Dear Fellow Shareholders:
Performance Review: We are pleased to report that your Fund had a total return
(market price change plus income) of 4.6% for the second quarter of 2001. In
comparison, the S&P Utilities Index had a total return of -5.7%, and a
composite of the S&P Utilities Index and the Lehman Utility Bond Index,
reflecting the stock and bond ratio of the Fund, had a total return of -4.2%.
Year-to-date, total return of your Fund has been 6.6% compared to -12.4% for
the S&P Utilities Index and -6.7% for the composite.
During the second quarter of 2001, your Fund paid three monthly 6.5 cent
dividends. The 6.5 cent per share monthly rate, without compounding, would be
78 cents annualized, or a 7.24% common stock dividend yield based on the June
29, 2001 closing price of $10.78 per share. That yield compares favorably with
the quarter-end yield of 3.6% on the Dow Jones Utility Index and the 3.0% yield
on the S&P Utilities Index.
The Business Cycle and Telecommunications Industry Credit Quality: The United
States economy enjoyed exceptional performance during the 1990's, and
especially from 1996 through mid-2000. Much of the economic optimism of the
later period was linked to perceived fundamental changes in the economy, often
referred to as the "New Economy." That term focused on the dramatic
acceleration in productivity that is tied to innovations in information
technology, particularly computers and communications. The acceleration in
productivity encouraged an investment boom to take advantage of profit
opportunities provided by technological advances, a consumption boom in
response to increases in national income, and a surge in stock values that
reflected optimism about higher corporate earnings growth.
Since mid-2000 however, the economy has turned from favorable performance to a
period of adjustment, characterized by slower economic growth and higher
unemployment, as a result of the imbalances that built up during the earlier
period. The Federal Reserve is shepherding the economy through this period with
prompt and aggressive easing of monetary (interest rate) policy--an
unprecedented six time, 275 total basis point reduction in the federal funds
rate so far this year.
Ups and downs in the economy are commonly called business cycles. During the
down part of the business cycle, bond rating agencies typically report a
decline in the aggregate credit worthiness of bond issuers, and a greater
number of specific bond issuer downgrades than upgrades. Indeed, Standard and
Poor's reports that during the first half of 2001, domestic corporate bond
downgrades exceeded upgrades by almost 5 to 1 measured by outstanding market
value, and almost 4 to 1 measured by issuer count. Uncharacteristically, the
telecommunications sector has been the hardest hit, with downgrades outpacing
upgrades by about 11 to 1 measured by volume and by about 6 to 1 by issuer
count. Further, the telecommunications industry had already begun to suffer
credit quality deterioration even during the recent robust economic times. Why
has this been so?
The telecommunications sector has been hard hit largely because of industry
changes and developments after the passage of the Telecommunications Act of
1996. In an attempt to foster competition in telecommunications service at the
local level, the Act forced existing local exchange carriers, most pointedly
the regional Bell operating companies (RBOCs), to give new industry entrants
access to their networks for specific functions on a wholesale cost basis. In
return, once a competitive environment at the local level was established, the
pre-existing local exchange carriers would be permitted to enter the long
distance market.
The new entrants to the local phone market felt that a secure business niche
had been created for them by law, but required extensive capital to fund their
business plans. Capital was readily available from enthusiastic investors and
was tapped by many companies, most all in the non-investment grade, "junk"
rating categories. But, because of the highly competitive environment, profits
were slower in coming than expected and, as the outlook darkened for new
entrants, the door for continued funding closed and credit quality and ratings
deteriorated.
To a much lesser extent, bond quality downgrades have also occurred with the
financially stronger incumbent national phone companies, both in the United
States and abroad. Again, this has not been caused by general economic
conditions, but by advances in technology and the need to fund business plans.
"Bandwidth" and "3G" are the telecommunications technology buzzwords of the
day. Bandwidth refers to the capacity of a communications medium to provide
increased speed and functionality for delivering voice and data. Upgraded
television cable systems can provide greater bandwidth at home. 3G, or third
generation wireless technology, promises greater bandwidth while consumers are
mobile.
In order to meet the anticipated consumer demand for greater bandwidth,
national incumbent phone companies have accumulated debt to acquire cable
companies and 3G wireless licenses, and to build the infrastructure necessary
to deliver bandwidth over these mediums. The result has been slippage in bond
ratings.
The credit trends of both the emerging and national incumbent phone companies
will probably stay negative in the near-term, as business plans get adjusted
and corporate balance sheets get "right-sized." This kind of adjustment does
not directly benefit from stimulative Federal Reserve interest rate policy.
Despite current trends, your Fund has policies in place to protect its bond
portfolio. First, the Fund is not permitted to make commitments to bonds that
are rated below investment grade. Second, a staff of portfolio managers and
analysts is in place to maintain a high quality and well diversified portfolio.
On June 30, 2001, the bond portion of the portfolio had representation from 12
telecommunications industry companies, with an average credit quality category
of "A."
The Bush Energy Plan: Over the past year or so, the electric utility industry
has received more attention than it is accustomed to receiving. After all, the
industry has been generally thought of as "mature"--providing slower-growing
investments for conservative, income-oriented investors like DNP, compared to
the formerly high flyers in the New Economy. This increased interest is not
only a result of the swoon of technology-related company stock prices. It is
also due to the problems plaguing California--rolling blackouts, extremely
volatile gas and electric prices, and the almost-unheard-of bankruptcy filing
of the state's largest utility. A service we have essentially taken for granted
doesn't seem so static anymore, as concerns are raised that California-type
problems could crop up this summer in other parts of the country.
