UTILITY TRUST
[LOGO OMITTED]
THE GABELLI
UTILITY TRUST
ANNUAL REPORT
DECEMBER 31, 2002
[LOGO OMITTED]
THE GABELLI
UTILITY TRUST
Our cover icon represents the underpinnings of Gabelli. The Teton mountains in
Wyoming represent what we believe in in America -- that creativity, ingenuity,
hard work and a global uniqueness provide enduring values. They also stand out
in an increasingly complex, interconnected and interdependent economic world.
INVESTMENT OBJECTIVE:
The Gabelli Utility Trust is a closed-end, non-diversified management investment
company whose primary objectives are long-term growth of capital and income. The
Utility Trust will invest in companies that provide products, services or
equipment for the generation or distribution of electricity, gas and water.
Additionally, the Utility Trust will invest in companies in telecommunications
services or infrastructure operations.
THIS REPORT IS PRINTED ON RECYCLED PAPER.
[GRAPHIC OMITTED]
PICTURE OF MARIO GABELLI
[LOGO OMITTED]
THE GABELLI
UTILITY TRUST
TO OUR SHAREHOLDERS,
In our view, the major investment theme for electric, gas and telephone
utilities can be summed up in two words: size matters. Electric generators with
a large and geographically diverse portfolio of generating plants can trade
around their structural long positions to enhance returns while avoiding the
risk of asset concentration in a single market. Electric, gas and telephone
distribution companies can spread their substantial fixed costs over a larger
base of customers and see the cost per customer decline, enhancing earnings
while reducing prices. Although the current unsettled market conditions seem to
have caused the consolidation activity seen over the past several years to slow
for a while, the underlying economics continue to support additional merger and
acquisition activity over time. We believe that the recent entry of large
European acquirers, the relatively low stock prices of utility companies and the
potential repeal by congress of the 1935 Public Utility Holding Company Act,
known as PUHCA, could accelerate the utility consolidation trend in the coming
quarters.
PREMIUM / DISCOUNT DISCUSSION
As a refresher to our shareholders, the price of a closed-end mutual fund
is determined in the open market by willing buyers and sellers. Shares of The
Gabelli Utility Trust (the "Trust") trade on the New York Stock Exchange and may
trade at a premium to (higher than) net asset value ("NAV") (the market value of
the Trust's underlying portfolio) or a discount to (lower than) net asset value.
Of the 545 closed-end funds that are publicly traded in the U.S., approximately
23% currently trade at premiums to NAV versus 32% five years ago and 49% ten
years ago.
Ideally, the Trust's market price will generally track the NAV. The
Trust's premium or discount to NAV fluctuates over time. Over our Trust's 3-year
history, the range fluctuated from a 3% discount in November 2000 to a 46%
premium in September 2002. The average variance from NAV for the Trust since
inception is a 15.7% premium to NAV. Shortly after the inception of the Trust,
the market price of the Trust exceeded the NAV and this premium has gradually
increased since.
"Mr. Market" often provides opportunities to invest at a discount. The
Trust has considered various initiatives to narrow the discount when appropriate
through distribution policies, rights offerings, share repurchase programs and
the potential use of leverage.
