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
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Franklin Custodian Funds
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(Exact name of registrant as specified in charter)
One Franklin Parkway, San Mateo, CA 94403-1906
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(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
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Date of fiscal year end: 9/30
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Date of reporting period: 3/31/10
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Item 1. Reports to Stockholders.
MARCH 31, 2010
SEMIANNUAL REPORT AND SHAREHOLDER LETTER
Franklin DynaTech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government Securities Fund
Franklin Utilities Fund
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FRANKLIN CUSTODIAN FUNDS
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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
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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...................................... 30
Franklin Utilities Fund....................................................... 39
Financial Highlights and Statements of Investments............................ 47
Financial Statements.......................................................... 100
Notes to Financial Statements................................................. 109
Shareholder Information....................................................... 132
Shareholder Letter
Dear Shareholder:
During the six-month period ended March 31, 2010, the U.S. economy
showed signs of an increasingly broad-based expansion while interest
rates remained near all-time lows and inflation was muted. Although
corporate and global economic data underscored some weak spots amid
short-term improvements, most U.S. companies during fourth quarter
2009 and first quarter 2010 beat consensus earnings estimates, aided
by government incentives and a wave of restructuring and
cost-cutting initiatives. U.S. equity markets enjoyed an unusually
strong nine-month surge until first quarter 2010, when volatility
returned as investors began to heed signs of overvaluation. Investor
concerns also arose about the global recovery's sustainability as
some government stimulus measures began to wind down. During the
period, U.S. Treasury yields rose and fell in response to wavering
investor sentiment. The yield curve reached record-breaking steep
levels during the first quarter of 2010 and flattened only slightly
by period-end.
Franklin Custodian Funds' semiannual report goes into greater detail
about prevailing conditions during the period under review. In
addition, you will find performance data, financial information and
discussions by the portfolio managers. Please remember that all
securities markets fluctuate, as do mutual fund share prices.
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.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Not part of the semiannual report | 1
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 current market conditions.
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, 2010.
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
The U.S. economy showed signs of broad-based improvement during the
six-month reporting period. Domestic industrial output,
manufacturing and exports posted steady gains, consumer spending and
confidence rebounded from recessionary lows, and the services sector
expanded for the first time in more than two years. However,
challenges remained as mixed economic reports, elevated debt
concerns surrounding the U.S. budget deficit and lack of job
prospects for the unemployed hindered the economy's advance. Fourth
quarter 2009 and first quarter 2010 corporate profit growth largely
surpassed consensus estimates, which allowed businesses to begin
restocking inventories that were depleted during the recession.
New-home prices rose in most regions due to lower interest rates, a
first-time homebuyer tax credit program, and prices dipping to
levels that lured bargain hunters. Unfortunately, the housing sector
overall remained weak as existing-home prices were essentially
unchanged while the pace of home sales and housing starts failed to
gain traction.
The U.S. economy expanded at its fastest pace in six years during
2009's fourth quarter, led by large inventory adjustments,
government spending, a revival of business investment and rising
exports. U.S. economic output as measured by gross domestic product
(GDP) grew at an annualized rate of 5.6% in the fourth quarter,
followed by an estimated annualized 3.2% advance in 2010's first
quarter.(1) As renewed signs of a demand-led recovery emerged, oil
prices jumped from $71 per barrel at the end of September 2009 to a
17-month peak of $84 at period-end, but remained below 2008's record
level. The March 2010 inflation rate was an annualized 2.3%.(2)
Core inflation, which excludes food and energy costs, rose at a 1.1%
annualized rate(2) and was below the Fed's informal target range of
1.5% to 2.0%.
Given few inflationary pressures and uncertainty surrounding the
economic recovery, the Federal Open Market Committee (FOMC)
announced it intended to hold the federal funds target rate in the
0% to 0.25% range "for an extended period" as it laid the groundwork
for an eventual tightening of monetary policy. During the period, it
began withdrawing more of the extraordinary support
1. Source: Bureau of Economic Analysis.
2. Source: Bureau of Labor Statistics.
Semiannual Report | 3
policies it had provided in response to the 2008 financial crisis.
Late in the period, the labor market improved somewhat as the
economy began to add jobs, and the unemployment rate subsided from a
26-year high of 10.1% in October 2009 to 9.7%, a level sustained
through the first three months of 2010.(2)
In February 2010, investor fears about the Greek government's
ability to finance its budget deficit forced several companies to
delay bond sales and prompted investors to flee to safer assets such
as U.S. Treasuries. These fears largely subsided by period-end, and
the credit market rebounded, although uncertainty remained about how
several European countries would meet their debt obligations. U.S.
companies aggressively borrowed in the debt market and liquidity
levels rose.
Wary investors favored short-term Treasuries, and the Treasury yield
curve reached all-time steep levels in February. The spread between
two- and 10-year Treasury yields increased from 236 basis points
(100 basis points equal one percentage point) at the beginning of
the period to 282 basis points at period-end. The two-year Treasury
bill yield rose from 0.95% to 1.02% over the six-month period, while
the 10-year Treasury note yield rose from 3.31% to 3.84%.
As investor confidence improved amid encouraging economic data,
equity markets generally rallied, though the advance was uneven. For
the six months under review, the blue chip stocks of the Dow Jones
Industrial Average delivered a +13.31% total return, while the
broader Standard & Poor's 500 Index (S&P 500) posted a total return
of +11.75% and the technology-heavy NASDAQ Composite Index returned
+13.50%.(3) All major industry groups posted gains for the period,
with the strongest returns from the cyclical consumer discretionary,
industrials and information technology sectors.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF
MARCH 31, 2010. 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.
3. Source: (C) 2010 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 is one of the most widely used benchmarks of U.S. equity
performance. The NASDAQ Composite Index measures all NASDAQ domestic
and international common type stocks listed on The NASDAQ Stock
Market. The index is market value-weighted and includes over 3,000
companies.
4 | Semiannual Report
Franklin DynaTech Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin DynaTech Fund seeks investments
primarily in companies management believes are leaders in innovation, take
advantage of new technologies, have superior management, and benefit from new
industry conditions in the dynamically changing global economy.
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.
We are pleased to bring you Franklin DynaTech Fund's semiannual report for the
period ended March 31, 2010.
PERFORMANCE OVERVIEW
Franklin DynaTech Fund - Class A delivered a +14.48% cumulative total return for
the six months under review. For the same period, the Fund performed comparably
to its narrow benchmark, the NASDAQ 100 Index, which posted a price-only return
of +13.92%, and outperformed its broader benchmark, the Standard & Poor's 500
Index (S&P 500), which had a total return of +11.75%. (1) The Fund outperformed
the Russell 1000 Growth Index, which had a +12.96% return. (2) You can find the
Fund's long-term performance data in the Performance Summary beginning on page
8.
INVESTMENT STRATEGY
We use fundamental, bottom-up research to seek companies meeting our criteria of
growth potential, quality and valuation. In seeking sustainable growth
characteristics, we look for companies we believe can produce sustainable
earnings and cash flow growth, evaluating the long-term market opportunity and
1. Source: (C) 2010 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.
2. Source: (C) 2010 Morningstar. The Russell 1000 Growth Index is market
capitalization weighted and measures performance of those Russell 1000 Index
companies with higher price-to-book ratios and higher forecasted growth values.
The index includes reinvested dividends.
The indexes are unmanaged. One cannot invest directly in an index, and an index
is not 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
competitive structure of an industry to target leaders and emerging leaders. We
define quality companies as those with strong and improving competitive
positions in attractive markets. We also believe important attributes of quality
are experienced and talented management teams as well as financial strength
reflected in the capital structure, gross and operating margins, free cash flow
generation and returns on capital employed. Our valuation analysis includes a
range of potential outcomes based on an assessment of multiple scenarios. In
assessing value, we consider whether security prices fully reflect the balance
of the sustainable growth opportunities relative to business and financial
risks.
PORTFOLIO BREAKDOWN
Franklin DynaTech Fund
Based on Total Net Assets as of 3/31/10
Software 11.2%
Semiconductors & Semiconductor Equipment 10.9%
Internet Software & Services 9.3%
Computers & Peripherals 8.5%
Pharmaceuticals 6.4%
Health Care Equipment & Supplies 6.2%
Energy Equipment & Services 5.9%
IT Services 5.1%
Communications Equipment 4.6%
Internet & Catalog Retail 4.6%
Biotechnology 3.9%
Aerospace & Defense 3.1%
Health Care Providers & Services 2.9%
Life Sciences Tools & Services 2.4%
Chemicals 2.3%
Other 12.7%
MANAGER'S DISCUSSION
During the reporting period, the Fund's performance continued to benefit from
the information technology sector, particularly Apple, in the computers and
peripherals industry, which continued to advance due to the announcement of the
iPad tablet computer.(3) IT services provider Visa aided performance as well.
The Fund's Internet software and services industry holdings also boosted
performance largely due to search engines Baidu and Google. Another significant
contributor was Intel in the semiconductors and semiconductor equipment
industry. The chip maker's strong 2009 results reflected the effects of
manufacturing and product innovations that created new operating efficiencies
and market opportunities. The Fund's health care sector holdings also benefited
performance.(4) During the period, a number of holdings in the health care
equipment industry performed well, including surgical robot developer Intuitive
Surgical and heart valve manufacturer Edwards Lifesciences. The Fund's position
in Teva Pharmaceutical Industries received a boost after Moody's Investors
Service upgraded the drug maker's credit rating. Several consumer discretionary
holdings also helped the Fund's returns, including Internet retailers Amazon.com
and Priceline.com, both of which benefited from improving consumer
spending.(5)
In contrast, the Fund's materials sector holdings weighed on performance,
largely due to Monsanto in the chemicals industry.(6) The agricultural products
producer detracted from performance after the company reduced the price of its
top-selling weed killer and also became the subject of a federal anti-trust
investigation. The financials sector hurt performance largely due to the Fund's
holding
3. The information technology sector comprises communications equipment;
computers and peripherals; electronic equipment, instruments and components;
Internet software and services; IT services; semiconductors and semiconductor
equipment; and software in the SOI.
4. The health care sector comprises biotechnology, health care equipment and
supplies, health care providers and services, health care technology, life
sciences tools and services, and pharmaceuticals in the SOI.
5. The consumer discretionary sector comprises Internet and catalog retail in
the SOI.
6. The materials sector comprises chemicals in the SOI.
6 | Semiannual Report
in global investment banking and securities firm The Goldman Sachs Group.(7)
Its share price declined amid investor concerns about federal inquiries into the
company's business practices. Although the information technology sector overall
was positive, some individual stocks hampered results, including Chinese search
engine Sohu.com and wireless technology developer QUALCOMM. Genetic analysis
tool developer Illumina from the health care sector also detracted from Fund
performance. During the period, we sold Sohu.com and Illumina.
As managers of Franklin DynaTech Fund, at period-end we continue to search for
innovative companies that leverage new technologies and new industry conditions
to build what we believe to be strong long-term growth prospects and are trading
at what we perceive to be attractive valuations. We believe it is these dynamic,
thought-leading companies that may lead economic advancement over the longer
term.
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, 2010, 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.
7. The financials sector comprises capital markets and diversified financial
services in the SOI.
TOP 10 HOLDINGS
Franklin DynaTech Fund
3/31/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ---------------------------------------------------------------- -----------
Apple Inc. 6.2%
COMPUTERS & PERIPHERALS, U.S.
Google Inc., A 4.1%
INTERNET SOFTWARE & SERVICES, U.S.
Intel Corp. 3.6%
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, U.S.
Visa Inc., A 3.3%
IT SERVICES, U.S.
Teva Pharmaceutical Industries Ltd., ADR 3.2%
PHARMACEUTICALS, ISRAEL
FMC Technologies Inc. 2.8%
ENERGY EQUIPMENT & SERVICES, U.S.
Amazon.com Inc. 2.4%
INTERNET & CATALOG RETAIL, U.S.
Hewlett-Packard Co. 2.3%
COMPUTERS & PERIPHERALS, U.S.
Celgene Corp. 2.2%
BIOTECHNOLOGY, U.S.
Priceline.com Inc. 2.2%
INTERNET & CATALOG RETAIL, U.S.
Semiannual Report | 7
Performance Summary as of 3/31/10
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 INFORMATION
CLASS A (SYMBOL: FKDNX) CHANGE 3/31/10 9/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$3.36 $26.56 $23.20
CLASS B (SYMBOL: FDNBX) CHANGE 3/31/10 9/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$3.04 $24.64 $21.60
CLASS C (SYMBOL: FDYNX) CHANGE 3/31/10 9/30/09
- ----------------------- ------ ------- -------
Net Asset Value (NAV) +$3.01 $24.35 $21.34
CLASS R (SYMBOL: N/A) CHANGE 3/31/10 9/30/09
- --------------------- ------ ------- -------
Net Asset Value (NAV) +$3.32 $26.45 $23.13
ADVISOR CLASS (SYMBOL: N/A) CHANGE 3/31/10 9/30/09
- --------------------------- ------ ------- -------
Net Asset Value (NAV) +$3.41 $26.69 $23.28
8 | 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) +14.48% +53.79% +31.58% +0.75%
Average Annual Total Return (2) +7.88% +44.98% +4.39% -0.52%
Value of $10,000 Investment (3) $ 10,788 $ 14,498 $ 12,399 $ 9,496
Total Annual Operating Expenses (4) 1.18%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- --------- -------- -------- ---------
Cumulative Total Return (1) +14.07% +52.66% +26.76% -5.14%
Average Annual Total Return (2) +10.07% +48.66% +4.52% -0.53%
Value of $10,000 Investment (3) $ 11,007 $ 14,866 $ 12,476 $ 9,486
Total Annual Operating Expenses (4) 1.93%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- --------- -------- -------- ---------
Cumulative Total Return (1) +14.11% +52.66% +26.76% -6.50%
Average Annual Total Return (2) +13.11% +51.66% +4.86% -0.67%
Value of $10,000 Investment (3) $ 11,311 $ 15,166 $ 12,676 $ 9,350
Total Annual Operating Expenses (4) 1.93%
CLASS R 6-MONTH 1-YEAR INCEPTION (12/1/08)
- ------- --------- -------- -------------------
Cumulative Total Return (1) +14.35% +53.42% +68.90%
Average Annual Total Return (2) +14.35% +53.42% +48.36%
Value of $10,000 Investment (3) $ 11,435 $ 15,342 $ 16,890
Total Annual Operating Expenses (4) 1.43%
ADVISOR CLASS (5) 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ----------------- --------- -------- -------- ---------
Cumulative Total Return (1) +14.65% +54.19% +32.20% +1.23%
Average Annual Total Return (2) +14.65% +54.19% +5.74% +0.12%
Value of $10,000 Investment (3) $ 11,465 $ 15,419 $ 13,220 $ 10,123
Total Annual Operating Expenses (4) 0.93%
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, GO TO
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 ADVANCEMENT. THE FUND MAY ALSO
INVEST IN SMALL-CAPITALIZATION COMPANIES, WHICH CAN BE PARTICULARLY SENSITIVE TO
CHANGING ECONOMIC CONDITIONS, AND THEIR PROSPECTS FOR GROWTH ARE LESS CERTAIN
THAN THOSE OF LARGER, MORE ESTABLISHED COMPANIES. 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. 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 and average
annual total returns of Advisor Class shares were -6.43% and -3.48%.
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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10
----------------- -------------- -----------------------
CLASS A
Actual $ 1,000 $ 1,144.80 $ 5.94
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.40 $ 5.59
CLASS B
Actual $ 1,000 $ 1,140.70 $ 9.77
Hypothetical (5% return before expenses) $ 1,000 $ 1,015.81 $ 9.20
CLASS C
Actual $ 1,000 $ 1,141.10 $ 9.93
Hypothetical (5% return before expenses) $ 1,000 $ 1,015.66 $ 9.35
CLASS R
Actual $ 1,000 $ 1,143.50 $ 7.27
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.15 $ 6.84
ADVISOR CLASS
Actual $ 1,000 $ 1,146.50 $ 4.60
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.64 $ 4.33
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 1.11%; B: 1.83%; C: 1.86%; R: 1.36%; and Advisor:
0.86%), multiplied by the average account value over the period, multiplied by
182/365 to reflect the one-half year period.
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.
We are pleased to bring you Franklin Growth Fund's semiannual report for the
period ended March 31, 2010.
PERFORMANCE OVERVIEW
Franklin Growth Fund - Class A delivered a +14.82% cumulative total return for
the six months under review. The Fund outperformed its benchmark, the Standard &
Poor's 500 Index (S&P 500), which had a total return of +11.75% 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 use fundamental, bottom-up research to seek companies meeting our criteria of
growth potential, quality and valuation. In seeking sustainable growth
characteristics, we look for companies we believe can produce sustainable
earnings and cash flow growth, evaluating the long-term market opportunity and
competitive structure of an industry to target leaders and emerging leaders. We
define quality companies as those with strong and improving competitive
positions in attractive markets. We also believe important attributes of quality
are experienced and talented management teams as well as financial strength
reflected in the capital structure, gross and operating margins, free cash flow
generation and returns on capital employed. Our valuation analysis includes a
range of potential outcomes based on an assessment of multiple scenarios. In
assessing value, we consider whether security prices fully reflect the balance
of the sustainable growth opportunities relative to business and financial
risks.
1. Source: (C) 2010 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, and an index is not 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
PORTFOLIO BREAKDOWN
Franklin Growth Fund
Based on Total Net Assets as of 3/31/10
Capital Goods 22.8%
Technology Hardware & Equipment 14.6%
Pharmaceuticals, Biotechnology & Life Sciences 13.8%
Software & Services 8.0%
Transportation 7.6%
Health Care Equipment & Services 5.0%
Energy 4.5%
Materials 2.9%
Automobiles & Components 2.4%
Other 15.2%
Short-Term Investments & Other Net Assets 3.2%
MANAGER'S DISCUSSION
Franklin Growth Fund owned shares of 149 companies at period-end. We
continue to invest in a broad array of companies of all sizes and in
varied industries.
During the six months under review, the Fund's strong performance
was broad-based with nearly every portfolio sector and individual
stock gaining in value. Fund performance benefited considerably from
the industrials, information technology and health care sectors. (2)
Within industrials, notable contributors included aerospace and
defense contractors Boeing and Northrop Grumman, railroad operators
such as Union Pacific and Canadian National Railway, and industrial
conglomerate 3M. Among information technology investments, the
Fund's biggest gains stemmed mainly from computer hardware and
electronic device maker Apple; Hewlett-Packard, one of the world's
most comprehensive manufacturers of computer hardware, software and
services; and Agilent Technologies, a manufacturer of advanced
scientific and medical testing equipment. Results within the health
care sector were aided by Millipore (sold by period-end) and Waters,
both of which make a wide array of testing and processing products
for the biotechnology and pharmaceuticals industries; Allergan, a
leading manufacturer of eye care, skin care and aesthetic products,
including best-selling pharmaceutical Botox; and Teleflex, which
through its medical segment produces surgical instruments, medical
devices and disposable supplies for hospital procedures.
The Fund had a few detractors with a small negative impact on
performance. The materials sector posted weak results, especially
among companies in the chemicals and construction materials
industries. Martin Marietta Materials, which produces aggregates and
other raw resources used in construction, transportation and
military applications; Air Products & Chemicals, which provides
gases such as argon, hydrogen, nitrogen and oxygen to manufacturers
and health care facilities; and Ecolab, which offers cleaning,
sanitation, pest-elimination and maintenance products and services
to hospitality, institutional and industrial customers, weighed on
performance. In the utilities sector, the Fund's position in
electric utility FPL Group also fell in value.
2. The industrials sector comprises capital goods, commercial and
professional services, and transportation in the SOI. The
information technology sector comprises semiconductors and
semiconductor equipment, software and services, and technology
hardware and equipment in the SOI. The health care sector comprises
health care equipment and services; and pharmaceuticals,
biotechnology, and life sciences in the SOI.
14 | Semiannual Report
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, CFA
Serena Perin Vinton, CFA
Portfolio Management Team
Franklin Growth Fund
CFA (R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2010, 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 HOLDINGS
Franklin Growth Fund
3/31/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------------------------------------- ----------
Apple Inc. 5.4%
TECHNOLOGY HARDWARE & EQUIPMENT
General Dynamics Corp. 2.2%
CAPITAL GOODS
Johnson & Johnson 2.2%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES
The Boeing Co. 2.1%
CAPITAL GOODS
International Business Machines Corp. 2.1%
TECHNOLOGY HARDWARE & EQUIPMENT
3M Co. 2.0%
CAPITAL GOODS
Cisco Systems Inc. 2.0%
TECHNOLOGY HARDWARE & EQUIPMENT
Northrop Grumman Corp. 1.9%
CAPITAL GOODS
Allergan Inc. 1.8%
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE SCIENCES
United Technologies Corp. 1.8%
CAPITAL GOODS
Semiannual Report | 15
Performance Summary as of 3/31/10
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 3/31/10 9/30/09
- ----------------------- -------- -------- --------
Net Asset Value (NAV) +$ 5.10 $ 41.58 $ 36.48
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.2820
CLASS B (SYMBOL: FKGBX) CHANGE 3/31/10 9/30/09
- ----------------------- -------- -------- --------
Net Asset Value (NAV) +$ 5.01 $ 39.94 $ 34.93
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.0257
CLASS C (SYMBOL: FRGSX) CHANGE 3/31/10 9/30/09
- ----------------------- -------- -------- --------
Net Asset Value (NAV) +$ 4.90 $ 39.51 $ 34.61
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.0672
CLASS R (SYMBOL: FGSRX) CHANGE 3/31/10 9/30/09
- ----------------------- -------- -------- --------
Net Asset Value (NAV) +$ 5.09 $ 41.46 $ 36.37
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.2255
ADVISOR CLASS (SYMBOL: FCGAX) CHANGE 3/31/10 9/30/09
- ----------------------------- -------- -------- --------
Net Asset Value (NAV) +$ 5.07 $ 41.60 $ 36.53
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.3576
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) +14.82% +56.76% +28.68% +25.88%
Average Annual Total Return (2) +8.21% +47.75% +3.94% +1.72%
Value of $10,000 Investment (3) $ 10,821 $ 14,775 $ 12,129 $ 11,864
Total Annual Operating Expenses (4) 1.00%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- --------- -------- -------- ---------
Cumulative Total Return (1) +14.42% +55.64% +23.93% +18.59%
Average Annual Total Return (2) +10.42% +51.64% +4.05% +1.72%
Value of $10,000 Investment (3) $ 11,042 $ 15,164 $ 12,193 $ 11,859
Total Annual Operating Expenses (4) 1.75%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------- --------- -------- -------- ---------
Cumulative Total Return (1) +14.43% +55.63% +23.96% +16.82%
Average Annual Total Return (2) +13.43% +54.63% +4.39% +1.57%
Value of $10,000 Investment (3) $ 11,343 $ 15,463 $ 12,396 $ 11,682
Total Annual Operating Expenses (4) 1.75%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------- --------- -------- -------- ------------------
Cumulative Total Return (1) +14.70% +56.37% +27.09% +33.03%
Average Annual Total Return (2) +14.70% +56.37% +4.91% +3.52%
Value of $10,000 Investment (3) $ 11,470 $ 15,637 $ 12,709 $ 13,303
Total Annual Operating Expenses (4) 1.25%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------- --------- -------- -------- ---------
Cumulative Total Return (1) +14.98% +57.15% +30.28% +29.03%
Average Annual Total Return (2) +14.98% +57.15% +5.43% +2.58%
Value of $10,000 Investment (3) $ 11,498 $ 15,715 $ 13,028 $ 12,903
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, GO TO
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 PRICES 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
MARKET'S MOST VOLATILE SECTORS. 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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10
------------------ --------------- -------------------------
CLASS A
Actual $ 1,000 $ 1,148.20 $ 5.30
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.00 $ 4.99
CLASS B
Actual $ 1,000 $ 1,144.20 $ 9.25
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.31 $ 8.70
CLASS C
Actual $ 1,000 $ 1,144.30 $ 9.30
Hypothetical (5% return before expenses) $ 1,000 $ 1,016.26 $ 8.75
CLASS R
Actual $ 1,000 $ 1,147.00 $ 6.64
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.75 $ 6.24
ADVISOR CLASS
Actual $ 1,000 $ 1,149.80 $ 3.97
Hypothetical (5% return before expenses) $ 1,000 $ 1,021.24 $ 3.73
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.99%; B: 1.73%; C: 1.74%; R: 1.24%; and Advisor:
0.74%), 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, 2010.
PERFORMANCE OVERVIEW
Franklin Income Fund - Class A delivered a +9.47% cumulative total return for
the six months under review. The Fund underperformed its equity benchmark, the
Standard & Poor's 500 Index (S&P 500), which posted a total return of +11.75%;
outperformed its fixed income benchmark, the Barclays Capital (BC) U.S.
Aggregate Index, which returned +1.99%; and outperformed its peers as measured
by the Lipper Mixed-Asset Target Allocation Moderate Funds Classification
Average, which had a +7.05% total return, for the same period. (1) You can find
the Fund's long-term performance data in the Performance Summary beginning on
page 25.
1. Source: (C) 2010 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 BC U.S. Aggregate Index is a market capitalization-weighted
index representing the U.S. investment-grade, fixed-rate, taxable bond market
with index components for government and corporate, mortgage pass-through and
asset-backed securities. All issues included are SEC registered, taxable, dollar
denominated and nonconvertible, must have at least one year to final maturity
and must be rated investment grade (Baa3/BBB-/BBB- or higher) by Moody's,
Standard & Poor's or Fitch, respectively.
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 3/31/10,
there were 557 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, and an index is not
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 72.
Semiannual Report | 21
DIVIDEND DISTRIBUTIONS*
Franklin Income Fund
10/1/09-3/31/10
DIVIDEND PER SHARE (CENTS)
-------------------------------------------------------------
MONTH CLASS A CLASS B CLASS B1** CLASS C CLASS R ADVISOR CLASS
- ----- ------- ------- ---------- ------- ------- -------------
October 1.25 1.10 1.16 1.17 1.19 1.27
November 1.25 1.10 1.16 1.17 1.19 1.27
December 1.25 1.11 1.13 1.16 1.19 1.28
January 1.25 1.11 1.13 1.16 1.19 1.28
February 1.20 1.06 1.08 1.11 1.14 1.23
March 1.20 1.05 1.08 1.11 1.14 1.23
- -----------------------------------------------------------------------
TOTAL 7.40 6.53 6.74 6.88 7.04 7.56
* 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.
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
During the period under review, the Fund's two major components, high yield
bonds and electric utility stocks, had mixed results. High yield bonds performed
well as indicated by the Credit Suisse (CS) High Yield Index's +10.99%
return.(2) In contrast, electric utility stocks had lackluster performance as
measured by the S&P 500 Utilities Index's +3.47% return. (3)
2. Source: (C) 2010 Morningstar. The CS High Yield Index is designed to mirror
the investible universe of the U.S. dollar-denominated high yield debt market.
3. Source: (C) 2010 Morningstar. The S&P 500 Utilities Index is a market
capitalization-weighted index that includes utility stocks in the S&P 500.
The indexes are unmanaged and include reinvestment of any income or
distributions. One cannot invest directly in an index, and an index is not
representative of the Fund's portfolio.
22 | Semiannual Report
The 10-year Treasury note declined and caused yields to increase from 3.31% to
3.84% over the period. Continued credit spread contraction, however, lifted
corporate bond performance, and the investment-grade and high yield categories
had positive returns. Investment-grade spreads declined from 218 basis points
(bps; 100 bps equal one percentage point) to 150 bps, while high yield spreads
declined from 764 bps to 591 bps.(4) The average yield to maturity for
investment-grade and high yield corporate bonds fell to 4.49% and 8.48%.(4)
Within fixed income, Ford Motor Credit Company bonds generated strong results,
driven by a recovery in global automotive sales and the company's improved
access to capital markets. During the period, independent credit rating agencies
Moody's Investors Service and S&P each upgraded the company's credit ratings to
B1+ and B-/Stable. Despite continued weakness in natural gas and power markets,
the Fund's position in Energy Future Holdings performed well, largely due to
improved high yield bond performance.
During the period, we took profits in several investment-grade corporate bonds
due to our concerns about rising long-term interest rates. Many of these
holdings were trading at substantial premiums to par value. We eliminated
positions in Allied Waste North America, American Express, Morgan Stanley, and
Freeport-McMoRan Copper & Gold. As a result, our overall exposure to fixed
income securities declined from 66.4% of total net assets on September 30, 2009,
to 61.0% on March 31, 2010. The Fund's exposure to equity securities holdings
rose from 32.4% of total net assets to 37.3% over the same period. This increase
was largely due to strong appreciation from several existing positions,
additions to some existing holdings and the initiation of several new positions.
Several existing equity holdings generated above-market returns, including
health care company Merck & Co., integrated electric utility company Dominion
Resources and global integrated oil and gas company ConocoPhillips.
We focused on adding equity holdings that we believed offered attractive
dividend yields, traded at attractive valuations and could provide dividend
growth. In general, these holdings were large-capitalization, high-quality,
investment-grade companies with strong balance sheets. We initiated new
positions in discount retailer Target, food and beverage company PepsiCo and
integrated major oil company Exxon Mobil. We added to existing positions in
mobile telecommunications company Vodafone Group, major integrated oil company
ConocoPhillips and electric utility company The Southern Company.
PORTFOLIO BREAKDOWN
Franklin Income Fund
Based on Total Net Assets as of 3/31/10
Consumer Discretionary Bonds 14.3%
Utilities Stocks 11.7%
Energy Bonds 10.0%
Financials Stocks 8.6%
Health Care Bonds 6.9%
Utilities Bonds 6.9%
Financials Bonds 6.6%
Energy Stocks 6.2%
Industrials Bonds 6.1%
Information Technology Bonds 5.1%
Health Care Stocks 2.8%
Materials Bonds 2.4%
Consumer Discretionary Stocks 2.3%
Telecommunication Services Stocks 2.2%
Other Bonds 2.7%
Other Stocks 3.5%
Short-Term Investments & Other Net Assets 1.7%
4. Sources: Barclays Capital; Credit Suisse.
Semiannual Report | 23
TOP 5 EQUITY HOLDINGS
Franklin Income Fund
3/31/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------- ----------
Bank of America Corp. 2.5%
FINANCIALS
Wells Fargo & Co. 2.2%
FINANCIALS
Exxon Mobil Corp. 1.7%
ENERGY MINERALS
Merck & Co. Inc. 1.6%
HEALTH TECHNOLOGY
Canadian Oil Sands Trust (Canada) 1.5%
ENERGY
TOP 5 BOND HOLDINGS*
Franklin Income Fund
3/31/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------- ----------
Ford Motor Credit Co. LLC 3.8%
CONSUMER DISCRETIONARY
Tenet Healthcare Corp. 2.5%
HEALTH CARE
HCA Inc. 2.3%
HEALTH CARE
Freescale Semiconductor Inc. 2.0%
INFORMATION TECHNOLOGY
Texas Competitive Electric Holdings Co. 1.9%
UTILITIES
* Does not include convertible bonds.
