|
INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
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Fund objective
The Funds investment objective is to provide long-term investors a high level of total return with an emphasis on cash distributions.
The Fund seeks to achieve its objective by investing primarily in energy midstream entities.
Letter from the chairman
Dear Shareholder,
We are pleased to provide the annual report of ClearBridge Energy Midstream Opportunity Fund Inc. for the twelve-month reporting period ended November 30, 2021.
Please read on for a detailed look at prevailing economic and market conditions during the Funds reporting period and to learn how those conditions have affected Fund performance.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support
you receive from your financial advisor. One way we accomplish this is through our website, www.franklintempleton.com. Here you can gain immediate access to market and investment information, including:
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Fund prices and performance,
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Market insights and commentaries from our portfolio managers, and
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A host of educational resources.
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We look forward to helping you meet your financial goals.
Sincerely,
Jane Trust, CFA
Chairman, President and Chief Executive Officer
December 31, 2021
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II
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Fund overview
Q. What is the Funds investment strategy?
A. The Funds investment objective is to provide long-term investors a high level of total return with an emphasis on cash distributions. The Fund seeks to
achieve its objective by investing primarily in energy midstream entities. Under normal market conditions, the Fund invests at least 80% of its managed assets in energy midstream entities including entities structured as both partnerships and
corporations (the 80% policy).
For purposes of the 80% policy, the Fund considers investments in midstream entities as those entities that provide midstream
services including the gathering, transporting, processing, fractionation, storing, refining, and distribution of oil, natural gas liquids and natural gas. The Fund considers an entity to be within the energy sector if it derives at least 50% of its
revenues from the business of exploring, developing, producing, gathering, transporting, processing, fractionating, storing, refining, distributing, mining or marketing natural gas, natural gas liquids (including propane), crude oil, refined
petroleum products or coal.
We currently focus primarily on investments in midstream entities with operations in crude oil, natural gas liquids and refined products
infrastructure. We believe that the increased supply of domestic oil and natural gas liquids due primarily to recent shale gas discoveries makes midstream entities focused on these liquid products well positioned for long-term growth.
However, should macroeconomic energy, political, regulatory or tax considerations evolve, and other types of midstream entities become more attractive, we may look
to invest in these new opportunities, subject to compliance with the Funds 80% policy.
ClearBridge Investments, LLC is the Funds subadviser. The
portfolio managers primarily responsible for overseeing the day-to-day management of the Fund are Michael Clarfeld, CFA, Chris Eades, and Peter Vanderlee, CFA.
Q. What were the overall market conditions during the Funds reporting period?
A. Equities delivered robust performance
during the twelve-month reporting period ended November 30, 2021, as the approval and subsequent rollout of multiple COVID-19 vaccines combined with accommodative monetary policy and ambitious fiscal spending helped the S&P 500 Indexi to a gain of 27.92%. The market was led by cyclical1 stocks benefiting from the economic recovery, as reopened businesses, greater mobility and a
healthy consumer encouraged spending and production, and high-growth technology stocks benefiting from strong secular trends as well as a lingering stay-at-home environment. More defensive,
non-cyclical2 sectors trailed.
1
|
Cyclicals consists of the following industries: automotive, entertainment, gaming, home construction, lodging, retailers,
restaurants, textiles, and other consumer services.
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2
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Non-cyclicals consists of the following industries: consumer products, food/beverage, health care, pharmaceuticals,
supermarkets and tobacco.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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1
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Fund overview (contd)
The reporting period began with positive developments for COVID-19 vaccines and resolution of the
U.S. election, which led to a broadening of market leadership from the mega cap growth stocks that had soared during the height of pandemic lockdowns. Positive COVID-19 vaccine trial results from Pfizer/BioNTech and Moderna increased optimism about
an eventual return to normal economic activity, sparking a rally in cyclical areas of the market. In the fourth quarter of 2020, value stocks, led by energy and financials, outperformed growth stocks for the first time since 2018. Stocks also
benefited as Joe Biden won the race for president and looked set to govern with a small majority in Congress.
Aggressive fiscal and monetary policies continued
unabated in early 2021, helping support consumer demand that, combined with stop-and-start supply chain recovery as COVID-19 rippled through global regions, raised inflation concerns and led to soaring commodity prices. Despite waves of COVID-19
periodically offering a bid to tech stocks that would benefit from a stay-at-home environment, inflation worries led to a steepening yield curve, weighing on high-multiple growth stocks and supporting cyclicals. Amid easing business restrictions and
accommodating fiscal and monetary policies, the U.S. economy picked up steam, with business confidence and new jobs numbers increasing steadily.
Markets wavered in
September 2021 after the Delta variant of COVID-19 put a pause on recovery plays and higher inflation coincided with signals from the Federal Reserve Board that it would reduce its bond buying as early as November and potentially raise the federal
funds rate in late 2022 or 2023. Equities delivered a flattish third quarter of 2021 as already challenging labor and supply shortages and broad-based inflationary pressures intensified, weighing on industrials and materials companies. Energy felt
crosswinds from a slowing Chinese economy even while global demand remained strong. Robust third quarter 2021 corporate earnings, however, suggesting companies have largely been able to absorb inflationary pressures, led to strong gains in October,
while the discovery of the Omicron variant of COVID-19 in late November 2021 reintroduced risks of pandemic-related restrictions.
Q. What
were the overall market conditions for the MLP sector during the reporting period?
A. The global rollout of vaccines, combined with heavy
government stimulus, helped brighten the outlook for economic reopening over the reporting period, supporting strong demand for energy and helping oil prices recover from $45 to $66 per barrel of West Texas Intermediate crude. The period saw the
global oil market continue its move from grossly oversupplied, following a demand plummet at the outset of the pandemic in early 2020, to modestly undersupplied. Global oil production increases beginning in the fourth quarter of 2020 continued
throughout the period, benefiting the MLP sector, with the Alerian MLP Indexii gaining 38.75% for the twelve-month reporting period. This trailed the S&P 500 Indexs energy sectors
(+56.61%) return, dominated by higher-beta oil exploration and production companies, while outperforming the S&P 500 Indexs (+27.92%) gain. Global oil demand is expected to average roughly 96 million barrels per day in 2021
and approach previous peak demand in 2022.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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Q. How did we respond to these changing market conditions?
A. Our investment approach remained consistent throughout the reporting period. We continued to focus on MLPs and infrastructure companies that are engaged in the
midstream space. These companies are generally less exposed to the volatility of commodity prices and have business models that are largely fee based. We focus on companies with high-quality assets, solid balance sheets and good growth outlooks.
The pathway to U.S. oil production approaching pre-pandemic levels is through increasing drilling activity. With crude oil futures currently discounting roughly $65
per barrel over the next two years, there should be sufficient economic returns to expect a continued increase in the number of rigs drilling. Yet, large publicly traded oil and gas producers have asserted they will not significantly increase
drilling activity, even with crude oil and natural gas prices at current levels. Their stated modus operandi is to return free cash flow to investors rather than increase drilling activity. This is in direct contrast to previous cycles.
Perhaps contrarian, our view remains that if economic returns are there (and they are), capital will find its way to drilling more wells. Rig count acceleration may be
slower than in prior cycles, but, in our view, economic returns will drive capital toward increasing the number of wells drilled. This should result in a continued recovery in U.S. production volumes, which should drive growing cash flows for U.S.
midstream companies in both 2022 and 2023. It is also important to note that a continued recovery in U.S. production volumes will come with little capital spending requirements on the part of midstream companies. The infrastructure systems are
largely built out.
Our base case remains that global oil demand continues to recover to pre-pandemic levels during 2022, driving the need for more oil supply on the
global market. At present, oil prices continue to signal a need for continued increases in U.S. drilling activity to bring more oil onto the market. This, in turn, should increase throughputs across energy infrastructure systems in the U.S. allowing
growing cash flows to fully display the benefit of the evolved U.S. midstream business model.
Performance review
For the twelve months ended November 30, 2021, ClearBridge Energy Midstream Opportunity Fund Inc. returned 64.18% based on its net asset value (NAV)iii and 82.70% based on its New York Stock Exchange (NYSE) market price per share. The Alerian MLP Index and the Lipper Energy MLP Closed-End Funds Category Averageiv returned 38.75% and 46.53%, respectively, over the same time frame. Please note that Lipper performance returns are based on each funds NAV.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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3
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Fund overview (contd)
The Fund has a practice of seeking to maintain a relatively stable level of distributions to
shareholders. This practice has no impact on the Funds investment strategy and may reduce the Funds NAV. The Funds manager believes the practice helps maintain the Funds competitiveness and may benefit the Funds market
price and premium/discount to the Funds NAV.
During the twelve-month period, the Fund made distributions to shareholders totaling $1.46 per share of which
$0.93 will be treated as a return of capital for tax purposes. The performance table shows the Funds twelve-month total return based on its NAV and market price as of November 30, 2021. Past performance is no guarantee of future
results.
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Performance Snapshot as of November 30, 2021
|
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Price Per Share
|
|
12-Month
Total Return*
|
|
$26.53 (NAV)
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|
64.18
|
%
|
$21.65 (Market Price)
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82.70
|
%
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All figures represent past performance and are not a guarantee of future results.
* Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating
expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.
Total return assumes the reinvestment of all distributions, including returns of capital, at NAV.
Total return assumes the reinvestment of all distributions, including returns of capital, in additional shares in accordance with the Funds Dividend
Reinvestment Plan.
Q. What were the leading contributors to performance?
A. On an absolute basis, the diversified energy infrastructure subsector was the leading contributor to performance during the reporting period, followed by the
gathering/ processing subsector. Relative to the Alerian MLP Index, stock selection and sector allocation contributed positively, with stock selection in the diversified energy infrastructure subsector contributing the most. In terms of individual
Fund holdings, the top contributors to performance for the period were Targa Resources, MPLX LP, Western Midstream Partners LP, DCP Midstream LP and Energy Transfer LP.
Q. What were the leading detractors from performance?
A. Stock selection in the gathering/processing subsector detracted from performance. In terms of individual Fund holdings, the sole detractor was Crestwood Equity
Partners LP.
Q. Were there any significant changes to the Fund during the reporting period?
A. During the reporting period, we initiated positions in TC Energy, Crestwood Equity Partners LP, DT Midstream, Hess Midstream LP and Aris Water Solutions. We
closed a position in Noble Midstream Partners LP. In addition, all of TC PipeLines LPs outstanding common units were acquired by TC Energy, whose shares we received and retained.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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Looking for additional information?
The Fund is traded under the symbol EMO and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available
online under the symbol XEMOX on most financial websites. Barrons and The Wall Street Journals Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a
monthly press release that can be found on most major financial websites as well as www.franklintempleton.com.
In a continuing effort to provide information
concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Funds current NAV, market price and other information.
Thank you for your investment in ClearBridge Energy Midstream Opportunity Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain
focused on achieving the Funds investment goals.
Sincerely,
Michael Clarfeld, CFA
Portfolio Manager
ClearBridge Investments, LLC
Chris Eades
Portfolio Manager
ClearBridge Investments, LLC
Peter Vanderlee, CFA
Portfolio Manager
ClearBridge Investments, LLC
December 13, 2021
RISKS:
The Fund is a non-diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. The Funds common stock is traded on the New York Stock Exchange. Similar to stocks, the Funds share price will fluctuate
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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5
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Fund overview (contd)
with market conditions and, at the time of sale, may be worth more or less than the original
investment. Shares of closed-end funds often trade at a discount to their net asset value. Because the Fund is non-diversified, it may be more susceptible to economic, political or regulatory events than a diversified fund. The Funds
investments are subject to a number of risks such as stock market risk, MLP and midstream entities risk, market events risk and portfolio management risk. MLP distributions are not guaranteed and there is no assurance that all distributions will be
tax deferred. Investments in MLP securities and midstream entities are subject to unique risks. The Funds concentration of investments in energy-related MLPs and midstream entities subjects it to the risks of MLPs, midstream entities and the
energy sector, including the risks of declines in energy or commodity prices, decreases in energy demand, adverse weather conditions, natural or other disasters, changes in government regulation, and changes in tax laws. Leverage may result in
greater volatility of NAV and the market price of common shares, and increases a shareholders risk of loss. The Fund may make significant investments in derivative instruments. Derivative instruments can be illiquid, may disproportionately
increase losses, and have a potentially large impact on Fund performance. The Fund may invest in small-capitalization or illiquid securities, which can increase the risk and volatility of the Fund. The Fund may also invest in money market funds,
including funds affiliated with the Funds manager and subadviser. For more information on Fund risks, see Summary of information regarding the Fund - Principal Risk Factors in this report.
Portfolio holdings and breakdowns are as of November 30, 2021 and are subject to change and may not be representative of the portfolio managers current or
future investments. The Funds top ten holdings (as a percentage of total net assets) as of November 30, 2021 were: MPLX LP (12.1%), Enterprise Products Partners LP (10.6%), Targa Resources Corp. (9.7%), Western Midstream Partners LP
(9.0%), Williams Cos. Inc. (8.4%), DCP Midstream LP (7.5%), Magellan Midstream Partners LP (6.2%), Energy Transfer LP (5.9%), Plains All American Pipeline LP (5.7%) and ONEOK Inc. (5.6%). Please refer to pages 11 through 12 for a list and
percentage breakdown of the Funds holdings.
The mention of sector breakdowns is for informational purposes only and should not be construed as a
recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in
any securities or investment strategies discussed should consult their financial professional. The Funds top five sector holdings (as a percentage of net assets) as of November 30, 2021 were: oil, gas & consumable fuels (49.3%),
diversified energy infrastructure (29.5%), gathering/processing (24.5%), liquids transportation & storage (12.9%) and oil/refined products (12.1%). The Funds portfolio composition is subject to change at any time.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no
deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
The information provided is not intended to be a forecast of
future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
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6
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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i
|
The S&P 500 Index is an unmanaged index of the stocks of 500 leading companies, and is generally representative of the
performance of larger companies in the U.S.
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ii
|
The Alerian MLP Index is a composite of the fifty most prominent energy master limited partnerships (MLPs) and
is calculated using a float-adjusted, capitalization-weighted methodology.
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iii
|
Net asset value (NAV) is calculated by subtracting total liabilities, including liabilities associated with
financial leverage (if any), from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the
market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Funds market price as determined by supply of and demand for the Funds shares.
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iv
|
Lipper, Inc., a wholly-owned subsidiary of Refinitiv, provides independent insight on global collective investments.
Returns are based on the twelve-month period ended November 30, 2021, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 17 funds in the Funds Lipper category.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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7
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Fund at a glance (unaudited)
Investment breakdown (%) as a percent of total
investments
|
The bar graph above represents the composition of the Funds investments as of November 30, 2021 and
November 30, 2020. The Fund is actively managed. As a result, the composition of the Funds investments is subject to change at any time.
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8
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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Fund performance (unaudited)
The performance of the Index reflects no deduction for fees, expenses or taxes, or the impact from the use of leverage.
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Assets:
|
|
|
|
|
Investments, at value (Cost $568,546,100)
|
|
$
|
512,051,878
|
|
Income tax receivable
|
|
|
6,341,812
|
|
Dividends and distributions receivable
|
|
|
421,177
|
|
Interest receivable
|
|
|
158
|
|
Other receivables
|
|
|
4,482
|
|
Prepaid expenses
|
|
|
52,870
|
|
Total Assets
|
|
|
518,872,377
|
|
|
|
Liabilities:
|
|
|
|
|
Loan payable (Note 5)
|
|
|
79,000,000
|
|
Senior Secured Notes (net of deferred debt issuance and offering costs of $146,870) (Note
6)
|
|
|
44,956,709
|
|
Mandatory Redeemable Preferred Stock ($100,000 liquidation value per share; 431 shares
issued and outstanding) (net of deferred offering costs of $224,276) (Note 7)
|
|
|
42,875,724
|
|
Payable for Fund shares repurchased
|
|
|
527,850
|
|
Investment management fee payable
|
|
|
435,648
|
|
Interest expense payable
|
|
|
359,141
|
|
Distributions payable to Mandatory Redeemable Preferred Stockholders
|
|
|
86,574
|
|
Directors fees payable
|
|
|
9,823
|
|
Accrued expenses
|
|
|
332,122
|
|
Total Liabilities
|
|
|
168,583,591
|
|
Total Net Assets Applicable to Common Shareholders
|
|
$
|
350,288,786
|
|
|
|
Net Assets Applicable to Common Shareholders:
|
|
|
|
|
Common stock par value ($0.001 par value; 13,201,931 shares issued and outstanding;
100,000,000 common shares authorized)
|
|
$
|
13,202
|
|
Paid-in capital in excess of par value
|
|
|
736,960,169
|
|
Total distributable earnings (loss), net of income taxes
|
|
|
(386,684,585
|
)
|
Total Net Assets Applicable to Common Shareholders
|
|
$
|
350,288,786
|
|
|
|
Common Shares Outstanding
|
|
|
13,201,931
|
|
|
|
Net Asset Value Per Common Share
|
|
|
$26.53
|
|
See Notes to Financial
Statements.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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13
|
Statement of operations
For the Year Ended November 30, 2021
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
Dividends and distributions
|
|
$
|
33,674,786
|
|
Return of capital (Note 1(h))
|
|
|
(28,689,445)
|
|
Net Dividends and Distributions
|
|
|
4,985,341
|
|
Interest
|
|
|
16,778
|
|
Less: Foreign taxes withheld
|
|
|
(280,537)
|
|
Total Investment
Income
|
|
|
4,721,582
|
|
|
|
Expenses:
|
|
|
|
|
Investment management fee (Note 2)
|
|
|
4,734,143
|
|
Interest expense (Notes 5 and 6)
|
|
|
2,417,989
|
|
Distributions to Mandatory Redeemable Preferred Stockholders (Notes 1 and 7)
|
|
|
1,968,056
|
|
Audit and tax fees
|
|
|
273,563
|
|
Legal fees
|
|
|
148,680
|
|
Directors fees
|
|
|
113,201
|
|
Transfer agent fees
|
|
|
106,276
|
|
Amortization of preferred stock offering costs (Note 7)
|
|
|
96,729
|
|
Commitment fees (Note 5)
|
|
|
90,714
|
|
Amortization of debt issuance and offering costs (Note 6)
|
|
|
72,887
|
|
Fund accounting fees
|
|
|
68,472
|
|
Rating agency fees
|
|
|
53,959
|
|
Franchise taxes
|
|
|
17,682
|
|
Shareholder reports
|
|
|
16,938
|
|
Stock exchange listing fees
|
|
|
5,113
|
|
Insurance
|
|
|
3,672
|
|
Custody fees
|
|
|
2,245
|
|
Miscellaneous expenses
|
|
|
136,696
|
|
Total Expenses
|
|
|
10,327,015
|
|
Less: Fee waivers and/or expense reimbursements (Note 2)
|
|
|
(190,353)
|
|
Net Expenses
|
|
|
10,136,662
|
|
Net Investment Loss, before income taxes
|
|
|
(5,415,080)
|
|
Current tax benefit (Note 11)
|
|
|
643,081
|
|
Net Investment Loss, net of income taxes
|
|
|
(4,771,999)
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions (Notes 1, 3 and 11):
|
|
|
|
|
Net Realized Gain From:
|
|
|
|
|
Investment transactions
|
|
|
34,108,556
|
|
Foreign currency transactions
|
|
|
1,707
|
|
Net Realized Gain, net of income
taxes
|
|
|
34,110,263
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
|
Investments
|
|
|
114,382,004
|
|
Foreign currencies
|
|
|
(4,325)
|
|
Change in Net Unrealized Appreciation
(Depreciation), net of income taxes
|
|
|
114,377,679
|
|
Net Gain on Investments and Foreign Currency Transactions, net of income taxes
|
|
|
148,487,942
|
|
Increase in Net Assets Applicable to Common Shareholders From Operations
|
|
$
|
143,715,943
|
|
See Notes to Financial
Statements.
