Dear Fellow Shareholders:
Performance Review: We are very pleased to report that your Fund had a total
return (market price change plus income) of 37.4% for 2000. This compares very
favorably to the 7.9% average return reported by Lipper Analytical Services
Inc. for Utility Funds, 6.8% for Equity Income Funds, -35.1% for
Telecommunications Funds, and -9.1% for the Standard and Poor's 500 Index. The
Fund, whose portfolio contains approximately 25% bonds, also surpassed the
Lehman Brothers Utility Bond Index, which had a 9.6% annual total return.
In pursuit of its objective of current income, the Fund declared twelve
monthly 6.5 cent per share dividends during 2000, plus an extra one cent per
share in the final dividend of the year. This was the tenth "extra" dividend
in the last thirteen years. The 6.5 cent per share monthly rate, without
compounding, would be 78 cents annualized or a 7.43% common stock dividend
yield based on the December 31, 2000 closing price of $10.50 per share. That
yield compares favorably with the 2000 year-end yield of 3.31% on the Dow
Jones Utility Index and the 2.82% yield on the Standard and Poor's Utilities
Index.
The road to favorable returns during 2000 had potentially axle-breaking
potholes, as the widely divergent returns of the indexes and mutual fund
groups cited above indicate. The telecommunications, electricity, and gas
industries continue to undergo deregulatory evolution, with corporate mergers
and acquisitions, asset acquisitions and divestitures, and diversification and
globalization strategies presenting many investment challenges and also many
opportunities. The California electric utility troubles are the most extreme
example of challenges facing utility companies and investors alike in the new
era. At year-end 2000, the Fund held only approximately one tenth of one
percent of its assets in investments directly related to the California
situation.
Annually, as an investment discipline, several Fund analysts prepare
industry reviews. Following are highlights from those reviews.
Got Natural Gas? A new breed of merchant energy companies--marketers, traders,
and independent generators--operating largely unfettered from regulation, led
the gas sector performance rankings. Dynegy Inc. common stock had a total
return of 220% in calendar year 2000 and The Coastal Corporation (now a part
of El Paso Energy Corporation) returned 159%. Even the more traditional gas
local distribution companies (LDCs) provided a robust 26% total return.
Several factors combined to get the natural gas group firing on all
cylinders. First, a tight gas supply environment drove commodity prices to
record levels. Companies owning or controlling natural gas enjoyed a spike in
revenue and earnings. The demand/supply imbalance was the result of a drop in
production, increased consumption from natural gas fired electricity
generating capacity, limited increase in Canadian imports, and a decline in
production rates from existing wells. Second, there were unprecedented
increases both in gas price volatility and wholesale power prices. These
conditions allowed the energy merchants in particular to sell more risk
management services and realize greater margins in their trading and marketing
businesses. Third, a very cold start to the winter season gave a valuation
boost to the market's view of the group.
We expect 2001 to be another positive, albeit more modest, year for the gas
group as many of the same dynamics from 2000 remain in place. Additionally,
the group could benefit from the return of normal summer weather in the
Northeast and Midwest. On the negative side, further declines in economic
activity could rapidly erode demand, posing a significant challenge to
performance. Further, the increase in commodity prices has resulted in large
gas bills to retail customers which could ignite regulatory and public
relations problems for some LDCs. The Fund will remain focused on companies
which will not be "squeezed" should prices remain high.
Telecommunications--Down But Not Out. The year 2000 was tough for the
telecommunications industry. It is said, "A rising tide lifts all boats," and
such had been the case with the telecommunications stocks in 1998 and 1999.
Conversely, when the tide went out, companies with poorly designed and
underfunded business plans were left stranded. However, because the Fund has
focused on high quality investments, the telecom stocks in our portfolio
performed relatively well compared to the rest of the industry.
