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 52^nd 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: 09/30/2014

 

Item 1 – Schedule of Investments

  

Schedule of Investments September 30, 2014 (Unaudited)	BlackRock Enhanced Government Fund, Inc. (EGF)
	(Percentages shown are based on Net Assets)

 

 

		BlackRock Enhanced Government Fund, Inc.		September 30, 2014	1

 

  

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

 

 

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.

 

		BlackRock Enhanced Government Fund, Inc.		September 30, 2014	2

 

 

  

Schedule of Investments (continued)	BlackRock Enhanced Government Fund, Inc. (EGF)

 

(c)	Represents or includes a TBA transaction. Unsettled TBA transactions as of September 30, 2014 were as follows:

 

		Counterparty											Value		Unrealized Appreciation/Depreciation
		Credit Suisse Securities (USA) LLC										$	(2,784,083)	$	(5,567)
		Goldman Sachs & Co.										$	111,363	$	102
		Deutsche Bank Securities, Inc.										$	(3,560,110)	$	(5,954)

 

(d)	All or a portion of security has been pledged as collateral in connection with open reverse repurchase agreements.
(e)	Investments in issuers considered to be an affiliate of the Fund during the period ended September 30, 2014, for purposes of Section 2(a)(3) of the Investment Company Act of 1940 Act, as amended, were as follows:

 

	Affiliate					Shares Held at December 31, 2013								Net Activity			Shares Held at September 30, 2014		Income
	BlackRock Liquidity Funds, TempFund, Institutional Class					3,984,792							1,634,908				5,619,700		$1,121

 

(f)	Represents the current yield as of report date.

 

Portfolio Abbreviations
IO	Interest Only
LIBOR	London Interbank Offer Rate
OTC	Over-the-Counter
TBA	To Be Announced
USD	U.S. Dollar

 

•	Reverse repurchase agreements outstanding as of September 30, 2014 were as follows:

 

Counterparty		Interest Rate	Trade Date	Maturity Date1		Face Value		Face Value Including Accrued Interest
Credit Suisse Securities (USA) LLC		0.09%	4/25/2013	Open	$	13,705,000	$	13,707,364
Credit Suisse Securities (USA) LLC		0.09%	4/25/2013	Open		12,275,000		12,277,117
Credit Suisse Securities (USA) LLC		0.09%	9/18/2013	Open		11,185,000		11,186,929
Deutsche Bank Securities, Inc.		0.05%	4/16/2014	Open		4,000,000		4,001,375
Merrill Lynch, Pierce, Fenner & Smith, Inc.		0.06%	7/23/2014	Open		2,047,500		2,049,615
Merrill Lynch, Pierce, Fenner & Smith, Inc.		0.06%	7/23/2014	Open		5,892,625		5,895,274
Merrill Lynch, Pierce, Fenner & Smith, Inc.		0.09%	7/23/2014	Open		11,500,000		11,510,734
Total					$	60,605,125	$	60,628,408

 

	1 Certain agreements have no stated maturity and can be terminated by either party at any time.

 

•	Financial futures contracts outstanding as of September 30, 2014 were as follows:

 

Contracts Sold	Issue	Exchange	Expiration	Notional Value			Unrealized Appreciation
(20)	Ultra Long U.S. Treasury Bond	Chicago Board of Trade	December 2014	$	3,050,000	$	36,066

 

		BlackRock Enhanced Government Fund, Inc.		September 30, 2014	3

 

  

Schedule of Investments (continued)	BlackRock Enhanced Government Fund, Inc. (EGF)

 

•	OTC interest rate swaptions sold as of September 30, 2014 were as follows:

 

Description

Counterparty

Put/ Call

Exercise Rate

Pay/Receive Exercise Rate

Floating Rate Index

Expiration Date

Notional Amount (000)

Market Value

2-Year Interest Rate Swap

Credit Suisse Securities (USA) LLC

Call

0.82%

Pay

3-Month LIBOR

10/29/14

$

37,500

$

(16,248)

5-Year Interest Rate Swap

Credit Suisse Securities (USA) LLC

Call

1.94%

Pay

3-Month LIBOR

10/29/14

37,500

(90,969)

10-Year Interest Rate Swap

Credit Suisse Securities (USA) LLC

Call

2.63%

Pay

3-Month LIBOR

10/29/14

22,500

(110,348)

