Edgar Filing: KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

N-30B-2

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Midstream/Energy Fund

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KMF Quarterly Report

February 28, 2019

CONTENTS


	Page

Adoption of an Optional Delivery Method for Shareholder Reports (Rule 30e-3 Notice)		1

Letter to Stockholders		2

Management Discussion		4

Schedule of Investments		9

Statement of Assets and Liabilities		12

Statement of Operations		13

Statement of Changes in Net Assets Applicable to Common Stockholders		14

Statement of Cash Flows		15

Financial Highlights		16

Notes to Financial Statements		20

Glossary of Key Terms		38

Repurchase Disclosure		39

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: This report of Kayne Anderson Midstream/Energy Fund, Inc. (the “Fund”) contains “forward-looking statements” as defined under the U.S. federal securities laws. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to materially differ from the Fund’s historical experience and its present expectations or projections indicated in any forward-looking statement. These risks include, but are not limited to, changes in economic and political conditions; regulatory and legal changes; MLP industry risk; leverage risk; valuation risk; interest rate risk; tax risk; and other risks discussed in the Fund’s filings with the Securities and Exchange Commission (“SEC”). You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The Fund undertakes no obligation to publicly update or revise any forward-looking statements made herein. There is no assurance that the Fund’s investment objectives will be attained.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

ADOPTION OF AN OPTIONAL DELIVERY METHOD FOR SHAREHOLDER REPORTS

Rule 30e-3 Notice

Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of Kayne Anderson Midstream/Energy Fund, Inc.’s (the “Fund” or “KMF”) annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on the Fund’s website (www.kaynefunds.com), and you will be notified by mail each time a report is posted and provided with a website link to access the report.

If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund or your financial intermediary electronically by calling the Fund at 1-877-657-3863 or contacting your financial intermediary.

You may elect to receive all future reports in paper free of charge. You can inform the Fund or your financial intermediary that you wish to continue receiving paper copies of your shareholder reports by calling the Fund at 1-877-657-3863 or contacting your financial intermediary. Your election to receive reports in paper will apply to all funds managed by KA Fund Advisors, LLC or held with your financial intermediary.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

LETTER TO STOCKHOLDERS

April 22, 2019

Dear Stockholders:

We are pleased to include a letter to KMF’s stockholders in this quarterly report. Historically, we have only included letters in the Fund’s annual reports, but believe that investors would benefit from more frequent updates from us on a go-forward basis.

Our goal with these quarterly letters is to provide a summary of KMF’s performance as well as a brief overview of the key trends impacting the Fund’s investments. We hope that you find this information helpful, and invite you to visit our recently redesigned website at kaynefunds.com for more information about the Fund. We also encourage investors to listen to podcasts posted on our website (they can be found on the “Insights” link). These podcasts cover a variety of topics, including the Fund’s performance, key industry trends and our outlook for the midstream sector.

Performance Highlights

KMF performed well during the first quarter of fiscal 2019, generating a 6.2% Net Asset Value Return, which is equal to the change in net asset value per share plus cash distributions paid during the period (assuming reinvestment through our dividend reinvestment program). Net Asset Value Return is the primary measure we use to gauge the Fund’s performance.

For the quarter, KMF’s Net Asset Value Return outperformed the Alerian MLP Index (total return of 2.4%) but modestly underperformed the Alerian Midstream Energy Select Index (total return of 6.4%). The main drivers of KMF’s performance during the quarter were as follows:


	Top Five Contributors to Performance					Bottom Five Contributors to Performance

	Name	Total Return				Name	Total Return
1.	Enbridge Inc.		14.8	%	1.	Targa Resources Corp.		(7.9	)%
2.	Kinder Morgan, Inc.		13.5	%	2.	KNOT Offshore Partners LP		(7.2	)%
3.	ONEOK, Inc.		6.0	%	3.	Antero Midstream Partners LP		(12.7	)%
4.	The Williams Companies, Inc.		6.9	%	4.	EQT Midstream Partners, LP		(16.4	)%
5.	Pembina Pipeline Corporation		10.2	%	5.	DCP Midstream, LP		(3.2	)%

Given how challenging market conditions were during December, we were pleased to generate a positive Net Asset Value Return for the first quarter. The Alerian MLP Index (“AMZ”) declined 9.4% during December — re-testing lows not seen since February 2016. The midstream sector has recovered since that time, with the AMZ generating a total return of 17.5% on a calendar year basis (through April 22^nd).

Market Update

Fourth quarter financial results for the midstream sector, which were announced in early 2019, were generally in-line with our expectations — capping off what was a very solid year of financial results for the industry. Driven by volume growth and new projects being placed into service, many large midstream companies generated record levels of EBITDA and distributable cash flow during 2018. We expect a continuation of this trend in 2019.

Given the volatility in commodity prices over the last few years, it is easy to focus on day-to-day prices swings and lose perspective on the progress made over a longer period of time. Today’s midstream sector is very different from the one of five years ago. We believe tremendous progress has been made addressing investors’ concerns and positioning the sector for future success.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

LETTER TO STOCKHOLDERS

The wave of simplification transactions has transformed the industry — today it is a mix of companies structured as MLPs and taxable corporations. These simplification transactions have eliminated incentive distribution rights for most of the midstream MLPs and resulted in a better alignment of economic interests between limited partners and the general partner. Additional benefits of these transactions are simplified ownership structures and improved corporate governance. We believe more work needs to be done to enhance corporate governance for many MLPs, but acknowledge things have improved relative to a few years ago. Focusing on financial metrics, companies in the industry have meaningfully reduced leverage levels and improved distribution coverage ratios since early 2016. Another area of improvement worth mentioning is the progress that has been made by the sector on becoming “self-financing.” The industry has done a very good job of becoming less reliant on the capital markets to finance growth projects — instead using internally generated cash flow, asset sales and joint ventures to fund capital expenditures. The net result of these changes is a sector that is on much sounder financial footing and, in our opinion, better positioned to generate attractive returns for investors over the next few years.

We believe the most impactful trend for the energy sector at this time is the push by investors for companies to focus on capital efficiency and shareholder returns. In simple terms, investors are demanding companies — in all facets of the energy industry — change the way they do business. We echo this sentiment. Thus far, we have seen companies in the upstream sector respond to these demands. The upstream industry is moving away from a “growth at all costs” mindset — something we believe will improve the overall health of the domestic energy sector. Based on our estimates, capital expenditures for upstream companies will decline this year relative to 2018 levels. While this should result in a decline in the growth rate of domestic production, we expect production will continue to grow for many years — a positive trend for the midstream industry. Investors in the midstream sector are making similar demands to management teams as their upstream peers: be very disciplined in your spending plans over the next few years. We agree with this message and believe it is imperative that midstream companies focus on returns on capital employed as well as ways they can return free cash flow to shareholders. We expect to provide more commentary on this topic as the year unfolds.

We appreciate your investment in the Fund and look forward to providing future updates.

KA Fund Advisors, LLC

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

MANAGEMENT DISCUSSION

(UNAUDITED)

Fund Overview

Kayne Anderson Midstream/Energy Fund, Inc. (“KMF”) is a non-diversified, closed-end fund that commenced operations in November 2010. Our investment objective is to provide a high level of total return with an emphasis on making cash distributions to our stockholders. We seek to achieve that investment objective by investing at least 80% of our total assets in the securities of companies in the Midstream/Energy Sector, consisting of (a) Midstream MLPs, (b) Midstream Companies, (c) Other MLPs and (d) Other Energy Companies. We anticipate that the majority of our investments will consist of investments in Midstream MLPs and Midstream Companies. Please see the Glossary of Key Terms for a description of these investment categories and for the meaning of capitalized terms not otherwise defined herein.

As of February 28, 2019, we had total assets of $926 million, net assets applicable to our common stockholders of $638 million (net asset value of $13.04 per share), and 49 million shares of common stock outstanding. As of February 28, 2019, we held $896 million in equity investments and $20 million in debt investments.

Recent Events

On March 28, 2019, we announced that our Board of Directors approved a program to purchase up to $20 million of common stock. As of March 27, 2019 our common stock was trading at a 14.0% discount to NAV. The repurchase program will continue until the earlier of (i) the repurchase of $20 million of common stock or (ii) September 30, 2019. Management will have discretion to authorize its agents to make purchases in the open market when shares are trading at a discount of at least 8% to our NAV per share. As of April 22, 2019, we have repurchased 592,079 shares of our common stock at an average price of $12.12 (total cost of $7.2 million) which represented an average discount to our NAV per share of approximately 12.0%.

Our Top Ten Portfolio Investments

Listed below are our top ten portfolio investments by issuer as of February 28, 2019.


Holding		Category⁽¹⁾	Amount ($ in millions)		Percent of Long-Term Investments
1.	ONEOK, Inc.	Midstream Company	$	90.7		9.9	%
2.	The Williams Companies, Inc.	Midstream Company		72.0		7.9
3.	Plains GP Holdings, L.P.⁽²⁾	Midstream Company		67.2		7.3
4.	Enbridge Inc.	Midstream Company		59.4		6.5
5.	Targa Resources Corp.	Midstream Company		50.4		5.5
6.	Kinder Morgan, Inc.	Midstream Company		47.3		5.2
7.	Pembina Pipeline Corporation	Midstream Company		42.9		4.7
8.	Capital Product Partners L.P. — Class B Units⁽³⁾	Midstream Company		35.5		3.9
9.	TransCanada Corporation	Midstream Company		34.2		3.7
10.	Energy Transfer LP	Midstream MLP		33.4		3.6

			$	533.0		58.2	%

(1)	See Glossary of Key Terms for definitions.

(2)	Our investment includes our holdings of Plains GP Holdings, L.P. (“PAGP”) and our interest in Plains AAP, L.P. (“PAGP-AAP”). Our ownership of PAGP-AAP is exchangeable on a one-for-one basis into either PAGP shares or Plains All American Pipeline, L.P. units at our option.

(3)

On March 27, 2019, Capital Product Partners L.P. (“CPLP”) and DSS Holdings L.P. (“DSS”) completed their previously announced combination whereby CPLP spun off its crude and product tanker business into a separate publicly listed company, which merged with DSS. In connection with this transaction, all of the Fund’s CPLP Class B Units were redeemed for cash at $9.00 per unit.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

MANAGEMENT DISCUSSION

(UNAUDITED)

Results of Operations — For the Three Months Ended February 28, 2019

Investment Income. Investment income totaled $4.8 million for the quarter and consisted primarily of net dividends and distributions and interest income on our investments. We received $15.4 million of dividends and distributions, of which $11.1 million was treated as return of capital. Interest income was $0.5 million.

Operating Expenses. Operating expenses totaled $6.0 million, including $2.7 million of investment management fees, $2.1 million of interest expense, $0.8 million of preferred stock distributions and $0.4 million of other operating expenses. Interest expense includes $0.2 million of non-cash amortization of debt issuance costs. Preferred stock distributions include $0.05 million of non-cash amortization.

Net Investment Loss. Our net investment loss totaled $1.2 million.

Net Realized Losses. We had net realized losses of $11.5 million, which included $0.2 million of net realized gains from option activity.

Net Change in Unrealized Gains. We had a net increase in unrealized gains of $47.9 million from investments.

Net Increase in Net Assets Resulting from Operations. We had an increase in net assets resulting from operations of $35.2 million. This increase was comprised of net investment loss of $1.2 million, net realized losses of $11.5 million and a net increase in unrealized gains of $47.9 million, as noted above.

Distributions to Common Stockholders

Our distributions are funded generally by net distributable income (“NDI”) generated from our portfolio investments. NDI is the amount of income received by us from our portfolio investments less operating expenses, subject to certain adjustments as described below. NDI is not a financial measure under the accounting principles generally accepted in the United States of America (“GAAP”). Refer to the “Reconciliation of NDI to GAAP” section below for a reconciliation of this measure to our results reported under GAAP.

Income from portfolio investments includes (a) cash dividends and distributions, (b) paid-in-kind dividends received (i.e., stock dividends), (c) interest income from debt securities and commitment fees from private investments in public equity (“PIPE investments”) and (d) net premiums received from the sale of covered calls.

Operating expenses include (a) investment management fees paid to our investment adviser (KAFA), (b) other expenses (mostly comprised of fees paid to other service providers), (c) accrual for estimated excise taxes (if any) and (d) interest expense and preferred stock distributions.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

MANAGEMENT DISCUSSION

(UNAUDITED)

Net Distributable Income (NDI)

(amounts in millions, except for per share amounts)


	Three Months Ended February 28, 2019
Distributions and Other Income from Investments
Dividends	$	15.4
Interest and Other Income		0.6
Net Premiums Received from Call Options Written		0.3

Total Distributions and Other Income from Investments		16.3
Expenses
Investment Management Fee		(2.7	)
Other Expenses		(0.4	)
Interest Expense		(2.0	)
Preferred Stock Distributions		(0.7	)

Net Distributable Income (NDI)	$	10.5

Weighted Shares Outstanding		48.9

NDI per Weighted Share Outstanding	$	0.214


Adjusted NDI per Weighted Share Outstanding⁽¹⁾	$	0.219

Distributions per Common Share⁽²⁾	$	0.225

(1)	Adjusted NDI includes distributions from SemGroup Corporation attributable to the first quarter of fiscal 2019 ($0.2 million) with an ex-dividend date of March 1^st, which was after our quarter end.