Early this year when many of the problems in California were receiving so much
attention, President Bush established the National Energy Policy Development
Group, directing it to "develop a national energy policy designed to . . .
promote dependable, affordable, and environmentally sound production and
distribution of energy for the future." In May, the Group announced a plan that
included five specific national goals and provided a set of recommendations to
be implemented by Executive order or Congressional legislation.
The five goals are: (1) modernize conservation by implementing new
technologies; (2) revitalize our energy infrastructure of gas pipelines,
electric transmission lines, refineries, and generation facilities; (3)
increase domestic energy supplies from the most prevalent sources--gas, oil,
and coal--as well as hydropower, nuclear power, and renewable energy sources
like wind and solar; (4) accelerate protection and improvement of the
environment through replacement of older equipment with new, "clean"
technologies in addition to caps and reductions in emissions of pollutants; and
(5) increase energy security by reducing America's dependence on foreign
sources of energy.
The proposed energy policy sounds good, but what does it mean for the types of
companies in which DNP invests? First, it must be acknowledged that our
national energy problems were many years in the making. Likewise, this is a
long-range energy plan that will take years to implement. In the short-run (the
next six to twelve months), DNP's investments will be affected more by the
economic recovery and how California's problems are resolved (or not) than by
implementation of any of the Plan's recommendations. Second, the
2
changeover of the Senate to Democratic control is likely to slow progress on
recommendations that need legislative approval, such as increased funding for
energy research and development or opening part of the Arctic National Wildlife
Refuge to new exploration and production of gas and oil.
Generally, recommendations under the Administration's control--for example,
expedited approval processes for pipeline or transmission line siting and
nuclear license extensions or additions--should help companies whose businesses
are inhibited by bottlenecks or other constraints existing in the current
system. A company like Exelon Corporation, for instance, which is the largest
owner and operator of nuclear facilities in the country, would benefit from the
ability to extend the useful life of its low-cost nuclear fleet and add new,
safe nuclear generation units using technologies developed abroad over the past
several years. Similarly, to the extent that a utility operates businesses in
regions of excess supply, such as Dominion Resources, Inc., Duke Energy
Corporation, or The Southern Company, any enhancements to the gas pipeline
system or electric transmission grid would give companies another outlet for
their capacity.
While the proposed energy policy is a constructive start to addressing the
basic national energy issues, the benefits will take some time to realize.
Don't expect monumental change any time soon!
Board of Directors Meeting--At the regular July Board of Directors' meeting,
the Board declared the following monthly dividends:
Cents Per Share Record Date Payable Date
--------------- ------------ ------------
6.5 cents August 31 September 10
6.5 cents September 28 October 10
6.5 cents October 31 November 13
Automatic Dividend Reinvestment Plan and Direct Deposit Service--The Fund has a
dividend reinvestment plan available to all registered shareholders.
Those shareholders whose shares are held for them by a brokerage house or
nominee in "street-name" may not participate in the Fund's automatic dividend
reinvestment plan. For such shareholders desiring automatic dividend
reinvestment, we suggest you contact your broker or other nominee.
As an added service, the Fund offers direct deposit service through electronic
funds transfer to all registered shareholders currently receiving a monthly
dividend check. This service is offered through The Bank of New York. For more
information and/or an authorization form on automatic dividend reinvestment or
direct deposit, please contact The Bank of New York at 1-877-381-2537 or
http://stock.bankofny.com.
Visit us on the Web--You can obtain the most recent shareholder financial
report and dividend information at our web site http://www.duffutility.com.
We appreciate your interest in Duff & Phelps Utilities Income Inc., and we will
continue to do our best to be of service to you.
/s/ Claire V. Hansen
/s/ Nathan I. Partain
Claire V. Hansen, CFA
Nathan I. Partain, CFA
Chairman
President and Chief
Executive Officer
3
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS
(UNAUDITED)
June 30, 2001
COMMON STOCKS--73.3%
Market
Value
Shares Company (Note 1)
--------- ------- --------------
[_] ELECTRIC--39.5%
1,300,000 Allegheny Energy Inc....................... $ 62,725,000
1,000,000 Allete Inc................................. 22,500,000
796,000 Dominion Resources......................... 47,863,480
1,600,000 DTE Energy Co.............................. 74,304,000
1,300,000 Duke Energy Corp........................... 50,713,000
1,593,400 Endesa S.A................................. 25,303,192
1,005,000 Entergy Corp............................... 38,581,950
1,000,000 Exelon Corp................................ 64,120,000
1,299,100 FPL Group Inc.............................. 78,218,811
1,000,000 Keyspan Corp............................... 36,480,000
215,000 National Grid Group PLC ADR................ 7,933,500
770,000 National Grid Group PLC (United Kingdom)... 5,657,784
2,256,600 NiSource Inc............................... 61,672,878
1,318,600 NSTAR...................................... 56,119,616
1,120,000 Pinnacle West Capital Corp................. 53,088,000
900,000 Progressive Energy Inc..................... 40,428,000
1,000,000 Public Service Enterprise Group............ 48,900,000
1,500,000 Reliant Energy Inc......................... 48,315,000
850,000 Scottish & Southern Energy (United Kingdom) 7,948,952
200,000 Scottish & Southern Energy ADR............. 18,705,000
1,000,000 Scottish Power PLC ADR..................... 29,200,000
3,500,000 Southern Co................................ 81,375,000
1,000,000 TECO Energy Inc............................ 30,500,000
1,500,000 Vectren Corp............................... 31,050,000
--------------
1,021,703,163
[_] GAS--9.6%
926,000 AGL Resources.............................. 21,992,500
1,004,800 El Paso Energy Corp........................ 52,792,192
400,000 National Fuel Gas Co....................... 20,796,000
2,425,000 Utilicorp United Inc....................... 74,083,750
950,000 WGL Holdings Inc........................... 25,754,500
1,500,000 Williams Companies Inc..................... 49,425,000
--------------
244,843,942
The accompanying notes are an integral part of the financial statements.