What can we expect in 2001? First and foremost, it is important to remember
that telecommunications is a growth industry and in general the fundamentals
are quite strong. Sales of telecommunications services have grown at a rate of
2-3 times aggregate national economic growth over the last 20 years, and we
see no major change in that trend. However, there have been some disruptions
to this growth model which began last year and are continuing into 2001. One
is the extreme price discounting in the long distance voice market as a result
of increased competitive pressures. Long haul pricing appears to have
stabilized for now, but we need to see a continuation of rational pricing for
growth to resume. The other problem has been the heavy level of capital
spending, by new and old companies alike, to take advantage of emerging
technologies. Although this additional investment is necessary to grow the
business, there usually is an initial period when the revenue and margins from
the growth initiatives lag behind the expenditures. We are in one of those
periods now, but hope to see modest improvement in returns later in the year.
The second important trend impacting this industry is the scarcity value of
network assets at the local level. The sophisticated long distance networks,
which offer greatly increased capacity and services, are nearing completion.
However, the full utilization of those networks is hampered by a bottleneck at
the local consumer level, or "the last mile". The valuable, existing local
access infrastructure is controlled by old-line operating companies both
domestically and internationally. We have favored the local access companies
for some time, and they remain the cornerstone of our telecom holdings.
The final trend to highlight is how important a healthy balance sheet has
become in this industry. Many companies took on huge sums of debt to finance
wireless licenses and big expansion plans. At the time, bankers and investors
were all too happy to accommodate the demand for credit. But, when the equity
markets sank last year, so did the companies' debt refinancing plans as well
as their credit ratings. Standard & Poor's Ratings Services reported that
during 2000 telecommunication company bond downgrades outpaced upgrades by 42
to 17. The value of outstanding debt downgraded was more than 6 times the
value upgraded. We have watched this trend with great interest and have been
able to invest in some attractively priced bonds of financially strong
companies as a result. However, stock performance may remain constrained until
balance sheets are cleaned up.
A Long Dark Winter in California. Electric utility industry observers gave a
sigh of relief after California narrowly avoided massive power outages and
blackouts last summer. Many believed that the risks were over when summer
passed and that state and federal regulators would have until the next
summer's seasonal peak in electricity demand to fix the industry's problems.
However, it became clear that the summer of 2000 problem was just the tip of
the iceberg when the California electric utilities were once again thrust into
the national spotlight during the uncharacteristically cold fourth quarter.
The power supply situation has now reached a full-fledged crisis. A shortage
of power has sent prices skyrocketing and rolling blackouts have been
implemented in the northern part of the state. California's Governor and
legislators, the Federal Energy Regulatory Commission, the Department of
Energy, and even the U.S. Senate have all gotten involved as two of the
industry's premiere electric utilities (Pacific Gas & Electric Company and
Southern California Edison Company) stand on the edge of bankruptcy.
How did this happen? A combination of factors came into play. First,
inefficiencies were inadvertently designed into the power market created by
California deregulation legislation. Second, a shortage of power resulted from
years of population and industrial growth unaccompanied by generation and
transmission capacity growth. Third, higher fuel and purchased power costs
resulted from: poor hydroelectric conditions, a return to more normal weather
following three mild years, and nationwide high natural gas prices following a
period of low exploration and development. These factors increased the cost of
power. At the same time, California utilities were forced to sell power to
consumers at a rate capped by regulators.
In an attempt to fix the problems, California legislators have enacted new
laws that change the course of deregulation. The goal of providing competitive
sources of electricity for retail consumers has essentially been halted, and
due to the adverse credit position of the investor-owned utilities, a state
agency (The Department of Water Resources) is now responsible for buying power
for utility customers.
2
The Governor and legislators are engaged in vigorous efforts to keep Pacific
Gas & Electric Company and Southern California Edison Company from being
pulled into bankruptcy. At this time it is unclear how the California scenario
will be resolved. What is clear is that the California debacle has impacted
other states throughout the country. Several states (including Arkansas,
Nevada, North Carolina, and New Mexico) have scaled back deregulation efforts
pending further reviews. Those states that have deregulated are reexamining
their positions with emphasis on making sure that they have adequate supply.
We view the higher level of state regulatory scrutiny as positive and expect
that deregulation will be slowed, but not stopped or repealed.
Your Fund's team of analysts and portfolio managers seek to steer the Fund's
portfolio away from risky investments, but we expect to continue to meet our
goal of consistency of income to which shareholders have become accustomed.
