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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number: 811-22626

Salient Midstream & MLP Fund

(Exact name of registrant as specified in charter)

4265 San Felipe, 8^th Floor

Houston, TX 77027

(Address of principal executive offices) (Zip code)

 

		With a Copy To:
Gregory A. Reid, Principal Executive Officer Salient Midstream & MLP Fund 4265 San Felipe, 8th Floor Houston, TX 77027 (Name and address of agent for service)		George J. Zornada K&L Gates LLP State Street Financial Center One Lincoln St. Boston, MA 02111-2950 (617) 261-3231

Registrant’s telephone number, including area code: (713) 993-4001

Date of fiscal year end: November 30

Date of reporting period: November 30, 2018

Form N-CSR is to be used by management investment companies to file reports with the Commission, not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

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Item 1.

Report to Stockholders.

The following is a copy of the report transmitted to shareholders of the Salient Midstream & MLP Fund (the “Fund”), pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “Act”) (17 CFR 270.30e-1).

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Shareholder Letter (Unaudited)			1
Report of Independent Registered Public Accounting Firm			6
Schedule of Investments			7
Statement of Assets, Liabilities and Shareholders’ Equity			10
Statement of Operations			11
Statements of Changes in Net Assets			12
Statement of Cash Flows			13
Financial Highlights			14
Notes to Financial Statements			15
Supplemental Information (Unaudited)			26
Privacy Policy (Unaudited)			33

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Shareholder Letter (Unaudited)

Dear Fellow Shareholders:¹

We are pleased to provide the annual report of the Salient Midstream & MLP Fund (the “Fund” or “SMM”) (NYSE: SMM) which contains updated data as of November 30, 2018.

As of November 30, 2018, the Fund had total gross assets of $252.7 million, net asset value of $10.04 per share and 17.7 million common shares outstanding. The Fund’s price per share was $8.41, which represents a 16.2% discount to its net asset value (“NAV”).²

The Fund’s investment allocation is shown in the pie chart below:

For illustrative purposes only.

Source: Salient Capital Advisors, LLC (“Adviser”), November 30, 2018. Figures are based on the Fund’s gross assets.

* General Partners that are structured as C-Corporations for US federal tax purposes.

 

 

¹ Certain statements in this letter are forward-looking statements. The forward-looking statements and other views expressed herein are those of the portfolio managers and the Fund as of the date of this letter. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. The Fund disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. There can be no assurance that the Fund will achieve its investment objectives. The value of the Fund will fluctuate with the value of the underlying securities. Historically, exchange-listed closed-end funds often trade at a discount to their net asset value.

² Past performance is not indicative of future results. Current performance may be higher or lower than the data shown. The data shown are unaudited. Returns do not reflect the deduction of taxes that shareholders may have to pay on Fund distributions or upon the sale of Fund shares.

 

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The Fund’s Top 10 holdings are shown below, as of November 30, 2018:¹

 

Company Name		Sector				% of Gross Assets
EMG Utica I Offshore Co-Investment, L.P.			MLP Affiliate			9.6%
Energy Transfer LP			MLP			9.0%
The Williams Companies, Inc.			Midstream Company			7.3%
Targa Resources Corp.			Midstream Company			7.2%
Macquarie Infrastructure Corp.			Other Energy & Infrastructure			5.2%
Plains GP Holdings, LP, Class A			MLP Affiliate			5.1%
TransCanada Corp.			Midstream Company			5.0%
Kinder Morgan, Inc.			Midstream Company			5.0%
Tallgrass Energy, LP			Midstream Company			4.8%
Enbridge, Inc.			Midstream Company			4.1%
Total						62.3%

For illustrative purposes only.

Current and future holdings are subject to change and risk. Figures are based on the Fund’s gross assets.

Source: Salient Capital Advisors, LLC (“Adviser”), November 30, 2018.

During the fiscal year (December 1, 2017 – November 30, 2018), the Fund’s NAV and market price total return were (3.4%) and (11.1%), respectively, compared to 1.2% for the Alerian MLP Index (AMZ), during the same period.^2,3 Some of the top contributing investments held by the Fund during the fiscal year include ONEOK, Inc. (NYSE: OKE), Plains GP Holdings, LP, Class A (PAGP), and Energy Transfer Partners, L.P (ETP). Top detractors to Fund performance include Macquarie Infrastructure Corp. (MIC), Enbridge Energy Management LLC (EEQ), and SemGroup Corp., Class A (SEMG).

Performance Snapshot

as of November 30, 2018 (unaudited)

 

Price Per Share		Fiscal YTD Total Return*		Since Inception* (Annualized)
$10.04 (NAV)		-3.36%		-2.70%
$8.41 (Market Price)		-11.05%		-5.31%

Source: Salient Capital Advisors, LLC (“Adviser”), November 30, 2018.

For illustrative purposes only. All figures represent past performance and are not indicative of future results. No investment strategy can guarantee performance results.

* Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares. Total return assumes the reinvestment of all distributions. Inception date of the Fund was May 25, 2012.

 

 

¹ Fund shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency. Data are based on total market value of Fund investments unless otherwise indicated. The data provided are for informational purposes only and are not intended for trading purposes.

² Alerian, November 30, 2018. Alerian MLP Index”, and “AMZ” are trademarks of Alerian and their use is granted under a license from Alerian. Past performance is not indicative of how the index will perform in the future. The index reflects the reinvestment of dividends and income and does not reflect deductions for fees, expenses, or taxes. The index is unmanaged and is not available for direct investment. Alerian MLP Index (AMZ) is a composite of some of the most prominent energy MLPs that provides investors with a comprehensive benchmark for this maturing asset class.

³ Past performance is not indicative of future results.

 

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Fund Update

Effective on January 1, 2019, the Alerian Midstream Energy Select Index (“AMEI Index”) will replace the Alerian MLP Index as the Fund’s primary benchmark index. We believe the AMEI Index more closely aligns to the Fund’s investment strategies as a result of changes recently made to the composition of the AMEI Index. The AMEI Index includes both midstream master limited partnerships (MLPs) and corporate structures and is designed to be “RIC compliant” by imposing a 25% limitation on MLPs in construction, similar to SMM.¹ As such, we believe the AMEI Index is a more appropriate benchmark for SMM.

Market Review

As we entered the back half of the reporting period, the same themes that had largely dictated midstream performance over the first half of the reporting period became even more critical. The commodity pricing environment that was supportive for most of the year turned sharply negative in October, investor confusion and/or fear of company consolidations/simplifications kept potential buyers on the sidelines, and through it all a confusing regulatory environment had a profoundly negative impact on midstream equity values.²

The second half of the reporting period started promisingly enough with the midstream sector extending its post-Federal Energy Regulatory Commission (FERC) ruling rally.³ From the end of May through August the Alerian MLP Index (AMZ) added 6.6% and hit its 2018 high on August 9, 2018 marking a YTD gain of nearly 12%.⁴

Midstream rallied as investors focused on takeaway capacity out of the prolific Permian Basin in West Texas rather than actual commodity prices. It became apparent that existing infrastructure would not be able to keep pace with the remarkable increase in production and several high-profile projects were announced to help alleviate potential bottlenecks from the region.⁵ The takeaway concerns were so acute in the Permian Basin that some companies began to re-allocate capital to other basins which provided an uplift to names that were not directly exposed to the Permian Basin. At the midpoint of the reporting period, some analysts even predicted a potential “super-spike” in the price of crude oil to $100/barrel (bbl) without some relief in the Permian Basin.⁶ The Organization of Petroleum Exporting Countries (OPEC) agreed to bump up its production at its May meeting and crude oil prices continued to creep higher through the summer.⁷ Record U.S. production of crude oil, natural gas, and natural gas liquids (NGLs) along with the supportive pricing environment was paying dividends for midstream investors.⁵ Midstream had the advantage in its negotiations with its customers as existing and potential bottlenecks served as a catalyst for producers to secure takeaway capacity out of some basins (particularly the Permian Basin) sooner rather than later. Also, midstream performance got a boost in July when the FERC decided to largely mitigate its own ruling from March regarding the ability for MLPs to include an income tax provision in its cost of service tariffs as long as the MLP was owned by a tax-paying entity, i.e. a corporation.^3,8

Despite the FERC walk-back, the flurry of company simplification announcements we saw in the first half of the reporting period continued during the back half of the reporting period with Energy Transfer, L.P. (ET), Valero Energy, Corp (VLO), and EnLink Midstream, LLC (ENLC) all announcing plans to absorb their underlying MLPs.⁹ The roll-up of the Energy Transfer family was announced on August 2, 2018, and was the last domino to fall.⁹

 

 

¹ The midstream sector involves the transportation (by pipeline, rail, barge, oil tanker or truck), storage, and wholesale marketing of crude or refined petroleum products. Master Limited Partnership (MLPs) are publicly traded limited partnerships and limited liability companies that are treated as partnerships for federal income tax purposes. Regulated Investment Company (RIC) An investment Company that does not pay taxes on its earnings.

² Bloomberg, November 2018.

³ Federal Energy Regulatory Commission (FERC), March 2018 and July 2018. The FERC is the United States federal agency that regulates the transmission and wholesale sale of electricity and natural gas in interstate commerce.

⁴ Alerian, November 2018. Past performance is not indicative of future results.

⁵ Energy Information Administration (EIA), November 2018. The EIA is a principal agency of the U.S. Federal Statistical System responsible for collecting, analyzing, and disseminating energy information. The Permian Basin is one of the most prolific oil and natural gas geologic basins in the United States. Natural gas liquids (NGLs) are components of natural gas that are separated from the gas state in the form of liquids.

⁶ CNBC, July 2018.

⁷ The Organization of Petroleum Exporting Companies (OPEC), May 2018 and December 2018. OPEC is a union of oil producing countries that regulate the amount of oil each country is able to produce.

⁸ Cost-of-service may be defined as the amount of revenue a regulated pipeline company must collect from rates charged consumers to recover the cost of doing business. Tariffs The terms and conditions under which the service of a pipeline are offered or provided, including the tolls, the rules and regulations, and the practices relating to specific services.

⁹ Energy Transfer, L.P., August 2018. Valero Energy, Corp., October 2018. EnLink Midstream, LLC., October 2018. Salient Capital Advisors, LLC is not a tax advisor and as such cannot provide tax advice.

 

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The terms were quite favorable to the underlying MLP, Energy Transfer Partners, L.P. (ETP) which was a pleasant surprise for some investors who had feared the worst. VLO announced its merger proposal on October 18, 2018 while ENLC made its announcement four days later on October 22, 2018.⁹ The VLO and ENLC transactions have taxable implications for holders of Valero Energy Partners, LP (VLP) and EnLink Midstream Partners, LP (ENLK).⁹ While we believe both transactions should result in improved cost of equity capital going forward, neither VLO nor ENLC stock have fared well post-announcement.²

Sentiment began to shift in late August and into September due to the fear of the potential sector-wide implications presented by a proposed ballot measure in Colorado (CO). Proposition 112 in CO would have required companies to implement setbacks of 2,500 feet for drilling (vs. current 500 feet) which would essentially halt future development of the Denver-Julesburg (DJ) Basin.¹⁰ Once Proposition 112 qualified for the ballot, midstream names with a CO presence saw their share prices fall.² Noble Midstream Partners, L.P. (NBLX) fell 19% in September and nearly 30% in the quarter largely due to its CO exposure.² Another name with significant CO exposure, Western Gas Equity Partners, L.P. (WGP) dropped 11.6% in September and 15.0% for the quarter, as well.² Ultimately, Proposition 112 failed by a 57-43% margin but CO exposed names did not bounce back as quickly as some anticipated.¹⁰

Sentiment continued to worsen in October and November as fears of a global recession perhaps spurred by the ongoing trade dispute between the US and China sent crude oil prices crashing. West Texas Intermediate (WTI) peaked at $76.31/bbl on October 3rd and closed November at $50.93/bbl, a 33% drop.^2,11 On November 2, 2018, it was announced that while many sanctions on Iran would be re-instituted, Iran was going to be allowed to continue exporting oil to eight countries, including China and India, the world’s two largest oil importers.¹² This was unexpected by most market watchers and it exacerbated the fall in crude oil prices since it led to an immediate oversupply situation. The increase in oil production that OPEC had announced in its May meeting would be reversed as OPEC did agree to reduce its exports by 1.2 million barrels per day (mmbpd) at its December meeting in Vienna.⁷

The sudden collapse in crude oil prices and another year of disappointing returns for midstream investors made for a difficult November as investors used midstream as a source for tax-loss selling.¹³ For the six-month period from June through November, the AMZ provided a total return of -4.0%. For the fiscal year, the AMZ return has been 1.2%.⁴

While the returns in the midstream space have been disappointing, we continue to believe that the sector is headed in the right direction. We believe that better balance sheets, better corporate governance and improved distribution coverage will ultimately get recognized by the investing public especially with U.S. production of crude oil, natural gas, and NGLs continuing at record levels.⁵ The shale revolution that has occurred over the last 10 years has resulted in the U.S. becoming a net exporter of energy.^5,14 We appreciate your confidence in investing with us.

Please note that this letter, including the financial information herein, is made available to shareholders of the Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this letter.

Sincerely,

Gregory A. Reid

President

MLP Business, Salient Capital Advisors, LLC

 

 

¹⁰ New York Times, November 2018. Denver-Julesburg (DJ) Basin is a crude oil and liquids rich gas play that is located in Northeast Colorado and Southeast Wyoming.

¹¹ West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing. It is the underlying commodity of New York Mercantile Exchange’s oil futures contracts.

¹² CNN, November 2018.

¹³ Tax-loss selling allows the investor to avoid paying capital gains tax on recently sold or appreciated assets. Salient Capital Advisors, LLC is not a tax advisor and as such cannot provide tax advice.

¹⁴ Shale Revolution refers to the sharp increase in United States energy production following technological advancements, which made it more economical to extract oil and gas from certain geological formations, or shale.

 

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Key Financial Data (Unaudited)

 

We supplement the reporting of our financial information determined under United States generally accepted accounting principles (“GAAP”) with certain non-GAAP financial measures: distributable cash flow and distributable cash flow coverage ratio. We believe these non-GAAP measures provide meaningful information to assist shareholders in understanding our financial results and assessing our performance. We pay distributions to our shareholders, funded in part by distributable cash flow generated from our portfolio investments. Distributable cash flow is the amount of income received by us from our portfolio investments less operating expenses, subject to certain adjustments as described below. Other companies with similar measures may calculate these measures differently, and as a result, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported net investment income. These non-GAAP financial measures reflect an additional way of viewing an aspect of our operations that, when viewed with our GAAP results and the below reconciliation to the corresponding GAAP financial measures, provide a more complete understanding of our Fund. We strongly encourage shareholders to review our financial statements in their entirety and not rely on any single financial measure.

The table below reconciles the non-GAAP financial measures, distributable cash flow and distributable cash flow coverage ratio, by starting with the most directly comparable GAAP financial measure, net investment income.

 

		Year Ended November 30, 2018
Net investment Income		$	(2,177,795	)
Reconciling items:
Return of capital of distributions(a)			13,653,700
Dividends paid in stock(b)			1,070,666
Option premium earnings(c)			503,738
Distributable cash flow (non-GAAP)		$	13,050,309
Distributions paid on common stock		$	13,415,893
Distributable cash flow coverage ratio (non-GAAP)			0.97

Reconciliation of distributable cash flow to GAAP

(a) GAAP recognizes that a significant portion of the cash distributions received from MLPs is characterized as a return of capital and therefore excluded from net investment income, whereas the distributable cash flow calculation includes the return of capital portion of such distributions.

(b) Distributable cash flow includes the value of dividends paid-in-kind (i.e., stock dividends), whereas such amounts are not included in net investment income for GAAP purposes during the period received, but rather are recorded as unrealized gains upon receipt.

(c) We may sell covered call option contracts to generate income or to reduce our ownership of certain securities that we hold. In some cases, we are able to repurchase these call option contracts at a price less than the fee that we received, thereby generating a profit. The amount we received from selling call options, less the amount that we pay to repurchase such call option contracts is included in distributable cash flow. For GAAP purposes, “income” from call option contracts sold is not included in net investment income. See Note 2—Summary of Significant Accounting Policies and Practices for a full discussion of the GAAP treatment of option contracts.

 

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Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Trustees

Salient Midstream & MLP Fund:

Opinion on the Financial Statements

We have audited the accompanying statement of assets, liabilities, and shareholders’ equity of Salient Midstream and MLP Fund (the “Fund”), including the schedule of investments, as of November 30, 2018, the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the related notes (collectively, the financial statements) and the financial highlights for each of the years in the five-year period then ended. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of November 30, 2018, the results of its operations and cash flows for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Such procedures also included confirmation of securities owned as of November 30, 2018, by correspondence with the custodian, investee or other appropriate auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. We believe that our audit provides a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the auditor of one or more Salient investment companies since 2003.

Columbus, Ohio

January 24, 2019

 

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Schedule of Investments

Salient Midstream & MLP Fund

November 30, 2018

 

		Shares/Units				Fair Value
Master Limited Partnerships and Related Companies—141.3%
Gathering & Processing—31.5%
United States—31.5%
Altus Midstream Co.(a)(b)			549,000			$	4,254,750
CNX Midstream Partners LP(b)			49,880				902,828
EMG Utica I Offshore Co-Investment, L.P.(a)(b)(c)			16,000,000				24,366,320
Enable Midstream Partners LP(b)(d)			252,878				3,373,393
EnLink Midstream LLC(d)			408,468				4,668,789
Oasis Midstream Partners LP(b)			9,339				188,181
Targa Resources Corp.(b)(d)			407,824				18,201,185
							55,955,446
Liquids Transportation & Storage—41.4%
Canada—14.4%
Enbridge, Inc.(d)			319,392				10,453,700
Inter Pipeline, Ltd.			158,408				2,546,641
TransCanada Corp.(d)			309,861				12,679,512
							25,679,853
United States—27.0%
Enbridge Energy Management LLC (PIK rate 3.29%)(d)(e)			729,959				7,956,553
Genesis Energy LP(b)(d)			405,421				8,939,533
MPLX LP(b)			121,243				4,016,781
NGL Energy Partners LP(b)			405,790				3,765,731
Plains GP Holdings LP, Class A(b)(d)			582,246				12,885,104
SemGroup Corp., Class A(d)			633,483				10,281,429
USD Partners LP(b)			8,200				86,018
							47,931,149
Marine Midstream—1.3%
Monaco—1.3%
GasLog Partners LP			103,505				2,381,650
Natural Gas Pipelines & Storage—54.5%
Canada—5.4%
Keyera Corp.			53,658				1,175,214
Pembina Pipeline Corp.(d)			247,962				8,348,880
							9,524,094
United States—49.1%
DCP Midstream LP(b)			66,397				2,262,810
Energy Transfer LP(b)(d)			1,553,391				22,632,907
Enterprise Products Partners LP(b)(d)			348,539				9,149,149
Equitrans Midstream Corp.(b)			5,864				130,885
Kinder Morgan, Inc.(d)			739,545				12,624,033
ONEOK, Inc.(d)			164,140				10,083,120
Tallgrass Energy LP(b)(d)			562,842				12,022,305
The Williams Companies, Inc.(d)			727,917				18,430,858
							87,336,067

 

See accompanying Notes to Financial Statements.		7

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Schedule of Investments

Salient Midstream & MLP Fund

November 30, 2018

 

		Shares/Units				Fair Value
Oil Service & Other Specialty—0.3%
United States—0.3%
USA Compression Partners LP(b)			42,999			$	621,766
Other Energy & Infrastructure—11.9%
United States—11.9%
Archrock, Inc.(b)			116,959				1,192,982
Clearway Energy, Inc., Class A(b)			33,782				609,089
Macquarie Infrastructure Corp.(d)			312,833				13,045,136
NextEra Energy Partners LP(b)(d)			114,474				5,345,936
Viper Energy Partners LP			34,576				1,038,317
							21,231,460
Refining & Marketing—0.4%
United States—0.4%
Sunoco LP(b)			23,761				664,358
Total Master Limited Partnerships and Related Companies (Cost $226,251,291)							251,325,843
Total Investments—141.3% (Cost $226,251,291)							251,325,843
Credit Facility—(41.6%)							(74,039,219	)
Other Assets and Liabilities—0.3%							590,036
Total Net Assets Applicable to Common Shareholders—100.0%						$	177,876,660

 

All percentages disclosed are calculated by dividing the indicated amounts by net assets applicable to common shareholders.

(a) Altus Midstream Co. and EMG Utica I Offshore Co-Investment L.P. are restricted securities exempt from registration under the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. See footnote 2(g) in the Notes to Financial Statements for further information.

(b) Non-income producing security.

(c) Affiliated company, as defined by the 1940 Act, in which the Fund owned 5% or more of the outstanding voting securities during the year ended November 30, 2018. There were no sales or purchases of the affiliated security during the year.

(d) All or a portion of these securities are held as collateral for the line of credit agreement. As of November 30, 2018, the total fair value of securities held as collateral for the line of credit agreement is $173,659,032.

(e) Distributions are paid-in-kind.

Salient Midstream & MLP Fund invested in the following industries as of November 30, 2018:

 

		Value				% of Total Investments
Gathering & Processing		$	55,955,446				22.3%
Liquids Transportation & Storage			73,611,002				29.3%
Marine Midstream			2,381,650				0.9%
Natural Gas Pipelines & Storage			96,860,161				38.5%
Oil Service & Other Specialty			621,766				0.2%
Other Energy & Infrastructure			21,231,460				8.5%
Refining & Marketing			664,358				0.3%
Total		$	251,325,843				100.0%

 

See accompanying Notes to Financial Statements.		8

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Schedule of Investments

Salient Midstream & MLP Fund

November 30, 2018

 

Salient Midstream & MLP Fund invested in securities with exposure to the following countries as of November 30, 2018:

 

		Value				% of Total Investments
Canada		$	35,203,947				14.0%
Monaco			2,381,650				0.9%
United States			213,740,246				85.1%
Total		$	251,325,843				100.0%

 

See accompanying Notes to Financial Statements.		9

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Statement of Assets, Liabilities and Shareholders’ Equity

Salient Midstream & MLP Fund

November 30, 2018

 

Assets:
Investments in affiliates, at value (cost $16,000,000)		$	24,366,320
Investments, at value (cost $210,251,291)			226,959,523
Cash and cash equivalents			1,144,560
Interest and dividends receivable			225,131
Prepaids and other assets			19,001
Total Assets			252,714,535
Liabilities:
Credit Facility			74,039,219
Payable to advisor			256,859
Interest payable			212,904
Line of credit commitment fees payable			7,163
Accounts payable and accrued expenses			321,730
Total Liabilities			74,837,875
Net Assets applicable to common shareholders		$	177,876,660
Net Assets Applicable to Common Shareholders:
Capital Stock, $0.01 par value; 17,722,449 shares issued and outstanding (unlimited shares authorized)		$	177,224
Paid-in capital			356,140,238
Total distributable earnings			(178,440,802	)
Net assets applicable to common shareholders		$	177,876,660
Net Asset Value:
Net assets applicable to common shareholders		$	177,876,660
Common shares outstanding			17,722,449
Net asset value per common share outstanding		$	10.04

 

See accompanying Notes to Financial Statements.		10

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Statement of Operations

Salient Midstream & MLP Fund

Year Ended November 30, 2018

 

Investment Income:
Distributions from master limited partnerships		$	5,972,501
Less return of capital on distributions			(5,972,501	)
Net investment income from master limited partnerships			—
Dividends from master limited partnership related companies			11,156,721
Less return of capital on dividends			(6,606,452	)
Net investment income from master limited partnership related companies			4,550,269
Dividends from affiliated master limited partnership related companies			1,074,747
Less return of capital on dividends			(1,074,747	)
Net investment income from affiliated master limited partnership related companies			—
Foreign taxes withheld			(190,736	)
Total Investment Income			4,359,533
Operating Expenses:
Investment advisory fee			3,242,714
Management fee			160,000
Administration fees			156,783
Custodian fees			20,251
Interest expense			2,111,164
Commitment fees			84,276
Professional fees			436,398
Transfer agent fees			18,682
Compliance fees			86,625
Other expenses			220,435
Total Expenses			6,537,328
Net Investment Loss			(2,177,795	)
Realized and Unrealized Gain (Loss):
Net realized gain on investments			1,983,994
Net realized gain on written options			503,738
Net realized loss on foreign currency			(1,953	)
Net realized gain			2,485,779
Change in unrealized appreciation/depreciation on:
Affiliated investments			835,008
Investments			(8,885,743	)
Written options			(9,783	)
Change in unrealized appreciation/depreciation from investments and written options			(8,060,518	)
Net realized and unrealized loss from investments and written options			(5,574,739	)
Net Decrease in Net Assets Applicable to Common Shareholders Resulting from Operations		$	(7,752,534	)

 

See accompanying Notes to Financial Statements.		11

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Statements of Changes in Net Assets

Salient Midstream & MLP Fund

 

		Year Ended November 30, 2018				Year Ended November 30, 2017
Operations:
Net investment income (loss)		$	(2,177,795	)		$	31,626
Net realized gain, net of income taxes			2,485,779				4,323,894
Change in unrealized depreciation			(8,060,518	)			(42,631,149	)
Net increase/(decrease) in net assets applicable to common shareholders resulting from operations			(7,752,534	)			(38,275,629	)
Distributions:
From distributable earnings			(1,017,739	)			—
From return of capital			(12,398,154	)			(17,297,109	)
Total distributions to common shareholders			(13,415,893	)			(17,297,109	)
Net decrease in net assets applicable to common shareholders		$	(21,168,427	)		$	(55,572,738	)
Net Assets:
Beginning of period			199,045,087				254,617,825
End of period(1)		$	177,876,660			$	199,045,087

 

(1) For the year ended November 30, 2017, included accumulated net investment loss of $(11,717,553).

 

See accompanying Notes to Financial Statements.		12

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Statement of Cash Flows

Salient Midstream & MLP Fund

For the Year Ended November 30, 2018

 

Cash flows from operating activities:
Net decrease in net assets resulting from operations		$	(7,752,534	)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by operating activities
Purchase of investments			(121,179,492	)
Proceeds from disposition of investments			139,235,609
Premiums from written options			2,415,592
Proceeds paid to cover written options			(2,085,674	)
Premiums paid on exercised written options			(60,165	)
Net realized gain on investments			(1,983,994	)
Net realized gain on written options			(503,738	)
Change in unrealized appreciation/depreciation from investments			8,885,743
Change in unrealized appreciation/depreciation from affiliated investments			(835,008	)
Change in unrealized appreciation/depreciation from written options			9,783
Change in operating assets and liabilities:
Deposit with broker for written options			18,401
Interest and dividends receivable			299,262
Prepaids and other assets			(10,791	)
Interest payable			70,051
Payable to Advisor			(16,156	)
Line of credit commitment fees payable			(5,171	)
Accounts payable and accrued expenses			72,824
Net cash provided by operating activities			16,574,542
Cash flows from financing activities:
Advances from credit facility			27,900,000
Repayments on credit facility			(30,850,000	)
Distributions paid to common shareholders			(13,415,893	)
Net cash used in financing activities			(16,365,893	)
Net increase in cash and cash equivalents			208,649
Cash and cash equivalents at beginning of year			935,911
Cash and cash equivalents at end of period		$	1,144,560
Supplemental schedule of cash activity:
Cash paid for interest during the period		$	2,041,113
Cash paid for line of credit commitment fees during the period			89,447
Supplemental schedule of non-cash activity:
Distributions received in kind		$	1,070,666

 

See accompanying Notes to Financial Statements.		13

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Financial Highlights

Salient Midstream & MLP Fund

 

		Year Ended November 30, 2018				Year Ended November 30, 2017				Year Ended November 30, 2016(1)				Year Ended November 30, 2015(1)				Year Ended November 30, 2014(1)
Per Common Share Data:(2)
Net Asset Value, beginning of period		$	11.23			$	14.37			$	14.23			$	27.80			$	24.29
Income/(loss) from operations:
Net investment income/(loss)(3)			(0.12	)			0.00	(4)			0.11				0.09				(0.19	)
Net realized and unrealized gain/(loss) from investments			(0.31	)			(2.16	)			1.17				(11.99	)			5.15
Net increase (decrease) resulting from operations			(0.43	)			(2.16	)			1.28				(11.90	)			4.96
Distributions paid from:
Net investment income			—				—				(0.11	)			(0.09	)			—
In excess of net investment income			(0.06	)			—				(1.00	)			(1.28	)			(1.14	)
Net realized gains			—				—				—				(0.20	)			—
Return of capital			(0.70	)			(0.98	)			(0.03	)			(0.10	)			(0.31	)
Net Asset Value, end of period		$	10.04			$	11.23			$	14.37			$	14.23			$	27.80
Per common share market value, end of period		$	8.41			$	10.22			$	13.40			$	12.82			$	26.20
Total investment return based on market value(5)			(11.05	)%			(17.08	)%			16.97	%			(46.45	)%			21.30	%
Ratios to Average Net Assets:
Net investment income/(loss)			(1.09	)%			0.01	%			1.01	%			0.41	%			(0.66	)%
Gross operating expenses (including tax expense/benefit)			3.26	%			2.40	%			2.34	%			(1.90	)%			3.34	%
Net operating expenses (including tax expense/benefit)			3.26	%			2.40	%			2.34	%			(1.90	)%			3.21	%(6)
Net operating expenses (excluding tax benefit/expense)			3.26	%			2.87	%			3.09	%			2.72	%			2.44	%(6)
Supplemental Data:
Net assets applicable to common shareholders, end of period (in 000s)		$	177,877			$	199,045			$	254,618			$	252,157			$	492,670
Average net assets (000s)		$	200,269			$	236,834			$	201,307			$	396,335			$	280,809
Portfolio turnover			45.27	%			23.72	%			93.44	%			28.64	%			46.39	%(7)
Asset coverage per $1,000 unit of senior indebtedness(8)		$	3,402			$	3,585			$	3,817			$	3,284			$	3,354
Short-term borrowings, end of period (000s)		$	74,039			$	76,989			$	90,389			$	110,400			$	209,300

 

(1) At and prior to November 30, 2016, Salient Midstream & MLP Fund presented information on a consolidated basis. See Note 1 for additional information.

(2) Information presented relates to a common share outstanding for periods indicated.

(3) Per share net investment income/(loss) has been calculated using the average daily shares method.

(4) Amount represents less than $0.01 per share.

(5) Total investment return is calculated assuming a purchase of common shares at the current market price on the first day of the period and a sale at the closing market price on the last day of the period reported (excluding brokerage commissions). Dividends and distributions are assumed for the purpose of this calculation to be reinvested at prices obtained under the DRIP (Dividend Reinvestment Plan).

(6) The amount includes an investment adviser waiver representing 0.13% for the periods ended November 30, 2014 to the expense ratios. Without this waiver, the expense ratios would be higher.

(7) In connection with the reorganization of Salient MLP & Energy Infrastructure Fund into Salient Midstream & MLP Fund, no purchases or sales occurred in an effort to realign the combined fund’s portfolio after the merger, and therefore none have been excluded from the portfolio turnover calculation. The value of investments acquired in the reorganization, which has been excluded from purchases in the portfolio turnover calculation, is $337,519,725.

(8) Calculated by subtracting the Fund’s total liabilities (not including borrowings) from the Fund’s total assets and dividing by the total number of senior indebtedness units, where one unit equals $1,000 of senior indebtedness.

 

See accompanying Notes to Financial Statements.		14

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Notes to Financial Statements

November 30, 2018

 

 

		15

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Notes to Financial Statements

November 30, 2018

 

 

		16

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Notes to Financial Statements

November 30, 2018

 

 

		17

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Notes to Financial Statements

November 30, 2018

 

 

 

The restricted securities held at November 30, 2018 are identified below and are also presented in the Fund’s Schedule of Investments.

 

Security		% of Net Assets				Acquisition Date				Shares/Units				Cost				Fair Value
Altus Midstream Co.^			2.4	%			11/8/2018				549,000			$	5,490,000			$	4,254,750
EMG Utica I Offshore Co-Investment, L.P.			13.7	%			2/22/2013				16,000,000			$	16,000,000			$	24,366,320
Total Restricted Securities			16.1	%										$	21,490,000			$	28,621,070

 

^ Effective December 26, 2018, the restriction on shares of Altus Midstream Co. was removed. The shares were released by the Transfer Agent and received by the Fund’s Custodian.

 

 

		18

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Notes to Financial Statements

November 30, 2018

 

 

		19

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Notes to Financial Statements

November 30, 2018

 

 

		20

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Notes to Financial Statements

November 30, 2018

 

 

The following is a summary categorization of the Fund’s investments based upon the three levels defined above as of November 30, 2018. The breakdown by category of equity securities is disclosed in the Schedule of Investments.

 

		LEVEL 1				LEVEL 2				LEVEL 3				Investments Valued at NAV as a Practical Expedient*				Total
		Investment Securities				Investment Securities				Investment Securities				Investment Securities				Investment Securities
Master Limited Partnerships and Related Companies
Gathering & Processing		$	27,334,376			$	4,254,750			$	—			$	24,366,320			$	55,955,446
Other			195,370,397				—				—								195,370,397
Total		$	222,704,773			$	4,254,750			$	—			$	24,366,320			$	251,325,843

 

* In accordance with ASC Subtopic 820-10, certain investments that are measured at fair value using the NAV (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliations of the fair value hierarchy to the amounts presented in the Statement of Assets, Liabilities and Shareholders’ Equity.

 

 

		21

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Notes to Financial Statements

November 30, 2018

 

 

The tax character of dividends paid to shareholders during the tax year ended in 2018 was as follows:

 

Ordinary Income		Net Long Term Capital Gain		Total Taxable Distributions		Tax Return of Capital		Total Distributions Paid
$1,017,739		$—		$1,017,739		$12,398,154		$13,415,893

The tax character of dividends paid to shareholders during the tax year ended in 2017 was as follows:

 

Ordinary Income		Net Long Term Capital Gains		Total Taxable Distributions		Tax Return of Capital		Total Distributions Paid
$—		$—		$—		$17,297,109		$17,297,109

 

		22

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Notes to Financial Statements

November 30, 2018

 

 

		23

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Notes to Financial Statements

November 30, 2018

 

 

		24

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Notes to Financial Statements

November 30, 2018

 

However, the following are details relating to the subsequent events through the date the financial statements were issued.

At a meeting of the Board held on October 23, 2018, the Trustees, including all of the Trustees who are not “interested persons” of the Trust (the “Independent Trustees,” as that term is defined in the 1940 Act), approved changes to the Fund’s benchmark. Effective on or about January 1, 2019, the Alerian Midstream Energy Select Index will replace the Alerian MLP Index as the Fund’s primary benchmark index because the new index more closely aligns to the Fund’s investment strategies as a result of changes made to the composition of the Alerian Midstream Energy Select Index.

 

		25

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Supplemental Information (Unaudited)

November 30, 2018

 

Trustees and Officers

The Fund’s operations are managed under the direction and oversight of the Board. Each Trustee serves for an indefinite term or until he or she reaches mandatory retirement as established by the Board. The Board appoints the officers of the Fund who are responsible for the Fund’s day-to-day business decisions based on policies set by the Board. The officers serve at the pleasure of the Board.

Trustee and Officer Fees

Remuneration payable to each Trustee who is not an “interested person” of the Advisor, as defined in the 1940 Act (the “Independent Trustees”) include an annual retainer of $50,000, an annual Board meeting fee of $25,000, a fee of $1,500 per day per informal Fund-related meeting, a fee of $1,500 per special telephonic Board meeting, an annual fee of $1,000 for membership on the audit committee, an annual fee of $500 for membership on the valuation committee, an annual fee of $1,000 for membership on the compliance committee, an annual fee of $6,000 for the audit committee chair, an annual fee of $5,000 for the compliance committee chair, and an annual fee of $2,500 for the valuation committee chair. Remuneration payable to the Lead Independent Trustee is an annual fee of $16,000. The aforementioned compensation to the Independent Trustees is payable quarterly and will be borne by the Fund on a pro rata basis with other funds in affiliated complexes having boards comprised of the same trustees. There are currently five Independent Trustees. In the interest of retaining Independent Trustees of the highest quality, the Board intends to periodically review such compensation and may modify it as the Board deems appropriate. The Fund’s Chief Compliance Officer (the “CCO”) is employed by the Advisor. The Fund has agreed to pay the Advisor approximately $81,000 per year as (i) an allocated portion of the compensation of an officer or employee of the Advisor to serve as CCO for the Fund (plus the cost of reasonable expenses related to the performance of the CCO’s duties, including travel expenses), and (ii) an allocation of the expenses of other officers or employees of the Advisor who serve in other compliance capacities for the Fund. The Board approves annually an allocation of such costs among such personnel.

The table below shows each Trustee and executive officer’s full name, address, and year of birth, the position held with the Trust, the length of time served in that position, his principal occupation during the past five years, and other directorships held by such Trustee. The address of each Trustee and officer is c/o Salient Midstream & MLP Fund, 4265 San Felipe, 8^th Floor, Houston, Texas 77027.

Interested Trustees*

 

Name and Year of Birth		Position(s) Held		Principal Occupation(s) During the Past 5 Years		Number of Portfolios in Fund Complex Overseen  by Trustee(1)		Other Directorships During Past 5 Years**
John A. Blaisdell* Year of Birth: 1960		Trustee (since inception)		Managing Director of Salient (since 2002).		7		Salient Private Access Funds (investment companies) (four funds) (since 2004); Endowment PMF Funds (investment companies) (three funds) (since 2014); Salient MF Trust (investment company) (two funds) (since 2012); Forward Funds (investment company) (four funds) (since 2015).

 

		26

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Supplemental Information (Unaudited)

November 30, 2018

 

Independent Trustees

 

Name and Year of Birth		Position(s) Held		Principal Occupation(s) During the Past 5 Years		Number of Portfolios in Fund Complex Overseen by Trustee(1)		Other Directorships During Past 5 Years**
Julie Allecta Year of Birth: 1946		Trustee (since 2018)		Retired Partner, Paul Hastings, Janofsky & Walker LLP (1999-2009); Member of Executive Committee and Governing Council, Independent Directors Council (since 2014); Director, WildCare Bay Area (2007-2017); Parliamentarian and Director, American Society of Botanical Artists, Northern California Chapter (2014-2015).		7		Litman Gregory Funds Trust (since 2013); Salient MF Trust (investment company) (two funds) (since 2015); Forward Funds (investment company) (four funds) (since 2012).
Jonathan P. Carroll Year of Birth: 1961		Trustee (since inception)		President, Lazarus Capital LLC (Investment company) (since 2006); President, Lazarus Energy Holdings, LLC (Investment holding company) (since 2006); President and CEO of Blue Dolphin Energy Company (since 2012); private investor (since 1988).		7		Salient Private Access Funds (investment companies) (four funds) (since 2004); Endowment PMF Funds (investment companies) (three funds) (since 2014); LRR Energy, L.P. (LRE) (energy company) (2014-2015); Blue Dolphin Energy Company (BDCO) (energy company) (since 2014); Salient MF Trust (investment company) (two funds) (since 2012); Forward Funds (investment company) (four funds) (since 2015).

 

		27

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Supplemental Information (Unaudited)

November 30, 2018

 

Name and Year of Birth		Position(s) Held		Principal Occupation(s) During the Past 5 Years		Number of Portfolios in Fund Complex Overseen by Trustee(1)		Other Directorships During Past 5 Years**
A. John Gambs Year of Birth: 1945		Trustee (since 2018); Audit Committee Chairperson (since 2018)		Director and Compensation Committee Chair, NMI Holdings, Inc. (2011-2012); Trustee and Audit Committee Chair, Barclays Global Investors Funds (2006-2010); Trustee and Audit Committee Chair, Master Investment Portfolio (2006-2010); Advisory Board Member, Fairview Capital Management (since 2009); Director, San Francisco Classical Voice (2011-2016); Member, Board of Governors San Francisco Symphony (since 2001); Director, The New Century Chamber Orchestra (since 2010); Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation (1988-1996); President and Director, Gambs Family Foundation (1997-2010).		7		Salient MF Trust (investment company) (two funds) (since 2015); Forward Funds (investment company) (four funds) (since 2012).
Dr. Bernard A. Harris, Jr. Year of Birth: 1956		Trustee (since inception)		Chief Executive Officer and Managing Partner, Vesalius Ventures, Inc. (venture investing) (since 2002); CEO, National Math and Science Initiative (non-profit) (since 2018); President and Founder, The Harris Foundation (non-profit) (since 1998); clinical scientist, flight surgeon and astronaut for NASA (1986-1996).		7		Salient Private Access Funds (investment companies) (four funds) (since 2009); Babson Funds (eleven funds) (since 2011); Monebo Technologies Inc. (since 2009); The National Math and Science Initiative (since 2008); Communities in Schools (since 2007); American Telemedicine Association (2007-2014); U.S. Physical Therapy, Inc. (since 2005); Houston Technology Center (2004-2016); The Harris Foundation, Inc. (since 1998); Salient MF Trust (investment company) (two funds) (since 2012); Forward Funds (investment company) (four funds) (since 2015).

 

		28

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Supplemental Information (Unaudited)

November 30, 2018

 

Name and Year of Birth		Position(s) Held		Principal Occupation(s) During the Past 5 Years		Number of Portfolios in Fund Complex Overseen by Trustee(1)		Other Directorships During Past 5 Years**
Haig G. Mardikian Year of Birth: 1947		Trustee (since 2018)		Owner of Haig G. Mardikian Enterprises, a real estate investment business (since 1971); General Partner of M&B Development, a real estate investment business (since 1983); General Partner of George M. Mardikian Enterprises, a real estate investment business (1983-2002); President and Director of Adiuvana-Invest, Inc., a real estate investment business (since 1989); President of the William Saroyan Foundation (since 1992); Managing Director of the United Broadcasting Company, radio broadcasting (1983-2001); Trustee of the International House of UC Berkeley (2001-2007); Director of the Downtown Association of San Francisco (1982-2006); Director of the Market Street Association (1982-2006); Trustee of Trinity College (1998-2007); Trustee of the Herbert Hoover Presidential Library (since 1997); Trustee of the Herbert Hoover Foundation (since 2002); Trustee of the Advisor California Civil Liberties Public Education Fund (1997-2006); Director of The Walnut Management Co., a privately held family investment company (since 2008); President of the Foundation of City College (2006-2010); Director of Near East Foundation (since 2007).		7		Salient MF Trust (investment company) (two funds) (since 2015); Forward Funds (investment company) (four funds) (since 1998); Chairman and Director of SIFE Trust Fund (1978-2001).

 

* This person’s status as an “interested” Trustee arises from his affiliation with the Advisor.

** This column includes only directorships of companies required to report to the SEC under the Securities Exchange Act of 1934 (i.e., public companies) or other investment companies registered under the 1940 Act.

(1) The Fund Complex for the purposes of this table consists of six (6) open-end funds in the Salient MF Trust and the Forward Funds (each, a “Trust”), with the series of each Trust being advised by either the Advisor or an affiliate of the Advisor; and one (1) public closed-end fund advised by either the Advisor or an affiliate of the Advisor.

 

		29

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Supplemental Information (Unaudited)

November 30, 2018

 

Officers of the Fund Who Are Not Trustees

 

Name and Year of Birth		Position(s) with the Fund		Principal Occupation(s) During Past 5 Years
Gregory A. Reid Year of Birth: 1965		President and Chief Executive Officer (since inception)		Trustee, Salient Midstream & MLP Fund (2012-2018); President, MLP Complex, Salient, since 2011; Managing Partner (Houston), Telemus Capital Partners (2007-2010); Senior Vice President, Merrill Lynch Private Banking Group (1997-2007).
Matt Hibbetts Year of Birth: 1982		Vice President (since 2018)		Chief Financial Officer, Salient (since 2018); Vice President, Salient MF Trust (since 2018); Vice President, Forward Funds (since 2018); Vice President, Salient Midstream & MLP Fund (since 2018); Chief Operating Officer —MLP Investments, Salient (2013-2018).
Barbara H. Tolle Year of Birth: 1949		Treasurer and Principal Financial Officer (since 2017)		Treasurer and Principal Financial Officer, Salient MF Trust (since 2017); Treasurer and Principal Financial Officer, Salient Midstream and MLP Fund (since 2017); Treasurer and Principal Financial Officer, Forward Funds (since 2006); Treasurer, Salient Private Access Funds (four funds) (since 2017); Treasurer, Endowment PMF Funds (three funds) (since 2017); Vice President, Director of Fund Accounting and Operations, Forward Management, LLC (since 2006); Vice President and Director, Fund Accounting and Administration, PFPC Inc. (1998-2006).
Paul A. Bachtold Year of Birth: 1973		Chief Compliance Officer (since inception)		Chief Compliance Officer and Secretary, Forward Securities (since 2016); Chief Compliance Officer, Forward Funds (since 2016); Chief Compliance Officer, Forward Management, LLC (since 2015); Chief Compliance Officer, Salient Private Access Funds (since 2010); Chief Compliance Officer, Endowment PMF Funds (since 2014); Chief Compliance Officer, Salient (since 2010); Chief Compliance Officer, Salient Midstream & MLP Fund (since 2012); Chief Compliance Officer, Salient MF Trust (since 2012).
Kristen Bayazitoglu Year of Birth: 1981		Secretary (Since 2018)		Secretary, Forward Funds (since 2018); Secretary, Salient MF Trust (since 2018); Secretary, Salient Midstream & MLP Fund (since 2018); Vice President, Forward Funds (2017-2018); Vice President, Salient MF Trust (2017-2018); Vice President, Salient Midstream & MLP Fund (2017-2018); Chief Operating Officer, Salient Partners, L.P. (since 2017); Vice President, Salient Private Access Funds (since 2017); Vice President, Endowment PMF Funds (since 2017); Vice President of Operations, Salient Partners, L.P. (March 2012-June 2017).

Form N-Q Filings

The Fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available on the SEC website at http://www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, DC and information regarding operation of the Public Reference Room may be obtained by calling (800) SEC-0330.

 

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Supplemental Information (Unaudited)

November 30, 2018

 

Forward-Looking Statements

This report contains “forward-looking statements” within the meaning of the 1933 Act and the Securities Exchange Act of 1934. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect the Fund’s actual results are the performance of the portfolio of investments held by it, the conditions in the U.S. and international financial, petroleum and other markets, the price at which shares of the Fund will trade in the public markets and other factors discussed in filings with the SEC.

Proxy Voting Policies

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (i) without charge, upon request by calling (800) 809-0525; and (ii) on the SEC website at http://www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 of any year will be made available on or around August 30 of that year (i) without charge, upon request by calling (800) 809-0525; and (ii) on the SEC website at http://www.sec.gov.

Statement of Additional Information

The Statement of Additional Information (“SAI”) includes additional information about the Fund’s Trustees and is available upon request without charge by calling (800) 809-0525 or by visiting the SEC website at http://www.sec.gov.

Certifications

The Fund’s Chief Executive Officer has submitted to the NYSE the annual CEO certification as required by Section 303A.12(a) of the NYSE Listed Fund Manual.

Board Consideration of the Investment Management Agreement

At an in-person meeting of the Board held on October 23, 2018, the Board, including the Trustees who are not “interested persons” as that term is defined in the Investment Company Act of 1940, as amended (the “Independent Trustees”), considered and approved the continuation of the Investment Management Agreement (the “Advisory Agreement”) between the Fund and the Advisor. In preparation for review of this agreement, the Board requested the Advisor to provide detailed information which the Board determined to be reasonably necessary to evaluate the agreement. The Independent Trustees held a telephonic meeting of the Board on October 5, 2018 (the “Pre-15(c) Meeting”) to review and discuss materials from the Advisor, and also met in-person among themselves prior to the October 23, 2018 meeting to review and discuss the response materials of the Advisor in support of the consideration of the Advisory Agreement. At the request of the Independent Trustees, the Advisor made presentations regarding the materials and responded to questions from the Independent Trustees relating to, among other things, portfolio management, the Fund’s investment program, Fund and Advisor compliance programs, Fund performance including benchmarks and comparisons to other funds, Fund fee levels, other portfolios (including fees) managed by the Advisor and its affiliates and the Advisor’s profitability (including revenue of the Advisor across all its funds). The Board, including the Independent Trustees, also took into consideration information furnished for the Board’s review and consideration throughout the year at regular Board meetings. The Independent Trustees were assisted at all times by independent counsel.

The Independent Trustees met with counsel in executive session without the presence of Advisor personnel, along with independent counsel. After the executive session was adjourned, the meeting was reconvened and the other attendees rejoined the meeting. The Independent Trustees reported that the extensive prior discussions among themselves and with independent counsel, including during the Pre-15(c) call, and their reviews of the Advisor’s response materials, left them satisfied that the Advisor had responded to requests. The Independent Trustees further reported that they had concluded that the Advisory Agreement enables the Fund’s shareholders to obtain high quality services at a cost that is appropriate, reasonable, and in the interests of investors. The Independent Trustees also reported that they took into account many factors, including overall down energy and MLP markets, the Fund’s leverage and fee structure, and believed management has taken reasonable steps in managing the Fund related to the energy markets. They stated that in light of the Advisor’s efforts, the prudent exercise of judgment warranted renewal of the advisory fee. It also was noted that the Board’s decision to renew the Advisory Agreement was not based on any single factor, but rather was based on a comprehensive consideration of all the information provided to the Board at its meetings throughout the year. Upon consideration of these and other factors, the Board also determined:

The nature, extent and quality of the advisory services provided. With respect to the Advisory Agreement, the Board considered: the specialized expertise required to manage the Fund’s strategy, personnel and staffing at the Advisor, the background and experience of key investment personnel; the Advisor’s focus on analysis of complex asset categories; the Advisor’s disciplined investment approach and commitment to investment principles; the Advisor’s significant investment in

 

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Supplemental Information (Unaudited)

November 30, 2018

 

and commitment to personnel, including hiring and extensive training; the Advisor’s significant compliance, risk oversight and tax reporting efforts; and, the Advisor’s oversight of and interaction with service providers.

The Board concluded that the nature, extent and quality of the management and advisory service provided were appropriate and thus supported a decision to renew the Advisory Agreement. The Board also concluded that the Advisor would be able to provide during the coming year quality of investment management and related services, and that these services are appropriate in scope and extent in light of the Fund’s operations, the competitive landscape and investor needs.

The investment performance of the Fund. The Board evaluated the comparative information provided by the Advisor regarding the Fund’s investment performance, distributions and information on the performance of other investment funds and indices, including the relevance of various indices. The Board also considered the various performance reports received throughout the year. The Board noted the drawdown in the MLP and energy markets and declines in energy prices during the year. On the basis of the Trustees’ assessment, the Trustees concluded that the Advisor, although faced with declines in the Fund’s area of investment focus during the year, was capable of generating a level of investment performance that is appropriate in light of the Fund’s investment objective, policies and strategies and competitive with comparable funds.

The cost of advisory service provided and the level of profitability. In analyzing the cost of services and profitability of the Advisor, the Board considered the revenues earned and expenses incurred by the Advisor. The Board took into account the significant investment by and cost to the Advisor in appropriate personnel and service infrastructure to support the operations and management of the Fund. On the basis of the Board’s review of the fees charged by the Advisor for investment advisory and related services, the specialized nature of the Fund’s investment program, the Fund’s use of leverage, the Advisor’s financial information and the costs associated with managing the Fund, the Board concluded that the level of investment management fees, and the Advisor’s profitability, are reasonable in light of the services provided, the management fees and overall expense ratios of comparable investment companies, and the anticipated profitability of the relationship between the Fund and the Advisor.

The extent to which economies of scale would be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of Fund investors. While noting that the management fees will not decrease as the level of Fund assets increase, the Board concluded that as a closed-end fund of a relatively fixed-scale the management fees reflect the Fund’s complex operations, the current markets for the MLP asset category, the economic environment for the Advisor, including its continued investment relating to support and monitoring of the Fund, and the competitive nature of the investment company market as relevant to the Fund. The Board noted that it would have the opportunity to periodically re-examine the matter of economies of scale, as well as the appropriateness of management fees payable to the Advisor.

Benefits (such as soft dollars) to the Advisor from its relationship with the Fund. The Board concluded that other benefits derived by the Advisor from its relationship with the Fund, to the extent such benefits are identifiable or determinable, are reasonable and fair, result from the provision of appropriate services to the Fund and investors therein, and are consistent with industry practice and the best interests of the Fund and its partners. In this regard, the Board noted that although the Advisor may use soft dollars, it has not done so to date with respect to the Fund.

Other considerations. The Board determined that the Advisor has made a continuing and substantial commitment both to the recruitment of high quality personnel, monitoring and investment decision-making, and maintained and expanded the financial, compliance and operational resources reasonably necessary to manage the Fund in a professional manner that is consistent with the best interests of the Fund and its investors. The Trustees also concluded that the Advisor continues to make a significant entrepreneurial commitment to the management and success of the Fund.

 

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Privacy Policy (Unaudited)

 

The Fund recognizes the importance of securing personal financial information. It is our policy to safeguard any personal and financial information that may be entrusted to us. The following is a description of the Fund’s policy regarding disclosure of nonpublic personal information.

We collect nonpublic personal information as follows:

We collect information about our investors, including, but not limited to, the investor’s name, address, telephone number, e-mail address, social security number and date of birth. We collect that information from subscription agreements, other forms of correspondence that we receive from investors, from personal conversations and from affiliated entities as permitted by law.

We receive information about investor transactions with us, including, but not limited to, account number, account balance, investment amounts, withdrawal amounts and other financial information.

We are permitted by law to disclose nonpublic information we collect, as described above, to the Fund’s service providers, including the Fund’s investment advisor, sub-advisors, servicing agent, independent administrator, custodian, legal counsel, accountant and auditor. We do not disclose any nonpublic information about our current or former investors to nonaffiliated third parties, except as required or permitted by law. We restrict access to investor nonpublic personal information to those persons who require such information to provide products or services to investors. We maintain physical, electronic and procedural safeguards that comply with federal standards to guard investors’ nonpublic personal information.

If an investor’s investment relationship with the Fund involves a financial intermediary, including, but not limited to, a broker-dealer, bank or trust company, the privacy policy of such investor’s financial intermediary would govern how any nonpublic personal information would be shared by them with nonaffiliated third parties.

 

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4265 San Felipe

8th Floor

Houston, Texas 77027

800-809-0525

www.salientpartners.com

 

 

    

Salient Midstream & MLP Fund

NYSE: SMM

 

 

 

 

 

11/18

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Item 2.

Code of Ethics.

(a) The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. This code of ethics is included as Exhibit 12(a)(1).

(b) During the period covered by the report, with respect to the registrant’s code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions; there have been no amendments to, nor any waivers granted from, a provision that relates to any element of the code of ethics definition enumerated in paragraph (b) of this Item 2.

 

Item 3.

Audit Committee Financial Expert.

The registrant’s board of trustees has determined that there is at least one audit committee financial expert serving on its audit committee. John Gambs is the “audit committee financial expert” and is considered to be “independent” as each term is defined in Item 3 of Form N-CSR.

 

Item 4.

Principal Accountant Fees and Services.

 

		2018				2017
Audit Fees		$	76,500			$	87,938
Audit-Related Fees			0				0
Tax Fees			0				0
All Other Fees			0				0

(e)(1) Disclose the audit committee’s pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.

The audit committee may delegate its authority to pre-approve audit and permissible non-audit services to one or more members of the committee. Any decision of such members to pre-approve services shall be presented to the full audit committee at its next regularly scheduled meeting.

(2) Disclose the percentage of services described in each of paragraphs (b) through (d) of this item that were approved by the audit committee pursuant to paragraph (c) (7)(i)(c) of Rule 2-01 of Regulation S-X.

 

2018		2017
0%		0%

(f) Not applicable.

(g) Disclose the aggregate non-audit fees billed by the registrant’s accountant for services rendered to registrant, and rendered to the registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant.

 

2018		2017
$0		$0

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(h) Not applicable.

 

Item 5.

Audit Committee of Listed Registrants.

(a) The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 (15 U.S.C 78c(a)(58)(A)), and is comprised of Julie Allecta, Jonathan P. Carroll, A. John Gambs, Dr. Bernard A. Harris, Jr., and Haig G. Mardikian.

 

Item 6.

Investments.

(a) The registrant’s Schedule of Investments as of the close of the reporting period is included in the Report to the Stockholders filed under Item 1 of Form N-CSR.

(b) Not applicable.

 

Item 7.

Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

A closed-end management investment company that is filing an annual report on this Form N-CSR must, unless it invests exclusively in non-voting securities, describe the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities, including the procedures that the company uses when a vote presents a conflict between the interests of its shareholders, on the one hand, and those of the company’s investment adviser; principal underwriter; or any affiliated person (as defined in section 2(a)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(3)) and the rules thereunder) of the company, its investment adviser, or its principal underwriter, on the other. Include any policies and procedures of the company’s investment adviser, or any other third party, that the company uses, or that are used on the company’s behalf, to determine how to vote proxies relating to portfolio securities.

 

Item 8.

Portfolio Managers of Closed-End Management Investment Companies.

Greg A. Reid and Frank T. Gardner III (the “portfolio managers”) are primarily responsible for the day-to-day management of the registrant’s portfolio.

(a)(1) The following table provides biographical information about the registrant’s portfolio managers as of the date of this filing:

 

Name		Position(s) Held With Registrant and Length of Time Served		Principal Occupation During Past 5 Years
Greg A. Reid		Trustee, President and Chief Executive Officer (since inception)		President, MLP Complex, Salient, since 2011; Managing Partner (Houston), Telemus Capital Partners, 2007-2010; Merrill Lynch Private Banking Group, 1997-2007.
Frank T. Gardner III		Managing Director and Portfolio Manager since 2010.		Portfolio Manager of Salient Capital Advisors, LLC since 2010, Director of Research from 2010 to 2015.

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(a)(2) The following table provides information about the other accounts managed on a day-to-day basis by the portfolio managers as of November 30, 2018:

 

Name		Number of Accounts				Total Assets of Accounts				Number of Accounts Subject to a Performance Fee				Total Assets of Accounts Subject to a Performance Fee
Greg A. Reid
Registered investment companies			1			$	1,085M				0			$	0
Other pooled investment companies			4			$	1,138M				1			$	81M
Other accounts			416			$	1,939M				1			$	9M
Frank T. Gardner III
Registered investment companies			1			$	1,085M				0			$	0
Other pooled investment companies			4			$	1,138M				1			$	81M
Other accounts			416			$	1,939M				1			$	9M

Conflicts of Interest with the Investment Adviser

Conflicts of interest may arise because Salient Partners, LP (“Salient”) and its affiliates generally carry on substantial investment activities for other clients in which we will have no interest. Salient or its affiliates may have financial incentives to favor certain of such accounts over us. Any of their proprietary accounts and other customer accounts may compete with us for specific trades. Salient or its affiliates may buy or sell securities for us which differ from securities bought or sold for other accounts and customers, although their investment objectives and policies may be similar to ours. Situations may occur when we could be disadvantaged because of the investment activities conducted by Salient or its affiliates for their other accounts. Such situations may be based on, among other things, legal or internal restrictions on the combined size of positions that may be taken for us and the other accounts, thereby limiting the size of our position, or the difficulty of liquidating an investment for us and the other accounts where the market cannot absorb the sale of the combined position.

Our investment opportunities may be limited by affiliations of Salient or its affiliates with MLPs and Energy Infrastructure Companies. In addition, to the extent that Salient sources and structures private investments in MLPs and Energy Infrastructure Companies, certain employees of Salient may become aware of actions planned by these companies, such as acquisitions, that may not be announced to the public. Although Salient maintains procedures to ensure that any material non-public information available to certain Salient employees not be shared with those employees responsible for the purchase and sale of publicly traded securities, it is possible that we could be precluded from investing in a company about which Salient has material non-public information.

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The Advisor also manages other funds that invest primarily in MLPs (collectively “Affiliated Funds”) and some of the Affiliated Funds have investment objectives that are similar to or overlap with ours. In particular, certain Affiliated Funds invest in MLPs and Midstream Energy Infrastructure Companies. Furthermore, the Advisor may at some time in the future, manage other investment funds with the same investment objective as ours.

Investment decisions for us are made independently from those of Salient’s other clients; however, from time to time, the same investment decision may be made for more than one fund or account. When two or more clients advised by Salient or its affiliates seek to purchase or sell the same publicly traded securities, the securities actually purchased or sold are allocated among the clients on a good faith equitable basis by Salient in its discretion in accordance with the clients’ various investment objectives and procedures adopted by Salient and approved by our Board of Trustees. In some cases, this system may adversely affect the price or size of the position that we may obtain. In other cases, however, our ability to participate in volume transactions may produce better execution for us.

We and our affiliates, including Affiliated Funds, may be precluded from co-investing in private placements of securities, including in any portfolio companies that we control. Except as permitted by law, Salient will not co-invest its other clients’ assets in the private transactions in which we invest. Salient will allocate private investment opportunities among its clients, including us, based on allocation policies that take into account several suitability factors, including the size of the investment opportunity, the amount of funds that each client has available for investment and the client’s investment objectives. These allocation policies may result in the allocation of investment opportunities to an Affiliated Fund rather than to us. The policies contemplate that Salient will exercise discretion, based on several factors relevant to the determination, in allocating the entirety, or a portion, of such investment opportunities to an Affiliated Fund, in priority to other prospectively interested advisory clients, including us. In this regard, when applied to specified investment opportunities that would normally be suitable for us, the allocation policies may result in certain Affiliated Funds having greater priority than us to participate in such opportunities depending on the totality of the considerations, including, among other things, our available capital for investment, our existing holdings, applicable tax and diversification standards to which we may then be subject and the ability to efficiently liquidate a portion of our existing portfolio in a timely and prudent fashion in the time period required to fund the transaction.

The investment management fee paid to our Adviser is based on the value of our assets, as periodically determined. A significant percentage of our assets may be illiquid securities acquired in private transactions for which market quotations will not be readily available. Although we will adopt valuation procedures designed to determine valuations of illiquid securities in a manner that reflects their fair value, there typically is a range of prices that may be established for each individual security. Senior management of our Adviser, our Board of Trustees and its Valuation Committee, and a third-party valuation firm might participate in the valuation of our securities.

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(a)(3) As of November 30, 2018:

Compensation

Messrs. Gardner and Reid are compensated by the Adviser through partnership distributions from Salient based on the amount of assets they manage, and they receive a portion of the advisory fees applicable to those accounts, which, with respect to certain amounts, as noted above, are based in part on the performance of those accounts. Some of the other accounts managed by Messrs. Gardner and Reid have investment strategies that are similar to ours. However, Salient manages potential conflicts of interest by allocating investment opportunities in accordance with its allocation policies and procedures. Messrs. Gardner and Reid did not own any of the Fund’s equity securities prior to this offering; however, through their limited partner interests in the parent company of the adviser, which owned all the Fund’s outstanding shares as of April 23, 2012 (with a value of approximately $100,000), Messrs. Gardner and Reid could be deemed to indirectly own a portion of the Fund’s securities.

(a)(4) As of November 30, 2018:

Securities Beneficially Owned in the Registrant by Portfolio Managers

The following table provides information about the dollar range of equity securities in the registrant beneficially owned by the portfolio managers:

 

Portfolio Manager		Aggregate Dollar Range of Beneficial Ownership in the Registrant
Greg A. Reid		$50,001 - $100,000
Frank T. Gardner III		NONE

 

Item. 9.

Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

 

Period		(a) Total Number of Shares (or Units) Purchased				(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
December 1, 2017 through December 31, 2017			—			N/A		N/A		N/A
January 1, 2018 through January 31, 2018			—			N/A		N/A		N/A
February 1, 2018 through February 28, 2018			—			N/A		N/A		N/A
March 1, 2018 through March 31, 2018			—			N/A		N/A		N/A
April 1, 2018 through April 30, 2018			—			N/A		N/A		N/A
May 1, 2018 through May 31, 2018			—			N/A		N/A		N/A
June 1, 2018 through June 30, 2018			—			N/A		N/A		N/A
July 1, 2018 through July 31, 2018			—			N/A		N/A		N/A
August 1, 2018 through August 31, 2018			—			N/A		N/A		N/A
September 1, 2018 through September 30, 2018			—			N/A		N/A		N/A
October 1, 2018 through October 31, 2018			—			N/A		N/A		N/A
November 1, 2018 through November 30, 2018			—			N/A		N/A		N/A
Total			—

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Item 10.

Submission of Matters to a Vote of Security Holders.

No material changes to the procedures by which the shareholders may recommend nominees to the registrant’s Board of Trustees have been implemented after the registrant’s last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.

 

Item 11.

Controls and Procedures.

 

(a)

The registrant’s principal executive officer and principal financial officer, or persons performing similar functions, have concluded, based on their evaluation of the registrant’s disclosure controls and procedures as conducted within 90 days of the filing date of this report, that these disclosure controls and procedures are adequately designed and are operating effectively to ensure that information required to be disclosed by the registrant on Form N-CSR is (i) accumulated and communicated to the investment company’s management, including its certifying officers, to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect the registrant’s internal control over financial reporting.

 

Item 12.

Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.

Not applicable

 

Item 13.

Exhibits.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.