PREMIUM / DISCOUNT DISCUSSION
-------------------------------
December 31, 2002
-----------------
Net Asset Value $6.27
Market Price $8.72
Premium 39.07%
-------------------------------
[GRAPH OMITTED]
PLOT POINTS FOLLOW:
7/9/99 0.1672
8/99 0.0816
9/99 0.1152
10/99 0.0582
11/99 0.0117
12/99 0.0007
1/00 0.0375
2/00 0.0289
3/00 -0.0127
4/00 0.0417
5/00 -0.0016
6/00 0.0403
7/00 0.0016
8/00 0.0081
9/00 0.0064
10/00 -0.022
11/00 0.0003
12/00 0.0658
1/01 0.0532
2/01 0.1445
3/01 0.0728
4/01 0.1646
5/01 0.1409
6/01 0.1223
7/01 0.1229
8/01 0.1643
9/01 0.1572
10/01 0.2455
11/01 0.2414
12/01 0.2746
1/02 0.3454
2/02 0.3704
3/02 0.3101
4/02 0.3225
5/02 0.1723
6/02 0.2561
7/02 0.3297
8/02 0.4065
9/02 0.4262
10/02 0.3246
11/02 0.4400
12/02 0.3907
INVESTMENT RESULTS (a)
--------------------------------------------------------------------------------
Quarter
-----------------------------------------
1ST 2ND 3RD 4TH YEAR
2002: Net Asset Value $7.45 $6.95 $6.03 $6.27 $6.27
Total Return 4.3% (5.5)% (10.8)% 7.2% (5.7)%
--------------------------------------------------------------------------------
2001: Net Asset Value $7.83 $7.93 $7.38 $7.32 $7.32
Total Return (2.8)% 3.2% (5.1)% 2.6% (2.3)%
--------------------------------------------------------------------------------
2000: Net Asset Value $7.66 $7.63 $8.26 $8.21 $8.21
Total Return 2.6% 1.6% 10.3% 6.2% 21.9%
--------------------------------------------------------------------------------
1999: Net Asset Value -- -- $7.51 $7.62 $7.62
Total Return -- -- 0.1%(c) 3.5% 3.6%(c)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Average Annual Returns - December 31, 2002
------------------------------------------
Average Annual Average Annual
NAV Return (a) Investment Return (b)
-------------- ---------------------
1 Year .................... (5.73)% 0.52%
3 Year .................... 3.96% 14.80%
Life of Fund (c) .......... 4.46% 11.72%
--------------------------------------------------------------------------------
(a) Life of Fund return based on initial net asset value of $7.50. Total returns
and average annual returns reflect changes in net asset value, reinvestment of
distributions at net asset value on the ex-dividend date and adjustments for
rights offerings, and are net of expenses. Of course, the returns noted
represent past performance and do not guarantee future results. Investment
returns and the principal value of an investment will fluctuate. When shares are
sold they may be worth more or less than their original cost.
(b) Life of Fund return based on initial offering price of $7.50. Total returns
and average annual returns reflect changes in closing market values on the New
York Stock Exchange, reinvestment of distributions at the price determined in
the Fund's dividend reinvestment program and adjustments for rights offerings.
(c) From commencement of investment operations on July 9, 1999.
COMPARATIVE RESULTS
--------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS THROUGH DECEMBER 31, 2002 (A)
----------------------------------------------------
SINCE
QUARTER INCEPTION (B) 3 YEAR 1 YEAR
------- ------------- ------ ------
Gabelli Utility Trust NAV Return (c) .................. 7.15% 4.46% 3.96% (5.73)%
Gabelli Utility Trust Investment Return (d) ........... 3.67% 11.72% 14.80% 0.52%
S&P Utility Index ..................................... 4.88% (10.31)% (8.52)% (29.99)%
Lipper Utility Fund Average ........................... 8.76% (9.67)% (12.82)% (23.79)%
(a) Returns represent past performance and do not guarantee future results.
Investment returns and the principal value of an investment will
fluctuate. When shares are sold, they may be worth more or less than their
original cost. The S&P Utility Index is an unmanaged indicator of electric
and gas utility stock performance, while the Lipper Average reflects the
average performance of open-end mutual funds classified in this particular
category. Dividends are considered reinvested. Performance for periods
less than one year are not annualized.
(b) From commencement of investment operations on July 9, 1999.
(c) Total returns and average annual returns reflect changes in net asset
value ("NAV"), reinvestment of distributions at net asset value on the
ex-dividend date and adjustments for rights offerings, and are net of
expenses. Since inception return based on initial net asset value of
$7.50.
(d) Total returns and average annual returns reflect changes in closing
market values on the New York Stock Exchange, reinvestment of
distributions at the price determined in the Fund's dividend reinvestment
program and adjustments for rights offerings. Since inception return based
on initial net asset value of $7.50.
--------------------------------------------------------------------------------
The Trust's long-term investment goal is growth of capital and income. We
believe that our stock selection process adds to the investment equation. Our
portfolio has provided a respectable 4.5% average annual return since inception.