(2)	Monthly distribution of $0.075 per common share paid, or to be paid, March 29, 2019, April 30, 2019 and May 31, 2019.

Payment of future distributions is subject to Board of Directors approval, as well as meeting the covenants on our debt agreements and terms of our preferred stock. The Fund has provided guidance on the expected distribution level for 2019 (monthly distribution rate of $0.075 per common share). The Fund plans to reassess its distribution level each December and provide guidance for the following twelve months. In determining this amount, management and the Board of Directors gives a significant amount of consideration to the NDI the portfolio is expected to generate during the twelve month guidance period.

Reconciliation of NDI to GAAP

The difference between distributions and other income from investments in the NDI calculation and total investment income as reported in our Statement of Operations is reconciled as follows:

•

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

•

NDI includes the value of paid-in-kind dividends and distributions whereas such amounts are not included as investment income for GAAP purposes, but rather are recorded as unrealized gains upon receipt.

•

NDI includes commitment fees from PIPE investments, whereas such amounts are generally not included in investment income for GAAP purposes, but rather are recorded as a reduction to the cost of the investment.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

MANAGEMENT DISCUSSION

(UNAUDITED)

•

Certain of our investments in debt securities were purchased at a discount or premium to the par value of such security. When making such investments, we consider the security’s yield to maturity, which factors in the impact of such discount (or premium). Interest income reported under GAAP includes the non-cash accretion of the discount (or amortization of the premium) based on the effective interest method. When we calculate interest income for purposes of determining NDI, in order to better reflect the yield to maturity, the accretion of the discount (or amortization of the premium) is calculated on a straight-line basis to the earlier of the expected call date or the maturity date of the debt security.

•

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 call premium that we received, thereby generating a profit. The premium we receive from selling call options, less (i) the amount that we pay to repurchase such call option contracts and (ii) the amount by which the market price of an underlying security is above the strike price at the time a new call option is written (if any), is included in NDI. For GAAP purposes, premiums received from call option contracts sold are not included in investment income. See Note 2 — Significant Accounting Policies for a full discussion of the GAAP treatment of option contracts.

The treatment of expenses included in NDI also differs from what is reported in the Statement of Operations as follows:

•

The non-cash amortization or write-offs of capitalized debt issuance costs and preferred stock offering costs related to our financings is included in interest expense and distributions on preferred stock for GAAP purposes, but is excluded from our calculation of NDI.

•

NDI also includes recurring payments (or receipts) on interest rate swap contracts or the amortization of termination payments on interest rate swap contracts entered into in anticipation of an offering of unsecured notes (“Notes”) or mandatory redeemable preferred stock (“MRP Shares”). The termination payments on interest rate swap contracts are amortized over the term of the Notes or MRP Shares issued. For GAAP purposes, these amounts are included in the realized gains/losses section of the Statement of Operations.

•

Under GAAP, excise taxes are accrued when probable and estimable. For NDI, we exclude excise tax that is unrelated to the current fiscal period.

•

For GAAP purposes, offering costs incurred related to the issuance of common stock reduce paid-in capital when stock is issued. Certain costs related to registration statements or shelf offerings may be written off once the registration statement or prospectus’ usefulness has expired. The non-cash amortization or write-off of these offering costs is included in operating expense for GAAP purposes, but is excluded from our calculation of NDI.

Liquidity and Capital Resources

At February 28, 2019, we had total leverage outstanding of $280 million, which represented 30% of total assets. Total leverage was comprised of $201 million of Notes, $4 million of borrowings outstanding under our unsecured revolving credit facility (the “Credit Facility”) and $75 million of MRP Shares. At February 28, 2019, we had $1 million of cash and cash equivalents. As of April 22, 2019, we had no borrowings outstanding under our Credit Facility and we had $23 million of cash and cash equivalents.

On February 8, 2019, we amended and extended our Credit Facility that was scheduled to mature on February 15, 2019. The Credit Facility has a 364-day term, maturing on February 7, 2020 and a total commitment amount of $100 million. The interest rate on outstanding borrowings under the Credit Facility may vary between LIBOR plus 1.30% and LIBOR plus 1.95%, depending on our asset coverage ratios. We pay a fee of 0.20% per annum on any unused amounts of the Credit Facility. In connection with the renewal and increase

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

MANAGEMENT DISCUSSION

(UNAUDITED)

in size of the Credit Facility by $25 million, we terminated our existing $35 million unsecured revolving term loan facility that was scheduled to mature on July 25, 2019.

At February 28, 2019, we had $201 million of Notes outstanding that mature between 2020 and 2025 and we had $75 million of MRP Shares outstanding that are subject to mandatory redemption between 2021 and 2024.

At February 28, 2019, our asset coverage ratios under the Investment Company Act of 1940, as amended (the “1940 Act”), were 448% for debt and 328% for total leverage (debt plus preferred stock). As of April 22, 2019, our asset coverage ratios were 467% for debt and 340% for total leverage. Our target asset coverage ratio with respect to our debt is 430%. At times we may be above or below this target depending on market conditions as well as certain other factors, including our target total leverage asset coverage ratio of 320% and the basic maintenance amount as stated in our rating agency guidelines.

As of February 28, 2019, our total leverage consisted 99% of fixed rate obligations and 1% of floating rate obligations. At such date, the weighted average interest/dividend rate on our total leverage was 3.72%.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

SCHEDULE OF INVESTMENTS

FEBRUARY 28, 2019

(amounts in 000’s, except number of option contracts)

(UNAUDITED)


Description	No. of Shares/Units		Value
Long-Term Investments — 143.7%
Equity Investments⁽¹⁾ — 140.6%
United States — 118.3%
Midstream Companies⁽²⁾ — 80.3%
Antero Midstream GP LP⁽³⁾⁽⁴⁾		409	$	5,223
Capital Product Partners L.P. — Class B Units^(4)(5)(6)(7)		3,939		35,455
EnLink Midstream, LLC ⁽⁸⁾		1,298		14,478
GasLog Partners LP⁽⁴⁾		1,289		28,480
Golar LNG Partners LP⁽⁴⁾		1,197		15,439
Höegh LNG Partners LP⁽⁴⁾		1,062		18,940
Kinder Morgan, Inc.⁽⁹⁾		2,469		47,305
KNOT Offshore Partners LP⁽⁴⁾		1,709		30,939
ONEOK, Inc.		1,412		90,708
Plains GP Holdings, L.P.^(4)(10)		2,205		51,141
Plains GP Holdings, L.P. — Plains AAP, L.P.^{(4)(5)(10)(11)}		690		16,094
SemGroup Corporation		493		7,766
Tallgrass Energy, LP⁽⁴⁾		1,233		27,911
Targa Resources Corp.		1,252		50,374
The Williams Companies, Inc.		2,696		71,964

				512,217

Midstream MLPs^(2)(12) — 35.1%
Andeavor Logistics LP		208		7,318
BP Midstream Partners LP		317		5,192
Buckeye Partners, L.P.⁽¹⁰⁾		716		22,532
Cheniere Energy Partners, L.P.		284		12,576
CNX Midstream Partners LP		114		1,772
Crestwood Equity Partners LP		218		6,912
DCP Midstream, LP		513		16,518
Energy Transfer LP		2,256		33,366
Enterprise Products Partners L.P.		1,175		32,502
EQT Midstream Partners, LP		77		3,005
Global Partners LP		556		10,567
Magellan Midstream Partners, L.P.		170		10,342
MPLX LP		625		20,725
Phillips 66 Partners LP		243		11,925
Shell Midstream Partners, L.P.		494		8,836
Summit Midstream Partners, LP		224		2,374
Western Midstream Partners, LP⁽¹³⁾		511		17,089

				223,551

Other Energy Companies — 2.9%
Marathon Petroleum Corporation		51		3,175
Phillips 66⁽⁹⁾		40		3,835
Sempra Energy		42		5,059
Viper Energy Partners LP		198		6,506

				18,575

Total United States (Cost — $738,198)				754,343

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

SCHEDULE OF INVESTMENTS

FEBRUARY 28, 2019

(amounts in 000’s, except number of option contracts)

(UNAUDITED)


Description								No. of Shares/Units		Value
Canada — 22.3%
Midstream Companies⁽²⁾ — 21.4%
Enbridge Inc.									1,605		59,359
Pembina Pipeline Corporation									1,172		42,949
TransCanada Corporation									764		34,153

											136,461

Other Energy Company — 0.9%
Jupiter Resources Inc.^(5)(6)(14)									1,261		5,361

Total Canada (Cost — $124,046)											141,822

Total Equity Investments (Cost — $862,244)											896,165


			Interest Rate			Maturity Date		Principal Amount
Debt Instruments — 3.1%
United States — 3.1%
Upstream —2.8%
California Resources Corporation^(5)(10)				8.000	%		12/15/22	$	12,500		10,016
Montage Resources Corporation⁽¹⁵⁾				8.875			7/15/23		8,600		7,783

											17,799

Midstream Company⁽²⁾ — 0.3%
Epic Crude Services, LP⁽⁵⁾				⁽¹⁶	⁾		2/21/26		2,000		1,980

Total Debt Investments (Cost — $20,127)											19,779

Total Long-Term Investments (Cost — $882,371)											915,944


	Strike Price		Expiration Date			No. of Contracts		Notional Amount⁽¹⁷⁾
Liabilities
Call Option Contracts Written⁽¹⁸⁾
United States
Midstream Company
Kinder Morgan, Inc.	$	19.00		3/15/19			500	$	958		(20	)

Other Energy Company
Phillips 66		100.00		3/15/19			300		2,891		(11	)

Total Call Option Contracts Written (Premiums Received — $51)											(31	)

Debt											(204,923	)
Mandatory Redeemable Preferred Stock at Liquidation Value											(75,000	)
Other Assets in Excess of Other Liabilities											1,585

Net Assets Applicable to Common Stockholders										$	637,575

(1)	Unless otherwise noted, equity investments are common units/common shares.

(2)	Refer to the “Glossary of Key Terms” for the definitions of Midstream Companies and Midstream MLPs.

(3)

On March 12, 2019, Antero Midstream GP LP (“AMGP”) and Antero Midstream Partners LP (“AM”) completed their previously announced merger whereby AMGP acquired all of the outstanding AM common units. In connection with the transaction, AMGP converted into a corporation and the combined entity was renamed Antero Midstream Corporation with its shares trading under the ticker symbol “AM”.

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

SCHEDULE OF INVESTMENTS

FEBRUARY 28, 2019

(amounts in 000’s, except number of option contracts)

(UNAUDITED)

(4)	This company is structured like an MLP, but is not treated as a publicly-traded partnership for regulated investment company (“RIC”) qualification purposes.

(5)

The Fund’s ability to sell this security is subject to certain legal or contractual restrictions. As of February 28, 2019, the aggregate value of restricted securities held by the Fund was $68,906 (7.4% of total assets), which included $28,090 of Level 2 securities and $40,816 of Level 3 securities. See Note 7 — Restricted Securities.

(6)	Fair valued security. See Notes 2 and 3 in Notes to Financial Statements.

(7)

Class B Units are convertible on a one-for-one basis into common units of Capital Product Partners L.P. (“CPLP”) and are senior to the common units in terms of liquidation preference and priority of distributions (liquidation preference of $9.00 per unit). On March 27, 2019, CPLP and DSS Holdings L.P. (“DSS”) completed their previously announced combination whereby CPLP spun off its crude and product tanker business into a separate publicly listed company, which merged with DSS. In connection with this transaction, all of the Fund’s CPLP Class B Units were redeemed for cash at $9.00 per unit.

(8)	On January 25, 2019, EnLink Midstream, LLC (“ENLC”) and EnLink Midstream Partners, LP (“ENLK”) completed their previously announced merger whereby ENLC acquired all common units of ENLK that ENLC did not previously own.

(9)	Security or a portion thereof is segregated as collateral on option contracts written.

(10)	The Fund believes that it is an affiliate of Buckeye Partners, L.P. (“BPL”), Plains AAP, L.P. (“PAGP-AAP”) and Plains GP Holdings, L.P. (“PAGP”). The Fund does not believe that it is an affiliate of California Resources Corporation. See Note 5 — Agreements and Affiliations.

(11)

The Fund’s ownership of PAGP-AAP is exchangeable on a one-for-one basis into either PAGP shares or Plains All American Pipeline, L.P. (“PAA”) units at the Fund’s option. The Fund values its PAGP-AAP investment on an “as exchanged” basis based on the higher public market value of either PAGP or PAA. As of February 28, 2019, the Fund’s PAGP-AAP investment is valued at PAA’s closing price. See Notes 3 and 7 in Notes to Financial Statements.