Detractors from performance during the period included electric utility stocks,
which languished largely due to continued weakness in domestic natural gas and
power prices. Several Fund holdings underperformed the broad S&P Utilities
Index, including FirstEnergy and Public Service Enterprise Group.
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
CFA (R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2010, 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.
24 | Semiannual Report
Performance Summary as of 3/31/10
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 3/31/10 9/30/09
- ---------------------------------- ------- -------- -------
Net Asset Value (NAV) +$ 0.11 $ 2.10 $ 1.99
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.0740
CLASS B (SYMBOL: FBICX) CHANGE 3/31/10 9/30/09
- ---------------------------------- ------- -------- -------
Net Asset Value (NAV) +$ 0.11 $ 2.09 $ 1.98
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.0653
CLASS B1 (SYMBOL: FICBX) CHANGE 3/31/10 9/30/09
- ---------------------------------- ------- -------- -------
Net Asset Value (NAV) +$0.11 $ 2.10 $ 1.99
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.0674
CLASS C (SYMBOL: FCISX) CHANGE 3/31/10 9/30/09
- ---------------------------------- ------- -------- -------
Net Asset Value (NAV) +$0.12 $ 2.12 $ 2.00
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.0688
CLASS R (SYMBOL: FISRX) CHANGE 3/31/10 9/30/09
- ---------------------------------- ------- -------- -------
Net Asset Value (NAV) +$0.11 $ 2.07 $ 1.96
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.0704
ADVISOR CLASS (SYMBOL: FRIAX) CHANGE 3/31/10 9/30/09
- ---------------------------------- ------- -------- -------
Net Asset Value (NAV) +$0.11 $ 2.09 $ 1.98
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.0756
Semiannual Report | 25
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/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) +9.47% +46.67% +25.38% +116.78%
Average Annual Total Return (2) +4.73% +40.33% +3.71% +7.60%
Value of $10,000 Investment (3) $10,473 $14,033 $11,999 $20,796
Distribution Rate (4) 6.58%
30-Day Standardized Yield (5) 5.95%
Total Annual Operating Expenses (6) 0.68%
CLASS B 6-MONTH 1-YEAR 5-YEAR INCEPTION (11/1/01)
- --------------------------------------- --------- -------- -------- --------------------
Cumulative Total Return (1) +9.04% +45.77% +20.25% +72.67%
Average Annual Total Return (2) +5.04% +41.77% +3.46% +6.71%
Value of $10,000 Investment (3) $10,504 $14,177 $11,854 $17,267
Distribution Rate (4) 6.03%
30-Day Standardized Yield (5) 5.38%
Total Annual Operating Expenses (6) 1.53%
CLASS B1 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------- --------- -------- -------- ---------
Cumulative Total Return (1) +9.11% +45.89% +22.18% +108.23%
Average Annual Total Return (2) +5.11% +41.89% +3.79% +7.61%
Value of $10,000 Investment (3) $10,511 $14,189 $12,047 $20,823
Distribution Rate (4) 6.17%
30-Day Standardized Yield (5) 5.71%
Total Annual Operating Expenses (6) 1.17%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------- --------- -------- -------- ---------
Cumulative Total Return (1) +9.64% +46.33% +22.64% +106.35%
Average Annual Total Return (2) +8.64% +45.33% +4.17% +7.51%
Value of $10,000 Investment (3) $10,864 $14,533 $12,264 $20,635
Distribution Rate (4) 6.28%
30-Day Standardized Yield (5) 5.69%
Total Annual Operating Expenses (6) 1.18%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- --------------------------------------- --------- -------- -------- ------------------
Cumulative Total Return (1) +9.40% +46.10% +22.93% +73.36%
Average Annual Total Return (2) +9.40% +46.10% +4.22% +6.90%
Value of $10,000 Investment (3) $10,940 $14,610 $12,293 $17,336
Distribution Rate (4) 6.61%
30-Day Standardized Yield (5) 5.86%
Total Annual Operating Expenses (6) 1.03%
26 | Semiannual Report
Performance Summary (CONTINUED)
PERFORMANCE (CONTINUED)
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------- --------- -------- -------- ---------
Cumulative Total Return (1) +9.60% +47.20% +26.46% +119.77%
Average Annual Total Return (2) +9.60% +47.20% +4.81% +8.19%
Value of $10,000 Investment (3) $10,960 $14,720 $12,646 $21,977
Distribution Rate (4) 7.06%
30-Day Standardized Yield (5) 6.34%
Total Annual Operating Expenses (6) 0.53%
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, GO TO
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 MORE DRAMATICALLY
OVER THE SHORTER 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): 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 3/31/10.
5. The 30-day standardized yield for the 30 days ended 3/31/10 reflects an
estimated yield to maturity (assuming all portfolio securities are held to
maturity). It should be regarded as an estimate of the Fund's rate of investment
income, and it may not equal the Fund's actual income distribution rate (which
reflects the Fund's past dividends paid to shareholders) or the income reported
in the Fund's financial statements.
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.
Semiannual Report | 27
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.
28 | 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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10
------------------ --------------- -------------------------
CLASS A
Actual $ 1,000 $ 1,094.70 $ 3.39
Hypothetical (5% return before expenses) $ 1,000 $ 1,021.69 $ 3.28
CLASS B
Actual $ 1,000 $ 1,090.40 $ 7.77
Hypothetical (5% return before expenses) $ 1,000 $ 1,017.50 $ 7.49
CLASS B1
Actual $ 1,000 $ 1,091.10 $ 5.94
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.25 $ 5.74
CLASS C
Actual $ 1,000 $ 1,096.40 $ 6.01
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.20 $ 5.79
CLASS R
Actual $ 1,000 $ 1,094.00 $ 5.22
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.95 $ 5.04
ADVISOR CLASS
Actual $ 1,000 $ 1,096.00 $ 2.61
Hypothetical (5% return before expenses) $ 1,000 $ 1,022.44 $ 2.52
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (A: 0.65%; B: 1.49%; B1: 1.14%; C: 1.15%; R: 1.00%;
Advisor: 0.50%), multiplied by the average account value over the period,
multiplied by 182/365 to reflect the one-half year period.
Semiannual Report | 29
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 its assets predominantly 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.
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 U.S. Government Securities Fund
Based on Total Net Assets as of 3/31/10
[PIE CHART]
- - GNMA 97.9%
- - Short-Term Investments & Other Net Assets 2.1%
This semiannual report for Franklin U.S. Government Securities Fund covers the
period ended March 31, 2010.
PERFORMANCE OVERVIEW
Franklin U.S. Government Securities Fund - Class A posted a +2.05% cumulative
total return for the six months under review. The Fund under-performed the
+2.66% total return of its peers as measured by the Lipper GNMA Funds
Classification Average.(2) In comparison, the Barclays Capital (BC) U.S.
)Government: Intermediate Index returned +0.70% for the same
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 3/31/10, there were 66 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, and an index is not 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 91.
30 | Semiannual Report
DIVIDEND DISTRIBUTIONS*
Franklin U.S. Government Securities Fund
10/1/09-3/31/10
DIVIDEND PER SHARE
------------------------------------------------------------------------
MONTH CLASS A CLASS B CLASS C CLASS R ADVISOR CLASS
- -------- ----------- ------------------ ---------- ------------ -------------
October 2.39 cents 2.10 cents 2.13 cents 2.20 cents 2.47 cents
November 2.39 cents 2.10 cents 2.13 cents 2.20 cents 2.47 cents
December 2.21 cents 1.92 cents 1.92 cents 2.00 cents 2.29 cents
January 2.21 cents 1.92 cents 1.92 cents 2.00 cents 2.29 cents
February 2.21 cents 1.92 cents 1.92 cents 2.00 cents 2.29 cents
March 2.21 cents 1.91 cents 1.93 cents 2.00 cents 2.28 cents
- ----------------------------------------------------------------------------------
TOTAL 13.62 CENTS 11.87 CENTS 11.95 CENTS 12.40 CENTS 14.09 CENTS
* All Fund distributions will vary depending upon current market conditions,
and past distributions are not indicative of future trends.
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 34.
INVESTMENT STRATEGY
We currently invest the Fund's assets predominantly 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 reporting period, GNMA mortgage-backed securities (MBS) remained
relatively attractive in the recent environment as the GNMA current coupon
yielded 4.38% at period-end, an income opportunity over 5- and 10-year
Treasuries, which yielded 2.55% and 3.84%.
3. Source: (C) 2010 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. The index includes public obligations of the U.S. Treasury
with at least one year to final maturity 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, and an index is not representative of the Fund's portfolio.
Semiannual Report | 31
The Federal Reserve Board's MBS purchase program supported the agency MBS
market but was concluded at period-end. We believe less favorable technical
conditions and higher volatility for the sector could arise due to a
possible lack of consistent investor demand. Despite periods of volatility
during the period, the MBS market continued to deliver the positive
performance it has exhibited since the MBS purchase program was announced
at the end of November 2008. Prepayment risk for higher coupon MBS remained
restrained as stagnant home prices, loss of home equity and tighter
underwriting standards lessened prepayment activity.
Over the period, GNMA MBS and Fannie Mae (FNMA) outperformed comparable
U.S. Treasuries and their conventional Freddie Mac (FHLMC) MBS
counterparts. Within the sector, higher coupon GNMAs (6.5%) were the best
performers, followed by their mid-coupon counterparts (5.0%-6.0%), while
lower coupons (4.0% and 4.5%) lagged. Mid-coupon GNMA I securities
(comprising single-issuer pools) generally outperformed comparable GNMA II
securities (comprising multiple-issuer pools). We slightly decreased the
Fund's allocation to GNMA II securities, as we felt GNMA I securities
offered better value on a historical price spread basis. We increased the
Fund's allocation to some lower and mid-coupon MBS (4.5% and 5.0%). Our
heaviest allocation was in 5.0% through 6.0% coupon securities.
Franklin U.S. Government Securities Fund takes a consistent and disciplined
approach and invests in GNMA mortgage pass-throughs, which remained the
only MBS backed by the full faith and credit of the U.S. government.(1) The
Fund took a collateral-intensive research approach to uncover opportunities
across the GNMA universe. We believe our experience and continual
investment in new technologies can help us identify specified pools and
individual securities that offer strong cash flow fundamentals and
valuations.
32 | Semiannual Report
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 PAUL VARUNOK]
- -s- Paul Varunok
Paul Varunok
Portfolio Management Team
Franklin U.S. Government Securities Fund
CFA(R) is a trademark owned by CFA Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2010, 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 | 33
Performance Summary as of 3/31/10
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 3/31/10 9/30/09
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) $ 0.00 $ 6.69 $ 6.69
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.1362
CLASS B (SYMBOL: FUGBX) CHANGE 3/31/10 9/30/09
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) $ 0.00 $ 6.68 $ 6.68
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.1187
CLASS C (SYMBOL: FRUGX) CHANGE 3/31/10 9/30/09
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) $ 0.00 $ 6.66 $ 6.66
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.1195
CLASS R (SYMBOL: FUSRX) CHANGE 3/31/10 9/30/09
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) $ 0.00 $ 6.69 $ 6.69
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.1240
ADVISOR CLASS (SYMBOL: FUSAX) CHANGE 3/31/10 9/30/09
- --------------------------------- ------ ------- -------
Net Asset Value (NAV) $ 0.00 $ 6.71 $ 6.71
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.1409
34 | Semiannual Report
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) +2.05% +4.44% +29.08% +73.25%
Average Annual Total Return (2) -2.33% -0.05% +4.33% +5.19%
Distribution Rate (3) 3.79%
30-Day Standardized Yield (4) 3.72%
Total Annual Operating Expenses (5) 0.75%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------ -------- ------- ------- --------
Cumulative Total Return (1) +1.79% +3.90% +25.81% +66.25%
Average Annual Total Return (2) -2.21% -0.10% +4.36% +5.21%
Distribution Rate (3) 3.43%
30-Day Standardized Yield (4) 3.35%
Total Annual Operating Expenses (5) 1.26%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------ -------- ------- ------- --------
Cumulative Total Return (1) +1.81% +4.10% +25.97% +64.58%
Average Annual Total Return (2) +0.81% +3.10% +4.73% +5.11%
Distribution Rate (3) 3.48%
30-Day Standardized Yield (4) 3.34%
Total Annual Operating Expenses (5) 1.26%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ------------------------------------ -------- ------- ------- ------------------
Cumulative Total Return (1) +1.87% +4.22% +26.94% +44.21%
Average Annual Total Return (2) +1.87% +4.22% +4.89% +4.54%
Distribution Rate (3) 3.59%
30-Day Standardized Yield (4) 3.51%
Total Annual Operating Expenses (5) 1.11%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------ -------- ------- ------- --------
Cumulative Total Return (1) +2.12% +4.73% +30.04% +75.75%
Average Annual Total Return (2) +2.12% +4.73% +5.39% +5.80%
Distribution Rate (3) 4.08%
30-Day Standardized Yield (4) 4.02%
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, GO TO
FRANKLINTEMPLETON.COM OR CALL (800) 342-5236.
Semiannual Report | 35
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 3/31/10.
4. The 30-day standardized yield for the 30 days ended 3/31/10 reflects an
estimated yield to maturity (assuming all portfolio securities are held to
maturity). It should be regarded as an estimate of the Fund's rate of investment
income, and it may not equal the Fund's actual income distribution rate (which
reflects the Fund's past dividends paid to shareholders) or the income reported
in the Fund's financial statements.
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.
36 | Semiannual Report
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.
Semiannual Report | 37
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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10
------------------ --------------- -----------------------
CLASS A
Actual $ 1,000 $ 1,020.50 $ 3.58
Hypothetical (5% return before expenses) $ 1,000 $ 1,021.39 $ 3.58
CLASS B
Actual $ 1,000 $ 1,017.90 $ 6.14
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.85 $ 6.14
CLASS C
Actual $ 1,000 $ 1,018.10 $ 6.19
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.80 $ 6.19
CLASS R
Actual $ 1,000 $ 1,018.70 $ 5.44
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.55 $ 5.44
ADVISOR CLASS
Actual $ 1,000 $ 1,021.20 $ 2.92
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: 1.22%; 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.
38 | Semiannual Report
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 3/31/10
Electric Utilities 49.3%
Multi-Utilities 38.0%
Independent Power Producers & Energy Traders 3.7%
Oil, Gas & Consumable Fuels 3.3%
Diversified Telecommunication Services 2.4%
Water Utilities 1.7%
Short-Term Investments & Other Net Assets 1.6%
This semiannual report for Franklin Utilities Fund covers the period ended March
31, 2010.
PERFORMANCE OVERVIEW
Franklin Utilities Fund - Class A posted a +5.29% cumulative total return for
the six months under review. The Fund underperformed its broad benchmark, the
Standard & Poor's 500 Index (S&P 500), which had a total return of +11.75% for
the same period. (1) However, the Fund outperformed the +3.47% 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 and gas sector. Generally,
we look for companies producing a high percentage of earnings from regulated
utility franchise operations.
MANAGER'S DISCUSSION
Investors' appetite for risk and cyclical stocks geared to an economic recovery
resulted in the market's clear shift out of more defensive (non-cyclical)
investment types such as utilities. In fact, utilities was one of the weakest
sectors in
1. Source: (C) 2010 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.
2. Source: (C) 2010 Morningstar. The S&P 500 Utilities Index is a market
capitalization-weighted index that includes utility stocks in the S&P 500.
The indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index, and an index is not 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 98.
Semiannual Report | 39
the S&P 500 during the six-month review period. Nonetheless, the Fund's
performance surpassed that of the S&P 500 Utilities Index, primarily due to
stock selection.
TOP 10 EQUITY HOLDINGS
Franklin Utilities Fund
3/31/10
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- ------------------------------------- ------------
The Southern Co. 4.6%
ELECTRIC UTILITIES
Entergy Corp. 4.6%
ELECTRIC UTILITIES
Sempra Energy 4.3%
MULTI-UTILITIES
PG&E Corp. 4.1%
MULTI-UTILITIES
Exelon Corp. 3.8%
ELECTRIC UTILITIES
Public Service Enterprise Group Inc. 3.6%
MULTI-UTILITIES
American Electric Power Co. Inc. 3.6%
ELECTRIC UTILITIES
PPL Corp. 3.4%
ELECTRIC UTILITIES
NV Energy Inc. 3.0%
ELECTRIC UTILITIES
Edison International 3.0%
ELECTRIC UTILITIES
Most portfolio holdings posted gains during this semiannual period. Among the
most significant contributors to performance were Dominion Resources, one of the
largest energy producers and transporters in the U.S., with operations in five
eastern states; American Electric Power (AEP), another large power generator and
distributor serving more than five million customers in 11 states; and Alliant
Energy, which provides regulated electric and natural gas service to
approximately one million electric and 400,000 natural gas customers in the
states of Iowa, Wisconsin and Minnesota. Dominion's share price increase during
the period was supported by its announced sale of onshore natural gas
exploration and production properties for $3.5 billion, the proceeds of which we
believe could be allocated to Dominion's utility franchise. The Fund's
investment in AEP was helped by increased investor appetite for electric
utilities offering above-average dividend yields that also did not have
significant commodity exposure. This same investor preference likely benefited
Alliant Energy, which also recently passed through tariff increases in Iowa and
Wisconsin that could lead to higher revenues.
Some of the Fund's largest detractors from performance were electric utilities
FirstEnergy, which serves a region including Ohio, Pennsylvania and New Jersey;
and Exelon, which operates in northern Illinois and southeastern Pennsylvania.
The Fund's holdings in electric utility PPL, which operates power distribution
networks in Pennsylvania and the U.K., was another detractor. Declining
electricity and natural gas prices throughout the reporting period continued to
cause a potential hindrance to these companies' profitability, as they sell
significant volumes of power at market-based pricing.
40 | Semiannual Report
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
[PHOTO OF J. BLAIR SCHMICKER]
- -s- J. Blair Schmicker
J. Blair Schmicker, CFA
Portfolio Management Team
Franklin Utilities Fund
CFA(R) and Chartered Financial Analyst(R)are trademarks owned by CFA
Institute.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2010, 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.
J. BLAIR SCHMICKER assumed portfolio manager responsibilities for Franklin
Utilities Fund in February 2010. He specializes in equity research analysis of
the utilities and industrials sectors. His primary research coverage includes
the integrated utility, capital goods, alternative energy and construction
industries.
Prior to joining Franklin Templeton Investments in 2007, Mr. Schmicker worked as
an associate at Aetos Capital and as an analyst at Credit Suisse.
Mr. Schmicker received an M.B.A. from The Wharton School, and a B.A. in
economics and mathematics from Dartmouth College. Mr. Schmicker is a Chartered
Financial Analyst (CFA) Charterholder and a member of the CFA Institute.
Semiannual Report | 41
Performance Summary as of 3/31/10
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 3/31/10 9/30/09
- -------------------------------------- ------- ------- -------
Net Asset Value (NAV) +$ 0.16 $ 10.90 $ 10.74
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.2400
Long-Term Capital Gain $ 0.1618
TOTAL $ 0.4018
CLASS B (SYMBOL: FRUBX) CHANGE 3/31/10 9/30/09
- -------------------------------------- ------- ------- -------
Net Asset Value (NAV) +$ 0.16 $ 10.90 $ 10.74
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.2125
Long-Term Capital Gain $ 0.1618
TOTAL $ 0.3743
CLASS C (SYMBOL: FRUSX) CHANGE 3/31/10 9/30/09
- -------------------------------------- ------- ------- -------
Net Asset Value (NAV) +$ 0.15 $ 10.86 $ 10.71
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.2140
Long-Term Capital Gain $ 0.1618
TOTAL $ 0.3758
CLASS R (SYMBOL: FRURX) CHANGE 3/31/10 9/30/09
- -------------------------------------- ------- ------- -------
Net Asset Value (NAV) +$ 0.16 $ 10.87 $ 10.71
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.2221
Long-Term Capital Gain $ 0.1618
TOTAL $ 0.3839
ADVISOR CLASS (SYMBOL: FRUAX) CHANGE 3/31/10 9/30/09
- -------------------------------------- ------- ------- -------
Net Asset Value (NAV) +$ 0.16 $ 10.95 $ 10.79
DISTRIBUTIONS (10/1/09-3/31/10)
Dividend Income $ 0.2482
Long-Term Capital Gain $ 0.1618
TOTAL $ 0.4100
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) +5.29% +24.23% +29.31% +123.01%
Average Annual Total Return (2) +0.79% +18.98% +4.36% +7.88%
Value of $10,000 Investment (3) $ 10,079 $ 11,898 $ 12,379 $ 21,355
Distribution Rate (4) 3.69%
30-Day Standardized Yield (5) 3.40%
Total Annual Operating Expenses (6) 0.80%
CLASS B 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- -------- -------- -------- ---------
Cumulative Total Return (1) +5.02% +23.61% +26.09% +114.01%
Average Annual Total Return (2) +1.02% +19.61% +4.42% +7.91%
Value of $10,000 Investment (3) $ 10,102 $ 11,961 $ 12,414 $ 21,401
Distribution Rate (4) 3.32%
30-Day Standardized Yield (5) 3.06%
Total Annual Operating Expenses (6) 1.30%
CLASS C 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- -------- -------- -------- ---------
Cumulative Total Return (1) +4.96% +23.60% +26.02% +111.94%
Average Annual Total Return (2) +3.96% +22.60% +4.73% +7.80%
Value of $10,000 Investment (3) $ 10,396 $ 12,260 $ 12,602 $ 21,194
Distribution Rate (4) 3.37%
30-Day Standardized Yield (5) 3.05%
Total Annual Operating Expenses (6) 1.30%
CLASS R 6-MONTH 1-YEAR 5-YEAR INCEPTION (1/1/02)
- -------------------------------------- -------- -------- -------- ------------------
Cumulative Total Return (1) +5.13% +23.76% +27.03% +67.22%
Average Annual Total Return (2) +5.13% +23.76% +4.90% +6.44%
Value of $10,000 Investment (3) $ 10,513 $ 12,376 $ 12,703 $ 16,722
Distribution Rate (4) 3.51%
30-Day Standardized Yield (5) 3.20%
Total Annual Operating Expenses (6) 1.15%
ADVISOR CLASS 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------- -------- -------- -------- ---------
Cumulative Total Return (1) +5.34% +24.27% +30.21% +126.03%
Average Annual Total Return (2) +5.34% +24.27% +5.42% +8.50%
Value of $10,000 Investment (3) $ 10,534 $ 12,427 $ 13,021 $ 22,603
Distribution Rate (4) 3.99%
30-Day Standardized Yield (5) 3.70%
Total Annual Operating Expenses (6) 0.65%
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, GO TO
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 3/31/10.
5. The 30-day standardized yield for the 30 days ended 3/31/10 reflects an
estimated yield to maturity (assuming all portfolio securities are held to
maturity). It should be regarded as an estimate of the Fund's rate of investment
income, and it may not equal the Fund's actual income distribution rate (which
reflects the Fund's past dividends paid to shareholders) or the income reported
in the Fund's financial statements.
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 10/1/09 VALUE 3/31/10 PERIOD* 10/1/09-3/31/10
----------------- -------------- -----------------------
CLASS A
Actual $ 1,000 $ 1,052.90 $ 4.04
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.99 $ 3.98
CLASS B
Actual $ 1,000 $ 1,050.20 $ 6.54
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.55 $ 6.44
CLASS C
Actual $ 1,000 $ 1,049.60 $ 6.59
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.50 $ 6.49
CLASS R
Actual $ 1,000 $ 1,051.30 $ 5.83
Hypothetical (5% return before expenses) $ 1,000 $ 1,019.25 $ 5.74
ADVISOR CLASS
Actual $ 1,000 $ 1,053.40 $ 3.28
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: 0.79%; B: 1.28%; 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
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
----------------------------------------------------------------------------------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 23.20 $ 24.87 $ 32.33 $ 25.80 $ 24.98 $ 22.01
----------------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (loss) (b) ............. (0.06) (0.06) (0.08) (0.08) (0.05) (0.01)
Net realized and unrealized gains (losses) ... 3.42 (0.03) (6.67) 6.61 0.87 2.98
----------------------------------------------------------------------------------
Total from investment operations ................ 3.36 (0.09) (6.75) 6.53 0.82 2.97
----------------------------------------------------------------------------------
Less distributions from net realized gains ...... -- (1.58) (0.71) -- -- --
---------------------------------------------------------------------------------
Redemption fees (c) ............................. -- -- --(d) --(d) --(d) --(d)
----------------------------------------------------------------------------------
Net asset value, end of period .................. $ 26.56 $ 23.20 $ 24.87 $ 32.33 $ 25.80 $ 24.98
==================================================================================
Total return (e) ................................ 14.48% 2.71% (21.36)% 25.31% 3.28% 13.49%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) .................................... 1.11% 1.16% 0.97% 0.99% 0.97% 1.00%
Net investment income (loss) .................... (0.49)% (0.34)% (0.26)% (0.30)% (0.20)% (0.02)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 571,136 $ 503,472 $ 388,843 $ 553,347 $ 590,633 $ 628,732
Portfolio turnover rate ......................... 19.11% 46.05% 41.01% 18.03% 18.61% 17.26%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 47
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
----------------------------------------------------------------------------------
CLASS B
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 21.60 $ 23.48 $ 30.78 $ 24.75 $ 24.15 $ 21.43
----------------------------------------------------------------------------------
Income from investment operations (a) :
Net investment income (loss) (b) ............. (0.14) (0.19) (0.29) (0.28) (0.23) (0.18)
Net realized and unrealized gains (losses) ... 3.18 (0.11) (6.30) 6.31 0.83 2.90
----------------------------------------------------------------------------------
Total from investment operations ................ 3.04 (0.30) (6.59) 6.03 0.60 2.72
----------------------------------------------------------------------------------
Less distributions from net realized gains ...... -- (1.58) (0.71) -- -- --
----------------------------------------------------------------------------------
Redemption fees (c) ............................. -- -- --(d) --(d) --(d) --(d)
----------------------------------------------------------------------------------
Net asset value, end of period .................. $ 24.64 $ 21.60 $ 23.48 $ 30.78 $ 24.75 $ 24.15
=================================================================================
Total return (e) ................................ 14.07% 1.96% (21.96)% 24.36% 2.48% 12.69%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) .................................... 1.83% 1.91% 1.73% 1.75% 1.72% 1.74%
Net investment income (loss) .................... (1.21)% (1.09)% (1.02)% (1.06)% (0.95)% (0.76)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 12,730 $ 13,682 $ 10,704 $ 16,625 $ 18,718 $ 19,497
Portfolio turnover rate ......................... 19.11% 46.05% 41.01% 18.03% 18.61% 17.26%
(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%.
The accompanying notes are an integral part of these financial statements.
48 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
----------------------------------------------------------------------------------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............ $ 21.34 $ 23.23 $ 30.46 $ 24.50 $ 23.90 $ 21.21
----------------------------------------------------------------------------------
Income from investment operations (a) :
Net investment income (loss) (b) ............. (0.14) (0.19) (0.28) (0.28) (0.23) (0.17)
Net realized and unrealized gains (losses) ... 3.15 (0.12) (6.24) 6.24 0.83 2.86
----------------------------------------------------------------------------------
Total from investment operations ................ 3.01 (0.31) (6.52) 5.96 0.60 2.69
----------------------------------------------------------------------------------
Less distributions from net realized gains ...... -- (1.58) (0.71) -- -- --
----------------------------------------------------------------------------------
Redemption fees (c) ............................. -- -- --(d) --(d) --(d) --(d)
----------------------------------------------------------------------------------
Net asset value, end of period .................. $ 24.35 $ 21.34 $ 23.23 $ 30.46 $ 24.50 $ 23.90
==================================================================================
Total return (e) ................................ 14.11% 1.89% (21.93)% 24.33% 2.51% 12.68%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) .................................... 1.86% 1.91% 1.73% 1.74% 1.71% 1.74%
Net investment income (loss) .................... (1.24)% (1.09)% (1.02)% (1.05)% (0.94)% (0.76)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ............... $ 94,837 $ 83,435 $ 53,289 $ 70,413 $ 69,069 $ 73,587
Portfolio turnover rate ......................... 19.11% 46.05% 41.01% 18.03% 18.61% 17.26%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 49
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
SIX MONTHS ENDED PERIOD ENDED
MARCH 31, 2010 SEPTEMBER 30,
(UNAUDITED) 2009 (a)
---------------------------------
CLASS R
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period .................... $ 23.13 $ 15.66
--------------------------------
Income from investment operations (b) :
Net investment income (loss) (c) ..................... (0.09) (0.09)
Net realized and unrealized gains (losses) ........... 3.41 7.56
--------------------------------
Total from investment operations ........................ 3.32 7.47
--------------------------------
Net asset value, end of period .......................... $ 26.45 $ 23.13
================================
Total return (d) ........................................ 14.35% 47.70%
RATIOS TO AVERAGE NET ASSETS (e)
Expenses (f) ............................................ 1.36% 1.41%
Net investment income (loss) ............................ (0.74)% (0.59)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ....................... $ 6,733 $ 6,345
Portfolio turnover rate ................................. 19.11% 46.05%
(a) For the period December 1, 2008 (effective date) to September 30, 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%.
The accompanying notes are an integral part of these financial statements.
50 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN DYNATECH FUND
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 2010 SEPTEMBER 30,
(UNAUDITED) 2009 2008 (a)
--------------------------------------------
ADVISOR CLASS
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................... $ 23.28 $ 24.90 $ 31.40
---------------------------------------------
Income from investment operations (b) :
Net investment income (loss) (c) .................... (0.03) (0.02) (0.01)
Net realized and unrealized gains (losses) .......... 3.44 (0.02) (6.49)
---------------------------------------------
Total from investment operations ....................... 3.41 (0.04) (6.50)
---------------------------------------------
Less distributions from net realized gains ............. -- (1.58) --
---------------------------------------------
Redemption fees (d) .................................... -- -- --(e)
---------------------------------------------
Net asset value, end of period ......................... $ 26.69 $ 23.28 $ 24.90
=============================================
Total return (f) ....................................... 14.65% 2.92% (20.70)%
RATIOS TO AVERAGE NET ASSETS (g)
Expenses (h) ........................................... 0.86% 0.91% 0.73%
Net investment income (loss) ........................... (0.24)% (0.09)% (0.02)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...................... $ 10,168 $ 8,208 $ 1,938
Portfolio turnover rate ................................ 19.11% 46.05% 41.01%
(a) For the period May 15, 2008 (effective date) to September 30, 2008.
(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) Effective September 1, 2008, the redemption fee was eliminated.
(e) Amount rounds to less than $0.01 per share.
(f) Total return is not annualized for periods less than one year.
(g) Ratios are annualized for periods less than one year.
(h) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 51
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------- ------------- ---------- ------------
COMMON STOCKS 100.0%
AEROSPACE & DEFENSE 3.1%
The Boeing Co. .............................................. United States 100,000 $ 7,261,000
Precision Castparts Corp. ................................... United States 110,000 13,938,100
------------
21,199,100
------------
AIR FREIGHT & LOGISTICS 1.5%
C.H. Robinson Worldwide Inc. ................................ United States 100,000 5,585,000
FedEx Corp. ................................................. United States 55,000 5,137,000
------------
10,722,000
------------
BIOTECHNOLOGY 3.9%
(a) Celgene Corp. ............................................... United States 250,000 15,490,000
(a) Gilead Sciences Inc. ........................................ United States 250,000 11,370,000
------------
26,860,000
------------
CAPITAL MARKETS 1.6%
(a) Financial Engines Inc. ...................................... United States 50,000 845,000
The Goldman Sachs Group Inc. ................................ United States 60,000 10,237,800
------------
11,082,800
------------
CHEMICALS 2.3%
Monsanto Co. ................................................ United States 50,000 3,571,000
Sigma-Aldrich Corp. ......................................... United States 225,000 12,073,500
------------
15,644,500
------------
COMMUNICATIONS EQUIPMENT 4.6%
(a) Cisco Systems Inc. .......................................... United States 500,000 13,015,000
(a) F5 Networks Inc. ............................................ United States 30,000 1,845,300
(a) Juniper Networks Inc. ....................................... United States 150,000 4,602,000
QUALCOMM Inc. ............................................... United States 175,000 7,348,250
ZTE Corp., H ................................................ China 850,000 5,150,852
------------
31,961,402
------------
COMPUTERS & PERIPHERALS 8.5%
(a) Apple Inc. .................................................. United States 185,000 43,462,050
Hewlett-Packard Co. ......................................... United States 300,000 15,945,000
------------
59,407,050
------------
DIVERSIFIED FINANCIAL SERVICES 0.9%
CME Group Inc. .............................................. United States 20,000 6,322,200
------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS 1.7%
(a) BYD Co. Ltd., H ............................................. China 50,000 497,794
(a) Dolby Laboratories Inc., A .................................. United States 190,000 11,147,300
------------
11,645,094
------------
ENERGY EQUIPMENT & SERVICES 5.9%
(a) Cameron International Corp. ................................. United States 25,000 1,071,500
(a) FMC Technologies Inc. ....................................... United States 300,000 19,389,000
National Oilwell Varco Inc. ................................. United States 200,000 8,116,000
Schlumberger Ltd. ........................................... United States 200,000 12,692,000
------------
41,268,500
------------
52 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------- ------------- ---------- ------------
COMMON STOCKS (CONTINUED)
HEALTH CARE EQUIPMENT & SUPPLIES 6.2%
Alcon Inc. .................................................. Switzerland 70,000 $ 11,309,200
Baxter International Inc. ................................... United States 50,000 2,910,000
(a) Edwards Lifesciences Corp. .................................. United States 100,000 9,888,000
(a) Intuitive Surgical Inc. ..................................... United States 30,000 10,443,900
Stryker Corp. ............................................... United States 150,000 8,583,000
------------
43,134,100
------------
HEALTH CARE PROVIDERS & SERVICES 2.9%
(a) Express Scripts Inc. ........................................ United States 150,000 15,264,000
McKesson Corp. .............................................. United States 50,000 3,286,000
(a) VCA Antech Inc. ............................................. United States 50,000 1,401,500
------------
19,951,500
------------
HEALTH CARE TECHNOLOGY 1.8%
(a) Cerner Corp. ................................................ United States 150,000 12,759,000
------------
HOTELS, RESTAURANTS & LEISURE 0.1%
(a) Ctrip.com International Ltd., ADR ........................... China 25,000 980,000
------------
INDUSTRIAL CONGLOMERATES 0.1%
General Electric Co. ........................................ United States 50,000 910,000
------------
INTERNET & CATALOG RETAIL 4.6%
(a) Amazon.com Inc. ............................................. United States 125,000 16,966,250
(a) Priceline.com Inc. .......................................... United States 60,000 15,300,000
------------
32,266,250
------------
INTERNET SOFTWARE & SERVICES 9.3%
(a) Baidu Inc., ADR ............................................. China 20,000 11,940,000
(a) eBay Inc. ................................................... United States 50,000 1,347,500
(a) Google Inc., A .............................................. United States 50,200 28,463,902
(a) MercadoLibre Inc. ........................................... Argentina 125,000 6,026,250
(a) Quinstreet Inc. ............................................. United States 25,000 425,250
Tencent Holdings Ltd. ....................................... China 600,000 12,032,070
(a) WebMD Health Corp. .......................................... United States 100,000 4,638,000
------------
64,872,972
------------
IT SERVICES 5.1%
MasterCard Inc., A .......................................... United States 50,000 12,700,000
Visa Inc., A ................................................ United States 250,000 22,757,500
------------
35,457,500
------------
LIFE SCIENCES TOOLS & SERVICES 2.4%
(a) Thermo Fisher Scientific Inc. ............................... United States 125,000 6,430,000
(a) Waters Corp. ................................................ United States 150,000 10,131,000
------------
16,561,000
------------
MACHINERY 1.6%
Flowserve Corp. ............................................. United States 100,000 11,027,000
------------
Semiannual Report | 53
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ----------------------------------------------------------------- ------------- ---------- ------------
COMMON STOCKS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS 1.5%
Noble Energy Inc. ........................................... United States 20,000 $ 1,460,000
Petroleo Brasileiro SA, ADR ................................. Brazil 200,000 8,898,000
------------
10,358,000
------------
PHARMACEUTICALS 6.4%
Allergan Inc. ............................................... United States 140,000 9,144,800
Johnson & Johnson ........................................... United States 75,000 4,890,000
Roche Holding AG ............................................ Switzerland 50,000 8,111,955
Teva Pharmaceutical Industries Ltd., ADR .................... Israel 350,000 22,078,000
------------
44,224,755
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 10.9%
(a) Aixtron AG .................................................. Germany 35,000 1,253,572
ARM Holdings PLC, ADR ....................................... United Kingdom 800,000 8,552,000
(a) Cree Inc. ................................................... United States 100,000 7,022,000
(a) Hittite Microwave Corp. ..................................... United States 100,000 4,397,000
Intel Corp. ................................................. United States 1,125,000 25,042,500
(a) Lam Research Corp. .......................................... United States 150,000 5,598,000
(a) Maxlinear INC, A ............................................ United States 52,000 923,000
(a) Netlogic Microsystems Inc. .................................. United States 250,000 7,357,500
Power Integrations Inc. ..................................... United States 150,000 6,180,000
(a) Silicon Laboratories Inc. ................................... United States 200,000 9,534,000
------------
75,859,572
------------
SOFTWARE 11.2%
(a) Adobe Systems Inc. .......................................... United States 400,000 14,148,000
(a) ANSYS Inc. .................................................. United States 200,000 8,628,000
(a) Check Point Software Technologies Ltd. ...................... Israel 200,000 7,012,000
(a) Concur Technologies Inc. .................................... United States 100,000 4,101,000
FactSet Research Systems Inc. ............................... United States 50,000 3,668,500
(a) Informatica Corp. ........................................... United States 100,000 2,686,000
Microsoft Corp. ............................................. United States 250,000 7,317,500
Oracle Corp. ................................................ United States 250,000 6,422,500
(a) Salesforce.com Inc. ......................................... United States 150,000 11,167,500
(a) Sybase Inc. ................................................. United States 200,000 9,324,000
(a) VMware Inc., A .............................................. United States 65,000 3,464,500
------------
77,939,500
------------
WIRELESS TELECOMMUNICATION SERVICES 1.9%
America Movil SAB de CV, L, ADR ............................. Mexico 47,600 2,396,183
(a) American Tower Corp., A ..................................... United States 250,000 10,652,500
------------
13,048,683
------------
TOTAL COMMON STOCKS (COST $364,997,865) 695,462,478
------------
54 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN DYNATECH FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------- ------------- ---------- -------------
SHORT TERM INVESTMENTS (COST $996,856) 0.1%
MONEY MARKET FUNDS 0.1%
(b) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ...... United States 996,856 $ 996,856
-------------
TOTAL INVESTMENTS (COST $365,994,721) 100.1% ..................... 696,459,334
OTHER ASSETS, LESS LIABILITIES (0.1)% ............................ (854,532)
-------------
NET ASSETS 100.0% $ 695,604,802
=============
See Abbreviations on page 131.
(a) Non-income producing.
(b) See Note 7 regarding investments in the Institutional Fiduciary Trust Money
Market Portfolio. The rate shown is the annualized seven-day yield at period
end.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 55
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN GROWTH FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
--------------------------------------------------------------------------------------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 36.48 $ 37.17 $ 46.36 $ 39.10 $ 34.83 $ 30.58
--------------------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ............ 0.09 0.29 0.24 0.16 0.12 0.13
Net realized and unrealized
gains (losses) ..................... 5.29 (0.67) (9.30) 7.21 4.21 4.20
--------------------------------------------------------------------------------------
Total from investment operations ....... 5.38 (0.38) (9.06) 7.37 4.33 4.33
--------------------------------------------------------------------------------------
Less distributions from net
investment income .................... (0.28) (0.31) (0.13) (0.11) (0.06) (0.08)
--------------------------------------------------------------------------------------
Redemption fees (c) .................... -- -- --(d) --(d) --(d) --(d)
--------------------------------------------------------------------------------------
Net asset value, end of period ......... $ 41.58 $ 36.48 $ 37.17 $ 46.36 $ 39.10 $ 34.83
======================================================================================
Total return (e) ....................... 14.82% (0.71)% (19.59)% 18.87% 12.46% 14.17%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ........................... 0.99% 1.00% 0.89% 0.93% 0.91% 0.94%
Net investment income .................. 0.49% 0.95% 0.56% 0.37% 0.34% 0.40%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 2,537,815 $2,173,714 $1,708,612 $2,123,419 $1,695,802 $1,567,675
Portfolio turnover rate ................ 2.64% 3.92% 5.64% 0.37% 2.21% 1.16%
(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%.
The accompanying notes are an integral part of these financial statements.
56 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
--------------------------------------------------------------------------------
CLASS B
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ............................. $ 34.93 $ 35.44 $ 44.42 $ 37.65 $ 33.73 $ 29.77
--------------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (loss) (b) ... (0.03) 0.07 (0.08) (0.16) (0.15) (0.11)
Net realized and unrealized
gains (losses) ................... 5.07 (0.58) (8.90) 6.93 4.07 4.07
--------------------------------------------------------------------------------
Total from investment operations ..... 5.04 (0.51) (8.98) 6.77 3.92 3.96
--------------------------------------------------------------------------------
Less distributions from net
investment income .................. (0.03) -- -- -- -- --
--------------------------------------------------------------------------------
Redemption fees (c) .................. -- -- --(d) --(d) --(d) --(d)
--------------------------------------------------------------------------------
Net asset value, end of period ....... $ 39.94 $ 34.93 $ 35.44 $ 44.42 $ 37.65 $ 33.73
================================================================================
Total return (e) ..................... 14.42% (1.44)% (20.22)% 17.98% 11.62% 13.30%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ......................... 1.73% 1.75% 1.64% 1.69% 1.67% 1.69%
Net investment income (loss) ......... (0.25)% 0.20% (0.19)% (0.39)% (0.42)% (0.35)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $ 75,004 $ 87,790 $ 89,779 $ 138,640 $ 122,871 $ 123,926
Portfolio turnover rate .............. 2.64% 3.92% 5.64% 0.37% 2.21% 1.16%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 57
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ............................. $ 34.61 $ 35.14 $ 44.03 $ 37.32 $ 33.43 $ 29.51
-----------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (loss) (b) ... (0.05) 0.06 (0.08) (0.16) (0.15) (0.11)
Net realized and unrealized
gains (losses) ................... 5.02 (0.57) (8.81) 6.87 4.04 4.03
-----------------------------------------------------------------------------
Total from investment operations ..... 4.97 (0.51) (8.89) 6.71 3.89 3.92
-----------------------------------------------------------------------------
Less distributions from net
investment income .................. (0.07) (0.02) -- -- -- --
-----------------------------------------------------------------------------
Redemption fees (c) .................. -- -- --(d) --(d) --(d) --(d)
-----------------------------------------------------------------------------
Net asset value, end of period ....... $ 39.51 $ 34.61 $ 35.14 $ 44.03 $ 37.32 $ 33.43
=============================================================================
Total return (e) ..................... 14.43% (1.45)% (20.19)% 17.98% 11.60% 13.32%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ......................... 1.74% 1.75% 1.64% 1.69% 1.66% 1.69%
Net investment income (loss) ......... (0.26)% 0.20% (0.19)% (0.39)% (0.41)% (0.35)%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $ 353,659 $315,305 $255,425 $340,671 $273,512 $270,538
Portfolio turnover rate .............. 2.64% 3.92% 5.64% 0.37% 2.21% 1.16%
(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%.
The accompanying notes are an integral part of these financial statements.
58 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------
CLASS R
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning
of period .......................... $ 36.37 $ 36.87 $ 45.99 $ 38.80 $ 34.59 $ 30.39
-----------------------------------------------------------------------------
Income from investment
operations (a):
Net investment income (b) .......... 0.04 0.20 0.14 0.04 0.02 0.05
Net realized and unrealized
gains (losses) ................... 5.28 (0.59) (9.23) 7.16 4.19 4.16
-----------------------------------------------------------------------------
Total from investment operations ..... 5.32 (0.39) (9.09) 7.20 4.21 4.21
-----------------------------------------------------------------------------
Less distributions from net
investment income .................. (0.23) (0.11) (0.03) (0.01) --(c) (0.01)
-----------------------------------------------------------------------------
Redemption fees (d) .................. -- -- --(c) --(c) --(c) --(c)
-----------------------------------------------------------------------------
Net asset value, end of period ....... $ 41.46 $ 36.37 $ 36.87 $ 45.99 $ 38.80 $ 34.59
=============================================================================
Total return (e) ..................... 14.70% (0.98)% (19.78)% 18.55% 12.18% 13.87%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ......................... 1.24% 1.25% 1.14% 1.19% 1.17% 1.19%
Net investment income ................ 0.24% 0.70% 0.31% 0.11% 0.08% 0.15%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $ 88,249 $ 65,113 $ 30,175 $ 53,134 $ 37,804 $ 27,818
Portfolio turnover rate .............. 2.64% 3.92% 5.64% 0.37% 2.21% 1.16%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 59
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN GROWTH FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------
ADVISOR CLASS
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning
of period .......................... $ 36.53 $ 37.25 $ 46.45 $ 39.17 $ 34.89 $ 30.63
-----------------------------------------------------------------------------
Income from investment
operations (a):
Net investment income (b) .......... 0.15 0.36 0.34 0.27 0.22 0.21
Net realized and unrealized
gains (losses) ................... 5.28 (0.68) (9.31) 7.21 4.21 4.21
-----------------------------------------------------------------------------
Total from investment operations ..... 5.43 (0.32) (8.97) 7.48 4.43 4.42
-----------------------------------------------------------------------------
Less distributions from net
investment income .................. (0.36) (0.40) (0.23) (0.20) (0.15) (0.16)
-----------------------------------------------------------------------------
Redemption fees (c) .................. -- -- --(d) --(d) --(d) --(d)
-----------------------------------------------------------------------------
Net asset value, end of period ....... $ 41.60 $ 36.53 $ 37.25 $ 46.45 $ 39.17 $ 34.89
=============================================================================
Total return (e) ..................... 14.98% (0.45)% (19.39)% 19.16% 12.73% 14.45%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ......................... 0.74% 0.75% 0.64% 0.69% 0.67% 0.69%
Net investment income ................ 0.74% 1.20% 0.81% 0.61% 0.58% 0.65%
SUPPLEMENTAL DATA
Net assets, end of period (000's) .... $ 485,715 $430,926 $256,988 $363,221 $274,603 $221,752
Portfolio turnover rate .............. 2.64% 3.92% 5.64% 0.37% 2.21% 1.16%
(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%.
The accompanying notes are an integral part of these financial statements.
60 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED)
FRANKLIN GROWTH FUND SHARES VALUE
- -------------------------------------------------- ---------- -------------
COMMON STOCKS 96.8%
AUTOMOBILES & COMPONENTS 2.4%
(a) Ford Motor Co. ............................... 1,100,000 $ 13,827,000
Harley-Davidson Inc. ......................... 838,096 23,525,355
Johnson Controls Inc. ........................ 1,400,000 46,186,000
Toyota Motor Corp., ADR (Japan) .............. 30,000 2,412,600
-------------
85,950,955
-------------
BANKS 0.5%
Wells Fargo & Co. ............................ 505,600 15,734,272
-------------
CAPITAL GOODS 22.8%
3M Co. ....................................... 855,000 71,452,350
ABB Ltd., ADR (Switzerland) .................. 850,000 18,564,000
The Boeing Co. ............................... 1,045,000 75,877,450
Caterpillar Inc. ............................. 200,000 12,570,000
Danaher Corp. ................................ 275,000 21,975,250
Deere & Co. .................................. 100,000 5,946,000
Emerson Electric Co. ......................... 1,000,000 50,340,000
(a) First Solar Inc. ............................. 50,000 6,132,500
General Dynamics Corp. ....................... 1,000,000 77,200,000
General Electric Co. ......................... 370,000 6,734,000
Illinois Tool Works Inc. ..................... 1,000,000 47,360,000
Ingersoll-Rand PLC. .......................... 1,002,000 34,939,740
Lockheed Martin Corp. ........................ 500,000 41,610,000
Northrop Grumman Corp. ....................... 1,000,000 65,570,000
Pall Corp. ................................... 500,000 20,245,000
Precision Castparts Corp. .................... 240,000 30,410,400
Raytheon Co. ................................. 600,000 34,272,000
Rockwell Collins Inc. ........................ 350,000 21,906,500
(a) SunPower Corp., A ............................ 2,000 37,800
(a) SunPower Corp., B ............................ 48,000 803,520
Textron Inc. ................................. 1,050,000 22,291,500
(a) Thomas & Betts Corp. ......................... 500,000 19,620,000
United Technologies Corp. .................... 850,000 62,568,500
W.W. Grainger Inc. ........................... 550,000 59,466,000
-------------
807,892,510
-------------
COMMERCIAL & PROFESSIONAL SERVICES 1.7%
Avery Dennison Corp. ......................... 462,000 16,821,420
Dun & Bradstreet Corp. ....................... 122,000 9,079,240
Equifax Inc. ................................. 400,000 14,320,000
Robert Half International Inc. ............... 150,000 4,564,500
(a) Stericycle Inc. .............................. 100,000 5,450,000
(a) Verisk Analytics Inc., A ..................... 300,000 8,460,000
-------------
58,695,160
-------------
CONSUMER DURABLES & APPAREL 1.3%
NIKE Inc., B ................................. 75,000 5,512,500
VF Corp. ..................................... 500,000 40,075,000
-------------
45,587,500
-------------
Semiannual Report | 61
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE
- ---------------------------------------------------- ---------- -------------
COMMON STOCKS (CONTINUED)
CONSUMER SERVICES 1.8%
(a) Apollo Group Inc., A ........................... 150,000 $ 9,193,500
Carnival Corp. ................................. 1,065,000 41,407,200
(a) Interval Leisure Group Inc. .................... 60,020 873,891
Starwood Hotels & Resorts Worldwide Inc. ....... 250,000 11,660,000
-------------
63,134,591
-------------
DIVERSIFIED FINANCIALS 1.3%
American Express Co. ........................... 242,300 9,997,298
BlackRock Inc. ................................. 100,000 21,776,000
JPMorgan Chase & Co. ........................... 334,300 14,959,925
-------------
46,733,223
-------------
ENERGY 4.5%
BP PLC, ADR (United Kingdom) ................... 350,200 19,985,914
ConocoPhillips ................................. 35,000 1,790,950
Devon Energy Corp. ............................. 290,000 18,684,700
Exxon Mobil Corp. .............................. 70,000 4,688,600
(a) FMC Technologies Inc. .......................... 300,000 19,389,000
Halliburton Co. ................................ 600,000 18,078,000
National Oilwell Varco Inc. .................... 175,000 7,101,500
Occidental Petroleum Corp. ..................... 200,000 16,908,000
Peabody Energy Corp. ........................... 350,000 15,995,000
Royal Dutch Shell PLC, A, ADR (Netherlands) .... 280,000 16,200,800
Schlumberger Ltd. .............................. 309,100 19,615,486
(a) Transocean Ltd. ................................ 15,222 1,314,876
-------------
159,752,826
-------------
FOOD & STAPLES RETAILING 0.6%
CVS Caremark Corp. ............................. 600,000 21,936,000
-------------
FOOD, BEVERAGE & TOBACCO 1.3%
Bunge Ltd. ..................................... 211,500 13,034,745
(a) Hansen Natural Corp. ........................... 300,000 13,014,000
PepsiCo Inc. ................................... 300,000 19,848,000
-------------
45,896,745
-------------
HEALTH CARE EQUIPMENT & SERVICES 5.0%
Aetna Inc. ..................................... 400,000 14,044,000
Baxter International Inc. ...................... 400,000 23,280,000
Cardinal Health Inc. ........................... 300,000 10,809,000
(a) CareFusion Corp. ............................... 150,000 3,964,500
Covidien PLC ................................... 350,000 17,598,000
(a) Edwards Lifesciences Corp. ..................... 50,000 4,944,000
(a) Intuitive Surgical Inc. ........................ 34,000 11,836,420
(a) Medco Health Solutions Inc. .................... 96,480 6,228,749
Medtronic Inc. ................................. 60,000 2,701,800
Quest Diagnostics Inc. ......................... 500,000 29,145,000
Teleflex Inc. .................................. 500,000 32,035,000
(a) Varian Medical Systems Inc. .................... 300,000 16,599,000
(a) Zimmer Holdings Inc. ........................... 64,000 3,788,800
-------------
176,974,269
-------------
62 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE
- -------------------------------------------------- ---------- -------------
COMMON STOCKS (CONTINUED)
HOUSEHOLD & PERSONAL PRODUCTS 0.6%
The Procter & Gamble Co. ..................... 335,000 $ 21,195,450
-------------
INSURANCE 1.2%
Aflac Inc. ................................... 333,300 18,094,857
(a) Berkshire Hathaway Inc., A ................... 184 22,411,200
-------------
40,506,057
-------------
MATERIALS 2.9%
Air Products and Chemicals Inc. .............. 500,000 36,975,000
Ecolab Inc. .................................. 353,700 15,545,115
Martin Marietta Materials Inc. ............... 90,000 7,519,500
Praxair Inc. ................................. 120,000 9,960,000
Randgold Resources Ltd., ADR (United
Kingdom)..................................... 150,000 11,524,500
Sigma-Aldrich Corp. .......................... 400,000 21,464,000
-------------
102,988,115
-------------
MEDIA 1.7%
(a) Live Nation Entertainment Inc. ............... 88,491 1,283,119
The Walt Disney Co. .......................... 1,687,290 58,903,294
-------------
60,186,413
-------------
PHARMACEUTICALS, BIOTECHNOLOGY & LIFE
SCIENCES 13.8%
Abbott Laboratories .......................... 400,000 21,072,000
Allergan Inc. ................................ 997,300 65,143,636
(a) Amgen Inc. ................................... 932,000 55,696,320
(a) Biogen Idec Inc. ............................. 400,000 22,944,000
(a) Celgene Corp. ................................ 324,400 20,099,824
(a) Covance Inc. ................................. 200,000 12,278,000
(a) Dionex Corp. ................................. 250,000 18,695,000
Eli Lilly and Co. ............................ 400,000 14,488,000
(a) Gilead Sciences Inc. ......................... 250,000 11,370,000
Johnson & Johnson ............................ 1,181,010 77,001,852
Merck & Co. Inc. ............................. 788,350 29,444,872
(a) Mettler-Toledo International Inc. ............ 50,000 5,460,000
Pfizer Inc. .................................. 2,761,000 47,351,150
Pharmaceutical Product Development Inc. ...... 300,000 7,125,000
Roche Holding AG, ADR (Switzerland) .......... 530,000 21,475,600
(a) Talecris Biotherapeutics Holdings Corp. ...... 460,000 9,163,200
Teva Pharmaceutical Industries Ltd.,
ADR (Israel) ............................... 275,000 17,347,000
(a) Waters Corp. ................................. 500,000 33,770,000
-------------
489,925,454
-------------
RETAILING 0.3%
Expedia Inc. ................................. 300,100 7,490,496
(a) HSN Inc. ..................................... 60,020 1,766,989
-------------
9,257,485
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.5%
Intel Corp. .................................. 500,000 11,130,000
Texas Instruments Inc. ....................... 250,000 6,117,500
-------------
17,247,500
-------------
Semiannual Report | 63
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE
- -------------------------------------------------- ---------- -------------
COMMON STOCKS (CONTINUED)
SOFTWARE & SERVICES 8.0%
(a) Adobe Systems Inc. ........................... 527,900 $ 18,671,823
(a) Autodesk Inc. ................................ 800,000 23,536,000
Automatic Data Processing Inc. ............... 700,000 31,129,000
(a) Citrix Systems Inc. .......................... 100,000 4,747,000
(a) Computer Sciences Corp. ...................... 1,000,000 54,490,000
(a) Google Inc., A ............................... 76,300 43,262,863
(a) IAC/InterActiveCorp .......................... 150,050 3,412,137
MasterCard Inc., A ........................... 80,000 20,320,000
Microsoft Corp. .............................. 325,000 9,512,750
Oracle Corp. ................................. 500,000 12,845,000
Paychex Inc. ................................. 425,000 13,047,500
Visa Inc., A ................................. 250,000 22,757,500
(a) Yahoo! Inc. .................................. 1,600,000 26,448,000
-------------
284,179,573
-------------
TECHNOLOGY HARDWARE & EQUIPMENT 14.6%
(a) Agilent Technologies Inc. .................... 1,150,000 39,548,500
(a) Apple Inc. ................................... 811,000 190,528,230
(a) Cisco Systems Inc. ........................... 2,695,000 70,150,850
(a) EMC Corp. .................................... 1,000,000 18,040,000
Hewlett-Packard Co. .......................... 1,156,250 61,454,688
International Business Machines Corp. ........ 580,000 74,385,000
(a) Logitech International SA (Switzerland) ...... 150,000 2,451,000
Molex Inc. ................................... 71,483 1,491,135
Molex Inc., A ................................ 133,100 2,349,215
QUALCOMM Inc. ................................ 660,000 27,713,400
(a) Research In Motion Ltd. (Canada) ............. 400,000 29,580,000
-------------
517,692,018
-------------
TELECOMMUNICATION SERVICES 1.2%
America Movil SAB de CV, L, ADR (Mexico) ..... 259,300 13,053,162
(a) American Tower Corp., A ...................... 715,000 30,466,150
-------------
43,519,312
-------------
TRANSPORTATION 7.6%
(a) Air France-KLM, ADR (France) ................. 600,000 9,390,000
(a) Alaska Air Group Inc. ........................ 600,000 24,738,000
(a) Allegiant Travel Co. ......................... 100,000 5,786,000
Arkansas Best Corp. .......................... 500,000 14,940,000
(a) British Airways PLC, ADR (United Kingdom) .... 600,000 21,990,000
C.H. Robinson Worldwide Inc. ................. 267,300 14,928,705
Canadian National Railway Co. (Canada) ....... 500,000 30,295,000
Canadian Pacific Railway Ltd. (Canada) ....... 500,000 28,120,000
(a) Continental Airlines Inc., B ................. 1,000,000 21,970,000
Expeditors International of Washington Inc. .. 404,200 14,923,064
Forward Air Corp. ............................ 495,333 13,027,258
Heartland Express Inc. ....................... 500,000 8,250,000
(a) Ryanair Holdings PLC, ADR (Ireland) .......... 239,200 6,499,064
64 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------ ------------ --------------
COMMON STOCKS (CONTINUED)
TRANSPORTATION (CONTINUED)
Southwest Airlines Co. ............................................. 65,200 $ 861,944
Union Pacific Corp. ................................................ 600,000 43,980,000
Werner Enterprises Inc. ............................................ 462,000 10,704,540
--------------
270,403,575
--------------
UTILITIES 1.2%
American Water Works Co. Inc. ...................................... 700,000 15,232,000
FPL Group Inc. ..................................................... 250,000 12,082,500
International Power PLC (United Kingdom) ........................... 3,058,904 14,806,136
--------------
42,120,636
--------------
TOTAL COMMON STOCKS (COST $1,715,605,439) .......................... 3,427,509,639
--------------
SHORT TERM INVESTMENTS (COST $114,279,732) 3.2%
MONEY MARKET FUNDS 3.2%
(b) Institutional Fiduciary Trust Money
Market Portfolio, 0.00% .......................................... 114,279,732 114,279,732
--------------
TOTAL INVESTMENTS (COST $1,829,885,171) 100.0%...................... 3,541,789,371
OTHER ASSETS, LESS LIABILITIES (0.0)% (c) .......................... (1,348,055)
--------------
NET ASSETS 100.0% .................................................. $3,540,441,316
==============
See Abbreviations on page 131.
(a) Non-income producing.
(b) See Note 7 regarding investments in the Institutional Fiduciary Trust Money
Market Portfolio. The rate shown is the annualized seven-day yield at period
end.
(c) Rounds to less than 0.1% of net assets.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 65
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN INCOME FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------------------------------
CLASS A
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period ........ $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42
-------------------------------------------------------------------------------------------------
Income from investment
operations (a):
Net investment income (b)... 0.07 0.13 0.16 0.14 0.14 0.14
Net realized and
unrealized gains
(losses) ................. 0.11 0.04 (0.71) 0.21 0.09 0.10
-------------------------------------------------------------------------------------------------
Total from investment
operations ................. 0.18 0.17 (0.55) 0.35 0.23 0.24
-------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ...... (0.07) (0.16) (0.15) (0.14) (0.15) (0.15)
Net realized gains ......... -- --(c) (0.06) (0.04) (0.01) (0.01)
-------------------------------------------------------------------------------------------------
Total distributions .......... (0.07) (0.16) (0.21) (0.18) (0.16) (0.16)
-------------------------------------------------------------------------------------------------
Redemption fees (d) .......... -- -- --(c) --(c) --(c) --(c)
-------------------------------------------------------------------------------------------------
Net asset value, end of
period ..................... $ 2.10 $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50
=================================================================================================
Total return (e) ............. 9.47% 10.56% (21.36)% 14.14% 9.73% 10.45%
RATIOS TO AVERAGE NET
ASSETS (f)
Expenses ..................... 0.65%(g) 0.68%(g) 0.62%(g) 0.63%(g) 0.64%(h) 0.65%(h)
Net investment income ........ 7.18% 7.93% 6.44% 5.31% 5.61% 5.54%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ................... $ 30,823,642 $27,773,006 $26,892,973 $35,476,603 $26,641,398 $21,934,575
Portfolio turnover rate ...... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51%
(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%.
