UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY

 

 

Investment Company Act file number: 811-21793

 

Name of Fund: BlackRock Enhanced Government Fund, Inc. (EGF)

 

Fund Address: 100 Bellevue Parkway, Wilmington, DE 19809

 

Name and address of agent for service: John M. Perlowski, Chief Executive Officer, BlackRock Enhanced Government Fund, Inc., 55 East 52nd Street, New York, NY 10055

 

Registrant’s telephone number, including area code: (800) 882-0052, Option 4

 

Date of fiscal year end: 12/31/2014

 

Date of reporting period: 03/31/2014

 

Item 1 – Schedule of Investments

 
 

Schedule of Investments March 31, 2014 (Unaudited) BlackRock Enhanced Government Fund, Inc. (EGF)
(Percentages shown are based on Net Assets)

 

Asset-Backed Securities Par
(000)		   Value  
 
First Franklin Mortgage Loan Trust, Series 2005-FF2, Class M2, 0.81%, 3/25/35 (a) $ 1,220 $ 1,218,130  
Motor 2012 PLC, Series 12A, Class A1C, 1.29%, 2/25/20 (b)   220   220,263  
Securitized Asset Backed Receivables LLC Trust (a):          
  Series 2005-OP1, Class M2, 0.83%, 1/25/35   1,658   1,489,738  
  Series 2005-OP2, Class M1, 0.58%, 10/25/35   1,025   880,760  
 
Total Asset-Backed Securities — 2.8%   3,808,891  
 

 

 

Corporate Bonds  
 
Diversified Telecommunication Services — 2.3%  
Verizon Communications, Inc., 2.50%, 9/15/16   3,000   3,106,410  
 
Energy Equipment & Services — 0.3%  
Transocean, Inc.:          
  4.95%, 11/15/15   295   313,195  
  5.05%, 12/15/16   50   54,384  
  6.00%, 3/15/18   60   66,724  
   
    434,303  
 
Total Corporate Bonds — 2.6%   3,540,713  
 

 

 

Non-Agency Mortgage-Backed Securities  
 
Collateralized Mortgage Obligations — 1.1%  
Bank of America Mortgage Securities, Inc., Series 2003-J, Class 2A1, 2.84%, 11/25/33 (a)   168   168,723  
Bear Stearns Alt-A Trust, Series 2004-13, Class A1, 0.89%, 11/25/34 (a)   243   241,472  
Homebanc Mortgage Trust, Series 2005-4, Class A1, 0.42%, 10/25/35 (a)   1,252   1,108,063  
   
    1,518,258  
 
Interest Only Collateralized Mortgage Obligations — 0.1%  
CitiMortgage Alternative Loan Trust, Series 2007-A5, Class 1A7, 6.00%, 5/25/37   341   85,524  
 
Total Non-Agency Mortgage-Backed Securities — 1.2%   1,603,782  
 
   

Preferred Securities

  
 
Capital Trusts Par
(000)		   Value  
 
Diversified Financial Services  — 0.4%  
ZFS Finance (USA) Trust V, 6.50%, 5/09/37 (b) $ 504 $ 540,540  
 
Electric Utilities — 1.5%  
PPL Capital Funding, Inc., 6.70%, 3/30/67   2,000   2,010,000  
 
Total Capital Trusts — 1.9%   2,550,540  
 

 

 

Trust Preferred — 1.5%
Shares		      
 
   
Capital Markets — 1.5%  
Morgan Stanley Capital Trust VIII, 6.45%, 4/15/67   80,000   1,977,567  
 
Total Preferred Securities — 3.4%   4,528,107  
 

 

 

U.S. Government Sponsored Agency Securities Par
(000)		      
 
Agency Obligations — 3.0%  
Federal Farm Credit Bank, 4.55%, 6/08/20 $ 3,500   3,974,866  
 
Collateralized Mortgage Obligations — 9.6%  
Ginnie Mae Mortgage-Backed Securities, Class C (a):          
  Series 2005-87, 5.06%, 9/16/34   2,230   2,277,723  
  Series 2006-3, 5.24%, 4/16/39   10,000   10,655,930  
   
