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: 811-21432
Reaves Utility Income Fund
(Exact name of registrant as specified in charter)
1290 Broadway, Suite 1100, Denver, Colorado 80203
(Address of principal executive offices) (Zip code)
Karen S. Gilomen, Esq.
Reaves Utility Income Fund
1290 Broadway, Suite 1100
Denver, Colorado 80203
(Name and address of agent for service)
Registrant’s telephone number, including area code: 303-623-2577
Date of fiscal year end: October 31
Date of reporting period: November 1, 2017 - April 30, 2018
Item 1. Reports to Stockholders.
Section 19(B) Disclosure
April 30, 2018 (Unaudited)
Reaves Utility Income Fund (the “Fund”), acting pursuant to a Securities and Exchange Commission (“SEC”) exemptive order and with the approval of the Fund’s Board of Trustees (the “Board”), has adopted a plan, consistent with its investment objectives and policies to support a level distribution of income, capital gains and/or return of capital (the “Plan”). In accordance with the Plan, the Fund currently distributes $0.17 per share on a monthly basis.
The fixed amount distributed per share is subject to change at the discretion of the Fund’s Board. Under the Plan, the Fund will distribute all available investment income to its shareholders, consistent with its primary investment objectives and as required by the Internal Revenue Code of 1986, as amended (the “Code”). If sufficient investment income is not available on a monthly basis, the Fund will distribute long-term capital gains and/or return of capital to shareholders in order to maintain a level distribution. Each monthly distribution to shareholders is expected to be at the fixed amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases to enable the Fund to comply with the distribution requirements imposed by the Code.
Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of these distributions or from the terms of the Plan. The Fund’s total return performance on net asset value is presented in its financial highlights table.
The Board may amend, suspend or terminate the Fund’s Plan without prior notice if it deems such action to be in the best interest of the Fund or its shareholders. The suspension or termination of the Plan could have the effect of creating a trading discount (if the Fund’s stock is trading below net asset value) or widening an existing trading discount. The Fund is subject to risks that could have an adverse impact on its ability to maintain level distributions. Examples of potential risks include, but are not limited to, economic downturns impacting the markets, increased market volatility, companies suspending or decreasing corporate dividend distributions and changes in the Code.
Please refer to Additional Information for a cumulative summary of the Section 19(a) notices for the Fund’s current fiscal period. Section 19(a) notices for the Fund, as applicable, are available on the Reaves Utility Income Fund website www.utilityincomefund.com.
| Reaves Utility Income Fund | Table of Contents |
| Shareholder Letter | 2 |
| Statement of Investments | 6 |
| Statement of Assets and Liabilities | 10 |
| Statement of Operations | 11 |
| Statement of Changes in Net Assets | 12 |
| Statement of Cash Flows | 13 |
| Financial Highlights | 14 |
| Notes to Financial Statements | 16 |
| Additional Information | 24 |
| Semi-Annual Report | April 30, 2018 | 1 |
| Reaves Utility Income Fund | Shareholder Letter |
April 30, 2018 (Unaudited)
To our Shareholders:
Investment Portfolio Returns: 6 months ended April 30, 2018
Total net assets of the Fund were $1,499,507,000 at April 30, 2018, or $30.81 of net asset value (“NAV”) per common share. At October 31, 2017 net assets totaled $1,612,865,000 representing $33.14 of net asset value per common share. Changes in the market price of the Fund can and do differ from the underlying changes in the net asset value per common share. As a result the market return to common shares can be higher or lower than the NAV return. The fiscal 2018 half year market return for shareholders was -6.18%, as is reflected in the table below. The share price of the Fund traded at a discount of 8.60% to the NAV at 4/30/2018, an increase from the 6.40% discount at the beginning of the fiscal year.
Distributions to Common Shareholders
In March 2018 the Fund increased its annual distribution per share from $1.92 to $2.04, an increase of 6.25%. This is the tenth distribution increase since April 2004, the date of the Fund’s first distribution.
For the 2018 fiscal year the Fund expects total distributions to come from earned income and capital gains sufficient to avoid a distribution from return of capital or other capital sources. For any given month, however, part of the distribution may be temporarily classified as a return of capital given the irregular realization of capital gains over the course of the year.
Leverage Facility
The leverage facility, which does not require re-hypothecation (lending) of Fund assets, was increased by $125,000,000 on January 2, 2018. As a percentage of net assets, leverage increased from 19.84% at October 31, 2017 to 29.68% at April 30, 2018. The leverage ratio at October 31, 2017 is artificially low because it reflects the net proceeds of the rights offering, which expired on October 4, 2017 (please refer to Notes 4 of the accompanying Financial Statements), but does not reflect the incremental leverage added in January 2018. The leverage ratio at October 9, 2017 the day before rights offering settled was 26.81%. For details about the facility please refer to Note 4 of the accompanying financial statements.
| Period Ended April 30, 2018 | |||||
| Six Months | One Year | Three Years+ | Five Years+ | Since Inception+** | |
| Total investment return – Net Asset Value* | -3.92% | -4.33% | 6.17% | 8.13% | 11.04% |
| Total investment return – Market Price* | -6.18% | -13.71% | 5.12% | 7.04% | 9.98% |
| S&P 500 Utilities Index1 | -4.78% | 3.22% | 9.06% | 8.35% | 9.61% |
| Dow Jones Utility Average2 | -4.57% | 3.77% | 10.18% | 9.48% | 10.86% |
| + | Annualized |
| * | Assumes all dividends being reinvested |
| ** | Index data since 02/29/04 |
| 2 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Shareholder Letter |
April 30, 2018 (Unaudited)
| 1 | S&P 500 Utilities Index is a capitalization-weighted index containing 28 Electric and Gas Utility stocks (including multi-utilities and independent power producers). Prior to July 1996, this index included telecommunications equities. |
| 2 | The Dow Jones Utility Average is a price-weighted average of 15 utility stocks traded in the United States. |
Overview
Volatile and rising interest rates, wildfires in California, an unexpected and unfavorable Federal Energy Regulatory Commission (FERC) decision, and investor disappointment with a proposed acquisition affected the value of portfolio investments. The rising oil price resulted in a positive total return from the high-yielding energy equities in the portfolio. The fiscal year began with the 10-year U.S. Treasury yielding 2.38%, trading at 3.03% for one day on April 25th and closing at 2.95% on April 30th. Consistent with prior experience, rising rates stimulated investor selling of utilities and telecom companies purchased solely for their relatively high dividend yield. As expected, the Federal Reserve raised interest rates 25 basis points in March, and utilities rallied in March and April.
Utilities
California wildfires exacerbated the decline in the S&P 500 Utilities Index and the Fund’s portfolio given that three of the index’s largest components are California utilities which were also included in the Fund’s portfolio. California imputes liability, known as inverse condemnation, for property damages to utilities if their equipment is deemed responsible for fires whether or not they were negligent. Unrelated, the FERC unexpectedly proposed a rule reducing the allowed return for some regulated assets owned by utilities and master limited partnerships (MLPs). The rule disallowed the recovery of an income tax allowance in setting tariff rates for regulated cost-of-service pipelines. The price declined for Dominion Resources, a top-ten holding, largely because it had to finance future projects by issuing common stock rather than financing through its MLP.
The utility sector’s broad-based price decline was, in our view, attributable to investors who bought utilities primarily for yield and rotated away when yields rose. By focusing solely on the relationship between dividend yield and interest rates, investors miss sizable differences in growth opportunities. In our experience, growth utilities usually outperform once interest rate-related market declines end. The March - April recovery in utility prices was consistent with our previous experience.
