Notes to Financial Statements
November 30, 2021
(1) ORGANIZATION
Salient
Midstream & MLP Fund (the Fund), a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), commenced operations on May 24, 2012 as a non-diversified, closed-end management investment company. The Fund is authorized to issue an unlimited number of common shares of beneficial interest (Common
Shares), which may be issued in more than one class or series. The Funds Common Shares are listed on the New York Stock Exchange (NYSE) under the symbol SMM.
The Funds objective is to provide a high level of total return with an emphasis on making quarterly cash distributions to its common shareholders. The Fund seeks
to achieve its investment objective by investing at least 80% of its total assets in securities of midstream companies and master limited partnerships (MLPs).
The board of trustees of the Fund (each member thereof a Trustee and collectively, the Board) is authorized to engage an investment advisor, and
pursuant to an investment management agreement (the Investment Management Agreement), it has selected Salient Capital Advisors, LLC (the Advisor) to manage the Funds portfolio and operations. The Advisor is a Texas
limited liability company that is registered as an investment advisor under the Investment Advisers Act of 1940, as amended. Under the Investment Management Agreement, the Advisor is responsible for the establishment of an investment committee (the
Investment Committee), which is responsible for developing, implementing, and supervising the Funds investment program subject to the ultimate supervision of the Board.
The Fund owns 100% of the limited partnership interests of EMG Utica I Offshore Co-Investment, LP (EMG Utica). EMG
Utica holds a non-controlling underlying interest in Mark West Utica EMG, L.L.C., which is a joint venture between Mark West Energy Partners, L.P. (Mark West) and The Energy and Minerals Group
(EMG). Mark West is owned by MPLX LP (NYSE: MPLX), which is a U.S. domiciled publicly traded master limited partnership that owns, operates, develops, and acquires midstream energy infrastructure assets. EMG is a private investment firm
that targets equity investments in the energy and minerals sector. EMG Utica is considered a variable interest entity (VIE) as it is a partnership and the Fund, as the limited partner, lacks the ability to remove the general partner and
does not have any substantive participating rights, as these reside with EMG Utica Co-Investment GP, LLC, the general partner for EMG Utica. This means the general partner of EMG Utica has full, exclusive and
unilateral power and authority to manage, control, administer and operate the assets and business affairs of EMG Utica. Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 810,
Consolidation, prior to the adoption of ASC update 2015-02, management believed the Fund was the primary beneficiary as it owned 100% of EMG Utica and had the right to receive the economic benefit
from the investment, and therefore consolidated EMG Utica in the Funds financial statements for the year ended November 30, 2016. Under ASC Update 2015-02, which the Fund
adopted effective the year ended November 30, 2017, consolidation of a VIEs financial statements would occur if a limited partner has the power to direct the activities and the right
to receive the benefits from the entity considered for consolidation. EMG Utica is no longer consolidated within the Funds financial statements, effective the year ended November 30, 2017.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) BASIS
OF ACCOUNTING
The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America
(U.S. GAAP). The accompanying financial statements reflect the financial position of the Fund. The Fund is an investment company and follows the investment company accounting and reporting guidance under FASB ASC Topic 946,
Financial Services-Investment Companies.
(b) CASH EQUIVALENTS
The Fund considers all unpledged temporary cash investments with a maturity date at the time of purchase of three months or less to be cash equivalents.
(c) PORTFOLIO SECURITIES TRANSACTIONS
Security transactions are
accounted for on a trade date basis. Realized gains and losses are reported using the specific identification cost basis.
(d) INVESTMENT VALUATION
The valuation of the Funds investments is determined each day based on the most recent close of regular session trading on the NYSE and reported by
ALPS Fund Services, Inc., the Funds independent administrator (the Administrator or ALPS). The Funds valuation policies are discussed in further detail in Note 3.
The Board has formed a valuation committee (the Board Valuation Committee) that is responsible for overseeing the Funds valuation policies, making
recommendations to the Board on valuation-related matters, and overseeing implementation by the Advisor of the Funds valuation policies.
The Board has
authorized the Advisor to establish a valuation committee of the Advisor (the Advisor Valuation Committee). The Advisor Valuation Committees function, subject to oversight of the Board Valuation Committee and the Board, is
generally to review the Funds valuation methodologies, valuation determinations, and any information provided to the Advisor Valuation Committee by the Advisor or the Administrator.
Notes to Financial Statements, continued
November 30, 2021
To the extent that the price of a security cannot be determined applying the methods described below, the Advisor
Valuation Committee in conjunction with the Administrator will determine the price of the security pursuant to the fair value procedures approved by the Board.
Investments held by the Fund are valued as follows:
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SECURITIES LISTED ON A SECURITIES EXCHANGE OR OVER-THE-COUNTER EXCHANGESIn general, the Fund values those securities at their last
sales price on the exchange or over-the-counter market or a markets official closing price on the valuation date. If the security is listed on more than one
exchange, the Fund uses the price from the exchange that it considers to be the principal exchange on which the security is traded. If there have been no sales for that day on the exchange where the security is principally traded, then the price of
the security will be valued at the mean between the closing bid and ask prices on the valuation date.
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PUBLICLY-TRADED EQUITY SECURITIES ACQUIRED IN A DIRECT PLACEMENT TRANSACTIONSuch securities may be subject to restrictions on resale that can affect the securitys liquidity and fair value. Such securities
that are convertible or otherwise will become freely tradable will be valued based on the market value of the freely tradable security less an applicable restriction discount. Generally, the discount will initially be equal to the discount at which
the Fund purchased the securities and thereafter will be periodically reassessed and likely reduced over the anticipated restricted period.
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DERIVATIVESExchange traded futures contracts are valued using quoted final settlement prices from the national exchange on which they are principally traded. If no such price is reported by such exchange on the
valuation date, the Advisor Valuation Committee will determine the fair value in good faith using information that is available at such time.
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Options that are listed on a securities exchange are generally valued on the valuation date at the mean of the closing bid and ask prices of the posted
market on the exchange on which they are listed. If on the valuation date the primary exchange is closed, the prior day price will be used. If no such price is reported, the fair value of such options will be determined in good faith using industry
standard pricing models utilizing publicly available input information on the valuation date.
Options traded on an over-the-counter market are generally valued using the mean of the closing bid and ask prices provided by an independent pricing service. If a quotation is not available from the independent pricing service,
the price is obtained from a broker (typically counterparty to the option) on the valuation date. If no such price is available on the valuation date, the Advisor Valuation Committee in conjunction
with the Administrator will determine the fair value of such options in good faith using information that is available at such time.
Non exchange-traded derivatives, such as swap agreements, are valued based on procedures approved by the Board. Credit default swaps and total return
swaps are generally fair valued using evaluated quotes provided by an independent pricing service. If a quotation is not available from the independent pricing service, the price is obtained from a broker (typically the counterparty to the swap
agreement) on the valuation date.
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SECURITIES NOT ACTIVELY TRADEDThe value of securities, derivatives or synthetic securities that are not actively traded on an exchange are determined by obtaining quotes from brokers that normally deal in such
securities or by an unaffiliated pricing service that may use actual trade data or procedures using market indices, matrices, yield curves, specific trading characteristics of certain groups of securities, pricing models or a combination of these
procedures. Securities for which independent pricing services are not available are valued pursuant to the valuation procedures approved by the Board.
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INVESTMENT FUNDSInvestments in investment limited partnerships and shares in unregistered investment funds (Investment Funds) for which a market value is not available will generally be valued using
the partners capital or net asset value (the NAV) as a practical expedient, as reported by the Investment Fund managers or the administrators of such Investment Funds. These Investment Funds value their underlying investments in
accordance with policies established by such Investment Funds. Prior to investing in any Investment Fund, the Adviser Valuation Committee, as part of the due diligence process, conducts a review of the valuation methodologies employed by the
Investment Fund to determine whether such methods are appropriate for the asset types. The Adviser Valuation Committee will consider whether it is appropriate, in light of the relevant circumstances, to value shares at NAV as reported by an
Investment Fund for valuation purposes, or whether to adjust such reported value to reflect an adjusted fair value. Because of the inherent uncertainty of valuation, fair value may differ significantly from the value that would have been used had
readily available markets for the investments in Investment Funds existed. The Funds investments in Investment Funds are subject to the terms and conditions of the respective operating agreements and offering memoranda of such Investment
Funds.