    12,933,653  
 
Interest Only Collateralized Mortgage Obligations — 2.4%  
Fannie Mae Mortgage-Backed Securities:          
  Series 2012-47, Class NI, 4.50%, 4/25/42   2,369   508,123  
  Series 2012-96, Class DI, 4.00%, 2/25/27   2,917   347,693  
  Series 2012-M9, Class X1, 4.08%, 12/25/17 (a)   5,510   673,480  
Ginnie Mae Mortgage-Backed Securities (a):          
  Series 2006-30, Class IO, 0.68%, 5/16/46   1,451   80,578  
               

 

BLACKROCK ENHANCED GOVERNMENT FUND, INC.MARCH 31, 20141
 
Schedule of Investments (continued) BlackRock Enhanced Government Fund, Inc. (EGF)
(Percentages shown are based on Net Assets)

 

U.S. Government Sponsored Agency Securities Par
(000)		   Value  
 
Interest Only Collateralized Mortgage Obligations (concluded)
Ginnie Mae Mortgage-Backed Securities (a) (concluded):          
    Series 2009-116, Class KS, 6.32%, 12/16/39 $ 1,055 $ 156,940  
  Series 2009-78, Class SD, 6.04%, 9/20/32   2,434   446,823  
  Series 2011-52, Class NS, 6.52%, 4/16/41   6,615   1,007,869  
   
    3,221,506  
 
Mortgage-Backed Securities — 64.1%  
Fannie Mae Mortgage-Backed Securities:          
  2.50%, 4/01/28   8,362   8,364,368  
  3.00%, 6/01/42 - 4/01/43   8,498   8,212,794  
  3.50%, 8/01/26 - 6/01/42   13,554   14,001,668  
  4.00%, 4/01/24 - 2/01/41   18,083   18,873,010  
  4.50%, 4/01/39 - 8/01/40   12,006   12,868,518  
  5.00%, 11/01/33 - 2/01/40   7,359   8,062,794  
  5.50%, 10/01/23 - 5/01/44 (c)   12,825   14,199,630  
  6.00%, 2/01/36 - 3/01/38   1,366   1,519,984  
Freddie Mac Mortgage-Backed Securities, 4.50%, 5/01/34   278   296,149  
Ginnie Mae Mortgage-Backed Securities, 5.00%, 11/15/35   13   14,040  
   
    86,412,955  
 
Total U.S. Government Sponsored Agency Securities — 79.1%   106,542,980  
 

 

 

U.S. Treasury Obligations  
 
U.S. Treasury Bonds:          
  6.63%, 2/15/27   2,000   2,787,188  
  5.38%, 2/15/31   2,000   2,558,438  
  3.88%, 8/15/40 (d)   12,000   12,791,256  
  4.38%, 5/15/41 (d)   10,000   11,559,380  
  3.75%, 8/15/41 (d)   10,000   10,418,750  
U.S. Treasury Notes:          
  0.38%, 11/15/15 (d)   5,900   5,908,986  
  0.75%, 3/15/17 (d)   3,000   2,988,750  
  0.75%, 6/30/17   4,000   3,962,500  
  1.38%, 6/30/18   3,000   2,985,936  
  3.13%, 5/15/21 (d)   10,000   10,532,810  
             
U.S. Treasury Obligations Par
(000)		   Value  
 
U.S. Treasury Notes (concluded):          
  1.75%, 5/15/22 (d) $ 2,000 $ 1,887,188  
 
Total U.S. Treasury Obligations — 50.8%   68,381,182  
 
Total Long-Term Investments
(Cost — $186,345,944) — 139.9%		   188,405.655  
 

 

 

Short-Term Securities
Shares		      
 
   
BlackRock Liquidity Funds, TempFund, Institutional Class, 0.03% (e)(f)   4,637,316   4,637,316  
 
Total Short-Term Securities
(Cost — $4,637,316) — 3.4%		   4,637,316  
 
Total Investments Before TBA Sale Commitments and Options Written (Cost — $190,983,260*) — 143.3%   193,042,971  
 

