The table below provides information about income and capital changes for a share of common stock outstanding throughout the
periods indicated (excluding supplemental data provided below):
The accompanying notes are an integral part of these financial statements.
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 six months ended April 30, 2022, 100% of the MLP distributions were treated as a return of capital.
15
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2022
(Unaudited)
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. In July 2017, the head of the United Kingdom Financial Conduct Authority (“FCA”) announced the intention to phase out the use of LIBOR by the end of 2021. However, after subsequent announcements by the FCA, the LIBOR
administrator and other regulators, certain of the most widely used LIBORs have been extended and are expected to 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
16
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2022
(Unaudited)
in excess thereof. The Administrator receives a quarterly fee at annual rates of 0.20% of Average Weekly 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 six months ended April 30, 2022 were $205,078.
C. Affiliated Shareholder: At April 30, 2022,
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 six months ended April 30, 2022
were $198,299,911 and $383,036,644, respectively.
Note 5. Distributions and Tax Information:
At April 30, 2022, the approximate federal tax cost and aggregate gross unrealized appreciation (depreciation) were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Federal Tax Cost |
|
Unrealized
Appreciation |
|
Unrealized
Depreciation |
|
Net Unrealized
Appreciation |
| |
|
$3,356,420,456 |
|
|
|
|
$1,232,708,711 |
|
|
|
|
$(139,078,299 |
) |
|
|
|
$1,093,630,412 |
|
At October 31, 2021, the Fund had $54,825,939 of long-term capital loss carryovers
available to offset future realized gains, if any, to the extent permitted by the Code. These capital losses are carried forward without expiration.
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.
Note 6. 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
17
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2022
(Unaudited)
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 the ability to require
repayment of the Facility upon 179 days’ notice or following an event of default. For the six months ended April 30, 2022, the average daily borrowings under the Facility and the weighted daily average interest rate were $598,000,000 and
1.09%, respectively. As of April 30, 2022, the amount of such outstanding borrowings was $598,000,000 and the applicable interest rate was 1.65%.
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 April 30, 2022, Hypothecated Securities under the Facility had a market value of $2,368,747,472 and Rehypothecated Securities had a
market value of $551,763,661. 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.
18
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2022
(Unaudited)
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 |
|
|
|
|
$99,040,000 |
|
| |
|
B |
|
|
|
|
200,000,000 |
|
|
|
|
3.00% |
|
|
|
|
7/22/26 |
|
|
|
|
189,320,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
$300,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$288,360,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $205,638 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.
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 7. 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.
Key terms of each series of MRP Shares at April 30, 2022 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% |
|
|
|
|
3.12% |
|
|
|
|
2.46% |
|
|
|
|
4/1/2024 |
|
|
|
|
$75,000,000 |
|
| |
|
E |
|
|
|
|
1,320 |
|
|
|
|
132,000,000 |
|
|
|
|
Fixed Rate |
|
|
|
|
4.63% |
|
|
|
|
4.63% |
|
|
|
|
4/1/2027 |
|
|
|
|
129,320,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
2,070 |
|
|
|
|
$207,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$204,320,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $104,609 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.
19
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2022
(Unaudited)
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.
In
general, the holders of the MRP Shares and of the Common Stock have equal voting rights of one vote per share. The holders of the MRP Shares are entitled to elect two members of the Board of Directors, and separate class votes are required on
certain matters that affect the respective interests of the MRP Shares and the Common Stock.
Note 8. 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 $35,985 are recorded as a reduction in paid-in surplus on common stock. The weighted average premium to NAV
per share sold during the six months ended April 30, 2022 was 14.29%.
Note 9. Merger:
On March 8, 2021, pursuant to an Agreement and Plan of Merger (the “Merger”), all of the assets and liabilities
of Duff & Phelps Utility and Corporate Bond Trust Inc. (“DUC”) were acquired by the Fund in exchange for an equal aggregate value of shares of the Fund.
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
20
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2022
(Unaudited)
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 |
|
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.
21
DNP SELECT INCOME FUND INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2022
(Unaudited)
Note 10. 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 11. 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.
22
RENEWAL OF INVESTMENT ADVISORY AGREEMENT (Unaudited)
Under
Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”), the terms of the Fund’s investment advisory agreement must be reviewed and approved at least annually by the Board of Directors of the Fund (the
“Board”), including a majority of the directors who are not “interested persons” of the Fund, as defined in section 2(a)(19) of the 1940 Act (the “Independent Directors”). Section 15(c) of the 1940 Act also
requires the Fund’s directors to request and evaluate, and the Fund’s investment adviser to furnish, such information as may reasonably be necessary to evaluate the terms of the investment advisory agreement. To assist the Board with this
responsibility, the Board has appointed a Contracts Committee, which is composed of the Independent Directors of the Fund and acts under a written charter that was most recently amended on December 17, 2015. A copy of the charter is available
on the Fund’s website at www.dpimc.com/dnp and in print to any shareholder, upon request.
The Contracts Committee,
assisted by the advice of independent legal counsel, conducted an annual review of the terms of the Fund’s contractual arrangements, including the investment advisory agreement with Duff & Phelps Investment Management Co. (the
“Adviser”). Set forth below is a description of the Contracts Committee’s annual review of the Fund’s investment advisory agreement, which provided the material basis for the Board’s decision to continue the investment
advisory agreement.
In the course of the Contracts Committee’s review, the members of the Contracts Committee
considered all of the information they deemed appropriate, including informational materials furnished by the Adviser in response to a request made by independent counsel on behalf of the Contracts Committee. In arriving at its recommendation that
continuation of the investment advisory agreement was in the best interests of the Fund and its shareholders, the Contracts Committee took into account all factors that it deemed relevant, without identifying any single factor or group of factors as
all-important or controlling. Among the factors considered by the Contracts Committee, and the conclusion reached with respect to each, were the following:
Nature, extent, and quality of services. The Contracts Committee considered the nature, extent and quality of the
services provided to the Fund by the Adviser. Among other materials, the Adviser furnished the Contracts Committee with a copy of its most recent investment adviser registration form (Form ADV). In evaluating the quality of the Adviser’s
services, the Contracts Committee noted the various complexities involved in the operations of the Fund, such as the use of multiple forms of leverage (senior notes, preferred stock and borrowings under a credit facility), the rehypothecation of
portfolio securities pledged under the credit facility and the Fund’s ongoing “at-the-market” offering program for its common stock, and concluded that
the Adviser is consistently providing high-quality services to the Fund in an increasingly complex environment. The Contracts Committee also considered the length of service of the individual professional employees of the Adviser who provide
services to the Fund. In the Contracts Committee’s view, the long-term service of capable and conscientious professionals provides a significant benefit to the Fund and its shareholders. The Contracts Committee also considered the Fund’s
investment performance as discussed below. The Contracts Committee also took into account its evaluation of the quality of the Adviser’s code of ethics and compliance program. The Contracts Committee also considered the consistent quality of
the services being provided by the Adviser even in light of the disruptions related to the COVID-19 pandemic. In light of the foregoing, the Contracts Committee concluded that it was generally satisfied with
the nature, extent and quality of the services provided to the Fund by the Adviser.
Investment performance of the Fund
and the Adviser. The Contracts Committee reviewed the Fund’s investment performance over time and compared that performance to other funds in its peer group. In making its
23
comparisons, the Contracts Committee utilized data provided by the Adviser and a report from Broadridge (“Broadridge”), an independent provider of investment company data. As reported
by Broadridge, the Fund’s net asset value (“NAV”) total return ranked above the median among all leveraged closed-end equity funds categorized by Broadridge as utility funds for the 3-, 5- and 10-year periods ended June 30, 2021, and below the median for that same group for the
1-year period ended June 30, 2021. The Adviser provided the Contracts Committee with performance information for the Fund for the 1-,
3-, and 5-year periods ended June 30, 2021, measured against two benchmarks: the Lipper Utility Peer Group Average and a composite of the S&P 500 Utilities
Index and the Bloomberg U.S. Utility Bond Index (the “S&P Composite”), calculated to reflect the relative weights of the Fund’s equity and bond portfolios. The Contracts Committee noted that on an NAV total return basis, the Fund
outperformed the Lipper Utility Peer Group Average for the 3- and 5-year periods ended June 30, 2021, while trailing that peer group average for the 1-year period ended June 30, 2021. On a market value basis, the Fund’s total return underperformed the peer group average for the 1-,
3- and 5-year periods ended June 30, 2021 The Contracts Committee also noted that the Fund’s NAV total return underperformed the S&P Composite for the 3- and 5-year periods ended June 30, 2021 while outperforming the S&P Composite for the 1-year period ended June 30,
2021. On a market value basis, the Fund underperformed the S&P Composite for the 1- and 3-year periods ended June 30, 2021 while outperforming the S&P
Composite for the 5-year period ended June 30, 2021.