The market forces have led to an 11.7% average annual return since inception.
However, it is important to remember that "Mr. Market" is a pendulum that swings
both ways. As the market moves away from momentum investing and back to basics,
we believe that an excessive premium for the Trust is not likely to be
sustainable.
[GRAPHIC OMITTED]
E P
P M
S V
MANAGEMENT
CASH FLOW
RESEARCH
2
2002 GUT SHAREHOLDER SURVEY
With our third quarter report to shareholders, we included a survey asking
for your opinions and thoughts. We wanted to know what our shareholders think
about the operations of the Trust. Specifically, we wanted your opinions on the
following issues:
o $0.06 Monthly Distribution Policy
o Monthly or Quarterly Distributions
o Rights Offerings
o Offering Preferred Stock
In regard to these issues, we included a shareholder response card. To
date we have received 5,858 responses. A summary of our shareholders' opinions
is set forth below:
Q1. $0.06 MONTHLY DISTRIBUTION POLICY -- SHOULD THE UTILITY TRUST CONTINUE ITS
$0.06 PER SHARE MONTHLY DISTRIBUTION POLICY?
Over 70% of those who responded said we should continue this policy.
Q2. PREFER MONTHLY OR QUARTERLY DISTRIBUTIONS -- SHOULD THE UTILITY TRUST
CONTINUE ITS MONTHLY DISTRIBUTION POLICY OR WOULD YOU PREFER A QUARTERLY
DISTRIBUTION?
Divided equally, about 50-50. Many shareholders who receive cash indicated
a strong preference for continuing monthly distributions.
Q3. RIGHTS OFFERINGS -- SHOULD THE UTILITY TRUST HAVE ANOTHER RIGHTS OFFERING?
THE UTILITY TRUST COMPLETED A RIGHTS OFFERING ON JUNE 27, 2002, OFFERING
ADDITIONAL SHARES TO SHAREHOLDERS AT $7.50.
Nearly 63% of those responding were in favor of the Utility Trust having
future Rights Offerings.
Q4. OFFERING PREFERRED STOCK -- ARE YOU IN FAVOR OF THE UTILITY TRUST OFFERING
PREFERRED STOCK?
27% of shareholders responded in favor of offering Preferred Stock.
64% said no to offering Preferred Stock and many expressed they wanted to
know more about the pros and cons a Preferred Offering would have.
Management thanks you for all your responses and comments. We appreciate
the time you took to inform us so we can better serve you. We are available to
answer any additional questions you may have. While all of your responses were
too numerous to list here, below are examples (edited) of some of the comments
received. First some of the negatives:
"No more rights offerings!!!!"
"Why do you have so much trouble doing good in utilities??"
"How are you tabulating the results of this survey? On the surface this survey
appears to be a sham! I hope I'm wrong."
"The monthly dividend is a portion of my monthly income. If you begin to pay
quarterly, I will sell my shares and invest in a closed-end security that does
pay monthly."
"The price of the rights offering was too high."
"The reason that I own this Trust is that it is an income producing investment.
If it stopped paying it's dividend, I would sell it."
"Try to earn more. Everything is negative!"
"In my opinion, utility stocks are very depressed and that's why power stocks
are usually held by governmental entities all over the world and that's why
governments issue bonds."
3
"A rights offering at a 20% discount would still be above the NAV if
shareholders get stock at a steep discount it will decrease the market price of
the Trust in all probability. I realize that a rights offering is what a closed
end fund must do to raise cash and expand."
"Why do you need more cash from either a rights offering or preferred stock when
25% of the Trust's assets are in US Bonds?"
"Concentrate on getting NAV closer to market price!"
"I find this rather humorous that you would be asking the shareholders "hey,
should we have another rights offering?" The offerings are usually opportunity
based. You tell us, the interest is there."
"How should I know!"
"Don't understand where the premium comes from."
"The Fund should only have dividend paying stocks."
"The 42% premium is going to collapse when interest rates rise and the stock
price increases. Start taking actions to protect shareholders now."