Telecommunications
Cable and satellite broadcasters such as Comcast Corporation (“Comcast”), Charter Communications, Inc. (“Charter”) and AT&T, Inc. (“AT&T”) were sold this year as their customers abandoned them sooner than expected for internet-based alternatives like Netflix, Inc. and Amazon.com, Inc. Simultaneously, Comcast bid for UK-based satellite and media firm Sky PLC. We believe the bid demonstrated Comcast’s desire to build a more international media presence, and willingness to commit capital to content. The market punished this decision, as it dashed investor hopes for a large stock buyback. AT&T’s bid for Time Warner reflects the desire to have a direct relationship with the customer. The Department of Justice (DOJ) sued to block the merger in federal district court in Washington, D.C. On June 12th, the court rejected DOJ’s complaint and ruled completely in favor of AT&T. The merger has since closed. AT&T’s, Comcast’s and Charter’s price declines contributed to the portfolio’s weak performance.
| Semi-Annual Report | April 30, 2018 | 3 |
| Reaves Utility Income Fund | Shareholder Letter |
April 30, 2018 (Unaudited)
Energy
Energy investments, consisting of high-yielding integrated majors and midstream companies, made a solid contribution to performance from a combination of dividends and price appreciation. The FERC decision mentioned above sparked a negative market reaction that adversely affected the entire MLP sector and midstream companies. However, the operations of the Fund’s pipelines and MLP investments are largely unaffected, because their rates are negotiated and therefore not expected to be affected by the FERC order.
The strength in the oil price has been driven by fundamental supply/demand tightness. Global demand for oil has been very strong while economic conditions have improved over the past year. In our view, most equity valuations do not reflect the improving oil price outlook. Price/earnings multiples have declined during the oil recovery as investors seem to distrust the market. The Fund’s energy holdings are yielding in excess of 5% with the prospect of dividend increases and stock buy backs.
OUTLOOK
The balance of the proceeds from the rights offering were invested. The increased investment in ONEOK, Inc. and BCE Inc. brought them into the top-ten holdings. The competitive challenges in the cable industry motivated a partial sale of Charter.
Overall earnings and dividend growth expectations for the portfolio are largely unchanged. We continue to think interest rate increases will be moderate and reflect real economic growth. Utility dividend yields remain above the 10-year U.S. Treasury yield. Earnings growth and periodic dividend increases will enhance valuation in a climate of moderately rising interest rates. Based upon this view, we expect total portfolio returns will allow the Fund to comfortably meet its distribution requirement to shareholders.
Sincerely,
Ronald J. Sorenson, Chief Investment Officer, Chief Executive Officer
John P. Bartlett, Vice President, CFA
Sources of distributions to shareholders may include net investment income, net realized short-term capital gains, net realized long-term capital gains and return of capital. If a distribution includes anything other than net investment income, the Fund provides a Section 19(a) notice of the best estimate of its distribution sources at that time. Please refer to Additional Information for a cumulative summary of the Section 19(a) notices for the Fund’s current period. The actual amounts and sources of distributions for tax reporting purposes will depend upon the Fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. The estimates may not match the final tax characterization (for the full year’s distributions) contained in the shareholder’s Form 1099-DIV. Distribution payments are not guaranteed; distribution rates may vary.
You cannot invest directly in an index.
| 4 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Shareholder Letter |
April 30, 2018 (Unaudited)
Industry Allocation as of April 30, 2018
| * | Includes Money Market Funds and U.S. Treasury Obligations |
Holdings are subject to change
| Semi-Annual Report | April 30, 2018 | 5 |
| Reaves Utility Income Fund | Statement of Investments |
April 30, 2018 (Unaudited)
| SHARES | VALUE | |||||||
| COMMON STOCKS 124.70% | ||||||||
| Airlines 1.39% | ||||||||
| Delta Air Lines, Inc.(1) | 400,000 | $ | 20,888,000 | |||||
| Diversified Telecommunication Services 18.91% | ||||||||
| AT&T, Inc.(1) | 1,900,000 | 62,130,000 | ||||||
| BCE, Inc.(1) | 1,570,000 | 66,646,500 | ||||||
| CenturyLink, Inc. | 2,235,000 | 41,526,300 | ||||||
| TELUS Corp. | 410,000 | 14,673,079 | ||||||
| Verizon Communications, Inc.(1) | 1,802,600 | 88,958,310 | ||||||
| Zayo Group Holdings, Inc.(2) | 265,000 | 9,619,500 | ||||||
| 283,553,689 | ||||||||
| Electric Utilities 25.43% | ||||||||
| Avangrid, Inc. | 192,500 | 10,146,675 | ||||||
| Edison International(1) | 551,000 | 36,101,520 | ||||||
| Eversource Energy(1) | 735,000 | 44,283,750 | ||||||
| Fortis, Inc.(1) | 1,412,000 | 47,303,537 | ||||||
| NextEra Energy Partners LP(1) | 742,853 | 30,954,685 | ||||||
| NextEra Energy, Inc.(1) | 607,000 | 99,493,370 | ||||||
| Pinnacle West Capital Corp.(1) | 503,000 | 40,491,500 | ||||||
| PPL Corp. | 550,000 | 16,005,000 | ||||||
| Red Electrica Corp. SA | 500,000 | 10,433,667 | ||||||
| The Southern Co.(1) | 1,000,000 | 46,120,000 | ||||||
| 381,333,704 | ||||||||
| Energy Equipment & Services 0.20% | ||||||||
| Baker Hughes, a GE Company | 85,000 | 3,069,350 | ||||||
| Food Products 1.50% | ||||||||
| The Kraft Heinz Co.(1) | 400,000 | 22,552,000 | ||||||
| Gas Utilities 1.78% | ||||||||
| Atmos Energy Corp. | 178,000 | 15,466,420 | ||||||
| South Jersey Industries, Inc. | 361,100 | 11,157,990 | ||||||
| 26,624,410 | ||||||||
| Media 14.27% | ||||||||
| Altice USA, Inc.(2) | 1,284,000 | 22,983,600 | ||||||
| Charter Communications, Inc., Class A(1)(2)(3) | 202,000 | 54,800,580 | ||||||
| Comcast Corp., Class A(1) | 2,912,000 | 91,407,680 | ||||||
| Liberty Global PLC: | ||||||||
| Class A(2) | 175,000 | 5,274,500 | ||||||
| Class C(2) | 185,000 | 5,383,500 | ||||||
| Liberty Latin America Ltd., Class A(2) | 405,000 | 7,452,000 | ||||||
| 6 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Statement of Investments |
April 30, 2018 (Unaudited)
| SHARES | VALUE | |||||||
| Media (continued) | ||||||||
| Time Warner, Inc. | 282,000 | $ | 26,733,600 | |||||
| 214,035,460 | ||||||||
| Multi-Utilities 28.24% | ||||||||
| CMS Energy Corp.(1) | 541,000 | 25,529,790 | ||||||
| Dominion Energy, Inc.(1) | 1,283,500 | 85,429,760 | ||||||
| DTE Energy Co.(1) | 1,050,000 | 110,670,000 | ||||||
| Infraestructura Energetica Nova SAB de CV | 900,000 | 3,965,822 | ||||||
| National Grid PLC, Sponsored ADR | 1 | 58 | ||||||
| NiSource, Inc. | 893,500 | 21,792,465 | ||||||
| Public Service Enterprise Group, Inc. | 410,000 | 21,381,500 | ||||||
| Sempra Energy(1) | 910,000 | 101,738,000 | ||||||
| WEC Energy Group, Inc.(1) | 823,700 | 52,947,436 | ||||||