 

 

TBA Sale Commitments (c) Par
(000)		      
 
   
Fannie Mae Mortgage-Backed Securities 5.50%, 4/01/41-5/01/41 $ 12,200   (13,463,367 )
 
Total TBA Sale Commitments
(Proceeds — $13,441,203) — (10.0)%		   (13,463,367 )
 

 

 

Options Written
(Premiums Received — $387,000) — (0.2)%		   (300,011 )
 
Total Investments, Net of TBA Sale Commitments and Options Written — 133.1%   179,279,593  
Liabilities in Excess of Other Assets — (33.1)%   (44,556,591 )
   
Net Assets — 100.0% $ 134,723,002  
 
* As of March 31, 2014, gross unrealized appreciation and depreciation based on cost for federal income tax purposes were as follows:

  
Tax cost $ 190,983,122  
   
Gross unrealized appreciation $ 4,937,929  
Gross unrealized depreciation   (2,850,985 )
   
Net unrealized appreciation $ 2,086,944  
   
 

 

BLACKROCK ENHANCED GOVERNMENT FUND, INC.MARCH 31, 20142
 
Schedule of Investments (continued) BlackRock Enhanced Government Fund, Inc. (EGF)
               
 

Notes to Schedule of Investments

(a) Variable rate security. Rate shown is as of report date.
(b) Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration to qualified institutional investors.
(c) Represents or includes a TBA transaction. Unsettled TBA transactions as of March 31, 2014 were as follows:
     
 
  Counterparty   Value   Unrealized
Depreciation		  
 
  Credit Suisse Securities (USA) LLC   $ (3,312,773) $ (4,805)  
  JPMorgan Securities, Inc   $ (3,414,621) $ (7,590)  
                     
 
(d) All or a portion of security has been pledged as collateral in connection with outstanding reverse repurchase agreements.  
(e) Investments in issuers considered to be an affiliate of the Fund during the period ended March 31, 2014, for purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as follows:  
                                   
 
  Affiliate  

Shares

Held at
December 31, 2013

   Net
Activity		  

Shares

Held at
March 31, 2014

   Income  
 
  BlackRock Liquidity Funds, TempFund, Institutional Class   3,984,792   652,386   4,637,178 $ 281  
                     
 
                                         
(f) Represents the current yield as of report date.
   

Portfolio Abbreviations

   
EUR Euro
LIBOR London Interbank Offered Rate
OTC Over-the-Counter
USD US Dollar
       
• Reverse repurchase agreements outstanding as of March 31, 2014 were as follows:
 
Counterparty Interest
Rate		 Trade
Date		 Maturity
Date		   Face Value   Face Value
Including
Accrued
Interest		  
 
Credit Suisse Securities (USA) LLC 0.10% 12/11/13 Open $ 6,630,000 $ 6,631,125  
Credit Suisse Securities (USA) LLC 0.10% 3/03/13 Open   10,400,000   10,400,653  
Credit Suisse Securities (USA) LLC 0.10% 3/03/13 Open   12,765,000   12,765,801  
Deutsche Bank Securities, Inc. 0.10% 4/02/13 Open   4,030,000   4,033,093  
Merrill Lynch, Pierce, Fenner & Smith, Inc. 0.09% 4/25/13 Open   11,500,000   11,505,671  
Merrill Lynch, Pierce, Fenner & Smith, Inc. 0.10% 4/25/13 Open   2,047,500   2,048,748  
Merrill Lynch, Pierce, Fenner & Smith, Inc. 0.11% 9/18/13 Open   5,892,625   5,892,884  
Total       $ 53,265,125 $ 53,277,975  
   
 
BLACKROCK ENHANCED GOVERNMENT FUND, INC.MARCH 31, 20143
 
Schedule of Investments (continued) BlackRock Enhanced Government Fund, Inc. (EGF)

 

• Financial futures contracts outstanding as of March 31, 2014 were as follows:
 
Contracts
Purchased		 Issue Exchange Expiration Notional
Value		   Unrealized
Depreciation		  
 