|
|
|
|
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14
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ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
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Statements of changes in net assets
|
|
|
|
|
|
|
|
|
For the Years Ended November 30,
|
|
2021
|
|
|
2020
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
Net investment loss, net of income taxes
|
|
$
|
(4,771,999)
|
|
|
$
|
(15,243,886)
|
|
Net realized gain (loss), net of income taxes
|
|
|
34,110,263
|
|
|
|
(252,704,016)
|
|
Change in net unrealized appreciation (depreciation), net of income taxes
|
|
|
114,377,679
|
|
|
|
(86,426,558)
|
|
Increase (Decrease) in Net Assets
Applicable to Common Shareholders From Operations
|
|
|
143,715,943
|
|
|
|
(354,374,460)
|
|
|
|
|
Distributions to Common Shareholders From (Note 1):
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
(7,120,282)
|
|
|
|
|
|
Return of capital
|
|
|
(12,436,920)
|
|
|
|
(30,336,861)
|
|
Decrease in Net Assets From Distributions
to Common Shareholders
|
|
|
(19,557,202)
|
|
|
|
(30,336,861)
|
|
|
|
|
Fund Share Transactions:
|
|
|
|
|
|
|
|
|
Cost of shares repurchased (665,383 and 579,300 shares repurchased, respectively) (Note
9)
|
|
|
(11,481,173)
|
|
|
|
(5,398,982)
|
|
Net share reduction due to reverse stock split (0 and 57,267,373 shares repurchased,
respectively) (Note 10)
|
|
|
|
|
|
|
|
|
Decrease in Net Assets From Fund Share
Transactions
|
|
|
(11,481,173)
|
|
|
|
(5,398,982)
|
|
Increase (Decrease) in Net Assets
Applicable to Common Shareholders
|
|
|
112,677,568
|
|
|
|
(390,110,303)
|
|
|
|
|
Net Assets Applicable to Common Shareholders:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
237,611,218
|
|
|
|
627,721,521
|
|
End of year
|
|
$
|
350,288,786
|
|
|
$
|
237,611,218
|
|
See Notes to Financial
Statements.
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
15
|
Statement of cash flows
For the Year Ended November 30, 2021
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net increase in net assets applicable to common shareholders resulting from
operations
|
|
$
|
143,715,943
|
|
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided (used) by operating activities:
|
|
|
|
|
Purchases of portfolio securities
|
|
|
(229,018,550)
|
|
Sales of portfolio securities
|
|
|
166,439,366
|
|
Net purchases, sales and maturities of short-term investments
|
|
|
1,324,265
|
|
Return of capital
|
|
|
28,689,445
|
|
Increase in dividends and distributions receivable
|
|
|
(204,862)
|
|
Increase in interest receivable
|
|
|
(106)
|
|
Decrease in prepaid expenses
|
|
|
36,258
|
|
Increase in other receivables
|
|
|
(4,482)
|
|
Increase in income tax receivable
|
|
|
(1,061,685)
|
|
Amortization of preferred stock offering costs
|
|
|
96,729
|
|
Amortization of debt issuance and offering costs
|
|
|
72,887
|
|
Increase in investment management fee payable
|
|
|
199,053
|
|
Increase in Directors fees payable
|
|
|
1,346
|
|
Increase in interest expense payable
|
|
|
1,319
|
|
Increase in accrued expenses
|
|
|
96,544
|
|
Decrease in distributions payable to Mandatory Redeemable Preferred Stockholders
|
|
|
(38,352)
|
|
Net realized gain on investments
|
|
|
(34,108,556)
|
|
Change in net unrealized appreciation (depreciation) of investments
|
|
|
(114,382,004)
|
|
Net Cash Used in Operating
Activities*
|
|
|
(38,145,442)
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
Distributions paid on common stock
|
|
|
(19,557,202)
|
|
Proceeds from loan facility borrowings
|
|
|
69,000,000
|
|
Payment for Fund shares repurchased (net of payable for Fund shares repurchased)
|
|
|
(11,297,356)
|
|
Net Cash Provided by Financing
Activities
|
|
|
38,145,442
|
|
Cash and restricted cash at beginning of year
|
|
|
|
|
Cash and restricted cash at end of year
|
|
|
|
|
*
|
Included in operating expenses is cash of $2,499,731 paid for interest and commitment fees on borrowings, $2,006,408 paid
for distributions to Mandatory Redeemable Preferred Stockholders and $309,485 paid for income taxes, net of refunds, if any.
|
|
The following table provides a reconciliation of cash and restricted cash reported within the Statement of Assets and
Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows.
|
|
|
|
|
|
|
|
November 30, 2021
|
|
Cash
|
|
|
|
|
Restricted cash
|
|
|
|
|
Total cash and restricted cash shown in the Statement of Cash Flows
|
|
|
|
|
See Notes to Financial
Statements.
|
|
|
|
|
|
16
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a common share of capital stock outstanding throughout each year ended November 30:
|
|
|
|
20211
|
|
|
20201,2
|
|
|
20191,2
|
|
|
20181,2
|
|
|
20171,2
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
|
$17.13
|
|
|
|
$43.75
|
|
|
|
$51.35
|
|
|
|
$56.85
|
|
|
|
$69.20
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
|
(0.36)
|
|
|
|
(1.07)
|
|
|
|
(0.70)
|
|
|
|
0.30
|
|
|
|
(1.00)
|
|
Net realized and unrealized gain (loss)
|
|
|
11.01
|
|
|
|
(23.54)
|
|
|
|
(2.30)
|
|
|
|
0.60
|
|
|
|
(4.95)
|
|
Total income (loss) from
operations
|
|
|
10.65
|
|
|
|
(24.61)
|
|
|
|
(3.00)
|
|
|
|
0.90
|
|
|
|
(5.95)
|
|
|
|
|
|
|
|
Less distributions to common shareholders from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
(0.54)
|
|
|
|
|
|
|
|
(1.70)
|
|
|
|
(1.60)
|
|
|
|
|
|
Return of capital
|
|
|
(0.93)
|
|
|
|
(2.13)
|
|
|
|
(2.90)
|
|
|
|
(4.80)
|
|
|
|
(6.40)
|
|
Total distributions to common
shareholders
|
|
|
(1.47)
|
|
|
|
(2.13)
|
|
|
|
(4.60)
|
|
|
|
(6.40)
|
|
|
|
(6.40)
|
|
Anti-dilutive impact of repurchase plan
|
|
|
0.22
|
3
|
|
|
0.12
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
|
$26.53
|
|
|
|
$17.13
|
|
|
|
$43.75
|
|
|
|
$51.35
|
|
|
|
$56.85
|
|
|
|
|
|
|
|
Market price, end of year
|
|
|
$21.65
|
|
|
|
$12.70
|
|
|
|
$38.10
|
|
|
|
$46.15
|
|
|
|
$52.35
|
|
Total return, based on NAV4,5
|
|
|
64.18
|
%
|
|
|
(57.35)
|
%
|
|
|
(6.57)
|
%
|
|
|
0.67
|
%
|
|
|
(9.34)
|
%
|
Total return, based on Market Price6
|
|
|
82.70
|
%
|
|
|
(62.74)
|
%
|
|
|
(8.15)
|
%
|
|
|
(0.87)
|
%
|
|
|
(9.54)
|
%
|
|
|
|
|
|
|
Net assets applicable to common shareholders, end of year (millions)
|
|
|
$350
|
|
|
|
$238
|
|
|
|
$628
|
|
|
|
$736
|
|
|
|
$355
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
|
|
1.41
|
%
|
|
|
1.52
|
%
|
|
|
1.50
|
%
|
|
|
1.49
|
%
|
|
|
1.43
|
%
|
Other expenses
|
|
|
1.68
|
|
|
|
3.65
|
7
|
|
|
2.16
|
|
|
|
2.12
|
|
|
|
1.72
|
|
Subtotal
|
|
|
3.09
|
|
|
|
5.17
|
7
|
|
|
3.66
|
|
|
|
3.61
|
|
|
|
3.15
|
|
Income tax expenses
|
|
|
|
8
|
|
|
1.32
|
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
Total gross
expenses
|
|
|
3.09
|
|
|
|
6.49
|
7
|
|
|
3.66
|
|
|
|
3.61
|
|
|
|
3.15
|
|
Total net
expenses
|
|
|
3.03
|
9
|
|
|
6.42
|
7,9
|
|
|
3.59
|
9
|
|
|
3.60
|
9
|
|
|
3.15
|
|
Net investment income (loss), net of income taxes
|
|
|
(1.43)
|
|
|
|
(4.71)
|
7
|
|
|
(1.37)
|
|
|
|
0.52
|
|
|
|
(1.45)
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
37
|
%
|
|
|
19
|
%
|
|
|
29
|
%
|
|
|
14
|
%
|
|
|
16
|
%
|
See Notes to Financial
Statements.
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
17
|
Financial highlights (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a common share of capital stock outstanding throughout each year ended November 30:
|
|
|
|
20211
|
|
|
20201,2
|
|
|
20191,2
|
|
|
20181,2
|
|
|
20171,2
|
|
|
|
|
|
|
|
Supplemental data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and Debt Issuance Outstanding, End of Year (000s)
|
|
|
$124,104
|
|
|
|
$55,104
|
|
|
|
$278,500
|
|
|
|
$343,000
|
|
|
|
$158,000
|
|
Asset Coverage Ratio for Loan and Debt Issuance Outstanding10
|
|
|
417
|
%
|
|
|
609
|
%
|
|
|
343
|
%
|
|
|
329
|
%
|
|
|
339
|
%
|
Asset Coverage, per $1,000 Principal Amount of Loan and Debt Issuance Outstanding10
|
|
|
$4,170
|
|
|
|
$6,094
|
|
|
|
$3,426
|
|
|
|
$3,286
|
|
|
|
$3,390
|
|
Weighted Average Loan and Debt Issuance (000s)
|
|
|
$95,983
|
|
|
|
$122,617
|
|
|
|
$318,462
|
|
|
|
$163,197
|
|
|
|
$157,819
|
|
Weighted Average Interest Rate on Loan and Debt Issuance
|
|
|
2.48
|
%
|
|
|
6.14
|
%11
|
|
|
3.83
|
%
|
|
|
3.51
|
%
|
|
|
3.32
|
%
|
Mandatory Redeemable Preferred Stock at Liquidation Value, End of Year (000s)
|
|
|
$43,100
|
|
|
|
$43,100
|
|
|
|
$48,000
|
|
|
|
$48,000
|
|
|
|
$23,000
|
|
Asset Coverage Ratio for Mandatory Redeemable Preferred Stock12
|
|
|
309
|
%
|
|
|
342
|
%
|
|
|
292
|
%
|
|
|
288
|
%
|
|
|
296
|
%
|
Asset Coverage, per $100,000 Liquidation Value per Share of Mandatory Redeemable Preferred
Stock12
|
|
|
$309,498
|
|
|
|
$341,958
|
|
|
|
$292,258
|
|
|
|
$288,277
|
|
|
|
$295,913
|
|
|
Calculation of the net gain per share (both realized and unrealized) does not correlate to the aggregate realized and
unrealized losses presented in the Statement of Operations due to the timing of the sales and repurchases of Fund shares in relation to fluctuating market values of the investments of the Fund.
|
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
On July 28, 2020, the Fund completed a 1-for-5 reverse stock split. Prior year per share amounts have been restated
to reflect the impact of the reverse stock split.
|
3
|
The repurchase plan was completed at an average repurchase price of $17.25 for 665,383 shares and $11,481,173 for the year
ended November 30, 2021 and $9.32 for 579,300 shares and $5,398,982 for the year ended November 30, 2020.
|
4
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the
absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.
|
5
|
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future
results.
|
6
|
The total return calculation assumes that distributions are reinvested in accordance with the Funds dividend
reinvestment plan. Past performance is no guarantee of future results.
|
7
|
Includes non-recurring prepayment penalties, the write-off of debt issuance and offering costs and the write-off of
preferred stock offering costs recognized during the period totaling 0.92% of average net assets.
|
8
|
For the years ended November 30, 2021, 2019, 2018 and 2017, the net income tax benefit was 0.19%, 0.88%, 3.08% and
4.20%, respectively. The net income tax benefit is not reflected in the Funds expense ratios.
|
9
|
Reflects fee waivers and/or expense reimbursements.
|
10
|
Represents value of net assets plus the loan outstanding, debt issuance outstanding and mandatory redeemable preferred
stock at the end of the period divided by the loan and debt issuance outstanding at the end of the period.
|
11
|
Includes prepayment penalties recognized during the period.
|
12
|
Represents value of net assets plus the loan outstanding, debt issuance outstanding and mandatory redeemable preferred
stock at the end of the period divided by the loan, debt issuance and mandatory redeemable preferred stock outstanding at the end of the period.
|
See Notes to Financial Statements.
|
|
|
|
|
|
18
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
Notes to financial statements
1. Organization and significant accounting policies
ClearBridge Energy Midstream Opportunity Fund Inc. (the Fund) was incorporated in Maryland on April 5, 2011 and is registered as a non-diversified,
closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act). The Board of Directors authorized 100 million shares of $0.001 par value common stock. The Funds investment
objective is to provide long-term investors a high level of total return with an emphasis on cash distributions. There can be no assurance that the Fund will achieve its investment objective.
The Fund seeks to achieve its objective by investing primarily in energy midstream entities. Under normal market conditions, the Fund invests at least 80% of its Managed
Assets in energy midstream entities including entities structured as both partnerships and corporations (the 80% policy). For purposes of the 80% policy, the Fund considers investments in midstream entities as those entities that provide midstream
services including the gathering, transporting, processing, fractionation, storing, refining, and distribution of oil, natural gas liquids and natural gas. The Fund considers an entity to be within the Energy sector if it derives at least 50% of its
revenues from the business of exploring, developing, producing, gathering, transporting, processing, fractionating, storing, refining, distributing, mining or marketing natural gas, natural gas liquids (including propane), crude oil, refined
petroleum products or coal. Managed Assets means net assets plus the amount of borrowings and assets attributable to any preferred stock of the Fund that may be outstanding.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles
(GAAP). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. Equity securities for which market quotations are
available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. The valuations for fixed income securities (which may include, but are not limited to, corporate, government,
municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or
broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit
risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. When the Fund holds securities or other assets that are
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
19
|
Notes to financial statements (contd)
denominated in a foreign currency, the Fund will normally use the currency exchange rates as of
4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager
using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available,
such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these
securities as determined in accordance with procedures approved by the Funds Board of Directors.
The Board of Directors is responsible for the valuation
process and has delegated the supervision of the daily valuation process to the Global Fund Valuation Committee (known as Legg Mason North Atlantic Fund Valuation Committee prior to March 1, 2021) (the Valuation Committee). The
Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Funds pricing policies, and reporting to the Board of Directors. When
determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews
transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value
determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield
analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not
limited to, the type of security; the issuers financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts research and
observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar
securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been
fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and
fair valuation occurrences are reported to the Board of Directors quarterly.
|
|
|
|
|
|
20
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income
approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses
valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation
techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
|
Level 1 quoted prices in active markets for identical investments
|
|
|
Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates,
prepayment speeds, credit risk, etc.)
|
|
|
Level 3 significant unobservable inputs (including the Funds own assumptions in determining the fair
value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing
in those securities.
The following is a summary of the inputs used in valuing the Funds assets carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Long-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Limited Partnerships
|
|
$
|
343,776,573
|
|
|
|
|
|
|
|
|
|
|
$
|
343,776,573
|
|
Common Stocks
|
|
|
155,344,582
|
|
|
|
|
|
|
|
|
|
|
|
155,344,582
|
|
Total Long-Term Investments
|
|
|
499,121,155
|
|
|
|
|
|
|
|
|
|
|
|
499,121,155
|
|
Short-Term Investments
|
|
|
12,930,723
|
|
|
|
|
|
|
|
|
|
|
|
12,930,723
|
|
Total Investments
|
|
$
|
512,051,878
|
|
|
|
|
|
|
|
|
|
|
$
|
512,051,878
|
|
|
See Schedule of Investments for additional detailed categorizations.
|
(b) Net asset value. The Fund determines the net asset value of its common
stock on each day the NYSE is open for business, as of the close of the customary trading session (normally 4:00 p.m. Eastern Time), or any earlier closing time that day. The Fund determines the net asset value per share of common stock by dividing
the value of the Funds securities, cash and other assets (including interest accrued but not collected) less all its liabilities (including accrued expenses, borrowings, interest payables and the aggregate liquidation value (i.e., $100,000 per
outstanding share) of the Mandatory Redeemable Preferred Stock (MRPS)), net of income taxes, by the total number of shares of common stock outstanding.
