-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CVz8lDz29QQTAacf1VIgoKSpjbQZBgDhRfFrhn2zwK3Z3SM6rlXuLe38SxHeM8mg mPuEtIXJNU5NB960yeIufw== 0000038721-09-000027.txt : 20090529 0000038721-09-000027.hdr.sgml : 20090529 20090529094809 ACCESSION NUMBER: 0000038721-09-000027 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20090331 FILED AS OF DATE: 20090529 DATE AS OF CHANGE: 20090529 EFFECTIVENESS DATE: 20090529 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN CUSTODIAN FUNDS CENTRAL INDEX KEY: 0000038721 IRS NUMBER: 132573775 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00537 FILM NUMBER: 09859241 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-312-2000 MAIL ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CUSTODIAN FUNDS INC DATE OF NAME CHANGE: 19920703 0000038721 S000006754 FRANKLIN DYNATECH FUND C000018321 CLASS A FKDNX C000018322 CLASS B FDNBX C000018323 CLASS C FDYNX C000066417 Advisor Class C000068977 Class R 0000038721 S000006755 FRANKLIN GROWTH FUND C000018324 CLASS A FKGRX C000018325 CLASS B FKGBX C000018326 CLASS C FRGSX C000018327 ADVISOR CLASS FCGAX C000018328 CLASS R FGSRX 0000038721 S000006756 FRANKLIN INCOME FUND C000018329 CLASS A FKINX C000018330 CLASS B1 FICBX C000018331 CLASS B FBICX C000018332 CLASS C FCISX C000018333 ADVISOR CLASS FRIAX C000018334 CLASS R FISRX 0000038721 S000006757 FRANKLIN U.S. GOVERNMENT SECURITIES FUND C000018335 CLASS A FKUSX C000018336 CLASS B FUGBX C000018337 CLASS C FRUGX C000018338 ADVISOR CLASS FUSAX C000018339 CLASS R FUSRX 0000038721 S000006758 FRANKLIN UTILITIES FUND C000018340 CLASS A FKUTX C000018341 CLASS B FRUBX C000018342 CLASS C FRUSX C000018343 ADVISOR CLASS FRUAX C000018344 CLASS R FRURX N-CSRS 1 fcfsrpt509.txt FR CUSTODIAN FUNDS N-CSRS PE 3/31/09 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-00537 --------- FRANKLIN CUSTODIAN FUNDS ------------------------ (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------ (Address of principal executive offices) (Zip code) CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 650 312-2000 ------------ Date of fiscal year end: 9/30 ---- Date of reporting period: 3/31/09 ------- ITEM 1. REPORTS TO STOCKHOLDERS. MARCH 31, 2009 SEMIANNUAL REPORT AND SHAREHOLDER LETTER Franklin DynaTech Fund Franklin Growth Fund Franklin Income Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund SIGN UP FOR eDELIVERY Log onto FRANKLINTEMPLETON.COM and click "My Profile" [PICTURE] FRANKLIN CUSTODIAN FUNDS [FRANKLIN LOGO] FRANKLIN - Templeton - Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE(R) Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups -- Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with offices in over 25 countries, Templeton offers investors a truly global perspective. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among what it believes are undervalued stocks, as well as arbitrage situations and distressed securities. TRUE DIVERSIFICATION Because our management groups work independently and adhere to different investment approaches, Franklin, Templeton and Mutual Series funds typically have distinct portfolios. That's why our funds can be used to build truly diversified allocation plans covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable, accurate and personal service that has helped us become one of the most trusted names in financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS [PICTURE] Not part of the semiannual report Contents SHAREHOLDER LETTER .................................... 1 SEMIANNUAL REPORT Economic and Market Overview .......................... 3 Franklin DynaTech Fund ................................ 5 Franklin Growth Fund .................................. 13 Franklin Income Fund .................................. 21 Franklin U.S. Government Securities Fund .............. 31 Franklin Utilities Fund ............................... 40 Financial Highlights and Statements of Investments .... 47 Financial Statements .................................. 98 Notes to Financial Statements ......................... 107 Shareholder Information ............................... 128
Shareholder Letter Dear Shareholder: The six-month period ended March 31, 2009, was an extraordinary and stressful time for investors and those of us who have worked in financial markets for many years. During this turbulent period, the U.S. recession deepened, the unemployment rate surged and consumer spending fell. Most stocks suffered major losses as investors worried about an uncertain future. With a new president, Barack Obama, the country and the financial markets were eager to see how effectively the government could address these problems. Although this environment is bound to provoke great concern, we think it is important to put short-term market developments in perspective. Keep in mind that as daunting as current conditions may be, we have navigated through other periods of high market volatility, such as the U.S. stock market's severe decline of 1987 and the bursting of the technology bubble in 2000. We remain committed to our long-term perspective and our disciplined investment philosophy. Therefore, we view recent declines as potential opportunities to find bargains that we believe may be well positioned to become eventual winners. Although conditions remain challenging, our experience gives us ample reason to be optimistic about future market stabilization and recovery. Franklin Custodian Funds' semiannual report goes into greater detail about prevailing conditions during the period under review. In addition, the portfolio managers discuss investment management decisions and Fund performance for the period. You will also find performance data and financial information. Please remember that all securities markets fluctuate, as do mutual fund share prices. NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE Not part of the semiannual report | 1 If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily prices, monthly performance figures, portfolio holdings and other information. You can also access your account, buy and sell shares, read timely articles, and find helpful financial planning tools. We hope you will take advantage of these online services. Although market conditions are constantly changing, we remain committed to our disciplined strategy as we manage the Funds. As always, we recommend investors consult their financial advisors and review their portfolios to design a long-term strategy and portfolio allocation that meet their individual needs, goals and risk tolerance. We firmly believe that most people benefit from professional advice, and that advice is invaluable as investors navigate changing market environments. We thank you for investing with Franklin Templeton, welcome your questions and comments, and look forward to serving your investment needs in the years ahead. Sincerely, -s- Charles B. Johnson Charles B. Johnson President and Chief Executive Officer - Investment Management Franklin Custodian Funds THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF MARCH 31, 2009. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 2 | Not part of the semiannual report Semiannual Report Economic and Market Overview During the six-month period ended March 31, 2009, economic conditions generally deteriorated. In February 2009, The Conference Board's Consumer Confidence Index fell to an all-time low since it began in 1967 as the U.S. economy faltered and stock markets declined. The government's abrupt conservatorship of Fannie Mae and Freddie Mac in early September 2008 and the failure of several blue chip banks and financial institutions roiled equity markets during the period. Despite government interventions and massive emergency funding, the nation's economic troubles were exacerbated as manufacturing activity weakened at its fastest pace in nearly 30 years and as home prices continued to fall in early 2009. Jobless claims mounted and the unemployment rate rose to 8.5% by period-end.(1) Although home sales declined for most of the period, they increased near period-end. Reflecting a broad-based contraction in consumer spending, falling corporate profits and slowing exports, economic growth, as measured by gross domestic product (GDP), fell an annualized 6.3% in the fourth quarter of 2008. In 2009's first quarter, GDP declined at an estimated 6.1% annualized rate. Oil prices stood at $101 per barrel at the beginning of the period, but retreated dramatically to $50 by period-end. Many other commodities such as agricultural products and base metals followed similar trends. Partially as a result of the steep price corrections, inflation declined significantly during the period, and March's inflation rate was an annualized -0.4%.1 Core inflation, which excludes food and energy costs, rose at a 1.8% annual rate, which was within the Federal Reserve Board's (Fed's) informal target range of 1.5%-2.0%.1 A slowing economy and decelerating inflation prompted policymakers to further lower interest rates and enact stimulus plans. During the six months under review, the Fed lowered the federal funds target rate to a range of 0% to 0.25% from 2.00% at the start of the period. The Fed and U.S. Treasury Department introduced new programs intended to enhance market liquidity. The government also outlined details of its Public-Private Investment Program, with an objective of removing devalued real estate-related assets from banks' balance sheets. Treasury prices rose for the first half of the period but began to decline in the latter half. Investors drove the yield on the three-month Treasury bill to a multi-decade low. Fixed income spreads were generally wide relative to Treasury yields over the period due to heightened market turbulence and risk aversion. 1. Source: Bureau of Labor Statistics. Semiannual Report | 3 The yield spread between the two-year and the 10-year Treasury yields rose slightly to 190 basis points (100 basis points equal one percentage point) at the end of March from 185 basis points at the beginning of the reporting period. The two-year Treasury bill yield fell from 2.00% to 0.81% over the six-month period. Over the same period, the 10-year Treasury note yield fell from 3.85% to 2.71%. Market volatility intensified during the reporting period as stocks fluctuated wildly. Near period-end, stock markets rebounded somewhat from severely depressed levels, but still declined significantly over the period. For the six months under review, the blue chip stocks of the Dow Jones Industrial Average had a total return of -28.57%, the broader Standard & Poor's 500 Index (S&P 500) a -30.54% total return, and the technology-heavy NASDAQ Composite Index a -26.50% total return.(2) All sectors lost value, and the financials, materials and industrials sectors had the largest declines. THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF MARCH 31, 2009. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE. 2. Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Dow Jones Industrial Average is price weighted based on the average market price of 30 blue chip stocks of companies that are generally industry leaders. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The index is market value weighted and includes more than 3,000 companies. 4 | Semiannual Report Franklin DynaTech Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks capital appreciation by investing substantially in equity securities of companies emphasizing scientific or technological development or that are in fast-growing industries. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin DynaTech Fund covers the period ended March 31, 2009. PERFORMANCE OVERVIEW Franklin DynaTech Fund - Class A had a -23.54% cumulative total return for the six months under review. For the same period, the Fund performed comparably with its narrow benchmark, the NASDAQ 100 Index, which had a price-only return of - -22.43%, and performed better than the broader Standard & Poor's 500 Index (S&P 500), which had a -30.54% total return.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 8. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. 1. Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The NASDAQ 100 Index includes 100 of the largest domestic and international nonfinancial companies listed on The NASDAQ Stock Market based on market capitalization. The index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies including investment companies. The NASDAQ 100 Index is calculated under a modified capitalization-weighted methodology. Index returns are price-return only and do not include reinvested dividends. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 includes reinvested dividends and is one of the most widely used benchmarks of U.S. equity performance. The indexes are unmanaged. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 52. Semiannual Report | 5 PORTFOLIO BREAKDOWN Franklin DynaTech Fund Based on Total Net Assets as of 3/31/09 (BAR CHART) Biotechnology 10.1 Pharmaceuticals 10.0% Software 8.7% Computers & Peripherals 7.6% Semiconductors & Semiconductor Equipment 7.5% Health Care Equipment & Supplies 6.8% Communications Equipment 6.5% Internet Software & Services 5.9% IT Services 5.5% Energy Equipment & Services 4.1% Chemicals 3.7% Life Sciences Tools & Services 3.6% Wireless Telecommunication Services 3.5% Internet & Catalog Retail 3.2% Health Care Providers & Services 2.3% Other 9.6% Short-Term Investments & Other Net Assets 1.4%
MANAGER'S DISCUSSION Unsurprisingly, the information technology sector suffered steep declines during the six months under review, weighing heaviest on the Fund's investments in software companies challenged by receding sales as weakening demand dynamics took hold.(2) Within the portfolio, the negative impact was especially noticeable among software makers such as Adobe Systems, Nintendo and Autodesk. Stocks in the communications equipment industry also fared poorly, as the valuations for Canadian wireless equipment and services provider Research In Motion and networking gear giant Cisco Systems fell sharply in value. The Fund's holdings in the health care equipment and supplies industry also recorded substantial losses. Notable detractors included Swiss ophthalmic equipment and pharmaceuticals maker Alcon; surgical instrument manufacturer Stryker; and Medtronic, which specializes in implantable biomedical devices. As demand for commodities and energy products faded with the intensifying recession, so did the value of Fund holdings in energy equipment and services providers such as Schlumberger and FMC Technologies. Despite broad-based and often heavy declines across most stock types during the period, our positions in health care and biotechnology holdings buoyed performance. The Fund benefited from the increased wave of mergers in the industry as it owned positions in Genentech, Schering-Plough and Wyeth, all of which were acquired. Myriad Genetics also stood out as a top performer as its predictive medicine products continued to show strong adoption in the marketplace. Elsewhere, wireless telecommunication services industry holdings SBA Communications, Leap Wireless International and Crown Castle International also posted strong returns and supported Fund performance, partially because the sale of Leap and Crown Castle during the period was timely. Finally, to a lesser degree, select consumer-related holdings performed well, namely Amazon.com, which benefited from its offering of Prime (free shipping after the customer pays a fixed annual fee), Marketplace (allows third-party sellers to sell easily on the site), and Kindle (wireless book reading device). It is undeniable that global economic conditions during the reporting period were weak and corporate profitability generally contracted. Yet we think it is important to keep two things in mind. First, one of the largest stock declines in history recently occurred, as the S&P 500 fell 57% from its peak through March 31, 2009.3 This suggested that markets were pricing in very bad news, so we think that any positive surprises should lead to higher stock prices. Second, equity markets have historically recovered ahead of the real economy. We found 2. The information technology sector comprises communications equipment, computers and peripherals, electronic equipment and instruments, Internet software and services, IT services, semiconductors and semiconductor equipment, and software in the SOI. 3. Source: (C) 2009 Morningstar. See footnote 1 for a description of the S&P 500. 6 | Semiannual Report March 2009 encouraging because it was much more positive than the rest of the period. Stocks, as measured by the S&P 500, hit their recent bear market low on March 9.4 From this point until March 31, the S&P 500 was 18% higher.(4) We have certainly seen false starts in the past, but at period-end we were particularly encouraged that financial stocks and Asian markets were participating in and leading this recovery. As financial markets stabilize, we believe other industries should benefit as well. As managers of Franklin DynaTech Fund, at period-end we were encouraged by the relative abundance of leading science and technology companies, which we believe have strong long-term growth prospects, trading at what we perceive to be attractive valuations. Looking out over the longer term, we believe it is these innovative, thought-leading companies that may lead economic advancement. Thank you for your continued participation in Franklin DynaTech Fund. We look forward to serving your future investment needs. [PHOTO OF RUPERT H. JOHNSON, JR.] - -s- Rupert H. Johnson, Jr. Rupert H. Johnson, Jr. (PHOTO OF MATTHEW J. MOBERG) - -s- Matthew J. Moberg Matthew J. Moberg, CPA Portfolio Management Team Franklin DynaTech Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 4. Sources: Standard & Poor's; (C) 2009 Ned Davis Research, Inc. See footnote 1 for a description of the S&P 500. TOP 10 HOLDINGS Franklin DynaTech Fund 3/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - ------------------------------------------------- ---------- Apple Inc. 5.0% COMPUTERS & PERIPHERALS, U.S. Google Inc., A 3.8% INTERNET SOFTWARE & SERVICES, U.S. Gilead Sciences Inc. 3.7% BIOTECHNOLOGY, U.S. Intel Corp. 3.6% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, U.S. Teva Pharmaceutical Industries Ltd., ADR 3.4% PHARMACEUTICALS, ISRAEL Visa Inc., A 3.0% IT SERVICES, U.S. QUALCOMM Inc. 2.6% COMMUNICATIONS EQUIPMENT, U.S. Hewlett-Packard Co. 2.5% COMPUTERS & PERIPHERALS, U.S. Amazon.com Inc. 2.4% INTERNET & CATALOG RETAIL, U.S. Celgene Corp. 2.3% BIOTECHNOLOGY, U.S.
Semiannual Report | 7 Performance Summary as of 3/31/09 FRANKLIN DYNATECH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKDNX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$7.60 $ 17.27 $ 24.87 DISTRIBUTIONS (10/1/08-3/31/09) Long-Term Capital Gain $ 1.5822
CLASS B (SYMBOL: FDNBX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$7.34 $ 16.14 $ 23.48 DISTRIBUTIONS (10/1/08-3/31/09) Long-Term Capital Gain $ 1.5822
CLASS C (SYMBOL: FDYNX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$7.28 $ 15.95 $ 23.23 DISTRIBUTIONS (10/1/08-3/31/09) Long-Term Capital Gain $ 1.5822
CLASS R (SYMBOL: N/A) CHANGE 3/31/09 12/1/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) +$1.58 $ 17.24 $ 15.66
ADVISOR CLASS (SYMBOL: N/A) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$7.59 $ 17.31 $ 24.90 DISTRIBUTIONS (10/1/08-3/31/09) Long-Term Capital Gain $ 1.5822
8 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AGGREGATE AND AVERAGE ANNUAL TOTAL RETURNS AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -23.54% -31.55% -14.56% -6.03% Average Annual Total Return(2) -27.95% -35.48% -4.24% -1.21% Value of $10,000 Investment(3) $ 7,205 $ 6,452 $ 8,052 $ 8,857 Total Annual Operating Expenses(4) 0.99%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (2/1/00) - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -23.81% -32.06% -17.72% -32.24% Average Annual Total Return(2) -26.57% -34.52% -4.17% -4.16% Value of $10,000 Investment(3) $ 7,343 $ 6,548 $ 8,083 $ 6,776 Total Annual Operating Expenses(4) 1.75%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -23.85% -32.06% -17.72% -12.78% Average Annual Total Return(2) -24.53% -32.68% -3.83% -1.36% Value of $10,000 Investment(3) $ 7,547 $ 6,732 $ 8,228 $ 8,722 Total Annual Operating Expenses(4) 1.75%
CLASS R INCEPTION (12/1/08) - -------------------------------------- ------------------ Cumulative Total Return(1) +10.09% Aggregate Total Return(5) +10.09% Value of $10,000 Investment(3) $11,009 Total Annual Operating Expenses(4) 1.25%
ADVISOR CLASS(6) 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -23.47% -31.41% -14.37% -5.83% Average Annual Total Return(2) -23.47% -31.41% -3.06% -0.60% Value of $10,000 Investment(3) $ 7,653 $ 6,859 $ 8,563 $ 9,417 Total Annual Operating Expenses(4) 0.75%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Semiannual Report | 9 Performance Summary (CONTINUED) ENDNOTES THE FUND'S INVESTMENTS IN FAST-GROWING INDUSTRIES, INCLUDING THE TECHNOLOGY AND TELECOMMUNICATIONS SECTORS (WHICH HAVE HISTORICALLY BEEN VOLATILE) COULD RESULT IN INCREASED PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM, DUE TO THE RAPID PACE OF PRODUCT CHANGE AND DEVELOPMENT AND CHANGES IN GOVERNMENT REGULATION OF COMPANIES EMPHASIZING SCIENTIFIC OR TECHNOLOGICAL ADVANCEMENTS. THE FUND MAY ALSO INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH INVOLVES SPECIAL RISKS SUCH AS RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND MODEST MARKET SHARE. THE PRICES OF THESE SECURITIES CAN BE VOLATILE, ESPECIALLY OVER THE SHORT TERM, AND INVESTORS SHOULD EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 5. Aggregate total return represents the change in value of an investment over the period shown. Since Class R shares have existed for less than one year, average annual total returns are not available. 6. Effective 5/15/08, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. Performance quotations for this class reflect the following methods of calculation: (a) For periods prior to 5/15/08, a restated figure is used based upon the Fund's Class A performance, excluding the effect of Class A's maximum initial sales charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods after 5/14/08, actual Advisor Class performance is used reflecting all charges and fees applicable to that class. Since 5/15/08 (commencement of sales), the cumulative total return of Advisor Class shares was -39.31%. 10 | Semiannual Report Your Fund's Expenses FRANKLIN DYNATECH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 11 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 10/1/08 VALUE 3/31/09 PERIOD* 10/1/08-3/31/09 ----------------- -------------- ------------------------- CLASS A Actual $1,000 $ 764.60 $ 5.10 Hypothetical (5% return before expenses) $1,000 $1,019.15 $ 5.84 CLASS B Actual $1,000 $ 761.90 $ 8.43 Hypothetical (5% return before expenses) $1,000 $1,015.36 $ 9.65 CLASS C Actual $1,000 $ 761.50 $ 8.43 Hypothetical (5% return before expenses) $1,000 $1,015.36 $ 9.65 CLASS R Actual (12/1/08-3/31/09) $1,000 $1,100.90 $ 4.94 Hypothetical (5% return before expenses) $1,000 $1,017.85 $ 7.14 ADVISOR CLASS Actual $1,000 $ 765.30 $ 4.05 Hypothetical (5% return before expenses) $1,000 $1,020.34 $ 4.63
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 1.16%; B: 1.92%; C: 1.92%; R: 1.42%; and Advisor 0.92%), multiplied by the average account value over the period, multiplied by 182/365 (Hypothetical for all share classes; Actual for Classes A, B, C and Advisor) to reflect the one-half year period. For Actual Class R expenses, the multiplier is 121/365 to reflect the number of days since inception. 12 | Semiannual Report Franklin Growth Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Growth Fund seeks capital appreciation by investing substantially in equity securities of companies that are leaders in their industries. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PORTFOLIO BREAKDOWN Franklin Growth Fund Based on Total Net Assets as of 3/31/09 [BAR CHART] Capital Goods* 25.4% Pharmaceuticals, Biotechnology & Life Sciences 20.0% Technology Hardware & Equipment 13.8% Transportation 8.1% Software & Services 7.4% Health Care Equipment & Services 5.6% Materials 2.6% Commercial & Professional Services 2.4% Energy 2.2% Other 6.7% Short-Term Investments & Other Net Assets 5.8%
* Significant exposure to a single sector may result in greater volatility for the Fund than a more broadly diversified portfolio. This semiannual report for Franklin Growth Fund covers the period ended March 31, 2009. PERFORMANCE OVERVIEW Franklin Growth Fund - Class A had a -27.27% cumulative total return for the six months under review. The Fund performed better than its benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -30.54% total return for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 16. INVESTMENT STRATEGY We are research-driven, fundamental investors pursuing a growth strategy. As "bottom-up" investors we focus primarily on finding individual securities that meet our criteria for growth potential, quality and valuation. We search for high-quality companies that have identifiable drivers of future earnings growth. We rely on our team of analysts to help provide in-depth industry expertise and use both qualitative and quantitative analysis to evaluate companies. Our analysts identify each company's market opportunity, competitive position, management and financial strength, business and financial risks, and valuation. We choose to invest in those companies that, in our opinion, offer the best trade-off between growth opportunity, business and financial risk, and valuation. MANAGER'S DISCUSSION Franklin Growth Fund owned shares of 109 companies at period-end. We continue to invest in a broad array of companies of all sizes and in varied industries. 1. Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 61. Semiannual Report | 13 TOP 10 HOLDINGS Franklin Growth Fund 3/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------------------- ---------- Apple Inc. 4.6% TECHNOLOGY HARDWARE & EQUIPMENT Johnson & Johnson 3.4% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES International Business Machines Corp. 3.4% TECHNOLOGY HARDWARE & EQUIPMENT Amgen Inc. 2.8% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES Northrop Grumman Corp. 2.6% CAPITAL GOODS 3M Co. 2.6% CAPITAL GOODS General Dynamics Corp. 2.5% CAPITAL GOODS W.W. Grainger Inc. 2.3% CAPITAL GOODS Allergan Inc. 2.3% PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES The Boeing Co. 2.2% CAPITAL GOODS
In a challenging environment for stocks, several of our holdings hindered Fund performance during the period. In the industrials sector, aerospace and defense companies Boeing, General Dynamics and Lockheed Martin were primary detractors, as was industrial conglomerate Textron. In the transportation industry, railroad operator Union Pacific declined in value. Elsewhere, auto components company Johnson Controls in the automobiles and components industry hurt results. During the period under review, Fund performance was helped by several holdings in the pharmaceuticals, biotechnology and life sciences industry. Among these were pharmaceutical giants Wyeth and Schering-Plough and biotechnology companies Genentech and Biogen Idec. Other contributors included computers and peripherals company Apple in the technology hardware and equipment industry and electric utility FPL, a new holding, in the utilities sector. Thank you for your continued participation in Franklin Growth Fund. We look forward to serving your future investment needs. [PHOTO OF V. JERRY PALMIERI] - -s- V. Jerry Palmieri V. Jerry Palmieri [PHOTO OF SERENA PERIN VINTON] - -s- Serena Perin Vinton Serena Perin Vinton Portfolio Management Team Franklin Growth Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 14 | Semiannual Report Effective November 1, 2008, SERENA PERIN VINTON, a senior vice president of Franklin Global Advisers, assumed portfolio manager responsibilities for Franklin Growth Fund. She is a member of the Franklin Institutional Large Cap Growth Equity team. Ms. Perin Vinton joined Franklin Templeton Investments in 1991. She served as an analyst and portfolio manager in the international fixed income group for four years before joining the Franklin equity group in 1995. Her prior equity research responsibilities include analysis of the consumer products and household goods, specialty retail, apparel/footwear/textiles, paper and forest products, building materials and steel industries. Prior to joining Franklin Templeton, Ms. Perin Vinton worked as a research assistant for a British member of Parliament in London. She earned her B.A. in business economics from Brown University. She is a Chartered Financial Analyst (CFA) Charterholder and is a licensed registered securities representative. Ms. Perin Vinton is a member of the CFA Institute. Semiannual Report | 15 Performance Summary as of 3/31/09 FRANKLIN GROWTH FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKGRX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$10.45 $ 26.72 $ 37.17 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $ 0.3065
CLASS B (SYMBOL: FKGBX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$ 9.76 $ 25.68 $ 35.44
CLASS C (SYMBOL: FRGSX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$ 9.70 $ 25.44 $ 35.14 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $ 0.0224
CLASS R (SYMBOL: FGSRX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$10.20 $ 26.67 $ 36.87 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $ 0.1080
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$10.53 $ 26.72 $ 37.25 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $ 0.4017
16 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -27.27% -33.09% -9.99% -8.28% Average Annual Total Return(2) -31.46% -36.93% -3.23% -1.45% Value of $10,000 Investment(3) $6,854 $ 6,307 $8,484 $8,645 Total Annual Operating Expenses(4) 0.89%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -27.54% -33.57% -13.30% -13.63% Average Annual Total Return(2) -30.44% -36.23% -3.21% -1.45% Value of $10,000 Investment(3) $6,956 $ 6,377 $8,496 $8,637 Total Annual Operating Expenses(4) 1.64%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -27.54% -33.57% -13.30% -14.89% Average Annual Total Return(2) -28.26% -34.23% -2.81% -1.60% Value of $10,000 Investment(3) $7,174 $ 6,577 $8,670 $8,511 Total Annual Operating Expenses(4) 1.64%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -27.37% -33.23% -11.12% -14.93% Average Annual Total Return(2) -27.37% -33.23% -2.33% -2.21% Value of $10,000 Investment(3) $7,263 $ 6,677 $8,888 $8,507 Total Annual Operating Expenses(4) 1.14%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -27.16% -32.89% -8.85% -5.98% Average Annual Total Return(2) -27.16% -32.89% -1.84% -0.61% Value of $10,000 Investment(3) $7,284 $ 6,711 $9,115 $9,402 Total Annual Operating Expenses(4) 0.64%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Semiannual Report | 17 Performance Summary (CONTINUED) ENDNOTES HISTORICALLY, THE FUND HAS FOCUSED ON LARGER COMPANIES. THE FUND MAY ALSO INVEST IN SMALL, RELATIVELY NEW AND/OR UNSEASONED COMPANIES, WHICH INVOLVES ADDITIONAL RISKS, AS THE PRICE OF THESE SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. IN ADDITION, THE FUND MAY INVEST UP TO 40% OF ITS NET ASSETS IN STOCKS OF FOREIGN COMPANIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY FLUCTUATIONS AND ECONOMIC AS WELL AS POLITICAL UNCERTAINTY. THE PORTFOLIO INCLUDES INVESTMENTS IN THE TECHNOLOGY SECTOR, WHICH HAS BEEN ONE OF THE MOST VOLATILE SECTORS OF THE MARKET. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 18 | Semiannual Report Your Fund's Expenses FRANKLIN GROWTH FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 19 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 10/1/08 VALUE 3/31/09 PERIOD* 10/1/08-3/31/09 ----------------- -------------- ------------------------- CLASS A Actual $1,000 $ 727.30 $4.26 Hypothetical (5% return before expenses) $1,000 $1,020.00 $4.99 CLASS B Actual $1,000 $ 724.60 $7.52 Hypothetical (5% return before expenses) $1,000 $1,016.21 $8.80 CLASS C Actual $1,000 $ 724.60 $7.52 Hypothetical (5% return before expenses) $1,000 $1,016.21 $8.80 CLASS R Actual $1,000 $ 726.30 $5.38 Hypothetical (5% return before expenses) $1,000 $1,018.70 $6.29 ADVISOR CLASS Actual $1,000 $ 728.40 $3.23 Hypothetical (5% return before expenses) $1,000 $1,021.19 $3.78
