<PAGE>
Dear Fellow Shareholders:
Performance Review: We are very pleased to report that your Fund had a total
return (market price change plus income) of 19.9% for 1998. This compares
favorably with the Dow Jones Utilities Index and the Standard and Poor's
Utility Index which had total returns of 18.5% and 14.8%, respectively. The
Fund, whose portfolio contains approximately 25% bonds, also significantly
surpassed the Lehman Brothers Utility Bond Index, which had a 13.4% annual
total return. For the two years ended December 31, 1998, total return for your
Fund was 53.2%.
The income portion of return came in the form of 12 monthly dividends of 6.5
cents per share. The Fund has as its objective current income and is dedicated
to the continuity of dividends. The 6.5-cents monthly dividend rate, without
compounding, would be 78 cents annualized or a 6.93% common stock dividend
yield based on the December 31, 1998 closing price of $11.25. That yield
compares favorably with the 3.81% yield of the Dow Jones Utilities Index and
the 4.09% yield of the S&P Utility Index at December 31, 1998.
Electrics Present Strong Fundamentals: During 1998, many companies took
strategic actions aimed at positioning themselves for future competition and
deregulation. The key drivers behind the evolving strategies have been
restructuring legislation and regulations at the state level. Even though the
pace of restructuring has been slower than many initially thought, a few key
states (California, Illinois, Massachusetts, New York, Pennsylvania) have
established the general framework for restructuring that many states are
expected to adopt. That framework incorporates a multi-year phase-in to
customer choice, rate freezes or modest rate reductions, recovery of
substantial portions of potentially stranded costs, and performance-based
regulatory plans.
For 1999, we expect that strategic positioning for competition and
deregulation will continue to be the major themes. Although the pathway to
competition is not entirely clear, we are convinced that the fundamentals of
the industry remain strong. Because of reasonable restructuring regulations,
continued cost cutting, asset sales, and stranded cost securitization, many
electric companies have substantial cash flows that will be reinvested in new
businesses or returned to investors via stock repurchases and debt
retirements. As the industry evolves toward a new model, your Fund's manager
believes that certain companies will be better positioned to prosper in a
competitive environment than others. We will continue to attempt to identify
those companies that have both the management and the strategy required to be
ahead of the pack.
Warm Weather Cools Natural Gas Prices: Mild temperatures made 1998 a
challenging year for natural gas equities. The warm weather caused a 2.7%
decline in consumption, which had been growing at about 2% annually, depressed
commodity prices and lowered earnings per share by 15% on average. The level
of merger and acquisition activity, which had been expected to support stock
prices, was lower than anticipated and was confined to the fourth quarter. On
average, merger transactions were smaller and more targeted at specific
assets. However, the acquisition premiums remained comparable with those of
prior years.
This rocky environment allowed your Fund's manager to take advantage of a
number of opportunities to increase exposure to the natural gas group. We took
this action due to our belief in the fundamental strengths of the group. These
include growing demand for natural gas spurred by new gas fired electric
generation capacity and concerns for the environment, a rebound in prices, and
the return of normal weather. While weather and low prices remain short-term
challenges, we believe that by staying close to management and carefully
monitoring and analyzing developments in the industry we can select those
stocks in the natural gas group which may out-perform the group over the long-
term.
<PAGE>
Internet Use Spurs Telecommunications Growth: The data and Internet
phenomenon created a lot of excitement this past year, but what does that have
to do with the telecom industry? Actually, more than most people realize.
Internet traffic on the telecom network is estimated to be growing 100% per
year while data traffic is increasing at a 40% rate. This compares to voice
traffic that is growing at much more mundane rate of less than 10%. At
present, data/Internet accounts for 40% of the traffic carried by the telecom
companies. Obviously, with the kinds of growth rates just mentioned, data is
going to overtake voice very soon and is expected to account for upwards of
80% of the traffic in 4 to 5 years.