"I'm in the Fund because you are smarter than I (or that was my thought several
years ago). Don't try to prove me wrong!"
"I worry about the existing premium of the stock price relative to NAV. Any way
to reduce it without scalping the price?"
"Just run the damn store!"
"Utilities are a dangerous investment right now because a lot of the leaderships
have collectively gone insane and squandered shareholder assets on energy
trading. I hope you can avoid those incompetent managements."
"Why not liquidate?"
"People invested in this fund are not in a democracy. You are supposed to be
professional managers, don't ask us to vote. Earn your fees and do what is
necessary to increase value!!!"
ON THE POSITIVE SIDE:
"Keep up the good work."
"I like it just as it is. Not broken, don't fix it."
"With many sectors of the utility industry experiencing distress, this is an
opportune time to raise capital and place the funds with our very capable
management team. You're doing a great job. Keep it up!"
"GUT is a plus to my portfolio."
"We trust Mario!! No opinions on the questions."
"Hang in there! Your choices of utilities are excellent (meaning I like them
too)."
"One of the best funds I have owned. Come on Mario, let's see you more on
CNBC!"
"You stand out as a responsible investment advisor. Congratulations and keep up
the honesty!"
"I'm satisfied with the program as it is now. Keep up the good work. Thanks for
asking shareholders opinions!"
"You are doing a good job in a bad market -- please maintain our value. Thanks."
4
"In light of today's low interest rates on many investments, GUT offers a very
good return. I also see nothing but progress for this Trust in the future. I am
very satisfied that I have invested with this instrument."
"You have done good so far. Just keep it up. Us old folks need all the income we
can get."
"The Trust has performed well in a down market. Thank you."
"I am 93 years old. A monthly distribution is better for me."
"Doing a good job in a trying current market."
"Please keep up the great work! Your fund has been one of my few winners during
this bear market."
"Kudos for your excellent communication with shareholders. Since dividends are
paid monthly, they should continue to be paid in that fashion.
"I was happy to see you bought some Otter Tail Corp. Your man on the rights
offering has always been so helpful."
"Fund is very good -- small -- but steady and safe!!"
"I've had GUT since July 1999 -- a good solid investment -- it requires very
little attention."
"We are in favor of whatever choices you deem to be in the best interest of the
shareholders."
"Thanks for your diligent management in a time where there are so many land
mines."
"Thank you for explaining the basics of net asset value, market price and
premium percentage in the quarterly report."
"I would never believe that Mario needed or sought the advice of his
stockholders. Good for him. We need to guard the dividend of utility companies
that are so immersed in debt."
"You have always showed respect and concern for your shareholders and we
appreciate it."
"I love David Schacter!"
"I like your easy to read quarterly reports. Keep it up."
"Thanks for the opportunity to express our views."
In reading your comments, however, it became clear to us that we needed to
more fully describe each of the policies and explain the benefits in more
detail. To this end we thought we would revisit some questions about each issue.
$0.06 MONTHLY DISTRIBUTION POLICY -- Q & A
------------------------------------------
Q: WHY DOES THE UTILITY TRUST PAY DIVIDENDS?
A mutual fund pays dividends to satisfy one of the requirements to qualify
as a Regulated Investment Company. To avoid paying income tax at the corporate
level, a mutual fund, whether open-end or closed-end like the Gabelli Utility
Trust, must distribute at least 90% of its ordinary income and realized capital
gains but will generally distribute all of its income for the year and thereby
act as a conduit. As a Regulated Investment Company, the tax benefits of net
long-term capital gains can be passed through to shareholders.
Q: WHAT IS THE HISTORY OF THE UTILITY TRUST'S DISTRIBUTIONS?
The following chart summarizes the total distributions made or declared by
the Utility Trust each year since inception.
1999 2000 2001 2002 (A)
---- ---- ---- --------
$0.15 $1.00 $0.70 $0.72
(a) On May 22, 2002, the Trust distributed Rights equivalent to $0.085 per share
upon full subscription of all issued shares.
5
Q: HOW WILL THE NEW TAX LAWS AFFECT DISTRIBUTIONS?
