<PAGE>
DEAR FELLOW SHAREHOLDERS:
PERFORMANCE REVIEW: During the first quarter of 1997, stock and bond market
investors adjusted their outlook to accommodate the increasing likelihood that
the Federal Reserve was going to raise interest rates. Prices fell with the
expectations, and on March 25, the Fed moved. The relatively high degree of
interest rate sensitivity of utility issues moved the group lower in price
with the markets, and debate on further Fed moves may depress valuations for
the near term. Nonetheless, the U.S. economy still is in its best fundamental
shape in years. Growth remains moderate, inflation relatively low, and
interest rates are modest by historical standards. Without significant
imbalances in the economy, the outlook remains favorable.
During the quarter, the popular Dow Jones Utilities Average and the more
broad-based S&P Utilities Index declined 6.0% and 4.5%, respectively. We are
pleased to report that the Fund's net asset value per share outperformed both
of these indices in the quarter. Including reinvested dividends, the return on
net asset value declined only 1.1%. The first quarter also saw a recovery in
the stock premium, so the total return on stock price was a positive 5.1%. The
six cent per share monthly dividend rate, without compounding, would be
seventy-two cents annualized or an 8.11% dividend yield based on the March 31,
1997 closing price of $8.875 per share.
FIRST QUARTER 1997
TOTAL RETURNS
[CHART APPEARS HERE]
DNP Market Value = 5.1%
DNP Net Asset Value = (1.1%)
S&P Utilities Index = (3.4%)
Lehman Brothers Utility Bond Index = (1.0%)
<PAGE>
ELECTRIC UTILITY COMPETITION--THE NEXT STEP. In an earlier report, we
discussed one complication of the increased utility competitive environment--
the so called "stranded investment." Stranded investment refers to the capital
investments made by utilities under traditional regulatory methods that would
become unrecoverable, or stranded, if the customer were able to obtain lower
cost power elsewhere. This problem is most severe for utilities that built
large nuclear facilities or were legally forced into signing high cost, long
term contracts with independent power producers.
Most regulators now agree that some stranded investment recovery is an
important component of the transition to competition, because it would
maintain the financial health of the public utilities. It is not surprising
that California started setting the standard for stranded investment recovery,
given that state's high cost of power. The California Public Utilities
Commission got the ball rolling on deregulation itself in April 1994.
Legislation was subsequently passed in September 1996 calling for a 10% rate
reduction associated with opening the California electric market to
competition. This legislation currently provides for the issuance of up to $10
billion in asset-backed securities--"Rate Reduction Bonds."
The first step in issuing an asset-backed rate reduction bond is for state
regulators to determine the amount of stranded assets at a utility. This is
not easy because it would include some hard assets, such as physical plant,
which would be made uneconomic by competition, but also associated items in
the capital, tax, and other accounts. A "transition-to-competition" charge
then is established which allows for the recovery of the value of the stranded
assets over a specified period of time. This charge would be added to the
monthly utility bill and is an asset to the utility. The transition charge
cannot be bypassed by customers whether they remain with the local utility or
choose a competitor. A security is then created for the utility which
represents interests in the future cash flow of the transition charge. Small
and large investors buy the securities and the net proceeds go to the utility
company to compensate for uneconomic stranded assets.
Other states are following California's lead, each with its own variation.
New York, Pennsylvania, Michigan, Massachusetts, and New Jersey all have
proposals on the table to recapture some portion of the stranded investments
through asset securitization while providing rate reductions to the end user.
If a utility issued a high-quality intermediate-term asset-backed rate
reduction bond in the current environment, it would represent low cost
financing. The benefits of low cost financing and renewed financial strength
from asset restructuring would partly accrue to utility customers in the form
of a rate reduction, more than offsetting the added "transition" charge. That
explains the term "rate reduction bonds" and the notion that a stranded asset
is not as onerous a burden as initially thought. If all goes smoothly, the
result is financially healthier utilities, lower electricity rates, and an
established path for future competition.
As always, there are risks with benefits. A utility gets a large cash
infusion with the sale of asset-backed bonds. That cash could be used to
retire debt, perhaps buy back stock, and possibly to make acquisitions. After
all, the stranded asset is being retired over time and the cash is received
immediately. How a utility handles its finances will determine its future
value. Your Fund management team spends a significant amount of time keeping
abreast of industry developments and restructuring proposals at both the state
and federal level. To date, the Fund has tried to avoid companies where the
regulatory environment does not appear to have the interest of investors
properly balanced with the interest of ratepayers.
