|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
11 |
Statement of assets and liabilities
November 30, 2022
|
|
|
|
|
|
|
Assets: |
|
|
|
|
Investments, at value (Cost $622,776,366) |
|
$ |
664,127,903 |
|
Income tax receivable |
|
|
5,881,897 |
|
Dividends and distributions receivable |
|
|
519,168 |
|
Money market fund distributions receivable |
|
|
38,429 |
|
Prepaid expenses |
|
|
30,033 |
|
Total Assets |
|
|
670,597,430 |
|
|
|
Liabilities: |
|
|
|
|
Loan payable (Note 5) |
|
|
111,000,000 |
|
Mandatory Redeemable Preferred Stock ($100,000 and $30 liquidation value per share; 349
and 566,669 shares issued and outstanding, respectively) (net of deferred offering costs of $564,507) (Note 7) |
|
|
51,335,563 |
|
Senior Secured Notes (net of deferred debt issuance and offering costs of $80,189) (Note
6) |
|
|
41,221,456 |
|
Payable for securities purchased |
|
|
1,089,250 |
|
Investment management fee payable |
|
|
509,566 |
|
Interest expense payable |
|
|
338,401 |
|
Distributions payable to Mandatory Redeemable Preferred Stockholders |
|
|
118,478 |
|
Directors fees payable |
|
|
20,000 |
|
Accrued expenses |
|
|
382,419 |
|
Total Liabilities |
|
|
206,015,133 |
|
Total Net Assets Applicable to Common Shareholders |
|
$ |
464,582,297 |
|
|
|
Net Assets Applicable to Common Shareholders: |
|
|
|
|
Common stock par value ($0.001 par value; 12,917,291 shares issued and outstanding;
99,432,982 common shares authorized) |
|
$ |
12,917 |
|
Paid-in capital in excess of par value |
|
|
726,464,313 |
|
Total distributable earnings (loss), net of income taxes |
|
|
(261,894,933) |
|
Total Net Assets Applicable to Common Shareholders |
|
$ |
464,582,297 |
|
|
|
Common Shares Outstanding |
|
|
12,917,291 |
|
|
|
Net Asset Value Per Common Share |
|
|
$35.97 |
|
See Notes to Financial
Statements.
|
|
|
|
|
12 |
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
Statement of operations
For the Year Ended November 30, 2022
|
|
|
|
|
|
|
Investment Income: |
|
|
|
|
Dividends and distributions |
|
$ |
40,761,780 |
|
Return of capital (Note 1(h)) |
|
|
(32,580,668) |
|
Net Dividends and Distributions |
|
|
8,181,112 |
|
Money market fund distributions |
|
|
101,727 |
|
Less: Foreign taxes withheld |
|
|
(371,242) |
|
Total Investment
Income |
|
|
7,911,597 |
|
|
|
Expenses: |
|
|
|
|
Investment management fee (Note 2) |
|
|
6,137,085 |
|
Interest expense (Notes 5 and 6) |
|
|
4,312,939 |
|
Distributions to Mandatory Redeemable Preferred Stockholders (Notes 1 and 7) |
|
|
1,726,973 |
|
Audit and tax fees |
|
|
276,618 |
|
Directors fees |
|
|
158,262 |
|
Legal fees |
|
|
142,589 |
|
Transfer agent fees |
|
|
128,592 |
|
Amortization of preferred stock offering costs (Note 7) |
|
|
86,030 |
|
Commitment fees (Note 5) |
|
|
84,410 |
|
Fund accounting fees |
|
|
69,437 |
|
Amortization of debt issuance and offering costs (Note 6) |
|
|
66,681 |
|
Shareholder reports |
|
|
25,111 |
|
Rating agency fees |
|
|
24,691 |
|
Franchise taxes |
|
|
6,718 |
|
Custody fees |
|
|
3,252 |
|
Insurance |
|
|
2,831 |
|
Stock exchange listing fees |
|
|
2,187 |
|
Miscellaneous expenses |
|
|
104,531 |
|
Total Expenses |
|
|
13,358,937 |
|
Less: Fee waivers and/or expense reimbursements (Note 2) |
|
|
(306,854) |
|
Net Expenses |
|
|
13,052,083 |
|
Net Investment Loss, before income taxes |
|
|
(5,140,486) |
|
Current tax expense (Note 10) |
|
|
(456,801) |
|
Net Investment Loss, net of income taxes |
|
|
(5,597,287) |
|
|
|
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions (Notes 1, 3 and 10): |
|
|
|
|
Net Realized Gain (Loss) From: |
|
|
|
|
Investment transactions |
|
|
54,161,247 |
|
Foreign currency transactions |
|
|
(12,119) |
|
Net Realized Gain, before income
taxes |
|
|
54,149,128 |
|
Net Realized Gain, net of income
taxes |
|
|
54,149,128 |
|
Change in Net Unrealized Appreciation (Depreciation) From: |
|
|
|
|
Investments |
|
|
97,845,759 |
|
Foreign currencies |
|
|
(271) |
|
Change in Net Unrealized Appreciation
(Depreciation), before income taxes |
|
|
97,845,488 |
|
Change in Net Unrealized Appreciation
(Depreciation), net of income taxes |
|
|
97,845,488 |
|
Net Gain on Investments and Foreign Currency Transactions, net of income taxes |
|
|
151,994,616 |
|
Increase in Net Assets Applicable to Common Shareholders From Operations |
|
$ |
146,397,329 |
|
See Notes to Financial
Statements.