It's still too early to tell. So far it appears that only the portion of
the Fund's distribution that is derived from corporate dividend income would
benefit from a dividend tax cut.
Q: WHY ARE A PORTION OF THE DISTRIBUTIONS SOMETIMES CLASSIFIED AS NON-TAXABLE
DISTRIBUTIONS (NON-TAXABLE RETURN OF CAPITAL)?
In the event the Trust distributes cash over and above net investment
income and realized capital gains for any year, the cash received may be viewed
as a tax-free return of capital. In this instance, shareholders pay no tax and
reduce their cost basis by the amount of the distribution equal to the return of
capital. In order to assist shareholders with their bookkeeping, an Historical
Distribution Summary appears in the Annual Report (page 23) which lists the
appropriate adjustment to cost basis.
Q: HOW DO I REINVEST MY DIVIDENDS?
All directly registered shareholders are eligible to participate in the
Trust's Automatic Dividend Reinvestment Plan which gives the shareholder the
option of having all distributions reinvested. Distributions will be reinvested
automatically unless the shareholder elects to receive cash. Distributions to
the shareholders who hold their shares in "street name" with a broker are
reinvested by the broker in additional shares under the Plan if the broker
participates in the Plan. Such shareholders should check with their broker to
see if their brokerage firm participates in the Plan.
One of the benefits of participating in the Trust's Automatic Dividend
Reinvestment Plan is that when the Trust is trading at a premium, where the
market price is equal to or exceeds net asset value, participants are issued
shares of Common Stock valued at the greater of the net asset value as most
recently determined or 95% of the then current market price of the Utility
Trust's Common Stock.
RIGHTS 101 -- Q & A
Q: WHAT ARE RIGHTS?
Rights are privileges granted to existing shareholders of a corporation
(in our case the Gabelli Utility Trust) to subscribe to shares of a new issue of
common stock. These rights represent short-term options granted by the
corporation which the shareholder has the option of exercising.
Q: WHAT IS THE HISTORY OF RIGHTS OFFERINGS?
Rights offerings have been used in Europe since the late 17th century
following the commencement of the London Stock Exchange. In England, rights
offerings are commonplace and well-regarded by shareholders, and represent an
integral part of its capital markets. While underwritten public offerings have
been the preferred method of raising capital in the U.S., rights offerings have
become more understood and more widely used. Today, rights offerings are even
more common in the U.S. and we expect that their frequency and effectiveness
will increase.
Q: WHAT IS A RIGHTS OFFERING AS IT RELATES TO CLOSED-END FUNDS?
A rights offering is an opportunity for shareholders to purchase
additional shares of a publicly traded company or mutual fund at a specified
price -- the "subscription price" -- with a nominal commission. To attract
shareholder interest, the subscription price is set at a discount to the current
market price. Although shareholders are not required to purchase additional
shares, they are given the opportunity, or "right", to purchase shares based on
the number of underlying shares they own on the record date. Rights may either
be transferable or non-transferable and the offering may or may not be
underwritten with a commitment by the underwriter to buy what is not subscribed
for.
Q: WHAT ARE TRANSFERABLE RIGHTS VERSUS NON-TRANSFERABLE RIGHTS?
Non-transferable rights have no value other than that they may be
exercised and do not trade on any exchange.
Transferable rights may trade on an exchange and afford the
non-subscribing shareholder the option of selling their rights on the exchange
or through the transfer agent. Selling the rights allows a non-subscribing
shareholder to recoup much of the dilution that may otherwise occur. A
non-transferable rights offering does not permit such an offset so that
non-subscribing shareholders could experience full dilution. Every closed-end
rights offering at Gabelli has been transferable, allowing shareholders to sell
their rights if they so desire.
6
Q: HOW IS A RIGHTS OFFERING BENEFICIAL TO SHAREHOLDERS?