The accompanying notes are an integral part of these financial statements.
66 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-------------------------------------------------------------------------------------------
CLASS B
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period ....... $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41
-------------------------------------------------------------------------------------------
Income from investment
operations (a):
Net investment
income (b) .............. 0.06 0.12 0.14 0.12 0.12 0.11
Net realized and
unrealized gains
(losses) ................ 0.12 0.04 (0.71) 0.21 0.08 0.11
-------------------------------------------------------------------------------------------
Total from investment
operations ................ 0.18 0.16 (0.57) 0.33 0.20 0.22
-------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ..... (0.07) (0.15) (0.13) (0.12) (0.12) (0.13)
Net realized gains ........ -- --(c) (0.06) (0.04) (0.01) (0.01)
-------------------------------------------------------------------------------------------
Total distributions ......... (0.07) (0.15) (0.19) (0.16) (0.13) (0.14)
-------------------------------------------------------------------------------------------
Redemption fees (d) ......... -- -- --(c) --(c) --(c) --(c)
-------------------------------------------------------------------------------------------
Net asset value, end
of period ................. $ 2.09 $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49
===========================================================================================
Total return (e) ............ 9.04% 9.70% (22.13)% 13.23% 8.83% 9.57%
RATIOS TO AVERAGE NET
ASSETS (f)
Expenses .................... 1.49%(g) 1.53%(g) 1.47%(g) 1.48%(g) 1.49%(h) 1.50%(h)
Net investment income ....... 6.34% 7.08% 5.59% 4.46% 4.76% 4.69%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ............ $ 1,894,594 $2,051,280 $2,428,765 $3,745,636 $3,743,374 $3,922,396
Portfolio turnover rate ..... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 67
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-------------------------------------------------------------------------------------------
CLASS B1
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value,
beginning of period ....... $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50 $ 2.42
-------------------------------------------------------------------------------------------
Income from investment
operations (a):
Net investment
income (b) .............. 0.07 0.13 0.15 0.13 0.13 0.12
Net realized and
unrealized gains
(losses) ................ 0.11 0.03 (0.71) 0.21 0.08 0.11
-------------------------------------------------------------------------------------------
Total from investment
operations ................ 0.18 0.16 (0.56) 0.34 0.21 0.23
-------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ..... (0.07) (0.15) (0.14) (0.13) (0.13) (0.14)
Net realized gains ........ -- --(c) (0.06) (0.04) (0.01) (0.01)
-------------------------------------------------------------------------------------------
Total distributions ......... (0.07) (0.15) (0.20) (0.30) (0.14) (0.15)
-------------------------------------------------------------------------------------------
Redemption fees (d) ......... -- -- --(c) --(c) --(c) --(c)
-------------------------------------------------------------------------------------------
Net asset value, end
of period ................. $ 2.10 $ 1.99 $ 1.98 $ 2.74 $ 2.57 $ 2.50
===========================================================================================
Total return (e) ............ 9.11% 10.03% (21.77)% 13.57% 9.17% 9.90%
RATIOS TO AVERAGE NET
ASSETS (f)
Expenses .................... 1.14%(g) 1.17%(g) 1.12%(g) 1.13%(g) 1.14%(h) 1.15%(h)
Net investment income ....... 6.69% 7.44% 5.94% 4.81% 5.11% 5.04%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ............ $ 32,103 $ 68,825 $ 224,713 $ 397,224 $ 459,302 $ 493,063
Portfolio turnover rate ..... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51%
(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%.
The accompanying notes are an integral part of these financial statements.
68 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------------------------------
CLASS C
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period .............. $ 2.00 $ 1.99 $ 2.76 $ 2.59 $ 2.51 $ 2.43
---------------------------------------------------------------------------------------------------
Income from investment
operations (a):
Net investment
income (b) .......... 0.07 0.13 0.15 0.13 0.13 0.13
Net realized and
unrealized gains
(losses) ............ 0.12 0.03 (0.72) 0.21 0.09 0.10
---------------------------------------------------------------------------------------------------
Total from investment
operations ............. 0.19 0.16 (0.57) 0.34 0.22 0.23
---------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .. (0.07) (0.15) (0.14) (0.13) (0.13) (0.14)
Net realized gains ..... -- --(c) (0.06) (0.04) (0.01) (0.01)
---------------------------------------------------------------------------------------------------
Total distributions ....... (0.07) (0.15) (0.20) (0.17) (0.14) (0.15)
---------------------------------------------------------------------------------------------------
Redemption fees (d) ....... -- -- --(c) --(c) --(c) --(c)
---------------------------------------------------------------------------------------------------
Net asset value, end of
period ................. $ 2.12 $ 2.00 $ 1.99 $ 2.76 $ 2.59 $ 2.51
===================================================================================================
Total return (e) .......... 9.64% 9.93% (21.98)% 13.47% 9.56% 9.84%
RATIOS TO AVERAGE NET
ASSETS (f)
Expenses (f) .............. 1.15%(g) 1.18%(g) 1.12%(g) 1.13%(g) 1.14%(h) 1.15%(h)
Net investment income ..... 6.68% 7.43% 5.94% 4.81% 5.11% 5.04%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ................ $ 14,717,275 $13,054,203 $12,443,143 $16,203,796 $12,138,969 $10,113,365
Portfolio turnover rate ... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 69
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------------------------------
CLASS R
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period .............. $ 1.96 $ 1.95 $ 2.71 $ 2.55 $ 2.48 $ 2.40
---------------------------------------------------------------------------------------------------
Income from investment
operations (a) :
Net investment
income (b) .......... 0.07 0.13 0.15 0.13 0.13 0.13
Net realized and
unrealized gains
(losses) ............ 0.11 0.03 (0.71) 0.20 0.09 0.10
---------------------------------------------------------------------------------------------------
Total from investment
operations ............. 0.18 0.16 (0.56) 0.33 0.22 0.23
---------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income .. (0.07) (0.15) (0.14) (0.13) (0.14) (0.14)
Net realized gains ..... -- --(c) (0.06) (0.04) (0.01) (0.01)
---------------------------------------------------------------------------------------------------
Total distributions ....... (0.07) (0.15) (0.20) (0.17) (0.15) (0.15)
---------------------------------------------------------------------------------------------------
Redemption fees (d) ....... -- -- --(c) --(c) --(c) --(c)
---------------------------------------------------------------------------------------------------
Net asset value, end
of period .............. $ 2.07 $ 1.96 $ 1.95 $ 2.71 $ 2.55 $ 2.48
===================================================================================================
Total return (e) .......... 9.40% 10.31% (21.91)% 13.47% 9.43% 10.15%
RATIOS TO AVERAGE NET
ASSETS (f)
Expenses .................. 1.00%(g) 1.03%(g) 0.97%(g) 0.98%(g) 0.99%(h) 1.00%(h)
Net investment income ..... 6.83% 7.58% 6.09% 4.96% 5.26% 5.19%
SUPPLEMENTAL DATA
Net assets, end of
period (000's) ......... $ 356,917 $ 315,298 $ 267,956 $ 286,670 $ 183,609 $ 122,222
Portfolio turnover rate ... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51%
(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%.
The accompanying notes are an integral part of these financial statements.
70 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN INCOME FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------------------------------
ADVISOR CLASS
PER SHARE OPERATING
PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning
of period ............... $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49 $ 2.41
---------------------------------------------------------------------------------------------------
Income from investment
operations (a):
Net investment
income (b) ........... 0.07 0.14 0.16 0.15 0.14 0.14
Net realized and
unrealized gains
(losses) ............. 0.12 0.03 (0.70) 0.21 0.09 0.11
---------------------------------------------------------------------------------------------------
Total from investment
operations .............. 0.19 0.17 (0.54) 0.36 0.23 0.25
---------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income ... (0.08) (0.16) (0.16) (0.15) (0.15) (0.16)
Net realized gains ...... -- --(c) (0.06) (0.04) (0.01) (0.01)
---------------------------------------------------------------------------------------------------
Total distributions ........ (0.08) (0.16) (0.22) (0.19) (0.16) (0.17)
---------------------------------------------------------------------------------------------------
Redemption fees (d) ........ -- -- --(c) --(c) --(c) --(c)
---------------------------------------------------------------------------------------------------
Net asset value, end of
period .................. $ 2.09 $ 1.98 $ 1.97 $ 2.73 $ 2.56 $ 2.49
===================================================================================================
Total return (e) ........... 9.60% 10.79% (21.33)% 14.36% 9.94% 10.65%
RATIOS TO AVERAGE NET
ASSETS (f)
Expenses ................... 0.50%(g) 0.53%(g) 0.47%(g) 0.48%(g) 0.49%(h) 0.50%(h)
Net investment income ...... 7.33% 8.08% 6.59% 5.46% 5.76% 5.69%
SUPPLEMENTAL DATA
Net assets, end of period
(000's) ................. $ 4,434,847 $ 4,183,925 $ 4,259,806 $ 6,195,966 $ 3,786,643 $ 2,280,318
Portfolio turnover rate .... 23.03% 51.36% 39.92% 25.45% 28.35% 28.51%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 71
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED)
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------- -------------- --------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 28.1%
CONSUMER DISCRETIONARY 1.9%
(a) Charter Communications Inc. ................................. United States 11,871,333 $ 409,560,988
(a) Charter Communications Inc., A .............................. United States 4,084,845 140,927,153
(a) Charter Communications Inc., wts., 11/30/14 ................. United States 2,112,650 11,725,208
(a),(b),(c) Dex One Corp. ............................................... United States 10,242,757 285,977,775
(a) SuperMedia Inc. ............................................. United States 127,517 5,215,445
(a) SuperMedia Inc., Litigation Trust ........................... United States 30,326,101 341,169
Target Corp. ................................................ United States 2,500,000 131,500,000
---------------
985,247,738
---------------
CONSUMER STAPLES 0.6%
Diageo PLC .................................................. United Kingdom 10,000,000 167,923,971
PepsiCo Inc. ................................................ United States 2,500,000 165,400,000
---------------
333,323,971
---------------
ENERGY 4.8%
(a),(b) Callon Petroleum Co. ........................................ United States 4,181,258 22,411,543
(b) Canadian Oil Sands Trust .................................... Canada 26,000,000 779,807,929
ConocoPhillips .............................................. United States 11,200,000 573,104,000
Exxon Mobil Corp. ........................................... United States 13,000,000 870,740,000
Spectra Energy Corp. ........................................ United States 11,500,000 259,095,000
---------------
2,505,158,472
---------------
FINANCIALS 4.7%
Bank of America Corp. ....................................... United States 41,071,000 733,117,350
Barclays PLC ................................................ United Kingdom 15,000,000 82,056,519
(a) Citigroup Inc. .............................................. United States 30,000,000 121,500,000
(b) Colony Financial Inc. ....................................... United States 1,250,000 25,000,000
HSBC Holdings PLC ........................................... United Kingdom 35,000,000 355,031,661
(a),(b) iStar Financial Inc. ........................................ United States 5,213,500 23,929,965
JPMorgan Chase & Co. ........................................ United States 10,250,000 458,687,500
Wells Fargo & Co. ........................................... United States 21,575,000 671,414,000
---------------
2,470,736,995
---------------
HEALTH CARE 2.3%
Abbott Laboratories ......................................... United States 739,800 38,972,664
Johnson & Johnson ........................................... United States 5,000,000 326,000,000
Merck & Co. Inc. ............................................ United States 23,000,000 859,050,000
---------------
1,224,022,664
---------------
INDUSTRIALS 0.0% (d)
(a) Nortek Inc. ................................................. United States 40,000 1,620,000
---------------
MATERIALS 0.3%
Nucor Corp. ................................................. United States 3,000,000 136,140,000
---------------
TELECOMMUNICATION SERVICES 2.2%
AT&T Inc. ................................................... United States 18,250,000 471,580,000
Verizon Communications Inc. ................................. United States 9,000,000 279,180,000
Vodafone Group PLC .......................................... United Kingdom 175,000,000 404,000,628
---------------
1,154,760,628
---------------
72 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ------------------------------------------------------------------------- ------------- --------------- ---------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
UTILITIES 11.3%
AGL Resources Inc. .......................................... United States 3,000,000 $ 115,950,000
Alliant Energy Corp. ........................................ United States 1,000,000 33,260,000
Ameren Corp. ................................................ United States 8,250,000 215,160,000
American Electric Power Co. Inc. ............................ United States 10,000,000 341,800,000
American Water Works Co. Inc. ............................... United States 1,388,400 30,211,584
(a),(e),(f) Calpine Corp., Contingent Distribution ...................... United States 125,000,000 --
CenterPoint Energy Inc. ..................................... United States 6,000,000 86,160,000
Consolidated Edison Inc. .................................... United States 5,300,000 236,062,000
Dominion Resources Inc. ..................................... United States 10,500,000 431,655,000
DTE Energy Co. .............................................. United States 4,250,000 189,550,000
Duke Energy Corp. ........................................... United States 34,000,000 554,880,000
FirstEnergy Corp. ........................................... United States 2,800,000 109,452,000
FPL Group Inc. .............................................. United States 7,375,000 356,433,750
NiSource Inc. ............................................... United States 2,800,000 44,240,000
PG&E Corp. .................................................. United States 11,500,000 487,830,000
Pinnacle West Capital Corp. ................................. United States 4,500,000 169,785,000
Portland General Electric Co. ............................... United States 2,400,000 46,344,000
PPL Corp. ................................................... United States 2,000,000 55,420,000
Progress Energy Inc. ........................................ United States 9,400,000 369,984,000
Public Service Enterprise Group Inc. ........................ United States 15,000,000 442,800,000
Sempra Energy ............................................... United States 6,500,000 324,350,000
The Southern Co. ............................................ United States 21,000,000 696,360,000
TECO Energy Inc. ............................................ United States 10,000,000 158,900,000
Xcel Energy Inc. ............................................ United States 18,500,000 392,200,000
----------------
5,888,787,334
----------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $13,789,032,748) ................................... 14,699,797,802
----------------
CONVERTIBLE PREFERRED STOCKS 3.1%
CONSUMER DISCRETIONARY 0.2%
(a) General Motors Corp., 6.25%, cvt. pfd., C ................... United States 11,000,000 95,148,900
----------------
FINANCIALS 2.3%
Bank of America Corp., 7.25%, cvt. pfd., L .................. United States 600,408 585,397,800
(a) Fannie Mae, 5.375%, cvt. pfd. ............................... United States 4,700 16,215,000
(a) Fannie Mae, 8.75%, cvt. pfd. ................................ United States 3,239,000 5,263,375
(a) Felcor Lodging Trust Inc., 7.80%, cvt. pfd., A .............. United States 3,000,000 54,300,000
(g) Forest City Enterprises Inc., 7.00%, cvt. pfd., 144A ........ United States 1,000,000 56,180,000
(a) Lehman Brothers Holdings Inc., 7.25%, cvt. pfd., P .......... United States 1,000,650 2,491,619
(a) Lehman Brothers Holdings Inc., 8.75%, cvt. pfd., Q .......... United States 550,000 1,210,000
Wells Fargo & Co., 7.50%, cvt. pfd., A ...................... United States 500,000 488,500,000
----------------
1,209,557,794
----------------
HEALTH CARE 0.5%
Tenet Healthcare Corp., 7.00%, cvt. pfd. .................... United States 250,000 258,137,500
----------------
UTILITIES 0.1%
FPL Group Inc., 8.375%, cvt. pfd. ........................... United States 900,000 45,634,500
----------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $3,671,187,627) .................................... 1,608,478,694
----------------
Semiannual Report | 73
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ---------------------------------------------------------------------------------- ------------- --------------- -------------
(h) EQUITY-LINKED SECURITIES 5.6%
CONSUMER DISCRETIONARY 0.2%
(g) JPMorgan Chase into Comcast Corp., 8.00%, 144A ........................... United States 5,000,000 $ 95,006,500
-------------
ENERGY 1.4%
(g) Barclays Bank PLC into Weatherford International Ltd., 12.00%, 144A ...... United States 7,350,000 129,617,250
Credit Suisse into Halliburtun Co., 12.00% ............................... United States 4,000,000 94,922,000
Credit Suisse into Weatherford International Ltd., 11.00% ................ United States 6,315,000 105,749,727
(g) Deutsche Bank AG into Chesapeake Energy Corp., 12.00%, 144A .............. United States 6,200,000 157,572,380
(g) The Goldman Sachs Group Inc. into Devon Energy Corp., 10.55%, 144A ....... United States 1,600,000 96,456,320
(g) The Goldman Sachs Group Inc. into XTO Energy Inc., 9.00%, 144A ........... United States 3,600,000 166,793,760
-------------
751,111,437
-------------
FINANCIALS 1.1%
Credit Suisse into Bank of America Corp., 10.00% ......................... United States 6,310,000 115,984,110
Credit Suisse into Bank of America Corp., 11.10% ......................... United States 8,850,000 161,357,625
(g) The Goldman Sachs Group Inc. into Citigroup Inc., 10.00%, 144A ........... United States 22,000,000 90,257,860
(g),(i) Deutsche Bank AG into Citigroup Inc., 10.00%, 144A ....................... United States 24,500,000 100,450,000
(g) Morgan Stanley into Wells Fargo & Co., 8.00%, 144A ....................... United States 3,000,000 90,260,100
-------------
558,309,695
-------------
INDUSTRIALS 0.2%
(g) JPMorgan Chase & Co. into First Solar Inc., 10.00%, 144A ................. United States 687,800 84,776,165
-------------
INFORMATION TECHNOLOGY 1.1%
(g) Barclays Bank PLC into Intel Corp., 8.00%, 144A .......................... United States 9,653,000 216,215,616
(g) The Goldman Sachs Group Inc. into Intel Corp., 10.00%, 144A .............. United States 7,500,000 144,037,500
(g) The Goldman Sachs Group Inc. into Xerox Corp., 12.00%, 144A .............. United States 13,400,000 123,417,752
(g) Morgan Stanley into Xilinx Inc., 8.00%, 144A ............................. United States 4,000,000 101,810,400
-------------
585,481,268
-------------
MATERIALS 1.3%
(g) Barclays Capital PLC into Newmont Mining Corp., 8.50%, 144A .............. United States 3,044,000 158,697,418
(g) Deutsche Bank AG into Newmont Mining Corp., 10.00%, 144A ................. United States 2,108,000 107,109,588
(g) The Goldman Sachs Group Inc. into Barrick Gold Corp., 12.5%, 144A ........ United States 5,000,000 194,020,000
(g) JPMorgan Chase into AngloGold Ashanti Ltd., 10.00%, 144A ................. United States 2,683,000 103,014,053
(g) Morgan Stanley into Freeport-Mcmoran Copper & Gold Inc., 9.00%, 144A ..... United States 1,250,000 103,277,375
-------------
666,118,434
-------------
74 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY SHARES/WARRANTS VALUE
- ----------------------------------------------------------------- -------------- --------------- ----------------
(h) EQUITY-LINKED SECURITIES (CONTINUED)
UTILITIES 0.3%
(g) Barclays Capital into Calpine Corp., 8.00%, 144A ........ United States 7,500,000 $ 87,687,750
Credit Suisse into Calpine Corp., 8.00% ................. United States 8,000,000 97,941,600
----------------
185,629,350
----------------
TOTAL EQUITY-LINKED SECURITIES
(COST $2,769,186,793) .................................. 2,926,432,849
----------------
PREFERRED STOCKS 0.5%
FINANCIALS 0.5%
(a) Fannie Mae, 6.75%, pfd. ................................. United States 3,000,000 2,790,000
(a) Fannie Mae, 7.625%, pfd., R ............................. United States 2,399,400 2,639,340
(a) Fannie Mae, 8.25%, pfd. ................................. United States 11,784,000 14,965,680
(a) Freddie Mac, 8.375%, pfd., Z ............................ United States 16,608,000 21,092,160
(g) GMAC Inc., 7.00%, pfd., 144A ............................ United States 267,636 204,022,268
----------------
TOTAL PREFERRED STOCKS (COST $ 928,695,780) ............. 245,509,448
----------------
PRINCIPAL AMOUNT(j)
-------------------
(K),(L) SENIOR FLOATING RATE INTERESTS 5.3%
CONSUMER DISCRETIONARY 1.3%
Clear Channel Communications Inc., Term Loan B, 3.898%,
11/13/15 ............................................... United States 537,786,283 438,715,832
(b) Dex Media West LLC, Term Loan B, 7.50%, 10/24/14 ........ United States 7,235,086 6,919,680
Harrah's Operating Co. Inc., Incremental Term Loan,
9.50%, 10/01/16 ........................................ United States 100,000,000 103,659,700
Jarden Corp., Term Loan B-3, 2.79%, 1/24/12 ............. United States 61,651,580 61,747,633
(b) R.H. Donnelley Inc., Term Loan B, 8.50%, 10/24/14 ....... United States 40,369,177 39,632,439
SuperMedia Inc., Exit Term Loan, 11.00%, 12/31/15 ....... United States 27,503,638 25,879,218
(i) Univision Communications Inc., Initial Term Loan,
2.54%, 9/29/14 ......................................... United States 20,000,000 17,864,940
----------------
694,419,442
----------------
HEALTH CARE 0.1%
HCA Inc., Term Loan A-1, 1.54%, 11/19/12 ................ United States 36,898,997 35,932,907
----------------
INDUSTRIALS 0.8%
Allison Transmission Inc., Term Loan B, 2.98% - 3.01%,
8/07/14 ................................................ United States 172,716,862 164,697,790
Altegrity Inc., Term Loan B, 3.271%, 2/21/15 ............ United States 97,268,749 90,095,179
Ceva Group PLC,
Dollar Pre-Refunded L/C Commitment, 3.29%, 8/01/12 .... United States 13,684,211 12,486,842
EGL Term Loans, 3.24%, 8/01/12 ........................ United States 113,117,105 102,512,377
Diversey Inc., Tranche B Dollar Term Loan, 5.50%,
11/24/15 ............................................... United States 40,000,000 40,525,000
----------------
410,317,188
----------------
INFORMATION TECHNOLOGY 1.8%
First Data Corp.,
Term Loan B-2, 3.032% - 3.04%, 9/24/14 ................ United States 243,750,000 216,203,569
Term Loan B-3, 3.032% - 3.04%, 9/24/14 ................ United States 326,771,616 289,192,880
Semiannual Report | 75
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(J) VALUE
- ------------------------------------------------------------------------- ------------- ------------------- ----------------
(k),(l) SENIOR FLOATING RATE INTERESTS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
Freescale Semiconductor Inc.,
Incremental Term Loan, 12.50%, 12/15/14 .................... United States 353,531,239 $ 365,021,005
Term Loan, 4.479%, 12/01/16 ................................ United States 62,244,671 58,899,020
----------------
929,316,474
----------------
MATERIALS 0.2%
Novelis Corp., U.S. Term Loan, 2.25% - 2.30%, 7/07/14 ....... United States 97,950,214 95,064,209
----------------
UTILITIES 1.1%
Texas Competitive Electric Holdings Co. LLC,
Delayed Draw, Term Loan, 3.729% - 3.79%, 10/10/14 .......... United States 209,737,500 168,911,466
Term Loan B-1, 3.729% - 3.79%, 10/10/14 .................... United States 171,676,825 141,365,221
Term Loan B-2, 3.729% - 3.79%, 10/10/14 .................... United States 100,428,557 82,721,094
Term Loan B-3, 3.729% - 3.79%, 10/10/14 .................... United States 268,812,500 218,949,932
----------------
611,947,713
----------------
TOTAL SENIOR FLOATING RATE INTERESTS
(COST $3,311,810,124) 2,776,997,933
----------------
CORPORATE BONDS 54.0%
CONSUMER DISCRETIONARY 12.5%
Cablevision Systems Corp., senior note,
(g) 144A, 8.625%, 9/15/17 .................................. United States 100,000,000 106,250,000
B, 8.00%, 4/15/12 ...................................... United States 450,000,000 483,187,500
(g) CCH II LLC/CCH II Capital Corp., senior note, 144A, 13.50%,
11/30/16 ................................................... United States 227,347,163 272,248,228
CCO Holdings LLC, senior note, 8.75%, 11/15/13 .............. United States 80,000,000 82,400,000
(g) Cequel Communications Holdings I LLC, senior note, 144A,
8.625%, 11/15/17 ........................................... United States 65,000,000 67,112,500
(g) Clear Channel Worldwide Holdings Inc., senior note,
A, 144A, 9.25%, 12/15/17 ................................ United States 28,700,000 29,955,625
B, 144A, 9.25%, 12/15/17 ................................ United States 116,050,000 121,852,500
(g) CSC Holdings Inc., senior note, 144A, 8.50%, 4/15/14 ..... United States 67,300,000 72,011,000
(b),(c),(m) Dex One Corp., senior sub. note, PIK, 14.00%,
1/29/17 .................................................... United States 81,136,340 83,164,748
DISH DBS Corp., senior note, 7.875%, 9/01/19 ................ United States 140,000,000 146,300,000
Dollar General Corp.,
senior note, 10.625%, 7/15/15 ........................... United States 306,698,000 338,134,545
(m) senior sub. note, PIK, 11.875%, 7/15/17 ................. United States 55,000,000 64,350,000
EchoStar DBS Corp., senior note,
7.75%, 5/31/15 .......................................... United States 130,000,000 136,500,000
7.125%, 2/01/16 ......................................... United States 245,000,000 250,818,750
Ford Motor Credit Co. LLC,
7.375%, 2/01/11 ......................................... United States 200,000,000 206,000,000
8.00%, 6/01/14 .......................................... United States 400,000,000 421,473,200
senior note, 9.875%, 8/10/11 ............................ United States 75,000,000 79,568,850
senior note, 7.25%, 10/25/11 ............................ United States 185,000,000 191,339,765
senior note, 7.50%, 8/01/12 ............................. United States 395,000,000 409,231,455
senior note, 7.00%, 10/01/13 ............................ United States 25,000,000 25,888,275
senior note, 8.70%, 10/01/14 ............................ United States 20,000,000 21,650,000
76 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE
- ------------------------------------------------------------------- -------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
CONSUMER DISCRETIONARY (CONTINUED)
Ford Motor Credit Co. LLC, (continued)
senior note, 12.00%, 5/15/15 ............................ United States 120,000,000 $ 143,497,560
senior note, 8.125%, 1/15/20 ............................ United States 47,700,000 50,120,537
(k) senior note, FRN, 5.507%, 6/15/11 ....................... United States 190,000,000 193,127,254
(k) senior note, FRN, 3.001%, 1/13/12 ....................... United States 243,000,000 235,996,300
(n) General Motors Corp., senior deb., 8.375%, 7/15/33 ........... United States 510,000,000 193,800,000
Harrah's Operating Co. Inc., senior secured note, 11.25%,
6/01/17 ..................................................... United States 150,000,000 162,375,000
Host Hotels & Resorts LP, senior note,
(g) 144A, 9.00%, 5/15/17 .................................... United States 125,750,000 136,438,750
K, 7.125%, 11/01/13 ..................................... United States 85,500,000 87,423,750
O, 6.375%, 3/15/15 ...................................... United States 240,000,000 239,400,000
Q, 6.75%, 6/01/16 ....................................... United States 190,000,000 191,425,000
S, 6.875%, 11/01/14 ..................................... United States 110,000,000 111,650,000
Jarden Corp., senior note, 8.00%, 5/01/16 .................... United States 10,600,000 11,156,500
KB Home, senior note,
5.75%, 2/01/14 .......................................... United States 75,000,000 73,125,000
6.25%, 6/15/15 .......................................... United States 90,000,000 86,850,000
9.10%, 9/15/17 .......................................... United States 49,000,000 51,940,000
7.25%, 6/15/18 .......................................... United States 70,500,000 67,856,250
Limited Brands Inc., senior note, 8.50%, 6/15/19 ............. United States 21,400,000 23,968,000
MGM MIRAGE,
senior note, 8.50%, 9/15/10 ............................. United States 40,000,000 40,450,000
senior note, 6.75%, 4/01/13 ............................. United States 70,000,000 63,700,000
(g) senior note, 144A, 11.375%, 3/01/18 ..................... United States 25,000,000 24,250,000
(g) senior secured note, 144A, 9.00%, 3/15/20 ............... United States 35,375,000 36,613,125
Michaels Stores Inc., senior note, 10.00%, 11/01/14 .......... United States 48,235,000 51,129,100
(g) Univision Communications Inc.,
(m) senior note, 144A, PIK, 10.50%, 3/15/15 ................. United States 293,555,406 254,659,315
senior secured note, 144A, 12.00%, 7/01/14 .............. United States 26,500,000 29,150,000
(g) UPC Germany GmbH, ............................................
senior secured bond, 144A, 8.125%, 12/01/17 ............. Germany 52,700,000 54,676,250
senior secured note, 144A, 8.125%, 12/01/17 ............. Germany 43,900,000 EUR 61,683,535
senior sub. note, 144A, 9.625%, 12/01/19 ................ Germany 23,100,000 EUR 33,081,808
(g) Virgin Media Secured Finance, senior secured note, 144A, .....
7.00%, 1/15/18 ............................................. United States 70,000,000 GBP 108,673,698
Visant Holding Corp., senior note, 8.75%, 12/01/13 ........... United States 50,000,000 51,500,000
(g) WMG Acquisition Corp., senior secured note, 144A, 9.50%,
6/15/16 .................................................... United States 7,700,000 8,267,875
Wyndham Worldwide Corp., senior note,
9.875%, 5/01/14 ......................................... United States 25,000,000 28,416,425
6.00%, 12/01/16 ......................................... United States 21,727,000 21,541,191
--------------
6,537,379,164
--------------
CONSUMER STAPLES 0.5%
(g) JBS USA LLC, senior note, 144A, 11.625%, 11.625%,
5/01/14 .................................................... United States 134,500,000 154,002,500
SUPERVALU Inc., senior note, 8.00%, 5/01/16 .................. United States 108,500,000 110,398,750
--------------
264,401,250
--------------
Semiannual Report | 77
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE
- --------------------------------------------------------------------- ------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
ENERGY 10.0%
Alon Refining Krotz Springs Inc., senior secured note,
13.50%, 10/15/14 ......................................... United States 30,000,000 $ 29,100,000
(g) Antero Resources Finance, senior note, 144A, 9.375%,
12/01/17 ................................................. United States 106,200,000 109,917,000
Bill Barrett Corp., senior note, 9.875%, 7/17/16 ............ United States 8,800,000 9,526,000
(b) Callon Petroleum Co., senior secured note, 13.00%,
9/15/16 ............................................... United States 83,625,000 71,499,375
Chesapeake Energy Corp., senior note,
7.625%, 7/15/13 ........................................ United States 55,000,000 57,612,500
9.50%, 2/15/15 ......................................... United States 220,000,000 240,350,000
6.50%, 8/15/17 ......................................... United States 183,000,000 177,967,500
6.25%, 1/15/18 ......................................... United States 165,000,000 157,987,500
7.25%, 12/15/18 ........................................ United States 188,065,000 189,005,325
6.875%, 11/15/20 ....................................... United States 158,000,000 154,445,000
(g),(i) Consol Energy Inc., senior note, 144A,
8.00%, 4/01/17 ......................................... United States 42,450,000 43,829,625
8.25%, 4/01/20 ......................................... United States 80,850,000 83,477,625
Denbury Resources Inc., senior sub. note, 8.25%, 2/15/20 .... United States 77,700,000 82,750,500
El Paso Corp., senior note,
12.00%, 12/12/13 ....................................... United States 161,600,000 189,880,000
7.25%, 4/01/18 ......................................... United States 50,000,000 51,845,350
MTN, 7.75%, 1/15/32 .................................... United States 250,000,000 246,902,500
(g) Expro Finance Luxembourg, senior secured note, 144A,
8.50%, 12/15/16 .......................................... United Kingdom 56,800,000 57,651,318
Forest Oil Corp., senior note, ..............................
8.50%, 2/15/14 ......................................... United States 115,000,000 121,900,000
7.25%, 6/15/19 ......................................... United States 47,875,000 48,353,750
(g) Holly Corp., senior note, 144A, 9.875%, 6/15/17 ............. United States 35,000,000 36,225,000
(g),(i) Linn Energy Corp., senior note,144A, 8.625%, 4/15/20 ....... United States 100,000,000 100,375,000
Mariner Energy Inc., senior note,
7.50%, 4/15/13 ......................................... United States 46,500,000 47,081,250
11.75%, 6/30/16 ........................................ United States 11,300,000 12,740,750
8.00%, 5/15/17 ......................................... United States 48,900,000 48,288,750
Newfield Exploration Co.,
senior sub. bond, 6.875%, 2/01/20 ...................... United States 120,000,000 121,500,000
senior sub. note, 6.625%, 4/15/16 ...................... United States 128,000,000 130,880,000
senior sub. note, 7.125%, 5/15/18 ...................... United States 7,600,000 7,752,000
OPTI Canada Inc., senior note, 7.875%, 12/15/14 ............. Canada 70,000,000 65,800,000
Petrohawk Energy Corp., senior note,
9.125%, 7/15/13 ........................................ United States 85,000,000 89,143,750
10.50%, 8/01/14 ........................................ United States 129,050,000 143,084,187
7.875%, 6/01/15 United States 141,000,000 144,348,750
(g) Petroplus Finance Ltd., senior note, 144A,
6.75%, 5/01/14 ......................................... Switzerland 120,000,000 108,600,000
7.00%, 5/01/17 ......................................... Switzerland 92,050,000 79,623,250
9.375%, 9/15/19 ........................................ Bermuda 94,930,000 86,860,950
Pioneer Natural Resources Co.,
6.65%, 3/15/17 ......................................... United States 15,000,000 15,071,700
senior bond, 6.875%, 5/01/18 ........................... United States 110,000,000 110,488,510
78 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE
- ----------------------------------------------------------------- -------------- ------------------- --------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
Plains Exploration & Production Co., senior note,
7.75%, 6/15/15 ...................................... United States 95,500,000 $ 97,290,625
10.00%, 3/01/16 ..................................... United States 80,000,000 88,800,000
8.625%, 10/15/19 .................................... United States 50,000,000 53,250,000
Quicksilver Resources Inc., senior note,
11.75%, 1/01/16 ..................................... United States 26,800,000 30,820,000
9.125%, 8/15/19 ..................................... United States 90,000,000 94,950,000
Sabine Pass LNG LP, senior secured note,
7.25%, 11/30/13 ..................................... United States 100,000,000 94,500,000
7.50%, 11/30/16 ..................................... United States 275,000,000 244,062,500
SandRidge Energy Inc., senior note,
(g) 144A, 9.875%, 5/15/16 ............................... United States 106,300,000 109,754,750
(g) 144A, 8.00%, 6/01/18 ................................ United States 232,500,000 222,037,500
(g) 144A, 8.75%, 1/15/20 ................................ United States 85,150,000 83,447,000
(k) FRN, 3.876%, 4/01/14 ................................ United States 68,925,000 63,235,448
(m) PIK, 8.625%, 4/01/15 ................................ United States 46,995,000 45,937,613
SEACOR Holdings Inc., senior note, 7.375%, 10/01/19 ......... United States 25,000,000 25,777,575
SESI LLC, senior note, 6.875%, 6/01/14 ...................... United States 117,000,000 115,245,000
Tesoro Corp.,
(f) 7.50%, 7/17/12 ...................................... United States 100,000,000 92,407,100
senior note, 6.50%, 6/01/17 ......................... United States 37,000,000 34,225,000
senior note, 9.75%, 6/01/19 ......................... United States 41,400,000 43,470,000
(g) W&T Offshore Inc., senior note, 144A, 8.25%, 6/15/14 ........ United States 192,500,000 181,912,500
(g) Western Refining Inc.,
(k) senior note, 144A, FRN, 10.75% 6/15/14 .............. United States 25,000,000 22,625,000
senior secured note, 144A, 11.25%, 6/15/17 .......... United States 25,000,000 22,625,000
--------------
5,238,237,326
--------------
FINANCIALS 6.0%
(o) Bank of America Corp., pfd., sub. bond, M, 8.125%,
Perpetual ................................................. United States 100,000,000 102,158,000
Duke Realty LP, senior note,
5.95%, 2/15/17 ...................................... United States 37,500,000 36,899,025
6.50%, 1/15/18 ...................................... United States 35,500,000 35,547,463
8.25%, 8/15/19 ...................................... United States 19,400,000 21,672,574
(p) FelCor Lodging LP, senior secured note, 10.00%, 10/01/14 .... United States 157,450,000 162,960,750
Forest City Enterprises Inc., senior note, 7.625%,
6/01/15 ................................................... United States 42,250,000 39,503,750
GMAC Inc., senior note,
6.875%, 8/28/12 ..................................... United States 160,000,000 163,000,000
(g) 144A, 8.00%, 3/15/20 ................................ United States 300,000,000 308,250,000
HCP Inc., senior note,
6.00%, 1/30/17 ...................................... United States 33,325,000 33,221,359
5.625%, 5/01/17 ..................................... United States 15,040,000 14,680,484
6.70%, 1/30/18 United States 10,500,000 10,716,132
(g) International Lease Finance Corp., senior note, 144A,
8.625%, 9/15/15 ..................................... United States 58,300,000 59,738,203
8.75%, 3/15/17 ...................................... United States 171,500,000 175,806,536
(b) iStar Financial Inc.,
8.625%, 6/01/13 ..................................... United States 174,100,000 150,596,500
(g) senior secured note, 144A, 8.00%, 3/15/11 ........... United States 6,142,000 6,149,678
(g) senior secured note, 144A, 10.00%, 6/15/14 .......... United States 117,350,000 117,936,750
Semiannual Report | 79
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE
- ------------------------------------------------------------------- --------------- ------------------- ---------------
CORPORATE BONDS (CONTINUED)
FINANCIALS (CONTINUED)
(o) JPMorgan Chase & Co., junior sub. note, 1, 7.90%,
Perpetual .................................................. United States 865,000,000 $ 925,293,960
(g),(i) LBI Escrow Corp., senior secured note, 144A, 8.00%,
11/01/17 ................................................... United States 88,000,000 91,410,000
(g),(k) Liberty Mutual Group, junior sub. note, 144A, FRN,
10.75%, 6/15/88 ............................................ United States 100,000,000 113,000,000
(g) Reynolds Group Escrow, senior secured note, 144A,
7.75%, 10/15/16 ........................................... United Kingdom 10,000,000 10,325,000
(o) Wells Fargo Capital XIII, pfd., 7.70%, Perpetual ........... United States 44,500,000 46,168,750
(o) Wells Fargo Capital XV, pfd., 9.75%, Perpetual ............. United States 449,600,000 505,800,000
---------------
3,130,834,914
---------------
HEALTH CARE 6.6%
Community Health Systems Inc., senior sub. note, 8.875%,
7/15/15 ................................................... United States 375,000,000 389,062,500
DaVita Inc.,
senior note, 6.625%, 3/15/13 ............................. United States 40,000,000 40,450,000
senior sub. note, 7.25%, 3/15/15 ......................... United States 70,000,000 71,750,000
HCA Inc.,
6.75%, 7/15/13 ........................................... United States 79,320,000 79,716,600
6.375%, 1/15/15 .......................................... United States 169,455,000 161,829,525
senior note, 6.50%, 2/15/16 .............................. United States 195,000,000 185,981,250
senior secured note, 9.25%, 11/15/16 ..................... United States 300,000,000 319,687,500
(g) senior secured note, 144A, 8.50%, 4/15/19 ................ United States 190,000,000 205,318,750
(g) senior secured note, 144A, 7.875%, 2/15/20 ............... United States 165,000,000 173,146,875
(g) senior secured note, 144A, 7.25%, 9/15/20 ................ United States 51,700,000 52,540,125
(g) IMS Health Inc., senior note, 144A, 12.50%,
3/01/18 .................................................. United States 40,000,000 46,750,000
(g),(m) Quintiles Transnational Corp., senior note, 144A, PIK,
9.50%, 12/30/14 ........................................... United States 100,000,000 102,250,000
(g) Talecris Biotherapeutics Holdings Corp., senior note,
144A, 7.75%, 11/15/16 ..................................... United States 36,250,000 36,612,500
Tenet Healthcare Corp.,
senior note, 7.375%, 2/01/13 ............................. United States 446,365,000 453,060,475
senior note, 9.875%, 7/01/14 ............................. United States 30,000,000 32,025,000
(g) senior secured note, 144A, 9.00%, 5/01/15 ................ United States 300,000,000 324,750,000
(g) senior secured note, 144A, 10.00%, 5/01/18 ............... United States 300,000,000 337,500,000
(k) senior note, FRN, 9.25%, 2/01/15 ......................... United States 115,000,000 121,181,250
(g) senior secured note, 144A, 8.875%, 7/01/19 ............... United States 30,000,000 32,625,000
(k),(m) US Oncology Holdings Inc., senior note, PIK, FRN,
7.178%, 3/15/12 ........................................... United States 90,093,895 85,814,435
US Oncology Inc.,
senior note, 10.75%, 8/15/14 ............................. United States 15,000,000 15,675,000
senior secured note, 9.125%, 8/15/17 ..................... United States 40,000,000 42,000,000
(g) Vanguard Health Holding Co. II LLC, senior bond,
144A, 8.00%, 2/01/18 ...................................... United States 151,000,000 147,602,500
---------------
3,457,329,285
---------------
80 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(J) VALUE
- -------------------------------------------------------------------- -------------- ------------------- ---------------
CORPORATE BONDS (CONTINUED)
INDUSTRIALS 5.3%
(g) American Airlines Inc., senior secured note, 144A, 10.50%,
10/15/12 .................................................. United States 57,500,000 $ 61,668,750
(g) Bombardier Inc., senior note, 144A,
7.50%, 3/15/18 ........................................... Canada 60,000,000 62,850,000
7.75%, 3/15/20 ........................................... Canada 85,000,000 88,825,000
(g) Case New Holland Inc., senior note, 144A, 7.75%,
9/01/13 ................................................... United States 201,050,000 209,594,625
(g) Ceva Group PLC, senior secured note, 144A,
11.625%, 10/01/16 ........................................ United Kingdom 11,800,000 12,655,500
11.50%, 4/01/18 .......................................... United Kingdom 212,525,000 221,557,312
(g) Delta Air Lines Inc., senior secured note, 144A,
9.50%, 9/15/14 ........................................... United States 83,150,000 88,139,000
11.75%, 3/15/15 .......................................... United States 110,000,000 118,525,000
Greenbrier Cos. Inc., senior note, 8.375%, 5/15/15 ......... United States 31,706,000 29,010,990
Hertz Corp.,
senior note, 8.875%, 1/01/14 ............................. United States 445,000,000 459,462,500
senior sub. note, 10.50%, 1/01/16 ........................ United States 140,000,000 151,025,000
(g) Icahn Enterprises/FIN, senior note, 144A,
7.75%, 1/15/16 ........................................... United States 120,000,000 116,025,000
8.00%, 1/15/18 ........................................... United States 105,000,000 101,587,500
(g),(m) JohnsonDiversey Holdings Inc., senior note, 144A, PIK,
10.50%, 5/15/20 ........................................... United States 49,200,000 53,874,000
(g) JohnsonDiversey Inc., senior note, 144A, 8.25%,
11/15/19 .................................................. United States 30,000,000 31,162,500
The Manitowoc Co. Inc., senior note, 9.50%, 2/15/18 ........ United States 63,800,000 66,830,500
Navistar International Corp., senior note, 8.25%,
11/01/21 United States 33,300,000 34,132,500
Nortek Inc., senior secured note, 11.00%, 12/15/13 ......... United States 40,177,777 43,291,555
RBS Global & Rexnord Corp.,
(g) 144A, 9.50%, 8/01/14 ................................... United States 98,206,000 102,625,270
senior note, 9.50%, 8/01/14 .............................. United States 173,274,000 181,071,330
senior sub. note, 11.75%, 8/01/16 ........................ United States 97,000,000 104,517,500
(g) RSC Equipment Rental/RSC Holdings, senior note, 144A,
10.25%, 11/15/19 .......................................... United States 58,000,000 58,435,000
(g) RSC Equipment Rental Inc., senior secured note, 144A,
10.00%, 7/15/17 ........................................... United States 30,000,000 31,950,000
(g) Severstal Columbus LLC, senior secured note, 144A, 10.25%,
2/15/18 ................................................... United States 25,000,000 26,000,000
Terex Corp., senior sub. note, 8.00%, 11/15/17 ............. United States 185,000,000 180,837,500
(g) Transdigm Inc., senior sub. note, 144A, 7.75%,
7/15/14 ................................................... United States 50,000,000 51,500,000
United Rentals North America Inc., senior sub. note, 7.75%,
11/15/13 .................................................. United States 59,820,000 57,875,850
---------------
2,745,029,682
---------------
INFORMATION TECHNOLOGY 3.2%
(g) Advanced Micro Devices Inc., senior note, 144A, 8.125%,
12/15/17 .................................................. United States 66,700,000 69,034,500
Ceridian Corp., senior note, 11.50%, 11/15/15 .............. United States 75,000,000 72,187,500
First Data Corp., senior note, 9.875%,
9/24/15 .................................................. United States 80,000,000 68,600,000
9/24/15 .................................................. United States 273,000,000 236,827,500
Semiannual Report | 81
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE
- ---------------------------------------------------------------- ---------------- ------------------- ---------------
CORPORATE BONDS (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
Freescale Semiconductor Inc.,
senior note, 8.875%, 12/15/14 ......................... United States 380,000,000 $ 364,800,000
senior note, 10.125%, 12/15/16 ........................ United States 176,000,000 156,640,000
(g) senior secured note, 144A, 10.125%, 3/15/18 ........... United States 100,000,000 107,500,000
Lucent Technologies Inc., 6.45%, 3/15/29 ................... United States 140,900,000 100,039,000
Sanmina-SCI Corp., senior sub. note,
6.75%, 3/01/13 ........................................ United States 150,000,000 150,750,000
8.125%, 3/01/16 ....................................... United States 100,000,000 101,125,000
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 .......................... United States 35,000,000 36,050,000
senior note, 10.625%, 5/15/15 ......................... United States 55,000,000 60,225,000
senior sub. note, 10.25%, 8/15/15 ..................... United States 85,000,000 89,781,250
(g) ViaSat Inc., senior note, 144A, 8.875%, 9/15/16 ............ United States 49,250,000 50,789,063
---------------
1,664,348,813
---------------
MATERIALS 2.2%
Boise Cascade LLC, senior sub. note, 7.125%, 10/15/14 ...... United States 15,000,000 13,950,000
(g) Cemex Finance LLC, senior secured note, 144A, 9.50%,
12/14/16 .............................................. United States 50,000,000 52,000,000
(g) Hexion Fin/Hexion Escrow, senior secured note, 144A,
8.875%, 2/01/18 ....................................... United States 35,000,000 34,650,000
Huntsman International LLC,
(g) senior note, 144A, 5.50%, 6/30/16 ..................... United States 105,000,000 95,287,500
senior sub. note, 7.875%, 11/15/14 .................... United States 35,000,000 35,525,000
senior sub. note, 7.375%, 1/01/15 ..................... United States 15,000,000 14,962,500
(g) Ineos Group Holdings PLC, senior sub. note, 144A, 7.875%,
2/15/16 ............................................... United Kingdom 190,000,000 EUR 201,985,157
(g) Kerling PLC, senior sec. note, 144A, 10.625%, 1/28/17 ...... United Kingdom 53,700,000 EUR 76,270,364
(g) Nalco Co., senior note, 144A, 8.25%, 5/15/17 ............... United States 29,650,000 31,651,375
Nalco Finance Holdings, senior note, 9.00%, 2/01/14 ........ United States 380,000,000 393,300,000
NewPage Corp., senior secured note,
10.00%, 5/01/12 ....................................... United States 52,800,000 36,894,000
11.375%, 12/31/14 ..................................... United States 50,000,000 50,000,000
Owens-Brockway Glass Container Inc., senior note, 7.375%,
5/15/16 ............................................... United States 43,850,000 46,261,750
United States Steel Corp., senior note, 7.375%, 4/01/20 .... United States 40,000,000 40,300,000
---------------
1,123,037,646
---------------
TELECOMMUNICATION SERVICES 1.9%
(g) Clearwire Communications LLC/Finance, senior sec. note,
144A, 12.00%, 12/01/15 ................................ United States 50,000,000 51,125,000
(g) Clearwire Corp., senior secured note, 144A,
12.00%, 12/01/15 ...................................... United States 145,000,000 148,625,000
Cricket Communications Inc.,
senior note, 9.375%, 11/01/14 ......................... United States 65,000,000 66,462,500
senior secured note, 7.75%, 5/15/16 ................... United States 30,000,000 31,275,000
Crown Castle International Corp.,
senior bond, 7.125%, 11/01/19 ......................... United States 31,200,000 31,746,000
senior note, 9.00%, 1/15/15 ........................... United States 35,000,000 38,062,500
(g) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ..... Jamaica 65,000,000 63,943,750
82 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE
- ---------------------------------------------------------------------- --------------- ------------------- ---------------
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATION SERVICES (CONTINUED)
(g),(i) New Communications Holdings, senior note, 144A,
7.875%, 4/15/15 ........................................... United States 47,900,000 $ 49,456,750
8.25%, 4/15/17 ............................................ United States 57,975,000 59,279,438
8.50%, 4/15/20 ............................................ United States 64,150,000 64,951,875
8.75%, 4/15/22 ............................................ United States 63,900,000 64,219,500
(g) Qwest Communications International Inc., senior note, 144A,
7.125%, 4/01/18 ............................................ United States 36,500,000 37,868,750
Qwest Corp., senior note, 8.375%, 5/01/16 .................... United States 17,350,000 19,605,500
Sprint Nextel Corp., senior note, 8.375%, 8/15/17 ............ United States 90,200,000 91,102,000
Virgin Media Finance PLC, senior note, 1, 9.50%, 8/15/16 ..... United Kingdom 74,800,000 82,093,000
(g) Wind Acquisition Finance SA, senior note, 144A, 11.75%,
7/15/17 .................................................... Italy 26,100,000 29,101,500
Windstream Corp., senior note, 7.875%, 11/01/17 .............. United States 70,750,000 70,042,500
---------------
998,960,563
---------------
UTILITIES 5.8%
The AES Corp., senior note, 8.00%, 10/15/17 .................. United States 90,000,000 91,800,000
(g) Calpine Construction Finance, senior secured note, 144A,
8.00%, 6/01/16 ............................................. United States 100,000,000 102,750,000
CMS Energy Corp., senior note, 8.75%, 6/15/19 ................ United States 11,850,000 13,438,966
(g) Crosstex Energy/Crosstex Energy Finance, senior note, 144A,
8.875%, 2/15/18 ............................................ United States 32,800,000 33,989,000
Dynegy Holdings Inc., senior note,
7.50%, 6/01/15 ............................................ United States 170,000,000 141,950,000
8.375%, 5/01/16 ........................................... United States 250,000,000 208,750,000
7.75%, 6/01/19 ............................................ United States 105,000,000 79,800,000
(g) 144A, 7.50%, 6/01/15 ...................................... United States 115,000,000 95,450,000
Dynegy Roseton Danskammer Pass Through Trust, secured bond,
B, 7.67%, 11/8/16 .......................................... United States 64,500,000 62,686,260
Energy Future Holdings Corp., senior note,
10.875%, 11/01/17 ......................................... United States 190,000,000 142,025,000
P, 5.55%, 11/15/14 ........................................ United States 406,220,000 298,508,330
(m) PIK, 12.00%, 11/01/17 ................................. United States 344,500,000 235,982,500
(g) Intergen NV, senior secured note, 144A, 9.00%, 6/30/17 ...... Netherlands 80,000,000 82,800,000
(g) Niska Gas Storage U.S./Canada, senior note, 144A, 8.875%,
3/15/18 .................................................... United States 75,000,000 77,062,500
Public Service Co. of New Mexico, senior note, 7.95%,
5/15/18 .................................................... United States 55,000,000 57,466,585
Reliant Energy Inc., senior note,
7.625%, 6/15/14 ........................................... United States 150,000,000 141,000,000
7.875%, 6/15/17 ........................................... United States 180,000,000 162,450,000
Texas Competitive Electric Holdings Co. LLC, senior note,
A, 10.25%, 11/01/15 ....................................... United States 740,000,000 518,000,000
B, 10.25%, 11/01/15 ....................................... United States 290,000,000 203,000,000
(m),(p) PIK, 11.25%, 11/01/16 ..................................... United States 425,000,000 293,250,000
---------------
3,042,159,141
---------------
TOTAL CORPORATE BONDS (COST $27,024,478,725) ................. 28,201,717,784
---------------
Semiannual Report | 83
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE
- ----------------------------------------------------------------------- --------------- ------------------- ---------------
CONVERTIBLE BONDS 1.4%
CONSUMER DISCRETIONARY 0.5%
(g) Host Hotels & Resorts LP, cvt., senior note, 144A, 2.625%,
4/15/12 ................................................... United States 120,956,000 $ 116,420,150
(g) Liberty Global Inc., cvt., senior sub. note, 144A, 4.50%,
11/15/16 .................................................. United States 101,250,000 130,612,500
---------------
247,032,650
---------------
FINANCIALS 0.6%
CapitalSource Inc., cvt., senior sub. note,
4.00%, 7/15/34 ............................................ United States 118,925,000 114,465,313
7.25%, 7/15/37 ............................................ United States 12,676,000 12,121,425
(b),(k) iStar Financial Inc., cvt., senior note, FRN, 0.751%,
10/01/12 .................................................. United States 250,000,000 190,125,000
---------------
316,711,738
---------------
HEALTH CARE 0.2%
LifePoint Hospitals Inc., cvt., senior sub. note, 3.50%,
5/15/14 ................................................... United States 75,941,000 76,422,466
---------------
INFORMATION TECHNOLOGY 0.1%
Advanced Micro Devices Inc., cvt., senior note,
6.00%, 5/01/15 ............................................ United States 36,025,000 34,719,094
(g) 144A, 5.75%, 8/15/12 ...................................... United States 39,550,000 39,599,437
---------------
74,318,531
---------------
TOTAL CONVERTIBLE BONDS (COST $716,084,648) .................. 714,485,385
---------------
MUNICIPAL BONDS (COST $180,212,400) 0.3%
(i) California State GO, 7.95%, 3/01/36 .......................... United States 180,000,000 184,559,400
---------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $52,390,688,845) .................................... 51,357,979,295
---------------
SHORT TERM INVESTMENTS 1.4%
U.S. GOVERNMENT AND AGENCY SECURITIES (COST $99,999,861) 0.2%
(q) FHLB, 4/05/10 ................................................ United States 100,000,000 99,999,400
---------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUNDS AND
REPURCHASE AGREEMENTS (COST $52,490,688,706) .............. 51,457,978,695
---------------
SHARES
----------------
MONEY MARKET FUNDS (COST $260,988,866) 0.5%
(r) Institutional Fiduciary Trust Money Market Portfolio,
0.00% ..................................................... United States 260,988,866 260,988,866
---------------
INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.1%
MONEY MARKET FUNDS 0.1%
(s) Bank of New York Institutional Cash Reserve Fund,
Series A, 0.01% ........................................... United States 30,561,238 30,561,238
(a) Bank of New York Institutional Cash Reserve Fund, B .......... United States 451,668 361,334
---------------
TOTAL MONEY MARKET FUNDS (COST $31,012,906) .................. 30,922,572
---------------
84 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN INCOME FUND COUNTRY PRINCIPAL AMOUNT(j) VALUE
- ---------------------------------------------------------------------- -------------- ------------------- ---------------
SHORT TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS (COST $347,581,492) 0.6%
(t) Joint Repurchase Agreement, 0.008%, 4/01/10
(Maturity Value $347,581,567) ................................. United States $ 347,581,492 $ 347,581,492
Banc of America Securities LLC (Maturity Value $43,534,591)
Barclays Capital Inc. (Maturity Value $52,999,237)
BNP Paribas Securities Corp. (Maturity Value $56,780,925)
Deutsche Bank Securities Inc. (Maturity Value $42,849,856)
HSBC Securities (USA) Inc. (Maturity Value $56,780,925)
Morgan Stanley & Co. Inc. (Maturity Value $56,780,925)
UBS Securities LLC (Maturity Value $37,855,108)
Collateralized by U.S. Government Agency Securities,
0.375% - 6.25%, 4/27/10 - 6/14/13; (q) U.S. Government
Agency Discount Notes, 4/05/10 - 9/27/10; and U.S.
Treasury Notes, 1.375% - 4.00%, 9/15/10 - 2/28/15
---------------
TOTAL SHORT TERM INVESTMENTS (COST $739,583,125) ................. 739,492,330
---------------
TOTAL INVESTMENTS (COST $53,130,271,970) 99.7% ................... 52,097,471,625
OTHER ASSETS, LESS LIABILITIES 0.3% .............................. 161,907,074
---------------
NET ASSETS 100.0% ................................................ $52,259,378,699
---------------
See Abbreviations on page 131.
(a) Non-income producing.
(b) See Note 11 regarding holdings of 5% voting securities.
(c) See Note 13 regarding other considerations.
(d) Rounds to less than 0.1% of net assets.
(e) Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
(f) Security has been deemed illiquid because it may not be able to be sold
within seven days. At March 31, 2010, the aggregate value of these
securities was $92,407,100, representing 0.18% of net assets.
(g) 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, 2010,
the aggregate value of these securities was $11,275,677,765, representing
21.58% of net assets.
(h) See Note 1(f) regarding equity-linked securities.
(i) A portion or all of the security purchased on a when-issued or delayed
delivery basis. See Note 1(d).
(j) The principal amount is stated in U.S. dollars unless otherwise indicated.
(k) The coupon rate shown represents the rate at period end.
(l) See Note 1(h) regarding senior floating rate interests.
(m) Income may be received in additional securities and/or cash.
(n) See Note 8 regarding defaulted securities.
(o) Perpetual security with no stated maturity date.
(p) A portion or all of the security is on loan at March 31, 2010. See Note
1(g).
(q) The security is traded on a discount basis with no stated coupon rate.
(r) See Note 7 regarding investments in the Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield
at period end.
(s) The rate shown is the annualized seven-day yield at period end.
(t) See Note 1(c) regarding joint repurchase agreement.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 85
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-------------------------------------------------------------------------------------------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of
period ............................ $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68
-------------------------------------------------------------------------------------------
Income from investment
operations (a)
Net investment income (b) ....... 0.13 0.27 0.30 0.31 0.30 0.28
Net realized and unrealized
gains (losses) ................ 0.01 0.27 0.08 (0.02) (0.09) (0.11)
-------------------------------------------------------------------------------------------
Total from investment operations 0.14 0.54 0.38 0.29 0.21 0.17
-------------------------------------------------------------------------------------------
Less distributions from net
investment income ................. (0.14) (0.30) (0.32) (0.33) (0.31) (0.32)
-------------------------------------------------------------------------------------------
Redemption fees (c) ................ -- -- -- (d) -- (d) -- (d) -- (d)
-------------------------------------------------------------------------------------------
Net asset value, end of period ..... $ 6.69 $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53
===========================================================================================
Total return (e) ................... 2.05% 8.50% 6.00% 4.63% 3.40% 2.67%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ....................... 0.71% 0.73% 0.72% 0.72% 0.72% 0.72%
Net investment income .............. 3.77% 4.11% 4.64% 4.78% 4.64% 4.29%
SUPPLEMENTAL DATA
Net assets, end of period (000's)... $ 6,410,681 $6,275,792 $5,353,961 $5,073,449 $5,291,117 $5,901,449
Portfolio turnover rate ............ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14%
(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%.
The accompanying notes are an integral part of these financial statements.