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
13 |
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
For the Years Ended November 30, |
|
2022 |
|
|
2021 |
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment loss, net of income taxes |
|
$ |
(5,597,287) |
|
|
$ |
(4,771,999) |
|
Net realized gain, net of income taxes |
|
|
54,149,128 |
|
|
|
34,110,263 |
|
Change in net unrealized appreciation (depreciation), net of income taxes |
|
|
97,845,488 |
|
|
|
114,377,679 |
|
Increase in Net Assets Applicable to
Common Shareholders From Operations |
|
|
146,397,329 |
|
|
|
143,715,943 |
|
|
|
|
Distributions to Common Shareholders From (Note 1): |
|
|
|
|
|
|
|
|
Dividends |
|
|
(24,902,723) |
|
|
|
(7,120,282) |
|
Return of capital |
|
|
|
|
|
|
(12,436,920) |
|
Decrease in Net Assets From Distributions
to Common Shareholders |
|
|
(24,902,723) |
|
|
|
(19,557,202) |
|
|
|
|
Fund Share Transactions: |
|
|
|
|
|
|
|
|
Cost of shares repurchased (284,640 and 665,383 shares repurchased, respectively) (Note
9) |
|
|
(7,201,095) |
|
|
|
(11,481,173) |
|
Decrease in Net Assets From Fund Share
Transactions |
|
|
(7,201,095) |
|
|
|
(11,481,173) |
|
Increase in Net Assets Applicable to
Common Shareholders |
|
|
114,293,511 |
|
|
|
112,677,568 |
|
|
|
|
Net Assets Applicable to Common Shareholders: |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
350,288,786 |
|
|
|
237,611,218 |
|
End of year |
|
$ |
464,582,297 |
|
|
$ |
350,288,786 |
|
See Notes to Financial
Statements.
|
|
|
|
|
14 |
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
Statement of cash flows
For the Year Ended November 30, 2022
|
|
|
|
|
|
|
Increase (Decrease) in Cash: |
|
|
|
|
Cash Flows from Operating Activities: |
|
|
|
|
Net increase in net assets applicable to common shareholders resulting from
operations |
|
$ |
146,397,329 |
|
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided (used) by operating activities: |
|
|
|
|
Purchases of portfolio securities |
|
|
(386,425,554) |
|
Sales of portfolio securities |
|
|
354,426,868 |
|
Net purchases, sales and maturities of short-term investments |
|
|
(651,001) |
|
Return of capital |
|
|
32,580,668 |
|
Increase in dividends and distributions receivable |
|
|
(97,991) |
|
Increase in money market fund distributions receivable |
|
|
(38,271) |
|
Decrease in prepaid expenses |
|
|
22,837 |
|
Decrease in other receivables |
|
|
4,482 |
|
Decrease in income tax receivable |
|
|
459,915 |
|
Increase in payable for securities purchased |
|
|
1,089,250 |
|
Amortization of preferred stock offering costs |
|
|
86,030 |
|
Amortization of debt issuance and offering costs |
|
|
66,681 |
|
Increase in investment management fee payable |
|
|
73,918 |
|
Increase in Directors fees payable |
|
|
10,177 |
|
Decrease in interest expense payable |
|
|
(20,740) |
|
Increase in accrued expenses |
|
|
50,297 |
|
Increase in distributions payable to Mandatory Redeemable Preferred Stockholders |
|
|
31,904 |
|
Net realized gain on investments |
|
|
(54,161,247) |
|
Change in net unrealized appreciation (depreciation) of investments |
|
|
(97,845,759) |
|
Net Cash Used in Operating
Activities* |
|
|
(3,940,207) |
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
Distributions paid on common stock |
|
|
(24,902,723) |
|
Proceeds from loan facility borrowings |
|
|
45,000,000 |
|
Repayment of Senior Secured Notes at maturity |
|
|
(3,801,934) |
|
Repayment of loan facility borrowings |
|
|
(13,000,000) |
|
Payment for Fund shares repurchased (net of payable for Fund shares repurchased) |
|
|
(7,728,945) |
|
Proceeds from offering of Mandatory Redeemable Preferred Stock |
|
|
17,000,070 |
|
Redemption of Mandatory Redeemable Preferred Stock |
|
|
(8,200,000) |
|
Preferred stock offering costs |
|
|
(426,261) |
|
Net Cash Provided by Financing
Activities |
|
|
3,940,207 |
|
Cash and restricted cash at beginning of year |
|
|
|
|
Cash and restricted cash at end of year |
|
|
|
|
* |
Included in operating expenses is $4,416,310 paid for interest and commitment fees on borrowings and $1,695,069 paid for
distributions to Mandatory Redeemable Preferred Stockholders and $171 refunded for income taxes, net of income taxes paid. |
See Notes to Financial Statements.