2 10-Year U.S. Treasury Note Bank of America Securities LLC June
2014		 $ 247,000 $ (1,640)  
105 90 Day Euro Future Bank of America Securities LLC December
2017		   25,427,062   (2,377)  
37 90 Day Euro Future Bank of America Securities LLC December
2018		   8,906,363   (3,239)  
 
Total           $ (7,256)  
     
                             
• Forward foreign currency exchange contracts outstanding as of March 31, 2014 were as follows:
 
Currency
Purchased		   Currency
Sold		 Counterparty Settlement
Date		   Unrealized
Depreciation		  
 
USD 54,385   EUR 40,000 Barclays Bank PLC 4/22/14 $ (718)  
 
     
                     
• OTC interest rate swaptions written as of March 31, 2014 were as follows:
  Description Counterparty Put/
Call		 Exercise Rate Pay/Receive Exercise Rate Expiration
Date		 Floating Rate Index Notional
Amount
(000)		 Market
Value		  
 
  2-Year Interest Rate Swap Royal Bank of Scotland PLC Call 0.57% Pay
4/28/14		 3-Month LIBOR $ 37,500 $ (23,826)  
  5-Year Interest Rate Swap Royal Bank of Scotland PLC Call 1.80% Pay
4/28/14		 3-Month LIBOR 37,500   (95,186)  
  10-Year Interest Rate Swap Royal Bank of Scotland PLC Call 2.81% Pay
4/28/14		 3-Month LIBOR 22,500   (87,292)  
  30-Year Interest Rate Swap Royal Bank of Scotland PLC Call 3.50% Pay
4/28/14		 3-Month LIBOR 11,300   (93,707)  
  Total $ (300,011)  
   
                               
   
• Centrally cleared interest rate swaps outstanding as of March 31, 2014 were as follows:
  Fixed
Rate		   Floating
Rate		  
Clearinghouse		 Expiration
Date		   Notional
Amount
(000)		   Unrealized
Appreciation		  
  2.29%1   3-Month LIBOR   Chicago Mercantile Exchange 5/30/23 $ 880 $ 33,051  
                                           
• OTC interest rate swaps outstanding as of March 31, 2014 were as follows:
  Fixed
Rate		   Floating
Rate		   Counterparty Expiration
Date		 Notional
Amount
(000)		 Market
Value		 Premiums
Paid
(Received)		 Unrealized
Depreciation
  5.96%1   3-Month LIBOR   Deutsche Bank AG 12/27/37 $ 23,900 $   (10,089,967)   —    $ (10,089,967)  
1  Fund pays the fixed rate and receives the floating rate.
     
BLACKROCK ENHANCED GOVERNMENT FUND, INC.MARCH 31, 20144
 
Schedule of Investments (continued) BlackRock Enhanced Government Fund, Inc. (EGF)

 

   
 
• Fair Value Measurements — Various inputs are used in determining the fair value of investments and derivative financial instruments. These inputs to valuation techniques are categorized into a disclosure hierarchy consisting of three broad levels for financial reporting purposes as follows:

  • Level 1 — unadjusted price quotations in active markets/exchanges for identical assets or liabilities that the Fund has the ability to access
 
  • Level 2 — other observable inputs (including, but not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs)
 
  • Level 3 — unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Fund's own assumptions used in determining the fair value of investments and derivative financial instruments)
 
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Changes in valuation techniques may result in transfers into or out of an assigned level within the disclosure hierarchy. In accordance with the Fund's policy, transfers between different levels of the fair value disclosure hierarchy are deemed to have occurred as of the beginning of the reporting period. The categorization of a value determined for investments and derivative financial instruments is based on the pricing transparency of the investment and derivative financial instrument and is not necessarily an indication of the risks associated with investing in those securities. For information about the Fund's policy regarding valuation of investments and derivative financial instruments, please refer to the Fund's most recent financial statements as contained in its annual report.