The Fund shareholder benefits from the opportunity to purchase additional
shares with no commission if shares are held directly with the Fund or, in some
instances, with a nominal charge from their broker. Thus, an investor is able to
put more financial assets to work in an investment discipline in which she or he
believes and which has performed well over an extended period of time. The
additional capital that is raised by the Fund is used to position the portfolio
to more fully take advantage of new investment opportunities. Increasing the
asset size of the Fund may also result in lowering the Fund's fixed expenses as
a percentage of average net assets.
Q: HOW IS A GABELLI FUNDS RIGHTS OFFERING BETTER THAN OTHER RIGHTS OFFERINGS
BY CLOSED-END FUNDS?
There are two types of rights offerings a closed-end fund may use to raise
additional capital: the direct offering method and the firm-underwritten method.
The Gabelli Funds utilize a direct offering method to realize the relative cost
advantages associated with this approach as compared to a firm-underwritten
method. A direct offering avoids costly underwriting and distribution service
fees that lessen shareholder value.
Q: ARE THE SHAREHOLDERS IN FAVOR OF RIGHTS OFFERINGS?
We have received numerous requests from the shareholders of our Funds for
rights offerings. Our shareholders have been overwhelmingly in favor of rights
offerings and look forward to future ones. This interest was evidenced by the
oversubscribed rights offerings the Utility Trust had last year and by the
recent Utility Trust survey.
Q: HOW DID THE GABELLI FUNDS FARE IN THEIR PREVIOUS RIGHTS OFFERING?
The Gabelli Funds have conducted eight previous rights offerings. The
following compares the total subscriptions received with the amount sought for
the previous rights offerings:
-----------------------------------------------------------------------------
YEAR FUND AMOUNT SUBSCRIPTIONS
SOUGHT SUBMITTED
($ Millions) ($ Millions)
-----------------------------------------------------------------------------
1991 Equity Trust $ 63 $136
-----------------------------------------------------------------------------
1992 Equity Trust $ 76 $165
-----------------------------------------------------------------------------
1993 Equity Trust $ 93 $176
-----------------------------------------------------------------------------
1995 Multimedia Trust $ 18 $ 44
-----------------------------------------------------------------------------
1995 Equity Trust $119 $200
-----------------------------------------------------------------------------
2000 Multimedia Trust $ 46 $ 86
-----------------------------------------------------------------------------
2001 Equity Trust $126 $225
-----------------------------------------------------------------------------
2002 Utility Trust $ 28 $ 50
-----------------------------------------------------------------------------
2002 Convertible and Income Securities Fund $ 22 $ 53
-----------------------------------------------------------------------------
Q: WHY DO MEMBERS OF THE NEWS MEDIA SAY THAT A RIGHTS OFFERING IS DILUTIVE?
Dilution may be experienced by shareholders who do not fully exercise
their rights. The dilution is the result of issuing new shares below the then
current net asset value. This causes the number of shares outstanding to
increase at a percentage rate greater than the increase in the Fund's assets. To
avoid dilution, a shareholder should fully subscribe to all shares made
available based on the subscription ratio. If a shareholder does not exercise
his or her rights, and sells the rights at their intrinsic value, the
shareholder will not experience dilution. However, a failure to sell rights or a
sale below intrinsic value results in dilution when the subscription price is
below the net asset value.
Please note that the Utility Trust's prior rights offering was at a
subscription price ABOVE the then net asset value. Therefore, it was NOT
DILUTIVE in any way and actually accretive to every shareholder, whether they
subscribed or not! Shareholders realized a positive increase of $0.19 to the
Utility Trust's net asset value.
7
Q: WERE SHAREHOLDERS ABLE TO SELL THEIR RIGHTS IN THE PAST RIGHTS OFFERING
FROM GABELLI FUNDS?
Registered shareholders of the Gabelli Funds had the option of selling all
or a portion of their rights by designating this desire on the Subscription
Certificate that accompanied the Prospectus. The subscription certificate must
have been returned to Equiserve Trust Company by the end of the offering period
at the designated address.
Those who held shares through a broker could simply have made the broker
aware of their desire to sell or exercise the rights.
Q: WHAT WERE THE TRANSACTION COSTS ON THE SALE OF THE RIGHTS?