The Contracts Committee
also considered that since current income is one of the Fund’s primary objectives, one measure of the Adviser’s performance is the fact that the Fund has been paying a regular 6.5 cent per share monthly distribution on its common stock
since July 1997, and that the Fund’s annualized distribution rate of 7.46% based on market value as of June 30, 2021 compares favorably with the 3.24% yield of the S&P Utilities Index (and the 1.35% yield of the S&P 500 Index,
representing the broader market), while considering that the Fund’s distribution rate contains a component of return of capital. The Contracts Committee noted that the Fund’s managed distribution plan provides for the Fund to distribute
all available investment income to shareholders and, if sufficient investment income is not available on a monthly basis, to distribute long-term capital gains and/or return capital to its shareholders in order to maintain the 6.5 cent per share
monthly distribution level. Additionally, the Contracts Committee considered the fact that since 1990, the Fund’s common stock has traded at a premium to NAV over 96% of the time (even though most
closed-end funds trade at a discount to NAV) as further evidence of the Adviser’s successful management of the Fund’s investment portfolio.
Costs of services and profits realized. The Contracts Committee considered the reasonableness of the compensation paid
to the Adviser, in both absolute and comparative terms, and also the profits realized by the Adviser and its affiliates from its relationship with the Fund. To facilitate this analysis, the Contracts Committee retained Broadridge to furnish a report
comparing the Fund’s management fee (defined as the sum of the advisory fee and administration fee) and other expenses to the similar expenses of other comparable funds selected by Broadridge (the “Broadridge expense group”). The
Contracts Committee reviewed, among other things, information provided by Broadridge comparing the Fund’s contractual management fee rate (at common asset levels) and actual management fee rate (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 Broadridge expense group. Based on the data provided on management fee rates, the Contracts Committee noted that: (i) the Fund’s contractual
management fee rate at a common asset level was lower than the median of its Broadridge expense group; (ii) the actual total expense rate was above the median on a total asset basis and on the basis of assets attributable to common stock; and
(iii) the actual management fee rate was lower than the median of its Broadridge expense group on a total asset basis and on the basis of assets attributable to common stock.
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In reviewing expense ratio comparisons between the Fund and other funds in the
peer group selected by Broadridge, the Contracts Committee considered leverage-related expenses separately from other expenses. The Contracts Committee noted that leverage-related expenses are not conducive to direct comparisons between funds,
because the leverage-related expenses on a fund’s income statement are significantly affected by the amount, type, tenor and accounting treatment of the leverage used by each fund, among other factors, and considered the Adviser’s report
indicating that the tenor and diversification of the Fund’s leverage were the primary drivers of the difference between the Fund’s investment-related expenses and those of other funds in the Broadridge peer group. Also, unlike all the
other expenses of the Fund (and other funds) which are incurred in return for a service, leverage expenses are incurred in return for the receipt of additional capital that is then invested by the Fund (and other funds using leverage) in additional
portfolio securities that produce revenue directly offsetting the leverage expenses. Accordingly, in evaluating the cost of the Fund’s leverage, the Contracts Committee considered the specific benefits to the Fund’s common shareholders of
maintaining such leverage, noting that the Fund’s management and the Board regularly monitor the amount, form, terms and risks of the Fund’s leverage, and that such leverage has continued to be accretive, generating net income for the
Fund’s common shareholders over and above its cost.
The Adviser also furnished the Contracts Committee with copies of
its financial statements, and the financial statements of its parent company, Virtus Investment Partners, Inc. The Adviser also provided information regarding the revenue and expenses related to its management of the Fund, and the methodology used
by the Adviser in allocating such revenue and expenses among its various clients. In reviewing those financial statements and other materials, the Contracts Committee examined the profitability of the investment advisory agreement to the Adviser and
determined that the profitability of that contract was reasonable in light of the services rendered to the Fund. The Contracts Committee considered that the Adviser must be able to compensate its employees at competitive levels in order to attract
and retain high-quality personnel to provide high-quality service to the Fund. The Contracts Committee concluded that the investment advisory fee was the product of arm’s length bargaining and that it was fair and reasonable to the Fund.
Economies of scale. The Contracts Committee considered whether the Fund has appropriately benefited from any economies
of scale. The Contracts Committee noted the breakpoints whereby the advisory fee is reduced at higher asset levels and concluded that any economies of scale are being shared between Fund shareholders and the Adviser in an appropriate manner.
Comparison with other advisory contracts. The Contracts Committee also received comparative information from the Adviser
with respect to its standard fee schedule for investment advisory clients other than the Fund. The Contracts Committee noted that, among all accounts managed by the Adviser, the Fund’s advisory fee rate is comparable to the Adviser’s
standard fee schedule at certain asset levels. However, the Contracts Committee noted that the services provided by the Adviser to the Fund are significantly more extensive and demanding than the services provided by the Adviser to its non-investment company, institutional accounts. Specifically, in providing services to the Fund, the Contracts Committee considered that the Adviser needs to: (1) comply with the 1940 Act, the Sarbanes-Oxley
Act and other federal securities laws and New York Stock Exchange requirements, (2) provide for external reporting (including semi-annual reports to shareholders, annual audited financial statements and disclosure of proxy voting), tax
compliance and reporting (which are particularly complex for investment companies), requirements of Section 19 of the 1940 Act relating to the source of distributions, (3) prepare for and attend meetings of the Board and its committees,
(4) communicate with Board and committee members between meetings, (5) communicate with a retail shareholder base consisting of thousands of investors, (6) manage the use of different forms of financial leverage and respond to
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changes in the financial markets and regulatory environment that could affect the amount and type of the Fund’s leverage and (7) respond to unanticipated issues in the financial markets
or regulatory environment that can impact the Fund. Based on the fact that the Adviser only provides the foregoing services to its investment company clients and not to its institutional account clients, the Contracts Committee concluded that the
management fees charged to the Fund are reasonable compared to those charged to other clients of the Adviser, when the nature and scope of the services provided to the Funds are taken into account. Furthermore, the Contracts Committee noted that
many of the Adviser’s other clients would not be considered “like accounts” of the Fund because these accounts are not of similar size and do not have the same investment objectives as, or possess other characteristics similar to, the
Fund.
Indirect benefits. The Contracts Committee considered possible sources of indirect benefits to the Adviser
from its relationship to the Fund, including brokerage and soft dollar arrangements, and enhanced reputation that may aid in obtaining new clients. In this regard, the Contracts Committee noted that the Fund does not utilize affiliates of the
Adviser for brokerage purposes, that the Adviser does not use third-party soft dollar arrangements and that the Adviser has continued to seek opportunities to reduce brokerage costs borne by the Fund.
Conclusion. Based upon its evaluation of all material factors, including the foregoing, and assisted by the advice of
independent legal counsel, the Contracts Committee concluded that the continued retention of the Adviser as investment adviser to the Fund was in the best interests of the Fund and its shareholders. Accordingly, the Contracts Committee recommended
to the full Board that the investment advisory agreement with the Adviser be continued for a one-year term ending March 1, 2023. On December 16, 2021, the Contracts Committee presented its
recommendations, and the criteria on which they were based, to the full Board, whereupon the Board, including all of the Independent Directors voting separately, accepted the Contracts Committee’s recommendations and unanimously approved the
continuation of the current investment advisory agreement with the Adviser for a one-year term ending March 1, 2023.
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INFORMATION ABOUT PROXY VOTING BY THE FUND (Unaudited)
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.