Board of Directors Meeting--At the December Special Board of Directors'
meeting, the Board declared the following monthly dividends:
Payable
Cents Per Share Record Date Date
--------------- ----------- -------
7.5 cents December 29 January 10
6.5 cents January 31 February 12
6.5 cents February 28 March 12
At the regular February Board of Directors' meeting, the Board declared the
following monthly dividends:
Payable
Cents Per Share Record Date Date
--------------- ----------- -------
6.5 cents March 30 April 10
6.5 cents April 30 May 10
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.
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 Chief Executive Officer and President
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Duff & Phelps Utilities Income Inc.:
We have audited the accompanying balance sheet of Duff & Phelps Utilities
Income Inc. (the "Fund") (a Maryland corporation), including the schedule of
investments, as of December 31, 2000, and the related statements of operations
and cash flows for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our
procedures included confirmation of securities owned as of December 31, 2000,
by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Duff
& Phelps Utilities Income Inc. as of December 31, 2000, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
February 5, 2001
4
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS
December 31, 2000
COMMON STOCKS--74.3%
Market
Value
Shares Company (Note 1)
--------- ------- --------------
[_] ELECTRIC--41.9%
1,300,000 Allegheny Energy Inc.................................. $ 62,643,750
1,096,000 Dominion Resources ................................... 73,432,000
1,600,000 DTE Energy Co. ....................................... 62,300,000
1,000,000 Duke Energy Corp. .................................... 85,250,000
1,593,400 Endesa S.A. .......................................... 26,589,862
1,005,000 Entergy Corp. ........................................ 42,524,062
1,575,000 Exelon Corp. ......................................... 110,580,750
1,299,100 FPL Group Inc. ....................................... 93,210,425
1,000,000 Keyspan Corp. ........................................ 42,375,000
215,000 National Grid Group PLC ADR........................... 9,755,625
770,000 National Grid Group PLC (United Kingdom)................ 6,940,926
2,256,600 NiSource Inc. ........................................ 69,390,450
1,318,600 NSTAR ................................................ 56,534,975
1,120,000 Pinnacle West Capital Corp. .......................... 53,340,000
1,000,000 Public Service Enterprise Group ...................... 48,625,000
700,000 Puget Sound Energy Inc. .............................. 19,468,750
1,500,000 Reliant Energy Inc. .................................. 64,968,750
850,000 Scottish & Southern Energy (United Kingdom)............. 7,846,154
200,000 Scottish & Southern Energy ADR ....................... 18,463,460
1,000,000 Scottish Power PLC ADR ............................... 30,312,500
1,182,600 Sierra Pacific Resources ............................. 18,995,512
2,500,000 Southern Co. ......................................... 83,125,000
834,800 Vectren Corp. ........................................ 21,391,750
1,000,000 Xcel Energy Inc. ..................................... 29,062,500
--------------
1,137,127,201
[_] GAS--8.9%
926,000 AGL Resources......................................... 20,429,875
1,004,800 El Paso Energy Corp. ................................. 71,968,800
400,000 National Fuel Gas Co. ................................ 25,175,000
2,050,000 Utilicorp United Inc. ................................ 63,550,000
1,500,000 Williams Companies Inc. .............................. 59,906,250
--------------
241,029,925
The accompanying notes are an integral part of the financial statements.