Rights were sold through Equiserve Trust Company with no fees and only a
nominal commission; however, certain brokerage firms may have charged a
transaction fee to sell or exercise rights.
Q: WHAT IF MY TOTAL NUMBER OF RIGHTS IS NOT EVENLY DIVISIBLE BY THE NUMBER OF
RIGHTS REQUIRED TO PURCHASE AN ADDITIONAL SHARE?
The Fund will automatically round up shareholders' rights allocation so
that the total number of rights a shareholder is granted is evenly divisible by
the number of rights required to purchase an additional share.
PREFERRED STOCK 101 -- Q & A
Q: WHAT IS COMMON STOCK?
A common stock is a unit of ownership (equity) of a public corporation.
Owners of common stock typically are entitled to vote on the selection of
directors and other important matters as well as to receive dividends on their
holdings.
Q: WHAT IS A BOND?
A bond is any interest-bearing or discounted government or corporate
security that obligates the issuer to pay the bondholder a specified sum of
money, usually at specific intervals, and to repay the principal amount of the
loan at maturity. Bondholders do not have corporate ownership privileges, as
stockholders do.
Q: WHAT IS A PREFERRED STOCK?
Preferred stock is a form of equity investment which has certain rights
that differ from those of common stock. In our case, the Preferred Stock would
typically be issued either at $25 per share with a fixed dividend rate or at
$25,000 per share with a variable dividend rate determined periodically through
an auction procedure. The Trust is obligated to pay this dividend to the
Preferred Shareholders before any dividends are paid to the common shares.
Thereafter, any investment return earned in excess of this dividend rate would
work to benefit the Common Shareholders.
The Board of Directors of The Gabelli Utility Trust continues to consider
an offering of preferred stock. The actual amount of capital to be raised, the
dividend rate and the timing of the offering have not been determined and would
be announced at a later date. The proceeds raised would be used for investment
purposes and the offering would be made only be means of a prospectus.
Q: HOW WOULD PREFERRED SHARES BENEFIT COMMON SHAREHOLDERS?
We feel there is an opportunity to take advantage of current low long-term
interest rates and earn an excess return for our Common Shareholders consistent
with our conservative investment approach. The only obligation that the Trust
would have to the Preferred Shareholders is to pay the stated dividend rate. By
locking in low rates through this preferred issuance, the Trust could benefit
common shareholders by earning a return in excess to the cost of maintaining the
preferred stock. That is, any investment return earned in excess of the stated
dividend rate would directly benefit Common Shareholders; however, any shortfall
from the stated rate would impact the Common Shareholder in the opposite
fashion. Therefore, by taking advantage of the currently low interest rate
environment and achieving our investment objectives, a Preferred Share issuance
offers what we believe is a conservative method of adding wealth for our Common
Shareholders.
8
Q: DOES THE ISSUANCE OF PREFERRED SHARES AFFECT THE $0.06 MONTHLY
DISTRIBUTION POLICY?
The issuance of Preferred Shares does not affect the $0.06 Monthly
Distribution Policy. Under present conditions there are no plans to change the
$0.06 Monthly Distribution Policy. If the Utility Trust were to issue Preferred
Shares, the Board of Directors would continue to review the $0.06 Monthly Policy
on a regular basis.
OUR APPROACH
There are nearly 80 publicly traded, investor-owned electric utilities in
the U.S; 50 more than we need from the standpoint of economic efficiency.
Moreover, stand-alone natural gas distribution companies make no economic sense
either; the combination utility model is clearly better. The balkanized
structure of the industry is inherently inefficient, and competitive forces are
now putting pressure on the marginal players. The large companies feel the need
to get bigger in order to achieve scale economies, while the small companies are
selling out as the cost of staying in the game rises. It is only because of a
complex and lengthy merger review and approval process that the industry remains
as fragmented as it is. Our investments in regulated companies have primarily,
though not exclusively, focused on fundamentally sound, reasonably priced
mid-cap and small-cap utilities that are likely acquisition targets for large
utilities seeking to bulk up. We also like the beneficiaries of developing
trends. This has led to our ongoing focus on natural gas pipelines and storage
operators as a way to take advantage of the growing demand for natural gas in
the U.S.