The following tables summarize the Fund's investments and derivative financial instruments categorized in the disclosure hierarchy as of March 31, 2014:

       
 
  Level 1   Level 2   Level 3   Total  
 
Assets:    
Investments:  
Long-Term Investments:  
  Asset-Backed Securities $ — $ 3,808,891   — $ 3,808,891  
  Corporate Bonds   —   3,540,713   —   3,540,713  
  Non-Agency Mortgage-Backed Securities   —   1,603,782   —   1,603,782  
  Preferred Securities   1,977,567   2,550,540   —   4,528,107  
  U.S. Government Sponsored Agency Securities   —   106,542,980   —   106,542,980  
  U.S. Treasury Obligations   —   68,381,182   —   68,381,182  
Short-Term Securities:  
  Short-Term Investment Fund   4,637,316   —   —   4,637,316  
Liabilities:    
Investments:  
  TBA Sale Commitments   — $ (13,463,367)   — $ (13,463,367)  
   
Total $ 6,614,883 $ 172,964,721   — $ 179,579,604  
   
                                 
BLACKROCK ENHANCED GOVERNMENT FUND, INC.MARCH 31, 20145
 
Schedule of Investments (concluded) BlackRock Enhanced Government Fund, Inc. (EGF)

 

 
   Level 1  Level 2  Level 3  Total
 
Derivative Financial Instruments1
Assets:                     
 Interest rate contracts   —     $33,051    —     $33,051 
Liabilities:                     
 Foreign currency exchange contracts   —      (718)   —      (718)
 Interest rate contracts  $(7,256)   (10,389,978)   —      (10,397,234)
                     
Total  $(7,256)  $(10,357,645)   —     $(10,364,901)
                     
                     
1 Derivative financial instruments are swaps, financial futures contracts, foreign currency exchange contracts and options written. Swaps, financial futures contracts and foreign currency exchange contracts are valued at the unrealized appreciation/depreciation on the instrument and options written are shown at value.
   

The carrying amount or face value, including accrued interest, for certain of the Fund’s assets and/or liabilities approximates fair value for financial statement purposes. As of March 31, 2014, such assets and/or liabilities are categorized within the disclosure hierarchy as follows:

 
   Level 1  Level 2  Level 3  Total
 
Assets:                    
Foreign currency at value.  $758    —      —     $758 
Cash pledged for centrally cleared swaps   35,000    —      —      35,000 
Cash pledged as collateral for OTC swaps   10,540,000    —      —      10,540,000 
Cash pledged as collateral for reverse repurchase agreements   1,075,000    —      —      1,075,000 
Cash pledged for financial futures contracts   109,000    —      —      109,000 
Liabilities:                    
Reverse repurchase agreement   —     $(53,277,975)   —      (53,277,975)
Total  $11,759,758   $(53,277,975)   —     $(41,518,217)
                     

As of December 31, 2013, the Fund used other observable inputs in determining the value of certain equity securities. As of March 31, 2014, the Fund valued the same securities using unadjusted price quotations from an exchange. As a result, investments with a beginning of period value of $1,878,008 transferred from Level 2 to Level 1 in the disclosure hierarchy.

   
BLACKROCK ENHANCED GOVERNMENT FUND, INC.MARCH 31, 20146
 

Item 2 – Controls and Procedures

2(a) – The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the ″1940 Act″)) are effective as of a date within 90 days of the filing of this report based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended.
2(b) – There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.

Item 3 – Exhibits

  Certifications – Attached hereto
  Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
   
  BlackRock Enhanced Government Fund, Inc.
     
  By: /s/ John M. Perlowski
    John M. Perlowski
    Chief Executive Officer (principal executive officer) of
    BlackRock Enhanced Government Fund, Inc.
   
  Date: May 23, 2014
   
  Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
   
  By: /s/ John M. Perlowski
    John M. Perlowski
  Chief Executive Officer (principal executive officer) of
    BlackRock Enhanced Government Fund, Inc.

 

  Date: May 23, 2014
   
  By: /s/ Neal J. Andrews
    Neal J. Andrews
  Chief Financial Officer (principal financial officer) of
    BlackRock Enhanced Government Fund, Inc.
   
  Date: May 23, 2014