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
15 |
Statement of cash flows (contd)
For the Year Ended November 30, 2022
|
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, 2022 |
|
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. 2022 Annual Report |
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a common share of capital stock outstanding throughout each year ended November 30: |
|
|
|
20221 |
|
|
20211 |
|
|
20201,2 |
|
|
20191,2 |
|
|
20181,2 |
|
|
|
|
|
|
|
Net asset value, beginning of year |
|
|
$26.53 |
|
|
|
$17.13 |
|
|
|
$43.75 |
|
|
|
$51.35 |
|
|
|
$56.85 |
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss) |
|
|
(0.43) |
|
|
|
(0.36) |
|
|
|
(1.07) |
|
|
|
(0.70) |
|
|
|
0.30 |
|
Net realized and unrealized gain (loss) |
|
|
11.65 |
|
|
|
11.01 |
|
|
|
(23.54) |
|
|
|
(2.30) |
|
|
|
0.60 |
|
Total income (loss) from
operations |
|
|
11.22 |
|
|
|
10.65 |
|
|
|
(24.61) |
|
|
|
(3.00) |
|
|
|
0.90 |
|
|
|
|
|
|
|
Less distributions to common shareholders from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
(1.92) |
|
|
|
(0.54) |
|
|
|
|
|
|
|
(1.70) |
|
|
|
(1.60) |
|
Return of capital |
|
|
|
|
|
|
(0.93) |
|
|
|
(2.13) |
|
|
|
(2.90) |
|
|
|
(4.80) |
|
Total distributions to common
shareholders |
|
|
(1.92) |
|
|
|
(1.47) |
|
|
|
(2.13) |
|
|
|
(4.60) |
|
|
|
(6.40) |
|
Anti-dilutive impact of repurchase plan |
|
|
0.14 |
3 |
|
|
0.22 |
3 |
|
|
0.12 |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year |
|
|
$35.97 |
|
|
|
$26.53 |
|
|
|
$17.13 |
|
|
|
$43.75 |
|
|
|
$51.35 |
|
Market price, end of year |
|
|
$30.43 |
|
|
|
$21.65 |
|
|
|
$12.70 |
|
|
|
$38.10 |
|
|
|
$46.15 |
|
Total return, based on NAV4,5 |
|
|
43.33 |
% |
|
|
64.18 |
% |
|
|
(57.35) |
% |
|
|
(6.57) |
% |
|
|
0.67 |
% |
Total return, based on Market Price6 |
|
|
50.20 |
% |
|
|
82.70 |
% |
|
|
(62.74) |
% |
|
|
(8.15) |
% |
|
|
(0.87) |
% |
|
|
|
|
|
|
Net assets applicable to common shareholders, end of year (millions) |
|
|
$465 |
|
|
|
$350 |
|
|
|
$238 |
|
|
|
$628 |
|
|
|
$736 |
|
|
|
|
|
|
|
Ratios to average net assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
|
1.44 |
% |
|
|
1.41 |
% |
|
|
1.52 |
% |
|
|
1.50 |
% |
|
|
1.49 |
% |
Other expenses |
|
|
1.70 |
|
|
|
1.68 |
|
|
|
3.65 |
7 |
|
|
2.16 |
|
|
|
2.12 |
|
Subtotal |
|
|
3.14 |
|
|
|
3.09 |
|
|
|
5.17 |
7 |
|
|
3.66 |
|
|
|
3.61 |
|
Income tax expenses |
|
|
0.11 |
|
|
|
|
8 |
|
|
1.32 |
|
|
|
|
8 |
|
|
|
8 |
Total gross
expenses |
|
|
3.25 |
|
|
|
3.09 |
|
|
|
6.49 |
7 |
|
|
3.66 |
|
|
|
3.61 |
|
Total net
expenses |
|
|
3.18 |
9 |
|
|
3.03 |
9 |
|
|
6.42 |
7,9 |
|
|
3.59 |
9 |
|
|
3.60 |
9 |
Net investment income (loss), net of income taxes |
|
|
(1.31) |
|
|
|
(1.43) |
|
|
|
(4.71) |
7 |
|
|
(1.37) |
|
|
|
0.52 |
|
|
|
|
|
|
|
Portfolio turnover rate |
|
|
60 |
% |
|
|
37 |
% |
|
|
19 |
% |
|
|
29 |
% |
|
|
14 |
% |
See Notes to Financial
Statements.
