longer. For the purposes of the preceding sentence,
the Energy Notes will be placed by a Broker-Dealer if such Energy Notes were (a)
the subject of Hold Orders to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial Owners
or (b) the subject of an Order submitted by such Broker-Dealer that is (1) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such Energy Notes as a result of the Auction or (2) a
Submitted Bid of a Potential Holder that resulted in such Potential Holder
purchasing such Energy Notes as a result of the Auction or (3) a valid Hold
Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
AUCTION PROCEDURES
Beneficial Owners. Prior to the Submission Deadline on each Auction
Date for a series of the Energy Notes, each customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer (or, if applicable, the Auction
Agent) as a holder of the Energy Notes of such series (a "Beneficial Owner") may
submit orders ("Orders") with respect to the Energy Notes of such series to that
Broker-Dealer as follows:
- Hold Order -- indicating its desire to hold the Energy Notes of
such series without regard to the Applicable Rate for the Energy
Notes of such series for the next Rate Period thereof.
- Bid -- indicating its desire to sell the principal amount of the
Outstanding Energy Notes, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell if the
Applicable Rate for the Energy Notes of such series for the next
succeeding Rate Period of the Energy Notes of such series shall be
less than the rate per annum specified by such Beneficial Owner
(also known as a hold at rate order).
- Sell Order -- indicating its desire to sell the principal amount
of the Outstanding Energy Notes, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the Energy Notes of such
series for the next succeeding Rate Period of the Energy Notes of
such series.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to the Energy Notes of a series then held by such
Beneficial Owner. A Beneficial Owner of the Energy Notes of such series that
submits a Bid with respect to the Energy Notes of such series to its
Broker-Dealer having a rate higher than the Maximum Rate for the Energy Notes of
such series on the Auction Date therefore will be treated as having submitted a
Sell Order with respect to such Energy Notes to its Broker-Dealer. A Beneficial
Owner of the Energy Notes of such series that fails to submit an Order with
respect to such Energy Notes to its Broker-Dealer will be deemed to have
submitted a Hold Order with respect to such Energy Notes of such series to its
Broker-Dealer; provided, however, that if a Beneficial Owner of the Energy Notes
Page 40
of such series fails to submit an Order with respect to the Energy Notes of such
series to its Broker-Dealer for an Auction relating to a Special Rate Period of
more than seven Rate Period Days in the case of Series A Energy Notes or seven
Rate Period Days in the case of Series B Energy Notes, such Beneficial Owner
will be deemed to have submitted a Sell Order with respect to such Energy Notes
to its Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell
the Energy Notes subject thereto. A Beneficial Owner that offers to become the
Beneficial Owner of the additional Energy Notes is, for purposes of such offer,
a Potential Beneficial Owner as discussed below.
Potential Beneficial Owners. A customer of a Broker-Dealer that is not
a Beneficial Owner of the Energy Notes of a series but that wishes to purchase
the Energy Notes of such series, or that is a Beneficial Owner of the Energy
Notes of such series that wishes to purchase additional Energy Notes of such
series (in each case, a "Potential Beneficial Owner"), may submit Bids to its
Broker-Dealer in which it offers to purchase such principal amount of the
Outstanding Energy Notes of such series specified in such bid if the Applicable
Rate for the Energy Notes of such series determined on such Auction Date shall
be higher than the rate specified in such Bid. A Bid placed by a Potential
Beneficial Owner of the Energy Notes of such series specifying a rate higher
than the Maximum Rate for the Energy Notes of such series on the Auction Date
therefore will not be accepted.
Each Broker-Dealer shall submit in writing, which shall include a
writing delivered via e-mail or other electronic means to the Auction Agent
prior to the Submission Processing Deadline on each Auction Date, all Orders for
the Energy Notes of a series subject to an Auction on such Auction Date obtained
by such Broker-Dealer, designating itself (unless otherwise permitted by the
Fund) as an Existing Holder in respect of the Energy Notes subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as Potential
Holders in respect of the Energy Notes subject to Orders submitted to it by
Potential Beneficial Owners. However, neither the Fund nor the Auction Agent
will be responsible for a Broker-Dealer's failure to comply with the foregoing.
Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of an
Existing Holder or a Potential Holder will be treated in the same manner as an
Order placed with a Broker-Dealer by a Beneficial Owner or Potential Beneficial
Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent
an Order in respect of the Energy Notes held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of the Energy Notes
held by it. A Broker-Dealer may also submit Orders to the Auction Agent for its
own account as an Existing Holder or Potential Holder, provided it is not an
affiliate of the Fund.
If Sufficient Clearing Bids for a series of the Energy Notes exist
(that is, the aggregate principal amount of the Outstanding Energy Notes of such
series subject to Submitted Bids of Potential Holders specifying one or more
rates lower than the Maximum Rate for the Energy Notes of such series exceeds or
is equal to the sum of the aggregate principal amount of the Outstanding Energy
Notes of such series subject to Submitted Sell Orders), the Applicable Rate for
the Energy Notes of such series for the next succeeding Rate Period thereof will
be the lowest rate specified in the Submitted Bids which, taking into account
such rate and all lower rates bid by Broker-Dealers as or on behalf of Existing
Holders and Potential Holders, would result in Existing Holders and Potential
Holders owning the aggregate principal amount of the Energy Notes of such series
available for purchase in the Auction. If Sufficient Clearing Bids for a series
of the Energy Notes do not exist (other than because all of the Outstanding
Energy Notes of such series are subject to Submitted Hold Orders), then the
Applicable Rate for all the Energy Notes of such series for the next succeeding
Rate Period thereof will be equal to the Maximum Rate for the Energy Notes of
such series. In such event, Beneficial Owners of the Energy Notes of such series
that have submitted or are deemed to have submitted Sell Orders may not be able
to sell in such Auction all aggregate principal amount of the Energy Notes of
such series subject to such Sell Orders. If Broker-Dealers submit or are deemed
to have submitted to the Auction Agent Hold Orders with respect to all Existing
Holders of a series of the Energy Notes, the Applicable Rate for all the Energy
Notes of such series for the next succeeding Rate Period thereof will be the All
Hold Rate.
The Auction Procedures include a pro rata allocation of the Energy
Notes for purchase and sale, which may result in an Existing Holder continuing
to hold or selling, or a Potential Holder purchasing, a principal amount of the
Energy Notes of a series of the Energy Notes that is less than the principal
amount of the Energy Notes of such series specified in its Order. To the extent
the allocation procedures have that result, Broker-Dealers that have designated
themselves as Existing Holders or Potential Holders in respect of customer
Orders will be required to make appropriate pro rata allocations among their
respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also an Interest Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
Page 41
SECONDARY MARKET TRADING AND TRANSFER OF THE ENERGY NOTES
The Broker-Dealers may maintain a secondary trading market of the
Energy Notes outside of Auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance that such
secondary trading market of the Energy Notes will be established or, if
established, will provide owners with liquidity of investment. The Energy Notes
are not registered on any stock exchange or on The Nasdaq Stock Market.
Investors who purchase the Energy Notes in an Auction for a Special Rate Period
should note that because the interest rate on such Energy Notes will be fixed
for the length of such Rate Period, the value of the Energy Notes may fluctuate
in response to changes in interest rates, and may be more or less than their
original cost if sold on the open market in advance of the next Auction
therefor, depending upon market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of an aggregate principal amount of the Energy Notes only in
$25,000 increments and only:
(1) pursuant to a Bid or Sell Order placed with the Auction
Agent in accordance with the Auction Procedures;
(2) to or through a Broker-Dealer; or
(3) to the Fund or any affiliate; provided, however, that (a)
a sale, transfer or other disposition of an aggregate principal amount
of the Energy Notes from a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer as the holder of such Energy Notes to
that Broker-Dealer or another customer of that Broker-Dealer shall not
be deemed to be a sale, transfer or other disposition for purposes of
the foregoing if such Broker-Dealer remains the Existing Holder of the
Energy Notes so sold, transferred or disposed of immediately after such
sale, transfer or disposition and (b) in the case of all transfers
other than pursuant to Auctions, the Broker-Dealer (or other person, if
permitted by the Fund) to whom such transfer is made shall advise the
Auction Agent of such transfer.
According to published news reports, the Commission has requested
information from a number of broker-dealers regarding certain of their practices
in connection with auction rate securities. Such published news reports also
indicate that the Commission has requested that each broker-dealer receiving the
request for information voluntarily conduct an investigation regarding its
practices and procedures in auction rate securities markets. The Underwriter has
advised the Fund that, as a participant in the auction rate securities markets,
it has received the request for information from the Commission described above.
The Underwriter is cooperating with the Commission in providing the requested
information. No assurance can be given as to whether the results of this process
will affect the market for the Energy Notes or the Auctions therefor.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the general supervision of the
duties performed by the Adviser and the Sub-Adviser. The names and business
addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the SAI.
INVESTMENT ADVISER
First Trust Advisors, 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532, is the investment adviser to the Fund and is responsible for supervising
the Sub-Adviser. First Trust Advisors serves as investment adviser or portfolio
supervisor to investment portfolios with approximately $23.0 billion in assets
which it managed or supervised as of January 31, 2006.
First Trust Advisors is also responsible for the ongoing monitoring of
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain clerical, bookkeeping and other administrative services.
First Trust Advisors is an Illinois limited partnership formed in 1991
and an investment adviser registered with the Commission under the Investment
Advisers Act of 1940, as amended. First Trust Advisors is a limited partnership
with one limited partner, Grace Partners of DuPage L.P. ("Grace Partners"), and
one general partner, The Charger Corporation. Grace Partners is a limited
partnership with one general partner, The Charger Corporation, and a number of
limited partners. Grace Partners' and The Charger Corporation's primary business
is investment advisory and broker/dealer services through their interests. The
Charger Corporation is an Illinois corporation controlled by the Robert Donald
Van Kampen family. First Trust Advisors is controlled by Grace Partners and The
Charger Corporation.
For additional information concerning First Trust Advisors, including a
description of the services provided, see the SAI.
SUB-ADVISER
The Sub-Adviser, Fiduciary Asset Management located at 8112 Maryland
Avenue, Suite 400, St. Louis, Missouri 63105, is a registered investment adviser
and serves as investment adviser or portfolio supervisor to investment
portfolios with approximately $16.8 billion of assets as of November 30, 2005.
Fiduciary Asset Management invests in a broad range of equity, hedged
equity, master limited partnership, and fixed income securities for
institutional and high net worth clients. Fiduciary Asset Management's clients
include Fortune 500 companies, public pensions and large endowments and
foundations. Fiduciary Asset Management has managed master limited partnership
portfolios for clients since 1995.
Page 42
Fiduciary Asset Management was founded as an independent investment
firm in 1994 by Charles D. Walbrandt. From 1974 through 1994, Mr. Walbrandt
served in various capacities with General Dynamics Corporation, including
Corporate Vice President, Trust Investment and Treasurer. While at General
Dynamics, Mr. Walbrandt created the internal investment department in 1983,
designed the investment management process and managed both equity and fixed
income portfolios. Mr. Walbrandt holds a B.S. degree in economics from the
University of Wisconsin, a M.B.A. in finance from St. Louis University and is a
Chartered Financial Analyst. Fiduciary Asset Management is controlled by Mr.
Walbrandt.
Fiduciary Asset Management's investment committee includes Charles D.
Walbrandt, Wiley D. Angell, Mohammad Riad, James J. Cunnane Jr. and Joseph E.
Gallagher. Mr. Cunnane serves as the primary portfolio manager for the Fund.
Mr. Cunnane has over ten years experience managing portfolios and is a
member of the equity portfolio management team and performs securities research.
Prior to joining Fiduciary Asset Management in 1996, he was a research analyst
with A.G. Edwards from 1994 to 1996. He also worked as an analyst for Maguire
Investment Advisors, where he gained extensive experiences in the development of
master limited partnership and mid- and small-cap stock portfolios. He holds a
B.S. degree in finance from Indiana University. Mr. Cunnane is a Chartered
Financial Analyst, and serves on the investment committee of the Archdiocese of
St. Louis and the board of the St. Louis internship program. The SAI provides
additional information about the portfolio manager's compensation, other
accounts managed by the portfolio manager and the portfolio manager's ownership
of common shares of the Fund.
William N. Adams performs securities research on equity and fixed
income securities and focuses on the energy sector. Prior to joining Fiduciary
Asset Management in 2004, Mr. Adams was a research analyst with Banc of America
Capital Management and previous entities from 1981 to 2004, specializing in
integrated oils, oil field services, oil and natural gas exploration, and
refining and marketing. Mr. Adams received his BSBA/MBA degrees from Washington
University in St. Louis and is a Chartered Financial Analyst.
For additional information concerning Fiduciary Asset Management,
including a description of the services provided, see "Sub-Adviser" in the SAI.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement (the "Investment
Management Agreement") between First Trust Advisors and the Fund, the Fund has
agreed to pay for the services and facilities provided by First Trust Advisors
an annual management fee, payable on a monthly basis, equal to 1.00% of the
Fund's Managed Assets.
For purposes of calculation of the management fee, the Fund's "Managed
Assets" means the average daily gross asset value of the Fund (which includes
assets attributable to the Fund's Preferred Shares, if any, and the principal
amount of borrowings), minus the sum of the Fund's accrued and unpaid dividends
on any outstanding Preferred Shares and accrued liabilities (other than the
principal amount of any borrowings incurred, commercial paper or notes or other
forms of indebtedness issued by the Fund and the liquidation preference of any
outstanding Preferred Shares).
After this offering of Series B Energy Notes, the Fund will be
leveraged in the amount of 28.89% of the Fund's Managed Assets. As a result, the
Fund's management fee will be 1.41% of net assets attributable to common shares.
In addition to the fee of First Trust Advisors, the Fund pays all other
costs and expenses of its operations, including compensation of its trustees
(other than those affiliated with First Trust Advisors), custodian, transfer
agency, administrative, accounting and dividend disbursing expenses, legal fees,
leverage expenses, expenses of independent auditors, expenses of repurchasing
shares, expenses of preparing, printing and distributing shareholder reports,
notices, proxy statements and reports to governmental agencies, and taxes, if
any.
The Sub-Adviser receives a portfolio management fee equal to 0.50% of
the Fund's Managed Assets. The Sub-Adviser's fee is paid by the Adviser out of
the Adviser's management fee.
For each of the first two years following the commencement of the
Fund's operations through June 24, 2006, the Adviser has agreed to reduce its
annual management fee to 0.75% of the Fund's Managed Assets in order to
reimburse the Fund for certain fees and expenses incurred by the Fund. The
Sub-Adviser has agreed to bear a portion of this reduction by reducing the
amount of its full sub-advisory fee during such period to 0.382% of the Fund's
Managed Assets.
Page 43
DESCRIPTION OF SHARES
COMMON SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of common shares. The common shares have a par value of $0.01 per share and,
subject to the rights of holders of preferred shares, if any, have equal rights
to the payment of dividends and the distribution of assets upon liquidation. The
common shares currently have no preemptive or conversion rights (except as may
otherwise be determined by the Trustees in their sole discretion) or rights to
cumulative voting. As of November 30, 2005, there were 6,446,995 common shares
of the Fund issued and outstanding.
The common shares are listed on the American Stock Exchange. The
trading or "ticker" symbol of the common shares is "FEN." The Fund intends to
hold annual meetings of shareholders so long as the common shares are listed on
a national securities exchange and such meetings are required as a condition to
such listing.
PREFERRED SHARES
The Declaration of Trust provides that the Fund's Board of Trustees may
authorize and issue preferred shares with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the holders
of the common shares. Holders of common shares have no preemptive right to
purchase any preferred shares that might be issued.
The Fund may elect to issue preferred shares as part of its leverage
strategy. The Board of Trustees also reserves the right to issue preferred
shares to the extent permitted by the 1940 Act, which currently limits the
aggregate liquidation preference of all outstanding preferred shares to 50% of
the value of the Fund's Managed Assets less liabilities and indebtedness of the
Fund. We cannot assure you, however, that any preferred shares will be issued.
Although the terms of any preferred shares, including dividend rate, liquidation
preference and redemption provisions, will be determined by the Board of
Trustees, subject to applicable law and the Declaration of Trust, it is likely
that the preferred shares will be structured to carry a relatively short-term
dividend rate reflecting interest rates on short-term bonds, by providing for
the periodic redetermination of the dividend rate at relatively short intervals
through an auction, remarketing or other procedure. The Fund also believes that
it is likely that the liquidation preference, voting rights and redemption
provisions of the preferred shares will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per preferred share plus
accrued and unpaid dividends, whether or not declared, before any distribution
of assets is made to holders of common shares. After payment of the full amount
of the liquidating distribution to which they are entitled, the holders of
preferred shares will not be entitled to any further participation in any
distribution of assets by the Fund.
Voting Rights. The 1940 Act requires that the holders of any preferred
shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The remaining trustees will be elected by holders of
common shares and preferred shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any preferred shares have the
right to elect a majority of the trustees of the Fund at any time two years'
dividends on any preferred shares are unpaid. The 1940 Act also requires that,
in addition to any approval by shareholders that might otherwise be required,
the approval of the holders of a majority of any outstanding preferred shares,
voting separately as a class, would be required to (1) adopt any plan of
reorganization that would adversely affect the preferred shares, and (2) take
any action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, changes in the Fund's subclassification as a
closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Declaration of Trust." As a result
of these voting rights, the Fund's ability to take any such actions may be
impeded to the extent that there are any preferred shares outstanding. The Board
of Trustees presently intends that, except as otherwise indicated in this
Prospectus and except as otherwise required by applicable law, holders of
preferred shares will have equal voting rights with holders of common shares
(one vote per share, unless otherwise required by the 1940 Act) and will vote
together with holders of common shares as a single class.
The affirmative vote of the holders of a majority of the outstanding
preferred shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of preferred
shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Fund. The
terms of any preferred shares issued are expected to provide that (1) they are
redeemable by the Fund in whole or in part at the original purchase price per
share plus accrued dividends per share, (2) the Fund may tender for or purchase
preferred shares and (3) the Fund may subsequently resell any shares so tendered
for or purchased. Any redemption or purchase of preferred shares by the Fund
Page 44
will reduce the leverage applicable to the common shares, while any resale of
shares by the Fund will increase that leverage.
The discussion above describes the possible offering of preferred
shares by the Fund. If the Board of Trustees determines to proceed with such an
offering, the terms of the preferred shares may be the same as, or different
from, the terms described above, subject to applicable law and the Fund's
Declaration of Trust. The Board of Trustees, without the approval of the holders
of common shares, may authorize an offering of preferred shares or may determine
not to authorize such an offering, and may fix the terms of the preferred shares
to be offered.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, in certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Board of Trustees. The Declaration of Trust further
provides for indemnification out of the assets and property of the Fund for all
loss and expense of any shareholder of the Fund. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Fund believes that the likelihood of such circumstances is remote.
The Declaration of Trust includes provisions that could limit the
ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status. Generally, the Declaration of Trust
requires a vote by holders of at least two-thirds of the common shares and
preferred shares, if any, voting together as a single class, except as described
below and in the Declaration of Trust, to authorize:
(1) a conversion of the Fund from a closed-end to an open-end
investment company;
(2) a merger or consolidation of the Fund with any
corporation, association, trust or other organization, including a
series or class of such other organization (subject to a limited
exception if the acquiring fund is not an operating entity immediately
prior to the transaction);
(3) a sale, lease or exchange of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's
investment activities, in connection with the termination of the Fund,
and other limited circumstances set forth in the Declaration of Trust);
(4) in certain circumstances, a termination of the Fund;
(5) a removal of trustees by common shareholders; or
(6) certain transactions in which a Principal Shareholder (as
defined in the Declaration of Trust) is a party to the transaction.
However, with respect to (1) above, if there are preferred shares
outstanding, the affirmative vote of the holders of two-thirds of the preferred
shares voting as a separate class shall also be required. With respect to (2)
above, except as otherwise may be required, if the transaction constitutes a
plan of reorganization which adversely affects preferred shares, if any, then an
affirmative vote of two-thirds of the preferred shares voting together as a
separate class is required as well. With respect to (1) through (3), if such
transaction has already been authorized by the affirmative vote of two-thirds of
the trustees, then the affirmative vote of the majority of the outstanding
voting securities, as defined in the 1940 Act (a "Majority Shareholder Vote"),
is required, provided that when only a particular class is affected (or, in the
case of removing a trustee, when the trustee has been elected by only one
class), only the required vote of the particular class will be required. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the Fund's shares otherwise required by law or any agreement between
the Fund and any national securities exchange. Approval of Fund shareholders is
not required, however, for any transaction, whether deemed a merger,
consolidation, reorganization, exchange of shares or otherwise whereby the Fund
issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the common shares and preferred shares, if any, outstanding and
entitled to vote. See the SAI under "Certain Provisions in the Declaration of
Trust."
The provisions of the Declaration of Trust described above could have
the effect of depriving the common shareholders of opportunities to sell their
common shares at a premium over the then current market price of the common
shares by discouraging a third party from seeking to obtain control of the Fund
in a tender offer or similar transaction. The overall effect of these provisions
is to render more difficult the accomplishment of a merger or the assumption of
control by a third party. They provide, however, the advantage of potentially
requiring persons seeking control of the Fund to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Fund's
Page 45
investment objective and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interests of the Fund and its common shareholders.
Reference should be made to the Declaration of Trust on file with the
Commission for the full text of these provisions.
STRUCTURE OF THE FUND;
COMMON SHARE REPURCHASES AND CHANGE IN FUND STRUCTURE
CLOSED-END STRUCTURE
Closed-end funds differ from open-end management investment companies
(commonly referred to as mutual funds) in that closed-end funds generally list
their shares for trading on a securities exchange and do not redeem their shares
at the option of the shareholder. By comparison, mutual funds issue securities
redeemable at net asset value at the option of the shareholder and typically
engage in a continuous offering of their shares. Mutual funds are subject to
continuous asset inflows and out-flows that can complicate portfolio management,
whereas closed-end funds generally can stay more fully invested in securities
consistent with the closed-end fund's investment objective and policies. In
addition, in comparison to open-end funds, closed-end funds have greater
flexibility in their ability to make certain types of investments, including
investments in illiquid securities.
However, shares of closed-end investment companies listed for trading
on a securities exchange frequently trade at a discount from net asset value,
but in some cases trade at a premium. The market price may be affected by
trading volume of the shares, general market and economic conditions and other
factors beyond the control of the closed-end fund. The foregoing factors may
result in the market price of the common shares being greater than, less than or
equal to net asset value. The Board of Trustees has reviewed the structure of
the Fund in light of its investment objective and policies and has determined
that the closed-end structure is in the best interests of the shareholders. As
described below, however, the Board of Trustees will review periodically the
trading range and activity of the Fund's shares with respect to its net asset
value and the Board may take certain actions to seek to reduce or eliminate any
such discount. Such actions may include open market repurchases or tender offers
for the common shares at net asset value or the possible conversion of the Fund
to an open-end mutual fund. There can be no assurance that the Board will decide
to undertake any of these actions or that, if undertaken, such actions would
result in the common shares trading at a price equal to or close to net asset
value per common share. In addition, as noted above, the Board of Trustees has
determined in connection with this initial offering of common shares of the Fund
that the closed-end structure is desirable, given the Fund's investment
objective and policies. Investors should assume, therefore, that it is highly
unlikely that the Board would vote to convert the Fund to an open-end investment
company.
REPURCHASE OF COMMON SHARES AND TENDER OFFERS
In recognition of the possibility that the common shares might trade at
a discount to net asset value and that any such discount may not be in the
interest of shareholders, the Fund's Board of Trustees, in consultation with the
Adviser, Sub-Adviser and any corporate finance services and consulting agent
that the Adviser may retain, from time to time will review possible actions to
reduce any such discount. The Board of Trustees of the Fund will consider from
time to time open market repurchases of and/or tender offers for common shares
to seek to reduce any market discount from net asset value that may develop. In
connection with its consideration from time to time of open-end repurchases of
and/or tender offers for common shares, the Board of Trustees of the Fund will
consider whether to commence a tender offer or share-repurchase program at the
first quarterly board meeting following a calendar year in which the Fund's
common shares have traded at an average weekly discount from net asset value of
more than 10% in the last 12 weeks of that calendar year. After any
consideration of potential actions to seek to reduce any significant market
discount, the Board may, subject to its fiduciary obligations and compliance
with applicable state and federal laws, authorize the commencement of a
share-repurchase program or tender offer. The size and timing of any such share
repurchase program or tender offer will be determined by the Board of Trustees
in light of the market discount of the common shares, trading volume of the
common shares, information presented to the Board of Trustees regarding the
potential impact of any such share repurchase program or tender offer, and
general market and economic conditions. There can be no assurance that the Fund
will in fact effect repurchases of or tender offers for any of its common
shares. The Fund may, subject to its investment limitation with respect to
borrowings, incur debt to finance such repurchases or a tender offer or for
other valid purposes. Interest on any such borrowings would increase the Fund's
expenses and reduce the Fund's net income.
There can be no assurance that repurchases of common shares or tender
offers, if any, will cause the common shares to trade at a price equal to or in
excess of their net asset value. Nevertheless, the possibility that a portion of
the Fund's outstanding common shares may be the subject of repurchases or tender
offers may reduce the spread between market price and net asset value that might
otherwise exist. In the opinion of the Fund, sellers may be less inclined to
accept a significant discount in the sale of their common shares if they have a
reasonable expectation of being able to receive a price of net asset value for a
Page 46
portion of their common shares in conjunction with an announced repurchase
program or tender offer for the common shares.
Although the Board of Trustees believes that repurchases or tender
offers generally would have a favorable effect on the market price of the common
shares, the acquisition of common shares by the Fund will decrease the Managed
Assets of the Fund and therefore will have the effect of increasing the Fund's
expense ratio and decreasing the asset coverage with respect to the Energy Notes
and any preferred shares outstanding. Because of the nature of the Fund's
investment objective, policies and portfolio, the Adviser and the Sub-Adviser do
not anticipate that repurchases of common shares or tender offers should
interfere with the ability of the Fund to manage its investments in order to
seek its investment objective, and does not anticipate any material difficulty
in borrowing money or disposing of portfolio securities to consummate
repurchases of or tender offers for common shares, although no assurance can be
given that this will be the case.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time
if approved by the holders of two-thirds of the Fund's shares outstanding and
entitled to vote; provided, however, that such vote shall be by Majority
Shareholder Vote if the action in question was approved previously by the
affirmative vote of two-thirds of the Trustees. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of the shares
otherwise required by law or any agreement between the Fund and any national
securities exchange. In the event of conversion, the common shares would cease
to be listed on the American Stock Exchange or other national securities
exchange or market system. Any preferred shares or Borrowings, including the
Energy Notes, would need to be redeemed or repaid upon conversion to an open-end
investment company. The Board of Trustees believes, however, that the closed-end
structure is desirable, given the Fund's investment objective and policies.
Investors should assume, therefore, that it is unlikely that the Board of
Trustees would vote to convert the Fund to an open-end investment company.
CERTAIN FEDERAL INCOME TAX MATTERS
The following is a summary of certain material U.S. federal income tax
considerations relating to the purchase, ownership and disposition of the Series
B Energy Notes. This summary deals only with holders that hold the Series B
Energy Notes as capital assets and who purchase the Series B Energy Notes in
connection with this offering. It does not address considerations that may be
relevant to you if you are an investor that is subject to special tax rules,
such as a financial institution, insurance company, regulated investment
company, real estate investment trust, investor in pass-through entities, or
holder of the Series B Energy Notes whose "functional currency" is not the
United States dollar, tax-exempt organization, broker or dealer in securities or
currencies, trader in securities or commodities that elects mark to market
treatment, person who holds the Series B Energy Notes in a qualified tax
deferred account such as an IRA, or person that will hold the Series B Energy
Notes as a position in a "straddle," "hedge" or as part of a "constructive sale"
for federal income tax purposes. In addition, this discussion does not address
the application of the U.S. federal alternative minimum tax.
This summary is based on the provisions of the Code, the applicable
Treasury regulations promulgated thereunder, judicial authority and current
administrative rulings, as in effect on the date of this summary, all of which
may change. Any change could apply retroactively and could affect the continued
validity of this summary.
As stated above, this summary does not discuss all aspects of U.S.
federal income taxation that may be relevant to a particular holder of the
Series B Energy Notes in light of such holder's particular circumstances and
income tax situation. Prospective holders should consult their own tax advisors
as to the specific tax consequences to them of the purchase, ownership and
disposition of the Series B Energy Notes, including the application and the
effect of state, local, foreign and other tax laws and the possible effects of
changes in U.S. or other tax laws. The Internal Revenue Service could disagree
with any conclusions set forth in this section. This summary may not be
sufficient for you to use for the purposes of avoiding penalties under federal
tax laws.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund has elected to be treated as a regular C corporation for U.S.
federal income tax purposes. Thus, the Fund will be subject to U.S. corporate
income tax on its U.S. taxable income. Such taxable income generally would
include all of the Fund's net income from the MLPs. The current U.S. federal
maximum income tax rate for corporations is 35%. In addition, the United States
also imposes a 20% alternative minimum tax on the recalculated alternative
minimum taxable income of an entity treated as a corporation. The Fund may also
be obligated to pay state income tax on its taxable income, either because the
states follow the federal election or because the states separately impose a tax
on the Fund.
Page 47
The MLPs in which the Fund intends to invest generally are treated as
partnerships for U.S. federal income tax purposes. As a partner in the MLPs, the
Fund will be required to report its allocable share of partnership income, gain,
loss, deduction and expense, whether or not any cash is distributed from the
MLPs.
Although the Fund intends to hold the interests in the MLPs for
investment, the Fund is likely to sell interests in a particular MLP from time
to time. On any such sale, the Fund generally will recognize gain or loss based
upon the difference between the consideration received for tax purposes on the
sale and the Fund's tax basis in the interest sold. The consideration received
is generally the amount paid by the purchaser plus any debt of the MLP allocated
to the Fund that will shift to the purchaser on the sale. The Fund's tax basis
in an MLP is generally the amount paid for the interest, decreased for any
distributions of cash received by the Fund in excess of the Fund's allocable
share of taxable income and decreased by the Fund's allocable share of net
losses. Thus, although cash in excess of taxable income and net tax losses may
create a temporary economic benefit to the Fund, they will increase the amount
of gain (or decrease the amount of loss) on the sale of an interest in an MLP.
No favorable federal income tax rate applies to long-term capital gains for
entities treated as corporations for federal income tax purposes, such as the
Fund. Thus, the Fund will be subject to federal income tax on its long-term
capital gains, like ordinary income, at rates of up to 35%.
In calculating the Fund's alternative minimum taxable income, certain
percentage depletion deductions and intangible drilling costs may be treated as
items of tax preference. Items of tax preference increase alternative minimum
taxable income and increase the likelihood that the Fund may be subject to the
alternative minimum tax.
The Fund will not be treated as a regulated investment company for
federal income tax purposes. In order to qualify as a regulated investment
company, the income and assets of the Fund must meet certain minimum
threshold tests. Because the Fund intends to invest a substantial portion of its
assets in MLPs, the Fund does not expect to meet such tests. Thus, the regulated
investment company taxation rules do not apply to the Fund or shareholders of
the Fund.
FEDERAL INCOME TAX TREATMENT OF U.S. HOLDERS
The following discussion applies to you only if you are a U.S. holder.
You will be a "U.S. holder" if you are an individual who is a citizen or
resident of the United States, a U.S. domestic corporation, or certain other
persons that are subject to U.S. federal income tax on a net income basis in
respect of an investment in the Series B Energy Notes.
The Fund intends to treat the Series B Energy Notes as indebtedness of
the Fund for federal income tax purposes, and does not intend to treat the
Series B Energy Notes as contingent payment debt obligations or obligations
issued with an original issue discount. This federal income tax discussion
assumes that this treatment is correct under present law. However, there is no
assurance that the Internal Revenue Service or a court would agree with this
characterization, and in such a situation the federal income tax treatment of
owners of the Series B Energy Notes would be different from that described
below.
Taxation of Interest. Payments or accruals of interest on the Series B
Energy Notes generally will be taxable to you as ordinary income at the time
such interest is received (actually or constructively) or accrued, in accordance
with your regular method of accounting for federal income tax purposes.
Purchase, Sale and Redemption of the Series B Energy Notes. Initially,
your tax basis in the Series B Energy Notes acquired generally will be equal to
your cost to acquire such Series B Energy Notes. In certain circumstances,
however, you may have to adjust your tax basis after you purchase your Series B
Energy Notes (for example, in the case of accruals of market discount, premium
and accrued interest, as discussed below). When you sell or exchange any of your
Series B Energy Notes, or if any of your Series B Energy Notes are redeemed, you
generally will recognize gain or loss equal to the difference between the amount
you realize on the transaction (less any accrued and unpaid interest, which will
be subject to tax in the manner described above under "Taxation of Interest")
and your tax basis in the Series B Energy Notes relinquished, subject to various
non-recognition provisions of the Code.
Except as discussed below with respect to market discount, the gain or
loss that you recognize on the sale, exchange or redemption of any of your
Series B Energy Notes generally will be capital gain or loss. Such gain or loss
generally will be long-term capital gain or loss if the disposed the Series B
Energy Notes were held for more than one year and will be short-term capital
gain or loss if the disposed Series B Energy Notes was held for one year or
less. Net capital gain recognized by a noncorporate U.S. holder generally will
be subject to tax at a lower rate (currently a maximum rate of 15%, although
this rate will increase to 20% for taxable years beginning after 2008) than net
short-term capital gain or ordinary income (currently a maximum rate of 35%).
Net capital gain equals net long-term capital gain minus net short-term capital
loss for the taxable year. The Code, however, treats certain capital gains as
ordinary income in special situations. A Holder's ability to deduct capital
losses may be limited.
Premium, Discount and Accrued Interest. If you purchase the Series B
Energy Notes at a cost greater than its stated principal amount, plus accrued
interest, you will be considered to have purchased the Series B Energy Notes at
Page 48
a premium, and you generally may elect to amortize this premium as an offset to
interest income, using a constant yield method, over the remaining term of the
Series B Energy Notes. If you make the election to amortize the premium, it
generally will apply to all debt instruments that you hold at the time of the
election, as well as any debt instruments that you subsequently acquire. In
addition, you may not revoke the election without the consent of the IRS. If you
elect to amortize the premium, you will be required to reduce your tax basis in
the Series B Energy Notes by the amount of the premium amortized during your
holding period. If you do not elect to amortize the premium and you hold the
Series B Energy Notes to maturity, you generally will be required to treat the
premium as a capital loss when the Series B Energy Notes are redeemed.
If you purchase the Series B Energy Notes at a price that reflects a
"market discount," any principal payments on, or any gain that you realize on
the disposition of the Series B Energy Notes generally will be treated as
ordinary income to the extent of the market discount that accrued on the Series
B Energy Notes during the time you held such Series B Energy Notes. "Market
discount" is defined under the Code as the excess of the stated redemption price
at maturity over your tax basis of the bond immediately after its acquisition by
you, except that if market discount is less than 0.25% of the stated redemption
price at maturity, multiplied by the number of complete years to maturity after
you acquire the bond, the market discount is considered to be zero. In addition,
you may be required to defer the deduction of all or a portion of any interest
paid on any indebtedness that you incurred or continued to purchase or carry
your Series B Energy Notes that were acquired at a market discount. In general,
market discount will be treated as accruing ratably over the term of the Series
B Energy Notes, or, at your election, under a constant yield method.
You may elect to include market discount in gross income currently as
it accrues (on either a ratable or constant yield basis), in lieu of treating a
portion of any gain realized on a sale or redemption of the Series B Energy
Notes as ordinary income. If you elect to include market discount on a current
basis, the interest deduction deferral rule described above will not apply and
your tax basis in your Series B Energy Notes will be increased by the amount of
market discount included in your gross income. If you do make such an election,
it will apply to all market discount debt instruments that you acquire on or
after the first day of the first taxable year to which the election applies.
This election may not be revoked without the consent of the IRS.
If the price of your Series B Energy Notes includes accrued interest,
you must include the accrued interest in your tax basis. When you receive this
accrued interest, you must treat it as a return of capital and reduce your tax
basis in the Series B Energy Notes.
This discussion provides only the general rules with respect to the tax
treatment of market discount and premium. The rules, however, are complex and
special rules apply in certain circumstances.
FEDERAL INCOME TAX TREATMENT OF NON-U.S. HOLDERS
The following discussion applies to you if you are a non-U.S. holder.
You will be a "non-U.S. holder" if you are a non-resident alien individual or a
foreign corporation.
The payment of interest on the Series B Energy Notes generally will be
considered "portfolio interest" and thus will generally be exempt from United
States federal withholding tax. This exemption will generally apply to you
provided that (1) interest paid on the Series B Energy Notes is not effectively
connected with your conduct of a trade or business in the United States, (2) you
are not a bank whose receipt of interest on the Series B Energy Notes is
described in Section 881(c)(3)(A) of the Code, (3) you do not actually or
constructively own 10 percent or more of the combined voting power of all
classes of the Fund's stock entitled to vote, (4) you are not a controlled
foreign corporation that is related, directly or indirectly to the Fund under
the Code and (5) you satisfy the certification requirements described below.
To satisfy the certification requirements, either (1) the beneficial
owner of any such Series B Energy Notes must certify, under penalties of
perjury, that such holder is a non-U.S. person and must provide such owner's
name, address and taxpayer identification number, if any, and any other required
information on a properly completed and executed IRS Form W-8BEN, or (2) a
securities clearing organization, bank or other financial institution that holds
customer securities in the ordinary course of its trade or business and holds
the Series B Energy Notes on behalf of the beneficial owner thereof must
certify, under penalties of perjury, that it has received a valid and properly
executed IRS Form W-8BEN from the beneficial holder and comply with certain
other requirements. Special certification rules apply for the Series B Energy
Notes held by a foreign partnership and other intermediaries
Interest on the Series B Energy Notes received by a non-U.S. holder
which is not excluded from U.S. federal withholding tax under the portfolio
interest exemption as described above generally will be subject to withholding
at a 30% rate, except where a non-U.S. holder can claim the benefits of an
applicable tax treaty to reduce or eliminate such withholding tax and such
non-U.S. holder provides the Fund with a properly executed IRS Form W-8BEN
claiming such exemption or reduction.
Any capital gain that a non-U.S. holder realizes on a sale, exchange or
other taxable disposition (including a redemption) of the Series B Energy Notes
generally will be exempt from United States federal income tax, including
Page 49
withholding tax. This exemption generally will not apply to you if your gain is
effectively connected with your conduct of a trade or business in the U.S. or
you are an individual holder and are present in the U.S. for a period or periods
aggregating 183 days or more in the taxable year of the disposition.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments
of principal, interest, and premium, if any, paid on the Series B Energy Notes
and to the proceeds of the sale of the Series B Energy Notes (including
redemption proceeds) paid to U.S. holders other than certain exempt recipients
(such as corporations). Information reporting generally will apply to payments
of interest on the Series B Energy Notes to non-U.S. holders and the amount of
tax, if any, withheld with respect to such payments. Copies of the information
returns reporting such interest payments and any withholding also may be made
available to the tax authorities in the country in which the non-U.S. holder
resides under the provisions of an applicable income tax treaty. In addition,
for non-U.S. holders, information reporting will apply to the proceeds of the
sale of the Series B Energy Notes within the United States or conducted through
United States-related financial intermediaries unless the certification
requirements described below have been complied with and the statement described
below in "Taxation of Non-U.S. Holders" has been received (and the payor does
not have actual knowledge or reason to know that the beneficial owner is a
United States person) or the holder otherwise establishes an exemption.
The Fund may be required to withhold, for U.S. federal income tax
purposes, a portion of all taxable payments (including redemption proceeds)
payable to holders of the Series B Energy Notes who fail to provide the Fund
with their correct taxpayer identification number, who fail to make required
certifications or who have been notified by the IRS that they are subject to
backup withholding (or if the Fund has been so notified). Certain corporate and
other shareholders specified in the Code and the regulations thereunder are
exempt from backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the holder's U.S. federal income tax
liability provided the appropriate information is furnished to the IRS. If you
are a non-U.S. holder, you may have to comply with certification procedures to
establish your non-U.S. status in order to avoid backup withholding tax
requirements. The certification procedures required to claim the exemption from
withholding tax on interest income outlined below will generally satisfy these
requirements.
CUSTODIAN, TRUSTEE AND AUCTION AGENT
PFPC Trust Company, 301 Bellevue Parkway, Wilmington, Delaware 19809,
serves as custodian for the Fund. As such, PFPC Trust Company has custody of all
securities and cash of the Fund and attends to the collection of principal and
income and payment for and collection of proceeds of securities bought and sold
by the Fund. PFPC Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809, is the
transfer, registrar, dividend disbursing agent and shareholder servicing agent
for the Fund and provides certain clerical, bookkeeping, shareholder servicing
and administrative services necessary for the operation of the Fund and
maintenance of shareholder accounts. PFPC Inc. also provides certain accounting
and administrative services to the Fund pursuant to an Administration and
Accounting Services Agreement, including maintaining the Fund's books of
account, records of the Fund's securities transactions, and certain other books
and records; acting as liaison with the Fund's independent public accountant and
providing the accountant with certain Fund accounting information; and providing
other continuous accounting and administrative services.
Deutsche Bank National Trust Company is the Trustee under the
Indenture, and acts as transfer agent, registrar, interest disbursing agent and
redemption agent with respect to the Series B Energy Notes. Deutsche Bank Trust
Company Americas, an affiliate of Deutsche Bank National Trust Company, serves
as the Auction Agent with respect to the Series B Energy Notes.
Page 50
UNDERWRITING
A.G. Edwards & Sons, Inc. has agreed, subject to the terms and
conditions of the underwriting agreement with the Fund, First Trust Advisors and
Fiduciary Asset Management (the "Underwriting Agreement"), to purchase from the
Fund the aggregate principal amount of Series B Energy Notes set forth below:
Underwriter Series B Energy Notes
----------- ---------------------
A.G. Edwards & Sons, Inc. $25,000,000
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions, including the absence of any
materially adverse change in the Fund's business and the receipt of certain
certificates, opinions and letters from the Fund and the Fund's attorneys and
independent accountants. The nature of the Underwriter's obligation is such that
it is committed to purchase all Series B Energy Notes offered hereby if it
purchases any Series B Energy Notes.
The Underwriter has advised the Fund that the Underwriter proposes to
offer some Series B Energy Notes directly to investors at the offering price of
$25,000 per Series B Energy Note, and may offer some Series B Energy Notes to
certain dealers at the offering price less a concession not in excess of $137.50
per Series B Energy Note, and such dealers may reallow a concession not in
excess of $37.50 per Series B Energy Note on sales to certain other dealers.
Series B Energy Notes are offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to its
right to reject orders in whole or in part.
The Fund, First Trust Advisors and Fiduciary Asset Management have each
agreed to indemnify the Underwriter for or to contribute to the losses arising
out of certain liabilities, including liabilities under the Securities Act.
The Fund anticipates that the Underwriter may from time to time act as
broker or dealer in connection with the execution of its portfolio transactions
after it has ceased to be an Underwriter and, subject to certain restrictions,
may so act while it is an Underwriter.
The Fund anticipates that the Underwriter or its affiliates may, from
time to time, act in auctions as a Broker-Dealers and receive fees as set forth
under "The Auction" and in the Statement of Additional Information. The
Underwriter is an active underwriter of, and dealer in, securities and acts as
market maker in a number of such securities, and therefore can be expected to
engage in portfolio transactions with, and perform services for, the Fund.
In connection with this offering, the Underwriter or selected dealers
may distribute prospectuses electronically.
First Trust Advisors (and not the Fund) has also entered into a
Corporate Finance Services and Consulting Agreement with A.G. Edwards and has
agreed to pay from its own assets a fee to A.G. Edwards. This fee will be
payable quarterly at the annual rate of 0.15% of the Fund's average daily net
assets and will be payable only so long as the Investment Management Agreement
remains in effect between the Fund and First Trust Advisors or any successor in
interest or affiliate of First Trust Advisors, as and to the extent that such
Investment Management Agreement is renewed or continued periodically in
accordance with the 1940 Act. Pursuant to the Corporate Finance Services and
Consulting Agreement, A.G. Edwards will: (i) provide relevant information,
studies or reports regarding closed-end investment companies with similar
investment objectives and/or strategies as the Fund as well as general trends in
the closed-end investment company and asset management industries, and consult
with representatives of First Trust Advisors in connection therewith; (ii) at
the request of First Trust Advisors, provide certain economic research and
statistical information and reports on behalf of First Trust Advisors or the
Fund and consult with representatives of First Trust Advisors or the Fund,
and/or Trustees of the Fund in connection therewith, which information and
reports shall include: (a) statistical and financial market information with
respect to the Fund's market performance; and (b) comparative information
regarding the Fund and other closed-end management investment companies with
respect to (x) the net asset value of their respective shares (as made publicly
available by the Fund and such investment companies), (y) the respective market
performance of the Fund and such other companies, and (z) other relevant
performance indicators; and (iii) provide First Trust Advisors with such other
services in connection with the Common Shares relating to the trading price and
market price thereof upon which First Trust Advisors and A.G. Edwards shall,
from time to time, agree, including after-market services designed to maintain
the visibility of the Fund in the market.
As described in further detail under "The Auction--Secondary Market
Trading and Transfer of the Energy Notes," the Underwriter, as a broker-dealer
participating in the auction rate securities market, is cooperating with the
Commission in providing requested information regarding certain practices in
connection with auction rate securities.
The address of the Underwriter is: A.G. Edwards & Sons, Inc.,
One North Jefferson Avenue, St. Louis, Missouri 63108.
Page 51
LEGAL OPINIONS
Certain legal matters in connection with the Series B Energy Notes
offered hereby will be passed upon for the Fund by Chapman and Cutler LLP,
Chicago, Illinois, and for the Underwriter by Skadden, Arps, Slate, Meagher &
Flom LLP, Chicago, Illinos. Chapman and Cutler LLP may rely as to certain
matters of Massachusetts law on the opinion of Bingham McCutchen LLP, Boston,
Massachusetts.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the Commission. These documents can be
inspected and copied for a fee at the Commission's public reference room, 450
Fifth Street, N.W., Washington, D.C. 20549. Reports, proxy statements, and other
information about the Fund can be inspected at the offices of the Exchange.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and the Series B Energy Notes can
be found in the Fund's registration statement (including amendments, exhibits,
and schedules) on Form N-2 filed with the Commission. The Commission maintains a
web site (http://www.sec.gov) that contains the Fund's registration statement,
other documents incorporated by reference, and other information the Fund has
filed electronically with the Commission, including proxy statements and reports
filed under the Securities Exchange Act of 1934.
Page 52
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
PAGE
Use of Proceeds 1
Investment Objective 1
Investment Restrictions 1
Investment Policies and Techniques 3
Additional Information About the Fund's Investments and Investment Risks 5
Other Investment Policies and Techniques 23
Management of the Fund 32
Investment Adviser 38
Proxy Voting Policies and Procedures 41
Sub-Adviser 41
Portfolio Transactions and Brokerage 45
Additional Information Concerning Auctions for the Series B Energy Notes 46
Certain Provisions in the Declaration of Trust 48
Repurchase of Fund Shares; Conversion to Open-End Fund 50
Net Asset Value 52
Certain Federal Income Tax Matters 55
Performance Related and Comparative Information 60
Experts 62
Custodian, Trustee and Auction Agent 62
Additional Information 63
Report of Independent Registered Public Accounting Firm F-1
Financial Statements F-2
Appendix A - Summary of Certain Provisions of the Indenture A-1
Appendix B - Auction Procedures B-1
Appendix C - Ratings of Investments C-1
Appendix D - Fiduciary Asset Management LLC Proxy Voting Policy D-1
Page 53
This Page Intentionally Left Blank.
[Blank Inside Back Cover]
================================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS. THE FUND HAS NOT, AND THE UNDERWRITER HAS NOT, AUTHORIZED
ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. THE FUND IS NOT, AND THE
UNDERWRITER IS NOT, MAKING AN OFFER OF THE SERIES B ENERGY NOTES IN ANY STATE
WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE
RESPECTIVE DATES AS OF WHICH THE INFORMATION IS GIVEN. THE FUND'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THOSE DATES.
----------------
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
The Fund 13
Caution Regarding Forward-looking Statements 13
Financial Highlights 14
Use of Proceeds 15
Capitalization 15
Risk Factors 16
The Fund's Investments 25
Use of Leverage 29
Description of the Series B Energy Notes 29
The Auction 40
Management of the Fund 42
Description of Shares 44
Certain Provisions in the Declaration of Trust 45
Structure of the Fund; Common Share Repurchases and Change in Fund
Structure 46
Certain Federal Income Tax Matters 47
Custodian, Trustee and Auction Agent 50
Underwriting 51
Legal Opinions 52
Available Information 52
Table of Contents for the Statement of Additional Information 53
================================================================================
================================================================================
$25,000,000
ENERGY INCOME AND
GROWTH FUND
SERIES B ENERGY NOTES,
DUE MARCH 30, 2046
----------------
PROSPECTUS
----------------
A.G. EDWARDS
March 20, 2006
================================================================================
ENERGY INCOME AND GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
The Energy Income and Growth Fund (the "Fund") is a non-diversified
closed-end management investment company.
This Statement of Additional Information relating to Series B auction
rate senior notes of the Fund (the "Series B Energy Notes") is not a prospectus,
but should be read in conjunction with the Fund's Prospectus relating thereto
dated March 20, 2006 (the "Prospectus"). This Statement of Additional
Information does not include all information that a prospective investor should
consider before purchasing the Series B Energy Notes. Investors should obtain
and read the Fund's Prospectus prior to purchasing the Series B Energy Notes. A
copy of the Fund's Prospectus may be obtained without charge by calling (800)
988-5891 or on the Commission's web site (http://www.sec.gov). Capitalized terms
used but not defined in this Statement of Additional Information have the
meanings ascribed to them in the Prospectus.
This Statement of Additional Information is dated March 20, 2006.
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
PAGE
Use of Proceeds 1
Investment Objective 1
Investment Restrictions 1
Investment Policies and Techniques 3
Additional Information About the Fund's Investments and Investment Risks 5
Other Investment Policies and Techniques 23
Management of the Fund 32
Investment Adviser 38
Proxy Voting Policies and Procedures 41
Sub-Adviser 41
Portfolio Transactions and Brokerage 45
Additional Information Concerning Auctions for the Series B Energy Notes 46
Certain Provisions in the Declaration of Trust 48
Repurchase of Fund Shares; Conversion to Open-End Fund 50
Net Asset Value 52
Certain Federal Income Tax Matters 55
Performance Related and Comparative Information 60
Experts 62
Custodian, Trustee and Auction Agent 62
Additional Information 63
Report of Independent Registered Public Accounting Firm F-1
Financial Statements F-2
Appendix A - Summary of Certain Provisions of the Indenture A-1
Appendix B - Auction Procedures B-1
Appendix C - Ratings of Investments C-1
Appendix D - Fiduciary Asset Management LLC Proxy Voting Policy D-1
-i-
USE OF PROCEEDS
The net proceeds of the offering of the Series B Energy Notes will be
approximately $24,590,000. The underwriting discounts and commissions and
estimated offering costs ($410,000) of the Series B Energy Notes will be
capitalized and amortized over the life of the Series B Energy Notes. The Fund
will use a portion of the net proceeds of the offering to reduce its outstanding
indebtedness, in the form of a revolving line of credit with a current
outstanding balance of approximately $6.5 million. Interest accrues on such
credit facility in the amount of LIBOR, plus 100 basis points. The remaining net
proceeds will be used to make investments consistent with the investment
strategy of the Fund.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a high level of after-tax
total return with an emphasis on current distributions paid to shareholders. For
purposes of the Fund's investment objective, total return includes capital
appreciation of, and all distributions received from, securities in which the
Fund invests regardless of the tax character of the distributions. The Fund
seeks to provide its shareholders with an efficient vehicle to invest in a
portfolio of cash generating securities of energy companies. The Fund focuses on
investing in publicly traded master limited partnerships ("MLPs") and related
public entities in the energy sector which the Fund's Sub-Adviser believes offer
opportunities for income and growth. As used in this Statement of Additional
Information, unless the context requires otherwise, MLPs are MLPs in the energy
sector. Due to the tax treatment of cash distributions made by MLPs to their
investors (such as the Fund), the Fund believes that a significant portion of
its income will be tax deferred, thereby maximizing cash available for
distribution by the Fund to its shareholders. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund's investment objective is considered fundamental and may not
be changed without shareholder approval. The remainder of the Fund's investment
policies, including its investment strategy, are considered non-fundamental and
may be changed by the Board of Trustees without shareholder approval, provided
that shareholders receive at least 60 days' prior written notice of any change.
The Fund will seek to achieve its investment objective by investing
primarily in securities of MLPs and MLP-related entities in the energy sector
that the Sub-Adviser believes offer attractive distribution rates and capital
appreciation potential. The Fund also may invest in other securities set forth
below if the Sub-Adviser expects to achieve the Fund's objective with such
investments.
INVESTMENT RESTRICTIONS
The Fund has adopted the following non-fundamental policies:
o Under normal market conditions, the Fund invests at least 85% of
its managed assets (including assets obtained through leverage) in
securities of energy companies, energy sector MLPs and MLP-related
entities.
-1-
o Under normal market conditions, the Fund intends to invest at
least 65% and up to 100% of its managed assets in equity
securities of MLPs and MLP-related entities. MLP and MLP-related
entity equity securities currently consist of common units,
subordinated units and I-Shares. The Fund also may invest in
equity securities of MLP-related entities, such as general
partners or other affiliates of MLPs.
o The Fund may invest in unregistered or otherwise restricted
securities. The types of unregistered or otherwise restricted
securities that the Fund may purchase consist of MLP common units,
MLP subordinated units and securities of public and private energy
companies. The Fund does not intend to invest more than 35% of its
managed assets in restricted securities, or no more than 10% of
its managed assets in private companies.
o The Fund may invest up to 25% of its managed assets in debt
securities of energy companies, MLPs and MLP-related entities,
including certain securities rated below investment grade ("junk
bonds"). Below investment grade debt securities will be rated at
least B3 by Moody's Investors Service, Inc. ("Moody's") and at
least B- by Standard & Poor's Ratings Group ("S&P") at the time of
purchase, or comparably rated by another statistical rating
organization or if unrated, determined to be of comparable quality
by the Sub-Adviser.
o The Fund will not invest more than 10% of its managed assets in
any single issuer.
o The Fund will not engage in short sales, except to the extent the
Fund engages in derivative investments to seek to hedge against
interest rate risk in connection with the Fund's use of Financial
Leverage or market risks associated with the Fund's portfolio.
The foregoing non-fundamental policies may be changed by the Board of
Trustees without shareholder approval, provided that shareholders receive at
least 60 days' prior written notice of any change.
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of its outstanding common
shares:
(1) Issue senior securities, as defined in the Investment
Company Act of 1940 (the "1940 Act"), other than (1) preferred shares,
which immediately after issuance will have asset coverage of at least
200%, (2) indebtedness, which immediately after issuance will have
asset coverage of at least 300%, or (3) the borrowings permitted by
investment restriction (2) set forth below;
(2) Borrow money, except as permitted by the 1940 Act;
For a further discussion of the limitations imposed on
borrowing by the 1940 Act, please see the section entitled "Borrowings"
in the Fund's Prospectus;
-2-
(3) Act as underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933, as amended ("Securities
Act"), in connection with the purchase and sale of portfolio
securities;
(4) Purchase or sell real estate, but this shall not prevent
the Fund from investing in securities of companies that deal in real
estate or are engaged in the real estate business, including real
estate investment trusts, and securities secured by real estate or
interests therein and the Fund may hold and sell real estate or
mortgages on real estate acquired through default, liquidation, or
other distributions of an interest in real estate as a result of the
Fund's ownership of such securities;
(5) Purchase or sell physical commodities unless acquired as
a result of ownership of securities or other instruments (but this
shall not prevent the Fund from purchasing or selling options, futures
contracts, derivative instruments or from investing in securities or
other instruments backed by physical commodities); or
(6) Make loans of funds or other assets, other than by
entering into repurchase agreements, lending portfolio securities and
through the purchase of securities in accordance with its investment
objective, policies and limitations.
The foregoing fundamental investment policies, together with the
investment objective of the Fund, cannot be changed without approval by holders
of a majority of the outstanding voting securities of the Fund, as defined in
the 1940 Act, which includes common shares and preferred shares, if any, voting
together as a single class, and of the holders of the outstanding preferred
shares voting as a single class. Under the 1940 Act a "majority of the
outstanding voting securities" means the vote of: (1) 67% or more of the Fund's
shares present at a meeting, if the holders of more than 50% of the Fund's
shares are present or represented by proxy; or (2) more than 50% of the Fund's
shares, whichever is less.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objective, policies, and techniques that are described in the Fund's
Prospectus.
Temporary Investments and Defensive Position. During periods in which
the Adviser or Sub-Adviser determines that it is temporarily unable to follow
the Fund's investment strategy or that it is impractical to do so, the Fund may
deviate from its investment strategy and invest all or any portion of its net
assets in cash, cash equivalents or other securities. The Fund's determination,
in consultation with the Adviser and the Sub-Adviser, that it is temporarily
unable to follow the Fund's investment strategy or that it is impracticable to
do so generally will occur only in situations in which a market disruption event
has occurred and where trading in the securities selected through application of
the Fund's investment strategy is extremely limited or absent. In such a case,
the Fund may not pursue or achieve its investment objective.
-3-
Cash and cash equivalents are defined to include, without limitation,
the following:
(1) U.S. government securities, including bills, notes and
bonds differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government agency securities
include securities issued by: (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do
so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of
their securities. Consequently, the value of such securities may
fluctuate.
(2) Certificates of Deposit issued against funds deposited in
a bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. The issuer of a certificate of deposit agrees to
pay the amount deposited plus interest to the bearer of the certificate
on the date specified thereon. Under current FDIC regulations, the
maximum insurance payable as to any one certificate of deposit is
$100,000, therefore, certificates of deposit purchased by the Fund may
not be fully insured.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver
such securities to the seller, who also simultaneously agrees to buy
back the securities at a fixed price and time. This assures a
predetermined yield for the Fund during its holding period, since the
resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the
Fund to invest temporarily available cash. Pursuant to the Fund's
policies and procedures, the Fund may enter into repurchase agreements
only with respect to obligations of the U.S. government, its agencies
or instrumentalities; certificates of deposit; or bankers' acceptances
in which the Fund may invest. Repurchase agreements may be considered
loans to the seller, collateralized by the underlying securities. The
risk to the Fund is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of default, the
repurchase agreement provides that the Fund is entitled to sell the
underlying collateral. If the seller defaults under a repurchase
agreement when the value of the underlying collateral is less than the
repurchase price, the Fund could incur a loss of both principal and
interest. The Sub-Adviser monitors the value of the collateral at the
time the action is entered into and at all times during the term of the
repurchase agreement. The Sub-Adviser does so in an effort to determine
-4-
that the value of the collateral always equals or exceeds the
agreed-upon repurchase price to be paid to the Fund. If the seller were
to be subject to a federal bankruptcy proceeding, the ability of the
Fund to liquidate the collateral could be delayed or impaired because
of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time. The Sub-Adviser will consider the
financial condition of the corporation (e.g., earning power, cash flow,
and other liquidity measures) and will continuously monitor the
corporation's ability to meet all its financial obligations, because
the Fund's liquidity might be impaired if the corporation were unable
to pay principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the highest
categories by a nationally recognized statistical rating organization
and which mature within one year of the date of purchase or carry a
variable or floating rate of interest.
(5) The Fund may invest in bankers' acceptances which are
short-term credit instruments used to finance commercial transactions.
Generally, an acceptance is a time draft drawn on a bank by an exporter
or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on
its maturity date. The acceptance may then be held by the accepting
bank as an asset or it may be sold in the secondary market at the going
rate of interest for a specific maturity.
(6) The Fund may invest in bank time deposits, which are
monies kept on deposit with banks or savings and loan associations for
a stated period of time at a fixed rate of interest. There may be
penalties for the early withdrawal of such time deposits, in which case
the yields of these investments will be reduced.
(7) The Fund may invest in shares of money market funds in
accordance with the provisions of the 1940 Act.
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS AND INVESTMENT RISKS
ENERGY COMPANIES
For purposes of the Fund's policy of investing 85% of its managed
assets in securities of energy companies, energy sector MLPs and MLP-related
entities, an energy company is one that derives its revenues from transporting,
processing, storing, distributing or marketing natural gas, natural gas liquids
("NGLs"), crude oil, refined petroleum products, coal or electricity, or
exploring, developing, managing or producing such commodities or products, or in
supplying energy-related products and services.
Energy sector MLPs are limited partnerships that derive at least 90% of
their income from energy operations. The business of energy sector MLPs is
affected by supply and demand for energy commodities because most MLPs derive
-5-
revenue and income based upon the volume of the underlying commodity
transported, processed, distributed, and/or marketed. Specifically, MLPs that
provide natural gas services and coal MLPs may be directly affected by energy
commodity prices. Propane MLPs own the underlying energy commodity, and
therefore have direct exposure to energy commodity prices, although the
Sub-Adviser intends to seek high quality MLPs that are able to mitigate or
manage direct margin exposure to commodity prices. The MLP sector in general
could be hurt by market perception that MLP's performance and valuation are
directly tied to commodity prices.
Some energy companies operate as "public utilities" or "local
distribution companies," and therefore are subject to rate regulation by state
or federal utility commissions. However, energy companies may be subject to
greater competitive factors than utility companies, including competitive
pricing in the absence of regulated tariff rates, which could cause a reduction
in revenue and which could adversely affect profitability. Most midstream MLPs
with pipeline assets are subjected to government regulation concerning the
construction, pricing and operation of pipelines. In many cases, the rates and
tariffs charged by these pipelines are monitored by the Federal Energy
Regulatory Commission ("FERC") or various state regulatory agencies.
Energy MLPs in which the Fund will invest generally can be classified
as Midstream MLPs, Propane MLPs and Coal MLPs.
Midstream MLP natural gas services include treating, gathering,
compression, processing, transmission and storage of natural gas and the
transportation, fractionation and storage of natural gas liquids (primarily
propane, ethane, butane and natural gasoline). Midstream MLP crude oil services
include gathering, transportation, storage and terminaling of crude oil.
Midstream MLP crude oil services include the gathering, transportation, storage
and terminaling of crude oil. Midstream MLP refined petroleum product services
include the transportation (usually via pipelines, barges, rail cars and
trucks), storage and terminaling of refined petroleum products (primarily
gasoline, diesel fuel and jet fuel) and other hydrocarbon by-products. Midstream
MLPs also may operate ancillary businesses, including the marketing of the
products and logistical services.
Propane MLP services include the distribution of propane to homeowners
for space and water heating and to commercial, industrial and agriculture
customers. Propane serves approximately 3% of the household energy needs in the
United States, largely for homes beyond the geographic reach of natural gas
distribution pipelines. Volumes are weather dependent and a majority of annual
cash flow is earned during the winter heating season (October through March).
Coal MLP services include the owning, leasing, managing, production and
sale of coal and coal reserves. Electricity generation is the primary use of
coal in the United States. Demand for electricity and supply of alternative
fuels to generators are the primary drivers of coal demand.
MLPs and MLP-related entities typically achieve distribution growth by
internal and external means. MLPs and MLP-related entities achieve growth
internally by experiencing higher commodity volume driven by the economy and
population, and through the expansion of existing operations, including
-6-
increasing the use of underutilized capacity, pursuing projects that can
leverage and gain synergies with existing and pursuing so called "greenfield
projects." External growth is achieved by making accretive acquisitions.
MLPs and MLP-related entities are subject to various federal, state and
local environmental laws and health and safety laws as well as laws and
regulations specific to their particular activities. Such laws and regulations
address: health and safety standards for the operation of facilities,
transportation systems and the handling of materials; air and water pollution
requirements and standards; solid waste disposal requirements; land reclamation
requirements; and requirements relating to the handling and disposition of
hazardous materials. Energy MLPs and MLP-related entities are directly or
indirectly subject to the costs of compliance with such laws applicable to them,
and changes in such laws and regulations may adversely affect their results of
operations.
MLPs and MLP-related entities operating interstate pipelines and
storage facilities are subject to substantial regulation by the FERC, which
regulates interstate transportation rates, services and other matters regarding
natural gas pipelines including: the establishment of rates for service;
regulation of pipeline storage and liquefied natural gas facility construction;
issuing certificates of need for companies intending to provide energy services
or constructing and operating interstate pipeline and storage facilities; and
certain other matters. FERC also regulates the interstate transportation of
crude oil, including: regulation of rates and practices of oil pipeline
companies; establishing equal service conditions to provide shippers with equal
access to pipeline transportation; and establishment of reasonable rates for
transporting petroleum and petroleum products by pipeline.
Energy sector MLPs and MLP-related entities may be subject to liability
relating to the release of substances into the environment, including liability
under federal "SuperFund" and similar state laws for investigation and
remediation of releases and threatened releases of hazardous materials, as well
as liability for injury and property damage for accidental events, such as
explosions or discharges of materials causing personal injury and damage to
property. Such potential liabilities could have a material adverse effect upon
the financial condition and results of operations of energy sector MLPs and
MLP-related entities.
Energy sector MLPs and MLP-related entities are subject to numerous
business related risks, including: deterioration of business fundamentals
reducing profitability due to development of alternative energy sources,
changing demographics in the markets served, unexpectedly prolonged and
precipitous changes in commodity prices and increased competition which takes
market share; reliance on growth potential through acquisitions; disruptions in
transportation systems; the dependence of certain MLPs and MLP-related entities
upon the energy exploration and development activities of unrelated third
parties; availability of capital for expansion and construction of needed
facilities; a significant decrease in natural gas production due to depressed
commodity prices or otherwise; the inability of MLPs and MLP-related entities to
successfully integrate recent or future acquisitions; and the general level of
the economy.
The energy industry and particular energy companies may be adversely
affected by possible terrorist attacks, such as the attacks that occurred on
September 11, 2001. It is possible that facilities of energy companies, due to
-7-
the critical nature of their energy businesses to the United States, could be
direct targets of terrorist attacks or be indirectly affected by attacks on
others. They may have to incur significant additional costs in the future to
safeguard their assets. In addition, changes in the insurance markets after
September 11, 2001 may make certain types of insurance more difficult to obtain
or obtainable only at significant additional cost. To the extent terrorism
results in a lower level of economic activity, energy consumption could be
adversely affected, which would reduce revenues and impede growth. Terrorist or
war related disruption of the capital markets could also affect the ability of
energy companies to raise needed capital.
MASTER LIMITED PARTNERSHIPS
Under normal circumstances the Fund will invest at least 65% of its
managed assets in equity securities of energy MLPs and MLP-related entities. An
MLP is a limited partnership the interests in which (known as units) are traded
on securities exchanges or over-the-counter. Organization as a partnership
eliminates tax at the entity level.
An MLP has one or more general partners (who may be individuals,
corporations, or other partnerships) which manage the partnership, and limited
partners, which provide capital to the partnership but have no role in its
management. Typically, the general partner is owned by company management or
another publicly traded sponsoring corporation. When an investor buys units in a
MLP, he or she becomes a limited partner.
MLPs are formed in several ways. A nontraded partnership may decide to
go public. Several nontraded partnerships may roll up into a single MLP. A
corporation may spin-off a group of assets or part of its business into a MLP of
which it is the general partner in order to realize the assets' full value on
the marketplace by selling the assets and using the cash proceeds received from
the MLP to address debt obligations or to invest in higher growth opportunities,
while retaining control of the MLP. A corporation may fully convert to a MLP,
although since 1986 the tax consequences have made this an unappealing option
for most corporations. Also, a newly formed company may operate as a MLP from
its inception.
The sponsor or general partner of an MLP, other energy companies, and
utilities may sell assets to MLPs in order to generate cash to fund expansion
projects or repay debt. The MLP structure essentially transfers cash flows
generated from these acquired assets directly to MLP limited partner unit
holders.
In the case of an MLP buying assets from its sponsor or general partner
the transaction is intended to be based upon comparable terms in the acquisition
market for similar assets. To help insure that appropriate protections are in
place, the board of the MLP generally creates an independent committee to review
and approve the terms of the transaction. The committee often obtains a fairness
opinion and can retain counsel or other experts to assist its evaluation. Since
both parties normally have a significant equity stake in the MLP, both parties
generally have an incentive to see that the transaction is accretive and fair to
the MLP.
MLPs tend to pay relatively higher distributions than other types of
companies and the Fund intends to use these MLP distributions in an effort to
meet its investment objective.
-8-
As a motivation for the general partner to manage the MLP successfully
and increase cash flows, the terms of MLPs typically provide that the general
partner receives a larger portion of the net income as distributions reach
higher target levels. As cash flow grows, the general partner receives a greater
interest in the incremental income compared to the interest of limited partners.
Although the percentages vary among MLPs, the general partner's marginal
interest in distributions generally increases from 2% to 15% at the first
designated distribution target level moving up to 25% and ultimately 50% as
pre-established distribution per unit thresholds are met. Nevertheless, the
aggregate amount distributed to limited partners will increase as MLP
distributions reach higher target levels. Given this incentive structure, the
general partner has an incentive to streamline operations and undertake
acquisitions and growth projects in order to increase distributions to all
partners.
Because the MLP itself does not pay tax, its income or loss is
allocated to its investors, irrespective of whether the investors receive any
cash payment from the MLP. An MLP typically makes quarterly cash distributions.
Although they resemble corporate dividends, MLP distributions are treated
differently for tax purposes. The MLP distribution is treated as a tax-deferred
return of capital to the extent of the investor's basis in his MLP interest and,
to the extent the distribution exceeds the investor's basis in the MLP, capital
gain. The investor's original basis is the price paid for the units. The basis
is adjusted downwards with each distribution and allocation of deductions (such
as depreciation) and losses, and upwards with each allocation of taxable income.
When the units are sold, the difference between the sales price and the
investor's adjusted basis represents taxable gain. The limited partner will not
be taxed on distributions until (1) he sells his MLP units and pays tax on his
gain, which gain is increased due to the basis decrease resulting from prior
distributions; or (2) his basis reaches zero.
For a further discussion and a description of MLP tax matters, see the
section entitled "Certain Federal Income Tax Matters."
THE FUND'S INVESTMENTS
The types of securities in which the Fund may invest include, but are
not limited to the following:
Equity Securities of MLPs and MLP-Related Entities. Consistent with its
investment objective, the Fund may invest up to 100% of its managed assets in
equity securities issued by energy sector MLPs. Equity securities currently
consist of common units, subordinated units and I-Shares (each discussed below).
The Fund also may invest in equity securities of MLP-related entities, such as
general partners or other affiliates of the MLPs. The Fund also may invest up to
15% of managed assets in equity or debt securities of non-MLPs or energy
companies.
The value of equity securities will be affected by changes in the stock
markets, which may be the result of domestic or international political or
economic news, changes in interest rates or changing investor sentiment. At
times, stock markets can be volatile and stock prices can change substantially.
Equity securities risk will affect the Fund's net asset value per share, which
will fluctuate as the value of the securities held by the Fund change. Not all
stock prices change uniformly or at the same time, and not all stock markets
-9-
move in the same direction at the same time. Other factors affect a particular
stock's prices, such as poor earnings reports by an issuer, loss of major
customers, major litigation against an issuer or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.
Certain of the energy companies in which the Fund may invest may have
comparatively smaller capitalizations. Investing in securities of smaller MLPs,
MLP-related entities and energy companies may involve greater risk than is
associated with investing in more established MLPs, MLP-related entities and
energy companies. Smaller capitalization MLPs, MLP-related entities and energy
companies may have limited product lines, markets or financial resources; may
lack management depth or experience; and may be more vulnerable to adverse
general market or economic developments than larger more established MLPs,
MLP-related entities and energy companies.
MLP Common Units. MLP common units represent a limited partnership
interest in the MLP. Common units are listed and traded on U.S. securities
exchanges or over-the-counter with their value fluctuating predominantly based
on the success of the MLP. The Fund intends to purchase common units in market
transactions but may also purchase securities directly from the MLP or other
parties in private placements. Unlike owners of common stock of a corporation,
owners of common units have limited voting rights and have no ability to
annually elect directors. MLPs generally distribute all available cash flow
(cash flow from operations less maintenance capital expenditures) in the form of
a quarterly distribution. Common unit holders have first priority to receive
quarterly cash distributions up to the MQD and have arrearage rights. In the
event of liquidation, common unit holders have preference over subordinated
units, but not debt holders or preferred unit holders, to the remaining assets
of the MLP.
MLP Subordinated Units. MLP subordinated units typically are issued by
MLPs to their original sponsors, such as their founders, corporate general
partners of MLPs, entities that sell assets to the MLP, and institutional
investors. The Fund expects to purchase subordinated units directly from these
persons. Subordinated units have similar voting rights as common units and are
generally not publicly traded. Once the MQD on the common units, including
arrearage, has been paid, subordinated units will receive cash distributions up
to the MQD prior to any incentive payments to the MLP's general partner. Unlike
common units, subordinated units do not have arrearage rights. In the event of
liquidation, common units have priority over subordinated units. Subordinated
units are typically converted into common units on a one-to-one basis after
certain time periods and/or performance targets have been satisfied.
Subordinated units are generally valued based on the price of the common units,
discounted to reflect the timing or likelihood of their conversion to common
units.
MLP I-Shares. I-Shares represent an ownership interest issued by an
affiliated party of an MLP. The MLP affiliate uses the proceeds from the sale of
I-Shares to purchase limited partnership interests in the MLP in the form of
I-Units. I-Units have features similar to MLP common units in terms of voting
rights, liquidation preference and distributions. However, rather than receiving
cash, the MLP affiliate receives additional i-units in an amount equal to the
cash distributions received by MLP common units. Similarly, holders of I-Shares
will receive additional I-Shares, in the same proportion as the MLP affiliates
receipt of I-Units, rather than cash distributions. I-Shares themselves have
-10-
limited voting rights similar to those applicable to MLP common units. The MLP
affiliate issuing the I-Shares is structured as a corporation for federal income
tax purposes. As a result, I-Shares holders, such as the Fund, will receive a
Form 1099 rather than a Form K-1 statement. I-Shares are traded on the New York
Stock Exchange.
Equity Securities of Energy Companies. The Fund does not intend to
invest more than 35% of its managed assets in equity securities issued by energy
companies. The Fund intends to purchase these equity securities in market
transactions but also may purchase securities directly from the issuers in
private placements. To generate additional income, the Fund intends, on a
consistent and ongoing basis, to write (or sell) covered call options on the
common stock of energy companies held in the Fund's portfolio.
Debt Securities. The Fund may invest up to 25% of its managed assets in
debt securities of energy companies, MLPs and MLP-related entities, including
securities rated below investment grade. The debt securities in which the Fund
may invest may provide for fixed or variable principal payments and various
types of interest rate and reset terms, including fixed rate, adjustable rate,
zero coupon, contingent, deferred, payment-in-kind and auction rate features.
Certain debt securities are "perpetual" in that they have no maturity date.
Certain debt securities are zero coupon bonds. A zero coupon bond is a bond that
does not pay interest either for the entire life of the obligations or for an
initial period after the issuance of the obligation. To the extent that the Fund
invests in below investment grade debt securities, such securities will be
rated, at the time of investment, at least B- by S&P's or B3 by Moody's or a
comparable rating by at least one other rating agency or, if unrated, determined
by the Sub-Adviser to be of comparable quality. If a security satisfies the
Fund's minimum rating criteria at the time of purchase and is subsequently
downgraded below such rating, the Fund will not be required to dispose of such
security. If a downgrade occurs, the Sub-Adviser will consider what action,
including the sale of such security, is in the best interest of the Fund and its
shareholders. In light of the risks of below investment grade securities, the
Sub-Adviser, in evaluating the creditworthiness of an issue, whether rated or
unrated, will take various factors into consideration, which may include, as
applicable, the issuer's operating history, financial resources and its
sensitivity to economic conditions and trends, the market support for the
facility financed by the issue (if applicable), the perceived ability and
integrity of the issuer's management and regulatory matters.
Below Investment Grade Debt Securities. The Fund may invest up to 25%
of its managed assets in below investment grade securities. The below investment
grade debt securities in which the Fund invests are rated from B3 to Bal by
Moody's, from B- to BB+ by S&P's, are comparably rated by another nationally
recognized rating agency or are unrated but determined by the Sub-Adviser to be
of comparable quality.
Investment in below investment grade securities involves substantial
risk of loss. Below investment grade debt securities or comparable unrated
securities are commonly referred to as "junk bonds" and are considered
predominantly speculative with respect to the issuer's ability to pay interest
and principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities. For these reasons, to the extent the Fund
-11-
invests in below investment grade securities, your investment in the Fund is
subject to the following specific risks:
- increased price sensitivity to changing interest rates and to a
deteriorating economic environment;
- greater risk of loss due to default or declining credit quality;
- adverse company specific events are more likely to render the
issuer unable to make interest and/or principal payments; and
- if a negative perception of the below investment grade debt market
develops, the price and liquidity of below investment grade debt
securities may be depressed. This negative perception could last
for a significant period of time.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a below investment grade debt issuer to make principal
payments and interest payments than an investment grade issuer. The principal
amount of below investment grade securities outstanding has proliferated in the
past decade as an increasing number of issuers have used below investment grade
securities for corporate financing. An economic downturn could severely affect
the ability of highly leveraged issuers to service their debt obligations or to
repay their obligations upon maturity. Similarly, down-turns in profitability in
specific industries, such as the energy industry, could adversely affect the
ability of below investment grade debt issuers in that industry to meet their
obligations. The market values of lower quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. The Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in payment of principal or interest on
its portfolio holdings. In certain circumstances, the Fund may be required to
foreclose on an issuer's assets and take possession of its property or
operations. In such circumstances, the Fund would incur additional costs in
disposing of such assets and potential liabilities from operating any business
acquired.
The secondary market for below investment grade securities may not be
as liquid as the secondary market for more highly rated securities, a factor
which may have an adverse effect on the Fund's ability to dispose of a
particular security when necessary to meet its liquidity needs. There are fewer
dealers in the market for below investment grade securities than investment
grade obligations. The prices quoted by different dealers may vary significantly
and the spread between the bid and asked price is generally much larger than
higher quality instruments. Under adverse market or economic conditions, the
secondary market for below investment grade securities could contract further,
independent of any specific adverse changes in the conditions of a particular
issuer, and these instruments may become illiquid. As a result, the Fund could
find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Because investors generally perceive that there are greater risks
associated with lower quality debt securities of the type in which the Fund may
invest a portion of its assets, the yields and prices of such securities may
tend to fluctuate more than those for higher rated securities. In the lower
-12-
quality segments of the debt securities market, changes in perceptions of an
issuer's creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the debt securities market,
resulting in greater yield and price volatility.
The Fund will not invest in distressed, below investment grade
securities (those that are in default or the issuers of which are in
bankruptcy). If a debt security becomes distressed while held by the Fund, the
Fund may be required to bear certain extraordinary expenses in order to protect
and recover its investments if it is recoverable at all.
See Appendix C to this SAI for a description of Moody's and S&P's
ratings.
Restricted Securities. 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.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act, or in a registered public offering. The Sub-Adviser has the ability to deem
restricted securities as liquid. To enable the Fund to sell its holdings of a
restricted security not registered for public sale, the Fund may have to cause
those securities to be registered. In situations in which the Fund must arrange
registration because the Fund wishes to sell the security, 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. The Fund would
bear the risks of any downward price fluctuation during that period.
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including private
placements, repurchase agreements, commercial paper, foreign securities and
corporate bonds and notes. These instruments are often restricted securities
because the securities are either themselves exempt from registration or sold in
transactions not requiring registration, such as Rule 144A transactions.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend on an efficient institutional
market in which such unregistered securities can be readily resold or on an
issuer's ability to honor a demand for repayment. Therefore, the fact that there
are contractual or legal restrictions on resale to the general public or certain
institutions is not dispositive of the liquidity of such investments.
Rule 144A under the Securities Act establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. Institutional markets for
-13-
restricted securities that exist or may develop as a result of Rule 144A may
provide both readily ascertainable values for restricted securities and the
ability to liquidate an investment. An insufficient number of qualified
institutional buyers interested in purchasing Rule 144A-eligible securities held
by the Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at reasonable prices.
Thinly-Traded Securities. The Fund also may invest in securities that
may not be restricted, but are thinly-traded. Although common units of MLPs,
I-Shares of MLP-related entities and common stock of energy companies trade on
the New York Stock Exchange, the American Stock Exchange, The Nasdaq Stock
Market or other securities exchanges or markets, such securities may trade less
than those of larger companies due to their relatively smaller capitalizations.
Such securities may be difficult to dispose of at a fair price during times when
the Fund believes it is desirable to do so. Thinly-traded securities also are
more difficult to value and the Sub-Adviser's judgment as to value will often be
given greater weight than market quotations, if any exist. If market quotations
are not available, thinly-traded securities will be valued in accordance with
procedures established by the Board. Investment of the Fund's capital in
thinly-traded securities may restrict the Fund's ability to take advantage of
market opportunities. The risks associated with thinly-traded securities may be
particularly acute in situations in which the Fund's operations require cash and
could result in the Fund borrowing to meet its short term needs or incurring
losses on the sale of thinly-traded securities.
Margin Borrowing. Although it does not currently intend to, the Fund
may in the future use margin borrowing of up to 33-1/3% of total managed assets
for investment purposes when the Sub-Adviser believes it will enhance returns.
Margin borrowings by the Fund create certain additional risks. For example,
should the securities that are pledged to brokers to secure margin accounts
decline in value, or should brokers from which the Fund has borrowed increase
their maintenance margin requirements (i.e., reduce the percentage of a position
that can be financed), then the Fund could be subject to a "margin call,"
pursuant to which it must either deposit additional funds with the broker or
suffer mandatory liquidation of the pledged securities to compensate for the
decline in value. In the event of a precipitous drop in the value of the assets
of the Fund, it might not be able to liquidate assets quickly enough to pay off
the margin debt and might suffer mandatory liquidation of positions in a
declining market at relatively low prices, thereby incurring substantially
losses. For these reasons, the use of borrowings for investment purposes is
considered a speculative investment practice.