* Expenses calculated using the most recent six-month expense ratio, annualized for each class (A: 0.99%; B: 1.75%; C: 1.75%; R: 1.25%; and Advisor: 0.75%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 20 | Semiannual Report Franklin Income Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Income Fund seeks to maximize income while maintaining prospects for capital appreciation by investing, under normal market conditions, in a diversified portfolio of debt and equity securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin Income Fund covers the period ended March 31, 2009. PERFORMANCE OVERVIEW Franklin Income Fund - Class A had a -17.48% cumulative total return for the six months under review. The Fund performed better than its equity benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -30.54% total return; underperformed its fixed income benchmark, the Barclays Capital (BC) U.S. Aggregate Index, which returned +4.70%; and performed comparably with its peers as measured by the Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average, which had a -18.12% total return, for the same period.(1) You can find the Fund's long-term performance data in the Performance Summary beginning on page 26. 1. Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks of U.S. equity performance. The LB U.S. Aggregate Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. All issues included must have at least one year to final maturity and must be rated investment grade (Baa3 or better) by Moody's Investors Service. They must also be dollar denominated and nonconvertible. Total return includes price appreciation/depreciation and income as a percentage of the original investment. The index is rebalanced monthly by market capitalization. Source: Lipper Inc. The Lipper Mixed-Asset Target Allocation Moderate Funds Classification Average is calculated by averaging the total returns of all funds within the Lipper Mixed-Asset Target Allocation Moderate Funds classification in the Lipper Open-End underlying funds universe. Lipper Mixed-Asset Target Allocation Moderate Funds are defined as funds that, by portfolio practice, maintain a mix of between 40%-60% equity securities, with the remainder invested in bonds, cash and cash equivalents. For the six-month period ended 3/31/09, there were 536 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these and other factors had been considered. The indexes are unmanaged and include reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 71. Semiannual Report | 21 PORTFOLIO BREAKDOWN Franklin Income Fund Based on Total Net Assets as of 3/31/09 Consumer Discretionary Bonds 15.7% Utilities Stocks 15.1% Financials Bonds 8.3% Energy Bonds 7.6% Utilities Bonds 6.8% Health Care Bonds 6.1% Senior Floating Rate Interests 5.9% Financials Stocks 5.4% Industrials Bonds 4.8% Energy Stocks 3.9% Health Care Stocks 2.8% Consumer Staples Bonds 2.6% Corporate Convertible Bonds 2.0% Other Bonds 4.2% Other Stocks 3.5% Short-Term Investments & Other Net Assets 5.3%
DIVIDEND DISTRIBUTIONS* Franklin Income Fund 10/1/08-3/31/09
DIVIDEND PER SHARE (CENTS) ----------------------------------------------------------------------- MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS - ----------- ------- ------- ---------- ------- ------- ------------- October 1.25 1.09 1.16 1.16 1.19 1.27 November 1.25 1.09 1.16 1.16 1.19 1.27 December*** 2.20 2.10 2.13 2.13 2.16 2.23 January 1.25 1.15 1.18 1.18 1.21 1.28 February 1.25 1.15 1.18 1.18 1.21 1.28 March 1.25 1.14 1.20 1.19 1.20 1.27 ---- ---- ---- ---- ---- ---- TOTAL 8.45 7.72 8.01 8.00 8.16 8.60
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. ** On November 1, 2001, the Fund closed Class B to new investors and changed the name to Class B1; a new Class B became available to investors. *** Includes an additional 0.95 cent per share distribution to meet excise tax requirements. INVESTMENT STRATEGY By generally performing independent analysis of debt, convertible and equity securities, we search for undervalued or out-of-favor securities we believe offer opportunities for income today and significant growth tomorrow. We consider such factors as a company's experience and managerial strength; its responsiveness to changes in interest rates and business conditions; debt maturity schedules and borrowing requirements; a company's changing financial condition and market recognition of the change; and a security's relative value based on such factors as anticipated cash flow, interest or dividend coverage, asset coverage and earnings. MANAGER'S DISCUSSION Equity markets remained volatile during the reporting period as the credit crisis continued and investors remained concerned about the global financial system's health. The global downturn deepened as demand declined for a wide range of products and services, pressuring valuations further. Stock markets plummeted at the beginning of 2009 due to concerns about a global depression before staging a rally from lows reached on March 9. By period-end, the rally had lifted the S&P 500 approximately 26% from its lowest point.(1) 22 | Semiannual Report The financial sector was among the laggards during the period. Continued worries regarding leverage and capital adequacy weighed on the sector along with rising concerns regarding loan losses due to the deteriorating economic environment and rising unemployment. Governments in the U.S. and abroad remained focused on the sector and put forth additional measures including a "stress test" to help improve capital levels and ultimately confidence in the beleaguered financial sector. Within financials, Bank of America, Wells Fargo and HSBC Holdings detracted from Fund performance. The electric utilities sector's total return, -20.54% as measured by the S&P 500 Utilities Index, reflected the negative impact of the sell-off.(2) Declines in aggregate electricity demand and energy commodity prices weighed on investors' expected results for the sector. Additionally, fears of continued credit market disruptions and the overall higher cost of debt financing raised concerns regarding the health and stability of common stock dividends for certain companies. Despite broad sector weakness, the Fund realized positive returns from several holdings including FPL Group, PG&E and Puget Sound Energy. FPL Group and PG&E performed well due to the success of their initiatives to develop clean energy from renewable sources including the wind and sun. Puget Sound appreciated as a consortium led by Macquarie Group successfully acquired the company. One bright spot among equities during the period under review was the performance of health care companies, particularly pharmaceutical companies. Our Schering-Plough and Mylan (sold by period-end) convertible investments appreciated. During the period, Schering-Plough agreed to be acquired by Merck, and we believe Mylan had a strong competitive position in generic pharmaceuticals, which investors expected to benefit from pressures to reduce health care costs. Fixed income markets also exhibited volatility during the period. The 10-year Treasury yield plummeted from 3.85% on September 30, 2008, to a low of 2.08% on December 18, 2008, as investors sought the safety and liquidity of U.S. Treasuries and shunned virtually all other asset classes. For example, credit spreads for investment-grade and noninvestment-grade corporate bonds widened. 2. Source: (C) 2009 Morningstar. The S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500. Semiannual Report | 23 TOP 5 EQUITY HOLDINGS Franklin Income Fund 3/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------ ---------- Public Service Enterprise Group Inc. 1.6% UTILITIES Bank of America Corp. 1.6% FINANCIALS Merck & Co. Inc. 1.6% HEALTH CARE Duke Energy Corp. 1.4% UTILITIES Canadian Oil Sands Trust (Canada) 1.4% FINANCIALS
TOP 5 BOND HOLDINGS* Franklin Income Fund 3/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ------------------------------------ ---------- Ford Motor Credit Co. LLC 4.6% CONSUMER DISCRETIONARY Tenet Healthcare Corp. 3.7% HEALTH CARE Energy Future Holdings Corp.** 3.3% UTILITIES Dynegy Holdings Inc. 2.6% UTILITIES GMAC LLC 2.4% FINANCIALS
* Does not include convertible bonds. ** Includes bonds issued by Texas Competitive Electric Holdings Co., a wholly owned subsidiary of Energy Future Holdings Corp. The largest detractors from Fund performance during the period within fixed income included Energy Future Holdings, Charter Communications (CCH in the SOI) and Freescale Semiconductor, which were negatively impacted by heavy debt loads and weakening fundamentals. For Energy Future Holdings, formerly TXU, weaker electricity demand and lower commodity prices, particularly for domestic natural gas, resulted in disappointing results. Despite strong performance of Charter Communications' cable and high speed Internet businesses, the company's excessive debt led it to seek a pre-packaged bankruptcy restructuring to continue operations. Lastly, weakening demand for consumer electronics and declining auto sales hurt Freescale Semiconductor. Significant contributors to Fund performance on the fixed income side included GMAC and Ford Motor Credit, which were among our largest fixed income holdings. GMAC benefited from becoming a bank holding company in December 2008 and from a significant preferred stock investment by the U.S. Treasury as part of the Troubled Asset Relief Program. Ford Motor Credit bonds improved from distressed levels as its parent company, Ford Motor, appeared to some to have sufficient liquidity to navigate current market challenges without seeking government assistance. Dollar General bonds also generated positive total returns as economic trends helped the company's relative position as a discount retail chain and as company-specific initiatives boosted profit margins. Although the Fund's overall allocation tilted toward bonds during the six-month period, we remain committed to seeking investments across a wide range of asset classes including common stocks, preferred stocks, convertible securities, corporate bonds, term loans, and government and agency securities. During the period, we increased our holdings in investment-grade corporate bonds and floating-rate corporate term loans. 24 | Semiannual Report Thank you for your continued participation in Franklin Income Fund. We look forward to serving your future investment needs. [PHOTO OF EDWARD PERKS] - -s- Edward Perks Edward Perks, CFA (PHOTO OF CHARLES B. JOHNSON) - -s- Charles B. Johnson Charles B. Johnson Portfolio Management Team Franklin Income Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. Semiannual Report | 25 Performance Summary as of 3/31/09 FRANKLIN INCOME FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKINX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.43 $1.55 $1.98 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.0845 Short-Term Capital Gain $0.0012 TOTAL $0.0857
CLASS B (SYMBOL: FBICX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.43 $1.54 $1.97 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.0772 Short-Term Capital Gain $0.0012 TOTAL $0.0784
CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.43 $1.55 $1.98 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.0801 Short-Term Capital Gain $0.0012 TOTAL $0.0813
CLASS C (SYMBOL: FCISX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.43 $1.56 $1.99 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.0800 Short-Term Capital Gain $0.0012 TOTAL $0.0812
CLASS R (SYMBOL: FISRX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.42 $1.53 $1.95 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.0816 Short-Term Capital Gain $0.0012 TOTAL $0.0828
26 | Semiannual Report Performance Summary (CONTINUED) PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/09 9/30/08 - ---------------------------------- ------ ------- ------- Net Asset Value (NAV) -$0.43 $1.54 $1.97 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.0860 Short-Term Capital Gain $0.0012 TOTAL $0.0872
PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B/B1: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -17.48% -30.06% -6.85% +51.98% Average Annual Total Return(2) -21.07% -33.11% -2.29% +3.82% Value of $10,000 Investment(3) $ 7,893 $6,689 $8,908 $14,551 Distribution Rate(4) 9.26% 30-Day Standardized Yield(5) 13.89% Total Annual Operating Expenses(6) 0.62%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (11/1/01) - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -17.95% -30.80% -10.83% +18.08% Average Annual Total Return(2) -21.07% -33.36% -2.55% +2.27% Value of $10,000 Investment(3) $ 7,893 $6,664 $8,788 $11,808 Distribution Rate(4) 8.88% 30-Day Standardized Yield(5) 13.74% Total Annual Operating Expenses(6) 1.47%
CLASS B1 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -17.71% -30.42% -9.20% +46.02% Average Annual Total Return(2) -20.84% -32.99% -2.19% +3.86% Value of $10,000 Investment(3) $ 7,916 $6,701 $8,951 $14,602 Distribution Rate(4) 9.29% 30-Day Standardized Yield(5) 14.06% Total Annual Operating Expenses(6) 1.12%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -17.63% -30.30% -9.17% +44.25% Average Annual Total Return(2) -18.41% -30.95% -1.91% +3.73% Value of $10,000 Investment(3) $ 8,159 $6,905 $9,083 $14,425 Distribution Rate(4) 9.15% 30-Day Standardized Yield(5) 14.06% Total Annual Operating Expenses(6) 1.12%
Semiannual Report | 27 Performance Summary (CONTINUED) PERFORMANCE (CONTINUED)
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -17.40% -30.27% -8.57% +18.66% Average Annual Total Return(2) -17.40% -30.27% -1.78% +2.39% Value of $10,000 Investment(3) $ 8,260 $6,973 $9,143 $11,866 Distribution Rate(4) 9.41% 30-Day Standardized Yield(5) 14.22% Total Annual Operating Expenses(6) 0.97%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - -------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -17.51% -29.79% -6.21% +53.76% Average Annual Total Return(2) -17.51% -29.79% -1.27% +4.40% Value of $10,000 Investment(3) $ 8,249 $7,021 $9,379 $15,376 Distribution Rate(4) 9.90% 30-Day Standardized Yield(5) 14.71% Total Annual Operating Expenses(6) 0.47%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. ENDNOTES THE FUND'S PORTFOLIO INCLUDES A SUBSTANTIAL PORTION OF HIGHER YIELDING, LOWER RATED CORPORATE BONDS BECAUSE OF THE RELATIVELY HIGHER YIELDS THEY OFFER. THESE SECURITIES CARRY A GREATER DEGREE OF CREDIT RISK RELATIVE TO INVESTMENT-GRADE SECURITIES. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG TERM, THEY TEND TO FLUCTUATE OVER THE SHORT TERM AS A RESULT OF FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR THE SECURITIES MARKET AS A WHOLE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS B1 (formerly Class B): These shares have higher annual fees and expenses than Class A shares. Effective 11/1/01, closed to new investors. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, B1, C, R and Advisor) per share on 3/31/09. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/09. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 28 | Semiannual Report Your Fund's Expenses FRANKLIN INCOME FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 29 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 10/1/08 VALUE 3/31/09 PERIOD* 10/1/08-3/31/09 ----------------- -------------- ------------------------- CLASS A Actual $ 1,000 $ 825.20 $ 3.14 Hypothetical (5% return before expenses) $ 1,000 $ 1,021.49 $ 3.48 CLASS B Actual $ 1,000 $ 820.50 $ 6.99 Hypothetical (5% return before expenses) $ 1,000 $ 1,017.25 $ 7.75 CLASS B1 Actual $ 1,000 $ 822.90 $ 5.41 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.00 $ 5.99 CLASS C Actual $ 1,000 $ 823.70 $ 5.41 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.00 $ 5.99 CLASS R Actual $ 1,000 $ 826.00 $ 4.73 Hypothetical (5% return before expenses) $ 1,000 $ 1,019.75 $ 5.24 ADVISOR CLASS Actual $ 1,000 $ 824.90 $ 2.46 Hypothetical (5% return before expenses) $ 1,000 $ 1,022.24 $ 2.72
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.69%; B: 1.54%; B1: 1.19%; C: 1.19%; R: 1.04%; and Advisor: 0.54%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 30 | Semiannual Report Franklin U.S. Government Securities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin U.S. Government Securities Fund seeks income by investing at least 80% of its net assets in U.S. government securities. The Fund presently invests substantially all of its assets in Government National Mortgage Association obligations (Ginnie Maes). Since 1983, the Fund has invested substantially in Ginnie Mae securities, which carry a guarantee backed by the full faith and credit of the U.S. government as to the timely payment of interest and principal.(1) Issued by the Government National Mortgage Association (GNMA), Ginnie Maes have been among the highest yielding U.S. government obligations available. PORTFOLIO BREAKDOWN Franklin U.S. Government Securities Fund Based on Total Net Assets as of 3/31/09 [PIE CHART] GNMA ............................................. 96.4% Short-Term Investments & Other Net Assets ........ 3.6%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. This semiannual report for Franklin U.S. Government Securities Fund covers the period ended March 31, 2009. PERFORMANCE OVERVIEW Franklin U.S. Government Securities Fund - Class A posted a +6.02% cumulative total return for the six months under review. The Fund outperformed the +5.45% total return of its peers as measured by the Lipper GNMA Funds Classification Average.(2) In comparison, the Barclays Capital (BC) 1. Securities owned by the Fund, but not shares of the Fund, are guaranteed by the U.S. government, its agencies or instrumentalities as to timely payment of principal and interest. The Fund's yield and share price are not guaranteed and will vary with market conditions. 2. Source: Lipper Inc. The Lipper GNMA Funds Classification Average is calculated by averaging the total return for all funds within the Lipper GNMA Funds classification in the Lipper Open-End underlying funds universe for the period indicated. Lipper GNMA Funds are defined as funds that invest primarily in GNMA securities. For the six-month period ended 3/31/09, there were 65 funds in this category. Lipper calculations do not include sales charges or expense subsidization by a fund's manager. The Fund's performance relative to the average may have differed if these or other factors had been considered. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 88. Semiannual Report | 31 DIVIDEND DISTRIBUTIONS* Franklin U.S. Government Securities Fund 10/1/08-3/31/09
DIVIDEND PER SHARE ----------------------------------------------------------------- MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS - -------- ----------- ----------- ----------- ----------- ------------- October 2.55 cents 2.29 cents 2.29 cents 2.37 cents 2.62 cents November 2.55 cents 2.29 cents 2.29 cents 2.37 cents 2.62 cents December 2.55 cents 2.27 cents 2.28 cents 2.36 cents 2.64 cents January 2.55 cents 2.27 cents 2.28 cents 2.36 cents 2.64 cents February 2.55 cents 2.27 cents 2.28 cents 2.36 cents 2.64 cents March 2.55 cents 2.26 cents 2.27 cents 2.35 cents 2.62 cents ----------- ----------- ----------- ----------- ------------- TOTAL 15.30 CENTS 13.65 CENTS 13.69 CENTS 14.17 CENTS 15.78 CENTS
* All Fund distributions will vary depending upon current market conditions, and past distributions are not indicative of future trends. U.S. Government: Intermediate Index returned +6.08% for the same period.(3) The Fund's return reflects the effect of management fees and expenses, while the BC U.S. Government: Intermediate Index does not have such costs. You can find the Fund's long-term performance data in the Performance Summary beginning on page 35. INVESTMENT STRATEGY We presently invest substantially all the Fund's assets in GNMA (Ginnie Mae) obligations. We analyze securities using proprietary models to help us identify attractive investment opportunities. The Fund's short-term investments may include short-term government securities and cash or cash equivalents. MANAGER'S DISCUSSION During the six-month reporting period, economic fundamentals deteriorated globally, as recessionary dynamics broadened and deepened. U.S. Treasury yields declined to multi-decade lows as the effects of liquidity and credit problems 3. Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The BC U.S. Government: Intermediate Index is the intermediate component of the BC U.S. Government Index, which covers securities issued by the U.S. government (i.e., securities in the BC U.S. Treasury and Agency Indexes), including public obligations of the U.S. Treasury with a remaining maturity of one year or more and publicly issued debt of U.S. government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. government. The index is unmanaged and includes reinvestment of any income or distributions. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 32| Semiannual Report impacted economic activity. In an ongoing effort to stabilize financial markets and restore confidence to investors, the U.S. Treasury and Federal Reserve announced several new initiatives aimed at increasing credit availability and reducing mortgage rates. The overall mortgage-backed securities (MBS) market continued its strong performance, relative to many other credit-related sectors. Over the period, Ginnie Mae (GNMA) MBS could not keep up with the robust performance of comparable high credit-quality U.S. Treasuries but had a strong total return profile relative to most other fixed income sectors. Consistent with its strategy, Franklin U.S. Government Securities Fund continued to invest substantially in GNMA MBS, and looked across the GNMA universe for strong cash flow fundamentals and valuations. During the period, GNMA MBS remained the only MBS backed by the full faith and credit of the U.S. government - -- the same guarantee applicable to U.S. Treasuries.1 Although this guarantee mostly isolated the GNMA sector from credit market disruptions, it was not completely immune to the general market volatility experienced by high credit-quality MBS. The primary risk for GNMA investors is prepayment risk, which occurs when residential mortgage pools prepay their underlying mortgages during the refinancing process, creating uncertain cash flows for investors. Rather than avoiding prepayment risk, the Fund sought to take advantage of discrepancies found in its prepayment valuations and the market's prepayment expectations. We used our experience and intensive research process to find pools that we believed contained these discrepancies. Although prepayments increased by the end of the period, they did not reach the extent experienced in past waves. According to our analysis, declines in home price appreciation and equity, as well as tighter underwriting standards, will likely lessen current prepayment activity. Over time, the majority of the GNMA sector's returns came from income, and our strategy continued to emphasize it as well. Historically, we have strategically allocated our resources between the two primary pass-through programs offered by Ginnie Mae: GNMA I MBS (comprising single-issuer pools) and GNMA II MBS (comprising multiple-issuer pools). Over the period, we marginally decreased the Fund's allocation to GNMA II securities as the sector richened and the GNMA I sector began offering better value. In some cases we swapped GNMA IIs into GNMA Is. The decline in Treasury and mortgage rates combined with the Federal Reserve Board's announcement that it would purchase agency mortgages as part of its quantitative easing policy increased prepayment risk in higher coupon MBS. In this environment, we reduced the portfolio's allocation to higher coupon MBS Semiannual Report | 33 in favor of lower coupon MBS. We favored 30-year collateral bonds rather than their 15-year counterparts and continually evaluated opportunities across the GNMA sector and coupon spectrum to identify those securities that offered what we considered the best total return potential. Thank you for your continued participation in Franklin U.S. Government Securities Fund. We welcome your comments and questions and look forward to serving your investment needs in the years ahead. [PHOTO OF ROGER A. BAYSTON] - -s- Roger A. Bayston Roger A. Bayston, CFA [PHOTO OF JACK LEMEIN] - -s- Jack Lemein Jack Lemein [PHOTO OF PAUL VARUNOK] - -s- Paul Varunok Paul Varunok Portfolio Management Team Franklin U.S. Government Securities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. 34 | Semiannual Report Performance Summary as of 3/31/09 FRANKLIN U.S. GOVERNMENT SECURITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKUSX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.23 $6.68 $6.45 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.1530
CLASS B (SYMBOL: FUGBX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.23 $6.67 $6.44 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.1365
CLASS C (SYMBOL: FRUGX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.22 $6.64 $6.42 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.1369
CLASS R (SYMBOL: FUSRX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.22 $6.67 $6.45 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.1417
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) +$0.22 $6.69 $6.47 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.1578
Semiannual Report | 35 Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN INCLUDES MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ ------ ------- Cumulative Total Return(1) +6.02% +6.62% +26.47% +69.23% Average Annual Total Return(2) +1.46% +2.12% +3.90% +4.95% Distribution Rate(3) 4.38% 30-Day Standardized Yield(4) 3.88% Total Annual Operating Expenses(5) 0.74%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ ------ ------- Cumulative Total Return(1) +5.60% +6.08% +23.25% +62.15% Average Annual Total Return(2) +1.60% +2.08% +3.93% +4.95% Distribution Rate(3) 4.07% 30-Day Standardized Yield(4) 3.55% Total Annual Operating Expenses(5) 1.26%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ ------ ------- Cumulative Total Return(1) +5.63% +5.96% +23.17% +60.44% Average Annual Total Return(2) +4.63% +4.96% +4.26% +4.84% Distribution Rate(3) 4.10% 30-Day Standardized Yield(4) 3.55% Total Annual Operating Expenses(5) 1.26%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- ------- ------ ------ ----------------- Cumulative Total Return(1) +5.68% +6.25% +23.99% +38.37% Average Annual Total Return(2) +5.68% +6.25% +4.39% +4.59% Distribution Rate(3) 4.23% 30-Day Standardized Yield(4) 3.71% Total Annual Operating Expenses(5) 1.11%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- ------ ------ ------- Cumulative Total Return(1) +5.92% +6.59% +27.21% +71.39% Average Annual Total Return(2) +5.92% +6.59% +4.93% +5.54% Distribution Rate(3) 4.70% 30-Day Standardized Yield(4) 4.21% Total Annual Operating Expenses(5) 0.61%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. 36 | Semiannual Report Performance Summary (CONTINUED) ENDNOTES THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY INTEREST RATE MOVEMENTS AND MORTGAGE PREPAYMENTS. BOND PRICES GENERALLY MOVE IN THE OPPOSITE DIRECTION OF INTEREST RATES. THUS, AS PRICES OF BONDS IN THE FUND ADJUST TO A RISE IN INTEREST RATES, THE FUND'S SHARE PRICE MAY DECLINE. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. Distribution rate is based on an annualization of the respective class's March dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/09. 4. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/09. 5. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. Semiannual Report | 37 Your Fund's Expenses FRANKLIN U.S. GOVERNMENT SECURITIES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 38 | Semiannual Report Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 10/1/08 VALUE 3/31/09 PERIOD* 10/1/08 - 3/31/09 ----------------- -------------- ------------------------- CLASS A Actual $1,000 $1,060.20 $3.65 Hypothetical (5% return before expenses) $1,000 $1,021.39 $3.58 CLASS B Actual $1,000 $1,056.00 $6.30 Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.19 CLASS C Actual $1,000 $1,056.30 $6.31 Hypothetical (5% return before expenses) $1,000 $1,018.80 $6.19 CLASS R Actual $1,000 $1,056.80 $5.54 Hypothetical (5% return before expenses) $1,000 $1,019.55 $5.44 ADVISOR CLASS Actual $1,000 $1,059.20 $2.98 Hypothetical (5% return before expenses) $1,000 $1,022.04 $2.92
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.71%; B: 1.23%; C: 1.23%; R: 1.08%; and Advisor: 0.58%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. Semiannual Report | 39 Franklin Utilities Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Utilities Fund seeks both capital appreciation and current income by investing at least 80% of its net assets in public utility company securities. PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236 FOR MOST RECENT MONTH-END PERFORMANCE. PORTFOLIO BREAKDOWN Franklin Utilities Fund Based on Total Net Assets as of 3/31/09 [BAR CHART] Electric Utilities 49.7% Multi-Utilities 37.6% Independent Power Producers & Energy Traders 3.3% Diversified Telecommunication Services 2.8% Oil, Gas & Consumable Fuels 2.5% Gas Utilities 1.6% Water Utilities 0.5% Short-Term Investments & Other Net Assets 2.0%
This semiannual report for Franklin Utilities Fund covers the period ended March 31, 2009. PERFORMANCE OVERVIEW For the six months under review, Franklin Utilities Fund - Class A had a -19.65% cumulative total return. The Fund performed better than its broad benchmark, the Standard & Poor's 500 Index (S&P 500), which had a -30.54% total return for the same period.(1) The Fund performed comparably to the -20.54% total return of its narrow benchmark, the S&P 500 Utilities Index.(2) You can find the Fund's long-term performance data in the Performance Summary beginning on page 42. INVESTMENT STRATEGY We search for the best return opportunities available in the global utilities arena with a specific focus on the U.S. electricity sector. Generally, we look for companies producing a high percentage of earnings from regulated utility franchise operations. MANAGER'S DISCUSSION An extreme bear market environment prevailed during much of the six months under review and utilities were not immune to the weakness. With waning demand arising from the intensifying global recession, it was also an especially difficult time for energy and related commodity stocks. Utility stocks did, 1. Source: (C) 2009 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. Each stock's weight in the index is proportionate to its market value. The S&P 500 is one of the most widely used benchmarks for U.S. equity performance. 2. Source: (C) 2009 Morningstar. The S&P 500 Utilities Index is a market capitalization-weighted index consisting of all utility stocks in the S&P 500. The indexes are unmanaged and include reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 95. 40 | Semiannual Report however, show some of their typically defensive investment characteristics, and as a whole the group recorded smaller losses than the overall stock market. Some of the Fund's electric utilities did not fare as well as others and represented the bulk of the portfolio's major detractors during the review period. A significant detractor from performance was FirstEnergy, an electric utility serving a region that includes Ohio, Pennsylvania and New Jersey. FirstEnergy's share price dropped significantly as a portion of the power it sells to electricity customers is influenced by general commodity prices. Several other electric utility holdings also produced significant losses: Exelon, which operates in northern Illinois and southeastern Pennsylvania; Entergy, which provides electricity to four southern states; and Edison International, which distributes electricity primarily to central and southern California and is also the country's leading purchaser of renewable energy. Each of these companies sells electricity at market-based pricing, and a severe drop in electricity prices during the period impacted these firms' profitability. Some holdings did manage to post gains during this difficult period, which helped mitigate the Fund's losses among other securities and buoyed its over-_all results. In particular, electric and natural gas utilities that are not directly exposed to commodity prices fared well. Among the most significant contributors in that regard were California-based multi-utility company PG&E and Washington state-based multi-utility company Puget Energy (no longer held by period-end), which was acquired by an investor consortium in February. In addition, FPL Group, a Florida-based electric utility, posted a positive return during the period. FPL benefited by increased interest in renewable energy, as it is the country's largest operator of wind-powered generation. Thank you for your continued participation in Franklin Utilities Fund. We look forward to serving your future investment needs. [PHOTO OF JOHN C. KOHLI] - -s- John C. Kohli John C. Kohli, CFA Portfolio Manager Franklin Utilities Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF MARCH 31, 2009, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 EQUITY HOLDINGS Franklin Utilities Fund 3/31/09
COMPANY % OF TOTAL SECTOR/INDUSTRY NET ASSETS - ----------------------------------- ---------- Exelon Corp. 5.7% ELECTRIC UTILITIES Entergy Corp. 4.7% ELECTRIC UTILITIES PG&E Corp. 4.6% MULTI-UTILITIES FPL Group Inc. 4.4% ELECTRIC UTILITIES Sempra Energy 4.2% MULTI-UTILITIES The Southern Co. 4.2% ELECTRIC UTILITIES Public Service Enterprise Group Inc. 3.6% MULTI-UTILITIES FirstEnergy Corp. 3.5% ELECTRIC UTILITIES PPL Corp. 3.3% ELECTRIC UTILITIES Duke Energy Corp. 3.1% ELECTRIC UTILITIES
Semiannual Report | 41 Performance Summary as of 3/31/09 FRANKLIN UTILITIES FUND Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses of each class. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table does not reflect any taxes that a shareholder would pay on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects reinvestment of the Fund's dividends and capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
CLASS A (SYMBOL: FKUTX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) -$2.63 $9.29 $ 11.92 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.2140 Long-Term Capital Gain $0.0773 TOTAL $0.2913
CLASS B (SYMBOL: FRUBX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) -$2.62 $9.29 $ 11.91 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.1848 Long-Term Capital Gain $0.0773 TOTAL $0.2621
CLASS C (SYMBOL: FRUSX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) -$2.62 $9.26 $ 11.88 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.1863 Long-Term Capital Gain $0.0773 TOTAL $0.2636
CLASS R (SYMBOL: FRURX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) -$2.62 $9.27 $ 11.89 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.1948 Long-Term Capital Gain $0.0773 TOTAL $0.2721
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/09 9/30/08 - --------------------------------- ------ ------- ------- Net Asset Value (NAV) -$2.64 $9.34 $ 11.98 DISTRIBUTIONS (10/1/08-3/31/09) Dividend Income $0.2220 Long-Term Capital Gain $0.0773 TOTAL $0.2993
42 | Semiannual Report Performance Summary (CONTINUED) PERFORMANCE CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 4.25% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES.
