The table below provides information about income and capital changes for a share of common stock outstanding throughout the
years indicated (excluding supplemental data provided below):
Note 1. Organization:
DNP
Select Income Fund Inc. (“DNP” or the “Fund”) was incorporated under the laws of the State of Maryland on November 26, 1986. The Fund commenced operations on January 21, 1987, as a
closed-end diversified management investment company registered under the Investment Company Act of 1940 (the “1940 Act”). The primary investment objectives of the Fund are current income and
long-term growth of income. Capital appreciation is a secondary objective.
Note 2. Significant Accounting Policies:
The Fund is an investment company that follows the accounting and reporting guidance of Accounting Standards Codification (“ASC”)
Topic 946 applicable to Investment Companies.
The following are the significant accounting policies of the Fund:
A. Investment Valuation: Equity securities traded on a national or foreign securities exchange or traded over-the counter and quoted on the NASDAQ Stock Market are valued at the last reported sale price or, if there was no sale on the valuation date, then the security is valued at the mean of the bid and ask prices, in
each case using valuation data provided by an independent pricing service, and are generally classified as Level 1. Equity securities traded on more than one securities exchange shall be valued at the last sale price on the business day as of
which such value is being determined at the close of the exchange representing the principal market for such securities and are classified as Level 1. If there was no sale on the valuation date, then the security is valued at the mean of the
closing bid and ask prices of the exchange representing the principal market for such securities. Debt securities are valued at the mean of the bid and ask prices provided by an independent pricing service when such prices are believed to reflect
the fair value of such securities and are generally classified as Level 2. Any securities for which it is determined that market prices are unavailable or inappropriate are valued at a fair value using a procedure determined in good faith by
the Board of Directors and are classified as Level 2 or 3 based on the valuation inputs.
B. Investment
Transactions and Investment Income: Security transactions are recorded on the trade date. Realized gains or losses from sales of securities are determined on the identified cost basis. Dividend income is recognized on the ex-dividend date. Interest income and expense are recognized on the accrual basis. Premiums on securities are amortized over the period remaining until first call date, if any, or if none, the remaining life of the
security. Discounts are accreted over the remaining life of the security. Discounts and premiums are not amortized or accreted for tax purposes.
The Fund invests in master limited partnerships (“MLPs”) which make distributions that are primarily attributable to
return of capital. Dividend income is recorded using management’s estimate of the percentage of income included in the distributions received from the MLP investments based on their historical dividend results. Distributions received in excess
of this estimated amount are recorded as a reduction of cost of investments (i.e., a return of capital). The actual amounts of income and return of capital components of its distributions are only determined by each MLP after its fiscal year-end and may differ from the estimated amounts. For the year ended October 31, 2021, 100% of the MLP distributions were treated as a return of capital.
15
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
October 31, 2021
C. Federal Income Taxes: It is the Fund’s intention to comply with requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the “Code”) applicable to regulated investment companies and to distribute substantially all of its taxable income and capital gains to its shareholders. Therefore, no provision for Federal income
or excise taxes is required. Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. The Fund’s federal income tax returns are generally subject to
examination by the Internal Revenue Service for a period of three years after they are filed. State and local tax returns may be subject to examination for different periods, depending upon the tax rules of each applicable jurisdiction.
D. Foreign Currency Translation: Investment securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollar amounts at the date of valuation at the mean of the quoted bid and asked prices of such currencies. Purchases and sales of investment securities and income and expense items denominated in foreign
currencies are translated into U.S. dollar amounts at the rate of exchange prevailing on the respective dates of such transactions. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates
on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
E. Accounting Standards: In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update No. 2020-04, (“ASU 2020-04”), Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments
in ASU 2020-04 provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offering Rate
(“LIBOR”) and other interbank-offered based reference rates as of the end of 2021. ASU 2020-04 is effective for certain reference rate-related contract modifications that occur during the period
March 12, 2020 through December 31, 2022. While the intention to phase out the use of LIBOR by the end of 2021 was announced by the head of the United Kingdom Financial Conduct Authority (“FCA”) in July 2017, subsequent announcements by
the FCA, the LIBOR administrator and other regulators indicate that it is possible that certain of the most widely used LIBORs may continue until mid-2023. Management is currently evaluating the impact, if any, of applying ASU 2020-04.