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OTHERInvestments in private placement securities and other securities for which market quotations are not readily
available will be valued in good faith by using fair value procedures approved by the Board. Such fair value procedures
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Notes to Financial Statements, continued
November 30, 2021
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may consider among other factors discounts to publicly traded issues, time until conversion date, securities with similar yields, quality, type of issue, coupon, duration and rating, and an analysis of the issuers financial
statements and reports. Valuation techniques such as the market approach and/or income approach may be used when sufficient and reliable data is available. If events occur that affect the value of the Funds securities before the NAV has been
calculated, the securities so affected will generally be priced using fair value procedures.
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SPECIAL PURPOSE ACQUISITION COMPANIESThe Fund may invest in stock, warrants, and other securities of special purpose acquisition companies (SPACs) or similar special purpose entities that pool funds to
seek potential acquisition opportunities. The Fund may enter into a commitment with a SPAC for a private investment in a public equity (PIPE) which will be satisfied if and when the SPAC completes its merger or acquisition. PIPEs are
illiquid and restricted, and unfunded SPAC PIPE commitments are marked-to-market with the unrealized appreciation/depreciation separately presented in the Statement of
Assets and Liabilities and Statement of Operations. As of November 30, 2021, the Fund held the following unfunded SPAC PIPE commitments:
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Security
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Commitment
Amount
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Fair Value
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Unrealized
Appreciation/
Depreciation
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Athena Technology Acquisition Corp
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$
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769,000
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$
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768,231
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$
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(769
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)
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Redwoods Investment Climate Holdings I, CorpFounder Shares
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117
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117
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Total
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$
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769,117
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$
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768,348
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$
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(769
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)
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(e) FOREIGN CURRENCY
The accounting
records of the Fund are maintained in U.S. dollars. Foreign currency amounts and investments denominated in a foreign currency, if any, are translated into U.S. dollar amounts at current exchange rates on the valuation date. Purchases and sales of
investments denominated in foreign currencies are translated into U.S. dollar amounts at the exchange rate on the respective dates of such transactions. The Fund does not isolate the portion of the results of operations resulting from changes in
foreign exchange rates on investments from fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gains on investments.
(f) MASTER LIMITED PARTNERSHIPS
Entities commonly referred to as MLPs are generally organized under state law as limited partnerships or limited liability companies. The Fund invests in MLPs receiving
partnership taxation treatment under the Internal Revenue Code of 1986, as amended (the Code), and whose interests or units are traded on securities exchanges like shares of corporate stock. To be treated as a partnership for
U.S. federal income tax purposes, an MLP whose units are traded on a securities exchange must receive at least 90% of its income from qualifying sources such as interest, dividends, real property rents, gains on dispositions of real property, income
and gains from mineral or natural resources activities, income and gains from the transportation or storage of certain fuels, and, in certain circumstances, income and gains from commodities or futures, forwards and options on commodities. Mineral
or natural resources activities include exploration, development, production, processing, mining, refining, marketing and transportation (including pipelines) of oil and gas, minerals, geothermal energy, fertilizer, timber or industrial source
carbon dioxide. An MLP consists of a general partner and limited partners (or in the case of MLPs organized as limited liability companies, a managing member and members).
The general partner or managing member typically controls the operations and management of the MLP and has an ownership stake in the partnership or limited liability
company. The limited partners or members, through their ownership of limited partner or member interests, provide capital to the entity, are intended to have no role in the operation and management of the entity and receive cash distributions. The
Funds investments in MLPs consist only of limited partner or member interest ownership. The MLPs themselves generally do not pay U.S. federal income taxes. Thus, unlike investors in corporate securities, direct MLP investors are generally not
subject to double taxation (i.e., corporate level tax and tax on corporate dividends). Currently, most MLPs operate in the energy and/or natural resources sector.
(g) RESTRICTED SECURITIES
The Fund may invest up to 30% of its total
assets in unregistered or otherwise restricted securities of which up to 10% may be in securities of privately held companies. The percentage limitations applicable to the Funds portfolio described above apply only at the time of investment
and the Fund is not required to sell securities due to subsequent changes in the value of securities it owns. A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without
prior registration under the Securities Act of 1933 (the 1933 Act) or pursuant to the resale limitations provided by Rule 144 under the 1933 Act, or an exemption from the registration requirements of the 1933 Act. Certain restricted
securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.
Notes to Financial Statements, continued
November 30, 2021
The restricted securities held at November 30, 2021 are identified below and are also presented in the Funds Schedule of Investments.
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Security
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% of Net
Assets
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Acquisition
Date
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Shares/Units
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Cost
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Fair Value
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EMG Utica I Offshore Co-Investment, LP
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11.70
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%
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2/22/2013
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16,000,000
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$
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13,489,733
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$
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15,591,011
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Microvast Holdings Inc.
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1.89
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%
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7/22/2021
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297,400
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3,026,045
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2,524,926
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TortoiseEcofin Acquisition Corp IIIFounder Shares
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0.00
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%
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7/21/2021
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41,550
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125
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125
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Total Restricted Securities
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13.59
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%
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$
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16,515,903
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$
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18,116,062
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(h) INVESTMENT INCOME
Interest income is recognized on the accrual basis. Distributions are recorded on the ex-dividend date. Distributions received
from the Funds investments in MLPs generally are composed of ordinary income, capital gains and return of capital from the MLPs.
(i) USE OF ESTIMATES
The financial statements have been prepared in conformity with U.S. GAAP, which requires management to make estimates and assumptions relating to the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results may differ from
those estimates and such differences may be significant.
(j) DERIVATIVE INSTRUMENTS
The Fund may invest in derivatives in order to meet its investment objectives. The risk in using derivatives varies depending upon the structure of the instruments. All
open derivative positions at period end, if any, are presented in the Funds Schedule of Investments. The following is a description of the derivative instruments that the Fund has utilized as part of its investment strategy, including the
primary underlying risk exposures related to each instrument type.
OPTIONSThe Fund may write equity call options with the purpose of generating realized
gains from premiums as a means to enhance distributions to the Funds common shareholders. Options are secured by investments, as detailed in the Funds Schedule of Investments. A call option on a security is a contract that gives the
holder of such call option the right to buy the security underlying the call option from the writer of such call option at a specified price at any time during the term of the option. At the time the call option is sold, the writer of a call option
receives a premium from the buyer of such call option. If the Fund writes a call option, it will have the obligation upon exercise of such call option to deliver the underlying security upon payment of the exercise price. As the writer of a covered
call option, during the options life, the
Fund gives up the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but the Fund
retains the risk of loss should the price of the underlying security decline.
FUTURES CONTRACTSThe Fund may invest in futures contracts as a part of its
hedging strategy to manage exposure to interest rate, equity and market price movements, and commodity prices. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. The
underlying asset is not physically delivered. Futures contracts are valued at their quoted daily settlement prices. Upon entering into a futures contract, the Fund is required to segregate liquid assets in accordance with the initial margin
requirements of the clearinghouse to secure the Funds performance. The clearinghouse also requires daily settlement of variation margin representing changes in the value of each contract. Fluctuations in the value of the contracts are recorded
as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as net realized gain (loss) on futures contracts. The primary risks associated with the use of futures contracts are imperfect correlation between
changes in fair values of the underlying assets and the prices of futures contracts, and the possibility of an illiquid market. With exchange-traded futures, there is minimal counterparty credit risk to the Fund since the exchange is a regulated
clearinghouse and is a counterparty to all exchange-traded futures which guarantees payment of the futures contract.
SWAP AGREEMENTSThe Fund may invest in
swap agreements, including credit default and total return swap agreements, in connection with its hedging strategy to manage market risks.
A total return swap is
a bilateral financial contract agreement where one party (the payer) agrees to pay the other (the receiver) the total return on a specified asset or index in exchange for a fixed or floating rate of return. A total return swap allows the receiver or
payer to derive the economic benefit of owning or having short exposure to an asset without owning or shorting the underlying asset directly. The receiver is entitled to the amount, if any, by which the notional amount of the total return swap would
have increased in value had it been invested in the
Notes to Financial Statements, continued
November 30, 2021
particular instruments, plus an amount equal to any dividends or interest that would have been received on those
instruments. In return, the payer is entitled to an amount equal to a fixed or floating rate of interest (e.g., a reference rate based on the average interest rate at which major global banks can borrow from one another) on the notional amount of
the swap plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such instruments, less any dividends or interest. The amounts to which each party is entitled are normally netted against each other
at periodic settlement dates, resulting in a single amount that is either due to or from each party.