5
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 2000
Market
Value
Shares Company (Note 1)
--------- ------- --------------
[_] TELECOMMUNICATION--14.6%
1,000,000 Alltell Corp. ...................................... $ 62,437,500
1,730,000 BellSouth Corp. .................................... 70,821,875
2,137,230 SBC Communications Inc. ............................ 102,052,733
700,000 Swisscom AG ADR..................................... 17,937,500
900,000 Tele-Danmark A/S ADR ............................... 18,281,250
856,250 Telecom Corp. of New Zealand Interim ADR . ......... 14,288,672
1,068,400 Telstra Corp. ADR .................................. 18,964,100
1,819,000 Verizon Communications ............................. 91,177,375
--------------
395,961,005
[_] NON-UTILITY--8.9%
258,600 Apartment Investment & Management Co. .............. 12,913,837
200,000 Avalon Bay Communities Inc. ........................ 10,025,000
409,000 Boston Properties Inc. ............................. 17,791,500
79,900 Camden Property Trust .............................. 2,676,650
347,400 CBL & Associates Properties Inc. ................... 8,793,562
403,600 Centerpoint Properties Corporation ................. 19,070,100
301,000 Chelsea GCA Realty Inc. ............................ 11,099,375
200,000 Developers Diversified Realty Corp. ................ 2,662,500
495,000 Duke-Weeks Realty Corp. ............................ 12,189,375
315,825 Equity Office Properties Trust...................... 10,303,791
200,000 Equity Residential Properties Trust ................ 11,062,500
269,000 Essex Property Trust Inc. .......................... 14,727,750
278,100 First Industrial Realty Trust ...................... 9,455,400
250,000 General Growth Properties, Inc. .................... 9,046,875
200,000 Kimco Realty Corp. ................................. 8,837,500
215,000 Macerich Co. ....................................... 4,125,312
95,000 Mack-Cali Realty Corp. ............................. 2,713,438
370,600 ProLogis Trust ..................................... 8,245,850
525,100 Reckson Associates Realty Corp. .................... 13,160,319
171,545 Reckson Associates Realty Corp. Class B............. 4,663,880
272,200 Smith Charles E. Residential Realty Inc. ........... 12,793,400
371,100 Spieker Properties Inc. ............................ 18,601,388
465,800 Vornado Realty Trust ............................... 17,845,963
--------------
242,805,265
--------------
Total Common Stocks (Cost--$1,602,844,345).......... 2,016,923,396
--------------
The accompanying notes are an integral part of the financial statements.
6
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 2000
Market
Value
Shares Company (Note 1)
------- ------- ------------
PREFERRED STOCKS--6.9%
[_] NON-UTILITY--1.1%
500,000 Cox Communications Inc. 7% 8/16/02...................... $ 31,000,000
------------
31,000,000
[_] UTILITY--5.8%
450,000 Dominion Resources 9 1/2% 11/16/04...................... 28,125,000
700,000 Duke Capital Financing Trust III 8 3/8% 8/31/29 ........ 18,375,000
223,500 EIX Trust II Series B 8.60% 10/29/29.................... 3,687,750
550,000 MediaOne Group 7.00% 11/15/02........................... 19,593,750
500,000 NiSource Industries Inc. 7.75% 2/19/03 ................. 27,093,750
209,000 P P & L Capital Trust II 8.10% 7/01/27.................. 5,225,000
789,100 Texas Utilities Co. 9 1/4% 8/16/02...................... 39,800,231
450,900 Utilicorp United Inc. 9 3/4% 11/16/02 .................. 15,217,875
------------
157,118,356
------------
Total Preferred Stocks (Cost--$175,085,503) ............ 188,118,356
------------
The accompanying notes are an integral part of the financial statements.
7
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 2000
BONDS--19.3%
Ratings*
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
----------- ------- --------- ------- -------- -----------
[_] ELECTRIC--10.1%
$ 5,000,000 AES Ironwood Corp.
8.857%, due 11/30/25..... Not Rated Baa3 BBB- $ 4,970,295
23,101,000 Alabama Power Co.
9%, due 12/01/24......... AA- A1 A 24,481,262
18,050,000 Comed Financing II
8 1/2%, due 1/15/27...... Not Rated Baa3 BBB 17,912,658
7,500,000 Commonwealth Edison Co.
9 7/8%, due 6/15/20...... A- Baa1 A- 8,423,932
8,850,000 Commonwealth Edison Co.
8 5/8%, due 2/01/22...... A- Baa1 A- 9,206,903
5,000,000 Commonwealth Edison Co.
8 3/8%, due 9/15/22...... A- Baa1 A- 5,178,340
10,000,000 Commonwealth Edison Co.
8 3/8%, due 2/15/23...... A- Baa1 A- 10,293,070
24,000,000 Dominion Resources
Capital Trust
7.83%, due 12/01/27...... BBB Baa1 BBB- 21,718,632
5,000,000 Gulf States Utilities
8.94%, due 1/01/22....... BBB Baa3 BBB- 5,355,580
8,800,000 Hydro--Quebec
9 3/4%, due 1/15/18...... AA- A2 A+ 9,317,572
5,000,000 Illinois Power Co.
