N-CSRS 1 fei_ncsrs.txt SEMI-ANNUAL REPORT TO SHAREHOLDERS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-22738 ----------- First Trust MLP and Energy Income Fund --------------------------------------------------------------- (Exact name of registrant as specified in charter) 187 Danbury Road Wilton, CT 06897 --------------------------------------------------------------- (Address of principal executive offices) (Zip code) W. Scott Jardine, Esq. First Trust Portfolios L.P. 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 --------------------------------------------------------------- (Name and address of agent for service) registrant's telephone number, including area code: 630-765-8000 Date of fiscal year end: October 31 ------------ Date of reporting period: April 30, 2015 ---------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. FIRST TRUST ----------- MLP AND ENERGY INCOME ----------- FUND (FEI) SEMI-ANNUAL REPORT FOR THE SIX MONTHS ENDED APRIL 30, 2015 FIRST TRUST ENERGY INCOME PARTNERS, LLC --------------------------- -------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) SEMI-ANNUAL REPORT APRIL 30, 2015 Shareholder Letter........................................................... 1 At a Glance.................................................................. 2 Portfolio Commentary......................................................... 3 Portfolio of Investments..................................................... 5 Statement of Assets and Liabilities.......................................... 10 Statement of Operations...................................................... 11 Statements of Changes in Net Assets.......................................... 12 Statement of Cash Flows...................................................... 13 Financial Highlights......................................................... 14 Notes to Financial Statements................................................ 15 Additional Information....................................................... 23 CAUTION REGARDING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. ("First Trust" or the "Advisor") and/or Energy Income Partners, LLC ("EIP" or the "Sub-Advisor") and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as "anticipate," "estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or other words that convey uncertainty of future events or outcomes. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of First Trust MLP and Energy Income Fund (the "Fund") to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and/or Sub-Advisor and their respective representatives only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof. PERFORMANCE AND RISK DISCLOSURE There is no assurance that the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline and that the value of the Fund shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See "Risk Considerations" in the Additional Information section of this report for a discussion of certain other risks of investing in the Fund. Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit http://www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and common share price will fluctuate and Fund shares, when sold, may be worth more or less than their original cost. HOW TO READ THIS REPORT This report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund's performance and investment approach. By reading the portfolio commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund's performance. The statistical information that follows may help you understand the Fund's performance compared to that of relevant market benchmarks. It is important to keep in mind that the opinions expressed by personnel of EIP are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, this report and other Fund regulatory filings. -------------------------------------------------------------------------------- SHAREHOLDER LETTER -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO APRIL 30, 2015 Dear Shareholders: Thank you for your investment in First Trust MLP and Energy Income Fund. First Trust Advisors L.P. ("First Trust") is pleased to provide you with the semi-annual report which contains detailed information about your investment for the six months ended April 30, 2015, including a market overview and a performance analysis for the period. We encourage you to read this report and discuss it with your financial advisor. U.S. markets, fueled by accelerating growth and an accommodating Federal Reserve, enjoyed a prosperous year in 2014. However, for the six months covered by this report, some economic and global factors, including the continued conflict in the Middle East and a sharp decline in oil prices, created volatility in the U.S. and global markets. Another factor that has impacted markets is the fact that many economists are predicting the Federal Reserve will begin to raise interest rates this year. As I have written previously, First Trust believes investors should maintain perspective about the markets and have realistic expectations about their investments. Markets will always go up and down, but we believe that having a long-term investment horizon and being invested in quality products can help you reach your goals. Thank you for giving First Trust the opportunity to be a part of your investment plan. We value the relationship and will continue to focus on our disciplined investment approach and long-term perspective to help investors reach their financial goals. Sincerely, /s/ James A. Bowen James A. Bowen Chairman of the Board of Trustees Chief Executive Officer of First Trust Advisors L.P. Page 1 FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) "AT A GLANCE" AS OF APRIL 30, 2015 (UNAUDITED) --------------------------------------------------------------- FUND STATISTICS --------------------------------------------------------------- Symbol on New York Stock Exchange FEI Common Share Price $20.67 Common Share Net Asset Value ("NAV") $22.42 Premium (Discount) to NAV (7.81)% Net Assets Applicable to Common Shares $1,018,644,646 Current Monthly Distribution per Common Share (1) $0.1150 Current Annualized Distribution per Common Share $1.3800 Current Distribution Rate on Closing Common Share Price (2) 6.68% Current Distribution Rate on NAV (2) 6.16% --------------------------------------------------------------- --------------------------------------------------------------- COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE) --------------------------------------------------------------- Common Share Price NAV 4/30/14 20.60 22.13 20.19 22.12 20.27 22.10 20.72 22.26 20.70 22.42 5/30/14 20.80 22.49 20.93 22.67 20.74 22.49 21.12 22.79 6/27/14 21.63 23.32 21.19 23.08 21.29 23.01 21.47 23.13 7/25/14 21.46 23.26 20.61 22.42 20.73 22.47 21.79 23.63 21.67 23.75 8/29/14 22.15 24.09 21.81 23.98 21.45 23.56 21.21 24.02 9/26/14 20.89 23.53 20.97 23.27 19.79 22.07 20.90 22.43 21.23 23.12 10/31/14 21.61 23.27 21.32 23.31 21.40 23.27 21.84 23.90 11/28/14 20.89 23.12 20.95 23.16 19.41 21.56 20.76 22.53 12/26/14 21.13 22.97 21.45 23.10 20.14 22.18 20.15 22.05 20.51 22.49 1/30/15 20.86 22.22 21.27 22.50 20.73 22.62 20.90 22.75 2/27/15 21.08 22.32 20.46 21.77 19.65 21.08 20.19 21.57 3/27/15 20.47 21.48 19.98 21.54 20.19 21.94 20.38 22.10 20.39 22.38 4/30/15 20.67 22.42 ---------------------------------------------------------------
---------------------------------------------------------------------------------------------------------- PERFORMANCE ---------------------------------------------------------------------------------------------------------- Average Annual Total Return ---------------------------- Inception 6 Months Ended 1 Year Ended (11/27/12) 4/30/15 4/30/15 to 4/30/15 Fund Performance (3) NAV -0.41% 8.11% 13.51% Market Value -1.13% 7.03% 7.69% Index Performance S&P 500(R) Index 4.40% 12.98% 20.35% Alerian MLP Total Return Index -7.48% -0.71% 12.02% Wells Fargo Midstream MLP Total Return Index -1.35% 9.85% 19.27% ----------------------------------------------------------------------------------------------------------
---------------------------------------------------------- % OF TOTAL INDUSTRY CLASSIFICATION INVESTMENTS ---------------------------------------------------------- Pipelines 74.8% Electric Power 6.4 Propane 5.7 Coal 3.6 Natural Gas Utility 3.6 Marine Transportation 3.0 Gathering & Processing 2.2 Other 0.7 ---------------------------------------------------------- Total 100.0% ======= ---------------------------------------------------------- % OF TOTAL TOP 10 HOLDINGS INVESTMENTS ---------------------------------------------------------- Kinder Morgan, Inc. 10.4% Enbridge Energy Partners, L.P. 7.4 Enterprise Products Partners, L.P. 6.9 Magellan Midstream Partners, L.P. 4.6 Energy Transfer Equity, L.P. 3.9 Plains All American Pipeline, L.P. 3.8 Williams (The) Cos., Inc. 3.8 TC Pipelines, L.P. 3.3 Spectra Energy Partners, L.P. 3.1 Williams Partners, L.P. 3.1 ---------------------------------------------------------- Total 50.3% ======= (1) Most recent distribution paid or declared through 4/30/2015. Subject to change in the future. (2) Distribution rates are calculated by annualizing the most recent distribution paid or declared through the report date and then dividing by Common Share price or NAV, as applicable, as of 4/30/2015. Subject to change in the future. (3) Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan and changes in NAV per share for NAV returns and changes in Common Share price for market value returns. Total returns do not reflect sales load and are not annualized for periods less than one year. Past performance is not indicative of future results. Page 2 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) SEMI-ANNUAL REPORT APRIL 30, 2015 SUB-ADVISOR ENERGY INCOME PARTNERS, LLC Energy Income Partners, LLC ("EIP"), Westport, CT, was founded in 2003 to provide professional asset management services in the area of energy-related master limited partnerships ("MLPs") and other high-payout securities such as pipeline companies, power utilities, Yield-Co's, and energy infrastructure real estate investment trusts ("REITs"). EIP mainly focuses on investments in energy-related infrastructure assets such as pipelines, power transmission and distribution, petroleum storage and terminals that receive fee-based or regulated income from their corporate and individual customers. As of April 30, 2015, EIP manages or supervises approximately $6.1 billion of assets. Private funds advised by EIP include a partnership for U.S. high net worth individuals and a master-and-feeder fund for institutions. EIP also manages separately managed accounts and provides its model portfolio to unified managed accounts. Finally, EIP serves as a sub-advisor to three closed-end management investment companies in addition to the First Trust MLP and Energy Income Fund ("FEI" or the "Fund"), an actively managed exchange-traded fund ("ETF"), a sleeve of an actively managed ETF and a sleeve of a series of a variable insurance trust. EIP is a registered investment advisor with the Securities and Exchange Commission. PORTFOLIO MANAGEMENT TEAM JAMES J. MURCHIE EVA PAO PORTFOLIO MANAGER CO-PORTFOLIO MANAGER FOUNDER AND CEO OF PRINCIPAL OF ENERGY INCOME PARTNERS, LLC ENERGY INCOME PARTNERS, LLC COMMENTARY FIRST TRUST MLP AND ENERGY INCOME FUND The Fund's investment objective is to seek a high level of total return with an emphasis on current distributions paid to common shareholders. The Fund pursues its objective by investing in cash-generating securities, with a focus on investing in MLPs and MLP-related entities in the energy sector and energy utilities industries. There can be no assurance that the Fund's investment objective will be achieved. The Fund may not be appropriate for all investors. MARKET RECAP As measured by the Alerian MLP Total Return Index ("AMZX") and the Wells Fargo Midstream MLP Total Return Index ("WCHWMIDT") (collectively the "MLP benchmarks"), the total return for energy-related MLPs over the six months ended April 30, 2015 was -7.48% and -1.35%, respectively. For AMZX, these returns reflect a positive 5.6% on an annualized basis from distribution payments, and the remaining returns are due to share price depreciation. For WCHWMIDT, these returns reflect a positive 4.95% on an annualized basis from distribution payments, while the remaining returns are due to share price depreciation. These figures are according to data collected from several sources, including the MLP benchmarks and Bloomberg. While in the short term market share price appreciation can be volatile, we believe that over the long term share price appreciation will approximate growth in per share quarterly cash distributions paid by MLPs. Growth in per share MLP distributions has averaged about 5.5% per year over the last 10 years. The cash distributions of MLPs decreased by about 4.7% over the last 12 months (source: Alerian Capital Management). PERFORMANCE ANALYSIS On a net asset value ("NAV") basis, for the six months ended April 30, 2015, the Fund provided a total return of -0.41%, including the reinvestment of dividends.(1) This compares, according to collected data, to a total return of 4.40% for the S&P 500(R) Index, -7.48% for AMZX and -1.35% for WCHWMIDT. On a market value basis, the Fund had a total return, including the reinvestment of dividends, of -1.13% for the six months ended April 30, 2015. At the end of the period, the Fund was priced at $20.67, while the NAV was $22.42, a discount of 7.81%. On October 31, 2014, the Fund was priced at $21.61, while the NAV was $23.27, a discount of 7.13%. ----------------------------- (1) Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan, changes in NAV per share for NAV returns and changes in Common Share price for market value returns. Total returns do not reflect a sales load. Past performance is not indicative of future results. Page 3 -------------------------------------------------------------------------------- PORTFOLIO COMMENTARY (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) SEMI-ANNUAL REPORT APRIL 30, 2015 The Fund increased its regular monthly Common Share distribution from $0.1117 to $0.1134 in January 2015 and to $0.1150 in April 2015. The Fund's NAV outperformed the -4.42% average of the MLP benchmarks. Contributing to this was underweight positions in MLPs that significantly underperformed the MLP benchmarks. The non-MLP portion of the portfolio contributed positively to performance. Income was enhanced by writing covered calls on select portfolio positions. Two important factors affecting the return of the Fund, relative to the average of the MLP benchmarks, are its accrual for taxes and its use of financial leverage through a line of credit. The Fund established a committed facility agreement with The Bank of Nova Scotia with a current maximum commitment amount of $400,000,000. The Fund uses leverage because its managers believe that, over time, leverage can enhance total return for common shareholders. However, the use of leverage can also increase the volatility of the NAV and therefore the share price. For example, if the prices of securities held by the Fund decline, the effect of changes in common share NAV and common shareholder total return loss is magnified by the use of leverage. Conversely, leverage may enhance common share returns during periods when the prices of securities held by the Fund generally are rising. Unlike the Fund, the MLP benchmarks are not leveraged, nor are their returns net of an accrual for taxes. Leverage had a negative impact on the performance of the Fund over this reporting period. MARKET AND FUND OUTLOOK MLPs continue to play an integral role in the restructuring of more diversified energy conglomerates. This restructuring includes the creation by these more diversified conglomerates of MLP subsidiaries that contain assets such as pipelines and storage terminals. It also includes the divestiture by some of these parent companies of most or all of their cyclical businesses, leaving the parent company looking very similar to an old-fashioned pipeline utility with a large holding in a subsidiary MLP. In our view, these diversified energy conglomerates are restructuring so their regulated infrastructure assets with predictable cash flows may be better valued by the market. The result is a better financing tool, in our opinion, to raise capital for the new energy infrastructure projects related to the rapid growth of North American oil and gas production. This phenomenon has spread to the power utility industry but instead of spinning out an MLP, diversified power companies are spinning out a regular "C" corporation with a higher dividend payout ratio (relative to earnings). As of April 30, 2015, the MLP asset class experienced three IPOs in 2015. There also has been a healthy level of secondary financing activity for MLPs as they continue to fund their ongoing investments in new pipelines, processing and storage facilities. Calendar year-to-date through April 30, 2015, there have been 17 secondary equity offerings for MLPs that raised $5.8 billion. This compares to $19.1 billion raised in calendar year 2014. Calendar year-to-date through April 30, 2015, MLPs also found access to the public debt markets, raising $14.1 billion in 14 offerings. This compares to $28.1 billion in calendar year 2014 (source: Barclays). The Fund continues to aim to be invested primarily in MLPs and other energy infrastructure companies with mostly non-cyclical cash flows, investment-grade ratings, conservative balance sheets, modest and/or flexible organic growth commitments and liquidity on their revolving lines of credit. Non-cyclical cash flows are, in our opinion, a good fit with a steady dividend obligation that is meant to be most or all of an energy infrastructure company's free cash flow. Page 4 FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) PORTFOLIO OF INVESTMENTS APRIL 30, 2015 (UNAUDITED)
SHARES/ UNITS DESCRIPTION VALUE ------------ ----------------------------------------------------------------------------- -------------- MASTER LIMITED PARTNERSHIPS - 88.3% GAS UTILITIES - 7.3% 879,374 AmeriGas Partners, L.P. (a).................................................. $ 42,851,895 690,902 Suburban Propane Partners, L.P. (a).......................................... 30,848,774 -------------- 73,700,669 -------------- INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 0.8% 100,000 Brookfield Renewable Energy Partners, L.P. (CAD) (a)......................... 3,269,789 124,127 NextEra Energy Partners, L.P. (a)............................................ 5,259,261 -------------- 8,529,050 -------------- OIL, GAS & CONSUMABLE FUELS - 80.2% 257,534 Alliance Holdings GP, L.P. (a)............................................... 12,799,440 1,129,260 Alliance Resource Partners, L.P. (a)......................................... 38,925,592 280,400 Columbia Pipeline Partners, L.P.............................................. 7,584,820 2,915,670 Enbridge Energy Partners, L.P. (a)........................................... 108,287,984 860,000 Energy Transfer Equity, L.P. (a)............................................. 57,327,600 780,030 Energy Transfer Partners, L.P. (a)........................................... 45,070,133 2,970,341 Enterprise Products Partners, L.P. (a)....................................... 101,734,179 250,000 EQT Midstream Partners, L.P. (a)............................................. 22,050,000 125,000 Golar LNG Partners, L.P. (a)................................................. 3,651,250 75,000 Hoegh LNG Partners, L.P. (a)................................................. 1,627,500 743,405 Holly Energy Partners, L.P. (a).............................................. 24,495,195 810,000 Magellan Midstream Partners, L.P. (a)........................................ 67,635,000 296,337 Natural Resource Partners, L.P. (a).......................................... 1,511,318 844,772 NGL Energy Partners, L.P. (a)................................................ 24,718,029 909,000 ONEOK Partners, L.P. (a)..................................................... 38,132,550 101,000 Phillips 66 Partners, L.P. (a)............................................... 7,660,850 1,109,000 Plains All American Pipeline, L.P. (a)....................................... 55,571,990 44,900 Shell Midstream Partners, L.P................................................ 1,804,531 849,811 Spectra Energy Partners, L.P. (a)............................................ 46,042,760 12,500 Tallgrass Energy Partners L.P................................................ 615,000 160,000 Targa Resources Partners, L.P. (a)........................................... 7,270,400 702,500 TC Pipelines, L.P. (a)....................................................... 47,826,200 986,624 Teekay LNG Partners, L.P. (a)................................................ 38,892,718 257,700 TransMontaigne Partners, L.P. (a)............................................ 9,717,867 921,607 Williams Partners, L.P. (a).................................................. 45,527,386 -------------- 816,480,292 -------------- TOTAL MASTER LIMITED PARTNERSHIPS............................................ 898,710,011 (Cost $623,791,698) -------------- COMMON STOCKS - 56.0% ELECTRIC UTILITIES - 3.5% 3,400 American Electric Power Co., Inc............................................. 193,358 163,000 Emera, Inc. (CAD) (a)........................................................ 5,493,228 1,000 Eversource Energy............................................................ 48,760 215,000 Exelon Corp.................................................................. 7,314,300 616,600 ITC Holdings Corp. (a)....................................................... 22,197,600 -------------- 35,247,246 --------------
See Notes to Financial Statements Page 5 FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) PORTFOLIO OF INVESTMENTS (CONTINUED) APRIL 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE ------------ ----------------------------------------------------------------------------- -------------- COMMON STOCKS (CONTINUED) GAS UTILITIES - 1.8% 79,033 Atmos Energy Corp. (a)....................................................... $ 4,267,782 50,000 Piedmont Natural Gas Co., Inc................................................ 1,872,000 40,000 South Jersey Industries, Inc................................................. 2,110,000 299,624 UGI Corp..................................................................... 10,429,912 -------------- 18,679,694 -------------- INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 2.1 % 289,100 NRG Yield, Inc., Class A (a)................................................. 14,223,720 260,000 Pattern Energy Group, Inc. (a)............................................... 7,534,800 -------------- 21,758,520 -------------- MULTI-UTILITIES - 6.4% 142,000 ATCO, Ltd., Class I (CAD) (a)................................................ 5,382,230 1,400 CMS Energy Corp.............................................................. 47,502 431,400 Dominion Resources, Inc...................................................... 30,922,752 34,500 National Grid PLC, ADR....................................................... 2,326,335 316,400 NiSource, Inc................................................................ 13,738,088 75,000 Public Service Enterprise Group, Inc......................................... 3,115,500 86,500 Sempra Energy................................................................ 9,183,705 4,600 Wisconsin Energy Corp........................................................ 225,952 -------------- 64,942,064 -------------- OIL, GAS & CONSUMABLE FUELS - 41.1% 774,500 Enbridge Income Fund Holdings, Inc. (CAD) (a)................................ 24,952,188 823,700 Enbridge, Inc................................................................ 43,104,221 1,045,500 Inter Pipeline, Ltd. (CAD) (a)............................................... 27,383,174 436,096 Keyera Corp. (CAD) (a)....................................................... 15,351,013 3,572,943 Kinder Morgan, Inc. (a)...................................................... 153,457,902 100,000 ONEOK, Inc................................................................... 4,810,000 273,000 Pembina Pipeline Corp. (CAD) (a)............................................. 9,501,260 1,167,400 Spectra Energy Corp.......................................................... 43,485,650 886,657 TransCanada Corp............................................................. 41,158,618 1,081,000 Williams (The) Cos., Inc..................................................... 55,336,390 -------------- 418,540,416 -------------- REAL ESTATE INVESTMENT TRUSTS - 1.1% 465,867 CorEnergy Infrastructure Trust............................................... 3,163,237 269,090 InfraREIT, Inc............................................................... 8,392,917 -------------- 11,556,154 -------------- TOTAL COMMON STOCKS.......................................................... 570,724,094 (Cost $466,440,643) -------------- TOTAL INVESTMENTS - 144.3%................................................... 1,469,434,105 (Cost $1,090,232,341) (b) --------------
Page 6 See Notes to Financial Statements FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) PORTFOLIO OF INVESTMENTS (CONTINUED) APRIL 30, 2015 (UNAUDITED)
NUMBER OF CONTRACTS DESCRIPTION VALUE ------------ ----------------------------------------------------------------------------- -------------- CALL OPTIONS WRITTEN - (0.5%) Dominion Resources, Inc. Calls 2,300 @ $75.00 due June 2015....................................................... $ (105,800) 2,000 @ 75.00 due July 2015....................................................... (130,000) -------------- (235,800) -------------- Enbridge Energy Partners, L.P. Calls 2,000 @ 40.00 due July 2015....................................................... (80,000) 2,180 @ 40.00 due October 2015.................................................... (141,700) -------------- (221,700) -------------- Enbridge, Inc. Calls 200 @ 55.00 due June 2015....................................................... (11,000) 2,000 @ 55.00 due July 2015....................................................... (200,000) 6,000 @ 60.00 due October 2015.................................................... (375,000) -------------- (586,000) -------------- Energy Transfer Partners, L.P. Call 2,100 @ 60.00 due June 2015....................................................... (252,000) -------------- Enterprise Products Partners, L.P. Calls 2,320 @ 35.00 due June 2015....................................................... (150,800) 2,300 @ 37.50 due June 2015....................................................... (23,000) 2,500 @ 37.50 due September 2015.................................................. (112,500) -------------- (286,300) -------------- Exelon Corp. Call 2,150 @ 36.00 due July 2015....................................................... (86,000) -------------- ITC Holdings Corp. Call 750 @ 45.00 due August 2015 (c)................................................. (15,000) -------------- Kinder Morgan, Inc. Calls 65 @ 42.50 due May 2015........................................................ (5,330) 9,280 @ 45.00 due June 2015....................................................... (287,680) 2,000 @ 47.50 due June 2015....................................................... (18,000) 2,500 @ 45.00 due September 2015.................................................. (217,500) 940 @ 50.00 due September 2015.................................................. (17,390) 3,000 @ 47.50 due December 2015................................................... (198,000) -------------- (743,900) -------------- Magellan Midstream Partners, L.P. Call 1,000 @ 87.50 due July 2015....................................................... (150,000) -------------- National Grid PLC, ADR Call 300 @ 70.00 due June 2015....................................................... (9,000) -------------- NiSource, Inc. Calls 2,580 @ 46.00 due June 2015....................................................... (122,550) 300 @ 46.00 due July 2015....................................................... (20,250) 210 @ 47.00 due July 2015....................................................... (8,925) -------------- (151,725) -------------- ONEOK Partners, L.P. Call 1,000 @ 52.50 due July 2015....................................................... (107,500) -------------- Plains All American Pipeline, L.P. Calls 800 @ 52.50 due August 2015..................................................... (92,000) 860 @ 55.00 due August 2015..................................................... (30,100) -------------- (122,100) --------------
See Notes to Financial Statements Page 7 FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) PORTFOLIO OF INVESTMENTS (CONTINUED) APRIL 30, 2015 (UNAUDITED)
NUMBER OF CONTRACTS DESCRIPTION VALUE ------------ ----------------------------------------------------------------------------- -------------- CALL OPTIONS WRITTEN (CONTINUED) Public Service Enterprise Group, Inc. Call 750 @ $45.00 due May 2015........................................................ $ (5,625) -------------- Sempra Energy Calls 300 @ 115.00 due July 2015...................................................... (15,000) 560 @ 125.00 due July 2015 (c).................................................. (25,200) -------------- (40,200) -------------- Spectra Energy Corp. Calls 600 @ 38.00 due May 2015........................................................ (18,000) 2,000 @ 37.00 due June 2015....................................................... (215,000) 3,570 @ 38.00 due June 2015....................................................... (274,890) 1,500 @ 39.00 due June 2015....................................................... (64,500) 2,000 @ 40.00 due June 2015....................................................... (45,000) 2,000 @ 39.00 due September 2015.................................................. (170,000) -------------- (787,390) -------------- TransCanada Corp. Calls 2,500 @ 50.00 due May 2015........................................................ (25,000) 2,620 @ 55.00 due May 2015 (c).................................................... (26,200) 1,150 @ 50.00 due August 2015..................................................... (86,250) 2,500 @ 50.00 due November 2015................................................... (331,250) -------------- (468,700) -------------- UGI Corp. Call 2,900 @ 37.50 due October 2015.................................................... (209,260) -------------- Williams (The) Cos., Inc. 2,000 @ 52.50 due May 2015........................................................ (74,000) 590 @ 52.50 due June 2015....................................................... (51,330) 2,240 @ 55.00 due June 2015....................................................... (71,680) 3,580 @ 55.00 due July 2015....................................................... (189,740) 2,399 @ 55.00 due August 2015..................................................... (201,516) -------------- (588,266) -------------- TOTAL CALL OPTIONS WRITTEN................................................... (5,066,466) (Premiums received $5,176,963) -------------- OUTSTANDING LOAN - (33.2%)................................................... (338,000,000) NET OTHER ASSETS AND LIABILITIES - (10.6%)................................... (107,722,993) -------------- NET ASSETS - 100.0%.......................................................... $1,018,644,646 ==============
----------------------------- (a) All or a portion of this security serves as collateral on the outstanding loan. (b) Aggregate cost for federal income tax purposes is $988,011,643. As of April 30, 2015, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $487,041,461 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $5,618,999. (c) This investment is fair valued by the Advisor's Pricing Committee in accordance with procedures adopted by the Fund's Board of Trustees and in accordance with provisions of the Investment Company Act of 1940, as amended. At April 30, 2015, investments noted as such are valued at $(66,400) or (0.01%) of net assets. ADR American Depositary Receipt CAD Canadian Dollar - Security is denominated in Canadian Dollars and is translated into U.S. Dollars based upon the current exchange rate. Page 8 See Notes to Financial Statements FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) PORTFOLIO OF INVESTMENTS (CONTINUED) APRIL 30, 2015 (UNAUDITED) INTEREST RATE SWAP AGREEMENTS:
NOTIONAL COUNTERPARTY FLOATING RATE (1) EXPIRATION DATE AMOUNT FIXED RATE (1) VALUE -------------------- ----------------- ------------------ ------------- ----------------- ------------ Bank of Nova Scotia 1 month LIBOR 10/08/23 $ 77,250,000 2.734% $ (5,677,876) Bank of Nova Scotia 1 month LIBOR 09/03/24 97,000,000 2.367% (4,015,010) ------------- ------------ $ 174,250,000 $ (9,692,886) ============= ============
(1) The Fund pays the fixed rate and receives the floating rate. The floating rates on April 30, 2015 were 0.180%. ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of April 30, 2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
ASSETS TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 4/30/2015 PRICES INPUTS INPUTS --------------- --------------- --------------- --------------- Master Limited Partnerships*................... $ 898,710,011 $ 898,710,011 $ -- $ -- Common Stocks*................................. 570,724,094 570,724,094 -- -- --------------- --------------- --------------- --------------- TOTAL.......................................... $ 1,469,434,105 $ 1,469,434,105 $ -- $ -- =============== =============== =============== =============== LIABILITIES TABLE LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE 4/30/2015 PRICES INPUTS INPUTS --------------- --------------- --------------- --------------- Call Options Written........................... $ (5,066,466) $ (5,000,066) $ (66,400) $ -- Interest Rate Swap**........................... (9,692,886) -- (9,692,886) -- --------------- --------------- --------------- --------------- TOTAL.......................................... $ (14,759,352) $ (5,000,066) $ (9,759,286) $ -- =============== =============== =============== ===============
* See Portfolio of Investments for industry breakout. ** See Interest Rate Swap Agreements for contract detail. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at April 30, 2015. See Notes to Financial Statements Page 9 FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 2015 (UNAUDITED)
ASSETS: Investments, at value (Cost $1,090,232,341)...................................................................... $1,469,434,105 Cash........................................................................................... 35,139,704 Cash segregated as collateral for open swap contracts.......................................... 17,822,774 Receivables: Dividends.................................................................................. 6,238,044 Investment securities sold................................................................. 2,802,883 Income taxes............................................................................... 552,257 Interest................................................................................... 240 Prepaid expenses............................................................................... 43,830 -------------- Total Assets............................................................................... 1,532,033,837 -------------- LIABILITIES: Outstanding loan............................................................................... 338,000,000 Deferred income taxes.......................................................................... 149,872,237 Options written, at value (Premiums received $5,176,963)....................................... 5,066,466 Swap contracts, at value (Cost $968)........................................................... 9,692,886 Payables: Investment securities purchased............................................................ 8,917,246 Investment advisory fees................................................................... 1,098,526 Administrative fees........................................................................ 307,594 Interest and fees on loan.................................................................. 255,215 Audit and tax fees......................................................................... 90,724 Custodian fees............................................................................. 50,482 Legal fees................................................................................. 21,427 Transfer agent fees........................................................................ 6,565 Printing fees.............................................................................. 4,453 Trustees' fees and expenses................................................................ 3,508 Financial reporting fees................................................................... 771 Other liabilities.............................................................................. 1,091 -------------- Total Liabilities.......................................................................... 513,389,191 -------------- NET ASSETS..................................................................................... $1,018,644,646 ============== NET ASSETS CONSIST OF: Paid-in capital................................................................................ $ 741,995,139 Par value...................................................................................... 454,395 Accumulated net investment income (loss), net of income taxes.................................. (2,456,444) Accumulated net realized gain (loss) on investments, written options, swap contracts and foreign currency transactions, net of income taxes........................... 38,431,955 Net unrealized appreciation (depreciation) on investments, written options, swap contracts and foreign currency translation, net of income taxes............................ 240,219,601 -------------- NET ASSETS..................................................................................... $1,018,644,646 ============== NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 22.42 ============== Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 45,439,454 ==============
Page 10 See Notes to Financial Statements FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
INVESTMENT INCOME: Dividends (net of foreign withholding tax of $452,416)......................................... $ 10,955,404 Interest....................................................................................... 946 Other.......................................................................................... 127 -------------- Total investment income.................................................................... 10,956,477 -------------- EXPENSES: Investment advisory fees....................................................................... 6,746,932 Interest and fees on loan...................................................................... 1,411,415 Administrative fees............................................................................ 473,827 Printing fees.................................................................................. 79,346 Custodian fees................................................................................. 63,248 Audit and tax fees............................................................................. 49,047 Legal fees..................................................................................... 18,649 Trustees' fees and expenses.................................................................... 15,858 Transfer agent fees............................................................................ 13,079 Financial reporting fees....................................................................... 4,625 Other.......................................................................................... 33,967 -------------- Total expenses............................................................................. 8,909,993 -------------- NET INVESTMENT INCOME (LOSS) BEFORE TAXES...................................................... 2,046,484 -------------- Current state income tax benefit (expense)..................................... (6,471) Current federal income tax benefit (expense)................................... -- Current foreign income tax benefit (expense)................................... -- Deferred federal income tax benefit (expense).................................. (231,292) Deferred state income tax benefit (expense).................................... (422,436) ----------- Total income tax benefit (expense)............................................................. (660,199) -------------- NET INVESTMENT INCOME (LOSS)................................................................... 1,386,285 -------------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) before taxes on: Investments................................................................................ 7,011,217 Written options............................................................................ 5,362,063 Swap contracts............................................................................. (2,102,494) Foreign currency transactions.............................................................. (29,824) -------------- Net realized gain (loss) before taxes.......................................................... 10,240,962 -------------- Deferred federal income tax benefit (expense).................................. (2,599,190) Deferred state income tax benefit (expense).................................... (77,486) ----------- Total income tax benefit (expense)......................................................... (2,676,676) -------------- Net realized gain (loss) on investments, written options, swap contracts and foreign currency transactions............................................................................... 7,564,286 -------------- Net change in unrealized appreciation (depreciation) before taxes on: Investments................................................................................ (23,940,473) Written options............................................................................ 3,174,205 Swap contracts............................................................................. (5,702,901) Foreign currency translation............................................................... 2,306 -------------- Net change in unrealized appreciation (depreciation) before taxes.............................. (26,466,863) -------------- Deferred federal income tax benefits (expense)................................. 9,326,112 Deferred state income tax benefits (expense)................................... 353,371 ----------- Total income tax benefit (expense)......................................................... 9,679,483 -------------- Net change in unrealized appreciation (depreciation) on investments, written options, swap contracts and foreign currency translation................................... (16,787,380) -------------- NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (9,223,094) -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ (7,836,809) ==============
See Notes to Financial Statements Page 11 FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR 4/30/2015 ENDED (UNAUDITED) 10/31/2014 ---------------- ---------------- OPERATIONS: Net investment income (loss)........................................................ $ 1,386,285 $ (1,464,780) Net realized gain (loss)............................................................ 7,564,286 29,882,551 Net change in unrealized appreciation (depreciation)................................ (16,787,380) 144,347,561 -------------- -------------- Net increase (decrease) in net assets resulting from operations..................... (7,836,809) 172,765,332 -------------- -------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income............................................................... -- -- Return of capital................................................................... (30,835,213) (60,598,056) -------------- -------------- Total distributions to shareholders................................................. (30,835,213) (60,598,056) -------------- -------------- Total increase (decrease) in net assets............................................. (38,672,022) 112,167,276 NET ASSETS: Beginning of period................................................................. 1,057,316,668 945,149,392 -------------- -------------- End of period....................................................................... $1,018,644,646 $1,057,316,668 ============== ============== Accumulated net investment income (loss), net of income taxes at end of period...... $ (2,456,444) $ (3,842,729) ============== ============== COMMON SHARES: Common Shares at end of period...................................................... 45,439,454 45,439,454 ============== ==============
Page 12 See Notes to Financial Statements FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES: Net increase (decrease) in net assets resulting from operations.................... $ (7,836,809) Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities: Purchases of investments....................................................... (215,812,450) Sales of investments........................................................... 229,077,483 Proceeds from written options.................................................. 10,237,654 Amount paid to close written options........................................... (2,980,466) Return of capital received from investment in MLPs............................. 21,051,203 Net realized gain/loss on investments and written options...................... (12,373,280) Net change in unrealized appreciation/depreciation on investments and written options.......................................................... 20,766,268 Net change in unrealized appreciation/depreciation on swap contracts........... 5,702,901 Increase in cash segregated as collateral for open swap contracts.............. (4,872,504) CHANGES IN ASSETS AND LIABILITIES: Increase in interest receivable................................................ (240) Decrease in dividends receivable (a)........................................... 1,649,170 Decrease in income tax receivable.............................................. 2,580 Increase in prepaid expenses................................................... (16,747) Increase in interest and fees on loan payable.................................. 19,762 Decrease in investment advisory fees payable................................... (77,132) Decrease in audit and tax fees payable......................................... (8,276) Increase in legal fees payable................................................. 2,050 Decrease in printing fees payable.............................................. (35,742) Increase in administrative fees payable........................................ 212,367 Increase in custodian fees payable............................................. 18,144 Increase in transfer agent fees payable........................................ 1,527 Increase in Trustees' fees and expenses payable................................ 890 Decrease in deferred income tax payable........................................ (6,349,079) Decrease in other liabilities payable.......................................... (12,212) ---------------- CASH PROVIDED BY OPERATING ACTIVITIES............................................. $ 38,367,062 ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions to Common Shareholders from return of capital.................... (30,835,213) Proceeds from borrowing........................................................ 23,000,000 Repayment of borrowing......................................................... (35,000,000) ---------------- CASH USED IN FINANCING ACTIVITIES.................................................. (42,835,213) ---------------- Decrease in cash and foreign currency.............................................. (4,468,151) Cash and foreign currency at beginning of period................................... 39,607,855 ---------------- CASH AT END OF PERIOD.............................................................. $ 35,139,704 ================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest and fees.................................. $ 1,391,653 ================ Cash paid during the period for taxes.............................................. $ 1,113,565 ================
----------------------------- (a) Includes net change in unrealized appreciation (depreciation) on foreign currency of $2,306. See Notes to Financial Statements Page 13 FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) FINANCIAL HIGHLIGHTS FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS ENDED YEAR PERIOD 4/30/2015 ENDED ENDED (UNAUDITED) 10/31/2014 10/31/2013 (a) --------------- --------------- --------------- Net asset value, beginning of period.............. $ 23.27 $ 20.80 $ 19.10 (b) ----------- ----------- ----------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss)...................... 0.03 (0.03) (0.05) Net realized and unrealized gain (loss)........... (0.20) 3.83 2.81 ----------- ----------- ----------- Total from investment operations.................. (0.17) 3.80 2.76 ----------- ----------- ----------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income............................. -- -- -- Net realized gain................................. -- -- (0.25) Return of capital................................. (0.68) (1.33) (0.73) ----------- ----------- ----------- Total distributions............................... (0.68) (1.33) (0.98) ----------- ----------- ----------- Common Shares offering costs charged to paid-in capital....................................... -- -- (0.02) ----------- ----------- ----------- Capital reduction resulting from issuance of Common Shares related to over-allotment....... -- -- (0.06) ----------- ----------- ----------- Net asset value, end of period.................... $ 22.42 $ 23.27 $ 20.80 =========== =========== =========== Market value, end of period....................... $ 20.67 $ 21.61 $ 19.63 =========== =========== =========== TOTAL RETURN BASED ON NET ASSET VALUE (c)......... (0.41)% 19.43% 14.27% =========== =========== =========== TOTAL RETURN BASED ON MARKET VALUE (c)............ (1.13)% 17.52% 2.99% =========== =========== =========== ----------------------------- Net assets, end of period (in 000's).............. $ 1,018,645 $ 1,057,317 $ 945,149 Portfolio turnover rate........................... 14% 34% 35% RATIOS OF EXPENSES TO AVERAGE NET ASSETS: Including current and deferred income taxes (d)... 0.51% (e) 11.28% 9.53% (e) Excluding current and deferred income taxes....... 1.77% (e) 1.79% 1.67% (e) Excluding current and deferred income taxes and interest expense.......................... 1.49% (e) 1.51% 1.43% (e) RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS: Net investment income (loss) ratio before tax expenses.................................. 0.41% (e) 0.24)% (0.42)% (e) Net investment income (loss) ratio including tax expenses (d).............................. 1.66% (e) (9.74)% (8.28)% (e) INDEBTEDNESS: Total loan outstanding (in 000's)................. $ 338,000 $ 350,000 $ 334,000 Asset coverage per $1,000 of indebtedness (f)..... $ 4,014 $ 4,021 $ 3,830
----------------------------- (a) The Fund was seeded on October 11, 2012 and commenced operations on November 27, 2012. (b) Beginning net asset value is net of sales load of $0.90 per share from the initial offering. (c) Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan, and changes in net asset value per share for net asset value returns and changes in Common Share price for market value returns. Total returns do not reflect sales load and are not annualized for periods less than one year. Past performance is not indicative of future results. (d) Includes current and deferred income taxes associated with each component of the Statement of Operations. (e) Annualized. (f) Calculated by taking the Fund's total assets less the Fund's total liabilities (not including the loan outstanding) and dividing by the loan outstanding in 000's. Page 14 See Notes to Financial Statements -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) 1. ORGANIZATION First Trust MLP and Energy Income Fund (the "Fund") is a non-diversified, closed-end management investment company organized as a Massachusetts business trust on August 17, 2012 and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FEI on the New York Stock Exchange ("NYSE"). The Fund's investment objective is to seek a high level of total return with an emphasis on current distributions paid to common shareholders. The Fund seeks to provide its shareholders with an efficient vehicle to invest in a portfolio of cash generating securities of energy companies. The Fund focuses on investing in equity and debt securities of master limited partnerships ("MLPs"), MLP-related entities and other energy sector and energy utilities companies, which Energy Income Partners, LLC ("EIP" or the "Sub-Advisor") believes offer opportunities for income and growth. There can be no assurance that the Fund will achieve its investment objective. The Fund may not be appropriate for all investors. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. PORTFOLIO VALUATION: The net asset value ("NAV") of the Common Shares of the Fund is determined daily as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The NAV per Common Share is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses, dividends declared but unpaid, deferred income taxes and any borrowings of the Fund) by the total number of Common Shares outstanding. The Fund's investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund's investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with valuation procedures adopted by the Fund's Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund's investments are valued as follows: Common stocks, MLPs and other equity securities listed on any national or foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and the London Stock Exchange Alternative Investment Market ("AIM")) are valued at the last price on the exchange on which they are principally traded or, for NASDAQ and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the principal market for such securities. Exchange-traded options contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, exchange-traded options contracts are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. Over-the-counter options contracts are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. Securities traded in an over-the-counter market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. Swaps are fair valued utilizing quotations provided by a third party pricing service or, if the pricing service does not provide a value, by quotes provided by the selling dealer or financial institution. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Fund's Board of Trustees or its delegate, the Advisor's Pricing Committee, at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended) for which a pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of the Fund's NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security's fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might Page 15 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following: 1) the type of security; 2) the size of the holding; 3) the initial cost of the security; 4) transactions in comparable securities; 5) price quotes from dealers and/or pricing services; 6) relationships among various securities; 7) information obtained by contacting the issuer, analysts, or the appropriate stock exchange; 8) an analysis of the issuer's financial statements; and 9) the existence of merger proposals or tender offers that might affect the value of the security. If the securities in question are foreign securities, the following additional information may be considered: 1) the value of similar foreign securities traded on other foreign markets; 2) ADR trading of similar securities; 3) closed-end fund trading of similar securities; 4) foreign currency exchange activity; 5) the trading prices of financial products that are tied to baskets of foreign securities; 6) factors relating to the event that precipitated the pricing problem; 7) whether the event is likely to recur; and 8) whether the effects of the event are isolated or whether they affect entire markets, countries or regions. The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows: o Level 1 - Level 1 Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. o Level 2 - Level 2 inputs are observable inputs, either directly or indirectly, and include the following: o Quoted prices for similar investments in active markets. o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the investment. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund's investments as of April 30, 2015, is included with the Fund's Portfolio of Investments. B. OPTION CONTRACTS: The Fund is subject to equity price risk in the normal course of pursuing its investment objective and may write (sell) options to hedge against changes in the value of equities. Also, the Fund seeks to generate additional income, in the form of premiums received, from writing (selling) the options. The Fund may write (sell) covered call or put options ("options") on all or a portion of the common stock and MLPs held in the Fund's portfolio as determined to be appropriate by the Sub-Advisor. The number of options the Fund can write (sell) is limited by the amount of common stock and MLPs the Fund holds in its portfolio. The Fund will not write (sell) "naked" or uncovered options. When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is included in "Options written, at value" on the Fund's Statement of Assets and Liabilities. Options are marked-to-market daily and their value will be affected by changes in the value and dividend rates of the underlying equity securities, changes in interest rates, changes in the actual or perceived volatility of the securities markets and the underlying equity securities and the remaining time to the options' expiration. The value of options may also be adversely affected if the market for the options becomes less liquid or trading volume diminishes. Page 16 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) Options the Fund writes (sells) will either be exercised, expire or be cancelled pursuant to a closing transaction. If the price of the underlying equity security exceeds the option's exercise price, it is likely that the option holder will exercise the option. If an option written (sold) by the Fund is exercised, the Fund would be obligated to deliver the underlying security to the option holder upon payment of the strike price. In this case, the option premium received by the Fund will be added to the amount realized on the sale of the underlying security for purposes of determining gain or loss. If the price of the underlying equity security is less than the option's strike price, the option will likely expire without being exercised. The option premium received by the Fund will, in this case, be treated as short-term capital gain on the expiration date of the option. The Fund may also elect to close out its position in an option prior to its expiration by purchasing an option of the same series as the option written (sold) by the Fund. Gain or loss on options is presented separately as "Net realized gain (loss) before taxes on written options" on the Statement of Operations. The options that the Fund writes (sells) give the option holder the right, but not the obligation, to purchase a security from the Fund at the strike price on or prior to the option's expiration date. The ability to successfully implement the writing (selling) of covered call options depends on the ability of the Sub-Advisor to predict pertinent market movements, which cannot be assured. Thus, the use of options may require the Fund to sell portfolio securities at inopportune times or for prices other than current market value, which may limit the amount of appreciation the Fund can realize on an investment, or may cause the Fund to hold a security that it might otherwise sell. As the writer (seller) of a covered option, the Fund foregoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the option above the sum of the premium and the strike price of the option, but has retained the risk of loss should the price of the underlying security decline. The writer (seller) of an option has no control over the time when it may be required to fulfill its obligation as a writer (seller) of the option. Once an option writer (seller) has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security to the option holder at the exercise price. Over-the-counter options have the risk of the potential inability of counterparties to meet the terms of their contracts. The Fund's maximum equity price risk for purchased options is limited to the premium initially paid. In addition, certain risks may arise upon entering into option contracts including the risk that an illiquid secondary market will limit the Fund's ability to close out an option contract prior to the expiration date and that a change in the value of the option contract may not correlate exactly with changes in the value of the securities hedged. C. SWAP AGREEMENTS: The Fund may enter into total return equity swap and interest rate swap agreements. A swap is a financial instrument that typically involves the exchange of cash flows between two parties ("Counterparties") on specified dates (settlement dates) where the cash flows are based on agreed upon prices, rates, etc. Swap agreements are individually negotiated and involve the risk of the potential inability of the Counterparties to meet the terms of the agreement. In connection with these agreements, cash and securities may be identified as collateral in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default under the swap agreement or bankruptcy/insolvency of a party to the swap agreement. In the event of a default by the Counterparty, the Fund will seek withdrawal of this collateral and may incur certain costs exercising its right with respect to the collateral. If a Counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain only limited recovery or may obtain no recovery in such circumstances. Swap agreements may increase or decrease the overall volatility of the investments of the Fund. The performance of swap agreements may be affected by a change in the specific interest rate, security, currency, or other factors that determine the amounts of payments due to and from the Fund. The Fund's maximum equity price risk to meet its future payments under swap agreements outstanding at April 30, 2015 is equal to the total notional amount as shown on the Portfolio of Investments. The notional amount represents the U.S. dollar value of the contract as of the day of the opening transaction or contract reset. When the Fund enters into a swap agreement, any premium paid is included in "Swap contracts, at value" on the Statement of Assets and Liabilities. The Fund held interest rate swap agreements at April 30, 2015. An interest rate swap agreement involves the Fund's agreement to exchange a stream of interest payments for another party's stream of cash flows. Interest rate swaps do not involve the delivery of securities or other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount of interest payments that the Fund is contractually obligated to make. D. SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis, including amortization of premiums and accretion of discounts. The Fund will rely to some extent on information provided by the MLPs, which is not necessarily timely, to estimate taxable income allocable to the MLP units held in the Fund's portfolio and to estimate the associated deferred tax asset or liability. From time to time, the Fund will modify its estimates and/or assumptions regarding its deferred tax liability as new information becomes available. To the extent the Fund modifies its estimates and/or assumptions, the NAV of the Fund will likely fluctuate. Page 17 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) Distributions received from the Fund's investments in MLPs generally are comprised of return of capital and investment income. The Fund records estimated return of capital and investment income based on historical information available from each MLP. These estimates may subsequently be revised based on information received from the MLPs after their tax reporting periods are concluded. E. DISTRIBUTIONS TO SHAREHOLDERS: The Fund intends to make monthly distributions to Common Shareholders. The Fund's distributions generally will consist of cash and paid-in-kind distributions from MLPs or their affiliates, dividends from common stocks, and income from other investments held by the Fund less operating expenses, including taxes. Distributions to Common Shareholders are recorded on the ex-date and are based on U.S. GAAP, which may differ from their ultimate characterization for federal income tax purposes. Distributions made from current or accumulated earnings and profits of the Fund will be taxable to shareholders as dividend income. Distributions that are in an amount greater than the Fund's current and accumulated earnings and profits will represent a tax-deferred return of capital to the extent of a shareholder's basis in the Common Shares, and such distributions will correspondingly increase the realized gain upon the sale of the Common Shares. Additionally, distributions not paid from current or accumulated earnings and profits that exceed a shareholder's tax basis in the Common Shares will generally be taxed as a capital gain. Distributions of $30,835,213 paid during the six months ended April 30, 2015, are anticipated to be characterized as return of capital for federal income tax purposes. However, the ultimate determination of the character of the distributions will be made after the 2015 calendar year. Distributions will automatically be reinvested in additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are elected by the shareholder. F. INCOME TAXES: The Fund is treated as a regular C corporation for U.S. federal income tax purposes and as such will be obligated to pay federal and applicable state and foreign corporate taxes on its taxable income. The Fund's tax expense or benefit is included in the Statement of Operations based on the component of income or gains (losses) to which such expense or benefit relates. The current U.S. federal maximum graduated income tax rate for corporations is 35%. The Fund may be subject to a 20% federal alternative minimum tax on its federal alternative minimum taxable income to the extent that its alternative minimum tax exceeds its regular federal income tax. This differs from most investment companies, which elect to be treated as "regulated investment companies" under the U.S. Internal Revenue Code of 1986, as amended. The various investments of the Fund may cause the Fund to be subject to state income taxes on a portion of its income at various rates. The tax deferral benefit the Fund derives from its investment in MLPs results largely because the MLPs are treated as partnerships for federal income tax purposes. As a partnership, an MLP has no income tax liability at the entity level. As a limited partner in the MLPs in which it invests, the Fund will be allocated its pro rata share of income, gains, losses, deductions and credits from the MLPs, regardless of whether or not any cash is distributed from the MLPs. To the extent that the distributions received from the MLPs exceed the net taxable income realized by the Fund from its investment, a tax liability results. This tax liability is a deferred liability to the extent that MLP distributions received have not exceeded the Fund's adjusted tax basis in the respective MLPs. To the extent that distributions from an MLP exceed the Fund's adjusted tax basis, the Fund will recognize a taxable capital gain. For the six months ended April 30, 2015, distributions of $21,140,194 received from MLPs have been reclassified as a return of capital. The cost basis of applicable MLPs has been reduced accordingly. The Fund's provision for income taxes consists of the following: Current federal income tax benefit (expense)...... $ -- Current state income tax benefit (expense)........ (6,471) Current foreign income tax benefit (expense)...... -- Deferred federal income tax benefit (expense)..... 6,495,630 Deferred state income tax benefit (expense)....... (146,551) ---------------- Total income tax benefit (expense)................ $ 6,342,608 ================ Page 18 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The Fund's 2015 income tax provision includes a full valuation allowance against the deferred tax assets associated with the state net operating loss. Components of the Fund's deferred tax assets and liabilities as of April 30, 2015 are as follows: Deferred tax assets: Federal net operating loss........................ $ 17,485,662 State net operating loss.......................... 3,387,543 State income taxes................................ 2,177,785 Capital loss carryforward......................... -- Other .......................................... -- ---------------- Total deferred tax assets......................... 23,050,990 Less: valuation allowance......................... (3,387,543) ---------------- Net deferred tax assets........................... $ 19,663,447 ================ Deferred tax liabilities: Unrealized gains on investment securities......... $ (169,535,684) ---------------- Total deferred tax liabilities.................... (169,535,684) ---------------- Total net deferred tax liabilities................ $ (149,872,237) ================ Total income taxes differ from the amount computed by applying the maximum graduated federal income tax rate of 35% to net investment income and realized and unrealized gains on investments. Application of statutory income tax rate.......... $ (4,962,796) State income taxes, net........................... (866,289) Change in valuation allowance..................... 965,754 Other............................................. (1,479,277) ---------------- Total............................................. $ (6,342,608) ================ The Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable years ending 2013 and 2014 remain open to federal and state audit. As of April 30, 2015, management has evaluated the application of these standards to the Fund, and has determined that no provision for income tax is required in the Fund's financial statements for uncertain tax positions. The Internal Revenue Service initiated a corporate income tax audit for the Fund's 2012 tax year. The audit is still ongoing and no adjustments have been proposed to date. G. EXPENSES: The Fund will pay all expenses directly related to its operations. H. FOREIGN CURRENCY: The books and records of the Fund are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of investments and items of income and expense are translated on the respective dates of such transactions. Unrealized gains and losses on assets and liabilities, other than investments in securities, which result from changes in foreign currency exchange rates have been included in "Net change in unrealized appreciation (depreciation) before taxes on foreign currency translation" on the Statement of Operations. Unrealized gains and losses on investments in securities which result from changes in foreign exchange rates are included with fluctuations arising from changes in market price and are shown in "Net change in unrealized appreciation (depreciation) before taxes on investments" on the Statement of Operations. Net realized foreign currency gains and losses include the effect of changes in exchange rates between trade date and settlement date on investment security transactions, foreign currency transactions and interest and dividends received. The portion of foreign currency gains and losses related to fluctuation in exchange rates between the initial purchase settlement date and subsequent sale trade date is included in "Net realized gain (loss) before taxes on investments" on the Statement of Operations. I. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES: Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11") requires entities to disclose both gross and net information about both instruments and transactions eligible for offset on the Statement of Assets and Liabilities, and disclose instruments and transactions subject to master netting or similar agreements. This disclosure requirement is intended to help investors and other financial statement users better assess the effect or potential effect of offsetting arrangements on a fund's financial position. In addition, Page 19 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) Accounting Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and Liabilities" ("ASU 2013-1"), specifies exactly which transactions are subject to offsetting disclosures. The scope of the disclosure requirements is limited to derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. For financial reporting purposes, the Fund does not offset financial assets and financial liabilities that are subject to master netting arrangements or similar agreements on the Statement of Assets and Liabilities. The Fund's right to setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jusisdiction to which a specific master netting or similar agreement counterparty is subject. At April 30, 2015, derivative assets and liabilities (by type) on a gross basis are as follows:
Gross Amounts not Offset in the Statement of Net Amounts of Assets and Liabilities Gross Amounts Liabilities Presented --------------------------- Gross Amounts of Offset in the in the Statement Cash Recognized Statement of Assets of Assets and Financial Segregated as Net Liabilities and Liabilities Liabilities Instruments Collateral Amount ------------------------------------------------------------------------------------------------------------------------------ Interest Rate Swap Contracts $ (9,692,886) $ -- $ (9,692,886) $ -- $ 9,692,886 $ --
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS First Trust, the investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the ongoing monitoring of the Fund's investment portfolio, managing the Fund's business affairs and providing certain administrative services necessary for the management of the Fund. For these investment management services, First Trust is entitled to a monthly fee calculated at an annual rate of 1.00% of the Fund's Managed Assets (the average daily total asset value of the Fund minus the sum of the Fund's liabilities other than the principal amount of borrowings). First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250. EIP serves as the Fund's Sub-Advisor and manages the Fund's portfolio subject to First Trust's supervision. The Sub-Advisor receives a monthly sub-advisory fee calculated at an annual rate of 0.50% of the Fund's Managed Assets that is paid by First Trust out of its investment advisory fee. First Trust Capital Partners, LLC ("FTCP"), an affiliate of First Trust, owns, through a wholly-owned subsidiary, a 15% ownership interest in each of EIP and EIP Partners, LLC, an affiliate of the EIP. In addition, on March 27, 2014, FTCP, through a wholly-owned subsidiary, purchased a preferred interest in EIP. The preferred interest was non-voting and did not share in the profits or losses of EIP. EIP redeemed all of the preferred shares in March 2015. BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's administrator, fund accountant and transfer agent in accordance with certain fee arrangements. As administrator and fund accountant, BNYM IS is responsible for providing certain administrative and accounting services to the Fund, including maintaining the Fund's books of account, records of the Fund's securities transactions, and certain other books and records. As transfer agent, BNYM IS is responsible for maintaining shareholder records for the Fund. The Bank of New York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain fee arrangements. As custodian, BNYM is responsible for custody of the Fund's assets. Each Trustee who is not an officer or employee of First Trust, any Sub-Advisor or any of their affiliates ("Independent Trustees") is paid a fixed annual retainer that is allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, or is an index fund. Additionally, the Lead Independent Trustee and the Chairmen of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based on net assets. Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee Chairmen rotate every three years. The officers and "Interested" Trustee receive no compensation from the Fund for acting in such capacities. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of investments, excluding short-term investments, for the six months ended April 30, 2015, were $216,100,384 and $210,079,011, respectively. Page 20 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) 5. DERIVATIVES TRANSACTIONS Written option activity for the Fund was as follows: NUMBER OF WRITTEN OPTIONS CONTRACTS PREMIUMS ----------------------------------------------------------------------------- Options outstanding at October 31, 2014.... $ 88,854 $ 5,322,013 Options Written............................ 181,418 10,237,654 Options Expired............................ (127,212) (7,584,473) Options Exercised.......................... (39,961) (2,040,175) Options Closed............................. (13,705) (758,056) --------- ------------ Options outstanding at April 30, 2015...... 89,394 $ 5,176,963 ========= ============ The following table presents the types of derivatives held by the Fund at April 30, 2015, the primary underlying risk exposure and the location of these instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES --------------------------------------- --------------------------------------- DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND INSTRUMENT EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE --------------- ----------- ------------------------- ----------- ------------------------- ----------- Written Options Equity Risk -- -- Options written, at value $ 5,066,466 Interest Rate Interest Swap Agreement Rate Risk Swap contracts, at value -- Swap contracts, at value 9,692,886
The following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for the six months ended April 30, 2015, on derivative instruments, as well as the primary underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION --------------------------------------------------------------------------------------------------- EQUITY RISK Net realized gain (loss) before taxes on written options $ 5,362,063 Net change in unrealized appreciation (depreciation) before taxes on written options 3,174,205 INTEREST RATE RISK --------------------------------------------------------------------------------------------------- Net realized gain (loss) before taxes on swap contracts $(2,102,494) Net change in unrealized appreciation (depreciation) before taxes on swap contracts (5,702,901)
The average volume of interest rate swaps was $174,250,000 for the six months ended April 30, 2015. 6. BORROWINGS The Fund has a committed facility agreement with The Bank of Nova Scotia that has a maximum commitment amount of $400,000,000. The borrowing rate under the facility is equal to the 1-month LIBOR plus 65 basis points. In addition, under the facility, the Fund pays a commitment fee of 0.15% on the undrawn amount of such facility when the utilization is below 50% of the maximum commitment amount. The average amount outstanding for the six months ended April 30, 2015 was $343,215,470 with a weighted average interest rate of 0.82%. As of April 30, 2015, the Fund had outstanding borrowings of $338,000,000 under this committed facility agreement. The high and low annual interest rates for the six months ended April 30, 2015 were 0.87% and 0.80%, respectively. The interest rate at April 30, 2015 was 0.83%. 7. INDEMNIFICATION The Fund has a variety of indemnification obligations under contracts with its service providers. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. 8. INDUSTRY CONCENTRATION RISK Under normal market conditions, the Fund will invest at least 85% of its Managed Assets in equity and debt securities of MLPs, MLP-related entities and other energy sector and energy utilities companies and at least 65% of its Managed Assets in equity securities issued by energy sector MLPs and energy sector and energy utilities MLP-related entities. Given this industry concentration, the Fund is more susceptible to Page 21 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) adverse economic or regulatory occurrences affecting that industry than an investment company that is not concentrated in a single industry. Energy issuers may be subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection with capital construction programs, high leverage costs associated with environmental and other regulations, the effects of economic slowdown, surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy conservation policies and other factors. 9. SUBSEQUENT EVENTS Management has evaluated the impact of all subsequent events to the Fund through the date the financial statements were issued, and has determined that there were the following subsequent events: On May 20, 2015, the Fund declared a distribution of $0.115 per share to Common Shareholders of record on June 3, 2015, payable June 15, 2015. Page 22 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) DIVIDEND REINVESTMENT PLAN If your Common Shares are registered directly with the Fund or if you hold your Common Shares with a brokerage firm that participates in the Fund's Dividend Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund, to receive cash distributions, all dividends, including any capital gain distributions, on your Common Shares will be automatically reinvested by BNY Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common Shares under the Plan. If you elect to receive cash distributions, you will receive all distributions in cash paid by check mailed directly to you by the Plan Agent, as the dividend paying agent. If you decide to participate in the Plan, the number of Common Shares you will receive will be determined as follows: (1) If Common Shares are trading at or above net asset value ("NAV") at the time of valuation, the Fund will issue new shares at a price equal to the greater of (i) NAV per Common Share on that date or (ii) 95% of the market price on that date. (2) If Common Shares are trading below NAV at the time of valuation, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the NYSE or elsewhere, for the participants' accounts. It is possible that the market price for the Common Shares may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share paid by the Plan Agent may exceed the market price at the time of valuation, resulting in the purchase of fewer shares than if the dividend or distribution had been paid in Common Shares issued by the Fund. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market within 30 days of the valuation date except where temporary curtailment or suspension of purchases is necessary to comply with federal securities laws. Interest will not be paid on any uninvested cash payments. You may elect to opt-out of or withdraw from the Plan at any time by giving written notice to the Plan Agent, or by telephone at (866) 340-1104, in accordance with such reasonable requirements as the Plan Agent and the Fund may agree upon. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan, and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions. The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Common Shares in your account will be held by the Plan Agent in non-certificated form. The Plan Agent will forward to each participant any proxy solicitation material and will vote any shares so held only in accordance with proxies returned to the Fund. Any proxy you receive will include all Common Shares you have received under the Plan. There is no brokerage charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Capital gains and income are realized although cash is not received by you. Consult your financial advisor for more information. If you hold your Common Shares with a brokerage firm that does not participate in the Plan, you will not be able to participate in the Plan and any dividend reinvestment may be effected on different terms than those described above. The Fund reserves the right to amend or terminate the Plan if in the judgment of the Board of Trustees the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan may be obtained by writing BNY Mellon Investment Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809. -------------------------------------------------------------------------------- PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that the Fund uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio investments during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; and (3) on the Securities and Exchange Commission's ("SEC") website located at http://www.sec.gov. PORTFOLIO HOLDINGS The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov; and (4) for review and copying at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling (800) SEC-0330. Page 23 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy Income and Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund, First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance and Financial Opportunities Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income Fund and First Trust Intermediate Duration Preferred & Income Fund was held on April 20, 2015 (the "Annual Meeting"). At the Annual Meeting, Richard E. Erickson and Thomas R. Kadlec were elected by the Common Shareholders of the First Trust MLP and Energy Income Fund as Class II Trustees for a three-year term expiring at the Fund's annual meeting of shareholders in 2018. The number of votes cast in favor of Mr. Erickson was 37,202,858, the number of votes against Mr. Erickson was 962,178, and the number of broker non-votes was 7,274,418. The number of votes cast in favor of Mr. Kadlec was 37,237,695, the number of votes against Mr. Kadlec was 927,341, and the number of broker non-votes was 7,274,418. James A. Bowen, Niel B. Nielson and Robert F. Keith are the other current and continuing Trustees. RISK CONSIDERATIONS Risks are inherent in all investing. The following summarizes some, but not all, of the risks that should be considered for the Fund. For additional information about the risks associated with investing in the Fund, please see the Fund's prospectus and statement of additional information, as well as other Fund regulatory filings. INDUSTRY CONCENTRATION RISK: Under normal market conditions, the Fund will invest at least 85% of its Managed Assets in equity and debt securities of MLPs, MLP-related entities and other energy sector and energy utilities companies and at least 65% of its Managed Assets in equity securities issued by energy sector MLPs and energy sector and energy utilities MLP-related entities. Given this industry concentration, the Fund is more susceptible to adverse economic or regulatory occurrences affecting that industry than an investment company that is not concentrated in a single industry. Energy issuers may be subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection with capital construction programs, high leverage costs associated with environmental and other regulations, the effects of economic slowdown, surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy conservation policies and other factors. INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject to investment risk, including the possible loss of the entire principal invested. An investment in Common Shares represents an indirect investment in the securities owned by the Fund. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. Common Shares at any point in time may be worth less than the original investment, even after taking into account the reinvestment of Fund dividends and distributions. Security prices can fluctuate for several reasons including the general condition of the securities markets, or when political or economic events affecting the issuers occur. When the Advisor or Sub-Advisor determines that it is temporarily unable to follow the Fund's investment strategy or that it is impractical to do so (such as when a market disruption event has occurred and trading in the securities is extremely limited or absent), the Fund may take temporary defensive positions. MLP RISK: An investment in MLP units involves risks which differ from an investment in common stock of a corporation. Holders of MLP units have limited control and voting rights on matters affecting the partnership. In addition, there are certain tax risks associated with an investment in MLP units and conflicts of interest exist between common unit holders and the general partner, including those arising from incentive distribution payments. LEVERAGE RISK: The use of leverage results in additional risks and can magnify the effect of any losses. The funds borrowed pursuant to a leverage borrowing program constitute a substantial lien and burden by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. If the Fund is not in compliance with certain credit facility provisions, the Fund may not be permitted to declare dividends or other distributions. RESTRICTED SECURITIES RISK: The Fund may invest in unregistered or otherwise restricted securities. The term "restricted securities" refers to securities that are unregistered or are held by control persons of the issuer and securities that are subject to contractual restrictions on their resale. As a result, restricted securities may be more difficult to value and the Fund may have difficulty disposing of such assets either in a timely manner or for a reasonable price. In order to dispose of an unregistered security, the Fund, where it has contractual rights to do so, may have to cause such security to be registered. A considerable period may elapse between the time the decision is made to sell the security and the time the security is registered so that the Fund could sell it. Contractual restrictions on the resale of securities vary in length and scope and are generally the result of a negotiation between the issuer and acquirer of the securities. The Fund would, in either case, bear market risks during that period. NON-DIVERSIFICATION RISK: The Fund is a non-diversified investment company under the 1940 Act and will not be treated as a regulated investment company under the Internal Revenue Code. Accordingly, there are no regulatory requirements under the 1940 Act or the Internal Revenue Code on the minimum number or size of securities held by the Fund. Page 24 -------------------------------------------------------------------------------- ADDITIONAL INFORMATION (CONTINUED) -------------------------------------------------------------------------------- FIRST TRUST MLP AND ENERGY INCOME FUND (FEI) APRIL 30, 2015 (UNAUDITED) CURRENCY RISK: The value of securities denominated or quoted in foreign currencies may be adversely affected by fluctuations in the relative currency exchange rates and by exchange control regulations. The Fund's investment performance may be negatively affected by a devaluation of a currency in which the Fund's investments are denominated or quoted. Further, the Fund's investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities denominated or quoted in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar. While certain of the Fund's non-U.S. dollar-denominated securities may be hedged into U.S. dollars, hedging may not alleviate all currency risks. NON-U.S. RISK: The Fund may invest a portion of its assets in the equity securities of issuers domiciled in jurisdictions other than the U.S. Investments in the securities and instruments of non-U.S. issuers involve certain considerations and risks not ordinarily associated with investments in securities and instruments of U.S. issuers. Non-U.S. companies are not generally subject to uniform accounting, auditing and financial standards and requirements comparable to those applicable to U.S. companies. Non-U.S. securities exchanges, brokers and listed companies may be subject to less government supervision and regulation than exists in the United States. Dividend and interest income may be subject to withholding and other non-U.S. taxes, which may adversely affect the net return on such investments. A related risk is that there may be difficulty in obtaining or enforcing a court judgment abroad. Page 25 This Page Left Blank Intentionally. This Page Left Blank Intentionally. This Page Left Blank Intentionally. FIRST TRUST INVESTMENT ADVISOR First Trust Advisors L.P. 120 E. Liberty Drive, Suite 400 Wheaton, IL 60187 INVESTMENT SUB-ADVISOR Energy Income Partners, LLC 49 Riverside Avenue Westport, CT 06880 ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT BNY Mellon Investment Servicing (US) Inc. 301 Bellevue Parkway Wilmington, DE 19809 CUSTODIAN The Bank of New York Mellon 101 Barclay Street, 20th Floor New York, NY 10286 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP 111 S. Wacker Drive Chicago, IL 60606 LEGAL COUNSEL Chapman and Cutler LLP 111 W. Monroe Street Chicago, IL 60603 [BLANK BACK COVER] ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. INVESTMENTS. (a) Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. (b) Not applicable. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. (a) Not applicable. (b) There has been no change, as of the date of this filing, in any of the portfolio managers identified in response to paragraph (a)(1) of this Item in the registrant's most recently filed annual report on Form N-CSR. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the registrant's organizational meeting the registrant's Board of Trustees adopted a Nominating and Governance Committee Charter which includes procedures by which shareholders may recommend nominees to the registrant's board of trustees as described below: When a vacancy on the Board of Trustees of a First Trust Fund occurs and nominations are sought to fill such vacancy, the Nominating and Governance Committee may seek nominations from those sources it deems appropriate in its discretion, including shareholders of the Fund. A shareholder may recommend a person for nomination as a candidate at any time. If a recommendation is received with satisfactorily completed information (as set forth below) regarding a candidate during a time when a vacancy exists on the Board or during such other time as the Committee is accepting recommendations, the recommendation will be forwarded to the Chair of the Committee and the outside counsel to the independent trustees. Recommendations received at any other time will be kept on file until such time as the Committee is accepting recommendations, at which point they may be considered for nomination. To submit a recommendation for nomination as a candidate for a position on the Board of Trustees, shareholders of the Fund shall mail such recommendation to W. Scott Jardine, Secretary, at the Fund's address, 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187. Such recommendation shall include the following information: (i) a statement in writing setting forth (A) the name, age, date of birth, business address, residence address and nationality of the person or persons to be nominated; (B) the class or series and number of all shares of the Registrant owned of record or beneficially by each such person or persons, as reported to such shareholder by such nominee(s); (C) any other information regarding each such person required by paragraphs (a), (d), (e) and (f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of Rule 14a-101 (Schedule 14A) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (or any successor provision thereto); (D) any other information regarding the person or persons to be nominated that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitation of proxies for election of trustees or directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder; and (E) whether such shareholder believes any nominee is or will be an "interested person" of the Registrant (as defined in the Investment Company Act of 1940) and, if not an "interested person," information regarding each nominee that will be sufficient for the Registrant to make such determination; and (ii) the written and signed consent of any person to be nominated to be named as a nominee and to serve as a trustee if elected. In addition, the trustees may require any proposed nominee to furnish such other information as they may reasonably require or deem necessary to determine the eligibility of such proposed nominee to serve as a trustee. The Committee will not consider new trustee candidates who are 72 years of age or older. A copy of the Nominating and Governance Committee Charter is available on the Registrant's website at www.ftportfolios.com. ITEM 11. CONTROLS AND PROCEDURES. (a) The Registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the Registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (1) (a) Not applicable. (2) (a) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (3) (a) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) First Trust MLP and Energy Income Fund -------------------------------------------------- By (Signature and Title)* /s/ Mark R. Bradley ---------------------------------------- Mark R. Bradley, President and Chief Executive Officer (principal executive officer) Date: June 22, 2015 --------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ Mark R. Bradley ---------------------------------------- Mark R. Bradley, President and Chief Executive Officer (principal executive officer) Date: June 22, 2015 --------------------- By (Signature and Title)* /s/ James M. Dykas ---------------------------------------- James M. Dykas, Treasurer, Chief Financial Officer and Chief Accounting Officer (principal financial officer) Date: June 22, 2015 --------------------- * Print the name and title of each signing officer under his or her signature.