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
17 |
Financial highlights (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a common share of capital stock outstanding throughout each year ended November 30: |
|
|
|
20221 |
|
|
20211 |
|
|
20201,2 |
|
|
20191,2 |
|
|
20181,2 |
|
|
|
|
|
|
|
Supplemental data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan and Debt Issuance Outstanding, End of Year (000s) |
|
|
$152,302 |
|
|
|
$124,104 |
|
|
|
$55,104 |
|
|
|
$278,500 |
|
|
|
$343,000 |
|
Asset Coverage Ratio for Loan and Debt Issuance Outstanding10 |
|
|
439 |
% |
|
|
417 |
% |
|
|
609 |
% |
|
|
343 |
% |
|
|
329 |
% |
Asset Coverage, per $1,000 Principal Amount of Loan and Debt Issuance Outstanding10 |
|
|
$4,391 |
|
|
|
$4,170 |
|
|
|
$6,094 |
|
|
|
$3,426 |
|
|
|
$3,286 |
|
Weighted Average Loan and Debt Issuance (000s) |
|
|
$148,414 |
|
|
|
$95,983 |
|
|
|
$122,617 |
|
|
|
$318,462 |
|
|
|
$163,197 |
|
Weighted Average Interest Rate on Loan and Debt Issuance |
|
|
2.87 |
% |
|
|
2.48 |
% |
|
|
6.14 |
%11 |
|
|
3.83 |
% |
|
|
3.51 |
% |
Mandatory Redeemable Preferred Stock at Liquidation Value, End of Year (000s) |
|
|
$51,900 |
|
|
|
$43,100 |
|
|
|
$43,100 |
|
|
|
$48,000 |
|
|
|
$48,000 |
|
Asset Coverage Ratio for Mandatory Redeemable Preferred Stock12 |
|
|
328 |
% |
|
|
309 |
% |
|
|
342 |
% |
|
|
292 |
% |
|
|
288 |
% |
Asset Coverage, per $100,000 Liquidation Value per Share of Mandatory Redeemable Preferred
Stock12 |
|
|
$327,511 |
|
|
|
$309,498 |
|
|
|
$341,958 |
|
|
|
$292,258 |
|
|
|
$288,277 |
|
Asset Coverage, per $30 Liquidation Value per Share of Mandatory Redeemable Preferred
Stock12 |
|
|
$98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial
Statements.
|
|
|
|
|
18 |
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
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 $25.30 for 284,640 shares and $7,201,095 for the year
ended November 30, 2022 and $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 and 2018, the net income tax benefit was 0.19%, 0.88% and 3.08%,
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.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
19 |
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 99,432,982 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 Fund follows the accounting and reporting guidance in Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946,
Financial Services - Investment Companies (ASC 946). The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (GAAP),
including, but not limited to, ASC 946. 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
|
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20 |
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
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 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.
Pursuant to policies adopted by the Board of Directors, the Funds manager has been designated as the valuation designee and is responsible for the oversight of the
daily valuation process. The Funds manager is assisted by the Global Fund Valuation Committee (the Valuation Committee). The Valuation Committee is responsible for making fair value determinations, evaluating the effectiveness of
the Funds pricing policies, and reporting to the Funds manager and 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.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
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|
21 |
|
Notes to financial statements (contd)
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 unadjusted 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 |
|
$ |
432,302,185 |
|
|
|
|
|
|
|
|
|
|
$ |
432,302,185 |
|
Common Stocks |
|
|
218,243,995 |
|
|
|
|
|
|
|
|
|
|
|
218,243,995 |
|
Total Long-Term Investments |
|
|
650,546,180 |
|
|
|
|
|
|
|
|
|
|
|
650,546,180 |
|
Short-Term Investments |
|
|
13,581,723 |
|
|
|
|
|
|
|
|
|
|
|
13,581,723 |
|
Total Investments |
|
$ |
664,127,903 |
|
|
|
|
|
|
|
|
|
|
$ |
664,127,903 |
|
|
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 and
$30 per outstanding share) of the Mandatory Redeemable Preferred Stock (MRPS)), net of income taxes, by the total number of shares of common stock outstanding.
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22 |
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
(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
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
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|
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|
23 |
|
Notes to financial statements (contd)
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.
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.
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24 |
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
For the year ended November 30, 2022, the Fund
estimated that approximately 81% of the MLP distributions received would be treated as a return of capital. The Fund recorded as return of capital the amount of $32,956,180 of dividends and distributions received from its investments.
Additionally, the Fund updated the return of capital estimates from the year ended November 30, 2021 based on actual amounts subsequently reported to the Fund. This
resulted in an increase of $375,512 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
100% 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.
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
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|
|
|
25 |
|
Notes to financial statements (contd)
(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.
(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.
|
|
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|
|
26 |
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
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 2018 through 2021 tax years remain open and subject to examination by tax jurisdictions.
(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 Earnings
(Loss), Net of Income Taxes |
|
|
Paid-in
Capital in Excess of Par Value |
|
(a) |
|
$ |
3,295,046 |
|
|
$ |
(3,295,046) |
|
(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 May 31, 2023.
During the year ended
November 30, 2022, fees waived and/or expenses reimbursed amounted to $306,854.
All officers and one Director of the Fund are employees of Franklin Resources
or its affiliates and do not receive compensation from the Fund.
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|
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|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
|
27 |
|
Notes to financial statements (contd)
3. Investments
During the year ended November 30, 2022, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
|
|
|
|
|
Purchases |
|
$ |
386,425,554 |
|
Sales |
|
|
354,426,868 |
|
4. Derivative instruments and hedging activities
During the year ended November 30, 2022, 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 $160,000,000 ($120,000,000 prior to June 22, 2022). The Credit Agreement is subject to a scheduled commitment
termination date of December 13, 2023 (previously, 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 the current commitment amount. The interest on the loan is calculated at a variable rate based on a benchmark (adjusted Term SOFR effective June 30,
2022 and prior to June 30, 2022 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, 2022, the Fund had $111,000,000 of borrowings outstanding per this credit agreement. Interest expense related to this loan for the
year ended November 30, 2022 was $2,451,851. For the year ended November 30, 2022, the Fund incurred commitment fees of $84,410. For the year ended November 30, 2022, the average daily loan balance was $104,320,548 and the weighted
average interest rate was 2.32%.