COVERED CALL OPTION TRANSACTIONS
Call options are contracts representing the right to purchase a common
stock at a specified price (the "strike price") at a specified future date (the
"expiration date"). The price of the option is determined from trading activity
in the broad options market, and generally reflects the relationship between the
current market price for the underlying common stock and the strike price, as
well as the time remaining until the expiration date. The Fund will write call
options only if they are "covered." In the case of a call option on a common
stock or other security, the option is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, cash or other assets determined to be liquid by the
-14-
Sub-Adviser (in accordance with procedures established by the Board of Trustees)
in such amount are segregated by the Fund's custodian) upon conversion or
exchange of other securities held by the Fund.
If an option written by the Fund expires unexercised, the Fund realizes
on the expiration date a capital gain equal to the premium received by the Fund
at the time the option was written. If an option purchased by the Fund expires
unexercised, the Fund realizes a capital loss equal to the premium paid at the
time the option expires. Prior to the earlier of exercise or expiration, an
exchange-traded option may be closed out by an offsetting purchase or sale of an
option of the same series (type, underlying security, exercise price, and
expiration). There can be no assurance, however, that a closing purchase or sale
transaction can be effected when the Fund desires. The Fund may sell put or call
options it has previously purchased, which could result in a net gain or loss
depending on whether the amount realized on the sale is more or less than the
premium and other transaction costs paid on the put or call option purchased.
See "Tax Matters."
HEDGING AND INTEREST RATE TRANSACTIONS
The Fund may, but is not required to, enter into various hedging and
strategic transactions to seek to reduce interest rate risks arising from any
use of Financial Leverage by the Fund, to facilitate portfolio management and
mitigate risks. Certain of these hedging and strategic transactions involve
derivative instruments. A derivative is a financial instrument whose performance
is derived at least in part from the performance of an underlying index,
security or asset. The values of certain derivatives can be affected
dramatically by even small market movements, sometimes in ways that are
difficult to predict. There are many different types of derivatives, with many
different uses. The Fund may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
energy-related commodities, equity, fixed income and interest rate indices, and
other financial instruments, purchase and sell financial futures contracts and
options thereon, enter into various interest rate transactions such as swaps,
caps, floors or collars or credit transactions and credit default swaps. The
Fund also may purchase derivative instruments that combine features of these
instruments. Collectively, all of the above are referred to as "Strategic
Transactions." The Fund generally seeks to use Strategic Transactions as a
portfolio management of hedging technique to seek to protect against possible
adverse changes in the market value of securities held in or to be purchased for
the Fund's portfolio, protect the value of the Fund's portfolio, facilitate the
sale of certain securities for investment purposes, manage the effective
interest rate exposure of the Fund, including the effective yield paid on any
Financial Leverage issued by the Fund, or establish positions in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Market conditions will determine whether and in what circumstances
the Fund would employ any of the hedging and strategic techniques described
below. The Fund will incur brokerage and other costs in connection with its
hedging transactions.
Options on Securities and Securities Indices. The Fund may purchase and
write (sell) call and put options on any securities and securities indices.
These options may be listed on national domestic securities exchanges or foreign
securities exchanges or traded in the over-the-counter market. The Fund may
write covered put and call options and purchase put and call options as a
-15-
substitute for the purchase or sale of securities or to protect against declines
in the value of the portfolio securities and against increases in the cost of
securities to be acquired.
Writing Covered Options. To generate additional income, the Fund
intends, on a consistent and ongoing basis, to write (or sell) covered call
options on the common stock of energy companies held in the Fund's portfolio. A
call option on securities written by the Fund obligates the Fund to sell
specified securities to the holder of the option at a specified price if the
option is exercised at any time before the expiration date. A put option on
securities written by the Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash settlement payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
Writing covered call options may deprive the Fund of the opportunity to profit
from an increase in the market price of the securities in its portfolio. Writing
covered put options may deprive the Fund of the opportunity to profit from a
decrease in the market price of the securities to be acquired for its portfolio.
All call and put options written by the Fund are covered. A written
call option or put option may be covered by (1) maintaining cash or liquid
securities in a segregated account with a value at least equal to the Fund's
obligation under the option, (2) entering into an offsetting forward commitment
and/or (3) purchasing an offsetting option or any other option which, by virtue
of its exercise price or otherwise, reduces the Fund's net exposure on its
written option position. A written call option on securities is typically
covered by maintaining the securities that are subject to the option in a
segregated account. The Fund may cover call options on a securities index by
owning securities whose price changes are expected to be similar to those of the
underlying index.
The Fund may terminate its obligations under an exchange traded call or
put option by purchasing an option identical to the one it has written.
Obligations under over-the-counter options may be terminated only by entering
into an offsetting transaction with the counterparty to such option. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. The Fund would normally purchase call options in
anticipation of an increase, or put options in anticipation of a decrease
("protective puts"), in the market value of securities of the type in which it
may invest. The Fund may also sell call and put options to close out its
purchased options.
The purchase of a call option would entitle the Fund, in return for the
premium paid, to purchase specified securities or currency at a specified price
during the option period. The Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities or currency exceeded the sum of the exercise price, the premium paid
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the call option.
-16-
The purchase of a put option would entitle the Fund, in exchange for
the premium paid, to sell specified securities at a specified price during the
option period. The purchase of protective puts is designed to offset or hedge
against a decline in the market value of the Fund's portfolio securities. Put
options may also be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. The
Fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of put options may be offset by countervailing changes in the value of
the Fund's portfolio securities.
The Fund's options transactions will be subject to limitations
established by each of the exchanges, boards of trade or other trading
facilities on which such options are traded. These limitations govern the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which the
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Sub-Adviser. An exchange, board of
trade or other trading facility may order the liquidation of positions found to
be in excess of these limits, and it may impose certain other sanctions.
Risks Associated with Options Transactions. There is no assurance that
a liquid secondary market on a domestic or foreign options exchange will exist
for any particular exchange-traded option or at any particular time. If the Fund
is unable to effect a closing purchase transaction with respect to covered
options it has written, the Fund will not be able to sell the underlying
securities or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if the Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (4) unusual or unforeseen circumstances may interrupt normal operations
on an exchange; (5) the facilities of an exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (6) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
-17-
The Fund's ability to terminate over-the-counter options is more
limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. The Sub-Adviser will determine the liquidity of each
over-the-counter option in accordance with guidelines adopted by the Board of
Trustees.
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of options
depends in part on the Sub-Adviser's ability to predict future price
fluctuations and, for hedging transactions, the degree of correlation between
the options and securities or currency markets.
Futures Contracts and Options on Futures Contracts. The Fund may
purchase and sell futures contracts based on various securities (such as U.S.
government securities) and securities indices, and any other financial
instruments and indices and purchase and write call and put options on these
futures contracts. The Fund may also enter into closing purchase and sale
transactions with respect to any of these contracts and options. All futures
contracts entered into by the Fund are traded on U.S. or foreign exchanges or
boards of trade that are licensed, regulated or approved by the Commodity
Futures Trading Commission ("CFTC").
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures contracts on securities will usually
be liquidated in this manner, the Fund may instead make, or take, delivery of
the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures contracts are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
The Fund may, for example, take a "short" position in the futures
market by selling futures contracts in an attempt to hedge against an
anticipated decline in market prices that would adversely affect the value of
the Fund's portfolio securities. Such futures contracts may include contracts
for the future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities.
Hedging and Other Strategies. Hedging is an attempt to establish with
more certainty than would otherwise be possible the effective price or rate of
return on portfolio securities or securities that the Fund proposes to acquire
or the exchange rate of currencies in which the portfolio securities are quoted
or denominated. When securities prices are falling, the Fund can seek to offset
a decline in the value of its current portfolio securities through the sale of
futures contracts. When securities prices are rising, the Fund, through the
purchase of futures contracts, can attempt to secure better rates or prices than
might later be available in the market when it effects anticipated purchases.
-18-
If, in the opinion of the Sub-Adviser, there is a sufficient degree of
correlation between price trends for the Fund's portfolio securities and futures
contracts based on other financial instruments, securities indices or other
indices, the Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in the
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Sub-Adviser will attempt to estimate the extent of this
volatility difference based on historical patterns and compensate for any
differential by having the Fund enter into a greater or lesser number of futures
contracts or by attempting to achieve only a partial hedge against price changes
affecting the Fund's portfolio securities.
When a short hedging position is successful, any depreciation in the
value of portfolio securities will be substantially offset by appreciation in
the value of the futures position. On the other hand, any unanticipated
appreciation in the value of the Fund's portfolio securities would be
substantially offset by a decline in the value of the futures position. On other
occasions, the Fund may take a "long" position by purchasing futures contracts.
Options on Futures Contracts. The purchase of put and call options on
futures contracts will give the Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Fund obtains the benefit of the futures position if
prices move in a favorable direction but limits its risk of loss in the event of
an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's assets. By
writing a call option, the Fund becomes obligated, in exchange for the premium
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that the Fund intends to
purchase. However, the Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. The loss incurred by the Fund in writing options
on futures is potentially unlimited and may exceed the amount of the premium
received.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Other Considerations. The Fund will engage in futures and related
options transactions either for bona fide hedging or for other purposes as
permitted by the CFTC. These purposes may include using futures and options on
futures as a substitute for the purchase or sale of securities to increase or
reduce exposure to particular markets. To the extent that the Fund is using
futures and related options for hedging purposes, futures contracts will be sold
to protect against a decline in the price of securities that the Fund owns or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. The Fund will determine that the
price fluctuations in the futures contracts and options on futures used for
-19-
hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments which it expects to purchase. As
evidence of its hedging intent, the Fund expects that on occasions on which it
takes a long futures or option position (involving the purchase of futures
contracts), the Fund generally will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities in the cash market at the
time when the futures or option position is closed out. However, in particular
cases, when it is economically advantageous for the Fund to do so, a long
futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
Transactions in futures contracts and options on futures involve
brokerage costs, require margin deposits and, in the case of contracts and
options obligating the Fund to purchase securities, require the Fund to
establish a segregated account consisting of cash or liquid securities in an
amount equal to the underlying value of such contracts and options.
While transactions in futures contracts and options on futures may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates or securities prices may
result in a poorer overall performance for the Fund than if it had not entered
into any futures contracts or options transactions.
Perfect correlation between the Fund's futures positions and portfolio
positions will be impossible to achieve. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
Fund may be exposed to risk of loss.
Some futures contracts or options on futures may become illiquid under
adverse market conditions. In addition, during periods of market volatility, a
commodity exchange may suspend or limit trading in a futures contract or related
option, which may make the instrument temporarily illiquid and difficult to
price. Commodity exchanges also may establish daily limits on the amount that
the price of a futures contract or related option can vary from the previous
day's settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out
positions and limiting its losses.
Equity Swaps and Interest Rate or Commodity Swaps, Collars, Caps and
Floors. In order to hedge the value of the Fund's portfolio against fluctuations
in the market value of equity securities, interest rates or commodity prices or
to enhance the Fund's income, the Fund may, but is not required to, enter into
equity swaps and various interest rate or commodity transactions such as
interest rate or commodity swaps and the purchase or sale of interest rate or
commodity caps and floors. To the extent that the Fund enters into these
transactions, the Fund expects to do so primarily to preserve a return or spread
on a particular investment or portion of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date, to protect against increasing commodity prices or to manage the Fund's
interest rate exposure on any debt securities or preferred shares issued by the
Fund for leverage purposes. The Fund intends to use these transactions primarily
as a hedge. However, the Fund also may invest in equity and interest rate or
commodity swaps to enhance income or to increase the Fund's yield, for example,
during periods of steep interest rate yield curves (i.e., wide differences
between short-term and long-term interest rates). The Fund is not required to
-20-
hedge its portfolio and may choose not to do so. The Fund cannot guarantee that
any hedging strategies it uses will work.
In an equity swap, the cash flows exchanged by the Fund and the
counterparty are based on the total return on some stock market index and an
interest rate (either a fixed rate or a floating rate). In an interest rate
swap, the Fund exchanges with another party their respective commitments to pay
or receive interest (e.g., an exchange of fixed rate payments for floating rate
payments). For example, if the Fund holds a debt instrument with an interest
rate that is reset only once each year, it may swap the right to receive
interest at this fixed rate for the right to receive interest at a rate that is
reset every week. This would enable the Fund to offset a decline in the value of
the debt instrument due to rising interest rates but would also limit its
ability to benefit from falling interest rates. Conversely, if the Fund holds a
debt instrument with an interest rate that is reset every week and it would like
to lock in what it believes to be a high interest rate for one year, it may swap
the right to receive interest at this variable weekly rate for the right to
receive interest at a rate that is fixed for one year. Such a swap would protect
the Fund from a reduction in yield due to falling interest rates and may permit
the Fund to enhance its income through the positive differential between one
week and one year interest rates, but would preclude it from taking full
advantage of rising interest rates.
The Fund usually will enter into equity and interest rate or commodity
swaps on a net basis (i.e., the two payment streams are netted out with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments). The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each swap contract will be accrued on a daily
basis, and an amount of cash or liquid instruments having an aggregate net asset
value at least equal to the accrued excess will be maintained in a segregated
account by the Fund's custodian. If the swap transaction is entered into on
other than a net basis, the full amount of the Fund's obligations will be
accrued on a daily basis, and the full amount of the Fund's obligations will be
maintained in a segregated account by the Fund's custodian.
The Fund also may engage in interest rate or commodity transactions in
the form of purchasing or selling interest rate or commodity caps or floors. The
Fund will not sell interest rate or commodity caps or floors that it does not
own. The purchase of an interest rate or commodity cap entitles the purchaser,
to the extent that a specified index exceeds a predetermined interest rate or
commodity price, to receive payments equal to the difference of the index and
the predetermined rate on a notional principal amount (i.e., the reference
amount with respect to which interest obligations are determined although no
actual exchange of principal occurs) from the party selling such interest rate
or commodity cap. The purchase of an interest rate or commodity floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate or commodity price, to receive payments at the difference of the
index and the predetermined rate on a notional principal amount from the party
selling such interest rate or commodity floor.
Typically, the parties with which the Fund will enter into equity and
interest rate or commodity transactions will be broker-dealers and other
financial institutions. The Fund will not enter into any equity swap, interest
rate or commodity swap, cap or floor transaction unless the unsecured senior
debt or the claims-paying ability of the other party thereto is rated investment
grade quality by at least one nationally recognized statistical rating
-21-
organization at the time of entering into such transaction or whose
creditworthiness is believed by the Sub-Adviser to be equivalent to such rating.
If there is a default by the other party to such a transaction, the Fund will
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid in comparison with other similar instruments traded in
the interbank market. Caps and floors, however, are less liquid than swaps.
Certain federal income tax requirements may limit the Fund's ability to engage
in interest rate swaps.
Credit Default Swap Agreements. The Fund may enter into credit default
swap agreements. The "buyer" in a credit default contract is obligated to pay
the "seller" a periodic stream of payments over the term of the contract
provided that no event of default on an underlying reference obligation has
occurred. If an event of default occurs, the seller must pay the buyer the "par
value" (full notional value) of the reference obligation in exchange for the
reference obligation. The Fund may be either the buyer or seller in the
transaction. If the Fund is a buyer and no event of default occurs, the Fund
loses its investment and recovers nothing. However, if an event of default
occurs, the buyer receives full notional value for a reference obligation that
may have little or no value. As a seller, the Fund receives a fixed rate of
income throughout the term of the contract, which typically is between six
months and three years, provided that there is no default event. If an event of
default occurs, the seller must pay the buyer the full notional value of the
reference obligation.
Credit default swaps involve greater risks than if the Fund had
invested in the reference obligation directly. In addition to general market
risks, credit default swaps are subject to illiquidity risk, counterparty risk
and credit risks. The Fund will enter into swap agreements only with
counterparties who are rated investment grade quality by at least one nationally
recognized statistical rating organization at the time of entering into such
transaction or whose creditworthiness is believed by the Sub-Adviser to be
equivalent to such rating. A buyer also will lose its investment and recover
nothing should no event of default occur. If an event of default were to occur,
the value of the reference obligation received by the seller, coupled with the
periodic payments previously received, may be less than the full notional value
it pays to the buyer, resulting in a loss of value to the Fund. When the Fund
acts as a seller of a credit default swap agreement it is exposed to the risks
of leverage since if an event of default occurs the seller must pay the buyer
the full notional value of the reference obligation.
If the Fund enters into a credit default swap, the Fund may be required
to report the swap as a "reportable transaction" for tax shelter reporting
purposes on the Fund's federal income tax return. If the Internal Revenue
Service (the "IRS") were to determine that the credit default swap is a tax
shelter, the Fund could be subject to penalties under the Internal Revenue Code
of 1986, as amended (the "Code").
The Fund may in the future employ new or additional investment
strategies and hedging instruments if those strategies and instruments are
consistent with the Fund's investment objective and are permissible under
applicable regulations governing the Fund.
-22-
OVER-THE-COUNTER MARKET RISK
The Fund may invest in over-the-counter securities. In contrast to the
securities exchanges, the over-the-counter market is not a centralized facility
that limits trading activity to securities of companies which initially satisfy
certain defined standards. Generally, the volume of trading in an unlisted or
over-the-counter security is less than the volume of trading in a listed
security. This means that the depth of market liquidity of some securities in
which the Fund invests may not be as great as that of other securities and, if
the Fund were to dispose of such a security, it might have to offer the shares
at a discount from recent prices, or sell the shares in small lots over an
extended period of time.
LEGISLATION RISK
At any time after the date of this SAI, legislation may be enacted that
could negatively affect the assets of the Fund or the issuers of such assets.
Changing approaches to regulation may have a negative impact on entities in
which the Fund invests. There can be no assurance that future legislation,
regulation or deregulation will not have a material adverse effect on the Fund
or will not impair the ability of the issuers of the assets held in the Fund to
achieve their business goals, and hence, for the Fund to achieve its investment
objective.
OTHER INVESTMENT POLICIES AND TECHNIQUES
HEDGING STRATEGIES
General Description of Hedging Strategies. The Fund may use derivatives
or other transactions for the purpose of hedging the Fund's exposure to an
increase in the price of a security prior to its anticipated purchase or a
decrease in the price of a security prior to its anticipated sale, to seek to
reduce interest rate risks arising from the use of any leverage by the Fund and
to mitigate risks. The specific derivative instruments to be used, or other
transactions to be entered into, for such hedging purposes may include options
on common equities, energy-related commodities, equity, fixed income and
interest rate indices, futures contracts (hereinafter referred to as "Futures"
or "Futures Contracts"), swap agreements and related instruments.
Hedging or derivative instruments on securities generally are used to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Such instruments may also be used to
"lock-in" recognized but unrealized gains in the value of portfolio securities.
Hedging strategies, if successful, can reduce the risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies also can reduce the
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. The use of hedging instruments is subject
to applicable regulations of the Commission, the several options and futures
exchanges upon which they are traded, the CFTC and various state regulatory
authorities. In addition, the Fund's ability to use hedging instruments may be
limited by tax considerations.
-23-
General Limitations on Futures and Options Transactions. The Fund has
filed a notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the CFTC and the National Futures Association,
which regulate trading in the futures markets. Pursuant to Section 4.5 of the
regulations under the Commodity Exchange Act (the "CEA"), the Fund is not
subject to regulation as a commodity pool under the CEA.
Various exchanges and regulatory authorities have undertaken reviews of
options and futures trading in light of market volatility. Among the possible
actions that have been presented are proposals to adopt new or more stringent
daily price fluctuation limits for Futures and options transactions and
proposals to increase the margin requirements for various types of futures
transactions.
Asset Coverage for Futures and Options Positions. The Fund will comply
with the regulatory requirements of the Commission and the CFTC with respect to
coverage of options and futures positions by registered investment companies
and, if the guidelines so require, will set aside cash, U.S. government
securities, high grade liquid debt securities and/or other liquid assets
permitted by the Commission and CFTC in a segregated custodial account in the
amount prescribed. Securities held in a segregated account cannot be sold while
the Futures or options position is outstanding, unless replaced with other
permissible assets, and will be marked-to-market daily.
Options. As an anticipatory hedge, the Fund may purchase put and call
options on stock or other securities. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
an underlying security or its equivalent at a specified price at any time during
the option period. In contrast, a call option gives the purchaser the right to
buy the underlying security covered by the option or its equivalent from the
writer of the option at the stated exercise price.
As a holder of a put option, the Fund will have the right to sell the
securities underlying the option and as the holder of a call option, the Fund
will have the right to purchase the securities underlying the option, in each
case at their exercise price at any time prior to the option's expiration date.
The Fund may seek to terminate its option positions prior to their expiration by
entering into closing transactions. The ability of the Fund to enter into a
closing sale transaction depends on the existence of a liquid secondary market.
There can be no assurance that a closing purchase or sale transaction can be
effected when the Fund so desires.
Certain Considerations Regarding Options. The hours of trading for
options may not conform to the hours during which the underlying securities are
traded. To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets. The
purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. The purchase of options involves the risk that the
premium and transaction costs paid by the Fund in purchasing an option will be
lost as a result of unanticipated movements in prices of the securities on which
the option is based. Imperfect correlation between the options and securities
markets may detract from the effectiveness of attempted hedging. Options
-24-
transactions may result in significantly higher transaction costs and portfolio
turnover for the Fund.
Some, but not all, of the derivative instruments may be traded and
listed on an exchange. There is no assurance that a liquid secondary market on
an options exchange will exist for any particular option, or at any particular
time, and for some options no secondary market on an exchange or elsewhere may
exist. If the Fund is unable to effect a closing sale transaction with respect
to options on securities that it has purchased, it would have to exercise the
option in order to realize any profit and would incur transaction costs upon the
purchase and sale of the underlying securities.
Futures Contracts. The Fund may enter into securities-related Futures
Contracts, including security futures contracts as an anticipatory hedge. The
Fund's hedging may include sales of Futures as an offset against the effect of
expected declines in securities prices and purchases of Futures as an offset
against the effect of expected increases in securities prices. The Fund will not
enter into Futures Contracts which are prohibited under the CEA and will, to the
extent required by regulatory authorities, enter only into Futures Contracts
that are traded on exchanges and are standardized as to maturity date and
underlying financial instrument. A security futures contract is a legally
binding agreement between two parties to purchase or sell in the future a
specific quantity of shares of a security or of the component securities of a
narrow-based security index, at a certain price. A person who buys a security
futures contract enters into a contract to purchase an underlying security and
is said to be "long" the contract. A person who sells a security futures contact
enters into a contract to sell the underlying security and is said to be "short"
the contract. The price at which the contract trades (the "contract price") is
determined by relative buying and selling interest on a regulated exchange.
Transaction costs are incurred when a Futures Contract is bought or
sold and margin deposits must be maintained. In order to enter into a security
futures contract, the Fund must deposit funds with its custodian in the name of
the futures commodities merchant equal to a specified percentage of the current
market value of the contract as a performance bond. Moreover, all security
futures contracts are marked-to-market at least daily, usually after the close
of trading. At that time, the account of each buyer and seller reflects the
amount of any gain or loss on the security futures contract based on the
contract price established at the end of the day for settlement purposes.
An open position, either a long or short position, is closed or
liquidated by entering into an offsetting transaction (i.e., an equal and
opposite transaction to the one that opened the position) prior to the contract
expiration. Traditionally, most futures contracts are liquidated prior to
expiration through an offsetting transaction and, thus, holders do not incur a
settlement obligation. If the offsetting purchase price is less than the
original sale price, a gain will be realized. Conversely, if the offsetting sale
price is more than the original purchase price, a gain will be realized; if it
is less, a loss will be realized. The transaction costs must also be included in
these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract and the Fund may not be able to realize
a gain in the value of its future position or prevent losses from mounting. This
inability to liquidate could occur, for example, if trading is halted due to
-25-
unusual trading activity in either the security futures contract or the
underlying security; if trading is halted due to recent news events involving
the issuer of the underlying security; if systems failures occur on an exchange
or at the firm carrying the position; or, if the position is on an illiquid
market. Even if the Fund can liquidate its position, it may be forced to do so
at a price that involves a large loss.
Under certain market conditions, it may also be difficult or impossible
to manage the risk from open security futures positions by entering into an
equivalent but opposite position in another contract month, on another market,
or in the underlying security. This inability to take positions to limit the
risk could occur, for example, if trading is halted across markets due to
unusual trading activity in the security futures contract or the underlying
security or due to recent news events involving the issuer of the underlying
security.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a Futures contract position. The Fund would
continue to be required to meet margin requirements until the position is
closed, possibly resulting in a decline in the Fund's NAV. In addition, many of
the contracts discussed above are relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
Security futures contracts that are not liquidated prior to expiration
must be settled in accordance with the terms of the contract. Some security
futures contracts are settled by physical delivery of the underlying security.
At the expiration of a security futures contract that is settled through
physical delivery, a person who is long the contract must pay the final
settlement price set by the regulated exchange or the clearing organization and
take delivery of the underlying shares. Conversely, a person who is short the
contract must make delivery of the underlying shares in exchange for the final
settlement price. Settlement with physical delivery may involve additional
costs.
Other security futures contracts are settled through cash settlement.
In this case, the underlying security is not delivered. Instead, any positions
in such security futures contracts that are open at the end of the last trading
day are settled through a final cash payment based on a final settlement price
determined by the exchange or clearing organization. Once this payment is made,
neither party has any further obligations on the contract.
As noted above, margin is the amount of funds that must be deposited by
the Fund in order to initiate futures trading and to maintain the Fund's open
positions in futures contracts. A margin deposit is intended to ensure the
Fund's performance of the futures contract. The margin required for a particular
futures contract is set by the exchange on which the futures contract is traded
and may be significantly modified from time to time by the exchange during the
term of the futures contract.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
future contract so that the margin deposit exceeds the required margin, the
-26-
broker will pay the excess to the respective Fund. In computing daily NAV, the
Fund will mark to market the current value of its open futures contracts. The
Fund expects to earn interest income on its margin deposits.
Because of the low margin deposits required, futures contracts trading
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the future contracts were closed out.
Thus, a purchase or sale of a futures contract may result in losses in excess of
the amount initially invested in the futures contract. However, the Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
In addition to the foregoing, imperfect correlation between the futures
contracts and the underlying securities may prevent the Fund from achieving the
intended hedge or expose the Fund to risk of loss. Under certain market
conditions, the prices of security futures contracts may not maintain their
customary or anticipated relationships to the prices of the underlying security
or index. These pricing disparities could occur, for example, when the market
for the security futures contract is illiquid, when the primary market for the
underlying security is closed, or when the reporting of transactions in the
underlying security has been delayed.
In addition, the value of a position in futures contracts could be
affected if trading is halted in either the security futures contract or the
underlying security. In certain circumstances, regulated exchanges are required
by law to halt trading in security futures contracts. For example, trading on a
particular security futures contract must be halted if trading is halted on the
listed market for the underlying security as a result of pending news,
regulatory concerns, or market volatility. Similarly, trading of a security
futures contract on a narrow-based security index must be halted under
circumstances such as where trading is halted on securities accounting for at
least 50% of the market capitalization of the index. In addition, regulated
exchanges are required to halt trading in all security futures contracts for a
specified period of time when the Dow Jones Industrial Average ("DJIA")
experiences one-day declines of 10%, 20% and 30%. The regulated exchanges may
also have discretion under their rules to halt trading in other circumstances -
such as when the exchange determines that the halt would be advisable in
maintaining a fair and orderly market.
A trading halt, either by a regulated exchange that trades security
futures or an exchange trading the underlying security or instrument, could
prevent the Fund from liquidating a position in security futures contracts in a
timely manner, which could expose the Fund to a loss.
Each regulated exchange trading a security futures contract may also
open and close for trading at different times than other regulated exchanges
trading security futures contracts or markets trading the underlying security or
securities. Trading in security futures contracts prior to the opening or after
the close of the primary market for the underlying security may be less liquid
than trading during regular market hours.
-27-
Risks and Special Considerations Concerning Derivatives. In addition to
the foregoing, the use of derivative instruments involves certain general risks
and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of
the underlying assets may go up or down. Adverse movements in the value
of an underlying asset can expose the Fund to losses. Market risk is
the primary risk associated with derivative transactions. Derivative
instruments may include elements of leverage and, accordingly,
fluctuations in the value of the derivative instrument in relation to
the underlying asset may be magnified. The successful use of derivative
instruments depends upon a variety of factors, particularly the
Sub-Adviser's ability to predict correctly changes in the relationships
of such hedge instruments to the Fund's portfolio holdings, and there
can be no assurance the Sub-Adviser's judgment in this respect will be
accurate. Consequently, the use of derivatives for hedging purposes
might result in a poorer overall performance for the Fund, whether or
not adjusted for risk, than if the Fund had not hedged its portfolio
holdings.
(2) Credit Risk. Credit risk is the risk that a loss is
sustained as a result of the failure of a counterparty to comply with
the terms of a derivative instrument. The counterparty risk for
exchange-traded derivatives is generally less than for
privately-negotiated or over-the-counter derivatives, since generally a
clearing agency, which is the issuer or counterparty to each
exchange-traded instrument, provides a guarantee of performance. For
privately-negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the
expected benefit of the derivative transactions and possibly other
losses to the Fund. The Fund will enter into transactions in derivative
instruments only with counterparties that the Sub-Adviser reasonably
believes are capable of performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there
might be an imperfect correlation, or even no correlation, between
price movements of a derivative instrument and price movements of
investments being hedged. When a derivative transaction is used to
completely hedge another position, changes in the market value of the
combined position (the derivative instrument plus the position being
hedged) result from an imperfect correlation between the price
movements of the two instruments. With a perfect hedge, the value of
the combined position remains unchanged with any change in the price of
the underlying asset. With an imperfect hedge, the value of the
derivative instrument and its hedge are not perfectly correlated. For
example, if the value of a derivative instrument used in a short hedge
(such as buying a put option or selling a futures contract) increased
by less than the decline in value of the hedged investments, the hedge
would not be perfectly correlated. This might occur due to factors
unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these
instruments are traded. In addition, the Fund's success in using
hedging instruments is subject to the Sub-Adviser's ability to
correctly predict changes in relationships of such hedge instruments to
the Fund's portfolio holdings, and there can be no assurance that the
Sub-Adviser's judgment in this respect will be accurate. An imperfect
-28-
correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to a risk of loss.
(4) Liquidity Risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or replaced quickly
at or very close to its fundamental value. Generally, exchange
contracts are liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out
with the other party to the transaction. The Fund might be required by
applicable regulatory requirements to maintain assets as "cover,"
maintain segregated accounts and/or make margin payments when it takes
positions in derivative instruments involving obligations to third
parties (i.e., instruments other than purchase options). If the Fund is
unable to close out its positions in such instruments, it might be
required to continue to maintain such accounts or make such payments
until the position expires, matures, or is closed out. These
requirements might impair the Fund's ability to sell a security or make
an investment at a time when it would otherwise be favorable to do so,
or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends upon the existence
of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the counterparty to enter into a transaction
closing out the position. Due to liquidity risk, there is no assurance
that any derivatives position can be sold or closed out at a time and
price that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside
in exchange for downside protection, the party taking the risk is
looking for a positive payoff. Despite this voluntary assumption of
risk, a counterparty that has lost money in a derivative transaction
may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or
interconnection risk is the risk that a disruption in the financial
markets will cause difficulties for all market participants. In other
words, a disruption in one market will spill over into other markets,
perhaps creating a chain reaction. Much of the OTC derivatives market
takes place among the OTC dealers themselves, thus creating a large
interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create
losses for other dealers and destabilize the entire market for OTC
derivative instruments.
SWAP AGREEMENTS
For hedging purposes, the Fund may enter into swap agreements. A swap
is a financial instrument that typically involves the exchange of cash flows
between two parties on specified dates (settlement dates), where the cash flows
are based on agreed-upon prices, rates, indices, etc. The nominal amount on
which the cash flows are calculated is called the notional amount. Swaps are
individually negotiated and structured to include exposure to a variety of
different types of investments or market factors, such as interest rates,
-29-
commodity prices, non-U.S. currency rates, mortgage securities, corporate
borrowing rates, security prices, indexes or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the Fund and its share price. The performance of swap agreements
may be affected by a change in the specific interest rate, currency, or other
factors that determine the amounts of payments due to and from the Fund. If a
swap agreement calls for payments by the Fund, the Fund must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
declines, the value of a swap agreement would be likely to decline, potentially
resulting in losses.
Generally, swap agreements have fixed maturity dates that are agreed
upon by the parties to the swap. The agreement can be terminated before the
maturity date only under limited circumstances, such as default by one of the
parties or insolvency, among others, and can be transferred by a party only with
the prior written consent of the other party. The Fund may be able to eliminate
its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counterparty is unable to meet
its obligations under the contract, declares bankruptcy, defaults or becomes
insolvent, the Fund may not be able to recover the money it expected to receive
under the contract.
A swap agreement can be a form of leverage, which can magnify the
Fund's gains or losses. In order to reduce the risk associated with leveraging,
the Fund may cover its current obligations under swap agreements according to
guidelines established by the Commission. If the Fund enters into a swap
agreement on a net basis, it will be required to segregate assets with a daily
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to receive
under the agreement. If the Fund enters into a swap agreement on other than a
net basis, it will be required to segregate assets with a value equal to the
full amount of the Fund's accrued obligations under the agreement.
Equity Swaps. In a typical equity swap, one party agrees to pay another
party the return on a security, security index or basket of securities in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to securities making up the index
of securities without actually purchasing those securities. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the interest that the Fund will
be committed to pay under the swap.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions, the payment
obligation and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required
under rules of the Commission to maintain in a separate account liquid assets,
consisting of cash, cash equivalents or liquid securities having a market value
at all times of at least equal to the amount of the commitment. Income generated
-30-
by any such assets which provide taxable income for U.S. federal income tax
purposes is includable in the taxable income of the Fund. The Fund may enter
into contracts to purchase securities on a forward basis (i.e., where settlement
will occur more than 60 days from the date of the transaction) only to the
extent that the Fund specifically collateralizes such obligations with a
security that is expected to be called or mature within sixty days before or
after the settlement date of the forward transaction. The commitment to purchase
securities on a when-issued, delayed delivery or forward basis may involve an
element of risk because at the time of delivery the market value may be less
than cost.
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements.
A repurchase agreement is a contractual agreement whereby the seller of
securities agrees to repurchase the same security at a specified price on a
future date agreed upon by the parties. The agreed-upon repurchase price
determines the yield during the Fund's holding period. Repurchase agreements are
considered to be loans collateralized by the underlying security that is the
subject of the repurchase contract. Income generated from transactions in
repurchase agreements will be taxable. The Fund will only enter into repurchase
agreements with registered securities dealers or domestic banks that, in the
opinion of the Sub-Adviser, present minimal credit risk. The risk to the Fund is
limited to the ability of the issuer to pay the agreed-upon repurchase price on
the delivery date; however, although the value of the underlying collateral at
the time the transaction is entered into always equals or exceeds the
agreed-upon repurchase price, if the value of the collateral declines there is a
risk of loss of both principal and interest. In the event of default, the
collateral may be sold, but the Fund may incur a loss if the value of the
collateral declines, and may incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. The
Sub-Adviser will monitor the value of the collateral at the time the transaction
is entered into and at all times subsequent during the term of the repurchase
agreement in an effort to determine that such value always equals or exceeds the
agreed-upon repurchase price. In the event the value of the collateral declines
below the repurchase price, the Fund will demand additional collateral from the
issuer to increase the value of the collateral to at least that of the
repurchase price, including interest.
LENDING OF PORTFOLIO SECURITIES
Although it is not the Fund's current intention, the Fund may lend its
portfolio securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents maintained on a
current basis in an amount at least equal to the market value of the securities
loaned by the Fund. The Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned, and would
also receive an additional return that may be in the form of a fixed fee or a
percentage of the collateral. The Fund may pay reasonable fees for services in
arranging these loans. The Fund would have the right to call the loan and obtain
the securities loaned at any time on notice of not more than five business days.
The Fund would not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the securities, if, in the
Sub-Advisers' judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of bankruptcy or other
-31-
default of the borrower, the Fund could experience both delays in liquidating
the loan collateral or recovering the loaned securities and losses, including
(a) possible decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce its rights
thereto, (b) possible subnormal levels of income and lack of access to income
during this period, and (c) expenses of enforcing its rights.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading will be undertaken as determined by the Fund's
Sub-Adviser. There are no limits on the rate of portfolio turnover. A higher
portfolio turnover rate results in correspondingly greater brokerage commissions
and other transactional expenses that are borne by the Fund. High portfolio
turnover may also result in the Fund's recognition of gains that will be taxable
as ordinary income to the Fund.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The general supervision of the duties performed for the Fund under the
Investment Management Agreement is the responsibility of the Board of Trustees.
The trustees set broad policies for the Fund and choose the Fund's officers. The
following is a list of the trustees and officers of the Fund and a statement of
their present positions and principal occupations during the past five years,
with the trustee who is an "interested person" (as such term is defined in the
1940 Act) of the Fund indicated by an asterisk.
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF OFFICE COMPLEX OTHER
AND YEAR FIRST OVERSEEN BY TRUSTEESHIPS
POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS TRUSTEE OR HELD BY
NAME, ADDRESS AND AGE OFFICES WITH FUND APPOINTED DURING PAST 5 YEARS OFFICER TRUSTEE
Trustee who is an
Interested Person of the
Fund
------------------------
James A. Bowen(1)* President, o One Year(2) President, First 24 Portfolios None
1001 Warrenville Road, Chairman of the o Since 2003 Trust Portfolios and
Suite 300 Board, Chief First Trust Advisors;
Lisle, IL 60532 Executive Officer Chairman of the Board
D.O.B.: 09/55 and Trustee of Directors, BondWave
LLC and Stonebridge
Advisors LLC
Trustees who are not
Interested Persons of the
Fund
-------------------------
Richard E. Erickson Trustee o One Year(2) Physician; President, 24 Portfolios None
c/o First Trust Advisors o Since 2003 Wheaton Orthopedics;
L.P. Co-owner and
1001 Warrenville Road, Co-Director, Sports
Suite 300 Med Center for
Lisle, IL 60532 Fitness; Limited
D.O.B.: 04/51 Partner, Gundersen
Real Estate
Partnership
-32-
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF OFFICE COMPLEX OTHER
AND YEAR FIRST OVERSEEN BY TRUSTEESHIPS
POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS TRUSTEE OR HELD BY
NAME, ADDRESS AND AGE OFFICES WITH FUND APPOINTED DURING PAST 5 YEARS OFFICER TRUSTEE
Niel B. Nielson Trustee o One Year(2) President (June 2002 24 Portfolios Director of Good
c/o First Trust Advisors o Since 2003 to Present), Covenant News Publishers -
L.P. College; Pastor (1997 Crossway Books;
1001 Warrenville Road, to 2002), College Covenant Transport, Inc.
Suite 300 Church in Wheaton
Lisle, IL 60532
D.O.B.: 03/54
Thomas R. Kadlec Trustee o One Year(2) Vice President, Chief 24 Portfolios None
c/o First Trust Advisors o Since 2003 Financial Officer
L.P. (1990 to Present),
1001 Warrenville Road, ADM Investor
Suite 300 Services, Inc.
Lisle, IL 60532 (Futures Commission
D.O.B.: 11/57 Merchant); Registered
Representative (2000
to Present),
Segerdahl & Company,
Inc., an NASD member
(Broker-Dealer);
President, ADM
Derivatives, Inc.
(May 2005 to present)
Officers of the Fund
--------------------
Mark R. Bradley Treasurer, o Indefinite Chief Financial 24 Portfolios N/A
1001 Warrenville Road, Controller, Chief term Officer, Managing
Suite 300 Financial Officer o Since 2003 Director, First Trust
Lisle, IL 60532 and Chief Portfolios and First
D.O.B.: 11/57 Accounting Officer Trust Advisors; Chief
Financial Officer,
BondWave LLC and
Stonebridge Advisors
LLC
Susan M. Brix Assistant Vice o Indefinite Representative, First 24 Portfolios N/A
1001 Warrenville Road, President term Trust Portfolios;
Suite 300 o Since 2003 Assistant Portfolio
Lisle, IL 60532 Manager, First Trust
D.O.B.: 01/60 Advisors
Robert F. Carey Vice President o Indefinite Senior Vice 24 Portfolios N/A
1001 Warrenville Road, term President, First
Suite 300 o Since 2003 Trust Portfolios and
Lisle, IL 60532 First Trust Advisors
D.O.B.: 07/63
James M. Dykas Assistant o Indefinite Vice President, First 24 Portfolios N/A
1001 Warrenville Road, Treasurer term Trust Portfolios L.P.
Suite 300 o Since (January 2005 to
Lisle, IL 60532 December present); Executive
D.O.B.: 01/66 2005 Director of Van
Kampen Asset
Management and Morgan
Stanley Investment
Management (1999 to
January 2005)
W. Scott Jardine Secretary and o Indefinite General Counsel, 24 Portfolios N/A
1001 Warrenville Road, Chief Compliance term First Trust Portfolios
Suite 300 Officer o Since 2003 Portfolios and First
Lisle, IL 60532 Trust Advisors;
D.O.B.: 05/60 Secretary, BondWave
LLC and Stonebridge
Advisors LLC
-33-
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF OFFICE COMPLEX OTHER
AND YEAR FIRST OVERSEEN BY TRUSTEESHIPS
POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS TRUSTEE OR HELD BY
NAME, ADDRESS AND AGE OFFICES WITH FUND APPOINTED DURING PAST 5 YEARS OFFICER TRUSTEE
Daniel J. Lindquist Vice President o Indefinite Senior Vice 24 Portfolios N/A
1001 Warrenville Road, term President, First
Suite 300 o Since Trust Advisors L.P.;
Lisle, IL 60532 December Vice President, First
D.O.B.: 02/70 2005 Trust Portfolios L.P.
(since April 2004; Chief
Operating Officer, Mina
Capital Management,
LLC (January 2004 to April
2004); Chief Operating
Officer, Samaritan
Asset Management
Services, Inc.
Kristi A. Maher Assistant o Indefinite Assistant General 24 Portfolios N/A
1001 Warrenville Road, Secretary term Counsel (March 2004
Suite 300 o Since 2004 to Present), First
Lisle, IL 60532 Trust Portfolios and
D.O.B.: 12/66 First Trust Advisors;
Associate (1995 to
March 2004), Chapman
and Cutler LLP
Roger F. Testin Vice President o Indefinite Senior Vice President 24 Portfolios N/A
1001 Warrenville Road, term (August 2001 to
Suite 300 o Since 2003 Present), First Trust
Lisle, IL 60532 Advisors; Analyst
D.O.B.: 06/66 (1998 to 2001), Dolan
Capital Management
--------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his
position of President of First Trust Advisors, investment adviser of
the Fund.
(2) Trustees are elected each year by shareholders and serve a one year term
until their successors are elected. Mr. Bowen's officer positions with
the Fund have an indefinite term.
The Board of Trustees of the Fund has four standing committees, the
Executive Committee (and Pricing and Dividend Committee), the Nominating and
Governance Committee, the Valuation Committee and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to
exercise all powers of and to act in the place of the Board of Trustees to the
extent permitted by the Fund's Declaration and By-laws. The members of the
Executive Committee shall also serve as a special committee of the Board known
as the Pricing and Dividend Committee which is authorized to exercise all of the
powers and authority of the Board in respect of the issuance and sale, through
an underwritten public offering, of the Common Shares of the Fund and all other
such matters relating to such financing, including determining the price at
which such shares are to be sold and approval of the final terms of the
underwriting agreement, including approval of the members of the underwriting
syndicate. Such committee is also responsible for the declaration and setting of
dividends. Messrs. Kadlec and Bowen are members of the Executive Committee. The
Nominating and Governance Committee is responsible for appointing and nominating
non-interested persons to the Fund's Board of Trustees. Messrs. Erickson,
Nielson and Kadlec are members of the Nominating and Governance Committee. If
there is no vacancy on the Board of Trustees, the Board will not actively seek
recommendations from other parties, including Shareholders. When a vacancy on
the Board 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. Any proposal
to elect any person nominated by shareholders for election as trustee
-34-
may only be brought before an annual meeting of a Fund if timely written notice
(the "Shareholder Notice") is provided to the secretary of the Fund. Unless a
greater or lesser period is required under applicable law, to be timely, the
Shareholder Notice must be delivered to or mailed and received at the Fund's
address, 1001 Warrenville Road, Suite 300, Lisle, Illinois 60532, Attn: W. Scott
Jardine, not less than forty-five (45) days nor more than sixty (60) days prior
to the first anniversary date of the date of the Fund's proxy statement released
to shareholders for the prior year's annual meeting; provided, however, if and
only if the annual meeting is not scheduled to be held within a period that
commences thirty (30) days before the first anniversary date of the annual
meeting for the preceding year and ends thirty (30) days after such anniversary
date (an annual meeting date outside such period being referred to herein as an
"Other Annual Meeting Date"), such Shareholder Notice must be given in the
manner provided herein by the later of the close of business on (i) the date
forty-five (45) days prior to such Other Annual Meeting Date or (ii) the tenth
(10th) business day following the date such Other Annual Meeting Date is first
publicly announced or disclosed.
Any shareholder submitting a nomination of any person or persons (as
the case may be) for election as a trustee or trustees of the Fund shall
deliver, as part of such Shareholder Notice: (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 Fund 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 Fund (as defined in the
1940 Act) and, if not an "interested person," information regarding each nominee
that will be sufficient for the Fund 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.
Without limiting the foregoing, any shareholder who gives a Shareholder
Notice of any matter proposed to be brought before a shareholder meeting
(whether or not involving nominees for trustees) shall deliver, as part of such
Shareholder Notice: (i) the description of and text of the proposal to be
presented; (ii) a brief written statement of the reasons why such shareholder
favors the proposal; (iii) such shareholder's name and address as they appear on
the Fund's books; (iv) any other information relating to the shareholder that
would be required to be disclosed in a proxy statement or other filings required
to be made in connection with the solicitation of proxies with respect to the
matter(s) proposed pursuant to Section 14 of the Exchange Act; (v) the class or
series and number of all shares of the Fund owned beneficially and of record by
such shareholder; (vi) any material interest of such shareholder in the matter
proposed (other than as a shareholder); (vii) a representation that the
shareholder intends to appear in person or by proxy at the shareholder meeting
to act on the matter(s) proposed; (viii) if the proposal involves nominee(s) for
-35-
trustees, a description of all arrangements or understandings between the
shareholder and each proposed nominee and any other person or persons (including
their names) pursuant to which the nomination(s) are to be made by the
shareholder; and (ix) in the case of a shareholder (a "Beneficial Owner") that
holds shares entitled to vote at the meeting through a nominee or "street name"
holder of record, evidence establishing such Beneficial Owner's indirect
ownership of, and entitlement to vote, shares at the meeting of shareholders.
Shares "beneficially owned" means all shares which such person is deemed to
beneficially own pursuant to Rules 13d-3 and 13d-5 under the Exchange Act.
If a recommendation is received during the appropriate time frame and
with satisfactorily completed information regarding a candidate during a time
when a vacancy exists on the Board or during such other time as the Nominating
and Governance Committee is accepting recommendations, the recommendation will
be forwarded to the Chair of the Nominating and Governance 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 Nominating and Governance
Committee is accepting recommendations, at which point they may be considered
for nomination. The Valuation Committee is responsible for the oversight of the
pricing procedures of the Fund. Messrs. Erickson and Kadlec are members
of the Valuation Committee. The Audit Committee is responsible for overseeing
the Fund's accounting and financial reporting process, the system of internal
controls, audit process and evaluating and appointing independent auditors
(subject also to Board approval). Messrs. Erickson, Nielson and Kadlec
serve on the Audit Committee.
Messrs. Erickson, Nielson, Kadlec and Bowen are also trustees of First
Defined Portfolio Fund, LLC, an open-end fund with 12 portfolios advised by
First Trust Advisors. Messrs. Bowen, Erickson, Nielson and Kadlec are
also trustees of the First Trust Value Line(R) 100 Fund, First Trust Value
Line(R) Dividend Fund, First Trust/Four Corners Senior Floating Rate Income
Fund, First Trust/Four Corners Senior Floating Rate Income Fund II,
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund,
First Trust/Value Line(R) & Ibbotson Equity Allocation Fund, Energy Income and
Growth Fund, First Trust/Fiduciary Asset Management Covered Call Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income
Fund and First Trust Strategic High Income Fund, closed-end funds advised by
First Trust Advisors. None of the trustees who are not "interested persons" of
the Fund, nor any of their immediate family members, has ever been a director,
officer or employee of, or consultant to, First Trust Advisors, First Trust
Portfolios or their affiliates. In addition, Mr. Bowen and the other officers of
the Fund hold the same positions with the First Defined Portfolio Fund, LLC,
First Trust Value Line(R) 100 Fund, First Trust Value Line(R) Dividend Fund,
First Trust/Four Corners Senior Floating Rate Income Fund, First Trust/Four
Corners Senior Floating Rate Income Fund II, Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, First Trust/Value Line(R) &
Ibbotson Equity Allocation Fund, Energy Income and Growth Fund, First Trust/
Fiduciary Asset Management Covered Call Fund, First Trust/Aberdeen Global
Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund and First Trust
Strategic High Income Fund (collectively, the "First Trust Fund Complex") as
they hold with the Fund.
Each fund in the First Trust Fund Complex pays each trustee who is not
an officer or employee of First Trust Advisors, any sub-adviser or any of their
affiliates ("Independent Trustees") an annual retainer of $10,000 which includes
compensation for all quarterly and special board meetings and committee
-36-
meetings. No additional meeting fees are paid in connection with regular
quarterly or special board meetings or regular or special committee meetings. In
addition, Thomas R. Kadlec is paid an additional $10,000 fee by the First Trust
Fund Complex to serve as the lead trustee. Trustees are also reimbursed for
travel and out-of-pocket expenses in connection with all meetings.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year to each of the trustees
and estimated total compensation to be paid to each of the trustees by the First
Trust Fund Complex for a full calendar year. The Fund has no retirement or
pension plans.
ESTIMATED
TOTAL COMPENSATION
ESTIMATED AGGREGATE FROM FUND AND
NAME OF TRUSTEE COMPENSATION FROM FUND (1) FUND COMPLEX(2)
James A. Bowen $0 $0
Richard E. Erickson $10,000 $130,000
Thomas R. Kadlec $10,770 $140,000
Niel B. Nielson $10,000 $130,000
--------------------
(1) The compensation estimated to be paid by the Fund to the trustees for the
first full fiscal year for services to the Fund.
(2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec
and Nielson, Independent Trustees, from the Fund and Fund Complex for a
full calendar year is based on estimated compensation to be paid to these
trustees for a full calendar year for services as trustees to the First
Defined Portfolio Fund, LLC, an open-end fund (with 12 portfolios) advised
by First Trust Advisors plus estimated compensation to be paid to these
trustees by the First Value Line(R) 100 Fund, the First Trust Value
Line(R) Dividend Fund, the First Trust/Four Corners Senior Floating Rate
Income Fund, the First Trust/Four Corners Senior Floating Rate Income Fund
II, the Macquarie/First Trust Global Infrastructure/Utilities Dividend &
Income Fund, the First Trust/Value Line(R) & Ibbotson Equity Allocation
Fund, the Energy Income and Growth Fund, the First Trust/Fiduciary Asset
Management Covered Call Fund, the First Trust/Aberdeen Global Opportunity
Income Fund, the First Trust/FIDAC Mortgage Income Fund, the First Trust
Strategic High Income Fund and the Fund for a full calendar year.
The Fund has no employees. Its officers are compensated by First Trust
Advisors. The Shareholders of the Fund will elect trustees at the next annual
meeting of shareholders.
The following table sets forth the dollar range of equity securities
beneficially owned by the trustees in the Fund and in other funds overseen by
the trustees in the First Trust Fund Complex as of December 31, 2005:
-37-
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
ALL REGISTERED
DOLLAR RANGE OF INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN
TRUSTEE IN THE FUND FIRST TRUST FUND COMPLEX
Mr. Bowen None Over $100,000
Mr. Erickson 280 Shares $ 50,001-$100,000
Mr. Kadlec None $ 50,001-$100,000
Mr. Nielson None $10,001-$50,000
As of November 30, 2005, the trustees of the Fund who are not
"interested persons" of the Fund and immediate family members do not own
beneficially or of record any class of securities of an investment adviser or
principal underwriter of the Fund or any person directly or indirectly
controlling, controlled by, or under common control with an investment adviser
or principal underwriter of the Fund.
For each of the first two years following the commencement of the
Fund's operations through June 24, 2006, the Adviser has agreed to reduce its
annual management fee to 0.75% of the Fund's managed assets in order to
reimburse the Fund for certain fees and expenses incurred by the Fund. The
Sub-Adviser has agreed to bear a portion of this reduction by reducing the
amount of its full sub-advisory fee during such period to 0.382% of the Fund's
managed assets.
After this offering of the Series B Energy Notes, the Fund will be
leveraged in the amount of 28.89% of the Fund's Managed Assets. As a result, the
Fund's management fee will be 1.41% of net assets attributable to common shares.
As of November 30, 2005, First Trust Portfolios owned 5,236 common
shares of the Fund. First Trust Portfolios L.P. is located at 1001 Warrenville
Road, Suite 300, Lisle, Illinois 60532.
INVESTMENT ADVISER
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, is the investment adviser to the Fund. As investment adviser,
First Trust Advisors provides the Fund with professional investment supervision
and selects the Fund's Sub-Adviser (with the approval of the Board of Trustees)
and permits any of its officers or employees to serve without compensation as
trustees or officers of the Fund if elected to such positions. First Trust
Advisors supervises the activities of the Fund's Sub-Adviser and provides the
Fund with certain other services necessary with the management of the portfolio.
First Trust Advisors is an Illinois limited partnership formed in 1991
and an investment adviser registered with the Commission under the Investment
Advisers Act of 1940 (the "Advisers Act"). First Trust Advisors is a limited
partnership with one limited partner, Grace Partners of DuPage L.P. ("Grace
Partners"), and one general partner, The Charger Corporation. Grace Partners is
-38-
a limited partnership with one general partner, The Charger Corporation, and a
number of limited partners. Grace Partners' and The Charger Corporation's
primary business is investment advisory and broker/dealer services through their
interests. The Charger Corporation is an Illinois corporation controlled by the
Robert Donald Van Kampen family. First Trust Advisors is controlled by Grace
Partners and The Charger Corporation.
First Trust Advisors serves as investment adviser to the Fund, eleven
other closed-end funds, the First Defined Portfolio Fund, LLC and the First
Trust Exchange-Traded Fund and also serves as sub-adviser to 10 mutual funds and
is the portfolio supervisor of certain unit investment trusts sponsored by First
Trust Portfolios. First Trust Portfolios specializes in the underwriting,
trading and distribution of unit investment trusts and other securities. First
Trust Portfolios, an Illinois limited partnership formed in 1991, acts as
sponsor for successive series of The First Trust Combined Series, FT Series
(formerly known as The First Trust Special Situations Trust), the First Trust
Insured Corporate Trust, The First Trust of Insured Municipal Bonds and The
First Trust GNMA. First Trust Portfolios introduced the first insured unit
investment trust in 1974 and to date, more than $56 billion in gross assets have
been deposited in First Trust Portfolios unit investment trusts.
First Trust Advisors acts as investment adviser to the Fund pursuant to
an Investment Management Agreement. The Investment Management Agreement
continues in effect for the Fund from year to year after its initial two-year
term so long as its continuation is approved at least annually by the trustees
including a majority of the Independent Trustees, or the vote of a majority of
the outstanding voting securities of the Fund. It may be terminated at any time
without the payment of any penalty upon 60 days' written notice by either party,
or by a majority vote of the outstanding voting securities of the Fund
(accompanied by appropriate notice), and will terminate automatically upon
assignment. The Investment Management Agreement also may be terminated, at any
time, without payment of any penalty, by the Board or by vote of a majority of
the outstanding voting securities of the Fund, in the event that it shall have
been established by a court of competent jurisdiction that the Adviser, or any
officer or director of the Adviser, has taken any action which results in a
breach of the covenants of the Adviser set forth in the Investment Management
Agreement. The Investment Management Agreement provides that First Trust
Advisors shall not be liable for any loss sustained by reason of the purchase,
sale or retention of any security, whether or not the purchase, sale or
retention shall have been based upon the investigation and research made by any
other individual, firm or corporation, if the recommendation shall have been
selected with due care and in good faith, except loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the Investment Management
Agreement. As compensation for its services, the Fund pays First Trust Advisors
a fee as described in the Prospectus. See "Management of the Fund--Investment
Management Agreement" in the Fund's Prospectus.
In addition to the fee of First Trust Advisors, the Fund pays all other
costs and expenses of its operations, including: compensation of its trustees
(other than those affiliated with First Trust Advisors); custodian, transfer
agency, administrative, accounting and dividend disbursing expenses; legal fees;
sub-licensing fee; expenses of independent auditors; expenses of preparing,
printing and distributing shareholder reports, notices, proxy statements and
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reports to governmental agencies; and taxes, if any. All fees and expenses are
accrued daily and deducted before payment of dividends to investors.
On April 18 and 19, 2004, the Trustees of the Fund met with members of
First Trust Advisors and the Sub-Adviser (the "Fund Advisers") to consider,
among other things, the possible approval of the Investment Management Agreement
between the Fund and First Trust Advisors and the Sub-Advisory Agreement between
the Adviser, the Sub-Adviser and the Fund.
Prior to the meeting, the Independent Trustees received a memorandum
describing their legal obligations and duties relating to the approval of an
investment advisory contract, including the duties of the Trustees under the
1940 Act and the general principles of state law; the requirements of the 1940
Act in such matters; the fiduciary duty of the Adviser; the standards used in
determining whether boards of trustees have fulfilled their duties; and various
factors to be considered by the Trustees in voting on whether to approve
advisory agreements. In evaluating the Investment Management Agreement and the
Sub-Advisory Agreement, the Independent Trustees met with their legal counsel
privately to discuss their responsibilities and obligations with respect to the
Investment Management Agreement and Sub-Advisory Agreement and the terms of the
proposed agreements.
In evaluating the Investment Management Agreement and the Sub-Advisory
Agreement, the Trustees considered narrative information concerning, among other
things, the nature of the services to be provided by the respective adviser or
sub-adviser, the fees to be paid to the respective adviser and sub-adviser and
the experience, resources and staffing of the respective adviser and
sub-adviser. As First Trust Advisors already services as investment adviser on
the various funds in the First Trust complex, the Trustees noted that they are
well informed as to its personnel, staffing, experience, investment philosophy
and fees paid by other clients. In evaluating the Investment Management
Agreement, the Trustees considered the supervisory services to be provided by
First Trust Advisors, as the investment adviser, the resources available to
fulfill such function and the advisory fees to be paid to First Trust Advisors.
In evaluating the Sub-Advisory Agreement with Fiduciary Asset
Management LLC ("Fiduciary Asset Management" or "Sub-Adviser") the Trustees met
with the relevant investment personnel from Fiduciary Asset Management and
considered information relating to the education, experience and number of
investment professionals and other personnel who would provide services under
the applicable agreement, its investment philosophy and process. The Trustees
received and reviewed written materials regarding Fiduciary Asset Management's
organizational structure, Fiduciary Asset Management's and its affiliates
experience with the MLP asset class, and resources available to Fiduciary Asset
Management. The Trustees considered the nature of the services provided by
Fiduciary Asset Management as well as the fee to be paid.
In considering the overall advisory arrangement, the Trustees also
received and reviewed written information regarding advisory fees paid by other
analogous closed-end funds and their respective expenses ratios. The Board of
Trustees, including all of the Independent Trustees of the Fund, and the sole
shareholder of the Fund, each approved the Investment Management Agreement and
the Sub-Advisory Agreement. The Independent Trustees determined that the terms
of the Fund's Investment Management Agreement and the Sub-Advisory Agreement,
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including the fees, are fair and reasonable, and that they will enable the Fund
to obtain high quality investment management services.
CODE OF ETHICS
The Fund, Adviser and Sub-Adviser have adopted codes of ethics under
Rule 17j-1 under the 1940 Act. These codes permit personnel subject to the code
to invest in securities, including securities that may be purchased or held by
the Fund. These codes can be reviewed and copied at the Commission's Public
Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at (202) 942-8090. The
codes of ethics are available on the EDGAR Database on the Commission's web site
(http://www.sec.gov), and copies of these codes may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Commission Public Reference Section,
Washington, D.C. 20549-0102.
PROXY VOTING POLICIES AND PROCEDURES
The Fund has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by the Fund are voted consistently and solely in the
best economic interests of the Fund.
The Board of Trustees is responsible for oversight of the Fund's proxy
voting process. The Board has delegated day-to-day proxy voting responsibility
to the Sub-Adviser to the extent the Fund holds voting securities. Fiduciary
Asst Management's Proxy Voting Policy is set forth in Appendix B to this
Statement of Additional Information.
Information regarding how the Fund voted proxies relating to portfolio
securities is available without charge, upon request, by calling (800) 621-1675
or by accessing the Commission's website at http://www.sec.gov.
SUB-ADVISER
Fiduciary Asset Management serves as the Fund's Sub-Adviser. In this
capacity, Fiduciary Asset Management is responsible for the selection and
on-going monitoring of the securities in the Fund's investment portfolio.
Fiduciary Asset Management, located at 8112 Maryland Avenue, Suite 400,
St. Louis, Missouri 63105, is a registered investment adviser and serves as
investment adviser or portfolio supervisor to investment portfolios with
approximately $16.8 billion of assets as of November 30, 2005.
Fiduciary Asset Management invests in a broad range of equity, hedged
equity, master limited partnership, and fixed income strategies for
institutional and high net worth clients. Fiduciary Asset Management's clients
include closed-end investment companies, Fortune 500 companies, public pensions
and large endowments and foundations. Fiduciary Asset Management was established
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as an independent investment firm in 1994. It serves as sub-adviser, with
responsibilities for day-to-day management, for two closed-end investment
companies, including the Fund, that invest primarily in master limited
partnerships and has managed Master Limited Partnership portfolios for clients
since 1995.
Fiduciary Asset Management was founded in 1994 by Charles D. Walbrandt.
From 1974 through 1994 Mr. Walbrandt served in various capacities with General
Dynamics Corporation, including Corporate Vice President, Trust Investment and
Treasurer. While at General Dynamics, Mr. Walbrandt created the internal
investment department in 1983, designed the investment management process and
managed both equity and fixed income portfolios. Mr. Walbrandt holds a B.S.
degree in economics from the University of Wisconsin, an M.B.A. in finance from
St. Louis University and is a Chartered Financial Analyst. Fiduciary Asset
Management is controlled by Mr. Walbrandt.
Fiduciary Asset Management's investment committee includes Charles D.
Walbrandt, Wiley D. Angell, Mohammad Riad, James J. Cunnane Jr., and Joseph E.
Gallagher. Mr. Cunnane serves as the primary portfolio manager for the Fund.
Mr. Cunnane has over ten years experience managing portfolios and is a
member of the equity portfolio management team and performs securities research.
Prior to joining Fiduciary Asset Management in 1996, he was a research analyst
with A.G. Edwards from 1994 to 1996. He also worked as an analyst for Maguire
Investment Advisors, where he gained extensive experiences in the development of
master limited partnership and mid- and small-cap stock portfolios. He holds a
B.S. degree in finance from Indiana University. Mr. Cunnane is a Chartered
Financial Analyst, and serves on the investment committee of the Archdiocese of
St. Louis and the board of the St. Louis internship program.
William N. Adams performs securities research on equity and fixed
income securities and focuses on the energy sector. Prior to joining Fiduciary
Asset Management in 2004, Mr. Adams was a research analyst with Banc of America
Capital Management from 1981 to 2004, specializing in integrated oils, oil field
services, oil and natural gas exploration, and refining and marketing. Mr. Adams
received his B.S.B.A. and M.B.A degrees from Washington University in St. Louis
and is a Chartered Financial Analyst.
Mr. Cunnane also has responsibility for the day-to-day management of
accounts other than the Fund. The advisory fees received by the Sub-Adviser in
connection with the management of the Fund and other accounts are not based on
the performance of the Fund or other accounts. Information regarding those other
accounts is set forth below.
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-----------------------------------------------------------------------------------------------------
NUMBER OF OTHER ACCOUNTS MANAGED AND ASSETS BY ACCOUNT TYPE
AS OF NOVEMBER 30, 2005
-----------------------------------------------------------------------------------------------------
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMETN
PORTFOLIO MANAGER (OTHER THAN THE FUND) VEHICLES OTHER ACCOUNTS
-----------------------------------------------------------------------------------------------------
James J. Cunnane Jr., Number: 1 Number: 0 Number: 142
Assets: $526,000,000 Assets: N/A Assets: $1,088,000,000
-----------------------------------------------------------------------------------------------------
Actual or apparent conflicts of interest may arise when a portfolio
manager has day-to-day management responsibilities with respect to more than one
fund or other account. More specifically, portfolio managers who manage multiple
funds and /or other accounts may be presented with one or more of the following
potential conflicts:
The management of multiple funds and/or other accounts may result in a
portfolio manager devoting unequal time and attention to the management of each
fund and/or other account. The Sub-Adviser seeks to manage such competing
interests for the time and attention of a portfolio manager by having the
portfolio manager focus on a particular investment discipline. Most other
accounts managed by a portfolio manager are managed using the same investment
models that are used in connection with the management of the Fund.
If a portfolio manager identifies a limited investment opportunity
which may be suitable for more than one fund or other account, a fund may not be
able to take full advantage of that opportunity due to an allocation of filled
purchase or sale orders across all eligible funds and other accounts. To deal
with these situations, the Sub-Adviser has adopted procedures for allocating
portfolio transactions across multiple accounts.
With respect to securities transactions for the Fund, the Sub-Adviser
determines which broker to use to execute each order, consistent with its duty
to seek best execution of the transaction. However, with respect to certain
other accounts (such as mutual funds for which the Sub-Adviser acts as
sub-advisor, other pooled investment vehicles that are not registered mutual
funds, and other accounts managed for organizations and individuals), the
Sub-Adviser may be limited by the client with respect to the selection of
brokers or may be instructed to direct trades through a particular broker. In
these cases, trades for a fund in a particular security may be placed separately
from, rather than aggregated with, such other accounts. Having separate
transactions with respect to a security may temporarily affect the market price
of the security or the execution of the transaction, or both, to the possible
detriment of such fund or other account(s) involved.
The Sub-Adviser, the Adviser and the Fund have adopted certain
compliance procedures which are designed to address these types of conflicts.
However, there is no guarantee that such procedures will detect each and every
situation in which a conflict arises.
As of November 30, 2005, Mr. Cunnane received all of his compensation
from the Sub-Adviser. Mr. Cunnane's compensation consists of the following
elements:
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1. Base Salary. Mr. Cunnane is paid a base salary which is
set at a level determined to be appropriate based upon his experience
and responsibilities through the use of independent compensation
surveys of the investment management industry.
2. Annual Bonus. Mr. Cunnane is paid a pre-tax annual bonus
calculated as 25% of the profitability of the product line for which he
is responsible. The product line profitability is defined as the
revenue generated by all accounts within his investment discipline less
the fixed and variable costs associated with supporting that revenue.
Such costs include employee costs, technology, office administration,
etc.
Mr. Cunnane also participates in benefit plans and programs generally
available to all employees.
As of November 30, 2005, Mr. Cunnane beneficially owned
$50,001-$100,000 of equity securities in the Fund.
The Sub-Adviser, subject to the Trustees' and the Adviser's
supervision, provides the Fund with discretionary investment services.
Specifically, the Sub-Adviser is responsible for managing the investments of the
Fund in accordance with the Fund's investment objective, policies and
restrictions as provided in the Prospectus and this Statement of Additional
Information, as may be subsequently changed by the Board of Trustees and
communicated to the Sub-Adviser in writing. The Sub-Adviser further agrees to
conform to all applicable laws and regulations of the Commission in all material
respects and to conduct its activities under the Sub-Advisory Agreement in all
material respects in accordance with applicable regulations of any governmental
authority pertaining to its investment advisory services. In the performance of
its duties, the Sub-Adviser will in all material respects satisfy any applicable
fiduciary duties it may have to the Fund, will monitor the Fund's investments,
and will comply with the provisions of the Fund's Declaration of Trust and
By-laws, as amended from time to time, and the stated investment objective,
policies and restrictions of the Fund. The Sub-Adviser is responsible for
effecting all security transactions for the Fund's assets. The Sub-Advisory
Agreement provides that the Sub-Adviser shall not be liable for any loss
suffered by the Fund or the Adviser (including, without limitation, by reason of
the purchase, sale or retention of any security) in connection with the
performance of the Sub-Adviser's duties under the Sub-Advisory Agreement, except
for a loss resulting from willful misfeasance, bad faith or gross negligence on
the part of the Sub-Adviser in performance of its duties under such Sub-Advisory
Agreement, or by reason of its reckless disregard of its obligations and duties
under such Sub-Advisory Agreement.
Pursuant to the Sub-Advisory Agreement among the Adviser, the
Sub-Adviser and the Fund, the Adviser has agreed to pay for the services and
facilities provided by the Sub-Adviser through sub-advisory fees. The
Sub-Adviser receives a portfolio management fee equal to 0.50% of the Fund's
Managed Assets. The Sub-Adviser's fee is paid by the Adviser out of the
Adviser's management fee.
As indicated above, for each of the first two years following the
commencement of the Fund's operations through June 24, 2006, the Adviser has
agreed to reduce its annual management fee to 0.75% of the Fund's Managed Assets
in order to reimburse the Fund for certain fees and expenses incurred by the
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Fund. The Sub-Adviser has agreed to bear a portion of this reduction by reducing
the amount of its full sub-advisory fee during such period to 0.382% of the
Fund's Managed Assets.
For the fiscal year ended November 30, 2005, the Adviser paid the
Sub-Adviser $689,526, and $212,995 was waived by the Sub-Adviser.
The Sub-Advisory Agreement may be terminated without the payment of any
penalty by First Trust Advisors, the Fund's Board of Trustees, or a majority of
the outstanding voting securities of the Fund (as defined in the 1940 Act), upon
60 days' written notice to the Sub-Adviser. Pursuant to a separate agreement
between the Sub-Adviser and First Trust Advisors, First Trust Advisors has
agreed that if First Trust Advisors or the Fund terminates or fails to renew the
Sub-Advisory Agreement with the Sub-Adviser other than for cause, First Trust
Advisors will resign and will not agree to be reinstated as investment adviser
to the Fund, which resignation shall be effective no later than 60 days
following the effective date of the Sub-Adviser's termination.
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The Sub-Advisory Agreement has been approved by a
majority of the Independent Trustees of the Fund and the initial sole
shareholder of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, the Sub-Adviser is
responsible for decisions to buy and sell securities for the Fund and for the
placement of the Fund's securities business, the negotiation of the commissions
to be paid on brokered transactions, the prices for principal trades in
securities, and the allocation of portfolio brokerage and principal business. It
is the policy of the Sub-Adviser to seek the best execution at the best security
price available with respect to each transaction, and with respect to brokered
transactions in light of the overall quality of brokerage and research services
provided to the Sub-Adviser and its advisees. The best price to the Fund means
the best net price without regard to the mix between purchase or sale price and
commission, if any. Purchases may be made from underwriters, dealers, and, on
occasion, the issuers. Commissions will be paid on the Fund's futures and
options transactions, if any. The purchase price of portfolio securities
purchased from an underwriter or dealer may include underwriting commissions and
dealer spreads. The Fund may pay mark-ups on principal transactions. In
selecting broker/dealers and in negotiating commissions, the Sub-Adviser
considers, among other things, the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. The
selection of a broker-dealer may take into account the sale of products
sponsored or advised by the Sub-Adviser and/or its affiliates. If approved by
the Fund's Board of Trustees, the Sub-Adviser may select an affiliated
broker-dealer to effect transactions in the Fund, so long as such transactions
are consistent with Rule 17e-1 under the 1940 Act.
-45-
Section 28(e) of the Securities Exchange Act of 1934, as amended
("Section 28(e)"), permits an investment adviser, under certain circumstances,
to cause an account to pay a broker or dealer who supplies brokerage and
research services a commission for effecting a transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
the transaction. Brokerage and research services include (a) furnishing advice
as to the value of securities, the advisability of investing, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities; (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and the
performance of accounts; and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement, and
custody).
In light of the above, in selecting brokers, the Sub-Adviser may
consider investment and market information and other research, such as economic,
securities and performance measurement research, provided by such brokers, and
the quality and reliability of brokerage services, including execution
capability, performance, and financial responsibility. Accordingly, the
commissions charged by any such broker may be greater than the amount another
firm might charge if the Sub-Adviser determines in good faith that the amount of
such commissions is reasonable in relation to the value of the research
information and brokerage services provided by such broker to the Sub-Adviser or
the Fund. The Sub-Adviser believes that the research information received in
this manner provides the Fund with benefits by supplementing the research
otherwise available to the Fund. The investment advisory fees paid by the Fund
to the Adviser under the Investment Management Agreement is not reduced as a
result of receipt by the Adviser or the Sub-Adviser of research services.
The Adviser and Sub-Adviser may place portfolio transactions for other
advisory accounts advised by them, and research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Sub-Adviser in servicing all of its accounts; not all of such services may be
used by the Sub-Adviser in connection with the Fund. The Sub-Adviser believes it
is not possible to measure separately the benefits from research services to
each of the accounts (including the Fund) they advise. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of those charged by another broker paid by each account
for brokerage and research services will vary. However, the Sub-Adviser believes
such costs to the Fund will not be disproportionate to the benefits received by
the Fund on a continuing basis. The Sub-Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations between the Fund and other
advisory accounts, the main factors considered by the Sub-Adviser are the
investment objective, the relative size of portfolio holding of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Fund and such other accounts and
funds.
-46-
ADDITIONAL INFORMATION CONCERNING AUCTIONS FOR THE SERIES B ENERGY NOTES
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Deutsche Bank Trust Company Americas) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of determining
the Applicable Rate for each series of the Energy Notes so long as the
Applicable Rate for the Energy Notes of such series is to be based on the
results of an Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for the Energy Notes. See "Broker-Dealers" below.
Securities Depository. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members with respect to each series of
the Energy Notes. One certificate for all of the Energy Notes of each series,
including the Series B Energy Notes, will be registered in the name of Cede &
Co., as nominee of the securities Depository. Such certificate will bear a
legend to the effect that such certificate is issued subject to the provisions
restricting transfers of Energy Notes contained in the Indenture. The Fund will
also issue stop-transfer instructions to the transfer agent for each series of
Energy Notes. Prior to the commencement of the right of holders of preferred
shares to elect a majority of the Fund's trustees, Cede & Co. will be the holder
of record of all the Energy Notes of each series of and owners of such Energy
Notes will not be entitled to receive certificates representing their ownership
interest in such Energy Notes.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in the Energy Notes, whether for its own
account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of the Energy Notes, the Auction Agent's registry of Existing
Holders, the results of Auctions and notices from any Broker-Dealer (or other
Person, if permitted by the Fund) with respect to transfers described under "The
-47-
Auction--Secondary Market Trading and Transfer of the Energy Notes" in the
Prospectus and notices from the Fund. The Auction Agent is not required to
accept any such notice for an Auction unless it is received by the Auction Agent
by 3:00 p.m., New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice or upon
notice to the Fund on a date specified in such notice if the Fund shall have
failed to pay the amounts due to the Auction Agent within 30 days of invoice. If
the Auction Agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor Auction Agent containing substantially the
same terms and conditions as the Auction Agency Agreement. The Fund may remove
the Auction Agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for the Energy Notes will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge in the
amount equal to: (i) in the case of any Auction immediately preceding a Rate
Period of less than one year, the product of (A) a fraction the numerator of
which is the number of days in the Rate Period (calculated by counting the first
day such Rate Period but excluding the last day thereof) and the denominator of
which is 360, times (B) 1/4 of 1%, times (C) $25,000, times (D) the sum of the
aggregate number of Energy Notes placed by such Broker-Dealer, or (ii) the
amount annually agreed upon by the Fund and the Broker-Dealers in the case of
the any Auction immediately preceding a Rate Period of one year or longer. For
the purposes of the preceding sentence, the Energy Notes will be placed by a
Broker-Dealer if such Energy Notes were (a) the subject of Hold Orders deemed to
have been submitted to the Auction Agent by the Broker-Dealer and were acquired
by such Broker-Dealer for its own account or were acquired by such Broker-Dealer
for its customers who are Beneficial owners or (b) the subject of an order
submitted by such Broker-Dealer that is (1) a Submitted Bid of an Existing
Holder that resulted in such Existing Holder continuing to hold such Energy
Notes as a result of the Auction or (2) a Submitted Bid of a Potential Holder
that resulted in such Potential Holder purchasing such Energy Notes as a result
of the Auction or (3) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction; such Broker-Dealer, however, would not
have knowledge of orders submitted by other Broker-Dealers in that Auction.
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CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, in certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund solely by
reason of his or her being a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Fund believes that the likelihood of such circumstances is remote.
The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or to convert the Fund
to open-end status. Specifically, the Declaration requires the affirmative vote
or consent by holders of at least two-thirds of the shares outstanding and
entitled to vote, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund with any corporation, association, trust or other
organization, including a series or class of such other organization (other than
a merger, consolidation, reorganization or sale of assets with an acquiring fund
that is not an operating entity immediately prior to the transaction), (3) a
sale, lease or exchange of all or substantially all of the Fund's assets (other
than in the regular course of business of the Fund, sales of assets in
connection with the termination of the Fund as provided in the Declaration of
Trust, or sale of assets with an acquiring fund that is not an operating entity
immediately prior to the transaction), (4) in certain circumstances, a
termination of the Fund, (5) removal of Trustees by shareholders, or (6) certain
transactions in which a Principal Shareholder (as defined below) is a party to
the transactions. However, with respect to items (1), (2) and (3) above, if the
applicable transaction has been already approved by the affirmative vote of
two-thirds of the Trustees, then the majority of the outstanding voting
securities as defined in the 1940 Act (a "Majority Shareholder Vote") is
required. In addition, if there are then preferred shares outstanding, with
respect to (1) above, two-thirds of the preferred shares voting as a separate
class shall also be required unless the action has already been approved by
two-thirds of the Trustees, in which case then a Majority Shareholder Vote is
required. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of the shares otherwise required by law or by the terms
of any class or series of preferred shares, whether now or hereafter authorized,
or any agreement between the Fund and any national securities exchange. Further,
in the case of items (2) or (3) that constitute a plan of reorganization (as
such term is used in the 1940 Act) which adversely affects the preferred shares
within the meaning of section 18(a)(2)(D) of the 1940 Act, except as may
otherwise be required by law, the approval of the action in question will also
require the affirmative vote of two thirds of the preferred shares voting as a
separate class provided, however, that such separate class vote shall be by a
Majority Shareholder Vote if the action in question has previously been approved
by the affirmative vote of two-thirds of the Trustees.
Approval of shareholders is not required, however, for any transaction,
whether deemed a merger, consolidation, reorganization or otherwise whereby the
Fund issues shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
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None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the Shares outstanding and entitled to vote.
As noted above, pursuant to the Declaration of Trust, the affirmative
approval of two-thirds of the Shares outstanding and entitled to vote, subject
to certain exceptions, shall be required for the following transactions in which
a Principal Shareholder (as defined below) is a party: (1) the merger or
consolidation of the Fund or any subsidiary of the Fund with or into any
Principal Shareholder; (2) the issuance of any securities of the Fund to any
Principal Shareholder for cash other than pursuant to a dividend reinvestment or
similar plan available to all shareholders; (3) the sale, lease or exchange of
all or any substantial part of the assets of the Fund to any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period); (4) the sale, lease or exchange to the Fund or any subsidiary thereof,
in exchange for securities of the Fund, of any assets of any Principal
Shareholder (except assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purposes of such computation all assets sold,
leased or exchanged in any series of similar transactions within a twelve-month
period). However, shareholder approval for the foregoing transactions shall not
be applicable to (1) any transaction, including, without limitation, any rights
offering, made available on a pro rata basis to all shareholders of the Fund or
class thereof unless the Trustees specifically make such transaction subject to
this voting provision, (2) any transaction if the Trustees shall by resolution
have approved a memorandum of understanding with such Principal Shareholder with
respect to and substantially consistent with such transaction or (3) any such
transaction with any corporation of which a majority of the outstanding shares
of all classes of stock normally entitled to vote in elections of directors is
owned of record or beneficially by the Fund and its subsidiaries. As described
in the Declaration of Trust, a Principal Shareholder shall mean any corporation,
person or other entity which is the beneficial owner, directly or indirectly, of
more than 5% of the outstanding shares and shall include any affiliate or
associate (as such terms are defined in the Declaration of Trust) of a Principal
Shareholder. The above affirmative vote shall be in addition to the vote of the
shareholders otherwise required by law or by the terms of any class or series of
preferred shares, whether now or hereafter authorized, or any agreement between
the Fund and any national securities exchange.
Reference should be made to the Declaration on file with the Commission
for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable to any person in
connection with the Fund property or the affairs of the Fund or for any neglect
or wrongdoing of any officer, employee or agent of the Fund or for the act or
omission of any other Trustee. Nothing in the Declaration, however, protects a
Trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office with or on behalf of the
Fund.
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REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's common shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), NAV, call protection, price, dividend stability,
relative demand for and supply of such shares in the market, general market and
economic conditions and other factors. Because shares of a closed-end investment
company may frequently trade at prices lower than NAV, the Trustees, in
consultation with the Fund's Adviser, Sub-Adviser and any corporate finance
services and consulting agent that the Adviser may retain from time to time, may
review possible actions to reduce any such discount. Actions may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares, or the conversion of the Fund to an
open-end investment company. There can be no assurance, however, that the
Trustees will decide to take any of these actions, or that share repurchases or
tender offers, if undertaken, will reduce a market discount. After any
consideration of potential actions to seek to reduce any significant market
discount, the Trustees may, subject to their fiduciary obligations and
compliance with applicable state and federal laws, authorize the commencement of
a share-repurchase program or tender offer. The size and timing of any such
share repurchase program or tender offer will be determined by the Trustees in
light of the market discount of the common shares, trading volume of the common
shares, information presented to the Trustees regarding the potential impact of
any such share repurchase program or tender offer, and general market and
economic conditions. There can be no assurance that the Fund will in fact effect
repurchases of or tender offers for any of its common shares. Before deciding
whether to take any action if the Fund's common shares trade below NAV, the
Trustees would consider all relevant factors, including the extent and duration
of the discount, the liquidity of the Fund's portfolio, the impact of any action
that might be taken on the Fund or its shareholders and market considerations.
Based on these considerations, even if the Fund's shares should trade at a
discount, the Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
Further, the staff of the Commission currently requires that any tender
offer made by a closed-end investment company for its shares must be at a price
equal to the NAV of such shares on the close of business on the last day of the
tender offer. Any service fees incurred in connection with any tender offer made
by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering Shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will increase the Fund's
expenses and reduce the Fund's net income. Any share repurchase, tender offer or
borrowing that might be approved by the Trustees would have to comply with the
Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and
regulations thereunder.
Although the decision to take action in response to a discount from NAV
will be made by the Trustees at the time they consider such issue, it is the
Trustees' present policy, which may be changed by the Trustees, not to authorize
repurchases of common shares or a tender offer for such shares if (1) such
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transactions, if consummated, would (a) result in the delisting of the common
shares from the American Stock Exchange, or (b) impair status as a registered
closed-end investment company under the 1940 Act; (2) the Fund would not be able
to liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objective and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the American Stock Exchange, (c) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by United States or state banks in which the Fund invests, (d) material
limitation affecting the Fund or the issuers of its portfolio securities by
Federal or state authorities on the extension of credit by lending institutions
or on the exchange of non-U.S. currency, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would have a
material adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Trustees may in the future modify
these conditions in light of experience with respect to the Fund.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's shares outstanding and entitled to
vote; provided, however, that unless otherwise provided by law, if there are
preferred shares outstanding, the affirmative vote of two-thirds of the
preferred shares voting as a separate class shall be required; provided,
however, that such votes shall be by the affirmative vote of the majority of the
outstanding voting securities, as defined in the 1940 Act, if the action in
question was previously approved by the affirmative vote of two-thirds of the
Trustees. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of the shares otherwise required by law or by the terms
of any class or series of preferred shares, whether now or hereafter authorized,
or any agreement between the Fund and any national securities exchange. See the
prospectus under "Closed-End Fund Structure" for a discussion of voting
requirements applicable to conversion of the Fund to an open-end company. If the
Fund converted to an open-end company, the Fund's common shares would no longer
be listed on the American Stock Exchange. Any preferred shares or other
Borrowings would need to be redeemed or repaid upon conversion to an open-end
investment company. Shareholders of an open-end investment company may require
the company to redeem their shares on any business day (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of
redemption. In order to avoid maintaining large cash positions or liquidating
favorable investments to meet redemptions, open-end companies typically engage
in a continuous offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate portfolio management.
The Trustees may at any time propose conversion of the Fund to an open-end
company depending upon their judgment as to the advisability of such action in
light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below NAV will
result in an increase in the NAV of those shares that remain outstanding.
However, there can be no assurance that share repurchases or tenders at or below
NAV will result in the Fund's shares trading at a price equal to their NAV.
Nevertheless, the fact that the Fund's shares may be the subject of repurchase
or tender offers from time to time may reduce any spread between market price
and NAV that might otherwise exist.
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In addition, a purchase by the Fund of its common shares will decrease
the Fund's Managed Assets which would likely have the effect of increasing the
Fund's expense ratio.
NET ASSET VALUE
The NAV of the common shares of the Fund is computed based upon the
value of the Fund's portfolio securities and other assets. The NAV is determined
as of the close of regular trading on the New York Stock Exchange (normally 4:00
p.m. eastern time) no less frequently than weekly on Friday of each week. U.S.
debt securities will normally be priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund calculates NAV
per common share by subtracting the Fund's liabilities (including accrued
expenses, dividends payable, any borrowings of the Fund and the market value of
written call options) and the liquidation value of any outstanding preferred
shares from the Fund's Managed Assets (the value of the securities and other
investments the Fund holds plus cash or other assets, including interest accrued
but not yet received and option premiums) and dividing the result by the total
number of common shares outstanding. The Fund will rely to some extent on
information provided by MLPs, which is not necessarily timely, to estimate
taxable income allocable to MLP units held by the Fund and to estimate
associated deferred tax liability. From time to time the Fund will modify its
estimates and/or assumption regarding its deferred tax liability as new
information becomes available. To the extent the Fund modifies its estimates
and/or assumptions, the net asset value of the Fund would likely fluctuate.
The assets in the Fund's portfolio will be valued daily in accordance
with Valuation Procedures adopted by the Trustees. The Sub-Adviser anticipates
that a majority of the Fund's assets will be valued using market information
supplied by third parties. In the event that market quotations are not readily
available, the pricing service does not provide a valuation for a particular
asset (as is the case for Unlisted Investments), or the valuations are deemed
unreliable, or if events occurring after the close of the principal markets for
particular securities (e.g., U.S. debt securities), but before the Fund values
its assets, would materially affect NAV, the Fund may use a fair value method in
good faith to value the Fund's securities and investments. The use of fair value
pricing by the Fund will be governed by Valuation Procedures established by the
Trustees, and in accordance with the provisions of the 1940 Act.
For purposes of determining the NAV of the Fund, readily marketable
portfolio securities listed on any U.S. exchange other than The Nasdaq Stock
Market are valued, except as indicated below, at the last sale price on the
business day as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the mean of the most recent bid
and asked prices on such day. Securities admitted to trade on Nasdaq are valued
at the Nasdaq Official Closing Price as determined by Nasdaq. Portfolio
securities traded on more than one securities exchange are valued at the last
sale price on the business day as of which such value is being determined at the
close of the exchange representing the principal market for such securities.
U.S. Equity securities traded in the over-the-counter market, but
excluding securities admitted to trading on Nasdaq, are valued at the closing
bid prices. Fixed income securities with a remaining maturity of 60 days or more
will be valued by the Fund using a pricing service. When price quotes are not
available, fair market value is based on prices of comparable securities. Fixed
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income securities maturing within 60 days are valued by the Fund on an amortized
cost basis.
Any derivative transaction that the Fund enters into may, depending on
the applicable market environment, have a positive or negative value for
purposes of calculating NAV. Any option transaction that the Fund enters into
may, depending on the applicable market environment, have no value or a positive
value. Exchange traded options and futures contracts are valued at the closing
price in the market where such contracts are principally traded.
Unlisted Investments--Fair Value. When applicable, fair value is
determined by the Board of Trustees or its designee. In fair valuing the Fund's
investments, consideration is given to several factors, which may include, among
others, the following:
o the projected cash flows for the issuer or borrower;
o the fundamental business data relating to the issuer or borrower;
o an evaluation of the forces which influence the market in which
these securities are purchased and sold;
o the type, size and cost of holding;
o the financial statements of the issuer or borrower;
o the credit quality and cash flow of issuer, based on the
Sub-Adviser's or external analysis;
o the information as to any transactions in or offers for the
holding;
o the price extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable
companies;
o the coupon payments;
o the quality, value and sale ability of collateral securing the
security or loan;
o the business prospects of the issuer/borrower, including any
ability to obtain money or resources from a parent or affiliate
and an assessment of the issuer's or borrower's management;
o the prospects for the issuer's or borrower's industry, and
multiples (of earnings and/or cash flow) being paid for similar
businesses in that industry;
o any decline in value over time due to the nature of the assets -
for example, an entity that has a finite-life concession
agreement with a government agency to provide a service (e.g.,
toll roads and airports); and
-54-
o other relevant factors.
If the Board of Trustees or its designee cannot obtain a market value
or the Board of Trustees or its designee determines that the value of a security
as so obtained does not represent a fair value as of the valuation time (due to
a significant development subsequent to the time its price is determined or
otherwise), fair value for the security shall be determined pursuant to
methodologies established by the Board of Trustees. The Valuation Procedures
provide that direct placements of securities of private companies (i.e.,
companies with no outstanding public securities) ordinarily will be valued at
cost. The Valuation Procedures provide that securities that are convertible into
publicly traded securities (i.e., subordinated units) ordinarily will be valued
at the market value of the publicly traded security less a discount equal in
amount to the discount negotiated at the time of purchase. A report of any
prices determined pursuant to such methodologies will be presented to the Board
of Trustees or a designated committee thereof for approval no less frequently
than quarterly.
The Valuation Procedures also provide that the Board of Trustees or its
designee will review the valuation of the obligation for income taxes separately
for current taxes and deferred taxes due to the differing impact of each on the
anticipated timing distributions by the Fund to its shareholders.
The allocation between current and deferred income taxes is determined
based upon the value of assets reported for book purposes compared to the
respective net tax bases of assets as recognized for federal income tax
purposes. It is anticipated that cash distributions, for MLPs in which the Fund
invests, will not equal the amount of taxable income allocable to the Fund
primarily due to depreciation and amortization recorded by MLPs which generally
results in a portion of the cash distribution received to not be recognizable as
income for tax purposes. The relative portion of such distributions not
recognized for tax purposes will vary among the MLPs, and will also vary year by
year for each MLP. The Board of Trustees or its designee will be able to
directly confirm the portion of each distribution recognized as taxable income
when it receives annual tax reporting information from each MLP. The allocation
between current and deferred income taxes also impacts the determination of the
Fund's earnings and profits, as described in Internal Revenue Code Section 312.
CERTAIN FEDERAL INCOME TAX MATTERS
The following is a summary of certain material U.S. federal income tax
considerations relating to the purchase, ownership and disposition of the Series
B Energy Notes. This summary deals only with holders that hold the Series B
Energy Notes as capital assets and who purchase the Series B Energy Notes in
connection with this offering. It does not address considerations that may be
relevant to you if you are an investor that is subject to special tax rules,
such as a financial institution, insurance company, regulated investment
company, real estate investment trust, investor in pass-through entities, or
holder of the Series B Energy Notes whose "functional currency" is not the
United States dollar, tax-exempt organization, broker or dealer in securities or
currencies, trader in securities or commodities that elects mark to market
treatment, person who holds the Series B Energy Notes in a qualified tax
deferred account such as an IRA, or person that will hold the Series B Energy
Notes as a position in a "straddle," "hedge" or as part of a "constructive sale"
for federal income tax purposes. In addition, this discussion does not address
the application of the U.S. federal alternative minimum tax.
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This summary is based on the provisions of the Code, the applicable
Treasury regulations promulgated thereunder, judicial authority and current
administrative rulings, as in effect on the date of this summary, all of which
may change. Any change could apply retroactively and could affect the continued
validity of this summary.
As stated above, this summary does not discuss all aspects of U.S.
federal income taxation that may be relevant to a particular holder of the
Series B Energy Notes in light of such holder's particular circumstances and
income tax situation. Prospective holders should consult their own tax advisors
as to the specific tax consequences to them of the purchase, ownership and
disposition of the Series B Energy Notes, including the application and the
effect of state, local, foreign and other tax laws and the possible effects of
changes in U.S. or other tax laws. The Internal Revenue Service could disagree
with any conclusions set forth in this section. This summary may not be
sufficient for you to use for the purposes of avoiding penalties under federal
tax laws.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund has elected to be treated as a regular C corporation for U.S.
federal income tax purposes. Thus, the Fund will be subject to U.S. corporate
income tax on its U.S. taxable income. Such taxable income generally would
include all of the Fund's net income from the MLPs. The current U.S. federal
maximum income tax rate for corporations is 35%. In addition, the United States
also imposes a 20% alternative minimum tax on the recalculated alternative
minimum taxable income of an entity treated as a corporation. The Fund may also
be obligated to pay state income tax on its taxable income, either because the
states follow the federal election or because the states separately impose a tax
on the Fund.
The MLPs in which the Fund intends to invest generally are treated as
partnerships for U.S. federal income tax purposes. As a partner in the MLPs, the
Fund will be required to report its allocable share of partnership income, gain,
loss, deduction and expense, whether or not any cash is distributed from the
MLPs.
Although the Fund intends to hold the interests in the MLPs for
investment, the Fund is likely to sell interests in a particular MLP from time
to time. On any such sale, the Fund generally will recognize gain or loss based
upon the difference between the consideration received for tax purposes on the
sale and the Fund's tax basis in the interest sold. The consideration received
is generally the amount paid by the purchaser plus any debt of the MLP allocated
to the Fund that will shift to the purchaser on the sale. The Fund's tax basis
in an MLP is generally the amount paid for the interest, decreased for any
distributions of cash received by the Fund in excess of the Fund's allocable
share of taxable income and decreased by the Fund's allocable share of net
losses. Thus, although cash in excess of taxable income and net tax losses may
create a temporary economic benefit to the Fund, they will increase the amount
of gain (or decrease the amount of loss) on the sale of an interest in an MLP.
No favorable federal income tax rate applies to long-term capital gains for
entities treated as corporations for federal income tax purposes, such as the
Fund. Thus, the Fund will be subject to federal income tax on its long-term
capital gains, like ordinary income, at rates of up to 35%.
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In calculating the Fund's alternative minimum taxable income, certain
percentage depletion deductions and intangible drilling costs may be treated as
items of tax preference. Items of tax preference increase alternative minimum
taxable income and increase the likelihood that the Fund may be subject to the
alternative minimum tax.
The Fund will not be treated as a regulated investment company for
federal income tax purposes. In order to qualify as a regulated investment
company, the income and assets of the Fund must meet certain minimum threshold
tests. Because the Fund intends to invest a substantial portion of its assets in
MLPs, the Fund does not expect to meet such tests. Thus, the regulated
investment company taxation rules do not apply to the Fund or shareholders of
the Fund.
FEDERAL INCOME TAX TREATMENT OF U.S. HOLDERS
The following discussions applies to you only if you are a U.S. holder.
You will be a "U.S. holder" if you are an individual who is a citizen or
resident of the United States, a U.S. domestic corporation, or certain other
persons that are subject to U.S. federal income tax on a net income basis in
respect of an investment in the Series B Energy Notes.
The Fund intends to treat the Series B Energy Notes as indebtedness of
the Fund for federal income tax purposes, and does not intend to treat the
Series B Energy Notes as contingent payment debt obligations or obligations
issued with an original issue discount. This federal income tax discussion
assumes that this treatment is correct under present law. However, there is no
assurance that the Internal Revenue Service or a court would agree with this
characterization, and in such a situation the federal income tax treatment of
owners of the Series B Energy Notes would be different from that described
below.
Taxation of Interest. Payments or accruals of interest on the Series B
Energy Notes generally will be taxable to you as ordinary income at the time
such interest is received (actually or constructively) or accrued, in accordance
with your regular method of accounting for federal income tax purposes.
Purchase, Sale and Redemption of the Series B Energy Notes. Initially,
your tax basis in the Series B Energy Notes acquired generally will be equal to
your cost to acquire such Series B Energy Notes. In certain circumstances,
however, you may have to adjust your tax basis after you purchase your Series B
Energy Notes (for example, in the case of accruals of market discount, premium
and accrued interest, as discussed below). When you sell or exchange any of your
Series B Energy Notes, or if any of your Series B Energy Notes are redeemed, you
generally will recognize gain or loss equal to the difference between the amount
you realize on the transaction (less any accrued and unpaid interest, which will
be subject to tax in the manner described above under "Taxation of Interest")
and your tax basis in the Series B Energy Notes relinquished, subject to various
non-recognition provisions of the Code.
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Except as discussed below with respect to market discount, the gain or
loss that you recognize on the sale, exchange or redemption of any of your
Series B Energy Notes generally will be capital gain or loss. Such gain or loss
generally will be long-term capital gain or loss if the disposed the Series B
Energy Notes were held for more than one year and will be short-term capital
gain or loss if the disposed Series B Energy Notes was held for one year or
less. Net capital gain recognized by a noncorporate U.S. holder generally will
be subject to tax at a lower rate (currently a maximum rate of 15%, although
this rate will increase to 20% for taxable years beginning after 2008) than net
short-term capital gain or ordinary income (currently a maximum rate of 35%).
Net capital gain equals net long-term capital gain minus net short-term capital
loss for the taxable year. The Code, however, treats certain capital gains as
ordinary income in special situations. A Holder's ability to deduct capital
losses may be limited.
Premium, Discount and Accrued Interest. If you purchase the Series B
Energy Notes at a cost greater than its stated principal amount, plus accrued
interest, you will be considered to have purchased the Series B Energy Notes at
a premium, and you generally may elect to amortize this premium as an offset to
interest income, using a constant yield method, over the remaining term of the
Series B Energy Notes. If you make the election to amortize the premium, it
generally will apply to all debt instruments that you hold at the time of the
election, as well as any debt instruments that you subsequently acquire. In
addition, you may not revoke the election without the consent of the IRS. If you
elect to amortize the premium, you will be required to reduce your tax basis in
the Series B Energy Notes by the amount of the premium amortized during your
holding period. If you do not elect to amortize the premium and you hold the
Series B Energy Notes to maturity, you generally will be required to treat the
premium as a capital loss when the Series B Energy Notes are redeemed.
If you purchase the Series B Energy Notes at a price that reflects a
"market discount," any principal payments on, or any gain that you realize on
the disposition of the Series B Energy Notes generally will be treated as
ordinary income to the extent of the market discount that accrued on the Series
B Energy Notes during the time you held such Series B Energy Notes. "Market
discount" is defined under the Code as the excess of the stated redemption price
at maturity over your tax basis of the bond immediately after its acquisition by
you, except that if market discount is less than 0.25% of the stated redemption
price at maturity, multiplied by the number of complete years to maturity after
you acquire the bond, the market discount is considered to be zero. In addition,
you may be required to defer the deduction of all or a portion of any interest
paid on any indebtedness that you incurred or continued to purchase or carry
your Series B Energy Notes that were acquired at a market discount. In general,
market discount will be treated as accruing ratably over the term of the Series
B Energy Notes, or, at your election, under a constant yield method.
-58-
You may elect to include market discount in gross income currently as it
accrues (on either a ratable or constant yield basis), in lieu of treating a
portion of any gain realized on a sale or redemption of the Series B Energy
Notes as ordinary income. If you elect to include market discount on a current
basis, the interest deduction deferral rule described above will not apply and
your tax basis in your Series B Energy Notes will be increased by the amount of
market discount included in your gross income. If you do make such an election,
it will apply to all market discount debt instruments that you acquire on or
after the first day of the first taxable year to which the election applies.
This election may not be revoked without the consent of the IRS.
If the price of your Series B Energy Notes includes accrued interest,
you must include the accrued interest in your tax basis. When you receive this
accrued interest, you must treat it as a return of capital and reduce your tax
basis in the Series B Energy Notes.
This discussion provides only the general rules with respect to the tax
treatment of market discount and premium. The rules, however, are complex and
special rules apply in certain circumstances.
FEDERAL INCOME TAX TREATMENT OF NON-U.S. HOLDERS
The following discussion applies to you if you are a non-U.S. holder.
You will be a "non-U.S. holder" if you are a non-resident alien individual or
a foreign corporation.
The payment of interest on the Series B Energy Notes generally will be
considered "portfolio interest" and thus will generally be exempt from United
States federal withholding tax, provided that the Series B Energy Notes are in
registered form and certain other requirements are met. This exemption will
generally apply to you provided that (1) interest paid on the Series B Energy
Notes is not effectively connected with your conduct of a trade or business in
the United States, (2) you are not a bank whose receipt of interest on the
Series B Energy Notes is described in Section 881(c)(3)(A) of the Code, (3) you
do not actually or constructively own 10 percent or more of the combined voting
power of all classes of the Fund's stock entitled to vote, (4) you are not a
controlled foreign corporation that is related, directly or indirectly to the
Fund under the Code and (5) you satisfy the certification requirements described
below.
To satisfy the certification requirements, either (1) the beneficial
owner of any such Series B Energy Notes must certify, under penalties of
perjury, that such holder is a non-U.S. person and must provide such owner's
name, address and taxpayer identification number, if any, and any other required
information on a properly completed and executed IRS Form W-8BEN, or (2) a
securities clearing organization, bank or other financial institution that holds
customer securities in the ordinary course of its trade or business and holds
the Series B Energy Notes on behalf of the beneficial owner thereof must
certify, under penalties of perjury, that it has received a valid and properly
executed IRS Form W-8BEN from the beneficial holder and comply with certain
other requirements. Special certification rules apply for the Series B Energy
Notes held by a foreign partnership and other intermediaries
Interest on the Series B Energy Notes received by a non-U.S. holder
which is not excluded from U.S. federal withholding tax under the portfolio
interest exemption as described above generally will be subject to withholding
at a 30% rate, except where a non-U.S. holder can claim the benefits of an
applicable tax treaty to reduce or eliminate such withholding tax and such
non-U.S. holder provides the Fund with a properly executed IRS Form W-8BEN
claiming such exemption or reduction.
Any capital gain that a non-U.S. holder realizes on a sale, exchange or
other taxable disposition (including a redemption) of the Series B Energy Notes
generally will be exempt from United States federal income tax, including
withholding tax. This exemption generally will not apply to you if your gain is
effectively connected with your conduct of a trade or business in the U.S. or
you are an individual holder and are present in the U.S. for a period or periods
aggregating 183 days or more in the taxable year of the disposition.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, interest, and premium, if any, paid on the Series B Energy Notes and
to the proceeds of the sale of the Series B Energy Notes (including redemption
proceeds) paid to U.S. holders other than certain exempt recipients (such as
corporations). Information reporting generally will apply to payments of
interest on the Series B Energy Notes to non-U.S. holders and the amount of tax,
if any, withheld with respect to such payments. Copies of the information
returns reporting such interest payments and any withholding also may be made
available to the tax authorities in the country in which the non-U.S. holder
resides under the provisions of an applicable income tax treaty. In addition,
for non-U.S. holders, information reporting will apply to the proceeds of the
sale of the Series B Energy Notes within the United States or conducted through
United States-related financial intermediaries unless the certification
requirements described below have been complied with and the statement described
below in "Taxation of Non-U.S. Holders" has been received (and the payor does
not have actual knowledge or reason to know that the beneficial owner is a
United States person) or the holder otherwise establishes an exemption.
The Fund may be required to withhold, for U.S. federal income tax purposes, a
portion of all taxable payments (including redemption proceeds) payable to
holders of the Series B Energy Notes who fail to provide the Fund with their
correct taxpayer identification number, who fail to make required certifications
or who have been notified by the IRS that they are subject to backup withholding
(or if the Fund has been so notified). Certain corporate and other shareholders
specified in the Code and the regulations thereunder are exempt from backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the holder's U.S. federal income tax liability provided
the appropriate information is furnished to the IRS. If you are a non-U.S.
holder, you may have to comply with certification procedures to establish your
non-U.S. status in order to avoid backup withholding tax requirements. The
certification procedures required to claim the exemption from withholding tax on
interest income outlined below will generally satisfy these requirements.
TAXATION OF NON-U.S. HOLDERS
If you are a non-resident alien individual or a foreign corporation (a
"non-U.S. holder"), the payment of interest on the Series B Energy Notes
generally will be considered "portfolio interest" and thus will generally be
exempt from United States federal withholding tax, provided that the Series B
-59-
Energy Notes are in registered form and certain other requirements are met. This
exemption will generally apply to you provided that (1) interest paid on the
Series B Energy Notes is not effectively connected with your conduct of a trade
or business in the United States, (2) you are not a bank whose receipt of
interest on the Series B Energy Notes is described in Section 881(c)(3)(A) of
the Code, (3) you do not actually or constructively own 10 percent or more of
the combined voting power of all classes of the Fund's stock entitled to vote,
(4) you are not a controlled foreign corporation that is related, directly or
indirectly to the Fund under the Code and (5) you satisfy the certification
requirements described below.
To satisfy the certification requirements, either (1) the beneficial
owner of any such Series B Energy Notes must certify, under penalties of
perjury, that such holder is a non-U.S. person and must provide such owner's
name, address and taxpayer identification number, if any, and any other required
information on a properly completed and executed IRS Form W-8BEN, or (2) a
securities clearing organization, bank or other financial institution that holds
customer securities in the ordinary course of its trade or business and holds
the Series B Energy Notes on behalf of the beneficial owner thereof must
certify, under penalties of perjury, that it has received a valid and properly
executed IRS Form W-8BEN from the beneficial holder and comply with certain
other requirements. Special certification rules apply for the Series B Energy
Notes held by a foreign partnership and other intermediaries
Interest on the Series B Energy Notes received by a non-U.S. holder
which is not excluded from U.S. federal withholding tax under the portfolio
interest exemption as described above generally will be subject to withholding
at a 30% rate, except where a non-U.S. holder can claim the benefits of an
applicable tax treaty to reduce or eliminate such withholding tax and such
non-U.S. holder provides the Fund with a properly executed IRS Form W-8BEN
claiming such exemption or reduction.
Any capital gain that a non-U.S. holder realizes on a sale, exchange or
other taxable disposition (including a redemption) of the Series B Energy Notes
generally will be exempt from United States federal income tax, including
withholding tax. This exemption will generally not apply to you if your gain is
effectively connected with your conduct of a trade or business in the U.S. or
you are an individual holder and are present in the U.S. for a period or periods
aggregating 183 days or more in the taxable year of the disposition.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds. In reports or other communications to shareholders of
the Fund or in advertising materials, the Fund may compare its performance with
that of (1) other investment companies listed in the rankings prepared by
Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services;
publications such as Barrons, Business Week, Forbes, Fortune, Institutional
Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values,
The New York Times, The Wall Street Journal and USA Today; or other industry or
financial publications or (2) the Standard and Poor's Index of 500 Stocks, the
Dow Jones Industrial Average, NASDAQ Composite Index and other relevant indices
and industry publications. Comparison of the Fund to an alternative investment
-60-
should be made with consideration of differences in features and expected
performance. The Fund may obtain data from sources or reporting services, such
as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be
generally accurate.
From time to time, the Fund may quote the Fund's total return,
aggregate total return or yield in advertisements or in reports and other
communications to Shareholders. The Fund's performance will vary depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and type of the respective investment companies' portfolio
securities.
The Fund's "average annual total return" is computed according to a
formula prescribed by the Commission. The formula can be expressed as follows:
Average Annual Total Return will be computed as follows:
ERV = P(1+T)/n/
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5-, or 10-year
periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion).
The Fund may also quote after-tax total returns to show the impact of
assumed federal income taxes on an investment in the Fund. The Fund's total
return "after taxes on distributions" shows the effect of taxable distributions,
but not any taxable gain or loss, on an investment in shares of the Fund for a
specified period of time. The Fund's total return "after taxes on distributions
and sale of Fund shares" shows the effect of both taxable distributions and any
taxable gain or loss realized by the shareholder upon the sale of fund shares at
the end of a specified period. To determine these figures, all income,
short-term capital gain distributions, and long-term capital gains distributions
are assumed to have been taxed at the highest marginal individualized federal
tax rate then in effect. Those maximum tax rates are applied to distributions
prior to reinvestment and the after-tax portion is assumed to have been
reinvested in the Fund. State and local taxes are ignored.
Actual after-tax returns depend on a shareholder's tax situation and
may differ from those shown. After-tax returns reflect past tax effects and are
not predictive of future tax effects.
-61-
Average Annual Total Return (After Taxes on Distributions) will be
computed as follows:
ATV/D/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV/D/ = ending value of a hypothetical $1,000 investment made
at the beginning of the period, at the end of the period
(or fractional portion thereof), after taxes on fund
distributions but not after taxes on redemptions.
Average Annual Total Return (After Taxes on Distributions and Sale of
Fund Shares) will be computed as follows:
ATV/DR/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions
and redemption)
n = number of years
ATV/DR/ = ending value of a hypothetical $1,000 investment made
at the beginning periods, at the end of the periods (or
fractional portion thereof), after taxes on fund
distributions and redemptions.
Quotations of yield for the Fund will be based on all investment income
per share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
Yield = 2 [( a-b/cd +1)/6/ - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
Past performance is not indicative of future results. At the time
Shareholders sell their shares, they may be worth more or less than their
original investment.
EXPERTS
The Financial Statements of the Fund as of and for the year ended
November 30, 2005, appearing in this Statement of Additional Information have
been audited by Deloitte & Touche LLP, independent registered public accounting
firm, as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
-62-
experts in accounting and auditing. Deloitte & Touche LLP provides accounting
and auditing services to the Fund. The principal business address of Deloitte &
Touche LLP is 111 South Wacker Drive, Chicago, Illinois 60606.
CUSTODIAN, TRUSTEE AND AUCTION AGENT
PFPC Trust Company, 301 Bellevue Parkway, Wilmington, Delaware 19809,
serves as custodian for the Fund. As such, PFPC Trust Company has custody of all
securities and cash of the Fund and attends to the collection of principal and
income and payment for and collection of proceeds of securities bought and sold
by the Fund. PFPC Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809 is the
transfer, registrar, dividend disbursing agent and shareholder servicing agent
for the Fund and provides certain clerical, bookkeeping, shareholder servicing
and administrative services necessary for the operation of the Fund and
maintenance of shareholder accounts. PFPC Inc. also provides certain accounting
and administrative services to the Fund pursuant to an Administration and
Accounting Services Agreement, including maintaining the Fund's books of
account, records of the Fund's securities transactions, and certain other books
and records; acting as liaison with the Fund's independent public accountant and
providing the accountant with certain Fund accounting information; and providing
other continuous accounting and administrative services.
Deutsche Bank National Trust Company is the Trustee under the Indenture
and acts as transfer agent, registrar, interest disbursing agent and redemption
agent with respect to the Series B Energy Notes. Deutsche Bank Trust Company
Americas, an affiliate of Deutsche Bank National Trust Company, serves as the
Auction Agent with respect to the Series B Energy Notes.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Commission, Washington, D.C. The Fund's Prospectus and this Statement
of Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the Series B Energy Notes
offered hereby, reference is made to the Fund's Registration Statement.
Statements contained in the Fund's Prospectus and this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
-63-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF ENERGY INCOME AND GROWTH FUND:
We have audited the accompanying statement of assets and liabilities of
Energy Income and Growth Fund (the "Fund"), including the portfolio of
investments, as of November 30, 2005, the related statements of operations and
cash flows for the year then ended, and the statements of changes in net assets
and the financial highlights for the year then ended and for the period June 17,
2004 (inception) through November 30, 2004. 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 November 30, 2005, by correspondence with the Fund's
custodian. 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 Fund as of November 30, 2005, the results of its operations and
its cash flows, the changes in its net assets, and the financial highlights for
the respective stated periods, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
January 13, 2006
F-1
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2005
MARKET
SHARES VALUE
MASTER LIMITED PARTNERSHIPS - 133.0%
OIL, GAS & CONSUMABLE FUELS - 133.0%
278,290 Alliance Resource Partners, L.P........................ $11,075,942
131,300 Atlas Pipeline Partners, L.P........................... 5,454,202
45,600 Boardwalk Pipeline Partners, L.P.*..................... 841,320
357,143 Clearwater Natural Resources, L.P.+.................... 7,142,860
40,000 Copano Energy, LLC..................................... 1,499,600
253,201 Copano Energy, LLC+.................................... 9,365,591
317,272 Crosstex Energy, L.P................................... 10,723,794
16,892 Enbridge Energy Partners, L.P.......................... 777,032
567,370 Energy Transfer Partners, L.P.......................... 19,160,085
176,425 Enterprise GP Holdings, L.P............................ 6,086,662
459,998 Enterprise Product Partners, L.P....................... 11,513,750
23,396 Global Partners, L.P.*................................. 458,328
73,100 Hiland Partners, L.P................................... 2,900,608
250,000 Holly Energy Partners, L.P............................. 9,670,000
148,000 Inergy Holdings, L.P................................... 5,283,600
385,275 Inergy, L.P............................................ 9,728,194
140,771 Kinder Morgan Energy Partners, L.P..................... 7,016,027
113,930 Magellan Midstream Partners, L.P....................... 3,662,849
347,826 Magellan Midstream Partners, L.P.+..................... 10,981,319
230,178 MarkWest Energy Partners, L.P.......................... 10,836,780
25,477 Martin Midstream Partners, L.P......................... 814,958
128,169 Natural Resource Partners, L.P......................... 7,381,253
7,154 Northern Border Partners, L.P.......................... 305,404
81,300 Pacific Energy Partners, L.P.+......................... 2,258,481
203,843 Pacific Energy Partners, L.P........................... 6,048,022
344,956 Plains All American Pipeline, L.P...................... 13,701,652
21,500 Suburban Propane Partners, L.P......................... 551,475
14,000 Teekay LNG Partners, L.P............................... 392,420
70,000 U.S. Shipping Partners, L.P............................ 1,590,400
205,291 Valero, L.P............................................ 10,777,778
153,600 Williams Partners, L.P................................. 5,171,712
-------------
193,172,098
-------------
TOTAL MASTER LIMITED PARTNERSHIPS...................... 193,172,098
(Cost $147,538,223) -------------
RIGHTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
17 Clearwater Natural Resources, L.P. - Rights+*.......... 0
-------------
TOTAL RIGHTS........................................... 0
(Cost $0) -------------
TOTAL INVESTMENTS - 133.0%............................. $193,172,098
(Cost $147,538,223)**
NET OTHER ASSETS & LIABILITIES - (9.6)%................ (13,942,571)
-------------
ENERGY NOTES PAYABLE - (23.4)%......................... (34,000,000)
-------------
NET ASSETS - 100.0%.................................... $145,229,527
-------------
--------------------
* As of November 30, 2005, this security has not paid a distribution to the
Fund.
** Aggregate cost for federal income tax purposes is $144,286,270.
+ Securities are restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended.
Before they are registered, these securities may only be resold, in
transactions exempt from registration, to qualified institutional buyers.
Market value is determined in accordance with procedures adopted by the
Board of Trustees (See Note 2D).
SEE NOTES TO FINANCIAL STATEMENTS.
F-2
ENERGY INCOME AND GROWTH FUND
NOVEMBER 30, 2005
STATEMENT OF ASSETS AND LIABILITIES
ASSETS:
Investments, at value
(Cost $147,538,223).......................................................................... $193,172,098
Cash............................................................................................. 2,981,413
Interest rate cap (cost $488,392)................................................................ 597,662
Prepaid expenses................................................................................. 482,398
Receivables:
Investment securities sold.................................................................. 174,367
Interest.................................................................................... 5,015
------------
Total Assets................................................................................ 197,412,953
------------
LIABILITIES:
Energy notes payable............................................................................. 34,000,000
Deferred income tax liability.................................................................... 17,239,691
Payables:
Income taxes................................................................................ 532,854
Audit and legal fees........................................................................ 140,549
Investment advisory fees.................................................................... 112,210
Interest on energy notes.................................................................... 100,351
Printing fees............................................................................... 27,607
Administrative fees......................................................................... 14,961
Accrued expenses................................................................................. 15,203
------------
Total Liabilities........................................................................... 52,183,426
------------
NET ASSETS....................................................................................... $145,229,527
------------
NET ASSETS CONSIST OF:
Accumulated net realized loss on investments sold, net of income taxes........................... $(2,632,588)
Net unrealized appreciation of investments and interest rate cap, net of income taxes............ 29,873,731
Par value........................................................................................ 64,470
Paid-in capital.................................................................................. 117,923,914
------------
Total Net Assets............................................................................ $145,229,527
------------
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................. $22.53
------------
Number of Common Shares Outstanding.............................................................. 6,446,995
------------
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
ENERGY INCOME AND GROWTH FUND
FOR THE YEAR ENDED
NOVEMBER 30, 2005
STATEMENT OF OPERATIONS
INVESTMENT INCOME:
Interest......................................................................................... $60,181
------------
Total investment income................................................................. 60,181
------------
EXPENSES:
Investment advisory fees......................................................................... 1,805,061
Interest expense................................................................................. 1,118,728
Audit and legal fees............................................................................. 365,820
Administration fees.............................................................................. 180,504
Trustees' fees and expenses...................................................................... 59,766
Printing fees.................................................................................... 47,046
Custodian fees................................................................................... 17,428
Other............................................................................................ 282,345
------------
Total expenses.......................................................................... 3,876,698
Fees waived by the investment advisor................................................... (451,281)
------------
Net expenses..................................................................................... 3,425,417
------------
NET INVESTMENT LOSS BEFORE TAXES: (3,365,236)
Current federal income tax benefit..................................... 3,145,420
Current income tax expense - other..................................... (44,743)
Deferred federal income tax expense.................................... (1,913,878)
Deferred income tax expense - other.................................... (28,486)
------------
Total income tax benefit.................................................................... 1,158,313
------------
Net investment loss.............................................................................. (2,206,923)
------------
NET REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS
AND INTEREST RATE CAP TRANSACTION:
Net realized gain/(loss) on:
Securities transactions..................................................................... 8,907,484
Written option transactions................................................................. (186,522)
------------
Net realized gain on investments during the period before taxes.................................. 8,720,962
------------
Current federal income tax expense..................................... (3,621,140)
Deferred federal income tax benefit.................................... 567,034
Deferred income tax benefit - other.................................... 5,053
------------
Total income tax expense.................................................................... (3,049,053)
------------
Net realized gain on investments during the period............................................... 5,671,909
Net increase from payment by the investment advisor and sub-advisor before taxes*................ 35,403
Current federal income tax expense.......................................................... (12,391)
------------
Net increase from payment by the investment advisor and sub-advisor*............................. 23,012
Net change in unrealized appreciation/(depreciation) of:
Investments................................................................................. 19,285,879
Written option transactions................................................................. 183,243
Interest rate cap transaction............................................................... 109,270
------------
Net change in unrealized appreciation/(depreciation) of investments and
interest rate cap transaction during the period before tax:.................................. 19,578,392
Deferred federal income tax expense.................................... (6,831,133)
Deferred income tax expense - other.................................... (60,869)
------------
Total income tax expense.................................................................... (6,892,002)
------------
Net change in unrealized appreciation/(depreciation) of investments and interest rate cap
transaction during the period................................................................ 12,686,390
------------
Net realized and unrealized gains on investments and interest rate cap transaction............... 18,381,311
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................. 16,174,388
------------
--------------------
* See Note 3 in Notes to Financial Statements.
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
ENERGY INCOME AND GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR PERIOD
ENDED ENDED
11/30/2005 11/30/2004*
OPERATIONS:
Net investment loss.......................................................... $(2,206,923) $(824,050)
Net realized gain on investments during the period........................... 5,671,909 316,965
Net change in unrealized appreciation/(depreciation) of investments and
interest rate cap transaction during the period........................... 12,686,390 17,187,341
Net increase from payment by the investment advisor and sub-advisor**........ 23,012 --
------------ ------------
Net increase in net assets resulting from operations......................... 16,174,388 16,680,256
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain on investments............................................. (5,613,501) --
Return of capital............................................................ (2,915,894) (2,081,702)
------------ ------------
Total distributions to shareholders.......................................... (8,529,395) (2,081,702)
CAPITAL TRANSACTIONS:
Net proceeds from sale of 6,405,236 Common Shares............................ -- 122,083,798
Proceeds from 26,352 and 15,407 Common Shares reinvested, respectively....... 591,262 310,920
------------ ------------
Total capital transactions................................................... 591,262 122,394,718
------------ ------------
Net increase in net assets................................................... 8,236,255 136,993,272
NET ASSETS:
Beginning of period.......................................................... 136,993,272 --
------------ ------------
End of period................................................................ $145,229,527 $136,993,272
------------ ------------
Accumulated net investment loss at end of period............................. $ -- $ (507,085)
------------ ------------
--------------------
* The Fund commenced operations on June 17, 2004.
** See Note 3 in Notes to Financial Statements.
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
ENERGY INCOME AND GROWTH FUND
FOR THE YEAR ENDED
NOVEMBER 30, 2005
STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations, after income tax
expense.........................................................................$16,174,388
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Changes in assets and liabilities:
Increase in investments, at value*..................................... (19,014,095)
Increase in interest rate cap**........................................ (597,662)
Increase in interest receivable........................................ (3,414)
Decrease in dividends receivable....................................... 44,555
Increase in prepaid expenses........................................... (482,398)
Decrease in receivable for investment securities sold.................. 731,845
Decrease in options written, at value***............................... (397,435)
Decrease in payable for investment securities purchased................ (2,048,358)
Increase in interest expense payable................................... 25,332
Increase in investment advisory fees payable........................... 11,145
Increase in audit and legal fees payable............................... 77,195
Increase in printing fees payable...................................... 1,486
Increase in administrative fees payable................................ 1,486
Increase in custodian fees payable..................................... (4,323)
Decrease in accrued expenses........................................... 1,599
Increase in income tax liability....................................... 8,795,133
------------
CASH PROVIDED BY OPERATING ACTIVITIES......................................... $3,316,479
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid (net of proceeds from 26,352 shares reinvested)....... (7,938,133)
Repayment of loan outstanding............................................ (30,000,000)
Issuance of Energy Notes................................................. 34,000,000
------------
CASH USED BY FINANCING ACTIVITIES............................................. (3,938,133)
------------
Decrease in cash.............................................................. (621,654)
Cash at beginning of year..................................................... 3,603,067
------------
Cash at end of year........................................................... $2,981,413
------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................................ $1,093,396
--------------------
* Includes net change in unrealized appreciation on investments of
$19,285,879.
** Includes net change in unrealized appreciation on interest rate cap
transaction of $109,270.
*** Includes net change in unrealized appreciation on written option
transactions of $183,243.
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
ENERGY INCOME AND GROWTH FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR PERIOD
ENDED ENDED
11/30/2005 11/30/2004*
Net asset value, beginning of period......................................... $21.34 $19.10
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss.......................................................... (0.34) (0.13)
Net realized and unrealized gain on investments and interest rate cap
transaction............................................................... 2.86 2.74
-------- --------
Total from investment operations after income tax expense.................... 2.52 2.61
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net realized gain on investments............................................. (0.88) --
Return of capital............................................................ (0.45) (0.33)
--------- ---------
Total from distributions..................................................... (1.33) (0.33)
--------- ---------
Common Shares offering costs charged to paid-in capital...................... -- (0.04)
Net asset value, end of period............................................... $22.53 $21.34
====== ======
Market value, end of period.................................................. $20.92 $22.12
====== ======
TOTAL RETURN BASED ON NET ASSET VALUE (A)+................................... 11.96%(f) 13.53%
======== ========
TOTAL RETURN BASED ON MARKET VALUE (B)+...................................... 0.29% 12.38%
========= ========
Net assets, end of period (in 000's)......................................... $145,230 $136,993
RATIOS OF EXPENSES TO AVERAGE NET ASSETS:
Net expense ratio excluding interest expense.............................. 1.57% 1.36%**
Total expense ratio....................................................... 2.64% 2.20%**
Net expense ratio......................................................... 2.33% 1.91%**
Net expense ratio including tax expenses (g).............................. 8.31% 18.09%**
RATIOS OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS:
Net investment loss ratio before tax expenses............................. (2.29)% (1.49)%**
Net investment loss ratio including tax expenses (g)...................... (8.27)% (17.67)%**
Portfolio turnover rate...................................................... 38.18% 34.86%
DEBT:
Total Energy Notes outstanding ($25,000 per note)............................ 1,360 N/A
Principal amount and market value per Energy Note (d)........................ $25,074 N/A
Asset coverage per Energy Note (c)........................................... $131,786 N/A
Total loan outstanding (in 000's)............................................ N/A $30,000
Asset coverage per $1,000 senior indebtedness (c)............................ N/A $5,566
--------------------
* The Fund commenced operations on June 17, 2004.
** Annualized.
(a) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if
any, at prices obtained by the Dividend Reinvestment Plan and changes in
net asset value per share and does not reflect sales load.
(b) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if
any, at prices obtained by the Dividend Reinvestment Plan and changes in
Common Share market price per share, all based on Common Share market
price per share.
(c) Calculated by subtracting the Fund's total liabilities (not including
loan outstanding) from the Fund's total assets and dividing this by the
amount of senior indebtedness.
(d) Includes accumulated and unpaid interest.
(e) Calculated by subtracting the Fund's total liabilities (not including the
Energy Notes) from the Fund's total assets and dividing this by the
number of Energy Notes outstanding.
(f) In 2005, the Fund received reimbursements from the investment advisor and
sub-advisor. This reimbursement had no effect on the Fund's total return
for Common Shares.
(g) Includes tax expense associated with each component of the Statement of
Operations.
+ Total return is not annualized for periods less than one year.
SEE NOTES TO FINANCIAL STATEMENTS.
F-7
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
1. FUND DESCRIPTION
Energy Income and Growth Fund (the "Fund") is a non-diversified,
closed-end management investment company organized as a Massachusetts business
trust on March 25, 2004, and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FEN on the American Stock
Exchange.
The Fund's investment objective is to seek a high level of after-tax
total return with an emphasis on current distributions paid to shareholders. The
Fund seeks to provide its shareholders with an efficient vehicle to invest in a
portfolio of cash-generating securities Of energy companies. The Fund will focus
on investing in publicly-traded master limited partnerships ("MLPs") and related
public entities in the energy sector, which Fiduciary Asset Management, LLC (the
"Sub-Advisor") believes offer opportunities for income and growth. Due to the
tax treatment of cash distributions made by MLPs to then-investors, a portion of
the distributions received may be tax deferred, thereby maximizing cash
available for distribution by the Fund to its shareholders, There can be no
assurance that the Fund's investment objective will be achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results Could differ
from those estimates.
A. PORTFOLIO VALUATION:
The Fund will determine the net asset value of its Common Shares as of
the close of regular session trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, no less frequently than weekly on Friday of
each week. Net asset value is computed by dividing the value of all assets of
the Fund (including option premiums, accrued interest and dividends), less all
Fund liabilities (including accrued expenses, dividends payable, Current Lind
deferred income taxes, any borrowings of the Fund and the market value of
written call options) by the total number of shares outstanding. The Fund will
rely to some extent on information provided by the MLPs, which is not
necessarily timely, to estimate taxable income allocable to the MLP units held
in the Fund's portfolio and to estimate the associated deferred tax liability.
From time to time, the Fund will modify its estimates and/or assumptions
regarding its deferred tax liability as new information becomes available. To
the extent the Fund modifies its estimates and/or assumptions, the net asset
value of the Fund Would likely fluctuate.
The Fund's investments are valued at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. Portfolio securities
listed on any exchange other than the NASDAQ National Market ("NASDAQ") are
valued at the last sale price on the business day as of which such value is
F-8
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
being determined. If there has been no sale on such day, the securities are
valued at the mean of the most recent bid and asked prices on such day.
Securities traded on the NASDAQ are valued at the NASDAQ Official Closing Price
as determined by NASDAQ. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined at the close of the exchange representing the
principal market for such securities. Portfolio Securities traded in the
over-the-counter market, but excluding securities traded on the NASDAQ, are
valued at the closing bid prices. Fixed income securities with a remaining
maturity of 60 days or more will be valued by the Fund using a pricing service.
When price quotes are not available, fair market value is based on prices of
comparable securities. Short-term investments that mature in less than 60 days
are valued at amortized cost.
Exchange-traded options and futures contracts are valued at the closing
price in the market where Such contracts are principally traded.
B. OPTION CONTRACTS:
The Fund may enter into various hedging and strategic transactions to
seek to reduce interest rate risks arising from any use of financial leverage by
the Fund, to facilitate portfolio management and mitigate risks.
Call options are contracts representing the right to purchase a common
stock at a specified price (the "strike price") through a specified future date
(the "expiration date"). The price of the option is determined from trading
activity in the broad options market, and generally reflects the relationship
between the Current market price for the underlying common stock and the strike
price, as well as the time remaining until the expiration date. The Fund will
write call options only if they are "covered." In the case of a call option on a
common stock or other security, the option is "covered" if the Fund owns the
security underlying the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or, if additional cash
consideration is required, cash or other assets determined to be liquid by the
Sub-Advisor in such amount are segregated by the Fund's Custodian) upon
conversion or exchange of other securities held by the Fund.
If an option written by the Fund expires unexercised, the Fund realizes
on the expiration date a capital gain equal to the premium received by the Fund
at the time the option was written. If an option purchased by the Fund expires
unexercised, the Fund realizes a capital loss equal to the premium paid at the
time the option expires. Prior to the earlier of exercise or expiration, an
exchange-traded option may he closed out by an offsetting purchase or sale of an
option of the same series (type, underlying security, exercise price and
expiration). There can be no assurance, however, that a closing purchase or sale
transaction can be effected when the Fund desires. The Fund may sell put or call
options it has previously purchased, which Could result in a net gain or loss
depending on whether the amount realized on the sale is more or less than the
premium and other transaction costs paid on the put or call option purchased.
F-9
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized
gains and losses from securities transactions are recorded on the identified
cost basis. Dividend income is recorded on the ex-dividend date. Interest income
is recognized and recorded on the accrual basis, including amortization of
premiums and accretion of discounts.
Distributions received from the Fund's investments in MLPs generally
are comprised of return of capital from the MLP to the extent of the cost basis
of such MLP investments. Cumulative distributions received in excess of the
Fund's cost basis in a MLP generally are recorded as dividend income.
Securities purchased or sold on a when-issued or delayed-delivery basis
may be settled a month or more after the trade date; interest income On Such
securities is not accrued until settlement date. The Fund instructs the
Custodian to segregate assets of the Fund with a current value at least equal to
the amount Of its when-issued purchase commitments.
D. RESTRICTED SECURITIES:
The Fund may invest LIP to 35(/c of its Managed Assets, the average
daily gross asset value of the Fund minus accrued liabilities (excluding the
principal of any borrowings), in restricted securities. Restricted securities
are securities that cannot be offered for public sale without first being
registered Under the Securities Act of 1933, as amended. The Fund Currently
holds the restricted Securities shown in the following table consisting of
limited partnership units of Clearwater Natural Resources, L.P. ("Clearwater"),
limited liability company units of Copano Energy, LLC ("Copano"), and limited
partnership units of Pacific Energy Partners, L.P. ("Pacific"), which were
purchased in private placement transactions. Restricted securities are Valued at
fair value in accordance with Procedures adopted by the Fund's Board of
Trustees.
CARRYING
CARRYING COST PER VALUE PER
VALUE PER SHARE AT SHARE AT
SHARE ACQUISITION ACQUISITION 11/30/05
ACQUISITION 11/30/05 DATE DATE VALUE % OF
SECURITY DATE SHARES (RESTRICTED) (RESTRICTED) (UNRESTRICTED) (RESTRICTED) NET ASSETS
Clearwater Natural
Resources, L.P. 8/01/05 357,143 $20.00 $20.00 N/A $7,142,860 4.92%
Copano Energy, LLC 8/01/05 253,201 36.99 28.21 $40.50 9,365,591 6.45
Pacific Energy
Partners, L.P. 9/30/05 81,300 27.78 30.75 65.31 2,258,481 1.56
Magellan Midstream
Partners, L.P. 4/13/05 347,826 31.57 28.75 30.92 10,981,319 7.56
---------- ----------- -------
1,039,470 $29,748,251 20.49%
========= =========== =======
--------------------
* This is the carrying value of unrestricted shares of Copano at 8/01/05,
which is the date of purchase and date an enforceable right to acquire
the restricted Copano securities was obtained by the Fund.
** This is the carrying value of unrestricted shares of Pacific at 9/30/05,
which is the date of purchase and date an enforceable right to acquire
the restricted Pacific securities was obtained by the Fund.
F-10
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
E. DISTRIBUTIONS TO SHAREHOLDERS:
The Fund intends to make quarterly 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, interest from debt instruments and income from other investments held by
the Fund less operating expenses, including taxes. Distributions made from
current and accumulated earnings and profits of the Fund will be taxable to
shareholders as dividend income.
Distributions that are in an amount greater than tile 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 its Common Shares, and such
distributions would correspondingly reduce the amount of realized loss upon the
sale of the Common Shares. A reduction in the shareholder's basis would increase
the realized gain or reduce the amount of realized loss upon the sale of the
Common Shares. Additionally, distributions not paid front current and
accumulated earnings and profits that exceed a shareholder's tax basis in its
Common Shares will be taxed as a capital gain.
Distributions paid during the year ended November 30, 2005, totaled
$8,529,395; of those distributions, $5,613,501 have been characterized as net
investment income and $2,915,894 have been characterized as return of capital
for tax purposes. Distributions will automatically be reinvested in additional
Common Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder. Permanent differences incurred
during the year ended November 30, 2005, resulting from differences in book and
tax accounting and have been reclassified at year end to reflect a decrease in
accumulated net investment loss by $2,714,008 and a decrease to accumulated net
realized gain on investments sold by $2,714,008. Net assets were not affected by
this reclassification.
F. INCOME TAXES:
The Fund has elected to be treated as a regular C corporation for U.S.
federal income tax purposes and as such will be obligated to pay federal and
applicable state and foreign corporate taxes on its taxable income. The Fund's
tax expense or benefit is included in the Statement of Operations based on the
component of income or gains/(losses) to which such expense or benefit relates.
The current U.S. federal maximum graduated income tax rate for corporations is
35%. In addition, the United States also imposes a 20% alternative minimum tax
on the recalculated alternative minimum taxable income of an entity treated as a
corporation. This differs from most investment companies, which elect to be
treated as "regulated investment companies" under the United States Internal
Revenue Code of 1986, as amended.
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 he
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
F-11
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
distributions received have not exceeded the Fund's adjusted tax basis in the
respective MLPs. To the extent that distributions from an MLP exceed the Fund's
adjusted tax basis, the Fund will recognize a taxable capital gain.
For the year ended November 30, 2005, distributions of $11,036,973
received from MLPs have been classified as return of capital. The cost basis of
applicable MLPs has been reduced accordingly.
The Fund's provision for income taxes is Calculated in accordance with
SFAS No. 109 Accounting for Income Taxes and consists of the following:
Current federal income taxes..................... $488,111
Current other taxes.............................. 44,743
Deferred federal income taxes.................... 8,177,977
Deferred other income taxes...................... 84,302
----------
Total income tax expense......................... $8,795,133
----------
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. At November 30, 2005,
the Fund had a net operating loss for state income tax purposes of $990,266. The
Fund's 2005 income tax provision includes a full valuation allowance against the
deferred tax assets associated with this net operating loss. Components of the
Fund's deferred tax assets and liabilities as of November 30, 2005 are as
follows:
DEFERRED TAX ASSETS:
State net operating loss......................... $56,897
State income taxes............................... 48,627
-----------
Total deferred tax assets........................ 105,524
Less: valuation allowance........................ (56,673)
-----------
Net deferred tax asset........................... $48,851
-----------
DEFERRED TAX LIABILITIES:
Unrealized gains on investment securities........ $17,287,771
Other............................................ 771
-----------
Total deferred tax liabilities................... $17,288,542
-----------
Total net deferred tax liability................. $17,239,691
-----------
Total income taxes differ from the amount computed by applying the
federal statutory income tax rate of 35% to net investment income and realized
and unrealized gains on investments.
Application of statutory income tax rate......... $8,739,332
State income taxes, net.......................... 19,335
Change in valuation allowance.................... 36,838
Other............................................ (372)
----------
Total............................................ $8,795,133
----------
F-12
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
G. EXPENSES:
The Fund will pay all expenses directly related to its operations.
H. INTEREST RATE CAP:
The Fund has entered into an interest rate cap transaction with Lehman
Brothers Special Financing Inc. for the purpose of limiting the impact that
higher short-term interest rates would have on the leverage costs of the Fund.
The transaction has a notional amount of $34,000,000, a cap rate of 5.00% per
annum and a termination date of May 3, 2010 and is marked to market with the
change in value reflected in Unrealized appreciation/(depreciation) in the
Statement of Operations. The initial cost of the transaction, $552,500, was
capitalized and is being amortized to expense on a straight line basis over the
term of the transaction.
I. ORGANIZATION AND OFFERING COSTS:
Organization costs consist of costs incurred to establish the Fund and
enable it to legally do business. These costs include filing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consist of legal fees pertaining
to the Fund's shares offered for sale, registration fees, underwriting fees, and
printing of the initial prospectus, among other fees. First Trust Advisors L.P.
("First Trust"), the Fund's investment advisor, has paid all organization
expenses. The Fund's estimated share of Common Share offering costs, $256,209,
was recorded as a reduction of the proceeds from the sale of Common Shares
during the period ended November 30, 2004.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace
Partners of DuPage L.P., and one general partner, The Charger Corporation. First
Trust serves as investment advisor to the Fund pursuant to an Investment
Management Agreement. First Trust is responsible for the ongoing monitoring of
the Fund's investment portfolio, managing the Fund's business affairs and
certain administrative services necessary for the management of the Fund. For
these services, First Trust is entitled to a monthly fee calculated at an annual
rate of 1.00% of the Fund's Managed Assets, the average daily gross asset value
of the Fund minus accrued liabilities.
During the year, the Fund's investment advisor and sub-advisor
reimbursed the Fund for $35,403 in connection with an affiliated transaction.
Fiduciary Asset Management, LLC serves as the Fund's Sub-Advisor and
manages the Fund's portfolio Subject to First Trust's supervision. The
Sub-Advisor receives a portfolio management fee of 0.50% of Managed Assets that
is paid monthly by First Trust from its investment advisory fee.
F-13
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
First Trust has agreed to waive fees and reimburse the Fund for
expenses in an amount equal to 0.25% of the average daily Managed Assets of the
Fund through June 24, 2006. The Sub-Advisor has agreed to bear a portion of this
fee waiver and expense reimbursement obligation by reducing the amount of its
full sub-advisory fee by 0.382% of the average daily Managed Assets. Waivers and
reimbursements are reported as "fees waived by the investment advisor" on the
Statement of Operations.
PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary of The PNC
Financial Services Group, Inc., serves as the Fund's Administrator and Transfer
Agent in accordance with certain fee arrangements. PFPC Trust Company, an
indirect, majority-owned subsidiary of The PNC Financial Services Group, Inc.,
serves as the Fund's Custodian in accordance with certain fee arrangements.
The Fund pays each Trustee who is not an officer or employee of First
Trust or any of its affiliates an annual retainer of $10,000, which includes
compensation for all regular quarterly board meetings and regular committee
meetings. No additional meeting fees are paid in connection with regular
quarterly board meetings or regular committee meetings. Additional fees of
$1,000 and $500 are paid to non-interested Trustees for special hoard meetings
and non-regular committee meetings, respectively. These additional fees are
shared by the funds in the First Trust fund complex that participate in the
particular meeting and are not per fund fees. Trustees are also reimbursed for
travel and out-of-pocket expenses in connection with all meetings.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, for the year ended November 30, 2005, were
$73,688,256 and $82,867,524, respectively.
As of November 30, 2005, the aggregate gross unrealized appreciation
for all securities in which there was an excess of value over tax cost was
$49,152,906 and the aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value was $267,078.
WRITTEN OPTION ACTIVITY FOR THE FUND WAS AS FOLLOWS:
NUMBER
OF
CONTRACTS PREMIUMS
WRITTEN OPTIONS
Options outstanding at November 30, 2004........ 1,139 $214,192
Options written................................. 65 21,969
Options closed.................................. (1,204) (236,161)
------ --------
Options Outstanding at November 30, 2005........ -- $--
------ --------
F-14
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
5. COMMON SHARES
As of November 30, 2005, 6,446,995 of $0.01 par value Common Shares
were issued and outstanding. An unlimited number of Common Shares has been
authorized under the Fund's Dividend Reinvestment Plan.
COMMON SHARE TRANSACTIONS WERE AS FOLLOWS:
YEAR ENDED PERIOD ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2004
-------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
Proceeds from Common Shares sold............. -- $-- 6,405,236 $122,340,007
Issued as reinvestment of dividends under the
Dividend Reinvestment Plan................. 26,352 591,262 15,407 310,920
Offering costs of Common Shares.............. -- -- -- (256,209)
------ -------- --------- ------------
26,352 $591,262 6,420,643 $122,394,718
------ -------- --------- ------------
6. ENERGY NOTES
The Fund's Declaration of Trust authorizes the issuance of notes as
determined by the Board of Trustees without the approval of Common Shareholders.
As of November 30, 2005, the Fund has 1,360 Series A Energy Notes ("Energy
Notes") outstanding at a principal value of $25,000 per note. The principal
amount of the Energy Notes will be due and payable on March 2, 2045. The Energy
Notes offering costs of $158,761 and commissions of $340,000 paid directly to
Lehman Brothers were capitalized and are being amortized to expense on a
straight line basis over the term of the Energy Notes.
An auction of the Energy Notes is generally held every 28 days. The
Energy Notes will pay interest at an annual rate that may vary for each auction
rate period. Existing note holders may submit an order to buy, sell or hold such
notes on each auction date.
The annual interest rate in effect as of November 30, 2005, was 4.014%.
The interest rate, as set by the auction process, is generally expected to vary
with short-term interest rates. The high and low annual interest rates during
the year ended November 30, 2005, were 4.014% and 2.466%, respectively, and the
average interest rate was 3.186%.
7. CREDIT AGREEMENT
The Fund has a credit agreement with the Custodial Trust Company of
Bear Stearns, Linder which the Fund may borrow from the Custodial Trust Company
an aggregate amount of up to the lesser of $30,000,000 or the maximum amount the
Fund is permitted to borrow Under the 1940 Act. For the year ended November 30,
2005, the average amount outstanding was $4,767,123 with a weighted average
interest rate of 3.34%. This credit agreement has no maturity date and can be
paid or called at any time. As of November 30, 2005, the Fund had no outstanding
borrowings under this credit agreement.
F-15
ENERGY INCOME AND GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005
8. CONCENTRATION OF CREDIT RISK
The Fund intends to invest at least 85% of its Managed Assets in
securities issued by energy companies, energy sector MLPs and MLP-related
entities. Given this industry concentration, the Fund will be more susceptible
to adverse economic or regulatory occurrences affecting that industry than an
investment company that is not concentrated in a single industry. Energy issuers
may be subject to a variety of factors that may adversely affect their business
or operations, including high interest costs in connection with capital
construction programs, high leverage costs associated with environmental and
other regulations, the effects of economic slowdown, surplus capacity, increased
competition from other providers of services, uncertainties concerning the
availability of fuel at reasonable prices, the effects of energy conservation
policies and other factors.
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.
9. SUBSEQUENT EVENT
On December 20, 2005, the Fund declared a dividend of $0.335 per share
to Common Shareholders of record January 17, 2006, payable January 31, 2006.
F-16
ENERGY INCOME AND GROWTH FUND
AUCTION RATE FUND NOTES
STATEMENT OF ADDITIONAL INFORMATION
March 20, 2006
APPENDIX A
SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE
The following is a summary of certain provisions of the Indenture. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Indenture, a copy of which is on file with the Commission.
DEFINITIONS
`AA' Composite Commercial Paper Rate" on any date means (i) the
interest equivalent of the 30-day rate, in the case of a Rate Period which is a
Standard Rate Period or shorter, or the 180-day rate, in the case of all other
Rate Periods on commercial paper on behalf of issuers whose corporate bonds are
rated "AA" by S&P, or the equivalent of such rating by another nationally
recognized rating agency, as announced by the Federal Reserve Bank of New York
for the close of business on the Business Day immediately preceding such date;
or (ii) if the Federal Reserve Bank of New York does not make available such a
rate, then the arithmetic average of the interest equivalent of such rates on
commercial paper placed on behalf of such issuers, as quoted on a discount basis
or otherwise by the Commercial Paper Dealers to the Auction Agent for the close
of business on the Business Day immediately preceding such date (rounded to the
next highest .001 of 1%). If any Commercial Paper Dealer does not quote a rate
required to determine the "AA" Composite Commercial Paper Rate, such rate shall
be determined on the basis of the quotations (or quotation) furnished by the
remaining Commercial Paper Dealers (or Dealer), if any, or, if there are no such
Commercial Paper Dealers, by the Auction Agent. For purposes of this definition,
(A) "Commercial Paper Dealers" shall mean (1) Citigroup Global Markets Inc.,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and
Goldman Sachs & Co.; (2) in lieu of any thereof, its respective Affiliate or
successor; and (3) in the event that any of the foregoing shall cease to quote
rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper of
such issuers then making such quotations selected by the Fund, and (B) "interest
equivalent" of a rate stated on a discount basis for commercial paper of a given
number of days' maturity shall mean a number equal to the quotient (rounded
upward to the next higher one-thousandth of 1%) of (1) such rate expressed as a
decimal, divided by (2) the difference between (x) 1.00 and (y) a fraction, the
numerator of which shall be the product of such rate expressed as a decimal,
multiplied by the number of days in which such commercial paper shall mature and
the denominator of which shall be 360.
"Affiliate" means any person controlled by, in control of or under
common control with the Fund; provided that no Broker-Dealer controlled by, in
control of or under common control with the Fund shall be deemed to be an
Affiliate nor shall any corporation or any person controlled by, in control of
or under common control with such corporation, or one of the trustees, directors
or executive officers of the Fund, which is also a Trustee of the Fund be deemed
to be an Affiliate solely because such Trustee, director or executive officer is
also a Trustee of the Fund.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
A-1
"All Hold Rate" means 80% of the "AA" Composite Commercial Paper Rate.
"Applicable Rate" means, with respect to the Series B Energy Notes for
each Rate Period (1) if Sufficient Clearing Orders exist for the Auction in
respect thereof, the Winning Bid Rate, (2) if Sufficient Clearing Orders do not
exist for the Auction in respect thereof, the Maximum Rate, (3) in the case
where all the Series B Energy Notes are the subject of Hold Orders for the
Auction in respect thereof, the All Hold Rate, and (4) if an Auction is not held
for any reason (including the circumstance where there is no Auction Agent or
Broker-Dealer, the Maximum Rate.
"Auction" means each periodic operation of the procedures set forth in
Appendix B--Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company Americas unless and
until another commercial bank, trust company, or other financial institution
appointed by a resolution of the Board of Trustees enters into an agreement with
the Fund to follow the Auction Procedures for the purpose of determining the
Applicable Rate.
"Auction Date" means the first Business Day next preceding the first
day of a Rate Period for the Series B Energy Notes.
"Auction Procedures" means the procedures for conducting Auctions set
forth in Appendix B hereto.
"Authorized Denominations" means $25,000 and any integral multiple
thereof.
"Beneficial Owner," with respect to each Series of the Energy Notes,
means a customer of a Broker-Dealer listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of such Series of the Energy
Notes.
"Bid" shall have the meaning specified in Appendix B--Auction
Procedures.
"Bidder" shall have the meaning in Appendix B--Auction Procedures;
provided, however, that neither the Fund nor any affiliate thereof shall be
permitted to be a Bidder in an Auction, except that any Broker-Dealer that is an
affiliate of the Fund may be a Bidder in an Auction, but only if the Orders
placed by such Broker-Dealer are not for its own account.
"Board of Trustees" or "Board" means the Board of Trustees of the Fund
or any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other
entity permitted by law to perform the functions required of a Broker-Dealer by
the Auction Procedures, that has been selected by the Fund and has entered into
a Broker-Dealer Agreement that remains effective.
"Broker-Dealer Agreement" means an agreement among the Auction Agent
and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
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"Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
the City of New York, New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth in the definition
of "AA" Composite Commercial Paper Rate.
"Commission" means the Securities and Exchange Commission.
"Default Rate" means the Reference Rate multiplied by three.
"Deposit Securities" means cash and any obligations or securities,
including short-term money market instruments that are Eligible Assets, rated at
least AAA, A-2 or SP-2 by S&P, except that such obligations or securities shall
be considered "Deposit Securities" only if they are also rated at least P-2 by
Moody's.
"Discount Factor" means the Moody's Discount Factor (if Moody's is then
rating the Series B Energy Notes), Fitch Discount Factor (if Fitch is then
rating the Series B Energy Notes) or an Other Rating Agency Discount Factor,
whichever is applicable.
"Discounted Value" means the quotient of the Market Value of an
Eligible Asset divided by the applicable Discount Factor, provided that with
respect to an Eligible Asset that is currently callable, Discounted Value will
be equal to the quotient as calculated above or the call price, whichever is
lower, and that, with respect to an Eligible Asset that is prepayable,
Discounted Value will be equal to the quotient as calculated above or the par
value, whichever is lower.
"Eligible Assets" means Moody's Eligible Assets or Fitch's Eligible
Assets (if Moody's or Fitch are then rating the Series B Energy Notes) and/or
Other Rating Agency Eligible Assets, whichever is applicable.
"Energy Notes Basic Maintenance Amount" as of any Valuation Date has
the meaning set forth in the Rating Agency Guidelines.
"Energy Notes Series B" means the Series B Energy Notes or any other
Notes hereinafter designated as Series B of the Energy Notes.
"Existing Holder," with respect to the Energy Notes of a series, shall
mean a Broker-Dealer (or any such other Person as may be permitted by the Fund)
that is listed on the records of the Auction Agent as a holder of the Energy
Notes of such series.
"Fitch" means Fitch Ratings and its successors at law.
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"Fitch Discount Factor" means the discount factors set forth in the
Fitch Guidelines for use in calculating the Discounted Value of the Fund's
assets in connection with Fitch's ratings of the Series B Energy Notes.
"Fitch Eligible Asset" means assets of the Fund set forth in the Fitch
Guidelines as eligible for inclusion in calculating the Discounted Value of the
Fund's assets in connection with Fitch's ratings of the Series B Energy Notes.
"Fitch Guidelines" mean the guidelines provided by Fitch, as may be
amended from time to time, in connection with Fitch's ratings of the Series B
Energy Notes.
"Holder" means, with respect to the Energy Notes, the registered holder
of notes of each series of the Energy Notes as the same appears on the books or
records of the Fund.
"Hold Order" shall have the meaning specified in Appendix B--Auction
Procedures.
"Issue Date" means, with respect to the Series B Energy Notes, March
23, 2006.
"Market Value" means the fair market value of an asset of the Fund
computed as follows: readily marketable portfolio securities listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected on the consolidated tape at the close of the New York Stock
Exchange on the Business Day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at the mean of the
closing bid and asked prices on such day. If no bid or asked prices are quoted
on such day, then the security is valued by such method as the Board of Trustees
shall determine in good faith to reflect its fair market value. Readily
marketable securities not listed on the New York Stock Exchange but listed on
other domestic or foreign securities exchanges or admitted to trading on the
National Association of Securities Dealers Automated Quotations, Inc. ("Nasdaq")
National Market are valued in a like manner. Portfolio securities traded on more
than one securities exchange are valued at the last sale price on the Business
Day as of which such value is being determined as reflected on the tape at the
close of the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market, including
listed securities whose primary market is believed by the investment adviser to
be over-the-counter, but excluding securities admitted to trading on the Nasdaq
National Market, are valued at the mean of the current bid and asked prices as
reported by Nasdaq or, in the case of securities not quoted by Nasdaq, the
National Quotation Bureau or such other comparable source as the Trustees deem
appropriate to reflect their fair market value. However, certain fixed-income
securities may be valued on the basis of prices provided by a pricing service
when such prices are believed by the Board of Trustees to reflect the fair
market value of such securities. The prices provided by a pricing service take
into account institutional size trading in similar groups of securities and any
developments related to specific securities. Where securities are traded on more
than one exchange and also over-the-counter, the securities will generally be
valued using the quotations the Board of Trustees believes reflect most closely
the value of such securities.
"Maximum Rate" means, on any date on which the Applicable Rate is
determined, the rate equal to Applicable Percentage of the applicable Reference
Rate, subject to upward but not downward adjustment in the discretion of the
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Board of Trustees after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance with the
Energy Notes Basic Maintenance Amount.
"Minimum Rate" means, on any Auction Date with respect to a Rate Period
of seven days or fewer, 70% of the AA Composite Commercial Paper Rate at the
close of business on the Business Day next preceding such Auction Date. There
shall be no Minimum Rate on any Auction Date with respect to a Rate Period of
more than the Standard Rate Period.
"Moody's" means Moody's Investors Service, Inc., a Delaware
corporation, and its successors at law.
"Moody's Discount Factor" means the discount factors set forth in the
Moody's Guidelines for use in calculating the Discounted Value of the Fund's
assets in connection with Moody's ratings of the Series B Energy Notes.
"Moody's Eligible Assets" means assets of the Fund set forth in the
Moody's Guidelines as eligible for inclusion in calculating the Discounted Value
of the Fund's assets in connection with Moody's ratings of the Series B Energy
Notes.
"Moody's Guidelines" mean the guidelines provided by Moody's, as may be
amended from time to time, in connection with Moody's ratings of the Series B
Energy Notes.
"1940 Act Energy Notes Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least 300%
with respect to all outstanding senior securities representing indebtedness of
the Fund, including all the Outstanding Energy Notes (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities representing indebtedness of a
closed-end investment company as a condition of declaring dividends on its
common shares), determined on the basis of values calculated as of a time within
48 hours next preceding the time of such determination.
"Notes" means Securities of the Fund ranking on a parity with the
Series B Energy Notes that may be issued from time to time pursuant to the
Indenture.
"Order" shall have the meaning specified in Appendix B--Auction
Procedures.
"Other Rating Agency" means each rating agency, if any, other than
Moody's or Fitch then providing a rating for the Series B Energy Notes pursuant
to the request of the Fund.
"Other Rating Agency Discount Factor" means the discount factors set
forth in the Other Rating Agency Guidelines of each Other Rating Agency for use
in calculating the Discounted Value of the Fund's assets in connection with the
Other Rating Agency's rating of the Series B Energy Notes.
"Other Rating Agency Eligible Assets" means assets of the Fund set
forth in the Other Rating Agency Guidelines of each Other Rating Agency as
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eligible for inclusion in calculating the Discounted Value of the Fund's assets
in connection with the Other Rating Agency's rating of the Series B Energy
Notes.
"Other Rating Agency Guidelines" mean the guidelines provided by each
Other Rating Agency, as may be amended from time to time, in connection with the
Other Rating Agency's rating of the Series B Energy Notes.
"Outstanding" or "outstanding" means, as of any date, the Energy Notes
theretofore issued by the Fund except, without duplication, (1) any such Energy
Notes theretofore canceled, redeemed or repurchased by the Fund, or delivered to
the Trustee for cancellation or with respect to which the Fund has given notice
of redemption and irrevocably deposited with the Paying Agent sufficient funds
to redeem such Energy Notes and (2) any such Energy Notes represented by any
certificate in lieu of which a new certificate has been executed and delivered
by the Fund. Notwithstanding the foregoing, (A) in connection with any Auction,
any Series of the Energy Notes as to which the Fund or any person known to the
Auction Agent to be an Affiliate of the Fund shall be the Existing Holder
thereof shall be disregarded and deemed not to be Outstanding, and (B) for
purposes of determining the Energy Notes Basic Maintenance Amount, the Energy
Notes held by the Fund shall be disregarded and not deemed Outstanding but the
Energy Notes held by any Affiliate of the Fund shall be deemed Outstanding.
"Paying Agent" means Deutsche Bank National Trust Company unless and
until another entity appointed by a resolution of the Board of Trustees enters
into an agreement with the Fund to serve as paying agent, which paying agent may
be the same as the Trustee or the Auction Agent.
"Person" or "person" means and includes an individual, a partnership, a
trust, a company, an unincorporated association, a joint venture or other entity
or a government or any agency or political subdivision thereof.
"Potential Beneficial Owner," with respect to a series of the Energy
Notes, shall mean a customer of a Broker-Dealer that is not a Beneficial Owner
of the Energy Notes of such series but that wishes to purchase the Energy Notes
of such series, or that is a Beneficial Owner of the Energy Notes of such series
that wishes to purchase additional Energy Notes of such series.
"Rate Period" means, with respect to the Series B Energy Notes, the
period commencing on the Issue Date thereof and ending on the date specified for
such series on the Issue Date thereof and thereafter, as to such series, the
period commencing on the day following each Rate Period for such series and
ending on the day established for such series by the Fund.
"Rating Agency" means each of Fitch (if Fitch is then rating the Series
B Energy Notes), Moody's (if Moody's is then rating the Series B Energy Notes)
and any Other Rating Agency.
"Rating Agency Guidelines" mean Fitch Guidelines (if Fitch is then
rating the Series B Energy Notes), Moody's Guidelines (if Moody's is then rating
the Series B Energy Notes) and any Other Rating Agency Guidelines.
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"Reference Rate" means, with respect to the determination of the
Maximum Rate and Default Rate, (1) the applicable AA Composite Commercial Paper
Rate (for a Rate Period of fewer than 184 days) or the applicable Treasury Index
Rate (for a Rate Period of 184 days or more) or (2) the applicable
London-Interbank Offered Rate ("LIBOR").
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or its successors.
"Securities Act" means the Securities Act of 1933, as amended from time
to time.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the Series B Energy Notes.
"Sell Order" shall have the meaning specified in Appendix B--Auction
Procedures.
"Special Rate Period" means a Rate Period that is not a Standard Rate
Period.
"Specific Redemption Provisions" means, with respect to any Special
Rate Period of more than one year, either, or any combination of (1) a period (a
"Non-Call Period") determined by the Board of Trustees after consultation with
the Broker-Dealers, during which the Series B Energy Notes subject to such
Special Rate Period are not subject to redemption at the option of the Fund
pursuant to the Indenture, and (2) a period (a "Premium Call Period"),
consisting of a number of whole years as determined by the Board of Trustees
after consultation with the Broker-Dealers, during each year of which the Series
B Energy Notes subject to such Special Rate Period shall be redeemable at the
Fund's option and/or in connection with any mandatory redemption at a price
equal to the principal amount plus accumulated but unpaid interest plus a
premium expressed as a percentage or percentages of $25,000 or expressed as a
formula using specified variables as determined by the Board of Trustees after
consultation with the Broker-Dealers.
"Standard Rate Period" means a Rate Period of seven days.
"Stated Maturity," with respect to the Series B Energy Notes shall mean
March 30, 2046.
"Submission Deadline" means 1:00 P.M., Eastern Standard time (or 11:00
a.m., Eastern Standard time, in the case of a daily Auction), on any Auction
Date or such other time on any Auction Date by which Broker-Dealers are required
to submit Orders to the Auction Agent as specified by the Auction Agent from
time to time.
"Submission Processing Deadline" shall mean the earlier of (i) 40
minutes after the Submission Deadline and (ii) the time when the Auction Agent
begins to disseminate the results of the Auction to the Broker-Dealers.
"Submitted Bid" shall have the meaning specified in Appendix B--Auction
Procedures.
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"Submitted Hold Order" shall have the meaning specified in Appendix
B--Auction Procedures.
"Submitted Order" shall have the meaning specified in Appendix
B--Auction Procedures.
"Submitted Sell Order" shall have the meaning specified in Appendix
B--Auction Procedures.
"Sufficient Clearing Bids" shall have the meaning specified in Appendix
B--Auction Procedures.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Rate
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Rate Periods with a length greater than
the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15(519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three
recognized dealers in U.S. Government securities selected by the Fund.
"Trustee" means Deutsche Bank National Trust Company, or such other
person who is named a trustee pursuant to the terms of the Indenture.
"Valuation Date" means every Thursday, or, if such day is not a
Business Day, the next preceding Business Day; provided, however, that the first
Valuation Date may occur on any other date established by the Trust; provided,
further, however, that such first Valuation Date shall be not more than one week
from the date on which the Series B Energy Notes initially are issued.
NOTE DETAILS, FORM OF NOTES AND REDEMPTION OF NOTES
INTEREST
(a) The Holders of any Series B Energy Notes shall be entitled to
receive interest payments on their Series B Energy Notes at the Applicable Rate,
determined as set forth in paragraph (c) below, and no more, payable on the
respective dates determined as set forth in paragraph (b) below. Interest on the
Outstanding Series B Energy Notes issued on the Issue Date shall accumulate from
the Issue Date.
(b) (1) Interest shall be payable, subject to subparagraph (b)(2)
below, on the Series B Energy Notes, with respect to any Rate
Period on the first Business Day following the last day of
such Rate Period; provided, however, if the Rate Period is
greater than 30 days then on a monthly basis on the first
A-8
Business Day of each month within such Rate Period and on the
Business Day following the last day of such Rate Period.
(2) If a day for payment of interest resulting from the
application of subparagraph (b)(1) above is not a Business
Day, (A) then the Interest Payment Date shall be the first
Business Day following such day for payment of interest in the
case of the Energy Notes designated as "Series B."
(3) The Fund shall pay to the Paying Agent not later than 3:00
p.m., New York City time, on the Business Day next preceding
each Interest Payment Date for the Series B Energy Notes, an
aggregate amount of funds available on the next Business Day
in the City of New York, New York, equal to the interest to be
paid to all Holders of such Series B Energy Notes on such
Interest Payment Date. The Fund shall not be required to
establish any reserves for the payment of interest.
(4) All moneys paid to the Paying Agent for the payment of
interest shall be held in trust for the payment of such
interest by the Paying Agent for the benefit of the Holders
specified in subparagraph (b)(5) below. Any moneys paid to the
Paying Agent in accordance with the foregoing but not applied
by the Paying Agent to the payment of interest, including
interest earned on such moneys, will, to the extent permitted
by law, be repaid to the Fund at the end of 90 days from the
date on which such moneys were to have been so applied.
(5) Each interest payment on the Series B Energy Notes shall be
paid on the Interest Payment Date therefor to the Holders of
that series as their names appear on the security ledger or
security records of the Fund on the Business Day next
preceding such Interest Payment Date. Interest in arrears for
any past Rate Period may be declared and paid at any time,
without reference to any regular Interest Payment Date, to the
Holders as their names appear on the books or records of the
Fund on such date, not exceeding 15 days preceding the payment
date thereof, as may be fixed by the Board of Trustees. No
interest will be payable in respect of any Interest Payment or
payments which may be in arrears.