(12)

Unless otherwise noted, securities are treated as a publicly-traded partnership for RIC qualification purposes. To qualify as a RIC for tax purposes, the Fund may directly invest up to 25% of its total assets in equity and debt securities of entities treated as publicly-traded partnerships. The Fund had 24.1% of its total assets invested in publicly-traded partnerships at February 28, 2019. It is the Fund’s intention to be treated as a RIC for tax purposes.

(13)

On February 28, 2019, Western Gas Partners, LP (“WES”) and Western Gas Equity Partners, LP (“WGP”) completed their previously announced merger whereby WGP acquired all of the publicly - held common units of WES in a unit-for-unit exchange. Immediately following the merger, WGP changed its name to Western Midstream Partners, LP with its units trading under the ticker symbol “WES”.

(14)

On December 19, 2018, Jupiter Resources Inc. and its affiliates (“Jupiter”) completed a recapitalization transaction. As a result of the reorganization, the Fund received 1,261 common shares of Jupiter Resources Inc. and cash equal to the semi-annual interest payment that was scheduled to be paid on October 1, 2018. The common shares are not publicly traded and are subject to certain restrictions. As of October 2, 2018, the Fund stopped accruing interest relating to the debt security.

(15)	On February 28, 2019, Eclipse Resources Corporation (“Eclipse Resources”) and Blue Ridge Mountain Resources, Inc. (“Blue Ridge”) completed their previously announced merger. In conjunction with the merger, Eclipse Resources changed its name to Montage Resources Corporation.

(16)	Floating rate first lien senior secured term loan. Security pays interest at a rate of LIBOR + 500 basis points with a 1.00% LIBOR floor (7.78% as of February 28, 2019).

(17)	The notional amount of call option contracts written is the product of (a) the number of contracts written, (b) 100 (each contract entitles the option holder to 100 units/shares) and (c) the market price of the underlying security as of February 28, 2019.

(18)	Security is non-income producing.

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES

FEBRUARY 28, 2019

(amounts in 000’s, except share and per share amounts)

(UNAUDITED)


ASSETS
Investments, at fair value:
Non-affiliated (Cost — $761,947)	$	826,177
Affiliated (Cost — $120,424)		89,767


Total investments (Cost — $882,371)		915,944

Cash		1,433

Deposits with brokers		237

Receivable for securities sold		5,917

Interest, dividends and distributions receivable (Cost — $1,925)		1,933

Deferred credit facility and term loan offering costs and other assets		592


Total Assets		926,056


LIABILITIES
Payable for securities purchased		5,915

Investment management fee payable		884

Accrued directors’ fees and expenses		62

Call option contracts written (Premiums received — $51)		31

Accrued expenses and other liabilities		2,968

Credit facility		4,000

Notes		200,923

Unamortized notes issuance costs		(655	)

Mandatory redeemable preferred stock, $25.00 liquidation value per share (3,000,000 shares issued and outstanding)		75,000

Unamortized mandatory redeemable preferred stock issuance costs		(647	)


Total Liabilities		288,481


NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS	$	637,575


NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS CONSIST OF

Common stock, $0.001 par value (48,878,499 shares issued and outstanding, 197,000,000 shares authorized)	$	49

Paid-in capital		892,093

Accumulated net investment income less distributions not treated as tax return of capital		(22,293	)

Accumulated net realized losses less distributions not treated as tax return of capital		(265,864	)

Net unrealized gains		33,590

NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS	$	637,575

NET ASSET VALUE PER COMMON SHARE	$	13.04

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED FEBRUARY 28, 2019

(amounts in 000’s)

(UNAUDITED)


INVESTMENT INCOME
Income
Dividends and distributions:
Non-affiliated investments	$	13,988
Affiliated investments		1,405
Money market mutual funds		4

Total dividends and distributions (after foreign taxes withheld of $271)		15,397
Return of capital		(11,118	)

Net dividends and distributions		4,279
Interest income		577

Total Investment Income		4,856

Expenses
Investment management fees		2,715
Professional fees		101
Administration fees		72
Directors’ fees and expenses		67
Reports to stockholders		55
Insurance		42
Custodian fees		17
Other expenses		53

Total Expenses — before interest expense and preferred distributions		3,122
Interest expense and amortization of offering costs		2,144
Distributions on mandatory redeemable preferred stock and amortization of offering costs		774

Total Expenses		6,040

Net Investment Loss		(1,184	)

REALIZED AND UNREALIZED GAINS (LOSSES)
Net Realized Gains (Losses)
Investments — non-affiliated		(11,978	)
Investments — affiliated		264
Foreign currency transactions		10
Options		240

Net Realized Losses		(11,464	)

Net Change in Unrealized Gains (Losses)
Investments — non-affiliated		42,764
Investments — affiliated		5,045
Foreign currency translations		10
Options		21

Net Change in Unrealized Gains		47,840

Net Realized and Unrealized Gains		36,376

NET INCREASE IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM OPERATIONS	$	35,192

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS

(amounts in 000’s, except share amounts)


	For the Three Months Ended February 28, 2019 (Unaudited)			For the Fiscal Year Ended November 30, 2018
OPERATIONS
Net investment loss⁽¹⁾	$	(1,184	)	$	(4,562	)
Net realized losses		(11,464	)		(8,281	)
Net change in unrealized gains (losses)		47,840			(55,070	)

Net Increase (Decrease) in Net Assets Resulting from Operations		35,192			(67,913	)

DIVIDENDS AND DISTRIBUTIONS TO COMMON STOCKHOLDERS⁽¹⁾
Dividends		(12,220	)⁽²⁾		(2,884	)⁽³⁾
Distributions — return of capital		—	⁽²⁾		(31,610	)⁽³⁾

Dividends and Distributions to Common Stockholders		(12,220	)		(34,494	)

CAPITAL STOCK TRANSACTIONS
Issuance of 26,844,329 shares of common stock in connection with the merger of Kayne Anderson Energy Total Return Fund, Inc.		—			405,460
Offering expenses associated with the issuance of common stock in merger		—			(293	)⁽⁴⁾

Net Increase in Net Assets Applicable to Common Stockholders from Capital Stock Transactions		—			405,167

Total Increase in Net Assets Applicable to Common Stockholders		22,972			302,760

NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS
Beginning of period		614,603			311,843

End of period	$	637,575		$	614,603

(1)

Distributions on the Fund’s mandatory redeemable preferred stock (“MRP Shares”) are treated as an operating expense under GAAP and are included in the calculation of net investment income (loss). See Note 2 — Significant Accounting Policies. Distributions in the amount of $727 paid to holders of MRP Shares during the three months ended February 28, 2019 are characterized as dividend income (a portion of which may be eligible to be treated as qualified dividend income) until after the end of the fiscal year when the Fund can determine its earnings and profits for the full fiscal year, which include gains and losses on the sale of securities for the remainder of the fiscal year. The final tax character may differ substantially from this preliminary information. Distributions in the amount of $1,912 paid to holders of MRP Shares for the fiscal year ended November 30, 2018 were characterized as dividends. A portion of the distributions characterized as dividends for the fiscal years ended November 30, 2018 was eligible to be treated as qualified dividend income. This characterization is based on the Fund’s earnings and profits.

(2)

Distributions paid to common stockholders for the three months ended February 28, 2019 are characterized as dividend income (a portion of which may be eligible to be treated as qualified dividend income) until after the end of the fiscal year when the Fund can determine its earnings and profits for the full fiscal year, which include gains and losses on the sale of securities for the remainder of the fiscal year. The final tax character may differ substantially from this preliminary information.

(3)

Distributions paid to common stockholders for the fiscal year ended November 30, 2018 were characterized as either dividends (a portion of which was eligible to be treated as qualified dividend income) or distributions (long term capital gains or return of capital). This characterization is based on the Fund’s earnings and profits.

(4)	Represents offering costs incurred in connection with the merger of Kayne Anderson Energy Total Return Fund, Inc.

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED FEBRUARY 28, 2019

(amounts in 000’s)

(UNAUDITED)


CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations	$	35,192
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:
Return of capital distributions		11,118
Net realized losses (excluding foreign currency transactions)		11,474
Net change in unrealized gains (excluding foreign currency translations)		(47,830	)
Accretion of bond discounts, net		(136	)
Purchase of long-term investments		(40,097	)
Proceeds from sale of long-term investments		58,480
Proceeds from sale of short-term investments, net		1,887
Decrease in deposits with brokers		9
Increase in receivable for securities sold		(4,668	)
Decrease in interest, dividends and distributions receivable		920
Amortization of deferred debt offering costs		209
Amortization of mandatory redeemable preferred stock offering costs		47
Decrease in other assets		35
Increase in payable for securities purchased		5,915
Decrease in investment management fee payable		(71	)
Increase in premiums received on call option contracts written		22
Decrease in accrued directors’ fees and expenses		(12	)
Decrease in accrued expenses and other liabilities		(447	)

Net Cash Provided by Operating Activities		32,047

CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in borrowings under credit facility		(20,000	)
Costs associated with renewal of credit facility		(394	)
Cash distributions paid to common stockholders		(12,220	)

Net Cash Used in Financing Activities		(32,614	)

NET CHANGE IN CASH		(567	)
CASH — BEGINNING OF PERIOD		2,000

CASH — END OF PERIOD	$	1,433

Supplemental disclosure of cash flow information:

During the three months ended February 28, 2019, interest paid related to debt obligations was $2,164.

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)


	For the Three Months Ended February 28, 2019 (Unaudited)			For the Fiscal Year Ended November 30,
	For the Three Months Ended February 28, 2019 (Unaudited)			2018			2017			2016

Per Share of Common Stock⁽¹⁾
Net asset value, beginning of period	$	12.57		$	14.15		$	17.41		$	17.56
Net investment income (loss)⁽²⁾		(0.02	)		(0.18	)		0.14			(0.07	)
Net realized and unrealized gains (losses)		0.74			(0.19	)		(2.10	)		1.43

Total income (loss) from operations		0.72			(0.37	)		(1.96	)		1.36

Common dividends — dividend income⁽³⁾		(0.25	)		(0.10	)		(0.03	)		(1.50	)
Common distributions — long-term capital gains⁽³⁾		—			—			—			—
Common distributions — return of capital⁽³⁾		—			(1.10	)		(1.27	)		—

Total dividends and distributions — common		(0.25	)		(1.20	)		(1.30	)		(1.50	)

Offering expenses associated with the issuance of common stock		—			(0.01	)⁽⁵⁾		—			—
Effect of shares issued in reinvestment of distributions		—			—			—			(0.01	)
Effect of issuance of common stock		—			—			—			—
Effect of common stock repurchased		—			—			—			—

Net asset value, end of period	$	13.04		$	12.57		$	14.15		$	17.41

Market value per share of common stock, end of period	$	11.24		$	10.96		$	12.88		$	15.33

Total investment return based on common stock market value⁽⁶⁾		5.0	%⁽⁷⁾		(6.7	)%		(8.7	)%		12.7	%
Total investment return based on net asset value⁽⁸⁾		6.2	%⁽⁷⁾		(2.6	)%		(11.7	)%		12.7	%
Supplemental Data and Ratios⁽⁹⁾
Net assets applicable to common stockholders, end of period	$	637,575		$	614,603		$	311,843		$	383,557
Ratio of expenses to average net assets
Management fees⁽¹⁰⁾		1.8	%		1.8	%		1.7	%		1.8	%
Other expenses		0.3			0.4			0.4			0.5

Subtotal		2.1			2.2			2.1			2.3
Interest expense and distributions on mandatory redeemable preferred stock⁽²⁾		2.0			1.8			1.7			3.8
Management fee waiver		—			—			—			—
Excise taxes		—			—			—			—

Total expenses		4.1	%		4.0	%		3.8	%		6.1	%

Ratio of net investment income (loss) to average net assets⁽²⁾		(0.8	)%		(1.1	)%		0.9	%		(0.5	)%
Net increase (decrease) in net assets applicable to common stockholders resulting from operations to average net assets		5.8	%⁽⁷⁾		(16.1	)%		(11.9	)%		10.3	%
Portfolio turnover rate		4.5	%⁽⁷⁾		21.9	%		25.5	%		48.2	%
Average net assets	$	603,384		$	420,605		$	360,869		$	314,015
Notes outstanding, end of period⁽¹¹⁾	$	200,923		$	200,923		$	91,000		$	91,000
Credit facility outstanding, end of period⁽¹¹⁾	$	4,000		$	24,000		$	—		$	—
Term loan outstanding, end of period⁽¹¹⁾	$	—		$	—		$	—		$	27,000
Mandatory redeemable preferred stock, end of period⁽¹¹⁾	$	75,000		$	75,000		$	35,000		$	35,000
Average shares of common stock outstanding		48,878,499			30,639,065			22,034,170			21,975,582
Asset coverage of total debt⁽¹²⁾		447.7	%		406.6	%		481.1	%		454.7	%
Asset coverage of total leverage (debt and preferred stock)⁽¹³⁾		327.8	%		304.9	%		347.5	%		350.7	%
Average amount of borrowings per share of common stock during the period⁽¹⁾	$	4.31		$	4.39		$	5.16		$	4.86

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)


	For the Fiscal Year Ended November 30,
	2015			2014			2013

Per Share of Common Stock⁽¹⁾
Net asset value, beginning of period	$	39.51		$	35.75		$	29.01
Net investment income (loss)⁽²⁾		0.30			(0.01	)		(0.06	)
Net realized and unrealized gains (losses)		(18.42	)		5.61			8.61

Total income (loss) from operations		(18.12	)		5.60			8.55

Common dividends — dividend income⁽³⁾		(1.68	)		(1.57	)		(1.15	)
Common distributions — long-term capital gains⁽³⁾		(2.14	)		(0.34	)		(0.66	)
Common distributions — return of capital⁽³⁾		—			—			—

Total dividends and distributions — common		(3.82	)⁽⁴⁾		(1.91	)		(1.81	)

Offering expenses associated with the issuance of common stock		—			—			—
Effect of shares issued in reinvestment of distributions		(0.01	)		(0.02	)		—
Effect of issuance of common stock		—			—			—
Effect of common stock repurchased		—			0.09			—

Net asset value, end of period	$	17.56		$	39.51		$	35.75

Market value per share of common stock, end of period	$	15.46		$	35.82		$	32.71

Total investment return based on common stock market value⁽⁶⁾		(50.2	)%		15.3	%		23.5	%
Total investment return based on net asset value⁽⁸⁾		(48.7	)%		16.4	%		30.5	%
Supplemental Data and Ratios⁽⁹⁾
Net assets applicable to common stockholders, end of period	$	380,478		$	854,257		$	788,057
Ratio of expenses to average net assets
Management fees⁽¹⁰⁾		1.9	%		1.7	%		1.8	%
Other expenses		0.2			0.2			0.2

Subtotal		2.1			1.9			2.0
Interest expense and distributions on mandatory redeemable preferred stock⁽²⁾		2.5			1.7			1.8
Management fee waiver		—			—			—
Excise taxes		0.4			—			0.1

Total expenses		5.0	%		3.6	%		3.9	%

Ratio of net investment income (loss) to average net assets⁽²⁾		1.0	%		(0.0	)%		(0.2	)%
Net increase (decrease) in net assets applicable to common stockholders resulting from operations to average net assets		(58.3	)%		14.0	%		25.9	%
Portfolio turnover rate		45.3	%		45.3	%		49.1	%
Average net assets	$	672,534		$	887,585		$	726,248
Notes outstanding, end of period⁽¹¹⁾	$	185,000		$	235,000		$	205,000
Credit facility outstanding, end of period⁽¹¹⁾	$	—		$	—		$	50,000
Term loan outstanding, end of period⁽¹¹⁾	$	—		$	46,000		$	—
Mandatory redeemable preferred stock, end of period⁽¹¹⁾	$	70,000		$	105,000		$	65,000
Average shares of common stock outstanding		21,657,943			21,897,671			21,969,288
Asset coverage of total debt⁽¹²⁾		343.5	%		441.4	%		434.5	%
Asset coverage of total leverage (debt and preferred stock)⁽¹³⁾		249.2	%		321.3	%		346.3	%
Average amount of borrowings per share of common stock during the period⁽¹⁾	$	11.16		$	12.84		$	10.51

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)


	For the Fiscal Year Ended November 30,						For the Period November 24, 2010⁽¹⁴⁾ through November 30, 2010
	2012			2011

Per Share of Common Stock⁽¹⁾
Net asset value, beginning of period	$	25.94		$	23.80		$	23.83	⁽¹⁵⁾
Net investment income (loss)⁽²⁾		0.17			0.29			(0.02	)
Net realized and unrealized gains (losses)		4.64			3.12			(0.01	)

Total income (loss) from operations		4.81			3.41			(0.03	)

Common dividends — dividend income⁽³⁾		(1.30	)		(1.20	)		—
Common distributions — long-term capital gains⁽³⁾		(0.41	)		—			—
Common distributions — return of capital⁽³⁾		—			—			—

Total dividends and distributions — common		(1.71	)		(1.20	)		—

Offering expenses associated with the issuance of common stock		—			—			—
Effect of shares issued in reinvestment of distributions		(0.03	)		(0.04	)		—
Effect of issuance of common stock		—			(0.03	)		—
Effect of common stock repurchased		—			—			—

Net asset value, end of period	$	29.01		$	25.94		$	23.80

Market value per share of common stock, end of period	$	28.04		$	22.46		$	25.00

Total investment return based on common stock market value⁽⁶⁾		33.3	%		(5.5	)%		0.0	%⁽⁷⁾
Total investment return based on net asset value⁽⁸⁾		19.4	%		14.7	%		(0.1	)%⁽⁷⁾
Supplemental Data and Ratios⁽⁹⁾
Net assets applicable to common stockholders, end of period	$	635,226		$	562,044		$	452,283
Ratio of expenses to average net assets
Management fees⁽¹⁰⁾		1.7	%		1.6	%		1.3	%
Other expenses		0.3			0.3			0.3	⁽¹⁶⁾

Subtotal		2.0			1.9			1.6
Interest expense and distributions on mandatory redeemable preferred stock⁽²⁾		1.8			1.3			—
Management fee waiver		—			(0.3	)		(0.3	)
Excise taxes		—			—			—

Total expenses		3.8	%		2.9	%		1.3	%

Ratio of net investment income (loss) to average net assets⁽²⁾		0.6	%		1.1	%		(1.3	)%⁽¹⁶⁾
Net increase (decrease) in net assets applicable to common stockholders resulting from operations to average net assets		16.8	%		13.4	%		(0.1	)%⁽⁷⁾
Portfolio turnover rate		67.6	%		74.1	%		0.0	%⁽⁷⁾
Average net assets	$	620,902		$	537,044		$	452,775
Notes outstanding, end of period⁽¹¹⁾	$	165,000		$	115,000		$	—
Credit facility outstanding, end of period⁽¹¹⁾	$	48,000		$	45,000		$	—
Term loan outstanding, end of period⁽¹¹⁾	$	—		$	—		$	—
Mandatory redeemable preferred stock, end of period⁽¹¹⁾	$	65,000		$	35,000		$	—
Average shares of common stock outstanding		21,794,596			21,273,512			19,004,000
Asset coverage of total debt⁽¹²⁾		428.7	%		473.2	%		—
Asset coverage of total leverage (debt and preferred stock)⁽¹³⁾		328.5	%		388.2	%		—
Average amount of borrowings per share of common stock during the period⁽¹⁾	$	8.85		$	6.50			—

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

FINANCIAL HIGHLIGHTS

(amounts in 000’s, except share and per share amounts)

(1)	Based on average shares of common stock outstanding.

(2)	Distributions on the Fund’s MRP Shares are treated as an operating expense under GAAP and are included in the calculation of net investment income (loss). See Note 2 — Significant Accounting Policies.

(3)

The actual characterization of the distributions made during the three months ended February 28, 2019 will not be determinable until after the end of the fiscal year when the Fund can determine its actual earnings and profits for the full fiscal year (which include gains and losses on the sale of securities for the remainder of the fiscal year) and may differ substantially from this preliminary information. The information presented for each of the other periods is a characterization of the total distributions paid to the common stockholders as either dividend income (a portion of which was eligible to be treated as qualified dividend income) or distributions (long-term capital gains or return of capital) and is based on the Fund’s earnings and profits.

(4)	Includes special distribution of $1.80 per share paid in July 2015.

(5)	Represents offering costs incurred in connection with the merger of Kayne Anderson Energy Total Return Fund, Inc.

(6)

Total investment return based on market value is calculated assuming a purchase of common stock at the market price on the first day and a sale at the current market price on the last day of the period reported. The calculation also assumes reinvestment of distributions at actual prices pursuant to the Fund’s dividend reinvestment plan.

(7)	Not annualized.

(8)

Total investment return based on net asset value is calculated assuming a purchase of common stock at the net asset value on the first day and a sale at the net asset value on the last day of the period reported. The calculation also assumes reinvestment of distributions at actual prices pursuant to the Fund’s dividend reinvestment plan.

(9)	Unless otherwise noted, ratios are annualized.

(10)	Ratio reflects total management fee before waiver, if any.

(11)	Principal/liquidation value.

(12)

Calculated pursuant to section 18(a)(1)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by Notes (principal value) or any other senior securities representing indebtedness and MRP Shares (liquidation value) divided by the aggregate amount of Notes and any other senior securities representing indebtedness. Under the 1940 Act, the Fund may not declare or make any distribution on its common stock nor can it incur additional indebtedness if at the time of such declaration or incurrence its asset coverage with respect to senior securities representing indebtedness would be less than 300%. For purposes of this test, the Credit Facility and the Term Loan are considered senior securities representing indebtedness.

(13)

Calculated pursuant to section 18(a)(2)(A) of the 1940 Act. Represents the value of total assets less all liabilities not represented by Notes (principal value), any other senior securities representing indebtedness and MRP Shares divided by the aggregate amount of Notes, any other senior securities representing indebtedness and MRP Shares (liquidation value). Under the 1940 Act, the Fund may not declare or make any distribution on its common stock nor can it issue additional preferred stock if at the time of such declaration or issuance, its asset coverage with respect to all senior securities would be less than 200%. In addition to the limitations under the 1940 Act, the Fund, under the terms of its MRP Shares, would not be able to declare or pay any distributions on its common stock if such declaration would cause its asset coverage with respect to all senior securities to be less than 225%. For purposes of these asset coverage ratio tests, the Credit Facility and the Term Loan are considered senior securities representing indebtedness.

(14)	Commencement of operations.

(15)	Initial public offering price of $25.00 per share less underwriting discounts of $1.125 per share and offering costs of $0.05 per share.

(16)	For purposes of annualizing other expenses of the Fund, professional fees and reports to stockholders are fees associated with the annual audit and annual report and therefore have not been annualized.

See accompanying notes to financial statements.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

1.	Organization

Kayne Anderson Midstream/Energy Fund, Inc. (the “Fund” or “KMF”) was organized as a Maryland corporation on August 26, 2010 and commenced operations on November 24, 2010. The Fund is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, closed-end investment management company. The Fund’s investment objective is to provide a high level of return with an emphasis on making quarterly cash distributions to its stockholders. The Fund seeks to achieve that investment objective by investing at least 80% of its total assets in the securities of companies in the Midstream/Energy Sector, consisting of (a) Midstream MLPs, (b) Midstream Companies, (c) Other MLPs and (d) Other Energy Companies. The Fund’s shares of common stock are listed on the New York Stock Exchange, Inc. (“NYSE”) under the symbol “KMF.”

On August 6, 2018, KMF completed its merger with Kayne Anderson Energy Total Return Fund, Inc. (“KYE”). Pursuant to the terms of the merger agreement approved by stockholders of KYE, KMF acquired all of the net assets of KYE in exchange for an equal net asset value of newly issued KMF common stock. The merger qualified as a tax-free reorganization under Section 368(a) of the Internal Revenue Code.

2.	Significant Accounting Policies

The following is a summary of the significant accounting policies that the Fund uses to prepare its financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Fund is an investment company and follows accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) Topic 946 — “Financial Services — Investment Companies.”

A. Use of Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the period. Actual results could differ materially from those estimates.

B. Cash and Cash Equivalents — Cash and cash equivalents include short-term, liquid investments with an original maturity of three months or less and include money market fund accounts.

C. Calculation of Net Asset Value — The Fund determines its net asset value on a daily basis and reports its net asset value on its website. Net asset value is computed by dividing the value of the Fund’s assets (including accrued interest and distributions), less all of its liabilities (including accrued expenses, distributions payable and any indebtedness) and the liquidation value of any outstanding preferred stock, by the total number of common shares outstanding.

D. Investment Valuation — Readily marketable portfolio securities listed on any exchange other than the NASDAQ Stock Market, Inc. (“NASDAQ”) are valued, except as indicated below, at the last sale price on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the most recent bid and ask prices on such day. Securities admitted to trade on the NASDAQ are valued at the NASDAQ official closing price. Portfolio securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities.

Equity securities traded in the over-the-counter market, but excluding securities admitted to trading on the NASDAQ, are valued at the closing bid prices. Debt securities that are considered bonds are valued by using the mean of the bid and ask prices provided by an independent pricing service or, if such prices are not available or in the judgment of KA Fund Advisors LLC (“KAFA”) such prices are stale or do not represent fair value, by an independent broker. For debt securities that are considered bank loans, the fair market value is determined by using the mean of the bid and ask prices provided by the agent or syndicate bank or principal market maker.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

When price quotes for securities are not available, or such prices are stale or do not represent fair value in the judgment of KAFA, fair market value will be determined using the Fund’s valuation process for securities that are privately issued or otherwise restricted as to resale.

Exchange-traded options and futures contracts are valued at the last sales price at the close of trading in the market where such contracts are principally traded or, if there was no sale on the applicable exchange on such day, at the mean between the quoted bid and ask price as of the close of such exchange.

The Fund holds securities that are privately issued or otherwise restricted as to resale. For these securities, as well as any security for which (a) reliable market quotations are not available in the judgment of KAFA, or (b) the independent pricing service or independent broker does not provide prices or provides a price that in the judgment of KAFA is stale or does not represent fair value, each shall be valued in a manner that most fairly reflects fair value of the security on the valuation date. Unless otherwise determined by the Board of Directors, the following valuation process is used for such securities:

•

Investment Team Valuation. The applicable investments are valued by senior professionals of KAFA who are responsible for the portfolio investments. The investments will be valued monthly, with new investments valued at the time such investment was made.

•

Investment Team Valuation Documentation. Preliminary valuation conclusions will be determined by senior management of KAFA. Such valuations and supporting documentation are submitted to the Valuation Committee (a committee of the Fund’s Board of Directors) and the Board of Directors on a quarterly basis.

•

Valuation Committee. The Valuation Committee meets to consider the valuations submitted by KAFA at the end of each quarter. Between meetings of the Valuation Committee, a senior officer of KAFA is authorized to make valuation determinations. All valuation determinations of the Valuation Committee are subject to ratification by the Board of Directors at its next regular meeting.

•

Valuation Firm. Quarterly, a third-party valuation firm engaged by the Board of Directors reviews the valuation methodologies and calculations employed for these securities, unless the aggregate fair value of such security is less than 0.1% of total assets.

•

Board of Directors Determination. The Board of Directors meets quarterly to consider the valuations provided by KAFA and the Valuation Committee and ratify valuations for the applicable securities. The Board of Directors considers the report provided by the third-party valuation firm in reviewing and determining in good faith the fair value of the applicable portfolio securities.

As of February 28, 2019, the Fund held 6.4% of its net assets applicable to common stockholders (4.4% of total assets) in securities that were fair valued pursuant to the procedures adopted by the Board of Directors (Level 3 securities). The aggregate fair value of these securities at February 28, 2019 was $40,816. See Note 3 — Fair Value and Note 7 — Restricted Securities.

E. Derivative Financial Instruments — The Fund may utilize derivative financial instruments in its operations.

Interest rate swap contracts. The Fund may use hedging techniques such as interest rate swaps to mitigate potential interest rate risk on a portion of the Fund’s leverage. Such interest rate swaps would principally be used to protect the Fund against higher costs on its leverage resulting from increases in interest rates. The Fund does not hedge any interest rate risk associated with portfolio holdings. Interest rate transactions the Fund may use for hedging purposes may expose it to certain risks that differ from the risks associated with its portfolio holdings. A decline in interest rates may result in a decline in the value of the swap contracts, which, everything else being held constant, would result in a decline in the net assets of the Fund. In addition, if the counterparty to an interest rate swap defaults, the Fund would not be able to use the anticipated net receipts under the interest rate swap to offset its cost of financial leverage.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

Interest rate swap contracts are recorded at fair value with changes in value during the reporting period, and amounts accrued under the agreements, included as unrealized gains or losses in the Statement of Operations. Monthly cash settlements under the terms of the interest rate swap agreements or termination payments are recorded as realized gains or losses in the Statement of Operations. The Fund generally values its interest rate swap contracts based on dealer quotations, if available, or by discounting the future cash flows from the stated terms of the interest rate swap agreement by using interest rates currently available in the market. See Note 8 —Derivative Financial Instruments.

Option contracts. The Fund is also exposed to financial market risks including changes in the valuations of its investment portfolio. The Fund may purchase or write (sell) call options. A call option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from the writer of the option the security underlying the option at a specified exercise price at any time during the term of the option.

The Fund would realize a gain on a purchased call option if, during the option period, the value of such securities exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchased call option. The Fund may also purchase put option contracts. If a purchased put option is exercised, the premium paid increases the cost basis of the securities sold by the Fund.

The Fund may also write (sell) call options with the purpose of generating realized gains or reducing its ownership of certain securities. If the Fund writes a call option on a security, the Fund has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price. The Fund will only write call options on securities that the Fund holds in its portfolio (i.e., covered calls).

When the Fund writes a call option, an amount equal to the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. If the Fund repurchases a written call option prior to its exercise, the difference between the premium received and the amount paid to repurchase the option is treated as a realized gain or loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. The Fund, as the writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. See Note 8 — Derivative Financial Instruments.

F. Security Transactions — Security transactions are accounted for on the date the securities are purchased or sold (trade date). Realized gains and losses are calculated using the specific identification cost basis method for GAAP purposes. For tax purposes, the Fund utilizes the average cost method to compute the adjusted tax cost basis of its MLP securities.

G. Return of Capital Estimates — Dividends and distributions received from the Fund’s investments in MLPs and Midstream Companies generally are comprised of income and return of capital. Payments made by MLPs (and other entities treated as partnerships for federal income tax purposes) are categorized as “distributions” and payments made by corporations are categorized as “dividends.” At the time such dividends and distributions are received, the Fund estimates the amount of such payments that is considered investment income and the amount that is considered a return of capital. The Fund estimates the return of capital portion of distributions received from its MLP investments based on historical information available from the investments. The Fund estimates the return of capital portion of dividends received from Midstream Companies based on information provided by each investment. These estimates are adjusted to actual in the subsequent fiscal year when final tax reporting information related to the Fund’s investments is received.

The return of capital portion of the distributions is a reduction to investment income that results in an equivalent reduction in the cost basis of the associated investments and increases net realized gains (losses) and net change in unrealized gains (losses). If the distributions received by the Fund exceed its cost basis (i.e. its cost basis has been reduced to zero), the distributions are treated as realized gains.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

The Fund includes all distributions received on its Statement of Operations and reduces its investment income by (i) the estimated return of capital and (ii) the distributions in excess of cost basis, if any. For the three months ended February 28, 2019, the Fund estimated $11,118 of return of capital and there were no distributions that were in excess of cost basis.

In accordance with GAAP, the return of capital cost basis reductions for the Fund’s MLP investments are limited to the total amount of the cash distributions received from such investments. For income tax purposes, the cost basis reductions for the Fund’s MLP investments typically exceed cash distributions received from such investments due to allocated losses from these investments.

The following table sets forth the Fund’s estimated return of capital portion of the dividends and distributions received from its investments.


	For the Three Months Ended February 28, 2019

Dividends from investments	$	10,792

Distributions from investments		4,876


Total dividends and distributions from investments (before foreign taxes withheld of $271)	$	15,668



Dividends — % return of capital		62	%

Distributions — % return of capital		91	%

Total dividends and distributions — % return of capital		71	%

Return of capital — attributable to net realized gains (losses)	$	445

Return of capital — attributable to net change in unrealized gains (losses)		10,673



Total return of capital	$	11,118

H. Investment Income — The Fund records dividends and distributions on the ex-dividend date. Interest income is recognized on the accrual basis, including amortization of premiums and accretion of discounts. When investing in securities with payment in-kind interest, the Fund will accrue interest income during the life of the security even though it will not be receiving cash as the interest is accrued. To the extent that interest income to be received is not expected to be realized, a reserve against income is established.

Many of the debt securities that the Fund holds were purchased at a discount or premium to the par value of the security. The non-cash accretion of a discount to par value increases interest income while the non-cash amortization of a premium to par value decreases interest income. The accretion of a discount and amortization of a premium are based on the effective interest method. The amount of these non-cash adjustments can be found in the Fund’s Statement of Cash Flows. The non-cash accretion of a discount increases the cost basis of the debt security, which results in an offsetting unrealized loss. The non-cash amortization of a premium decreases the cost basis of the debt security, which results in an offsetting unrealized gain. To the extent that par value is not expected to be realized, the Fund discontinues accruing the non-cash accretion of the discount to par value of the debt security.

The Fund may receive paid-in-kind and non-cash dividends and distributions in the form of additional units or shares from its investments. For paid-in-kind dividends, the additional units are not reflected in investment income during the period received, but are recorded as unrealized gains upon receipt. Non-cash distributions are reflected in investment income because the Fund has the option to receive its distribution in cash or in additional

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

shares or units of the security. During the three months ended February 28, 2019, the Fund did not receive any paid-in-kind dividends or non-cash distributions.

I. Distributions to Stockholders — Distributions to common stockholders are recorded on the ex-dividend date. Distributions to holders of MRP Shares are accrued on a daily basis as described in Note 12 — Preferred Stock. As required by the Distinguishing Liabilities from Equity topic of the FASB Accounting Standards Codification (ASC 480), the Fund includes the accrued distributions on its MRP Shares as an operating expense due to the fixed term of this obligation. For tax purposes the payments made to the holders of the Fund’s MRP Shares are treated as dividends or distributions.

The characterization of the distributions paid to holders of MRP Shares and common stock as either dividend income (eligible to be treated as qualified dividend income) or distributions (long-term capital gains or return of capital) is determined after the end of the fiscal year based on the Fund’s actual earnings and profits and, therefore, the characterization may differ from preliminary estimates.

J. Partnership Accounting Policy — The Fund records its pro-rata share of the income (loss) to the extent of distributions it has received, allocated from the underlying partnerships and adjusts the cost basis of the underlying partnerships accordingly. These amounts are included in the Fund’s Statement of Operations.

K. Taxes — It is the Fund’s intention to continue to be treated as and to qualify each year for special tax treatment afforded a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As long as the Fund meets certain requirements that govern its sources of income, diversification of assets and timely distribution of earnings to stockholders, the Fund will not be subject to U.S. federal income tax.

The Fund must pay distributions equal to 90% of its investment company taxable income (ordinary income and short-term capital gains) to qualify as a RIC and it must distribute all of its taxable income (ordinary income, short-term capital gains and long-term capital gains) to avoid federal income taxes. The Fund will be subject to federal income tax on any undistributed portion of income. For purposes of the distribution test, the Fund may elect to treat as paid on the last day of its taxable year all or part of any distributions that are declared after the end of its taxable year if such distributions are declared before the due date of its tax return, including any extensions (August 15th). See Note 6 — Taxes.

All RICs are subject to a non-deductible 4% excise tax on income that is not distributed on a timely basis in accordance with the calendar year distribution requirements. To avoid the tax, the Fund must distribute during each calendar year an amount at least equal to the sum of (i) 98% of its ordinary income for the calendar year, (ii) 98.2% of its net capital gains for the one-year period ending on November 30, the last day of our taxable year, and (iii) undistributed amounts from previous years on which the Fund paid no U.S. federal income tax. A distribution will be treated as paid during the calendar year if it is paid during the calendar year or declared by the Fund in October, November or December, payable to stockholders of record on a date during such months and paid by the Fund during January of the following year. Any such distributions paid during January of the following year will be deemed to be received by stockholders on December 31 of the year the distributions are declared, rather than when the distributions are actually received.

The Fund will be liable for the excise tax on the amount by which it does not meet the distribution requirement and will accrue an excise tax liability at the time that the liability is estimable and probable.

Dividend income received by the Fund from sources within Canada is subject to a 15% foreign withholding tax. Interest income on Canadian corporate debt obligations should generally be exempt from withholding tax on interest, with a few exceptions (e.g., a profit participating debt interest).

The Accounting for Uncertainty in Income Taxes Topic of the FASB Accounting Standards Codification (ASC 740) defines the threshold for recognizing the benefits of tax-return positions in the financial statements as

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

“more-likely-than-not” to be sustained by the taxing authority and requires measurement of a tax position meeting the more-likely-than-not criterion, based on the largest benefit that is more than 50% likely to be realized.

The Fund utilizes the average cost method to compute the adjusted tax cost basis of its MLP securities.

The Fund’s 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. Tax years subsequent to fiscal year 2014 remain open and subject to examination by federal and state tax authorities.

L. Foreign Currency Translations — The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) market value of investment securities, assets and liabilities at the rate of exchange as of the valuation date; and (ii) purchases and sales of investment securities, income and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions.

The Fund does not isolate that portion of gains and losses on investments in equity and debt securities which is due to changes in the foreign exchange rates from that which is due to changes in market prices of equity and debt securities. Accordingly, realized and unrealized foreign currency gains and losses with respect to such securities are included in the reported net realized and unrealized gains and losses on investment transactions balances.

Net realized foreign exchange gains or losses represent gains and losses from transactions in foreign currencies and foreign currency contracts, foreign exchange gains or losses realized between the trade date and settlement date on security transactions, and the difference between the amounts of interest and dividends recorded on the Fund’s books and the U.S. dollar equivalent of such amounts on the payment date.

Net unrealized foreign exchange gains or losses represent the difference between the cost of assets and liabilities (other than investments) recorded on the Fund’s books from the value of the assets and liabilities (other than investments) on the valuation date.