6. Senior secured notes
At November 30, 2022, the Fund had $41,301,645 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, 2022 was $1,861,088. 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).
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28 |
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ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
On August 26, 2022, Series D Senior Notes in
the amount of $3,801,934 matured.
The table below summarizes the key terms of each series of Senior Notes at November 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
Amount |
|
|
Rate |
|
|
Maturity |
|
|
Estimated Fair Value |
|
Senior secured notes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B |
|
$ |
8,364,254 |
|
|
|
3.87 |
% |
|
|
February 7, 2023 |
|
|
$ |
8,190,709 |
|
Series C |
|
|
10,075,124 |
|
|
|
4.02 |
% |
|
|
February 7, 2025 |
|
|
|
9,662,826 |
|
Series E |
|
|
950,483 |
|
|
|
3.76 |
% |
|
|
August 26, 2026 |
|
|
|
880,061 |
|
Series G |
|
|
11,609,975 |
|
|
|
4.51 |
% |
|
|
October 15, 2023 |
|
|
|
11,378,475 |
|
Series H |
|
|
10,301,809 |
|
|
|
4.66 |
% |
|
|
October 15, 2025 |
|
|
|
9,933,030 |
|
|
|
$ |
41,301,645 |
|
|
|
|
|
|
|
|
|
|
$ |
40,045,101 |
|
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, 2022, the Fund had 567,018 shares of fixed rate MRPS outstanding with an aggregate liquidation value of $51,900,070. 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.
On March 28, 2022, which was the scheduled redemption date, the Fund redeemed 41 shares of Series B MRPS at a
liquidation value of 4,100,000 plus any accumulated unpaid dividends. On August 7, 2022, which was the scheduled redemption date, the Fund redeemed 41 shares of Series F MRPS at a liquidation value of 4,100,000 plus any accumulated unpaid
dividends.
On November 17, 2022, the Fund completed a private placement of $17,000,070 fixed rate MRPS. Net proceeds from the offering were used for general
corporate purposes and to refinance existing leverage.
On November 17, 2022, Series C, Series D, Series E and Series G MRPS were exchanged for Series H, Series
I, Series J and Series K MRPS, respectively.
|
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
|
29 |
|
Notes to financial statements (contd)
The table below summarizes the key terms of each series of the MRPS at November 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series |
|
Term Redemption Date |
|
|
Rate |
|
|
Shares |
|
|
Liquidation Preference Per Share |
|
|
Aggregate Liquidation Value |
|
|
Estimated Fair Value |
|
Series H |
|
|
3/26/2024 |
|
|
|
4.26 |
% |
|
|
140 |
|
|
$ |
100,000 |
|
|
$ |
14,000,000 |
|
|
$ |
13,624,140 |
|
Series I |
|
|
7/23/2024 |
|
|
|
4.37 |
% |
|
|
30 |
|
|
|
100,000 |
|
|
|
3,000,000 |
|
|
|
2,869,922 |
|
Series J |
|
|
7/23/2026 |
|
|
|
4.55 |
% |
|
|
70 |
|
|
|
100,000 |
|
|
|
7,000,000 |
|
|
|
6,556,972 |
|
Series K |
|
|
8/7/2024 |
|
|
|
4.30 |
% |
|
|
109 |
|
|
|
100,000 |
|
|
|
10,900,000 |
|
|
|
10,413,542 |
|
Series L |
|
|
11/17/2032 |
|
|
|
7.28 |
% |
|
|
566,669 |
|
|
|
30 |
|
|
|
17,000,070 |
|
|
|
18,331,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,900,070 |
|
|
$ |
51,796,219 |
|
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.
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 a nationally recognized statistical ratings organization (NRSRO) then providing a
rating, the applicable dividend rate will increase by 0.5% to 4.0% according to a predetermined schedule.
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, if applicable, is in default of specified rating agency requirements, the MRPS are subject
to mandatory redemption and penalties 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, if applicable, rating agency requirements.
The holders of Series L MRPS have one vote per share and the holders of Series H, Series I, Series J and Series K MRPS have one vote for every $30.00 of liquidation
preference held. Holders of MRPS 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.
|
|
|
|
|
30 |
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
8. Distributions to common
shareholders subsequent to November 30, 2022
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 |
|
2/21/2023 |
|
|
2/28/2023 |
|
|
$ |
0.5300 |
|
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. On July 29, 2022, the Fund announced that the Board had authorized the amendment of the Funds
repurchase program under which the Fund may continue to repurchase in the open market up to an additional 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 continue 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.
During the year ended November 30, 2022, the Fund repurchased and retired 1.98% of its common shares outstanding
under the repurchase plan. The weighted average discount per share on these repurchases was 19.61% for the year ended November 30, 2022. 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, 2022, the Fund repurchased 1,529,323 shares or 9.94% of its common shares outstanding for a total amount of $24,081,250.
10. Income taxes
The Funds federal and state income tax provision consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
State |
|
|
Total |
|
Current tax expense (benefit) |
|
$ |
312,178 |
|
|
$ |
144,623 |
|
|
$ |
456,801 |
|
Deferred tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense (benefit) |
|
$ |
312,178 |
|
|
$ |
144,623 |
|
|
$ |
456,801 |
|
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 1.2%. 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).
|
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
|
31 |
|
Notes to financial statements (contd)
During the year, the Funds combined federal and state income tax rate decreased from 22.5%
to 22.2% 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 |
% |
|
$ |
30,839,367 |
|
State taxes, net of federal tax benefit |
|
|
1.20 |
% |
|
|
1,762,250 |
|
Non-deductible distributions on MRPS, dividends received deduction and other, net (federal and state) |
|
|
(0.10) |
% |
|
|
(145,123) |
|
Change in valuation allowance |
|
|
(23.14) |
% |
|
|
(33,976,310) |
|
Change in blended state tax rate from 1.5% to 1.2% |
|
|
0.85 |
% |
|
|
1,245,117 |
|
Expiration of capital loss carryforward |
|
|
0.50 |
% |
|
|
731,500 |
|
Total tax expense (benefit) |
|
|
0.31 |
% |
|
$ |
456,801 |
|
Components of the Funds net deferred tax asset (liability) as of November 30, 2022 are as follows:
|
|
|
|
|
Deferred tax assets |
|
|
|
|
Net operating loss carryforwards |
|
$ |
22,842,969 |
|
Capital loss carryforward |
|
|
62,589,249 |
|
Other deferred tax assets |
|
|
675,965 |
|
|
|
Deferred tax liabilities |
|
|
|
|
Unrealized gains on investment securities |
|
|
(9,179,021) |
|
Basis reduction resulting from differences in the book vs. taxable income received from MLPs |
|
|
(15,393,787) |
|
Net deferred tax asset (liability) before valuation allowance |
|
|
61,535,375 |
|
Less: Valuation allowance |
|
|
(61,535,375) |
|
Total net deferred tax asset (liability) |
|
|
|
|
At November 30, 2022, the Fund had federal and state net operating loss carryforwards of $95,523,717 and $54,420,518 (net of state
apportionment), respectively (deferred tax asset of $22,842,969). 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. During the
year ended November 30, 2022, the Fund utilized $44,889,180 and $10,775,547 of federal and
|
|
|
|
|
32 |
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
state net operating loss carryforwards,
respectively, available from previous years. If not utilized, the federal net operating loss carryforwards of $6,654,519 and $78,250,167 expire in tax years 2033 and 2036, respectively, and $10,619,031 does not have an expiration. Remaining state
net operating loss carryforwards either expire in tax years between 2023 and 2040 or have an indefinite carryforward.
Additionally, at November 30, 2022, the
Fund had a federal and state capital loss carryforward of $281,933,554 (deferred tax asset of $62,589,249), which may be carried forward for 5 years. During the year ended November 30, 2022, the Fund utilized $43,403,113 of capital loss
carryforward available from previous years. If not utilized, the remaining capital loss carryforwards of $8,061,828 and $273,871,726 expire in tax years 2023 and 2024, respectively. 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.
Under Section 384 of the Code, the Fund is limited in its ability to use loss carryovers acquired in the November 16, 2018 acquisition of ClearBridge American
Energy MLP Fund Inc. 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. This also resulted in the additional expiration of capital loss carryforward available from previous years of $3,295,046. 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.
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, 2022. Note 1(l) describes the assessment required under ASC 740 to determine whether a valuation allowance for
deferred tax assets is necessary using a more likely than not standard of realizability. Based on that assessment, and considering the limitations imposed under Section 384 as discussed above, management has determined that the Fund is not
expected to be able to generate significant future taxable income of the appropriate character in order to realize its deferred tax assets, and accordingly has determined that a full valuation allowance on its net deferred tax asset is appropriate
at this time. The capital loss carryforward is a material component of the net deferred tax asset and also has a five-year expiration. If in the future, a valuation allowance is required to reserve against an individual deferred tax asset, such as
the capital loss carryforward, it could have a material impact on the Funds net asset value and results of operations in the period it is recorded.
|
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
|
33 |
|
Notes to financial statements (contd)
At November 30, 2022, the cost basis of investments for Federal income tax purposes was
$555,821,706. At November 30, 2022, gross unrealized appreciation and depreciation of investments for Federal income tax purposes were as follows:
|
|
|
|
|
Gross unrealized appreciation |
|
$ |
117,383,144 |
|
Gross unrealized depreciation |
|
|
(9,076,947) |
|
Net unrealized appreciation (depreciation) before tax |
|
$ |
108,306,197 |
|
Net unrealized appreciation (depreciation) after tax |
|
$ |
84,262,221 |
|
11. Recent accounting pronouncements and regulatory updates
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the Act) into law. The Act, among other things, imposes a nondeductible
1 percent excise tax on public company stock buybacks. This excise tax is applicable to the fair market value of stock repurchased after December 31, 2022, and may include both common and preferred stock. The Act also imposes a 15 percent
corporate alternative minimum tax on the adjusted financial statement income of large corporations for taxable years beginning after December 31, 2022. Management is still evaluating the impact of the Act but currently does not believe such
potential impact to be material to the Fund should some of the provisions be applicable to the Fund.
* * *
In June
2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-03, Fair Value Measurement (Topic 820) Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.
The amendments in the ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, should not be considered in measuring fair value. The ASU is
effective for interim and annual reporting periods beginning after December 15, 2023, with the option of early adoption. Management is currently evaluating the impact, if any, of applying this ASU.
* * *
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.
|
|
|
|
|
34 |
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
12. 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 the overnight and
one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023. All other LIBOR settings, including the one-week and two-month USD LIBOR settings, have ceased publication as of
January 1, 2022. 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 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.
* * *
On
February 24, 2022, Russia engaged in military actions in the sovereign territory of Ukraine. The current political and financial uncertainty surrounding Russia and Ukraine may increase market volatility and the economic risk of investing in
securities in these countries and may also cause uncertainty for the global economy and broader financial markets. The ultimate fallout and long-term impact from these events are not known. The Fund will continue to assess the impact on valuations
and liquidity and will take any potential actions needed in accordance with procedures approved by the Board of Directors.
|
|
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. 2022 Annual Report |
|
|
|
|
35 |
|
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 |
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. |
|
|
|
37 |
Additional information
(unaudited) (contd)
Information about Directors and Officers
|
|
|
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 |
|
Formerly 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) |
|
|
|
|
|
38 |
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. |
|
|
|
Independent Directors (contd) |
|
Eileen A. Kamerick** |
|
|
Year of birth |
|
1958 |
Position(s) held with Fund1 |
|
Lead Independent Director and Member of Nominating, Compensation, Pricing and Valuation and Audit Committees, 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 NACD 2022 Directorship 100 honoree; Adjunct Professor, Georgetown University Law Center (since 2021); Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor, University of Iowa College
of Law (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, VALIC Company I (since October 2022); Director of ACV Auctions Inc. (since 2021); Director of Hochschild Mining plc (precious metals company) (since 2016); Director of Associated
Banc-Corp (financial services company) (since 2007); formerly Trustee of AIG Funds and Anchor Series Trust (2018 to 2021) |
|
Nisha Kumar*** |
|
|
Year of birth |
|
1970 |
Position(s) held with Fund1 |
|
Director and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of the Audit Committee, Class II |
Term of office1 and length of time served |
|
Since 2019 |
Principal occupation(s) during the past five years |
|
Formerly, Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (2011 to 2021); 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 to 2018); and Director of The Asia Tigers Fund, Inc. (2016 to
2018) |
|
|
|
|
|
ClearBridge Energy Midstream Opportunity Fund Inc. |
|
|
|
39 |
Additional information
(unaudited) (contd)
Information about Directors and Officers
|
|
|
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 128 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) |
|
128 |
Other board memberships held by Director during the past five years |
|
None |
|
|
|
Additional Officers |
|
Fred Jensen Franklin
Templeton 280 Park Avenue, 8th Floor, New
York, NY 10017 |
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) |
|
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) |
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40 |
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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Additional Officers (contd) |
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Thomas C. Mandia**** |
Franklin
Templeton 100 First Stamford Place, 6th
Floor, Stamford, CT 06902 |
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Year of birth |
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1962 |
Position(s) held with Fund1 |
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Senior Vice President |
Term of office1 and length of time served |
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Since 2022 |
Principal occupation(s) during the past five years |
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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) and Assistant Secretary of certain funds in the fund complex (2006 to 2022) |
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Christopher Berarducci Franklin Templeton 280 Park Avenue, 8th Floor, New York, NY 10017 |
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Year of birth |
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1974 |
Position(s) held with Fund1 |
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Treasurer and Principal Financial Officer |
Term of office1 and length of time served |
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Since 2019 |
Principal occupation(s) during the past five years |
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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. |
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Jeanne M. Kelly Franklin Templeton 280 Park Avenue, 8th Floor, New York, NY 10017 |
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Year of birth |
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1951 |
Position(s) held with Fund1 |
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Senior Vice President |
Term of office1 and length of time served |
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Since 2011 |
Principal occupation(s) during the past five years |
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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) |
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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). |
* |
Mr. Hutchinson served as a Director until his passing on October 28, 2022. |
** |
Effective November 9, 2022, Ms. Kamerick became Lead Independent Director. |
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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41 |
Additional information
(unaudited) (contd)
Information about Directors and Officers
*** |
Effective November 9, 2022, Ms. Kumar became Chair of Audit Committee. |
**** |
Effective February 10, 2022, Mr. Mandia became a Senior Vice President. |
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 2025 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. |
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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.
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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43 |
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:
Franklin Resources Inc.
Compliance Department
280 Park Ave, 8th Floor
New York, NY 10017
Complaints may also be submitted by telephone at 1-800-742-5274.
Complaints submitted through this number will be received by the CCO.
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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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ClearBridge Energy Midstream Opportunity Fund Inc. |
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45 |
Summary of information regarding the Fund (unaudited) (contd)
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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ClearBridge Energy Midstream Opportunity Fund Inc. |
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. The 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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ClearBridge Energy Midstream Opportunity Fund Inc. |
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47 |
Summary of information regarding the Fund (unaudited) (contd)
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 midsteam 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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48 |
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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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49 |
Summary of information regarding the Fund (unaudited) (contd)
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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. |
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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50 |
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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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51 |
Summary of information regarding the Fund (unaudited) (contd)
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. |
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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53 |
Summary of information regarding the Fund (unaudited) (contd)
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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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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Summary of information regarding the Fund (unaudited) (contd)
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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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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57 |
Summary of information regarding the Fund (unaudited) (contd)
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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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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Summary of information regarding the Fund (unaudited) (contd)
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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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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Summary of information regarding the Fund (unaudited) (contd)
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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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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ClearBridge Energy Midstream Opportunity Fund Inc. |
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63 |
Summary of information regarding the Fund (unaudited) (contd)
other factors, political developments, armed conflicts, economic sanctions, major cybersecurity events, 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, wars, 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 or markets directly affected, the value and liquidity of the funds investments may be negatively affected. Following Russias recent invasion of Ukraine, Russian stocks lost
all, or nearly all, of their market value. Other securities or markets could be similarly affected by past or future geopolitical or other events or conditions.