86 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------------
CLASS B
PER SHARE OPERATING PERFORMANCE
(for a share outstanding
throughout the period)
Net asset value, beginning of period ... $ 6.68 $ 6.44 $ 6.38 $ 6.42 $ 6.52 $ 6.67
---------------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ............. 0.11 0.24 0.27 0.27 0.26 0.25
Net realized and unrealized gains
(losses) ............................. 0.01 0.26 0.07 (0.01) (0.08) (0.11)
---------------------------------------------------------------------------------
Total from investment operations ....... 0.12 0.50 0.34 0.26 0.18 0.14
---------------------------------------------------------------------------------
Less distributions from net investment
income ................................ (0.12) (0.26) (0.28) (0.30) (0.28) (0.29)
---------------------------------------------------------------------------------
Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d)
---------------------------------------------------------------------------------
Net asset value, end of period ......... $ 6.68 $ 6.68 $ 6.44 $ 6.38 $ 6.42 $ 6.52
=================================================================================
Total return (e) ....................... 1.79% 7.79% 5.61% 4.10% 2.87% 2.13%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ........................... 1.22% 1.24% 1.24% 1.25% 1.24% 1.25%
Net investment income .................. 3.26% 3.60% 4.12% 4.25% 4.12% 3.76%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 174,947 $230,575 $284,649 $316,720 $388,807 $478,788
Portfolio turnover rate ................ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 87
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 6.66 $ 6.42 $ 6.36 $ 6.40 $ 6.50 $ 6.65
---------------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ............. 0.11 0.23 0.27 0.27 0.26 0.25
Net realized and unrealized gains
(losses) ............................. 0.01 0.27 0.07 (0.01) (0.08) (0.11)
---------------------------------------------------------------------------------
Total from investment operations ....... 0.12 0.50 0.34 0.26 0.18 0.14
---------------------------------------------------------------------------------
Less distributions from net
investment income ..................... (0.12) (0.26) (0.28) (0.30) (0.28) (0.29)
---------------------------------------------------------------------------------
Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d)
---------------------------------------------------------------------------------
Net asset value, end of period ......... $ 6.66 $ 6.66 $ 6.42 $ 6.36 $ 6.40 $ 6.50
=================================================================================
Total return (e) ....................... 1.81% 8.01% 5.48% 4.12% 2.88% 2.14%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ........................... 1.23% 1.24% 1.24% 1.25% 1.23% 1.25%
Net investment income .................. 3.25% 3.60% 4.12% 4.25% 4.13% 3.76%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 1,977,819 $1,464,614 $610,148 $418,951 $424,462 $508,539
Portfolio turnover rate ................ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14%
(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 repurchas es of the Fund shares in relation to income
earned and/or fluctuating mar ket 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 per iods less than one year.
(g) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
88 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
----------------------------------------------------------------------------
CLASS R
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the
period)
Net asset value, beginning of period ... $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53 $ 6.68
----------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ............. 0.11 0.25 0.28 0.28 0.27 0.26
Net realized and unrealized gains
(losses) ............................. 0.01 0.26 0.07 (0.01) (0.08) (0.11)
----------------------------------------------------------------------------
Total from investment operations ....... 0.12 0.51 0.35 0.27 0.19 0.15
----------------------------------------------------------------------------
Less distributions from net investment
income ................................ (0.12) (0.27) (0.29) (0.31) (0.29) (0.30)
----------------------------------------------------------------------------
Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d)
----------------------------------------------------------------------------
Net asset value, end of period ......... $ 6.69 $ 6.69 $ 6.45 $ 6.39 $ 6.43 $ 6.53
============================================================================
Total return (e) ....................... 1.87% 8.12% 5.61% 4.25% 3.01% 2.29%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ........................... 1.08% 1.09% 1.09% 1.10% 1.09% 1.10%
Net investment income .................. 3.40% 3.75% 4.27% 4.40% 4.27% 3.91%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 128,730 $138,548 $104,648 $74,537 $71,104 $65,790
Portfolio turnover rate ................ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 89
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------
ADVISOR CLASS
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 6.71 $ 6.47 $ 6.41 $ 6.45 $ 6.55 $ 6.69
---------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ............. 0.13 0.28 0.31 0.31 0.31 0.29
Net realized and unrealized gains
(losses) ............................. 0.01 0.27 0.08 (0.01) (0.09) (0.10)
---------------------------------------------------------------------------
Total from investment operations ....... 0.14 0.55 0.39 0.30 0.22 0.19
---------------------------------------------------------------------------
Less distributions from net investment
income ................................ (0.14) (0.31) (0.33) (0.34) (0.32) (0.33)
---------------------------------------------------------------------------
Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d)
---------------------------------------------------------------------------
Net asset value, end of period ......... $ 6.71 $ 6.71 $ 6.47 $ 6.41 $ 6.45 $ 6.55
===========================================================================
Total return (e) ....................... 2.12% 8.63% 6.11% 4.75% 3.53% 2.95%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ........................... 0.58% 0.59% 0.59% 0.60% 0.59% 0.60%
Net investment income .................. 3.90% 4.25% 4.77% 4.90% 4.77% 4.41%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 985,225 $863,951 $612,026 $470,751 $387,239 $334,681
Portfolio turnover rate ................ 22.11% 34.74% 21.66% 12.34% 20.54% 29.14%
(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%.
The accompanying notes are an integral part of these financial statements.
90 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED)
FRANKLIN U.S. GOVERNMENT SECURITIES FUND PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------- ----------------- --------------
MORTGAGE-BACKED SECURITIES 97.9%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) FIXED RATE 97.9%
GNMA GP 30 Year, 8.25%, 3/15/17 - 10/15/17 ....................... $ 90,733 $ 100,508
GNMA GP 30 Year, 9.25%, 5/15/16 - 12/15/16 ....................... 199,649 221,397
GNMA GP 30 Year, 11.00%, 7/15/10 - 11/15/10 ...................... 17,410 17,760
GNMA GP 30 Year, 11.25%, 7/15/13 - 12/15/15 ...................... 125,294 139,695
GNMA GP 30 Year, 11.50%, 2/15/13 - 5/15/13 ....................... 19,926 22,082
GNMA GP 30 Year, 11.75%, 7/15/13 - 8/15/13 ....................... 23,665 26,033
GNMA GP 30 Year, 12.00%, 3/15/11 ................................. 2,044 2,143
GNMA GP 30 Year, 12.75%, 5/15/14 ................................. 3,683 4,229
GNMA I SF 15 Year, 6.50%, 5/15/18 ................................ 781,008 846,809
GNMA I SF 30 Year, 4.50%, 3/15/39 ................................ 105,530,660 107,030,116
GNMA I SF 30 Year, 4.50%, 1/15/39 - 3/15/40 ...................... 1,210,140,981 1,227,336,621
GNMA I SF 30 Year, 5.00%, 8/15/39 ................................ 180,363,401 188,201,046
(a)GNMA I SF 30 Year, 5.00%, 2/15/33 - 3/15/40 ...................... 2,152,014,611 2,245,373,054
GNMA I SF 30 Year, 5.50%, 2/15/39 ................................ 134,442,230 142,483,008
GNMA I SF 30 Year, 5.50%, 5/15/28 - 12/15/39 ..................... 1,485,317,715 1,578,362,720
GNMA I SF 30 Year, 6.00%, 10/15/23 - 2/15/39 ..................... 970,409,345 1,043,289,633
GNMA I SF 30 Year, 6.00%, 12/15/39 ............................... 121,867,481 130,384,727
GNMA I SF 30 Year, 6.50%, 5/15/23 - 8/15/37 ...................... 236,588,345 258,180,778
GNMA I SF 30 Year, 6.75%, 3/15/26 ................................ 38,644 43,124
GNMA I SF 30 Year, 7.00%, 4/15/16 - 9/15/32 ...................... 144,019,469 161,459,528
GNMA I SF 30 Year, 7.25%, 11/15/25 - 1/15/26 ..................... 470,243 527,651
GNMA I SF 30 Year, 7.50%, 7/15/16 - 8/15/33 ...................... 46,781,933 52,687,920
GNMA I SF 30 Year, 7.70%, 1/15/21 - 1/15/22 ...................... 359,273 409,588
GNMA I SF 30 Year, 8.00%, 11/15/15 - 9/15/30 ..................... 27,962,335 31,811,557
GNMA I SF 30 Year, 8.50%, 5/15/16 - 6/15/25 ...................... 6,144,598 7,016,097
GNMA I SF 30 Year, 9.00%, 11/15/15 - 7/15/23 ..................... 7,498,969 8,496,571
GNMA I SF 30 Year, 9.50%, 5/15/16 - 8/15/22 ...................... 4,584,830 5,260,675
GNMA I SF 30 Year, 10.00%, 2/15/16 - 3/15/25 ..................... 6,065,607 6,860,414
GNMA I SF 30 Year, 10.50%, 2/15/12 - 10/15/21 .................... 4,507,795 5,059,123
GNMA I SF 30 Year, 11.00%, 7/15/10 - 5/15/21 ..................... 2,825,118 3,144,878
GNMA I SF 30 Year, 11.50%, 3/15/13 - 2/15/16 ..................... 769,562 856,790
GNMA I SF 30 Year, 12.00%, 5/15/11 - 1/15/18 ..................... 3,859,766 4,318,746
GNMA I SF 30 Year, 12.50%, 5/15/10 - 1/15/16 ..................... 2,339,046 2,638,609
GNMA I SF 30 Year, 13.00%, 1/15/11 - 9/15/15 ..................... 2,691,771 3,028,613
GNMA II GP 30 Year, 8.75%, 3/20/17 - 7/20/17 ..................... 36,538 40,654
GNMA II GP 30 Year, 11.50%, 8/20/13 .............................. 9,781 10,810
GNMA II SF 30 Year, 4.50%, 12/20/39 .............................. 136,875,974 138,430,866
GNMA II SF 30 Year, 4.50%, 5/20/33 - 2/20/40 ..................... 195,159,695 197,575,954
GNMA II SF 30 Year, 5.00%, 9/20/33 ............................... 145,870,757 152,518,760
GNMA II SF 30 Year, 5.00%, 7/20/33 - 12/20/39 .................... 254,130,822 265,124,450
GNMA II SF 30 Year, 5.50%, 12/20/34 .............................. 93,961,595 100,001,637
GNMA II SF 30 Year, 5.50%, 6/20/34 - 3/20/39 ..................... 555,981,800 590,550,845
GNMA II SF 30 Year, 6.00%, 10/20/23 - 12/20/38 ................... 543,326,958 584,955,793
GNMA II SF 30 Year, 6.50%, 6/20/24 - 1/20/39 ..................... 175,158,995 190,418,148
GNMA II SF 30 Year, 7.00%, 2/20/28 - 7/20/33 ..................... 26,014,625 29,257,547
GNMA II SF 30 Year, 7.50%, 10/20/22 - 4/20/32 .................... 4,776,162 5,379,981
Semiannual Report | 91
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (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, 8.00%, 8/20/16 - 6/20/30 .......................... $ 2,402,932 $ 2,732,629
GNMA II SF 30 Year, 8.50%, 4/20/16 - 6/20/25 .......................... 1,206,955 1,370,196
GNMA II SF 30 Year, 9.00%, 8/20/16 - 11/20/21 ......................... 384,491 436,904
GNMA II SF 30 Year, 9.50%, 3/20/18 - 4/20/25 .......................... 242,012 278,055
GNMA II SF 30 Year, 10.00%, 8/20/15 - 3/20/21 ......................... 459,830 519,980
GNMA II SF 30 Year, 10.50%, 9/20/13 - 3/20/21 ......................... 1,240,656 1,379,513
GNMA II SF 30 Year, 11.00%, 8/20/13 - 1/20/21 ......................... 187,581 209,105
GNMA II SF 30 Year, 11.50%, 9/20/13 - 2/20/18 ......................... 102,692 113,437
GNMA II SF 30 Year, 12.00%, 9/20/13 - 2/20/16 ......................... 168,375 187,881
GNMA II SF 30 Year, 12.50%, 10/20/13 - 11/20/15 ....................... 112,666 127,137
GNMA II SF 30 Year, 13.00%, 10/20/13 - 9/20/15 ........................ 109,727 124,481
--------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $9,174,543,281) ................ 9,477,387,006
--------------
SHARES
----------------
SHORT TERM INVESTMENTS (COST $239,265,772) 2.5%
MONEY MARKET FUNDS 2.5% ...............................................
(b)Institutional Fiduciary Trust Money Market Portfolio, 0.00% ........... 239,265,772 239,265,772
--------------
TOTAL INVESTMENTS (COST $9,413,809,053) 100.4% ........................ 9,716,652,778
OTHER ASSETS, LESS LIABILITIES (0.4)% ................................. (39,250,640)
--------------
NET ASSETS 100.0% ..................................................... $9,677,402,138
==============
See Abbreviations on page 131.
(a) A portion or all of the security purchased on a TBA basis. See Note 1(d).
(b) See Note 7 regarding investments in the Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield
at period end.
The accompanying notes are an integral part of these financial statements.
92 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------------------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period .............................. $ 10.74 $ 11.92 $ 14.58 $ 12.89 $ 12.59 $ 10.16
---------------------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ........... 0.21 0.43 0.41 0.40 0.43 0.45
Net realized and unrealized
gains (losses) ..................... 0.35 (1.11) (1.93) 2.16 0.37 2.42
---------------------------------------------------------------------------------------
Total from investment operations ...... 0.56 (0.68) (1.52) 2.56 0.80 2.87
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income ............... (0.24) (0.42) (0.40) (0.40) (0.41) (0.44)
Net realized gains .................. (0.16) (0.08) (0.74) (0.47) (0.09) --
---------------------------------------------------------------------------------------
Total distributions ................... (0.40) (0.50) (1.14) (0.87) (0.50) (0.44)
---------------------------------------------------------------------------------------
Redemption fees (c) ................... -- -- -- (d) -- (d) -- (d) -- (d)
---------------------------------------------------------------------------------------
Net asset value, end of period ........ $ 10.90 $ 10.74 $ 11.92 $ 14.58 $ 12.89 $ 12.59
=======================================================================================
Total return (e) ...................... 5.29% (5.20)% (11.63)% 20.32% 6.69% 28.81%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) .......................... 0.79% 0.80% 0.74% 0.75% 0.76% 0.78%
Net investment income ................. 3.82% 4.29% 2.92% 2.83% 3.54% 3.92%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $ 1,684,461 $1,543,060 $1,769,397 $2,157,614 $1,926,732 $1,986,034
Portfolio turnover rate ............... 3.82% 15.49% 8.32% 10.84% 7.97% 13.53%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 93
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------------
CLASS B
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of
period ............................... $ 10.74 $ 11.91 $ 14.56 $ 12.88 $ 12.57 $ 10.15
---------------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ........... 0.18 0.38 0.33 0.33 0.37 0.39
Net realized and unrealized gains
(losses) ........................... 0.35 (1.10) (1.91) 2.15 0.38 2.42
---------------------------------------------------------------------------------
Total from investment operations ...... 0.53 (0.72) (1.58) 2.48 0.75 2.81
---------------------------------------------------------------------------------
Less distributions from:
Net investment income ............... (0.21) (0.37) (0.33) (0.33) (0.35) (0.39)
Net realized gains .................. (0.16) (0.08) (0.74) (0.47) (0.09) --
---------------------------------------------------------------------------------
Total distributions ................... (0.37) (0.45) (1.07) (0.80) (0.44) (0.39)
---------------------------------------------------------------------------------
Redemption fees (c) ................... -- -- -- (d) -- (d) -- (d) -- (d)
---------------------------------------------------------------------------------
Net asset value, end of period ........ $ 10.90 $ 10.74 $ 11.91 $ 14.56 $ 12.88 $ 12.57
=================================================================================
Total return (e) 5.02% (5.65)% (12.04)% 19.66% 6.25% 28.11%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) .......................... 1.28% 1.30% 1.24% 1.26% 1.26% 1.28%
Net investment income ................. 3.33% 3.79% 2.42% 2.32% 3.04% 3.42%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $ 58,404 $ 64,176 $ 92,695 $127,587 $133,824 $154,277
Portfolio turnover rate ............... 3.82% 15.49% 8.32% 10.84% 7.97% 13.53%
(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%.
The accompanying notes are an integral part of these financial statements.
94 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-----------------------------------------------------------------------------
CLASS C
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ..... $ 10.71 $ 11.88 $ 14.53 $ 12.85 $ 12.55 $ 10.13
-----------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) .............. 0.18 0.38 0.33 0.33 0.37 0.39
Net realized and unrealized gains
(losses) .............................. 0.34 (1.10) (1.91) 2.15 0.37 2.42
-----------------------------------------------------------------------------
Total from investment operations ......... 0.52 (0.72) (1.58) 2.48 0.74 2.81
-----------------------------------------------------------------------------
Less distributions from:
Net investment income .................. (0.21) (0.37) (0.33) (0.33) (0.35) (0.39)
Net realized gains ..................... (0.16) (0.08) (0.74) (0.47) (0.09) --
-----------------------------------------------------------------------------
Total distributions ...................... (0.37) (0.45) (1.07) (0.80) (0.44) (0.39)
-----------------------------------------------------------------------------
Redemption fees (c) ...................... -- -- -- (d) -- (d) -- (d) -- (d)
-----------------------------------------------------------------------------
Net asset value, end of period ........... $ 10.86 $ 10.71 $ 11.88 $ 14.53 $ 12.85 $ 12.55
=============================================================================
Total return (e) ......................... 4.96% (5.64)% (12.06)% 19.72% 6.19% 28.16%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ............................. 1.29% 1.30% 1.24% 1.26% 1.25% 1.28%
Net investment income .................... 3.32% 3.79% 2.42% 2.32% 3.05% 3.42%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ........ $ 354,864 $300,544 $339,247 $424,977 $391,509 $435,714
Portfolio turnover rate .................. 3.82% 15.49% 8.32% 10.84% 7.97% 13.53%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 95
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
-------------------------------------------------------------------------
CLASS R
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period ... $ 10.71 $ 11.89 $ 14.54 $ 12.86 $ 12.57 $ 10.15
-------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ............ 0.19 0.40 0.36 0.35 0.39 0.43
Net realized and unrealized gains
(losses) ............................ 0.35 (1.11) (1.92) 2.16 0.36 2.40
-------------------------------------------------------------------------
Total from investment operations ....... 0.54 (0.71) (1.56) 2.51 0.75 2.83
-------------------------------------------------------------------------
Less distributions from:
Net investment income ................ (0.22) (0.39) (0.35) (0.36) (0.37) (0.41)
Net realized gains ................... (0.16) (0.08) (0.74) (0.47) (0.09) --
-------------------------------------------------------------------------
Total distributions .................... (0.38) (0.47) (1.09) (0.83) (0.46) (0.41)
-------------------------------------------------------------------------
Redemption fees (c) .................... -- -- -- (d) -- (d) -- (d) -- (d)
-------------------------------------------------------------------------
Net asset value, end of period ......... $ 10.87 $ 10.71 $ 11.89 $ 14.54 $ 12.86 $ 12.57
=========================================================================
Total return (e) ....................... 5.13% (5.57)% (11.92)% 19.92% 6.29% 28.35%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) ........................... 1.14% 1.15% 1.09% 1.11% 1.11% 1.13%
Net investment income .................. 3.47% 3.94% 2.57% 2.47% 3.19% 3.57%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ...... $ 39,668 $37,795 $36,596 $41,845 $27,736 $14,649
Portfolio turnover rate ................ 3.82% 15.49% 8.32% 10.84% 7.97% 13.53%
(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%.
The accompanying notes are an integral part of these financial statements.
96 | Semiannual Report
Franklin Custodian Funds
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN UTILITIES FUND
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED SEPTEMBER 30,
(UNAUDITED) 2009 2008 2007 2006 2005
---------------------------------------------------------------------------
ADVISOR CLASS
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the period)
Net asset value, beginning of period... $ 10.79 $ 11.98 $ 14.64 $ 12.95 $ 12.64 $ 10.20
---------------------------------------------------------------------------
Income from investment operations (a):
Net investment income (b) ........... 0.22 0.45 0.42 0.42 0.45 0.48
Net realized and unrealized
gains (losses) ..................... 0.35 (1.12) (1.92) 2.17 0.38 2.42
---------------------------------------------------------------------------
Total from investment operations ...... 0.57 (0.67) (1.50) 2.59 0.83 2.90
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............... (0.25) (0.44) (0.42) (0.43) (0.43) (0.46)
Net realized gains .................. (0.16) (0.08) (0.74) (0.47) (0.09) --
---------------------------------------------------------------------------
Total distributions ................... (0.41) (0.52) (1.16) (0.90) (0.52) (0.46)
---------------------------------------------------------------------------
Redemption fees (c) ................... -- -- -- (d) -- (d) -- (d) -- (d)
---------------------------------------------------------------------------
Net asset value, end of period ........ $ 10.95 $ 10.79 $ 11.98 $ 14.64 $ 12.95 $ 12.64
===========================================================================
Total return (e) ...................... 5.34% (5.12)% (11.45)% 20.43% 6.88% 29.00%
RATIOS TO AVERAGE NET ASSETS (f)
Expenses (g) .......................... 0.64% 0.65% 0.59% 0.61% 0.61% 0.63%
Net investment income ................. 3.97% 4.44% 3.07% 2.97% 3.69% 4.07%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ..... $ 160,443 $124,454 $58,817 $86,823 $103,041 $110,249
Portfolio turnover rate ............... 3.82% 15.49% 8.32% 10.84% 7.97% 13.53%
(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%.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 97
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------ --------------- -------------- --------------
COMMON STOCKS 95.1%
DIVERSIFIED TELECOMMUNICATION SERVICES 2.4%
AT&T Inc. .................................................. United States 1,200,000 $ 31,008,000
Verizon Communications Inc. ................................ United States 800,000 24,816,001
--------------
55,824,001
--------------
ELECTRIC.UTILITIES 47.7%
Allegheny Energy Inc. ...................................... United States 1,400,000 32,200,000
American.Electric Power Co. Inc. ........................... United States 2,400,000 82,032,000
Cleco Corp. ................................................ United States 1,000,000 26,550,000
Duke Energy Corp. .......................................... United States 3,800,000 62,016,000
Edison International ....................................... United States 2,000,000 68,340,000
Entergy Corp. .............................................. United States 1,300,000 105,755,000
Exelon Corp. ............................................... United States 2,000,000 87,620,000
FirstEnergy Corp. .......................................... United States 1,700,000 66,453,000
FPL Group Inc. ............................................. United States 1,300,000 62,829,000
Great Plains Energy Inc. ................................... United States 1,000,000 18,570,000
Hawaiian.Electric Industries Inc. .......................... United States 600,000 13,470,000
Northeast Utilities ........................................ United States 900,000 24,876,000
NV Energy Inc. ............................................. United States 5,600,000 69,048,000
Pinnacle.West Capital Corp. ................................ United States 600,000 22,638,000
PNM Resources Inc. ......................................... United States 3,300,000 41,349,000
Portland.General Electric Co. .............................. United States 1,100,000 21,241,000
PPL Corp. .................................................. United States 2,800,000 77,588,000
Progress.Energy Inc. ....................................... United States 1,500,000 59,040,000
Scottish.and Southern Energy PLC ........................... United Kingdom 1,500,000 25,074,723
The Southern Co. ........................................... United States 3,200,000 106,112,000
Westar Energy Inc. ......................................... United States 1,080,600 24,097,380
--------------
1,096,899,103
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 2.5%
Constellation Energy Group ................................. United States 1,600,000 56,176,000
--------------
MULTI-UTILITIES 37.5%
Alliant Energy Corp. ....................................... United States 1,500,000 49,890,000
Ameren Corp. ............................................... United States 800,000 20,864,000
CenterPoint Energy Inc. .................................... United States 3,800,000 54,568,000
CMS Energy Corp. ........................................... United States 1,300,000 20,098,000
Consolidated Edison Inc. ................................... United States 1,100,000 48,994,000
Dominion.Resources Inc. .................................... United States 1,500,000 61,665,000
DTE Energy Co. ............................................. United States 500,000 22,300,000
GDF Suez.................................................... France 700,000 27,048,019
National.Grid PLC .......................................... United Kingdom 4,987,755 48,580,205
NiSource.Inc. .............................................. United States 1,300,000 20,540,000
PG&E Corp. ................................................. United States 2,200,000 93,324,000
Public Service Enterprise Group Inc. ....................... United States 2,800,000 82,656,000
RWE AG ..................................................... Germany 300,000 26,657,566
SCANA Corp. ................................................ United States 775,000 29,132,250
Sempra Energy .............................................. United States 2,000,000 99,800,000
TECO Energy Inc. ........................................... United States 700,000 11,123,000
98 | Semiannual Report
Franklin Custodian Funds
STATEMENT OF INVESTMENTS, MARCH 31, 2010 (UNAUDITED) (CONTINUED)
FRANKLIN UTILITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------ -------------- ---------------- --------------
COMMON STOCKS (CONTINUED)
MULTI-UTILITIES (CONTINUED)
United Utilities Group PLC ......................................... United Kingdom 2,960,189 $ 25,124,002
Vectren Corp. ...................................................... United States 800,000 19,776,000
Wisconsin Energy Corp. ............................................. United States 900,000 44,469,000
Xcel Energy Inc. ................................................... United States 2,600,000 55,120,000
--------------
861,729,042
--------------
OIL, GAS & CONSUMABLE FUELS 3.3%
Spectra Energy Corp. ............................................... United States 2,197,600 49,511,928
The Williams Cos. Inc. ............................................. United States 1,105,190 25,529,889
--------------
75,041,817
--------------
WATER UTILITIES 1.7%
American Water Works Co. Inc. ...................................... United States 1,800,000 39,168,000
--------------
TOTAL COMMON STOCKS (COST $1,724,114,278) .......................... 2,184,837,963
--------------
PRINCIPAL AMOUNT
----------------
CORPORATE BONDS 3.3%
ELECTRIC UTILITIES 1.6%
MidAmerican Energy Holdings Co., senior note, 8.48%, 9/15/28 ....... United States $25,000,000 30,918,375
Northeast Generation Co., senior secured note, B-1, 8.812%, ........
10/15/26........................................................... United States 7,142,579 7,200,841
--------------
38,119,216
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.2%
Energy Future Holdings Corp., senior note,
P, 5.55%, 11/15/14 ................................................ United States 32,300,000 23,735,461
R, 6.55%, 11/15/34 ................................................ United States 5,700,000 2,964,000
--------------
26,699,461
--------------
MULTI-UTILITIES 0.5%
Aquila Inc., senior note,
9.95%, 2/01/11 .................................................... United States 6,000,000 6,307,608
8.27%, 11/15/21 ................................................... United States 6,100,000 6,359,091
--------------
12,666,699
--------------
TOTAL CORPORATE BONDS (COST $77,804,433) ........................... 77,485,376
--------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $1,801,918,711) ............................................. 2,262,323,339
--------------
SHARES
----------------
SHORT TERM INVESTMENTS (COST $27,420,822) 1.2%
MONEY MARKET FUNDS 1.2%
(a) Institutional Fiduciary Trust Money Market Portfolio, 0.00%......... United States 27,420,822 27,420,822
--------------
TOTAL INVESTMENTS (COST $1,829,339,533) 99.6% ...................... 2,289,744,161
OTHER ASSETS, LESS LIABILITIES 0.4% ................................ 8,096,457
--------------
NET ASSETS 100.0% .................................................. $2,297,840,618
==============
(a) See Note 7 regarding investments in the Institutional Fiduciary Trust
Money Market Portfolio. The rate shown is the annualized seven-day yield
at period end.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 99
Franklin Custodian Funds
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
March 31, 2010 (unaudited)
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................... $ 364,997,865 $1,715,605,439 $50,474,392,213
Cost - Non-controlled affiliated issuers (Note 11).... -- -- 2,047,309,399
Cost - Sweep Money Fund (Note 7) ..................... 996,856 114,279,732 260,988,866
Cost - Repurchase agreements ......................... -- -- 347,581,492
------------------------------------------------
Total cost of investments ............................ $ 365,994,721 $1,829,885,171 $53,130,271,970
================================================
Value - Unaffiliated issuers ......................... $ 695,462,478 $3,427,509,639 $49,685,749,885
Value - Non-controlled affiliated issuers (Note 11)... -- -- 1,803,151,382
Value - Sweep Money Fund (Note 7) .................... 996,856 114,279,732 260,988,866
Value - Repurchase agreements ........................ -- -- 347,581,492
------------------------------------------------
Total value of investments (a) ....................... 696,459,334 3,541,789,371 52,097,471,625
Cash ................................................... -- 112,444 14,938,582
Receivables:
Investment securities sold ........................... -- -- 431,485,786
Capital shares sold .................................. 987,587 5,596,822 133,431,332
Dividends and interest ............................... 301,317 2,882,806 660,077,897
Other assets ........................................... 138 8,156 1,949,252
------------------------------------------------
Total assets ...................................... 697,748,376 3,550,389,599 53,339,354,474
------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ...................... -- -- 903,707,432
Capital shares redeemed .............................. 919,786 5,124,878 91,464,215
Affiliates ........................................... 756,511 3,382,367 44,170,391
Allocator Funds (Note 12) ............................ -- 50,955 149,484
Unaffiliated transfer agent fees ..................... 334,067 1,016,566 6,466,410
Payable upon return of securities loaned ............... -- -- 31,012,906
Accrued expenses and other liabilities ................. 133,210 373,517 3,004,937
------------------------------------------------
Total liabilities ................................. 2,143,574 9,948,283 1,079,975,775
------------------------------------------------
Net assets, at value ............................ $ 695,604,802 $3,540,441,316 $52,259,378,699
================================================
Net assets consist of:
Paid-in capital ........................................ $ 430,274,715 $1,923,436,003 $59,950,751,117
Undistributed net investment income (loss) ............. (1,965,046) -- --
Distributions in excess of net investment income ....... -- (2,303,424) (402,932,276)
Net unrealized appreciation (depreciation) ............. 330,470,898 1,711,904,200 (1,033,021,174)
Accumulated net realized gain (loss) ................... (63,175,765) (92,595,463) (6,255,418,968)
------------------------------------------------
Net assets, at value ............................ $ 695,604,802 $3,540,441,316 $52,259,378,699
================================================
(a) The Franklin Income Fund includes $30,292,875 of securities loaned.
The accompanying notes are an integral part of these financial statements.
100 | Semiannual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2010 (unaudited)
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------------------------------------------
CLASS A:
Net assets, at value ...................................... $ 571,135,665 $2,537,815,311 $30,823,642,079
------------------------------------------------
Shares outstanding ........................................ 21,501,836 61,031,378 14,683,998,418
------------------------------------------------
Net asset value per share (a) ............................. $ 26.56 $ 41.58 $ 2.10
------------------------------------------------
Maximum offering price per share (net asset value per
share / 94.25%, 94.25% and 95.75%, respectively) ......... $ 28.18 $ 44.12 $ 2.19
------------------------------------------------
CLASS B:
Net assets, at value ...................................... $ 12,730,440 $ 75,003,509 $ 1,894,593,654
------------------------------------------------
Shares outstanding ........................................ 516,618 1,877,922 906,716,489
------------------------------------------------
Net asset value and maximum offering price per share (a)... $ 24.64 $ 39.94 $ 2.09
------------------------------------------------
CLASS B1:
Net assets, at value ...................................... -- -- $ 32,103,072
------------------------------------------------
Shares outstanding ........................................ -- -- 15,268,038
------------------------------------------------
Net asset value and maximum offering price per share (a)... -- -- $ 2.10
------------------------------------------------
CLASS C:
Net assets, at value ...................................... $ 94,837,479 $ 353,659,109 $14,717,275,473
------------------------------------------------
Shares outstanding ........................................ 3,894,713 8,950,015 6,956,068,311
------------------------------------------------
Net asset value and maximum offering price per share (a)... $ 24.35 $ 39.51 $ 2.12
------------------------------------------------
CLASS R:
Net assets, at value ...................................... $ 6,733,008 $ 88,248,730 $ 356,917,380
------------------------------------------------
Shares outstanding ........................................ 254,511 2,128,308 172,083,411
------------------------------------------------
Net asset value and maximum offering price per share ...... $ 26.45 $ 41.46 $ 2.07
------------------------------------------------
ADVISOR CLASS:
Net assets, at value ...................................... $ 10,168,210 $ 485,714,657 $ 4,434,847,041
------------------------------------------------
Shares outstanding ........................................ 380,962 11,675,135 2,124,611,267
------------------------------------------------
Net asset value and maximum offering price per share ...... $ 26.69 $ 41.60 $ 2.09
------------------------------------------------
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 101
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2010 (unaudited)
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
--------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................................................ $ 9,174,543,281 $1,801,918,711
Cost - Sweep Money Fund (Note 7) ....................................................... 239,265,772 27,420,822
--------------------------------
Total cost of investments .............................................................. $ 9,413,809,053 $1,829,339,533
================================
Value - Unaffiliated issuers ........................................................... $ 9,477,387,006 $2,262,323,339
Value - Sweep Money Fund (Note 7) ...................................................... 239,265,772 27,420,822
--------------------------------
Total value of investments ............................................................. 9,716,652,778 2,289,744,161
Receivables:
Capital shares sold .................................................................... 29,240,518 6,259,963
Dividends and interest ................................................................. 38,699,303 7,736,993
Other assets ............................................................................. 22,982 5,698
--------------------------------
Total assets ........................................................................ 9,784,615,581 2,303,746,815
--------------------------------
Liabilities:
Payables:
Investment securities purchased ........................................................ 63,915,346 --
Capital shares redeemed ................................................................ 34,224,229 3,399,814
Affiliates ............................................................................. 7,590,132 1,835,847
Allocator Funds (Note 12) .............................................................. 29,377 6,897
Unaffiliated transfer agent fees ....................................................... 1,102,458 377,743
Accrued expenses and other liabilities ................................................... 351,901 285,896
--------------------------------
Total liabilities ................................................................... 107,213,443 5,906,197
--------------------------------
Net assets, at value .............................................................. $ 9,677,402,138 $2,297,840,618
================================
Net assets consist of:
Paid-in capital .......................................................................... $ 9,753,117,340 $1,840,955,301
Undistributed net investment income (distributions in excess of net investment income) ... (10,879,861) 3,313,770
Net unrealized appreciation (depreciation) ............................................... 302,843,725 460,412,497
Accumulated net realized gain (loss) ..................................................... (367,679,066) (6,840,950)
--------------------------------
Net assets, at value .............................................................. $ 9,677,402,138 $2,297,840,618
================================
The accompanying notes are an integral part of these financial statements.
102 | Semiannual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2010 (unaudited)
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
----------------------------------
CLASS A:
Net assets, at value .................................................... $ 6,410,681,408 $ 1,684,461,363
----------------------------------
Shares outstanding ...................................................... 957,566,053 154,566,858
----------------------------------
Net asset value per share (a) ........................................... $ 6.69 $ 10.90
----------------------------------
Maximum offering price per share (net asset value per share / 95.75%).... $ 6.99 $ 11.38
----------------------------------
CLASS B:
Net assets, at value .................................................... $ 174,946,938 $ 58,404,333
----------------------------------
Shares outstanding ...................................................... 26,172,408 5,360,010
----------------------------------
Net asset value and maximum offering price per share (a) ................. $ 6.68 $ 10.90
----------------------------------
CLASS C:
Net assets, at value .................................................... $ 1,977,819,248 $ 354,864,068
----------------------------------
Shares outstanding ...................................................... 297,135,674 32,671,619
----------------------------------
Net asset value and maximum offering price per share (a) ................. $ 6.66 $ 10.86
----------------------------------
CLASS R:
Net assets, at value .................................................... $ 128,729,784 $ 39,668,134
----------------------------------
Shares outstanding ...................................................... 19,245,938 3,649,824
----------------------------------
Net asset value and maximum offering price per share ..................... $ 6.69 $ 10.87
----------------------------------
ADVISOR CLASS:
Net assets, at value .................................................... $ 985,224,760 $ 160,442,720
----------------------------------
Shares outstanding ...................................................... 146,782,474 14,645,723
----------------------------------
Net asset value and maximum offering price per share .................... $ 6.71 $ 10.95
----------------------------------
(a) Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 103
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the six months ended March 31, 2010 (unaudited)
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
---------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ............................................ $ 2,033,472 $ 23,980,325 $ 297,642,682
Non-controlled affiliated issuers (Note 11) ..................... -- -- 22,913,188
Interest:
Unaffiliated issuers ............................................ -- 7,876 1,491,441,173
Non-controlled affiliated issuers (Note 11) ..................... -- -- 36,890,591
Income from securities loaned ..................................... -- -- 297,481
---------------------------------------------------
Total investment income .................................... 2,033,472 23,988,201 1,849,185,115
---------------------------------------------------
Expenses:
Management fees (Note 3a) ......................................... 1,581,497 7,385,689 96,302,659
Distribution fees: (Note 3c)
Class A ......................................................... 666,574 2,876,058 21,889,371
Class B ......................................................... 64,178 402,276 9,817,508
Class B1 ........................................................ -- -- 133,751
Class C ......................................................... 442,759 1,640,631 44,940,438
Class R ......................................................... 16,364 186,647 836,472
Transfer agent fees (Note 3e) ..................................... 1,006,957 3,685,459 22,543,650
Special servicing agreement fees (Note 12) ........................ -- 284,524 1,192,645
Custodian fees (Note 4) ........................................... 4,329 22,099 388,255
Reports to shareholders ........................................... 88,645 313,566 2,558,744
Registration and filing fees ...................................... 59,706 87,928 462,351
Professional fees ................................................. 41,773 44,463 255,331
Trustees' fees and expenses ....................................... 2,593 20,931 144,684
Other ............................................................. 23,144 96,461 615,734
---------------------------------------------------
Total expenses ............................................. 3,998,519 17,046,732 202,081,593
Expense reductions (Note 4) ................................ (1) (2) (118)
---------------------------------------------------
Net expenses ............................................ 3,998,518 17,046,730 202,081,475
---------------------------------------------------
Net investment income (loss) .......................... (1,965,046) 6,941,471 1,647,103,640
---------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ......................................... 17,956,791 37,922,016 (1,197,548,711)
Non-controlled affiliated issuers (Note 11)................... -- -- (82,755,348)
Written options ................................................. -- -- 1,038,713
Foreign currency transactions ................................... 77,557 8,821 (1,824,169)
---------------------------------------------------
Net realized gain (loss) .............................. 18,034,348 37,930,837 (1,281,089,515)
---------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ..................................................... 72,035,852 406,845,894 4,140,394,887
Translation of other assets and liabilities denominated in
foreign currencies ........................................... -- (371) (27,938)
---------------------------------------------------
Net change in unrealized appreciation
(depreciation) ..................................... 72,035,852 406,845,523 4,140,366,949
---------------------------------------------------
Net realized and unrealized gain (loss) .............................. 90,070,200 444,776,360 2,859,277,434
---------------------------------------------------
Net increase (decrease) in net assets resulting from operations ...... $ 88,105,154 $ 451,717,831 $ 4,506,381,074
===================================================
The accompanying notes are an integral part of these financial statements.
104 | Semiannual Report
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the six months ended March 31, 2010 (unaudited)
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES FUND UTILITIES FUND
---------------------------------
Investment income:
Dividends ......................................................... $ -- $ 47,025,820
Interest .......................................................... 210,792,913 3,322,330
--------------------------------
Total investment income ...................................... 210,792,913 50,348,150
--------------------------------
Expenses:
Management fees (Note 3a) ......................................... 21,169,980 5,027,416
Distribution fees: (Note 3c)
Class A ......................................................... 4,169,741 1,203,467
Class B ......................................................... 647,999 198,815
Class C ......................................................... 5,719,471 1,063,248
Class R ......................................................... 344,845 96,710
Transfer agent fees (Note 3e) ..................................... 5,122,985 1,534,423
Special servicing agreement fees (Note 12) ........................ 166,953 44,813
Custodian fees (Note 4) ........................................... 59,585 21,612
Reports to shareholders ........................................... 326,375 159,426
Registration and filing fees ...................................... 181,653 89,934
Professional fees ................................................. 76,135 25,623
Trustees' fees and expenses ....................................... 36,109 10,507
Other ............................................................. 177,295 47,412
--------------------------------
Total expenses ............................................... 38,199,126 9,523,406
Expense reductions (Note 4) .................................. (3) (3)
--------------------------------
Net expenses ............................................... 38,199,123 9,523,403
--------------------------------
Net investment income ................................... 172,593,790 40,824,747
--------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ..................................................... 11,890,615 (3,401,415)
Foreign currency transactions ................................... -- (31,551)
--------------------------------
Net realized gain (loss) ................................ 11,890,615 (3,432,966)
--------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments ..................................................... 1,733,412 68,491,039
Translation of other assets and liabilities denominated in
foreign currencies ........................................... -- (17,207)
--------------------------------
Net change in unrealized appreciation (depreciation) .... 1,733,412 68,473,832
--------------------------------
Net realized and unrealized gain (loss) .............................. 13,624,027 65,040,866
--------------------------------
Net increase (decrease) in net assets resulting from operations ...... $ 186,217,817 $ 105,865,613
================================
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 105
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, 2010 YEAR ENDED MARCH 31, 2010 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2009 (UNAUDITED) SEPTEMBER 30, 2009
--------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) ...................... $ (1,965,046) $ (2,203,451) $ 6,941,471 $ 19,035,425
Net realized gain (loss) from investments and
foreign currency transactions .................. 18,034,348 (59,040,251) 37,930,837 18,944,348
Net change in unrealized appreciation
(depreciation) on investments and
translation of other assets and
liabilities denominated in foreign
currencies .................................... 72,035,852 117,993,942 406,845,523 50,707,596
--------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ................. 88,105,154 56,750,240 451,717,831 88,687,369
--------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ........................................ -- -- (16,704,519) (13,937,611)
Class B ........................................ -- -- (59,099) --
Class C ........................................ -- -- (605,181) (158,739)
Class R ........................................ -- -- (424,812) (93,243)
Advisor Class .................................. -- -- (4,186,666) (2,842,374)
Net realized gains:
Class A ........................................ -- (23,817,251) -- --
Class B ........................................ -- (674,313) -- --
Class C ........................................ -- (3,500,844) -- --
Advisor Class .................................. -- (211,314) -- --
--------------------------------------------------------------------------
Total distributions to shareholders ................. -- (28,203,722) (21,980,277) (17,031,967)
--------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ........................................ (4,888,201) 95,693,757 58,900,673 423,439,580
Class B ........................................ (2,699,717) 2,223,304 (23,638,394) 64,703
Class C ........................................ (330,044) 24,245,692 (5,570,020) 55,014,386
Class R ........................................ (466,616) 4,561,511 13,103,712 30,600,261
Advisor Class .................................. 741,734 5,097,576 (4,939,883) 151,094,118
--------------------------------------------------------------------------
Total capital share transactions .................... (7,642,844) 131,821,840 37,856,088 660,213,048
--------------------------------------------------------------------------
Net increase (decrease) in net assets ........ 80,462,310 160,368,358 467,593,642 731,868,450
Net assets:
Beginning of period ................................. 615,142,492 454,774,134 3,072,847,674 2,340,979,224
--------------------------------------------------------------------------
End of period ....................................... $ 695,604,802 $ 615,142,492 $ 3,540,441,316 $ 3,072,847,674
==========================================================================
Undistributed net investment income (loss)
(distributions in excess of net investment income)
included in net assets:
End of period ..................................... $ (1,965,046) $ -- $ (2,303,424) $ 12,735,382
==========================================================================
The accompanying notes are an integral part of these financial statements.
106 | 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, 2010 YEAR ENDED MARCH 31, 2010 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2009 (UNAUDITED) SEPTEMBER 30, 2009
--------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................ $ 1,647,103,640 $ 3,021,185,783 $ 172,593,790 $ 326,946,470
Net realized gain (loss) from investments,
written options and foreign currency
transactions .................................. (1,281,089,515) (4,679,001,452) 11,890,615 8,947,805
Net change in unrealized appreciation
(depreciation) on investments and translation
of other assets and liabilities denominated in
foreign currencies ............................ 4,140,366,949 5,364,093,012 1,733,412 306,262,342
--------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ................ 4,506,381,074 3,706,277,343 186,217,817 642,156,617
--------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ....................................... (1,056,761,799) (2,122,519,292) (129,334,653) (266,824,581)
Class B ....................................... (64,655,718) (162,039,544) (3,682,161) (10,979,232)
Class B1 ...................................... (1,479,961) (12,892,120) -- --
Class C ....................................... (461,117,464) (924,754,117) (30,774,270) (39,006,086)
Class R ....................................... (11,627,078) (22,649,572) (2,560,862) (5,108,595)
Advisor Class ................................. (161,290,476) (322,719,140) (19,573,023) (32,473,805)
Net realized gains:
Class A ....................................... -- (15,591,600) -- --
Class B ....................................... -- (1,384,690) -- --
Class B1 ...................................... -- (124,160) -- --
Class C ....................................... -- (7,179,957) -- --
Class R ....................................... -- (166,198) -- --
Advisor Class ................................. -- (2,449,031) -- --
--------------------------------------------------------------------------
Total distributions to shareholders ................ (1,756,932,496) (3,594,469,421) (185,924,969) (354,392,299)
--------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ....................................... 1,435,953,453 729,974,966 134,084,364 707,313,300
Class B ....................................... (265,899,390) (324,408,642) (55,687,864) (64,174,344)
Class B1 ...................................... (39,010,992) (136,813,461) -- --
Class C ....................................... 892,934,344 543,188,709 513,764,204 820,560,727
Class R ....................................... 23,180,055 40,235,428 (9,791,990) 29,529,703
Advisor Class ................................. 16,235,823 (24,803,405) 121,259,448 227,056,372
--------------------------------------------------------------------------
Total capital share transactions ................... 2,063,393,293 827,373,595 703,628,162 1,720,285,758
--------------------------------------------------------------------------
Net increase (decrease) in
net assets ............................... 4,812,841,871 939,181,517 703,921,010 2,008,050,076
Net assets:
Beginning of period ................................ 47,446,536,828 46,507,355,311 8,973,481,128 6,965,431,052
--------------------------------------------------------------------------
End of period ...................................... $ 52,259,378,699 $ 47,446,536,828 $ 9,677,402,138 $ 8,973,481,128
==========================================================================
Undistributed net investment income (distributions in
excess of net investment income) included in net
assets:
End of period .................................... $ (402,932,276) $ (293,103,420) $ (10,879,861) $ 2,451,318
==========================================================================
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 107
Franklin Custodian Funds
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FRANKLIN UTILITIES FUND
-------------------------------------
SIX MONTHS ENDED
MARCH 31, 2010 YEAR ENDED
(UNAUDITED) SEPTEMBER 30, 2009
-------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ......................................................... $ 40,824,747 $ 79,810,590
Net realized gain (loss) from investments and foreign currency transactions ... (3,432,966) 28,009,600
Net change in unrealized appreciation (depreciation) on investments and
translation of other assets and liabilities denominated in foreign
currencies ............. ................................................... 68,473,832 (249,432,367)
-------------------------------------
Net increase (decrease) in net assets resulting from operations .......... 105,865,613 (141,612,177)
-------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .................................................................... (35,370,116) (60,897,517)
Class B .................................................................... (1,186,684) (2,457,137)
Class C .................................................................... (6,383,269) (10,325,076)
Class R .................................................................... (779,667) (1,233,300)
Advisor Class .............................................................. (3,215,899) (2,775,441)
Net realized gains:
Class A .................................................................... (23,199,153) (11,143,330)
Class B .................................................................... (922,593) (556,682)
Class C .................................................................... (4,562,415) (2,138,465)
Class R .................................................................... (555,438) (236,227)
Advisor Class .............................................................. (1,930,079) (407,396)
-------------------------------------
Total distributions to shareholders ............................................. (78,105,313) (92,170,571)
-------------------------------------
Capital share transactions: (Note 2)
Class A .................................................................... 120,272,722 (47,298,609)
Class B .................................................................... (6,743,468) (18,007,546)
Class C .................................................................... 50,753,084 (4,044,700)
Class R .................................................................... 1,342,666 4,676,850
Advisor Class .............................................................. 34,425,335 71,734,045
-------------------------------------
Total capital share transactions ................................................ 200,050,339 7,060,040
-------------------------------------
Net increase (decrease) in net assets .................................... 227,810,639 (226,722,708)
Net assets:
Beginning of period ............................................................. 2,070,029,979 2,296,752,687
-------------------------------------
End of period ................................................................... $ 2,297,840,618 $ 2,070,029,979
=====================================
Undistributed net investment income included in net assets:
End of period ................................................................... $ 3,313,770 $ 9,424,658
=====================================
The accompanying notes are an integral part of these financial statements.
108 | 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. 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
Equity and other 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. Certain equity securities are valued based upon
fundamental characteristics or relationships to similar securities. Investments
in open-end mutual funds and non-registered money market funds are valued at the
closing net asset value. Short term investments are valued at cost.
Corporate debt securities, government securities, municipal securities, mortgage
backed securities, asset-backed securities, collateralized debt obligations and
other debt securities generally trade in the over-the-counter market rather than
on a securities exchange. The Funds 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 Funds' 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. Debt securities
denominated in a foreign currency are converted into their U.S. dollar
equivalent at the foreign exchange rate in effect at the close of the NYSE on
the date that the values of the foreign debt securities are determined.
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 Funds 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
Semiannual Report | 109
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a. SECURITY VALUATION (CONTINUED)
each security. The Funds' pricing services use independent market quotations
from loan dealers or financial institutions and may incorporate valuation
methodologies that consider multiple bond 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 equity 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 equity 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 security is determined.
The Funds have 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 based upon the underlying investment book value,
anticipated future cash flows, market changes in comparable or similar
securities, 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 Funds' 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. The Funds may enter
into foreign currency exchange contracts to facilitate transactions denominated
in a foreign currency. 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.
110 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
b. FOREIGN CURRENCY TRANSLATION (CONTINUED)
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.
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. JOINT REPURCHASE AGREEMENT
The Funds may enter into a joint repurchase agreement 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. A repurchase agreement is 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 joint repurchase agreement held by
the funds at period end had been entered into on March 31, 2010. The joint
repurchase agreement is valued at cost which approximates market value.
d. SECURITIES PURCHASED ON A WHEN-ISSUED, DELAYED DELIVERY, AND TBA BASIS
The Funds may purchase securities on a when-issued, 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. DERIVATIVE FINANCIAL INSTRUMENTS
Certain funds may invest in derivative financial instruments (derivatives) in
order to manage risk or gain exposure to various other investments or markets.
Derivatives are financial contracts based on an underlying or notional amount,
require no initial investment or an initial net investment that is smaller than
would normally be required to have a similar response to changes in market
factors, and require or permit net settlement. Derivatives may contain various
risks including the potential inability of the counterparty to fulfill their
obligations under the terms of the contract,
Semiannual Report | 111
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
e. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
the potential for an illiquid secondary market, and the potential for market
movements which may expose the Fund to gains or losses in excess of the amounts
shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers
or the Fund's independent pricing services and the Fund's net benefit or
obligation under the contract, as measured by the fair market value of the
contract, is included in net assets. Realized gain and loss and unrealized
appreciation and depreciation on these contracts for the period are included in
the Statement of Operations.
The Franklin Income Fund generally purchases or writes option contracts in order
to manage or gain exposure to equity price risk. An option is a contract
entitling the holder to purchase or sell a specific amount of shares or units of
a particular security, currency or index, or notional amount of a swap
(swaption), at a specified price. Options purchased are recorded as an asset
while options written are recorded as a liability. Upon exercise of an option,
the acquisition cost or sales proceeds of the security is adjusted by any
premium paid or received. Upon expiration of an option, any premium paid or
received is recorded as a realized loss or gain. Upon closing an option other
than through expiration or exercise, the difference between the premium and the
cost to close the position is recorded as a realized gain or loss.
See Note 10 regarding other derivative information.
f. EQUITY-LINKED SECURITIES
The Franklin Income Fund 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. Income received from equity
linked securities is recorded as realized gains in the Statement of Operations
and 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 guarantee 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. SECURITIES LENDING
The Franklin Income Fund participates 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
112 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
g. SECURITIES LENDING (CONTINUED)
is delivered to the fund on the next business day. The collateral is invested in
a non-registered money fund (Bank of New York Institutional Cash Reserve Fund or
ICRF) and in a 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.
In September of 2008, the Bank of New York Mellon (BNYM) advised the Fund that
the ICRF had exposure to certain defaulted debt obligations of Lehman Brothers
Holdings, Inc. and that they had created a separate sleeve (Series B) of the
ICRF to hold these securities apart from the main investments. Each investor in
the ICRF was allocated its pro-rata portion of Series B. The Fund's position in
Series B is disclosed on the Statement of Investments at fair value and any
unrealized loss attributable to the position is included in net assets.
h. 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 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.
i. INCOME TAXES
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. As a result, no provision for federal
income taxes is required. The Funds file U.S. income tax returns as well as tax
returns in certain other jurisdictions. As of March 31, 2010, and for all open
tax years, the Funds have determined that no provision for income tax is
required in the Funds' financial statements. Open tax years are those that
remain subject to examination by such taxing authorities, which in the case of
the U.S. is three years after the filing of a fund's tax return.
j. 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
Semiannual Report | 113
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
j. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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.
k. 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.
l. 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.
114 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At March 31, 2010, 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, 2010
Shares sold .................... 2,004,116 $ 49,818,877 6,838,086 $ 266,368,287
Shares issued in reinvestment of
distributions ................ -- -- 402,844 15,404,767
Shares redeemed ................ (2,206,800) (54,707,078) (5,793,608) (222,872,381)
-----------------------------------------------------------
Net increase (decrease) ........ (202,684) $ (4,888,201) 1,447,322 $ 58,900,673
===========================================================
Year ended September 30, 2009
Shares sold .................... 2,782,002 $ 53,411,677 12,015,889 $ 359,509,553
Shares issued on merger
(Note 14) .................... 7,598,915 126,195,671 14,593,037 451,362,637
Shares issued in reinvestment of
distributions ................ 1,359,432 21,288,705 486,462 12,711,248
Shares redeemed ................ (5,668,339) (105,202,296) (13,479,108) (400,143,858)
-----------------------------------------------------------
Net increase (decrease) ........ 6,072,010 $ 95,693,757 13,616,280 $ 423,439,580
===========================================================
CLASS B SHARES:
Six Months ended March 31, 2010
Shares sold .................... 26,881 $ 618,708 33,405 $ 1,253,187
Shares issued in reinvestment of
distributions ................ -- -- 1,489 54,809
Shares redeemed ................ (143,742) (3,318,425) (669,933) (24,946,390)
-----------------------------------------------------------
Net increase (decrease) ........ (116,861) $ (2,699,717) (635,039) $ (23,638,394)
===========================================================
Year ended September 30, 2009
Shares sold .................... 68,034 $ 1,166,470 269,458 $ 7,369,648
Shares issued on merger
(Note 14) .................... 471,140 7,329,289 897,036 26,650,945
Shares issued in reinvestment of
distributions ................ 39,296 576,475 -- --
Shares redeemed ................ (400,924) (6,848,930) (1,186,449) (33,955,890)
-----------------------------------------------------------
Net increase (decrease) ........ 177,546 $ 2,223,304 (19,955) $ 64,703
===========================================================
CLASS C SHARES:
Six Months ended March 31, 2010
Shares sold .................... 436,143 $ 9,894,790 755,646 $ 27,978,429
Shares issued in reinvestment of
distributions ................ -- -- 15,351 559,243
Shares redeemed ................ (450,476) (10,224,834) (932,113) (34,107,692)
-----------------------------------------------------------
Net increase (decrease) ........ (14,333) $ (330,044) (161,116) $ (5,570,020)
===========================================================
Year ended September 30, 2009
Shares sold .................... 610,534 $ 10,952,317 1,769,875 $ 50,036,992
Shares issued on merger
(Note 14) .................... 1,986,027 30,539,237 2,280,868 67,125,954
Shares issued in reinvestment of
distributions ................ 219,790 3,186,956 5,806 144,797
Shares redeemed ................ (1,201,455) (20,432,818) (2,213,519) (62,293,357)
-----------------------------------------------------------
Net increase (decrease) ........ 1,614,896 $ 24,245,692 1,843,030 $ 55,014,386
===========================================================
Semiannual Report | 115
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN DYNATECH FUND FRANKLIN GROWTH FUND
-------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
CLASS R SHARES:
Six Months ended March 31, 2010
Shares sold .................... 45,185 $ 1,121,427 614,658 $ 23,698,539
Shares issued in reinvestment of
distributions ................ -- -- 10,831 413,311
Shares redeemed ................ (64,971) (1,588,043) (287,457) (11,008,138)
---------------------------------------------------------
Net increase (decrease) ........ (19,786) $ (466,616) 338,032 $ 13,103,712
=========================================================
Year ended September 30, 2009 (a)
Shares sold .................... 105,135 $ 1,878,341 2,050,622 $ 61,397,829
Shares issued on merger
(Note 14) .................... 269,510 4,473,861 308,381 9,519,723
Shares issued in reinvestment of
distributions ................ -- -- 3,545 92,515
Shares redeemed ................ (100,348) (1,790,691) (1,390,720) (40,409,806)
---------------------------------------------------------
Net increase (decrease) ........ 274,297 $ 4,561,511 971,828 $ 30,600,261
=========================================================
ADVISOR CLASS SHARES:
Six Months ended March 31, 2010
Shares sold .................... 51,551 $ 1,308,738 598,425 $ 23,232,896
Shares issued in reinvestment of
distributions ................ -- -- 102,177 3,905,212
Shares redeemed ................ (23,180) (567,004) (823,339) (32,077,991)
---------------------------------------------------------
Net increase (decrease) ........ 28,371 $ 741,734 (122,737) $ (4,939,883)
=========================================================
Year ended September 30, 2009
Shares sold .................... 193,916 $ 3,835,277 1,828,858 $ 54,651,357
Shares issued on merger
(Note 14) .................... 99,151 1,649,870 4,691,275 145,148,039
Shares issued in reinvestment of
distributions ................ 13,467 211,295 102,244 2,668,575
Shares redeemed ................ (31,772) (598,866) (1,722,646) (51,373,853)
---------------------------------------------------------
Net increase (decrease) ........ 274,762 $ 5,097,576 4,899,731 $ 151,094,118
=========================================================
(a) For the period December 1, 2008 (effective date) to September 30, 2009,
for the Franklin DynaTech Fund.
FRANKLIN U.S. GOVERNMENT
FRANKLIN INCOME FUND SECURITIES FUND
----------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
CLASS A SHARES:
Six Months ended March 31, 2010
Shares sold ................. 1,576,591,081 $ 3,213,841,437 124,065,841$ 830,968,510
Shares issued in reinvestment
of distributions .......... 401,331,361 808,301,285 14,281,548 95,494,486
Shares redeemed ............. (1,270,125,334) (2,586,189,269) (118,400,194) (792,378,632)
-----------------------------------------------------------------------
Net increase (decrease) ..... 707,797,108 $ 1,435,953,453 19,947,195 $ 134,084,364
=======================================================================
Year ended September 30, 2009
Shares sold ................. 3,194,615,875 $ 5,446,582,263 327,684,616 $ 2,154,557,471
Shares issued in reinvestment
of distributions .......... 929,761,078 1,563,293,948 28,818,237 189,352,370
Shares redeemed ............. (3,760,506,184) (6,279,901,245) (248,416,455) (1,636,596,541)
-----------------------------------------------------------------------
Net increase (decrease) ..... 363,870,769 $ 729,974,966 108,086,398$ 707,313,300
=======================================================================
116 | 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 B SHARES:
Six Months ended March 31, 2010
Shares sold ................. 8,087,103 $ 16,414,369 933,182 $ 6,242,446
Shares issued in reinvestment
of distributions .......... 22,318,313 44,727,747 430,503 2,877,233
Shares redeemed ............. (160,640,686) (327,041,506) (9,693,605) (64,807,543)
--------------------------------------------------------------------
Net increase (decrease) ..... (130,235,270) $ (265,899,390) (8,329,920) $ (55,687,864)
====================================================================
Year ended September 30, 2009
Shares sold ................. 34,580,449 $ 58,074,216 8,056,168 $ 52,523,598
Shares issued in reinvestment
of distributions .......... 63,807,057 106,531,528 1,218,659 7,988,052
Shares redeemed ............. (295,644,541) (489,014,386) (18,942,006) (124,685,994)
--------------------------------------------------------------------
Net increase (decrease) ..... (197,257,035) $ (324,408,642) (9,667,179) $ (64,174,344)
====================================================================
CLASS B1 SHARES:
Six Months ended March 31, 2010
Shares sold ................. 87,642 $ 180,178
Shares issued in reinvestment
of distributions .......... 426,645 854,437
Shares redeemed ............. (19,883,483) (40,045,607)
----------------------------------
Net increase (decrease) ..... (19,369,196) (39,010,992)
==================================
Year ended September 30, 2009
Shares sold ................. 616,259 $ 1,006,991
Shares issued in reinvestment
of distributions .......... 4,478,768 7,437,357
Shares redeemed ............. (84,121,447) (145,257,809)
----------------------------------
Net increase (decrease) ..... (79,026,420) $ (136,813,461)
==================================
CLASS C SHARES:
Six Months ended March 31, 2010
Shares sold ................. 811,200,034 $ 1,666,950,076 108,871,363 $ 725,234,137
Shares issued in reinvestment
of distributions .......... 159,914,613 324,735,550 3,574,666 23,781,589
Shares redeemed ............. (535,043,386) (1,098,751,282) (35,349,898) (235,251,522)
--------------------------------------------------------------------
Net increase (decrease) ..... 436,071,261 $ 892,934,344 77,096,131 $ 513,764,204
====================================================================
Year ended September 30, 2009
Shares sold ................. 1,490,228,499 $ 2,568,269,575 177,348,206 $ 1,163,765,108
Shares issued in reinvestment
of distributions .......... 372,417,014 631,594,234 4,298,963 28,151,041
Shares redeemed ............. (1,592,519,479) (2,656,675,100) (56,632,697) (371,355,422)
--------------------------------------------------------------------
Net increase (decrease) ..... 270,126,034 $ 543,188,709 125,014,472 $ 820,560,727
====================================================================
Semiannual Report | 117
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 R SHARES:
Six Months ended March 31, 2010
Shares sold ................. 32,670,166 $ 65,717,871 4,775,546 $ 31,951,629
Shares issued in reinvestment
of distributions .......... 5,446,023 10,842,622 372,092 2,486,745
Shares redeemed ............. (26,569,727) (53,380,438) (6,620,088) (44,230,364)
-----------------------------------------------------------------
Net increase (decrease) ..... 11,546,462 $ 23,180,055 (1,472,450) $ (9,791,990)
=================================================================
Year ended September 30, 2009
Shares sold ................. 68,996,085 $ 115,848,208 13,507,302 $ 88,919,423
Shares issued in reinvestment
of distributions .......... 12,725,193 21,140,911 758,236 4,977,846
Shares redeemed ............. (58,266,413) (96,753,691) (9,774,179) (64,367,566)
-----------------------------------------------------------------
Net increase (decrease) ..... 23,454,865 $ 40,235,428 4,491,359 $ 29,529,703
=================================================================
ADVISOR CLASS SHARES:
Six Months ended March 31, 2010
Shares sold ................. 196,977,757 $ 399,697,232 30,613,325 $ 205,621,866
Shares issued in reinvestment
of distributions .......... 72,414,844 144,990,702 2,359,147 15,813,014
Shares redeemed ............. (261,640,781) (528,452,111) (14,933,906) (100,175,432)
-----------------------------------------------------------------
Net increase (decrease) ..... 7,751,820 $ 16,235,823 18,038,566 $ 121,259,448
=================================================================
Year ended September 30, 2009
Shares sold ................. 537,139,078 $ 923,014,317 56,386,916 $ 373,566,694
Shares issued in reinvestment
of distributions .......... 185,103,308 309,081,671 4,110,288 27,061,258
Shares redeemed ............. (772,328,637) (1,256,899,393) (26,340,863) (173,571,580)
-----------------------------------------------------------------
Net increase (decrease) ..... (50,086,251) $ (24,803,405) 34,156,341 $ 227,056,372
=================================================================
FRANKLIN UTILITIES FUND
----------------------------
SHARES AMOUNT
----------------------------
CLASS A SHARES:
Six Months ended March 31, 2010
Shares sold ...................................... 19,369,848 $ 212,982,699
Shares issued in reinvestment of distributions.... 4,520,035 48,855,778
Shares redeemed .................................. (12,993,488) (141,565,755)
----------------------------
Net increase (decrease) ......................... 10,896,395 $ 120,272,722
============================
Year ended September 30, 2009
Shares sold ...................................... 21,564,244 $ 217,252,356
Shares issued in reinvestment of distributions.... 5,861,644 57,450,592
Shares redeemed .................................. (32,180,738) (322,001,557)
----------------------------
Net increase (decrease) .......................... (4,754,850) $ (47,298,609)
============================
118 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
FRANKLIN UTILITIES FUND
---------------------------
SHARES AMOUNT
---------------------------
CLASS B SHARES:
Six Months ended March 31, 2010
Shares sold ............................................. 241,141 $ 2,639,135
Shares issued in reinvestment of distributions .......... 126,304 1,366,468
Shares redeemed ......................................... (984,191) (10,749,071)
---------------------------
Net increase (decrease) ................................. (616,746) $ (6,743,468)
===========================
Year ended September 30, 2009
Shares sold ............................................. 320,985 $ 3,200,510
Shares issued in reinvestment of distributions .......... 184,409 1,806,989
Shares redeemed ......................................... (2,310,669) (23,015,045)
---------------------------
Net increase (decrease) ................................. (1,805,275) $ (18,007,546)
===========================
CLASS C SHARES:
Six Months ended March 31, 2010
Shares sold ............................................. 7,253,863 $ 79,607,806
Shares issued in reinvestment of distributions .......... 632,358 6,816,177
Shares redeemed ......................................... (3,286,533) (35,670,899)
---------------------------
Net increase (decrease) ................................. 4,599,688 $ 50,753,084
===========================
Year ended September 30, 2009
Shares sold ............................................. 6,347,474 $ 64,084,256
Shares issued in reinvestment of distributions .......... 738,883 7,227,247
Shares redeemed ......................................... (7,568,351) (75,356,203)
---------------------------
Net increase (decrease) ................................. (481,994) $ (4,044,700)
===========================
CLASS R SHARES:
Six Months ended March 31, 2010
Shares sold ............................................. 665,364 $ 7,241,333
Shares issued in reinvestment of distributions .......... 122,079 1,316,377
Shares redeemed ......................................... (665,505) (7,215,044)
---------------------------
Net increase (decrease) ................................. 121,938 $ 1,342,666
===========================
Year ended September 30, 2009
Shares sold ............................................. 1,545,267 $ 15,712,097
Shares issued in reinvestment of distributions .......... 147,603 1,446,259
Shares redeemed ......................................... (1,242,997) (12,481,506)
---------------------------
Net increase (decrease) ................................. 449,873 $ 4,676,850
===========================
ADVISOR CLASS SHARES:
Six Months ended March 31, 2010
Shares sold ............................................. 4,220,006 $ 46,654,991
Shares issued in reinvestment of distributions .......... 406,755 4,418,188
Shares redeemed ......................................... (1,511,033) (16,647,844)
---------------------------
Net increase (decrease) ................................. 3,115,728 $ 34,425,335
===========================
Year ended September 30, 2009
Shares sold ............................................. 8,908,323 $ 94,646,702
Shares issued in reinvestment of distributions .......... 267,630 2,655,239
Shares redeemed ......................................... (2,556,521) (25,567,896)
---------------------------
Net increase (decrease) ................................. 6,619,432 $ 71,734,045
===========================
Semiannual Report | 119
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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
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, the Franklin Growth Fund and the Franklin U.S.
Government Securities 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% In excess of $50 billion
120 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
a. MANAGEMENT FEES (CONTINUED)
Under a subadvisory agreement, Investment Advisory, an affiliate of Advisers,
provides subadvisory services to the Franklin Growth Fund and receives from
Advisers fees based on the average monthly net assets of the fund.
b. ADMINISTRATIVE FEES
Under an agreement with Advisers, FT Services provides administrative services
to the Funds. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Funds.
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' Class B, B1, C and R 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%
Semiannual Report | 121
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 ...... $ 77,520 $ 656,131 $ 7,766,802
Contingent deferred sales charges retained ......................................... $ 7,515 $ 23,234 $ 649,405
FRANKLIN U.S.
GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------- ---------
Sales charges retained net of commissions paid to unaffiliated broker/dealers ...... $ 1,660,186 $ 311,549
Contingent deferred sales charges retained ......................................... $ 473,976 $ 26,733
e. TRANSFER AGENT FEES
For the period ended March 31, 2010, 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 FRANKLIN FRANKLIN
DYNATECH GROWTH INCOME U.S. GOVERNMENT UTILITIES
FUND FUND FUND SECURITIES FUND FUND
--------- ----------- ------------ --------------- ----------
Transfer agent fees ............... $ 573,018 $ 2,098,376 $ 10,691,261 $ 3,140,795 $ 922,899
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, 2010, the
custodian fees were reduced as noted in the Statements of Operations.
122 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At September 30, 2009, the capital loss carryforwards were as
follows:
FRANKLIN FRANKLIN
DYNATECH FRANKLIN FRANKLIN U.S. GOVERNMENT
FUND GROWTH FUND INCOME FUND SECURITIES FUND
--------------------------------------------------------------------
Capital loss carryforwards expiring in:
2010 ........................................ $ 7,950,525 $ -- $ -- $ 11,768,551
2011 ........................................ 3,784,201 -- -- 33,556,845
2012 ........................................ -- -- -- 129,102,166
2013 ........................................ -- -- -- 74,283,298
2014 ........................................ -- -- -- 47,763,112
2015 ........................................ -- -- -- 28,034,940
2016 ........................................ 9,095,484 120,221,975 -- 20,514,778
2017 ........................................ 34,738,251 -- 589,874,490 18,668,917
--------------------------------------------------------------------
$ 55,568,461 (a) $ 120,221,975 (b) $ 589,874,490 $ 363,692,607
====================================================================
(a) Includes $46,198,980 from the merged Franklin Global Communications Fund,
Franklin Global Health Care Fund and Franklin Technology Fund, which may be
carried over to offset future capital gains, subject to certain limitations.
(b) Includes $123,319,972 from the merged Franklin Capital Growth, which may be
carried over to offset future capital gains, subject to certain limitations.
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, 2009, deferred losses were as
follows:
FRANKLIN FRANKLIN
DYNATECH FRANKLIN U.S. GOVERNMENT FRANKLIN
FUND INCOME FUND SECURITIES FUND UTILITIES FUND
---------------------------------------------------------------
Realized capital losses ............................ $ 25,293,981 $ 4,350,025,960 $ 15,877,074 $ --
Realized currency losses ........................... $ -- $ -- $ -- $ 85,988
At March 31, 2010, 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 ............................... $ 366,149,373 $ 1,844,938,496 $ 53,363,628,372
===================================================
Unrealized appreciation ........................... $ 330,622,955 $ 1,739,984,456 $ 5,166,055,587
Unrealized depreciation ........................... (312,994) (43,133,581) (6,432,212,334)
---------------------------------------------------
Net unrealized appreciation (depreciation) ........ $ 330,309,961 $ 1,696,850,875 $ (1,266,156,747)
===================================================
Semiannual Report | 123
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
FRANKLIN
U.S. GOVERNMENT
SECURITIES FRANKLIN
FUND UTILITIES FUND
---------------------------------
Cost of investments ................................ $ 9,413,809,053 $ 1,830,213,928
=================================
Unrealized appreciation ............................ $ 310,632,204 $ 523,428,059
Unrealized depreciation ............................ (7,788,479) (63,897,826)
---------------------------------
Net unrealized appreciation (depreciation) ......... $ 302,843,725 $ 459,530,233
=================================
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, payments-in-kind, and bond discounts and premiums.
6. INVESTMENT TRANSACTIONS
Purchases and sales (excluding short term securities) for the period ended March
31, 2010, were as follows:
FRANKLIN FRANKLIN FRANKLIN
DYNATECH FUND GROWTH FUND INCOME FUND
------------------------------------------------
Purchases ........................................ $ 122,110,079 $ 83,899,601 $ 13,542,412,870
Sales ............................................ $ 131,916,435 $ 128,803,594 $ 11,181,661,366
FRANKLIN
U.S. GOVERNMENT FRANKLIN
SECURITIES UTILITIES
FUND FUND
------------------------------
Purchases ........................................ $ 3,152,828,050 $ 255,239,078
Sales ............................................ $ 2,007,335,871 $ 81,562,070
Transactions in options written during the period ended March 31, 2010, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
-----------------------
FRANKLIN INCOME FUND
Options outstanding at September 30, 2009 ..... -- $ --
Options written ............................... 26,796 1,038,713
Options expired ............................... (26,796) (1,038,713)
Options exercised ............................. -- --
Options closed ................................ -- --
-----------------------
Options outstanding at March 31, 2010 ......... -- $ --
=======================
124 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the 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
At March 31, 2010, the Franklin Income Fund had 56.1% 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, 2010, the aggregate
value of these securities was $193,800,000, representing 0.37% 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. 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, 2010, unfunded commitments were as follows:
UNFUNDED
BORROWER COMMITMENT
-------------
FRANKLIN INCOME FUND
CF Industries Holdings, Inc., Bridge Term Loan ........... $ 325,000,000
-------------
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 | 125
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. OTHER DERIVATIVE INFORMATION
For the period ended March 31, 2010, the effect of derivative contracts on the
Franklin Income Fund's Statement of Operations was as follows:
CHANGE IN AVERAGE
UNREALIZED AMOUNT
DERIVATIVE CONTRACTS REALIZED GAIN APPRECIATION OUTSTANDING
NOT ACCOUNTED FOR AS STATEMENT OF OPERATIONS (LOSS) FOR (DEPRECIATION) DURING THE
HEDGING INSTRUMENTS LOCATIONS THE PERIOD FOR THE PERIOD THE PERIOD (a)
- -----------------------------------------------------------------------------------------------------------------------------------
Equity contracts Net realized gain (loss) from written options $ 1,038,713 $ -- $ 6,335
(a) Represents the average number of option contracts or notional amount for
other derivative contracts outstanding during the period.
See Note 1(e) regarding derivative financial instruments.
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, 2010, were as shown below.
NUMBER OF NUMBER OF
SHARES/ SHARES/ REALIZED
PRINCIPAL HELD PRINCIPAL VALUE CAPITAL
AT BEGINNING GROSS GROSS HELD AT END AT END INVESTMENT GAIN
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND
NON-CONTROLLED AFFILIATES
Ameren Corp .................. 12,100,000 -- 3,850,000 8,250,000 $ -- (a) $ 7,934,850 $ (90,329,119)
Ameren Corp., senior note,
8.875%, 5/15/14 ............ 58,200,000 -- 58,200,000 -- -- (a) 4,620,078 7,173,310
Canadian Oil Sands Trust ..... 25,847,400 152,600 -- 26,000,000 779,807,929 14,690,838 --
Callon Petroleum Co. ......... -- 4,181,258 -- 4,181,258 22,411,543 -- --
Callon Petroleum Co.,
senior secured note,
13.00%, 9/15/16 ............ -- 83,625,000 -- 83,625,000 71,499,375 3,835,135 --
Colony Financial Inc. ........ 1,250,000 -- -- 1,250,000 25,000,000 287,500 --
iStar Financial Inc. ......... 5,213,500 -- -- 5,213,500 23,929,965 -- --
iStar Financial Inc.,
8.625%, 6/01/13 ............ 169,100,000 5,000,000 -- 174,100,000 150,596,500 12,714,807 --
iStar Financial Inc., cvt.,
senior note,
FRN, 0.751%, 10/01/12 ...... 250,000,000 -- -- 250,000,000 190,125,000 1,669,240 --
iStar Financial Inc.,
senior secured note,
144A, 8.00%, 3/15/11 ....... -- 6,142,000 -- 6,142,000 6,149,678 266,153 --
iStar Financial Inc.,
senior secured note,
144A, 10.00%, 6/15/14 ...... 54,850,000 62,500,000 -- 117,350,000 117,936,750 11,591,292 --
126 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONTINUED)
NUMBER OF NUMBER OF
SHARES/ SHARES/ REALIZED
PRINCIPAL HELD PRINCIPAL VALUE CAPITAL
AT BEGINNING GROSS GROSS HELD AT END AT END INVESTMENT GAIN
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF PERIOD OF PERIOD INCOME (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND
(CONTINUED)
NON-CONTROLLED AFFILIATES
(CONTINUED)
(b) Dex Media West LLC,
Term Loan B, 7.50%, 10/24/14 ... -- 7,771,319 536,233 7,235,086 $ 6,919,680 $ 75,119 $ 164,777
Dex One Corp. ................... -- 10,242,757 -- 10,242,757 285,977,775 -- --
Dex One Corp., senior sub.
note, PIK, 14.00%, 1/29/17 ..... -- 81,136,340 -- 81,136,340 83,164,748 1,649,772 --
(b) R.H. Donnelley Inc.,
Term Loan B, 8.50%, 10/24/14 ... -- 42,659,116 2,289,939 40,369,177 39,632,439 468,995 235,684
-------------------------------------------
TOTAL AFFILIATED SECURITIES
(3.45% of Net Assets) .......... $ 1,803,151,382 $ 59,803,779 $ (82,755,348)
===========================================
(a) As of March 31, 2010, no longer an affiliate.
(b) Company is a wholly owned subsidiary of Dex One Corp.
12. SPECIAL SERVICING AGREEMENT
On May 1, 2009, certain funds, which are eligible underlying investments of one
or more of the Franklin Templeton Fund Allocator Series Funds (Allocator Funds),
entered into a Special Servicing Agreement (SSA) with the Allocator Funds and
certain service providers of the funds and the Allocator Funds. Under the SSA,
the funds may pay a portion of the Allocator Funds' expenses (other than any
asset allocation, administrative and distribution fees), to the extent such
payments are less than the amount of the benefits realized or expected to be
realized by the funds (e.g., due to reduced costs associated with servicing
accounts) from the investment in the funds by the Allocator Funds. The Allocator
Funds are either managed by Franklin Advisers, Inc. or administered by FT
Services. For the period ended March 31, 2010, the funds were held by one or
more of the Allocator Funds and were allocated expenses as noted in the
Statements of Operations. At March 31, 2010, one or more of the Allocator Funds
owned a percentage of the funds' outstanding shares as follows:
FRANKLIN
FRANKLIN FRANKLIN U.S. GOVERNMENT FRANKLIN
GROWTH FUND INCOME FUND SECURITIES FUND UTILITIES FUND
- -----------------------------------------------------------------
6.85% 5.27% 3.19% 2.56%
13. OTHER CONSIDERATIONS
From time to time, officers, directors or employees of the Franklin Income
Fund's Investment Manager may have discussions or enter into agreements with
issuers, underwriters or creditors' committees which, pursuant to the fund's
policies and requirements of applicable securities laws, could prevent the fund
from trading in the securities of such company for limited or extended periods
of time.
Semiannual Report | 127
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
14. REORGANIZATION
On December 3, 2008, the Franklin DynaTech Fund acquired the net assets of the
Franklin Global Communications Fund, the Franklin Global Health Care Fund, and
the Franklin Technology Fund pursuant to a plan of reorganization approved by
the Franklin Global Communications Fund's, the Franklin Global Health Care
Fund's, and the Franklin Technology Fund's shareholders. The reorganization was
accomplished by a tax free exchange, and the net assets acquired and shares
issued were as follows:
SHARES ISSUED UNREALIZED
BY FRANKLIN APPRECIATION
FUND NAME NET ASSETS DYNATECH FUND (DEPRECIATION)
- --------------------------------------------------------------------------------------------
Franklin Global Communications Fund ......... $ 47,740,803 2,914,752 $ (18,325,185)
Franklin Global Health Care Fund ............ 89,644,203 5,503,466 (8,804,887)
Franklin Technology Fund .................... 32,802,922 2,006,525 (10,136,675)
--------------------------------------------
Total ....................................... $ 170,187,928 10,424,743 $ (37,266,747)
============================================
The combined net assets of the Franklin DynaTech Fund immediately after the
reorganization were $475,468,843.
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 reorganization was accomplished
by a tax-free exchange of 22,770,597 shares of the Franklin Growth Fund for the
net assets of the Franklin Capital Growth Fund which aggregate $699,807,298,
including $(9,584,107) of unrealized appreciation (depreciation). The combined
net assets of the Franklin Growth Fund immediately after the reorganization were
$2,586,155,713.
15. CREDIT FACILITY
The Funds, together with other U.S. registered and foreign investment funds
(collectively "Borrowers"), managed by Franklin Templeton Investments, are
borrowers in a joint syndicated senior unsecured credit facility totaling $750
million (Global Credit Facility) which matures on January 21, 2011. This Global
Credit Facility provides 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 their 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 of 0.10% based upon the unused portion of the Global
Credit Facility, which is reflected in other expenses on the Statements of
Operations. During the period ended March 31, 2010, the Funds did not utilize
the Global Credit Facility.
128 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
16. FAIR VALUE MEASUREMENTS
The Funds follow a fair value hierarchy that distinguishes between market data
obtained from independent sources (observable inputs) and the Funds' 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)
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, 2010, in valuing
the funds' assets carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------
FRANKLIN DYNATECH FUND
ASSETS:
Investments in Securities: .............
Equity Investments (a) .............. $ 695,462,478 $ -- $ -- $ 695,462,478
Short Term Investments .............. 996,856 -- -- 996,856
--------------------------------------------------
Total Investments in Securities ... $ 696,459,334 $ -- $ -- $ 696,459,334
==================================================
FRANKLIN GROWTH FUND
ASSETS:
Investments in Securities:
Equity Investments (a) .............. $ 3,427,509,639 $ -- $ -- $ 3,427,509,639
Short Term Investments .............. 114,279,732 -- -- 114,279,732
--------------------------------------------------
Total Investments in Securities ... $ 3,541,789,371 $ -- $ -- $ 3,541,789,371
==================================================
Semiannual Report | 129
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
16. FAIR VALUE MEASUREMENTS (CONTINUED)
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------------------------------------------------------------------
FRANKLIN INCOME FUND
ASSETS:
Investments in Securities:
Equity Investments:(b)
Consumer Discretionary ............. $ 1,080,055,469 $ 341,169 $ -- $ 1,080,396,638
Health Care ........................ 1,224,022,664 258,137,500 -- 1,482,160,164
Financials ......................... 3,642,913,594 282,890,643 -- 3,925,804,237
Industrials ........................ -- 1,620,000 -- 1,620,000
Utilities .......................... 5,888,787,334 45,634,500 -- (c) 5,934,421,834
Other Equity Investments (a) ....... 4,129,383,071 -- -- 4,129,383,071
Equity-Linked Securities ................ -- 2,926,432,849 -- 2,926,432,849
Senior Floating Rate .................... -- 2,776,997,933 -- 2,776,997,933
Interests ...............................
Corporate Bonds ......................... -- 28,109,310,684 92,407,100 28,201,717,784
Convertible Bonds ....................... -- 714,485,385 -- 714,485,385
Municipal Bonds ......................... -- 184,559,400 -- 184,559,400
Short Term Investments .................. 260,988,866 478,503,464 -- 739,492,330
----------------------------------------------------------------------
Total Investments in Securities .... $ 16,226,150,998 $ 35,778,913,527 $ 92,407,100 $ 52,097,471,625
======================================================================
FRANKLIN U.S. GOVERNMENT
SECURITIES FUND
ASSETS:
Investments in Securities:
Mortgage-Backed Securities .............. $ -- $ 9,477,387,006 $ -- $ 9,477,387,006
Short Term Investments .................. 239,265,772 -- -- 239,265,772
----------------------------------------------------------------------
Total Investments in Securities .... $ 239,265,772 $ 9,477,387,006 $ -- $ 9,716,652,778
======================================================================
FRANKLIN UTILITIES FUND
ASSETS:
Investments in Securities:
Equity Investments (a) .................. $ 2,184,837,963 $ -- $ -- $ 2,184,837,963
Corporate Bonds ......................... -- 77,485,376 -- 77,485,376
Short Term Investments .................. 27,420,822 -- -- 27,420,822
----------------------------------------------------------------------
Total Investments in Securities ... $ 2,212,258,785 $ 77,485,376 $ -- $ 2,289,744,161
======================================================================
(a) For detailed industry descriptions, see the accompanying Statements of
Investments.
(b) Includes common, preferred and convertible preferred stock as well as other
equity investments.
(c) Includes securities determined to have no value at March 31, 2010.
130 | Semiannual Report
Franklin Custodian Funds
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
16. FAIR VALUE MEASUREMENTS (CONTINUED)
At March 31, 2010, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining the Funds' fair value,
were as follows:
NET CHANGE
NET CHANGE IN UNREALIZED
IN APPRECIATION
BALANCE AT NET UNREALIZED NET TRANSFER BALANCE (DEPRECIATION)
BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF AT END ON ASSETS HELD
OF YEAR GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 OF PERIOD AT PERIOD END
------------------------------------------------------------------------------------------------
FRANKLIN INCOME FUND
ASSETS
Corporate Bonds ...... $ -- $ -- $ 157,100 $ 92,250,000 $ -- $ 92,407,100 $ 157,100
17. NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board issued an Accounting
Standards Update which enhances and clarifies existing fair value measurement
disclosure requirements and is effective for interim and annual periods
beginning after December 15, 2009. The Funds believe the adoption of this
Accounting Standards Update will not have a material impact on their financial
statements.
18. SUBSEQUENT EVENTS
The Funds have evaluated subsequent events through the issuance of the financial
statements and determined that no events have occurred that require disclosure.
ABBREVIATIONS
CURRENCY
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
SELECTED PORTFOLIO
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
GP - Graduated Payment
L/C - Letter of Credit
MTN - Medium Term Note
PIK - Payment-In-Kind
SF - Single Family
Semiannual Report | 131
Franklin Custodian Funds
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 23, 2010, 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 within
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 to U.S. mutual funds and other accounts, 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.
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 management personnel with the code of ethics adopted
throughout the Franklin Templeton fund
132 | Semiannual Report
Franklin Custodian Funds
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 management's conservative approach and diligent risk management
procedures, including continuous monitoring of counterparty credit risk and
attention given to derivatives and other complex instruments. The Board also
took into account, among other things, management's efforts in establishing a
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 as evidenced by its subsidization of money market funds.
The Board also noted management's efforts to minimize any negative impact on the
nature and quality of services provided the Funds arising from Franklin
Templeton Investments' implementation of a hiring freeze and employee reductions
in response to market conditions during the latter part of 2008 and early 2009.
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 2009 and the previous
10-year period ended December 31, 2009, in comparison with a performance
universe selected by Lipper. Investment performance was
Semiannual Report | 133
Franklin Custodian Funds
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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. The Lipper
report showed the Fund's total return for 2009 to be in the second-lowest
quintile of its performance universe but to be in either the highest or
next-to-highest quintile of such universe in each of the previous three-, five-
and 10-year periods on an annualized basis. In explaining 2009 performance,
management pointed out that the Fund had a broader view of the technology sector
than other funds within the performance universe and had holdings in the health
care sector, which had performed poorly in 2009. The Board was satisfied with
the Fund's overall performance as shown in the Lipper report, noting such
explanation.
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. The Lipper report showed the Fund's total
return during 2009 to be in the second-highest quintile of such performance
universe and its total return on an annualized basis to be in the highest
quintile of such universe during each of the previous three- and five-year
periods, and in the upper half of such universe for the previous 10-year period.
The Board expressed satisfaction with the Fund's performance as shown in the
Lipper report.
FRANKLIN INCOME FUND - The 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 income return during 2009 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 total
return during 2009 to be in the highest quintile of its Lipper performance
universe, and on an annualized basis to be in the highest or second-highest
quintile of such universe during each of the previous three-, five- and 10-year
periods. The Board was satisfied with the Fund's performance as shown in the
Lipper report.
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 income return during 2009 to be in the second-highest quintile of its
Lipper performance universe and its income return on an annualized basis to be
in the highest or second-highest quintile of such universe during each of the
previous three-, five- and 10-year periods. The Fund's Lipper report showed its
total return to be in the lowest quintile of its performance universe during
2009, and its total return on an annualized basis to be in the second-lowest
quintile of such universe for the previous three-year period, and in the
134 | Semiannual Report
Franklin Custodian Funds
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
middle quintile of such universe for each of the previous five- and 10-year
periods. The Board found such comparative performance to be acceptable in view
of the Fund's income investment objective and conservative policy of investing
only in plain vanilla Ginnie Mae pass-through securities, noting that the Fund's
total return for the annualized three-year period was within 18 basis points of
the performance universe median.
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. The Fund's Lipper report showed its
income return during 2009, as well as during each of the previous three-, five-
and 10-year periods on an annualized basis to be in the highest quintile of such
performance universe. The Fund's total return during 2009 placed it in the
middle quintile of its performance universe, and placed it in the highest or
second-highest quintile of such universe during each of the previous three-,
five- and 10-year periods on an annualized basis. The Board was satisfied with
the Fund's performance as shown in the Lipper report.
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 information taken from each
fund's most recent annual report, which reflects historical asset levels that
may be quite different from those currently existing, particularly in a period
of market volatility. While recognizing such inherent limitation and the fact
that expense ratios generally increase as assets decline and decrease as assets
grow, the Board believed the independent analysis conducted by Lipper to be 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 the contractual investment management fee rate for each of Franklin
DynaTech Fund, Franklin Growth Fund and Franklin Utilities Fund to be in the
least expensive quintile of its respective Lipper expense group, to be in the
second-highest quintile of its expense group for Franklin Income Fund, and to be
within one basis point of its expense group median for Franklin U.S. Government
Securities Fund. The actual total expense ratios for all the Funds were in the
least expensive quintile of their respective Lipper expense groups with the
exception of Franklin U.S. Government Securities Fund whose total expense ratio
was, however, below the median of its Lipper expense group. 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 as shown in the
Lipper reports.
Semiannual Report | 135
Franklin Custodian Funds
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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,
2009, being the most recent fiscal year-end for Franklin Resources, Inc., the
Manager's parent. 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 review the reasonableness of
the allocation methodologies solely for use by the Fund's Board 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 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
136 | Semiannual Report
Franklin Custodian Funds
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
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 Trust's investment manager has established Proxy Voting Policies and
Procedures (Policies) that the Trust uses to determine how to vote proxies
relating to portfolio securities. Shareholders may view the Trust'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 Trust'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.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust 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.
Semiannual Report | 137
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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 (2)
Mutual Recovery Fund (3)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin DynaTech Fund
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 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 (4)
Templeton Global Long-Short Fund (5)
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 (6)
Franklin Templeton Conservative Allocation Fund (7)
Franklin Templeton Growth Allocation Fund (7)
Franklin Templeton Moderate Allocation Fund (7)
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 (8)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund (8)
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 (8)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME (9)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund (10)
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 Michigan (12)
Arizona Minnesota (12)
California11 Missouri
Colorado New Jersey
Connecticut New York (11)
Florida North Carolina
Georgia Ohio (12)
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts (12) Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance
Products Trust (13)
1. The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
2. Effective 5/1/09, Mutual Qualified Fund changed its name to Mutual Quest
Fund. The fund's investment goal and strategy remained unchanged.
3. 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.
4. Effective 5/1/09, Mutual Discovery Fund changed its name to Mutual Global
Discovery Fund. The fund's investment goal and strategy remained unchanged.
5. Effective 12/18/09, this fund is closed to new investors, pending a proposal
to merge the fund into Templeton World Fund. Existing shareholders may continue
to make additional investments until shortly before the completion of the
transaction, expected in April 2010.
6. Effective 3/19/10, this fund is closed to new investors, pending a
reorganization of the fund into Franklin Templeton Corefolio Allocation Fund.
Existing shareholders may continue to make additional investments until shortly
before the completion of the transaction, expected in June 2010.
7. Effective 5/1/10, the Franklin Templeton Target Funds changed their name to
the Franklin Templeton Allocation Funds. The funds' investment goals and primary
investment strategies remained unchanged.
8. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
9. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
10. The fund invests primarily in insured municipal securities.
11. These funds are available in three or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities, a
high-yield portfolio (CA only) and a money market portfolio (CA only).
12. 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 2/15/09.
13. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
05/10 Not part of the semiannual report
(LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
SIGN UP FOR ELECTRONIC DELIVERY
on FRANKLINTEMPLETON.COM
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 summary
prospectus and/or prospectus. Investors should carefully consider a fund's
investment goals, risks, charges and expenses before investing. A 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 S 05/10
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 expert is 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 Managers of Closed-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, 2010
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, 2010
By/s/GASTON GARDEY
-------------------
Gaston Gardey
Chief Financial Officer and
Chief Accounting Officer
Date May 27, 2010