4
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2001
Market
Value
Shares Company (Note 1)
--------- ------- ------------
[_] TELECOMMUNICATION--13.9%
1,000,000 Alltell Corp............................ $ 61,260,000
1,730,000 BellSouth Corp.......................... 69,667,100
2,137,230 SBC Communications Inc.................. 85,617,434
700,000 Swisscom AG ADR......................... 16,695,000
856,250 Telecom Corp. of New Zealand Interim ADR 15,540,938
1,068,400 Telstra Corp. ADR....................... 14,840,076
1,819,000 Verizon Communications.................. 97,316,500
------------
360,937,048
[_] NON-UTILITY - 10.3%
308,600 Apartment Investment & Management Co.... 14,874,520
75,400 Archstone Communities Trust............. 1,943,812
200,000 Avalon Bay Communities Inc.............. 9,350,000
409,000 Boston Properties Inc................... 16,728,100
129,900 Camden Property Trust................... 4,767,330
347,400 CBL & Associates Properties Inc......... 10,661,706
403,600 Centerpoint Properties Corporation...... 20,260,720
301,000 Chelsea GCA Realty Inc.................. 14,116,900
495,000 Duke-Weeks Realty Corp.................. 12,300,750
315,825 Equity Office Properties Trust.......... 9,989,545
225,000 Equity Residential Properties Trust..... 12,723,750
269,000 Essex Property Trust Inc................ 13,328,950
278,100 First Industrial Realty Trust .......... 8,938,134
250,000 General Growth Properties, Inc.......... 9,840,000
140,000 Green S.L. Realty Properties Inc........ 4,243,400
200,000 Kimco Realty Corp....................... 9,470,000
370,600 ProLogis Trust.......................... 8,420,032
75,000 Pan Pacific Retail Properties Inc....... 1,950,000
525,100 Reckson Associates Realty Corp.......... 12,077,300
171,545 Reckson Associates Realty Corp. Class B. 4,221,722
125,000 Simon Property Group.................... 3,746,250
225,000 Smith Charles E. Residential Realty Inc. 11,283,750
301,100 Spieker Properties Inc.................. 18,050,945
25,000 Storage USA............................. 900,000
The accompanying notes are an integral part of the financial statements.
5
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2001
Market
Value
Shares Company (Note 1)
--------- ------- --------------
349,000 Summit Properties.............................. $ 9,363,670
465,800 Vornado Realty Trust........................... 18,184,832
104,500 Weingarten Realty Investors.................... 4,582,325
--------------
266,318,443
--------------
Total Common Stocks (Cost--$1,649,017,429)..... 1,893,802,596
--------------
PREFERRED STOCKS--8.0%
[_] NON-UTILITY--1.1%
500,000 Cox Communications Inc. 7% 8/16/02............. 29,000,000
--------------
29,000,000
[_] UTILITY--6.9%
450,000 Dominion Resources 91/2% 11/16/04.............. 26,010,000
700,000 Duke Capital Financing Trust III 8 3/8% 8/31/29 18,550,000
1,200,000 Duke Energy 8 1/4% 5/18/04..................... 30,780,000
223,500 EIX Trust II Series B 8.60% 10/29/29........... 3,061,950
550,000 MediaOne Group 7.00% 11/15/02.................. 14,795,000
500,000 NiSource Industries Inc. 7.75% 2/19/03......... 24,595,000
209,000 P P & L Capital Trust II 8.10% 7/01/27......... 5,235,450
789,100 Texas Utilities Co. 91/4% 8/16/02.............. 40,835,925
450,900 Utilicorp United Inc. 9 3/4% 11/16/02.......... 14,861,664
--------------
178,724,989
--------------
Total Preferred Stocks (Cost--$205,045,503).... 207,724,989
--------------
The accompanying notes are an integral part of the financial statements.
6
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2001
BONDS--20.9%
Ratings
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
----------- ------- --------- ------- -------- -----------
[_] ELECTRIC--10.5%
$ 5,000,000 AES Ironwood Corp.
8.857%, due 11/30/25............... Not Rated Baa3 BBB- $ 5,130,790
21,839,000 Alabama Power Co.
9%, due 12/01/24................... A+ A1 A 23,127,785
18,050,000 Comed Financing II
8 1/2%, due 1/15/27................ Not Rated Baa2 BBB 17,528,788
7,500,000 Commonwealth Edison Co.
9 7/8%, due 6/15/20................ A- A3 A- 8,301,593
8,850,000 Commonwealth Edison Co.
8 5/8%, due 2/01/22................ A- A3 A- 9,302,934
5,000,000 Commonwealth Edison Co.
8 3/8%, due 9/15/22................ A- A3 A- 5,213,680
10,000,000 Commonwealth Edison Co.
8 3/8%, due 2/15/23................ A- A3 A- 10,411,520
6,000,000 Dayton Power and Light
8.15% due 1/15/26.................. AA A2 BBB+ 5,940,162
24,000,000 Dominion Resources Capital Trust
7.83%, due 12/01/27................ BBB Baa1 BBB- 22,711,296
5,000,000 Gulf States Utilities
8.94%, due 1/01/22................. BBB Baa3 BBB- 5,169,715
1,000,000 Houston Lighting
83/4%, due 3/01/22................. A- A3 BBB+ 1,041,621
18,800,000 Hydro--Quebec
93/4%, due 1/15/18................. AA- A2 A+ 20,002,955
5,000,000 Illinois Power Co.
7 1/2%, due 7/15/25................ A- Baa1 BBB+ 4,742,280
5,000,000 Louisiana Power & Light Co.
8 3/4%, due 3/01/26................ BBB+ Baa2 BBB+ 5,119,660
4,000,000 New York State Electric & Gas Corp.
8 7/8%, due 11/01/21............... A A3 A 4,162,124
The accompanying notes are an integral part of the financial statements.
7
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2001
Ratings
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
----------- ------- --------- ---- ---- ------------
$ 5,000,000 Progress Energy Inc.
73/4%, due 3/1/31............. Not Rated Baa1 BBB $ 5,176,090
5,000,000 PSEG Power
8 5/8%, due 4/15/31........... Not Rated Baa1 BBB 5,401,670
10,000,000 Public Service Co. of Colorado
8 3/4%, due 3/01/22........... A A3 A 10,384,970
22,750,000 Puget Capital Trust
8.231%, due 6/01/27........... Not Rated Baa2 BBB- 21,577,601
13,000,000 Southern Co. Capital Trust
8.14%, due 2/15/27............ Not Rated A3 BBB+ 12,402,494
27,830,000 Texas Utilities Electric Co.
93/4%, due 5/01/21............ A- A3 BBB+ 29,272,624
12,000,000 UtiliCorp United Inc.
8%, due 3/01/23............... BBB Baa3 BBB 11,329,824
10,000,000 Virginia Electric & Power Co.
8 5/8%, due 10/01/24.......... A+ A2 A 10,401,830
17,700,000 Virginia Electric & Power Co.
8 1/4%, due 3/01/25........... A+ A2 A 18,045,203
------------
271,899,209
[_] GAS--2.4%
5,125,000 ANR Pipeline Co.
9 5/8%, due 11/01/21.......... Not Rated Baa1 BBB+ 6,053,061
5,000,000 KN Energy Inc.
71/4%, due 3/01/28............ BBB Baa2 BBB 4,812,905
10,000,000 Phillips Petroleum Co.
9.18%, due 9/15/21............ BBB Baa2 BBB 10,501,950
5,000,000 Southern California Gas Co.
83/4%, due 10/01/21........... AA A1 AA- 5,186,210
6,488,000 Southern Union Co.
7.60%, due 2/01/24............ BBB+ Baa2 BBB+ 6,149,858
8,850,000 Southern Union Co.
81/4%, due 11/15/29........... BBB+ Baa2 BBB+ 8,968,165
The accompanying notes are an integral part of the financial statements.
8
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2001
Ratings
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
----------- ------- --------- ---- ---- ------------
$10,000,000 TE Products Pipeline Co.
7.51%, due 1/15/28............... Not Rated Baa2 BBB+ $ 9,333,170
9,000,000 Trans-Canada Pipeline
9 1/8%, due 4/20/06.............. Not Rated A3 BBB 9,920,997
------------
60,926,316
[_] TELECOMMUNICATION--6.1%
19,000,000 AT&T Corp.
8.35%, due 1/15/25............... A- A2 A 19,417,449
15,000,000 AT&T Corp.
83/4%, due 3/01/31............... BBB Baa2 BBB 15,626,115
5,000,000 Bell South Capital Funding
7 7/8% 2/15/30................... AA+ Aa3 AA- 5,337,400
25,000,000 British Telecom PLC
8 5/8%, due 12/15/30............. A Baa1 A- 27,263,925
11,350,000 France Telecom
81/2%, due 3/01/31............... A- A3 A- 11,941,289
12,000,000 GTE California Inc.
8.07%, due 4/15/24............... AA AA3 A+ 12,165,432
17,625,000 GTE Corp.
7.90%, due 2/01/27............... A+ A2 A+ 17,523,868
13,750,000 New England Telephone & Telegraph
9%, due 8/01/31.................. AA Aa2 A+ 14,506,608
9,000,000 New York Telephone Co.
7 5/8%, due 2/01/23.............. AA A1 A+ 8,803,980
9,000,000 Tele-Commun Inc.
9.80%, due 2/01/12............... A- A3 A 10,647,387
5,000,000 US West Communications
8 7/8%, due 6/01/31.............. BBB+ A2 BBB+ 5,270,880
5,000,000 Vodafone Group PLC
7 7/8% 2/15/30................... A A2 A 5,271,980
5,000,000 Worldcom Inc.
81/4% 5/15/13.................... A- A3 BBB+ 4,885,300
------------
158,661,613
9
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
(UNAUDITED)
June 30, 2001
Ratings
---------------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
----------- ------- ----- ---- ---- --------------
[_] NON-UTILITY--1.9%
$17,500,000 Contl Cablevision Not
91/2%, due 8/01/13........ Rated A3 A- $ 19,455,503
8,000,000 Dayton Hudson Corp.
