5. RESTRICTED SECURITIES
As of April 30, 2016, 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, 2016 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 | | $ | 6,150,393 | | | $ | 6,150,393 | | | | 0.56 | % |
| Talara Opportunities II, LP | 8/30/2013 – 7/24/2015 | | | 4,051,936 | | | | 1,823,371 | | | | 0.17 | % |
| TOTAL | | | $ | 10,202,329 | | | $ | 7,973,764 | | | | 0.73 | % |
Purchases and sales of investment securities, other than short-term securities, for the period ended April 30, 2016, aggregated $230,382,403 and $124,693,960, 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.
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.
Each Independent Trustee receives an annual retainer of $14,000, plus $2,000 for each meeting attended. The Chairman of the Audit Committee receives an additional $500 per meeting attended.
| Reaves Utility Income Fund | Notes to Financial Statements |
April 30, 2016 (Unaudited)
9. 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, 2016 | 25 |
| Reaves Utility Income Fund | Additional Information |
April 30, 2016 (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 Mkt 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.
| Reaves Utility Income Fund | Additional Information |
April 30, 2016 (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 22, 2016 meeting (“Meeting”) of the Board of the Fund, the Board, including those Trustees who are not “interested persons” of the Trust, 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, 2016 | 27 |
| Reaves Utility Income Fund | Additional Information |
April 30, 2016 (Unaudited)
Although not meant to be all-inclusive, the following discussion summarizes the factors considered and conclusions reached by the Trustees in the executive sessions 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 the rehypothecation of portfolio securities pledged under the credit facility, 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 (“Independent Data Provider”). As reported by an Independent Data Provider, the Fund’s net total return (annualized) ranked first among the universe of leveraged closed-end mutual funds categorized by the Independent Data Provider as utility funds for the 2-, 3-, 5- and 10-year periods, fifth for the 1-year period and third for the 4-year period ended December 31, 2015. The Fund also outperformed the Lipper Closed-End Sector Equity Fund Index for the 2-, 3-, 4-, 5- and 10-year periods ended December 31, 2015. 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 an Independent 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 Independent Data Provider (the “expense group”). The Trustees reviewed, among other things, information provided by the Independent 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 its 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 its expense group; and (ii) the actual management fee rate was lower than the median of its expense group both on the basis of assets attributable to common stock and on a total asset basis.
| Reaves Utility Income Fund | Additional Information |
April 30, 2016 (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 the rights offering.
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, 2016 | 29 |
| Reaves Utility Income Fund | Additional Information |
April 30, 2016 (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.
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, 2016 | | % Breakdown of the Total Cumulative Distributions for the six months ended April 30, 2016 |
| | 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 | $0.41896 | $0.44157 | $0.04697 | $0.90750 | | 46.17% | 48.66% | 5.17% | 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.
| Reaves Utility Income Fund | Additional Information |
April 30, 2016 (Unaudited)
ANNUAL MEETING OF STOCKHOLDERS
On April 29, 2016, the Annual Meeting of Stockholders of the Fund was held to elect two Trustees. On February 29, 2016, the record date for the meeting, the Fund had 27,999,290.308 outstanding shares of common stock. The votes cast at the meeting were as follows:
Proposal 1 – Proposal to elect two Trustees:
Election of Jeremy W. Deems as Trustee of the Fund:
| | Shares Voted | % Voted |
| Affirmative | 26,857,175.308 | 95.921% |
| Withheld | 1,142,115.000 | 4.079% |
| TOTAL | 27,999,290.308 | 100.000% |
Election of Jeremy O. May as Trustee of the Fund:
| | Shares Voted | % Voted |
| Affirmative | 26,948,219.308 | 96.246% |
| Withheld | 1,051,071.000 | 3.754% |
| TOTAL | 27,999,290.308 | 100.000% |
| Semi-Annual Report | April 30, 2016 | 31 |