As a result, the telecom companies could be viewed as closet Internet
stocks. The local companies, whether they are the incumbents, the new entrants
or the cable companies, connect the customer to the Internet--obviously a
crucial link. Providing the long haul transmission between local companies are
the long distance companies, both traditional and emerging network providers,
which are installing high-speed high bandwidth fiber to carry all that data
traffic. Consequently, the telecom industry is very important to the
development of the Internet, which in turn represents a terrific growth
opportunity for our telecommunications holdings. Therefore, our outlook for
the telecommunications industry remains quite positive.
Lower Risk and High Yield from REITs: The REIT sector stock price
performance in 1998 was disappointing despite the industry's fundamental
performance which was very good. As the real estate market cycle approached
equilibrium (balanced demand and supply), investors leapt to the conclusion
that any new construction foretold a return to the oversupplied market
conditions of the late 1980's. The industry continues to have difficulty
shaking the perception of it being undisciplined. Capital markets, both debt
and equity, in anticipation of what they perceived as "inevitable"
overbuilding and a possible recession coming in 1999, pulled back from the
real estate industry's financial requests. We believe this was an
overreaction. Neither the overbuilding nor the recession has yet to
materialize.
The reluctance of the capital markets to invest in REITs has slowed an
already relatively slow supply of new financings and elongated the portion of
the real estate market cycle in which demand outpaces supply. When the
favorable demand and supply relationship is combined with continued healthy
GDP growth, we look for industry fundamentals to remain attractive in 1999 and
2000. Our interest in REITs remains positive due to their characteristics as a
low risk (visible earnings growth based on leases) and high yield (average
sector yield of 7.5%) investment opportunity.
Regardless which utility industry sector is being considered, your Fund
manager views change as both an investment challenge and opportunity. The
opportunities and challenges are to select those companies that will be more
successful and avoid those companies that will be less successful. We remain
committed to a strong and well diversified portfolio, and expect our
experience, research, and patience to continue to serve the income needs of
our investors.
Board of Directors Meeting: A regular meeting of the Board of Directors was
held in January 1999. At that meeting, the Board declared the following
monthly dividends:
<TABLE>
<CAPTION>
Dividends Per Share Record Date Payable Date
------------------- ----------- ------------
<S> <C> <C>
6.5 cents 2/26/99 3/10/99
6.5 cents 3/31/99 4/12/99
6.5 cents 4/30/99 5/10/99
</TABLE>
2
<PAGE>
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.
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 inasmuch as the Fund cannot communicate directly with those
shareholders since the Fund does not have their 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.
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.
Claire V. Hansen, CFA Calvin J. Pedersen, CFA
Chairman Director, President and
Chief Executive Officer
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Duff & Phelps Utilities Income Inc.:
We have audited the accompanying balance sheet of DUFF & PHELPS UTILITIES
INCOME INC. (a Maryland corporation), including the schedule of investments,
as of December 31, 1998, 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
the years indicated thereon. 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 generally accepted auditing
standards. 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. Our procedures included confirmation of securities
owned as of December 31, 1998, by correspondence with the custodian and
brokers. 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, 1998, the results of
its operations and 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 the years indicated thereon, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
January 25, 1999
4
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS
December 31, 1998
COMMON STOCKS--75.6%
<TABLE>
<CAPTION>
Market
Value
Shares Company (Note 1)
------ ------- --------------
<C> <S> <C>
ELECTRIC--40.8%
1,318,600 BEC Energy.......................................... $ 54,309,838
1,017,900 Carolina Power & Light Co........................... 47,904,919
1,352,700 CMS Energy Corp..................................... 65,521,406
450,000 Consolidated Edison Inc............................. 23,793,750
1,265,000 DQE Incorporated.................................... 55,580,937
1,000,000 Duke Energy Corp.................................... 64,062,500
2,058,400 Edison International................................ 57,377,900
400,000 Electricidade DePortugal ADR........................ 17,825,000
1,593,400 Endesa S.A.......................................... 43,021,800
1,700,000 FirstEnergy Corp.................................... 55,356,250
1,200,100 FPL Group Inc....................................... 73,956,163
1,500,000 Houston Industries Inc. ............................ 48,187,500
686,500 National Power PLC ADR.............................. 25,228,875
1,122,800 New Century Energies Inc............................ 54,736,500
2,256,600 NIPSCO Industries Inc............................... 68,685,263
1,000,000 Pacificorp.......................................... 21,062,500
1,120,000 Pinnacle West Capital Corp.......................... 47,460,000
302,000 Powergen PLC ADR.................................... 16,157,000
300,000 RWE AG ADR.......................................... 16,436,310
500,000 Scottish Power PLC ADR.............................. 20,656,250
902,280 Sempra Energy Solutions............................. 22,895,355
1,500,000 Southern Co......................................... 43,593,750
500,000 Southern Electric PLC ADR........................... 5,623,700
2,000,000 Unicom Corp......................................... 77,125,000
1,300,000 UtiliCorp United Inc................................ 47,693,750
--------------
1,074,252,216
GAS--8.3%
926,000 AGL Resources....................................... 21,355,875
225,000 CMS Energy Corp. Class G............................ 5,681,250
590,600 Columbia Energy Group............................... 34,107,150
744,800 EL Paso Energy Corp................................. 25,928,350
600,000 Enron Corp.......................................... 34,237,500
532,300 KN Energy........................................... 19,362,412
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
Market
Value
Shares Company (Note 1)
------ ------- --------------
<C> <S> <C>
400,000 National Fuel Gas Co................................ $ 18,075,000
444,700 NICOR Inc........................................... 18,788,575
1,320,000 Williams Companies Inc.............................. 41,167,500
--------------
218,703,612
TELECOMMUNICATION--18.7%
600,000 Alltell Corp........................................ 35,887,500
1,619,000 Bell Atlantic Corp.................................. 85,807,000
1,130,000 BellSouth Corp...................................... 56,358,750
1,015,000 Cable and Wireless ADS.............................. 37,301,250
2,037,230 SBC Communications Inc.............................. 109,246,459
56,250 Sonera Group ADR*................................... 1,986,148
575,000 Sprint Corp......................................... 48,371,875
556,250 Telecom Corp. of New Zealand Interim ADR............ 9,977,734
142,100 Telestra Corp. ADR.................................. 13,250,825
1,000,000 U.S. West Inc....................................... 64,625,000
540,000 Vivendi ADR......................................... 28,034,316
--------------
490,846,857
NON-UTILITY--7.8%
125,000 Alexandria Real Estate Equities Inc................. 3,867,187
125,000 Apartment Investment & Management Co................ 4,648,438
200,000 Avalon Bay Communities Inc.......................... 6,850,000
409,000 Boston Properties Inc............................... 12,474,500
253,800 CBL & Associates Properties Inc..................... 6,551,212
350,000 Centerpoint Properties Corporation.................. 11,834,375
120,000 Chelsea GCA Realty Inc.............................. 4,275,000
150,000 Colonial Properties Trust........................... 3,993,750
450,000 Cornerstone Properties Inc.......................... 7,031,250
50,000 Crescent Operating Inc.*............................ 237,500
580,000 Crescent Real Estate Equities Inc................... 13,340,000
400,000 Developers Diversified Realty Corp.................. 7,100,000
400,000 Equity Residential Properties Trust................. 16,175,000
200,000 Essex Property Trust Inc............................ 5,950,000
478,100 First Industrial Realty Trust....................... 12,819,056
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
Market
Value
Shares Company (Note 1)
------ ------- --------------
<C> <S> <C>
126,300 Gables Residential Trust........................... $ 2,928,581
100,000 Golf Trust of America Inc.......................... 2,775,000
72,800 Great Lakes REIT Inc............................... 1,142,050
355,000 Highwoods Properties Inc........................... 9,141,250
200,000 HRPT Properties Trust.............................. 2,812,500
175,000 Macerich Co........................................ 4,484,375
145,000 Mack-Cali Realty Corp.............................. 4,476,875
290,000 Nationwide Health Properties....................... 6,253,125
200,000 Omega Healthcare Investors Inc..................... 6,037,500
3,819 Omega WorldWide Inc.*.............................. 16,708
525,100 Reckson Associates Realty Corp..................... 11,650,656
328,416 Reckson Service Industries Inc.*................... 1,354,716
205,100 Tower Realty Trust Inc............................. 4,127,638
104,000 TriNet Corporate Realty Trust...................... 2,782,000
200,000 Urban Shopping Centers Inc......................... 6,550,000
22,250 Vornado Operating Inc.*............................ 179,391
445,000 Vornado Realty Trust............................... 15,018,750
200,000 Weeks Corp......................................... 5,637,500
--------------
204,515,883
--------------
Total Common Stocks (Cost--$1,680,476,250)......... 1,988,318,568
--------------
CONVERTIBLE PREFERRED STOCKS--1.7%
NON-UTILITY--0.0%
8,700 Tanger Factory Outlet Centers Inc. Series A........ $ 165,844
--------------
UTILITY--1.7%
789,100 Texas Utilities Co................................. 44,485,513
--------------
Total Convertible Preferred Stocks (Cost--
$39,793,343)....................................... 44,651,357
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1998
BONDS--23.0%
<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--12.7%
$24,920,000 Alabama Power Co.
9%, due 12/01/24 AA- A1 A+ $ 26,820,873
14,500,000 Commonwealth Edison Co.
9 3/4%, due 2/15/20 BBB Baa2 BBB 15,846,412
7,500,000 Commonwealth Edison Co.
9 7/8%, due 6/15/20 BBB Baa2 BBB 8,979,870
8,850,000 Commonwealth Edison Co.
8 5/8%, due 2/01/22 BBB Baa2 BBB 9,692,184
5,000,000 Commonwealth Edison Co.
8 3/8%, due 9/15/22 BBB Baa2 BBB 5,401,180
10,000,000 Commonwealth Edison Co.
8 3/8%, due 2/15/23 BBB Baa2 BBB 10,898,330
Dominion Resources
6,000,000 Capital Trust
7.83%, due 12/01/27 Not Rated Baal BBB+ 6,357,522
8,000,000 Duquesne Light Co.
7.55%, due 6/15/25 A- Baa1 BBB+ 8,156,488
5,000,000 Gulf States Utilities
8.94%, due 1/01/22 Not Rated Baa3 BBB- 5,290,610
20,000,000 Illinois Power Co.
8%, due 2/15/23 BBB+ Baa1 BBB 21,054,060
5,000,000 Illinois Power Co.
7 1/2%, due 7/15/25 BBB+ Baal BBB 5,200,530
Louisiana Power & Light
5,000,000 Co.
8 3/4%, due 3/01/26 Not Rated Baa2 BBB 5,344,250
New York State Electric
15,000,000 & Gas Corp.
9 7/8, due 11/01/20 Not Rated A3 BBB+ 16,619,205
New York State Electric
4,000,000 & Gas Corp.
8 7/8, due 11/01/21 Not Rated A3 BBB+ 4,403,516
Pennsylvania Power &
14,105,000 Light Co.
9 1/4%, due 10/01/19 Not Rated A3 A- 15,156,232
Pennsylvania Power &
16,850,000 Light Co.
9 3/8%, due 7/01/21 Not Rated A3 A- 19,002,958
Potomac Electric Power
27,580,000 Co.
9%, due 6/01/21 A+ A1 A 30,310,641
Public Service Co. of
10,000,000 Colorado
8 3/4%, due 3/01/22 Not Rated A3 A 11,023,180
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
Ratings
--------------------------
Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
--------- ------- --------- ------- -------- --------------
<C> <S> <C> <C> <C> <C>
$12,500,000 Puget Capital Trust
8.231%, due 6/01/27 Not Rated Baa2 BBB $ 13,771,925
Rochester Gas & Electric
3,000,000 Corp.
9 3/8%, due 4/01/21 A- A3 A- 3,328,563
Texas Utilities Electric
29,830,000 Co.
9 3/4%, due 5/01/21 A- A3 BBB+ 33,429,377
Texas Utilities Electric
10,000,000 Co.
8 3/4%, due 11/01/23 A- A3 BBB+ 11,113,820
12,600,000 Union Electric Co.
8 3/4%, due 12/01/21 Not Rated Aa3 AA- 13,995,828
12,000,000 UtiliCorp United Inc.
8%, due 3/01/23 BBB Baa3 BBB 12,719,388
Virginia Electric &
17,700,000 Power Co.
8 1/4%, due 3/01/25 A A2 A 19,864,338
--------------
333,781,280
GAS--2.8%
2,125,000 ANR Pipeline Co.
9 5/8%, due 11/01/21.... Not Rated Baa2 BBB 2,735,988
8,875,000 Enron Corp.
9.65%, due 5/15/01...... BBB+ Baa2 BBB+ 9,576,879
5,000,000 KN Energy Inc.
7 1/4, due 3/10/28...... Not Rated Baa2 BBB- 4,935,365
7,885,000 Penzoil Co.
10 1/8, due 11/15/09.... BBB- Bal BBB 8,922,895
10,000,000 Phillips Petroleum Co.
9.18%, due 9/15/21...... Not Rated A3 A- 11,039,660
4,500,000 Sonat Inc.
9 1/2%, due 8/15/99..... Not Rated A3 BBB+ 4,599,639
Southern California Gas
5,000,000 Co.
8 3/4%, due 10/01/21.... AA- A1 AA- 5,561,230
6,488,000 Southern Union Co.
7.60%, due 2/01/24...... Not Rated Baa3 BBB+ 7,064,790
10,000,000 TE Products Pipeline Co.
7.51%, due 1/25/28...... Not Rated Baa2 BBB+ 10,047,780
9,000,000 Trans-Canada Pipeline
9 1/8%, due 4/20/06..... Not Rated A3 BBB+ 10,456,920
--------------
74,941,146
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
Ratings
--------------------------
Standard Market
Duff & and Value
Par Value Company Phelps Moody's Poor's (Note 1)
--------- ------- --------- ------- -------- --------------
<C> <S> <C> <C> <C> <C>
TELECOMMUNICATION--
7.1%
$34,000,000 AT & T Corp.
8.35%, due 1/15/25...... AA Aa3 AA- $ 38,773,430
35,428,000 GTE Corp.
9 3/8%, due 12/01/00.... A- Baa1 A 38,130,590
6,000,000 GTE Corp.
10 1/4%, due 11/01/20... A- Baa1 A 6,868,368
10,000,000 GTE California Inc.
8.07%, due 4/15/24...... AA A2 AA- 11,286,170
6,625,000 GTE Corp.
7.90%, due 2/01/27...... A- Baa1 A 7,379,899
Mountain States
11,995,000 Telephone
9 1/2%, due 5/01/00..... Not Rated A2 A+ 12,637,152
New England Telephone &
13,750,000 Telegraph
9%, due 8/01/31......... AA Aa2 AA 15,465,381
10,000,000 New York Telephone Co.
7 5/8%, due 2/01/23..... A A2 A+ 10,798,610
20,740,000 New York Telephone Co.
9 3/8%, due 7/15/31..... A A2 A+ 23,513,311
Southwestern Bell
14,900,000 Telephone
7.20%, due 10/15/26..... AA Aa3 AA 15,937,651
5,000,000 US West Communications
8 7/8%, due 6/01/31..... AA- A2 A+ 5,616,230
--------------
186,406,792
NON-UTILITY--0.4%
Dayton Hudson Corp.
8,000,000 9 7/8%, due 7/01/20..... A- A3 A- 10,996,328
--------------
10,996,328
--------------
Total Bonds (Cost--$588,265,812).................... 606,125,546
--------------
U.S. TREASURY OBLIGATIONS--2.9%
66,000,000 U.S. Treasury Bonds
11 3/4%, due 2/15/01................................ 75,363,750
--------------
Total U.S. Treasury Obligations (Cost--
$78,725,547)........................................ 75,363,750
--------------
U.S. GOVERNMENT AGENCY OBLIGATIONS--0.0%
808,453 Federal National Mortgage Association
8%, due 5/01/05..................................... 837,001
--------------
Total U.S. Government Agency Obligations (Cost--
$835,485)........................................... 837,001
--------------
TOTAL INVESTMENTS (Cost--$2,388,096,437)--(103.2%).. $2,715,296,222
==============
</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.
*Non income producing security
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments at market value:
Common stocks (cost $1,680,476,250)........................... $1,988,318,568
Convertible preferred stocks (cost $39,793,343)............... 44,651,357
Bonds (cost $588,265,812)..................................... 606,125,546
U.S. Treasury obligations (cost $78,725,547).................. 75,363,750
U.S. Government agency obligations (cost $835,485)............ 837,001
Interest-bearing deposits with custodian....................... 83,954,490
Receivables:
Securities sold............................................... 9,539,210
Interest...................................................... 15,691,382
Dividends..................................................... 6,686,225
Securities lending income..................................... 146,052
Prepaid expenses............................................... 108,647
--------------
Total Assets................................................. $2,831,422,228
==============
LIABILITIES:
Payable for investments purchased.............................. $ 7,074,905
Due to Adviser (Note 2)........................................ 3,847,847
Due to Administrator (Note 2).................................. 958,611
Dividends payable on common stock.............................. 13,371,427
Dividends payable on remarketed preferred stock................ 1,094,695
Accrued expenses............................................... 2,381,176
Commercial paper outstanding (Note 6).......................... 171,002,097
--------------
Total Liabilities............................................ 199,730,758
--------------
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 205,714,255 shares issued and outstanding) (Note 4)....... 205,714
Paid-in surplus (Note 4)....................................... 1,833,560,113
Accumulated net realized loss on investments................... (31,442,139)
Undistributed net investment income............................ 2,167,997
Net unrealized appreciation on investments..................... 327,199,785
--------------
Net assets applicable to common stock (equivalent to $10.36
per share based on 205,714,255 shares outstanding).......... 2,131,691,470
--------------
Total Capital (Net Assets)................................... 2,631,691,470
--------------
Total Liabilities and Capital................................ $2,831,422,228
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest......................................................... $ 57,900,953
Dividends (less withholding tax of $1,119,757)................... 151,015,099
Securities lending income........................................ 1,071,605
------------
Total investment income......................................... 209,987,657
EXPENSES:
Commercial paper interest expense (Note 6 )...................... 7,766,994
Management fees (Note 2)......................................... 14,713,237
Administrative fees (Note 2)..................................... 3,692,647
Transfer agent fees.............................................. 553,100
Custodian fees................................................... 295,700
Remarketing agent fees........................................... 1,267,360
Shareholder reports.............................................. 458,300
Legal and audit fees............................................. 141,400
Directors' fees (Note 2)......................................... 277,800
Other expenses................................................... 620,067
------------
Total expenses.................................................. 29,786,605
------------
Net investment income........................................... 180,201,052
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments................................. 104,910,892
Net change in unrealized appreciation on investments............. (11,148,041)
------------
Net gain on investments.......................................... 93,762,851
------------
Net increase in net assets resulting from operations............. $273,963,903
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the year ended December
31
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income......................... $ 180,201,052 $ 173,238,151
Net realized gain on investments.............. 104,910,892 43,757,905
Net change in unrealized appreciation on
investments................................... (11,148,041) 250,102,364
-------------- --------------
Net increase in net assets resulting from
operations................................... 273,963,903 467,098,420
DISTRIBUTIONS TO STOCKHOLDERS FROM:
Net investment income--preferred stock (Note
5)............................................ (20,869,678) (20,366,612)