30-Year Interest Rate Swap

Credit Suisse Securities (USA) LLC

Call

3.16%

Pay

3-Month LIBOR

10/29/14

11,300

(120,669)

$

(338,234)

 

•	Centrally cleared interest rate swaps outstanding as of September 30, 2014 were as follows:

 

Fixed Rate

Floating Rate

Clearinghouse

Expiration Date

Notional Amount (000)

Unrealized Appreciation

2.29%1

3-Month LIBOR

Chicago Mercantile

5/30/23

$

880

$

16,837

 

•	OTC interest rate swaps outstanding as of September 30, 2014 were as follows:

 

Fixed Rate		Floating Rate		Counterparty	Expiration Date		Notional Amount (000)		Market Value		Unrealized Depreciation
5.96%1		3-Month LIBOR		Deutsche Bank AG	12/27/37	$	23,900	$	(11,622,793)	$	(11,622,792)

1 The Fund pays the fixed rate and receives the floating rate.

 

		BlackRock Enhanced Government Fund, Inc.		September 30, 2014	4

 

  

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. 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. 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 quoted prices 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)
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 semi-annual report. The following tables summarize the Fund's investments and derivative financial instruments categorized in the disclosure hierarchy as of September 30, 2014:

 

			Level 1		Level 2		Level 3		Total
Assets:
Investments:
Long-Term Investments:
	Asset-Backed Securities	$	—	$	3,134,832		—	$	3,134,832
	Corporate Bonds		—		3,503,216		—		3,503,216
	Non-Agency Mortgage-Backed Securities		—		1,523,796		—		1,523,796
	Preferred Securities		1,984,767		2,567,800		—		4,552,567
	U.S. Government Sponsored Agency Securities		—		98,127,620		—		98,127,620
	U.S. Treasury Obligations		—		78,566,445		—		78,566,445
Short-Term Securities			5,619,700		—		—		5,619,700
Liabilities:
Investments:
	TBA Sale Commitments		—		(8,348,732)		—		(8,348,732)
Total		$	7,604,467	$	179,074,977		—	$	186,679,444

 

		Level 1		Level 2		Level 3		Total
Derivative Financial Instruments 1
Assets:
Interest rate contracts	$	36,066	$	16,837		—	$	52,903
Liabilities:
Interest rate contracts		—		(11,961,026)		—		(11,961,026)
Total	$	36,066	$	(11,944,189)		—	$	(11,908,123)

 

		BlackRock Enhanced Government Fund, Inc.		September 30, 2014	5

 

  

Schedule of Investments (concluded)	BlackRock Enhanced Government Fund, Inc. (EGF)

 

1	Derivative financial instruments are swaps, financial futures contracts and options written. Swaps and financial futures contracts are valued at the unrealized appreciation/depreciation on the instrument and options written are shown at value.

 

The Fund may hold assets and/or liabilities in which the fair value approximates the carrying amount for financial reporting purposes. As of September 30, 2014, such assets and/or liabilities are categorized within the disclosure hierarchy as follows:

 

			Level 1		Level 2		Level 3		Total
Assets:
	Cash pledged as collateral for centrally cleared swaps	$	35,000		—		—	$	35,000
	Cash pledged as collateral for over-the-counter swaps		11,840,000		—		—		11,840,000
	Cash pledged as collateral for reverse repurchase agreements		1,314,000		—		—		1,314,000
	Cash pledged for financial futures contracts		60,000		—		—		60,000
	Foreign currency at value		339		—		—		339
Liabilities:
	Bank overdraft		—	$	(501,704	)	—		(501,704	)
	Reverse repurchase agreements		—		(60,628,408	)	—		(60,628,408	)
Total		$	13,249,339	$	(61,130,112	)	—	$	(47,880,773	)

 

There were no transfers between levels during the period ended September 30, 2014.

 

 

		BlackRock Enhanced Government Fund, Inc.		September 30, 2014	6

 

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: November 24, 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: November 24, 2014
	By:	/s/ Neal J. Andrews
		Neal J. Andrews
		Chief Financial Officer (principal financial officer) of
		BlackRock Enhanced Government Fund, Inc.
	Date: November 24, 2014