F. Use of Estimates: The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those
estimates.
Note 3. Agreements and Management Arrangements:
A. Adviser and Administrator: The Fund has an Advisory Agreement with Duff & Phelps Investment Management Co.
(the “Adviser”) an indirect, wholly owned subsidiary of Virtus Investment Partners, Inc. (“Virtus”), to provide professional investment management services for the Fund and has an Administration Agreement with Robert W.
Baird & Co. Incorporated (the “Administrator”) to provide administrative and management services for the Fund. The Adviser receives a quarterly fee at an annual rate of 0.60% of the Average Weekly Managed Assets of the Fund up to
$1.5 billion and 0.50% of Average Weekly Managed Assets in excess thereof. The Administrator receives a quarterly fee at annual rates of 0.20% of Average Weekly
16
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
October 31, 2021
Managed Assets up to $1 billion, and 0.10% of Average Weekly Managed Assets over $1 billion. For purposes of the foregoing
calculations, “Average Weekly Managed Assets” is defined as the average weekly value of the total assets of the Fund minus the sum of all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings or
other indebtedness constituting financial leverage).
B. Directors: The Fund pays each director not affiliated with
the Adviser an annual fee. Total fees paid to directors for the year ended October 31, 2021 were $418,312.
C.
Affiliated Shareholder: At October 31, 2021, Virtus Partners, Inc. (a wholly owned subsidiary of Virtus) held 284,976 shares of the Fund, which represent 0.08% of the shares of common stock outstanding. These shares may be sold at any time.
Note 4. Investment Transactions:
Purchases and sales of investment securities (excluding short-term investments) for the year ended October 31, 2021 were
$506,456,825 and $513,134,147, respectively.
Note 5. Distributions and Tax Information:
At October 31, 2021, the approximate federal tax cost and aggregate gross unrealized appreciation (depreciation) were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Cost
|
|
Unrealized
Appreciation
|
|
Unrealized
Depreciation
|
|
Net Unrealized
Appreciation
|
|
|
|
$3,385,988,080
|
|
|
|
|
$1,103,680,714
|
|
|
|
|
$(168,465,255
|
)
|
|
|
|
$935,215,459
|
|
At October 31, 2021, the Fund had capital loss carryovers available to offset future realized
gains, if any, to the extent permitted by the Code. These capital loss carryovers were acquired from Duff & Phelps Utility and Corporate Bond Trust Inc. (“DUC”) in its merger with and into the Fund. Net capital losses are carried
forward without expiration and generally retain their short-term and long-term character as applicable. Short-term capital loss carryovers of approximately $84,375 and long-term capital loss carryovers of $5,231,127 are expected to be utilized.
Approximately $54,825,939 of long-term capital loss carryovers are available for future use.
The Fund declares and pays
monthly dividends on its common shares of a stated amount per share. Subject to approval and oversight by the Fund’s Board of Directors, the Fund seeks to maintain a stable distribution level (a Managed Distribution Plan) consistent with the
Fund’s primary investment objective of current income. If and when sufficient investment income is not available on a monthly basis, the Fund will distribute long-term capital gains and/or return capital in order to maintain the $0.065 per
common share distribution level. The character of distributions is determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles.
17
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
October 31, 2021
The tax character of distributions paid to common shareholders during the years ended October 31, 2021 and 2020 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
10/31/21
|
|
|
10/31/20
|
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
|
$87,234,887
|
|
|
|
$74,898,817
|
|
|
Long-term capital gains
|
|
|
129,799,757
|
|
|
|
122,897,733
|
|
|
Return of capital
|
|
|
38,307,410
|
|
|
|
39,105,460
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
$255,342,054
|
|
|
|
$236,902,010
|
|
|
|
|
|
|
|
|
|
|
|
At October 31, 2021, the components of distributable earnings on a tax basis were as
follows:
|
|
|
|
|
|
|
Undistributed net ordinary income
|
|
|
$0
|
|
|
Undistributed long-term capital gains
|
|
|
0
|
|
|
Net unrealized appreciation
|
|
|
935,194,075
|
|
|
Tax capital loss carryovers
|
|
|
(54,825,939
|
)
|
|
Other ordinary timing differences
|
|
|
(22,981,945
|
)
|
|
|
|
|
|
|
|
|
|
|
$857,386,191
|
|
|
|
|
|
|
|
Note 6. Reclassification of Capital Accounts:
Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect
their tax character. Permanent reclassifications can arise from differing treatment of certain income and gain transactions. These adjustments have no impact on net assets or net asset value per share of the Fund. Temporary differences that arise
from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will likely reverse at some time in the future. The reclassifications at October 31, 2021 primarily relate to premium
amortization and the Fund’s investment in MLPs and the recharacterization of MLP gains and distributions.
Note 7. Debt Financing:
The Fund has a Committed Facility Agreement (the “Facility”) with a commercial bank (the “Bank”)
that allows the Fund to borrow cash up to a limit of $598,000,000. The Fund has also issued secured notes (the “Notes”). The Facility and Notes rank pari passu with each other and are senior, with priority in all respects to the
outstanding common and preferred stock as to the payment of dividends and with respect to the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Fund. Key information regarding the Facility and Notes is detailed
below.
A. Borrowings Under the Facility: Borrowings under the Facility are collateralized by certain assets of the
Fund (the “Hypothecated Securities”). The Fund expressly grants the Bank the right to re-register the Hypothecated Securities in its own name or in another name other than the Fund’s and to
pledge, repledge, hypothecate, rehypothecate, sell, lend or otherwise transfer or use the Hypothecated Securities. Interest is charged at 1 month LIBOR plus an additional percentage rate of 0.85% on the amount borrowed. The Bank has
18
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
October 31, 2021
the ability to require repayment of the Facility upon 179 days’ notice or following an event of default. On March 8, 2021, upon
completion of the Merger detailed in Note 9, the Fund assumed borrowings in the amount of $105,000,000. An increase in borrowings in the amount of $93,000,000 was used to redeem all 930 shares outstanding of Mandatory Redeemable Preferred Shares
Series B and Series D on their stated maturity date of April 1, 2021. For the year ended October 31, 2021, the average daily borrowings under the Facility and the weighted daily average interest rate were $523,246,575 and 0.95%,
respectively. As of October 31, 2021, the amount of such outstanding borrowings was $598,000,000 and the applicable interest rate was 0.94%.
The Bank has the ability to borrow the Hypothecated Securities (“Rehypothecated Securities”). The Fund is entitled to
receive a fee from the Bank in connection with any borrowing of Rehypothecated Securities. The fee is computed daily based on a percentage of the difference between the fair market rate as determined by the Bank and the Fed Funds Open rate and is
paid monthly. The Fund can designate any Hypothecated Security as ineligible for rehypothecation and can recall any Rehypothecated Security at any time and if the Bank fails to return it (or an equivalent security) in a timely fashion, the Bank will
be liable to the Fund for the ultimate delivery of such security and certain costs associated with delayed delivery. In the event the Bank does not return the security or an equivalent security, the Fund will have the right to, among other things,
apply and set off an amount equal to 100% of the then-current fair market value of such Rehypothecated Securities against any amounts owed to the Bank under the Facility. The Fund is entitled to receive an amount equal to any and all interest,
dividends or distributions paid or distributed with respect to any Hypothecated Security on the payment date. At October 31, 2021, Hypothecated Securities under the Facility had a market value of $2,317,552,503 and Rehypothecated Securities had
a market value of $561,023,329 If at the close of any business day, the value of all outstanding Rehypothecated Securities exceeds the value of the Fund’s borrowings, the Bank shall promptly, at its option, either reduce the amount of the
outstanding Rehypothecated Securities or deliver an amount of cash at least equal to the excess amount.
B. Notes:
In 2016, the Fund completed a private placement of $300,000,000 of Notes in two fixed-rate series. Net proceeds from the issuances were used to reduce the amount of the Fund’s borrowing under its Facility. The Notes are secured by a lien on all
assets of the Fund of every kind, including all securities and all other investment property, equal and ratable with the liens securing the Facility. The Notes are not listed on any exchange or automated quotation system.
Key terms of each series of secured notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Amount
|
|
Rate
|
|
Maturity
|
|
Estimated
Fair Value
|
|
|
|
A
|
|
|
|
|
$100,000,000
|
|
|
|
|
2.76%
|
|
|
|
|
7/22/23
|
|
|
|
|
$102,450,000
|
|
|
|
|
B
|
|
|
|
|
200,000,000
|
|
|
|
|
3.00%
|
|
|
|
|
7/22/26
|
|
|
|
|
208,340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$300,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$310,790,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Fund incurred costs in connection with the issuance of the Notes. These costs were recorded
as a deferred charge and are being amortized over the respective life of each series of Notes. Amortization of these offering costs of $414,684 is included under the caption “Interest expense and amortization of deferred offering costs on
secured notes” on the Statement of Operations and the unamortized balance is deducted from the carrying amount of the Notes under the caption “Secured notes” on the Statement of Assets and Liabilities.
19
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
October 31, 2021
Holders of the Notes are entitled to receive semi-annual interest payments until maturity. The Notes accrue interest at the
annual fixed rate indicated above. The Notes are subject to optional and mandatory redemption in certain circumstances and subject to certain prepayment penalties and premiums.
The estimated fair value of the Notes was calculated, for disclosure purposes, based on estimated market yields and credit
spreads for comparable instruments or representative indices with similar maturity, terms and structure. The Notes are categorized as Level 2 within the fair value hierarchy.
Note 8. Mandatory Redeemable Preferred Shares:
The Fund has issued and outstanding Mandatory Redeemable Preferred Shares (“MRP Shares”) with a liquidation
preference of $100,000 per share.
On the mandatory redemption date of April 1, 2021, the full amount of Series B and
Series D of MRP Shares were redeemed at the aggregate liquidation preference of $93,000,000.
Key terms of each series of
MRP Shares at October 31, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Shares
Outstanding
|
|
Liquidation
Preference
|
|
Quarterly Rate Reset
|
|
Rate
|
|
Weighted
Average
Daily Rate
|
|
Mandatory
Redemption
Date
|
|
Estimated
Fair Value
|
|
|
|
C
|
|
|
|
|
750
|
|
|
|
|
$75,000,000
|
|
|
|
|
3M LIBOR + 2.15%
|
|
|
|
|
2.28%
|
|
|
|
|
2.34%
|
|
|
|
|
4/1/2024
|
|
|
|
|
$75,000,000
|
|
|
|
|
E
|
|
|
|
|
1,320
|
|
|
|
|
132,000,000
|
|
|
|
|
Fixed Rate
|
|
|
|
|
4.63%
|
|
|
|
|
4.63%
|
|
|
|
|
4/1/2027
|
|
|
|
|
143,748,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,070
|
|
|
|
|
$207,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$218,748,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Fund incurred costs in connection with the issuance of the MRP Shares. These costs were
recorded as a deferred charge and are being amortized over the respective life of each series of MRP Shares. Amortization of these deferred offering costs of $293,597 is included under the caption “Interest expense and amortization of deferred
offering costs on preferred shares” on the Statement of Operations and the unamortized balance is deducted from the carrying amount of the MRP Shares under the caption “Mandatory redeemable preferred shares” on the Statement of Assets
and Liabilities.
Holders of the MRP Shares are entitled to receive quarterly cumulative cash dividend payments on the
first business day following each quarterly dividend date which is the last day of each of March, June, September and December.
MRP Shares are subject to optional and mandatory redemption in certain circumstances. The redemption price per share is equal
to the sum of the liquidation preference per share plus any accumulated but unpaid dividends plus, in some cases, an early redemption premium (which varies based on the date of redemption). The MRP Shares are not listed on any exchange or automated
quotation system. The MRP Shares are categorized as Level 2 within the fair value hierarchy. The Fund is subject to certain restrictions relating to the MRP Shares such as maintaining certain asset coverage, effective leverage ratio and
overcollateralization ratio requirements. Failure to comply with these restrictions could preclude the Fund from declaring any distributions to common shareholders and could trigger the mandatory redemption of the MRP Shares at liquidation value.
20
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
October 31, 2021
In general, the holders of the MRP Shares and of the Common Stock have equal voting rights of one vote per share. The holders
of the MRP Shares are entitled to elect two members of the Board of Directors, and separate class votes are required on certain matters that affect the respective interests of the MRP Shares and the Common Stock.
Note 9. Offering of Shares of Common Stock:
The Fund has a shelf registration statement allowing for an offering of up to $200,000,000 of shares of common stock. The
shares may be offered and sold directly to purchasers, through at-the-market offerings using an equity distribution agent, or through a combination of these methods. The
Fund entered into an agreement with Wells Fargo Securities, LLC to act as the Fund’s equity distribution agent. The Fund incurred costs in connection with this offering of shares of common stock. These costs are recorded as a deferred charge
and are being amortized as shares of common stock are sold. Amortization of these offering costs of $13,261 are recorded as a reduction in paid in surplus on common stock. The weighted average premium to NAV per share sold during the year ended
October 31, 2021 was 14.78%. The Fund’s prior shelf registration statement expired in June 2021. Unamortized costs associated with that offering of $315,798 were fully expensed.
Note 10. Merger:
At a meeting held November 23, 2020, the Board approved merging DUC with and into the Fund pursuant to an Agreement and
Plan of Merger (the “Merger”). The Merger was approved by the shareholders of DUC on February 22, 2021 and was completed on March 8, 2021. The Fund acquired all of the assets and liabilities of DUC in exchange for an equal
aggregate value of shares of the Fund. The Fund is the surviving legal and accounting entity of the Merger.
In the Merger,
shareholders of DUC received newly issued DNP common shares in a tax-free transaction having an aggregate net asset value equal to the aggregate net asset value of the holdings of DUC, as determined at the
close of business on March 5, 2021. The resulting exchange rate was 1.055545 shares of common stock of the Fund for each share of common stock of DUC. Fractional DNP shares were not issued in the merger and consequently cash was distributed for
any such fractional amounts. Relevant details pertaining to the Merger are as follows:
|
|
|
|
|
|
|
DUC—Prior to Merger
|
|
|
|
|
|
Common shares outstanding
|
|
|
27,512,581
|
|
|
Net assets applicable to common shares
|
|
|
$256,135,664
|
|
|
NAV per common share
|
|
|
$9.31
|
|
|
DNP—Prior to Merger
|
|
|
|
|
|
Common shares
|
|
|
309,720,193
|
|
|
Net assets applicable to common shares
|
|
|
$2,731,699,411
|
|
|
NAV per common share
|
|
|
$8.82
|
|
|
DNP—Post Merger
|
|
|
|
|
|
Common shares outstanding
|
|
|
338,760,960
|
|
|
Net assets applicable to common shares
|
|
|
$2,987,835,075
|
|
|
NAV per common share
|
|
|
$8.82
|
|
21
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
October 31, 2021
Assuming the Merger had been completed on November 1, 2020, the beginning of the fiscal reporting period of the Fund, the
pro forma results of operations for the year ended October 31, 2021, would have been as follows:
|
|
|
|
|
|
|
Net investment income
|
|
|
$77,716,537
|
|
|
Net realized and unrealized gain
|
|
|
442,553,780
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
$520,270,317
|
|
|
|
|
|
|
|
Because the combined funds have been managed as a single integrated fund since the Merger was
completed, it is not practicable to separate the amounts of revenue and earnings of DUC that have been included in the Fund’s statement of operations since March 8, 2021.
For financial reporting purposes, $345,032,828 of the assets received in the Merger were in the form of securities recorded at
fair value, with cost of $323,064,790 and net unrealized appreciation of $21,968,038. The cost basis of the investments received from DUC was carried forward to align ongoing reporting of the Fund’s realized and unrealized gains and losses with
amounts distributable to stockholders for tax purposes. The Fund acquired capital loss carryovers of $60,141,441 from DUC in the Merger, of which $84,375 are short-term and $60,057,066 are long-term. These capital loss carryovers are not subject to
expiration, but they may be subject to future annual limitations on use.
In addition to the securities received in the
Merger, the Fund acquired cash in the amount of $12,729,737 and receivables in the amount of $3,902,280. Borrowings in the amount of $105,000,000 and payables in the amount of $529,181 were also assumed.
Note 11. Indemnifications:
Under the Fund’s organizational documents, its Officers and Directors are indemnified against certain liabilities arising
out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide general indemnifications to other parties. The Fund’s maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund that have not occurred. However, the Fund has not had prior claims or losses pursuant to these arrangements and expects the risk of loss to be remote.
Note 12. Subsequent Events:
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued,
and has determined that there were no subsequent events requiring recognition or disclosure in these financial statements.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of DNP Select Income Fund Inc.
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of DNP Select Income Fund Inc. (the “Fund”),
including the schedule of investments, as of October 31, 2021, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial
highlights for each of the five years in the period then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Fund at October 31, 2021, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended and its financial highlights for each of the five
years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on
the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of the Fund’s internal
control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control
over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities owned as of October 31, 2021, by correspondence with the custodian. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of one or more Duff & Phelps Investment Management Co.
investment companies since 1991.
Chicago, Illinois
December 17, 2021
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TAX INFORMATION (Unaudited)
The following information is being provided in order to meet reporting requirements set forth by the Code and/or to meet state
specific requirements. In early 2022, the Fund will make available the tax status of all distributions paid for the calendar year 2021.Shareholders should consult their tax advisors. With respect to distributions paid during the fiscal year ended
October 31, 2021, the Fund designates the following amounts (or if subsequently determined to be different, the maximum amount allowable):
|
|
|
|
|
|
|
Qualified Dividend Income % (for non-corporate
shareholders)
|
|
|
100
|
%
|
|
Dividends Received Deduction % (for corporate shareholders)
|
|
|
89
|
%
|
|
Long-Term Capital Gain Distributions in thousands ($)
|
|
|
$135,156
|
|
INFORMATION ABOUT PROXY VOTING BY THE FUND (Unaudited)
The Fund’s Board
of Directors has adopted proxy voting policies and procedures. These proxy voting policies and procedures may be changed at any time by the Fund’s Board of Directors.
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio
securities is available without charge, upon request, by calling the Administrator toll-free at (833) 604-3163 or is available on the Fund’s website www.dpimc.com/dnp or on the SEC’s website
www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12
month period ended June 30 is available without charge, upon request, by calling the Administrator toll-free at (833) 604-3163 or is available on the Fund’s website at www.dpimc.com/dnp or on the
SEC’s website at www.sec.gov.
INFORMATION ABOUT THE FUND’S PORTFOLIO HOLDINGS (Unaudited)
The Fund files its
complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters (January 31 and July 31) as an exhibit to Form NPORT-P. The Fund’s Form
NPORT-P is available on the SEC’s website at www.sec.gov. In addition, the Fund’s schedule of portfolio holdings is available without charge, upon request, by calling the Administrator toll-free at
(833) 604-3163 or is available on the Fund’s website at www.dpimc.com/dnp.
ADDITIONAL INFORMATION (Unaudited)
Since
October 31, 2020: (i) there have been no material changes in the Fund’s investment objectives or policies that have not been approved by the shareholders; (ii) there have been no changes in the Fund’s charter or by-laws that would delay or prevent a change in control of the Fund which have not been approved by the shareholders; (iii) there have been no material changes in the principal risk factors associated with an
investment in the fund; and (iv) there have been no changes in the persons who are primarily responsible for the day-to-day management of the Fund’s portfolio.
Additional information relating to the Fund’s directors and officers, and any other information found elsewhere in
this Annual Report, may be requested by contacting the Fund at the address provided on the back of this report.
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INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND PRINCIPAL RISKS (Unaudited)
Investment
Objective: The Fund’s primary investment objectives are current income and long-term growth of income. Capital appreciation is a secondary objective.
Principal Strategies: The Fund seeks to achieve its investment objectives by investing primarily in a diversified
portfolio of equity and fixed income securities of companies in the public utilities industry. Under normal market conditions, more than 65% of the Fund’s total assets will be invested in securities of public utility companies engaged in the
production, transmission or distribution of electric energy, gas or telephone services.
The Fund’s policy of
concentrating its investments in the utilities industry has been developed to take advantage of the characteristics of securities of companies in that industry. Historically, securities of companies in the public utilities industry have tended to
produce current income and long-term growth of income for their holders. They are well suited to the Fund’s primary investment objectives.
Principal Risks:
Equity Securities Risk: Generally, prices of equity securities are more volatile than those of fixed income
securities. The prices of equity securities will rise and fall in response to a number of different factors. In particular, equity securities will respond to events that affect entire financial markets or industries (such as changes in inflation or
consumer demand) and to events that affect particular issuers (such as news about the success or failure of a new product). Equity securities also are subject to “stock market risk,” meaning that stock prices in general may decline over
short or extended periods of time. When the value of the stocks held by a fund goes down, the value of the fund’s shares will be affected.
Industry/Sector Concentration Risk: The Fund invests a significant portion of its total assets in securities of
public utility companies. The value of the investments of a fund that focuses its investments in a particular industry or market sector will be highly sensitive to financial, economic, political and other developments affecting that industry or
market sector, and conditions that negatively impact that industry or market sector will have a greater impact on the Fund as compared with a fund that does not have its holdings concentrated in a particular industry or market sector. Events
negatively affecting the industries or market sectors in which the Fund has invested are therefore likely to cause the value of the Fund’s shares to decrease, perhaps significantly.
Utilities Industry Risk: Risks that are intrinsic to public utility companies include difficulty in obtaining an
adequate return on invested capital, difficult in financing large construction programs during an inflationary period, restrictions on operations and increased costs and delays attributable to environmental considerations and regulation, difficulty
in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets, technological innovations that may render existing plants, equipment or products obsolete, the potential impact of natural or man-made disasters, increased costs and reduced availability of certain types of fuel, occasional reduced availability and high costs of natural gas and other fuels, the effects of energy conservation, the effects
of a national energy policy and lengthy delays and greatly increased costs and other problems associated with the design, construction, licensing, regulation and operation of nuclear facilities for electric generation, including, among other
considerations, the problems associated with the use of radioactive materials, the disposal of radioactive wastes, shutdown of facilities or release of radiation resulting from catastrophic events, disallowance of costs by regulators which may
reduce profitability, and changes in market structure that increase competition. There are substantial differences among the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major shifts in policy
from time to time.
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Credit & Interest Risk: Debt securities are
subject to various risks, the most prominent of which are credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt securities may rise or fall in response to changes in interest
rates, and this risk may be enhanced with longer-term maturities.
Foreign Investing Risk: Investing in
securities of non-U.S. companies involves special risks and considerations not typically associated with investing in U.S. companies, and the values of non-U.S.
securities may be more volatile than those of U.S. securities. The values of non-U.S. securities are subject to economic and political developments in countries and regions where the issuers operate or are
domiciled, or where the securities are traded, such as changes in economic or monetary policies, and to changes in currency exchange rates. Values may also be affected by restrictions on receiving the investment proceeds from a non-U.S. country.
In general, less information is publicly available about non-U.S. companies than about U.S. companies. Non-U.S. companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S.
companies. Certain foreign issuers classified as passive foreign investment companies may be subject to additional taxation risk.