| 423,454,831 | ||||||||
| Oil, Gas & Consumable Fuels 15.53% | ||||||||
| BP PLC, Sponsored ADR | 226,000 | 10,077,340 | ||||||
| Exxon Mobil Corp. | 300,000 | 23,325,000 | ||||||
| ONEOK, Inc.(1) | 1,100,000 | 66,242,000 | ||||||
| Royal Dutch Shell PLC: | ||||||||
| Class A | 300,000 | 10,453,286 | ||||||
| Class A, Sponsored ADR(1) | 1,300,000 | 90,870,000 | ||||||
| The Williams Cos, Inc.(1) | 1,000,000 | 25,730,000 | ||||||
| TransCanada Corp. | 144,000 | 6,112,800 | ||||||
| 232,810,426 | ||||||||
| Real Estate Investment Trusts (REITS) 5.72% | ||||||||
| American Tower Corp. | 220,000 | 29,999,200 | ||||||
| Annaly Capital Management, Inc.(1) | 2,907,000 | 30,145,590 | ||||||
| Crown Castle International Corp.(1) | 230,000 | 23,200,100 | ||||||
| Uniti Group, Inc. | 131,140 | 2,363,143 | ||||||
| 85,708,033 | ||||||||
| Road & Rail 4.30% | ||||||||
| Union Pacific Corp.(1) | 482,000 | 64,409,660 | ||||||
| Water Utilities 4.77% | ||||||||
| American Water Works Co., Inc.(1) | 789,300 | 68,337,594 | ||||||
| Aqua America, Inc. | 90,000 | 3,163,500 | ||||||
| 71,501,094 | ||||||||
| Semi-Annual Report | April 30, 2018 | 7 |
| Reaves Utility Income Fund | Statement of Investments |
April 30, 2018 (Unaudited)
| SHARES | VALUE | |||||||
| Wireless Telecommunication Services 2.66% | ||||||||
| T-Mobile US, Inc.(1)(2) | 660,000 | $ | 39,936,600 | |||||
| TOTAL COMMON STOCKS | ||||||||
| (Cost $1,562,111,016) | 1,869,877,257 | |||||||
| LIMITED PARTNERSHIPS 2.74% | ||||||||
| Oil, Gas & Consumable Fuels 2.74% | ||||||||
| Bastion Energy LLC (Anglo Dutch)(4)(5) | 2,462,783 | |||||||
| Enterprise Products Partners LP(1) | 1,310,000 | 35,160,400 | ||||||
| Talara Opportunities II, LP(2)(4)(5)(6) | 3,442,500 | |||||||
| 41,065,683 | ||||||||
| TOTAL LIMITED PARTNERSHIPS | ||||||||
| (Cost $30,590,051) | 41,065,683 | |||||||
| BOND RATING MOODY/S&P | PRINCIPAL AMOUNT | VALUE | ||||||||
| CORPORATE BONDS 0.10% | ||||||||||
| Diversified Telecommunication Services 0.10% | ||||||||||
| Frontier Communications Corp., 7.125%, | ||||||||||
| 01/15/2023 | Caa1/B- | $ | 2,000,000 | 1,440,000 | ||||||
| TOTAL CORPORATE BONDS | ||||||||||
| (Cost $1,923,760) | 1,440,000 | |||||||||
| SHARES | VALUE | |||||||||
| MONEY MARKET FUNDS 0.32% | ||||||||||
| Federated Treasury Obligations Money Market Fund, 1.550% (7-Day Yield) | 4,858,756 | 4,858,756 | ||||||||
| TOTAL MONEY MARKET FUNDS | ||||||||||
| (Cost $4,858,756) | 4,858,756 | |||||||||
| U.S. TREASURY OBLIGATIONS 1.66% | ||||||||||
| U.S. Treasury Bill 1.555%, 05/17/2018(7) | 5,000,000 | 4,996,472 | ||||||||
| U.S. Treasury Bill 1.770%, 08/16/2018(7) | 20,000,000 | 19,890,366 | ||||||||
| 24,886,838 | ||||||||||
| TOTAL U.S. TREASURY OBLIGATIONS | ||||||||||
| (Cost $24,891,326) | 24,886,838 | |||||||||
| 8 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Statement of Investments |
April 30, 2018 (Unaudited)
| VALUE | ||||
| TOTAL INVESTMENTS - 129.52% | ||||
| (Cost $1,624,374,909) | $ | 1,942,128,534 | ||
| LEVERAGE FACILITY - (29.68%) | (445,000,000 | ) | ||
| OTHER ASSETS IN EXCESS OF LIABILITIES - 0.16% | 2,378,650 | |||
| NET ASSETS - 100.00% | $ | 1,499,507,184 | ||
| (1) | Pledged security; a portion or all of the security is pledged as collateral for borrowings as of April 30, 2018. (See Note 4) |
| (2) | Non-Income Producing Security. |
| (3) | This security is marked to cover the unfunded commitment. (See Note 1) |
| (4) | Restricted security. Investment represents a non-public partnership interest and is not unitized. (See Note 5) |
| (5) | Security fair valued by management, pursuant to procedures approved by the Board of Trustees, using significant unobservable inputs. (See Note 1) |
| (6) | Represents funded portion of total outstanding commitments. See Note 1 for information on any unfunded commitments. |
| (7) | Rate shown represents the bond equivalent yield to maturity at date of purchase. |
Common Abbreviations:
ADR - American Depositary Receipt
Co. - Company
Corp. - Corporation
Cos. - Companies
Inc. - Incorporated
LLC - Limited Liability Company
LP - Limited Partnership
PLC - Public Limited Company
SAB de CV - A variable rate company
See Notes to Financial Statements.
| Semi-Annual Report | April 30, 2018 | 9 |
| Reaves Utility Income Fund | Statement of Assets and Liabilities |
April 30, 2018 (Unaudited)
| ASSETS: | ||||
| Investments, at value (Cost $1,624,374,909) | $ | 1,942,128,534 | ||
| Foreign currency, at value (Cost $65,778) | 65,778 | |||
| Dividends receivable | 4,101,685 | |||
| Interest receivable | 41,933 | |||
| Receivable for investments sold | 65,882 | |||
| Other assets | 70,323 | |||
| Total Assets | 1,946,474,135 | |||
| LIABILITIES: | ||||
| Loan payable | 445,000,000 | |||
| Interest payable on loan outstanding | 394,544 | |||
| Payable for investments purchased | 109,663 | |||
| Accrued investment advisory fees | 923,658 | |||
| Accrued administration fees | 425,685 | |||
| Accrued trustees’ fees | 42,298 | |||
| Accrued chief compliance officer fees | 3,090 | |||
| Other payables and accrued expenses | 68,013 | |||
| Total Liabilities | 446,966,951 | |||
| Total Commitments for Contingencies (Notes 1 and 8) | ||||
| Net Assets Applicable to Common Shareholders | $ | 1,499,507,184 | ||
| COMPOSITION OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES: | ||||
| Paid-in capital | $ | 1,137,884,083 | ||
| Overdistributed net investment income | (31,599,171 | ) | ||
| Accumulated net realized gain | 75,469,080 | |||
| Net unrealized appreciation | 317,753,192 | |||
| Net Assets Applicable to Common Shareholders | $ | 1,499,507,184 | ||
| Shares of common stock outstanding of no par value, unlimited shares authorized | 48,670,001 | |||
| Net asset value per common share | $ | 30.81 | ||
See Notes to Financial Statements.
| 10 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Statement of Operations |
For the Six Months Ended April 30, 2018 (Unaudited)
| INVESTMENT INCOME: | ||||
| Dividends (Net of foreign withholding taxes of $894,989) | $ | 36,047,162 | ||
| Interest on investment securities | 649,461 | |||
| Total Investment Income | 36,696,623 | |||
| EXPENSES: | ||||
| Interest on loan | 5,359,661 | |||
| Investment advisory fees | 5,649,191 | |||
| Administration fees | 2,603,540 | |||
| Chief compliance officer fees | 19,340 | |||
| Trustees' fees | 95,474 | |||
| Miscellaneous fees | 164,172 | |||
| Total Expenses | 13,891,378 | |||
| Net Investment Income | 22,805,245 | |||
| Net realized gain/(loss) on: | ||||
| Investment securities | 38,470,788 | |||
| Foreign currency transactions | (41,569 | ) | ||
| Change in unrealized appreciation/(depreciation) of: | ||||
| Investment securities | (127,385,268 | ) | ||
| Translation of assets and liabilities denominated in foreign currencies | 3,277 | |||
| Net loss on investments and foreign currency transactions | (88,952,772 | ) | ||
| Net Decrease in Net Assets Attributable to Common Shares from Operations | $ | (66,147,527 | ) | |
See Notes to Financial Statements.
| Semi-Annual Report | April 30, 2018 | 11 |
| Reaves Utility Income Fund | Statement of Changes in Net Assets |
For the Six Months Ended April 30, 2018 (Unaudited) | For the Year Ended October 31, 2017 | |||||||
| COMMON SHAREHOLDER OPERATIONS: | ||||||||
| Net investment income | $ | 22,805,245 | $ | 35,242,453 | ||||
| Net realized gain | 38,429,219 | 38,417,343 | ||||||
| Long-term capital gains from other investment companies | – | – | ||||||
| Change in unrealized appreciation/(depreciation) | (127,381,991 | ) | 93,308,718 | |||||
| Net increase/(decrease) in net assets attributable to common shares from operations | (66,147,527 | ) | 166,968,514 | |||||
| DISTRIBUTIONS TO COMMON SHAREHOLDERS: | ||||||||
| From net investment income | (47,209,901 | ) | (36,543,080 | ) | ||||
| From net realized gains | – | (63,249,077 | ) | |||||
| Net decrease in net assets from distributions to common shareholders | (47,209,901 | ) | (99,792,157 | ) | ||||
| CAPITAL SHARE TRANSACTIONS: | ||||||||
| Proceeds from rights offering, net of offering cost | – | 428,014,151 | ||||||
| Proceeds from common shares issued to shareholders from reinvestment of dividends | – | 1,098,183 | ||||||
| Net increase from capital share transactions | – | 429,112,334 | ||||||
| Net Increase/(Decrease) in Net Assets Attributable to Common Shares | (113,357,428 | ) | 496,288,691 | |||||
| NET ASSETS ATTRIBUTABLE TO COMMON SHAREHOLDERS: | ||||||||
| Beginning of period | $ | 1,612,864,612 | $ | 1,116,575,921 | ||||
| End of period* | $ | 1,499,507,184 | $ | 1,612,864,612 | ||||
| *Including overdistributed net investment income of: | $ | (31,599,171 | ) | $ | (7,194,515 | ) | ||
See Notes to Financial Statements.
| 12 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Statement of Cash Flows |
For the Six Months Ended April 30, 2018 (Unaudited)
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
| Net decrease in net assets from operations | $ | (66,147,527 | ) | |
| Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities: | ||||
| Purchase of investment securities | (583,948,674 | ) | ||
| Proceeds from disposition of investment securities | 235,289,351 | |||
| Net purchases of short-term investment securities | 249,757,367 | |||
| Premium amortization | (360,890 | ) | ||
| Net realized (gain)/loss on: | ||||
| Investment securities | (38,470,788 | ) | ||
| Net change in unrealized (appreciation)/depreciation on: | ||||
| Investments | 127,385,268 | |||
| (Increase)/Decrease in assets: | ||||
| Dividends receivable | (1,759,427 | ) | ||
| Interest receivable | 5,685 | |||
| Other assets | (70,323 | ) | ||
| Increase/(Decrease) in liabilities: | ||||
| Interest payable on loan outstanding | 153,833 | |||
| Accrued investment advisory fees | 35,345 | |||
| Accrued administration fees | 16,289 | |||
| Accrued trustees' fees | (1,634 | ) | ||
| Accrued chief compliance officer fees | (160 | ) | ||
| Accrued expenses for rights offering costs (See Note 3) | (347,647 | ) | ||
| Other payables and accrued expenses | 22,829 | |||
| Net Cash Used in Operating Activities | (78,441,103 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
| Proceeds from bank borrowing | 125,000,000 | |||
| Cash distributions paid on Common Shares | (47,209,901 | ) | ||
| Net Cash Provided by Financing Activities | 77,790,099 | |||
| Net Decrease in cash | (651,004 | ) | ||
| Cash and Foreign currency, beginning of year | $ | 716,782 | ||
| Foreign currency, end of year | $ | 65,778 | ||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||
| Cash paid during the period for interest from bank borrowing | $ | 5,205,828 | ||
See Notes to Financial Statements.
| Semi-Annual Report | April 30, 2018 | 13 |
Reaves Utility Income Fund
| PER COMMON SHARE OPERATING PERFORMANCE: |
| Net asset value per share, beginning of period |
| INCOME/LOSS FROM INVESTMENT OPERATIONS: |
| Net investment income(1) |
| Net realized and unrealized gain/(loss) |
| Total income/(loss) from investment operations |
| DISTRIBUTIONS TO COMMON SHAREHOLDERS: |
| From net investment income |
| From net realized gains |
| Total distributions to common shareholders |
| Change due to rights offering |
| Total distributions and rights offering |
| Net asset value per common share, end of period |
| Market price per common share, end of period |
| Total Investment Return - Net Asset Value(3) |
| Total Investment Return - Market Price(3) |
| RATIOS AND SUPPLEMENTAL DATA |
| Net assets attributable to common shares, end of period (000s) |
| Ratio of expenses to average net assets attributable to common shares |
| Ratio of expenses excluding interest expense to average net assets attributable to common shares |
| Ratio of net investment income to average net assets attributable to common shares |
| Portfolio turnover rate |
| BORROWINGS AT END OF PERIOD |
| Aggregate amount outstanding (000s) |
| Asset coverage per $1,000 (000s) |
| (1) | Calculated using average common shares outstanding. |
| (2) | Effect of rights offerings for common shares at a price below market price. (See Note 3) |
| (3) | Total investment return is calculated assuming a purchase of a common share at the opening on the first day and a sale at closing on the last day of each period reported. Total investment return excludes any sales charges. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. |
| (4) | Not Annualized. |
| (5) | Annualized. |
See Notes to Financial Statements.
| 14 | www.utilityincomefund.com |
Financial Highlights
For the Six Months Ended 4/30/18 (Unaudited) | For the Year Ended 10/31/17 | For the Year Ended 10/31/16 | For the Year Ended 10/31/15 | For the Year Ended 10/31/14 | For the Year Ended 10/31/13 | |||||||||||||||||
| $ | 33.14 | $ | 32.53 | $ | 30.29 | $ | 32.71 | $ | 27.91 | $ | 25.66 | |||||||||||
| 0.47 | 1.00 | 0.84 | 0.84 | 1.80 | 1.14 | |||||||||||||||||
| (1.83 | ) | 3.87 | 3.89 | (1.47 | ) | 4.64 | 2.69 | |||||||||||||||
| (1.36 | ) | 4.87 | 4.73 | (0.63 | ) | 6.44 | 3.83 | |||||||||||||||
| (0.97 | ) | (1.04 | ) | (0.99 | ) | (0.89 | ) | (1.50 | ) | (1.51 | ) | |||||||||||
| – | (1.80 | ) | (0.83 | ) | (0.90 | ) | (0.14 | ) | (0.07 | ) | ||||||||||||
| (0.97 | ) | (2.84 | ) | (1.82 | ) | (1.79 | ) | (1.64 | ) | (1.58 | ) | |||||||||||
| – | (1.42 | )(2) | (0.67 | )(2) | – | – | – | |||||||||||||||
| (0.97 | ) | (4.26 | ) | (2.49 | ) | (1.79 | ) | (1.64 | ) | (1.58 | ) | |||||||||||
| $ | 30.81 | $ | 33.14 | $ | 32.53 | $ | 30.29 | $ | 32.71 | $ | 27.91 | |||||||||||
| $ | 28.16 | $ | 31.02 | $ | 30.00 | $ | 29.67 | $ | 30.88 | $ | 25.92 | |||||||||||
| (3.92 | )%(4) | 11.04 | % | 14.31 | % | (1.78 | )% | 24.24 | % | 15.73 | % | |||||||||||
| (6.18 | )%(4) | 12.70 | % | 7.62 | % | 1.91 | % | 26.29 | % | 9.05 | % | |||||||||||
| $ | 1,499,507 | $ | 1,612,865 | $ | 1,116,576 | $ | 878,952 | $ | 949,088 | $ | 809,731 | |||||||||||
| 1.78 | %(5) | 1.66 | % | 1.59 | % | 1.62 | % | 1.71 | % | 1.71 | % | |||||||||||
| 1.09 | %(5) | 1.09 | % | 1.14 | % | 1.15 | % | 1.16 | % | 1.21 | % | |||||||||||
| 2.93 | %(5) | 2.97 | % | 2.66 | % | 2.67 | % | 6.10 | % | 4.33 | % | |||||||||||
| 13 | %(4) | 15 | % | 34 | % | 32 | % | 26 | % | 30 | % | |||||||||||
| $ | 445,000 | $ | 320,000 | $ | 320,000 | $ | 320,000 | $ | 290,000 | $ | 290,000 | |||||||||||
| $ | 4,370 | $ | 6,040 | $ | 4,489 | $ | 3,747 | $ | 4,273 | $ | 3,792 | |||||||||||
| Semi-Annual Report | April 30, 2018 | 15 |
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2018 (Unaudited)
1. SIGNIFICANT ACCOUNTING AND OPERATING POLICIES
Reaves Utility Income Fund (the “Fund”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a closed-end management investment company. The Fund was organized under the laws of the state of Delaware by an Agreement and Declaration of Trust dated September 15, 2003. The Fund’s investment objective is to provide a high level of after-tax income and total return consisting primarily of tax-advantaged dividend income and capital appreciation. The Fund is a diversified investment company for purpose of the 1940 Act. The Agreement and Declaration of Trust provides that the Trustees may authorize separate classes of shares of beneficial interest. The Fund’s common shares are listed on the NYSE American LLC (the “Exchange”) and trade under the ticker symbol “UTG”.