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
21
|
Notes to financial statements (contd)
(c) Master limited partnerships. Entities commonly referred to as MLPs are generally organized under state law as limited partnerships or limited liability companies. The Fund intends to primarily invest 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 estate rents, gain from the sale or disposition of real property, income and gain
from mineral or natural resources activities, income and gain from the transportation or storage of certain fuels, and, in certain circumstances, income and gain from commodities or futures, forwards and options with respect to 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. 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 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.
(d) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar
amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange
rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from fluctuations in
foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or
losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Funds books and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.
|
|
|
|
|
|
22
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those
of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(e) Foreign investment risks. The Funds investments in foreign
securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or may pay interest or dividends in foreign currencies, changes in the
relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation,
taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.
(f) Concentration risk. Concentration in the energy sector may present more risks than if the Fund were broadly diversified over numerous sectors of the economy.
A downturn in the energy sector of the economy could have a larger impact on the Fund than on an investment company that does not concentrate in the sector. At times, the performance of securities of companies in the sector may lag the performance
of other sectors or the broader market as a whole.
(g) Security transactions and investment income.
Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind
securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or
securities. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence.
The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the
realizability of interest accrued up to the date of default or credit event.
(h) Return of capital
estimates. Distributions received from the Funds investments in MLPs generally are comprised of income 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 the
MLPs after their tax reporting periods are concluded.
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
23
|
Notes to financial statements (contd)
For the year ended November 30, 2021, the Fund estimated that approximately 87% of the MLP
distributions received would be treated as a return of capital. The Fund recorded as return of capital the amount of $29,187,360 of dividends and distributions received from its investments.
Additionally, the Fund updated the return of capital estimates from the year ended November 30, 2020 based on actual amounts subsequently reported to the Fund. This
resulted in an increase of $497,915 in net dividends and distributions received from investments.
(i) Partnership
accounting policy. The Fund records its pro rata share of the income (loss) and capital gains (losses), to the extent of distributions it has received, allocated from the underlying partnerships and
accordingly adjusts the cost basis of the underlying partnerships for return of capital. These amounts are included in the Funds Statement of Operations.
(j) Distributions to shareholders. Distributions to common shareholders are
declared and paid on a quarterly basis and are recorded on the ex-dividend date. The estimated characterization of the distributions paid to common shareholders will be either a dividend (ordinary income),
distribution (return of capital) or combination of both. This estimate is based on the Funds operating results during the year. The Fund has generated sufficient current year earnings and profits for tax purposes from gains realized on the
sale of its MLP investments such that approximately 36% of the distributions paid during the current year will be treated as dividend income. Because the Fund is taxed as a C Corporation, the distributions paid by the Fund are considered
to be dividend income to the extent that the distributions are paid out of the Funds current net income and realized capital gains. The actual tax characterization of the common stock distributions made during the current year will not be
determined until after the end of the fiscal year when the Fund can determine its earnings and profits and, therefore, may differ from the preliminary estimates.
Distributions to holders of MRPS are accrued on a daily basis as described in Note 7 and are treated as an operating expense as required by GAAP. For tax purposes, the
payments made to the holders of the Funds MRPS are treated as a dividend (ordinary income) or distribution (return of capital) similar to the treatment of distributions made to common shareholders as described above. The Fund anticipates that
100% of its current year distributions to the MRPS shareholders will be treated as dividend income. The actual tax characterization of the MRPS distributions made during the current year will not be determined until after the end of the fiscal year
when the Fund can determine its earnings and profits and, therefore, may differ from the preliminary estimates.
(k) Compensating balance arrangements. The Fund has an arrangement with its
custodian bank whereby a portion of the custodians fees is paid indirectly by credits earned on the Funds cash on deposit with the bank.
|
|
|
|
|
|
24
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
(l) Federal and other taxes.
The Fund, as a corporation, is obligated to pay federal and state income tax on its taxable income. The Fund invests its assets primarily in MLPs, which generally are treated as partnerships for federal
income tax purposes. As a limited partner in the MLPs, the Fund includes its allocable share of the MLPs taxable income in computing its own taxable income. The Fund, and entities in which the Fund invests, may be subject to audit by the
Internal Revenue Service or other applicable tax authorities. The Funds taxable income or tax liability for prior taxable years could be adjusted if there is an audit of the Fund, or of any entity that is treated as a partnership for tax
purposes in which the Fund holds an equity interest. The Fund may be required to pay tax, as well as interest and penalties, in connection with such an adjustment.
Deferred income taxes reflect (i) taxes on unrealized gains (losses), which are attributable to the temporary difference between fair market value and book basis,
(ii) the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and, as applicable, (iii) the net tax benefit of
accumulated net operating losses, capital losses and tax credit carryforwards. To the extent the Fund has a deferred tax asset, consideration is given as to whether or not a valuation allowance is required. The need to establish a valuation
allowance for deferred tax assets is assessed periodically by management of the Fund based on Financial Accounting Standards Board (FASB), Accounting Standards Codification Topic 740, Income Taxes (ASC 740) that it is more
likely than not that some portion or all of the deferred tax asset will not be realized. In the assessment for a valuation allowance, consideration is given to all positive and negative evidence related to the realization of the deferred tax asset.
This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are highly dependent on future allocations of taxable income and future cash distributions
from the Funds MLP holdings), the duration of statutory carryforward periods and the associated risk that net operating losses, capital losses and tax credit carryforwards may expire unused.
For all open tax years and for all major jurisdictions, management of the Fund has concluded that there are no significant uncertain tax positions that would require
recognition in the financial statements. Furthermore, management of the Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve
months.
The Fund may rely to some extent on information provided by the MLPs, which may not necessarily be timely, to estimate taxable income and gains allocable
from the MLP units held in the portfolio and to estimate the associated deferred tax liability. Such estimates are made in good faith. From time to time, as new information becomes available, the Fund modifies its estimates or assumptions regarding
the current and deferred tax liabilities.
The Funds policy is to classify interest and penalties associated with underpayment of federal and state income
taxes, if any, as income tax expense on its Statement of Operations. The 2017 through 2020 tax years remain open and subject to examination by tax jurisdictions.
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
25
|
Notes to financial statements (contd)
(m) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.
During the current year, the following reclassifications have been made:
|
|
|
|
|
|
|
|
|
|
|
Total Distributable
|
|
|
Paid-in
|
|
|
|
Earnings (Loss),
|
|
|
Capital
|
|
|
|
Net of
|
|
|
in Excess of
|
|
|
|
Income Taxes
|
|
|
Par Value
|
|
(a)
|
|
$
|
24,084,307
|
|
|
$
|
(24,084,307)
|
|
(a)
|
Reclassifications are due to the expiration of a capital loss carryforward.
|
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (LMPFA) is the Funds investment manager and ClearBridge Investments, LLC (ClearBridge) is the
Funds subadviser. LMPFA and ClearBridge are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (Franklin Resources).
Under the
investment management agreement, the Fund pays LMPFA an annual fee, paid monthly, in an amount equal to 1.00% of the Funds average daily Managed Assets.
LMPFA
provides administrative and certain oversight services to the Fund. LMPFA delegates to the subadviser the day-to-day portfolio management of the Fund. For its services,
LMPFA pays ClearBridge a fee monthly, at an annual rate equal to 70% of the net management fee it receives from the Fund.
During periods in which the Fund utilizes
financial leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Funds assets, including those investments purchased with leverage.
Effective March 1, 2021, LMPFA implemented a voluntary investment management fee waiver of 0.05% that will continue until February 28, 2023.
During the year ended November 30, 2021, fees waived and/or expenses reimbursed amounted to $190,353.
All officers and one Director of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation from the Fund.
3. Investments
During the year ended
November 30, 2021, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
|
|
|
|
|
Purchases
|
|
$
|
229,018,550
|
|
Sales
|
|
|
166,439,366
|
|
|
|
|
|
|
|
26
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
4. Derivative instruments and hedging activities
During the year ended November 30, 2021, the Fund did not invest in derivative instruments.
5. Loan
The Fund has a revolving credit
agreement with The Bank of Nova Scotia (Credit Agreement), which allows the Fund to borrow up to an aggregate amount of $120,000,000 ($75,000,000 prior to August 20, 2021 and $100,000,000 prior to May 8, 2020). Effective
December 15, 2021, the Credit Agreement is subject to a scheduled commitment termination date of December 14, 2022. The Fund pays a commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.25%, except
that the commitment fee is 0.15% in the event that the aggregate outstanding principal balance of the loan is equal to or greater than 75% of $120,000,000. The interest on the loan is calculated at a variable rate based on a benchmark (currently
LIBOR, but subject to transition to adjusted SOFR, or an alternative benchmark, upon the occurrence of certain benchmark transition events including the cessation of publication of LIBOR) plus any applicable margin. Securities held by the Fund are
subject to a lien, granted to The Bank of Nova Scotia, to the extent of the borrowing outstanding and any additional expenses. The Funds Credit Agreement contains customary covenants that, among other things, may limit the Funds ability
to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations and require asset coverage ratios in addition to those required
by the 1940 Act. In addition, the Credit Agreement may be subject to early termination under certain conditions and may contain other provisions that could limit the Funds ability to utilize borrowing under the agreement. At November 30,
2021, the Fund had $79,000,000 of borrowings outstanding per this credit agreement. Interest expense related to this loan for the year ended November 30, 2021 was $523,767. For the year ended November 30, 2021, the Fund incurred commitment
fees of $90,714. For the year ended November 30, 2021, based on the number of days during the reporting period that the Fund had a loan balance outstanding, the average daily loan balance was $50,879,452 and the weighted average interest rate
was 1.02%.
6. Senior secured notes
At
November 30, 2021, the Fund had $45,103,579 aggregate principal amount of fixed-rate senior secured notes (Senior Notes) outstanding. Interest expense related to the Senior Notes for the year ended November 30, 2021 was
$1,894,223. Costs incurred by the Fund in connection with the Senior Notes are recorded as a deferred charge and are amortized over the life of the notes. Securities held by the Fund are subject to a lien, granted to the Senior Notes holders, to the
extent of the borrowings outstanding and any additional expenses. The Senior Notes holders and the lender have equal access to the lien (See Note 5).
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
27
|
Notes to financial statements (contd)
The table below summarizes the key terms of each series of Senior Notes at November 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Amount
|
|
|
Rate
|
|
|
Maturity
|
|
|
Estimated
Fair Value
|
|
Senior secured notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
$
|
8,364,254
|
|
|
|
3.87
|
%
|
|
|
February 7, 2023
|
|
|
$
|
8,524,427
|
|
Series C
|
|
|
10,075,124
|
|
|
|
4.02
|
%
|
|
|
February 7, 2025
|
|
|
|
10,501,105
|
|
Series D
|
|
|
3,801,934
|
|
|
|
3.33
|
%
|
|
|
August 26, 2022
|
|
|
|
3,854,596
|
|
Series E
|
|
|
950,483
|
|
|
|
3.76
|
%
|
|
|
August 26, 2026
|
|
|
|
987,596
|
|
Series G
|
|
|
11,609,975
|
|
|
|
4.51
|
%
|
|
|
October 15, 2023
|
|
|
|
12,114,072
|
|
Series H
|
|
|
10,301,809
|
|
|
|
4.66
|
%
|
|
|
October 15, 2025
|
|
|
|
11,037,979
|
|
|
|
$
|
45,103,579
|
|
|
|
|
|
|
|
|
|
|
$
|
47,019,775
|
|
The Senior Notes are not listed on any exchange or automated quotation system. The estimated fair value of the Senior Notes was
calculated, for disclosure purposes, based on estimated market yields and credit spreads for comparable instruments with similar maturity, terms and structure. The Senior Notes are categorized as Level 3 within the fair value hierarchy.
7. Mandatory redeemable preferred stock
At
November 30, 2021, the Fund had 431 shares of fixed rate MRPS outstanding with an aggregate liquidation value of $43,100,000. Offering costs incurred by the Fund in connection with the MRPS issuance are being amortized to expense over the
respective life of each series of MRPS.
The table below summarizes the key terms of each series of the MRPS at November 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Term
Redemption
Date
|
|
|
Rate
|
|
|
Shares
|
|
|
Liquidation
Preference
Per Share
|
|
|
Aggregate
Liquidation
Value
|
|
|
Estimated
Fair Value
|
|
Series B
|
|
|
3/28/2022
|
|
|
|
4.07%
|
|
|
|
41
|
|
|
$
|
100,000
|
|
|
$
|
4,100,000
|
|
|
$
|
4,165,011
|
|
Series C
|
|
|
3/28/2024
|
|
|
|
4.26%
|
|
|
|
140
|
|
|
|
100,000
|
|
|
|
14,000,000
|
|
|
|
14,347,088
|
|
Series D
|
|
|
7/23/2024
|
|
|
|
4.37%
|
|
|
|
30
|
|
|
|
100,000
|
|
|
|
3,000,000
|
|
|
|
3,095,579
|
|
Series E
|
|
|
7/23/2026
|
|
|
|
4.55%
|
|
|
|
70
|
|
|
|
100,000
|
|
|
|
7,000,000
|
|
|
|
7,296,297
|
|
Series F
|
|
|
8/7/2022
|
|
|
|
4.01%
|
|
|
|
41
|
|
|
|
100,000
|
|
|
|
4,100,000
|
|
|
|
4,155,604
|
|
Series G
|
|
|
8/7/2024
|
|
|
|
4.30%
|
|
|
|
109
|
|
|
|
100,000
|
|
|
|
10,900,000
|
|
|
|
11,225,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,100,000
|
|
|
$
|
44,285,364
|
|
The MRPS are not listed on any exchange or automated quotation system. The estimated fair value of the MRPS was calculated, for
disclosure purposes, based on estimated market yields and credit spreads for comparable instruments with similar maturity, terms and structure. The MRPS are categorized as Level 3 within the fair value hierarchy.
|
|
|
|
|
|
28
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
Holders of MRPS are entitled to receive quarterly cumulative cash dividends payable on the first business day following
each quarterly dividend date (February 15, May 15, August 15 and November 15). In the event of a rating downgrade of any series of the MRPS below A by Fitch Ratings Inc. (Fitch) or other nationally recognized
statistical ratings organization then providing a rating, the applicable dividend rate will increase, according to a predetermined schedule, by 0.5% to 4.0%. In March 2020, Fitch revised its ratings assigned to the MRPS from AA to
BBB and, consequently, holders of MRPS were entitled to receive enhanced dividends by 2.0%. Effective January 22, 2021, after Fitch withdrew its ratings and Kroll Bond Rating Agency (KBRA) assigned the rating of
A to each series of the Funds MRPS, the holders receive dividends payable at the rates shown in the table.
The MRPS rank senior to the Funds
outstanding common stock and on parity with any other preferred stock. The Fund may, at its option, redeem the MRPS, in whole or in part, at the liquidation preference amount plus all accumulated but unpaid dividends plus the make whole amount equal
to the discounted value of the remaining scheduled payments. If the Fund fails to maintain a total leverage (debt and preferred stock) asset coverage ratio of at least 225% or is in default of specified rating agency requirements, the MRPS are
subject to mandatory redemption under certain provisions.
The Fund may not declare dividends or make other distributions on shares of its common stock unless the
Fund has declared and paid full cumulative dividends on the MRPS, due on or prior to the date of the common stock dividend or distribution, and meets the MRPS asset coverage and rating agency requirements.
The holders of the MRPS have one vote per share and vote together with the holders of common stock of the Fund as a single class, except on matters affecting only the
holders of MRPS or the holders of common stock. Pursuant to the 1940 Act, holders of the MRPS have the right to elect two Directors of the Fund, voting separately as a class.
8. Distributions to common shareholders subsequent to November 30, 2021
The following distribution to common shareholders has been declared by the Funds Board of Directors and is payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payable Date
|
|
|
Amount
|
|
2/18/2022
|
|
|
2/28/2022
|
|
|
$
|
0.3900
|
|
9. Stock repurchase program
On November 16, 2015, the Fund announced that the Funds Board of Directors (the Board) had authorized the Fund to repurchase in the open market up
to approximately 10% of the Funds outstanding common stock when the Funds shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such
amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts.
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
29
|
Notes to financial statements (contd)
During the year ended November 30, 2021, the Fund repurchased and retired 4.64% of its common
shares outstanding under the repurchase plan. The weighted average discount per share on these repurchases was 20.72% for the year ended November 30, 2021. Shares repurchased and the corresponding dollar amount are included in the Statements of
Changes in Net Assets. The anti-dilutive impact of these share repurchases is included in the Financial Highlights.
Since the commencement of the stock repurchase
program through November 30, 2021, the Fund repurchased 1,244,683 shares or 7.95% of its common shares outstanding for a total amount of $16,880,155.
10. Reverse stock split
On July 14, 2020, the Fund announced that the Funds Board had approved a 1-for-5 reverse stock split, which was completed prior to the open of trading on the New York Stock Exchange on July 28, 2020. As a result of the reverse stock split,
every five outstanding shares of common stock of the Fund were automatically converted into one share of common stock. The reverse stock split decreased the number of the Funds shares of common stock outstanding and increased the net asset
value per share by a proportional amount. Neither the Funds portfolio holdings nor the total value of stockholders investments in the Fund were affected as a result of the reverse stock split. The details of the reverse stock split are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
Net Asset Value
Before Reverse
Stock Split
|
|
|
Net Asset Value After
Reverse Stock Split
|
|
|
Shares Outstanding
Before Reverse
Stock Split
|
|
|
Shares Outstanding
After Reverse Stock
Split
|
|
1-for-5
|
|
$
|
2.94
|
|
|
$
|
14.70
|
|
|
|
71,584,218
|
|
|
|
14,316,845
|
|
11. Income taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the
COVID-19 pandemic. The CARES Act contains several corporate income tax provisions, including but not limited to, (1) providing a 5-year carryback of net operating
loss (NOL) tax carryforwards generated in tax years beginning after December 31, 2017 and before January 1, 2021; (2) temporarily removing the 80% taxable income limitation on NOL utilization for tax years beginning before
January 1, 2021; (3) temporarily increasing the allowable interest expense deductions under Sec. 163(j) of the Code; and (4) accelerating the refundability of corporate alternative minimum tax credits. None of these provisions impacted the
Fund for the year ended November 30, 2021.