9 7/8%, due 7/01/20....... A A2 A 10,066,568
19,940,000 EOP Operating LP
71/2%, due 4/19/29........ BBB+ Baa1 BBB+ 18,371,639
--------------
47,893,710
--------------
Total Bonds (Cost--$547,175,733)............................ 539,380,848
--------------
U.S. TREASURY OBLIGATIONS--0.4%
7,250,000 U.S. Treasury Notes
13 3/8%, due 8/15/01........................................ 7,339,291
2,000,000 U.S. Treasury Bonds
10 3/4%, due 8/15/05........................................ 2,425,866
--------------
Total U.S. Treasury Obligations (Cost--$9,628,272).......... 9,765,157
--------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--2.7%
65,000,000 Federal Home Loan Mortgage Corp.
93/4%, due 2/14/03.......................................... 70,108,155
--------------
Total U.S. Government Agency Obligations (Cost--$69,718,894) 70,108,155
--------------
COMMERCIAL PAPER--1.9%
50,000,000 General Electric Capital Corp.
4.07%, due 7/02/01.......................................... 49,994,347
--------------
Total Commercial Paper (Amortized cost--$49,994,347)........ 49,994,347
--------------
TOTAL INVESTMENTS (Cost--$2,530,580,178)................................ $2,770,776,092
--------------
--------
The percentage shown for each investment category is the total value of that
category as a percentage of the total net assets of the Fund.
The accompanying notes are an integral part of the financial statements.
10
DUFF & PHELPS UTILITIES INCOME INC.
BALANCE SHEET
(UNAUDITED)
June 30, 2001
ASSETS:
Investments at market value:
Common stocks (cost $1,649,017,429)....................................................... $1,893,802,596
Preferred stocks (cost $205,045,503)...................................................... 207,724,989
Bonds (cost $547,175,733)................................................................. 539,380,848
U.S. Treasury obligations (cost $9,628,272)............................................... 9,765,157
U.S. Government Agency Obligation (cost $69,718,894)...................................... 70,108,155
Commercial paper (amortized cost $49,994,347)............................................. 49,994,347
Interest-bearing deposits with custodian................................................... 8,403,261
Receivables:
Interest.................................................................................. 15,757,556
Dividends................................................................................. 7,190,113
Securities lending income................................................................. 148,391
Prepaid expenses........................................................................... 149,734
--------------
Total Assets............................................................................ $2,802,425,147
==============
LIABILITIES:
Due to Adviser (Note 2).................................................................... $ 3,904,524
Due to Administrator (Note 2).............................................................. 967,851
Dividends payable on common stock.......................................................... 13,796,786
Dividends payable on remarketed preferred stock............................................ 1,244,948
Accrued expenses........................................................................... 3,280,918
Commercial paper outstanding (Note 6)...................................................... 195,416,733
--------------
Total Liabilities....................................................................... 218,611,760
--------------
CAPITAL:
Remarketed preferred stock ($.001 par value; 100,000,000 shares authorized and 5,000 shares
issued and outstanding, liquidation preference $100,000 per share) (Note 5).............. 500,000,000
--------------
Common stock ($.001 par value; 250,000,000 shares authorized and 212,258,247 shares issued
and outstanding) (Note 4)................................................................ 212,258
Paid-in surplus (Note 4)................................................................... 1,896,685,506
Accumulated net realized loss on investments............................................... (42,344,132)
Distributions in excess of net investment income........................................... (10,934,990)
Unrealized depreciation on foreign currency translation.................................... (1,169)
Net unrealized appreciation on investments................................................. 240,195,914
--------------
Net assets applicable to common stock (equivalent to $9.82 per share based on
212,258,247 shares outstanding)....................................................... 2,083,813,387
--------------
Total Capital (Net Assets).............................................................. 2,583,813,387
--------------
Total Liabilities and Capital........................................................... $2,802,425,147
==============
The accompanying notes are an integral part of the financial statements.
11
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
For the six months ended June 30, 2001
INVESTMENT INCOME:
Interest............................................................................. $ 25,287,026
Dividends (less withholding tax of $524,387)......................................... 84,017,462
Securities lending income............................................................ 662,837
--------------
Total investment income............................................................ 109,967,325
EXPENSES:
Commercial paper interest expense (Note 6)........................................... 5,657,563
Management fees (Note 2)............................................................. 7,713,508
Administrative fees (Note 2)......................................................... 1,914,579
Transfer agent fees.................................................................. 307,700
Custodian fees....................................................................... 162,900
Remarketing agent fees............................................................... 628,472
Shareholder reports.................................................................. 325,800
Legal and audit fees................................................................. 144,800
Directors' fees (Note 2)............................................................. 144,800
Other expenses....................................................................... 372,459
--------------
Total expenses..................................................................... 17,372,581
--------------
Net investment income.............................................................. 92,594,744
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments..................................................... 23,817,175
Net change in unrealized appreciation on investments and foreign currency translation (169,542,551)
--------------
Net loss on investments.............................................................. (145,725,376)
--------------
Net decrease in net assets resulting from operations................................. ($ 53,130,632)
==============
The accompanying notes are an integral part of the financial statements.