(c) (1) The interest rate on the Outstanding Series B Energy
Notes during the period from and after the Issue Date to and
including the last day of the initial Rate Period therefor
shall be equal to the rate per annum set forth under (a)
above. For each subsequent Rate Period with respect to the
Series B Energy Notes Outstanding thereafter, the interest
rate shall be equal to the rate per annum that results from an
Auction; provided, however, that if an Auction for any
subsequent Rate Period of the Series B Energy Notes is not
held for any reason or if Sufficient Clearing Bids have not
been made in an Auction (other than as a result of the Series
B Energy Notes being the subject of Submitted Hold Orders),
then the interest rate on the Series B Energy Notes for any
such Rate Period shall be the Maximum Rate (except (1) during
a Default Period when the interest rate shall be the Default
Rate, as set forth in (c)(2) below) or (2) after a Default
Period and prior to the beginning of the next Rate Period when
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the interest rate shall be the Maximum Rate at the close of
business on the last day of such Default Period). The All Hold
Rate will apply automatically following an Auction in which
all of the Outstanding Series of the Series B Energy Notes are
subject (or are deemed to be subject) to Hold Orders. The rate
per annum at which interest is payable on the Series B Energy
Notes as determined pursuant to this paragraph (c)(1) shall be
the "Applicable Rate." For Standard Rate Periods or less only,
the Applicable Rate resulting from an Auction will not be less
than the Minimum Rate.
(2) Subject to the cure provisions below, a "Default Period" with
respect to a particular Series will commence on any date the
Fund fails to deposit irrevocably in trust in same-day funds,
with the Paying Agent by 12:00 noon, New York City time, (A)
the full amount of any declared interest on that Series
payable on the Interest Payment Date (an "Interest Default")
or (B) the full amount of any redemption price (the
"Redemption Price") payable on the date fixed for redemption
(the "Redemption Date") (a "Redemption Default" and, together
with an Interest Default, hereinafter referred to as a
"Default"). Subject to the cure provisions of (c)(3) below, a
Default Period with respect to an Interest Default or a
Redemption Default shall end on the Business Day on which, by
12:00 noon, New York City time, all unpaid interest and any
unpaid Redemption Price shall have been deposited irrevocably
in trust in same-day funds with the Paying Agent. In the case
of an Interest Default, the Applicable Rate for each Rate
Period commencing during a Default Period will be equal to the
Default Rate, and each subsequent Rate Period commencing after
the beginning of a Default Period shall be a Standard Rate
Period; provided, however, that the commencement of a Default
Period will not by itself cause the commencement of a new Rate
Period. No Auction shall be held during a Default Period with
respect to an Interest Default applicable to the Series B
Energy Notes.
(3) No Default Period with respect to an Interest Default or
Redemption Default shall be deemed to commence if the amount
of any interest or any Redemption Price due (if such default
is not solely due to the willful failure of the Fund) is
deposited irrevocably in trust, in same-day funds with the
Paying Agent by 12:00 noon, New York City time, within three
Business Days after the applicable Interest Payment Date or
Redemption Date, together with an amount equal to the Default
Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 365
for each Series. The Default Rate shall be equal to the
Reference Rate multiplied by three.
(4) The amount of interest payable on each Interest Payment Date
of each Rate Period of less than one (1) year (or in respect
of interest on another date in connection with a redemption
during such Rate Period) shall be computed by multiplying the
Applicable Rate (or the Default Rate) for such Rate Period (or
a portion thereof) by a fraction, the numerator of which will
be the number of days in such Rate Period (or portion thereof)
that such Series B Energy Notes were outstanding and for which
the Applicable Rate or the Default Rate was applicable and the
denominator of which will be 365, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to
the nearest cent. During any Rate Period of one year or more,
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the amount of interest per Energy Note payable on any Interest
Payment Date (or in respect of interest on another date in
connection with a redemption during such Rate Period) shall be
computed as described in the preceding sentence.
(d) Any Interest Payment made on the Series B Energy Notes shall
first be credited against the earliest accrued but unpaid
interest due with respect to such Series.
REDEMPTION
(a) (1) After the initial Rate Period, subject to the provisions of the
Indenture and to the extent permitted under the 1940 Act and Massachusetts law,
the Fund may, at its option, redeem in whole or in part out of funds legally
available therefor the Series B Energy Notes designated in the Indenture as (A)
having a Rate Period of one year or less, on the Business Day after the last day
of such Rate Period by delivering a notice of redemption not less than 15 days
and not more than 40 days prior to the date fixed for such redemption, at a
redemption price equal to the aggregate principal amount, plus an amount equal
to accrued but unpaid interest thereon (whether or not earned) to the date fixed
for redemption ("Redemption Price"), or (B) having a Rate Period of more than
one year, on any Business Day prior to the end of the relevant Rate Period by
delivering a notice of redemption not less than 15 days and not more than 40
days prior to the date fixed for such redemption, at the Redemption Price, plus
a redemption premium, if any, determined by the Board of Trustees after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions at the time of the designation of such Rate Period as set
forth in the Indenture; provided, however, that during a Rate Period of more
than one year no Series B Energy Notes will be subject to optional redemption
except in accordance with any Specific Redemption Provisions approved by the
Board of Trustees after consultation with the Broker-Dealers at the time of the
designation of such Rate Period. Notwithstanding the foregoing, the Fund shall
not give a notice of or effect any redemption pursuant to this paragraph (a)(1)
unless, on the date on which the Fund intends to give such notice and on the
date of redemption (a) the Fund has available certain Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to Holders of the Series B Energy Notes by reason of the
redemption of such Series B Energy Notes on such date fixed for the redemption
and (b) the Fund would have Eligible Assets with an aggregate Discounted Value
at least equal to the Energy Notes Basic Maintenance Amount immediately
subsequent to such redemption, if such redemption were to occur on such date, it
being understood that the provisions of paragraph (d) below shall be applicable
in such circumstances in the event the Fund makes the deposit and takes the
other action required thereby.
(2) If the Fund fails to maintain, as of any Valuation Date, Eligible
Assets with an aggregate Discounted Value at least equal to the Energy Notes
Basic Maintenance Amount or, as of the last Business Day of any month, the 1940
Act Energy Notes Asset Coverage, and such failure is not cured within ten
Business Days following such Valuation Date in the case of a failure to maintain
the Energy Notes Basic Maintenance Amount or on the last Business Day of the
following month in the case of a failure to maintain the 1940 Act Energy Notes
Asset Coverage as of such last Business Day (each, an "Asset Coverage Cure
Date"), the Series B Energy Notes will be subject to mandatory redemption out of
funds legally available therefor. The principal amount of the Series B Energy
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Notes to be redeemed in such circumstances will be equal to the lesser of (A)
the minimum principal amount of the Series B Energy Notes the redemption of
which, if deemed to have occurred immediately prior to the opening of business
on the relevant Asset Coverage Cure Date, would result in the Fund having
Eligible Assets with an aggregate Discounted Value at least equal to the Energy
Notes Basic Maintenance Amount, or sufficient to satisfy 1940 Act Energy Notes
Asset Coverage, as the case may be, in either case as of the relevant Asset
Coverage Cure Date (provided that, if there is no such minimum principal amount
of the Series B Energy Notes the redemption of which would have such result, all
such Series B Energy Notes then Outstanding will be redeemed), and (B) the
maximum principal amount of the Series B Energy Notes that can be redeemed out
of funds expected to be available therefor on the Mandatory Redemption Date at
the Mandatory Redemption Price set forth in subparagraph (a)(3) below.
(3) In determining the Series B Energy Notes required to be redeemed in
accordance with the foregoing subparagraph (a)(2), the Fund shall allocate the
principal amount of the Series B Energy Notes required to be redeemed to satisfy
the Energy Notes Basic Maintenance Amount or the 1940 Act Energy Notes Asset
Coverage, as the case may be, pro rata among the Holders of the Series B Energy
Notes in proportion to the principal amount of the Series B Energy Notes they
hold and other Notes, including the Series A Energy Notes, subject to mandatory
redemption provisions similar to those contained in the Indenture, subject to
the further provisions of this subparagraph (3). The Fund shall effect any
required mandatory redemption pursuant to subparagraph (a)(2) above no later
than 40 days after the Asset Coverage Cure Date (the "Mandatory Redemption
Date"), except that if the Fund does not have funds legally available for the
redemption of, or is not otherwise legally permitted to redeem, the principal
amount of the Series B Energy Notes which would be required to be redeemed by
the Fund under clause (A) of subparagraph (a)(2) above if sufficient funds were
available, together with other Notes which are subject to mandatory redemption
under provisions similar to those contained in this paragraph, or the Fund
otherwise is unable to effect such redemption on or prior to such Mandatory
Redemption Date, the Fund shall redeem those Series B Energy Notes, and other
Notes which it was unable to redeem, on the earliest practicable date on which
the Fund will have such funds available, upon notice pursuant to paragraph (b)
below to record owners of the Series B Energy Notes to be redeemed and the
Paying Agent. The Fund will deposit with the Paying Agent funds sufficient to
redeem the specified principal amount of the Series B Energy Notes with respect
to a redemption required under subparagraph (a)(2) above, by 1:00 p.m., New York
City time, of the Business Day immediately preceding the Mandatory Redemption
Date. If fewer than all of the Outstanding Series B Energy Notes are to be
redeemed pursuant to this subparagraph (3), the principal amount of the Series B
Energy Notes to be redeemed shall be redeemed pro rata from the Holders of such
Series B Energy Notes in proportion to the principal amount of such Energy Note
held by such Holders, by lot or by such other method as the Fund shall deem fair
and equitable, subject, however, to the terms of any applicable Specific
Redemption Provisions. "Mandatory Redemption Price" means the Redemption Price
plus (in the case of a Rate Period of one year or more only) a redemption
premium, if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions.
(b) In the event of a redemption pursuant to paragraph (a) above, the
Fund will file a notice of its intention to redeem with the Commission so as to
provide at least the minimum notice required under Rule 23c-2 under the 1940
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Act or any successor provision. In addition, the Fund shall deliver a notice of
redemption to the Auction Agent and the Trustee (the "Notice of Redemption")
containing the information set forth below (1) in the case of an optional
redemption pursuant to subparagraph (a)(1) above, one Business Day prior to the
giving of notice to the Holders and (2) in the case of a mandatory redemption
pursuant to subparagraph (a)(2) above, on or prior to the 30th day preceding the
Mandatory Redemption Date. The Trustee will use its reasonable efforts to
provide notice to each Holder of the Series B Energy Notes called for redemption
by electronic or other reasonable means not later than the close of business on
the Business Day immediately following the day on which the Trustee determines
the Series B Energy Notes to be redeemed (or, during a Default Period with
respect to such Series B Energy Notes, not later than the close of business on
the Business Day immediately following the day on which the Trustee receives
Notice of Redemption from the Fund). The Trustee shall confirm such notice in
writing not later than the close of business on the third Business Day preceding
the date fixed for redemption by providing the Notice of Redemption to each
Holder of the Series B Energy Notes called for redemption, the Paying Agent (if
different from the Trustee) and the Securities Depository. Notice of Redemption
will be addressed to the registered owners of the Series B Energy Notes at their
addresses appearing on the books or records of the Fund. Such Notice of
Redemption will set forth (1) the date fixed for redemption, (2) the principal
amount and identity of the Series B Energy Notes to be redeemed, (3) the
redemption price (specifying the amount of accumulated interest to be included
therein), (4) that interest on the Series B Energy Notes to be redeemed will
cease to accrue on such date fixed for redemption, and (5) the provision under
which redemption shall be made. No defect in the Notice of Redemption or in the
transmittal or mailing thereof will affect the validity of the redemption
proceedings, except as required by applicable law. If fewer than all the Series
B Energy Notes held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder shall also specify the principal amount of the Series B
Energy Notes to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) above, no such
Series B Energy Notes may be redeemed unless all interest on the Outstanding
Series B Energy Notes and all Notes of the Fund ranking on a parity with the
Series B Energy Notes, have been or are being contemporaneously paid or set
aside for payment; provided, however, that the foregoing shall not prevent the
purchase or acquisition of all the Outstanding Series B Energy Notes pursuant to
the successful completion of an otherwise lawful purchase or exchange offer made
on the same terms to, and accepted by, Holders of all the Outstanding Series B
Energy Notes.
(d) Upon the deposit of funds sufficient to redeem any such Series B
Energy Notes with the Paying Agent and the giving of the Notice of Redemption to
the Trustee under paragraph (b) above, interest on such Series B Energy Notes
shall cease to accumulate and such Series B Energy Notes shall no longer be
deemed to be Outstanding for any purpose (including, without limitation, for
purposes of calculating whether the Fund has maintained the requisite Energy
Notes Basic Maintenance Amount or the 1940 Act Energy Notes Asset Coverage), and
all rights of the holder of the Series B Energy Notes so called for redemption
shall cease and terminate, except the right of such holder to receive the
redemption price specified in the Indenture, but without any interest or other
additional amount. Such redemption price shall be paid by the Paying Agent to
the nominee of the Securities Depository. The Fund shall be entitled to receive
from the Paying Agent, promptly after the date fixed for redemption, any cash
deposited with the Paying Agent in excess of (1) the aggregate redemption price
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of the Series B Energy Notes called for redemption on such date and (2) such
other amounts, if any, to which Holders of the Series B Energy Notes called for
redemption may be entitled. Any funds so deposited that are unclaimed at the end
of two years from such redemption date shall, to the extent permitted by law, be
paid to the Fund, after which time the Holders of the Series B Energy Notes so
called for redemption may look only to the Fund for payment of the redemption
price and all other amounts, if any, to which they may be entitled. The Fund
shall be entitled to receive, from time to time after the date fixed for
redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption
has been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem any Series of the Series B
Energy Notes shall be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Fund shall have failed, for any
reason whatsoever, to deposit in trust with the Paying Agent the redemption
price with respect to any such Series B Energy Notes for which such Notice of
Redemption has been given. Notwithstanding the fact that the Fund may not have
redeemed any such Series B Energy Notes for which a Notice of Redemption has
been given, interest may be paid on the Series B Energy Notes and shall include
those Series B Energy Notes for which Notice of Redemption has been given but
for which deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption
price of any such Series B Energy Notes called for redemption shall be held in
trust by the Paying Agent for the benefit of holders of the Series B Energy
Notes to be redeemed.
(g) So long as any such Series B Energy Notes are held of record by the
nominee of the Securities Depository, the redemption price for such Series B
Energy Notes will be paid on the date fixed for redemption to the nominee of the
Securities Depository for distribution to Agent Members for distribution to the
persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing contained in the
Indenture limits any right of the Fund to purchase or otherwise acquire any such
Series B Energy Notes outside of an Auction at any price, whether higher or
lower than the price that would be paid in connection with an optional or
mandatory redemption, so long as, at the time of any such purchase, there is no
arrearage in the payment of interest on, or the mandatory or optional redemption
price with respect to, any series of the Series B Energy Notes for which Notice
of Redemption has been given and the Fund is in compliance with the 1940 Act
Energy Notes Asset Coverage and has Eligible Assets with an aggregate Discounted
Value at least equal to the Energy Notes Basic Maintenance Amount after giving
effect to such purchase or acquisition on the date thereof. If less than all the
Outstanding Series B Energy Notes of any series are redeemed or otherwise
acquired by the Fund, the Fund shall give notice of such transaction to the
Trustee, in accordance with the procedures agreed upon by the Board of Trustees.
(i) Notwithstanding anything in the Indenture to the contrary, the
Board of Trustees may, without further consent of the holders of the Series B
Energy Notes or the holder of Shares of capital stock of the Fund, authorize,
create or issue any class or series of Notes, including other series of the
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Series B Energy Notes, ranking prior to or on a parity with the Series B Energy
Notes to the extent permitted by the 1940 Act, as amended, if, upon issuance,
either (A) the net proceeds from the sale of such Notes (or such portion thereof
needed to redeem or repurchase the Outstanding Series B Energy Notes) are
deposited with the Trustee in accordance with paragraph (d) above, Notice of
Redemption as contemplated by paragraph (b) above has been delivered prior
thereto or is sent promptly thereafter, and such proceeds are used to redeem all
the Outstanding Series B Energy Notes or (B) the Fund would meet the 1940 Act
Energy Notes Asset Coverage, the Energy Notes Basic Maintenance Amount and the
requirements set forth below in "Certain Other Restrictions."
DESIGNATION OF RATE PERIOD
The initial Rate Period for the Series B Energy Notes shall be seven
days. The Fund will designate the duration of subsequent Rate Periods of the
Series B Energy Notes; provided, however, that no such designation is necessary
for a Standard Rate Period and, provided further, that any designation of a
Special Rate Period shall be effective only if (1) notice thereof shall have
been given as provided in the Indenture, (2) any failure to pay in a timely
manner to the Trustee the full amount of any interest on, or the redemption
price of, the Series B Energy Notes shall have been cured as provided above, (3)
Sufficient Clearing Bids shall have existed in an Auction held on the Auction
Date immediately preceding the first day of such proposed Special Rate Period,
(4) if the Fund shall have mailed a Notice of Redemption with respect to any
such Series B Energy Notes, the redemption price with respect to such Series B
Energy Notes shall have been deposited with the Paying Agent, and (5) in the
case of the designation of a Special Rate Period, the Fund has confirmed that as
of the Auction Date next preceding the first day of such Special Rate Period, it
has Eligible Assets with an aggregate Discounted Value at least equal to the
Energy Notes Basic Maintenance Amount, and the Fund has consulted with the
Broker-Dealers and has provided notice of such designation and otherwise
complied with the Rating Agency Guidelines.
If the Fund proposes to designate any Special Rate Period, not fewer
than seven (or two Business Days in the event the duration of the Rate Period
prior to such Special Rate Period is fewer than 8 days) nor more than 30
Business Days prior to the first day of such Special Rate Period, notice shall
be (1) made by press release and (2) communicated by the Fund by telephonic or
other means to the Auction Agent and the Trustee and confirmed in writing
promptly thereafter. Each such notice shall state (A) that the Fund proposes to
exercise its option to designate a succeeding Special Rate Period, specifying
the first and last days thereof and (B) that the Fund will by 3:00 p.m., New
York City time, on the second Business Day next preceding the first day of such
Special Rate Period, notify the Auction Agent and Trustee, who will promptly
notify the Broker-Dealers, of either (x) its determination, subject to certain
conditions, to proceed with such Special Rate Period, subject to the terms of
any Specific Redemption Provisions, or (y) its determination not to proceed with
such Special Rate Period, in which latter event the succeeding Rate Period shall
be a Standard Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Fund shall
deliver to the Auction Agent and the Trustee, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
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(1) a notice stating (A) that the Fund has determined to
designate the next succeeding Rate Period as a Special Rate Period,
specifying the first and last days thereof and (B) the terms of any
Specific Redemption Provisions; or
(2) a notice stating that the Fund has determined not to
exercise its option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period, the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Rate Period to the effect set forth in clause
(2) above, thereby resulting in a Standard Rate Period.
RESTRICTIONS ON TRANSFER
The Series B Energy Notes may be transferred only (a) pursuant to an
order placed in an Auction, (b) to or through a Broker-Dealer or (c) to the Fund
or any Affiliate. Notwithstanding the foregoing, a transfer other than pursuant
to an Auction will not be effective unless the selling Existing Holder or the
Agent Member of such Existing Holder, in the case of an Existing Holder whose
Series B Energy Notes are listed in its own name on the books of the Auction
Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer, in the case
of a transfer between persons holding the Series B Energy Notes through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the Series B Energy Notes issued to the Securities
Depository will bear legends with respect to the restrictions described above
and stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.
1940 ACT ENERGY NOTES ASSET COVERAGE
The Fund shall maintain, as of the last Business Day of each month in
which any such Series B Energy Notes are Outstanding, asset coverage with
respect to the Series B Energy Notes which is equal to or greater than the 1940
Act Energy Notes Asset Coverage; provided, however, that subparagraph (a)(2) of
"Redemption" above shall be the sole remedy in the event the Fund fails to do
so.
THE ENERGY NOTES BASIC MAINTENANCE AMOUNT
So long as the Series B Energy Notes are Outstanding and any Rating
Agency is then rating the Series B Energy Notes, the Fund shall maintain, as of
each Valuation Date, Eligible Assets having an aggregate Discounted Value equal
to or greater than the Energy Notes Basic Maintenance Amount; provided, however,
that subparagraph (a)(2) of "Redemption" above shall be the sole remedy in the
event the Fund fails to do so.
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CERTAIN OTHER RESTRICTIONS
For so long as any such Series B Energy Notes are Outstanding and any
Rating Agency is then rating the Series B Energy Notes, the Fund will not engage
in certain proscribed transactions set forth in the Rating Agency Guidelines,
unless it has received written confirmation from each such Rating Agency that
proscribes the applicable transaction in its Rating Agency Guidelines that any
such action would not impair the rating then assigned by such Rating Agency to
the Series B Energy Notes.
For so long as any such Series B Energy Notes are Outstanding, the Fund
will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, common shares or other
shares of beneficial interest of the Fund) upon any class of shares of
beneficial interest of the Fund, unless, in every such case, immediately after
such transaction, the 1940 Act Energy Notes Asset Coverage would be achieved
after deducting the amount of such dividend, distribution, or purchase price, as
the case may be; provided, however, that dividends may be declared upon any
preferred shares of beneficial interest of the Fund if the Energy Notes have an
asset coverage of at least 200% at the time of declaration thereof, after
deducting the amount of such dividend.
COMPLIANCE PROCEDURES FOR ASSET MAINTENANCE TESTS
For so long as any such Series B Energy Notes are Outstanding and any
Rating Agency is then rating such Series B Energy Notes:
(a) As of each Valuation Date, the Fund shall determine in
accordance with the procedures specified in the Indenture (1) the
Market Value of each Eligible Asset owned by the Fund on that date, (2)
the Discounted Value of each such Eligible Asset using the Discount
Factors, (3) whether the Energy Notes Basic Maintenance Amount is met
as of that date, (4) the value of the total assets of the Fund, less
all liabilities, and (5) whether the 1940 Act Energy Notes Asset
Coverage is met as of that date.
(b) Upon any failure to maintain the required Energy Notes
Basic Maintenance Amount or 1940 Act Energy Notes Asset Coverage on any
Valuation Date, the Fund may use reasonable commercial efforts
(including, without limitation, altering the composition of its
portfolio, purchasing the Series B Energy Notes outside of an Auction
or in the event of a failure to file a Rating Agency Certificate (as
defined below) on a timely basis, submitting the requisite Rating
Agency Certificate) to re-attain (or certify in the case of a failure
to file on a timely basis, as the case may be) the required Energy
Notes Basic Maintenance Amount or 1940 Act Energy Notes Asset Coverage
on or prior to the Asset Coverage Cure Date.
(c) Compliance with the Energy Notes Basic Maintenance Amount
and 1940 Act Energy Notes Asset Coverage tests shall be determined with
reference to those Energy Notes which are deemed to be Outstanding.
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(d) The Fund shall deliver to each Rating Agency which is
then rating the Series B Energy Notes and any other party specified in
the Rating Agency Guidelines all certificates that are set forth in the
respective Rating Agency Guidelines regarding 1940 Act Energy Notes
Asset Coverage, the Energy Notes Basic Maintenance Amount and/or
related calculations at such times and containing such information as
set forth in the respective Rating Agency Guidelines (each, a "Rating
Agency Certificate").
(e) In the event that any Rating Agency Certificate is not
delivered within the time periods set forth in the Rating Agency
Guidelines, the Fund shall be deemed to have failed to maintain the
Energy Notes Basic Maintenance Amount or the 1940 Act Energy Notes
Asset Coverage, as the case may be, on such Valuation Date for purposes
of paragraph (b) above. In the event that any Rating Agency Certificate
with respect to an applicable Asset Coverage Cure Date is not delivered
within the time periods set forth in the Rating Agency Guidelines, the
Fund shall be deemed to have failed to have Eligible Assets with an
aggregate Discounted Value at least equal to the Energy Notes Basic
Maintenance Amount or to meet the 1940 Energy Notes Asset Coverage, as
the case may be, as of the related Valuation Date, and such failure
shall be deemed not to have been cured as of such Asset Coverage Cure
Date for purposes of the mandatory redemption provisions.
DELIVERY OF NOTES
Upon the execution and delivery of the Indenture, the Fund shall
execute and deliver to the Trustee and the Trustee shall authenticate the Series
B Energy Notes and deliver them to The Depository Trust Company and as provided
in the Indenture.
Prior to the delivery by the Trustee of any of the Series B Energy
Notes, there shall have been filed with or delivered to the Trustee the
following:
(a) A resolution duly adopted by the Fund, certified by the
Secretary or other Authorized Officer thereof, authorizing the
execution and delivery of this Supplemental Indenture and the issuance
of the Series B Energy Notes;
(b) Duly executed copies of the Supplemental Indenture and a
copy of the Indenture;
(c) Rating letters from each Rating Agency rating the Series
B Energy Notes; and
(d) An opinion of counsel pursuant to the requirements of the
Indenture.
TRUSTEE'S AUTHENTICATION CERTIFICATE
The Trustee's authentication certificate upon the Series B Energy Notes
shall be substantially in the form provided. No Series B Energy Note shall be
secured hereby or entitled to the benefit hereof, or shall be valid or
obligatory for any purpose, unless a certificate of authentication,
substantially in such form, has been duly executed by the Trustee; and such
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certificate of the Trustee upon any Series B Energy Note shall be conclusive
evidence and the only competent evidence that such Bond has been authenticated
and delivered. The Trustee's certificate of authentication shall be deemed to
have been duly executed by it if manually signed by an authorized officer of the
Trustee, but it shall not be necessary that the same person sign the certificate
of authentication on all of the Series B Energy Notes issued.
EVENTS OF DEFAULT; REMEDIES
EVENTS OF DEFAULT
An "Event of Default" means any one of the following events (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) default in the payment of any interest upon any series of
the Energy Notes when it becomes due and payable and the continuance of
such default for 30 days; or
(b) default in the payment of the principal of or any premium
on any series of the Energy Notes at its Stated Maturity; or
(c) default in the performance, or breach, of any covenant or
warranty of the Fund in the Indenture, and continuance of such default
or breach for a period of 90 days after there has been given, by
registered or certified mail, to the Fund by the Trustee a written
notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default;" or
(d) the entry by a court having jurisdiction in the premises
of (A) a decree or order for relief in respect of the Fund in an
involuntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or (B) a
decree or order adjudging the Fund a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Fund
under any applicable Federal or State law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Fund or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order for relief or any such other
decree or order unstayed and in effect for a period of 60 consecutive
days; or
(e) the commencement by the Fund of a voluntary case or
proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by
it to the entry of a decree or order for relief in respect of the Fund
in an involuntary case or proceeding under any applicable Federal or
State bankruptcy, insolvency, reorganization or other similar law or to
the commencement of any bankruptcy or insolvency case or proceeding
against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable Federal or State
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law, or the consent by it to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official
of the Fund or of any substantial part of its property, or the making
by it of an assignment for the benefit of creditors, or the admission
by it in writing of its inability to pay its debts generally as they
become due, or the taking of corporate action by the Fund in
furtherance of any such action;
(f) if, pursuant to Section 18(a)(l)(c)(2) of the 1940 Act on
the last business day of each of twenty-four consecutive calendar
months any class of securities shall have an asset coverage of less
than 100%; or
(g) any other Event of Default provided with respect to any
series of the Energy Notes, including a default in the payment of any
redemption price payable on the date fixed for redemption.
ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT
If an Event of Default with respect to the Energy Notes of any series
at the time Outstanding occurs and is continuing, then in every such case the
Trustee or the Holders of not less than a majority in principal amount of the
Outstanding Energy Notes of that series may declare the principal amount of all
the Energy Notes of that series to be due and payable immediately, by a notice
in writing to the Fund (and to the Trustee if given by Holders), and upon any
such declaration such principal amount (or specified amount) shall become
immediately due and payable. If an Event of Default specified in paragraphs (d)
and (e) above with respect to the Energy Notes of any series at the time
Outstanding occurs, the principal amount of all the Energy Notes of that series
shall automatically, and without any declaration or other action on the part of
the Trustee or any Holder, become immediately due and payable.
At any time after such a declaration of acceleration with respect to
the Energy Notes of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee, the Holders of a
majority in principal amount of the Outstanding Energy Notes of that series, by
written notice to the Fund and the Trustee, may rescind and annul such
declaration and its consequences if:
(a) the Fund has paid or deposited with the Trustee a sum
sufficient to pay
(1) all overdue interest on all such Energy Notes of
that series,
(2) the principal of (and premium, if any, on) any
such Energy Notes of that series which have become due
otherwise than by such declaration of acceleration and any
interest thereon at the rate or rates prescribed therefor in
such Energy Notes,
(3) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate or rates
prescribed therefor in such Energy Notes, and
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(4) all sums paid or advanced by the Trustee and the
reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel; and
(b) all Events of Default with respect to the Energy Notes of
that series, other than the non-payment of the principal of the Energy
Notes of that series which have become due solely by such declaration
of acceleration, have been cured or waived.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE
The Fund covenants that if:
(a) default is made in the payment of any interest on any
such Energy Notes when such interest becomes due and payable and such
default continues for a period of 30 days, or
(b) default is made in the payment of the principal of (or
premium, if any, on) any such Energy Notes at the Maturity thereof,
the Fund will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Energy Notes, the whole amount then due and payable on such
Energy Notes for principal and any premium and interest and, to the extent that
payment of such interest shall be legally enforceable, interest on any overdue
principal and premium and on any overdue interest, at the rate or rates
prescribed therefor in such Energy Notes, and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
If an Event of Default with respect to the Energy Notes of any series
occurs and is continuing, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the Holders of the Energy Notes of such
series by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in the Indenture or in aid of the
exercise of any power granted in the Indenture, or to enforce any other proper
remedy.
APPLICATION OF MONEY COLLECTED
Any money collected by the Trustee pursuant to the provisions of the
Indenture relating to an Event of Default shall be applied in the following
order, at the date or dates fixed by the Trustee and, in case of the
distribution of such money on account of principal or any premium or interest,
upon presentation of the Energy Notes and the notation thereon of the payment if
only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under
the Indenture;
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and
SECOND: To the payment of the amounts then due and unpaid for
principal of and any premium and interest on the Energy Notes in
respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Energy Notes for
principal and any premium and interest, respectively.
LIMITATION ON SUITS
No Holder of any such Energy Notes of any series shall have any right
to institute any proceeding, judicial or otherwise, with respect to the
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless
(a) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Energy
Notes of that series;
(b) the Holders of not less than a majority in principal
amount of the Outstanding Energy Notes of that series shall have made
written request to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee
indemnity reasonably satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Energy Notes of that
series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of the Indenture to affect, disturb or prejudice the rights of any other of such
Holders, or to obtain or to seek to obtain priority or preference over any other
of such Holders or to enforce any right under the Indenture, except in the
manner provided and for the equal and ratable benefit of all of such Holders.
UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST
Notwithstanding any other provision in the Indenture, the Holder of any
such Energy Notes shall have the right, which is absolute and unconditional, to
receive payment of the principal of and any premium and (subject to the
provisions of any supplemental indenture) interest on such Energy Notes on the
respective Stated Maturities expressed in such Energy Notes (or, in the case of
redemption, on the Redemption Date), and to institute suit for the enforcement
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of any such payment and such rights shall not be impaired without the consent of
such Holder.
RESTORATION OF RIGHTS AND REMEDIES
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under the Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Fund, the Trustee and the Holders shall be
restored severally and respectively to their former positions and thereafter all
rights and remedies of the Trustee and the Holders shall continue as though no
such proceeding had been instituted.
RIGHTS AND REMEDIES CUMULATIVE
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen the Energy Notes, no right or remedy
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or remedy.
CONTROL BY HOLDERS
The Holders of not less than a majority in principal amount of the
Outstanding Energy Notes shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, with respect to the
Energy Notes, provided that
(1) such direction shall not be in conflict with any rule of
law or with the Indenture, and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
WAIVER OF PAST DEFAULTS
The Holders of not less than a majority in principal amount of the
Outstanding Energy Notes of any series may on behalf of the Holders of all the
Energy Notes waive any past default hereunder with respect to such series and
its consequences, except a default
(1) in the payment of the principal of or any premium or
interest on any such Energy Notes, or
(2) in respect of a covenant or provision which cannot be
modified or amended without the consent of the Holder of each
Outstanding Energy Notes affected.
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Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of the Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture shall upon request of the Fund cease to be of further
effect (except as to any surviving rights of registration of transfer or
exchange of any such Energy Notes expressly provided for herein or in the terms
of such Security), and the Trustee, at the expense of the Fund, shall execute
proper instruments acknowledging satisfaction and discharge of the Indenture,
when
(a) Either:
(1) all such Energy Notes theretofore authenticated
and delivered (other than (1) Securities which have been
destroyed, lost or stolen and which have been replaced or paid
as provided in the Indenture; and (2) the Energy Notes for
whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Fund and thereafter repaid
to the Fund or discharged from such trust, as provided in the
Indenture) have been delivered to the Trustee for
cancellation; or
(2) all such Energy Notes not theretofore delivered
to the Trustee for cancellation have become due and payable,
or will become due and payable at their Stated Maturity within
one year, or are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the giving
of notice of redemption by the Trustee in the name, and at the
expense, of the Fund, and the Fund, in the case of this
subsection (2), has deposited or caused to be deposited with
the Trustee as trust funds in trust for the purpose money in
an amount sufficient to pay and discharge the entire
indebtedness on such Securities not theretofore delivered to
the Trustee for cancellation, for principal and any premium
and interest to the date of such deposit (in the case of
Securities which have become due and payable) or to the Stated
Maturity or Redemption Date, as the case may be;
(b) the Fund has paid or caused to be paid all other sums
payable hereunder by the Trust; and
(c) the Fund has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of the Indenture have been complied with.
Notwithstanding the satisfaction and discharge of the Indenture, the
obligations of the Fund to the Trustee under the Indenture and, if money shall
have been deposited with the Trustee pursuant to subparagraph (2) of paragraph
(a) above, the obligations of the Trustee under certain provisions of the
Indenture shall survive.
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THE TRUSTEE
CERTAIN DUTIES AND RESPONSIBILITIES
The duties and responsibilities of the Trustee shall be as provided by
the Trust Indenture Act. Notwithstanding the foregoing, no provision of the
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of the Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions below.
NOTICE OF DEFAULTS
If a default occurs hereunder with respect to the Energy Notes of any
series, the Trustee shall give the Holders of the Energy Notes of such series
notice of such default as and to the extent provided by the Trust Indenture Act;
provided, however, that in the case of any default with respect to the Energy
Notes of such series, no such notice to Holders shall be given until at least 90
days after the occurrence thereof. For the purpose hereof, the term "default"
means any event which is, or after notice or lapse of time or both would become,
an Event of Default with respect to the Energy Notes of such series.
CERTAIN RIGHTS OF TRUSTEE
Subject to the provisions under "Certain Duties and Responsibilities"
above:
(a) the Trustee may conclusively rely and shall be protected
in acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties;
(b) any request or direction of the Fund shall be
sufficiently evidenced by a Fund Request or Fund Order, and any
resolution of the Board of Trustees shall be sufficiently evidenced by
a Board Resolution;
(c) whenever in the administration of the Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee may, in the absence of bad faith on its part, rely upon an
Officers' Certificate;
(d) the Trustee may consult with counsel of its selection and
the written advice of such counsel or any Opinion of Counsel shall be
full and complete authorization and protection in respect of any action
taken, suffered or omitted by it in good faith and in reliance thereon;
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(e) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by the Indenture at the request or
direction of any of the Holders pursuant to the Indenture, unless such
Holders shall have offered to the Trustee security or indemnity
reasonably satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in compliance with such
request or direction;
(f) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Fund, personally or by agent or
attorney;
(g) the Trustee may execute any of the trusts or powers or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due
care by it hereunder;
(h) the Trustee shall not be liable for any action taken,
suffered or omitted to be taken by it in good faith and reasonably
believed by it to be authorized or within the discretion or rights or
powers conferred upon it by the Indenture;
(i) the Trustee shall not be deemed to have notice of any
default or Event of Default unless a Responsible Officer of the Trustee
has actual knowledge thereof or unless written notice of any event
which is in fact such a default is received by the Trustee at the
Corporate Trust Office of the Trustee, and such notice references the
Series B Energy Notes and the Indenture; and
(j) the rights, privileges, protections, immunities and
benefits given to the Trustee, including its rights to be indemnified,
are extended to, and shall be enforceable by, the Trustee in each of
its capacities hereunder.
COMPENSATION AND REIMBURSEMENT
The Fund agrees:
(a) to pay to the Trustee from time to time such compensation
as shall be agreed in writing between the parties for all services
rendered by it (which compensation shall not be limited by any
provision of law in regard to the compensation of a trustee of an
express trust);
(b) except as otherwise expressly provided, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any
provision of the Indenture (including the reasonable compensation and
the expenses and disbursements of its agents and counsel), except any
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such expense, disbursement or advance as may be attributable to its
negligence or bad faith; and
(c) to indemnify each of the Trustee or any predecessor
Trustee for, and to hold it harmless against, any and all losses,
liabilities, damages, claims or expenses including taxes (other than
taxes imposed on the income of the Trustee) incurred without negligence
or bad faith on its part, arising out of or in connection with the
acceptance or administration of the trust or trusts hereunder,
including the costs and expenses of defending itself against any claim
(whether asserted by the Fund, a Holder or any other Person) or
liability in connection with the exercise or performance of any of its
powers or duties hereunder.
When the Trustee incurs expenses or renders services in connection with
an Event of Default, the expenses (including the reasonable charges and expenses
of its counsel) and the compensation for the services are intended to constitute
expenses of administration under any applicable Federal or State bankruptcy,
insolvency or other similar law.
The provisions hereof shall survive the termination of the Indenture.
CONFLICTING INTERESTS
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and the Indenture. To the extent not
prohibited by the Trust Indenture Act, and the Indenture, the Trustee shall not
be deemed to have a conflicting interest by virtue of being a trustee under the
Indenture with respect to the Series B Energy Notes of more than one series.
RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR
No resignation or removal of the Trustee and no appointment of a
successor Trustee shall become effective until the acceptance of appointment by
the successor Trustee in accordance with the applicable requirements.
The Trustee may resign at any time with respect to the Energy Notes of
one or more series by giving written notice thereof to the Fund. If the
instrument of acceptance by a successor Trustee shall not have been delivered to
the Trustee within 60 days after the giving of such notice of resignation, the
resigning Trustee may petition, at the expense of the Fund, any court of
competent jurisdiction for the appointment of a successor Trustee with respect
to the Energy Notes of such series.
The Trustee may be removed at any time with respect to the Energy Notes
of any series by Act of the Holders of a majority in principal amount of the
Outstanding Energy Notes of such series, delivered to the Trustee and to the
Fund. If the instrument of acceptance by a successor Trustee shall not have been
delivered to the Trustee within 30 days after the giving of a notice of removal
pursuant to this paragraph, the Trustee being removed may petition, at the
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expense of the Fund, any court of competent jurisdiction for the appointment of
a successor Trustee with respect to the Energy Notes of such series.
If at any time:
(a) the Trustee shall fail to comply after written request
therefor by the Fund or by any Holder who has been a bona fide Holder
of the Energy Notes for at least six months, or
(b) the Trustee shall cease to be eligible and shall fail to
resign after written request therefor by the Fund or by any such
Holder, or
(c) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then, in any such case,
(1) the Fund by a Board Resolution may remove the Trustee with respect
to all such Energy Notes, or (2) any Holder who has been a bona fide
Holder of the Energy Notes for at least six months may, on behalf of
himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee with respect to
all such Energy Notes and the appointment of a successor Trustee or
Trustees.
If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, with respect
to the Energy Notes of one or more series, the Fund, by a Board Resolution,
shall promptly appoint a successor Trustee or Trustees with respect to the
Energy Notes of that or those series (it being understood that any such
successor Trustee may be appointed with respect to the Energy Notes of one or
more or all of such series and that at any time there shall be only one Trustee
with respect to the Energy Notes of any particular series) and shall comply with
the applicable requirements. If, within one year after such resignation, removal
or incapability, or the occurrence of such vacancy, a successor Trustee with
respect to the Energy Notes of any series shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Energy Notes of
such series delivered to the Fund and the retiring Trustee, the successor
Trustee so appointed shall, forthwith upon its acceptance of such appointment in
accordance with the applicable requirements, become the successor Trustee with
respect to the Energy Notes of such series and to that extent supersede the
successor Trustee appointed by the Fund.
If no successor Trustee with respect to the Energy Notes of any series
shall have been so appointed by the Fund or the Holders and accepted appointment
in the manner required, any Holder who has been a bona fide Holder of the Energy
Notes of such series for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Energy Notes of such
series.
The Fund shall give notice of each resignation and each removal of the
Trustee with respect to the Energy Notes of any series and each appointment of a
successor Trustee with respect to the Energy Notes of any series to all Holders
of the Energy Notes of such series in the manner provided. Each notice shall
A-28
include the name of the successor Trustee with respect to the Energy Notes of
such series and the address of its Corporate Trust Office.