2
<PAGE>
QUARTERLY BOARD MEETING: The quarterly Board meeting was held on April 10,
1997, in New York City at the New York Stock Exchange in recognition of 10
years of listing of Fund shares. At the meeting, the Board declared the
following monthly dividends:
<TABLE>
<CAPTION>
DIVIDENDS PER SHARE RECORD DATE PAYMENT DATE
------------------- ----------- ------------
<S> <C> <C>
6 cents April 30 May 12
6 cents May 30 June 10
6 cents June 30 July 10
</TABLE>
ANNUAL SHAREHOLDER MEETING: The common shareholders elected Robert J. Day
and Harry J. Bruce to represent them for continuing terms on the Board until
the annual meeting in the year 2000. In addition, preferred shareholders
elected Nancy Lampton to a continuing term on the Board representing them
until the annual meeting in the year 2000.
AUTOMATIC DIVIDEND REINVESTMENT PLAN AND DIRECT DEPOSIT SERVICE: The Fund
has a dividend reinvestment plan available to all registered shareholders. As
long as the market price of the common stock of the Fund exceeds or is equal
to the net asset value per share, new shares for the dividend reinvestment
program are issued at the greater of either 95% of the market price or the net
asset value. If the market price per share of common stock is below the net
asset value per share, shares are purchased in the open market at prevailing
market prices, plus any brokerage commissions paid by the Bank of New York for
all shares purchased by it in the reinvestment of the distribution and
credited to the accounts of plan participants.
For those shareholders whose shares are held for them by a brokerage house
or nominee in "street-name", you may not participate in the Fund's automatic
dividend reinvestment plan inasmuch as the Fund cannot communicate directly
with you since the Fund does not have your name and address. Thus for those
Fund shareholders in "street-name" desiring automatic dividend reinvestment,
we suggest you contact your broker or other nominee.
As an added service, the Fund now offers direct deposit service through
electronic funds transfer to all registered shareholders currently receiving a
monthly dividend check. Direct deposit provides automatic and immediate access
to your funds on the dividend payment date and eliminates the possibility of
mail delays and lost or stolen checks. 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. You can
contact the Advisor, Administrator, or the Bank of New York by calling the
Fund's toll free number of 1-800-680-4DNP.
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/ Calvin J. Pedersen
Claire V. Hansen, CFA Calvin J. Pedersen
Chairman President and Chief Executive
Officer
3
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF NET ASSETS
(UNAUDITED)
MARCH 31, 1997
COMMON STOCKS--69.4%
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES COMPANY (NOTE 1)
------ ------- --------------
<C> <S> <C>
ELECTRIC--41.1%
1,733,000 Baltimore Gas & Electric Co........................ $ 46,357,750
1,818,600 Boston Edison Co................................... 47,510,925
1,617,900 Carolina Power & Light Co.......................... 58,648,875
1,635,000 CINergy Corp....................................... 55,794,375
705,000 CIPSCO Inc......................................... 24,939,375
1,352,700 CMS Energy Corp.................................... 44,470,013
1,265,000 DQE Incorporated................................... 35,103,750
780,000 Duke Power Co...................................... 34,417,500
1,025,900 Eastern Utilities Associates....................... 18,466,200
1,550,000 Edison International............................... 34,875,000
560,000 Empresa National De Electricidad ADR............... 36,330,000
500,000 Energy Group PLC................................... 16,062,500
1,447,800 FPL Group Inc...................................... 63,884,175
2,050,000 GPU Inc............................................ 65,856,250
1,865,400 Illinova Corp...................................... 42,671,025
1,141,800 LG&E Energy Corp................................... 27,545,925
686,500 National Power PLC ADR............................. 22,826,125
1,278,300 NIPSCO Industries Inc.............................. 50,173,275
1,600,000 PECO Energy Co..................................... 32,600,000
302,000 Powergen PLC ADR................................... 11,778,000
2,000,000 Southern Co........................................ 42,250,000
1,319,700 TECO Energy Inc.................................... 31,672,800
1,000,000 Texas Utilities Co................................. 34,250,000
--------------
878,483,838
GAS--4.3%
235,000 AGL Resources...................................... 4,318,125
661,600 Brooklyn Union Gas Co.............................. 18,194,000
225,000 CMS Energy Corp. Class G........................... 4,190,625
245,000 EL Paso Natural Gas Co. ........................... 13,873,125
113,000 National Fuel Gas Co............................... 4,830,750
444,700 NICOR Inc.......................................... 14,230,400
300,000 Washington Gas Light Co............................ 6,750,000
560,000 Williams Companies, Inc............................ 24,920,000
--------------
91,307,025
</TABLE>
The accompanying note is an integral part of the financial statements.
4
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF NET ASSETS--(CONTINUED)
(UNAUDITED)
MARCH 31, 1997
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES COMPANY (NOTE 1)
------ ------- --------------
<C> <S> <C>
TELECOMMUNICATION--14.3%
1,143,100 Ameritech Corp..................................... $ 70,300,650
565,000 Bellsouth Corp..................................... 23,871,250
310,200 British Telecommunications PLC ADR................. 21,714,000
480,000 Cable and Wireless ADS............................. 11,400,000
600,000 GTE Corp........................................... 27,975,000
200,000 Royal PTT Nederland ADS............................ 7,250,000
1,318,615 SBC Communications Inc............................. 69,392,114
664,400 Telefonica De Espana ADS........................... 47,670,700
575,000 Sprint Corp........................................ 26,162,500
--------------
305,736,214
NON-UTILITY--9.7%
50,000 Arden Realty Inc................................... 1,362,500
253,800 CBL & Associates Properties Inc.................... 6,218,100
350,000 Centerpoint Properties Corporation................. 10,718,750
120,000 Chelsea GCA Realty Inc............................. 4,305,000
100,000 Colonial Properties Trust.......................... 2,900,000
800,000 Crescent Real Estate Equities Inc.................. 21,400,000
150,000 Developers Diversified Realty Corp................. 5,662,500
400,000 Equity Residential Properties Trust................ 17,750,000
478,100 First Industrial Realty Trust...................... 15,119,912
156,300 Gables Residential Trust........................... 3,985,650
455,000 Highwoods Properties Inc........................... 15,242,500
200,000 Meditrust.......................................... 7,450,000
175,000 Macerich Co........................................ 4,900,000
590,000 Nationwide Health Properties....................... 12,611,250
500,000 Patriot American Hospitality....................... 12,125,000
273,700 Reckson Associates Realty Corp..................... 12,624,413
468,100 Starwood Lodging Trust............................. 18,255,900
373,400 TriNet Corporate Realty Trust...................... 11,808,775
200,000 Urban Shopping Centers Inc......................... 6,000,000
160,600 Vornado Realty Trust............................... 10,720,050
200,000 Weeks Corp......................................... 6,875,000
--------------
208,035,300
--------------
Total Common Stocks (Cost--$1,469,729,933)......... 1,483,562,377
--------------
</TABLE>
The accompanying note is an integral part of the financial statements.
5
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF NET ASSETS--(CONTINUED)
(UNAUDITED)
MARCH 31, 1997
<TABLE>
<CAPTION>
MARKET
VALUE
SHARES COMPANY (NOTE 1)
------ ------- ------------
<C> <S> <C>
CONVERTIBLE PREFERRED STOCKS--0.0%
NON-UTILITY--0.0%
47,000 Tanger Factory Outlet Centers Inc. Series A............... $ 1,122,125
------------
Total Convertible Preferred Stocks (Cost--$989,350)....... 1,122,125
------------
</TABLE>
BONDS--28.5%
<TABLE>
<CAPTION>
RATINGS
--------------------------
STANDARD MARKET
DUFF & AND VALUE
PAR VALUE COMPANY PHELPS MOODY'S POOR'S (NOTE 1)
--------- ------- --------- ------- -------- --------------
<C> <S> <C> <C> <C> <C>
ELECTRIC--16.1%
$24,920,000 Alabama Power Co.
9%, due 12/01/24....... AA- A1 A+ 26,131,435
14,500,000 Commonwealth Edison Co.
9 3/4%, due 2/15/20.... BBB Baa2 BBB 15,589,644
7,500,000 Commonwealth Edison Co.
9 7/8%, due 6/15/20.... BBB Baa2 BBB 8,256,427
10,000,000 Commonwealth Edison Co.
8 3/8%, due 2/15/23.... BBB Baa2 BBB 9,748,318
35,000,000 CTC Mansfield Funding
Corp.
10 5/8%, due 9/30/16... Not Rated Aaa AAA 37,062,899
8,000,000 Duquesne Light Co.
7.55%, due 6/15/25..... A- Baa1 BBB+ 7,398,799
5,000,000 Gulf States Utilities
8.94%, due 1/01/22..... Not Rated Baa3 BBB- 4,974,120
20,000,000 Illinois Power Co.
8%, due 2/15/23........ BBB+ Baa1 BBB 19,217,578
15,000,000 New York State Electric
& Gas Corp.
9 7/8%, due 11/01/20... Not Rated Baa1 BBB+ 16,127,309
4,000,000 New York State Electric
& Gas Corp.
8 7/8%, due 11/01/21... Not Rated Baa1 BBB+ 4,026,603
</TABLE>
The accompanying note is an integral part of the financial statements.
6
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF NET ASSETS--(CONTINUED)
(UNAUDITED)
MARCH 31, 1997
<TABLE>
<CAPTION>
RATINGS
--------------------------
STANDARD MARKET
DUFF & AND VALUE
PAR VALUE COMPANY PHELPS MOODY'S POOR'S (NOTE 1)
--------- ------- --------- ------- -------- ------------
<C> <S> <C> <C> <C> <C>
$ 6,500,000 Ohio Edison Co.
8 3/4%, due 2/15/98.... BBB+ Baa2 BBB- $ 6,608,426
14,105,000 Pennsylvania Power &
Light Co.
9 1/4%, due 10/01/19... Not Rated A3 A- 15,132,210
16,850,000 Pennsylvania Power &
Light Co.
9 3/8%, due 7/01/21.... Not Rated A3 A- 18,204,957
26,750,000 Philadelphia Electric
8 3/4%, due 4/01/22.... Not Rated Baa1 BBB+ 28,347,241
20,950,000 Potomac Electric Power
Co.
9%, due 6/01/21........ AA- A1 A 22,147,164
3,000,000 Rochester Gas & Electric
Corp.
9 3/8%, due 4/01/21.... BBB+ Baa1 BBB+ 3,224,730
29,830,000 Texas Utilities Electric
Co.
9 3/4%, due 5/01/21.... Not Rated Baa1 BBB+ 33,021,987
10,000,000 Texas Utilities Electric
Co.
8 3/4%, due 11/01/23... Not Rated Baa1 BBB+ 10,252,879
12,000,000 UtiliCorp United Inc.
8%, due 3/01/23........ BBB Baa3 BBB 11,497,079
4,000,000 Union Electric Co.
8 3/4%, due 12/01/21... AA- A1 AA- 4,152,084
29,780,000 Virginia Electric &
Power Co.
9 3/8%, due 6/01/98.... A A2 A 30,693,798
11,500,000 Virginia Electric &
Power Co.
8 1/4%, due 3/01/25.... A A2 A 11,499,642
------------
343,315,329
GAS--3.3%
8,875,000 Enron Corp.
9.65%, due 5/15/01..... BBB+ Baa2 BBB+ 9,651,296
6,000,000 Northwest Pipeline Corp.
10.65%, due 11/15/18... BBB+ Baa1 BBB 6,402,989
7,885,000 Penzoil Co.
10 1/8%, due 11/15/09.. Not Rated Baa3 BBB 9,460,139
</TABLE>
The accompanying note is an integral part of the financial statements.
7
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF NET ASSETS--(CONTINUED)
(UNAUDITED)
MARCH 31, 1997
<TABLE>
<CAPTION>
RATINGS
--------------------------
STANDARD MARKET
DUFF & AND VALUE
PAR VALUE COMPANY PHELPS MOODY'S POOR'S (NOTE 1)
--------- ------- --------- ------- -------- -------------
<C> <S> <C> <C> <C> <C>
$10,000,000 Phillips Petroleum Co.
9.18%, due 9/15/21..... Not Rated A3 A- $ 10,730,800
9,500,000 Transco Energy
9 1/8%, due 5/01/98.... BBB Baa2 BBB- 9,755,511
14,500,000 Transcontinental Gas
Pipe Line Corp.
9 1/8%, due 2/01/17.... BBB+ Baa1 BBB 14,899,735
7,000,000 Williams Co.
10 1/4%, due 7/15/20... BBB Baa2 BBB- 8,671,851
-------------
69,572,321
TELECOMMUNICATION--7.6%
8,000,000 AT&T Corp.
8.35%, due 1/15/25..... AA+ Aa3 AA 8,094,503
13,500,000 Bellsouth Capital
Funding Corp.
9 1/4%, due 1/15/98.... AA+ Aa1 AAA 13,808,313
6,500,000 GTE Corp.
8.85%, due 3/01/98..... A- A3 A 6,636,395
35,428,000 GTE Corp.
9 3/8%, due 12/01/00... A- A3 A 38,125,806
6,000,000 GTE Corp.
10 1/4%, due 11/01/20.. A- A3 A 6,703,673
10,000,000 GTE Corp.
8.07%, due 4/15/24..... A- A3 BBB+ 10,111,079
11,995,000 Mountain States
Telephone
9 1/2%, due 5/01/00.... AA Aa3 AA- 12,824,657
13,750,000 New England Telephone &
Telegraph
9%, due 8/01/31........ AA Aa2 AA- 14,445,750
10,000,000 New York Telephone Co.
7 5/8%, due 2/01/23.... A A1 A 9,500,000
10,000,000 New York Telephone Co.
7%, due 8/15/25........ A A1 A 8,836,479
20,740,000 New York Telephone Co.
9 3/8%, due 7/15/31.... A A1 A 22,542,098
5,000,000 Pacific Bell
8 1/2%, due 8/15/31.... AA- A1 AA- 5,050,375
5,000,000 US West Communications
8 7/8%, due 6/01/31.... AA- Aa3 A+ 5,159,295
-------------
161,838,423
</TABLE>
The accompanying note is an integral part of the financial statements.
8
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF NET ASSETS--(CONTINUED)
(UNAUDITED)
MARCH 31, 1997
<TABLE>
<CAPTION>
RATINGS
-----------------------
STANDARD MARKET
DUFF & AND VALUE
PAR VALUE COMPANY PHELPS MOODY'S POOR'S (NOTE 1)
--------- ------- ------ ------- -------- ----------------
<C> <S> <C> <C> <C> <C>
NON-UTILITY--1.2%
$15,700,000 American General Corp.
9 5/8%, due 2/01/18.... AA- A1 AA- $ 16,465,483
8,000,000 Dayton Hudson Corp.
9 7/8%, due 7/01/20.... A- Baa1 BBB+ 9,452,864
----------------
25,918,347
----------------
Total Bonds (Cost--$607,887,996)................. 600,644,420
----------------
U.S. TREASURY OBLIGATIONS--1.6%
29,000,000 U.S. Treasury Bonds
11 3/4%, due 2/15/01............................ 33,957,201
----------------
Total U.S. Treasury Obligations (Cost--
$35,325,625).................................... 33,957,201
----------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--0.1%
1,553,607 Federal National Mortgage Association
8%, due 5/01/05................................. 1,560,404
----------------
Total U.S. Government Agency Obligations (Cost--
$1,605,556)..................................... 1,560,404
----------------
COMMERCIAL PAPER--2.3%
25,000,000 Household Finance Co.
5.48%, due 4/01/97.............................. 25,000,000
25,000,000 Merrill Lynch
5.75%, due 4/01/97.............................. 25,000,000
----------------
Total Commercial Paper (Cost--$50,000,000)....... 50,000,000
----------------
CASH AND OTHER ASSETS LESS LIABILITIES--(1.5%)............... ( 32,600,433)
----------------
NET ASSETS
(equivalent to $8.17 per share of common stock based on
200,609,418 shares of common stock outstanding, authorized
250,000,000 shares, $.001 par value per share and 5,000
shares remarketed preferred stock outstanding, authorized
100,000,000 shares, liquidation preference $100,000 per
share, $.001 par value per share)........................... $2,138,246,094
================
</TABLE>
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 note is an integral part of the financial statements.
9
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF NET ASSETS--(CONTINUED)
(UNAUDITED)
MARCH 31, 1997
(1) 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 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.
Other assets and securities are valued at a fair value, as determined in
good faith by the Board of Directors.
10
<PAGE>
BOARD OF DIRECTORS
WALLACE B. BEHNKE
HARRY J. BRUCE
FRANKLIN A. COLE
GORDON B. DAVIDSON
ROBERT J. DAY
CLAIRE V. HANSEN, CFA
FRANCIS E. JEFFRIES, CFA
NANCY LAMPTON
BERYL W. SPRINKEL
OFFICERS
CLAIRE V. HANSEN, CFA
Chairman
CALVIN J. PEDERSEN, CFA
President and Chief Executive Officer
RICHARD J. SPLETZER, CFA, CIC
Executive Vice President and Chief Investment Officer
T. BROOKS BEITTEL, CFA
Senior Vice President, Secretary and Treasurer
NATHAN I. PARTAIN, CFA
Senior Vice President
JOSEPH C. CURRY, JR.
Vice President
MICHAEL SCHATT
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
(800) 680-4367
(312) 368-5510
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
(502) 588-8400
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
1-800-432-8224
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
11
<PAGE>
Duff & Phelps
Utilities Income Inc.
1ST
FIRST QUARTER
REPORT
MARCH 31, 1997
[ART]