For
example, the ongoing impact of COVID-19 and its subsequent variants have been rapidly evolving and have resulted in extreme volatility in the financial markets; 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; and disruptions to supply chains, consumer demand and employee availability. Some sectors of the economy and individual issuers
have experienced particularly large losses. While in the process of gradually reversing, these circumstances may continue for an extended period of time and may result in a sustained domestic or even global economic downturn or 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. Developing or emerging market countries may be more impacted by the
COVID-19 pandemic as they may have less established health care systems and may be less able to control or mitigate the effects of the pandemic. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets,
industries and individual issuers, are not known. The U.S. government and the Federal Reserve, as well as certain foreign governments and central banks, have taken extraordinary actions to support local and global economies and the financial markets
in response to the COVID-19 pandemic. 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. Government actions to mitigate the economic impact of the pandemic have resulted in a large expansion of government deficits and debt, the long term consequences of which are not known. Recently, inflation and
interest rates have increased and may rise further. The COVID-19 pandemic could adversely affect the value and liquidity of the funds investments, impair the funds ability to satisfy redemption requests, and negatively impact the
funds performance. In addition, the COVID-19 pandemic, 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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Valuation Risk. The sales price the Fund
could receive for any particular portfolio investment may differ from the Funds valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair value methodology. These
differences may increase significantly and affect Fund investments more broadly during periods of market volatility. The Funds ability to value its investments may be impacted by technological issues and/or errors by pricing services or other
third party service providers. The valuation of the Funds investments involves subjective judgment. 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.
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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65 |
Summary of information regarding the Fund (unaudited) (contd)
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.
Deferred tax assets may constitute a relatively high percentage of the Funds net asset value. A capital loss carryforward may constitute a
material deferred tax asset and also has a five-year expiration. Any valuation allowance required against deferred tax assets, such as a capital loss carryforward, or future adjustments to a valuation allowance 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.
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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.
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.
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Summary of information regarding the Fund (unaudited) (contd)
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.
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.
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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 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.
Effective August 19, 2022, the Fund began operating under Rule 18f-4 under the 1940 Act which, among other things, governs the use of derivative investments and
certain financing transactions (e.g. reverse repurchase agreements) by registered investment companies. Among other things, Rule 18f-4 requires funds that invest in derivative instruments beyond a specified limited amount to apply a value at risk
(VaR) based limit to their use of certain derivative instruments and financing transactions and to adopt and implement a derivatives risk management program. A fund that uses derivative instruments in a limited amount is not subject to the full
requirements of Rule 18f-4. Compliance with Rule 18f-4 by the Fund could, among other things, make derivatives more costly, limit their availability or utility, or otherwise adversely affect their performance. Rule 18f-4 may limit the Funds
ability to use derivatives as part of its investment strategy.
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
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Summary of information regarding the Fund (unaudited) (contd)
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.
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.
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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 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
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Summary of information regarding the Fund (unaudited) (contd)
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 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.
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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 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.
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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Summary of information regarding the Fund (unaudited) (contd)
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.
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.
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ClearBridge Energy Midstream Opportunity Fund Inc. |
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 an effort to prevent or mitigate 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.
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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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 P.O. Box 43006, Providence,
RI 02940-3078 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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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 P.O. Box 43006, Providence, RI 02940-3078 or by calling the Plan Agent at 1-888-888-0151.
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ClearBridge
Energy Midstream Opportunity Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
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
George P. Hoyt
Secretary and Chief Legal Officer
Thomas C. Mandia*
Senior Vice President
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.
P.O. Box 43006
Providence, RI 02940-3078
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
* |
Effective February 10, 2022, Mr. Mandia became a Senior Vice President. |
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 the Western Asset Money Market 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; and |
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Online account access user IDs, passwords, security challenge question responses. |
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, 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 |
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 Funds at 1-877-721-1926 for the Western Asset Money
Market Funds or
1-888-777-0102 for the Legg Mason-sponsored closed-end funds.
Revised October 2022
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NOT PART OF THE ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (contd)
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, 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).
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.
You also have the right to request the deletion of the personal information collected or maintained by the
Funds.
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 2022
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NOT PART OF THE ANNUAL REPORT |
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.
Quarterly performance, semi-annual and annual reports, current net asset value and other information regarding
the Fund may be found on Franklin Templetons website, which can be accessed at www.franklintempleton.com. Any reference to Franklin Templetons website in this report is intended to allow investors public access to information regarding
the Fund and does not, and is not intended to, incorporate Franklin Templetons website in this report.
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.
P.O. Box 43006
Providence, RI 02940-3078
LMFX014219 1/23 SR22-4581