12
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF CHANGES IN NET ASSETS
For the
six months For the year
ended ended
June 30, 2001 December 31,
(UNAUDITED) 2000
-------------- --------------
FROM OPERATIONS:
Net investment income.................................................... $ 92,594,744 $ 190,201,026
Net realized gain on investments......................................... 23,817,175 53,471,923
Net change in unrealized appreciation on investments and foreign currency
translation............................................................ (169,542,551) 311,528,851
-------------- --------------
Net increase (decrease) in net assets resulting from operations........ (53,130,632) 555,201,800
DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income--preferred stock (Note 5).......................... (9,962,872) (23,887,016)
Net investment income--common stock (Note 3)............................. (82,574,183) (165,926,959)
-------------- --------------
Total distributions.................................................... (92,537,055) (189,813,975)
FROM CAPITAL STOCK TRANSACTIONS (Note 4):
Shares issued to common stockholders from dividend reinvestment.......... 13,467,530 22,497,362
-------------- --------------
Net increase in net assets derived from capital stock transactions....... 13,467,530 22,497,362
-------------- --------------
Total increase (decrease).............................................. (132,200,157) 387,885,187
TOTAL NET ASSETS:
Beginning of period...................................................... 2,716,013,544 2,328,128,357
-------------- --------------
End of period (including distributions in excess of and undistributed net
investment income of $10,934,990 and $3,415,147, respectively)......... $2,583,813,387 $2,716,013,544
============== ==============
The accompanying notes are an integral part of the financial statements.
13
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six months ended June 30, 2001
Cash Flows From (For):
OPERATING ACTIVITIES
Interest received...................................................... $ 28,143,263
Income dividends received.............................................. 83,662,136
Securities lending income.............................................. 588,642
Operating expenses paid (excluding interest)........................... (11,540,580)
Interest paid on commercial paper...................................... (7,008,170)
---------------
Net cash provided by operating activities.......................................... $ 93,845,291
INVESTING ACTIVITIES
Purchase of investment securities...................................... (3,395,581,754)
Proceeds from sale/redemption of investment securities................. 3,385,832,149
---------------
Net cash used in investing activities.............................................. (9,749,605)
FINANCING ACTIVITIES
Dividends paid......................................................... (95,013,079)
Proceeds from issuance of common stock under dividend reinvestment plan 13,467,531
Change in net proceeds from issuance of commercial paper............... 2,229,341
---------------
Net cash used in financing activities.............................................. (79,316,207)
------------
Net increase in cash and cash equivalents................................................ 4,779,479
Cash and cash equivalents--beginning of period.......................... 3,623,782
------------
Cash and cash equivalents--end of period................................ $ 8,403,261
============
Reconciliation of net investment income to net cash provided by operating activities:
Net investment income.................................................................. $ 94,676,562
Adjustments to reconcile net investment income to net cash provided by
operating activities:
Decrease in interest receivable...................................... 774,419
Increase in dividends receivable..................................... (355,326)
Decrease in accrued expenses......................................... (1,176,169)
Increase in other receivable......................................... (74,195)
---------------
Total adjustments.............................................................. (831,271)
------------
Net cash provided by operating activities................................................ $ 93,845,291
============
The accompanying notes are an integral part of the financial statements.
14
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2001
(1) SIGNIFICANT ACCOUNTING POLICIES:
Duff & Phelps Utilities Income Inc. (the "Fund") was incorporated under the
laws of the State of Maryland on November 26, 1986. The Fund commenced
operations on January 21, 1987, as a closed-end diversified management
investment company registered under the Investment Company Act of 1940. The
primary investment objectives of the Fund are current income and long-term
growth of income. Capital appreciation is a secondary objective.
The following are the significant accounting policies of the Fund:
(a) The market values for securities are determined as follows:
Securities traded on a national securities exchange or traded
over-the-counter and quoted on the NASDAQ System are valued at last sales
prices. Securities so traded for which there were no sales and other
securities are valued at the mean of the most recent bid-asked quotations.
Bonds not traded on a securities exchange nor quoted on the NASDAQ System
are valued at a fair value using a procedure determined in good faith by the
Board of Directors which includes the use of a pricing service. Each money
market instrument having a maturity of 60 days or less is valued on an
amortized cost basis, which approximates market value. Other assets and
securities are valued at a fair value, as determined in good faith by the
Board of Directors.
(b) No provision is made for Federal income taxes since the Fund has
elected to be taxed as a "regulated investment company" and has made such
distributions to its shareholders deemed necessary to be relieved of all
Federal income taxes under provisions of current Federal tax law. The Fund
intends to utilize provisions of Federal income tax laws which allow a
realized capital loss to be carried forward for eight years following the
year of loss and offset such losses against any future realized gains. At
December 31, 2000, the Fund had tax capital loss carry forwards of
$79,152,839 which expire beginning on December 31, 2003.
The accumulated net realized loss and undistributed net investment income
captions on the balance sheet reflect book/tax temporary differences. These
differences are a result of the deferral of wash sale losses, the accretion
of market discount and the cash basis recognition of preferred dividends for
tax purposes.
(c) The accounts of the Fund are kept on the accrual basis of accounting.
Security transactions are recorded on the trade date. Realized gains or
losses from sales of securities are determined on the specific identified
cost basis. Dividend income is recognized on the ex-dividend date. Interest
income and expense are recognized on the accrual basis.