CLASS A 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- -------- -------- --------- Cumulative Total Return(1) -19.65% -25.90% +24.38% +74.30% Average Annual Total Return(2) -23.07% -29.04% +3.57% +5.26% Value of $10,000 Investment(3) $ 7,693 $ 7,096 $11,914 $16,689 Distribution Rate(4) 4.16% 30-Day Standardized Yield(5) 4.23% Total Annual Operating Expenses(6) 0.74%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- -------- -------- --------- Cumulative Total Return(1) -19.84% -26.27% +21.24% +67.44% Average Annual Total Return(2) -22.96% -29.10% +3.60% +5.29% Value of $10,000 Investment(3) $ 7,704 $ 7,090 $11,934 $16,744 Distribution Rate(4) 3.71% 30-Day Standardized Yield(5) 3.93% Total Annual Operating Expenses(6) 1.24%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- -------- -------- --------- Cumulative Total Return(1) -19.87% -26.31% +21.22% +65.63% Average Annual Total Return(2) -20.65% -27.02% +3.92% +5.18% Value of $10,000 Investment(3) $ 7,935 $ 7,298 $12,122 $16,563 Distribution Rate(4) 3.76% 30-Day Standardized Yield(5) 3.94% Total Annual Operating Expenses(6) 1.24%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02) - ------------------------------------- ------- -------- -------- ------------------ Cumulative Total Return(1) -19.78% -26.11% +22.25% +35.12% Average Annual Total Return(2) -19.78% -26.11% +4.10% +4.24% Value of $10,000 Investment(3) $ 8,022 $ 7,389 $12,225 $13,512 Distribution Rate(4) 3.94% 30-Day Standardized Yield(5) 4.07% Total Annual Operating Expenses(6) 1.09%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR - ------------------------------------- ------- -------- -------- --------- Cumulative Total Return(1) -19.57% -25.74% +25.33% +76.88% Average Annual Total Return(2) -19.57% -25.74% +4.62% +5.87% Value of $10,000 Investment(3) $ 8,043 $ 7,426 $12,533 $17,688 Distribution Rate(4) 4.49% 30-Day Standardized Yield(5) 4.55% Total Annual Operating Expenses(6) 0.59%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT FRANKLINTEMPLETON.COM OR CALL (800) 342-5236. Semiannual Report | 43 Performance Summary (CONTINUED) ENDNOTES IN ADDITION TO SENSITIVITY TO OTHER FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES HAVE BEEN HISTORICALLY SENSITIVE TO INTEREST RATE CHANGES. WHEN INTEREST RATES FALL, UTILITY SECURITIES PRICES, AND THUS A UTILITIES FUND'S SHARE PRICE, TEND TO RISE; WHEN INTEREST RATES RISE, THEIR PRICES GENERALLY FALL. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. CLASS B: These shares have higher annual fees and expenses than Class A shares. CLASS C: Prior to 1/1/04, these shares were offered with an initial sales charge; thus actual total returns would have differed. These shares have higher annual fees and expenses than Class A shares. CLASS R: Shares are available to certain eligible investors as described in the prospectus. These shares have higher annual fees and expenses than Class A shares. ADVISOR CLASS: Shares are available to certain eligible investors as described in the prospectus. 1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. Six-month return has not been annualized. 3. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 4. Distribution rate is based on an annualization of the respective class's most recent quarterly dividend and the maximum offering price (NAV for Classes B, C, R and Advisor) per share on 3/31/09. 5. Yield, calculated as required by the SEC, is based on the earnings of the Fund's portfolio for the 30 days ended 3/31/09. 6. Figures are as stated in the Fund's prospectus current as of the date of this report. In periods of market volatility, assets may decline significantly, causing total annual Fund operating expenses to become higher than the figures shown. 44 | Semiannual Report Your Fund's Expenses FRANKLIN UTILITIES FUND As a Fund shareholder, you can incur two types of costs: - - Transaction costs, including sales charges (loads) on Fund purchases; and - - Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. Semiannual Report | 45 Your Fund's Expenses (CONTINUED) PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 10/1/08 VALUE 3/31/09 PERIOD* 10/1/08-3/31/09 ----------------- -------------- ------------------------- CLASS A Actual $1,000 $ 803.50 $3.51 Hypothetical (5% return before expenses) $1,000 $1,021.04 $3.93 CLASS B Actual $1,000 $ 801.60 $5.79 Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.49 CLASS C Actual $1,000 $ 801.30 $5.79 Hypothetical (5% return before expenses) $1,000 $1,018.50 $6.49 CLASS R Actual $1,000 $ 802.20 $5.12 Hypothetical (5% return before expenses) $1,000 $1,019.25 $5.74 ADVISOR CLASS Actual $1,000 $ 804.30 $2.88 Hypothetical (5% return before expenses) $1,000 $1,021.74 $3.23
* Expenses are calculated using the most recent six-month expense ratio, annualized for each class (A: 0.78%; B: 1.29%; C: 1.29%; R: 1.14%; and Advisor: 0.64%), multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period. 46 | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN DYNATECH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------ (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- -------- -------- -------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 24.87 $ 32.33 $ 25.80 $ 24.98 $ 22.01 $ 20.17 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .............. (0.02) (0.08) (0.08) (0.05) (0.01) (0.09) Net realized and unrealized gains (losses) ................................... (6.00) (6.67) 6.61 0.87 2.98 1.93 -------- -------- -------- -------- -------- -------- Total from investment operations ................ (6.02) (6.75) 6.53 0.82 2.97 1.84 -------- -------- -------- -------- -------- -------- Less distributions from net realized gains ...... (1.58) (0.71) -- -- -- -- -------- -------- -------- -------- -------- -------- Redemption fees(c) .............................. -- --(d) --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- -------- Net asset value, end of period .................. $ 17.27 $ 24.87 $ 32.33 $ 25.80 $ 24.98 $ 22.01 ======== ======== ======== ======== ======== ======== Total return(e) ................................. (23.54)% (21.36)% 25.31% 3.28% 13.49% 9.12% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ..................................... 1.16% 0.97% 0.99% 0.97% 1.00% 0.97% Net investment income (loss) .................... (0.28)% (0.26)% (0.30)% (0.20)% (0.02)% (0.41)% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $380,946 $388,843 $553,347 $590,633 $628,732 $640,120 Portfolio turnover rate ......................... 29.92% 41.01% 18.03% 18.61% 17.26% 14.93%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 47 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------ (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- -------- -------- -------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 23.48 $ 30.78 $ 24.75 $ 24.15 $ 21.43 $ 19.79 ------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .............. (0.08) (0.29) (0.28) (0.23) (0.18) (0.25) Net realized and unrealized gains (losses) ................................... (5.68) (6.30) 6.31 0.83 2.90 1.89 ------- -------- -------- -------- -------- -------- Total from investment operations ................ (5.76) (6.59) 6.03 0.60 2.72 1.64 ------- -------- -------- -------- -------- -------- Less distributions from net realized gains ......................................... (1.58) (0.71) -- -- -- -- ------- -------- -------- -------- -------- -------- Redemption fees(c) .............................. -- --(d) --(d) --(d) --(d) --(d) ------- -------- -------- -------- -------- -------- Net asset value, end of period .................. $ 16.14 $ 23.48 $ 30.78 $ 24.75 $ 24.15 $ 21.43 ======= ======== ======== ======== ======== ======== Total return(e) ................................. (23.81)% (21.96)% 24.36% 2.48% 12.69% 8.29% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ..................................... 1.92% 1.73% 1.75% 1.72% 1.74% 1.72% Net investment income (loss) .................... (1.04)% (1.02)% (1.06)% (0.95)% (0.76)% (1.16)% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $12,458 $ 10,704 $ 16,625 $ 18,718 $ 19,497 $ 18,824 Portfolio turnover rate ......................... 29.92% 41.01% 18.03% 18.61% 17.26% 14.93%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. 48 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------ (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- -------- -------- -------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 23.23 $ 30.46 $ 24.50 $ 23.90 $ 21.21 $ 19.59 ------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) .............. (0.08) (0.28) (0.28) (0.23) (0.17) (0.25) Net realized and unrealized gains (losses) ................................... (5.62) (6.24) 6.24 0.83 2.86 1.87 ------- -------- -------- -------- -------- -------- Total from investment operations ................ (5.70) (6.52) 5.96 0.60 2.69 1.62 ------- -------- -------- -------- -------- -------- Less distributions from net realized gains ......................................... (1.58) (0.71) -- -- -- -- ------- -------- -------- -------- -------- -------- Redemption fees(c) .............................. -- --(d) --(d) --(d) --(d) --(d) ------- -------- -------- -------- -------- -------- Net asset value, end of period .................. $ 15.95 $ 23.23 $ 30.46 $ 24.50 $ 23.90 $ 21.21 ======= ======== ======== ======== ======== ======== Total return(e) ................................. (23.85)% (21.93)% 24.33% 2.51% 12.68% 8.27% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ..................................... 1.92% 1.73% 1.74% 1.71% 1.74% 1.72% Net investment income (loss) .................... (1.04)% (1.02)% (1.05)% (0.94)% (0.76)% (1.16)% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $62,439 $ 53,289 $ 70,413 $ 69,069 $ 73,587 $ 75,642 Portfolio turnover rate ......................... 29.92% 41.01% 18.03% 18.61% 17.26% 14.93%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 49 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
PERIOD ENDED MARCH 31, 2009(a) (UNAUDITED) ----------------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period $ 15.66 ------- Income from investment operations(b): Net investment income (loss)(c) (0.03) Net realized and unrealized gains (losses) 1.61 ------- Total from investment operations 1.58 ------- Net asset value, end of period $ 17.24 ======= Total return(d) 10.09% RATIOS TO AVERAGE NET ASSETS(e) Expenses(f) 1.42% Net investment income (loss) (0.54)% SUPPLEMENTAL DATA Net assets, end of period (000's) $ 4,602 Portfolio turnover rate 29.92%
(a) For the period December 1, 2008 (effective date) to March 31, 2009. (b) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (c) Based on average daily shares outstanding. (d) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (e) Ratios are annualized for periods less than one year. (f) Benefit of expense reduction rounds to less than 0.01%. 50 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN DYNATECH FUND
SIX MONTHS ENDED PERIOD ENDED MARCH 31, 2009 SEPTEMBER 30, (UNAUDITED) 2008(a) ---------------- ------------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 24.90 $ 31.40 ------- ------- Income from investment operations(b): Net investment income (loss)(c) .............................. --(d) (0.01) Net realized and unrealized gains (losses) ................... (6.01) (6.49) ------- ------- Total from investment operations ................................ (6.01) (6.50) ------- ------- Less distributions from net realized gains ...................... (1.58) -- ------- ------- Redemption fees(e) .............................................. -- --(d) ------- ------- Net asset value, end of period .................................. $ 17.31 $ 24.90 ------- ------- Total return(f) ................................................. (23.47)% (20.70)% RATIOS TO AVERAGE NET ASSETS(g) Expenses(h) ..................................................... 0.92% 0.73% Net investment income (loss) .................................... (0.04)% ( 0.02)% SUPPLEMENTAL DATA Net assets, end of period (000's) ............................... $ 5,020 $ 1,938 Portfolio turnover rate ......................................... 29.92% 41.01%
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 51 Franklin Custodian Fund STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED)
FRANKLIN DYNATECH FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------- ------------- --------------- ----------- COMMON STOCKS AND OTHER EQUITY INTERESTS 98.6% AEROSPACE & DEFENSE 1.3% Precision Castparts Corp .................................... United States 100,000 $ 5,990,000 ----------- AIR FREIGHT & LOGISTICS 1.5% C.H. Robinson Worldwide Inc ................................. United States 150,000 6,841,500 ----------- BIOTECHNOLOGY 10.1% (a)Amgen Inc. .................................................. United States 21,900 1,084,487 (a)Celgene Corp. ............................................... United States 244,800 10,869,120 (a)Cephalon Inc. ............................................... United States 35,000 2,383,500 (a)Genzyme Corp. ............................................... United States 65,000 3,860,350 (a)Gilead Sciences Inc. ........................................ United States 369,600 17,119,872 (a)Myriad Genetics Inc. ........................................ United States 214,200 9,739,674 (a)OSI Pharmaceuticals Inc. .................................... United States 50,000 1,913,000 ----------- 46,970,003 ----------- CAPITAL MARKETS 0.7% The Goldman Sachs Group Inc. ................................ United States 10,000 1,060,200 Invesco Ltd. ................................................ United States 150,000 2,079,000 ----------- 3,139,200 ----------- CHEMICALS 3.7% Monsanto Co. ................................................ United States 105,000 8,725,500 Sigma-Aldrich Corp. ......................................... United States 225,000 8,502,750 ----------- 17,228,250 ----------- COMMERCIAL SERVICES & SUPPLIES 1.1% (a)Stericycle Inc. ............................................. United States 110,000 5,250,300 ----------- COMMUNICATIONS EQUIPMENT 6.5% (a)Cisco Systems Inc. .......................................... United States 612,300 10,268,271 (a,b)Dilithium Networks Inc., wts., 12/31/09 ................... United States 4,126 -- QUALCOMM Inc. ............................................... United States 310,000 12,062,100 (a)Research In Motion Ltd. ..................................... Canada 120,000 5,168,400 (a)Tandberg ASA. ............................................... Norway 200,000 2,946,686 ----------- 30,445,457 ----------- COMPUTERS & PERIPHERALS 7.6% (a)Apple Inc. .................................................. United States 220,000 23,126,400 Hewlett-Packard Co. ......................................... United States 363,900 11,666,634 (a)NetApp Inc. ................................................. United States 45,100 669,284 ----------- 35,462,318 ----------- CONSUMER FINANCE 0.2% American Express Co. ........................................ United States 50,000 681,500 ----------- DIVERSIFIED FINANCIAL SERVICES 0.9% CME Group Inc. .............................................. United States 10,000 2,463,900 JPMorgan Chase & Co. ........................................ United States 50,000 1,329,000 Moody's Corp. ............................................... United States 20,000 458,400 ----------- 4,251,300 -----------
52 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------- ------------- --------------- ----------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS 1.3% (a)Dolby Laboratories Inc., A. ................................. United States 120,000 $ 4,093,200 (a)FLIR Systems Inc. ........................................... United States 100,000 2,048,000 ----------- 6,141,200 ----------- ENERGY EQUIPMENT & SERVICES 4.1% (a)FMC Technologies Inc. ....................................... United States 300,000 9,411,000 (a)National Oilwell Varco Inc. ................................. United States 50,000 1,435,500 Schlumberger Ltd. ........................................... United States 200,000 8,124,000 ----------- 18,970,500 ----------- HEALTH CARE EQUIPMENT & SUPPLIES 6.8% Alcon Inc. .................................................. Switzerland 50,000 4,545,500 Baxter International Inc. ................................... United States 112,500 5,762,250 C. R. Bard Inc. ............................................. United States 82,500 6,576,900 Medtronic Inc. .............................................. United States 200,000 5,894,000 (a)St. Jude Medical Inc. ....................................... United States 80,000 2,906,400 Stryker Corp. ............................................... United States 170,000 5,786,800 ----------- 31,471,850 ----------- HEALTH CARE PROVIDERS & SERVICES 2.3% (a)Express Scripts Inc. ........................................ United States 150,000 6,925,500 (a)Laboratory Corp. of America Holdings. ....................... United States 28,300 1,655,267 (a)VCA Antech Inc. ............................................. United States 100,000 2,255,000 ----------- 10,835,767 ----------- HEALTH CARE TECHNOLOGY 1.2% (a)Cerner Corp. ................................................ United States 125,000 5,496,250 ----------- INDUSTRIAL CONGLOMERATES 0.1% ............................... General Electric Co. ........................................ United States 20,000 202,200 ----------- INTERNET & CATALOG RETAIL 3.2% (a)Amazon.com Inc. ............................................. United States 150,000 11,016,000 (a)Priceline.com Inc. .......................................... United States 50,000 3,939,000 ----------- 14,955,000 ----------- INTERNET SOFTWARE & SERVICES 5.9% (a)Baidu.com, ADR. ............................................. China 25,000 4,415,000 (a)Google Inc., A. ............................................. United States 50,200 17,472,612 (a)MercadoLibre Inc. ........................................... Argentina 80,000 1,484,000 (a)Sohu.com Inc. ............................................... China 50,000 2,065,500 Tencent Holdings Ltd. ....................................... China 250,000 1,851,506 ----------- 27,288,618 ----------- IT SERVICES 5.5% (a)Affiliated Computer Services Inc., A. ....................... United States 100,000 4,789,000 MasterCard Inc., A. ......................................... United States 42,000 7,034,160 Visa Inc., A. ............................................... United States 250,000 13,900,000 ----------- 25,723,160 -----------
Semiannual Report | 53 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------- ------------- --------------- ----------- COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) LIFE SCIENCES TOOLS & SERVICES 3.6% (a)Illumina Inc. ............................................... United States 100,000 $ 3,724,000 Pharmaceutical Product Development Inc. ..................... United States 63,400 1,503,848 (a)Thermo Fisher Scientific Inc. ............................... United States 125,000 4,458,750 (a)Waters Corp. ................................................ United States 195,300 7,216,335 ----------- 16,902,933 ----------- MACHINERY 1.0% Danaher Corp. ............................................... United States 35,000 1,897,700 Flowserve Corp. ............................................. United States 50,000 2,806,000 ----------- 4,703,700 ----------- MEDIA 0.3% (a)The DIRECTV Group Inc. ...................................... United States 70,000 1,595,300 ----------- PHARMACEUTICALS 10.0% Abbott Laboratories. ........................................ United States 60,000 2,862,000 Allergan Inc. ............................................... United States 50,000 2,388,000 Johnson & Johnson. .......................................... United States 184,000 9,678,400 Merck KGaA. ................................................. Germany 20,000 1,762,655 Novo-Nordisk AS, ADR. ....................................... Denmark 80,000 3,838,400 Roche Holding AG. ........................................... Switzerland 50,000 6,859,903 Schering-Plough Corp. ....................................... United States 150,000 3,532,500 Teva Pharmaceutical Industries Ltd., ADR. ................... Israel 350,000 15,767,500 ----------- 46,689,358 ----------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 7.5% (a)Cree Inc. ................................................... United States 20,000 470,600 (a)Hittite Microwave Corp. ..................................... United States 100,000 3,120,000 Intel Corp. ................................................. United States 1,125,000 16,931,250 (a)Lam Research Corp. .......................................... United States 150,000 3,415,500 Microchip Technology Inc. ................................... United States 180,000 3,814,200 (a)Netlogic Microsystems Inc. .................................. United States 100,000 2,748,000 Power Integrations Inc. ..................................... United States 100,000 1,720,000 (a)Silicon Laboratories Inc. ................................... United States 100,000 2,640,000 ----------- 34,859,550 ----------- SOFTWARE 8.7% (a)Activision Blizzard Inc. .................................... United States 500,000 5,230,000 (a)Adobe Systems Inc. .......................................... United States 380,000 8,128,200 (a)ANSYS Inc. .................................................. United States 175,000 4,392,500 (a)Autodesk Inc. ............................................... United States 150,000 2,521,500 (a)Concur Technologies Inc. .................................... United States 100,000 1,919,000 Microsoft Corp. ............................................. United States 250,000 4,592,500 Nintendo Co. Ltd., ADR. ..................................... Japan 135,000 4,927,500 (a)Oracle Corp. ................................................ United States 300,000 5,421,000 (a)Salesforce.com Inc. ......................................... United States 100,000 3,273,000 ----------- 40,405,200 -----------
54 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------------------------- ------------- ---------------- ------------ COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED) WIRELESS TELECOMMUNICATION SERVICES 3.5% America Movil SAB de CV, L, ADR ........................................... Mexico 47,600 $ 1,289,008 (a)American Tower Corp., A ................................................... United States 319,535 9,723,450 China Mobile (Hong Kong) Ltd., ADR ........................................ China 12,600 548,352 Rogers Communications Inc., B ............................................. Canada 76,200 1,755,788 (a)SBA Communications Corp. .................................................. United States 130,400 3,038,320 ------------ 16,354,918 ------------ TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS (COST $370,894,128) ..................................................... 458,855,332 ------------ PREFERRED STOCKS (COST $289,500) 0.0%(c) COMMUNICATIONS EQUIPMENT 0.0%(c) (a,b)Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES ........... United States 124,248 162,765 ------------
PRINCIPAL AMOUNT ---------------- NOTES (COST $4,807) 0.0%(c) COMMUNICATIONS EQUIPMENT 0.0%(c) (a,b)Dilithium Networks Inc., 11.00%, 12/31/09 ................................... United States 4,807 4,807 ------------ TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $371,188,435) 459,022,904 ------------
SHARES ---------------- SHORT TERM INVESTMENTS (COST $10,188,175) 2.2% MONEY MARKET FUNDS 2.2% (d)Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.13% ...... United States 10,188,175 10,188,175 ------------ TOTAL INVESTMENTS (COST $381,376,610) 100.8% .............................. 469,211,079 OTHER ASSETS, LESS LIABILITIES (0.8)% ..................................... (3,744,870) ------------ NET ASSETS 100.0% ......................................................... $465,466,209 ============
See Abbreviations on page 127. (a) Non-income producing. (b) See Note 9 regarding restricted and illiquid securities. (c) Rounds to less than 0.1% of net assets. (d) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 55 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ---------------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ---------- ---------- ---------- ---------- ---------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 37.17 $ 46.36 $ 39.10 $ 34.83 $ 30.58 $ 26.87 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ........... 0.18 0.24 0.16 0.12 0.13 0.06 Net realized and unrealized gains (losses) ................... (10.32) (9.30) 7.21 4.21 4.20 3.68 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations ...... (10.14) (9.06) 7.37 4.33 4.33 3.74 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions from net investment income ................... (0.31) (0.13) (0.11) (0.06) (0.08) (0.03) ---------- ---------- ---------- ---------- ---------- ---------- Redemption fees(c) .................... -- --(d) --(d) --(d) --(d) --(d) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ........ $ 26.72 $ 37.17 $ 46.36 $ 39.10 $ 34.83 $ 30.58 ========== ========== ========== ========== ========== ========== Total return(e) ....................... (27.27)% (19.59)% 18.87% 12.46% 14.17% 13.92% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................... 0.99% 0.89% 0.93% 0.91% 0.94% 0.98% Net investment income ................. 1.27% 0.56% 0.37% 0.34% 0.40% 0.20% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $1,213,355 $1,708,612 $2,123,419 $1,695,802 $1,567,675 $1,531,871 Portfolio turnover rate ............... 2.04% 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. 56 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ----------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ------- -------- -------- -------- -------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 35.44 $ 44.42 $ 37.65 $ 33.73 $ 29.77 $ 26.32 ------- ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............... 0.07 (0.08) (0.16) (0.15) (0.11) (0.16) Net realized and unrealized gains (losses) ..................................... (9.83) (8.90) 6.93 4.07 4.07 3.61 ------- ------- -------- -------- -------- -------- Total from investment operations ................. (9.76) (8.98) 6.77 3.92 3.96 3.45 ------- ------- -------- -------- -------- -------- Redemption fees(c) -- --(d) --(d) --(d) --(d) --(d) ------- ------- -------- -------- -------- -------- Net asset value, end of period ................... $ 25.68 $ 35.44 $ 44.42 $ 37.65 $ 33.73 $ 29.77 ======= ======= ======== ======== ======== ======== Total return(e) .................................. (27.54)% (20.22)% 17.98% 11.62% 13.30% 13.11% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ...................................... 1.75% 1.64% 1.69% 1.67% 1.69% 1.73% Net investment income (loss) ..................... 0.51% (0.19)% (0.39)% (0.42)% (0.35)% (0.55)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $55,163 $89,779 $138,640 $122,871 $123,926 $121,986 Portfolio turnover rate .......................... 2.04% 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 57 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ---------------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ---------- ---------- --------- ---------- ---------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................... $ 35.14 $ 44.03 $ 37.32 $ 33.43 $ 29.51 $ 26.09 ---------- ---------- ---------- --------- ---------- ---------- Income from investment operations(a): Net investment income (loss)(b) .... 0.07 (0.08) (0.16) (0.15) (0.11) (0.16) Net realized and unrealized gains (losses) ................... (9.75) (8.81) 6.87 4.04 4.03 3.58 ---------- ---------- ---------- --------- ---------- ---------- Total from investment operations ...... (9.68) (8.89) 6.71 3.89 3.92 3.42 ---------- ---------- ---------- --------- ---------- ---------- Less distributions from net investment income ................... (0.02) -- -- -- -- -- ---------- ---------- ---------- --------- ---------- ---------- Redemption fees(c) -- --(d) --(d) --(d) --(d) --(d) ---------- ---------- ---------- --------- ---------- ---------- Net asset value, end of period ........ $ 25.44 $ 35.14 $ 44.03 $ 37.32 $ 33.43 $ 29.51 ========== ========== ========== ========= ========== ========== Total return(e) ....................... (27.54)% (20.19)% 17.98% 11.60% 13.32% 13.11% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................... 1.75% 1.64% 1.69% 1.66% 1.69% 1.73% Net investment income (loss) .......... 0.51% (0.19)% (0.39)% (0.41)% (0.35)% (0.55)% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $ 178,792 $ 255,425 $ 340,671 $ 273,512 $ 270,538 $ 270,131 Portfolio turnover rate ............... 2.04% 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g)Benefit of expense reduction rounds to less than 0.01%. 58 | The accompanying notes are an integral part of these financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 --------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- --------- -------- -------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............. $ 36.87 $ 45.99 $ 38.80 $ 34.59 $ 30.39 $ 26.74 ------------- -------- -------- --------- -------- -------- Income from investment operations(a): Net investment income (loss)(b) ............... 0.14 0.14 0.04 0.02 0.05 (0.02) Net realized and unrealized gains (losses) .... (10.23) (9.23) 7.16 4.19 4.16 3.67 ------------- -------- -------- --------- -------- -------- Total from investment operations ................. (10.09) (9.09) 7.20 4.21 4.21 3.65 ------------- -------- -------- --------- -------- -------- Less distributions from net investment income .... (0.11) (0.03) (0.01) --(c) (0.01) -- ------------- -------- -------- --------- -------- -------- Redemption fees(d) ............................... -- --(c) --(c) --(c) --(c) --(c) ------------- -------- -------- --------- -------- -------- Net asset value, end of period ................... $ 26.67 $ 36.87 $ 45.99 $ 38.80 $ 34.59 $ 30.39 ============= ======== ======== ========= ======== ======== Total return(e) .................................. (27.37)% (19.78)% 18.55% 12.18% 13.87% 13.65% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ...................................... 1.25% 1.14% 1.19% 1.17% 1.19% 1.23% Net investment income (loss) ..................... 1.01% 0.31% 0.11% 0.08% 0.15% (0.05)% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $ 27,751 $ 30,175 $ 53,134 $ 37,804 $ 27,818 $ 20,060 Portfolio turnover rate .......................... 2.04% 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 59 FRANKLIN CUSTODIAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN GROWTH FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ----------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- --------- --------- --------- --------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............ $ 37.25 $ 46.45 $ 39.17 $ 34.89 $ 30.63 $ 26.91 ------------- -------- --------- --------- --------- --------- Income from investment operations(a): Net investment income(b) ..................... 0.21 0.34 0.27 0.22 0.21 0.14 Net realized and unrealized gains (losses) ... (10.34) (9.31) 7.21 4.21 4.21 3.67 ------------- -------- --------- --------- --------- --------- Total from investment operations ................ (10.13) (8.97) 7.48 4.43 4.42 3.81 ------------- -------- --------- --------- --------- --------- Less distributions from net investment income ... (0.40) (0.23) (0.20) (0.15) (0.16) (0.09) ------------- -------- --------- --------- --------- --------- Redemption fees(c) .............................. -- --(d) --(d) --(d) --(d) --(d) ------------- -------- --------- --------- --------- --------- Net asset value, end of period .................. $ 26.72 $ 37.25 $ 46.45 $ 39.17 $ 34.89 $ 30.63 ============= ======== ========= ========= ========= ========= Total return(e) ................................. (27.16)% (19.39)% 19.16% 12.73% 14.45% 14.19% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ..................................... 0.75% 0.64% 0.69% 0.67% 0.69% 0.73% Net investment income ........................... 1.51% 0.81% 0.61% 0.58% 0.65% 0.45% SUPPLEMENTAL DATA Net assets, end of period (000's) ............... $ 185,794 $256,988 $ 363,221 $ 274,603 $ 221,752 $ 133,332 Portfolio turnover rate ......................... 2.04% 5.64% 0.37% 2.21% 1.16% 1.56%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. 60 | The accompanying notes are an integral part of these financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED)
FRANKLIN GROWTH FUND SHARES VALUE - ----------------------------------------------------------------------------------------------- --------- ------------- COMMON STOCKS 94.1% AUTOMOBILES & COMPONENTS 1.5% (a)Ford Motor Co. ............................................................................. 1,100,000 $ 2,893,000 Harley-Davidson Inc. ....................................................................... 400,000 5,356,000 Johnson Controls Inc. ...................................................................... 1,200,000 14,400,000 Toyota Motor Corp., ADR (Japan) ............................................................ 30,000 1,899,000 ------------- 24,548,000 ------------- CAPITAL GOODS 25.4% 3M Co. ..................................................................................... 855,000 42,510,600 The Boeing Co. ............................................................................. 1,045,000 37,181,100 Caterpillar Inc. ........................................................................... 200,000 5,592,000 Deere & Co. ................................................................................ 100,000 3,287,000 Emerson Electric Co. ....................................................................... 1,000,000 28,580,000 General Dynamics Corp. ..................................................................... 1,000,000 41,590,000 General Electric Co. ....................................................................... 70,000 707,700 Illinois Tool Works Inc. ................................................................... 1,000,000 30,850,000 Ingersoll-Rand Co. Ltd., A ................................................................. 1,002,000 13,827,600 Lockheed Martin Corp. ...................................................................... 500,000 34,515,000 Northrop Grumman Corp. ..................................................................... 1,000,000 43,640,000 Pall Corp. ................................................................................. 500,000 10,215,000 Raytheon Co. ............................................................................... 600,000 23,364,000 Rockwell Collins Inc. ...................................................................... 100,000 3,264,000 (a)SunPower Corp., A .......................................................................... 2,000 47,560 (a)SunPower Corp., B .......................................................................... 48,000 950,400 Textron Inc. ............................................................................... 1,050,000 6,027,000 (a)Thomas & Betts Corp. ....................................................................... 500,000 12,510,000 Tyco International Ltd. .................................................................... 387,513 7,579,754 United Technologies Corp. .................................................................. 850,000 36,533,000 W.W. Grainger Inc. ......................................................................... 550,000 38,599,000 ------------- 421,370,714 ------------- COMMERCIAL & PROFESSIONAL SERVICES 2.4% Avery Dennison Corp. ....................................................................... 462,000 10,321,080 Dun & Bradstreet Corp. ..................................................................... 122,000 9,394,000 Equifax Inc. ............................................................................... 400,000 9,780,000 Robert Half International Inc. ............................................................. 300,000 5,349,000 (a)Stericycle Inc. ............................................................................ 100,000 4,773,000 ------------- 39,617,080 ------------- CONSUMER DURABLES & APPAREL 1.7% VF Corp. ................................................................................... 500,000 28,555,000 ------------- CONSUMER SERVICES 0.8% Carnival Corp. ............................................................................. 565,000 12,204,000 (a)Interval Leisure Group Inc. ................................................................ 60,020 318,106 ------------- 12,522,106 ------------- ENERGY 2.2% BP PLC, ADR (United Kingdom) ............................................................... 350,200 14,043,020 ConocoPhillips ............................................................................. 35,000 1,370,600 Devon Energy Corp. ......................................................................... 50,000 2,234,500
Semiannual Report | 61 FRANKLIN CUSTODIAN FUNDS STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE - ----------------------------------------------------------------------------------------------- --------- ------------- COMMON STOCKS (CONTINUED) ENERGY (CONTINUED) Exxon Mobil Corp. .......................................................................... 70,000 $ 4,767,000 Royal Dutch Shell PLC, A, ADR (Netherlands) ................................................ 280,000 12,404,000 Schlumberger Ltd. .......................................................................... 40,000 1,624,800 (a)Transocean Ltd. ............................................................................ 15,222 895,662 ------------- 37,339,582 ------------- HEALTH CARE EQUIPMENT & SERVICES 5.6% Baxter International Inc. .................................................................. 400,000 20,488,000 Cardinal Health Inc. ....................................................................... 300,000 9,444,000 (a)Edwards Lifesciences Corp. ................................................................. 50,000 3,031,500 IMS Health Inc. ............................................................................ 500,000 6,235,000 (a)Intuitive Surgical Inc. .................................................................... 19,000 1,811,840 (a)Medco Health Solutions Inc. ................................................................ 96,480 3,988,483 Medtronic Inc. ............................................................................. 60,000 1,768,200 Quest Diagnostics Inc. ..................................................................... 500,000 23,740,000 Teleflex Inc. .............................................................................. 500,000 19,545,000 (a)Zimmer Holdings Inc. ....................................................................... 64,000 2,336,000 ------------- 92,388,023 ------------- HOUSEHOLD & PERSONAL PRODUCTS 0.1% The Procter & Gamble Co. ................................................................... 35,000 1,648,150 ------------- MATERIALS 2.6% Air Products and Chemicals Inc. ............................................................ 500,000 28,125,000 Sigma-Aldrich Corp. ........................................................................ 400,000 15,116,000 ------------- 43,241,000 ------------- MEDIA 1.2% The Walt Disney Co. ........................................................................ 1,130,000 20,520,800 ------------- PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES 20.0% Abbott Laboratories ........................................................................ 400,000 19,080,000 Allergan Inc. .............................................................................. 800,000 38,208,000 (a)Amgen Inc. ................................................................................. 932,000 46,152,640 (a)Biogen Idec Inc. ........................................................................... 400,000 20,968,000 (a)Celgene Corp. .............................................................................. 25,000 1,110,000 (a)Dionex Corp. ............................................................................... 250,000 11,812,500 Eli Lilly and Co. .......................................................................... 400,000 13,364,000 Johnson & Johnson .......................................................................... 1,081,000 56,860,600 Merck & Co. Inc. ........................................................................... 500,000 13,375,000 (a)Millipore Corp. ............................................................................ 400,000 22,964,000 Pfizer Inc. ................................................................................ 2,170,000 29,555,400 Roche Holding AG, ADR (Switzerland) ........................................................ 80,000 2,752,000 Schering-Plough Corp. ...................................................................... 500,000 11,775,000 (a)Waters Corp. ............................................................................... 500,000 18,475,000 Wyeth ...................................................................................... 600,000 25,824,000 ------------- 332,276,140 -------------