A credit default swap gives one party (the buyer) the right to
recoup the economic value of a decline in the value of debt securities of the reference issuer if a credit event (a downgrade, bankruptcy or default) occurs. This value is obtained by delivering a debt security of the reference issuer to the party
in return for a previously agreed upon payment from the other party (frequently, the par value of the debt security) or receive a net amount equal to the par value of the defaulted reference entity less its recovery value. The Fund is usually a net
buyer of credit default swaps.
The Fund as a buyer of a credit default swap would have the right to deliver a referenced debt obligation and receive the par (or
other agreed-upon) value of such debt obligation from the counterparty in the event of a default or other credit event by the reference issuer with respect to its debt obligations. In return, the Fund would pay the counterparty a periodic stream of
payments over the term of the agreement provided that no event of default or other credit event has occurred. If no default or other credit event occurs, the counterparty would keep the stream of payments and would have no further obligations to the
Fund.
In addition to being exposed to the credit risk of the underlying reference entity, swap agreements are subject to counterparty risk, market risk and
interest rate risk. Swap agreements utilized by the Fund may not perform as expected. Risks may arise as a result of the failure of the counterparty to perform under the agreement. The loss incurred by the failure of a counterparty is generally
limited to the market value and premium amounts recorded. The Fund considers the creditworthiness of each counterparty to a swap agreement in evaluating potential credit risk, and will not enter into any swap agreement unless the Advisor believes
the counterparty to the transaction is creditworthy. Additionally, risks may arise from the unanticipated movements in interest rates or in the value of the underlying reference assets. The Fund may use various techniques to minimize credit risk
including early termination or reset and payment. Collateral, in the form of cash, is held in broker segregated accounts for swap agreements.
The following is a summary of the effect of derivative instruments on the Statement of Operations for the year ended
November 30, 2021:
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Net Realized
Gain on
Written Options
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Change in
Unrealized
Appreciation/
Depreciation
on Written Options
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Equity Risk Exposure:
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Written Call Options
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$
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272,362
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$
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119,663
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As described above, the Fund utilized derivative instruments to achieve its investment objective during the year ended November 30,
2021. The Fund may enter into International Swaps and Derivatives Association, Inc. Master Agreements (ISDA Master Agreement) or similar agreements with its derivative contract counterparties whereby the Fund may, under certain
circumstances, offset with the counterparty certain derivative financial instruments payables and/or receivables with collateral held and/or posted and create one single net payment. There were no derivative financial instruments that are
subject to enforceable netting arrangements or other similar agreements as of November 30, 2021.
The following is a summary of the average monthly notional
value of written options during the year ended November 30, 2021:
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Average Monthly
Notional Value
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Notional Value
Outstanding at
November 30, 2021
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Written Call Options
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$
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2,077,556
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$
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1,459,502
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(k) DISTRIBUTIONS TO SHAREHOLDERS
The
Fund intends to continue to comply with the requirements under Subchapter M of the Code in order to continue to qualify as a regulated investment company (RIC). If so qualified, the Fund will not be subject to federal income tax to the
extent it distributes substantially all of its net investment income and net capital gains to its shareholders.
The Fund generally makes quarterly distributions to
shareholders. Net realized capital gains, if any, are distributed annually. Distributions from net realized gains may include short-term capital gains. All net short term capital gains are included in ordinary income for tax purposes. Distributions
to shareholders are recorded on the ex-dividend date. The Fund may also pay, at the end of the calendar year, a special distribution to comply with requirements under the Code.
Each shareholder will automatically be a participant under the Funds Dividend Reinvestment Plan (DRIP) and have all income distributions and capital
gains distributions automatically reinvested in Shares, unless a shareholder otherwise elects to receive distributions in cash. Generally, for U.S. federal income tax purposes, shareholders receiving Shares under the DRIP will be treated as having
received a distribution equal to the amount of cash they would have received had the shareholder not participated in the DRIP.
Notes to Financial Statements, continued
November 30, 2021
The character of distributions made during the period from net investment income or net realized gains may differ from its
ultimate characterization for federal income tax purposes.
The amount of distributions is determined in accordance with federal income tax regulations which may
differ from U.S. GAAP. These book/tax differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., return of capital and differing treatment on partnership
investments), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences (e.g., wash sales, differing treatment on partnership
investments, late year ordinary loss deferrals and capital loss carryforwards) do not require a reclassification. Distributions which exceed net investment income and net realized gains for financial reporting purposes but not for tax purposes are
reported as distributions in excess of net investment income or net realized gains. To the extent they exceed net investment income and net realized gains for tax purposes, they are reported as return of capital.
(l) CFTC REGULATION
The Commodity Futures Trading Commission
(CFTC) adopted rules to harmonize conflicting United States Securities and Exchange Commission (the SEC) and CFTC disclosure, reporting and recordkeeping requirements for registered investment companies that do not meet an
exemption from the definition of commodity pool. The harmonization rules provide that the CFTC will accept the SECs disclosure, reporting, and recordkeeping regime as substituted compliance for substantially all of the otherwise applicable
CFTC regulations as long as such investment companies meet the applicable SEC requirements. With respect to the Fund, the Advisor has claimed an exemption from the definition of the term commodity pool operator under CFTC Regulation 4.5
of the Commodity Exchange Act (CEA). As such, the Fund is not currently subject to registration or regulation as a commodity pool under the CEA. Effective November 18, 2019, the Advisor is no longer registered with the CFTC as a
commodity pool operator and commodity trading adviser, and is no longer a member of the National Futures Association given the current activities.
(m) RETURN
OF CAPITAL ESTIMATES
Distributions received from the Funds investments in MLPs generally are composed of income, capital gains and return of capital.
The Fund records investment income and return of capital based on estimates made at the time such distributions are received. Such estimates are based on historical information available from each MLP and other industry sources. These estimates may
subsequently be revised based on information received from MLPs after their tax reporting periods are concluded.
For the year ended November 30, 2021, the Fund estimated that approximately 100% of the MLP distributions received
and certain distributions received from master limited partnership related companies would be treated as a return of capital. The Fund recorded as return of capital the amount of $6,856,046 of dividends and distributions received from its
investments.
(3) FAIR VALUE MEASUREMENTS
The Fund defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions.
The valuation techniques employed by the Fund, as described below, maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair
value. The inputs used to determine the fair value of the Funds investments are summarized in the three broad levels listed below:
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Level 1unadjusted quoted prices in active markets for identical investments
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Level 2investments with other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
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Level 3investments with significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments) that are developed based on the best information available
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Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The Fund discloses transfers
between levels based on valuations at the end of the reporting period. The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments.
Other assets and securities, which are generally not exchange-traded, or for which market quotations are not readily available, or are deemed unreliable are valued at
fair value as determined in good faith by the Advisor Valuation Committee. Fair value pricing may be used for significant events such as securities for which trading has been suspended, prices have become stale or for which there is no currently
available price at the close of the NYSE. When observable prices are not available, the Advisor Valuation Committee may use one or more valuation techniques such as the market approach, the income approach, or internal pricing models for which
sufficient and reliable data is available. The market approach generally consists of using comparable market data and transactions. The income approach generally consists of estimating future cash flows from an investment to determine the net
Notes to Financial Statements, continued
November 30, 2021
present value. A significant change in the unobservable inputs could result in a significantly lower or higher fair value
measurement. Depending on the source and relative significance of valuation inputs, these investments may be classified as Level 2 or Level 3 in the fair value hierarchy.
The Fund establishes valuation processes and procedures to ensure that the valuation techniques for investments that are categorized within Level 3 of the fair
value hierarchy are fair, consistent, and appropriate. The Advisor is responsible for developing the Funds written valuation processes and procedures, conducting periodic reviews of the valuation policies, and evaluating the overall fairness
and consistent application of the valuation policies. The Board Valuation Committee has authorized the Advisor to oversee the implementation of the Board approved valuation procedures by the Administrator. The Advisor Valuation
Committee is comprised of various Fund personnel, which include members from the Funds portfolio management and operations groups. The Advisor Valuation Committee meets monthly or as
needed, to determine the valuations of the Funds Level 3 investments. Fund valuations are required to be supported by market data, industry accepted third-party valuation models, or other methods the Advisor Valuation Committee deems to
be appropriate, including the use of internal proprietary valuation models. In addition, changes in the underlying assumptions used in the fair value measurement technique, including discount rates, liquidity risks, and estimates of future cash
flows, could significantly affect these fair value estimates. Because of the inherent uncertainty of valuation, including Level 3 input risk, this estimated value may differ from the value that would have been used had a ready market for this
investment existed, and the differences could be significant.
The following is a summary categorization of the
Funds investments based upon the three levels defined above as of November 30, 2021. The breakdown by category of equity securities is disclosed in the Schedule of Investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Investment
Securities
|
|
Investment
Securities
|
|
Other
Financial
Instruments
|
|
Investment
Securities
|
|
Other
Financial
Instruments
|
|
Investment
Securities
|
|
Other
Financial
Instruments
|
Master Limited Partnerships
|
|
|
$
|
46,026,748
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
46,026,748
|
|
|
|
$
|
|
|
MLP Related Companies
|
|
|
|
127,441,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,591,011
|
(a)
|
|
|
|
|
|
|
|
|
143,032,888
|
|
|
|
|
|
|
Special Purpose Acquisition Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
Warrants
|
|
|
|
27,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,815
|
|
|
|
|
|
|
Written Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,193
|
)
|
Unfunded SPAC PIPE Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(768,348
|
)
|
|
|
|
|
|
|
|
|
(768,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
173,496,440
|
|
|
|
$
|
|
|
|
|
$
|
(11,193
|
)
|
|
|
$
|
15,591,136
|
|
|
|
$
|
(768,348
|
)
|
|
|
$
|
189,087,576
|
|
|
|
$
|
(779,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) During the year
ended November 30, 2021, the Fund continued to value EMG Utica I Offshore Co-Investment LP with an income approach using a discounted cash flow model.
The following is a reconciliation of Level 3 investments based on the inputs used to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Type
|
|
Balance
as
of November 30,
2020
|
|
Purchases
|
|
Sales
Proceeds
|
|
Realized
Gain/(Loss)
|
|
Change
in
Unrealized
Appreciation/
(Depreciation)
|
|
Transfer into
Level 3
|
|
Transfer
Out
of
Level 3
|
|
Balance
as
of November 30,
2021
|
|
Net change
in
unrealized
appreciation/
(depreciation)
included in the
Statement of
Operations
attributable
to Level 3
investments
held at
November 30,
2021
|
MLP Related Companies
|
|
|
$
|
15,361,838
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
(429,444
|
)(a)
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
15,591,011
|
|
|
|
$
|
(429,444
|
)(a)
|
Special Purpose Acquisition Companies
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
Unfunded SPAC PIPE Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(769
|
)
|
|
|
|
(769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
15,361,838
|
|
|
|
$
|
125
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
(430,213
|
)
|
|
|
$
|
|
|
|
|
$
|
|
|
|
|
$
|
15,590,367
|
|
|
|
$
|
(430,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The change in
unrealized appreciation/depreciation reflects a reclassification of prior year return of capital on distributions from EMG Utica I Offshore Co-Investment, LP.
Notes to Financial Statements, continued
November 30, 2021
The table below provides additional information about the Level 3 Fair Value Measurements as of November 30, 2021:
Qualitative Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Fair Value
|
|
Valuation
Technique
|
|
Unobservable
Inputs(a)
|
|
Input Value/
Range
|
Master Limited Partnerships
|
|
|
$
|
15,591,011
|
|
|
Discounted Cash Flow
|
|
Discount Rate
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
Terminal Cash Flow Exit Multiple
|
|
|
|
10.8x
|
|
Special Purpose Acquisition Companies
|
|
|
|
125
|
|
|
Recent Transaction
|
|
Recent Transaction
|
|
|
$
|
0.003
|
|
(a) A change to the
unobservable input may result in a significant change to the value of the investment as follows:
|
|
|
|
|
Unobservable Inputs
|
|
Impact to Value if Input Increases
|
|
Impact to Value if Input
Decreases
|
Discount Rate
|
|
Decrease
|
|
Increase
|
Terminal Cash Flow Exit Multiple
|
|
Increase
|
|
Decrease
|
Recent Transaction
|
|
Increase
|
|
Decrease
|
EMG Uticas originally planned dissolution date of December 31, 2021 was extended to December 31, 2022,
with the ability to extend for an additional one-year period at the election of the general partner, EMG Utica Co-Investment GP, LLC. Upon dissolution, the Fund would
receive its share of the net proceeds from the sale of underlying assets in EMG Utica which may differ from the Funds valuation of its position in EMG Utica due to the inherent uncertainty of valuation, including Level 3 input risk
currently being used for valuation purposes, and the difference could be significant. The Fund does not have any unfunded commitments in EMG Utica and the investment cannot be sold by the Fund without the consent of EMG Utica Co-Investment GP, LLC.
(4) CREDIT FACILITY
The Fund maintains a line of credit agreement (the Agreement) with Bank of Nova Scotia (BNS) which provides a $60,000,000 committed lending
facility. Prior to March 24, 2021, BNS provided a $50,000,000 committed lending facility. Borrowings under the Agreement are secured by investments, as detailed in the Funds Schedule of Investments. The Agreement provides for a commitment
fee of 0.10% per annum on undrawn amounts above a certain threshold plus interest accruing on outstanding borrowed amounts at the one month LIBOR plus 0.95% per annum. The Fund initially entered the Agreement on November 17, 2014, and the
Agreement provides the Fund with a rolling 364 day commitment period. The average principal balance and weighted average interest rate for the year ended November 30, 2021, was approximately $47,063,705 and 1.05%, respectively. At
November 30, 2021, the principal balance outstanding was $56,100,000 at an interest rate of 1.04%, and the aggregate market value of the securities held as collateral was $110,434,724, representing 82.85% of net assets.
On July 27, 2017, the head of the United Kingdoms Financial Conduct Authority announced a desire to phase out the use of the London
Interbank Offered Rate (LIBOR) by the end of 2021. More specifically, the ICE Benchmark Administration Limited, the administrator of LIBOR, is expected to cease publishing most LIBOR
maturities, including some US LIBOR maturities, on December 31, 2021, and the remaining and most liquid US LIBOR maturities on June 30, 2023. Financial industry groups have begun planning for that transition, however, there remains
uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial
institutions, intends to replace LIBOR with the Secured Overnight Funding Rate (SOFR), a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities. Abandonment of or modifications to LIBOR could have adverse
impacts and represent a significant risk on newly issued financial instruments and existing financial instruments which reference LIBOR, could lead to significant short-term and long-term uncertainty and market instability and to the extent to which
that may impact the Fund cannot yet be determined.
(5) FEDERAL INCOME TAXES
The Fund intends to continue to comply with the requirements of the Code applicable to RICs and to distribute all of its taxable income to shareholders. Also, in order
to avoid the payment of any federal excise taxes, the Fund will distribute substantially all of its net investment income and net realized gains on a calendar year basis.
For the tax years ended November 30, 2018 through November 30, 2021, and for all major jurisdictions, management of the Fund has evaluated the tax positions
taken or expected to be taken in the course of preparing the Funds tax returns to determine whether the tax positions will more-likely-than-not be sustained by the Fund upon
challenge by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold and that would result in a tax benefit
Notes to Financial Statements, continued
November 30, 2021
or expense to the Fund would be recorded as a tax benefit or expense in the current period. For the year ended
November 30, 2021, the Fund did not recognize any amounts for unrecognized tax benefit/expense. A reconciliation of unrecognized tax benefit/expense is not provided herein, as the beginning and ending amounts of unrecognized tax benefit/expense
are zero, with no interim additions, reductions or settlements.
In accordance with U.S. GAAP, the Fund has made reclassifications among its capital accounts,
primarily attributable to partnership
investments. These reclassifications are intended to adjust the components of the Funds net assets to reflect the tax character of permanent book/tax differences and have no impact on the
net assets or the NAV of the Fund. As of November 30, 2021, the Fund made reclassifications to increase or (decrease) the components of the net assets detailed below:
|
|
|
|
|
|
|
|
|
Paid-in Capital
|
|
Total Distributable
Earnings
|
|
$
|
(5,168,499
|
)
|
|
|
$
|
5,168,499
|
|
The tax character of dividends paid to shareholders
during the tax year ended in 2021 was as follows:
|
|
|
|
|
|
|
|
|
Ordinary
Income
|
|
Net Long Term
Capital Gains
|
|
Total Taxable
Distributions
|
|
Tax Return of
Capital
|
|
Total
Distributions
Paid
|
$
|
|
$
|
|
$
|
|
$4,607,836
|
|
$4,607,836
|
The tax character of dividends paid to shareholders during the tax year ended in 2020 was as follows:
|
|
|
|
|
|
|
|
|
Ordinary
Income
|
|
Net Long Term
Capital Gains
|
|
Total Taxable
Distributions
|
|
Tax Return of
Capital
|
|
Total
Distributions
Paid
|
$
|
|
$
|
|
$
|
|
$6,220,579
|
|
$6,220,579
|
The following information is provided on a tax basis as of November 30, 2021:
|
|
|
|
|
|
Cost of Investments and written options
|
|
|
$
|
157,703,942
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
|
35,923,546
|
|
Gross unrealized depreciation
|
|
|
|
(4,539,912
|
)
|
Net unrealized appreciation (depreciation) of foreign currency, derivatives and unfunded SPAC PIPE
commitments
|
|
|
|
115,388
|
|
|
|
|
|
|
|
Net unrealized appreciation (depreciation)
|
|
|
|
31,499,022
|
|
Undistributed net investment income
|
|
|
|
|
|
Accumulated realized loss
|
|
|
|
(228,583,903
|
)
|
|
|
|
|
|
|
Distributable earnings
|
|
|
|
|
|
Other cumulative effect of timing differences
|
|
|
|
(7,126,654
|
)
|
|
|
|
|
|
|
Total accumulated earnings (losses)
|
|
|
|
(204,211,535
|
)
|
|
|
|
|
|
|
The differences between book-basis and tax-basis unrealized appreciation (depreciation) are
primarily due to differences in the timing of recognition of gains and losses on partnership investments, straddle loss deferrals and wash sales for tax and book purposes.
As of the end of the tax year ended November 30, 2021, the Fund also has available for tax purposes unused capital loss carryovers (CLCOs) as follows:
|
|
|
|
|
|
|
|
|
Short-Term
|
|
Long-Term
|
|
$
|
145,470,239
|
|
|
|
$
|
83,113,664
|
|
|
|
|
|
|
|
|
|
|
(6) INVESTMENT TRANSACTIONS
For the year ended November 30, 2021, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were $184,177,355
and $146,642,545, respectively.
(7) SERVICE PROVIDERS
ALPS serves as
administrator to the Fund. Under the administration agreement, ALPS is responsible for administrative, accounting and recordkeeping services of the Fund.
Citibank,
N.A. serves as the Funds custodian.
Computershare, Inc. serves as the transfer agent, DRIP Plan Administrator agent and dividend paying agent for the Fund.
(8) RELATED PARTY TRANSACTIONS
INVESTMENT MANAGEMENT FEE
In consideration of the advisory and other services provided by the Advisor, under the terms of the Investment Management Agreement between the Advisor and
the Fund, the Fund pays the Advisor a management fee equal to 1.20% annually of the average monthly total assets of the Fund. For purposes of calculating the management fee, the average total assets for each monthly period are determined
by averaging the total assets on the last business day of that month with the total assets on the last business day of the prior month. The fee is accrued daily and payable monthly.
Notes to Financial Statements, continued
November 30, 2021
In connection with the investment in EMG Utica, the Fund pays a management fee to EMG MUH, LP, an affiliate of EMG Utica,
calculated at 1.0% annually of the contributed capital. The fee is payable quarterly in advance.
Also in connection with the investment in EMG Utica, the Fund is
entitled to distributions in accordance with the terms of the limited partnership agreement. The terms of the limited partnership agreement allows for a portion of certain distributions to be paid to EMG MUH, LP as carried interest and
represents a share of the profits.
(9) TRUSTEE AND OFFICER FEES
The
Funds operations are managed under the direction and oversight of the Board of Trustees. The Board of Trustees appoints Officers of the Fund who are responsible for the Funds day-to-day business decisions based on policies set by the Board of Trustees. The Officers serve at the pleasure of the Board of Trustees.
The Fund does not pay any compensation directly to the Officers or Trustees who are also Trustees, Officers or employees of Salient Management or its affiliates, except
as noted below. As of November 30, 2021, there were six Trustees, five of whom are not interested persons of the Fund within the meaning of that term under the 1940 Act (each, an Independent Trustee). The Trustees of the
Fund may also serve as Trustees of other registered investment companies managed by the Advisor and its affiliates, including Salient MF Trust and Forward Funds (together with the Fund, the Trusts). Each fund within the Trusts pays
Independent Trustees an allocated portion of the retainer of $50,000 per year. Each fund within the Trusts pays Independent Trustees an allocated portion of the amounts of: $6,250 for attendance in person at a regular meeting and $1,500 for
attendance by telephone at a regular meeting; $1,500 for attendance in person or by video conference at a special meeting that is not held in conjunction with a regular meeting and $1,500 for attendance by telephone at a special meeting that is not
held in conjunction with a regular meeting; and $1,500 per day for participation in Trust-related meetings not held in conjunction with a meeting. The Chairman of the Board of Trustees, the Chairman of the Audit Committee, the Chairman of the
Nominating Committee, the Chairman of the Valuation Committee, and the Chairman of the Compliance Committee receive a special retainer fee in the amount of $16,000, $6,000, $5,000, $2,500 and $5,000, respectively per year. In addition, each member
of the Audit Committee, Nominating Committee and Compliance Committee receives $1,000, respectively per year, and each member of the Valuation Committee receives $500 per year. In the interest of retaining Independent Trustees of the highest
quality, the Board intends to periodically review such compensation and may modify it as the Board deems appropriate. The interested Trustees receive no compensation from the Fund. In addition, Independent Trustees receive reimbursements for
reasonable out-of-pocket expenses incurred for their services as a Trustee, including for the transportation and other expenses that they incur in attending meetings.
The Chief Compliance Officer of the Fund (CCO) is an employee of, and is compensated by, the Advisor. As of
November 30, 2021, the Fund has agreed to pay the Advisor approximately $98,000 per year as (i) an allocated portion of the compensation of an officer or employee of the Advisor to serve as CCO for the Fund (plus the cost of reasonable
expenses related to the performance of the CCOs duties, including travel expenses), and (ii) an allocation of the expenses of other officers or employees of the Advisor who serve in other compliance capacities for the Fund. The Board
approves annually an allocation of such costs among such personnel, and the Fund bears its pro rata share of such expense. Other affiliated funds and registered investment companies managed by the Advisor pay additional compensation for the same
purposes.
(10) INDEMNIFICATIONS
Under the Funds organizational
documents, its Officers and Trustees are indemnified against certain liability arising out of the performance of their duties with respect to the Fund. In addition, in the normal course of business, the Fund enters into contracts with vendors and
others that provide general indemnification. The Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. Based on experience, however, the Fund expects the risk of loss
to be remote.
(11) RISK CONSIDERATIONS
The following summary of certain
common principal risk factors is not meant to be comprehensive of all the Funds risks.
(a) GENERAL MARKET RISK
An investment in the Funds common shares represents an indirect investment in the securities owned by the Fund, some of which will be traded on a national
securities exchange or in the over-the-counter markets. The value of the securities in which the Fund invests, like other market investments, may move up or down,
sometimes rapidly and unpredictably. The value of the securities in which the Fund invests may affect the value of the Funds common shares. An investment in the Funds common shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of the Funds distributions.
(b) CONCENTRATION RISK
The Funds investment portfolio is concentrated in MLPs and midstream companies. The focus of the portfolio on a specific industry or industries within the
midstream sector may present more risks than if the portfolio was broadly diversified over numerous sectors of the economy. A downturn in one or more industries within the midstream sector would have a larger impact on the Fund than on an investment
Notes to Financial Statements, continued
November 30, 2021
company that does not concentrate solely in MLPs and midstream companies. To the extent that the Fund invests a relatively
high percentage of the Funds assets in the obligations of a limited number of issuers, the Fund may be more susceptible than more widely diversified investment companies to any single economic, political or regulatory occurrence. The Fund may
also hold large positions in the securities of a single issuer. As such, the Fund has a greater potential to realize losses upon the occurrence of adverse events affecting that issuer or in the event that the Fund has to quickly sell its position in
that issuer.
(c) LEVERAGE RISK
Financial leverage represents the
leveraging of the Funds investment portfolio. The use of leverage can amplify losses. Unless the income and capital appreciation, if any, on securities acquired with the proceeds from financial leverage exceed the costs of such financial
leverage, the use of leverage could cause the Funds NAV to decline. When financial leverage is used, the NAV and market value of the Funds common shares will be more volatile. There is no assurance that the Funds use of financial
leverage will be successful.
(d) DERIVATIVES RISK
The Fund may
purchase and sell derivative instruments (including, but not limited to, options, futures contracts and swap agreements). The use of derivatives has risks, including high price volatility, government intervention,
non-performance by the counterparty, the imperfect correlation between the value of such instruments and the underlying assets, the possible default of the other party to the transaction and the illiquidity of
the derivative investments. Furthermore, successful use of these techniques may depend on the Advisors correct anticipation of pertinent market movements, which cannot be assured. The use of derivatives may result in losses greater than if
they had not been used, may require the Fund to sell or purchase portfolio securities at inopportune times or for prices other than current market values, may limit the amount of appreciation the Fund can realize on an investment or may cause the
Fund to hold a security that the Fund might otherwise sell. In addition, amounts paid by the Fund as premiums and cash or other assets held in margin accounts with respect to derivative transactions are not otherwise available to the Fund for
investment purposes.
(e) COUNTERPARTY RISK
The Fund will be
subject to the risk of the inability of counterparties to perform with respect to transactions, whether due to a contract dispute, insolvency, liquidity or other causes, which could subject the Fund to substantial losses. This risk increases and
becomes more concentrated as the number of Fund counterparties decreases. Counterparty risk also increases with the Funds use of certain over-the-counter
derivatives, which lack some of the safeguards afforded on a regulated
exchange. Counterparty defaults may have a negative impact beyond the value of the contract as it could lead to the encumbrance of Fund collateral.
(f) CURRENCY RISK
Currency risk refers to the possibility that
changes in currency exchange rates will negatively affect securities denominated in, and/or receiving revenues in, foreign currencies. The liquidity and trading value of foreign currencies could be affected by global economic factors, such as
inflation, interest rate levels, and trade balances among countries, as well as the actions of sovereign governments. Adverse changes in currency exchange rates (relative to the U.S. dollar) may erode or reverse any potential gains from the
Funds investments in securities denominated in a foreign currency or may widen existing losses. The Funds net currency positions may expose it to risks independent of its securities positions.
(g) MIDSTREAM RISK
Midstream Companies and MLPs and other entities
that provide crude oil, refined product and natural gas services are subject to supply and demand fluctuations in the markets they serve which may be impacted by a wide range of factors including fluctuating commodity prices, weather, increased
conservation or use of alternative fuel sources, increased governmental or environmental regulation, depletion, rising interest rates, declines in domestic or foreign production, accidents or catastrophic events, and economic conditions, among
others.
(h) SPECIAL PURPOSE ACQUISITION COMPANIES RISK
The Fund
may invest in stock, warrants, and other securities of special purpose acquisition companies (SPACs) or similar special purpose entities that pool funds to seek potential acquisition opportunities. Because SPACs and similar entities are
in essence blank check companies without operating history or ongoing business other than seeking acquisitions, the value of their securities is particularly dependent on the ability of the entitys management to identify and complete a
profitable acquisition. An investment in a SPAC is subject to a variety of risks, including that (i) a portion of the monies raised by the SPAC for the purpose of effecting an acquisition or merger may be expended prior to the transaction for
payment of taxes and other purposes; (ii) an attractive acquisition or merger target may not be identified at all, in which case the SPAC will be required to return any remaining monies to shareholders; (iii) if an acquisition or merger
target is identified, the Fund may elect not to participate in the proposed transaction or the Fund may be required to divest its interests in the SPAC due to regulatory or other considerations, in which case the warrants or other rights with
respect to the SPAC held by the Fund may expire worthless or may be repurchased or retired by the SPAC at an unfavorable price; (iv) any proposed merger or acquisition may be unable to obtain the requisite
Notes to Financial Statements, continued
November 30, 2021
approval, if any, of SPAC shareholders; (v) under any circumstances in which the Fund receives a refund of all or a
portion of its original investment (which typically represents a pro rata share of the proceeds of the SPACs assets, less any applicable taxes), the returns on that investment may be negligible, and the Fund may be subject to opportunity costs
to the extent that alternative investments would have produced higher returns; (vi) to the extent an acquisition or merger is announced or completed, shareholders who sell their shares prior to that time may not reap any resulting benefits;
(vii) the Fund may be delayed in receiving any redemption or liquidation proceeds from a SPAC to which it is entitled; (viii) an acquisition or merger once effected may prove unsuccessful and an investment in the SPAC may lose value;
(ix) an investment in a SPAC may be diluted by additional later offerings of interests in the SPAC or by other investors exercising existing rights to purchase shares of the SPAC; (x) only a thinly traded market for shares of or interests
in a SPAC may develop, or there may be no market at all, leaving the Fund unable to sell its interest in a SPAC or to sell its interest only at a price below what the Fund believes is the SPAC interests intrinsic value; (xi) the values of
investments in SPACs may be highly volatile and may depreciate significantly over time; and (xii) SPACs may be subject to regulatory scrutiny, such as regarding offering and accounting matters, and uncertainty caused by such scrutiny, or the
commencement of regulatory actions, could impact the prospects for success of, as well as the trading and value of, a SPAC.
(i) PANDEMICS AND ASSOCIATED
ECONOMIC DISRUPTION
An outbreak of respiratory disease caused by a novel coronavirus was first detected in China in late 2019 and subsequently spread
internationally. This coronavirus has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as general anxiety
and economic uncertainty. It is not known
how long any negative impacts, or any future impacts of other significant events such as a substantial economic downturn, will last. Health crises caused by outbreaks of disease, such as the
coronavirus outbreak, may exacerbate other pre-existing political, social and economic risks. This outbreak, and other epidemics and pandemics that may arise in the future, could negatively affect the global
economy, as well as the economies of individual countries, individual companies and the market in general in significant and unforeseen ways. For example, a widespread health crisis such as a global pandemic could cause substantial market
volatility, exchange trading suspensions and closures, impact the Funds ability to complete repurchase requests, and affect Fund performance. Any such impact could adversely affect the Funds performance, the performance of the securities
in which the Fund invests, lines of credit available to the Fund and may lead to losses on your investment in the Fund. In addition, the increasing interconnectedness of markets around the world may result in many markets being affected by events or
conditions in a single country or region or events affecting a single or small number of issuers.
(12) CAPITAL SHARE TRANSACTIONS
The Fund has an unlimited number of shares of capital stock authorized, $0.01 par value per share, and 17,722,448 shares issued and outstanding at November 30,
2021. There was no capital share activity for the year ended November 30, 2021.
(13) SUBSEQUENT EVENTS
The Fund has evaluated the need for additional disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued.
Based on this evaluation, no adjustments were required to the financial statements as of November 30, 2021.
Supplemental Information (Unaudited)
November 30, 2021
The table below shows each Trustee and executive officers full name, year of birth, the position held with the Fund, the length of time served in that position,
his/her principal occupation during the past five years, and other directorships held by such Trustee. The address of each Trustee and officer is c/o Salient Midstream & MLP Fund, 4265 San Felipe, 8th Floor, Houston, Texas 77027.
Interested Trustees*
|
|
|
|
|
|
|
|
|
|
|
Name and Year of Birth
|
|
Position(s) Held
with the Fund
|
|
Principal Occupation(s)
During the Past 5 Years
|
|
Number of
Portfolios in
Fund Complex
Overseen
by
Trustee(1)
|
|
|
Other Directorships
During Past 5 Years**
|
Gregory A. Reid*
Year of Birth: 1965
|
|
Trustee (since 2020); President and Chief Executive Officer (since inception)
|
|
President and Chief Executive Officer, Salient Midstream & MLP Fund (since inception); President, MLP Complex, Salient, (since 2011).
|
|
|
6
|
|
|
Forward Funds (investment company) (three funds) (since 2020); Salient MF Trust (investment company) (two funds) (since 2020); Salient
Midstream & MLP Fund (investment company) (2012-2018)
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
Name and Year of Birth
|
|
Position(s) Held
with the Fund
|
|
Principal Occupation(s)
During the Past 5 Years
|
|
Number of
Portfolios in
Fund Complex
Overseen
by
Trustee(1)
|
|
|
Other Directorships
During Past 5 Years**
|
Julie Allecta
Year of Birth: 1946
|
|
Trustee
(since 2018)
|
|
Retired Partner, Paul Hastings, Janofsky & Walker LLP (1999-2009); Trustee, Litman Gregory Masters Funds Trust (since 2013); Member of Executive Committee and Governing Council,
Independent Directors Council (since 2014); Director, WildCare Bay Area (2007-2017).
|
|
|
6
|
|
|
Litman Gregory Funds Trust (since 2013); Salient MF Trust (investment company) (two funds) (since 2015); Forward Funds (investment company)
(three funds) (since 2012).
|
Jonathan P.
Carroll
Year of Birth: 1961
|
|
Trustee
(since inception)
|
|
President, Lazarus Capital LLC (since 2006); President, Lazarus Energy Holdings, LLC (since 2006); President and CEO, Blue Dolphin Energy Company (since 2012); President and Director,
Starlight Relativity Acquisition Company, LLC (since 2019); President and Director, The San Antonio Refinery LLC (since 2019); President and Director, Lazarus San Antonio Refinery LLC (since 2019); private investor (since 1988).
|
|
|
6
|
|
|
Salient Private Access Funds (investment companies) (four funds) (since 2004); Endowment PMF Funds (investment companies) (three funds)
(since 2014); Salient MF Trust (investment company) (two funds) (since 2012); Forward Funds (investment company) (three funds) (since 2015); LRR Energy, L.P. (LRE) (energy company) (2014-2015); Blue Dolphin Energy Company (BDCO) (energy company)
(since 2014); Starlight Relativity Acquisition Company, LLC (Investment Company) (since 2019); The San Antonio Refinery LLC (energy company) (since 2019); Lazarus San Antonio Refinery LLC (energy company) (since
2019).
|
Supplemental Information, continued (Unaudited)
November 30, 2021
|
|
|
|
|
|
|
|
|
|
|
Name and Year of Birth
|
|
Position(s) Held
with the Fund
|
|
Principal Occupation(s)
During the Past 5 Years
|
|
Number of
Portfolios in
Fund Complex
Overseen
by
Trustee(1)
|
|
|
Other Directorships
During Past 5 Years**
|
A. John Gambs
Year of Birth: 1945
|
|
Trustee (since 2018); Audit Committee Chairperson
(since 2018)
|
|
Director and Compensation Committee Chair, NMI Holdings, Inc. (2011-2012); Trustee and Audit Committee Chair, Barclays Global Investors Funds (2006-2010); Trustee and Audit Committee Chair,
Master Investment Portfolio (2006-2010); Advisory Board Member, Fairview Capital Management (since 2009); Director, San Francisco Classical Voice (2011-2016); Member, Board of Governors San Francisco Symphony (since 2001) and Vice President
(2018-2020); Director, The New Century Chamber Orchestra (since 2010); Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation (1988-1996); President and Director, Gambs Family Foundation (1997-2010).
|
|
|
6
|
|
|
Salient MF Trust (investment company) (two funds) (since 2015); Forward Funds (investment company) (three funds) (since 2012).
|
Dr. Bernard A. Harris, Jr.
Year of Birth: 1956
|
|
Trustee
(since inception)
|
|
Chief Executive Officer and Managing Partner, Vesalius Ventures, Inc. (venture investing) (since 2002); CEO, National Math and Science Initiative
(non-profit) (since 2018); President and Founder, The Harris Foundation (non-profit) (since 1998); clinical scientist, flight surgeon and astronaut for NASA
(1986-1996).
|
|
|
6
|
|
|
Salient Private Access Funds (investment companies) (four funds) (since 2009); Babson Funds (eleven funds) (since 2011); Monebo Technologies
Inc. (since 2009); The National Math and Science Initiative (since 2008); Communities in Schools (since 2007); American Telemedicine Association (2007-2014); U.S. Physical Therapy, Inc. (since 2005); Houston Technology Center (2004-2016); The
Harris Foundation, Inc. (since 1998); Salient MF Trust (investment company) (two funds) (since 2012); Forward Funds (investment company) (three funds) (since 2015).
|
Supplemental Information, continued (Unaudited)
November 30, 2021
|
|
|
|
|
|
|
|
|
|
|
Name and Year of Birth
|
|
Position(s) Held
with the Fund
|
|
Principal Occupation(s)
During the Past 5 Years
|
|
Number of
Portfolios in
Fund Complex
Overseen
by
Trustee(1)
|
|
|
Other Directorships
During Past 5 Years**
|
Haig G. Mardikian
Year of Birth: 1947
|
|
Trustee
(since 2018)
|
|
Owner of Haig G. Mardikian Enterprises, a real estate investment business (since 1971); General Partner of M&B Development, a real estate investment business (since 1983);
General Partner of George M. Mardikian Enterprises, a real estate investment business (1983-2002); President and Director of Adiuvana-Invest, Inc., a real estate investment business (since 1989); President of the William Saroyan Foundation (since
1992); Managing Director of the United Broadcasting Company, radio broadcasting (1983-2001); Trustee of the International House of UC Berkeley (2001-2007); Director of the Downtown Association of San Francisco (1982-2006); Director of the Market
Street Association (1982-2006); Trustee of Trinity College (1998-2007); Trustee of the Herbert Hoover Presidential Library (since 1997); Trustee of the Herbert Hoover Foundation (since 2002); Trustee of the Advisor California Civil Liberties Public
Education Fund (1997-2006); Director of The Walnut Management Co., a privately held family investment company (since 2008); President of the Foundation of City College (2006-2010); Director of Near East Foundation (since 2007).
|
|
|
6
|
|
|
Salient MF Trust (investment company) (two funds) (since 2015); Forward Funds (investment company) (three funds) (since 1998); Chairman and
Director of SIFE Trust Fund (1978-2001).
|
* This persons
status as an interested Trustee arises from his affiliation with the Advisor.
** This column includes only directorships of companies required to
report to the SEC under the Securities Exchange Act of 1934 (i.e., public companies) or other investment companies registered under the 1940 Act.
(1) The Fund
Complex for the purposes of this table consists of five (5) open-end funds in the Salient MF Trust and the Forward Funds (each, a Trust), with the series of each Trust being advised by
either the Advisor or an affiliate of the Advisor; and the Fund.
Supplemental Information, continued (Unaudited)
November 30, 2021
Officers of the Fund Who Are Not Trustees***
|
|
|
|
|
Name and Year of Birth(1)
|
|
Position(s) with the Fund
|
|
Principal Occupation(s) During Past 5 Years
|
Thomas Dusenberry
Year of Birth: 1977
|
|
Treasurer and Principal Financial Officer (since 2020)
|
|
Treasurer and Principal Financial Officer (since 2020), Assistant Treasurer (April 2019-December 2019), Salient MF Trust; Treasurer and
Principal Financial Officer (since 2020), Assistant Treasurer (April 2019-December 2019), Salient Midstream and MLP Fund; Treasurer and Principal Financial Officer (since 2020), Assistant Treasurer (April 2019-December 2019), Forward Funds;
Principal Financial Officer (since 2018) and Treasurer (since 2020), Salient Private Access Funds (four funds); Principal Financial Officer (since 2018) and Treasurer (since 2020), Endowment PMF Funds (three funds); Director of Fund Operations,
Salient (2016-2019); Senior Vice President of Fund Accounting and Administration, Salient (since 2020); Vice President of Fund Accounting and Administration, Citi Fund Services Ohio, Inc. (2001- 2016).