(d) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
(e) As required, effective January 1, 2001, the Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
and began amortizing discount and premium on debt securities. Prior to
January 1, 2001, the Fund did not amortize premiums or discounts on debt
securities. The cumulative effect of this accounting change had no impact on
total net assets of the Fund, but resulted in a $14,407,825 reduction in
cost of securities and a corresponding $14,407,825 increase in net
unrealized appreciation, based on securities held by the Fund on January 1,
2001.
The effect of this change for the six months ended June 30, 2001 was to
decrease net investment income by $2,081,818; increase net unrealized
appreciation by $3,349,936; and increase net realized gains by $13,139,707.
The statement of changes in net assets and financial highlights for the
prior periods have not been restated to reflect this change in presentation.
15
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
June 30, 2001
(2) MANAGEMENT ARRANGEMENTS:
The Fund has engaged Duff & Phelps Investment Management Co. (the "Adviser")
to provide professional investment management services for the Fund and has
engaged J. J. B. Hilliard, W. L. Lyons, Inc. (the "Administrator") to provide
administrative and management services for the Fund. The Adviser receives a
quarterly fee at an annual rate of .60% of the average weekly net assets of the
Fund up to $1.5 billion and .50% of average weekly net assets in excess
thereof. The Administrator receives a quarterly fee at annual rates of .25% of
average weekly net assets up to $100 million, .20% of average weekly net assets
from $100 million to $1 billion, and .10% of average weekly net assets over $1
billion. For purposes of the foregoing calculations, "average weekly net
assets" is defined as the sum of (i) the aggregate net asset value of the
Fund's common stock (ii) the aggregate liquidation preference of the Fund's
preferred stock and (iii) the aggregate proceeds to the Fund of commercial
paper issued by the Fund. Directors of the Fund not affiliated with the Adviser
receive a fee of $22,500 per year plus $1,500 per board meeting, plus $1,000
per committee meeting attended. Committee Chairmen receive an additional fee of
$3,000 per year. Transfer agent and custodian fees are paid to The Bank of New
York.
(3) DIVIDENDS:
The Board of Directors has authorized the following distributions to common
stockholders from investment income in 2001:
Record Payable Dividend
Date Date Per Share
---- -------- ---------
01-31-01 02-12-01 $.065
02-28-01 03-12-01 .065
03-30-01 04-10-01 .065
Record Payable Dividend
Date Date Per Share
---- -------- ---------
04-30-01 05-10-01 $.065
05-31-01 06-11-01 .065
06-29-01 07-10-01 .065
(4) CAPITAL STOCK TRANSACTIONS:
The Fund may purchase shares of its own stock in open market or private
transactions, from time to time and in such amounts and at such prices (not
exceeding $100,000 plus accumulated and unpaid dividends in the case of the
Fund's remarketed preferred stock and less than net asset value in the case of
the Fund's common stock) as management may deem advisable. Since any such
purchases of the Fund's common stock would be made at prices below net asset
value, they would increase the net asset value per share of the remaining
shares of common stock outstanding. The Fund has not purchased any shares of
its common stock.
Transactions in common stock and paid-in surplus during 2000 and for the six
months ended June 30, 2001 were as follows:
Shares Amount
----------- --------------
For the year ended December 31, 2000:
Beginning capitalization....... 208,478,761 $1,860,932,872
Dividend reinvestment........ 2,456,999 22,497,362
----------- --------------
Total capitalization......... 210,935,760 $1,883,430,234
=========== ==============
For the six months ended June 30, 2001:
Beginning capitalization........ 210,935,760 $1,883,430,234
Dividend reinvestment......... 1,322,487 13,467,530
----------- --------------
Total capitalization.......... 212,258,247 $1,896,897,764
=========== ==============
16
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
June 30, 2001
(5) REMARKETED PREFERRED STOCK:
In 1988, the Fund issued 5,000 shares of Remarketed Preferred Stock ("RP")
in five series of 1,000 shares each at a public offering price of $100,000 per
share. The underwriting discount and other expenses incurred in connection with
the issuance of the RP were recorded as a reduction of paid-in surplus on
common stock. Dividends on the RP are cumulative at a rate which was initially
established for each series at its offering. Since the initial offering of each
series, the dividend rate on each series has been reset every 49 days by a
remarketing process. Dividend rates ranged from 2.997% to 4.850% during the six
months ended June 30, 2001.
The RP is redeemable at the option of the Fund on any dividend payment date
at a redemption price equal to $100,000 per share, plus accumulated and unpaid
dividends. The Fund is required to maintain certain asset coverage with respect
to the RP, and the RP is subject to mandatory redemption if that asset coverage
is not maintained. Each series of RP is also subject to mandatory redemption on
a date certain as follows: Series A--November 28, 2012; Series B--November 18,
2015; Series C--November 7, 2018; Series D--December 22, 2021; and Series
E--December 11, 2024.
In general, the holders of the RP and of the Common Stock have equal voting
rights of one vote per share, except that the holders of the RP, as a class,
vote to elect two members of the Board of Directors, and separate class votes
are required on certain matters that affect the respective interests of the RP
and the Common Stock. The RP has a liquidation preference of $100,000 per share
plus accumulated and unpaid dividends.
(6) COMMERCIAL PAPER:
The Board of Directors has authorized the Fund to issue up to $200,000,000
of Commercial Paper Notes (the "Notes") in minimum denominations of $100,000
with maturities up to 270 days. The Notes generally will be sold on a discount
basis, but may be sold on an interest-bearing basis. The Notes are not
redeemable by the Fund nor are they subject to voluntary prepayment prior to
maturity. The aggregate amount of Notes outstanding changes from time to time.