M. Indemnifications — Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide general indemnification to other parties. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred, and may not occur. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

N. Offering and Debt Issuance Costs — Offering costs incurred by the Fund related to the issuance of its common stock reduce additional paid-in-capital when the stock is issued. Costs incurred by the Fund related to the issuance of its debt (revolving credit facility, term loan or notes) or its preferred stock are capitalized and amortized over the period the debt or preferred stock is outstanding.

For the purpose of calculating the Fund’s asset coverage ratios pursuant to the 1940 Act, deferred issuance costs are not deducted from the carrying value of Notes and MRP Shares.

3.	Fair Value

The Fair Value Measurement Topic of the FASB Accounting Standards Codification (ASC 820) defines fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants under current market conditions at the measurement date. As required by ASC 820, the Fund has performed an analysis of all assets and liabilities measured at fair value to determine the significance and character of all inputs to their fair value determination. Inputs are the assumptions, along with considerations of risk, that a market participant would use to value an asset or a liability. In general, observable inputs are based on market data that is readily available, regularly distributed and verifiable that the Fund obtains

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

from independent, third-party sources. Unobservable inputs are developed by the Fund based on its own assumptions of how market participants would value an asset or a liability.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories.

•

Level 1 — Valuations based on quoted unadjusted prices for identical instruments in active markets traded on a national exchange to which the Fund has access at the date of measurement.

•

Level 2 — Valuations based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.

•

Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The following table presents the Fund’s assets and liabilities measured at fair value on a recurring basis at February 28, 2019, and the Fund presents these assets and liabilities by security type and description on its Schedule of Investments. Note that the valuation levels below are not necessarily an indication of the risk or liquidity associated with the underlying investment.


	Total		Quoted Prices in Active Markets (Level 1)		Prices with Other Observable Inputs (Level 2)			Unobservable Inputs (Level 3)
Assets at Fair Value
Equity investments	$	896,165	$	839,255	$	16,094	⁽¹⁾	$	40,816
Debt investments		19,779		—		19,779			—

Total assets at fair value	$	915,944	$	839,255	$	35,873		$	40,816

Liabilities at Fair Value
Call option contracts written	$	31	$	—	$	31		$	—

(1)

The Fund’s investment in Plains AAP, L.P. (“PAGP-AAP”) is exchangeable on a one-for-one basis into either Plains GP Holdings, L.P. (“PAGP”) shares or Plains All American Pipeline, L.P. (“PAA”) units at the Fund’s option. The Fund values its PAGP-AAP investment on an “as exchanged” basis based on the higher public market value of either PAGP or PAA. As of February 28, 2019, the Fund’s PAGP-AAP investment is valued at PAA’s closing price. The Fund categorizes its investment as a Level 2 security for fair value reporting purposes.

As of February 28, 2019, the Fund had Notes outstanding with aggregate principal amount of $200,923 and 3,000,000 shares of MRP Shares outstanding with a total liquidation value of $75,000. The Notes and MRP Shares were issued in private placements to institutional investors and are not listed on any exchange or automated quotation system. See Note 11 — Notes and Note 12 — Preferred Stock. As a result, the Fund categorizes the Notes and MRP Shares as Level 3 securities and determines the fair value of these instruments based on estimated market yields and credit spreads for comparable instruments with similar maturity, terms and structure.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

The Fund records the Notes and MRP Shares on its Statement of Assets and Liabilities at principal amount or liquidation value. As of February 28, 2019, the estimated fair values of these leverage instruments are as follows.


Security	Principal Amount/ Liquidation Value		Fair Value
Notes	$	200,923	$	201,300
MRP Shares	$	75,000	$	73,500

The following table presents the Fund’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended February 28, 2019.


	Equity Investments
Balance — November 30, 2018	$	35,455
Purchases		—
Issuances		—
Transfers in from Level 2		6,599
Transfers out to Level 1 and 2		—
Realized gains (losses)		—
Unrealized gains (losses), net		(1,238	)

Balance — February 28, 2019	$	40,816

The $6,599 transfer in from Level 2 relates to the Fund’s investment in a senior unsecured note issued by Jupiter Resources Inc. (Level 2). On December 28, 2018, the Fund exchanged this debt investment for Jupiter Resources Inc. common stock as part of a recapitalization transaction. The common stock investment in Jupiter Resources Inc. is not traded and is considered a Level 3 security. The Fund utilizes the beginning of reporting period method for determining transfers between levels.

The $1,238 of net unrealized losses relate to investments that are still held at the end of the reporting period. The Fund includes these unrealized gains (losses) on the Statement of Operations — Net Change in Unrealized Gains (Losses).

Valuation Techniques and Unobservable Inputs

Unless otherwise determined by the Board of Directors, the Fund values its private investments in public equity (“PIPE”) investments that are convertible into or otherwise will become publicly-tradeable (e.g., through subsequent registration or expiration of a restriction on trading) based on the market value of the publicly-traded security less a discount. This discount is initially equal to the discount negotiated at the time the Fund agrees to a purchase price. To the extent that such securities are convertible or otherwise become publicly traded within a time frame that may be reasonably determined, this discount will be amortized on a straight line basis over such estimated time frame.

The Fund owns Class B Units of Capital Product Partners L.P. (“CPLP”). The Class B Units are convertible on a one-for-one basis into common units and are senior to the underlying common units in terms of liquidation preference and priority of distributions. On November 27, 2018, CPLP and DSS Holdings L.P. (“DSS”) entered into a definitive agreement pursuant to which CPLP agreed to spin off its crude and product tanker business into a separate publicly listed company that would merge with DSS. In connection with this transaction, the Fund negotiated to have its CPLP Class B Units redeemed at a price of $9.00 per unit in cash. As a result of the announced transaction, the Fund valued its investment in CPLP Class B Units at $9.00 per unit. On March 27, 2019, CPLP and DSS completed their previously announced combination and all of the Fund’s CPLP Class B Units were redeemed.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

The Fund made an initial investment in Jupiter Resources Inc. (“Jupiter”) 8.50% senior unsecured notes due October 1, 2022 upon their issuance in September of 2014. On December 19, 2018, Jupiter completed a recapitalization transaction. As a result of the reorganization, the Fund received 1,261 common shares of Jupiter and cash equivalent to the semi-annual interest payment that was scheduled to be paid October 1, 2018. The common shares are not publicly traded and are subject to certain restrictions as to resale.

The Fund’s investment in Jupiter is valued using a combination of the following valuation techniques: (i) an analysis of valuations for publicly traded companies in a similar line of business (“public company analysis”) and (ii) an analysis of the net asset value of the company (“NAV analysis”). In addition to these valuation techniques, the Fund considers any trading activity in Jupiter’s equity when determining its valuation for its investment.

On December 19, 2018, the Fund received 1,261 common shares of Jupiter that were issued at a price of $4.25 per share. For the remainder of the first quarter of fiscal 2019, there were no meaningful trades in the Jupiter shares.

The public company analysis utilizes valuation ratios (commonly referred to as trading multiples) for publicly traded companies in a similar line of business as the portfolio company to estimate the fair value of such portfolio company (“public peers”). The Fund’s analysis focuses on the ratio of enterprise value (“EV”) to earnings before interest expense, income tax expense, depreciation and amortization (“EBITDA”) which is referred to as an EV/EBITDA multiple. For this analysis, the Fund utilizes projections provided by external sources as well as internally developed estimates. The analysis focuses on EBITDA projections for the current calendar year. Based on this data, the Fund selects a range of multiples given the trading multiples of similar publicly traded companies and applies such multiples to the portfolio company’s EBITDA to estimate the portfolio company’s enterprise value and equity value. When calculating these values, the Fund applies a discount to the portfolio company’s estimated equity value for the lack of marketability in the portfolio company’s securities.

The NAV analysis is derived using projected cash flows for the company’s proved developed producing (“PDP”) reserves as well as its proved undeveloped reserves and undeveloped acreage. These cash flows are discounted back to present value to determine the value of the company’s assets (including cash-on-hand and the value of any commodity price hedges). For this analysis, the projections are based on internally developed projections. Further, the cash flows attributable to the company’s PDP reserves are discounted at a 10% rate and the cash flows attributable to undeveloped reserves/acreage (net of associated capital expenditures) are discounted at a 20% rate. This value is then reduced by the company’s debt and other liabilities to determine Jupiter’s equity value, or net asset value. When calculating these values, the Fund applies a discount of 20% based on the trading prices of public peers relative to their estimated net asset values.

Under these valuation techniques, the Fund estimates the operating results of Jupiter (including EBITDA). These estimates utilize unobservable inputs such as historical operating results, which may be unaudited, and projected operating results, which will be based on operating assumptions for the company. These estimates will be sensitive to changes in assumptions specific to Jupiter as well as general assumptions for the industry. Other unobservable inputs utilized in the valuation techniques outlined above include: selection of publicly-traded companies, selected ranges for valuation multiples and selection of discount rates.

Changes in EBITDA multiples, or discount rates, each in isolation, may change the fair value of the Fund’s investment. Generally, a decrease in EBITDA multiples, or an increase in discount rates will result in a decrease in the fair value of the Fund’s investment.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

Additionally, the fair value of the Fund’s investments may differ from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Fund may ultimately realize.

The following table summarizes the significant unobservable inputs that the Fund used to value its portfolio investments categorized as Level 3 as of February 28, 2019:

Quantitative Table for Valuation Techniques


					Range
Assets at Fair Value	Fair Value		Valuation Technique	Unobservable Inputs	Low		High		Average
CPLP Class B Units	$	35,455	- Redemption price	- Negotiated redemption price per unit	$	9.00	$	9.00	$	9.00

Jupiter Resources Inc. Common Shares		5,361	- Public company analysis	- Selected valuation multiples: EV / 2019E EBITDA		5.0x		5.8x		5.4x
				- Discount for marketability		15.0%		25.0%		20.0%
			- NAV analysis	- Discount rate		10.0%		20.0%		15.0%
				- Price to NAV discount		20.0%		20.0%		20.0%

Total	$	40,816

4.	Concentration of Risk

The Fund’s investments are concentrated in the energy sector. The focus of the Fund’s portfolio within the energy sector may present more risks than if the Fund’s portfolio were broadly diversified across numerous sectors of the economy. A downturn in the energy sector would have a larger impact on the Fund than on an investment company that does not focus on the energy sector. The performance of securities in the energy sector may lag the performance of other industries or the broader market as a whole. Additionally, to the extent that the Fund invests a relatively high percentage of its assets in the securities of a limited number of issuers, the Fund may be more susceptible than a more widely diversified investment company to any single economic, political or regulatory occurrence. At February 28, 2019, the Fund had the following investment concentrations:


Category	Percent of Long-Term Investments
Securities of Energy Companies⁽¹⁾		100.0	%
Equity securities		97.8	%
Debt securities		2.2	%
Securities of MLPs⁽¹⁾		24.4	%
Largest single issuer		9.9	%
Restricted securities		7.5	%

(1)	Refer to the “Glossary of Key Terms” for the definitions of Energy Companies and MLPs.

5.	Agreements and Affiliations

A. Administration Agreement — On August 1, 2018, in connection with its merger with KYE, the Fund entered into an amended administration and accounting agreement with Ultimus Fund Solutions, LLC (“Ultimus”). Pursuant to the agreement, Ultimus will continue to provide certain administrative and accounting services for the Fund. The agreement has an initial term of three years and automatic one-year renewals unless earlier terminated by either party as provided under the terms of the agreement.

B. Investment Management Agreement — The Fund has entered into an investment management agreement with KA Fund Advisors, LLC (“KAFA”) under which KAFA, subject to the overall supervision of the Fund’s

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Fund. On March 27, 2019, the Fund renewed its investment management agreement with KAFA for a period of one year. The investment management agreement will expire on March 31, 2020 and may be renewed annually thereafter upon approval of the Fund’s Board of Directors (including a majority of the Fund’s directors who are not “interested persons” of the Fund, as such term is defined in the 1940 Act). For providing these services, KAFA receives an investment management fee from the Fund. For the three months ended February 28, 2019, the Fund paid management fees at an annual rate of 1.25% of the average monthly total assets of the Fund.

For purposes of calculating the management fee, the “average total assets” for each monthly period are determined by averaging the total assets at the last business day of that month with the total assets at the last business day of the prior month. The total assets of the Fund shall be equal to its average monthly gross asset value (which includes assets attributable to the Fund’s use of debt and preferred stock), minus the sum of the Fund’s accrued and unpaid dividends and distributions on any outstanding common stock and accrued and unpaid dividends and distributions on any outstanding preferred stock and accrued liabilities (other than liabilities associated with borrowing or leverage by the Fund). Liabilities associated with borrowing or leverage include the principal amount of any debt issued by the Fund, the liquidation preference of any outstanding preferred stock, and other liabilities from other forms of borrowing or leverage such as short positions and put or call options held or written by the Fund.