ACCEPTANCE OF APPOINTMENT BY SUCCESSOR
In case of the appointment hereunder of a successor Trustee with
respect to all such Energy Notes, every such successor Trustee so appointed
shall execute, acknowledge and deliver to the Fund and to the retiring Trustee
an instrument accepting such appointment, and thereupon the resignation or
removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee; but, on the
request of the Fund or the successor Trustee, such retiring Trustee shall, upon
payment of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee and
shall duly assign, transfer and deliver to such successor Trustee all property
and money held by such retiring Trustee hereunder.
In case of the appointment hereunder of a successor Trustee with
respect to the Energy Notes of one or more (but not all) series, the Fund, the
retiring Trustee and each successor Trustee with respect to the Energy Notes of
one or more series shall execute and deliver a supplemental indenture wherein
each successor Trustee shall accept such appointment and which (1) shall contain
such provisions as shall be necessary or desirable to transfer and confirm to,
and to vest in, each successor Trustee all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Energy Notes of that or those series
to which the appointment of such successor Trustee relates, (2) if the retiring
Trustee is not retiring with respect to all such Energy Notes, shall contain
such provisions as shall be deemed necessary or desirable to confirm that all
the rights, powers, trusts and duties of the retiring Trustee with respect to
the Energy Notes of that or those series as to which the retiring Trustee is not
retiring shall continue to be vested in the retiring Trustee, and (3) shall add
to or change any of the provisions of the Indenture as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by more
than one Trustee, it being understood that nothing in the Indenture shall
constitute such Trustees co-trustees of the same trust and that each such
Trustee shall be trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Trustee; and upon
the execution and delivery of such supplemental indenture the resignation or
removal of the retiring Trustee shall become effective to the extent provided
therein and each such successor Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Energy Notes of that or those series
to which the appointment of such successor Trustee relates; but, on request of
the Fund or any successor Trustee, such retiring Trustee shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder with respect to the Energy Notes of that or
those series to which the appointment of such successor Trustee relates.
Upon request of any such successor Trustee, the Fund shall execute any
and all instruments for more fully and certainly vesting in and confirming to
such successor Trustee all such rights, powers and trusts referred to in the
first or second preceding paragraph, as the case may be.
A-29
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible.
MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible, without the execution or
filing of any paper or any further act on the part of any of the parties hereto.
In case any such Energy Notes shall have been authenticated, but not delivered,
by the Trustee then in office, any successor by merger, conversion or
consolidation to such authenticating Trustee may adopt such authentication and
deliver the Energy Notes so authenticated with the same effect as if such
successor Trustee had itself authenticated such Energy Notes.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
FUND MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS
The Fund shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and the Fund shall not permit any Person to consolidate with or
merge into the Fund, unless:
(a) in case the Fund shall consolidate with or merge into
another Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, the Person formed by such
consolidation or into which the Fund is merged or the Person which
acquires by conveyance or transfer, or which leases, the properties and
assets of the Fund substantially as an entirety shall be a corporation,
partnership or trust, shall be organized and validly existing under the
laws of any domestic or foreign jurisdiction and shall expressly
assume, by an indenture supplemental hereto, executed and delivered to
the Trustee, in form satisfactory to the Trustee, the due and punctual
payment of the principal of and any premium and interest on all the
Energy Notes and the performance or observance of every covenant of the
Indenture on the part of the Fund to be performed or observed;
(b) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of the Fund or
any Subsidiary as a result of such transaction as having been incurred
by the Fund or such Subsidiary at the time of such transaction, no
Event of Default, and no event which, after notice or lapse of time or
both, would become an Event of Default, shall have happened and be
continuing;
(c) the Fund has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
A-30
such supplemental indenture comply and that all conditions precedent in
the Indenture provided for relating to such transaction have been
complied with.
SUCCESSOR SUBSTITUTED
Upon any consolidation of the Fund with, or merger of the Fund into,
any other Person or any conveyance, transfer or lease of the properties and
assets of the Fund substantially as an entirety, the successor Person formed by
such consolidation or into which the Fund is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Fund under the Indenture with the same
effect as if such successor Person had been named as the Fund in the Indenture,
and thereafter, except in the case of a lease, the predecessor Person shall be
relieved of all obligations and covenants under the Indenture and the Energy
Notes.
DEFEASANCE AND COVENANT DEFEASANCE
DEFEASANCE AND DISCHARGE
Upon the Fund's exercise of its option (if any) to have the provisions
of the Indenture relating to Defeasance applied to any such Energy Notes or any
series of the Energy Notes, as the case may be, the Fund shall be deemed to have
been discharged from its obligations, with respect to such Energy Notes as
provided in the Indenture on and after the date the conditions set forth are
satisfied (hereinafter called "Defeasance"). For this purpose, such Defeasance
means that the Fund shall be deemed to have paid and discharged the entire
indebtedness represented by such Energy Notes and to have satisfied all its
other obligations under such Energy Notes and the Indenture insofar as such
Energy Notes are concerned (and the Trustee, at the expense of the Fund, shall
execute proper instruments acknowledging the same), subject to the following
which shall survive until otherwise terminated or discharged hereunder: (1) the
rights of Holders of such Energy Notes to receive, solely from the trust fund,
payments in respect of the principal of and any premium and interest on such
Energy Notes when payments are due, (2) the Fund's obligations with respect to
such Energy Notes, (3) the rights, powers, trusts, duties and immunities of the
Trustee.
COVENANT DEFEASANCE
Upon the Fund's exercise of its option (if any) to have provisions of
the Indenture relating to Covenant Defeasance applied to any such Energy Notes
or any series of the Energy Notes, as the case may be, (1) the Fund shall be
released from its obligations under certain provisions of the Indenture for the
benefit of the Holders of such Energy Notes and (2) the occurrence of any event
specified in the Indenture, and any such covenants provided pursuant to certain
provisions of the Indenture shall be deemed not to be or result in an Event of
Default, in each case with respect to such Energy Notes as provided in the
Indenture on and after the date the conditions are satisfied (hereinafter called
"Covenant Defeasance"). For this purpose, such Covenant Defeasance means that,
with respect to such Energy Notes, the Fund may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such specified section of the Indenture, whether directly or indirectly by
reason of any reference elsewhere in the Indenture, or by reason of any
A-31
reference in any such section or article of the Indenture to any other provision
in the Indenture or in any other document, but the remainder of the Indenture
and such Energy Notes shall be unaffected thereby.
CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE
(a) The Fund shall irrevocably have deposited or caused to be deposited
with the Trustee (or another trustee which satisfies the requirements and agrees
to comply with the provisions of the relevant Article of the Indenture
applicable to it) as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated solely
to, the benefits of the Holders of such Energy Notes, (1) money in an amount, or
(2) U.S. Government Obligations which through the scheduled payment of principal
and interest in respect thereof in accordance with their terms will provide, not
later than one day before the due date of any payment, money in an amount, or
(3) such other obligations or arrangements as may be specified with respect to
such Energy Notes, or (4) a combination thereof, in each case sufficient, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
and discharge, and which shall be applied by the Trustee (or any such other
qualifying trustee) to pay and discharge, the principal of and any premium and
interest on such Energy Notes on the respective Stated Maturities, in accordance
with the terms of the Indenture and such Energy Notes. As used in the Indenture,
"U.S. Government Obligation" means (x) any security which is (1) a direct
obligation of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (2) an obligation
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case (1) or (2), is not callable or
redeemable at the option of the Fund thereof, and (y) any depositary receipt
issued by a bank (as defined in Section 3(a)(2) of the Energy Notes Act) as
custodian with respect to any U.S. Government Obligation which is specified in
Clause (10) above and held by such bank for the account of the holder of such
depositary receipt, or with respect to any specific payment of principal of or
interest on any U.S. Government Obligation which is so specified and held,
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depositary
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation or the specific payment of principal or interest evidenced
by such depositary receipt.
(b) In the event of an election to have Defeasance and Discharge apply
to any such Energy Notes or any series of the Energy Notes, as the case may be,
the Fund shall have delivered to the Trustee an Opinion of Counsel stating that
(1) the Fund has received from, or there has been published by, the Internal
Revenue Service a ruling or (2) since the date of this instrument, there has
been a change in the applicable Federal income tax law, in either case (1) or
(2) to the effect that, and based thereon such opinion shall confirm that, the
Holders of such Energy Notes will not recognize gain or loss for Federal income
tax purposes as a result of the deposit, Defeasance and discharge to be effected
with respect to such Energy Notes and will be subject to Federal income tax on
the same amount, in the same manner and at the same times as would be the case
if such deposit, Defeasance and discharge were not to occur.
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(c) In the event of an election to have Covenant Defeasance apply to
any such Energy Notes or any series of the Energy Notes, as the case may be, the
Fund shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of such Energy Notes will not recognize gain or loss for
Federal income tax purposes as a result of the deposit and Covenant Defeasance
to be effected with respect to such Energy Notes and will be subject to Federal
income tax on the same amount, in the same manner and at the same times as would
be the case if such deposit and Covenant Defeasance were not to occur.
(d) The Fund shall have delivered to the Trustee an Officers'
Certificate to the effect that neither such Energy Notes nor any other such
Energy Notes of the same series, if then listed on any such Energy Notes
exchange, will be delisted as a result of such deposit.
(e) No event which is, or after notice or lapse of time or both would
become, an Event of Default with respect to such Energy Notes or any other such
Energy Notes shall have occurred and be continuing at the time of such deposit
or, with regard to any such event specified, at any time on or prior to the 90th
day after the date of such deposit (it being understood that this condition
shall not be deemed satisfied until after such 90th day).
(f) Such Defeasance or Covenant Defeasance shall not cause the Trustee
to have a conflicting interest within the meaning of the Trust Indenture Act
(assuming all such Energy Notes are in default within the meaning of such Act).
(g) Such Defeasance or Covenant Defeasance shall not result in a breach
or violation of, or constitute a default under, any other agreement or
instrument to which the Fund is a party or by which it is bound.
(h) Such Defeasance or Covenant Defeasance shall not result in the
trust arising from such deposit constituting an investment company within the
meaning of the Investment Company Act unless such trust shall be registered
under the Investment Company Act or exempt from registration thereunder.
(i) No event or condition shall exist that would prevent the Fund from
making payments of the principal of (and any premium) or interest on the Energy
Notes of such series on the date of such deposit or at any time on or prior to
the 90th day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 90th day).
(j) The Fund shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Defeasance or Covenant Defeasance have been
complied with.
(k) The Fund shall have delivered to the Trustee an Opinion of Counsel
substantially to the effect that (1) the trust funds deposited pursuant hereto
will not be subject to any rights of any holders of indebtedness or equity of
the Fund, and (2) after the 90th day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, except
that if a court were to rule under any such law in any case or proceeding that
the trust funds remained property of the Fund, no opinion is given as to the
effect of such laws on the trust funds except the following: (A) assuming such
A-33
trust funds remained in the possession of the trustee with whom such funds were
deposited prior to such court ruling to the extent not paid to Holders of such
Energy Notes, such trustee would hold, for the benefit of such Holders, a valid
and perfected security interest in such trust funds that is not avoidable in
bankruptcy or otherwise and (B) such Holders would be entitled to receive
adequate protection of their interests in such trust funds if such trust funds
were used.
A-34
APPENDIX B
AUCTION PROCEDURES
1. Orders. (a) Prior to the Submission Deadline on each Auction Date
for a series of the Energy Notes:
(1) each Beneficial Owner of the Energy Notes of such series
may submit to its Broker-Dealer by telephone or otherwise information
as to:
(A) the principal amount of the Outstanding Energy
Notes, if any, of such series held by such Beneficial Owner
which such Beneficial Owner desires to continue to hold
without regard to the Applicable Rate for the Energy Notes of
such Series for the next succeeding Rate Period of such
series;
(B) the principal amount of the Outstanding Energy
Notes, if any, of such series held by such Beneficial Owner
which such Beneficial Owner offers to sell if the Applicable
Rate for the Energy Notes of such Series for the next
succeeding Rate Period of the Energy Notes of such series
shall be less than the rate per annum specified by such
Beneficial Owner; and/or
(C) the principal amount of the Outstanding Energy
Notes, if any, of such series held by such Beneficial Owner
which such Beneficial Owner offers to sell without regard to
the Applicable Rate for the Energy Notes of such Series for
the next succeeding Rate Period of the Energy Notes of such
series; and
(2) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the purpose of conducting a
competitive Auction in a commercially reasonable manner, contact
Potential Beneficial Owners (by telephone or otherwise), including
Persons that are not Beneficial Owners, on such lists to determine the
principal amount of the Energy Notes, if any, of such series which each
such Potential Beneficial Owner offers to purchase if the Applicable
Rate for the Energy Notes of such Series for the next succeeding Rate
Period of the Energy Notes of such series shall not be less than the
rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (1)(A), (1)(B), (1)(C) or
(2) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (1)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (1)(B) or (2) of this paragraph (a) is hereinafter referred to as a
"Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (1)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
B-1
(b) (1) A Bid by a Beneficial Owner or an Existing Holder of the Energy
Notes of a series subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the principal amount of the Outstanding Energy Notes of
such series specified in such Bid if the Applicable Rate for the Energy
Notes of such series determined on such Auction Date shall be less than
the rate specified therein;
(B) such principal amount or a lesser principal amount of the
Outstanding Energy Notes of such series to be determined as set forth
in clause (4) of paragraph (a) of Section 4 of this Appendix B if the
Applicable Rate for the Energy Notes of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the principal amount of the Outstanding Energy Notes of
such series specified in such Bid if the rate specified therein shall
be higher than the Maximum Rate for the Energy Notes of such series, or
such principal amount or a lesser principal amount of the Outstanding
Energy Notes of such series to be determined as set forth in clause (3)
of paragraph (b) of Section 4 of this Appendix B if the rate specified
therein shall be higher than the Maximum Rate for the Energy Notes of
such series and Sufficient Clearing Bids for the Energy Notes of such
series do not exist.
(2) A Sell Order by a Beneficial Owner or an Existing Holder of the
Energy Notes of a series of the Energy Notes subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the sum principal amount of the Outstanding Energy Notes
of such series specified in such Sell Order; or
(B) such principal amount or a lesser principal amount of the
Outstanding Energy Notes of such series as set forth in clause (3) of
paragraph (b) of Section 4 of this Appendix B if Sufficient Clearing
Bids for the Energy Notes of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to a series of the Energy Notes shall not be liable to any Person for failing to
sell such Energy Notes pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 2 of this Appendix B if (1) such Energy Notes were
transferred by the Beneficial Owner thereof without compliance by such
Beneficial Owner or its transferee Broker-Dealer (or other transferee person, if
permitted by the Fund) with the provisions of the Indenture or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such Energy Notes.
(3) A Bid by a Potential Beneficial Holder or a Potential Holder of the
Energy Notes of a series subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
B-2
(A) the principal amount of the Outstanding Energy Notes of
such series specified in such Bid if the Applicable Rate for the Energy
Notes of such series determined on such Auction Date shall be higher
than the rate specified therein; or
(B) such principal amount or a lesser principal amount of the
Outstanding Energy Notes of such series as set forth in clause (5) of
paragraph (a) of Section 4 of this Appendix B if the Applicable Rate
for the Energy Notes of such series determined on such Auction Date
shall be equal to the rate specified therein.
2. Submission of Orders by Broker-Dealers to Auction Agent. (a) Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline or prior to the Submission Processing Deadline if certain
conditions are satisfied on each Auction Date all Orders for the Energy Notes of
a series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the Fund) as an
Existing Holder in respect of the Energy Notes subject to Orders submitted or
deemed submitted to it by Beneficial Owners and as a Potential Holder in respect
of the Energy Notes subject to Orders submitted to it by Potential Beneficial
Owners, and shall specify with respect to each such Order:
(1) the name of the Bidder placing such Order (which shall be
the Broker-Dealer unless otherwise permitted by the Fund);
(2) the aggregate principal amount of the Energy Notes of
such series that are the subject of such Order;
(3) to the extent that such Bidder is an Existing Holder of
the Energy Notes of such series:
(A) the principal amount of the Energy Notes, if
any, of such series subject to any Hold Order of such Existing
Holder;
(B) the principal amount of the Energy Notes, if
any, of such series subject to any Bid of such Existing Holder
and the rate specified in such Bid; and
(C) the principal amount of the Energy Notes, if
any, of such series subject to any Sell Order of such Existing
Holder;
(4) to the extent such Bidder is a Potential Holder of the
Energy Notes of such series, the rate and principal amount of the
Energy Notes of such series specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the outstanding Energy Notes
of a series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline or Submission Deadline, as the case may be, the
Auction Agent shall deem a Hold Order to have been submitted by or on behalf of
B-3
such Existing Holder covering the principal amount of the Outstanding Energy
Notes of such series held by such Existing Holder and not subject to Orders
submitted to the Auction Agent; provided, however, that if an Order or Orders
covering all of the Outstanding Energy Notes of such series held by any Existing
Holder is not submitted to the Auction Agent prior to the Submission Deadline or
Submission Processing Deadline, as the case may be, for an Auction relating to a
Special Rate Period consisting of more than seven Rate Period Days, the Auction
Agent shall deem a Sell Order to have been submitted by or on behalf of such
Existing Holder covering the principal amount of the outstanding Energy Notes of
such series held by such Existing Holder and not subject to Orders submitted to
the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the principal amount of the
Outstanding Energy Notes of a series subject to an Auction held by such Existing
Holder, such Orders shall be considered valid in the following order of
priority:
(1) all Hold Orders for the Energy Notes of such series shall
be considered valid, but only up to and including in the aggregate
principal amount of the Outstanding Energy Notes of such series held by
such Existing Holder, and if the aggregate principal amount of the
Energy Notes of such series subject to such Hold Orders exceeds the
aggregate principal amount of the Outstanding Energy Notes of such
series held by such Existing Holder, the principal amount of the Energy
Notes subject to each such Hold Order shall be reduced pro rata to
cover the principal amount of the Outstanding Energy Notes of such
series held by such Existing Holder;
(2) (A) any Bid for the Energy Notes of such series shall be
considered valid up to and including the excess of the principal amount
of the Outstanding Energy Notes of such series subject to any Hold
Orders referred to in clause (1) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for the Energy Notes of such series is submitted to the
Auction Agent with the same rate and the aggregate principal amount of
the Outstanding Energy Notes of such series subject to such Bids is
greater than such excess, such Bids shall be considered valid up to and
including the amount of such excess, and the principal amount of the
Energy Notes of such series subject to each Bid with the same rate
shall be reduced pro rata to cover the principal amount of the Energy
Notes of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid
of an Existing Holder for the Energy Notes of such series is submitted
to the Auction Agent with different rates, such Bids shall be
considered valid in the ascending order of their respective rates up to
and including the amount of such excess; and
(D) in any such event, the amount, if any, of such
Outstanding Energy Notes of such series subject to any portion of Bids
considered not valid in whole or in part under this clause (2) shall be
treated as the subject of a Bid for the Energy Notes of such series by
or on behalf of a Potential Holder at the rate therein specified; and
B-4
(3) all Sell Orders for the Energy Notes of such series shall
be considered valid up to and including the excess of the principal
amount of the Outstanding Energy Notes of such series held by such
Existing Holder over the aggregate principal amount of the Energy Notes
of such series subject to valid Hold Orders referred to in clause (1)
above and valid Bids referred to in clause (2) above.
(e) If more than one Bid for one or more Energy Note of a series is
submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted shall be a separate Bid with the rate and principal amount
therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. (a) Not earlier than the Submission Processing Deadline on each
Auction Date for a series of the Energy Notes, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of the Energy Notes of such series (each such Order as submitted or
deemed submitted by a Broker-Dealer being hereinafter referred to individually
as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as
the case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(1) the excess of the aggregate principal amount of the
Outstanding Energy Notes of such series over the principal amount of
the Outstanding Energy Notes of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the "Available
Energy Notes" of such series);
(2) from the Submitted Orders for the Energy Notes of such
series whether:
(A) the aggregate principal amount of the
Outstanding Energy Notes of such series subject to Submitted
Bids of Potential Holders specifying one or more rates between
the Minimum Rate (for Standard Rate Periods or less, only) and
the Maximum Rate (for all Rate Periods) for the Energy Notes
of such series;
exceeds or is equal to the sum of:
(B) the aggregate principal amount of the
Outstanding Energy Notes of such series subject to Submitted
Bids of Existing Holders specifying one or more rates between
the Minimum Rate (for Standard Rate Periods or less, only) and
the Maximum Rate (for all Rate Periods) for Energy Notes of
such series; and
(C) the aggregate principal amount of the
Outstanding Energy Notes of such series subject to Submitted
Sell Orders (in the event such excess or such equality exists
(other than because all of the Outstanding Energy Notes of
such series are subject to Submitted Hold Orders), such
Submitted Bids in subclause (A) above being hereinafter
B-5
referred to collectively as "Sufficient Clearing Bids" for the
Series B Energy Notes of such series); and
(3) if Sufficient Clearing Bids for the Energy Notes of such
series exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate" for the Energy Notes of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Existing Holders specifying lower rates were rejected,
thus entitling such Existing Holders to continue to hold the
Energy Notes of such series that are subject to such Submitted
Bids; and
(B) (I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such Submitted
Bids of Potential Holders specifying lower rates were
accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate principal amount of the Outstanding Energy Notes
of such series which, when added to the aggregate principal amount of the
Outstanding Energy Notes of such series to be purchased by such Potential
Holders described in subclause (B) above, would equal not less than the
Available Energy Notes of such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 3, the Auction Agent shall advise the
Fund of the Minimum Rate and Maximum Rate for the series of the Energy Notes for
which an Auction is being held on the Auction Date and, based on such
determination, the Applicable Rate for the Energy Notes of such series for the
next succeeding Rate Period thereof as follows:
(1) if Sufficient Clearing Bids for the Energy Notes of such
series exist, that the Applicable Rate for all such Energy Notes of
such series for the next succeeding Rate Period thereof shall be equal
to the Winning Bid Rate for the Energy Notes of such series so
determined;
(2) if Sufficient Clearing Bids for the Energy Notes of such
series do not exist (other than because all of the Outstanding Energy
Notes of such series are subject to Submitted Hold Orders), that the
Applicable Rate for all such Energy Notes of such series for the next
succeeding Rate Period thereof shall be equal to the Maximum Rate for
the Energy Notes of such series; or
(3) if all of the Outstanding Energy Notes of such series are
subject to Submitted Hold Orders, that the Applicable Rate for all such
Energy Notes of such series for the next succeeding Rate Period thereof
shall be All Hold Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of the Energy Notes. Existing Holders shall continue to
hold the Energy Notes that are subject to Submitted Hold Orders, and, based on
the determinations made pursuant to paragraph (a) of Section 3 of this Appendix
B, the Submitted Bids and Submitted Sell Orders shall be accepted or rejected by
B-6
the Auction Agent and the Auction Agent shall take such other action as set
forth below:
(a) If Sufficient Clearing Bids for a series of the Energy
Notes have been made, all Submitted Sell Orders with respect to the
Energy Notes of such series shall be accepted and, subject to the
provisions of paragraphs (d) and (e) of this Section 4, Submitted Bids
with respect to the Energy Notes of such series shall be accepted or
rejected as follows in the following order of priority and all other
Submitted Bids with respect to the Energy Notes of such series shall be
rejected:
(1) Existing Holders' Submitted Bids for the Energy
Notes of such series specifying any rate that is higher than
the Winning Bid Rate for the Energy Notes of such series shall
be accepted, thus requiring each such Existing Holder to sell
the Energy Notes subject to such Submitted Bids;
(2) Existing Holders' Submitted Bids for the Energy
Notes of such series specifying any rate that is lower than
the Winning Bid Rate for the Energy Notes of such series shall
be rejected, thus entitling each such Existing Holder to
continue to hold the Energy Notes subject to such Submitted
Bids;
(3) Potential Holders' Submitted Bids for the Energy
Notes of such series specifying any rate that is lower than
the Winning Bid Rate for the Energy Notes of such series shall
be accepted;
(4) each Existing Holder's Submitted Bid for the
Energy Notes of such series specifying a rate that is equal to
the Winning Bid Rate for the Energy Notes of such series shall
be rejected, thus entitling such Existing Holder to continue
to hold the Energy Notes subject to such Submitted Bid, unless
the aggregate principal amount of the Outstanding Energy Notes
subject to all such Submitted Bids shall be greater than the
principal amount of the Energy Notes (the "remaining Energy
Notes") in the excess of the Available Energy Notes of such
series over the principal amount of the Energy Notes subject
to Submitted Bids described in clauses (2) and (3) of this
paragraph (a), in which event such Submitted Bid of such
Existing Holder shall be rejected in part, and such Existing
Holder shall be entitled to continue to hold the Energy Notes
subject to such Submitted Bid, but only in an amount equal to
the principal amount of the Energy Notes of such series
obtained by multiplying the remaining principal amount by a
fraction, the numerator of which shall be the principal amount
of the Outstanding Energy Notes held by such Existing Holder
subject to such Submitted Bid and the denominator of which
shall be the aggregate principal amount of the Outstanding
Energy Notes subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning
Bid Rate for the Energy Notes of such series; and
(5) each Potential Holder's Submitted Bid for
aggregate principal amount of such series specifying a rate
that is equal to the Winning Bid Rate for aggregate principal
amount of such series shall be accepted but only in an amount
B-7
equal to the principal amount of the Energy Notes of such
series obtained by multiplying the principal amount of the
Energy Notes in the excess of the Available Energy Notes of
such series over the principal amount of the Energy Notes
subject to Submitted Bids described in clauses (2) through (4)
of this paragraph (a) by a fraction, the numerator of which
shall be the principal amount of the Outstanding Energy Notes
subject to such Submitted Bid and the denominator of which
shall be the aggregate principal amount of the Outstanding
Energy Notes subject to such Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning
Bid Rate for the Energy Notes of such series.
(b) If Sufficient Clearing Bids for a series of the Energy
Notes have not been made (other than because all of the Outstanding
Energy Notes of such series are subject to Submitted Hold Orders),
subject to the provisions of paragraph (d) of this Section 4, Submitted
Orders for the Energy Notes of such series shall be accepted or
rejected as follows in the following order of priority and all other
Submitted Bids for the Energy Notes of such series shall be rejected:
(1) Existing Holders' Submitted Bids for the Energy
Notes of such series specifying any rate that is equal to or
lower than the Maximum Rate for the Energy Notes of such
series shall be rejected, thus entitling such Existing Holders
to continue to hold the Energy Notes subject to such Submitted
Bids;
(2) Potential Holders' Submitted Bids for the Energy
Notes of such series specifying any rate that is equal to or
lower than the Maximum Rate for the Energy Notes of such
series shall be accepted; and
(3) Each Existing Holder's Submitted Bid for the
Energy Notes of such series specifying any rate that is higher
than the Maximum Rate for the Energy Notes of such series and
the Submitted Sell Orders for the Energy Notes of such series
of each Existing Holder shall be accepted, thus entitling each
Existing Holder that submitted or on whose behalf was
submitted any such Submitted Bid or Submitted Sell Order to
sell the Energy Notes of such series subject to such Submitted
Bid or Submitted Sell Order, but in both cases only in an
amount equal to the principal amount of the Energy Notes of
such series obtained by multiplying the principal amount of
the Energy Notes of such series subject to Submitted Bids
described in clause (2) of this paragraph (b) by a fraction,
the numerator of which shall be the principal amount of the
Outstanding Energy Notes of such series held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order
and the denominator of which shall be the aggregate principal
amount of the Outstanding Energy Notes of such series subject
to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding Energy Notes of a series are
subject to Submitted Hold Orders, all Submitted Bids for the Energy
Notes of such series shall be rejected.
B-8
(d) If, as a result of the procedures described in clause (4)
or (5) of paragraph (a) or clause (3) of paragraph (b) of this Section
4, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, less than
an Authorized Denomination of the Energy Notes on any Auction Date, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, round up or down the principal amount of the Energy Notes
of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so
that the principal amount of the Energy Notes so purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be
equal to an Authorized Denomination.
(e) If, as a result of the procedures described in clause (5)
of paragraph (a) of this Section 4, any Potential Holder would be
entitled or required to purchase less than an Authorized Denomination
of the Energy Notes on any Auction Date, the Auction Agent shall, in
such manner as it shall determine in its sole discretion, allocate the
Energy Notes of such series or purchase among Potential Holders so that
only the Energy Notes of such series in Authorized Denominations are
purchased on such Auction Date as a result of such procedures by any
Potential Holder, even if such allocation results in one or more
Potential Holders not purchasing the Energy Notes of such series on
such Auction Date.
(f) Based on the results of each Auction for a series of the
Energy Notes, the Auction Agent shall determine the aggregate principal
amount of the Energy Notes of such series to be purchased and the
aggregate principal amount of the Energy Notes of such series to be
sold by Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that such
aggregate principal amount of the Energy Notes and such aggregate
principal amount of the Energy Notes to be sold differ, determine to
which other Potential Holder(s) or Existing Holder(s) they shall
deliver, or from which other Potential Holder(s) or Existing Holder(s)
they shall receive, as the case may be, the Energy Notes of such
series. Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder
or Beneficial Owner of the Energy Notes of a series with respect to
whom a Broker-Dealer submitted a Bid to the Auction Agent for such
Energy Notes that was accepted in whole or in part, or submitted or is
deemed to have submitted a Sell Order for such Energy Notes that was
accepted in whole or in part, fails to instruct its Agent Member to
deliver such Energy Notes against payment therefor, partial deliveries
of the Energy Notes that have been made in respect of Potential
Holders' or Potential Beneficial Owners' Submitted Bids for the Energy
Notes of such series that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate
of either shall have any responsibility or liability with respect to
the failure of an Existing Holder, a Potential Holder, a Beneficial
Owner, a Potential Beneficial Owner or its respective Agent Member to
deliver the Energy Notes of any series or to pay for the Energy Notes
of any series sold or purchased pursuant to the Auction Procedures or
otherwise.
B-9
APPENDIX C
RATINGS OF INVESTMENTS
Standard & Poor's Corporation--A brief description of the applicable
Standard & Poor's Corporation, a division of The McGraw-Hill Companies
("Standard & Poor's" or "S&P"), rating symbols and their meanings (as published
by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation. The issue credit rating is
not a recommendation to purchase, sell, or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. The result is a
dual rating, in which the short-term ratings address the put feature, in
addition to the usual long-term rating. Medium-term notes are assigned long-term
ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the
obligor to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights. The issue ratings definitions are expressed in terms
of default risk. As such, they pertain to senior obligations of an
entity. Junior obligations are typically rated lower than senior
obligations, to reflect the lower priority in bankruptcy, as noted
above.
C-1
AAA
An obligation rated `AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA
An obligation rated `AA' differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A
An obligation rated `A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated `BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC, AND C
Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded as
having significant speculative characteristics. `BB' indicates the least degree
of speculation and `C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB
An obligation rated `BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B
An obligation rated `B' is more vulnerable to nonpayment than
obligations rated `BB' but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
C-2
CCC
An obligation rated `CCC' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated `CC' is currently highly vulnerable to nonpayment.
C
The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D
An obligation rated `D' is in payment default. The `D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The `D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-). The ratings from `AA' to `CCC' may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
c
The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the Issuer is below an investment-grade level
and/or the Issuer's bonds are deemed taxable.
p
The letter `p' indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
C-3
*
Continuance of the ratings is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
r
The `r' highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of such
obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R.
Not rated.
Debt obligations of Issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS
Under present commercial bank regulations issued by the Comptroller of
the Currency, bonds rated in the top four categories (`AAA', `AA', W, `BBB',
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
Notes
A Standard & Poor's note ratings reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
o Amortization schedule - the larger the final maturity
relative to other maturities, the more likely it will
be treated as a note; and
o Source of payment - the more dependent the issue is
on the market for its refinancing, the more likely it
will be treated as a note.
C-4
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3
Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the Issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from `A-1' for the
highest quality obligations to `D' for the lowest. These categories are as
follows:
A-1
A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
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A-3
A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B
A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C
A short-term obligation rated `C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
D
A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The `D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the Issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Moody's Investors Service, Inc.--A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
MUNICIPAL BONDS
Aaa
Bonds which are rated `Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
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likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated `Aa' are judged to be of high quality by all
standards. Together with the `Aaa' group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in `Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in `Aaa'
securities.
A
Bonds which are rated `A' possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated `Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated `Ba' are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated `B' generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa
Bonds which are rated `Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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Ca
Bonds which are rated `Ca' represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated `C' are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. #(hatchmark): Represents issues that are
secured by escrowed funds held in cash, held in trust, invested and reinvested
in direct, non-callable, non-prepayable United States government obligations or
non-callable, non-prepayable obligations unconditionally guaranteed by the U.S.
Government, Resolution Funding Corporation debt obligations.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the condition.
(P): When applied to forward delivery bonds, indicates the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
issue ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
SHORT-TERM LOANS
MIG 1/VMIG 1
This designation denotes superior credit quality. Excellent protection
is afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2
This designation denotes strong credit quality. Margins of protection
are ample, although not as large as in the preceding group.
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MIG 3/VMIG 3
This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG
This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
COMMERCIAL PAPER
Issuers (or supporting institutions) rated Prime-1 have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will normally be evidenced by the following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
o Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers (or supporting institutions) rated Prime-2 have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation than is the case for Prime-2 securities. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch Ratings--A brief description of the applicable Fitch Ratings
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
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LONG-TERM CREDIT RATINGS
Investment Grade
AAA
Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
High credit quality. `A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB
Good credit quality. `BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB
Speculative. `BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B
Highly speculative. `B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
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CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic developments. A `CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
DDD, DD, AND D DEFAULT
The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. `DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. `DD' indicates
potential recoveries in the range of 50%-90%, and `D' the lowest recovery
potential, i.e., below 50%. Entities rated in this category have defaulted on
some or all of their obligations. Entities rated `DDD' have the highest prospect
for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated `DD' and `D' are generally undergoing a
formal reorganization or liquidation process; those rated `DD' are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
`D' have a poor prospect for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1
Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2
Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3
Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
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B
Speculative Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D
Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' Long-term
rating category, to categories below `CCC', or to Short-term ratings other than
`F1'.
`NR' indicates that Fitch Ratings does not rate the Issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount
of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are `stable' could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch Ratings may be unable to identify
the fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
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APPENDIX D
FIDUCIARY ASSET MANAGEMENT, LLC
PROXY VOTING POLICY
A. STATEMENT OF POLICY
1. It is the policy of Fiduciary Asset Management, LLC ("FAM") to vote
all proxies over which it has voting authority in the best interest of FAM's
clients.
B. DEFINITIONS
2. By "best interest of FAM's clients," FAM means clients' best
economic interest over the long term - that is, the common interest that all
clients share in seeing the value of a common investment increase over time.
Clients may have differing political or social interests, but their best
economic interest is generally uniform.
3. By "material conflict of interest," FAM means circumstances when
FAM itself knowingly does business with a particular proxy issuer or closely
affiliated entity, and may appear to have a significant conflict of interest
between its own interests and the interests of clients in how proxies of that
issuer are voted.
C. FAM INVESTS WITH MANAGEMENTS THAT SEEK SHAREHOLDERS' BEST INTERESTS
4. Under its investment philosophy, FAM generally invests client funds
in a company only if FAM believes that the company's management seeks to serve
shareholders' best interests. Because FAM has confidence in the managements of
the companies in which it invests, it believes that management decisions and
recommendations on issues such as proxy voting generally are likely to be in
shareholders' best interests.
5. FAM may periodically reassess its view of company managements. If
FAM concludes that a company's management no longer serves shareholders' best
interests, FAM generally sells its clients' shares of the company. FAM believes
that clients do not usually benefit from holding shares of a poorly managed
company or engaging in proxy contests with management. There are times when FAM
believes management's position on a particular proxy issue is not in the best
interests of our clients but it does not warrant a sale of the client's shares.
In these circumstances, FAM will vote contrary to management's recommendations.
D. FAM'S PROXY VOTING PROCEDURES
6. When companies in which FAM has invested client funds issue
proxies, FAM routinely votes the proxies as recommended by management, because
it believes that recommendations by these companies' managements generally are
in shareholders' best interests, and therefore in the best economic interest of
FAM's clients.
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7. If FAM has decided to sell the shares of a company, whether because
of concerns about the company's management or for other reasons, FAM generally
abstains from voting proxies issued by the company after FAM has made the
decision to sell. FAM generally will not notify clients when this type of
routine abstention occurs.
8. FAM also may abstain from voting proxies in other circumstances.
FAM may determine, for example, that abstaining from voting is appropriate if
voting may be unduly burdensome or expensive, or otherwise not in the best
economic interest of clients, such as when foreign proxy issuers impose
unreasonable voting or holding requirements. FAM generally will not notify
clients when this type of routine abstention occurs.
9. The procedures in this policy apply to all proxy voting matters
over which FAM has voting authority, including changes in corporate governance
structures, the adoption or amendment of compensation plans (including stock
options), and matters involving social issues or corporate responsibility.
E. ALTERNATIVE PROCEDURES FOR POTENTIAL MATERIAL CONFLICTS OF INTEREST
10. In certain circumstances, such as when the proponent of a proxy
proposal is also a client of FAM, an appearance might arise of a potential
conflict between FAM's interests and the interests of affected clients in how
the proxies of that issuer are voted.
11. Because FAM does not exercise discretion in voting proxies, but
routinely votes proxies as recommended by management, no potential conflict of
interest could actually affect FAM's voting of the proxies.
12.a. Nevertheless, when FAM itself knowingly does business with a
particular proxy issuer and a material conflict of interest between FAM's
interests and clients' interests may appear to exist, FAM generally would, to
avoid any appearance concerns, follow an alternative procedure rather than vote
proxies as recommended by management. Such an alternative procedure generally
would involve causing the proxies to be voted in accordance with the
recommendations of an independent service provider that FAM may use to assist in
voting proxies. FAM generally will not notify clients if it uses this procedure
to resolve an apparent material conflict of interest. FAM will document the
identification of any material conflict of interest and its procedure for
resolving the particular conflict.
12.b. In unusual cases, FAM may use other alternative procedures to
address circumstances when a material conflict of interest may appear to exist,
such as, without limitation:
(i) Notifying affected clients of the conflict of interest (if
practical), and seeking a waiver of the conflict to permit FAM to vote
the proxies under its usual policy;
(ii) Abstaining from voting the proxies; or
(iii) Forwarding the proxies to clients so that clients may vote
the proxies themselves.
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FAM generally will notify affected clients if it uses one of these alternative
procedures to resolve a material conflict of interest.
F. OTHER EXCEPTIONS
13. On an exceptions basis, FAM may for other reasons choose to depart
from its usual procedure of routinely voting proxies as recommended by
management.
G. VOTING BY CLIENT INSTEAD OF FAM
14. A FAM client may vote its own proxies instead of directing FAM to
do so. FAM recommends this approach if a client believes that proxies should be
voted based on political or social interests.
15. FAM generally will not accept proxy voting authority from a client
(and will encourage the client to vote its own proxies) if the client seeks to
impose client-specific voting guidelines that may be inconsistent with FAM's
guidelines or with the client's best economic interest in FAM's view.
16. FAM generally will abstain from voting on (or otherwise
participating in) the commencement of legal proceedings such as shareholder
class actions or bankruptcy proceedings.
H. PERSONS RESPONSIBLE FOR IMPLEMENTING FAM'S POLICY
17. FAM's client services staff has primary responsibility for
implementing FAM's proxy voting procedures, including ensuring that proxies are
timely submitted. FAM also may use a service provider to assist in voting
proxies, recordkeeping, and other matters.
18. FAM's Senior Vice President, Client Relations will routinely confer
with FAM's Chief Investment Officer if there is a proxy proposal which would
result in a vote against management.
I. RECORDKEEPING
19. FAM or a service provider maintains, in accordance with Rule 204-2
of the Investment Advisers Act:
(i) Copies of all proxy voting policies and procedures;
(ii) Copies of proxy statements received (unless maintained
elsewhere as described below);
(iii) Records of proxy votes cast on behalf of clients;
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(iv) Documents prepared by FAM that are material to a decision on
how to vote or memorializing the basis for a decision;
(v) Written client requests for proxy voting information; and
(vi) written responses by FAM to written or oral client requests.
20. FAM will obtain an undertaking from any service provider that the
service provider will provide copies of proxy voting records and other documents
promptly upon request if FAM relies on the service provider to maintain related
records.
21. FAM or its service provider may rely on the SEC's EDGAR system to
keep records of certain proxy statements if the proxy statements are maintained
by issuers on that system (as is generally true in the case of larger U.S.-based
issuers).
22. All proxy related records will be maintained in an easily
accessible place for five years (and an appropriate office of FAM or a service
provider for the first two years).
J. AVAILABILITY OF POLICY AND PROXY VOTING RECORDS TO CLIENTS
23. FAM will initially inform clients of this policy and how a client
may learn of FAM's voting record for the client's securities through summary
disclosure in Part II of FAM's Form ADV. Upon receipt of a client's request for
more information, FAM will provide to the client a copy of this proxy voting
policy and/or how FAM voted proxies for the client during the period since this
policy was adopted.
Adopted effective August 1, 2003 and as amended October 18, 2005.
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