7 1/2%, due 7/15/25...... A- Baa1 BBB+ 4,867,710
5,000,000 Louisiana Power & Light
Co.
8 3/4%, due 3/01/26...... BBB+ Baa2 BBB 5,197,510
4,000,000 New York State Electric &
Gas Corp.
8 7/8%, due 11/01/21..... A A3 A 4,197,028
27,580,000 Potomac Electric Power
Co.
9%, due 6/01/21.......... A+ A1 A 28,867,765
10,000,000 Public Service Co. of
Colorado
8 3/4%, due 3/01/22...... A A3 A 10,414,230
22,750,000 Puget Capital Trust
8.231%, due 6/01/27...... Not Rated Baa2 BBB- 21,824,121
3,000,000 Rochester Gas & Electric
Corp.
9 3/8%, due 4/01/21...... A- A3 A- 3,136,662
13,000,000 Southern Co. Capital
Trust
8.14%, due 2/15/27....... Not Rated A3 BBB+ 12,311,676
The accompanying notes are an integral part of the financial statements.
8
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 2000
Ratings*
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
----------- ------- --------- ------- -------- ------------
$27,830,000 Texas Utilities Electric
Co.
9 3/4%, due 5/01/21..... A- A3 BBB+ $ 29,585,015
12,000,000 UtiliCorp United Inc.
8%, due 3/01/23......... BBB Baa3 BBB 11,532,012
5,000,000 Virginia Electric &
Power Co.
8 5/8%, due 10/01/24.... A+ A2 A 5,230,140
17,700,000 Virginia Electric &
Power Co.
8 1/4%, due 3/01/25..... A+ A2 A 18,120,127
------------
272,142,240
[_] GAS--2.2%
5,125,000 ANR Pipeline Co.
9 5/8%, due 11/01/21.... Not Rated Baa1 BBB+ 6,121,751
5,000,000 KN Energy Inc.
7 1/4%, due 3/01/28..... BBB- Baa2 BBB- 4,782,280
10,000,000 Phillips Petroleum Co.
9.18%, due 9/15/21...... BBB Baa2 BBB 10,622,090
5,000,000 Southern California Gas
Co.
8 3/4%, due 10/01/21.... AA A1 AA- 5,262,845
6,488,000 Southern Union Co.
7.60%, due 2/01/24...... BBB+ Baa2 BBB+ 6,036,014
8,850,000 Southern Union Co.
8 1/4%, due 11/15/29.... BBB+ Baa2 BBB+ 8,814,042
10,000,000 TE Products Pipeline Co.
7.51%, due 1/15/28...... Not Rated Baa2 BBB+ 9,148,970
9,000,000 Trans-Canada Pipeline
9 1/8%, due 4/20/06..... Not Rated A3 BBB 9,944,784
------------
60,732,776
[_] TELECOMMUNICATION--5.3%
44,000,000 AT & T Corp.
8.35%, due 1/15/25...... A- A2 A 43,205,184
10,000,000 British Telecom PLC
8 5/8%, due 12/15/30.... A A3 A 10,039,660
12,000,000 GTE California Inc.
8.07%, due 4/15/24...... AA AA3 A+ 12,291,900
17,625,000 GTE Corp.
7.90%, due 2/01/27...... A+ A2 A+ 17,446,970
13,750,000 New England Telephone &
Telegraph
9%, due 8/01/31......... AA Aa2 A+ 14,721,795
The accompanying notes are an integral part of the financial statements.
9
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 2000
Ratings*
--------------------------
Fitch
IBCA, Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
----------- ------- --------- ------- -------- --------------
$ 9,000,000 New York Telephone Co.
7 5/8%, due 2/01/23..... AA A1 A+ $ 8,754,453
20,740,000 New York Telephone Co.
9 3/8%, due 7/15/31..... AA A1 A+ 22,210,673
9,000,000 Tele-Commun Inc.