62 | Semiannual Report FRANKLIN CUSTODIAN FUNDS STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE - ----------------------------------------------------------------------------------------------- --------- ------------- COMMON STOCKS (CONTINUED) RETAILING 0.2% (a)Expedia Inc. ............................................................................... 300,100 $ 2,724,908 (a)HSN Inc. ................................................................................... 60,020 308,503 (a)Ticketmaster Entertainment Inc. ............................................................ 60,020 221,474 ------------- 3,254,885 ------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.3% Texas Instruments Inc. ..................................................................... 250,000 4,127,500 (a)Verigy Ltd. (Singapore) .................................................................... 48,974 404,036 ------------- 4,531,536 ------------- SOFTWARE & SERVICES 7.4% Automatic Data Processing Inc. ............................................................. 700,000 24,612,000 (a)Computer Sciences Corp. .................................................................... 1,000,000 36,840,000 (a)Google Inc., A ............................................................................. 40,000 13,922,400 (a)IAC/InterActiveCorp. ....................................................................... 150,050 2,285,262 Microsoft Corp. ............................................................................ 900,000 16,533,000 (a)Oracle Corp. ............................................................................... 500,000 9,035,000 (a)Yahoo! Inc. ................................................................................ 1,600,000 20,496,000 ------------- 123,723,662 ------------- TECHNOLOGY HARDWARE & EQUIPMENT 13.8% (a)Agilent Technologies Inc. .................................................................. 400,000 6,148,000 (a)Apple Inc. ................................................................................. 725,000 76,212,000 (a)Cisco Systems Inc. ......................................................................... 1,545,000 25,909,650 (a)EMC Corp. .................................................................................. 1,000,000 11,400,000 Hewlett-Packard Co. ........................................................................ 1,156,250 37,069,375 International Business Machines Corp. ...................................................... 580,000 56,196,200 (a)Logitech International SA (Switzerland) .................................................... 150,000 1,542,000 (a)Mettler-Toledo International Inc. .......................................................... 50,000 2,566,500 Molex Inc. ................................................................................. 146,483 2,012,676 Molex Inc., A .............................................................................. 146,483 1,851,545 QUALCOMM Inc. .............................................................................. 110,000 4,280,100 Tyco Electronics Ltd. ...................................................................... 387,513 4,278,144 ------------- 229,466,190 ------------- TELECOMMUNICATION SERVICES 0.2% (a)American Tower Corp., A .................................................................... 115,000 3,499,450 ------------- TRANSPORTATION 8.1% Air France-KLM, ADR (France) ............................................................... 550,000 4,867,500 (a)Alaska Air Group Inc. ...................................................................... 500,000 8,785,000 (a)AMR Corp. .................................................................................. 2,000,000 6,380,000 Arkansas Best Corp. ........................................................................ 500,000 9,510,000 British Airways PLC, ADR (United Kingdom) .................................................. 500,000 10,195,000 Canadian National Railway Co. (Canada) ..................................................... 500,000 17,725,000 Canadian Pacific Railway Ltd. (Canada) ..................................................... 500,000 14,815,000 (a)Continental Airlines Inc., B ............................................................... 1,000,000 8,810,000 Expeditors International of Washington Inc. ................................................ 80,000 2,263,200 Forward Air Corp. .......................................................................... 500,000 8,115,000
Semiannual Report | 63 FRANKLIN CUSTODIAN FUNDS STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE - -------------------------------------------------------------------------------------------- --------- --------------- COMMON STOCKS (CONTINUED) TRANSPORTATION (CONTINUED) Heartland Express Inc. .................................................................. 500,000 $ 7,405,000 Southwest Airlines Co. .................................................................. 65,200 412,716 Union Pacific Corp. ..................................................................... 600,000 24,666,000 Werner Enterprises Inc. ................................................................. 500,000 7,560,000 (a)YRC Worldwide Inc. ...................................................................... 700,000 3,143,000 --------------- 134,652,416 --------------- UTILITIES 0.6% FPL Group Inc. 200,000 10,146,000 --------------- TOTAL COMMON STOCKS (COST $1,003,352,234) 1,563,300,734 ---------------
PRINCIPAL AMOUNT ---------------- CORPORATE BONDS (COST $1,615,052) 0.1% AUTOMOBILES & COMPONENTS 0.1% General Motors Corp., senior deb., 8.375%, 7/15/33 ...................................... $ 8,500,000 1,062,500 TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,004,967,286) 1,564,363,234 ---------------
SHARES ---------------- SHORT TERM INVESTMENTS 5.8% MONEY MARKET FUNDS (COST $ 82,480,843) 5.0% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.13% .................... 82,480,843 82,480,843 ---------------
PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENTS (COST $13,980,468) 0.8% (c)Joint Repurchase Agreement, 0.132%, 4/01/09 (Maturity Value $ 13,980,519) .......................................................... $ 13,980,468 13,980,468 Banc of America Securities LLC (Maturity Value $ 978,357) Barclays Capital Inc. (Maturity Value $ 978,357) BNP Paribas Securities Corp. (Maturity Value $ 3,913,427) Credit Suisse Securities (USA) LLC (Maturity Value $ 3,424,388) Deutsche Bank Securities Inc. (Maturity Value $ 2,729,277) HSBC Securities (USA) Inc. (Maturity Value $ 1,956,713) Collateralized by U.S.Government Agency Securities, 1.03% - 5.50%, 9/25/09 - 12/14/22; (d) U.S. Treasury Bills, 6/11/09 - 9/03/09; and U.S. Treasury Notes, 0.875% - 4.50%, 5/15/10 - 3/31/13 --------------- TOTAL INVESTMENTS (COST $ 1,101,428,597) 100.0% ............................................ 1,660,824,545 OTHER ASSETS, LESS LIABILITIES 0.0%(e) ..................................................... 30,522 --------------- NET ASSETS 100.0% .......................................................................... $ 1,660,855,067 ===============
See Abbreviations on page 127. (a) Non-income producing. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (c) See Note 1(c) regarding joint repurchase agreement. (d) The security is traded on a discount basis with no stated coupon rate. (e) Rounds to less than 0.1% of net assets. 64 | The accompanying notes are an integral part of these financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS FINANCIAL HIGHLIGHTS FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 -------------------------------------------------------------------------------- CLASS A (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ------------ ------------ ------------ ----------- ------------ PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....... $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 ------------- ------------ ------------ ------------ ----------- ------------ Income from investment operations(a): Net investment income(b) ............. 0.08 0.16 0.14 0.14 0.14 0.12 Net realized and unrealized gains (losses) .............. (0.43) (0.71) 0.21 0.09 0.10 0.22 ------------- ------------ ------------ ------------ ----------- ------------ Total from investment operations .............. (0.35) (0.55) 0.35 0.23 0.24 0.34 ------------- ------------ ------------ ------------ ----------- ------------ Less distributions from: Net investment income ... (0.08) (0.15) (0.14) (0.15) (0.15) (0.16) Net realized gains ...... --(c) (0.06) (0.04) (0.01) (0.01) (0.01) ------------- ------------ ------------ ------------ ----------- ------------ Total distributions ........ (0.08) (0.21) (0.18) (0.16) (0.16) (0.17) ------------- ------------ ------------ ------------ ----------- ------------ Redemption fees(d) ......... -- --(c) --(c) --(c) --(c) --(c) ------------- ------------ ------------ ------------ ----------- ------------ Net asset value, end of period ............... $ 1.55 $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 ============= ============ ============ ============ =========== ============ Total return(e) ............ (17.48)% (21.36)% 14.14% 9.73% 10.45% 15.50% RATIOS TO AVERAGE NET ASSETS(f) Expenses ................... 0.69%(g) 0.62%(g) 0.63%(g) 0.64%(h) 0.65%(h) 0.68%(g) Net investment income ...... 9.60% 6.44% 5.31% 5.61% 5.54% 5.11% SUPPLEMENTAL DATA Net assets, end of period (000's) ................. $ 20,236,054 $ 26,892,973 $ 35,476,603 $ 26,641,398 $21,934,575 $ 14,743,190 Portfolio turnover rate .... 27.31% 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 65 FRANKLIN CUSTODIAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------------------------ CLASS B (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ----------- ----------- ------------ ------------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 ----------- ----------- ----------- ------------ ------------- ----------- Income from investment operations(a): Net investment income(b) ... 0.07 0.14 0.12 0.12 0.11 0.10 Net realized and unrealized gains (losses) ................. (0.42) (0.71) 0.21 0.08 0.11 0.22 ----------- ----------- ----------- ------------ ------------- ----------- Total from investment operations .................... (0.35) (0.57) 0.33 0.20 0.22 0.32 ----------- ----------- ----------- ------------ ------------- ----------- Less distributions from: Net investment income ...... (0.08) (0.13) (0.12) (0.12) (0.13) (0.14) Net realized gains ......... --(c) (0.06) (0.04) (0.01) (0.01) (0.01) ----------- ----------- ----------- ------------ ------------- ----------- Total distributions ........... (0.08) (0.19) (0.16) (0.13) (0.14) (0.15) ----------- ----------- ----------- ------------ ------------- ----------- Redemption fees(d) ............ -- --(c) --(c) --(c) --(c) --(c) ----------- ----------- ----------- ------------ ------------- ----------- Net asset value, end of period ..................... $ 1.54 $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 =========== =========== =========== ============ ============= =========== Total return(e)................. (17.95)% (22.13)% 13.23% 8.83% 9.57% 14.59% RATIOS TO AVERAGE NET ASSETS(f) Expenses ...................... 1.54%(g) 1.47%(g) 1.48%(g) 1.49%(h) 1.50%(h) 1.53%(g) Net investment income ......... 8.75% 5.59% 4.46% 4.76% 4.69% 4.26% SUPPLEMENTAL DATA Net assets, end of period (000's) ...................... $ 1,666,993 $ 2,428,765 $ 3,745,636 $ 3,743,374 $ 3,922,396 $ 3,486,880 Portfolio turnover rate ....... 27.31% 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 66 | The accompanying notes are an integral part of these financial statements. | Semiannual Report FRANKLIN CUSTODIAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------------------------ CLASS B1 (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ----------- ----------- ------------ ------------- ----------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .......... $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 $ 2.25 ----------- ----------- ----------- ------------ ------------- ----------- Income from investment operations(a): Net investment income(b) ... 0.07 0.15 0.13 0.13 0.12 0.11 Net realized and unrealized gains (losses) .................. (0.42) (0.71) 0.21 0.08 0.11 0.21 ----------- ----------- ----------- ------------ ------------- ----------- Total from investment operations ................... (0.35) (0.56) 0.34 0.21 0.23 0.32 ----------- ----------- ----------- ------------ ------------- ----------- Less distributions from: Net investment income ...... (0.08) (0.14) (0.13) (0.13) (0.14) (0.14) Net realized gains ......... --(c) (0.06) (0.04) (0.01) (0.01) (0.01) ----------- ----------- ----------- ------------ ------------- ----------- Total distributions ........... (0.08) (0.20) (0.17) (0.14) (0.15) (0.15) ----------- ----------- ----------- ------------ ------------- ----------- Redemption fees(d) ............ -- --(c) --(c) --(c) --(c) --(c) ----------- ----------- ----------- ------------ ------------- ----------- Net asset value, end of period ....................... $ 1.55 $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42 =========== =========== =========== ============ ============= =========== Total return(e) ............... (17.71)% (21.77)% 13.57% 9.17% 9.90% 14.90% RATIOS TO AVERAGE NET ASSETS(f) Expenses ...................... 1.19%(g) 1.12%(g) 1.13%(g) 1.14%(h) 1.15%(h) 1.18%(g) Net investment income ......... 9.10% 5.94% 4.81% 5.11% 5.04% 4.61% SUPPLEMENTAL DATA Net assets, end of period (000's) ................ $ 132,020 $ 224,713 $ 397,224 $ 459,302 $ 493,063 $ 511,471 Portfolio turnover rate ....... 27.31% 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 67 FRANKLIN CUSTODIAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------------------------ (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ----------- ----------- ----------- ----------- ---------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of Period ................. $ 1.99 $ 2.76 $ 2.59 $ 2.51 $ 2.43 $ 2.26 ---------- ----------- ----------- ----------- ----------- ---------- Income from investment operations(a): Net investment income(b) ............... 0.07 0.15 0.13 0.13 0.13 0.11 Net realized and unrealized gains (losses) ........... (0.42) (0.72) 0.21 0.09 0.10 0.21 ---------- ----------- ----------- ----------- ----------- ---------- Total from investment Operations ................ (0.35) (0.57) 0.34 0.22 0.23 0.32 ---------- ----------- ----------- ----------- ----------- ---------- Less distributions from: Net investment income ..... (0.08) (0.14) (0.13) (0.13) (0.14) (0.14) Net realized gains ........ --(c) (0.06) (0.04) (0.01) (0.01) (0.01) ---------- ----------- ----------- ----------- ----------- ---------- Total distributions .......... (0.08) (0.20) (0.17) (0.14) (0.15) (0.15) ---------- ----------- ----------- ----------- ----------- ---------- Redemption fees(d) ........... -- --(c) --(c) --(c) --(c) --(c) ---------- ----------- ----------- ----------- ----------- ---------- Net asset value, end of period ................ $ 1.56 $ 1.99 $ 2.76 $ 2.59 $ 2.51 $ 2.43 ========== =========== =========== =========== =========== ========== Total return(e) .............. (17.63)% (21.98)% 13.47% 9.56% 9.84% 14.85% RATIOS TO AVERAGE NET ASSETS(f) Expenses ..................... 1.19%(g) 1.12%(g) 1.13%(g) 1.14%(h) 1.15%(h) 1.18%(g) Net investment income ........ 9.10% 5.94% 4.81% 5.11% 5.04% 4.61% SUPPLEMENTAL DATA Net assets, end of period (000's) ................... $9,326,417 $12,443,143 $16,203,796 $12,138,969 $10,113,365 $6,616,891 Portfolio turnover rate ...... 27.31% 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 68 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 --------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- -------- -------- ------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....... $ 1.95 $ 2.71 $ 2.55 $ 2.48 $ 2.40 $ 2.23 -------- -------- -------- -------- -------- ------- Income from investment operations(a): Net investment income(b) ................ 0.07 0.15 0.13 0.13 0.13 0.11 Net realized and unrealized gains (losses) .............................. (0.41) (0.71) 0.20 0.09 0.10 0.22 -------- -------- -------- -------- -------- ------- Total from investment operations ........... (0.34) (0.56) 0.33 0.22 0.23 0.33 -------- -------- -------- -------- -------- ------- Less distributions from: Net investment income ................... (0.08) (0.14) (0.13) (0.14) (0.14) (0.15) Net realized gains ...................... --(c) (0.06) (0.04) (0.01) (0.01) (0.01) -------- -------- -------- -------- -------- ------- Total distributions ........................ (0.08) (0.20) (0.17) (0.15) (0.15) (0.16) -------- -------- -------- -------- -------- ------- Redemption fees(d) ......................... -- --(c) --(c) --(c) --(c) --(c) -------- -------- -------- -------- -------- ------- Net asset value, end of period ............. $ 1.53 $ 1.95 $ 2.71 $ 2.55 $ 2.48 $ 2.40 ======== ======== ======== ======== ======== ======= Total return(e) ............................ (17.40)% (21.91)% 13.47% 9.43% 10.15% 15.25% RATIOS TO AVERAGE NET ASSETS(f) Expenses ................................... 1.04%(g) 0.97%(g) 0.98%(g) 0.99%(h) 1.00%(h) 1.03%(g) Net investment income ...................... 9.25% 6.09% 4.96% 5.26% 5.19% 4.76% SUPPLEMENTAL DATA Net assets, end of period (000's) .......... $228,117 $267,956 $286,670 $183,609 $122,222 $73,165 Portfolio turnover rate .................... 27.31% 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 69 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN INCOME FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------------------ (UNAUDITED) 2008 2007 2006 2005 2004 ----------------- ---------- ---------- ---------- ---------- -------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ....................... $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 $ 2.24 ---------- ---------- ---------- ---------- ---------- -------- Income from investment operations (a): Net investment income(b) ..... 0.08 0.16 0.15 0.14 0.14 0.12 Net realized and unrealized gains (losses) ............. (0.42) (0.70) 0.21 0.09 0.11 0.22 ---------- ---------- ---------- ---------- ---------- -------- Total from investment operations ................... (0.34) (0.54) 0.36 0.23 0.25 0.34 ---------- ---------- ---------- ---------- ---------- -------- Less distributions from: Net investment income ........ (0.09) (0.16) (0.15) (0.15) (0.16) (0.16) Net realized gains ........... --(c) (0.06) (0.04) (0.01) (0.01) (0.01) ---------- ---------- ---------- ---------- ---------- -------- Total distributions ............. (0.09) (0.22) (0.19) (0.16) (0.17) (0.17) ---------- ---------- ---------- ---------- ---------- -------- Redemption fees(d) .............. -- --(c) --(c) --(c) --(c) --(c) ---------- ---------- ---------- ---------- ---------- -------- Net asset value, end of period ........................ $ 1.54 $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41 ========== ========== ========== ========== ========== ======== Total return(e) ................. (17.51)% (21.33)% 14.36% 9.94% 10.65% 15.74% RATIOS TO AVERAGE NET ASSETS(f) Expenses ........................ 0.54%(g) 0.47%(g) 0.48%(g) 0.49%(h) 0.50%(h) 0.53%(g) Net investment income ........... 9.75% 6.59% 5.46% 5.76% 5.69% 5.26% SUPPLEMENTAL DATA Net assets, end of period (000's) ....................... $2,893,768 $4,259,806 $6,195,966 $3,786,643 $2,280,318 $901,149 Portfolio turnover rate ....... 27.31% 39.92% 25.45% 28.35% 28.51% 31.90%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Amount rounds to less than $0.01 per share. (d) Effective September 1, 2008, the redemption fee was eliminated. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. (h) Benefit of waiver and payment by affiliate and expense reduction rounds to less than 0.01%. 70 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE - ------------------------------------------------------------ -------------- ---------- -------------- COMMON STOCKS 26.8% CONSUMER DISCRETIONARY 0.1% (a)Comcast Corp., A ........................................ United States 3,789,333 $ 51,686,502 -------------- CONSUMER STAPLES 0.0%(b) Diageo PLC .............................................. United Kingdom 909,000 10,257,795 -------------- ENERGY 3.0% (c)Canadian Oil Sands Trust ................................ Canada 25,847,400 497,163,950 ConocoPhillips .......................................... United States 8,500,000 332,860,000 Spectra Energy Corp. .................................... United States 15,761,200 222,863,368 -------------- 1,052,887,318 -------------- FINANCIALS 3.4% Bank of America Corp. ................................... United States 50,000,000 341,000,000 Barclays PLC ............................................ United Kingdom 15,000,000 31,852,562 Duke Realty Corp. ....................................... United States 3,163,800 17,400,900 HSBC Holdings PLC ....................................... United Kingdom 35,000,000 198,361,114 iStar Financial Inc. .................................... United States 5,213,500 14,649,935 JPMorgan Chase & Co. .................................... United States 10,000,000 265,800,000 Wells Fargo & Co. ....................................... United States 21,000,000 299,040,000 -------------- 1,168,104,511 -------------- HEALTH CARE 2.5% Merck & Co. Inc. ........................................ United States 20,000,000 535,000,000 Pfizer Inc. ............................................. United States 23,000,000 313,260,000 -------------- 848,260,000 -------------- INFORMATION TECHNOLOGY 1.1% (a)Intel Corp. ............................................. United States 20,000,000 301,000,000 (a)Texas Instruments Inc. .................................. United States 4,800,000 79,248,000 -------------- 380,248,000 -------------- MATERIALS 0.7% AngloGold Ashanti Ltd., ADR ............................. South Africa 2,884,064 106,018,193 Newmont Mining Corp. .................................... United States 3,000,000 134,280,000 -------------- 240,298,193 -------------- TELECOMMUNICATION SERVICES 1.0% AT&T Inc. ............................................... United States 11,000,000 277,200,000 Vodafone Group PLC. ..................................... United Kingdom 30,000,000 52,836,513 -------------- 330,036,513 -------------- UTILITIES 15.0% AGL Resources Inc. ...................................... United States 3,600,000 95,508,000 (c)Ameren Corp. ............................................ United States 12,150,000 281,758,500 American Electric Power Co. Inc. ........................ United States 8,350,000 210,921,000 CenterPoint Energy Inc. ................................. United States 5,600,000 58,408,000 Consolidated Edison Inc. ................................ United States 5,300,000 209,933,000 Constellation Energy Group .............................. United States 3,000,000 61,980,000 Dominion Resources Inc. ................................. United States 10,600,000 328,494,000 DTE Energy Co. .......................................... United States 4,550,000 126,035,000
Semiannual Report | 71 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE - ------------------------------------------------------------ -------------- ---------- -------------- COMMON STOCKS (CONTINUED) UTILITIES (CONTINUED) Duke Energy Corp. ....................................... United States 34,750,000 $ 497,620,000 FirstEnergy Corp. ....................................... United States 5,400,000 208,440,000 FPL Group Inc. .......................................... United States 8,550,000 433,741,500 NiSource Inc. ........................................... United States 4,400,000 43,120,000 PG&E Corp. .............................................. United States 10,000,000 382,200,000 (c)Pinnacle West Capital Corp. ............................. United States 5,100,000 135,456,000 Portland General Electric Co. ........................... United States 3,000,000 52,770,000 Progress Energy Inc. .................................... United States 9,450,000 342,657,000 Public Service Enterprise Group Inc. .................... United States 18,350,000 540,774,500 Sempra Energy .......................................... United States 5,950,000 275,128,000 The Southern Co. ........................................ United States 13,500,000 413,370,000 TECO Energy Inc. ........................................ United States 10,000,000 111,500,000 Xcel Energy Inc. ........................................ United States 18,900,000 352,107,000 -------------- 5,161,921,500 -------------- TOTAL COMMON STOCKS (COST $11,891,677,222) .............. 9,243,700,332 -------------- CONVERTIBLE PREFERRED STOCKS 2.8% CONSUMER DISCRETIONARY 0.1% General Motors Corp., 6.25%, cvt. pfd., C ............... United States 11,000,000 27,940,000 -------------- ENERGY 0.5% (d)Sandridge Energy Inc., 8.50%, cvt., pfd., 144A .......... United States 1,810,000 174,380,468 -------------- FINANCIALS 1.8% Bank of America Corp., 7.25%, cvt. pfd., L .............. United States 465,000 197,392,500 Citigroup Inc., 6.50%, cvt. pfd. ........................ United States 5,698,450 155,852,607 (e)Fannie Mae, 5.375%, cvt. pfd. ........................... United States 4,700 7,473,000 (e)Fannie Mae, 8.75%, cvt. pfd. ............................ United States 3,239,000 3,368,560 Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .......... United States 3,000,000 12,000,000 Legg Mason Inc., 7.00%, cvt. pfd ........................ United States 2,625,000 47,775,000 (e)Lehman Brothers Holdings Inc., 7.25%, cvt. pfd., P ...... United States 1,000,650 740,481 (e)Lehman Brothers Holdings Inc., 8.75%, cvt. pfd., Q ...... United States 550,000 577,500 (e)Washington Mutual Inc., 7.75%, cvt. pfd., R ............. United States 25,484 124,872 Wells Fargo & Co., 7.50%, cvt. pfd., A .................. United States 380,000 182,016,200 -------------- 607,320,720 -------------- HEALTH CARE 0.3% Schering-Plough Corp., 6.00%, cvt. pfd. ................. United States 525,000 110,709,375 ------------- UTILITIES 0.1% CMS Energy Trust I, 7.75%, cvt. pfd. .................... United States 1,725,000 50,156,618 ------------- TOTAL CONVERTIBLE PREFERRED STOCKS (COST $3,849,220,315) .................................. 970,507,181 -------------- (f)EQUITY LINKED SECURITIES 0.9% ENERGY 0.4% (d)The Goldman Sachs Group Inc. into XTO Energy Inc., 9.00%, 144A ................................................... United States 3,825,000 115,911,079 --------------
72 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE - --------------------------------------------------------------- ------------- ------------------- ------------ (f)EQUITY LINKED SECURITIES (CONTINUED) MATERIALS 0.5% (d)The Goldman Sachs Group Inc. into Barrick Gold Corp., 12.5%, 144A ....................................... United States 5,000,000 $171,933,000 ------------ TOTAL EQUITY LINKED SECURITIES (COST $358,433,093) ....... 287,844,079 ------------ PREFERRED STOCKS 0.2% FINANCIALS 0.2% (e)Fannie Mae, 6.75%, pfd. .................................. United States 3,000,000 1,500,000 (e)Fannie Mae, 7.625%, pfd., R .............................. United States 2,399,400 1,751,562 (e)Fannie Mae, 8.25%, pfd. .................................. United States 11,784,000 8,366,640 (e)Freddie Mac, 8.375%, pfd., Z ............................. United States 16,608,000 7,639,680 (d)Preferred Blocker Inc., 7.00%, pfd., 144A ................ United States 267,636 53,301,396 ------------ TOTAL PREFERRED STOCKS (COST $928,695,780) ............... 72,559,278 ------------
PRINCIPAL AMOUNT(g) ------------------- (h,i)SENIOR FLOATING RATE INTERESTS 5.9% CONSUMER DISCRETIONARY 1.2% Clear Channel Communications Inc., Term Loan B, 4.17%, 11/13/15 ..................................... United States 635,000,000 243,880,005 (j)Dex Media West LLC, Term Loan B, 6.25%, 10/24/14 ......... United States 10,000,000 4,591,670 (k)Idearc Inc., Term Loan A, 5.75%, 11/17/13 ......................... United States 44,437,500 17,515,796 Term Loan B, 6.25%, 11/17/14 ......................... United States 24,809,645 9,582,725 Jarden Corp., Term Loan B-3, 3.72% - 4.75%, 1/24/12 ...... United States 122,812,824 111,628,137 R.H. Donnelley Inc., Term Loan D-2, 6.75%, 6/30/11 ....... United States 53,309,074 23,922,447 ------------ 411,120,780 ------------ HEALTH CARE 0.5% Bausch and Lomb Inc., (l)Delayed Draw Term Loan, 3.768% - 4.47%, 4/28/15 ...... United States 5,268,000 4,523,895 Parent Term Loan B, 4.47%, 4/28/15 ................... United States 34,681,000 29,782,309 HCA Inc., Term Loan A-1, 3.22%, 11/19/12 ....................... United States 79,027,978 68,527,135 Term Loan B-1, 3.47%, 11/18/13 ....................... United States 72,977,912 62,268,403 ------------ 165,101,742 ------------ INDUSTRIALS 0.7% Allison Transmission Inc., Term Loan B, 3.29% - 3.32%, 8/07/14 ................................................ United States 174,088,704 116,252,607 Ceva Group PLC, Dollar Pre-Refunded L/C Commitment, 4.22%, 8/01/12 ... United States 13,684,211 5,952,631 EGL Term Loans, 3.521%, 8/01/12 ...................... United States 114,280,263 49,711,914 U.S. Investigations Services Inc., Term Loan B, 3.977%, 2/21/15 ........................................ United States 108,345,865 87,805,331 ------------ 259,722,483 ------------ INFORMATION TECHNOLOGY 1.8% First Data Corp., Term Loan B-2, 3.268% - 3.272%, 9/24/14 .............. United States 246,250,000 166,665,201 Term Loan B-3, 3.268% - 3.272%, 9/24/14 .............. United States 330,123,120 223,360,312
Semiannual Report | 73 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - --------------------------------------------------------------- ------------- ------------------- -------------- (h,i)SENIOR FLOATING RATE INTERESTS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Freescale Semiconductor Inc., (j)2.247%, 12/01/13 ..................................... United States 78,180,898 $ 32,591,662 12.50%, 12/15/14 ..................................... United States 356,202,760 185,670,689 -------------- 608,287,864 -------------- MATERIALS 0.4% Newpage Corp., Term Loan B, 4.313% - 6.00%, 12/21/14 ..... United States 40,500,000 27,864,000 Novelis Corp., US Term Loan, 3.22%, 7/07/14 .............. United States 149,221,745 94,755,808 -------------- 122,619,808 -------------- UTILITIES 1.3% Texas Competitive Electric Holdings Co. LLC, Term Loan B-1, 4.018% - 4.033%, 10/10/14 ............. United States 172,994,038 114,673,423 Term Loan B-2, 4.018% - 4.033%, 10/10/14 ............. United States 246,249,999 163,371,607 Term Loan B-3, 4.018% - 4.033%, 10/10/14 ............. United States 270,875,000 179,261,283 -------------- 457,306,313 -------------- TOTAL SENIOR FLOATING RATE INTERESTS (COST $3,318,311,313) ................................... 2,024,158,990 -------------- CORPORATE BONDS 56.1% CONSUMER DISCRETIONARY 15.7% Cablevision Systems Corp., senior note, B, 8.00%, 4/15/12 ................................................. United States 485,000,000 474,087,500 (k,m)CCH I Holdings LLC, senior note, 13.50%, 1/15/14 ...................................... United States 375,000,000 6,093,750 9.92%, 4/01/14 ....................................... United States 117,380,000 1,613,975 11.75%, 5/15/14 ...................................... United States 342,000,000 5,557,500 (k,m)CCH I LLC, senior secured note, 11.00%, 10/01/15 ......... United States 767,000,000 86,287,500 (k,m)CCH II LLC, senior note, 10.25%, 9/15/10 ................. United States 310,000,000 263,162,100 (k,m)CCO Holdings LLC, senior note, 8.75%, 11/15/13 ........... United States 80,000,000 64,555,520 CSC Holdings Inc., senior note, (d)144A, 8.50%, 4/15/14 ................................. United States 67,300,000 66,627,000 B, 7.625%, 4/01/11 ................................... United States 36,050,000 35,959,875 Dex Media Inc., senior disc. note, 9.00%, 11/15/13 ................... United States 290,000,000 37,700,000 senior note, B, 8.00%, 11/15/13 ...................... United States 95,600,000 12,428,000 Dex Media West Finance, senior note, B, 8.50%, 8/15/10 ....................... United States 106,500,000 53,782,500 senior sub. note, 9.875%, 8/15/13 .................... United States 114,100,000 23,105,250 DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 ....... United States 285,000,000 280,725,000 Dollar General Corp., senior note, 10.625%, 7/15/15 ........................ United States 510,000,000 511,275,000 (n)senior sub. note, PIK, 11.875%, 7/15/17 .............. United States 200,000,000 197,500,000 EchoStar DBS Corp., senior note, 6.375%, 10/01/11 ..................................... United States 65,000,000 62,887,500 7.75%, 5/31/15 ....................................... United States 133,000,000 123,025,000 7.125%, 2/01/16 ...................................... United States 265,000,000 238,500,000
74 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - --------------------------------------------------------------- -------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) CONSUMER DISCRETIONARY (CONTINUED) Ford Motor Co., 7.45%, 7/16/31 ........................... United States 600,000,000 $ 188,250,000 Ford Motor Credit Co. LLC, 7.375%, 10/28/09 .................................... United States 627,000,000 565,867,500 7.875%, 6/15/10 ..................................... United States 550,000,000 454,640,450 7.375%, 2/01/11 ..................................... United States 410,000,000 309,992,800 senior note, 9.75%, 9/15/10 ......................... United States 145,000,000 119,320,210 senior note, 9.875%, 8/10/11 ........................ United States 75,000,000 56,810,700 senior note, 7.25%, 10/25/11 ........................ United States 90,000,000 64,121,490 General Motors Corp., senior deb., 8.375%, 7/15/33 ....... United States 510,000,000 63,750,000 Host Hotels & Resorts LP, senior note, 6.875%, 11/01/14 .................................... United States 110,000,000 85,250,000 K, 7.125%, 11/01/13 ................................. United States 76,800,000 62,400,000 M, 7.00%, 8/15/12 ................................... United States 13,000,000 11,050,000 O, 6.375%, 3/15/15 .................................. United States 230,000,000 171,350,000 Q, 6.75%, 6/01/16 ................................... United States 185,000,000 135,975,000 KB Home, senior note, 6.375%, 8/15/11 ..................................... United States 40,000,000 36,200,000 5.75%, 2/01/14 ...................................... United States 75,000,000 59,718,750 6.25%, 6/15/15 ...................................... United States 90,000,000 70,200,000 7.25%, 6/15/18 ...................................... United States 70,500,000 53,580,000 (d)Lamar Media Corp., senior note, 144A, 9.75%, 4/01/14 ..... United States 30,800,000 30,145,500 Liberty Media Corp., senior note, 5.70%, 5/15/13 ......... United States 85,000,000 63,547,955 MGM MIRAGE, senior note, 6.75%, 4/01/13 ......................... United States 70,000,000 24,850,000 (d)senior secured note, 144A, 13.00%, 11/15/13 ......... United States 125,000,000 93,750,000 R.H. Donnelley Corp., senior disc. note, A-1, 6.875%, 1/15/13 ............. United States 142,000,000 8,520,000 senior disc. note, A-2, 6.875%, 1/15/13 ............. United States 209,450,000 12,567,000 senior note, 6.875%, 1/15/13 ........................ United States 55,000,000 3,300,000 senior note, 8.875%, 10/15/17 ....................... United States 501,500,000 30,090,000 senior note, A-3, 8.875%, 1/15/16 ................... United States 213,100,000 13,318,750 (d,n)Univision Communications Inc., senior note, 144A, PIK, 9.75%, 3/15/15 ......................................... United States 332,000,000 34,860,000 Visant Holding Corp., senior note, 8.75%, 12/01/13 ....... United States 50,000,000 45,750,000 -------------- 5,414,049,075 -------------- CONSUMER STAPLES 2.6% Altria Group Inc., 7.125%, 6/22/10 ..................................... United States 55,000,000 57,062,610 senior bond, 9.25%, 8/06/19 ......................... United States 102,000,000 109,314,726 senior note, 8.50%, 11/10/13 ........................ United States 130,000,000 141,180,000 senior note, 9.70%, 11/10/18 ........................ United States 330,000,000 360,002,940 (d)Anheuser-Busch InBev NV, senior note, 144A, 7.20%, 1/15/14 .......................................... United States 110,000,000 115,426,740 (d)BAT International Finance PLC, senior note, 144A, 9.50%, 11/15/18 ................................................ United Kingdom 41,000,000 46,668,004 (d)Tyson Foods Inc., senior note, 144A, 10.50%, 3/01/14 ..... United States 52,800,000 54,120,000 -------------- 883,775,020 --------------
Semiannual Report | 75 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(G) VALUE - --------------------------------------------------------------- ------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) ENERGY 7.6% Callon Petroleum Co., senior note, 9.75%, 12/08/10 ....... United States 110,000,000 $ 44,550,000 Chesapeake Energy Corp., senior note, 7.625%, 7/15/13 ..................................... United States 55,000,000 50,875,000 9.50%, 2/15/15 ...................................... United States 167,000,000 163,242,500 6.50%, 8/15/17 ...................................... United States 175,000,000 143,500,000 6.25%, 1/15/18 ...................................... United States 150,000,000 117,750,000 7.25%, 12/15/18 ..................................... United States 169,000,000 139,636,250 6.875%, 11/15/20 .................................... United States 135,000,000 106,312,500 El Paso Corp., senior note, 12.00%, 12/12/13 .................................... United States 176,600,000 188,962,000 7.25%, 4/01/18 ...................................... United States 50,000,000 42,750,000 MTN, 7.75%, 1/15/32 ................................. United States 250,000,000 187,724,750 (d)Forest Oil Corp., senior note, 144A, 8.50%, 2/15/14 ...... United States 57,500,000 53,618,750 Mariner Energy Inc., senior note, 7.50%, 4/15/13 ...................................... United States 45,000,000 33,525,000 8.00%, 5/15/17 ...................................... United States 29,600,000 19,684,000 Newfield Exploration Co., senior sub. note, 6.625%, 4/15/16 ..................................... United States 120,800,000 108,720,000 OPTI Canada Inc., senior note, 7.875%, 12/15/14 .......... Canada 127,000,000 56,197,500 Petrohawk Energy Corp., senior note, 9.125%, 7/15/13 ..................................... United States 83,000,000 80,095,000 (d)144A, 10.50%, 8/01/14 ............................... United States 129,050,000 129,050,000 (d)144A, 7.875%, 6/01/15 ............................... United States 99,000,000 87,615,000 (d)Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ...................................... Switzerland 67,150,000 50,026,750 7.00%, 5/01/17 ...................................... Switzerland 5,000,000 3,625,000 Pioneer Natural Resources Co., 6.65%, 3/15/17 . .................................... United States 25,000,000 19,092,975 senior bond, 6.875%, 5/01/18 ........................ United States 110,000,000 81,416,170 Plains Exploration & Production Co., senior note, 7.75%, 6/15/15 ............................................. United States 75,000,000 64,875,000 Sabine Pass LNG LP, senior secured note, 7.25%, 11/30/13 ..................................... United States 105,000,000 74,550,000 7.50%, 11/30/16 ..................................... United States 375,000,000 253,125,000 (d)SandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18 ............................................. United States 28,000,000 20,720,000 Sesi LLC, senior note, 6.875%, 6/01/14 ................... United States 110,000,000 89,650,000 Tesoro Corp., senior note, 6.50%, 6/01/17 ................ United States 16,000,000 12,160,000 (d)W&T Offshore Inc., senior note, 144A, 8.25%, 6/15/14 ..... United States 147,398,000 95,071,710 Weatherford International Ltd., senior bond, 9.875%, 3/01/39 ........................ United States 65,000,000 64,128,805 senior note, 9.625%, 3/01/19 ........................ United States 50,000,000 51,831,200 -------------- 2,634,080,860 -------------- FINANCIALS 8.3% American Express Co., senior note, 7.00%, 3/19/18 ........ United States 90,000,000 79,569,720 American Express Credit Corp., senior note, C, 7.30%, 8/20/13 ...................................... United States 150,000,000 139,415,400 (d,h)American International Group Inc., junior sub. deb., 144A, FRN, 8.175%, 5/15/58 ............................... United States 250,000,000 21,310,000