MLP Risk: An investment in MLP units involves some risks that differ from an investment in the common stock of a
corporation. Holders of MLP units have limited control on matters affecting the partnership. MLPs holding credit-related investments are subject to interest rate risk and the risk of default on payment obligations by debt issuers. MLPs that
concentrate in a particular industry or a particular geographic region are subject to risks associated with such industry or region. The fees that MLPs charge for transportation of oil and gas products through their pipelines are subject to
government regulation, which could negatively impact the revenue stream. Investing in MLPs also involves certain risks related to investing in the underlying assets of the MLPs and risks associated with pooled investment vehicles. These include the
risk of environmental incidents, terrorist attacks, demand destruction from high commodity prices, proliferation of alternative energy sources, inadequate supply of external capital, and conflicts of interest with the general partner. The benefit
derived from the Fund’s investment in MLPs is largely dependent on the MLPs being treated as partnerships for federal income tax purposes, so any change to this status would adversely affect the price of the MLP units.
Certain MLPs in which the Fund may invest depend upon their parent or sponsor entities for the majority of their revenues. If
their parent or sponsor entities fail to make such payments or satisfy their obligations, the revenues and cash flows of such MLPs and ability of such MLPs to make distributions to unit holders, such as the Fund, would be adversely affected.
No Guarantee: There is no guarantee that the portfolio will meet its objectives.
Leverage Risk: The Fund employs leverage through preferred stock, secured notes and a line of credit. While this
leverage often serves to increase yield, it also subjects the Fund to increased risks. These risks may include the likelihood of increased price and NAV volatility and the possibility that the Fund’s common stock income will fall if the
dividend rate on the preferred shares or the interest rate on any borrowings rises. The use of leverage is premised upon the expectation that the cost of leverage will be lower than the return on the investments made with the proceeds. However, if
the income or capital appreciation from the securities purchased from such proceeds is not sufficient to cover the cost of leverage or if the Fund incurs capital losses, the return to common stockholders will be less than if the leverage had not
been used. There can be no assurance that a leverage strategy will be successful during any period in which it is employed.
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Market Volatility Risk: The value of the securities in which the Fund
invests may go up or down in response to the prospects of individual issuers and/or general economic conditions. Such price changes may be temporary or may last for extended periods.
Instability in the financial markets may expose the Fund to greater market and liquidity risk and potential difficulty in
valuing portfolio instruments that it holds. In response to financial markets that experienced extreme volatility, and in some cases a lack of liquidity, the U.S. Government and other governments have taken a number of unprecedented actions,
including acquiring distressed assets from financial institutions and acquiring ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear. Additional legislation or government
regulation may also change the way in which funds themselves are regulated, which could limit or preclude the Fund’s ability to achieve its investment objective. Local, regional or global events such as war, acts of terrorism, the spread of
infectious illness or other public health issue, recessions, or other events could have a significant impact on the Fund and its investments, hampering the ability of the Fund’s portfolio managers to invest the Fund’s assets as intended.
Management Risk: The Fund is subject to management risk because it is an actively managed investment portfolio with
broad investment mandates. The Adviser will apply investment techniques and risk analysis in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results
Prepayment/Call Risk: Issuers may prepay or call their fixed rate obligation when interest rates fall, forcing the Fund
to reinvest in obligations with lower interest rates and the Fund may not benefit fully from the increase in value that other fixed income investments experience when interest rates decline.
U.S. Government Securities Risk: U.S. Government securities may be subject to price fluctuations. An agency may default
on an obligation not backed by the full faith and credit of the United States. Any guarantee on U.S. Government securities does not apply to the value of the Fund’s shares.
Closed-End Fund Risk: Closed-end funds
may trade at a discount or premium from their net asset values, which may affect whether an investor will realize gains or losses. They may also employ leverage, which may increase volatility.
Distribution Risk: In February 2007, the Board adopted a Managed Distribution Plan (the “Plan”) for the Fund.
The Plan provides for the continuation of the 6.5 cents per share monthly distribution. While the adoption of the Plan does not in any way constitute a guarantee that the Fund will maintain at least a 6.5 cents per share monthly distribution, it
does indicate that the Fund currently intends to use long-term capital gains and/or return of capital, if necessary, to maintain that distribution rate. The Board may amend, suspend or terminate the Plan without prior notice to shareholders if it
deems such action to be in the best interests of the Fund and its shareholders, in which case the 6.5 cents per share monthly distribution might not be maintained.
27