The Funds federal and state income tax provision consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
State
|
|
|
Total
|
|
Current tax expense (benefit)
|
|
$
|
(347,232)
|
|
|
$
|
(295,849)
|
|
|
$
|
(643,081)
|
|
Deferred tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit)
|
|
$
|
(347,232)
|
|
|
$
|
(295,849)
|
|
|
$
|
(643,081)
|
|
|
|
|
|
|
|
30
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
Total income taxes have been computed by applying the U.S. federal statutory income tax rate of 21% plus a blended net
state income tax rate of 1.5%. The Fund applied this rate to net investment income (loss) and realized and unrealized gains (losses) on investments before income taxes in computing its total income tax expense (benefit).
During the year, the Funds combined federal and state income tax rate decreased from 22.7% to 22.5% due primarily to the enactment of lower tax rates in various
state tax jurisdictions where the Funds MLP investments have a significant presence. The remeasuring of the Funds net deferred tax asset to a lower tax rate resulted in the additional income tax expense and corresponding increase in the
Funds effective tax rate as outlined below. The adjustment, however, was fully offset by an equivalent change in valuation allowance.
The provision for income
taxes differs from the amount derived from applying the statutory income tax rate to net investment income (loss) and realized and unrealized gains (losses) before income taxes as follows:
|
|
|
|
|
|
|
|
|
Provision at statutory rates
|
|
|
21.00
|
%
|
|
$
|
30,045,301
|
|
State taxes, net of federal tax benefit
|
|
|
1.50
|
%
|
|
|
2,146,093
|
|
Non-deductible distributions on MRPS, dividends received deduction and other, net (federal and state)
|
|
|
0.13
|
%
|
|
|
191,429
|
|
Change in valuation allowance
|
|
|
(27.69)
|
%
|
|
|
(39,619,521)
|
|
Change in blended state tax rate from 1.7% to 1.5%
|
|
|
0.82
|
%
|
|
|
1,174,648
|
|
Expiration of capital loss carryforward
|
|
|
3.79
|
%
|
|
|
5,418,969
|
|
Total tax expense (benefit)
|
|
|
(0.45)
|
%
|
|
$
|
(643,081)
|
|
Components of the Funds net deferred tax asset (liability) as of November 30, 2021 are as follows:
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
33,789,620
|
|
Capital loss carryforward
|
|
|
73,200,750
|
|
Unrealized losses on investment securities
|
|
|
12,712,173
|
|
Other deferred tax assets
|
|
|
667,953
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
Basis reduction resulting from differences in the book vs. taxable income received from MLPs
|
|
|
(24,858,811)
|
|
Net deferred tax asset (liability) before valuation allowance
|
|
|
95,511,685
|
|
Less: Valuation allowance
|
|
|
(95,511,685)
|
|
Total net deferred tax asset (liability)
|
|
|
|
|
At November 30, 2021, the Fund had federal and state net operating loss carryforwards of $144,233,534 and $67,596,372 (net of state
apportionment), respectively (deferred tax asset of $33,789,620). Several states compute net operating losses before apportionment, therefore the value of the state net operating loss carryforward disclosed may fluctuate for changes in apportionment
factors. Realization of the deferred tax asset related to the net operating loss carryforwards is dependent, in part, on generating sufficient taxable income in each respective jurisdiction prior to expiration of the loss carryforwards. If not
utilized, the federal net operating loss carryforward expires in tax years 2033 and 2036, and the state net operating loss carryforwards expire in tax years between 2021 and 2040. The net operating loss carryforward generated in the current year
does not have an expiration for federal purposes nor for state purposes in select jurisdictions that conform to the Code.
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
31
|
Notes to financial statements (contd)
Additionally, at November 30, 2021, the Fund had a federal and state capital loss
carryforward of $325,336,667 (deferred tax asset of $73,200,750), which may be carried forward for 5 years. During the year ended November 30, 2021, the Fund utilized $26,738,320 of capital loss carryforward available from previous years, and
$24,084,307 of capital loss carryforward available from previous years expired. A valuation allowance was previously recorded against this deferred tax asset, therefore its expiration had no effect on net assets or net asset value per share. If not
utilized, the remaining capital loss carryforward expires in tax years 2023 and 2024. For corporations, capital losses can only be used to offset capital gains and cannot be used to offset ordinary income. Therefore, the use of this capital loss
carryforward is dependent upon the Fund generating sufficient net capital gains prior to the expiration of the loss carryforward.
As a result of the
November 16, 2018 acquisition of ClearBridge American Energy MLP Fund, Inc., the Funds pre-acquisition loss carryovers are subject to an annual limitation of approximately $8.0 million under
Section 382 of the Code. As of November 30, 2021, all of the Funds remaining pre-acquisition loss carryovers have either been utilized or expired unused. Additionally, under Section 384 of
the Code, the Fund is limited in its ability to use the acquired funds loss carryovers to offset the recognition of its built-in gains in assets that existed at the time of the acquisition
for a period of five-years.
The amount of net operating loss and capital loss carryforwards differed from the amounts disclosed in the prior year financial
statements due to differences between the estimated and actual amounts of taxable income received from the MLPs for the prior year.
Significant declines in the fair
market value of its portfolio of investments, in conjunction with cumulative net operating losses and capital losses incurred and expected to be incurred, have resulted in the Fund having a net deferred tax asset as of November 30, 2021. Based
on the assessment, as described in Note 1(l), and considering the limitations imposed under Sections 382 and 384 as discussed above, management of the Fund has determined that it is not more likely than not that it will be able to generate
significant future taxable income of the appropriate character in order to realize its deferred tax assets. Accordingly, management of the Fund has determined that a full valuation allowance on its net deferred tax asset is appropriate at this time.
|
|
|
|
|
|
32
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
At November 30, 2021, the cost basis of investments for Federal income tax purposes was $458,740,608. At
November 30, 2021, gross unrealized appreciation and depreciation of investments for Federal income tax purposes were as follows:
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
91,579,670
|
|
Gross unrealized depreciation
|
|
|
(38,268,400)
|
|
Net unrealized appreciation (depreciation) before tax
|
|
$
|
53,311,270
|
|
Net unrealized appreciation (depreciation) after tax
|
|
$
|
41,316,234
|
|
12. Recent accounting pronouncement
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04,
Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU No. 2021-01, with further amendments to
Topic 848. The amendments in the ASUs provide optional temporary accounting recognition and financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the LIBOR and other
interbank-offered based reference rates as of the end of 2021 and 2023. The ASUs are effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has
reviewed the requirements and believes the adoption of these ASUs will not have a material impact on the financial statements.
13. Other
matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as coronavirus) has
continued to rapidly spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual
issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Funds investments and negatively impact the Funds performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
* * *
The London
Interbank Offered Rate, or LIBOR, the offered rate for short-term Eurodollar deposits between major international banks, is used extensively in the United States and globally as a reference rate in various financing and commercial
transactions. On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of (i) the overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023 and (ii) all other LIBOR settings, including the
one-week and two-month USD LIBOR settings, immediately following the LIBOR publication on Friday, December 31, 2021. There remains uncertainty regarding the nature
of any replacement rate and the impact of the transition from LIBOR on the financial markets generally, transactions that use LIBOR as a reference
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
|
33
|
Notes to financial statements (contd)
rate and financial institutions that engage in such transactions, including issuers of securities
in which the Fund invests. As such, the potential effect of a transition away from LIBOR on the Fund or the Funds investments cannot yet be determined.
|
|
|
|
|
|
34
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2021 Annual Report
|
Report of independent registered public accounting firm
To the Board of Directors and Shareholders of ClearBridge Energy
Midstream Opportunity Fund Inc.
|
|
|
Independent Directors
|
|
Robert D. Agdern
|
|
|
Year of birth
|
|
1950
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Compliance Liaison, Class III
|
Term of office1 and length of time served
|
|
Since 2015
|
Principal occupation(s) during the past five years
|
|
Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (2002 to 2016); formerly, Deputy General
Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special assignments (1993 to 1998) (Amoco merged
with British Petroleum in 1998 forming BP PLC)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
None
|
|
Carol L. Colman
|
|
|
Year of birth
|
|
1946
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit and Compensation Committees, and Chair of Pricing and Valuation Committee, Class I
|
Term of office1 and length of time served
|
|
Since 2011
|
Principal occupation(s) during the past five years
|
|
President, Colman Consulting Company (consulting)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
|
|
|
36
|
|
ClearBridge Energy Midstream Opportunity Fund Inc.
|
|
|
|
Independent Directors
(contd)
|
|
|
Daniel P. Cronin
|
|
|
|
|
Year of birth
|
|
1946
|
Position(s) held with Fund1
|
|
Director and Member of Audit, Compensation and Pricing and Valuation Committees, and Chair of Nominating Committee, Class I
|
Term of office1 and length of time served
|
|
Since 2011
|
Principal occupation(s) during the past five years
|
|
Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
Paolo M. Cucchi
|
|
|
|
|
Year of birth
|
|
1941
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, and Pricing and Valuation Committees, and Chair of Compensation Committee, Class I
|
Term of office1 and length of time served
|
|
Since 2011
|
Principal occupation(s) during the past five years
|
|
Emeritus Professor of French and Italian (since 2014) and formerly, Vice President and Dean of The College of Liberal Arts (1984 to 2009) and Professor of French and Italian (2009 to 2014)
at Drew University
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
William R. Hutchinson
|
|
|
|
|
Year of birth
|
|
1942
|
Position(s) held with Fund1
|
|
Lead Independent Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class II
|
Term of office1 and length of time served
|
|
Since 2011
|
Principal occupation(s) during the past five years
|
|
President, W.R. Hutchinson & Associates Inc. (consulting) (since 2001)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
Director (1994 to 2021) and Non-Executive Chairman of the Board (December 2009 to April 2020), Associated Banc-Corp. (financial services
company)
|
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc.
|
|
37
|
Additional information
(unaudited) (contd)
Information about Directors and Officers
|
|
|
Independent Directors
(contd)
|
|
|
Eileen A. Kamerick
|
|
|
|
|
Year of birth
|
|
1958
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of Audit Committee, Class III
|
Term of office1 and length of time served
|
|
Since 2013
|
Principal occupation(s) during the past five years
|
|
Chief Executive Officer, The Governance Partners, LLC (consulting firm) (since 2015); National Association of Corporate Directors Board Leadership Fellow (since 2016, with Directorship
Certification since 2019) and financial expert; Adjunct Professor, Georgetown University Law Center (since 2021); Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor, Washington University in St. Louis and
University of Iowa law schools (since 2007); formerly, Chief Financial Officer, Press Ganey Associates (health care informatics company) (2012 to 2014); Managing Director and Chief Financial Officer, Houlihan Lokey (international investment bank)
and President, Houlihan Lokey Foundation (2010 to 2012)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
Director of ACV Auctions Inc. (since 2021); Trustee of AIG Funds and Anchor Series Trust (2018 to 2021); Director of Hochschild Mining plc (precious metals company) (since 2016); Director
of Associated Banc-Corp (financial services company) (since 2007)
|
|
|
Nisha Kumar
|
|
|
|
|
Year of birth
|
|
1970
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Coordinator of Alternative Investments, Class II
|
Term of office1 and length of time served
|
|
Since 2019
|
Principal occupation(s) during the past five years
|
|
Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (since 2011); formerly, Chief Financial Officer and Chief Administrative
Officer of Rent the Runway, Inc. (2011); Executive Vice President and Chief Financial Officer of AOL LLC, a subsidiary of Time Warner Inc. (2007 to 2009), Member of the Council of Foreign Relations
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
Director of The India Fund, Inc. (since 2016); formerly, Director of Aberdeen Income Credit Strategies Fund (2017-2018); and Director of The Asia Tigers Fund, Inc. (2016 to 2018)
|
|
|
|
|
|
|
38
|
|
ClearBridge Energy Midstream Opportunity Fund Inc.
|
|
|
|
Interested Director and Officer
|
|
|
Jane Trust, CFA2
|
|
|
|
|
Year of birth
|
|
1962
|
Position(s) held with Fund1
|
|
Director, Chairman, President and Chief Executive Officer, Class II
|
Term of office1 and length of time served
|
|
Since 2015
|
Principal occupation(s) during the past five years
|
|
Senior Vice President, Fund Board Management, Franklin Templeton (since 2020); Officer and/or Trustee/Director of 132 funds associated with LMPFA or its affiliates (since 2015); President
and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Managing Director (2018 to 2020) and Managing Director (2016 to 2018) of Legg Mason & Co., LLC (Legg Mason & Co.); Senior Vice President of LMPFA
(2015)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
130
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
Additional Officers
|
|
Fred Jensen
|
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY 10018
|
|
|
|
|
Year of birth
|
|
1963
|
Position(s) held with Fund1
|
|
Chief Compliance Officer
|
Term of office1 and length of time served
|
|
Since 2020
|
Principal occupation(s) during the past five years
|
|
Director - Global Compliance of Franklin Templeton (since 2020); Managing Director of Legg Mason & Co. (2006 to 2020); Director of Compliance, Legg Mason Office of the Chief
Compliance Officer (2006 to 2020); formerly, Chief Compliance Officer of Legg Mason Global Asset Allocation (prior to 2014); Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2013); formerly, Chief Compliance Officer of The
Reserve Funds (investment adviser, funds and broker-dealer) (2004) and Ambac Financial Group (investment adviser, funds and broker-dealer) (2000 to 2003)
|
|
|
Jenna Bailey
|
|
|
Franklin Templeton
100 First Stamford Place, 5th Floor, Stamford, CT 06902
|
|
|
|
|
Year of birth
|
|
1978
|
Position(s) held with Fund1
|
|
Identity Theft Prevention Officer
|
Term of office1 and length of time served
|
|
Since 2015
|
Principal occupation(s) during the past five years
|
|
Senior Compliance Analyst of Franklin Templeton (since 2020); Identity Theft Prevention Officer of certain funds associated with Legg Mason & Co. or its affiliates (since 2015);
formerly, Compliance Officer of Legg Mason & Co. (2013 to 2020); Assistant Vice President of Legg Mason & Co. (2011 to 2020)
|
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc.
|
|
39
|
Additional information
(unaudited) (contd)
Information about Directors and Officers
|
|
|
Additional Officers (contd)
|
|
|
George P. Hoyt
|
|
|
Franklin Templeton
100 First Stamford Place, 6th Floor, Stamford, CT 06902
|
|
|
|
|
Year of birth
|
|
1965
|
Position(s) held with Fund1
|
|
Secretary and Chief Legal Officer
|
Term of office1 and length of time served
|
|
Since 2020
|
Principal occupation(s) during the past five years
|
|
Associate General Counsel of Franklin Templeton (since 2020); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since
2020); formerly, Managing Director (2016 to 2020) and Associate General Counsel for Legg Mason & Co. and Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (2006 to 2020)
|
|
|
Thomas C. Mandia
|
|
|
Franklin Templeton
100 First Stamford Place, 6th Floor, Stamford, CT 06902
|
|
|
|
|
Year of birth
|
|
1962
|
Position(s) held with Fund1
|
|
Assistant Secretary
|
Term of office1 and length of time served
|
|
Since 2006
|
Principal occupation(s) during the past five years
|
|
Senior Associate General Counsel of Franklin Templeton (since 2020); Secretary of LMPFA (since 2006); Assistant Secretary of certain funds associated with Legg Mason & Co. or its
affiliates (since 2006); Secretary of LM Asset Services, LLC (LMAS) (since 2002) and Legg Mason Fund Asset Management, Inc. (LMFAM) (since 2013) (formerly registered investment advisers); formerly, Managing Director and
Deputy General Counsel of Legg Mason & Co. (2005 to 2020)
|
|
|
Christopher Berarducci
|
|
|
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY 10018
|
|
|
|
|
Year of birth
|
|
1974
|
Position(s) held with Fund1
|
|
Treasurer and Principal Financial Officer
|
Term of office1 and length of time served
|
|
Since 2019
|
Principal occupation(s) during the past five years
|
|
Vice President, Fund Administration and Reporting, Franklin Templeton (since 2020); Treasurer (since 2010) and Principal Financial Officer (since 2019) of certain funds associated with Legg
Mason & Co. or its affiliates; formerly, Managing Director (2020), Director (2015 to 2020), and Vice President (2011 to 2015) of Legg Mason & Co.
|
|
|
|
|
|
|
40
|
|
ClearBridge Energy Midstream Opportunity Fund Inc.
|
|
|
|
Additional Officers (contd)
|
|
|
Jeanne M. Kelly
|
|
|
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY 10018
|
|
|
|
|
Year of birth
|
|
1951
|
Position(s) held with Fund1
|
|
Senior Vice President
|
Term of office1 and length of time served
|
|
Since 2011
|
Principal occupation(s) during the past five years
|
|
U.S. Fund Board Team Manager, Franklin Templeton (since 2020); Senior Vice President of certain funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice
President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); formerly, Managing Director of Legg Mason & Co. (2005 to 2020); Senior Vice President of LMFAM (2013 to 2015)
|
|
Directors who are not interested persons of the Fund within the meaning of Section 2(a)(19) of the
Investment Company Act of 1940, as amended (the 1940 Act).
|
1
|
The Funds Board of Directors is divided into three classes: Class I, Class II and Class III. The
terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2024, year 2022 and year 2023, respectively, or thereafter in each case when their respective successors are duly elected and
qualified. The Funds executive officers are chosen each year, to hold office until their successors are duly elected and qualified.
|
2
|
Ms. Trust is an interested person of the Fund as defined in the 1940 Act because Ms. Trust is an
officer of LMPFA and certain of its affiliates.
|
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc.
|
|
41
|
Annual chief executive officer and principal financial officer
certifications (unaudited)
The Funds Chief Executive Officer (CEO) has submitted to the NYSE the required
annual certification and the Fund also has included the Certifications of the Funds CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Funds Form
N-CSR filed with the SEC for the period of this report.
|
|
|
|
|
|
42
|
|
ClearBridge Energy Midstream Opportunity Fund Inc.
|
Other shareholder communications regarding accounting matters (unaudited)
The Funds Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal
accounting controls or auditing matters (collectively, Accounting Matters). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (CCO). Persons who are
uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Funds Audit Committee Chair. Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 47th Floor
New York, New York 10018
Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through this number will be received by the CCO.
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc.
|
|
43
|
Summary of information regarding the Fund (unaudited)
Investment Objective
The Funds investment
objective is to provide long-term investors a high level of total return with an emphasis on cash distributions.
Principal Investment
Policies and Strategies
Under normal market conditions, the Fund invests at least 80% of its Managed Assets (as defined below) in energy midstream
entities including entities structured as both partnerships and corporations (the 80% policy). For purposes of the 80% policy, the Fund considers investments in midstream entities as those entities that provide midstream services
including the gathering, transporting, processing, fractionation, storing, refining, and distribution of oil, natural gas liquids and natural gas. The Fund considers an entity to be within the energy sector if it derives at least 50% of its revenues
from the business of exploring, developing, producing, gathering, transporting, processing, fractionating, storing, refining, distributing, mining or marketing natural gas, natural gas liquids (including propane), crude oil, refined petroleum
products or coal. For as long as Energy Midstream is in the name of the Fund, the Fund will invest at least 80% of its Managed Assets in energy midstream entities. The Fund may not change its policy to invest at least 80% of its Managed
Assets in energy midstream entities unless it provides stockholders with at least 60 days written notice of such change.
Entities commonly referred to as
MLPs are generally organized under state law as limited partnerships or limited liability companies. The Fund intends to primarily invest 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 United States federal income tax purposes, an MLP whose units are traded
on a securities exchange must receive at least 90% of its gross income from qualifying sources such as interest, dividends, real estate rents, gain from the sale or disposition of real property, income and gain from mineral or natural resources
activities, income and gain from the transportation or storage of certain fuels, and, in certain circumstances, income and gain from commodities or futures, forwards and options with respect to 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 MLP. 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 MLPs themselves generally do not pay United States 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, natural resources or real estate sectors.
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Managed Assets means net assets plus the
amount of any borrowings and assets attributable to any preferred stock that may be outstanding.
The Fund may invest up to 20% of its Managed Assets in securities
of issuers that are not energy midstream entities. This 20% allocation may be in any of the securities described therein, including securities of non-MLP companies engaged primarily in the energy sector. Such
issuers may be treated as corporations for United States federal income tax purposes and, therefore, may not offer the tax benefits of investing in MLPs.
The Fund
may invest up to 30% of its Managed Assets in unregistered or otherwise restricted securities. Restricted securities are securities that are unregistered or subject to contractual or other legal restrictions on resale. The Fund typically
acquires restricted securities in directly negotiated transactions. In connection with its investments in restricted securities generally, the Fund may invest up to 15% of its Managed Assets in restricted securities issued by non-public companies. In some instances, such an investment may be made with the expectation that the assets of such non-public company will be contributed to a newly-formed
MLP or sold to or merged with an existing MLP in the future. The Fund may purchase Rule 144A securities for which there may be a secondary market of qualified institutional buyers as contemplated by Rule 144A under the Securities Act.
The Fund may invest up to 20% of its Managed Assets in debt securities of MLPs and other issuers, including debt securities rated below investment grade (that is, rated
Ba or lower by Moodys Investors Service, Inc. (Moodys), BB+ or lower by Standard & Poors Ratings Group (S&P) or Fitch Ratings (Fitch), comparably rated by another nationally
recognized statistical rating organization (NRSRO), or, if unrated, determined by ClearBridge to be of comparable credit quality), also known as junk bonds. The Fund may invest in debt securities without regard for their
maturity. The Fund may invest up to 15% of its Managed Assets, at the time of purchase, in securities of any single issuer.
The Fund intends to primarily invest in
MLPs receiving partnership taxation treatment under the Code, and whose interests or units are traded on securities exchanges like shares of corporate stock.
The Fund may invest in equity securities issued by affiliates of MLPs, including the general partners or managing members of MLPs. Such issuers may be organized and/or
taxed as corporations and therefore may not offer the advantageous tax characteristics of MLP units. The Fund also may invest in common and preferred stock, convertible securities, warrants and depository receipts of companies that are organized as
corporations, limited liability companies or limited partnerships. A portion of the Funds portfolio may include investments in non-cumulative preferred securities, whereby the issuer does not have an
obligation to make up any arrearages to its shareholders.
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Summary of information regarding the Fund (unaudited) (contd)
The Fund may invest in royalty trusts. However, such investments do not count towards the Funds 80% policy.
The Fund may invest, without limitation, in securities of foreign issuers including securities traded on non-U.S. exchanges and
of emerging market issuers. Such investments in securities of foreign issuers may include investments in ADRs. The Fund considers a country to be an emerging market country if, at the time of investment, it is represented in the J.P. Morgan Emerging
Markets Bond Index Global or categorized by the World Bank in its annual categorization as middle or low-income.
The Fund
may enter into derivative transactions, such as interest rate swaps, options contracts, futures contracts, forward contracts, options on futures contracts and indexed securities for investment, hedging and risk management purposes; provided that the
Funds exposure to derivative instruments, as measured by the total notional amount of all such instruments, will not exceed 20% of its Managed Assets. With respect to this limitation, the Fund may net derivatives with opposite exposure to the
same underlying instrument. To the extent that the security or index underlying the derivative or synthetic instrument is or is composed of securities of energy MLPs, the Fund will include such derivative and synthetic instruments, at market value,
for the purposes of the Funds 80% policy. The Fund may sell certain equity securities short for investment and/or hedging purposes. he Fund may use any or all of these techniques at any time, and the use of any particular derivative
transaction will depend on market conditions. The Fund may use interest rate swaps for hedging purposes only and not as a speculative investment and would typically use interest rate swaps to shorten the average interest rate reset time of the
Funds holdings. The Funds ability to pursue certain of these strategies may be limited by applicable regulations of the CFTC, SEC, or other applicable regulators.
The Fund is operated by persons who have claimed an exclusion, granted to operators of registered investment companies like the Fund, from registration as a
commodity pool operator with respect to the Fund under the Commodity Exchange Act (the CEA), and, therefore, are not subject to registration or regulation with respect to the Fund under the CEA. As a result, since
December 31, 2012, the Fund has been limited in its ability to use commodity futures (which include futures on broad-based securities indexes and interest rate futures) (collectively, commodity interests) or options on commodity
futures, engage in certain swaps transactions or make certain other investments (whether directly or indirectly through investments in other investment vehicles) for purposes other than bona fide hedging, as defined in the rules of the
Commodity Futures Trading Commission.
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The Fund may invest in securities of other closed-end or open-end investment companies, including exchange-traded funds, that invest primarily in MLP entities in which the Fund may invest directly to the extent
permitted by the 1940 Act.
At times ClearBridge may judge that conditions in the markets for securities of MLP entities make pursuing the Funds primary
investment strategy inconsistent with the best interests of its stockholders. At such times ClearBridge may, temporarily, use alternative strategies primarily designed to reduce fluctuations in the value of the Funds assets. If the Fund takes
a temporary defensive position, it may be unable to achieve its investment objective. In implementing these defensive strategies, the Fund may invest all or a portion of its assets in cash, obligations of the U.S. government, its
agencies or instrumentalities; other investment grade debt securities; investment grade commercial paper; certificates of deposit and bankers acceptances; or any other fixed income securities that ClearBridge considers consistent with this
strategy.
Principal Risk Factors
There is
no assurance that the Fund will meet their investment objective. You may lose money on your investment in the Fund. The value of the Funds shares may go up or down, sometimes rapidly and unpredictably. Market conditions, financial conditions
of issuers represented in the Funds portfolio, investment strategies, portfolio management, and other factors affect the volatility of the Funds shares. An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other government agency. The following section includes a summary of the principal risks of investing in the Fund.
Investment and Market Risk. An investment in the Fund is subject to investment risk, including the possible loss of the entire amount that you invest. Your investment in
the Common Stock represents an indirect investment in the energy midstream entities and other investments owned by the Fund, most of which could be purchased directly. The value of the Funds portfolio securities may move up or down, sometimes
rapidly and unpredictably. At any point in time, your Common Stock may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.
Energy Sector Risks. MLPs and midstream entities operating in the energy sector are subject to many operating risks, including: equipment failure causing outages;
structural, maintenance, impairment and safety problems; transmission or transportation constraints, inoperability or inefficiencies; dependence on a specified fuel source; changes in electricity and fuel usage; availability of competitively priced
alternative energy sources; changes in generation efficiency and market heat rates; lack of sufficient capital to maintain facilities; significant capital expenditures to keep older assets operating efficiently; seasonality; changes in supply and
demand for energy; catastrophic and/or weather-related events such
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Summary of information regarding the Fund (unaudited) (contd)
as spills, leaks, well blowouts, uncontrollable flows, ruptures, fires, explosions, floods, earthquakes, hurricanes, discharges of toxic gases and similar occurrences;
storage, handling, disposal and decommissioning costs; and environmental compliance. Breakdown or failure of an energy companys assets may prevent it from performing under applicable sales agreements, which in certain situations could result
in termination of the agreement or incurring a liability for liquidated damages. As a result of the above risks and other potential hazards associated with energy companies, certain companies may become exposed to significant liabilities for which
they may not have adequate insurance coverage. Any of the aforementioned risks could have a material adverse effect on the business, financial condition, results of operations and cash flows of energy companies.
Because the Fund invests, under normal market conditions, at least 80% of its Managed Assets in energy midstream entities including entities structured as both
partnerships and corporations, concentration in the energy sector may present more risks than if the Fund were broadly diversified over numerous sectors of the economy. A downturn in the energy sector of the economy, adverse political, legislative
or regulatory developments, material declines in energy-related commodity prices (such as those experienced over the last few years) or other events could have a larger impact on the Fund than on an investment company that does not concentrate in
the sector. At times, the performance of securities of companies in the sector may lag the performance of other sectors or the broader market as a whole. In addition, there are several specific risks associated with investments in the energy sector,
including the following:
Regulatory Risk. The energy sector is highly regulated. MLPs and other entities operating in the energy sector are subject to
significant regulation of nearly every aspect of their operations by federal, state and local governmental agencies. Such regulation can change rapidly or over time in both scope and intensity. For example, a particular by-product or process, including hydraulic fracturing, may be declared hazardoussometimes retroactivelyby a regulatory agency and unexpectedly increase production costs or limit ability to develop some
reserves. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions
or both. Stricter laws, regulations or enforcement policies could be enacted in the future which would likely increase compliance costs and may materially adversely affect the financial performance of MLPs and midstream entities.
Specifically, the operations of wells, gathering systems, pipelines, refineries and other facilities are subject to stringent and complex federal, state and local
environmental laws and regulations. These include, for example:
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the federal Clean Air Act and comparable state laws and regulations that impose obligations related to air emissions;
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ClearBridge Energy Midstream Opportunity Fund Inc.
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the federal Clean Water Act and comparable state laws and regulations that impose obligations related to discharges of
pollutants into regulated bodies of water;
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RCRA and comparable state laws and regulations that impose requirements for the handling and disposal of waste from
facilities; and
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CERCLA, also known as Superfund, and comparable state laws and regulations that regulate the cleanup of
hazardous substances that may have been released at properties currently or previously owned or operated by MLPs or at locations to which they have sent waste for disposal.
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Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary
penalties, the imposition of remedial requirements, and the issuance of orders enjoining future operations. Certain environmental statutes, including RCRA, CERCLA, the federal Oil Pollution Act and analogous state laws and regulations, impose
strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed of or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file
claims for personal injury and property damage allegedly caused by the release of hazardous substances or other waste products into the environment.
There is an
inherent risk that entities may incur environmental costs and liabilities due to the nature of their businesses and the substances they handle. For example, an accidental release from wells or gathering pipelines could subject them to substantial
liabilities for environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury and property damage, and fines or penalties for related violations of environmental laws or regulations.
Moreover, the possibility exists that stricter laws, regulations or enforcement policies could significantly increase the compliance costs of entities or limit their ability to develop some reserves. For example, hydraulic fracturing, a technique
used in the completion of certain oil and gas wells, has become a subject of increasing regulatory scrutiny and may be subject in the future to more stringent, and more costly to comply with, requirements. Similarly, the implementation of more
stringent environmental requirements could significantly increase the cost of any remediation that may become necessary. Entities may not be able to recover these costs from insurance.
Voluntary initiatives and mandatory controls have been adopted or are being discussed both in the United States and worldwide to reduce emissions of greenhouse
gases such as carbon dioxide, a by-product of burning fossil fuels, and methane, the major constituent of natural gas, which many scientists and policymakers believe contribute to global climate change.
These measures and future measures could result in increased costs to certain
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Summary of information regarding the Fund (unaudited) (contd)
companies in which the Fund may invest to operate and maintain facilities and administer and manage a greenhouse gas emissions program and may reduce demand for fuels
that generate greenhouse gases and that are managed or produced by companies in which the Fund may invest.
Federal, state and local governments may enact laws, and
federal, state and local agencies (such as the Environmental Protection Agency) may promulgate rules or regulations, that prohibit or significantly regulate the operation of energy assets. For instance, in the wake of a Supreme Court decision
holding that the EPA has some legal authority to deal with climate change under the Clean Air Act, the EPA and the Department of Transportation jointly wrote regulations to cut gasoline use and control greenhouse gas emissions from cars and trucks.
The EPA has also taken action to require certain entities to measure and report greenhouse gas emissions and certain facilities may be required to control emissions of greenhouse gases pursuant to EPA air permitting and other regulatory programs.
These measures, and other programs addressing greenhouse gas emissions, could reduce demand for energy or raise prices, which may adversely affect the total return of certain of the Funds investments.
Commodity Price Risk. MLPs and midstream entities operating in the energy sector may be affected by fluctuations in the prices of energy commodities, including,
for example, natural gas, natural gas liquids, crude oil and coal, in the short- and long-term. Fluctuations in energy commodity prices would impact directly companies that own such energy commodities and could impact indirectly companies that
engage in transportation, storage, processing, distribution or marketing of such energy commodities. Fluctuations in energy commodity prices can result from changes in general economic conditions or political circumstances (especially of key energy
producing and consuming countries); market conditions; weather patterns; domestic production levels; volume of imports; energy conservation; domestic and foreign governmental regulation; international politics; policies of OPEC; taxation; tariffs;
and the availability and costs of local, intrastate and interstate transportation methods. The energy sector as a whole may also be impacted by the perception that the performance of energy sector companies is directly linked to commodity prices.
High commodity prices may drive further energy conservation efforts, and a slowing economy may adversely impact energy consumption, which may adversely affect the performance of MLPs and midstream entities operating in the energy sector. Recent
economic and market events have fueled concerns regarding potential liquidations of commodity futures and options positions.
Depletion Risk. Entities engaged
in the exploration, development, management or production of energy commodities face the risk that commodity reserves are depleted over time. Such companies seek to increase their reserves through expansion of their current businesses, acquisitions,
further development of their existing sources of energy
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ClearBridge Energy Midstream Opportunity Fund Inc.
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commodities, exploration of new sources of energy
commodities or by entering into long-term contracts for additional reserves; however, there are risks associated with each of these potential strategies. If such companies fail to acquire additional reserves in a cost-effective manner and at a rate
at least equal to the rate at which their existing reserves decline, their financial performance may suffer. Additionally, failure to replenish reserves could reduce the amount and affect the tax characterization of the distributions paid by such
companies.
Supply and Demand Risk. Entities operating in the energy sector could be adversely affected by reductions in the supply of or demand for energy
commodities. The volume of production of energy commodities and the volume of energy commodities available for transportation, storage, processing or distribution could be affected by a variety of factors, including depletion of resources; depressed
commodity prices; catastrophic events; labor relations; increased environmental or other governmental regulation; equipment malfunctions and maintenance difficulties; import volumes; international politics, policies of OPEC; and increased
competition from alternative energy sources. Alternatively, a decline in demand for energy commodities could result from factors such as adverse economic conditions (especially in key energy-consuming countries); increased taxation; increased
environmental or other governmental regulation; increased fuel economy; increased energy conservation or use of alternative energy sources; legislation intended to promote the use of alternative energy sources; or increased commodity prices.
Acquisition Risk. MLP and midstream entity investments owned by the Fund may depend on their ability to make acquisitions that increase adjusted operating surplus
per unit in order to increase distributions to unit holders. The ability of such MLPs and midstream entities to make future acquisitions is dependent on their ability to identify suitable targets, negotiate favorable purchase contracts, obtain
acceptable financing and outbid competing potential acquirers. To the extent that such MLPs and midstream entities are unable to make future acquisitions, or such future acquisitions fail to increase the adjusted operating surplus per unit, their
growth and ability to make distributions to unit holders will be limited. There are risks inherent in any acquisition, including erroneous assumptions regarding revenues, acquisition expenses, operating expenses, cost savings and synergies;
assumption of liabilities; indemnification; customer losses; key employee defections; distraction from other business operations; and unanticipated difficulties in operating or integrating new product areas and geographic regions.
Weather Risks. Weather plays a role in the seasonality of some entities cash flows. Entities in the propane industry, for example, rely on the winter season
to generate almost all of their earnings. In an unusually warm winter season, propane MLPs experience decreased demand for their product. Although most entities can reasonably predict seasonal weather demand based on normal weather patterns, extreme
weather conditions,
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Summary of information regarding the Fund (unaudited) (contd)
such as the hurricanes that severely damaged cities along the U.S. Gulf Coast in recent years, demonstrate that no amount of preparation can protect an entity from the
unpredictability of the weather or possible climate change. The damage done by extreme weather also may serve to increase many entities insurance premiums and could adversely affect such companies financial condition and ability to pay
distributions to shareholders.
Cyclical Industry Risk. The energy industry is cyclical and from time to time may experience a shortage of drilling rigs,
equipment, supplies, or qualified personnel, or due to significant demand, such services may not be available on commercially reasonable terms. An entitys ability to successfully and timely complete capital improvements to existing or other
capital projects is contingent upon many variables. Should any such efforts be unsuccessful, an entity could be subject to additional costs and/or the write-off of its investment in the project or improvement.
The marketability of oil and gas production depends in large part on the availability, proximity and capacity of pipeline systems owned by third parties. Oil and gas properties are subject to royalty interests, liens and other burdens, encumbrances,
easements or restrictions, all of which could impact the production of a particular entity. Oil and gas entities operate in a highly competitive and cyclical industry, with intense price competition. A significant portion of their revenues may
depend on a relatively small number of customers, including governmental entities and utilities.
Catastrophic Event Risk. MLPs and midstream entities
operating in the energy sector are subject to many dangers inherent in the production, exploration, management, transportation, processing and distribution of natural gas, natural gas liquids, crude oil, refined petroleum and petroleum products and
other hydrocarbons. These dangers include leaks, fires, explosions, damage to facilities and equipment resulting from natural disasters, inadvertent damage to facilities and equipment (such as those suffered by BPs Deepwater Horizon drilling
platform in 2010 or spills by various onshore oil pipelines) and terrorist acts. Since the September 11th terrorist attacks, the U.S. government has issued warnings that energy assets, specifically U.S. pipeline infrastructure, may be targeted in
future terrorist attacks. These dangers give rise to risks of substantial losses as a result of loss or destruction of commodity reserves; damage to or destruction of property, facilities and equipment; pollution and environmental damage; and
personal injury or loss of life. Any occurrence of such catastrophic events could bring about a limitation, suspension or discontinuation of the operations of MLPs and midstream entities operating in the energy sector. MLPs and midstream entities
operating in the energy sector may not be fully insured against all risks inherent in their business operations and therefore accidents and catastrophic events could adversely affect such companies financial condition and ability to pay
distributions to shareholders. It is expected that increased governmental regulation will mitigate such catastrophic risk, such as the recent oil spills referred to above, which could increase insurance premiums and other operating costs for MLPs
and midstream entities.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Industry Specific Risks. MLPs and midstream
entities operating in the energy sector are also subject to risks that are specific to the industry they serve.
Pipelines. Pipeline companies are subject to
(i) the demand for natural gas, natural gas liquids, crude oil or refined products in the markets they serve, (ii) changes in the availability of products for gathering, transportation, processing or sale due to natural declines in
reserves and production in the supply areas serviced by the companies facilities, (iii) sharp decreases in crude oil or natural gas prices that cause producers to curtail production or reduce capital spending for exploration activities,
and (iv) environmental regulation. Demand for gasoline, which accounts for a substantial portion of refined product transportation, depends on price, prevailing economic conditions in the markets served, and demographic and seasonal factors.
Companies that own interstate pipelines that transport natural gas, natural gas liquids, crude oil or refined petroleum products are subject to regulation by the Federal Energy Regulatory Commission (FERC) with respect to the tariff
rates they may charge for transportation services. An adverse determination by FERC with respect to the tariff rates of such companies could have a material adverse effect on their business, financial condition, results of operations and cash flows
and their ability to pay cash distributions or dividends.
Further, effective January 2018, the 2017 Tax Cuts and Jobs Act changed several provisions of the federal
tax code, including a reduction in the maximum corporate tax rate. Following the 2017 Tax Cuts and Jobs Act being signed into law, filings have been made at FERC requesting that FERC require natural gas and liquids pipelines to lower their
transportation rates to account for lower taxes. Following the effective date of the law, FERC orders granting certificates to construct proposed natural gas pipeline facilities have directed pipelines proposing new rates for service on those
facilities to re-file such rates so that the rates reflect the reduction in the corporate tax rate, and FERC has issued data requests in pending certificate proceedings for proposed natural gas pipeline
facilities requesting pipelines to explain the impacts of the reduction in the corporate tax rate on the rate proposals in those proceedings and to provide re-calculated initial rates for service on the
proposed pipeline facilities. Furthermore, on March 15, 2018, the FERC took a number of actions that could materially adversely impact MLPs. For example, the FERC reversed a long-standing policy that allowed MLPs to recover an income tax
allowance when calculating the transportation rates for cost-of-service pipelines owned by such MLPs, arguing that MLPs are pass-through entities that do not incur
income taxes and that recovery of an income tax allowance would lead to double recovery. In July of 2018, the FERC issued Order No. 849, which required pipelines to make one-time filings to allow FERC to
determine which cost-of-service natural gas pipelines may be collecting unjust and unreasonable rates or are overearning in light of 1) the corporate income tax
reductions; and 2) the FERCs revised policy concerning an MLPs ability to recover an income tax allowance. Reports were filed in late 2018. While the Commission has closed some of
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Summary of information regarding the Fund (unaudited) (contd)
these proceedings with no further action, the Commission has also initiated investigations into the rates of a number of pipelines pursuant to its authority under
section 5 of the Natural Gas Act as a result of its review of the one-time filings. With respect to cost-of-service oil and
refined products pipelines, the FERC announced that it will account for the lower corporate tax rate and the FERCs policy change related to an MLPs ability to recover an income tax allowance in 2020 when setting the next cost inflation
index level, which index level sets the maximum allowable rate increases for oil and refined products pipelines and is set by FERC every five years, which could limit such pipelines ability to raise rates.
FERC also issued a policy statement that provides accounting and ratemaking guidance for treatment of accumulated deferred income tax (ADIT) for all
FERC-jurisdictional public utilities, natural gas pipelines, and oil pipelines, as FERC found the tax rate reduction would also result in a reduction in ADIT liabilities and ADIT assets on the books of rate-regulated companies. The companies in the
energy and infrastructure sector that own the affected natural gas, oil or refined products pipelines could experience a material reduction in revenues and cash flows, which may in turn materially adversely affect their financial condition. FERC may
enact other regulations or issue further requests to pipelines that may lead to lower rates.
Gathering and processing. Gathering and processing companies are
subject to natural declines in the production of oil and natural gas fields, which utilize their gathering and processing facilities as a way to market their production, prolonged declines in the price of natural gas or crude oil, which curtails
drilling activity and therefore production, and declines in the prices of natural gas liquids and refined petroleum products, which cause lower processing margins. In addition, some gathering and processing contracts subject the gathering or
processing company to direct commodities price risk.
Midstream. MLPs and midstream 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.
Exploration and production. Exploration, development and production companies are particularly vulnerable to declines in the demand for and prices of crude oil
and natural gas. Reductions in prices for crude oil and natural gas can cause a given reservoir to become uneconomic for continued production earlier than it would if prices were higher, resulting in the plugging and abandonment of, and cessation of
production from, that reservoir. In addition, lower commodity prices not only reduce revenues but also can result in substantial downward adjustments in reserve estimates. The accuracy of any reserve estimate is a
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ClearBridge Energy Midstream Opportunity Fund Inc.
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function of the quality of available data, the
accuracy of assumptions regarding future commodity prices and future exploration and development costs and engineering and geological interpretations and judgments. Different reserve engineers may make different estimates of reserve quantities and
related revenue based on the same data. Actual oil and gas prices, development expenditures and operating expenses will vary from those assumed in reserve estimates, and these variances may be significant. Any significant variance from the
assumptions used could result in the actual quantity of reserves and future net cash flow being materially different from those estimated in reserve reports. In addition, results of drilling, testing and production and changes in prices after the
date of reserve estimates may result in downward revisions to such estimates. Substantial downward adjustments in reserve estimates could have a material adverse effect on a given exploration and production companys financial position and
results of operations. In addition, due to natural declines in reserves and production, exploration and production companies must economically find or acquire and develop additional reserves in order to maintain and grow their revenues and
distributions.
Propane. Propane MLPs are subject to earnings variability based upon weather conditions in the markets they serve, fluctuating
commodity prices, increased use of alternative fuels, increased governmental or environmental regulation, and accidents or catastrophic events, among others.
Coal. MLPs and other entities with coal assets 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, the level of their customers coal stockpiles, weather, increased conservation or use of alternative fuel sources, increased governmental or environmental regulation, depletion, rising interest
rates, declines in domestic or foreign production, mining accidents or catastrophic events, health claims and economic conditions, among others. It has become increasingly difficult to obtain and maintain the permits necessary to mine coal. Further,
such permits, if obtained, have increasingly contained more stringent, and more difficult and costly to comply with, provisions relating to environmental protection.
Marine shipping. Marine shipping (or tanker companies) are exposed to many of the same risks as other energy companies. In addition, the highly
cyclical nature of the tanker industry may lead to volatile changes in charter rates and vessel values, which may adversely affect the earnings of tanker companies in our portfolio. Fluctuations in charter rates and vessel values result from changes
in the supply and demand for tanker capacity and changes in the supply and demand for oil and oil products. Historically, the tanker markets have been volatile because many conditions and factors can affect the supply and demand for tanker capacity.
Changes in demand for transportation of oil over longer distances and supply of tankers to carry that oil may materially affect revenues, profitability and cash flows of
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Summary of information regarding the Fund (unaudited) (contd)
tanker companies. The successful operation of vessels in the charter market depends upon, among other things, obtaining profitable spot charters and minimizing time
spent waiting for charters and traveling unladen to pick up cargo. The value of tanker vessels may fluctuate and could adversely affect the value of tanker company securities in our portfolio. Declining tanker values could affect the ability of
tanker companies to raise cash by limiting their ability to refinance their vessels, thereby adversely impacting tanker company liquidity. Tanker company vessels are at risk of damage or loss because of events such as mechanical failure, collision,
human error, war, terrorism, piracy, cargo loss and bad weather. Tanker vessels are also subject to international environmental regulations, including increasingly stringent engine efficiency and ballast water exchange requirements, and older
vessels that have not been retrofitted may be limited in the ports they can access. In addition, changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to time resulted in
attacks on vessels, mining of waterways, piracy, terrorism, labor strikes, boycotts and government requisitioning of vessels. These sorts of events could interfere with shipping lanes and result in market disruptions and a significant loss of tanker
company earnings.
Energy and Energy Infrastructure Sector Risk. The Fund is subject to the risk of focusing investments in the energy sector, which makes it
more susceptible to factors adversely affecting issuers within that industry than would a fund investing in a more diversified portfolio of securities. A downturn in the energy sector of the economy could have an adverse impact on the Fund. At
times, the performance of securities of companies in the energy sector of the economy may lag the performance of other sectors or the broader market as a whole. The profitability of companies in the energy infrastructure sector is related to
worldwide energy prices and costs related to energy production. The energy sector is cyclical and highly dependent on commodity prices. Energy-related companies can be significantly affected by the supply of, and demand for, particular energy
products (such as oil and natural gas). Companies in the energy infrastructure sector may be adversely affected by natural disasters or other catastrophes. These companies may be at risk for environmental damage claims and other types of litigation.
Companies in the energy infrastructure sector also may be adversely affected by changes in exchange rates, interest rates, economic conditions, tax treatment, government regulation and intervention, negative perception, efforts at energy
conservation and world events in the regions in which the companies operate (e.g., expropriation, nationalization, confiscation of assets and property or the imposition of restrictions on foreign investments and repatriation of capital, military
coups, social unrest, violence or labor unrest). Companies in the energy infrastructure sector may have significant capital investments in, or engage in transactions involving, emerging market countries, which may heighten these risks.
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Risks of Investing in MLP Units. An
investment in MLP units involves risks that differ from a similar investment in equity securities, such as common stock, of a corporation. Holders of MLP units have the rights typically afforded to limited partners in a limited partnership. As
compared to common stockholders of a corporation, holders of MLP units have more limited control and limited rights to vote on matters affecting the partnership. Holders of MLP units are also exposed to the risk that they will be required to repay
amounts to the MLP that are wrongfully distributed to them. Additionally, conflicts of interest may exist among common unit holders, subordinated unit holders and the general partner or managing member of an MLP; for example, a conflict may arise as
a result of incentive distribution payments, and the general partner does not generally have any duty to the limited partners beyond a good faith standard. For example, over the last few years there have been several
simplification transactions in which the incentive distribution rights were eliminated by either (i) a purchase of the outstanding MLP units by the general partner or (ii) by the purchase of the incentive distribution rights by
the MLP. These simplification transactions present a conflict of interest between the general partner and the MLP and may be structured in a way that is unfavorable to the MLP. There are also certain tax risks associated with an investment in MLP
units (described below).
Tax Risks of Investing in Equity Securities of MLPs. Partnerships do not pay United States federal income tax at the partnership
level. Rather, each partner of a partnership, in computing its United States federal income tax liability, will include its allocable share of the partnerships income, gains, losses, deductions and expenses. A change in current tax law, a
change in the business of a given MLP, or a change in the types of income earned by a given MLP, could result in an MLP being treated as a corporation for United States federal income tax purposes, which would result in such MLP being required to
pay United States federal income tax on its taxable income. The classification of an MLP as a corporation for United States federal income tax purposes would have the effect of reducing the amount of cash available for distribution by the MLP and
causing any such distributions received by the Fund to be taxed as dividend income to the extent of the MLPs current or accumulated earnings and profits. Thus, if any of the MLPs owned by the Fund were treated as corporations for United States
federal income tax purposes, the after-tax return to the Fund with respect to its investment in such MLPs could be materially reduced, which could cause a substantial decline in the value of the Funds
shares of common stock (the Common Stock).
The Fund is treated as a regular corporation, or a C corporation, for United States federal
income tax purposes and, as a result, unlike most investment companies, is subject to corporate income tax to the extent the Fund recognizes positive returns. Any taxes paid by the Fund reduce the amount available to pay distributions to Common
Stockholders, and therefore investors in the Fund will likely receive lower distributions than if they invested directly in MLPs.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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57
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Summary of information regarding the Fund (unaudited) (contd)
To the extent that the Fund invests in the equity securities of an MLP, the Fund will be a partner in such MLP. Accordingly, the Fund is required to include in its
taxable income the Funds allocable share of the income, gains, losses, deductions and expenses recognized by each such MLP, regardless of whether the MLP distributes cash to the Fund. Historically, MLPs have been able to offset a significant
portion of their income with tax deductions. The Fund incurs a current tax liability on its allocable share of an MLPs income and gains that are not offset by the MLPs tax deductions, losses and credits, or its net operating loss
carryovers, if any. The portion, if any, of a distribution received by the Fund from an MLP that is offset by the MLPs tax deductions, losses or credits is treated as a return of capital. However, those distributions reduce the Funds
adjusted tax basis in the equity securities of the MLP, which results in an increase in the amount of gain (or decrease in the amount of loss) that is recognized by the Fund for United States federal income tax purposes upon the sale of any such
equity securities or upon subsequent distributions in respect of such equity securities. The percentage of an MLPs income and gains that are offset by tax deductions, losses and credits will fluctuate over time for various reasons. A
significant slowdown in acquisition activity or capital spending by MLPs held in the Funds portfolio could result in a reduction of accelerated depreciation generated by new acquisitions, which may result in increased current tax liability for
the Fund.
The Fund accrues deferred income taxes for its future tax liability associated with the difference between the Funds tax basis in an MLP security
and the fair market value of the MLP security. Upon the Funds sale of an MLP security, the Fund will be liable for previously deferred taxes on taxable realized gains from such sale. The Fund relies to some extent on information provided by
MLPs, which may not necessarily be timely, to estimate its deferred tax liability for purposes of financial statement reporting and determining its net asset value. From time to time, the Fund may modify its estimates or assumptions regarding its
deferred tax liability as new information becomes available.
A corporations earnings and profits are generally calculated by making certain adjustments to the
corporations reported taxable income. However, because of the Funds investment in equity securities of MLPs, its earnings and profits may be calculated using accounting methods that are different from those used for calculating taxable
income. Due to these differences, the Fund may make distributions out of its current or accumulated earnings and profits, which will be treated as dividends, that are in excess of its taxable income.
In addition, changes in tax laws or regulations, or future interpretations of such laws or regulations, could adversely affect the Fund or the MLP investments in which
the Fund invests. For instance, the Tax Cuts and Jobs Act enacted in 2017 has resulted in significant changes to the federal tax law. Some of these changes, such as partial limitations on the deductibility of business interest expense and the use of
net operating loss carryovers, may have an adverse impact on the Fund or the MLPs in which it invests.
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Lack of Diversification of Customers and
Suppliers. Certain MLPs and midstream entities in which the Fund invests or may invest in the future depend upon a limited number of customers for substantially all of their revenue. Similarly, certain MLPs and midstream entities in which the
Fund invests or may invest in the future depend upon a limited number of suppliers of goods or services to continue their operations. The loss of any such customers or suppliers could materially adversely affect such MLPs and midstream
entities results of operations and cash flow, and their ability to make distributions to unit holders, such as the Fund, would therefore be materially adversely affected.
Affiliated Party Risk. Certain MLPs in which the Fund may invest depend upon their parent or sponsor entities for the majority of their revenues. If their parent
or sponsor entities fail to make such payments or satisfy their obligations, the revenues and cash flows of such MLPs and ability of such MLPs to make distributions to unit holders, such as the Fund, would be adversely affected.
Equity Securities Risk. A substantial percentage of the Funds assets are invested in equity securities, including MLP common units, MLP subordinated units,
MLP preferred units, equity securities of MLP affiliates, including I-Shares, and common stocks of other issuers. Equity risk is the risk that MLP units or other equity securities held by the Fund will fall
due to general market or economic conditions, perceptions regarding the industries in which the issuers of securities held by the Fund participate, changes in interest rates, and the particular circumstances and performance of particular companies
whose securities the Fund holds. The price of an equity security of an issuer may be particularly sensitive to general movements in the stock market, or a drop in the stock market may depress the price of most or all of the equity securities held by
the Fund. In addition, MLP units or other equity securities held by the Fund may decline in price if the issuer fails to make anticipated distributions or dividend payments because, among other reasons, the issuer experiences a decline in its
financial condition. In general, the equity securities of MLPs that are publicly traded partnerships tend to be less liquid than the equity securities of corporations, which means that the Fund could have difficulty selling such securities at the
time it would prefer and at a price it believes would reflect the value of the security.
MLP subordinated units typically are convertible to MLP common units at a one-to-one ratio. The price of MLP subordinated units is typically tied to the price of the corresponding MLP common unit, less a discount. The size of the discount depends
upon a variety of factors, including the likelihood of conversion, the length of time remaining until conversion and the size of the block of subordinated units being purchased or sold.
I-Shares represent an indirect investment in MLP I-units. Prices and volatilities of I-Shares tend to correlate to the price of common units. Holders of I-Shares are subject to the same risks as holders of MLP common units. In addition, I-Shares may trade less frequently, particularly those of issuers with smaller capitalizations. Given their potential for limited trading volume, I-Shares may display volatile
or erratic price movements. In addition, I-Shares often may be subordinated in terms of liquidation rights to MLP common units.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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59
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Summary of information regarding the Fund (unaudited) (contd)
If the Fund invests in equity securities of other open- or closed-end investment companies, including exchange-traded funds, the
Fund will bear its ratable share of that investment companys expenses, and Common Stockholders would remain subject to payment of the Funds investment management fees with respect to the assets so invested. Common Stockholders would
therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies.
Interest Rate Risk. Rising interest rates could
increase the costs of capital thereby increasing operating costs and reducing the ability of MLPs and midstream entities operating in the energy sector to carry out acquisitions or expansions in a cost-effective manner. As a result, rising interest
rates could negatively affect the financial performance of MLPs and midstream entities operating in the energy sector. Rising interest rates may also impact the price of the securities of MLPs and midstream entities operating in the energy sector as
the yields on alternative investments increase. During periods of rising interest rates, the market price of such securities generally declines. Conversely, during periods of declining interest rates, the market price of fixed income securities
generally rises.
Inflation/Deflation Risk. Inflation risk is the risk that the value of certain assets or income from the Funds investments will be
worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Stock and distributions on the Common Stock can decline. In addition, during any periods of rising inflation, the dividend rates
or borrowing costs associated with the Funds use of leverage would likely increase, which would tend to further reduce returns to stockholders. Deflation risk is the risk that prices throughout the economy decline over timethe opposite
of inflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer defaults more likely, which may result in a decline in the value of the Funds portfolio.
Liquidity Risk. Although the equity securities in which the Fund invests generally trade on major stock exchanges, certain securities owned by the Fund may trade
less frequently, particularly those of MLPs, midstream entities and other issuers with smaller capitalizations. Securities with limited trading volumes may display volatile or erratic price movements. Also, the Fund may be one of the largest
investors in certain sub-sectors of the energy or natural resource sectors. Thus, it may be more difficult for the Fund to buy and sell significant amounts of such securities without an unfavorable impact on
prevailing market prices. Larger purchases or sales of these securities by the Fund in a short period of time may cause abnormal movements in the market price of these securities. As a result, these securities may be difficult to dispose of at a
fair price at the times when ClearBridge believe it is desirable to do so. If these securities are private securities, they are more
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difficult to value, and market quotations may not
accurately reflect the value of such securities. Investment of our capital in securities that are less actively traded or over time experience decreased trading volume may restrict our ability to take advantage of other market opportunities.
Natural Resources Sector Risks. The natural resources sector includes companies principally engaged in owning or developing
non-energy natural resources (including timber and minerals) and industrial materials, or supplying goods or services to such companies. The Funds investments in MLPs and midstream entities operating in
the natural resources sector will be subject to the risk that prices of these securities may fluctuate widely in response to the level and volatility of commodity prices; exchange rates; import controls; domestic and global competition;
environmental regulation and liability for environmental damage; mandated expenditures for safety or pollution control; the success of exploration projects; depletion of resources; tax policies; and other governmental regulation. Investments in the
natural resources sector can be significantly affected by changes in the supply of or demand for various natural resources. The value of investments in the natural resources sector may be adversely affected by a change in inflation.
Small Capitalization Risk. The Fund may invest in securities of MLPs, midstream entities and other issuers that have comparatively smaller capitalizations
relative to issuers whose securities are included in major benchmark indexes, which presents unique investment risks. These companies often have limited product lines, markets, distribution channels or financial resources, and the management of such
companies may be dependent upon one or a few key people. The market movements of equity securities issued by MLPs and midstream entities with smaller capitalizations may be more abrupt or erratic than the market movements of equity securities of
larger, more established companies or the stock market in general. Historically, smaller capitalization companies have sometimes gone through extended periods when they did not perform as well as larger companies. In addition, equity securities of
smaller capitalization companies generally are less liquid than those of larger companies. Finally, small-cap securities may not be widely followed by the investment community, which may result in reduced
demand. This means that the Fund could have greater difficulty selling such securities at the time and price that the Fund would like.
Competition Risk. A
number of alternatives available to the Fund as vehicles for investment in a portfolio of energy MLPs, midstream entities and their affiliates currently exist, including other publicly traded investment companies, structured notes and private funds.
These competitive conditions may adversely impact our ability to meet our investment objective, which in turn could adversely impact our ability to make distributions.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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61
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Summary of information regarding the Fund (unaudited) (contd)
Restricted Securities Risk. The Fund may invest up to 30% of its Managed Assets in unregistered or otherwise restricted securities. The term restricted
securities refers to securities that are unregistered, held by control persons of the issuer or are subject to contractual restrictions on their resale. Restricted securities are often purchased at a discount from the market price of
unrestricted securities of the same issuer reflecting the fact that such securities may not be readily marketable without some time delay. Such securities are often more difficult to value and the sale of such securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of liquid securities trading on national securities exchanges or in the
over-the-counter markets. Contractual restrictions on the resale of securities result from negotiations between the issuer and purchaser of such securities and therefore
vary substantially in length and scope. To dispose of a restricted security that the Fund has a contractual right to sell, the Fund may first be required to cause the security to be registered. A considerable period may elapse between a decision to
sell the securities and the time when the Fund would be permitted to sell, during which time the Fund would bear market risks. The difficulties and delays associated with selling restricted securities could result in our inability to realize a
favorable price upon disposition of such securities, and at times might make disposition of such securities impossible.
Cash Flow Risk. The Fund expects that
a substantial portion of the cash flow it receives will be derived from its investments in equity securities of MLPs and midstream entities. The amount and tax characterization of cash available for distribution by an MLP or midstream entity depends
upon the amount of cash generated by such entitys operations. Cash available for distribution by MLPs and midstream entities will vary widely from quarter to quarter and is affected by various factors affecting the entitys operations and
the energy industry at large. Large declines in commodity prices (such as those experienced from mid-2014 to early 2016) can result in material declines in cash flow from operations. Further, covenants in debt
instruments issued by MLPs and midstream entities in which the Fund intends to invest may restrict distributions to equity holders or, in certain circumstances, may not allow distributions to be made to equity holders. Finally, the acquisition of an
MLP or midstream entity by an acquiror with a lower yield could result in lower distributions to the equity holders of the acquired MLP or midstream entity. These kind of transactions have become more prevalent in recent years. To the extent MLPs
and midstream entities that the Fund owns reduce their distributions to equity holders, this will result in reduced levels of net distributable income and can cause the Fund to reduce its distributions. In addition to the risks described herein,
operating costs, capital expenditures, acquisition costs, construction costs, exploration costs and borrowing costs may reduce the amount of cash that an MLP or midstream entity has available for distribution in a given period.
Market Events Risk. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market
conditions, overall economic trends or events, governmental actions or intervention, actions taken by the U.S. Federal Reserve or foreign central banks, market disruptions caused by trade disputes or
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other factors, political developments, investor
sentiment, the global and domestic effects of a pandemic, and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic,
financial or political events, trading and tariff arrangements, public health events, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or
not the Fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Funds investments may be negatively affected.
The rapid and global spread of a highly contagious novel coronavirus respiratory disease, designated COVID-19, first detected in
China in December 2019, has resulted in extreme volatility in the financial markets and severe losses; reduced liquidity of many instruments; restrictions on international and, in some cases, local travel, significant disruptions to business
operations (including business closures); strained healthcare systems; disruptions to supply chains, consumer demand and employee availability; and widespread uncertainty regarding the duration and long-term effects of this pandemic. Some sectors of
the economy and individual issuers have experienced particularly large losses. Market volatility in the energy markets, including decreases in demand for (and prices of) energy-related commodities as a result of the impact of COVID-19 on global economic activity, has significantly affected the performance of the energy sector, as well as the performance of the midstream energy companies in which the Fund invests. Volatility in the energy
markets may also affect the ability of midstream energy companies to finance capital expenditures, manage liquidity needs, refinance debt maturities and to maintain distributions to investors due to a lack of access to capital. In addition, the COVID-19 pandemic may result in a sustained economic downturn or a global recession, domestic and foreign political and social instability, damage to diplomatic and international trade relations and increased
volatility and/or decreased liquidity in the securities markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. Certain risks, such as interest rate
risk, credit risk, liquidity risk and counterparty risk, may be heightened as a result of such market events. The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, are taking extraordinary actions to
support local and global economies and the financial markets in response to the COVID-19 pandemic, including by pushing interest rates to very low levels. This and other government intervention into the
economy and financial markets to address the COVID-19 pandemic may not work as intended, particularly if the efforts are perceived by investors as being unlikely to achieve the desired results. The COVID-19 pandemic could adversely affect the value and liquidity of the Funds investments and negatively impact the Funds performance. In addition, the outbreak of
COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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63
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Summary of information regarding the Fund (unaudited) (contd)
Valuation Risk. To the extent the Fund invests in private securities, market prices generally are unavailable for such investments, including MLP subordinated
units, direct ownership of general partner or managing member interests and restricted or unregistered securities of certain MLPs, midstream entities and private companies. The values of such securities will ordinarily be determined by fair
valuations determined by the Board of Directors or its designee in accordance with procedures governing the valuation of portfolio securities adopted by the Board of Directors. Proper valuation of such securities may require more reliance on the
judgment of ClearBridge than valuation of securities for which an active trading market exists. As a limited partner in the MLPs, the Fund includes its allocable share of the MLPs taxable income in computing its own taxable income. Deferred
income taxes in the financial statements of the Fund reflect (i) taxes on unrealized gains/losses, which are attributable to the temporary difference between fair market value and the cost basis of the Funds assets for financial reporting
purposes, (ii) the net tax effects of temporary differences between the carrying amount and the cost basis of such assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and, as applicable,
(iii) the net tax benefit of accumulated net operating losses, capital losses and tax credit carryovers. To the extent the Fund has a deferred tax asset, consideration is given as to whether or not a valuation allowance is required. The need to
establish a valuation allowance for deferred tax assets is assessed periodically by the Fund based on the criterion established by Financial Accounting Standards Board Codification Topic 740, Income Taxes (formerly Statement of Financial Accounting
Standards No. 109) that it is more likely than not that some portion or all of the deferred tax asset will not be realized. In the assessment for a valuation allowance, consideration is given to all positive and negative evidence related to the
realization of the deferred tax asset. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability (which are highly dependent on future allocations of
taxable income and future cash distributions from the Funds MLP holdings), the duration of statutory carryover periods and the associated risk that net operating loss, capital loss and tax credit carryovers may expire unused.
The Fund may rely to some extent on information provided by the MLPs, which may not necessarily be timely, to estimate taxable income allocable to the MLP units held in
the portfolio and to estimate the associated deferred tax asset or liability. Such estimates are made in good faith. From time to time, as new information becomes available, the Fund modifies its estimates or assumptions regarding the deferred tax
asset or liability.
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Deferred tax assets may constitute a relatively high
percentage of the Funds net asset value. Any valuation allowance required against such deferred tax assets or future adjustments to a valuation allowance may reduce the Funds deferred tax assets and could have a material impact on the
Funds net asset value and results of operations in the period the valuation allowance is recorded or adjusted.
Royalty Trust Risk. Royalty trusts are
exposed to many of the same risks as other MLPs. In addition, the value of the equity securities of the royalty trusts in which the Fund invests may fluctuate in accordance with changes in the financial condition of those royalty trusts, the
condition of equity markets generally, commodity prices, and other factors. Distributions on royalty trusts in which the Fund may invest will depend upon the declaration of distributions from the constituent royalty trusts, but there can be no
assurance that those royalty trusts will pay distributions on their securities. Typically royalty trusts own the rights to royalties on the production and sales of a natural resource, including oil, gas, minerals and timber As these deplete,
production and cash flows steadily decline, which may decrease distributions. The declaration of such distributions generally depends upon various factors, including the operating performance and financial condition of the royalty trust and general
economic conditions.
In many circumstances, the royalty trusts in which the Fund may invest may have limited operating histories. The value of royalty trust
securities in which the Fund invests are influenced by factors that are not within the Funds control, including the financial performance of the respective issuers, interest rates, exchange rates and commodity prices (which will vary and are
determined by supply and demand factors including weather and general economic and political conditions), the hedging policies employed by such issuers, issues relating to the regulation of the energy industry and operational risks relating to the
energy industry.
Market Discount from Net Asset Value Risk. Shares of closed-end investment companies frequently
trade at a discount from their net asset value. This risk is separate and distinct from the risk that the Funds net asset value could decrease as a result of its investment activities and may be a greater risk to investors expecting to sell
their Common Stock in a relatively short period following completion of this offering. Whether investors will realize gains or losses upon the sale of the Common Stock will depend not upon the Funds net asset value but upon whether the market
price of the Common Stock at the time of sale is above or below the investors purchase price for the Common Stock.
Because the market price of the Common
Stock will be determined by factors such as relative supply of and demand for the Common Stock in the market, general market and economic conditions and other factors beyond the control of the Fund, the Fund cannot predict whether the Common Stock
will trade at, above or below net asset value or at, above or below the initial public offering price. The Funds Common Stock is designed primarily for long term investors and you should not view the Fund as a vehicle for trading purposes.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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65
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Summary of information regarding the Fund (unaudited) (contd)
Below Investment Grade (High Yield or Junk Bond) Securities Risk. The Fund may invest up to 20% of its Managed Assets in fixed income securities of below
investment grade quality. High yield debt securities are generally subject to greater credit risks than higher-grade debt securities, including the risk of default on the payment of interest or principal. High yield debt securities are considered
speculative, typically have lower liquidity and are more difficult to value than higher grade bonds. High yield debt securities tend to be volatile and more susceptible to adverse events, credit downgrades and negative sentiments and may be
difficult to sell at a desired price, or at all, during periods of uncertainty or market turmoil.
Foreign Securities and Emerging Markets Risk. A fund that
invests in foreign (non-U.S.) securities may experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies. The securities markets of many foreign
countries are relatively small, with a limited number of companies representing a small number of industries. Investments in foreign securities (including those denominated in U.S. dollars) are subject to economic and political developments in the
countries and regions where the issuers operate or are domiciled, or where the securities are traded, such as changes in economic or monetary policies. Values may also be affected by restrictions on receiving the investment proceeds from a foreign
country. Less information may be publicly available about foreign companies than about U.S. companies. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition,
the Funds investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation,
political or financial instability and adverse diplomatic developments. In addition, there may be difficulty in obtaining or enforcing a court judgment abroad. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject
to non-U.S. withholding taxes, and special U.S. tax considerations may apply.
The risks of foreign investment are greater
for investments in emerging markets. The Fund considers a country to be an emerging market country if, at the time of investment, it is represented in the J.P. Morgan Emerging Markets Bond Index Global or categorized by the World Bank in its annual
categorization as middle- or low-income. Emerging market countries typically have economic and political systems that are less fully developed, and that can be expected to be less stable, than those of more
advanced countries. Low trading volumes may result in a lack of liquidity and in price volatility. Emerging market countries may have policies that restrict investment by foreigners, that require governmental approval prior to investments by foreign
persons, or that prevent foreign investors from withdrawing their money at will. An investment in emerging market securities should be considered speculative.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Currency Risk. The value of investments in
securities denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change. Currency conversion costs and currency fluctuations could erase investment gains or add to investment
losses. Currency exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls and speculation. The Fund may be
unable or may choose not to hedge its foreign currency exposure.
Leverage Risk. The Fund may use leverage through borrowings, including loans from certain
financial institutions and/or the issuance of debt securities, and through the issuance of preferred stock. The Fund may use leverage through borrowings in an aggregate amount of up to approximately 33 1/3% of the Funds total assets less all
liabilities and indebtedness not represented by senior securities (for these purposes, total net assets) immediately after such borrowings. Furthermore, the Fund may use leverage through the issuance of preferred stock in an aggregate
amount of liquidation preference attributable to the preferred shares combined with the aggregate amount of any borrowings of up to approximately 50% of the Funds total net assets immediately after such issuance. The Fund had outstanding
senior secured notes, a revolving credit facility with a financial institution and outstanding MRPS. Any effective leverage will create an opportunity for increased returns on the Funds Common Stock but also create the possibility of losses if
the cost of leverage exceeds the return on the Funds investment. The effective leverage offered by such investments could cause the Funds net asset value to be subject to more frequent and wider fluctuation than would be the case if the
Fund did not invest in them. Because the fees received by the LMPFA and Clearbridge are based on the total Managed Assets of the Fund, the LMPFA and Clearbridge have a financial incentive for the Fund to use financial leverage, which may create a
conflict of interest between the LMPFA and Clearbridge and the Common Stockholders. There is no assurance that the Funds strategy of investing in instruments that have the economic effect of financial leverage will be successful.
Derivatives Risk. The Fund may utilize a variety of derivative instruments such as interest rate swaps, options contracts, futures contracts, forward contracts,
options on futures contracts and indexed securities. Using derivatives can increase Fund losses and reduce opportunities for gains when market prices, interest rates, currencies, or the derivatives themselves behave in a way not anticipated by the
Fund. Using derivatives also can have a leveraging effect and increase Fund volatility. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Derivatives may not be available at the time or
price desired, may be difficult to sell, unwind or value, and the counterparty may default on its obligations to the Fund. Derivatives are generally subject to the risks applicable to the assets, rates, indices or other indicators underlying the
derivative. The value of a derivative may fluctuate more than the underlying assets, rates, indices or other indicators to which it relates. Use of derivatives may have different tax
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ClearBridge Energy Midstream Opportunity Fund Inc.
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67
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Summary of information regarding the Fund (unaudited) (contd)
consequences for the Fund than an investment in the underlying security, and those differences may affect the amount, timing and character of income distributed to
shareholders. The U.S. government and foreign governments are in the process of adopting and implementing regulations governing derivatives markets, including mandatory clearing of certain derivatives, margin and reporting requirements. The ultimate
impact of the regulations remains unclear. Additional regulation of derivatives may make derivatives more costly, limit their availability or utility, otherwise adversely affect their performance or disrupt markets.