9.80%, due 2/01/12...... A- A3 A- 10,471,986
5,000,000 US West Communications
8 7/8%, due 6/01/31..... A A2 BBB+ 5,115,635
--------------
144,258,256
[_] NON-UTILITY--1.7%
17,500,000 Contl Cablevision
9 1/2%, due 8/01/13..... Not Rated A2 AA- 19,162,010
8,000,000 Dayton Hudson Corp.
9 7/8%, due 7/01/20..... A A2 A 9,807,736
19,940,000 EOP Operating LP
7 1/2%, due 4/19/29..... BBB+ Baa1 BBB+ 18,019,479
--------------
46,989,225
--------------
Total Bonds (Cost--$543,400,970) ................... 524,122,497
--------------
U.S. TREASURY OBLIGATIONS--2.8%
66,000,000 U.S. Treasury Bonds
11 3/4%, due 2/15/01................................ 66,469,260
7,250,000 U.S. Treasury Notes
13 3/8%, due 8/15/01................................ 7,587,016
2,000,000 U.S. Treasury Bonds
10 3/4%, due 8/15/05................................ 2,453,908
--------------
Total U.S. Treasury Obligations (Cost--
$89,017,734)........................................ 76,510,184
--------------
COMMERCIAL PAPER--3.7%
35,000,000 Citigroup Inc.
6.54%, due 1/02/01.................................. 34,993,642
35,000,000 Ford Motor Credit Corp.
6.54%, due 1/02/01.................................. 34,993,642
30,000,000 General Electric Capital
Corp.
5.90%, due 1/02/01.................................. 29,995,083
--------------
Total Commercial Paper (Amortized Cost--
$99,982,367)........................................ 99,982,367
--------------
TOTAL INVESTMENTS (Cost $2,510,330,919) (107.0%).... $2,905,656,800
--------------
--------
*Bond ratings are not covered by the report of independent public accountants.
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
December 31, 2000
ASSETS:
Investments at market value:
Common stocks (cost $1,602,844,345)........................... $2,016,923,396
Preferred stocks (cost $175,085,503).......................... 188,118,356
Bonds (cost $543,400,970)..................................... 524,122,497
U.S. Treasury obligations (cost $89,017,734).................. 76,510,184
Commercial paper (amortized cost $99,982,367)................. 99,982,367
Interest-bearing deposits with custodian....................... 3,623,782
Receivables:
Securities sold............................................... 11,742,408
Interest...................................................... 16,452,231
Dividends..................................................... 6,839,544
Securities lending income..................................... 74,197
Prepaid expenses............................................... 74,112
--------------
Total Assets................................................. $2,944,463,074
==============
LIABILITIES:
Payable for securities purchased............................... 8,490,540
Due to Adviser (Note 2)........................................ 3,906,861
Due to Administrator (Note 2).................................. 969,897
Dividends payable on common stock.............................. 15,820,182
Dividends payable on remarketed preferred stock................ 1,697,576
Accrued expenses............................................... 4,377,082
Commercial paper outstanding (Note 6).......................... 193,187,392
--------------
Total Liabilities............................................ 228,449,530
--------------
CAPITAL:
Remarketed preferred stock ($.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 210,935,760 shares issued and outstanding) (Note 4)....... 210,936
Paid-in surplus (Note 4)....................................... 1,883,219,299
Accumulated net realized loss on investments................... (66,161,307)
Undistributed net investment income............................ 3,415,147
Unrealized appreciation on foreign currency translation........ 3,588
Net unrealized appreciation on investments..................... 395,325,881
--------------
Net assets applicable to common stock (equivalent to $10.51
per share based on 210,935,760 shares outstanding).......... 2,216,013,544
--------------
Total Capital (Net Assets)................................... 2,716,013,544
--------------
Total Liabilities and Capital................................ $2,944,463,074
==============
The accompanying notes are an integral part of the financial statements.
11
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF OPERATIONS
For the year ended December 31, 2000
INVESTMENT INCOME:
Interest......................................................... $ 57,448,446
Dividends (less withholding tax of $838,454)..................... 166,455,473
Securities lending income........................................ 1,341,999
------------
Total investment income......................................... 225,245,918
EXPENSES:
Commercial paper interest expense (Note 6)....................... 12,877,742
Management fees (Note 2)......................................... 14,719,244
Administrative fees (Note 2)..................................... 3,693,849
Transfer agent fees.............................................. 622,200
Custodian fees................................................... 329,400
Remarketing agent fees........................................... 1,270,832
Shareholder reports.............................................. 433,500
Legal and audit fees............................................. 239,800
Directors' fees (Note 2)......................................... 247,200
Other expenses................................................... 611,125
------------
Total expenses.................................................. 35,044,892
------------
Net investment income........................................... 190,201,026
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments................................. 53,471,923
Net change in unrealized appreciation on investments and foreign
currency translation............................................ 311,528,851
------------
Net gain on investments.......................................... 365,000,774
------------
Net increase in net assets resulting from operations............. $555,201,800
============
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 year For the year
ended ended
December 31, December 31,
2000 1999
-------------- --------------
FROM OPERATIONS:
Net investment income......................... $ 190,201,026 $ 184,464,368
Net realized gain (loss) on investments....... 53,471,923 (88,191,091)
Net change in unrealized appreciation on
investments and foreign currency translation. 311,528,851 (243,399,166)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations................... 555,201,800 (147,125,889)
DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income--preferred stock
(Note 5)..................................... (23,887,016) (19,928,894)
Net investment income--common stock (Note 3).. (165,926,959) (163,675,376)
-------------- --------------
Total distributions.......................... (189,813,975) (183,604,270)
FROM CAPITAL STOCK TRANSACTIONS (Note 4):
Shares issued to common stockholders from
dividend reinvestment........................ 22,497,362 27,167,046
-------------- --------------
Net increase in net assets derived from
capital share transactions................... 22,497,362 27,167,046
-------------- --------------
Total increase (decrease).................... 387,885,187 (303,563,113)
TOTAL NET ASSETS:
Beginning of year............................. 2,328,128,357 2,631,691,470
-------------- --------------
End of year (including undistributed net
investment income of $3,415,147 and
$3,028,096 respectively)..................... $2,716,013,544 $2,328,128,357
============== ==============
The accompanying notes are an integral part of the financial statements.
13
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF CASH FLOWS
For the year ended December 31, 2000
Cash Flows From (For):
OPERATING ACTIVITIES
Interest received........................... $ 55,927,863
Income dividends received................... 167,284,594
Securities lending income................... 1,451,982
Operating expenses paid (excluding
interest).................................. (21,637,746)
Interest paid on commercial paper........... (12,281,109)
---------------
Net cash provided by operating activities.................. $ 190,745,584
INVESTING ACTIVITIES
Purchase of investment securities........... (6,101,084,481)
Proceeds from sale/redemption of investment
securities................................. 6,003,229,947
Return of capital on investments............ 488,158
Long-term capital gains dividends received.. 1,418,167
---------------
Net cash used in investing activities...................... (95,948,209)
FINANCING ACTIVITIES
Dividends paid.............................. (189,249,384)
Proceeds from issuance of common stock under
dividend reinvestment plan................. 22,497,362
Change in net proceeds from issuance of
commercial paper........................... (655,389)
---------------
Net cash used in financing activities...................... (167,407,411)
-------------
Net decrease in cash and cash equivalents.................... (72,610,036)
Cash and cash equivalents--beginning of year................. 76,233,818
-------------
Cash and cash equivalents--end of year....................... $ 3,623,782
=============
Reconciliation of net investment income to net cash provided
by operating activities:
Net investment income....................................... $ 190,201,026
Adjustments to reconcile net investment
income to net cash provided by operating
activities:
Increase in interest receivable............ (1,520,583)
Decrease in dividends receivable........... 829,122
Increase in accrued expenses............... 1,126,037
Decrease in other receivable............... 109,982
---------------
Total adjustments......................................... 544,558
-------------
Net cash provided by operating activities................... $ 190,745,584
=============
The accompanying notes are an integral part of the financial statements.
14
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
(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) In November 2000, the American Institute of Certified Public
Accountants (AICPA) issued a revised version of the AICPA Audit and
Accounting Guide for Investment Companies (the "Guide"). The Guide is
effective for annual financial statements issued for fiscal years beginning
after December 15, 2000. The Fund does not anticipate that the adoption of
the Guide will have a significant effect on the financial statements.
15
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
(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 2000:
Record Payable Dividend Record Payable Dividend
Date Date Per Share Date Date Per Share
-------- -------- --------- -------- -------- ---------
01-31-00 02-10-00 $.065 07-31-00 08-10-00 $.065
02-29-00 03-10-00 .065 08-31-00 09-11-00 .065
03-31-00 04-10-00 .065 09-29-00 10-10-00 .065
04-28-00 05-10-00 .065 10-31-00 11-10-00 .065
05-31-00 06-12-00 .065 11-30-00 12-11-00 .065
06-30-00 07-10-00 .065 12-29-00 01-10-01 .075
(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 1999 and 2000 were
as follows:
Shares Amount
----------- --------------
For the year ended December 31, 1999:
Beginning capitalization.......................... 205,714,255 $1,833,765,826
Dividend reinvestment............................. 2,764,506 27,167,046
----------- --------------
Total capitalization............................ 208,478,761 $1,860,932,872
=========== ==============
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
=========== ==============
16
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2000
(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 4.14% to 5.14% during the
year ended December 31, 2000.
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 6.05%
to 6.78% during the year ended December 31, 2000. At December 31, 2000, the
Fund had Notes outstanding of $193,187,392.
(7) INVESTMENT TRANSACTIONS:
For the year ended December 31, 2000, purchases and sales of investment
securities (excluding short-term securities) were $5,892,977,650 and
$5,898,269,356, respectively. For federal income tax purposes, at December 31,
2000, the gross unrealized depreciation on investments was $74,052,290 and
gross unrealized appreciation was $468,006,258. The cost of investments for
financial reporting and Federal income tax purposes was $2,510,330,919 and
$2,511,702,832, 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 December 31, 2000, the fund had loaned portfolio securities with a
market value of $325,089,390 to a broker/dealer and money market instruments
with a market value of $338,710,505 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 years indicated:
For the year ended December 31
-----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Net asset value:
Beginning of year........ $ 8.77 $ 10.36 $ 9.90 $ 8.44 $ 8.85
---------- ---------- ---------- ---------- ----------
Net investment income.... 0.88 0.89 0.88 0.85 0.84
Net realized gain (loss)
and change in unrealized
appreciation/depreciation
on investments.......... 1.76 (1.59) 0.46 1.46 (0.41)
---------- ---------- ---------- ---------- ----------
Total from investment
operations............... 2.64 (0.70) 1.34 2.31 0.43
Dividends on preferred
stock from net
investment income....... (0.11) (0.10) (0.10) (0.10) (0.10)
Dividends on common stock
from net investment
income.................. (0.79) (0.79) (0.78) (0.75) (0.74)
---------- ---------- ---------- ---------- ----------
Total distributions...... (0.90) (0.89) (0.88) (0.85) (0.84)
Net asset value:
End of year............. $ 10.51 $ 8.77 $ 10.36 $ 9.90 $ 8.44
========== ========== ========== ========== ==========
Per share market value:
End of year............. $ 10.50 $ 8.31 $ 11.25 $ 10.13 $ 8.63
Ratio of expenses to
average net assets
attributable to common
shares.................. 1.79% 1.66% 1.46% 1.45% 1.53%
Total investment return.. 37.37% (19.85)% 19.95% 27.69% 4.68%
Ratio of net investment
income to average net
assets attributable to
common shares........... 9.73% 9.40% 8.85% 9.87% 10.16%
Portfolio turnover rate.. 229.70% 223.78% 251.19% 213.57% 226.21%
Net assets, end of year
(000s omitted)........... $2,716,014 $2,328,128 $2,631,692 $2,510,035 $2,186,443
18
Board of Directors
WALLACE B. BEHNKE
HARRY J. BRUCE
FRANKLIN A. COLE
GORDON B. DAVIDSON
CLAIRE V. HANSEN, CFA
FRANCIS E. JEFFRIES, CFA
NANCY LAMPTON
BERYL W. SPRINKEL
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
Duff & Phelps
Utilities Income Inc.
4th
Annual Report
December 31,
2000