Net investment income--common stock (Note 3).. (159,478,752) (151,165,448)
-------------- --------------
Total distributions.......................... (180,348,430) (171,532,060)
FROM CAPITAL STOCK TRANSACTIONS (Note 4):
Shares issued to common stockholders from
dividend reinvestment......................... 28,041,305 28,025,074
-------------- --------------
Net increase in net assets derived from
capital share transactions.................... 28,041,305 28,025,074
-------------- --------------
Total increase............................... 121,656,778 323,591,434
TOTAL NET ASSETS:
Beginning of year............................. 2,510,034,692 2,186,443,258
-------------- --------------
End of year (including undistributed net
investment income of $2,167,997 and $2,315,375
respectively)................................. $2,631,691,470 $2,510,034,692
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
STATEMENT OF CASH FLOWS
For the year ended December 31, 1998
<TABLE>
<S> <C> <C>
Cash Flows From (For):
OPERATING ACTIVITIES
Interest received............................ $ 56,827,073
Income dividends received.................... 153,326,198
Securities lending income.................... 1,097,659
Operating expenses paid (excluding interest). (21,797,174)
Interest paid on commercial paper............ (6,745,740)
---------------
Net cash provided by operating activities................... $182,708,016
INVESTING ACTIVITIES
Purchase of investment securities............ (6,604,569,236)
Proceeds from sale/redemption of investment
securities................................... 6,538,983,828
Return of capital on investments............. 2,450,598
Long-term capital gains dividends received... 262,248
---------------
Net cash used in investing activities....................... (62,872,562)
FINANCING ACTIVITIES
Dividends paid............................... (180,613,363)
Proceeds from issuance of common stock under
dividend reinvestment plan................... 28,041,305
Change in net proceeds from issuance of
commercial paper............................. 72,560,213
---------------
Net cash used in financing activities....................... (80,011,845)
------------
Net increase in cash and cash equivalents..................... 39,823,609
Cash and cash equivalents--beginning of year.................. 44,130,881
------------
Cash and cash equivalents--end of year........................ $ 83,954,490
============
Reconciliation of net investment income to net
cash provided by operating activities:
Net investment income........................................ $180,201,052
Adjustments to reconcile net investment
income to net cash provided by operating
activities:
Increase in interest receivable............. (1,073,880)
Decrease in dividends receivable............ 2,311,099
Increase in accrued expenses................ 1,243,691
Decrease in other receivable................ 26,054
---------------
Total adjustments.......................................... 2,506,964
------------
Net cash provided by operating activities.................... $182,708,016
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(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, 1998, the Fund had tax capital loss carry forwards of
$31,214,552 which expire beginning on December 31, 2002.
In 1993, the Fund adopted the American Institute of Certified Public
Accountants' Statement of Position 93-2, "Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of
Capital Distributions by Investment Companies". In conformance with this
statement, the Fund changed the classification of distributions to
shareholders to better disclose the differences between financial statement
amounts and distributions determined in accordance with federal income tax
regulations. As a result, 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 generally
accepted accounting principles 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.
15
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998
(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 $17,500 per year plus $1,000 per board or 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 1998:
<TABLE>
<CAPTION>
Record Payable Dividend
Date Date Per Share
------ ------- ---------
<S> <C> <C>
01-30-98 02-10-98 $.065
02-27-98 03-10-98 .065
03-31-98 04-10-98 .065
04-30-98 05-11-98 .065
05-29-98 06-10-98 .065
06-30-98 07-10-98 .065
</TABLE>
<TABLE>
<CAPTION>
Record Payable Dividend
Date Date Per Share
------ ------- ---------
<S> <C> <C>
07-31-98 08-10-98 $.065
08-31-98 09-10-98 .065
09-30-98 10-13-98 .065
10-30-98 11-10-98 .065
11-30-98 12-10-98 .065
12-31-98 01-11-99 .065
</TABLE>
(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 1998 were as
follows:
<TABLE>
<CAPTION>
Shares Amount
----------- --------------
<S> <C> <C>
For the year ended December 31, 1997:
Beginning capitalization.......................... 199,741,443 $1,777,699,447
Dividend reinvestment............................. 3,195,438 28,025,074
----------- --------------
Total capitalization............................ 202,936,881 $1,805,724,521
=========== ==============
For the year ended December 31, 1998:
Beginning capitalization.......................... 202,936,881 $1,805,724,521
Dividend reinvestment............................. 2,777,374 28,041,305
----------- --------------
Total capitalization............................ 205,714,255 $1,833,765,826
=========== ==============
</TABLE>
16
<PAGE>
DUFF & PHELPS UTILITIES INCOME INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1998
(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 3.915% to 4.380% during the
year ended December 31, 1998.