The Notes are unsecured, general obligations of the Fund. The Fund has entered
into a credit agreement to provide liquidity. The Fund is able to request loans
under the credit agreement of up to $100,000,000 at any one time, subject to
certain restrictions. Interest rates on the Notes ranged from 3.68% to 5.34%
during the six months ended June 30, 2001. At June 30, 2001, the Fund had Notes
outstanding of $195,416,733.
(7) INVESTMENT TRANSACTIONS:
For the six months ended June 30, 2001, purchases and sales of investment
securities (excluding short-term securities) were $3,264,108,173 and
$3,201,198,424, respectively. For federal income tax purposes, at June 30,
2001, the gross unrealized depreciation on investments was $81,200,834 and
gross unrealized appreciation was $316,674,897. The cost of investments for
financial reporting and Federal income tax purposes was $2,533,930,116 and
$2,535,302,029, respectively.
The Fund may lend portfolio securities to a broker/dealer. Loans are
required to be secured at all times by collateral at least equal to the market
value of securities loaned. The Fund receives a portion of the income earned on
the securities held as collateral and continues to earn income on the loaned
securities. Security loans are subject to the risk of failure by the borrower
to return the loaned securities in which case the Fund could incur a loss. At
June 30, 2001, the fund had loaned portfolio securities with a market value of
$629,648,878 to a broker/dealer and money market instruments with a market
value of $645,438,725 were held in the Fund's account at the broker/dealer as
collateral.
17
DUFF & PHELPS UTILITIES INCOME INC.
FINANCIAL HIGHLIGHTS--SELECTED PER SHARE DATA AND RATIOS
The table below provides information about income and capital changes for a
share of common stock outstanding throughout the periods indicated:
For the year ended December 31
-----------------------------------------------------------
For the six
months ending
June 30, 2001
(UNAUDITED) 2000 1999 1998 1997 1996
------------- ---------- ---------- ---------- ---------- ----------
Net asset value:
Beginning of period......... $ 10.51 $ 8.77 $ 10.36 $ 9.90 $ 8.44 $ 8.85
---------- ---------- ---------- ---------- ---------- ----------
Net investment income....... 0.45 0.88 0.89 0.88 0.85 0.84
Net realized gain (loss) and
change in unrealized
appreciation/depreciation
on investments............ (0.70) 1.76 (1.59) 0.46 1.46 (0.41)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations................ (0.25) 2.64 (0.70) 1.34 2.31 0.43
Dividends on preferred stock
from net investment
income.................... (0.05) (0.11) (0.10) (0.10) (0.10) (0.10)
Dividends on common stock
from net investment
income.................... (0.39) (0.79) (0.79) (0.78) (0.75) (0.74)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions......... (0.44) (0.90) (0.89) (0.88) (0.85) (0.84)
Net asset value:
End of period.............. $ 9.82 $ 10.51 $ 8.77 $ 10.36 $ 9.90 $ 8.44
========== ========== ========== ========== ========== ==========
Per share market value:
End of period.............. $ 10.78 $ 10.50 $ 8.31 $ 11.25 $ 10.13 $ 8.63
Ratio of expenses to average
net assets attributable to
common shares............. 1.64%* 1.79% 1.66% 1.46% 1.45% 1.53%
Total investment return..... 6.63% 37.37% (19.85)% 19.95% 27.69% 4.68%
Ratio of net investment
income to average net
assets attributable to
common shares............. 8.92%* 9.73% 9.40% 8.85% 9.87% 10.16%
Portfolio turnover rate..... 118.11% 229.70% 223.78% 251.19% 213.57% 226.21%
Net assets, end of period
(000s omitted)............ $2,583,813 $2,716,014 $2,328,128 $2,631,692 $2,510,035 $2,186,443
--------
* Annualized
18
Board of Directors
WALLACE B. BEHNKE
HARRY J. BRUCE
FRANKLIN A. COLE
GORDON B. DAVIDSON
ROBERT J. GENETSKI
CLAIRE V. HANSEN, CFA
FRANCIS E. JEFFRIES, CFA
NANCY LAMPTON
DAVID J. VITALE
Officers
CLAIRE V. HANSEN, CFA
Chairman,
NATHAN I. PARTAIN, CFA
President and Chief Executive Officer
T. BROOKS BEITTEL, CFA
Senior Vice President, Secretary and Treasurer
MICHAEL SCHATT
Senior Vice President
JOSEPH C. CURRY, JR.
Vice President
DIANNA P. WENGLER
Assistant Secretary
Duff & Phelps
Utilities Income Inc.
Common stock listed on the New York Stock Exchange under the symbol DNP
55 East Monroe Street
Chicago, Illinois 60603
(312) 368-5510
Shareholder inquiries please contact
Transfer Agent
Dividend Disbursing
Agent and Custodian
The Bank of New York
Shareholder Relations
Church Street Station
P.O. Box 11258
New York, New York 10286-1258
(877) 381-2537
Investment Adviser
Duff & Phelps
Investment Management Co.
55 East Monroe Street
Chicago, Illinois 60603
Administrator
J.J.B. Hilliard, W.L. Lyons, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202
(888) 878-7845
Legal Counsel
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Independent Public Accountants
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
19
Duff & Phelps
Utilities Income Inc.
Semi-Annual Report
June 30, 2001
[Graphic]
2nd Quarter