|
Paul A. Bachtold
Year of Birth: 1973
|
|
Chief Compliance Officer (since inception)
|
|
Chief Compliance Officer and Secretary, Forward Securities (since 2016); Chief Compliance Officer, Forward Funds (since 2016); Chief
Compliance Officer, Forward Management, LLC (since 2015); Chief Compliance Officer, Salient Private Access Funds (since 2010); Chief Compliance Officer, Endowment PMF Funds (since 2014); Chief Compliance Officer, Salient (since 2010); Chief
Compliance Officer, Salient Midstream & MLP Fund (since 2012); Chief Compliance Officer, Salient MF Trust (since 2012).
|
Kristen
Bayazitoglu
Year of Birth: 1981
|
|
Secretary (Since 2018)
|
|
Secretary, Forward Funds (since 2018); Secretary, Salient MF Trust (since 2018); Secretary, Salient Midstream & MLP Fund (since
2018); Vice President, Forward Funds (2017-2018); Vice President, Salient MF Trust (2017-2018); Vice President, Salient Midstream & MLP Fund (2017-2018); Chief Operating Officer, Salient Partners, L.P. (since 2017); Vice President, Salient
Private Access Funds (since 2017); Vice President, Endowment PMF Funds (since 2017); Vice President of Operations, Salient Partners, L.P. (March 2012-June 2017).
|
(1) The business
address of each officer is c/o Salient Midstream & MLP Fund, 4265 San Felipe, 8th Floor, Houston, Texas 77027.
Supplemental Information, continued (Unaudited)
November 30, 2021
At an in-person meeting of the Board held on October 26, 2021, the Board, including the Trustees who are not
interested persons as that term is defined in the Investment Company Act of 1940, as amended (the Independent Trustees), considered and approved the continuation of the Investment Management Agreement (the Advisory
Agreement) between the Fund and the Advisor. In preparation for review of this agreement, the Board requested the Advisor to provide detailed information that the Board determined to be reasonably necessary to evaluate the agreement. The
Independent Trustees held a meeting of the Board on October 4, 2021 (the Pre-15(c) Meeting) to review and discuss materials from the Advisor, and also met among themselves prior to the
October 26, 2021 meeting to review and discuss the response materials of the Advisor in support of the consideration of the Advisory Agreement. At the request of the Independent Trustees, the Advisor made presentations regarding the materials
and responded to questions from the Independent Trustees relating to, among other things, portfolio management, the Funds investment program, Fund and Advisor compliance programs, Fund performance including benchmarks and comparisons to other
funds, Fund fee levels, other portfolios (including fees) managed by the Advisor and its affiliates and the Advisors profitability (including revenue of the Advisor across all its advised funds). The Board, including the Independent Trustees,
also took into consideration information furnished for the Boards review and consideration throughout the year at regular Board meetings. The Independent Trustees were assisted at all times by independent counsel.
The Independent Trustees met with counsel in executive session without the presence of Advisor personnel, along with independent counsel. After the executive session,
the Independent Trustees reported that the extensive prior discussions among themselves and with independent counsel, including during the Pre-15(c) call, and their reviews of the Advisors response
materials, left them satisfied that the Advisor had responded to requests. The Independent Trustees further reported that they had concluded that the Advisory Agreement enables the Funds shareholders to obtain high quality services at a cost
that is appropriate, reasonable, and in the interests of investors. The Independent Trustees also reported that they took into account many factors, including volatility and conditions in the markets and the Funds performance since the
beginning of the pandemic, and the Funds leverage and fee structure, and believed management has acted appropriately in managing the Fund. They stated that in light of the Advisors efforts, the prudent exercise of judgment warranted
renewal of the advisory fee. It also was noted that the Boards decision to renew the Advisory Agreement was not based on any single factor, but rather was based on a comprehensive consideration of all the information provided to the Board at
its meetings throughout the year, and that individual Trustees may have assigned weight to differing factors. Upon consideration of these and other factors, the Board also determined:
The nature, extent and quality of the advisory services provided. With respect to the Advisory Agreement, the Board considered: the specialized expertise required
to manage the Funds strategy, personnel and staffing at the Advisor, the background and experience of key investment personnel; the Advisors focus on analysis of complex asset categories; the Advisors disciplined investment
approach and commitment to investment principles; the Advisors significant investment in and commitment to personnel, including hiring and extensive training; the Advisors significant compliance, risk oversight and tax reporting efforts;
and, the Advisors oversight of and interaction with service providers.
The Board concluded that the nature, extent and quality of the management and advisory
service provided were appropriate and thus supported a decision to renew the Advisory Agreement. The Board also concluded that the Advisor would be able to provide during the coming year quality of investment management and related services, and
that these services are appropriate in scope and extent in light of the Funds operations, the competitive landscape and investor needs.
The investment
performance of the Fund. The Board evaluated the comparative information provided by the Advisor regarding the Funds investment performance, distributions and information on the performance of other investment funds and indices, including
the relevance of various indices and the limited number of competitive funds structured for pass-through taxation treatment of investors like the Fund rather than fund-level taxation and double taxation. The Board also considered the various
performance reports received throughout the year. The Board noted the performance since pandemic lows as well as challenges in the MLP and energy markets during the year. On the basis of the Trustees assessment, the Trustees concluded that the
Advisor was capable of generating a level of investment performance that is appropriate in light of the Funds investment objective, policies and strategies and competitive with comparable funds.
The cost of advisory service provided and the level of profitability. In analyzing the cost of services and profitability of the Advisor, the Board considered the
revenues earned and expenses incurred by the Advisor. The Board took into account the significant investment by and cost to the Advisor in appropriate personnel and service infrastructure to support the operations and management of the Fund. On the
basis of the Boards review of the fees charged by the Advisor for investment advisory and related services, the specialized nature of the Funds investment program, the Funds use of leverage, the Advisors financial information
and the costs associated with managing the Fund, the Board concluded that the level of investment management fees, and the Advisors profitability, are reasonable in light of the services provided, the management fees and overall expense ratios
of comparable investment companies, and the anticipated profitability of the relationship between the Fund and the Advisor.
The extent to which economies of
scale would be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of fund investors. The Board noted that, as a closed-end fund of a relatively fixed-scale,
the management fees reflect the Funds complex operations, the current markets for the MLP asset category, the economic environment for the Advisor, including its continued investment relating to support and monitoring of the Trust, and the
Supplemental Information, continued (Unaudited)
November 30, 2021
competitive nature of the investment company market as relevant to the Fund. The Board noted that it would have the opportunity to periodically re-examine the matter of economies of scale, as well as the appropriateness of management fees payable to the Advisor.
Benefits
(such as soft dollars) to the Advisor from its relationship with the Fund. The Board concluded that other benefits derived by the Advisor from its relationship with the Fund, to the extent such benefits are identifiable or determinable, are
reasonable and fair, result from the provision of appropriate services to the Fund and investors therein, and are consistent with industry practice and the best interests of the Fund and its shareholders.
Other considerations. The Board determined that the Advisor has made a continuing and substantial commitment to the recruitment of high quality personnel,
monitoring and investment decision-making, and maintained and expanded the financial, compliance and operational resources reasonably necessary to manage the Fund in a professional manner that is consistent with the best interests of the Fund and
its investors. The Trustees also concluded that the Advisor continues to make a significant entrepreneurial commitment to the management and success of the Fund.
Supplemental Information, continued (Unaudited)
November 30, 2021
N-PORT Filings
The Fund files its
complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Funds Form
N-PORT reports are available on the SECs web site at http://www.sec.gov.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the 1933 Act and the Securities Exchange Act of 1934. By their nature, all
forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect the Funds actual results are the
performance of the portfolio of investments held by it, the conditions in the U.S. and international financial, petroleum and other markets, the price at which shares of the Fund will trade in the public markets and other factors discussed in
filings with the SEC.
Proxy Voting Policies
The Fund is required to file Form N-PX, with its complete proxy voting record for the twelve months ended June 30, no later than August 31 of each year. A description of the policies and procedures that the
Fund uses to determine how to vote proxies relating to portfolio securities and information regarding how the Fund voted proxies for the period ended June 30 of each year will be available: (i) without charge, upon request,
by calling (800) 809-0525, or (ii) by visiting the SECs website at http://www.sec.gov.
Statement of
Additional Information
The Statement of Additional Information (SAI) includes additional information about the Funds Trustees and is available
upon request without charge by calling (800) 809-0525 or by visiting the SEC website at http://www.sec.gov.