The Fund may have elements of risk, including the risk of loss of equity. There is no assurance that the investment process will consistently lead to successful results. An investment concentrated in sectors and industries may involve greater risk and volatility than a more broadly diversified investment.
The Fund invests a significant portion of its total assets in securities of utility companies, which may include companies in the electric, gas, water, and telecommunications sectors, as well as other companies engaged in other infrastructure operations. This may make the Fund particularly susceptible to adverse economic, political or regulatory occurrences affecting those sectors. As concentration of the Fund’s investments in a sector increases, so does the potential for fluctuation in the net asset value of common shares.
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements is in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), which requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The Fund is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies in the Financial Accounting Standards Board Accounting Standards Codification Topic 946.
Investment Valuation: The net asset value per common share (“NAV”) of the Fund is determined no less frequently than daily, on each day that the Exchange is open for trading, as of the close of regular trading on the Exchange (normally 4:00 p.m. New York time). The NAV is determined by dividing the value of the Fund’s total assets less its liabilities by the number of shares outstanding.
The Board of Trustees (the “Board”) has established the following procedures for valuation of the Fund’s asset values under normal market conditions. For domestic equity securities, foreign equity securities and funds that are traded on an exchange, the market price is usually the closing sale or official closing price on that exchange. In the case of a domestic and foreign equity security not traded on an exchange, or if such closing prices are not otherwise available, the mean of the closing bid and ask price will be used. The fair value for debt obligations is generally the evaluated mean price supplied by the Fund’s primary and/or secondary independent third-party pricing service, approved by the Board. An evaluated mean is considered to be a daily fair valuation price which may use a matrix, formula or other objective method that takes into consideration various factors, including, but not limited to: structured product markets, fixed income markets, interest rate movements, new issue information, trading, cash flows, yields, spreads, credit quality and other pertinent information as determined by the pricing services evaluators and methodologists. If the Fund’s primary and/or secondary independent third-party pricing services are unable to supply a price, or if the price supplied is deemed to be unreliable, the market price may be determined using quotations received from one or more broker-dealers that make a market in the security. Investments in non-exchange traded funds are fair valued at their respective net asset values.
| 16 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2018 (Unaudited)
Securities, for which market quotations or valuations are not available, are valued at fair value in good faith by or at the direction of the Board. When applicable, fair value of an investment is determined by the Fund’s Fair Valuation Committee as a designee of the Board. In fair valuing the Fund’s investments, consideration is given to several factors, which may include, among others, the following: the fundamental business data relating to the issuer, borrower or counterparty; an evaluation of the forces which influence the market in which the investments are purchased and sold; the type, size and cost of the investment; the information as to any transactions in or offers for the investment; the price and extent of public trading in similar securities (or equity securities) of the issuer, or comparable companies; the coupon payments, yield data/cash flow data; the quality, value and saleability of collateral, if any, securing the investment; the business prospects of the issuer, borrower or counterparty, as applicable, including any ability to obtain money or resources from a parent or affiliate and an assessment of the issuer’s, borrower’s or counterparty’s management; the prospects for the industry of the issuer, borrower or counterparty, as applicable, and multiples (of earnings and/or cash flow) being paid for similar businesses in that industry; one or more non-affiliated independent broker quotes for the sale price of the portfolio security; and other relevant factors.
The Fund discloses the classification of its fair value measurements following a three-tier hierarchy based on the inputs used to measure fair value. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available.
Various inputs are used in determining the value of the Fund’s investments as of the end of the reporting period. When inputs used fall into different levels of the fair value hierarchy, the level in the hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The designated input levels are not necessarily an indication of the risk or liquidity associated with these investments. These inputs are categorized in the following hierarchy under applicable financial accounting standards:
| Level 1 – | Unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities that the Fund has ability to access at the measurement date; |
| Level 2 – | Quoted prices which are not active, quoted prices for similar assets or liabilities in active markets or inputs other than quoted prices that are observable (either directly or indirectly) for substantially the full term of the asset or liability; and |
| Semi-Annual Report | April 30, 2018 | 17 |
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2018 (Unaudited)
| Level 3 – | Significant unobservable prices or inputs (including the Fund’s own assumptions in determining the fair value of investments) where there is little or no market activity for the asset or liability at the measurement date. |
The following is a summary of the Fund’s investments in the fair value hierarchy as of April 30, 2018:
| Valuation Inputs | ||||||||||||||||
| Investments in Securities at Value* | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Common Stocks | $ | 1,869,877,257 | $ | – | $ | – | $ | 1,869,877,257 | ||||||||
| Limited Partnerships | 35,160,400 | – | 5,905,283 | 41,065,683 | ||||||||||||
| Corporate Bonds | – | 1,440,000 | – | 1,440,000 | ||||||||||||
| Money Market Funds | 4,858,756 | – | – | 4,858,756 | ||||||||||||
| U.S. Treasury Obligations | – | 24,886,838 | – | 24,886,838 | ||||||||||||
| Total | $ | 1,909,896,413 | $ | 26,326,838 | $ | 5,905,283 | $ | 1,942,128,534 | ||||||||
| * | See Statement of Investments for industry classifications. |
During the six months ended April 30, 2018, there were no transfers between Level 1 and 2 securities. The Fund evaluates transfers into or out of Level 1, Level 2 and Level 3 as of the end of the reporting period.
The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:
Investments in Securities at Value |
Balance as of 10/31/2017 | Return of Capital | Realized gain/(loss) | Change in unrealized appreciation/ (depreciation) | Purchases | Sales Proceeds | Transfer in and/or (out) of Level 3 | 4/30/2018 | Net change in unrealized appreciation/ (depreciation) attributable to Level 3 investments held at 4/30/2018 |
| Limited Partnerships | $7,705,054 | $(1,954,782) | $– | $155,011 | $– | $– | $– | $5,905,283 | $155,011 |
| Total | $7,705,054 | $(1,954,782) | $– | $155,011 | $– | $– | $– | $5,905,283 | $155,011 |
| 18 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2018 (Unaudited)
The table below provides additional information about the Level 3 fair value measurements as of April 30, 2018:
| Investment Type | Fair Value as of 4/30/18 |
Valuation Technique* | Unobservable Input** | Amount |
| Discount Rate | 12.5% | |||
| Decline Rate | 25% | |||
| Limited Partnership | $2,462,783 | Discounted Cash Flow | Discount for Lack of Marketability | 15% |
| Limited Partnership | 3,442,500 | Market Multiple Approach | Commodity Price Multiple | 0.85x |
| Total | $5,905,283 |
| * | The fair valuation procedures used to value the Level 3 investments are in accordance with the Fund's Board-approved fair valuation policies. |
| ** | A change in the unobservable input may result in a significant change to the value of the investment as follows: |
| Unobservable Input | Impact to Value if Input Increases |
Impact to Value if Input Decreases |
| Discount Rate | Decrease | Increase |
| Decline Rate | Decrease | Increase |
| Discount for Lack of Marketability | Decrease | Increase |
| Commodity Price Multiple | Increase | Decrease |
Commitments for Contingencies: As of April 30, 2018, the Fund had an unfunded capital commitment of $948,064 representing an agreement which obligates the Fund to meet capital calls in the future. Capital calls can only be made if and when certain requirements have been fulfilled; thus, the timing and the amount of such capital calls cannot readily be determined. The unfunded commitment is fair valued by management and any unrealized appreciation or depreciation is included in the Statement of Assets and Liabilities and any change in unrealized appreciation or depreciation is included in the Statement of Operations.
Foreign Securities: The Fund may directly purchase securities of foreign issuers. Investing in securities of foreign issuers involves special risks not typically associated with investing in securities of U.S. issuers. The risks include possible revaluation of currencies, the inability to repatriate foreign currency, less complete financial information about companies and possible future adverse political and economic developments. Moreover, securities of many foreign issuers and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. issuers.
Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Investment valuations and other assets and liabilities initially expressed in foreign currencies are converted each business day the Exchange is open into U.S. dollars based upon current exchange rates. Prevailing foreign exchange rates may generally be obtained at the close of the Exchange (normally, 4:00 p.m. New York time). The portion of realized and unrealized gains or losses on investments due to fluctuations in foreign currency exchange rates is not separately disclosed and is included in realized and unrealized gains or losses on investments, when applicable. As of and during the six months ended April 30, 2018, the Fund had no outstanding forward foreign currency contracts.
| Semi-Annual Report | April 30, 2018 | 19 |
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2018 (Unaudited)
Distributions to Shareholders: The Fund intends to make a level distribution each month to common shareholders after payment of interest on any outstanding borrowings. The level dividend rate may be modified by the Board of Trustees from time to time. Any net capital gains earned by the Fund are distributed at least annually. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income Taxes: The Fund’s policy is to comply with the provisions of the Code applicable to regulated investment companies and to distribute all of its taxable income and gains to its shareholders. Therefore, no federal income tax provision is required.
Investment Transactions: Investment security transactions are accounted for as of trade date. Dividend income is recorded on the ex-dividend date, or as soon as information is available to the Fund. Interest income, which includes amortization of premium and accretion of discount, is accrued as earned. Realized gains and losses from investment transactions are determined using the first-in first-out basis for both financial reporting and income tax purposes.
2. INCOME TAXES AND TAX BASIS INFORMATION
The Fund complies with the requirements under Subchapter M of the Code applicable to regulated investment companies and intends to distribute substantially all of its net taxable income and net capital gains, if any, each year. The Fund is not subject to income taxes to the extent such distributions are made.
As of and during the six months ended April 30, 2018, the Fund did not have a liability for any unrecognized tax benefits in the accompanying financial statements. The Fund files U.S. federal, state, and local tax returns as required. The Fund’s tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return but which can be extended to six years in certain circumstances. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.
Net investment income (loss) and net realized gain (loss) may differ for financial statement and tax purposes. The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which the income or realized gain was recorded by the Fund.
The amounts and characteristics of tax basis distributions and composition of distributable earnings/(accumulated losses) are finalized at fiscal year-end and are not available for the six months ended April 30, 2018.
| 20 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2018 (Unaudited)
The tax character of the distributions paid by the Fund were as follows:
For the Year Ended October 31, 2017 | ||||
| Distributions paid from: | ||||
| Ordinary Income | $ | 36,543,080 | ||
| Long-Term Capital Gain | 63,249,077 | |||
| Total | $ | 99,792,157 | ||
As of April 30, 2018, net unrealized appreciation/depreciation of investments based on federal tax cost were as follows:
| Gross appreciation (excess of value over tax cost) | $ | 405,564,446 | ||
| Gross depreciation (excess of tax cost over value) | (66,949,624 | ) | ||
| Net unrealized appreciation | 338,614,822 | |||
| Cost of investments for income tax purposes | $ | 1,603,513,712 |
3. CAPITAL TRANSACTIONS
Common Shares: There are an unlimited number of no par value common shares of beneficial interest authorized.
In a rights offering which expired October 4, 2017, shareholders exercised rights to purchase 14,314,706 shares at $29.93 per share for proceeds, net of expenses, of $428,014,151. The subscription price of $29.93 per share was established on October 4, 2017, which represented 95% of the reported market price per share, based on the average of the last reported sales price of a common share on the Exchange for the five trading days preceding October 4, 2017.
Transactions in common shares were as follows:
For the Six Months Ended April 30, 2018 | For the Year Ended October 31, 2017 | |||||||
| Common Stock outstanding - beginning of period | 48,670,001 | 34,323,571 | ||||||
| Common Stock issued from rights offering | – | 14,314,706 | ||||||
| Common Stock issued as reinvestment of dividends | – | 31,724 | ||||||
| Common Stock outstanding - end of period | 48,670,001 | 48,670,001 | ||||||
4. BORROWINGS
On December 8, 2016, the Fund entered into a Credit Agreement with Pershing LLC. Under the terms of the Credit Agreement, the Fund was allowed to borrow up to $330,000,000. Interest was charged at a rate of the one month LIBOR (“London Interbank Offered Rate”) plus 1.10%. Borrowings under the Credit Agreement are secured by assets of the Fund that are held by the Fund’s custodian in a separate account (the “pledged collateral”). Borrowing commenced under the terms of the Credit Agreement on December 13, 2016. Effective January 2, 2018, the Credit Agreement with Pershing LLC, was amended to allow the Fund to increase the amount allowed to be borrowed up to $455,000,000, at an interest rate of one month LIBOR plus 1.00%.
| Semi-Annual Report | April 30, 2018 | 21 |
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2018 (Unaudited)
For the six months ended April 30, 2018, the average amount borrowed under the Credit Agreement was $402,196,197, at an average rate of 2.64%. As of April 30, 2018, the amount of outstanding borrowings was $445,000,000, the interest rate was 2.91% and the amount of pledged collateral was $707,834,064.
5. RESTRICTED SECURITIES
As of April 30, 2018, investments in securities included issues that are considered restricted. Restricted securities are often purchased in private placement transactions, are not registered under the Securities Act of 1933, may have contractual restrictions on resale, and may be valued under methods approved by the Board of Trustees as reflecting fair value.
Restricted securities as of April 30, 2018 were as follows:
| Description | Acquisition Date(s) | Cost | Market Value | Market Value as Percentage of Net Assets | |||||||||
| Bastion Energy LLC (Anglo Dutch) | 7/30/2015 | $ | – | $ | 2,462,783 | 0.16 | % | ||||||
| Talara Opportunities II, LP | 8/30/2013-7/24/2015 | 4,051,936 | 3,442,500 | 0.23 | % | ||||||||
| TOTAL | $ | 4,051,936 | $ | 5,905,283 | 0.39 | % | |||||||
6. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term securities, for the six months ended April 30, 2018, aggregated $568,885,195 and $233,473,201, respectively.
7. MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Reaves Asset Management (“Reaves”) serves as the Fund’s investment adviser pursuant to an Investment Advisory and Management Agreement (the “Advisory Agreement”) with the Fund. As compensation for its services to the Fund, Reaves receives an annual investment advisory fee of 0.575% based on the Fund’s average daily total assets, computed daily and payable monthly.
ALPS Fund Services, Inc. (“ALPS”) serves as the Fund’s administrator pursuant to an Administration, Bookkeeping and Pricing Services Agreement (the “Administration Agreement”) with the Fund. As compensation for its services to the Fund, ALPS receives an annual administration fee based on the Fund’s average daily total assets, computed daily and payable monthly. ALPS will pay all expenses in connection with the performance of its services under the Administration Agreement, with the exception of advisory fees, trustees’ fees, portfolio transaction expenses, litigation expenses, tax cost of preferred shares, expenses of conducting repurchase offers for the purpose of repurchasing fund shares, the printing and distribution cost incurred to comply with the terms of the Fund’s 19(b) exemptive relief granted on July 14, 2011 and extraordinary expenses.
| 22 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2018 (Unaudited)
Pursuant to the Chief Compliance Officer Services Agreement, the Fund has agreed to pay ALPS for providing Chief Compliance Officer services to the Fund an annual fee payable in monthly installments.
Both Reaves and ALPS are considered affiliates of the Fund as defined under the 1940 Act.
8. INDEMNIFICATIONS
In the normal course of business, the Fund enters into contracts that contain a variety of representations which provide general indemnifications. 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 yet occurred.
| Semi-Annual Report | April 30, 2018 | 23 |
| Reaves Utility Income Fund | Additional Information |
April 30, 2018 (Unaudited)
DIVIDEND REINVESTMENT PLAN
Unless the registered owner of Common Shares elects to receive cash by contacting DST Systems, Inc. (the “Plan Administrator”), all dividends declared on Common Shares will be automatically reinvested by the Plan Administrator for shareholders in the Fund’s Dividend Reinvestment Plan (the “Plan”), in additional Common Shares. Shareholders who elect not to participate in the Plan will receive all dividends and other distributions in cash paid by check mailed directly to the shareholder of record (or, if the Common Shares are held in street or other nominee name, then to such nominee) by the Plan Administrator as dividend disbursing agent. You may elect not to participate in the Plan and to receive all dividends in cash by contacting the Plan Administrator, as dividend disbursing agent, at the address set forth below. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Plan Administrator prior to the dividend record date; otherwise, such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Some brokers may automatically elect to receive cash on your behalf and may re-invest that cash in additional Common Shares for you. If you wish for all dividends declared on your Common Shares to be automatically reinvested pursuant to the Plan, please contact your broker.
The Plan Administrator will open an account for each Common Shareholder under the Plan in the same name in which such Common Shareholder’s Common Shares are registered. Whenever the Fund declares a dividend or other distribution (together, a “Dividend”) payable in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Administrator for the participants’ accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Common Shares from the Fund (“Newly Issued Common Shares”) or (ii) by purchase of outstanding Common Shares on the open market (“Open-Market Purchases”) on the NYSE American LLC or elsewhere. If, on the payment date for any Dividend, the closing market price plus estimated brokerage commissions per Common Share is equal to or greater than the net asset value per Common Share, the Plan Administrator will invest the Dividend amount in Newly Issued Common Shares on behalf of the participants. The number of Newly Issued Common Shares to be credited to each participant’s account will be determined by dividing the dollar amount of the Dividend by the net asset value per Common Share on the payment date; provided that, if the net asset value is less than or equal to 95% of the closing market value on the payment date, the dollar amount of the Dividend will be divided by 95% of the closing market price per Common Share on the payment date. If, on the payment date for any Dividend, the net asset value per Common Share is greater than the closing market value plus estimated brokerage commissions, the Plan Administrator will invest the Dividend amount in Common Shares acquired on behalf of the participants in Open-Market Purchases. In the event of a market discount on the payment date for any Dividend, the Plan Administrator will have until the last business day before the next date on which the Common Shares trade on an “ex-dividend” basis or 30 days after the payment date for such Dividend, whichever is sooner (the “Last Purchase Date”), to invest the Dividend amount in Common Shares acquired in Open-Market Purchases. It is contemplated that the Fund will pay monthly income Dividends. Therefore, the period during which Open-Market Purchases can be made will exist only from the payment date of each Dividend through the date before the next “ex-dividend” date which typically will be approximately ten days. If, before the Plan Administrator has completed its Open-Market Purchases, the market price per Common Share exceeds the net asset value per Common Share, the average per Common Share purchase price paid by the Plan Administrator may exceed the net asset value of the Common Shares, resulting in the acquisition of fewer Common Shares than if the Dividend had been paid in Newly Issued Common Shares on the Dividend payment date. Because of the foregoing difficulty with respect to Open-Market Purchases, the Plan provides that if the Plan Administrator is unable to invest the full Dividend amount in Open-Market Purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Administrator may cease making Open-Market Purchases and may invest the uninvested portion of the Dividend amount in Newly Issued Common Shares at the net asset value per Common Share at the close of business on the Last Purchase Date, provided that, if the net asset value is less than or equal to 95% of the then current market price per Common Share, the dollar amount of the Dividend will be divided by 95% of the market price on the payment date.
| 24 | www.utilityincomefund.com |
| Reaves Utility Income Fund | Additional Information |
April 30, 2018 (Unaudited)
The Plan Administrator maintains all shareholders’ accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Common Shares in the account of each Plan participant will be held by the Plan Administrator on behalf of the Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Administrator will forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance with the instructions of the participants.
In the case of Common Shareholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Administrator will administer the Plan on the basis of the number of Common Shares certified from time to time by the record shareholder’s name and held for the account of beneficial owners who participate in the Plan.
There will be no brokerage charges with respect to Common Shares issued directly by the Fund. However, each participant will pay a pro rata share of brokerage commissions incurred in connection with Open-Market Purchases. The automatic reinvestment of Dividends will not relieve participants of any federal, state or local income tax that may be payable (or required to be withheld) on such Dividends. Participants that request a sale of Common Shares through the Plan Administrator are subject to brokerage commissions.
The Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants with regard to purchases in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants.
All correspondence or questions concerning the Plan should be directed to the Plan Administrator, DST Systems, Inc., 333 West 11th Street, 5th Floor, Kansas City, Missouri 64105.
APPROVAL OF INVESTMENT ADVISORY AGREEMENT
At the March 12, 2018 meeting of the Board of the Fund (the “Meeting”), the Board, including those Trustees who are not “interested Trustees” of the Fund, as that term is defined in the 1940 Act (the “Independent Trustees”), approved Reaves to serve as the Fund’s investment adviser and approved the investment advisory agreement between Reaves and the Fund with respect to the Fund (the “Advisory Agreement”), upon the terms and conditions set forth therein, for an additional one-year term. In connection with considering the approval of the Advisory Agreement, the Independent Trustees met in executive session with independent counsel, who provided assistance and advice.
| Semi-Annual Report | April 30, 2018 | 25 |
| Reaves Utility Income Fund | Additional Information |
April 30, 2018 (Unaudited)
Although not meant to be all-inclusive, the following discussion summarizes the factors considered and conclusions reached by the Trustees in the executive session and at the Meeting in determining to approve the Advisory Agreement.
Nature, extent, and quality of services. The Trustees considered the nature, extent and quality of the services provided to the Fund by Reaves. In evaluating the quality of Reaves’ services, the Trustees noted the various complexities involved in the operations of the Fund, such as the use of leverage, and concluded that Reaves continues to consistently provide high-quality services to the Fund in an increasingly complex environment. The Trustees also considered the Fund’s investment performance and took into account its evaluation of the quality of Reaves’ compliance program. The Trustees also considered the qualifications, experience and capability of Reaves’ management team and other personnel and the extent of care with which Reaves performs its duties and obligations. The Trustees also considered information from Reaves regarding the overall financial strength of Reaves and considered the resources and staffing in place with respect to the services provided to the Fund. In light of the foregoing, the Trustees concluded that it was generally satisfied with the nature, extent and quality of the services provided to the Fund by Reaves.
Performance of the Fund and Reaves. The Trustees reviewed the Fund’s investment performance over time and compared that performance to other funds in its peer group. In making its comparisons, the Trustees utilized a report from an independent provider of investment company data (the “Data Provider”). As reported by the Data Provider, the Fund’s net total return (annualized) ranked 8th, 2nd, 2nd, 1st, 1st, and 2nd for the 1-, 2-, 3-, 4-, 5- and 10-year periods ended December 31, 2017, respectively, among the ten fund universe of leveraged closed-end funds categorized by Data Provider as utility funds. The Fund also outperformed the Lipper Closed-End Sector Equity Fund Index for the 2-, 4-, 5-, and 10-year periods. The Trustees also considered that, because providing a high level of after-tax total return is part of the Fund’s investment objective, one of the best measures of Reaves’ performance is the fact that the Fund has maintained and increased its monthly distribution on common stock without returning capital to investors. The Trustees noted that the Fund’s exemption from Rule 19b-1 under the 1940 Act, received from the SEC in 2009, permits a portion of each distribution to be treated as paid from sources other than net income, including but not limited to short-term capital gain, long-term capital gain and return of capital.
Costs of services and profits realized. The Trustees considered the reasonableness of the compensation paid to Reaves, in both absolute and comparative terms, and also the profits realized by Reaves from its relationship with the Fund. To facilitate this analysis, the Trustees retained the Data Provider 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 comparable funds selected by the Data Provider (the “Data Provider expense group”). The Trustees reviewed, among other things, information provided by the Data Provider comparing the Fund’s contractual management fee rate (at common asset levels) and actual management fee rate (reflecting fee waivers, if any) as a percentage of total assets and as a percentage of assets attributable to common stock to other funds in the Data Provider expense group. Based on the data provided on management fee rates, the Trustees noted that: (i) the Fund’s contractual management fee rate was lower than the median of the Data Provider expense group; and (ii) the actual management fee rate was lower than the median of the Data Provider expense group both on the basis of assets attributable to common stock and on a total asset basis.
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| Reaves Utility Income Fund | Additional Information |
April 30, 2018 (Unaudited)
Reaves also furnished the Trustees with copies of its financial statements and other information regarding its expenses in providing services to the Fund. In reviewing those financial statements and other materials, the Trustees examined the profitability of the investment advisory agreement to Reaves and determined that the profitability of that contract was within a reasonable range. The Trustees considered that Reaves 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 Trustees concluded that the management fee was fair and reasonable.
Economies of scale. The Trustees considered whether the Fund has appropriately benefited from any economies of scale. The Trustees noted that there were no fee breakpoints in the Advisory Agreement, but considered Reaves’ view that adding breakpoints would not be appropriate at this time and that any increases in the Fund’s assets are primarily attributable to market appreciation, dividend reinvestments and rights offerings.
Comparison with other advisory contracts. The Trustees also received comparative information from Reaves with respect to its standard fee schedule for investment advisory clients other than the Fund. The Trustees noted that, among all accounts managed by Reaves, the Fund’s advisory fee rate is comparable to Reaves’ standard fee schedule. However, the Trustees noted that the services provided by Reaves to the Fund are more extensive and demanding than the services provided by Reaves to its non-investment company, institutional accounts and to those investment company accounts for which Reaves serves only in a sub-advisory capacity. Based on the fact that Reaves only provides the enhanced services to its investment company clients and not to its institutional account clients, the Trustees concluded that comparisons between the two fee structures would not be appropriate or meaningful. Furthermore, the Trustees noted that many of Reaves’ 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 Trustees considered indirect benefits to Reaves from its relationship to the Fund, including increased visibility among its institutional asset manager peer group and “sell side” research obtained from broker-dealers that execute trades for the Fund.
Based upon its evaluation of all material factors, including the foregoing, and assisted by the advice of independent legal counsel, the Trustees concluded that the level of fees paid to Reaves was fair and reasonable in light of the usual and customary charges for such services, and that the continued retention of Reaves as investment adviser to the Fund was in the best interests of the Fund and its shareholders.
FUND PROXY VOTING POLICIES & PROCEDURES
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 toll-free 1-800-644-5571, or on the Fund’s website at http://www.utilityincomefund.com. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is also available without charge upon request by calling toll-free 1-800-644-5571, or on the SEC’s website at http://www.sec.gov.
| Semi-Annual Report | April 30, 2018 | 27 |
| Reaves Utility Income Fund | Additional Information |
April 30, 2018 (Unaudited)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. Copies of the Fund’s Forms N-Q are available on the Commission’s website at http://www.sec.gov. You may also review and copy Forms N-Q at the Commission’s Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the Commission at 1-800-SEC-0330. Information on the Fund’s Forms N-Q is available without a charge, upon request, by contacting the Fund at 1-800-644-5571 and on the website at http://www.utilityincomefund.com.
NOTICE
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that the Fund may purchase at market prices from time to time shares of its common stock in the open market.
SECTION 19(A) NOTICES
The following table sets forth the estimated amount of the sources of distribution for purposes of Section 19 of the Investment Company Act of 1940, as amended, and the related rules adopted there under. The Fund estimates the following percentages, of the total distribution amount per share, attributable to (i) current and prior fiscal year net investment income, (ii) net realized short-term capital gain, (iii) net realized long-term capital gain and (iv) return of capital or other capital source as a percentage of the total distribution amount. These percentages are disclosed for the fiscal year-to-date cumulative distribution amount per share for the Fund.
The amounts and sources of distributions reported in these 19(a) notices are only estimates and not for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. Shareholders will receive a Form 1099-DIV for the calendar year that will tell you how to report these distributions for federal income tax purposes.
Total Cumulative Distributions for the six months ended April 30, 2018 |
% Breakdown of the Total Cumulative Distributions for the six months ended April 30, 2018 | |||||||
| Net Investment Income | Net Realized Capital Gains | Return of Capital | Total Per Common Share | Net Investment Income | Net Realized Capital Gains | Return of Capital | Total Per Common Share | |
Reaves Utility Income Fund |
$0.44213 | $0.52787 | $0.00 | $0.97 | 45.58% | 54.42% | 0.00% | 100.00% |
The Fund’s dividend policy is to distribute all or a portion of its net investment income to its shareholders on a monthly basis. In order to provide shareholders with a more stable level of dividend distributions, the Fund may at times pay out less than the entire amount of net investment income earned in any particular month and may at times in any particular month pay out such accumulated but undistributed income in addition to net investment income earned in that month. As a result, the dividends paid by the Fund for any particular month may be more or less than the amount of net investment income earned by the Fund during such month. The Fund’s current accumulated but undistributed net investment income, if any, is disclosed in the Statement of Assets and Liabilities, which comprises part of the financial information included in this report.
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| Reaves Utility Income Fund | Additional Information |
April 30, 2018 (Unaudited)
ANNUAL MEETING OF STOCKHOLDERS
On April 11, 2018, the Annual Meeting of Stockholders of the Fund was held to elect two Trustees. On February 12, 2018, the record date for the meeting, the Fund had 48,670,001 outstanding shares of common stock. The votes cast at the meeting were as follows:
Proposal 1 – Proposal to elect two Trustees:
Election of E. Wayne Nordberg as Trustee of the Fund:
| Shares Voted | % Voted | |
| Affirmative | 40,983,747.988 | 96.512% |
| Withheld | 1,481,419.798 | 3.488% |
| TOTAL | 42,465,167.786 | 100.000% |
Election of Larry W. Papasan as Trustee of the Fund:
| Shares Voted | % Voted | |
| Affirmative | 40,801,095.681 | 96.082% |
| Withheld | 1,664,072.105 | 3.918% |
| TOTAL | 42,465,167.786 | 100.000% |
| Semi-Annual Report | April 30, 2018 | 29 |
| Item 2. | Code of Ethics. |
Not applicable to this report.
| Item 3. | Audit Committee Financial Expert. |
Not applicable to this report.
| Item 4. | Principal Accountant Fees and Services. |
Not applicable to this report.
| Item 5. | Audit Committee of Listed Registrants. |
Not applicable to this report.
| Item 6. | Investments. |
| (a) | The schedule of investments is included as part of the Reports to Stockholders filed under Item 1 of this report. |
| (b) | Not applicable to the registrant. |
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Not applicable to this report.
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
(a) Not applicable to this report.
(b) Not applicable.
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
Not applicable the registrant.
| Item 10. | Submission of Matters to a Vote of Security Holders. |
No material changes to the procedures by which the shareholders may recommend nominees to the registrant’s Board of Trustees have been implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
| Item 11. | Controls and Procedures. |
| (a) | Based on an evaluation of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended), the registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures are effective as of a date within 90 days of the filing date of this report. |
| (b) | There were no significant changes in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal half-year that have materially affected, or are 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) The Code of Ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions is attached hereto as Exhibit 13(a)(1).
(a)(2) The certifications required by Item 13(a)(2) of Form N-CSR are filed herewith as Exhibit 99.CERT.
(b) Pursuant to the Securities and Exchange Commission’s Order granting relief from Section 19(b) of the Investment Company Act of 1940 dated August 10, 2009, the form of 19(a) Notices to Beneficial Owners are attached hereto as Exhibit 12(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.
REAVES UTILITY INCOME FUND
| By: | /s/Jeremy O. May | |
| Jeremy O. May | ||
| President (Principal Executive Officer) | ||
| Date: | July 6, 2018 |
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: | /s/Jeremy O. May | |
| Jeremy O. May | ||
| President (Principal Executive Officer) | ||
| Date: | July 6, 2018 |
| By: | /s/Jill A. Kerschen | |
| Jill A. Kerschen | ||
| Treasurer (Principal Financial Officer) | ||
| Date: | July 6, 2018 |