76 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - --------------------------------------------------------------- ------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) FINANCIALS (CONTINUED) (o)Bank of America Corp., pfd., sub. bond, M, 8.125%, Perpetual ................................................ United States 70,000,000 $ 28,793,800 Duke Realty LP, senior note, 6.25%, 5/15/13 ...................................... United States 16,000,000 11,521,607 5.95%, 2/15/17 ...................................... United States 30,000,000 17,974,470 6.50%, 1/15/18 ...................................... United States 21,100,000 12,987,782 General Electric Capital Corp., senior note, 5.625%, 5/01/18 ..................................... United States 20,000,000 17,431,960 (d)GMAC LLC, senior note, 144A, 7.75%, 1/19/10 ...................................... United States 319,000,000 273,542,500 7.25%, 3/02/11 ...................................... United States 148,000,000 109,632,480 6.875%, 9/15/11 ..................................... United States 425,000,000 302,221,750 6.875%, 8/28/12 ..................................... United States 170,000,000 114,279,100 6.75%, 12/01/14 ..................................... United States 58,052,000 33,787,425 Goldman Sachs Group Inc., senior note, 7.50%, 2/15/19 .... United States 80,000,000 80,017,680 HCP Inc., senior note, 5.65%, 12/15/13 ..................................... United States 500,000 376,874 6.30%, 9/15/16 ...................................... United States 23,000,000 16,285,469 6.00%, 1/30/17 ...................................... United States 13,190,000 8,892,421 5.625%, 5/01/17 ..................................... United States 5,000,000 3,196,060 6.70%, 1/30/18 ...................................... United States 39,700,000 27,414,112 iStar Financial Inc., 8.625%, 6/01/13 ..................................... United States 160,000,000 51,231,520 senior note, 5.95%, 10/15/13 ........................ United States 20,000,000 6,004,360 (o)JPMorgan Chase & Co., junior sub. note, 1, 7.90%, Perpetual ........................................... United States 775,000,000 499,062,025 (k)Lehman Brothers Holdings Inc., senior note, 7.50%, 12/03/08 ..................................... United States 400,000,000 31,889,500 7.50%, 1/21/09 ...................................... United States 900,000,000 43,780,500 6.20%, 9/26/14 ...................................... United States 286,300,000 37,934,750 (d,h)Liberty Mutual Group, junior sub. note, 144A, FRN, 10.75%, 6/15/88 .......................................... United States 100,000,000 49,056,500 Merrill Lynch & Co. Inc., 6.875%, 4/25/18 ................ United States 48,000,000 37,622,400 Morgan Stanley, 5.05%, 1/21/11 ........................... United States 88,000,000 86,567,008 Morgan Stanley Dean Witter & Co., 6.60%, 4/01/12 ...................................... United States 25,000,000 25,129,275 5.30%, 3/01/13 ...................................... United States 100,000,000 96,272,600 Simon Property Group LP, senior note, 10.35%, 4/01/19 .... United States 100,000,000 97,376,700 (o)Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ......... United States 44,500,000 21,582,500 (o)Wells Fargo Capital XV, pfd., 9.75%, Perpetual ........... United States 417,000,000 310,665,000 (d)Woodside Finance Ltd., 144A, 8.75%, 3/01/19 ................................ Australia 70,000,000 69,046,810 senior note, 144A, 8.125%, 3/01/14 .................. Australia 105,000,000 106,351,662 -------------- 2,868,223,720 -------------- HEALTH CARE 6.1% Community Health Systems Inc., senior sub. note, 8.875%, 7/15/15 ............................................... United States 353,500,000 335,825,000 DaVita Inc., senior note, 6.625%, 3/15/13 ........................ United States 50,000,000 48,750,000 senior sub. note, 7.25%, 3/15/15 .................... United States 62,000,000 59,907,500
Semiannual Report | 77 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - --------------------------------------------------------------- -------------- ------------------- -------------- CORPORATE BONDS (CONTINUED) HEALTH CARE (CONTINUED) HCA Inc., 6.75%, 7/15/13 .................................... United States 7,615,000 $ 5,730,288 6.375%, 1/15/15 ................................... United States 145,000,000 95,700,000 senior note, 6.50%, 2/15/16 ....................... United States 150,000,000 99,000,000 senior secured note, 9.25%, 11/15/16 .............. United States 145,000,000 132,312,500 Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 ................................... United States 370,000,000 296,000,000 (h)FRN, 9.25%, 2/01/15 ............................... United States 350,000,000 271,250,000 (d)144A, 9.00%, 5/01/15 .............................. United States 350,500,000 339,985,000 (d)144A, 10.00%, 5/01/18 ............................. United States 360,000,000 350,100,000 (h,n)U.S. Oncology Holdings Inc., senior note, PIK, FRN, 6.904%, 3/15/12 ................................... United States 84,068,604 51,281,848 Vanguard Health Holding Co. I LLC, senior disc. note, zero cpn. to 10/01/09, 11.25% thereafter, 10/01/15 .............................. United States 23,900,000 19,956,500 -------------- 2,105,798,636 -------------- INDUSTRIALS 4.8% Allied Waste North America Inc., senior note, B, 7.375%, 4/15/14 ................... United States 190,000,000 180,210,060 senior note, B, 7.125%, 5/15/16 ................... United States 95,000,000 88,707,865 senior secured note, 6.125%, 2/15/14 .............. United States 215,000,000 202,308,335 senior secured note, 6.875%, 6/01/17 .............. United States 100,000,000 91,137,300 Browning-Ferris Industries Inc., 7.40%, 9/15/35 ........ United States 100,000,000 88,086,900 (d)Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 ..... United Kingdom 100,000,000 38,750,000 Hertz Corp., senior note, 8.875%, 1/01/14 ...................... United States 320,000,000 195,600,000 senior sub. note, 10.50%, 1/01/16 ................. United States 25,000,000 11,000,000 Ingersoll-Rand Global Holding Co. Ltd., senior note, 9.50%, 4/15/14 .............................. United States 58,100,000 58,095,352 JohnsonDiversey Holdings Inc., senior disc. note, 10.67%, 5/15/13 ................................... United States 168,400,000 127,142,000 JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ........................................... United States 125,000,000 113,750,000 Nortek Inc., senior note, 10.00%, 12/01/13 ............. United States 85,000,000 35,912,500 RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ....................... United States 120,000,000 97,800,000 senior sub. note, 11.75%, 8/01/16 ................. United States 94,000,000 57,810,000 (d,h,n)Rexnord Holdings Inc., senior note, 144A, PIK, FRN, 7.511%, 3/01/13 ................................... United States 157,398,375 67,681,301 Terex Corp., senior sub. note, 8.00%, 11/15/17 ......... United States 185,000,000 150,775,000 (d)U.S. Investigations Services Inc., senior note, 144A, 10.50%, 11/01/15 ............................ United States 45,000,000 34,537,500 -------------- 1,639,304,113 -------------- INFORMATION TECHNOLOGY 1.9% Ceridian Corp., senior note, 11.50%, 11/15/15 .......... United States 80,000,000 34,000,000 First Data Corp., senior note, 9.875%, 9/24/15 ......... United States 270,000,000 159,300,000 Fiserv Inc., senior note, 6.80%, 11/20/17 .............. United States 40,000,000 37,504,360 Flextronics International Ltd., senior sub. note, 6.25%, 11/15/14 ............................................. Singapore 75,000,000 63,750,000
78 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - --------------------------------------------------------------- -------------- ------------------- ------------- CORPORATE BONDS (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 .................................... United States 3,685,000 $ 792,275 10.125%, 12/15/16 ................................... United States 140,364,000 25,967,340 Lucent Technologies Inc., 6.45%, 3/15/29 ................. United States 180,000,000 69,300,000 (d,k)Nortel Networks Ltd., senior note, 144A, 10.75%, 7/15/16 .................................................. Canada 77,100,000 14,263,500 Sanmina-SCI Corp., senior sub. note, 6.75%, 3/01/13 ...................................... United States 150,000,000 59,250,000 8.125%, 3/01/16 ..................................... United States 100,000,000 35,500,000 SunGard Data Systems Inc., senior note, 9.125%, 8/15/13 ........................ United States 35,000,000 30,625,000 (d)senior note, 144A, 10.625%, 5/15/15 ................. United States 55,000,000 48,400,000 senior sub. note, 10.25%, 8/15/15 ................... United States 85,000,000 59,925,000 ------------- 638,577,475 ------------- MATERIALS 1.8% Freeport-McMoRan Copper & Gold Inc., senior note, 8.25%, 4/01/15 ......................... United States 82,400,000 78,666,250 senior note, 8.375%, 4/01/17 ........................ United States 110,000,000 102,995,090 senior secured note, 6.875%, 2/01/14 ................ United States 70,000,000 68,669,300 (d)Ineos Group Holdings PLC, senior sub. note, 144A, 7.875%, 2/15/16 ............................................. United Kingdom 175,000,000 EUR 19,746,562 Nalco Finance Holdings, senior note, 9.00%, 2/01/14 ...... United States 380,000,000 343,900,000 NewPage Corp., senior secured note, 10.00%, 5/01/12 ...... United States 60,000,000 21,150,000 Novelis Inc., senior note, 7.25%, 2/15/15 ................ Canada 3,000,000 1,215,000 ------------- 636,342,202 ------------- TELECOMMUNICATION SERVICES 0.5% Crown Castle International Corp., senior note, 9.00%, 1/15/15 ...................................... United States 100,000,000 100,750,000 (d)Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ..................................... Jamaica 131,000,000 85,150,000 ------------- 185,900,000 ------------- UTILITIES 6.8% Aquila Inc., senior note, 11.875%, 7/01/12 ............... United States 79,500,000 83,531,365 Arizona Public Service Co., senior note, 8.75%, 3/01/19 .. United States 80,000,000 80,472,320 CMS Energy Corp., senior note, 7.75%, 8/01/10 ........... United States 16,860,000 16,822,605 Dominion Resources Inc., senior note, 8.875%, 1/15/19 ............................................. United States 40,000,000 45,368,920 Duke Energy Corp., senior note, 6.30%, 2/01/14 ........... United States 37,600,000 38,549,550 Dynegy Holdings Inc., senior note, 6.875%, 4/01/11 ..................................... United States 345,520,000 309,240,400 8.75%, 2/15/12 ...................................... United States 331,905,000 290,416,875 7.50%, 6/01/15 ...................................... United States 113,560,000 78,072,500 8.375%, 5/01/16 ..................................... United States 231,760,000 158,176,200 7.75%, 6/01/19 ...................................... United States 100,000,000 65,500,000 Energy Future Holdings Corp., senior note, 10.875%, 11/01/17 ................................... United States 187,500,000 121,875,000 P, 5.55%, 11/15/14 .................................. United States 300,000,000 113,138,700 (n)PIK, 12.00%, 11/01/17 ............................... United States 243,700,000 104,181,750 Illinois Power Co., senior secured note, 9.75%, 11/15/18 ............................................ United States 65,000,000 70,888,090
Semiannual Report | 79 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(g) VALUE - --------------------------------------------------------------- -------------- ------------------- --------------- CORPORATE BONDS (CONTINUED) UTILITIES (CONTINUED) (d)Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ..... Netherlands 80,000,000 $ 72,800,000 Public Service Co. of New Mexico, senior note, 7.95%, 5/15/18 .................................................. United States 55,000,000 48,336,915 Reliant Energy Inc., senior note, 7.625%, 6/15/14 ....................................... United States 150,000,000 121,500,000 7.875%, 6/15/17 ....................................... United States 153,100,000 121,714,500 Sempra Energy, senior note, 8.90%, 11/15/13 ................ United States 63,000,000 68,569,074 Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%, 11/01/15 ................................... United States 350,000,000 176,750,000 B, 10.25%, 11/01/15 ................................... United States 186,900,000 94,384,500 (n)PIK, 10.50%, 11/01/16 ................................. United States 150,000,000 57,750,000 --------------- 2,338,039,264 --------------- TOTAL CORPORATE BONDS (COST $27,785,719,655) 19,344,090,365 --------------- CONVERTIBLE BONDS 2.0% CONSUMER DISCRETIONARY 0.5% (d)Host Hotels & Resorts LP, cvt., senior note, 144A, 2.625%, 4/15/12 ....................................... United States 98,022,000 68,615,400 (d)Host Marriott LP, cvt., senior deb., 144A, 3.25%, 3/15/24 ............................................... United States 100,533,000 91,736,363 --------------- 160,351,763 --------------- FINANCIALS 1.1% (d)Duke Realty LP, cvt., senior note, 144A, 3.75%, 12/01/11 .............................................. United States 135,000,000 94,500,000 (h)iStar Financial Inc., cvt., senior note, FRN, 1.935%, 10/01/12 .............................................. United States 250,000,000 72,470,750 Vornado Realty Trust, cvt., senior bond, 3.625%, 11/15/26 ...................................... United States 75,000,000 58,875,000 2.85%, 4/01/27 ........................................ United States 222,500,000 167,987,500 --------------- 393,833,250 --------------- INFORMATION TECHNOLOGY 0.4% (d)Advanced Micro Devices Inc., cvt., senior note, 144A, 5.75%, 8/15/12 .................................................. United States 325,000,000 145,437,500 --------------- TOTAL CONVERTIBLE BONDS (COST $1,023,145,377) .............. 699,622,513 --------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $49,155,202,755) ................................... 32,642,482,738 ---------------
80 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES VALUE - --------------------------------------------------------------- -------------- ------------------- --------------- SHORT TERM INVESTMENTS 2.9% MONEY MARKET FUNDS (COST $258,040,182) 0.7% (p)Bank of New York Institutional Cash Reserve Fund, 0.15% ...................................................... United States 451,668 $ 442,635 (q)Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.13% ........................................... United States 257,588,514 257,588,514 --------------- 258,031,149 ---------------
PRINCIPAL AMOUNT(g) ------------------- REPURCHASE AGREEMENTS (COST $757,401,060) 2.2% (r)Joint Repurchase Agreement, 0.132%, 4/01/09 (Maturity Value $757,403,829) .............................. United States $757,401,060 757,401,060 Banc of America Securities LLC (Maturity Value $53,003,120) Barclays Capital Inc. (Maturity Value $53,003,120) BNP Paribas Securities Corp. (Maturity Value $212,012,480) Credit Suisse Securities (USA) LLC (Maturity Value $185,518,494) Deutsche Bank Securities Inc. (Maturity Value $147,860,375) HSBC Securities (USA) Inc. (Maturity Value $106,006,240) Collateralized by U.S.Government Agency Securities, 1.03% - 5.50%, 9/25/09 - 12/14/22; (s)U.S. Treasury Bills, 6/11/09 - 9/03/09; and U.S. Treasury Notes, 0.875% - 4.50%, 5/15/10 - 3/31/13 --------------- TOTAL INVESTMENTS (COST $50,170,643,997) 97.6% .............................. 33,657,914,947 OPTIONS WRITTEN (0.0)%(b) ................................................... (375,000) OTHER ASSETS, LESS LIABILITIES 2.4% ......................................... 825,828,799 --------------- NET ASSETS 100.0% ........................................................... $34,483,368,746 ===============
CONTRACTS ----------- (t)OPTIONS WRITTEN 0.0%(b) CALL OPTIONS 0.0%(b) CONSUMER DISCRETIONARY 0.0%(b) Comcast Corp., Apr. 15 Calls, 4/18/09 ....................................... 5,000 100,000 --------------- INFORMATION TECHNOLOGY 0.0%(b) Intel Corp., Apr. 17 Calls, 4/18/09 ......................................... 5,000 65,000 Texas Instruments Inc., Apr. 17.5 Calls, 4/18/09 ............................ 5,000 210,000 --------------- 275,000 --------------- TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $453,897) .............................................. 375,000 ===============
Semiannual Report | 81 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED) FRANKLIN INCOME FUND See Abbreviations on page 127. (a) A portion or all of the security is held in connection with written option contracts open at period end. (b) Rounds to less than 0.1% of net assets. (c) See Note 11 regarding holdings of 5% voting securities. (d) Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933. These securities have been deemed liquid under guidelines approved by the Trust's Board of Trustees. At March 31, 2009, the aggregate value of these securities was $3,947,781,749, representing 11.45% of net assets. (e) Non-income producing. (f) See Note 1(f) regarding Equity-Linked Securities. (g) The principal amount is stated in U.S. dollars unless otherwise indicated. (h) The coupon rate shown represents the rate at period end. (i) See Note 1(i) regarding senior floating rate interests. (j) A portion or all of the security purchased on a delayed delivery basis. See Note 1(d). (k) See Note 8 regarding defaulted securities. (l) See Note 10 regarding unfunded loan commitments. (m) See Note 12 regarding other considerations. (n) Income may be received in additional securities and/or cash. (o) Perpetual security with no stated maturity date. (p) The rate shown is the annualized seven-day yield at period end. (q) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (r) See Note 1(c) regarding joint repurchase agreement. (s) The security is traded on a discount basis with no stated coupon rate. (t) See Note 1(g) regarding written options. 82 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ---------------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ----------------- ---------- ---------- ---------- ---------- ---------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ............................ $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ........ 0.14 0.30 0.31 0.30 0.28 0.27 Net realized and unrealized gains (losses) ................. 0.24 0.08 (0.02) (0.09) (0.11) (0.04) ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations ... 0.38 0.38 0.29 0.21 0.17 0.23 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions from net investment income ................ (0.15) (0.32) (0.33) (0.31) (0.32) (0.36) ---------- ---------- ---------- ---------- ---------- ---------- Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period ..... $ 6.68 $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 ========== ========== ========== ========== ========== ========== Total return(e) .................... 6.02% 6.00% 4.63% 3.40% 2.67% 3.46% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................ 0.71% 0.72% 0.72% 0.72% 0.72% 0.70% Net investment income .............. 4.33% 4.64% 4.78% 4.64% 4.29% 4.09% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $6,150,173 $5,353,961 $5,073,449 $5,291,117 $5,901,449 $6,420,381 Portfolio turnover rate ............ 17.22% 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 83 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------ (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- -------- -------- -------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .............................. $ 6.44 $ 6.38 $ 6.42 $ 6.52 $ 6.67 $ 6.80 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ........... 0.12 0.27 0.27 0.26 0.25 0.24 Net realized and unrealized gains (losses) .................... 0.25 0.07 (0.01) (0.08) (0.11) (0.05) -------- -------- -------- -------- -------- -------- Total from investment operations ...... 0.37 0.34 0.26 0.18 0.14 0.19 -------- -------- -------- -------- -------- -------- Less distributions from net investment income ................... (0.14) (0.28) (0.30) (0.28) (0.29) (0.32) -------- -------- -------- -------- -------- -------- Redemption fees(c) .................... -- --(d) --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- -------- Net asset value, end of period ........ $ 6.67 $ 6.44 $ 6.38 $ 6.42 $ 6.52 $ 6.67 ======== ======== ======== ======== ======== ======== Total return(e) ....................... 5.60% 5.61% 4.10% 2.87% 2.13% 2.92% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................... 1.23% 1.24% 1.25% 1.24% 1.25% 1.23% Net investment income ................. 3.81% 4.12% 4.25% 4.12% 3.76% 3.56% SUPPLEMENTAL DATA Net assets, end of period (000's) ..... $283,707 $284,649 $316,720 $388,807 $478,788 $568,276 Portfolio turnover rate ............... 17.22% 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. 84 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------ (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- -------- -------- -------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $ 6.42 $ 6.36 $ 6.40 $ 6.50 $ 6.65 $ 6.78 ---------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ........ 0.12 0.27 0.27 0.26 0.25 0.24 Net realized and unrealized gains (losses) ................. 0.24 0.07 (0.01) (0.08) (0.11) (0.05) ---------- -------- -------- -------- -------- -------- Total from investment operations ... 0.36 0.34 0.26 0.18 0.14 0.19 ---------- -------- -------- -------- -------- -------- Less distributions from net investment income ................. (0.14) (0.28) (0.30) (0.28) (0.29) (0.32) ---------- -------- -------- -------- -------- -------- Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d) ---------- -------- -------- -------- -------- -------- Net asset value, end of period ..... $ 6.64 $ 6.42 $ 6.36 $ 6.40 $ 6.50 $ 6.65 ========== ======== ======== ======== ======== ======== Total return(e) .................... 5.63% 5.48% 4.12% 2.88% 2.14% 2.91% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................ 1.23% 1.24% 1.25% 1.23% 1.25% 1.23% Net investment income .............. 3.81% 4.12% 4.25% 4.13% 3.76% 3.56% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $1,021,558 $610,148 $418,951 $424,462 $508,539 $597,451 Portfolio turnover rate ............ 17.22% 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 85 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 -------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- ------- ------- ------- ------- CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 $ 6.81 -------- -------- ------- ------- ------- ------- Income from investment operations(a): Net investment income(b) ........ 0.13 0.28 0.28 0.27 0.26 0.25 Net realized and unrealized gains (losses) ................. 0.23 0.07 (0.01) (0.08) (0.11) (0.05) -------- -------- ------- ------- ------- ------- Total from investment operations ... 0.36 0.35 0.27 0.19 0.15 0.20 -------- -------- ------- ------- ------- ------- Less distributions from net investment income ................. (0.14) (0.29) (0.31) (0.29) (0.30) (0.33) -------- -------- ------- ------- ------- ------- Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d) -------- -------- ------- ------- ------- ------- Net asset value, end of period ..... $ 6.67 $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68 ======== ======== ======= ======= ======= ======= Total return(e) .................... 5.68% 5.61% 4.25% 3.01% 2.29% 3.08% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................ 1.08% 1.09% 1.10% 1.09% 1.10% 1.08% Net investment income .............. 3.96% 4.27% 4.40% 4.27% 3.91% 3.71% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $125,610 $104,648 $74,537 $71,104 $65,790 $59,431 Portfolio turnover rate ............ 17.22% 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. 86 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------ (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- -------- -------- -------- ADVISOR CLASS PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................. $ 6.47 $ 6.41 $ 6.45 $ 6.55 $ 6.69 $ 6.83 -------- -------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ........ 0.15 0.31 0.31 0.31 0.29 0.28 Net realized and unrealized gains (losses) ................. 0.23 0.08 (0.01) (0.09) (0.10) (0.06) -------- -------- -------- -------- -------- -------- Total from investment operations ... 0.38 0.39 0.30 0.22 0.19 0.22 -------- -------- -------- -------- -------- -------- Less distributions from net investment income ................. (0.16) (0.33) (0.34) (0.32) (0.33) (0.36) -------- -------- -------- -------- -------- -------- Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- -------- Net asset value, end of period ..... $ 6.69 $ 6.47 $ 6.41 $ 6.45 $ 6.55 $ 6.69 ======== ======= ======== ======== ======== ======== Total return(e) .................... 5.92% 6.11% 4.75% 3.53% 2.95% 3.42% RATIOS TO AVERAGE NET ASSETS(f) Expenses(g) ........................ 0.58% 0.59% 0.60% 0.59% 0.60% 0.58% Net investment income .............. 4.46% 4.77% 4.90% 4.77% 4.41% 4.21% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $733,364 $612,026 $470,751 $387,239 $334,681 $340,279 Portfolio turnover rate ............ 17.22% 21.66% 12.34% 20.54% 29.14% 41.45%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 87 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------- ---------------- --------------- MORTGAGE-BACKED SECURITIES 96.4% GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 96.4% GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ..................... $ 101,127 $ 108,488 GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ..................... 221,844 240,891 GNMA GP 30 Year, 10.00%, 11/15/09 - 1/15/10 .................... 35,640 36,557 GNMA GP 30 Year, 10.25%, 5/15/20 ............................... 9,980 11,059 GNMA GP 30 Year, 11.00%, 1/15/10 - 11/15/10 .................... 124,595 129,972 GNMA GP 30 Year, 11.25%, 7/15/13 - 1/15/16 ..................... 186,841 209,558 GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 ..................... 28,220 31,657 GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ..................... 29,403 33,108 GNMA GP 30 Year, 12.00%, 3/15/11 - 12/15/12 .................... 9,483 10,336 GNMA GP 30 Year, 12.50%, 5/15/10 - 6/15/10 ..................... 12,199 12,861 GNMA GP 30 Year, 12.75%, 5/15/14 ............................... 4,405 5,124 GNMA I SF 15 Year, 6.50%, 5/15/18 .............................. 1,112,935 1,174,760 GNMA I SF 15 Year, 7.00%, 10/15/09 ............................. 7,494 7,527 (a)GNMA I SF 30 Year, 4.50%, 1/15/39 - 4/01/39 .................... 464,235,446 475,811,904 GNMA I SF 30 Year, 4.50%, 3/15/39 .............................. 114,170,000 117,026,412 (a)GNMA I SF 30 Year, 5.00%, 2/15/33 - 4/01/39 .................... 963,922,210 1,002,947,848 GNMA I SF 30 Year, 5.50%, 5/15/38 - 12/15/38 ................... 1,454,013,840 1,518,033,374 GNMA I SF 30 Year, 5.50%, 12/15/38 ............................. 94,950,000 99,093,657 (a)GNMA I SF 30 Year, 5.50%, 2/15/39 .............................. 107,160,074 111,692,559 GNMA I SF 30 Year, 6.00%, 10/15/23 - 11/15/38 .................. 1,455,896,787 1,526,731,957 GNMA I SF 30 Year, 6.50%, 5/15/23 - 2/15/38 .................... 351,052,634 371,641,231 GNMA I SF 30 Year, 6.75%, 3/15/26 - 4/15/26 .................... 67,994 72,487 GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 .................... 176,486,092 189,244,183 GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ................... 534,778 571,308 GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/33 .................... 57,078,920 61,199,633 GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 .................... 402,914 430,411 GNMA I SF 30 Year, 8.00%, 11/15/15 - 9/15/30 ................... 33,656,557 36,255,951 GNMA I SF 30 Year, 8.25%, 3/15/27 .............................. 36,577 39,554 GNMA I SF 30 Year, 8.50%, 12/15/09 - 6/15/25 ................... 7,414,157 8,027,411 GNMA I SF 30 Year, 9.00%, 9/15/13 - 7/15/23 .................... 9,202,990 9,954,964 GNMA I SF 30 Year, 9.50%, 6/15/09 - 8/15/22 .................... 5,422,700 5,954,926 GNMA I SF 30 Year, 10.00%, 2/15/16 - 3/15/25 ................... 7,290,095 8,048,955 GNMA I SF 30 Year, 10.50%, 2/15/12 - 10/15/21 .................. 5,520,652 6,202,900 GNMA I SF 30 Year, 11.00%, 12/15/09 - 5/15/21 .................. 3,894,416 4,342,400 GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ................... 1,073,625 1,211,546 GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ................... 5,252,000 6,026,700 GNMA I SF 30 Year, 12.50%, 4/15/10 - 8/15/18 ................... 3,804,214 4,322,642 GNMA I SF 30 Year, 13.00%, 1/15/11 - 9/15/15 ................... 4,250,054 4,867,475 GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ................... 40,371 43,177 GNMA II GP 30 Year, 11.50%, 8/20/13 ............................ 12,133 13,565 GNMA II SF 30 Year, 4.50%, 5/20/33 - 10/20/34 .................. 35,605,943 36,516,300 GNMA II SF 30 Year, 5.00%, 7/20/33 - 3/20/36 ................... 270,501,660 281,081,480 GNMA II SF 30 Year, 5.00%, 9/20/33 ............................. 175,388,298 182,163,465 GNMA II SF 30 Year, 5.50%, 6/20/34 - 8/20/38 ................... 678,832,225 707,372,657 GNMA II SF 30 Year, 5.50%, 12/20/34 ............................ 122,433,793 127,647,179 GNMA II SF 30 Year, 5.50%, 6/20/38 ............................. 105,237,477 109,539,050 GNMA II SF 30 Year, 6.00%, 10/20/23 - 12/20/38 ................. 841,087,520 879,498,246
88 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------- ---------------- --------------- MORTGAGE-BACKED SECURITIES (CONTINUED) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE (CONTINUED) GNMA II SF 30 Year, 6.50%, 6/20/24 - 3/20/34 ................... $ 59,653,099 $ 63,555,894 GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ................... 32,192,935 34,513,856 GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 .................. 5,856,298 6,278,518 GNMA II SF 30 Year, 8.00%, 8/20/16 - 6/20/30 ................... 2,854,086 3,082,031 GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 ................... 1,437,796 1,550,693 GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/21 .................. 463,535 499,833 GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 ................... 265,370 290,947 GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 .................. 578,508 635,207 GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 .................. 1,494,647 1,669,766 GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 .................. 234,790 263,776 GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 .................. 129,132 145,817 GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 .................. 232,634 266,113 GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ................ 176,510 203,214 GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ................. 174,003 204,800 --------------- TOTAL MORTGAGE-BACKED SECURITIES (COST $ 7,743,615,186) ........ 8,008,799,870 ---------------
SHARES ------------- SHORT TERM INVESTMENTS 5.0% MONEY MARKET FUNDS (COST $257,603,750) 3.1% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.13% ....................................... 257,603,750 257,603,750 ---------------
PRINCIPAL AMOUNT ---------------- REPURCHASE AGREEMENTS (COST $161,755,000) 1.9% (c) Barclays Capital Inc., 0.14%, 4/01/09 (Maturity Value $ 161,755,629) Collateralized by U.S. Treasury Notes, 2.00%, 11/30/13 ..... $ 161,755,000 161,755,000 --------------- TOTAL INVESTMENTS (COST $ 8,162,973,936) 101.4% ................. 8,428,158,620 OTHER ASSETS, LESS LIABILITIES (1.4)% ........................... (113,746,276) --------------- NET ASSETS 100.0% ............................................... $ 8,314,412,344 ===============
See Abbreviations on page 127. (a) A portion or all of the security purchased on a delayed delivery or TBA basis. See Note 1(d). (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. (c) See Note 1(c) regarding repurchase agreements. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 89 Franklin Custodian Funds FINANCIAL HIGHLIGHTS FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ------------------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ---------- ---------- ---------- ---------- ---------- CLASS A PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................ $ 11.92 $ 14.58 $ 12.89 $ 12.59 $ 10.16 $ 8.80 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations(a): Net investment income(b) ....... 0.21 0.41 0.40 0.43 0.45 0.43 Net realized and unrealized gains (losses) ................ (2.55) (1.93) 2.16 0.37 2.42 1.33 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations ....................... (2.34) (1.52) 2.56 0.80 2.87 1.76 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions from: Net investment income .......... (0.21) (0.40) (0.40) (0.41) (0.44) (0.40) Net realized gains ............. (0.08) (0.74) (0.47) (0.09) -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total distributions ............... (0.29) (1.14) (0.87) (0.50) (0.44) (0.40) ---------- ---------- ---------- ---------- ---------- ---------- Redemption fees(c) ................ -- --(d) --(d) --(d) --(d) --(d) ---------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period .... $ 9.29 $ 11.92 $ 14.58 $ 12.89 $ 12.59 $ 10.16 ========== ========== ========== ========== ========== ========== Total return(e) ................... (19.65)% (11.63)% 20.32% 6.69% 28.81% 20.40% RATIOS TO AVERAGE NET ASSETS(f) Expenses .......................... 0.78%(g) 0.74%(g) 0.75%(g) 0.76%(g) 0.78%(g) 0.80% Net investment income ............. 4.14% 2.92% 2.83% 3.54% 3.92% 4.49% SUPPLEMENTAL DATA Net assets, end of period (000's) .......................... $1,341,624 $1,769,397 $2,157,614 $1,926,732 $1,986,034 $1,450,832 Portfolio turnover rate ........... 8.34% 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. 90 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 --------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ------- -------- -------- -------- -------- CLASS B PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ........................ $ 11.91 $ 14.56 $ 12.88 $ 12.57 $ 10.15 $ 8.80 ------- ------- -------- -------- -------- -------- Income from investment operations(a): Net investment income(b) ....... 0.18 0.33 0.33 0.37 0.39 0.38 Net realized and unrealized gains (losses) ................ (2.54) (1.91) 2.15 0.38 2.42 1.33 ------- ------- -------- -------- -------- -------- Total from investment operations ....................... (2.36) (1.58) 2.48 0.75 2.81 1.71 ------- ------- -------- -------- -------- -------- Less distributions from: Net investment income .......... (0.18) (0.33) (0.33) (0.35) (0.39) (0.36) Net realized gains ............. (0.08) (0.74) (0.47) (0.09) -- -- ------- ------- -------- -------- -------- -------- Total distributions ............... (0.26) (1.07) (0.80) (0.44) (0.39) (0.36) ------- ------- -------- -------- -------- -------- Redemption fees(c) ................ -- --(d) --(d) --(d) --(d) --(d) ------- ------- -------- -------- -------- -------- Net asset value, end of period .... $ 9.29 $ 11.91 $ 14.56 $ 12.88 $ 12.57 $ 10.15 ======= ======= ======== ======== ======== ======== Total return(e) ................... (19.84)% (12.04)% 19.66% 6.25% 28.11% 19.71% RATIOS TO AVERAGE NET ASSETS(f) Expenses .......................... 1.29%(g) 1.24%(g) 1.26%(g) 1.26%(g) 1.28%(g) 1.30% Net investment income ............. 3.63% 2.42% 2.32% 3.04% 3.42% 3.99% SUPPLEMENTAL DATA Net assets, end of period (000's) .......................... $62,063 $92,695 $127,587 $133,824 $154,277 $127,105 Portfolio turnover rate ........... 8.34% 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 91 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 -------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- -------- -------- --------- -------- -------- CLASS C PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ......................... $ 11.88 $ 14.53 $ 12.85 $ 12.55 $ 10.13 $ 8.78 -------- -------- -------- --------- -------- -------- Income from investment operations(a): Net investment income(b) ........ 0.18 0.33 0.33 0.37 0.39 0.38 Net realized and unrealized gains (losses) ................. (2.53) (1.91) 2.15 0.37 2.42 1.33 -------- -------- -------- -------- -------- -------- Total from investment operations ... (2.35) (1.58) 2.48 0.74 2.81 1.71 -------- -------- -------- -------- -------- -------- Less distributions from: Net investment income ........... (0.19) (0.33) (0.33) (0.35) (0.39) (0.36) Net realized gains .............. (0.08) (0.74) (0.47) (0.09) -- -- -------- -------- -------- -------- -------- -------- Total distributions ................ (0.27) (1.07) (0.80) (0.44) (0.39) (0.36) -------- -------- -------- -------- -------- -------- Redemption fees(c) ................. -- --(d) --(d) --(d) --(d) --(d) -------- -------- -------- -------- -------- -------- Net asset value, end of period ..... $ 9.26 $ 11.88 $ 14.53 $ 12.85 $ 12.55 $ 10.13 ======== ======== ======== ========= ======== ======== Total return(e) .................... (19.87)% (12.06)% 19.72% 6.19% 28.16% 19.76% RATIOS TO AVERAGE NET ASSETS(f) Expenses ........................... 1.29%(g) 1.24%(g) 1.26%(g) 1.25%(g) 1.28%(g) 1.30% Net investment income .............. 3.63% 2.42% 2.32% 3.05% 3.42% 3.99% SUPPLEMENTAL DATA Net assets, end of period (000's) .. $257,162 $339,247 $424,977 $391,509 $435,714 $283,747 Portfolio turnover rate ............ 8.34% 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. 92 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 ---------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ------- ------- ------- ------- ------ CLASS R PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period ..................... $ 11.89 $ 14.54 $ 12.86 $ 12.57 $ 10.15 $ 8.79 --------- ------- ------- ------- ------- ------ Income from investment operations(a): Net investment income(b) ... 0.19 0.36 0.35 0.39 0.43 0.39 Net realized and unrealized gains (losses) ............ (2.54) (1.92) 2.16 0.36 2.40 1.34 --------- ------- ------- ------- ------- ------ Total from investment operations ................... (2.35) (1.56) 2.51 0.75 2.83 1.73 --------- ------- ------- ------- ------- ------ Less distributions from: Net investment income ...... (0.19) (0.35) (0.36) (0.37) (0.41) (0.37) Net realized gains ......... (0.08) (0.74) (0.47) (0.09) -- -- --------- ------- ------- ------- ------- ------ Total distributions ........... (0.27) (1.09) (0.83) (0.46) (0.41) (0.37) --------- ------- ------- ------- ------- ------ Redemption fees(c) ............ -- --(d) --(d) --(d) --(d) --(d) --------- ------- ------- ------- ------- ------ Net asset value, end of period ................ $ 9.27 $ 11.89 $ 14.54 $ 12.86 $ 12.57 $10.15 ========= ======= ======= ======= ======= ====== Total return(e) ............... (19.78)% (11.92)% 19.92% 6.29% 28.35% 20.02% RATIOS TO AVERAGE NET ASSETS(f) Expenses ...................... 1.14%(g) 1.09%(g) 1.11%(g) 1.11%(g) 1.13%(g) 1.15% Net investment income ......... 3.78% 2.57% 2.47% 3.19% 3.57% 4.14% SUPPLEMENTAL DATA Net assets, end of period (000's) ...................... $ 29,311 $36,596 $41,845 $27,736 $14,649 $1,590 Portfolio turnover rate ....... 8.34% 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return does not reflect sales commissions or contingent deferred sales charges, if applicable, and is not annualized for periods less than one year. (f)Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 93 Franklin Custodian Funds FINANCIAL HIGHLIGHTS (CONTINUED) FRANKLIN UTILITIES FUND
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, 2009 --------------------------------------------------------------- (UNAUDITED) 2008 2007 2006 2005 2004 ---------------- ------- ------- -------- -------- --------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the period) Net asset value, beginning of period .................... $ 11.98 $ 14.64 $ 12.95 $ 12.64 $ 10.20 $ 8.84 ------- ------- ------- -------- -------- --------- Income from investment operations(a): Net investment income(b) ... 0.22 0.42 0.42 0.45 0.48 0.44 Net realized and unrealized gains (losses) ............ (2.56) (1.92) 2.17 0.38 2.42 1.34 ------- ------- ------- -------- -------- --------- Total from investment operations ................... (2.34) (1.50) 2.59 0.83 2.90 1.78 ------- ------- ------- -------- -------- --------- Less distributions from: Net investment income ...... (0.22) (0.42) (0.43) (0.43) (0.46) (0.42) Net realized gains ......... (0.08) (0.74) (0.47) (0.09) -- -- ------- ------- ------- -------- -------- --------- Total distributions ........... (0.30) (1.16) (0.90) (0.52) (0.46) (0.42) ------- ------- ------- -------- -------- --------- Redemption fees(c) -- --(d) --(d) --(d) --(d) --(d) ------- ------- ------- -------- -------- --------- Net asset value, end of period ....................... $ 9.34 $ 11.98 $ 14.64 $ 12.95 $ 12.64 $ 10.20 ======= ======= ======= ======== ======== ========= Total return(e) ............... (19.57)% (11.45)% 20.43% 6.88% 29.00% 20.48% RATIOS TO AVERAGE NET ASSETS (f) Expenses ...................... 0.64%(g) 0.59%(g) 0.61%(g) 0.61%(g) 0.63%(g) 0.65% Net investment income ......... 4.28% 3.07% 2.97% 3.69% 4.07% 4.64% SUPPLEMENTAL DATA Net assets, end of period (000's) ..................... $50,976 $58,817 $86,823 $103,041 $110,249 $51,586 Portfolio turnover rate ....... 8.34% 8.32% 10.84% 7.97% 13.53% 16.13%