COMMENTARY
Utility stocks came back to life during the fourth quarter of 2002. A
combination of factors helped utilities outperform the overall stock market in
late 2002. These factors included purchases by investors who recognized the
group's oversold condition, continued weakness in the U.S. economy and growing
emphasis on the importance of dividend payments as part of the total return
equation. The group's performance was also aided by another cut in interest
rates by the Federal Reserve Board (the "Fed"), which made the high dividend
yields on utility stocks relatively more attractive.
In addition, it appears that a turning point was reached in the
fundamentals of many utility companies during the second half of 2002. That
bodes well for 2003 and beyond. After so many utility companies became
over-leveraged with debt due to failed attempts to become merchant energy
companies, there was a huge strategic turnaround that started in early 2002 and
accelerated in the second half of 2002. Utility companies decided to get "back
to basics" and they divested and/or wrote down many of their non-utility
investments. Many of the utilities that owned merchant energy trading operations
have either closed them down or are in the process of exiting the energy trading
business.
Along with the strategic turnaround, utilities began a major effort to
repair their damaged balance sheets by issuing huge amounts of new common equity
and using the proceeds to pay down debt. Furthermore, most of the utilities that
were planning to construct new unregulated power plants have cancelled these
projects, resulting in much lower capital spending budgets. Therefore, many
utilities are beginning 2003 with a much stronger capital structure than they
had at the start of 2002. Furthermore, by getting "back to basics", they have
reduced their business risk, improved their cash flows and increased the
stability of their earnings.
Utility stocks still appear cheap to us. On a relative price/earnings
("P/E") basis, utility stocks are near the low end of their historic trading
range relative to the Standard & Poor's ("S&P") 500 Index. Similarly, utility
stocks also look cheap compared with bonds. Historically, long-term government
bonds have yielded more than utility stocks, but for the past several months,
the average yield on utility stocks has been higher than the yield on long-term
government bonds.
The U.S. economy remains weak. The recovery from the recession is
occurring at a very slow pace. Therefore, it is likely that overall corporate
earnings growth in 2003 might be disappointingly slow for investors in some
cyclical and technology sectors. However, the steady and predictable earnings
growth that is being forecasted by most utility companies is less likely to
disappoint investors. In fact, the typical 3% to 5% earnings per share ("EPS")
growth rate for utility stocks might turn out to be quite competitive with the
EPS growth that is achieved in many sectors that trade at much higher P/E ratios
than the utility group.
9
President Bush has proposed a number of tax reductions in an effort to
stimulate the U.S. economy. The proposal to eliminate the double-taxation of
corporate dividends would essentially make dividend payments tax-free to the
common stock investor. Stocks of companies that typically pay high dividends,
such as utilities, should benefit the most if Congress approves this proposal.
Another major fundamental positive for the utility sector would be the
passage of energy legislation by Congress. A comprehensive energy bill was
proposed and debated during 2002, but the bill never moved far enough along to
get voted upon by Congress. We believe that passage of an energy bill is still a
priority for Congress and the President in 2003. In the 2002 energy bill
proposed by President Bush, there was a provision to repeal PUHCA, which has
been a major deterrent to mergers and acquisitions ("M&A") in the utility
industry. We believe that the pace of merger activity would accelerate greatly
if PUHCA is repealed. We are optimistic that with a Republican majority in both
the Senate and the House of Representatives, an energy bill containing the PUHCA
repeal can be passed this year.
Speaking of M&A, we believe that one of the next acquirers of a U.S.
utility will be either a large foreign utility or a large private equity group
from the U.S. Many cash-rich European utilities are shopping around for U.S.
acquisitions. German utility giant E.ON already owns the largest utility in
Kentucky, LG&E Energy. E.ON's Chairman and CEO has said publicly that he wants
to use LG&E and its one million utility customers as a base for making further
U.S. utility acquisitions. Meanwhile, National Grid of the U.K. could be ready
to make another acquisition in the U.S. National Grid already owns three
utilities in the northeastern region of the U.S., including New England
Electric, