SEC Form N-CSRS filed by Duff & Phelps Utility and Infrastructure Fund Inc.
$DPG
Trusts Except Educational Religious and Charitable
Finance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22533
Duff & Phelps Utility and Infrastructure Fund Inc.
(Exact name of registrant as specified in charter)
200 South Wacker Drive, Suite 500
Chicago, Illinois 60606
(Address of principal executive offices) (Zip code)
| Alan M. Meder Duff & Phelps Utility and Infrastructure Fund Inc. 200 South Wacker Drive, Suite 500 Chicago, Illinois 60606 |
Lawrence R. Hamilton, Esq. Mayer Brown LLP 71 South Wacker Drive Chicago, Illinois 60606 |
(Name and address of agent for service)
Registrant’s telephone number, including area code: 312-368-5510
Date of fiscal year end: October 31
Date of reporting period: April 30, 2023
Item 1. Reports to Stockholders.
| (a) | The Report to Shareholders is attached herewith. |
Semi-Annual
Report
April 30, 2023
Fund
Distributions and Managed Distribution Plan: In June 2015, the Board of Directors (the “Board”) of Duff & Phelps Utility and Infrastructure Fund Inc. (“DPG” or the
“Fund”) adopted a Managed Distribution Plan (the “Plan”), which currently provides for the Fund to continue to make a quarterly distribution on its common stock of 35.0 cents per share. As further described in the
Letter to Shareholders, the quarterly distribution starting with the September 2023 distribution will be decreased to 21.0 cents per share. Under the Plan, the Fund will distribute all available investment income to shareholders, consistent with the
Fund’s investment objective. If and when sufficient investment income is not available on a quarterly basis, the Fund will distribute long-term capital gains and/or return capital to its shareholders in order to maintain the steady
distribution rate that has been approved by the Board.
If the
Fund estimates that it has distributed more than its income and capital gains in a particular period, a portion of your distribution may be a return of capital. A return of capital may occur, for example, when some or all of the money that you
invested in the Fund is paid back to you. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income.”
You should not draw any
conclusions about the Fund’s investment performance from the amount of the Fund’s distributions or from the terms of the Fund’s Managed Distribution Plan.
Whenever
a quarterly distribution includes a capital gain or return of capital component, the Fund will provide you with a written statement indicating the sources of the distribution and the amount derived from each source.
The
amounts and sources of distributions reported in your quarterly written statements are only estimates and are not provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the
Fund’s investment results during its fiscal year and may be subject to changes based on tax regulations. The Fund will send you a Form 1099-DIV for the calendar year that will tell you how to report distributions for federal income tax
purposes.
The Board
may amend, suspend, or terminate the Managed Distribution Plan without prior notice to shareholders if it deems such action to be in the best interests of the Fund and its shareholders. For example, the Board might take such action if the Plan had
the effect of shrinking the Fund’s assets to a level that was determined to be detrimental to Fund shareholders. The suspension or termination of the Plan could have the effect of creating a trading discount if the Fund’s stock is
trading at or above net asset value or widening an existing trading discount.
The
Managed Distribution Plan is described in a Question and Answer format on your Fund’s website, www.dpimc.com/dpg under the “Dividend and Distributions” tab. The tax characterization of the Fund’s historical distributions can
also be found on the website under the “Tax Information” tab.
LETTER TO SHAREHOLDERS
June 15, 2023
Dear Fellow Shareholders:
Change to the Fund’s Distribution Level: The Fund’s distribution level of $1.40 per share, on an annual basis, was set at the time of the Fund’s initial distribution in September 2011. In 2015, the Fund adopted the Managed Distribution Plan to
allow the Fund to distribute long-term capital gains and/or return capital to its shareholders in order to maintain the steady distribution rate.
The Fund’s distribution level has, over
time, exceeded the performance of the sectors in which the Fund invests, and consequently has exceeded the total return of the Fund. This has had a negative impact on the Fund’s net asset value (“NAV”). In addition, the rapid
rise in interest rates over the past year has decreased the benefit of leverage to the Fund, putting further pressure on the Fund’s ability to generate income.
At its June meeting, the Board of Directors voted
to maintain the Managed Distribution Plan, but to decrease the distribution from the annual level of $1.40 per share to a new level of $0.84 per share. Fund management and the Board believe that the new distribution level is more in line with
the portfolio’s earnings power and should be more sustainable over time and thus that the new distribution level is in the long-term interest of shareholders.
Performance Review: The Fund declared two quarterly distributions in the first half of the 2023 fiscal year. The December and March dividends were at the prior 35-cent level which, on an annualized basis, were equivalent to
11.0% of the April 28, 2023 closing price of $12.75 per share. As described above, at the June 8, 2023 meeting, the Board of Directors reduced the Fund’s distribution under the Managed Distribution Plan to an annual level of $0.84 per
share, or $0.21 per share quarterly. Please refer to the inside front cover of this report for important information about the Fund and its Managed Distribution Plan.
For the six months ended April 30, 2023, on an
NAV basis, the Fund’s total return (income plus change in the NAV of the portfolio) was 3.9% and its market value total return was 1.5%, compared to the Composite Index’s 5.9% total return. The Composite Index is composed of the MSCI USA
Utilities Index (net), the MSCI World ex USA Utilities Index (net), the Alerian US Midstream Energy Index, the FTSE All-World Telecommunications Index, and the MSCI World Core Infrastructure Selected GICS Index (net), with each index weighted to
reflect the sector allocation of the Fund. The Fund’s five-year annualized total return on an NAV basis was 4.2% through April 30, 2023, below the Composite Index, which had a 6.3% annualized total return for that same period. On a market
value basis, the Fund had a five-year annualized total return of 8.6% through April 30, 2023.
1
| Total
Return1 For the period indicated through April 30, 2023 | ||||
| Six Months | One Year | Five
Years (annualized) |
Ten
Years (annualized) | |
| Duff & Phelps Utility and Infrastructure Fund Inc. | ||||
| Market Value2 | 1.5% | -0.1% | 8.6% | 4.8% |
| Net Asset Value3 | 3.9% | -4.6% | 4.2% | 2.6% |
| Composite Index4 | 5.9% | 0.8% | 6.3% | 4.0% |
| MSCI USA Utilities Index (net)4 | 4.2% | -1.1% | 8.2% | 7.4% |
| Alerian US Midstream Energy Index4 | 0.8% | 9.2% | 9.3% | N/A |
| FTSE All-World Telecommunications Index4 | 11.3% | -1.2% | 0.5% | 2.0% |
| MSCI World Core Infrastructure Selected GICS® (net)4 | 11.0% | -0.1% | N/A | N/A |
| MSCI World ex USA Utilities Index (net)4 | 26.9% | 4.4% | 5.4% | 4.6% |
| 1 | Past performance is not indicative of future results. Current performance may be lower or higher than performance in historical periods. |
| 2 | Total return on market value assumes a purchase of common stock at the closing market price of the last business day of the prior period and a sale at the closing market price on the last business day of each period shown in the table and assumes reinvestment of dividends at the actual reinvestment prices obtained under the terms of the Fund’s dividend reinvestment plan. In addition, when buying or selling stock, you would ordinarily pay brokerage expenses. Because brokerage expenses are not reflected in the above calculations, your total return net of brokerage expenses would be lower than the total return on market value shown in the table. Source: Administrator of the Fund. |
| 3 | Total return on NAV uses the same methodology as is described in note 2, but with use of NAV for beginning, ending and reinvestment values. Because the Fund’s expenses (ratios detailed on page 14 of this report) reduce the Fund’s NAV, they are already reflected in the Fund’s total return on NAV shown in the table. NAV represents the underlying value of the Fund’s net assets, but the market price per share may be higher or lower than the NAV. Source: Administrator of the Fund. |
| 4 | The Composite Index is a composite of the returns of the Alerian US Midstream Energy, MSCI USA Utilities (net), MSCI World ex USA Utilities, MSCI World Core Infrastructure Selected GICS (net), and FTSE All-World Telecommunications Indices, weighted monthly to reflect the stock sector allocation of the Fund based on beginning of month market values. The MSCI World Core Infrastructure Selected GICS Index (net) incepted on November 1, 2020, and thus does not have five- and ten-year return information. The Alerian US Midstream Energy Index was launched December 29, 2017 and therefore does not have ten-year return information. Prior to November 1, 2018, the Composite Index was a composite of the returns of the Alerian MLP, MSCI USA Utilities, MSCI World ex USA Utilities (net), and MSCI World Telecom Indices, weighted monthly to reflect the stock sector allocation of the Fund based on beginning of month market values. The November 1, 2018 change in the indices comprising the Composite Index was discussed in the 2018 Annual Report. The indices are calculated on a total return basis, net of foreign withholding taxes, with dividends reinvested. Indices are unmanaged; their returns do not reflect any fees, expenses, or sales charges; and they are not available for direct investment. Source: Index returns were obtained from MSCI and Morningstar Direct. |
The Macro Environment and Fund Sectors:
Macro factors remain in the driver’s seat for both equity
and bond markets. The direction of inflation and interest rates, the actions of the Federal Reserve, bank failures, conflicting economic data, and the outlook for corporate earnings are all areas of debate. Many analysts expect a
recession in the U.S. in the second half of the year or possibly in 2024, although equity markets currently seem to price in, at most, a shallow recession. The economic outlook outside the U.S. at this point appears brighter, although there is
some concern that other regions may follow the U.S. if it falls into a recession.
2
At the start of the Fund’s fiscal year on
November 1, 2022, macro factors benefitted domestic utilities. Investors were concerned about the economic outlook and were attracted to utilities’ steady earnings growth. Domestic utilities also benefitted from warm weather in the
U.S. Coming into the winter, natural gas prices were trading in a $6-7/MMBtu range amid fears that prices could spike higher with the onset of cold weather. In the core winter months of January to March, heating degree days were 10%
below normal in the U.S., according to the National Oceanic and Atmospheric Administration (NOAA) and natural gas prices dropped into a low $2/MMBtu range.
Natural gas prices impacted consumer heating
bills less than had been feared and helped to decrease electricity prices through lower fuel costs for gas-fired generation. Lower bill pressure decreased the risk of regulatory intervention and created more room for utilities’ rate base
growth. Warmer weather did have a negative aspect for gas distribution utilities, resulting in lower volumes. Although lower volumes caused several companies to reduce guidance for the quarter, they generally maintained their full year
guidance. More recently, domestic utility stocks have faced macro headwinds in the form of sector rotation, as investors moved out of defensive sectors, like utilities, and into large capitalization technology stocks.
A record warm winter had a dramatic effect on
European economies and sentiment toward European utilities. Europe was in a very tenuous situation coming into winter due to the undersupply of Russian natural gas. A cold winter could have severely strained households and industry and
would have created high political and regulatory risks for utilities. Our view was that the risks in Europe far outweighed potential rewards, and consequently the Fund had few investments in the region. Unfortunately, this negatively
impacted performance when early signs of warm weather caused European utilities to rally. Fund positioning in international utilities remains somewhat defensive as we look for companies with lower regulatory risk and greater resilience to cope
with future energy strains.
The economic
reprise in Europe benefitted many European infrastructure companies. Airports saw traffic volumes close to 2019 levels, resulting in improved financials. Toll road operators saw good volumes and even better activity in their construction
businesses, especially those focused on energy contracting. Closer to home, North American railroads turned in mixed performances. Although pricing remains strong, the outlook for volumes is more uncertain, and the tragic events involving
Norfolk Southern raised concerns regarding the industry.
Following a very strong performance in 2022, the
midstream energy sector treaded water for the first half of the fiscal year. Sentiment was held in check by moderating volume growth and lower commodity prices. The global price of crude oil in 2023 has been lower year-to-date, largely
due to better-than-expected supply and also due to anticipation of an economic slowdown in developed economies. Our view is that supply tightness will begin to be felt as 2023 progresses. Further, the historical evidence suggests that
demand will remain relatively resilient in all but a severe downturn. In any case, the midstream energy sector has become more defensive over the last couple of years as companies have focused on paying down debt and increasing return to
shareholders. We have more confidence in midstream’s positioning than in past periods of economic uncertainty.
The coming months will undoubtedly present
unforeseen challenges, but we expect to find opportunities as well. Based on our current views of macroeconomic trends, industry drivers, and geopolitical risks, we believe your Fund is appropriately positioned. Our objective is to invest in
companies with experienced management teams and predictable business models that are positioned for success despite the uncertain economic environment. As always, we will continue to closely monitor global developments through our research and
management meetings, incorporating changes to portfolio positioning as warranted.
3
Board of Directors Meeting: At the regular March 2023 Board meeting, the Board authorized a quarterly distribution of 35 cents per share to holders of record of common stock on June 15, 2023, with the distribution to be payable on June 30, 2023.
At the regular June 2023 Board meeting, the Board authorized a quarterly distribution of 21 cents per share to holders of record of common stock on September 15, with the distribution to be payable on September 30, 2023.
The Impact of Leverage on the Fund: The use of leverage enables the Fund to borrow at short-term rates and invest at potentially higher yields on equity holdings. As of April 30, 2023, the Fund’s leverage consisted of $40 million of floating
rate preferred stock and $135 million of floating rate debt. On that date, the total amount of leverage represented approximately 28% of the Fund’s total assets. As outlined in Notes 7 and 8 to the Fund’s financial statements, the
Fund’s borrowings and preferred shares pay interest and dividends based on the SOFR (Secured Overnight Financing Rate) rate and three-month Term SOFR rate, respectively, and rising interest rates increase the cost of the Fund’s
leverage.
The amount and type of
leverage used by the Fund is reviewed by the Board of Directors based on the Fund’s expected earnings relative to the anticipated costs (including fees and expenses) associated with the leverage. In addition, the long-term expected
benefits of leverage are weighed against the potential effect of increasing the volatility of both the Fund’s NAV and the market value of its common stock. The use of leverage increases the benefits to the Fund when equity valuations are
rising and conversely, exacerbates the negative impact when equity valuations are falling. In addition, the income-oriented equity investments held in your Fund can be adversely affected by a rise in interest rates.
The Federal Open Market Committee
(“FOMC”), the committee within the Federal Reserve (“Fed”) that sets domestic monetary policy, raised the target range for the federal funds rate at a near record pace since the beginning of last calendar year, to a current
rate of 5.00 to 5.25%. The Fed also began to reduce the size of its balance sheet via a runoff of its securities holdings.
There is a great deal of debate as to the
Fed’s future actions in 2023 and beyond. Market expectations for a pause in rate hikes, followed by several cuts by year end, seem to have recently moderated. There is also the possibility that the Fed will continue to raise the
federal funds rate in an effort to control inflation.
Rising interest rates generally have a negative
impact on income-oriented investments, although if improved growth accompanies the rising rates, that impact can be mitigated. The negative impact of rising interest rates can also potentially be mitigated by an improved outlook for long-term
inflation, or by relative sector performance. The amount and type of leverage employed by the Fund could potentially be modified or eliminated at any time due to the need to meet asset coverage requirements of Fund leverage or if management and the
Board of Directors came to view the long-term expected benefits of the leverage less favorably.
4
Visit us on the Web—You can obtain more information about the Fund, including the most recent shareholder financial reports and distribution information, at our website, www.dpimc.com/dpg. We appreciate your interest in Duff & Phelps Utility and Infrastructure Fund Inc., and we will continue to do our
best to be of service to you.
| Eric Elvekrog, CFA, CPA | David Grumhaus Vice President and Chief Investment Officer |
President and Chief Executive Officer
Certain statements in this report are
forward-looking statements. Discussions of specific investments are for illustration only and are not intended as recommendations of individual investments. The forward-looking statements and other views expressed herein are those of the portfolio
managers as of the date of this report. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and the views expressed herein are subject to change at any time, due to numerous market
and other factors. The Fund disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein.
5
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
SCHEDULE OF INVESTMENTS
April 30, 2023
April 30, 2023
(Unaudited)
The accompanying notes are an integral part of these
financial statements.
6
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
SCHEDULE OF INVESTMENTS—(Continued)
April 30, 2023
(Unaudited)
| Shares | Description | Value | ||
| ■ Written Options—(0.0)% | ||||
| (see Open Written Option Contracts on the next page) | ||||
| Total
Written Options (Premiums received $248,902) |
$ (118,512) | |||
| TOTAL
INVESTMENTS AFTER WRITTEN OPTIONS—137.4% (Cost $578,745,665) |
627,909,556 | |||
| Secured borrowings—(29.5)% | (135,000,000) | |||
| Mandatory Redeemable Preferred Shares at liquidation value—(8.8)% | (40,000,000) | |||
|
Other assets less other
liabilities—0.9% |
4,222,645 | |||
| NET ASSETS APPLICABLE TO COMMON STOCK—100.0% | $ 457,132,201 | |||
| (1) | All or a portion of the security is segregated as collateral for written options. The value of securities segregated as collateral is $18,097,484. |
| (2) | Non-income producing. |
| (3) | All or a portion of the total investments before written options have been pledged as collateral for borrowings. |
The percentage shown for each investment category is
the total value of that category as a percentage of the net assets applicable to common stock of the Fund.
The accompanying notes are an integral part of
these financial statements.
7
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
SCHEDULE OF INVESTMENTS—(Continued)
April 30, 2023
(Unaudited)
| Open Written Option Contracts as of April 30, 2023, were as follows: | ||||||||||
| Description of Option | Number
of Contracts |
Contract
Notional Amount |
Strike
Price |
Expiration
Date |
Value | |||||
| Exchange-Traded Call Options | ||||||||||
|
Alliant Energy
Corp. |
(1,606) | $ (9,636) | $ 60.00 | 7/21/23 | $ (83,512) | |||||
|
American Electric Power Co.,
Inc. |
(1,000) | (10,500) | 105.00 | 8/18/23 | (35,000) | |||||
| $(118,512) | ||||||||||
The Fund’s
investments are carried at fair value which is defined as the price that the Fund might reasonably expect to receive upon selling an investment in a timely transaction to an independent buyer in the principal or most advantageous market of the
investment. The three-tier hierarchy of inputs established to classify fair value measurements for disclosure purposes is summarized in the three broad levels listed below:
Level 1—quoted prices in active markets for
identical securities
Level 2—other
significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risks, etc.)
Level 3—significant unobservable inputs
(including the Fund’s own assumptions in determining fair value of investments)
The inputs or methodology used for valuing
securities are not necessarily an indication of the risk associated with investing in these securities. The following is a summary of the inputs used to value each of the Fund’s investments at April 30, 2023:
| Level 1 | |
|
Common stocks & MLP
interests |
$628,028,068 |
|
Written
options |
(118,512) |
|
Total
investments |
$627,909,556 |
There were no Level 2 or
Level 3 priced securities held and there were no transfers into or out of Level 3.
The accompanying notes are an integral part of
these financial statements.
8
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
SCHEDULE OF INVESTMENTS—(Continued)
April 30, 2023
(Unaudited)
SECTOR ALLOCATION*
* Percentages
are based on total investments before written options rather than net assets applicable to common stock.
| Currency Abbreviations: | |
| AUD | Australian Dollar |
| CAD | Canadian Dollar |
| DKK | Danish Krone |
| EUR | Euro |
| USD | United States Dollar |
The accompanying notes are an integral part of these financial
statements.
9
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2023
(Unaudited)
| Assets: | |
|
Investments at value (cost
$578,994,567) |
$628,028,068 |
|
Cash
|
3,312,739 |
| Receivables: | |
|
Dividends
|
1,517,078 |
|
Tax reclaims
|
772,525 |
|
Prepaid expenses
|
35,305 |
|
Total
assets |
633,665,715 |
| Liabilities: | |
|
Written options at value (premiums received $248,902) (Note
5) |
118,512 |
|
Secured borrowings (Note
8) |
135,000,000 |
| Payables: | |
|
Investment advisory fees (Note
3) |
515,371 |
|
Administrative fees (Note
3) |
37,154 |
|
Interest on secured borrowings (Note
8) |
654,415 |
|
Interest on floating rate mandatory redeemable preferred shares (Note
7) |
236,724 |
|
Accrued
expenses |
94,094 |
|
Floating rate mandatory redeemable preferred shares (liquidation preference $40,000,000, net of deferred offering costs of $122,756) (Note
7) |
39,877,244 |
|
Total
liabilities |
176,533,514 |
|
NET ASSETS APPLICABLE TO COMMON
STOCK |
$457,132,201 |
| CAPITAL: | |
|
Common stock ($0.001 par value; 596,000,000 shares authorized and 38,181,740 shares issued and
outstanding) |
$ 38,182 |
|
Additional paid-in
capital |
452,091,869 |
|
Total distributable earnings (accumulated
losses) |
5,002,150 |
|
Net assets applicable to common
stock |
$457,132,201 |
|
NET ASSET VALUE PER SHARE OF COMMON
STOCK |
$ 11.97 |
The accompanying notes are an integral part of these financial
statements.
10
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED
April 30, 2023
(Unaudited)
| INVESTMENT INCOME: | |
|
Dividends (less foreign withholding tax of
$274,582) |
$13,274,485 |
|
Less return of capital distributions (Note
2) |
(5,263,051) |
|
Total investment
income |
8,011,434 |
| EXPENSES: | |
|
Investment advisory fees (Note
3) |
3,259,208 |
|
Administrative fees (Note
3) |
232,784 |
|
Interest expense and fees on secured borrowings (Note
8) |
3,899,523 |
|
Interest expense and amortization of deferred offering costs on preferred shares (Note
7) |
1,319,192 |
|
Reports to shareholders
|
74,959 |
|
Professional
fees |
67,560 |
|
Directors’ fees (Note
3) |
36,978 |
|
Accounting agent
fees |
30,872 |
|
Custodian fees
|
8,940 |
|
Transfer agent
fees |
4,626 |
|
Other
expenses |
70,335 |
|
Total
expenses |
9,004,977 |
|
Net investment income
(loss) |
(993,543) |
| REALIZED AND UNREALIZED GAIN (LOSS): | |
|
Net realized gain (loss) on
investments |
(9,034,103) |
|
Net realized gain (loss) on foreign currency transactions
|
47,569 |
|
Net realized gain (loss) on written
options |
588,325 |
|
Net change in unrealized appreciation / depreciation on investments and foreign currency
translation |
27,379,506 |
|
Net change in unrealized appreciation / depreciation on written
options |
58,987 |
|
Net realized and unrealized gain
(loss) |
19,040,284 |
|
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON STOCK RESULTING FROM
OPERATIONS |
$18,046,741 |
The accompanying notes are an integral part of these financial
statements.
11
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
STATEMENTS OF CHANGES IN NET ASSETS
| For
the six months ended April 30, 2023 (Unaudited) |
For
the year ended October 31, 2022 | ||
| OPERATIONS: | |||
|
Net investment income
(loss) |
$ (993,543) | $ 4,392,301 | |
|
Net realized gain
(loss) |
(8,398,209) | 19,381,434 | |
|
Net change in unrealized appreciation / depreciation
|
27,438,493 | (36,400,820) | |
|
Net increase (decrease) in net assets applicable to common stock resulting from
operations |
18,046,741 | (12,627,085) | |
| DISTRIBUTIONS TO COMMON STOCKHOLDERS: | |||
|
Net investment income and capital
gains |
— | (4,541,413) | |
|
In excess of net investment
income |
(26,692,232) * | — | |
|
Return of
capital |
— | (48,709,802) | |
|
Decrease in net assets from distributions to common stockholders (Note
6) |
(26,692,232) | (53,251,215) | |
| From Capital Share Transactions | |||
|
Shares issued to common stockholders from dividend reinvestment (66,662 and 122,705 shares,
respectively) |
849,879 | 1,654,019 | |
| Increase (decrease) in net assets from capital share transactions | 849,879 | 1,654,019 | |
|
Total increase (decrease) in net
assets |
(7,795,612) | (64,224,281) | |
| TOTAL NET ASSETS APPLICABLE TO COMMON STOCK: | |||
|
Beginning of
period |
464,927,813 | 529,152,094 | |
|
End of
period |
$457,132,201 | $464,927,813 |
| * | Allocations to net investment income, net realized gain and/or return of capital will be determined at fiscal year end. |
The accompanying notes are an integral part of these financial
statements.
12
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED
April 30, 2023
(Unaudited)
| INCREASE (DECREASE) IN CASH | |
| Cash Flows provided by (used in) operating activities: | |
|
Net increase (decrease) in net assets resulting from operations
|
$ 18,046,741 |
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | |
|
Proceeds from sale of long-term
investments |
128,884,923 |
|
Purchases of long-term investments
|
(95,188,873) |
|
Net (purchases) or sales of money market mutual
funds |
5,982,710 |
|
Net change in unrealized (appreciation)/depreciation on
investments |
(27,302,358) |
|
Net change in unrealized (appreciation)/depreciation on written
options |
(58,987) |
|
Net realized (gain)/loss on
investments |
9,034,103 |
|
Net realized (gain)/loss on written
options |
(588,325) |
|
Return of capital distributions on
investments |
5,263,051 |
|
Net proceeds from written
options |
765,824 |
|
Amortization of deferred offering costs on mandatory redeemable preferred
shares |
26,232 |
|
(Increase) Decrease in tax reclaims
receivable |
(128,617) |
|
(Increase) Decrease in dividends
receivable |
(756,854) |
|
(Increase) Decrease in prepaid
expenses |
(17,328) |
|
Increase (Decrease) in interest payable on secured
borrowings |
62,907 |
|
Increase (Decrease) in interest payable on mandatory redeemable preferred
shares |
40,637 |
|
Increase (Decrease) in affiliated expenses
payable |
(30,369) |
|
Increase (Decrease) in non-affiliated expenses
payable |
(18,316) |
|
Cash provided by (used in) operating
activities |
44,017,101 |
|
Cash provided by (used in) financing
activities: |
|
|
Repayment of secured borrowings
|
(20,000,000) |
|
Cash distribution paid to
shareholders |
(25,842,353) |
|
Cash provided by (used in) financing
activities |
(45,842,353) |
|
Net increase (decrease) in
cash |
(1,825,252) |
|
Cash and foreign currency at beginning of
period |
5,137,991 |
| Cash at end of period | $ 3,312,739 |
|
Supplemental cash flow
information: |
|
|
Cash paid during the period for interest expense on secured
borrowings |
$ 3,836,616 |
|
Cash paid during the period for interest expense on floating rate mandatory redeemable preferred
shares |
$ 1,252,323 |
The accompanying notes are an integral part of these financial
statements.
13
DUFF & PHELPS UTILITY AND INFRASTRUCTURE FUND INC.
FINANCIAL HIGHLIGHTS—SELECTED PER SHARE DATA AND RATIOS
The
table below provides information about income and capital changes for a share of common stock outstanding throughout the periods indicated (excluding supplemental data provided below):
| For
the six months ended April 30, 2023 (Unaudited) |
For the year ended October 31, | ||||||||||
| 2022 | 2021 | 2020 | 2019 | 2018 | |||||||
| PER SHARE DATA: | |||||||||||
|
Net asset value, beginning of period
|
$ 12.20 | $ 13.93 | $ 12.11 | $ 16.40 | $ 15.28 | $ 17.47 | |||||
|
Net investment income (loss)
|
(0.03) | 0.12 | 0.12 | 0.22 | 0.12 | 0.19 | |||||
|
Net realized and unrealized gain (loss)
|
0.50 | (0.45) | 3.10 | (3.11) | 2.40 | (0.98) | |||||
| Net increase (decrease) from investment operations applicable to common stock | 0.47 | (0.33) | 3.22 | (2.89) | 2.52 | (0.79) | |||||
| Distributions on common stock: | |||||||||||
|
Net investment income
|
— | (0.12) | — | (0.71) | — | (1.15) | |||||
|
In excess of net investment income
|
(0.70) | — | — | — | — | — | |||||
|
Net realized gain
|
— | — | — | — | (0.56) | (0.25) | |||||
|
Return of capital
|
— | (1.28) | (1.40) | (0.69) | (0.84) | — | |||||
| Total distributions | (0.70) | (1.40) | (1.40) | (1.40) | (1.40) | (1.40) | |||||
|
Net asset value, end of period
|
$ 11.97 | $ 12.20 | $ 13.93 | $ 12.11 | $ 16.40 | $ 15.28 | |||||
|
Market value, end of period
|
$ 12.75 | $ 13.26 | $ 14.26 | $ 10.20 | $ 15.53 | $ 13.21 | |||||
| RATIOS
TO AVERAGE NET ASSETS APPLICABLE TO COMMON STOCK: |
|||||||||||
|
Operating expenses
|
3.87% * | 2.51% | 2.27% | 2.82% | 3.20% | 2.97% | |||||
|
Operating expenses, without leverage
|
1.62% * | 1.62% | 1.62% | 1.67% | 1.62% | 1.62% | |||||
|
Net investment income (loss)
|
(0.43)% * | 0.85% | 0.88% | 1.59% | 0.72% | 1.13% | |||||
| SUPPLEMENTAL DATA: | |||||||||||
|
Total return on market value(1)
|
1.51% | 3.04% | 55.26% | (25.95)% | 29.13% | (7.95)% | |||||
|
Total return on net asset value(1)
|
3.89% | (2.67)% | 27.62% | (17.42)% | 17.01% | (4.82)% | |||||
|
Portfolio turnover rate
|
15% | 50% | 45% | 50% | 48% | 46% | |||||
|
Net assets applicable to common stock, end of period (000’s omitted)
|
$457,132 | $464,928 | $529,152 | $459,201 | $621,962 | $579,457 | |||||
|
Secured borrowing outstanding, end of period (000’s omitted)
|
$135,000 | $155,000 | $170,000 | $130,000 | $160,000 | $160,000 | |||||
|
Asset coverage on secured borrowings(2)
|
$ 4,682 | $ 4,258 | $ 4,348 | $ 5,148 | $ 5,512 | $ 5,247 | |||||
|
Mandatory redeemable preferred shares, end of period (000’s omitted)(3)
|
$ 40,000 | $ 40,000 | $ 40,000 | $ 80,000 | $100,000 | $100,000 | |||||
|
Asset coverage on mandatory redeemable preferred shares(4)
|
$ 90 | $ 85 | $ 88 | $ 80 | $ 85 | $ 81 | |||||
|
Asset coverage ratio on total leverage (secured borrowings and mandatory redeemable preferred shares), end of period(5)
|
361% | 338% | 352% | 319% | 339% | 323% | |||||
| * | Annualized. |
| (1) | Total return on market value assumes a purchase of common stock at the closing market price of the last business day of the prior period and a sale at the closing market price on the last business day of each period shown in the table and assumes reinvestment of dividends at the actual reinvestment prices obtained under the terms of the Fund’s Automatic Reinvestment and Cash Purchase Plan. Total Return on net asset value uses the same methodology, but with the use of net asset value for beginning, ending and reinvestment values. |
| (2) | Represents value of net assets applicable to common stock plus the secured borrowings and mandatory redeemable preferred shares (“preferred shares”) outstanding at period end divided by the secured borrowings outstanding at period end, calculated per $1,000 principal amount of borrowing. The rights of debt holders are senior to the rights of the holders of the Fund’s common and preferred shares. |
| (3) | The Fund’s preferred shares are not publicly traded. |
| (4) | Represents value of net assets applicable to common stock plus secured borrowings and preferred shares outstanding at period end divided by the secured borrowings and preferred shares outstanding at period end, calculated per $25 liquidation preference per share of preferred shares. |
| (5) | Represents value of net assets applicable to common stock plus secured borrowings and preferred shares outstanding at period end divided by the secured borrowings and preferred shares outstanding at period end. |
The
accompanying notes are an integral part of these financial statements.
14
DUFF & PHELPS UTILITY AND
INFRASTRUCTURE FUND INC.
NOTES TO FINANCIAL
STATEMENTS
April 30, 2023
April 30, 2023
(Unaudited)
Note 1. Organization
Duff & Phelps Utility and Infrastructure Fund
Inc. (“DPG” or the “Fund”) was incorporated under the laws of the State of Maryland on March 15, 2011. The Fund commenced operations on July 29, 2011, the date on which its initial public offering shares were issued, as a
non-diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s investment objective is to seek total return, resulting primarily from (i) a high level of current income, with an emphasis on providing tax-advantaged dividend income, and (ii) growth in current income, and secondarily from
capital appreciation.
Note 2. Significant Accounting
Policies
The Fund is an investment company
that follows the accounting and reporting guidance of Accounting Standards Codification (“ASC”) Topic 946 applicable to Investment Companies.
The following are the significant accounting
policies of the Fund:
A. Investment
Valuation: Equity securities traded on a national or foreign securities exchange or traded over-the-counter and quoted on the NASDAQ Stock Market are valued at the last reported sale price or, if there was no sale on
the valuation date, then the security is valued at the closing bid price, in each case using valuation data provided by an independent pricing service, and are generally classified as Level 1. Equity securities traded on more than one securities
exchange shall be valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities and are classified as Level 1. If there was no sale on
the valuation date, then the security is valued at the closing bid price of the exchange representing the principal market for such securities. Exchange traded options are valued at the last posted settlement price on the market where such option is
principally traded and are classified as Level 1. If an option is not traded on the day prior to the expiration date and is out of the money, the option will be fair valued, and classified as Level 2. Any securities for which it is determined that
market prices are unavailable or unreliable are fair valued using the Adviser’s policies adopted by the Board of Directors and are classified as Level 2 or 3 based on the valuation inputs.
B. Investment
Transactions and Investment Income: Security transactions are recorded on the trade date. Realized gains and losses from sales of securities are determined on the identified cost basis. Dividend income is recognized
on the ex-dividend date or, in the case of certain foreign securities, as soon as the Fund is notified. Interest income and expense are recognized on the accrual basis.
The Fund invests in master limited partnerships
(“MLPs”) which make distributions that are primarily attributable to return of capital. Dividend income is recorded using management’s estimate of the percentage of income included in the distributions received from the MLP
investments based on their historical dividend results. Distributions received in excess of this estimated amount are recorded as a reduction of cost of investments (i.e., a return of capital). The actual amounts of income and return of capital
components of its distributions are only
15
DUFF & PHELPS UTILITY AND
INFRASTRUCTURE FUND INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
April 30, 2023
(Unaudited)
determined by each MLP after its fiscal year-end
and may differ from the estimated amounts. For the six months ended April 30, 2023, the Fund estimated that 100% of the MLP distributions received would be treated as a return of capital.
C. Income
Taxes: It is the Fund’s intention to comply with requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) applicable to regulated investment companies and to
distribute substantially all of its taxable income and capital gains to its shareholders. Therefore, no provision for federal income or excise taxes is required.
The Fund may be subject to foreign taxes on
income or gains on investments, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries as applicable based upon current interpretations of the tax rules and regulations that exist in the markets in which it
invests.
Management of the Fund has
concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. The Fund’s U.S. federal income tax return is generally subject to examination by the Internal Revenue Service for a
period of three years after they are filed. State, local and/or non-U.S. tax returns and/or other filings may be subject to examination for different periods, depending upon the tax rules of each applicable jurisdiction.
D. Foreign
Currency Translation: Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the foreign currency exchange rate effective at the end of the
reporting period. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts at the rate of exchange prevailing on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with
the net realized and unrealized gain or loss on investments.
E. Derivative
Financial Instruments: Disclosures on derivative instruments and hedging activities are intended to improve financial reporting for derivative instruments by enhanced disclosure that enables the investors to
understand how and why a fund uses derivatives, how derivatives are accounted for, and how derivative instruments affect a fund’s results of operations and financial position. Summarized below is a specific type of derivative instrument used
by the Fund.
Options
The Fund is subject to equity price risk in the
normal course of pursuing its investment objectives and is authorized to write (sell) covered call options, in an attempt to manage such risk and with the purpose of generating realized gains. A call option on a security is a contract that gives the
holder of such call option the right to buy the security underlying the call option from the writer of such call option at a specified price (strike price) at any time during the term of the option. A covered call option is an option written on a
security held by the Fund.
16
DUFF & PHELPS UTILITY AND
INFRASTRUCTURE FUND INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
April 30, 2023
(Unaudited)
When a call option is written (sold), the Fund
receives a premium (or call premium) from the buyer of such call option and records a liability to reflect its obligation to deliver the underlying security upon the exercise of the call option at the strike price.
Changes in the value of the written options are
included in “Net change in unrealized appreciation / depreciation on written options” on the Statement of Operations. “Net realized gain (loss) on written options” on the Statement of Operations will include the following:
(a) premiums received from holders on options that have expired, and (b) the difference between the premium received and the amount paid to repurchase an open option, including any commission. Premiums from options exercised are added to the
proceeds from the sale of the underlying security in order to determine the net realized gain or loss on the security.
F. Use of
Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from those estimates.
G. Accounting
Standards: In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2020-04, (“ASU 2020-04”), Reference Rate Reform (Topic
848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in ASU 2020-04 provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned
discontinuation of the London Interbank Offering Rate (“LIBOR”) and other interbank-offered based reference rates as of the end of 2021. In March 2021, the administrator for LIBOR announced the extension of the publication of a majority
of the USD LIBOR settings to June 30, 2023. On December 21, 2022, the FASB issued ASU 2022-06 to defer the sunset date of ASC 848 until December 31, 2024. ASU 2020-04 is effective for certain reference rate-related contract modifications that occur
during the period March 12, 2020 through December 31, 2024. Management has adopted ASU 2020-04 and ASU 2022-06.
Note 3. Agreements and Management
Arrangements
A. Adviser: The Fund has an Advisory Agreement with Duff & Phelps Investment Management Co. (the “Adviser” or “DPIM”), an indirect, wholly owned subsidiary of Virtus Investment Partners, Inc.
(“Virtus”). The Adviser receives a monthly fee at an annual rate of 1.00% of Average Weekly Managed Assets, which is defined as the average weekly value of the total assets of the Fund minus the sum of all accrued liabilities of the Fund
(other than the aggregate amount of any outstanding borrowings or other indebtedness constituting financial leverage).
B.
Administrator: The Fund has an Administration Agreement with Virtus Fund Services, LLC (the “Administrator”), an indirect, wholly owned subsidiary of Virtus. The Administrator receives a monthly fee at an
annual rate of 0.10% of the average weekly net assets of the Fund.
C. Directors: The Fund pays each director an annual fee. Total fees paid to directors for the six months ended April 30, 2023 were $36,978.
17
DUFF & PHELPS UTILITY AND
INFRASTRUCTURE FUND INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
April 30, 2023
(Unaudited)
D. Affiliated
Shareholder: At April 30, 2023, Virtus Partners, Inc. (a wholly owned subsidiary of Virtus) held 14,355 shares of the Fund, which represent 0.04% of shares of common stock outstanding. These shares may be sold at any
time.
Note 4. Investment
Transactions
Purchases and sales of investment
securities (excluding short-term investments) for the six months ended April 30, 2023 were $95,188,873 and $128,884,923, respectively.
Note 5. Derivatives Transactions
The Fund’s investments in derivatives may
represent economic hedges; however, they are not considered to be hedge transactions for financial reporting purposes. For additional information on the derivative instruments in which the Fund was invested during the reporting period, refer to the
Schedule of Investments and Note 2E above. During the six months ended April 30, 2023, the Fund wrote call options on individual stocks held in its portfolio of investments to enhance returns while forgoing some upside potential. The risk in writing
call options is that the Fund gives up the opportunity for profit if the market price of the referenced security increases and the option is exercised. All written options have a primary risk exposure of equity price associated with them.
For the six months ended April 30, 2023, the average
quarterly premiums received for written options was $268,725.
The following is a summary of the derivative
activity reflected in the financial statements for the six months ended April 30, 2023.
| Statement of Assets and Liabilities | Statement of Operations | ||
| Assets: None | $ — | Net realized gain (loss) from written options | $588,325 |
| Liabilities: Written options at value | (118,512) | Net change in unrealized appreciation / depreciation from written options | 58,987 |
| Net asset (liability) balance | $(118,512) | Total realized and unrealized gain (loss) | $647,312 |
18
DUFF & PHELPS UTILITY AND
INFRASTRUCTURE FUND INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
April 30, 2023
(Unaudited)
Note 6. Distributions and Tax
Information
At April 30, 2023, the
approximate federal tax cost and aggregate gross unrealized appreciation (depreciation) were as follows:
| Federal
Tax Cost |
Unrealized
Appreciation |
Unrealized
Depreciation |
Net
Unrealized Appreciation (Depreciation) | ||||
|
Investments |
$582,181,564 | $77,148,940 | $(31,302,436) | $45,846,504 | |||
|
Written
options |
(248,902) | 130,390 | — | 130,390 |
The Fund has capital
loss carryovers available to offset future realized gains, if any, to the extent permitted by the Code. Net capital losses are carried forward without expiration and generally retain their short-term and/or long-term tax character, as applicable.
For the year ended October 31, 2022, the Fund’s capital loss carryovers were as follows:
| Short-Term | Long-Term | |
| $4,649,768 | $— |
The Fund declares and
pays a quarterly distribution on its common shares of a stated amount per share. Subject to approval and oversight by the Fund’s Board of Directors, the Fund seeks to maintain a stable distribution level (a Managed Distribution Plan)
consistent with the Fund’s primary investment objective. If and when sufficient investment income is not available on a quarterly basis, the Fund will distribute long-term capital gains and/or return capital in order to maintain the common
share distribution. The character of distributions is determined in accordance with federal tax regulations, which may differ from U.S. generally accepted accounting principles.
Note 7. Floating Rate Mandatory Redeemable
Preferred Shares
In 2015, the Fund issued
4,000,000 Floating Rate Mandatory Redeemable Preferred Shares (“MRP Shares”) in three series each with a liquidation preference of $25.00 per share. Proceeds from the issuances were used to reduce the size of the Fund’s credit
facility.
On April 20, 2020, the Fund
voluntarily redeemed all 800,000 of its outstanding Series A MRP Shares, and on October 22, 2021, the Fund voluntarily redeemed all 1,600,000 of its outstanding Series B MRP Shares.
Key terms of Series C MRP Shares at April 30, 2023
are as follows:
| Series | Shares
Outstanding |
Liquidation
Preference |
Quarterly
Rate Reset |
Rate | Weighted
Daily Average Rate |
Mandatory
Redemption Date | ||||||
| C | 1,600,000 | $40,000,000 | 3M Term SOFR + 2.21%* | 7.10% | 6.43% | 8/24/2025 |
* Prior to April 1, 2023,
the quarterly rate reset of the outstanding Series C shares was 3M LIBOR + 1.95%.
19
DUFF & PHELPS UTILITY AND
INFRASTRUCTURE FUND INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
April 30, 2023
(Unaudited)
SOFR - Secured Overnight Financing Rate
The Fund incurred costs in connection with the
issuance of the MRP Shares. These costs were recorded as a deferred charge and are being amortized over the respective life of each series of MRP Shares. Amortization of these deferred offering costs of $26,232 is included under the caption
“Interest expense and amortization of deferred offering costs on preferred shares” on the Statement of Operations, and the unamortized balance is deducted from the carrying amount of the MRP Shares under the caption “Floating rate
mandatory redeemable preferred shares” on the Statement of Assets and Liabilities.
Holders of the MRP Shares are entitled to receive
quarterly cumulative cash dividend payments on the first business day following each quarterly dividend date, which is the last day of each of March, June, September and December.
MRP Shares are subject to optional and mandatory
redemption by the Fund in certain circumstances. The redemption price per share is equal to the sum of the liquidation preference per share plus any accumulated but unpaid dividends plus, in some cases, an early redemption premium (which may vary
based on the date of redemption). The MRP Shares are not listed on any exchange or automated quotation system. The fair value of the MRP Shares is estimated to be their liquidation preference. The MRP Shares are categorized as Level 2 within the
fair value hierarchy. The Fund is subject to certain restrictions relating to the MRP Shares such as maintaining certain asset coverage, effective leverage ratio and overcollateralization ratio requirements. Failure to comply with these restrictions
could preclude the Fund from declaring any distributions to common shareholders and could trigger the mandatory redemption of the MRP Shares.
In general, the holders of the MRP Shares and of
the Common Stock have equal voting rights of one vote per share. The holders of the MRP Shares are entitled 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 MRP Shares and the Common Stock.
Note 8. Secured Borrowings
The Fund has a Credit Agreement (the
“Agreement”) with a commercial bank (the “Bank”) that allows the Fund to borrow cash from the Bank, up to a limit of $170,000,000. Borrowings under the Agreement are collateralized by investments of the Fund. Interest is
charged at daily SOFR plus an additional percentage rate on the amount borrowed and on the undrawn balance (the commitment fee). Total commitment fees accrued for the six months ended April 30, 2023, were $17,271 and are included in the
“Interest expense and fees on secured borrowings” line of the Statement of Operations. The Agreement is renewable and can also be converted to a 1-year fixed term facility. The Bank has the ability to require repayment of outstanding
borrowings under the Agreement upon certain circumstances such as an event of default. For the six months ended April 30, 2023, average daily borrowings under the Agreement and the weighted daily average interest rate were $148,301,373 and 5.21%,
respectively. At April 30, 2023, the Fund had outstanding borrowings of $135,000,000 at a rate of 5.735% for a one-month term.
20
DUFF & PHELPS UTILITY AND
INFRASTRUCTURE FUND INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
April 30, 2023
(Unaudited)
Note 9. Indemnifications
Under the Fund’s organizational documents,
its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide general indemnifications to
other parties. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not occurred. However, the Fund has not had prior claims or losses pursuant to these
arrangements and expects the risk of loss to be remote.
Note 10. Subsequent Events
Management has evaluated the impact of all
subsequent events on the Fund through the date the financial statements were available for issuance, and has determined that the following subsequent events require recognition or disclosure in these financial statements:
On June 12, 2023, the Fund announced that on July
14, 2023, it will redeem 200,000 of its 1,600,000 issued and outstanding Floating Rate Mandatory Redeemable Preferred Shares, Series C.
On June 15, 2023, the Fund announced that effective
with the September 29, 2023 pay date, the quarterly distribution rate will be reduced to 21.0 cents per share from the current rate of 35.0 cents per share.
21
RENEWAL OF INVESTMENT ADVISORY AGREEMENT
(Unaudited)
Under Section 15(c) of the Investment Company Act
of 1940 (the “1940 Act”), the terms of the Fund’s investment advisory agreement must be reviewed and approved at least annually by the Board of Directors of the Fund (the “Board”), including a majority of the directors
who are not “interested persons” of the Fund, as defined in section 2(a)(19) of the 1940 Act (the “Independent Directors”). Section 15(c) of the 1940 Act also requires the Fund’s directors to request and evaluate, and
the Fund’s investment adviser to furnish, such information as may reasonably be necessary to evaluate the terms of the investment advisory agreement. To assist the Board with this responsibility, the Board has appointed a Contracts Committee,
which is composed of the Independent Directors of the Fund and acts under a written charter that was most recently amended on December 17, 2015. A copy of the charter is available on the Fund’s website at www.dpimc.com/dpg and in print to any
shareholder, upon request.
The Contracts
Committee, assisted by the advice of independent legal counsel, conducted an annual review of the terms of the Fund’s contractual arrangements, including the investment advisory agreement with Duff & Phelps Investment Management Co. (the
“Adviser”). Set forth below is a description of the Contracts Committee’s annual review of the Fund’s investment advisory agreement, which provided the material basis for the Board’s decision to continue the investment
advisory agreement.
In the course of the
Contracts Committee’s review, the members of the Contracts Committee considered all of the information they deemed appropriate, including informational materials furnished by the Adviser in response to a request made by independent counsel on
behalf of the Contracts Committee. In arriving at its recommendation that continuation of the investment advisory agreement was in the best interests of the Fund and its shareholders, the Contracts Committee took into account all factors that it
deemed relevant, without identifying any single factor or group of factors as all-important or controlling. Among the factors considered by the Contracts Committee, and the conclusion reached with respect to each, were the following:
Nature, extent, and quality of services. The Contracts Committee considered the nature, extent and quality of the services provided to the Fund by the Adviser. Among other materials, the Adviser furnished the Contracts Committee with a copy of its most recent
investment adviser registration form (Form ADV). In evaluating the quality of the Adviser’s services, the Contracts Committee noted the various complexities involved in the operations of the Fund, such as the use of multiple forms of leverage
(preferred stock and borrowings under a credit facility), and concluded that the Adviser is consistently providing high-quality services to the Fund in an increasingly complex environment. The Contracts Committee also considered the length of
service of the individual professional employees of the Adviser who provide services to the Fund. In the Contracts Committee’s view, the long-term service of capable and conscientious professionals provides a significant benefit to the Fund
and its shareholders. The Contracts Committee also considered the Fund’s investment performance as discussed below. The Contracts Committee also took into account its evaluation of the quality of the Adviser’s code of ethics and
compliance program. The Contracts Committee also considered the consistent quality of the services being provided by the Adviser even in light of the disruptions related to the COVID-19 pandemic. In light of the foregoing, the Contracts
Committee concluded that it was generally satisfied with the nature, extent and quality of the services provided to the Fund by the Adviser.
Investment performance of the Fund and the Adviser. The Contracts Committee reviewed the Fund’s investment performance over time and compared that performance to other funds in its peer group. In making its comparisons, the Contracts Committee utilized data
provided by the Adviser and a report from Broadridge (“Broadridge”), an independent provider of investment company data. As reported by Broadridge, the Fund’s net asset value (“NAV”) total return ranked below the
median among all leveraged closed-end equity funds categorized by Broadridge as utility funds for the 1-, 3- and 5-year periods ended June 30, 2022. The Adviser provided the Contracts Committee with performance information for the Fund for the
1-, 3- and 5-year periods ended June 30, 2022, measured against two benchmarks: the Lipper Sector Peer Group Average (leveraged closed-end equity funds selected by Thomson
22
Reuters Lipper) and a composite of the Alerian U.S. Midstream
Energy Index, the MSCI USA Utilities Index, MSCI ACWI ex USA Utilities Index, the MSCI World Core Infrastructure Selected GICS Index, and the FTSE All World Telecommunications Index, weighted to reflect the Fund’s investments in the relevant
sectors covered by those indices (the “Composite Benchmark”).1 The Contracts Committee noted that, for the 3- and 5-year periods ended June 30, 2022, the
Fund’s NAV total return underperformed the Lipper Sector Peer Group Average while outperforming the average for the 1-year period ended June 30, 2022. For the same period, the Contracts Committee also noted that the Fund’s market value
total return outperformed the Lipper Sector Peer Group Average for the 1-, 3- and 5-year periods. The Contracts Committee noted that, for the period ended June 30, 2022, the Fund’s NAV total return trailed the Composite Benchmark for the
1-, 3- and 5-year periods, and that the Fund’s market value total return outperformed the Composite Benchmark for the 1-, 3- and 5-year periods. In evaluating the performance of the Fund, the Committee took account of the fact that in November
2019, the Fund had changed its investment policies to allow greater investment in infrastructure companies and to allow a higher proportion of its investments to be in the United States, and that this policy change had necessitated a repositioning
of the Fund’s portfolio, with a goal of providing more stable investment performance with less volatility over the long term. The Committee also considered that, as reported by the Adviser, the Fund performance for the 3- and 5-year
trailing periods ended June 30, 2022, was negatively impacted by deleveraging during the early phase of the COVID-19 pandemic, as well as the Fund’s exposure to midstream energy holdings that were particularly impacted by the pandemic during
that same period.
The Contracts Committee
noted that the Fund’s managed distribution plan, adopted in 2015, provides for the Fund to distribute all available investment income to shareholders and, if sufficient investment income is not available on a quarterly basis, to distribute
long-term capital gains and/or return capital to its shareholders in order to maintain the 35 cent per share quarterly distribution level.
Costs of services and profits realized. The Contracts Committee considered the reasonableness of the compensation paid to the Adviser, in both absolute and comparative terms, and also the profits realized by the Adviser and its affiliates from its
relationship with the Fund. To facilitate this analysis, the Contracts Committee retained Broadridge to furnish a report comparing the Fund’s management fee (defined as the sum of the advisory fee and administration fee) and other expenses to
the similar expenses of other utility funds selected by Broadridge (the “Broadridge expense group”). The Contracts Committee reviewed, among other things, information provided by Broadridge comparing the Fund’s contractual
management fee rate (at common asset levels) and actual management fee rate as a percentage of total assets and as a percentage of assets attributable to common stock to other funds in its Broadridge expense group. Based on the data provided on
management fee rates, the Contracts Committee noted that: (i) the Fund’s contractual management fee rate at a common asset level was higher than the median of its Broadridge expense group; (ii) the actual total expense rate was higher than the
median of its Broadridge expense group on the basis of assets attributable to common stock and on a total assets basis; and (iii) the actual management fee rate was higher than the median of its Broadridge expense group on the basis of assets
attributable to common stock and on a total asset basis.
In reviewing expense ratio comparisons between
the Fund and other funds in the peer group selected by Broadridge, the Contracts Committee considered leverage-related expenses separately from other expenses. The Contracts Committee noted that leverage-related expenses are not conducive to
direct comparisons between funds, because the leverage-related expenses on a fund’s income statement are significantly affected by the amount, type and tenor of the leverage used by each fund, among other factors, and considered the
Adviser’s report indicating that the tenor of the Fund’s leverage was the primary driver of the difference between the Fund’s investment-related expenses and those of other funds in the Broadridge peer group. Also, unlike all
the other expenses of the Fund (and other funds) which are incurred in return for a service, leverage expenses are incurred in return for the receipt of additional capital that is then invested by the Fund (and other funds using leverage) in
additional portfolio securities that produce revenue directly offsetting the leverage expenses. Accordingly, in evaluating the cost of the Fund’s
23
leverage, the Contracts Committee considered the specific
benefits to the Fund’s common shareholders of maintaining such leverage, noting that the Fund’s management and the Board regularly monitor the amount, form, terms and risks of the Fund’s leverage, and that such leverage has
continued to be accretive, generating net income for the Fund’s common shareholders over and above its cost.
The Adviser also furnished the Contracts
Committee with copies of its financial statements, and the financial statements of its parent company, Virtus Investment Partners, Inc. The Adviser also provided information regarding the revenue and expenses related to its management of the Fund,
and the methodology used by the Adviser in allocating such revenue and expenses among its various clients. In reviewing those financial statements and other materials, the Contracts Committee examined the profitability of the investment advisory
agreement to the Adviser and determined that the profitability of that contract was reasonable in light of the services rendered to the Fund. The Contracts Committee considered that the Adviser must be able to compensate its employees at competitive
levels in order to attract and retain high-quality personnel to provide high-quality service to the Fund. The Contracts Committee concluded that the investment advisory fee was the product of arm’s length bargaining and that it was fair and
reasonable to the Fund.
Economies of scale. The Contracts Committee considered whether the Fund has appropriately benefited from any economies of scale. The Contracts Committee encouraged the Adviser to continue to work towards reducing costs by leveraging
relationships with service providers across the complex of funds advised by the Adviser.
Comparison with other advisory contracts. The Contracts Committee also received comparative information from the Adviser with respect to its standard fee schedules for investment advisory clients other than the Fund. The Contracts Committee noted that, among
all accounts managed by the Adviser, the Fund’s advisory fee rate is higher than the Adviser’s standard fee schedule. However, the Contracts Committee noted that the services provided by the Adviser to the Fund are significantly more
extensive and demanding than the services provided by the Adviser to its non-investment company, institutional accounts. Specifically, in providing services to the Fund, the Contracts Committee considered that the Adviser needs to: (1) comply with
the 1940 Act, the Sarbanes-Oxley Act and other federal securities laws and New York Stock Exchange requirements, (2) provide for external reporting (including semi-annual reports to shareholders, annual audited financial statements and disclosure of
proxy voting), tax compliance and reporting (which are particularly complex for investment companies), requirements of Section 19 of the 1940 Act relating to the source of distributions, (3) prepare for and attend meetings of the Board and its
committees, (4) communicate with Board and committee members between meetings, (5) communicate with a retail shareholder base consisting of thousands of investors, (6) manage the use of financial leverage and respond to changes in the financial
markets and regulatory environment that could affect the amount and type of the Fund’s leverage and (7) respond to unanticipated issues in the financial markets or regulatory environment that can impact the Fund. Based on the fact that the
Adviser only provides the foregoing services to its investment company clients and not to its institutional account clients, the Contracts Committee concluded that the management fees charged to the Fund are reasonable compared to those charged to
other clients of the Adviser, when the nature and scope of the services provided to the Funds are taken into account. Furthermore, the Contracts Committee noted that many of the Adviser’s other clients would not be considered “like
accounts” of the Fund because these accounts are not of similar size and do not have the same investment objectives as, or possess other characteristics similar to, the Fund.
Indirect
benefits. The Contracts Committee considered possible sources of indirect benefits to the Adviser from its relationship to the Fund, including brokerage and soft dollar arrangements, and enhanced reputation that may
aid in obtaining new clients. In this regard, the Contracts Committee noted that the Fund does not utilize affiliates of the Adviser for brokerage purposes, that the Adviser does not use third-party soft dollar arrangements and that the Adviser has
continued to seek opportunities to reduce brokerage costs borne by the Fund.
24
Conclusion. Based
upon its evaluation of all material factors, including the foregoing, and assisted by the advice of independent legal counsel, the Contracts Committee concluded that the continued retention of the Adviser as investment adviser to the Fund was in the
best interests of the Fund and its shareholders. Accordingly, the Contracts Committee recommended to the full Board that the investment advisory agreement with the Adviser be continued for a one-year term ending March 1, 2024. On December 14, 2022,
the Contracts Committee presented its recommendations, and the criteria on which they were based, to the full Board, whereupon the Board, including all of the Independent Directors voting separately, accepted the Contracts Committee’s
recommendations and unanimously approved the continuation of the current investment advisory agreement with the Adviser for a one-year term ending March 1, 2024.
1 For periods prior to November 1, 2020, the benchmark did not include the MSCI World Core Infrastructure Selected GICS Index. For
periods prior to November 1, 2018, the composite benchmark was a weighted average of the Alerian MLP Index, the MSCI U.S. Utilities Index, the MSCI ACWI ex-U.S. Utilities Index, and the MSCI World Telecom Index.
25
INFORMATION ABOUT PROXY VOTING BY THE FUND
(Unaudited)
The Fund’s Board of Directors has adopted
proxy voting policies and procedures. These proxy voting policies and procedures may be changed at any time by the Fund’s Board of Directors. A description of the policies and procedures that the Fund uses to determine how to vote proxies
relating to portfolio securities is available without charge, upon request, by calling Fund Services toll-free at (866) 270-7598 or is available on the Fund’s website at www.dpimc.com/dpg or on the SEC’s website at www.sec.gov.
Information regarding how the Fund voted proxies
relating to portfolio securities during the most recent 12 month period ended June 30 is available without charge, upon request, by calling Fund Services toll-free at (866) 270-7598 or is available on the Fund’s website at www.dpimc.com/dpg or
on the SEC’s website at www.sec.gov.
INFORMATION ABOUT THE FUND’S PORTFOLIO
HOLDINGS (Unaudited)
The Fund files its complete schedule of portfolio
holdings with the SEC for its first and third fiscal quarters (January 31 and July 31) as an exhibit to Form NPORT-P. The Fund’s Form NPORT-P is available on the SEC’s website at www.sec.gov. In addition, the Fund’s schedule of
portfolio holdings is available without charge, upon request, by calling the Administrator toll-free at (866) 270-7598 or is available on the Fund’s website at www.dpimc.com/dpg.
ADDITIONAL INFORMATION (Unaudited)
Notice is hereby given in accordance with Section
23(c) of the 1940 Act that the Fund may from time to time purchase its shares of common stock in the open market.
REPORT ON ANNUAL MEETING OF SHAREHOLDERS
(Unaudited)
The Annual Meeting of Shareholders of the Fund was
held on March 6, 2023. The following is a description of each matter voted upon at the meeting and the number of votes cast on each matter:
| Shares
Voted For |
Shares
Withheld | ||
| 1. Election of director* | |||
| Director elected by the holders of the Fund’s common and preferred stock to serve until the Annual Meeting in the year 2026 and until her successor is duly elected and qualified: | |||
|
Mareilé B.
Cusack |
30,967,576 | 627,594 | |
| 2. Election of director* | |||
| Director elected by the holders of the Fund’s common and preferred stock to serve until the Annual Meeting in the year 2025 and until his successor is duly elected and qualified: | |||
|
David J. Vitale |
30,948,300 | 646,870 |
26
| Shares
Voted For |
Shares
Withheld | ||
| 3. Election of director* | |||
| Director elected by the holders of the Fund’s preferred stock to serve until the Annual Meeting in the year 2026 and until her successor is duly elected and qualified: | |||
|
Geraldine M.
McNamara |
1,600,000 | 0 | |
| *Directors whose term of office continued beyond this meeting are as follows: Donald C. Burke, Philip R. McLoughlin and Eileen A. Moran. | |||
27
| (b) | Not applicable. |
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
| (a) | A schedule of investments is included as part of the report to stockholders filed under Item 1(a) of this report. |
| (b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
During the period covered by this report, no purchases were made by or on behalf of the registrant or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act of 1934 (“the “Exchange Act”)) of shares or other units of any class of the registrant’s equity securities that is registered by the registrant pursuant to Section 12 of the Exchange Act.
Item 10. Submission of Matters to a Vote of Security Holders.
No changes to the procedures by which shareholders may recommend nominees to the registrant’s board of directors have been implemented after the registrant last provided disclosure in response to the requirements of Item 22(b)(15) of Schedule 14A (i.e., in the registrant’s proxy statement dated January 13, 2023) or this Item.
Item 11. Controls and Procedures.
| (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “1940 Act”)) are effective, based on an evaluation of those controls and procedures made as of a date within 90 days of the filing date of this report as required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) under the Exchange Act. |
| (b) | There has been no change in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13. Exhibits.
| (a)(1) | Not applicable. |
| (a)(2) |
| (a)(2)(1) | There were no written solicitations to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the Registrant to 10 or more persons. |
| (a)(2)(2) | There was no change in the Registrant’s independent public accountant during the period covered by the report. |
| (b) |
| (c) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| (Registrant) | Duff & Phelps Utility and Infrastructure Fund Inc. | |
| By (Signature and Title) | /s/ David D. Grumhaus, Jr. | |
| David D. Grumhaus, Jr., President and Chief Executive Officer (Principal Executive Officer) | ||
Date 6/23/23
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By (Signature and Title) | /s/ David D. Grumhaus, Jr. | |
| David D. Grumhaus, Jr., President and Chief Executive Officer (Principal Executive Officer) |
Date 6/23/23
| By (Signature and Title) | /s/ Alan M. Meder | |
| Alan M. Meder, Treasurer and Assistant Secretary (Principal Financial Officer) |
Date 6/23/23