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 4.92%
to 5.57% during the year ended December 31, 1998. At December 31, 1998, the
Fund had Notes outstanding of $171,002,097.
(7) INVESTMENT TRANSACTIONS:
For the year ended December 31, 1998, purchases and sales of investment
securities (excluding short-term securities) were $6,611,644,141 and
$6,515,581,535, respectively. For federal income tax purposes, at December 31,
1998, the gross unrealized depreciation on investments was $38,286,843 and
gross unrealized appreciation was $362,282,099. The cost of investments for
financial reporting and Federal income tax purposes was $2,388,096,437 and
$2,391,300,966, 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, 1998, the fund had loaned portfolio securities with a
market value of $481,917,660 to a broker/dealer and money market instruments
with a market value of $497,086,145 were held as collateral in the Fund's
account at the broker/dealer or at The Bank of New York.
17
<PAGE>
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:
<TABLE>
<CAPTION>
For the year ended December 31
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value:
Beginning of year........ $ 9.90 $ 8.44 $ 8.85 $ 7.23 $ 9.65
---------- ---------- ---------- ---------- ----------
Net investment income.... 0.88 0.85 0.84 0.85 0.82
Net realized gain (loss)
and change in unrealized
appreciation/depreciation
on investments.......... 0.46 1.46 (0.41) 1.62 (2.42)
---------- ---------- ---------- ---------- ----------
Total from investment
operations.............. 1.34 2.31 0.43 2.47 (1.60)
Dividends on preferred
stock from net
investment income....... (0.10) (0.10) (0.10) (0.12) (0.10)
Dividends on common stock
from net investment
income.................. (0.78) (0.75) (0.74) (0.73) (0.72)
Dividends on common stock
from net realized
capital gains........... (0.00) (0.00) (0.00) (0.00) (0.00)
---------- ---------- ---------- ---------- ----------
Total distributions...... (0.88) (0.85) (0.84) (0.85) (0.82)
Net asset value:
End of year............. $ 10.36 $ 9.90 $ 8.44 $ 8.85 $ 7.23
========== ========== ========== ========== ==========
Per share market value:
End of year............. $ 11.25 $ 10.13 $ 8.63 $ 9.00 $ 7.88
Ratio of expenses to
average net assets
attributable to common
shares.................. 1.46% 1.45% 1.53% 1.62% 1.58%
Total investment return.. 19.95% 27.69% 4.68% 24.77% (18.04%)
Ratio of net investment
income to average net
assets attributable to
common shares........... 8.85% 9.87% 10.16% 10.65% 10.21%
Portfolio turnover rate.. 251.19% 213.57% 226.21% 188.28% 129.56%
Net assets, end of year
(000s omitted).......... $2,631,692 $2,510,035 $2,186,443 $2,239,331 $1,896,090
</TABLE>
18
<PAGE>
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
CALVIN J. PEDERSEN, CFA
BERYL W. SPRINKEL
Officers
CLAIRE V. HANSEN, CFA
Chairman
CALVIN J. PEDERSEN, CFA
President and Chief Executive Officer
NATHAN I. PARTAIN, CFA
Executive Vice President and Chief Investment 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
(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
19
<PAGE>
Duff & Phelps
Utilities Income Inc.
4th
Annual Report
December 31,
1998