D. Portfolio Companies — From time to time, the Fund may “control” or may be an “affiliate” of one or more of its portfolio companies, as each of these terms is defined in the 1940 Act. In general, under the 1940 Act, the Fund would be presumed to “control” a portfolio company if the Fund and its affiliates owned 25% or more of its outstanding voting securities and would be an “affiliate” of a portfolio company if the Fund and its affiliates owned 5% or more of its outstanding voting securities. The 1940 Act contains prohibitions and restrictions relating to transactions between investment companies and their affiliates (including the Fund’s investment adviser), principal underwriters and affiliates of those affiliates or underwriters.

The Fund believes that there are several factors that determine whether or not a security should be considered a “voting security” in complex structures such as limited partnerships of the kind in which the Fund invests. The Fund also notes that the Securities and Exchange Commission (the “SEC”) staff has issued guidance on the circumstances under which it would consider a limited partnership interest to constitute a voting security. Under most partnership agreements, the management of the partnership is vested in the general partner, and the limited partners, individually or collectively, have no rights to manage or influence management of the partnership through such activities as participating in the selection of the managers or the board of the limited partnership or the general partner. As a result, the Fund believes that many of the limited partnership interests in which it invests should not be considered voting securities. However, it is possible that the SEC staff may consider the limited partner interests the Fund holds in certain limited partnerships to be voting securities. If such a determination were made, the Fund may be regarded as a person affiliated with and controlling the issuer(s) of those securities for purposes of Section 17 of the 1940 Act.

In making such a determination as to whether to treat any class of limited partnership interests the Fund holds as a voting security, the Fund considers, among other factors, whether or not the holders of such limited partnership interests have the right to elect the board of directors of the limited partnership or the general partner. If the holders of such limited partnership interests do not have the right to elect the board of directors, the Fund generally has not treated such security as a voting security. In other circumstances, based on the facts and circumstances of those partnership agreements, including the right to elect the directors of the general partner, the Fund has treated those securities as voting securities. If the Fund does not consider the security to be a voting security, it will not consider such partnership to be an “affiliate” unless the Fund and its affiliates own more than 25% of the outstanding securities of such partnership. Additionally, certain partnership agreements give common unitholders the right to elect the partnership’s board of directors, but limit the amount of voting securities any

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

limited partner can hold to no more than 4.9% of the partnership’s outstanding voting securities (i.e., any amounts held in excess of such limit by a limited partner do not have voting rights). In such instances, the Fund does not consider itself to be an affiliate if it owns more than 5% of such partnership’s common units.

There is no assurance that the SEC staff will not consider that other limited partnership securities that the Fund owns and does not treat as voting securities are, in fact, voting securities for the purposes of Section 17 of the 1940 Act. If such determination were made, the Fund will be required to abide by the restrictions on “control” or “affiliate” transactions as proscribed in the 1940 Act. The Fund or any portfolio company that it controls, and its affiliates, may from time to time engage in certain of such joint transactions, purchases, sales and loans in reliance upon and in compliance with the conditions of certain exemptive rules promulgated by the SEC. The Fund cannot make assurances, however, that it would be able to satisfy the conditions of these rules with respect to any particular eligible transaction, or even if the Fund were allowed to engage in such a transaction, that the terms would be more or as favorable to the Fund or any company that it controls as those that could be obtained in an arm’s length transaction. As a result of these prohibitions, restrictions may be imposed on the size of positions that may be taken for the Fund or on the type of investments that it could make.

As of February 28, 2019, the Fund believes that Buckeye Partners, L.P. (“BPL”) meets the criteria described above and is therefore considered an affiliate of the Fund.

Plains AAP, L.P., and Plains GP Holdings, L.P. — Robert V. Sinnott is Co-Chairman of Kayne Anderson Capital Advisors, L.P. (“KACALP”), the managing member of KAFA. Mr. Sinnott also serves as a director of PAA GP Holdings LLC, which is the general partner of Plains GP Holdings, L.P. (“PAGP”). Members of senior management of KACALP and KAFA and various affiliated funds managed by KACALP own PAGP shares, PAA units and interests in Plains AAP, L.P. (“PAGP-AAP”). The Fund believes that it is an affiliate of PAGP and PAGP-AAP under the 1940 Act by virtue of (i) the Fund’s and other affiliated Kayne Anderson funds’ ownership interest in PAGP and PAGP-AAP and (ii) Mr. Sinnott’s participation on the board of PAA GP Holdings LLC.

California Resources Corporation — Mr. Sinnott serves as a director of California Resources Corporation (“CRC”). The Fund’s investment in CRC is not a voting security, and as such, the Fund does not believe that it is an affiliate of CRC. Despite Mr. Sinnott’s participation on the board of CRC, the Fund does not believe that it is an affiliate of CRC because the Fund’s and other Kayne Anderson funds’ aggregate ownership does not meet the criteria described above, and because the Fund’s investment in CRC is not a voting security.

The following table summarizes the Fund’s investments in affiliates as of and for the three months ended February 28, 2019:


Investment⁽¹⁾	No. of Shares/ Units⁽²⁾ (in 000’s)		Value		Dividends/ Distributions Received		Net Realized Gains (Losses)		Net Change in Unrealized Gains (Losses)
Buckeye Partners, L.P.		716	$	22,532	$	537	$	264	$	1,625
Plains GP Holdings, L.P.		2,205		51,141		661		—		2,999
Plains GP Holdings, L.P. — Plains AAP, L.P.		690		16,094		207		—		421

Total			$	89,767	$	1,405	$	264	$	5,045

(1)	See Schedule of Investments for investment classifications.

(2)	During the three months ended February 28, 2019, the Fund sold 30 common units of BPL. There were no sales of PAGP or PAGP-AAP and the Fund made no purchases of any affiliates during the first quarter of 2019.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

Taxes

It is the Fund’s intention to continue to be treated as and to qualify as a RIC under Subchapter M of the Code and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements. See Note 2 — Significant Accounting Policies.

Income and capital gain distributions made by RICs often differ from GAAP basis net investment income (loss) and net realized gains (losses). For the Fund, the principal reason for these differences is the return of capital treatment of dividends and distributions from MLPs and certain other of its investments. Net investment income and net realized gains for GAAP purposes may differ from taxable income for federal income tax purposes.

As of February 28, 2019, the principal temporary differences between income for GAAP purposes and taxable income were (a) realized losses that were recognized for GAAP purposes, but disallowed for tax purposes due to wash sale rules; (b) disallowed partnership losses related to the Fund’s MLP investments; and (c) other basis adjustments in the Fund’s MLPs and other investments.

For the fiscal year ended November 30, 2018, the tax character of the total $34,494 distributions paid to common stockholders was $2,884 of dividend income and $31,610 of return of capital. The tax character of the total $1,912 distributions paid to holders of MRP shares was dividend income.

For purposes of determining the tax character of the dividends/distributions to investors, the amounts in excess of the Fund’s earnings and profits for federal income tax purposes are treated as a return of capital. Earnings and profits differ from taxable income due principally to adjustments related to the Fund’s investments in MLPs.

As a result of the 2017 Tax Cuts and Jobs Act (the “Tax Reform Bill”) the Fund may have a limitation on the deductibility of net interest expense. To the extent the Fund’s deductions are limited in any given year, the Fund will be able to utilize such deductions in future periods if it has sufficient taxable income.

The Fund acquired all of the net assets of KYE on August 6, 2018 in a tax-free reorganization under Section 368(a) of the Internal Revenue Code. For certain tax purposes, due to its larger market value at the time of the merger, KYE was determined to be the technical tax acquirer. As of November 30, 2017, KYE and KMF had capital loss carryforwards of $113,715 and $119,575, respectively. As of the merger date, KMF had estimated capital loss carryforwards of $129,948. As KYE is the technical tax acquirer, KYE’s capital loss carryforwards can be carried forward indefinitely and generally should not be limited as a result of the merger with KMF. Regulations under Section 382 of the Internal Revenue Code (“Section 382”) limit the amount of capital gains that can be offset by KMF’s capital loss carryforward to $8,533, annually, until all of KMF’s loss carryforwards are fully utilized. As of the merger date, KMF had $38,230 of unrealized built-in gains for tax purposes. In addition to the Section 382 annual limitation, the Fund will be able to utilize KMF’s capital loss carryforwards up to the amount of built-in gains that are realized.

Under the Regulated Investment Company Modernization Act of 2010, any net capital losses recognized after December 31, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses.

At February 28, 2019, the cost basis of investments for federal income tax purposes was $889,166, and the premiums received on outstanding option contracts written were $51. At February 28, 2019, gross unrealized appreciation and depreciation of investments and options, if any, for federal income tax purposes were as follows:


Gross unrealized appreciation of investments (including options, if any)	$	139,014
Gross unrealized depreciation of investments (including options, if any)		(112,216	)

Net unrealized appreciation of investments before foreign currency related translations		26,798
Unrealized appreciation on foreign currency related translations		1

Net unrealized appreciation of investments	$	26,799

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

7.	Restricted Securities

From time to time, the Fund’s ability to sell certain of its investments is subject to certain legal or contractual restrictions. For instance, private investments that are not registered under the Securities Act of 1933, as amended (the “Securities Act”), cannot be offered for public sale in a non-exempt transaction without first being registered. In other cases, certain of the Fund’s investments have restrictions such as lock-up agreements that preclude the Fund from offering these securities for public sale.

At February 28, 2019, the Fund held the following restricted investments:


Investment	Acquisition Date	Type of Restriction	Number of Units, Principal ($) (in 000s)		Cost Basis (GAAP)		Fair Value		Fair Value Per Unit		Percent of Net Assets			Percent of Total Assets
Level 2 Investments
Equity Investments
Plains GP Holdings, L.P. — Plains AAP, L.P.⁽¹⁾	⁽²⁾	⁽³⁾		690	$	2,302	$	16,094	$	23.34		2.5	%		1.7	%
Senior Notes⁽⁴⁾
California Resources Corporation	⁽²⁾	⁽⁵⁾		12,500		9,726		10,016		n/a		1.6			1.1
Epic Crude Services, LP	2/27/19	⁽⁶⁾		2,000		1,980		1,980		n/a		0.3			0.2

Total					$	14,008	$	28,090				4.4	%		3.0	%

Level 3 Investments⁽⁷⁾
Equity Investments
Capital Product Partners L.P.
Class B Units	⁽²⁾	⁽⁵⁾		3,939	$	18,931	$	35,455	$	9.00		5.6	%		3.8	%
Jupiter Resources Inc.	⁽⁸⁾	⁽⁶⁾		1,261		14,620		5,361		4.25		0.8			0.6

Total						33,551		40,816				6.4			4.4

Total of all restricted investments					$	47,559	$	68,906				10.8	%		7.4	%

(1)

The Fund values its investment in Plains AAP, L.P. (“PAGP-AAP”) on an “as exchanged” basis based on the higher public market value of either Plains GP Holdings, L.P. (“PAGP”) or Plains All American, L.P. (“PAA”). As of February 28, 2019, the Fund’s PAGP-AAP investment is valued at PAA’s closing price. See Note 3 — Fair Value.

(2)	Security was acquired at various dates in current and/or prior fiscal years.

(3)	The Fund’s investment in PAGP-AAP is exchangeable on a one-for-one basis into either PAGP shares or PAA units at the Fund’s option. Upon exchange, the PAGP shares or PAA units will be freely tradable.

(4)

These securities have a fair market value determined by the mean of the bid and ask prices provided by an agent or a syndicate bank, a principal market maker, an independent pricing service or an independent broker as more fully described in Note 2 — Significant Accounting Policies. These securities have limited trading volume and are not listed on a national exchange.

(5)	Unregistered or restricted security of a publicly-traded company.

(6)	Unregistered security of a private company.

(7)	Securities are valued using inputs reflecting the Fund’s own assumptions as more fully described in Note 2 — Significant Accounting Policies and Note 3 — Fair Value.

(8)	On December 28, 2018, as part of a recapitalization transaction, the Fund received shares from Jupiter Resources Inc.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

8.	Derivative Financial Instruments

As required by the Derivatives and Hedging Topic of the FASB Accounting Standards Codification (ASC 815), the following are the derivative instruments and hedging activities of the Fund. See Note 2 — Significant Accounting Policies.

Option Contracts — Transactions in option contracts for the three months ended February 28, 2019 were as follows:


	Number of Contracts			Premium
Call Options Written
Options outstanding at November 30, 2018		300		$	29
Options written		4,800			340
Options subsequently repurchased⁽¹⁾		(4,300	)		(318	)
Options exercised		—			—
Options expired		—			—

Options outstanding at February 28, 2019⁽²⁾		800		$	51

(1)	The price at which the Fund subsequently repurchased the options was $78, which resulted in net realized gains of $240.

(2)	The percentage of total long-term investments subject to call options written was 0.42% as of February 28, 2019.

Interest Rate Swap Contracts — The Fund may enter into interest rate swap contracts to partially hedge itself from increasing expense on its leverage resulting from increasing interest rates. At the time the interest rate swap contracts reach their scheduled termination, there is a risk that the Fund would not be able to obtain a replacement transaction or that the terms of the replacement transaction would not be as favorable as on the expiring transaction. In addition, if the Fund is required to terminate any swap contract early, then the Fund could be required to make a termination payment. As of February 28, 2019, the Fund did not have any interest rate swap contracts outstanding.

The following table sets forth the fair value of the Fund’s derivative instruments on the Statement of Assets and Liabilities:

Derivatives Not Accounted for as
Hedging Instruments

Statement of Assets and Liabilities

Location

Fair Value as of

February 28, 2019

Call options written

Call option contracts written

$(31)

The following table sets forth the effect of the Fund’s derivative instruments on the Statement of Operations:


		For the Three Months Ended February 28, 2019
Derivatives Not Accounted for as Hedging Instruments	Location of Gains/(Losses) on Derivatives Recognized in Income	Net Realized Gains/(Losses) on Derivatives Recognized in Income		Change in Unrealized Gains/(Losses) on Derivatives Recognized in Income
Call options written	Options	$	240	$	21

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

9.	Investment Transactions

For the three months ended February 28, 2019, the Fund purchased and sold securities in the amounts of $40,097 and $58,480 (excluding short-term investments and options).

10.

Credit Facility and Term Loan

On February 8, 2019, the Fund amended and extended its unsecured revolving credit facility (the “Credit Facility”) that was scheduled to mature on February 15, 2019. The Credit Facility has a 364-day term, maturing on February 7, 2020 and a total commitment amount of $100,000. The interest rate on outstanding borrowings under the Credit Facility may vary between LIBOR plus 1.30% and LIBOR plus 1.95%, depending on the Fund’s asset coverage ratios. The Fund pays a fee of 0.20% per annum on any unused amounts of the Credit Facility. In connection with the renewal and increase in size of the Credit Facility by $25,000, the Fund terminated its existing $35,000 unsecured revolving term loan facility that was scheduled to mature on July 25, 2019.

For the three months ended February 28, 2019, the average amount outstanding under the Credit Facility was $9,867 with a weighted average rate of 3.76%. As of February 28, 2019, the Fund had $4,000 outstanding under the Credit Facility at an interest rate of 3.80%.

As of February 28, 2019, the Fund was in compliance with all financial and operational covenants required by the Credit Facility. See Financial Highlights for the Fund’s asset coverage ratios under the 1940 Act.

11.

Notes

At February 28, 2019, the Fund had $200,923 aggregate principal amount of Notes outstanding. The table below sets forth the key terms of each series of Notes outstanding at February 28, 2019.


Series	Principal Outstanding February 28, 2019		Unamortized Issuance Costs		Estimated Fair Value February 28, 2019	Fixed Interest Rate			Maturity
C	$	21,000	$	55	$21,500		4.00	%		3/22/22
D		40,000		150	40,000		3.34	%		5/1/23
E		30,000		89	30,300		3.46	%		7/30/21
G		24,538		41	24,300		3.07	%		8/8/20
H		42,308		153	42,300		3.72	%		8/8/23
I		38,077		166	37,900		3.82	%		8/8/25
J		5,000		1	5,000		3.36	%		10/7/21

	$	200,923	$	655	$201,300

Holders of the Series C, D and E Notes are entitled to receive cash interest payments semi-annually (on March 3 and September 3) at the fixed rate. Holders of the Series G, H, I and J Notes are entitled to receive cash interest payments semi-annually (on February 13 and August 13) at the fixed rate. As of February 28, 2019, the weighted average interest rate on the outstanding Notes was 3.57%.

As of February 28, 2019, each series of Notes was rated “AAA” by FitchRatings. In the event the credit rating on any series of Notes falls below “A-”, the interest rate on such series will increase by 1% during the period of time such series is rated below “A-”. The Fund is required to maintain a current rating from one rating agency with respect to each series of Notes and is prohibited from having any rating of less than investment grade (“BBB-”) with respect to each series of Notes.

The Notes were issued in private placement offerings to institutional investors and are not listed on any exchange or automated quotation system. The Notes contain various covenants related to other indebtedness,

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

liens and limits on the Fund’s overall leverage. Under the 1940 Act and the terms of the Notes, the Fund may not declare dividends or make other distributions on shares of its common stock or make purchases of such shares if, at any time of the declaration, distribution or purchase, asset coverage with respect to senior securities representing indebtedness (including the Notes) would be less than 300%.

The Notes are redeemable in certain circumstances at the option of the Fund. The Notes are also subject to a mandatory redemption to the extent needed to satisfy certain requirements if the Fund fails to meet an asset coverage ratio required by law and is not able to cure the coverage deficiency by the applicable deadline, or fails to cure a deficiency as stated in the Fund’s rating agency guidelines in a timely manner.

The Notes are unsecured obligations of the Fund and, upon liquidation, dissolution or winding up of the Fund, will rank: (1) senior to all of the Fund’s outstanding preferred shares; (2) senior to all of the Fund’s outstanding common shares; (3) on a parity with any unsecured creditors of the Fund and any unsecured senior securities representing indebtedness of the Fund; and (4) junior to any secured creditors of the Fund.

At February 28, 2019, the Fund was in compliance with all covenants under the Notes agreements.

12.

Preferred Stock

At February 28, 2019, the Fund had 3,000,000 shares of MRP Shares outstanding, with a total liquidation value of $75,000 ($25.00 per share). The table below sets forth the key terms of each series of MRP Shares outstanding at February 28, 2019.


Series	Liquidation Value February 28, 2019		Unamortized Issuance Costs		Estimated Fair Value February 28, 2019		Rate	Mandatory Redemption Date
C	$	35,000	$	168	$	34,600	4.06%		7/30/21
D		20,000		170		19,400	3.36%		9/7/21
E		20,000		309		19,500	4.07%		12/1/24

	$	75,000	$	647	$	73,500

Holders of the MRP Shares are entitled to receive cumulative cash dividend payments on the first business day following each quarterly period (February 28, May 31, August 31 and November 30).

As of February 28, 2019, the Fund’s series C, D and E MRP Shares were rated “A” by FitchRatings. The dividend rate on the Fund’s MRP Shares will increase between 0.5% and 4.0% if the credit rating is downgraded below “A” by FitchRatings. Further, the annual dividend rate for all series of MRP Shares will increase by 4.0% if no ratings are maintained, and the annual dividend rate will increase by 5.0% if the Fund fails to make quarterly dividend or certain other payments. The Fund is required to maintain a current rating from one rating agency with respect to each series of MRP Shares.

The MRP Shares rank senior to all of the Fund’s outstanding common shares and on parity with any other preferred stock. The MRP Shares are redeemable in certain circumstances at the option of the Fund and are also subject to a mandatory redemption if the Fund fails to meet a total leverage (debt and preferred stock) asset coverage ratio of 225% or fails to maintain its basic maintenance amount as stated in the Fund’s rating agency guidelines.

Under the terms of the MRP Shares, the Fund may not declare dividends or make other distributions on shares of its common stock or make purchases of such shares if, at any time of the declaration, distribution or purchase, asset coverage with respect to total leverage would be less than 225% or the Fund would fail to maintain its basic maintenance amount as stated in the Fund’s rating agency guidelines.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in 000’s, except number of option contracts, share and per share amounts)

(UNAUDITED)

The holders of the MRP Shares have one vote per share and will vote together with the holders of common stock as a single class except on matters affecting only the holders of MRP Shares or the holders of common stock. The holders of the MRP Shares, voting separately as a single class, have the right to elect at least two directors of the Fund.

At February 28, 2019, the Fund was in compliance with the asset coverage and basic maintenance requirements of its MRP Shares.

13.

Common Stock

At February 28, 2019, the Fund had 197,000,000 shares of common stock authorized and 48,878,499 shares outstanding. As of February 28, 2019, KAFA owned 4,000 shares of the Fund. During the three months ended February 28, 2019, there were no common stock transactions.

14.

Subsequent Events

On March 28, 2019, the Fund declared monthly distributions of $0.075 per common share to be paid on April 30, May 31, and June 28 of 2019.

On March 28, 2019, the Fund announced that its Board of Directors approved a program to purchase up to $20,000 of the Fund’s common stock. As of March 27, 2019, the Fund’s common stock was trading at a 14.0% discount to NAV. The repurchase program will continue until the earlier of (i) the repurchase of $20,000 of common stock or (ii) September 30, 2019.

On March 29, 2019, the Fund paid its previously declared monthly distribution of $0.075 per common share. Of the total distribution of $3,666, pursuant to the Fund’s dividend reinvestment plan, $309 was reinvested into the Fund through open market purchases of common stock.

The Fund has performed an evaluation of subsequent events through the date the financial statements were issued and has determined that no additional items require recognition or disclosure.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

GLOSSARY OF KEY TERMS

(UNAUDITED)

This glossary contains definitions of certain key terms, as they are used in our investment objective and policies and as described in this report. These definitions may not correspond to standard sector definitions.

“Energy Assets” means assets that are used in the energy sector, including assets used in exploring, developing, producing, generating, transporting, transmitting, storing, gathering, processing, refining, distributing, mining or marketing of natural gas, natural gas liquids, crude oil, refined products, coal or electricity.

“Energy Companies” means companies that own and operate Energy Assets or provide energy-related services. For purposes of this definition, this includes companies that (i) derive at least 50% of their revenues or operating income from operating Energy Assets or providing services for the operation of such Energy Assets or (ii) have Energy Assets that represent the majority of their assets.

“General Partner MLPs” means Master Limited Partnerships whose assets consist of ownership interests of an affiliated Master Limited Partnership (which may include general partnership interests, incentive distribution rights, common units and subordinated units).

“Master Limited Partnerships” or “MLPs” means limited partnerships and limited liability companies that are publicly traded and are treated as partnerships for federal income tax purposes, includes Midstream MLPs and other MLPs.

“Midstream Assets” means assets used in energy logistics, including, but not limited to, assets used in transporting, storing, gathering, processing, distributing, or marketing of natural gas, natural gas liquids, crude oil or refined products.

“Midstream Companies” means companies that own and operate Midstream Assets and are taxed as corporations for federal income tax purposes, including MLP Affiliates of Midstream MLPs. This includes companies structured like MLPs, but not treated as a publicly-traded partnership for RIC qualification purposes as well as MLP Affiliates of Midstream MLPs. For purposes of this definition, this includes companies that (i) derive at least 50% of their revenue or operating income from operating Midstream Assets or (ii) have Midstream Assets that represent the majority of their assets.

“Midstream/Energy Sector” consists of (a) Midstream MLPs, (b) Midstream Companies, (c) Other MLPs and (d) Other Energy Companies.

“Midstream Sector” consists of (a) Midstream MLPs and (b) Midstream Companies.

“Midstream MLPs” means MLPs that principally own and operate Midstream Assets including General Partner MLPs whose assets consist of ownership interests of an affiliated Midstream MLP.

“MLP Affiliates” means affiliates of Master Limited Partnerships, substantially all of whose assets consist of i-units or other ownership interests in Master Limited Partnerships. MLP Affiliates are not treated as partnerships for federal income tax purposes.

“Other Energy Companies” means Energy Companies, excluding MLPs and Midstream Companies.

“Other MLPs” consists of (a) upstream MLPs, (b) coal MLPs, (c) propane MLPs and (d) MLPs that operate other energy assets or provide energy-related services.

KAYNE ANDERSON MIDSTREAM/ENERGY FUND, INC.

REPURCHASE DISCLOSURE

(UNAUDITED)

Notice is hereby given in accordance with Section 23(c) of the 1940 Act, that the Fund may from time to time purchase shares of its common and preferred stock and its Notes in the open market or in privately negotiated transactions.


Directors and Corporate Officers

Kevin S. McCarthy		Chairman of the Board of Directors and Chief Executive Officer

William R. Cordes		Director

Anne K. Costin		Director

Barry R. Pearl		Director

Albert L. Richey		Director

William H. Shea, Jr		Director

William L. Thacker		Director

James C. Baker		Director and President

Terry A. Hart		Chief Financial Officer, Treasurer and Assistant Secretary

David J. Shladovsky		Secretary

Michael J. O’Neil		Chief Compliance Officer

J.C. Frey		Executive Vice President

Ron M. Logan, Jr.		Senior Vice President

Jody C. Meraz		Senior Vice President

A. Colby Parker		Assistant Treasurer

Investment Adviser KA Fund Advisors, LLC 811 Main Street, 14th Floor Houston, TX 77002		Administrator Ultimus Fund Solutions, LLC 225 Pictoria Drive, Suite 450 Cincinnati, OH 45246

1800 Avenue of the Stars, Third Floor Los Angeles, CA 90067		Stock Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 (888) 888-0317

Custodian JPMorgan Chase Bank, N.A. 383 Madison Avenue, Fourth Floor New York, NY 10179		Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP 601 S. Figueroa Street, Suite 900 Los Angeles, CA 90017

		Legal Counsel Paul Hastings LLP 101 California Street, Forty-Eighth Floor San Francisco, CA 94111

Please visit us on the web at www.kaynefunds.com or call us toll-free at 1-877-657-3863.

LOGO

This report, including the financial statements herein, is made available to stockholders 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 report.