(a) The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchases of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund. (b) Based on average daily shares outstanding. (c) Effective September 1, 2008, the redemption fee was eliminated. (d) Amount rounds to less than $0.01 per share. (e) Total return is not annualized for periods less than one year. (f) Ratios are annualized for periods less than one year. (g) Benefit of expense reduction rounds to less than 0.01%. 94 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------- -------------- ---------- ------------ COMMON STOCKS 94.2% DIVERSIFIED TELECOMMUNICATION SERVICES 2.8% AT&T Inc. ............................................................ United States 1,000,000 $ 25,200,000 Verizon Communications Inc. .......................................... United States 800,000 24,160,000 ------------ 49,360,000 ------------ ELECTRIC UTILITIES 47.4% Allegheny Energy Inc. ................................................ United States 1,000,000 23,170,000 American Electric Power Co. Inc. ..................................... United States 1,300,000 32,838,000 Cleco Corp. .......................................................... United States 1,000,000 21,690,000 Duke Energy Corp. .................................................... United States 3,800,000 54,416,000 Edison International ................................................. United States 1,800,000 51,858,000 Entergy Corp. ........................................................ United States 1,200,000 81,708,000 Exelon Corp. ......................................................... United States 2,200,000 99,858,000 FirstEnergy Corp. .................................................... United States 1,600,000 61,760,000 FPL Group Inc. ....................................................... United States 1,500,000 76,095,000 Hawaiian Electric Industries Inc. .................................... United States 400,000 5,496,000 Northeast Utilities .................................................. United States 500,000 10,795,000 NV Energy Inc. ....................................................... United States 5,000,000 46,950,000 Pepco Holdings Inc. .................................................. United States 1,000,000 12,480,000 Pinnacle West Capital Corp. .......................................... United States 600,000 15,936,000 Portland General Electric Co. ........................................ United States 1,500,000 26,385,000 PPL Corp. ............................................................ United States 2,000,000 57,420,000 Progress Energy Inc. ................................................. United States 1,500,000 54,390,000 The Southern Co. ..................................................... United States 2,400,000 73,488,000 Westar Energy Inc. ................................................... United States 1,080,600 18,942,918 ------------ 825,675,918 ------------ GAS UTILITIES 1.6% AGL Resources Inc. ................................................... United States 786,875 20,875,794 Southwest Gas Corp. .................................................. United States 300,000 6,321,000 ------------ 27,196,794 ------------ INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.5% Constellation Energy Group............................................ United States 2,100,000 43,386,000 ------------ MULTI-UTILITIES 36.9% Alliant Energy Corp. ................................................. United States 1,200,000 29,628,000 Ameren Corp. . ....................................................... United States 1,350,000 31,306,500 CenterPoint Energy Inc. .............................................. United States 2,000,000 20,860,000 CMS Energy Corp. ..................................................... United States 1,000,000 11,840,000 Consolidated Edison Inc. ............................................. United States 800,000 31,688,000 Dominion Resources Inc. .............................................. United States 1,600,000 49,584,000 DTE Energy Co. ....................................................... United States 500,000 13,850,000 GDF Suez ............................................................. France 700,000 24,021,111 Integrys Energy Group Inc. ........................................... United States 200,000 5,208,000 National Grid PLC .................................................... United Kingdom 4,987,755 38,286,908 NiSource Inc. ........................................................ United States 1,500,000 14,700,000 PG&E Corp. ........................................................... United States 2,100,000 80,262,000 PNM Resources Inc. ................................................... United States 855,720 7,068,247 Public Service Enterprise Group Inc. ................................. United States 2,100,000 61,887,000
Semiannual Report | 95 Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------- -------------- ------------------ -------------- COMMON STOCKS (CONTINUED) MULTI-UTILITIES (CONTINUED) RWE AG ............................................................... Germany 300,000 $ 21,151,057 SCANA Corp. .......................................................... United States 900,000 27,801,000 Sempra Energy ........................................................ United States 1,600,000 73,984,000 TECO Energy Inc. ..................................................... United States 700,000 7,805,000 United Utilities Group PLC ........................................... United Kingdom 1,460,189 10,129,709 Vectren Corp. ........................................................ United States 600,000 12,654,000 Wisconsin Energy Corp. ............................................... United States 600,000 24,702,000 Xcel Energy Inc. ..................................................... United States 2,400,000 44,712,000 -------------- 643,128,532 -------------- OIL, GAS & CONSUMABLE FUELS 2.5% Spectra Energy Corp. ................................................. United States 2,197,600 31,074,064 The Williams Cos. Inc. ............................................... United States 1,105,190 12,577,062 -------------- 43,651,126 -------------- WATER UTILITIES 0.5% American Water Works Co. Inc. ........................................ United States 400,000 7,696,000 -------------- TOTAL COMMON STOCKS (COST $1,479,329,346) ............................ 1,640,094,370 -------------- CONVERTIBLE PREFERRED STOCKS (COST $13,497,475) 0.5% ELECTRIC UTILITIES 0.5% CMS Energy Trust I, 7.75%, cvt. pfd. ................................. United States 270,050 7,852,055 --------------
PRINCIPAL AMOUNT(a) ------------------- CORPORATE BONDS 3.3% ELECTRIC UTILITIES 1.8% MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ......... United States $25,000,000 26,732,600 Northeast Generation Co., senior secured note, B-1, 8.812%, 10/15/26 ................................................... United States 7,294,922 5,527,713 -------------- 32,260,313 -------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.8% Energy Future Holdings Corp., senior note, P, 5.55%, 11/15/14. ............................................. United States 32,300,000 12,181,267 R, 6.55%, 11/15/34 .............................................. United States 5,700,000 1,574,220 -------------- 13,755,487 -------------- MULTI-UTILITIES 0.7% Aquila Inc., senior note, 9.95%, 2/01/11 .................................................. United States 6,000,000 5,895,858 8.27%, 11/15/21 ................................................. United States 6,100,000 6,161,872 -------------- 12,057,730 -------------- TOTAL CORPORATE BONDS (COST $77,228,025) ............................. 58,073,530 -------------- TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS (COST $1,570,054,846) ............................................. 1,706,019,955 --------------
96 | Semiannual Report Franklin Custodian Funds STATEMENT OF INVESTMENTS, MARCH 31, 2009 (UNAUDITED) (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE - ---------------------------------------------------------------------- -------------- -------------- -------------- SHORT TERM INVESTMENTS (COST $30,247,454) 1.7% MONEY MARKET FUNDS 1.7% (b)Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.13% ............................................................. United States 30,247,454 $ 30,247,454 -------------- TOTAL INVESTMENTS (COST $1,600,302,300) 99.7% ..................... 1,736,267,409 OTHER ASSETS, LESS LIABILITIES 0.3% ............................... 4,868,925 -------------- NET ASSETS 100.0% ................................................. $1,741,136,334 ==============
(a) The principal amount is stated in U.S. dollars unless otherwise indicated. (b) See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. The rate shown is the annualized seven-day yield at period end. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 97 Franklin Custodian Funds FINANCIAL STATEMENTS STATEMENTS OF ASSETS AND LIABILITIES March 31, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- -------------- ---------------- Assets: Investments in securities: Cost - Unaffiliated issuers ........................................... $ 371,188,435 $1,004,967,286 $ 48,375,609,233 Cost - Non-controlled affiliated issuers (Note 11) .................... -- -- 780,045,190 Cost - Sweep Money Fund (Note 7) ...................................... 10,188,175 82,480,843 257,588,514 Cost - Repurchase agreements .......................................... -- 13,980,468 757,401,060 ------------- -------------- ---------------- Total cost of investments ............................................. $ 381,376,610 $1,101,428,597 $ 50,170,643,997 ============= ============== ================ Value - Unaffiliated issuers .......................................... $ 459,022,904 $1,564,363,234 $ 31,728,546,923 Value - Non-controlled affiliated issuers (Note 11) ................... -- -- 914,378,450 Value - Sweep Money Fund (Note 7) ..................................... 10,188,175 82,480,843 257,588,514 Value - Repurchase agreements ......................................... -- 13,980,468 757,401,060 ------------- -------------- ---------------- Total value of investments ............................................ 469,211,079 1,660,824,545 33,657,914,947 Cash 57,511 84,892 5,215,654 Receivables: Investment securities sold ............................................ -- -- 411,117,417 Capital shares sold ................................................... 440,765 2,734,889 82,879,391 Dividends and interest ................................................ 308,715 1,951,978 568,449,968 Other assets ............................................................ 1,015 4,111 75,507 ------------- -------------- ---------------- Total assets ....................................................... 470,019,085 1,665,600,415 34,725,652,884 ------------- -------------- ---------------- Liabilities: Payables: Investment securities purchased ....................................... 2,635,003 -- 123,654,747 Capital shares redeemed ............................................... 1,279,611 2,524,512 79,383,207 Affiliates ............................................................ 546,547 1,715,080 29,876,577 Unaffiliated transfer agent fees ...................................... 85,019 283,157 5,735,979 Options written, at value (premiums received $0, $0 and $453,897) ....... -- -- 375,000 Unrealized depreciation on unfunded loan commitments (Note 10) .......... -- -- 488,337 Accrued expenses and other liabilities .................................. 6,696 222,599 2,770,291 ------------- -------------- ---------------- Total liabilities .................................................. 4,552,876 4,745,348 242,284,138 ------------- -------------- ---------------- Net assets, at value ............................................. $ 465,466,209 $1,660,855,067 $ 34,483,368,746 ============= ============== ================ Net assets consist of: Paid-in capital ......................................................... $ 427,260,973 $1,062,759,052 $ 55,081,332,519 Undistributed net investment income (loss) .............................. (862,618) 3,673,245 -- Distributions in excess of net investment income ........................ -- -- (25,863,108) Net unrealized appreciation (depreciation) .............................. 87,834,012 559,395,948 (16,513,040,297) Accumulated net realized gain (loss) .................................... (48,766,158) 35,026,822 (4,059,060,368) ------------- -------------- ---------------- Net assets, at value ............................................. $ 465,466,209 $1,660,855,067 $ 34,483,368,746 ============= ============== ================
98 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- -------------- --------------- CLASS A: Net assets, at value .................................................. $ 380,946,004 $1,213,354,760 $20,236,054,011 ============= ============== =============== Shares outstanding .................................................... 22,060,460 45,409,763 13,093,178,325 ============= ============== =============== Net asset value per share(a) .......................................... $ 17.27 $ 26.72 $ 1.55 ============= ============== =============== Maximum offering price per share (net asset value per share / 94.25%, 94.25% and 95.75%, respectively) ............................ $ 18.32 $ 28.35 $ 1.62 ============= ============== =============== CLASS B: Net assets, at value .................................................. $ 12,458,344 $ 55,163,212 $ 1,666,992,952 ============= ============== =============== Shares outstanding .................................................... 771,984 2,147,912 1,082,868,627 ============= ============== =============== Net asset value and maximum offering price per share(a) ............... $ 16.14 $ 25.68 $ 1.54 ============= ============== =============== CLASS B1: Net assets, at value .................................................. -- -- $ 132,019,768 ============= ============== =============== Shares outstanding .................................................... -- -- 85,347,280 ============= ============== =============== Net asset value and maximum offering price per share(a) ............... -- -- $ 1.55 ============= ============== =============== CLASS C: Net assets, at value .................................................. $ 62,438,987 $ 178,791,727 $ 9,326,417,009 ============= ============== =============== Shares outstanding .................................................... 3,915,088 7,027,886 5,989,238,966 ============= ============== =============== Net asset value and maximum offering price per share(a) ............... $ 15.95 $ 25.44 $ 1.56 ============= ============== =============== CLASS R: Net assets, at value .................................................. $ 4,602,462 $ 27,751,272 $ 228,117,495 ============= ============== =============== Shares outstanding .................................................... 266,946 1,040,521 149,256,731 ============= ============== =============== Net asset value and maximum offering price per share .................. $ 17.24 $ 26.67 $ 1.53 ============= ============== =============== ADVISOR CLASS: Net assets, at value .................................................. $ 5,020,412 $ 185,794,096 $ 2,893,767,511 ============= ============== =============== Shares outstanding .................................................... 290,044 6,954,220 1,882,252,602 ============= ============== =============== Net asset value and maximum offering price per share .................. $ 17.31 $ 26.72 $ 1.54 ============= ============== ===============
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 99 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2009 (unaudited)
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- Assets: Investments in securities: Cost - Unaffiliated issuers .............................................................. $7,743,615,186 $1,570,054,846 Cost - Sweep Money Fund (Note 7) ......................................................... 257,603,750 30,247,454 Cost - Repurchase agreements ............................................................. 161,755,000 -- -------------- -------------- Total cost of investments ................................................................ $8,162,973,936 $1,600,302,300 ============== ============== Value - Unaffiliated issuers ............................................................. $8,008,799,870 $1,706,019,955 Value - Sweep Money Fund (Note 7) ........................................................ 257,603,750 30,247,454 Value - Repurchase agreements ............................................................ 161,755,000 -- -------------- -------------- Total value of investments ............................................................... 8,428,158,620 1,736,267,409 Cash ....................................................................................... 2,809 -- Receivables: Investment securities sold ............................................................... 227,758,653 -- Capital shares sold ...................................................................... 43,113,103 2,410,392 Dividends and interest ................................................................... 34,415,772 6,931,855 Other assets ............................................................................... 15,570 4,034 -------------- -------------- Total assets .......................................................................... 8,733,464,527 1,745,613,690 -------------- -------------- Liabilities: Payables: Investment securities purchased .......................................................... 400,315,221 -- Capital shares redeemed .................................................................. 11,753,008 2,649,509 Affiliates ............................................................................... 6,051,692 1,435,199 Unaffiliated transfer agent fees ......................................................... 698,645 220,631 Accrued expenses and other liabilities ..................................................... 233,617 172,017 -------------- -------------- Total liabilities ..................................................................... 419,052,183 4,477,356 -------------- -------------- Net assets, at value ................................................................ $8,314,412,344 $1,741,136,334 ============== ============== Net assets consist of: Paid-in capital ............................................................................ $8,460,007,222 $1,581,785,328 Undistributed net investment income (distributions in excess of net investment income) ..... (7,993,402) 5,321,207 Net unrealized appreciation (depreciation) ................................................. 265,184,684 135,965,109 Accumulated net realized gain (loss) ....................................................... (402,786,160) 18,064,690 -------------- -------------- Net assets, at value ................................................................ $8,314,412,344 $1,741,136,334 ============== ==============
100 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED) March 31, 2009 (unaudited)
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- CLASS A: Net assets, at value ....................................... $ 6,150,173,475 $1,341,623,975 =============== ============== Shares outstanding ......................................... 921,046,556 144,373,184 =============== ============== Net asset value per share(a) ............................... $ 6.68 $ 9.29 =============== ============== Maximum offering price per share (net asset value per share / 95.75%) .......................................... $ 6.98 $ 9.70 =============== ============== CLASS B: Net assets, at value ....................................... $ 283,706,562 $ 62,063,245 =============== ============== Shares outstanding ......................................... 42,555,501 6,680,797 =============== ============== Net asset value and maximum offering price per share(a) .... $ 6.67 $ 9.29 =============== ============== CLASS C: Net assets, at value ....................................... $ 1,021,558,074 $ 257,162,091 =============== ============== Shares outstanding ......................................... 153,813,850 27,757,814 =============== ============== Net asset value and maximum offering price per share(a) .... $ 6.64 $ 9.26 =============== ============== CLASS R: Net assets, at value ....................................... $ 125,610,088 $ 29,311,144 =============== ============== Shares outstanding ......................................... 18,827,914 3,161,822 =============== ============== Net asset value and maximum offering price per share ....... $ 6.67 $ 9.27 =============== ============== ADVISOR CLASS: Net assets, at value ....................................... $ 733,364,145 $ 50,975,879 =============== ============== Shares outstanding ......................................... 109,556,853 5,459,375 =============== ============== Net asset value and maximum offering price per share ....... $ 6.69 $ 9.34 =============== ==============
(a) Redemption price is equal to net asset value less contingent deferred sales charges, if applicable. Semiannual Report | The accompanying notes are an integral part of these financial statements. | 101 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS for the six months ended March 31, 2009 (unaudited)
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- ------------- --------------- Investment income: Dividends: Unaffiliated issuers .................................................... $ 1,838,441 $ 19,715,201 $ 371,535,878 Non-controlled affiliated issuers (Note 11) ............................. -- -- 52,161,189 Sweep Money Fund (Note 7) ............................................... 58,028 19,831 880,252 Interest .................................................................. 1,065 215,729 1,430,922,626 Income from securities loaned ............................................. -- -- 126,131 ------------- ------------- --------------- Total investment income ............................................ 1,897,534 19,950,761 1,855,626,076 ------------- ------------- --------------- Expenses: Management fees (Note 3a) ................................................. 1,061,825 4,062,374 71,367,035 Distribution fees: (Note 3c) Class A ................................................................. 429,173 1,548,140 15,712,783 Class B ................................................................. 57,998 314,615 9,097,877 Class B1 ................................................................ -- -- 516,930 Class C ................................................................. 281,119 946,483 31,415,082 Class R ................................................................. 7,870 66,063 566,777 Transfer agent fees (Note 3e) ............................................. 742,354 2,179,928 21,880,747 Custodian fees (Note 4) ................................................... 5,006 28,730 205,223 Reports to shareholders ................................................... 48,915 198,502 1,860,996 Registration and filing fees .............................................. 45,932 76,156 930,560 Professional fees ......................................................... 20,599 30,334 184,444 Trustees' fees and expenses ............................................... 2,032 7,087 172,963 Other ..................................................................... 57,474 28,695 600,453 ------------- ------------- --------------- Total expenses ..................................................... 2,760,297 9,487,107 154,511,870 Expense reductions (Note 4) ........................................ (145) (63) (39,679) ------------- ------------- --------------- Net expenses .................................................... 2,760,152 9,487,044 154,472,191 ------------- ------------- --------------- Net investment income (loss) .................................. (862,618) 10,463,717 1,701,153,885 ------------- ------------- --------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments: Unaffiliated issuers ................................................. (48,505,869) 51,731,758 (3,878,280,067) Non-controlled affiliated issuers (Note 11) .......................... -- -- 2,898,232 Realized gain distributions from REITs .................................. -- -- 9,156,789 Written options ......................................................... -- -- 201,299 Foreign currency transactions ........................................... 118,937 (16,652) (577,323) ------------- ------------- --------------- Net realized gain (loss) ...................................... (48,386,932) 51,715,106 (3,866,601,070) ------------- ------------- --------------- Net change in unrealized appreciation (depreciation) on: Investments ............................................................. (52,576,818) (704,539,240) (5,975,812,446) Translation of other assets and liabilities denominated in foreign currencies ................................................... (457) -- 253,284 ------------- ------------- --------------- Net change in unrealized appreciation (depreciation) .......... (52,577,275) (704,539,240) (5,975,559,162) ------------- ------------- --------------- Net realized and unrealized gain (loss) ...................................... (100,964,207) (652,824,134) (9,842,160,232) ------------- ------------- --------------- Net increase (decrease) in net assets resulting from operations .............. $(101,826,825) $(642,360,417) $(8,141,006,347) ============= ============= ===============
102 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF OPERATIONS (CONTINUED) for the six months ended March 31, 2009 (unaudited)
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- Investment income: Dividends: Unaffiliated issuers .................................................................. $ -- $ 43,380,827 Sweep Money Fund (Note 7) ............................................................. 908,690 47,535 Interest ................................................................................ 190,949,591 3,296,537 --------------- -------------- Total investment income ............................................................ 191,858,281 46,724,899 --------------- -------------- Expenses: Management fees (Note 3a) ............................................................... 17,027,657 4,390,096 Distribution fees: (Note 3c) Class A ............................................................................... 3,878,236 1,024,487 Class B ............................................................................... 935,733 233,512 Class C ............................................................................... 2,637,661 913,144 Class R ............................................................................... 288,965 77,076 Transfer agent fees (Note 3e) ........................................................... 4,344,067 1,414,131 Custodian fees (Note 4) ................................................................. 57,913 38,212 Reports to shareholders ................................................................. 297,443 134,393 Registration and filing fees ............................................................ 108,629 71,857 Professional fees ....................................................................... 50,274 26,941 Trustees' fees and expenses ............................................................. 20,333 6,561 Other ................................................................................... 146,887 30,340 --------------- -------------- Total expenses ..................................................................... 29,793,798 8,360,750 Expense reductions (Note 4) ........................................................ (5,403) (464) --------------- -------------- Net expenses ..................................................................... 29,788,395 8,360,286 --------------- -------------- Net investment income ......................................................... 162,069,886 38,364,613 --------------- -------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments ........................................................................... 5,751,010 17,308,636 Foreign currency transactions ......................................................... -- (104,597) --------------- -------------- Net realized gain (loss) ...................................................... 5,751,010 17,204,039 --------------- -------------- Net change in unrealized appreciation (depreciation) on: Investments ........................................................................... 270,336,713 (505,416,409) Translation of other assets and liabilities denominated in foreign currencies ......... -- 10,486 --------------- -------------- Net change in unrealized appreciation (depreciation) .......................... 270,336,713 (505,405,923) --------------- -------------- Net realized and unrealized gain (loss) .................................................... 276,087,723 (488,201,884) --------------- -------------- Net increase (decrease) in net assets resulting from operations ............................ $ 438,157,609 $ (449,837,271) =============== ==============
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 103 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ------------------------------------- ------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2009 YEAR ENDED MARCH 31, 2009 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2008 (UNAUDITED) SEPTEMBER 30, 2008 ---------------- ------------------ --------------- ------------------ Increase (decrease) in net assets: Operations: Net investment income (loss) ................. $ (862,618) $ (2,101,251) $ 10,463,717 $ 13,118,571 Net realized gain (loss) from investments and foreign currency transactions ............. (48,386,932) 43,383,275 51,715,106 93,118,459 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies ........................ (52,577,275) (169,942,555) (704,539,240) (703,968,727) ------------- ------------- -------------- --------------- Net increase (decrease) in net assets resulting from operations ............ (101,826,825) (128,660,531) (642,360,417) (597,731,697) ------------- ------------- -------------- --------------- Distributions to shareholders from: Net investment income: Class A ................................... -- -- (13,937,515) (6,070,923) Class C ................................... -- -- (158,739) -- Class R ................................... -- -- (93,243) (37,603) Advisor Class ............................. -- -- (2,842,374) (1,821,203) Net realized gains: Class A ................................... (23,817,215) (11,692,397) -- -- Class B ................................... (674,313) (381,099) -- -- Class C ................................... (3,500,844) (1,631,082) -- -- Advisor Class ............................. (211,314) -- -- -- ------------- ------------- -------------- --------------- Total distributions to shareholders ............ (28,203,686) (13,704,578) (17,031,871) (7,929,729) ------------- ------------- -------------- --------------- Capital share transactions: (Note 2) Class A ................................... 103,336,323 (43,399,423) (13,624,468) 15,676,618 Class B ................................... 4,817,660 (2,207,134) (10,177,209) (23,505,949) Class C ................................... 24,433,522 (13,103) (6,022,190) (17,756,728) Class R ................................... 4,406,938 -- 7,405,727 (9,619,605) Advisor Class ............................. 3,728,143 2,370,407 1,686,271 (37,246,106) ------------- ------------- -------------- --------------- Total capital share transactions ............... 140,722,586 (43,249,253) (20,731,869) (72,451,770) ------------- ------------- -------------- --------------- Redemption fees ................................ -- 2,715 -- 7,384 ------------- ------------- -------------- --------------- Net increase (decrease) in net assets ... 10,692,075 (185,611,647) (680,124,157) (678,105,812) Net assets: Beginning of period ............................ 454,774,134 640,385,781 2,340,979,224 3,019,085,036 ------------- ------------- -------------- --------------- End of period .................................. $ 465,466,209 $ 454,774,134 $1,660,855,067 $ 2,340,979,224 ============= ============= ============== =============== Undistributed net investment income (loss) included in net assets: End of period ................................ $ (862,618) $ -- $ 3,673,245 $ 10,241,399 ============= ============= ============== ===============
104 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN FRANKLIN INCOME FUND U.S. GOVERNMENT SECURITIES FUND ------------------------------------- ------------------------------------ SIX MONTHS ENDED SIX MONTHS ENDED MARCH 31, 2009 YEAR ENDED MARCH 31, 2009 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2008 (UNAUDITED) SEPTEMBER 30, 2008 ---------------- ------------------ ---------------- ------------------ Increase (decrease) in net assets: Operations: Net investment income ...................... $ 1,701,153,885 $ 3,656,589,855 $ 162,069,886 $ 305,138,958 Net realized gain (loss) from investments, written options and foreign currency transactions ............................ (3,866,601,070) (73,189,382) 5,751,010 (4,950,231) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .............................. (5,975,559,162) (16,753,818,156) 270,336,713 74,540,856 ---------------- ---------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations .......... (8,141,006,347) (13,170,417,683) 438,157,609 374,729,583 ---------------- ---------------- -------------- -------------- Distributions to shareholders from: Net investment income: Class A ................................. (1,111,635,600) (2,070,078,091) (133,613,430) (255,332,116) Class B ................................. (89,193,572) (175,223,876) (6,030,578) (13,147,734) Class B1 ................................ (8,170,294) (18,498,215) -- -- Class C ................................. (483,025,981) (864,273,614) (16,365,132) (21,546,227) Class R ................................. (11,579,655) (17,491,311) (2,476,242) (3,921,392) Advisor Class ........................... (174,656,025) (358,190,789) (15,220,904) (27,206,570) Net realized gains: Class A ................................. (15,591,600) (800,081,992) -- -- Class B ................................. (1,384,690) (82,519,889) -- -- Class B1 ................................ (124,160) (8,423,689) -- -- Class C ................................. (7,179,957) (363,101,410) -- -- Class R ................................. (166,198) (6,753,197) -- -- Advisor Class ........................... (2,449,031) (142,671,699) -- -- ---------------- ---------------- -------------- -------------- Total distributions to shareholders .......... (1,905,156,763) (4,907,307,772) (173,706,286) (321,154,039) ---------------- ---------------- -------------- -------------- Capital share transactions: (Note 2) Class A ................................. (837,599,679) 1,818,347,709 596,639,334 236,684,954 Class B ................................. (240,160,550) (326,601,311) (10,816,608) (35,014,568) Class B1 ................................ (44,593,157) (76,335,994) -- -- Class C ................................. (416,704,799) 1,004,888,472 382,584,133 189,199,415 Class R ................................. 20,290,671 78,037,080 16,953,876 29,664,847 Advisor Class ........................... (459,055,941) (219,327,033) 99,169,234 136,835,144 ---------------- ---------------- -------------- -------------- Total capital share transactions ............. (1,977,823,455) 2,279,008,923 1,084,529,969 557,369,792 ---------------- ---------------- -------------- -------------- Redemption fees .............................. -- 176,722 -- 78,148 ---------------- ---------------- -------------- -------------- Net increase (decrease) in net assets... (12,023,986,565) (15,798,539,810) 1,348,981,292 611,023,484 Net assets: Beginning of period .......................... 46,507,355,311 62,305,895,121 6,965,431,052 6,354,407,568 ---------------- ---------------- -------------- -------------- End of period ................................ $ 34,483,368,746 $ 46,507,355,311 $8,314,412,344 $6,965,431,052 ================ ================ ============== ============== Undistributed net investment income (distributions in excess of net investment income) included in net assets: End of period .............................. $ (25,863,108) $ 151,244,134 $ (7,993,402) $ 3,642,998 ================ ================ ============== ==============
Semiannual Report | The accompanying notes are an integral part of these financial statements. | 105 Franklin Custodian Funds FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN UTILITIES FUND -------------------------------------- SIX MONTHS ENDED MARCH 31, 2009 YEAR ENDED (UNAUDITED) SEPTEMBER 30, 2008 ---------------- ------------------ Increase (decrease) in net assets: Operations: Net investment income ..................................................... $ 38,364,613 $ 77,610,616 Net realized gain (loss) from investments and foreign currency transactions............................................................. 17,204,039 55,226,870 Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies .............................................................. (505,405,923) (444,647,745) -------------- -------------- Net increase (decrease) in net assets resulting from operations ...... (449,837,271) (311,810,259) -------------- -------------- Distributions to shareholders from: Net investment income: Class A ................................................................ (30,937,748) (60,642,671) Class B ................................................................ (1,306,450) (2,772,274) Class C ................................................................ (5,198,482) (9,718,344) Class R ................................................................ (600,126) (1,082,816) Advisor Class .......................................................... (1,194,582) (2,496,434) Net realized gains: Class A ................................................................ (11,143,330) (107,493,008) Class B ................................................................ (556,682) (6,261,449) Class C ................................................................ (2,138,465) (21,133,249) Class R ................................................................ (236,227) (2,175,474) Advisor Class .......................................................... (407,396) (4,410,835) -------------- -------------- Total distributions to shareholders ......................................... (53,719,488) (218,186,554) -------------- -------------- Capital share transactions: (Note 2) Class A ................................................................ (40,488,407) 15,831,422 Class B ................................................................ (10,896,657) (12,918,491) Class C ................................................................ (7,463,551) (7,376,287) Class R ................................................................ 798,087 3,080,978 Advisor Class .......................................................... 5,990,934 (10,722,085) -------------- -------------- Total capital share transactions ............................................ (52,059,594) (12,104,463) -------------- -------------- Redemption fees ............................................................. -- 8,502 -------------- -------------- Net increase (decrease) in net assets ................................ (555,616,353) (542,092,774) Net assets: Beginning of period ......................................................... 2,296,752,687 2,838,845,461 -------------- -------------- End of period ............................................................... $1,741,136,334 $2,296,752,687 ============== ============== Undistributed net investment income included in net assets: End of period ............................................................... $ 5,321,207 $ 6,193,982 ============== ==============
106 | The accompanying notes are an integral part of these financial statements. | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Custodian Funds (Trust) is registered under the Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment company, consisting of five funds (Funds). The classes of shares offered within each of the Funds are indicated below. Effective December 1, 2008, the Franklin DynaTech Fund began offering a new class of shares, Class R. Each class of shares differs by its initial sales load, contingent deferred sales charges, distribution fees, voting rights on matters affecting a single class and its exchange privilege.
CLASS A, CLASS B, CLASS C, CLASS R CLASS A, CLASS B, CLASS B1, & ADVISOR CLASS CLASS C, CLASS R & ADVISOR CLASS - ---------------------------------------- -------------------------------- Franklin DynaTech Fund Franklin Income Fund Franklin Growth Fund Franklin U.S. Government Securities Fund Franklin Utilities Fund
The following summarizes the Funds' significant accounting policies. A. SECURITY VALUATION Securities listed on a securities exchange or on the NASDAQ National Market System are valued at the last quoted sale price or the official closing price of the day, respectively. Over-the-counter securities and listed securities for which there is no reported sale are valued within the range of the most recent quoted bid and ask prices. Securities that trade in multiple markets or on multiple exchanges are valued according to the broadest and most representative market. Investments in open-end mutual funds and non-registered money market funds are valued at the closing net asset value. Corporate debt securities, government securities, mortgage pass-through securities, other mortgage-backed securities, collateralized mortgage obligations and asset-backed securities generally trade in the over-the-counter market rather than on a securities exchange. The Trust may utilize independent pricing services, quotations from bond dealers, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Trust's pricing services may use valuation models or matrix pricing which considers information with respect to comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, option adjusted spread models, prepayment projections, interest rate spreads and yield curves, to determine current value. Senior secured corporate loans with floating or variable interest rates generally trade in the over-the-counter market rather than on a securities exchange. The Trust may utilize independent pricing services, quotations from loan dealers and other financial institutions, and information with respect to bond and note transactions, to assist in determining a current market value for each security. The Trust's pricing services use independent market quotations from loan dealers or financial institutions and may incorporate valuation methodologies that consider multiple bond Semiannual Report | 107 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. SECURITY VALUATION (CONTINUED) characteristics such as dealer quotes, issuer type, coupon, maturity, weighted average maturity, interest rate spreads and yield curves, cash flow and credit risk/quality analysis, to determine current value. Foreign securities are valued as of the close of trading on the foreign stock exchange on which the security is primarily traded, or the NYSE, whichever is earlier. If no sale is reported at that time, the foreign security will be valued within the range of the most recent quoted bid and ask prices. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on the day that the value of the foreign security is determined. The Trust has procedures to determine the fair value of individual securities and other assets for which market prices are not readily available or which may not be reliably priced. Methods for valuing these securities may include: fundamental analysis, matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. Due to the inherent uncertainty of valuations of such securities, the fair values may differ significantly from the values that would have been used had a ready market for such investments existed. Occasionally, events occur between the time at which trading in a security is completed and the close of the NYSE that might call into question the availability (including the reliability) of the value of a portfolio security held by the fund. The investment manager monitors price movements following the close of trading in foreign stock markets through a series of country specific market proxies (such as baskets of American Depository Receipts, futures contracts and exchange traded funds). These price movements are measured against established trigger thresholds for each specific market proxy to assist in determining if an event has occurred. If such an event occurs, the securities may be valued using fair value procedures, which may include the use of independent pricing services. All security valuation procedures are approved by the Trust's Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. Occasionally, events may impact the availability or reliability of foreign exchange rates used to convert the U.S. dollar equivalent value. If such an event occurs, the foreign exchange rate will be valued at fair value using procedures established and approved by the Trust's Board of Trustees. The Funds do not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments on the Statement of Operations. 108 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. FOREIGN CURRENCY TRANSLATION (CONTINUED) Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. REPURCHASE AGREEMENTS The Funds may enter into repurchase agreements. Repurchase agreements are accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the fund's custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. The Funds may also enter into joint repurchase agreements whereby their uninvested cash balance is deposited into a joint cash account with other funds managed by the investment manager or an affiliate of the investment manager and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. All repurchase agreements held by the Funds at period end had been entered into on March 31, 2008. Repurchase agreements are valued at cost. D. SECURITIES PURCHASED ON A DELAYED DELIVERY AND TBA BASIS The Funds may purchase securities on a delayed delivery and to-be-announced (TBA) basis, with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Funds will generally purchase these securities with the intention of holding the securities, they may sell the securities before the settlement date. Sufficient assets have been segregated for these securities. E. FOREIGN CURRENCY CONTRACTS When the Funds purchase or sell foreign securities they may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate at a future date. Realized and unrealized gains and losses on these contracts are included in the Statement of Operations. The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts, which may be in excess of the amount reflected in the Statement of Assets and Liabilities. Semiannual Report | 109 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F. EQUITY-LINKED SECURITIES The Funds may invest in equity-linked securities. Equity-linked securities are hybrid financial instruments that generally combine both debt and equity characteristics into a single note form. Payments received from equity linked securities may be based on the performance of an underlying equity security, an equity index, or an option position. The risks of investing in equity-linked securities include unfavorable price movements in the underlying security and the credit risk of the issuing financial institution. There may be no guaranty of a return of principal with equity linked securities and the appreciation potential may be limited. Equity-linked securities may be more volatile and less liquid than other investments held by the fund. G. OPTIONS The Funds may purchase or write options. Options are contracts entitling the holder to purchase or sell securities or other financial instruments at a specified price or, in the case of index options, to receive or pay the difference between the index value and the strike price of the index option. Options purchased are recorded as investments; options written (sold) are recorded as liabilities. Upon closing of an option which results in a cash settlement, the difference between the premium (original option value) and the settlement proceeds is realized as a gain or loss. When securities are acquired or delivered upon exercise of an option, the acquisition cost or sale proceeds are adjusted by the amount of the premium. When an option expires, the premium is realized as a gain for options written or as a loss for options purchased. The risks include the possibility there may be an illiquid options market or the inability of the counterparties to fulfill their obligations under the contract. Writing options involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. H. SECURITIES LENDING Certain funds participate in a principal based security lending program. The fund receives cash collateral against the loaned securities in an amount equal to at least 102% of the market value of the loaned securities. Collateral is maintained over the life of the loan in an amount not less than 100% of the market value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund on the next business day. The collateral is invested in a non-registered money market fund managed by the fund's custodian on the fund's behalf. The fund receives income from the investment of cash collateral, in addition to lending fees and rebates paid by the borrower. The fund bears the market risk with respect to the collateral investment, securities loaned, and the risk that the principal may default on its obligations to the fund. At March 31, 2009, the Funds have no securities on loan. I. SENIOR FLOATING RATE INTERESTS Senior secured corporate loans pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered 110 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) I. SENIOR FLOATING RATE INTERESTS (CONTINUED) by a designated U.S. bank or the London InterBank Offered Rate (LIBOR). Senior secured corporate loans often require prepayment of principal from excess cash flows or at the discretion of the borrower. As a result, actual maturity may be substantially less than the stated maturity. Senior secured corporate loans in which the fund invests are generally readily marketable, but may be subject to some restrictions on resale. J. INCOME TAXES No provision has been made for U.S. income taxes because it is each fund's policy to qualify as a regulated investment company under the Internal Revenue Code and to distribute to shareholders substantially all of its taxable income and net realized gains. The Funds have reviewed the tax positions, taken on federal income tax returns, for each of the three open tax years and as of March 31, 2009, and have determined that no provision for income tax is required in the Funds' financial statements. K. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Interest income and estimated expenses are accrued daily. Amortization of premium and accretion of discount on debt securities are included in interest income. Facility fees are recognized as income over the expected term of the loan. Dividend income is recorded on the ex-dividend date. Distributions to shareholders are recorded on the ex-dividend date and are determined according to income tax regulations (tax basis). Distributable earnings determined on a tax basis may differ from earnings recorded in accordance with accounting principles generally accepted in the United States of America. These differences may be permanent or temporary. Permanent differences are reclassified among capital accounts to reflect their tax character. These reclassifications have no impact on net assets or the results of operations. Temporary differences are not reclassified, as they may reverse in subsequent periods. Common expenses incurred by the Trust are allocated among the Funds based on the ratio of net assets of each fund to the combined net assets of the Trust. Fund specific expenses are charged directly to the fund that incurred the expense. Realized and unrealized gains and losses and net investment income, not including class specific expenses, are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Differences in per share distributions, by class, are generally due to differences in class specific expenses. Semiannual Report | 111 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) L. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. M. REDEMPTION FEES A short term trading redemption fee was imposed, with some exceptions, on any fund shares that were redeemed or exchanged within seven calendar days following their purchase date. The redemption fee was 2% of the amount redeemed. Such fees were retained by the funds and accounted for as an addition to paid-in capital. Effective September 1, 2008, the redemption fee was eliminated. N. GUARANTEES AND INDEMNIFICATIONS Under the Trust's organizational documents, its officers and trustees are indemnified by the Trust against certain liabilities arising out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust, on behalf of the Funds, enters into contracts with service providers that contain general indemnification clauses. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred. Currently, the Trust expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At March 31, 2009, there were an unlimited number of shares authorized (without par value). Transactions in the Funds' shares were as follows:
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND ----------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ----------- --------------- ----------- -------------- CLASS A SHARES: Six Months ended March 31, 2009 Shares sold ......................... 1,175,088 $ 20,744,685 6,578,144 $ 186,224,401 Shares issued on merger (Note 13) ... 7,598,915 126,195,671 -- -- Shares issued in reinvestment of distributions .................. 1,359,430 21,288,669 486,458 12,711,152 Shares redeemed ..................... (3,705,483) (64,892,702) (7,622,615) (212,560,021) ---------- -------------- ---------- -------------- Net increase (decrease) ............. 6,427,950 $ 103,336,323 (558,013) $ (13,624,468) ========== ============== ========== ============== Year ended September 30, 2008 Shares sold ......................... 2,459,851 $ 74,264,719 8,827,142 $ 378,328,625 Shares issued in reinvestment of distributions .................. 327,827 10,398,720 122,947 5,584,261 Shares redeemed ..................... (4,271,990) (128,062,862) (8,782,747) (368,236,268) ---------- -------------- ---------- -------------- Net increase (decrease) ............. (1,484,312) $ (43,399,423) 167,342 $ 15,676,618 ========== ============== ========== ==============
112 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN DYNATECH FUND (a,b) FRANKLIN GROWTH FUND ---------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ----------- ------------- CLASS B SHARES: Six Months ended March 31, 2009 Shares sold ......................... 46,430 $ 758,576 209,344 $ 5,533,013 Shares issued on merger (Note 13) ... 471,140 7,329,289 -- -- Shares issued in reinvestment of distributions ................. 39,296 576,475 -- -- Shares redeemed ..................... (240,815) (3,846,680) (594,348) (15,710,222) --------- ------------ ---------- ------------- Net increase (decrease) ............. 316,051 $ 4,817,660 (385,004) $ (10,177,209) ========= ============ ========== ============= Year ended September 30, 2008 Shares sold ......................... 52,403 $ 1,544,828 125,600 $ 5,153,957 Shares issued in reinvestment of distributions ................. 11,458 345,223 -- -- Shares redeemed ..................... (148,078) (4,097,185) (714,091) (28,659,906) --------- ------------ ---------- ------------- Net increase (decrease) ............. (84,217) $ (2,207,134) (588,491) $ (23,505,949) ========= ============ ========== ============= CLASS C SHARES: Six Months ended March 31, 2009 Shares sold ......................... 216,310 $ 3,574,285 1,034,375 $ 27,756,469 Shares issued on merger (Note 13) ... 1,986,027 30,539,237 -- -- Shares issued in reinvestment of distributions ................. 219,790 3,186,956 5,806 144,798 Shares redeemed ..................... (801,189) (12,866,956) (1,280,396) (33,923,457) --------- ------------ ---------- ------------- Net increase (decrease) ............. 1,620,938 $ 24,433,522 (240,215) $ (6,022,190) ========= ============ ========== ============= Year ended September 30, 2008 Shares sold ......................... 463,723 $ 13,055,269 1,049,876 $ 42,650,882 Shares issued in reinvestment of distributions ................. 49,809 1,484,796 -- -- Shares redeemed ..................... (531,022) (14,553,168) (1,518,464) (60,407,610) --------- ------------ ---------- ------------- Net increase (decrease) ............. (17,490) $ (13,103) (468,588) $ (17,756,728) ========= ============ ========== ============= CLASS R SHARES: Six Months ended March 31, 2009 Shares sold ......................... 68,885 $ 1,133,993 1,364,349 $ 39,868,070 Shares issued on merger (Note 13) ... 269,510 4,473,861 -- -- Shares issued in reinvestment of distributions ................. -- -- 3,545 92,514 Shares redeemed ..................... (71,449) (1,200,916) (1,145,821) (32,554,857) --------- ------------ ---------- ------------- Net increase (decrease) ............. 266,946 $ 4,406,938 222,073 $ 7,405,727 ========= ============ ========== ============= Year ended September 30, 2008 Shares sold ......................... 1,405,234 $ 60,391,562 Shares issued in reinvestment of distributions ................. 831 37,532 Shares redeemed ..................... (1,742,886) (70,048,699) ---------- ------------- Net increase (decrease) ............. (336,821) $ (9,619,605) ========== =============
Semiannual Report | 113 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN DYNATECH FUND (a,b) FRANKLIN GROWTH FUND ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT -------- ------------ ----------- -------------- ADVISOR CLASS SHARES: Six Months ended March 31, 2009 Shares sold ....................... 114,156 $ 2,115,701 805,246 $ 22,529,098 Shares issued on merger (Note 13)........................ 99,151 1,649,870 -- -- Shares issued in reinvestment of distributions ................... 13,467 211,295 102,244 2,668,574 Shares redeemed ................... (14,559) (248,723) (851,411) (23,511,401) ------- ----------- ---------- ------------- Net increase (decrease) ........... 212,215 $ 3,728,143 56,079 $ 1,686,271 ======= =========== ========== ============= Year ended September 30, 2008 Shares sold ....................... 77,884 $ 2,371,991 435,026 $ 18,614,125 Shares issued in reinvestment of distributions ................... -- -- 35,629 1,618,617 Shares redeemed ................... (55) (1,584) (1,391,576) (57,478,848) ------- ----------- ---------- ------------- Net increase (decrease) ........... 77,829 $ 2,370,407 (920,921) $ (37,246,106) ======= =========== ========== =============
(a) For the period December 1, 2008 (effective date) to March 31, 2009 for Class R. (b) For the period May 15, 2008 (effective date) to September 30, 2008 for Advisor Class.
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND --------------- ----------------- ------------- ---------------- SHARES AMOUNT SHARES AMOUNT --------------- ----------------- ------------- ---------------- CLASS A SHARES: Six Months ended March 31, 2009 Shares sold .................... 1,511,778,323 $ 2,415,898,820 199,339,600 $ 1,302,445,747 Shares issued in reinvestment of distributions ............. 505,568,857 819,865,146 14,363,320 93,590,950 Shares redeemed ................ (2,536,499,396) (4,073,363,645) (122,188,824) (799,397,363) -------------- ---------------- ------------ --------------- Net increase (decrease) ........ (519,152,216) $ (837,599,679) 91,514,096 $ 596,639,334 ============== ================ ============ =============== Year ended September 30, 2008 Shares sold .................... 2,544,696,021 $ 6,300,808,165 163,998,702 $ 1,063,757,904 Shares issued in reinvestment of distributions ............. 861,810,845 2,170,625,893 26,672,832 172,606,574 Shares redeemed ................ (2,750,408,371) (6,653,086,349) (154,570,818) (999,679,524) -------------- ---------------- ------------ --------------- Net increase (decrease) ........ 656,098,495 $ 1,818,347,709 36,100,716 $ 236,684,954 ============== ================ ============ =============== CLASS B SHARES: Six Months ended March 31, 2009 Shares sold .................... 18,674,905 $ 30,061,499 6,778,438 $ 44,042,990 Shares issued in reinvestment of distributions ............. 36,323,303 58,626,490 669,442 4,355,048 Shares redeemed ................ (206,338,375) (328,848,539) (9,061,886) (59,214,646) -------------- ---------------- ------------ --------------- Net increase (decrease) ........ (151,340,167) $ (240,160,550) (1,614,006) $ (10,816,608) ============== ================ ============ =============== Year ended September 30, 2008 Shares sold .................... 27,100,787 $ 66,950,743 5,348,092 $ 34,672,758 Shares issued in reinvestment of distributions ............. 69,806,922 176,086,346 1,444,414 9,335,318 Shares redeemed ................ (235,941,388) (569,638,400) (12,232,414) (79,022,644) -------------- ---------------- ------------ --------------- Net increase (decrease) ........ (139,033,679) $ (326,601,311) (5,439,908) $ (35,014,568) ============== ================ ============ ===============
114 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND --------------------------------- ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------- ----------------- ------------ --------------- CLASS B1 SHARES: Six Months ended March 31, 2009 Shares sold .................... 523,787 $ 845,832 Shares issued in reinvestment of distributions ............. 2,894,115 4,710,652 Shares redeemed ................ (31,734,276) (50,149,641) -------------- ---------------- Net increase (decrease) ........ (28,316,374) (44,593,157) ============== ================ Year ended September 30, 2008 -------------- ---------------- Shares sold .................... 822,057 $ 2,065,334 -------------- ---------------- Shares issued in reinvestment of distributions ............ 6,648,942 16,876,257 -------------- ---------------- Shares redeemed ................ (38,805,221) (95,277,585) -------------- ---------------- Net increase (decrease) ........ (31,334,222) (76,335,994) ============== ================ CLASS C SHARES: Six Months ended March 31, 2009 Shares sold .................... 680,146,705 $ 1,095,141,615 79,856,682 $ 519,646,464 Shares issued in reinvestment of distributions ............. 200,749,592 327,888,795 1,787,535 11,596,816 Shares redeemed ................ (1,141,528,347) (1,839,735,209) (22,855,438) (148,659,147) -------------- ---------------- ----------- -------------- Net increase (decrease) ........ (260,632,050) $ (416,704,799) 58,788,779 $ 382,584,133 ============== ================ =========== ============== Year ended September 30, 2008 Shares sold .................... 1,222,445,500 $ 3,049,617,623 48,720,410 $ 314,954,793 Shares issued in reinvestment of distributions ............. 334,651,278 849,748,929 2,414,820 15,553,869 Shares redeemed ................ (1,188,226,292) (2,894,478,080) (21,953,511) (141,309,247) -------------- ---------------- ----------- -------------- Net increase (decrease) ........ 368,870,486 $ 1,004,888,472 29,181,719 $ 189,199,415 ============== ================ =========== ============== CLASS R SHARES: Six Months ended March 31, 2009 Shares sold .................... 38,489,064 $ 61,673,334 7,268,795 $ 47,502,983 Shares issued in reinvestment of distributions ............. 6,778,693 10,837,677 371,440 2,418,694 Shares redeemed ................ (33,093,110) (52,220,340) (5,039,350) (32,967,801) -------------- ---------------- ----------- -------------- Net increase (decrease) ........ 12,174,647 $ 20,290,671 2,600,885 $ 16,953,876 ============== ================ =========== ============== Year ended September 30, 2008 Shares sold .................... 58,875,986 $ 144,210,207 9,784,662 $ 63,518,662 Shares issued in reinvestment of distributions ............. 8,993,345 22,370,464 589,231 3,808,045 Shares redeemed ................ (36,526,510) (88,543,591) (5,812,499) (37,661,860) -------------- ---------------- ----------- -------------- Net increase (decrease) ........ 31,342,821 $ 78,037,080 4,561,394 $ 29,664,847 ============== ================ =========== ==============
Semiannual Report | 115 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN U.S. GOVERNMENT FRANKLIN INCOME FUND SECURITIES FUND --------------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ------------- ----------------- ------------ -------------- ADVISOR CLASS SHARES: Six Months ended March 31, 2009 Shares sold .................... 226,418,311 $ 351,424,971 25,292,769 $ 166,547,528 Shares issued in reinvestment of distributions ............. 105,858,946 171,186,435 2,057,583 13,438,112 Shares redeemed ................ (616,970,353) (981,667,347) (12,381,066) (80,816,406) ------------ ---------------- ----------- ------------- Net increase (decrease) ........ (284,693,096) $ (459,055,941) 14,969,286 $ 99,169,234 ============ ================ =========== ============= Year ended September 30, 2008 Shares sold .................... 150,837,000 $ 385,467,201 23,046,973 $ 149,358,584 Shares issued in reinvestment of distributions ............. 194,550,584 488,488,071 3,926,708 25,461,308 Shares redeemed ................ (451,931,098) (1,093,282,305) (5,837,483) (37,984,748) ------------ ---------------- ----------- ------------- Net increase (decrease) ........ (106,543,514) $ (219,327,033) 21,136,198 $ 136,835,144 ============ ================ =========== =============
FRANKLIN UTILITIES FUND ------------------------------ SHARES AMOUNT ------------ --------------- CLASS A SHARES: Six Months ended March 31, 2009 Shares sold ................................................. 12,154,554 $ 121,569,096 Shares issued in reinvestment of distributions .............. 3,542,764 33,654,745 Shares redeemed ............................................. (19,749,447) (195,712,248) ----------- -------------- Net increase (decrease) ..................................... (4,052,129) $ (40,488,407) =========== ============== Year ended September 30, 2008 Shares sold ................................................. 16,043,525 $ 225,313,039 Shares issued in reinvestment of distributions .............. 9,557,544 137,168,657 Shares redeemed ............................................. (25,172,402) (346,650,274) ----------- -------------- Net increase (decrease) ..................................... 428,667 $ 15,831,422 =========== ============== CLASS B SHARES: Six Months ended March 31, 2009 Shares sold ................................................. 195,320 $ 1,954,408 Shares issued in reinvestment of distributions .............. 116,482 1,110,672 Shares redeemed ............................................. (1,413,036) (13,961,737) ----------- -------------- Net increase (decrease) ..................................... (1,101,234) $ (10,896,657) =========== ============== Year ended September 30, 2008 Shares sold ................................................. 520,447 $ 7,346,138 Shares issued in reinvestment of distributions .............. 385,638 5,555,107 Shares redeemed ............................................. (1,884,233) (25,819,736) ----------- -------------- Net increase (decrease) ..................................... (978,148) $ (12,918,491) =========== ==============
116 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN UTILITIES FUND --------------------------- SHARES AMOUNT ----------- ------------- CLASS C SHARES: Six Months ended March 31, 2009 Shares sold ...................................... 3,470,267 $ 34,883,883 Shares issued in reinvestment of distributions ... 449,027 4,261,749 Shares redeemed .................................. (4,715,405) (46,609,183) ---------- ------------ Net increase (decrease) .......................... (796,111) $ (7,463,551) ========== ============ Year ended September 30, 2008 Shares sold ...................................... 4,526,897 $ 63,185,313 Shares issued in reinvestment of distributions ... 1,256,000 18,036,872 Shares redeemed .................................. (6,474,947) (88,598,472) ---------- ------------ Net increase (decrease) .......................... (692,050) $ (7,376,287) ========== ============ CLASS R SHARES: Six Months ended March 31, 2009 Shares sold ...................................... 658,237 $ 6,574,728 Shares issued in reinvestment of distributions ... 86,795 822,800 Shares redeemed .................................. (661,223) (6,599,441) ---------- ------------ Net increase (decrease) .......................... 83,809 $ 798,087 ========== ============ Year ended September 30, 2008 Shares sold ...................................... 1,413,654 $ 19,831,591 Shares issued in reinvestment of distributions ... 223,864 3,206,653 Shares redeemed .................................. (1,437,674) (19,957,266) ---------- ------------ Net increase (decrease) .......................... 199,844 $ 3,080,978 ========== ============ ADVISOR CLASS SHARES: Six Months ended March 31, 2009 Shares sold ...................................... 1,913,893 $ 19,600,711 Shares issued in reinvestment of distributions ... 142,857 1,360,388 Shares redeemed .................................. (1,507,938) (14,970,165) ---------- ------------ Net increase (decrease) .......................... 548,812 $ 5,990,934 ========== ============ Year ended September 30, 2008 Shares sold ...................................... 2,965,799 $ 43,092,338 Shares issued in reinvestment of distributions ... 392,475 5,664,728 Shares redeemed .................................. (4,378,036) (59,479,151) ---------- ------------ Net increase (decrease) .......................... (1,019,762) $(10,722,085) ========== ============
3. TRANSACTIONS WITH AFFILIATES Franklin Resources, Inc. is the holding company for various subsidiaries that together are referred to as Franklin Templeton Investments. Certain officers and trustees of the Trust are also officers and/or directors of the following subsidiaries:
SUBSIDIARY AFFILIATION - ---------------------------------------------------------------- ---------------------- Franklin Advisers, Inc. (Advisers) Investment manager Franklin Investment Advisory Services, LLC (Investment Advisory) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
Semiannual Report | 117 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) A. MANAGEMENT FEES The Franklin Income Fund and the Franklin Utilities Fund pay an investment management fee to Advisers based on the month-end net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ---------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% Over $50 billion, up to and including $65 billion 0.345% Over $65 billion, up to and including $80 billion 0.340% In excess of $80 billion
The Franklin DynaTech Fund and the Franklin U.S. Government Securities Fund pay an investment management fee to Advisers, and the Franklin Growth Fund pays an investment management fee to Investment Advisory, based on the month-end net assets of each of the funds as follows:
ANNUALIZED FEE RATE NET ASSETS - ------------------- ---------------------------------------------------- 0.625% Up to and including $100 million 0.500% Over $100 million, up to and including $250 million 0.450% Over $250 million, up to and including $7.5 billion 0.440% Over $7.5 billion, up to and including $10 billion 0.430% Over $10 billion, up to and including $12.5 billion 0.420% Over $12.5 billion, up to and including $15 billion 0.400% Over $15 billion, up to and including $17.5 billion 0.380% Over $17.5 billion, up to and including $20 billion 0.360% Over $20 billion, up to and including $35 billion 0.355% Over $35 billion, up to and including $50 billion 0.350% In excess of $50 billion
B. ADMINISTRATIVE FEES Under an agreement with Advisers and Investment Advisory, FT Services provides administrative services to the Funds. The fee is paid by Advisers and Investment Advisory based on average daily net assets, and is not an additional expense of the Funds. 118 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) C. DISTRIBUTION FEES The Trust's Board of Trustees has adopted distribution plans for each share class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under the 1940 Act. Under the Funds' Class A reimbursement distribution plans, the Funds reimburse Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate. Under the Class A reimbursement distribution plans, costs exceeding the maximum for the current plan year cannot be reimbursed in subsequent periods. In addition, under the Funds' compensation distribution plans, the Funds pay Distributors for costs incurred in connection with the servicing, sale and distribution of each fund's shares up to the maximum annual plan rate for each class. The maximum annual plan rates, based on the average daily net assets, for each class, are as follows:
FRANKLIN FRANKLIN FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN DYNATECH GROWTH INCOME SECURITIES UTILITIES FUND FUND FUND FUND FUND -------- -------- -------- --------------- --------- Reimbursement Plans Class A ............ 0.25% 0.25% 0.15% 0.15% 0.15% Compensation Plans: Class B ............ 1.00% 1.00% 1.00% 0.65% 0.65% Class B1 ........... -- -- 0.65% -- -- Class C ............ 1.00% 1.00% 0.65% 0.65% 0.65% Class R ............ 0.50% 0.50% 0.50% 0.50% 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Funds of the following commission transactions related to the sales and redemptions of the Funds' shares for the period:
FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND -------- --------- ----------- Sales charges retained net of commissions paid to unaffiliated broker/dealers ................................................ $ 24,165 $ 247,854 $ 4,730,351 Contingent deferred sales charges retained ...................... $ 3,990 $ 22,204 $ 1,404,058
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ------------- --------- Sales charges retained net of commissions paid to unaffiliated broker/dealers................................................. $ 1,215,414 $ 111,241 Contingent deferred sales charges retained....................... $ 187,711 $ 46,135
Semiannual Report | 119 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) E. TRANSFER AGENT FEES For the period ended March 31, 2009, the Funds paid transfer agent fees as noted in the Statements of Operations of which the following amounts were retained by Investor Services:
FRANKLIN FRANKLIN FRANKLIN DYNATECH GROWTH INCOME FUND FUND FUND --------- ----------- ------------ Transfer agent fees .................. $ 537,084 $ 1,585,353 $ 11,201,596
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND --------------- --------- Transfer agent fees ........................... $ 2,861,659 $ 941,409
4. EXPENSE OFFSET ARRANGEMENT The Funds have entered into an arrangement with their custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. During the period ended March 31, 2009, the custodian fees were reduced as noted in the Statements of Operations. 5. INCOME TAXES For tax purposes, capital losses may be carried over to offset future capital gains, if any. At September 30, 2008, the capital loss carryforwards were as follows:
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES GROWTH FUND FUND ------------ --------------- Capital loss carryforwards expiring in: 2009 .................................... $ -- $ 46,256,951 2010 .................................... -- 11,768,551 2011 .................................... -- 33,556,845 2012 .................................... 16,688,284 129,102,166 2013 .................................... -- 74,283,298 2014 .................................... -- 47,763,112 2015 .................................... -- 28,034,940 2016 .................................... -- 20,514,778 ------------ ------------- $ 16,688,284 $ 391,280,641 ============ =============
For tax purposes, realized capital losses and realized currency losses occurring subsequent to October 31, may be deferred and treated as occurring on the first day of the following fiscal year. At September 30, 2008, the Franklin Income Fund and the Franklin U.S. Government Securities 120 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INCOME TAXES (CONTINUED) Fund deferred realized capital losses of $152,070,052 and $17,256,291, respectively. At September 30, 2008, the Franklin DynaTech Fund deferred realized currency losses of $40,773. At March 31, 2009, the cost of investments and net unrealized appreciation (depreciation) for income tax purposes were as follows:
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND -------------- ---------------- ------------------ Cost of investments .......................... $ 381,746,107 $ 1,104,026,000 $ 50,194,860,659 ============= =============== ================= Unrealized appreciation ...................... $ 115,440,094 $ 731,979,206 $ 1,299,861,362 Unrealized depreciation ...................... (27,975,122) (175,180,661) (17,836,807,074) ------------- --------------- ----------------- Net unrealized appreciation (depreciation) ... $ 87,464,972 $ 556,798,545 $ (16,536,945,712) ============= =============== =================
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES UTILITIES FUND FUND ---------------- ---------------- Cost of investments .......................... $ 8,162,973,936 $ 1,598,187,875 =============== =============== Unrealized appreciation ...................... $ 265,882,641 $ 327,408,276 Unrealized depreciation ...................... (697,957) (189,328,742) --------------- --------------- Net unrealized appreciation (depreciation) ... $ 265,184,684 $ 138,079,534 =============== ===============
Net investment income (loss) differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, paydown losses, payments-in-kind, and bond discounts and premiums. Net realized gains (losses) differ for financial statement and tax purposes primarily due to differing treatments of wash sales, foreign currency transactions, paydown losses, and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short term securities) for the period ended March 31, 2009, were as follows:
FRANKLIN FRANKLIN FRANKLIN DYNATECH FUND GROWTH FUND INCOME FUND ------------- ------------ ---------------- Purchases ................... $ 124,936,466 $ 37,167,021 $ 9,816,555,774 Sales ....................... $ 139,561,251 $ 76,145,248 $ 11,138,774,620
FRANKLIN U.S. GOVERNMENT FRANKLIN SECURITIES FUND UTILITIES FUND --------------- -------------- Purchases .................................. $ 2,447,763,639 $ 161,927,395 Sales ...................................... $ 1,253,554,468 $ 257,035,737
Semiannual Report | 121 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. INVESTMENT TRANSACTIONS (CONTINUED) Transactions in options written during the period ended March 31, 2009, were as follows:
NUMBER OF PREMIUMS CONTRACTS RECEIVED --------- ---------- FRANKLIN INCOME FUND Options outstanding at September 30, 2008 ............. -- $ -- Options written ....................................... 18,000 513,897 Options expired ....................................... (3,000) (60,000) Options exercised ..................................... -- -- Options closed ........................................ -- -- ------ --------- Options outstanding at March 31, 2009 ................. 15,000 $ 453,897 ====== =========
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (Sweep Money Fund), an open-end investment company managed by Advisers. Management fees paid by the Funds are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management and administrative fees paid by the Sweep Money Fund. 8. CREDIT RISK AND DEFAULTED SECURITIES The Franklin Income Fund has 50.2% of its portfolio invested in high yield, senior secured floating rate notes, or other securities rated below investment grade. These securities may be more sensitive to economic conditions causing greater price volatility and are potentially subject to a greater risk of loss due to default than higher rated securities. The Franklin Income Fund held defaulted securities and/or other securities for which the income has been deemed uncollectible. At March 31, 2009, the aggregate value of these securities was $582,237,116, representing 1.69% of the fund's net assets. The Fund discontinues accruing income on securities for which income has been deemed uncollectible and provides an estimate for losses on interest receivable. The securities have been identified on the accompanying Statement of Investments. 9. RESTRICTED SECURITIES The Funds may invest in securities that are restricted under the Securities Act of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed upon restrictions on resale. Restricted securities are often purchased in private placement transactions, and cannot be sold without prior 122 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 9. RESTRICTED SECURITIES (CONTINUED) registration unless the sale is pursuant to an exemption under the 1933 Act. Disposal of these securities may require greater effort and expense, and prompt sale at an acceptable price may be difficult. The Funds may have registration rights for restricted securities. The issuer generally incurs all registration costs. At March 31, 2009, the Franklin DynaTech Fund held investments in restricted securities, excluding 144A securities deemed to be liquid, valued in accordance with procedures approved by the Trust's Board of Trustees as reflecting fair value, as follows:
SHARES/WARRANTS/ ACQUISITION PRINCIPAL AMOUNT ISSUER DATE COST VALUE - ---------------------- -------------------------------------------------------------------- -------- ----------- --------- FRANKLIN DYNATECH FUND 124,248 Dilithium Networks Inc., depository receipt, D, pfd., 144A, PIPES... 7/13/06 $ 289,500 $ 162,765 4,807 Dilithium Networks Inc., 11.00%, 12/31/09 .......................... 10/30/08 4,807 4,807 4,126 Dilithium Networks Inc., wts., 12/31/09 ............................ 10/30/08 1 -- --------- TOTAL RESTRICTED SECURITIES (0.04% of Net Assets) .................. $ 167,572 =========
10. UNFUNDED LOAN COMMITMENTS The Franklin Income Fund may enter into certain credit agreements, all or a portion of which may be unfunded. The fund is obligated to fund these loan commitments at the borrowers' discretion. Funded portions of credit agreements are presented on the Statement of Investments. At March 31, 2009, unfunded commitments were as follows:
UNFUNDED COMMITMENT ----------- BORROWER FRANKLIN INCOME FUND Bausch and Lomb Inc., Delayed Draw Term Loan ................. $ 3,512,000 -----------
Unfunded loan commitments and funded portions of credit agreements are marked to market daily and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and Statement of Operations. Semiannual Report | 123 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES The 1940 Act defines "affiliated companies" to include investments in portfolio companies in which a fund owns 5% or more of the outstanding voting securities. Investments in "affiliated companies" for the Franklin Income Fund for the period ended March 31, 2009, were as shown below.
NUMBER OF NUMBER OF SHARES SHARES REALIZED HELD AT HELD AT VALUE CAPITAL BEGINNING GROSS GROSS END AT END INVESTMENT GAIN NAME OF ISSUER OF PERIOD ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS) - ------------------------------- ---------- --------- ---------- --------- ------------- ------------ -------------- FRANKLIN INCOME FUND NON-CONTROLLED AFFILIATES AGL Resources Inc. ............ 4,000,000 -- 400,000 3,600,000 $ --(a) $ 3,400,000 $ (4,771,533) Ameren Corp. .................. 12,500,000 -- 350,000 12,150,000 281,758,500 12,750,000 (11,385,680) Canadian Oil Sands Trust ...... 25,000,000 847,400 -- 25,847,400 497,163,950 15,900,559 -- PG&E Corp. .................... 20,000,000 -- 10,000,000 10,000,000 --(a) 10,469,592 (35,287,883) Pinnacle West Capital Corp. ... 5,500,000 -- 400,000 5,100,000 135,456,000 5,775,000 (7,236,926) Puget Energy Inc. ............. 7,500,000 -- 7,500,000 -- --(a) 3,866,038 61,580,254 ------------- ------------ ------------- TOTAL AFFILIATED SECURITIES (2.65% of Net Assets)......................... $ 914,378,450 $ 52,161,189 $ 2,898,232 ============= ============ =============
(a) As of March 31, 2009, no longer an affiliate. 12. OTHER CONSIDERATIONS Officers, directors or employees of the Franklin Income Fund's Investment Manager, may serve from time to time as members of bondholders' steering committees or official creditors' committees. Such participation may result in the possession by the Investment Manager of material non-public information which, pursuant to the Fund's policies and the requirements of applicable securities laws, could prevent the Fund from trading in the securities of such companies for limited or extended periods of time. 13. MERGER On December 3, 2008, the Franklin DynaTech Fund acquired the net assets of the Franklin Global Communications Fund, Franklin Global Health Care Fund, and the Franklin Technology Fund pursuant to a plan of reorganization approved by the Franklin Global Communications Fund's, Franklin Global Health Care Fund's, and the Franklin Technology Fund's shareholders. The merger was accomplished by a tax free exchange, and the net assets acquired and shares issued were as follows:
SHARES ISSUED BY FRANKLIN FUND NAME NET ASSETS DYNATECH FUND - ------------------------------------------------ ------------- ------------- Franklin Global Communications Fund ............ $ 47,740,803 2,914,752 Franklin Global Health Care Fund ............... 89,644,203 5,503,466 Franklin Technology Fund ....................... 32,802,922 2,006,525 ------------- ------------- Total .......................................... $ 170,187,928 10,424,743 ============= =============
124 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 13. MERGER (CONTINUED) The net asset figures shown above include ($18,324,767), ($8,835,122), and ($10,136,675) of unrealized appreciation (depreciation) for the Franklin Global Communications Fund, Franklin Global Health Care Fund, and the Franklin Technology Fund, respectively. The combined net assets of the fund immediately after the merger were $475,468,843. 14. CREDIT FACILITY Effective January 23, 2009, the Funds, together with other U.S. registered and foreign investment funds managed by Franklin Templeton Investments (individually, "Borrower"; collectively "Borrowers"), entered into a joint syndicated senior unsecured credit facility totaling $725 million (Global Credit Facility) to provide a source of funds to the Borrowers for temporary and emergency purposes, including the ability to meet future unanticipated or unusually large redemption requests. Under the terms of the Global Credit Facility, the Funds shall, in addition to interest charged on any borrowings made by the Funds and other costs incurred by the Funds, pay its share of fees and expenses incurred in connection with the implementation and maintenance of the Global Credit Facility, based upon its relative share of the aggregate net assets of all of the Borrowers, including an annual commitment fee based upon the unused portion of the Global Credit Facility. During the period, the Funds incurred commitment fees of $23,088 of their pro rata portion of the Global Credit Facility, which is reflected in Other expenses on the Statements of Operations. During the period ended March 31, 2009, the Funds did not utilize the Global Credit Facility. 15. FAIR VALUE MEASUREMENTS The Funds adopted Financial Accounting Standards Board (FASB) Statement No. 157, "Fair Value Measurement" (SFAS 157), on October 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Funds have determined that the implementation of SFAS 157 did not have a material impact on the Funds' financial statements. SFAS 157 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources (observable inputs) and the Trust's own market assumptions (unobservable inputs). These inputs are used in determining the value of the Funds' investments and are summarized in the following fair value hierarchy: -- Level 1 - quoted prices in active markets for identical securities -- Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speed, credit risk, etc.) -- Level 3 - significant unobservable inputs (including the fund's own assumptions in determining the fair value of investments) Semiannual Report | 125 Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 15. FAIR VALUE MEASUREMENTS (CONTINUED) The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of March 31, 2009, in valuing the Funds' assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL ---------------- ---------------- --------- ---------------- FRANKLIN DYNATECH FUND ASSETS: Investments in Securities $ 469,043,507 $ -- $ 167,572 $ 469,211,079 FRANKLIN GROWTH FUND ASSETS: Investments in Securities $ 1,645,781,577 $ 15,042,968 $ -- $ 1,660,824,545 FRANKLIN INCOME FUND ASSETS: Investments in Securities $ 10,901,130,268 $ 22,756,784,679 $ -- $ 33,657,914,947 LIABILITIES: Options Written 375,000 -- -- 375,000 Other Financial Instrumentsa -- 488,337 -- 488,337 FRANKLIN U.S. GOVERNMENT SECURITIES FUND ASSETS: Investments in Securities $ 257,603,750 $ 8,170,554,870 $ -- $ 8,428,158,620 FRANKLIN UTILITIES FUND ASSETS: Investments in Securities $ 1,670,341,824 $ 65,925,585 $ -- $ 1,736,267,409
(a) Other financial instruments includes net unrealized appreciation (depreciation) on unfunded loan commitments. At March 31, 2009 the reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining the Funds' fair value, were as follows:
FRANKLIN DYNATECH FUND ------------- INVESTMENTS IN SECURITIES ------------- Beginning Balance - October 1, 2008 ......................... $ -- Net realized gain (loss) ................................. -- Net change in unrealized appreciation (depreciation) ..... (18,637) Net purchases (sales) .................................... -- Transfers in and/or out of Level 3 ....................... 186,209 ------------- Ending Balance .............................................. $ 167,572 ============= Net change in unrealized appreciation (depreciation) attributable to assets still held at end of period ....... $ (18,637) =============
126 | Semiannual Report Franklin Custodian Funds NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 16. NEW ACCOUNTING PRONOUNCEMENTS In April 2009, FASB issued FASB Staff Position FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4), which provides additional guidance when the volume and level of activity for the asset or liability measured at fair value have significantly decreased. Additionally, FSP FAS 157-4 amends FASB Statement No. 157, Fair Value Measurements, expanding disclosure requirements by reporting entities surrounding the major categories of assets and liabilities carried at fair value. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The Trust is currently evaluating the impact, if any, of applying FSP FAS 157-4. In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which expands disclosures about derivative investments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Trust believes applying the various provisions of SFAS 161 will not have a material impact on its financial statements. 17. SUBSEQUENT EVENT On May 6, 2009, the Franklin Growth Fund acquired the net assets of the Franklin Capital Growth Fund pursuant to a plan of reorganization approved by the Franklin Capital Growth Fund's shareholders. The merger was accomplished by a tax-free exchange of 22,770,597 shares of the Franklin Growth Fund (valued at $709,391,405) for the net assets of the Franklin Capital Growth Fund which aggregated $699,807,298, including $(9,584,107) of unrealized appreciation (depreciation). The combined net assets of the Fund immediately after the merger were $2,586,155,713. ABBREVIATIONS CURRENCY SELECTED PORTFOLIO EUR - Euro ADR - American Depository Receipt FRN - Floating Rate Note GP - Graduated Payment MTN - Medium Term Note PIK - Payment-In-Kind PIPES - Private Investment in Public Equity Security SF - Single Family Semiannual Report | 127 Franklin Custodian Funds SHAREHOLDER INFORMATION BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT At a meeting held February 24, 2009, the Board of Trustees (Board), including a majority of non-interested or independent Trustees, approved renewal of the investment management agreement for each of the five separate funds comprising Franklin Custodian Funds (Fund(s)). In reaching this decision, the Board took into account information furnished throughout the year at regular Board meetings, as well as information prepared specifically in connection with the annual renewal review process. Information furnished and discussed throughout the year included investment performance reports and related financial information for each Fund, as well as periodic reports on shareholder services, legal, compliance, pricing, brokerage commissions and execution and other services provided by the Investment Manager (Manager) and its affiliates. Information furnished specifically in connection with the renewal process included a report for each Fund prepared by Lipper, Inc. (Lipper), an independent organization, as well as additional material, including a Fund profitability analysis report prepared by management. The Lipper reports compared each Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by Lipper. The Fund profitability analysis report discussed the profitability to Franklin Templeton Investments from its overall U.S. fund operations, as well as on an individual fund-by-fund basis. Included with such profitability analysis report was information on a fund-by-fund basis listing portfolio managers and other accounts they manage, as well as information on management fees charged by the Manager and its affiliates including management's explanation of differences where relevant and a three-year expense analysis with an explanation for any increase in expense ratios. Additional material accompanying such report was a memorandum prepared by management describing project initiatives and capital investments relating to the services provided to the Funds by the Franklin Templeton Investments organization, as well as a memorandum relating to economies of scale and a comparative analysis concerning transfer agent fees charged each Fund. Such material also discussed some of the actions taken by management in coping with problems arising out of the past year's financial upheaval. In considering such materials, the independent Trustees received assistance and advice from and met separately with independent counsel. While the investment management agreements for all Funds were considered at the same Board meeting, the Board dealt with each Fund separately. In approving continuance of the investment management agreement for each Fund, the Board, including a majority of independent Trustees, determined that the existing management fee structure was fair and reasonable and that continuance of the investment management agreement was in the best interests of each Fund and its shareholders. While attention was given to all information furnished, the following discusses some primary factors relevant to the Board's decision. NATURE, EXTENT AND QUALITY OF SERVICES. The Board was satisfied with the nature and quality of the overall services provided by the Manager and its affiliates to the Funds and their shareholders. In addition to investment performance and expenses discussed later, the Board's opinion was based, in part, upon periodic reports furnished it showing that the investment policies and restrictions for each Fund were consistently complied with as well as other reports periodically furnished the Board covering matters such as the compliance of portfolio managers and other 128 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) management personnel with the code of ethics adopted throughout the Franklin Templeton fund complex, the adherence to fair value pricing procedures established by the Board, and the accuracy of net asset value calculations. The Board also noted the extent of benefits provided Fund shareholders from being part of the Franklin Templeton family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. Favorable consideration was given to management's continuous efforts and expenditures in establishing back-up systems and recovery procedures to function in the event of a natural disaster, it being noted by the Board that such systems and procedures had functioned smoothly during the Florida hurricanes and blackouts experienced in recent years. Among other factors taken into account by the Board were the Manager's best execution trading policies, including a favorable report by an independent portfolio trading analytical firm. Consideration was also given to the experience of each Fund's portfolio management team, the number of accounts managed and general method of compensation. In this latter respect, the Board noted that a primary factor in management's determination of a portfolio manager's bonus compensation was the relative investment performance of the funds he or she managed and that a portion of such bonus was required to be invested in a predesignated list of funds within such person's fund management area so as to be aligned with the interests of Fund shareholders. The Board also took into account the quality of transfer agent and shareholder services provided Fund shareholders by an affiliate of the Manager, noting continuing expenditures by management to increase and improve the scope of such services, periodic favorable reports on such service conducted by third parties, and the continuous enhancements to and high industry ranking given the Franklin Templeton website. Particular attention was given to the overall performance and actions taken by the Manager and its affiliates in response to problems arising out of the market turmoil and financial crisis experienced during the past year. In this respect, the Board noted that management's independent credit analysis and diligent risk management procedures had minimized exposure of funds within the Franklin Templeton complex to subprime mortgages and that its continuous monitoring of counterparty credit risk had limited fund exposure to firms experiencing financial difficulties like Bear Stearns and AIG. The same type of conservative approach and attention to risk had also prevented any structured investment products or other volatile instruments from being held in the portfolios of any of the money market funds within the Franklin Templeton complex, including the sweep money fund utilized by many of the funds as part of their cash management. The Board also took into account, among other things, management's efforts in establishing a $725 million global credit facility for the benefit of the Funds and other accounts managed by Franklin Templeton Investments to provide a source of cash for temporary and emergency purposes or to meet unusual redemption requests as well as the strong financial position of the Manager's parent company and its commitment to the mutual fund business. The Board also noted that during the past year Franklin Templeton Investments, like many other fund managers, had announced a hiring freeze and implemented employee reductions, and the Board discussed with management the nature of such reductions and steps being taken to minimize any negative impact on the nature and quality of services being provided the Funds. Semiannual Report | 129 Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of each Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions with portfolio managers at Board meetings during the year, particular attention in assessing performance was given to the Lipper reports furnished for the agreement renewals. The Lipper reports prepared for each individual Fund showed the investment performance of its Class A shares during 2008 and the previous 10-year periods ended December 31, 2008, in comparison with a performance universe selected by Lipper. Investment performance was shown on a total return basis for all Funds with income return being shown as well for those Funds having income as an investment objective element. The following summarizes the performance results for each Fund. FRANKLIN DYNATECH FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of the Fund and all retail and institutional science and technology funds as classified by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within such performance universe experienced losses during the past year. On a comparative basis the Fund's Lipper report showed the Fund's total return during 2008 to be in the second-highest quintile of such performance universe, and on an annualized basis to be in the second-highest quintiles of such universe for the previous three-, five- and 10-year periods. The Board noted such favorable comparative performance. FRANKLIN GROWTH FUND - The Fund's investment performance was shown in comparison to a performance universe consisting of all retail and institutional multi-cap core funds as classified by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds with such performance universe experienced losses during the past year. On a comparative basis, the Fund's Lipper report showed the Fund's total return during 2008 to be in the highest quintile of such performance universe and its total return on an annualized basis ranked it in the highest quintile of such universe during each of the previous three- and five-year periods, as well as the middle quintile of such universe for the previous 10-year period. The Board noted such favorable comparative performance. FRANKLIN INCOME FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of the Fund and all other retail and institutional mixed-asset target allocation moderate funds as classified by Lipper. The Lipper report showed the Fund's 7.68% income return during 2008 to be in the highest or best performing quintile of its performance universe and that its income return during each of the previous 10 years was also in the highest quintile of such performance universe. The Lipper report showed the Fund's 30.51% loss on a total return basis during 2008 to be below the 2008 median loss of 25.34% for the performance universe placing it in the fifth or worst performing quintile of such universe, while its total return on an annualized basis was in the middle quintile of such universe during each of the previous three- and five-year periods, and in the highest quintile of such universe for the previous 10-year period. The Board discussed with management the reasons for the Fund's total return performance 130 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) during 2008 and, while intending to continuously monitor such Fund, did not believe that such recent underperformance warranted any change in portfolio management. FRANKLIN U.S. GOVERNMENT SECURITIES FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of all retail and institutional Ginnie Mae funds as classified by Lipper. The Fund's Lipper report showed its 4.95% income return during 2008 was in the second-highest quintile of such universe and its income return on an annualized basis was in the second-highest quintile for the previous three-year period and in the highest quintile of such performance universe for the previous five- and 10-year periods. The Fund's 6.88% total return, as shown in such report, was in the second-highest quintile of its performance universe during 2008, and its total return on an annualized basis was in the middle quintile of such universe for the previous three-year period, and the second-highest quintile of such universe for the previous five- and 10-year periods. The Board expressed satisfaction with such performance. FRANKLIN UTILITIES FUND - This Fund's investment performance was shown in comparison to a performance universe consisting of all retail and institutional utility funds as classified by Lipper. Consistent with the market sell-off that occurred in 2008, the Fund and all other funds within such performance universe experienced losses on a total return basis during the past year. On a comparative basis, the Fund's Lipper report showed its income return during 2008, as well as during each of the previous three-, five- and 10-year periods on an annualized basis was in the highest quintile of such performance universe. The Fund's total return during 2008 placed it in the highest quintile of its performance universe, and on an annualized basis placed it in the highest quintile of its performance universe during the previous three- and 10-year periods, and the second-highest quintile during the previous five-year period. The Board noted such favorable comparative performance. COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the management fees and total expense ratios of each Fund compared with those of a group of other funds selected by Lipper as constituting its appropriate Lipper expense group. Lipper expense data is based upon historical information taken from each Fund's most recent annual report and, as a result of the severe decline in mutual fund industry assets during the last quarter of 2008, is based on asset levels that are higher than the level currently existing for most funds. While recognizing the limitations inherent in Lipper's methodology and recognizing that current expense ratios may increase as assets decline, the Board believed that the independent analysis conducted by Lipper remained an appropriate measure of comparative expenses. In reviewing comparative costs, Lipper provides information on each Fund's contractual investment management fee in comparison with the contractual investment management fee that would have been charged by other funds within its Lipper expense group assuming they were similar in size to the Fund, as well as the actual total expenses of the Fund in comparison with those of its Lipper expense group. The Lipper contractual investment management fee analysis considers administrative charges as being part of management fees and total expenses for comparative consistency are shown by Lipper for Fund Class A shares. The results of such expense comparisons showed that the contractual investment management fee Semiannual Report | 131 Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) rate for each of Franklin DynaTech Fund, Franklin Growth Fund and Franklin Utilities Fund was in the least expensive quintile of their respective Lipper expense groups, and for Franklin Income Fund and Franklin U.S. Government Securities Fund was in the second least expensive quintile of their Lipper expense groups. The actual total expense rates for all the Funds were in the least expensive quintile of their respective Lipper expense groups. Based upon the above, the Board was satisfied with the management fees and total expenses of each Fund in comparison to its respective Lipper expense group. MANAGEMENT PROFITABILITY. The Board also considered the level of profits realized by the Manager and its affiliates in connection with the operation of each Fund. In this respect, the Board reviewed the Fund profitability analysis that addresses the overall profitability of Franklin Templeton's U.S. fund business, as well as its profits in providing management and other services to each of the individual Funds during the 12-month period ended September 30, 2008, being the most recent fiscal year end for Franklin Resources, Inc., the Manager's parent. During such period, the assets of the Franklin Templeton U.S. fund business were significantly higher than currently existing, and to such extent the profitability analysis does not reflect current fund operations. While taking this into account in assessing the significance of the Fund profitability analysis, the Board recognized such analysis was made at a given point in time and that the decline in assets and effect on profitability would be reflected in the profitability analysis covering Franklin Resources' 2009 fiscal year period. In reviewing the analysis, attention was given to the methodology followed in allocating costs to each Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this respect, the Board noted that, while being continuously refined and reflecting changes in the Manager's own cost accounting, the cost allocation methodology was consistent with that followed in profitability report presentations for the Funds made in prior years and that the Funds' independent registered public accounting firm had been engaged by the Manager to perform certain procedures on a biennial basis, specified and approved by the Manager and the Funds' Board solely for their purposes and use in reference to the profitability analysis. In reviewing and discussing such analysis, management discussed with the Board its belief that costs incurred in establishing the infrastructure necessary for the type of mutual fund operations conducted by the Manager and its affiliates may not be fully reflected in the expenses allocated to each Fund in determining its profitability, as well as the fact that the level of profits, to a certain extent, reflected operational cost savings and efficiencies initiated by management. The Board also took into account management's expenditures in improving shareholder services provided the Funds, as well as the need to meet additional regulatory and compliance requirements resulting from the Sarbanes-Oxley Act and recent SEC and other regulatory requirements. In addition, the Board considered a third-party study comparing the profitability of the Manager's parent on an overall basis as compared to other publicly held managers broken down to show profitability from management operations exclusive of distribution expenses, as well as profitability including distribution expenses. The Board also considered the extent to which the Manager and its affiliates might derive ancillary benefits from fund operations, including its interest in a joint venture entity that financed up-front commissions paid 132 | Semiannual Report Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED) to brokers/dealers who sold fund Class B shares prior to February 2005 when the offering of such shares was discontinued, as well as potential benefits resulting from allocation of fund brokerage and the use of commission dollars to pay for research. Based upon its consideration of all these factors, the Board determined that the level of profits realized by the Manager and its affiliates from providing services to each Fund was not excessive in view of the nature, quality and extent of services provided. ECONOMIES OF SCALE. The Board also considered whether economies of scale are realized by the Manager as the Funds grow larger and the extent to which this is reflected in the level of management fees charged. While recognizing that any precise determination is inherently subjective, the Board noted that based upon the Fund profitability analysis, it appears that as some funds get larger, at some point economies of scale do result in the Manager realizing a larger profit margin on management services provided such a fund. The Board also noted that economies of scale are shared with each Fund and its shareholders through management fee breakpoints so that as a Fund grows in size, its effective management fee rate declines. The fee structure under the investment management agreement with each Fund provides an initial fee of 0.625% on the first $100 million of assets; 0.50% on the next $150 million of assets; 0.45% on the next $7.25 billion of assets; and declining thereafter for each subsequent $2.5 billion of assets until reaching a breakpoint of 0.35% for assets in excess of $50 billion, with such breakpoints continuing in the case of Franklin Income Fund and Franklin Utilities Fund to 0.345% on assets in excess of $65 billion and 0.34% on assets in excess of $80 billion. In discussing such overall fee structure, management noted that the asset sizes of all Funds were beneath their last breakpoint levels and stated its view that such fee structures reach a relatively low rate quickly reflecting anticipated economies of scale as a Fund's assets increase and pointed out the favorable effective management fee and total expense comparisons for each Fund within its Lipper expense group, as previously discussed under "Comparative Expenses." The Board believed that to the extent economies of scale may be realized by the Manager and its affiliates, the schedule of fees under the investment management agreement for each Fund provides a sharing of benefits with the Fund and its shareholders. PROXY VOTING POLICIES AND PROCEDURES The Fund's investment manager has established Proxy Voting Policies and Procedures (Policies) that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at (954) 527-7678 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the U.S. Securities and Exchange Commission's website at sec.gov and reflect the most recent 12-month period ended June 30. Semiannual Report | 133 Franklin Custodian Funds SHAREHOLDER INFORMATION (CONTINUED) QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the U.S. Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling (800) SEC-0330. 134 | Semiannual Report This page intentionally left blank. This page intentionally left blank. Franklin Templeton Funds LITERATURE REQUEST. TO RECEIVE A PROSPECTUS, PLEASE CALL US AT (800) DIAL BEN/(800) 342-5236 OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. VALUE Franklin All Cap Value Fund Franklin Balance Sheet Investment Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund(1) Franklin MidCap Value Fund Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Quest Fund Mutual Recovery Fund(2) Mutual Shares Fund BLEND Franklin Focused Core Equity Fund Franklin Large Cap Equity Fund Franklin Rising Dividends Fund GROWTH Franklin Flex Cap Growth Fund Franklin Growth Fund Franklin Growth Opportunities Fund Franklin Small Cap Growth Fund Franklin Small-Mid Cap Growth Fund SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Real Estate Fund Franklin Gold & Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Mutual Financial Services Fund GLOBAL Mutual Global Discovery Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund INTERNATIONAL Franklin India Growth Fund Franklin International Growth Fund Franklin International Small Cap Growth Fund Mutual European Fund Mutual International Fund Templeton BRIC Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Emerging Markets Small Cap Fund Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Frontier Markets Fund HYBRID Franklin Balanced Fund Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Templeton Income Fund ASSET ALLOCATION Franklin Templeton Corefolio(R) Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton 2015 Retirement Target Fund Franklin Templeton 2025 Retirement Target Fund Franklin Templeton 2035 Retirement Target Fund Franklin Templeton 2045 Retirement Target Fund FIXED INCOME Franklin Adjustable U.S. Government Securities Fund(3) Franklin Floating Rate Daily Access Fund Franklin High Income Fund Franklin Limited Maturity U.S. Government Securities Fund(3) Franklin Low Duration Total Return Fund Franklin Real Return Fund Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund(3) Templeton Global Bond Fund Templeton Global Total Return Fund Templeton International Bond Fund TAX-FREE INCOME(4) NATIONAL Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund(5) LIMITED-/INTERMEDIATE-TERM California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California(6) Colorado Connecticut Florida Georgia Kentucky Louisiana Maryland Massachusetts(7) Michigan(7) Minnesota(7) Missouri New Jersey New York(6) North Carolina Ohio(7) Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust(8) 1. The fund is closed to new investors. Existing shareholders and select retirement plans can continue adding to their accounts. 2. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 3. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 4. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 5. The fund invests primarily in insured municipal securities. 6. These funds are available in four or more variations, including long-term portfolios, intermediate-term portfolios, portfolios of insured securities, a high-yield portfolio (CA only) and money market portfolios. 7. The Board of Trustees approved the elimination of the non-fundamental policy requiring the fund to invest at least 80% of net assets in insured municipal securities and the removal of the word "Insured" from the fund name. The changes became effective 2/17/09. 8. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 04/09 Not part of the semiannual report [FRANKLIN TEMPLETON INVESTMENTS LOGO] One Franklin Parkway San Mateo, CA 94403-1906 SIGN UP FOR eDELIVERY Log onto FRANKLINTEMPLETON.COM and click "My Profile" SEMIANNUAL REPORT AND SHAREHOLDER LETTER FRANKLIN CUSTODIAN FUNDS INVESTMENT MANAGER Franklin Advisers, Inc. DISTRIBUTOR Franklin Templeton Distributors, Inc. (800) DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES (800) 632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. FCF S2009 05/09 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are John B. Wilson and he is independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. N/A ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PORTFOLIO MANGERS OF CLOSE-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 11. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and Gaston Gardey, Chief Financial Officer and Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRANKLIN CUSTODIAN FUNDS By /S/LAURA F. FERGERSON -------------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date May 27, 2009 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/LAURA F. FERGERSON ------------------------- Laura F. Fergerson Chief Executive Officer - Finance and Administration Date May 27, 2009 By /S/GASTON GARDEY ------------------------- Gaston Gardey Chief Financial Officer and Chief Accounting Officer Date May 27, 2009 EX-99.CODE ETH 2 ncsr_code1208.txt REVISED CODE OF ETHICS 12/08 Exhibit 12(a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVES & SENIOR FINANCIAL OFFICERS - ------------------------------------------------------------------------------ PROCEDURES Revised December 22, 2008 - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Covered Officers and Purpose of the Code This code of ethics (the "Code") applies to the Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers," each of whom is set forth in Exhibit A) of each investment company advised by a Franklin Resources subsidiary and that is registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") for the purpose of promoting: o Honest and ethical conduct, including the ethical resolution of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer will be expected to adhere to a high standard of business ethics and must be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Franklin Resources, Inc. has separately adopted the CODE OF ETHICS AND BUSINESS CONDUCT ("Business Conduct"), which is applicable to all officers, directors and employees of Franklin Resources, Inc., including Covered Officers. It summarizes the values, principles and business practices that guide the employee's business conduct and also provides a set of basic principles to guide officers, directors and employees regarding the minimum ethical requirements expected of them. It supplements the values, principles and business conduct identified in the Code and other existing employee policies. Additionally, the Franklin Templeton Funds have separately adopted the CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING governing personal securities trading and other related matters. The Code for Insider Trading provides for separate requirements that apply to the Covered Officers and others, and therefore is not part of this Code. Insofar as other policies or procedures of Franklin Resources, Inc., the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superceded by this Code to the extent that they overlap or conflict with the provisions of this Code. Please review these other documents or consult with the Legal Department if have questions regarding the applicability of these policies to you. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of apposition with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his or her personal influence or personal relationships improperly to influence investment decisions orfinancial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the FT Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/ 1 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors of the FT Funds; o any direct or indirect business relationship with any independent public accounting firm (which are not related to the routine issues related to the firm's service as the Covered Persons accountant); and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). These reports will be reviewed by the Legal Department for compliance with the Code. There are some conflict of interest situations that should always be approved in writing by Franklin Resources General Counsel or Deputy General Counsel, if material. Examples of these include/2: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100 from any person, from any corporation or association o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval from the Franklin Resources General Counsel for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. Franklin Resources General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. IV. Disclosure and Compliance o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the FT Funds, the FT Fund's adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. V. Reporting and Accountability Each Covered Officer must: o Upon becoming a covered officer affirm in writing to the Board that he or she has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify Franklin Resources' General Counsel or Deputy General Counsel promptly if he or she knows of any violation of this Code. Failure to do so is itself is a violation of this Code. Franklin Resources' General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./3 However, the Independent Directors of the respective FT Funds will consider any approvals or waivers/4 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o Franklin Resources General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to the Legal Department; o If, after such investigation, the General Counsel or Deputy General Counsel believes that no violation has occurred, The General Counsel is not required to take any further action; o Any matter that the General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate FT Fund or Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules./5 VI. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-1 under the Investment Company Act, the Code of Ethics and Business Conduct and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VII. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VIII. Confidentiality All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. IX. Internal Use The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. X. Disclosure on Form N-CSR Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. The Legal Department shall be responsible for ensuring that: o a copy of the Code is filed with the SEC as an exhibit to each Fund's annual report; and o any amendments to, or waivers (including implicit waivers) from, a provision of the Code is disclosed in the registrant's annual report on Form N-CSR. In the event that the foregoing disclosure is omitted or is determined to be incorrect, the Legal Department shall promptly file such information with the SEC as an amendment to Form N-CSR. In such an event, the Fund Chief Compliance Officer shall review the Code and propose such changes to the Code as are necessary or appropriate to prevent reoccurrences. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics December 2008 FRANKLIN GROUP OF FUNDS Edward B. Jamieson President and Chief Executive Officer - Investment Management Charles B. Johnson President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer FRANKLIN MUTUAL SERIES FUNDS Peter Langerman Chief Executive Officer-Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer TEMPLETON GROUP OF FUNDS Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jennifer J. Bolt Chief Executive Officer - Finance and Administration Laura Fergerson Chief Financial Officer and Chief Accounting Officer EXHIBIT B ACKNOWLEDGMENT FORM DECEMBER FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel c/o Code of Ethics Administration within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Code of Ethics Administration, Global Compliance SM-920/2 TELEPHONE: (650) 312-5698 Fax: (650) 312-5646 E-MAIL: Preclear-Code of Ethics (internal address); lpreclear@frk.com (external address) - ------------------------------------------------------------------------------ COVERED OFFICER'S NAME: - ------------------------------------------------------------------------------ TITLE: - ------------------------------------------------------------------------------ DEPARTMENT: - ------------------------------------------------------------------------------ LOCATION: - ------------------------------------------------------------------------------ CERTIFICATION FOR YEAR ENDING: - ------------------------------------------------------------------------------ TO: Franklin Resources General Counsel, Legal Department I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment. ---------------------------- ---------------------- Signature Date signed - ----------------------------- 1. Reporting of these affiliations or other relationships shall be made by completing the annual Directors and Officers Questionnaire and returning the questionnaire to Franklin Resources Inc, General Counsel or Deputy General Counsel. 2. Any activity or relationship that would present a conflict for a Covered Officer may also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 3. Franklin Resources General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 4. Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. See Part X. 5. See Part X. EX-99.CERT 3 fcf302cert.txt SECTION 302 CERTIFICATION Exhibit 12(a)(2) I, Laura F. Fergerson, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN CUSTODIAN FUNDS; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 5/27/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Executive Officer - Finance and Administration PAGE Exhibit 12(a)(2) I, Gaston Gardey, certify that: 1. I have reviewed this report on Form N-CSR of FRANKLIN CUSTODIAN FUNDS; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 5/27/2009 S\GASTON GARDEY Gaston Gardey Chief Financial Officer and Chief Accounting Officer EX-99.906CERT 4 fcf906cert.txt SECTION 906 CERTFICATION Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Laura F. Fergerson, Chief Executive Officer of the FRANKLIN CUSTODIAN FUNDS (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 3/31/2009 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 5/27/2009 S\LAURA F. FERGERSON Laura F. Fergerson Chief Executive Officer - Finance and Administration PAGE Exhibit 12(b) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Gaston Gardey, Chief Financial Officer of the FRANKLIN CUSTODIAN FUNDS (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 3/31/2009 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: 5/27/2009 S\GASTON GARDEY Gaston Gardey Chief Financial Officer and Chief Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----