The Securities and Exchange Commission adopted a new rule on October 28, 2020 that mandates that a funds derivatives risk management program provide for
specific items as required by the rule, including compliance with a VaR test. Compliance with these new requirements will be required after an eighteen-month transition period following the effective date of the adopted rule. Following the
compliance date, these requirements may limit the ability of the Fund to use derivatives and reverse repurchase agreements and similar financing transactions as part of its investment strategies. These requirements may increase the cost of the
Funds investments in derivatives, which could adversely affect shareholders.
Short Sales Risk. If the price of the security sold short increases
between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will realize a loss, which may be substantial. A fund that engages in a short sale or short position may lose more money than the actual cost of the
short sale or short position and its potential losses may be unlimited if the fund does not own the security sold short or the reference instrument and it is unable to close out of the short sale or short position.
Legal and Regulatory Risk. Legal, tax and regulatory changes could occur and may adversely affect the Fund and its ability to pursue its investment strategies
and/or increase the costs of implementing such strategies. New (or revised) laws or regulations may be imposed by the CFTC, the SEC, the U.S. Federal Reserve or other banking regulators, other governmental regulatory authorities or self-regulatory
organizations that supervise the financial markets that could adversely affect the Fund. In particular, these agencies are empowered to promulgate a variety of new rules pursuant to recently enacted financial reform legislation in the United States.
The Fund also may be adversely affected by changes in the enforcement or interpretation of existing statutes and rules by these governmental regulatory authorities or self-regulatory organizations.
In addition, the securities and futures markets are subject to comprehensive statutes, regulations and margin requirements. The CFTC, the SEC, the Federal Deposit
Insurance Corporation, other regulators and self-regulatory organizations and exchanges are authorized under these statutes, regulations and otherwise to take extraordinary actions in the event of market emergencies. The Fund and the Investment
Manager have historically been eligible for exemptions from certain regulations. However, there is no assurance that the Fund and LMPFA will continue to be eligible for such exemptions.
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68
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ClearBridge Energy Midstream Opportunity Fund Inc.
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The U.S. Government enacted legislation that
provides for new regulation of the derivatives market, including clearing, margin, reporting, recordkeeping, and registration requirements. Although the CFTC has released final rules relating to clearing, reporting, recordkeeping and registration
requirements under the legislation, certain of the provisions are subject to further final rule making, and thus its ultimate impact remains unclear. New regulations could, among other things, restrict the Funds ability to engage in
derivatives transactions (for example, by making certain types of derivatives transactions no longer available to the Fund) and/or increase the costs of such derivatives transactions (for example, by increasing margin or capital requirements), and
the Fund may be unable to execute its investment strategies as a result. It is unclear how the regulatory changes will affect counterparty risk.
The CFTC and
certain futures exchanges have established limits, referred to as position limits, on the maximum net long or net short positions which any person may hold or control in particular options and futures contracts; those position limits may
also apply to certain other derivatives positions the Fund may wish to take. All positions owned or controlled by the same person or entity, even if in different accounts, may be aggregated for purposes of determining whether the applicable position
limits have been exceeded. Thus, even if the Fund does not intend to exceed applicable position limits, it is possible that different clients managed by the Investment Manager and its affiliates may be aggregated for this purpose. Therefore it is
possible that the trading decisions of the Investment Manager may have to be modified and that positions held by the Fund may have to be liquidated in order to avoid exceeding such limits. The modification of investment decisions or the elimination
of open positions, if it occurs, may adversely affect the performance of the Fund.
The SEC has in the past adopted interim rules requiring reporting of all short
positions above a certain de minimis threshold and may adopt rules requiring monthly public disclosure in the future. In addition, other non-U.S. jurisdictions where the Fund may trade have adopted reporting
requirements. If the Funds short positions or its strategy become generally known, it could have a significant effect on ClearBridges ability to implement its investment strategy. In particular, it would make it more likely that other
investors could cause a short squeeze in the securities held short by the Fund, forcing the Fund to cover its positions at a loss. Such reporting requirements also may limit the Investment Managers ability to access management and
other personnel at certain companies where ClearBridge seeks to take a short position. In addition, if other investors engage in copycat behavior by taking positions in the same issuers as the Fund, the cost of borrowing securities to sell short
could increase drastically and the availability of such securities to the Fund could decrease drastically. Such events could make the Fund unable to execute its investment
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ClearBridge Energy Midstream Opportunity Fund Inc.
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69
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Summary of information regarding the Fund (unaudited) (contd)
strategy. In addition, the SEC and other regulatory and self-regulatory authorities have implemented various rules and may adopt additional rules in the future that may
impact those engaging in short selling activity. If additional rules were adopted regarding short sales, they could restrict the Funds ability to engage in short sales in certain circumstances, and the Fund may be unable to execute its
investment strategy as a result.
The SEC and regulatory authorities in other jurisdictions may adopt (and in certain cases, have adopted) bans on short sales of
certain securities in response to market events. Bans on short selling may make it impossible for the Fund to execute certain investment strategies and may have a material adverse effect on the Funds ability to generate returns.
Counterparty Risk. The Fund may enter into transactions with counterparties that become unable or unwilling to fulfill their contractual obligations. There can be
no assurance that any such counterparty will not default on its obligations to the Fund. In the event of a counterparty default, the Fund may be hindered or delayed in exercising rights against a counterparty and may experience significant losses.
To the extent that the Fund enters into multiple transactions with a single or small set of counterparties, the Fund will be subject to increased counterparty risk.
Privately Held Company Risk. Privately held companies are not subject to SEC reporting requirements, are not required to maintain their accounting records in
accordance with generally accepted accounting principles, and are not required to maintain effective internal controls over financial reporting. As a result, ClearBridge may not have timely or accurate information about the business, financial
condition and results of operations of the privately held companies in which the Fund invests.
Debt Securities Risks. Debt securities in which the Fund
invests are subject to many of the risks described elsewhere in this section. In addition, they are subject to credit risk, interest rate risk, and, depending on their quality, other special risks. An issuer of a debt security may be unable to make
interest payments and repay principal. The Fund could lose money if the issuer of a debt obligation is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The
downgrade of a security by rating agencies may further decrease its value. Certain debt instruments, particularly below investment grade securities or junk bonds, may contain call or redemption provisions which would allow the issuer
thereof to prepay principal prior to the debt instruments stated maturity. This is known as prepayment risk. Prepayment risk is greater during a falling interest rate environment as issuers can reduce their cost of capital by refinancing
higher yielding debt instruments with lower yielding debt instruments. An issuer may also elect to refinance its debt instruments with lower yielding debt instruments if the credit standing of the issuer improves. To the extent debt securities in
its portfolio are called or redeemed, the Fund may be forced to reinvest in lower yielding securities. Debt securities have reinvestment risk, which is the risk that income from the Funds portfolio will
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70
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ClearBridge Energy Midstream Opportunity Fund Inc.
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decline if and when the Fund invests the proceeds
from matured, traded or called fixed income instruments at market interest rates that are below the portfolios current earnings rate. A decline in income could affect the Funds Common Stock price or its overall return.
Redenomination Risk. Continuing uncertainty as to the status of the euro and the EMU has created significant volatility in currency and financial markets
generally. Any partial or complete dissolution of the EMU could have significant adverse effects on currency and financial markets, and on the values of the Funds portfolio investments. If one or more EMU countries were to stop using the euro
as its primary currency, the Funds investments in such countries may be redenominated into a different or newly adopted currency. As a result, the value of those investments could decline significantly and unpredictably. In addition,
securities or other investments that are redenominated may be subject to foreign currency risk, liquidity risk and valuation risk to a greater extent than similar investments currently denominated in euros. To the extent a currency used for
redenomination purposes is not specified in respect of certain EMU- related investments, or should the euro cease to be used entirely, the currency in which such investments are denominated may be unclear,
making such investments particularly difficult to value or dispose of. The Fund may incur additional expenses to the extent it is required to seek judicial or other clarification of the denomination or value of such securities.
Management Risk. The Fund is subject to management risk because it is an actively managed investment portfolio. Clearbridge and each individual portfolio manager
will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results. Clearbridges judgement about the attractiveness, relative value or
potential appreciation of a particular sector or security may prove to be incorrect.
Potential Conflicts of Interest Risk. LMPFA, ClearBridge and the
portfolio managers have interests which may conflict with the interests of the Fund. In particular, LMPFA also manages, and ClearBridge serves as subadviser to, other closed-end investment companies listed on
the NYSE that have investment objectives and investment strategies that are substantially similar to those of the Fund. Further, LMPFA and ClearBridge may at some time in the future manage and/or advise other investment funds or accounts with the
same or substantially similar investment objective and strategies as the Fund. As a result, LMPFA, ClearBridge and the Funds portfolio managers may devote unequal time and attention to the management of the Fund and those other funds and
accounts, and may not be able to formulate as complete a strategy or identify equally attractive investment opportunities as might be the case if they were to devote substantially more attention to the management of the Fund. LMPFA, ClearBridge and
the Funds portfolio managers may identify a limited investment opportunity that may be suitable for multiple funds and accounts, and the opportunity may be allocated among these several funds and accounts, which may limit the
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ClearBridge Energy Midstream Opportunity Fund Inc.
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71
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Summary of information regarding the Fund (unaudited) (contd)
Funds ability to take full advantage of the investment opportunity. Additionally, transaction orders may be aggregated for multiple accounts for purpose of
execution, which may cause the price or brokerage costs to be less favorable to the Fund than if similar transactions were not being executed concurrently for other accounts. At times, a portfolio manager may determine that an investment opportunity
may be appropriate for only some of the funds and accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and accounts should take differing positions with respect to a particular security. In these
cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and
accounts. For example, a portfolio manager may determine that it would be in the interest of another account to sell a security that the Fund holds, potentially resulting in a decrease in the market value of the security held by the Fund.
The portfolio managers may also engage in cross trades between funds and accounts, may select brokers or dealers to execute securities transactions based in part on
brokerage and research services provided to LMPFA or ClearBridge which may not benefit all funds and accounts equally and may receive different amounts of financial or other benefits for managing different funds and accounts. Finally, LMPFA or its
affiliates may provide more services to some types of funds and accounts than others.
There is no guarantee that the policies and procedures adopted by LMPFA,
ClearBridge and the Fund will be able to identify or mitigate the conflicts of interest that arise between the Fund and any other investment funds or accounts that LMPFA and/or ClearBridge may manage or advise from time to time.
Portfolio Turnover Risk. Changes to the investments of the Fund may be made regardless of the length of time particular investments have been held. A high
portfolio turnover rate may result in increased transaction costs for the Fund in the form of increased dealer spreads and other transactional costs, which may have an adverse impact on performance. The portfolio turnover rate of the Fund will vary
from year to year, as well as within a year.
Government Intervention in Financial Markets Risk. The instability in the financial markets has led the U.S.
government and foreign governments to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity.
U.S. federal and state governments and foreign governments, their regulatory agencies or self regulatory organizations may take additional actions that affect the regulation of the securities in which the Fund invests, or the issuers of such
securities, in ways that are unforeseeable. Issuers of corporate fixed income securities might seek protection under the bankruptcy laws. Legislation or regulation may also change the way in which the Fund itself is regulated. Such legislation or
regulation could limit or preclude the Funds ability to achieve its investment objective. Clearbridge monitors developments and seeks to manage the Funds portfolio in a manner consistent with achieving the Funds investment
objective, but there can be no assurance that it will be successful in doing so.
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72
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Non-Diversification Risk. The Fund is classified as non-diversified
under the 1940 Act. As a result, it can invest a greater portion of its assets in obligations of a single issuer than a diversified fund. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by
any single corporate, economic, political or regulatory occurrence.
Anti-Takeover Provisions Risk. The Funds Charter and Bylaws include provisions that
are designed to limit the ability of other entities or persons to acquire control of the Fund for short-term objectives, including by converting the Fund to open-end status or changing the composition of the
Board, that may be detrimental to the Funds ability to achieve its primary investment objective. Such provisions may limit the ability of shareholders to sell their shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the Fund. There can be no assurance, however, that such provisions will be sufficient to deter activist investors that seek to cause the Fund to take actions that may not be aligned with the interests of
long-term shareholders.
Operational risk. The valuation of the Funds investments may be negatively impacted because of the operational risks arising
from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third party service providers or trading counterparties. It
is not possible to identify all of the operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. The Fund and its shareholders could be negatively impacted
as a result.
Cybersecurity risk. Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain access to Fund assets,
Fund or proprietary information, cause the Fund, the Funds manager and subadviser and/or their service providers to suffer data breaches, data corruption or loss of operational functionality or prevent fund investors from purchasing, redeeming
or exchanging shares or receiving distributions. The Fund, manager and subadviser have limited ability to prevent or mitigate cybersecurity incidents affecting third party service providers, and such third party service providers may have limited
indemnification obligations to the Fund or the manager. Cybersecurity incidents may result in financial losses to the Fund and its shareholders, and substantial costs may be incurred in order to prevent any future cybersecurity incidents. Issuers of
securities in which the Fund invests are also subject to cybersecurity risks, and the value of these securities could decline if the issuers experience cybersecurity incidents.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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73
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Summary of information regarding the Fund (unaudited) (contd)
More Information
For a complete list of the
Funds fundamental investment restrictions and more detailed descriptions of the Funds investment policies, strategies and risks, see the Funds registration statement on Form N-14 that was
declared effective by the SEC on September 14, 2018, as amended or superseded by subsequent disclosures. The Funds fundamental investment restrictions may not be changed without the approval of the holders of a majority of the outstanding
voting securities, as defined in the 1940 Act.
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74
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ClearBridge Energy Midstream Opportunity Fund Inc.
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Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return
of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the Plan Agent), in additional shares of Common Stock under the Funds Dividend
Reinvestment Plan (the Plan). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust
Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date is not a NYSE trading day, the
immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal to the greater of (a) the
net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close of
trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day
following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders; except
when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common
Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the
Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day
prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by the Plan Agent
in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e., opt-out)
by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at
1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business
days prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agents investment of the most recently declared dividend or distribution on the Common Stock.
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ClearBridge Energy Midstream Opportunity Fund Inc.
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75
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Dividend reinvestment plan
(unaudited) (contd)
Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage charges
actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage commissions
incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost averaging,
which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Funds net asset value declines. While dollar cost averaging has definite advantages,
it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to
pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the
right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the
record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to
notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at 462 South 4th Street,
Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151.
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76
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ClearBridge Energy Midstream Opportunity Fund Inc.
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ClearBridge
Energy Midstream Opportunity Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Fred Jensen
Chief Compliance Officer
Jenna Bailey
Identity Theft Prevention Officer
George P. Hoyt
Secretary and Chief Legal Officer
Thomas C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
ClearBridge Energy Midstream
Opportunity Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadviser
ClearBridge Investments, LLC
Custodian
The Bank of New York Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
Independent registered public
accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett
LLP
900 G Street NW
Washington, DC 20001
New York Stock Exchange Symbol
EMO
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very
Important to the Legg Mason Funds
This Privacy and Security Notice (the Privacy Notice) addresses the Legg Mason Funds privacy and
data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds distributor, Franklin Distributors, LLC, as well as Legg Mason-sponsored closed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited
to:
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Personal information included on applications or other forms;
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Account balances, transactions, and mutual fund holdings and positions;
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Bank account information, legal documents, and identity verification documentation;
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Online account access user IDs, passwords, security challenge question responses; and
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Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of
an individuals total debt, payment history, etc.).
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How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other
financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services
you have authorized or as permitted or required by law.
The Funds may disclose information about you to:
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Employees, agents, and affiliates on a need to know basis to enable the Funds to conduct ordinary business, or
to comply with obligations to government regulators;
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Service providers, including the Funds affiliates, who assist the Funds as part of the ordinary course of business
(such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds behalf, including companies that may perform statistical analysis, market research and marketing services solely
for the Funds;
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Permit access to transfer, whether in the United States or countries outside of the United States to such Funds
employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;
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The Funds representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary
business, or to comply with obligations to government regulators;
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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
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NOT PART OF THE ANNUAL REPORT
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Legg Mason Funds Privacy and Security Notice (contd)
Except as otherwise permitted by applicable law, companies acting on the Funds behalf,
including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to
perform. The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory
request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds
practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds Privacy and Security Practices
The Funds will notify you annually of their privacy policy as
required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard
your nonpublic personal information. The Funds internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to
them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary, so you can take appropriate protective steps. If you have
consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is
incomplete, not accurate or not current, if you have questions about the Funds privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by
clicking on the Contact Us section of the Funds website at www.franklintempleton.com, or contact the Fund at
1-888-777-0102.
Revised April 2018
Legg Mason California Consumer Privacy Act Policy
Although much of the personal information we collect is nonpublic personal information subject to federal law, residents of California may, in certain
circumstances, have additional rights under the California Consumer Privacy Act (CCPA). For example, if you are a broker,
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NOT PART OF THE ANNUAL REPORT
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Legg Mason Funds Privacy and Security Notice (contd)
dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the account of any
other person(s) or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your personal
information (as defined by the CCPA).
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In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the
categories and specific pieces of personal information we have collected about you.
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You also have the right to request the deletion of the personal information collected or maintained by the Funds.
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If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set
forth below. The rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process
described below. We do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.
We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a request
on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or other
applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an agent if
suitable and appropriate proof is not provided.
For the 12-month period prior to the date of this Privacy Policy, the Legg
Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.
Contact Information
Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202
Email: DataProtectionOfficer@franklintempleton.com
Phone: 1-800-396-4748
Revised October 2020
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NOT PART OF THE ANNUAL REPORT
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ClearBridge Energy Midstream Opportunity Fund Inc.
ClearBridge Energy Midstream Opportunity Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market
prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first
and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Funds Forms N-PORT are available on the SECs website at www.sec.gov.
To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th
of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.franklintempleton.com and (3) on the SECs website at www.sec.gov.
This report is transmitted to the shareholders of ClearBridge Energy Midstream Opportunity Fund Inc. for their information. This is not a prospectus, circular or
representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
LMFX014219 1/22 SR21-4325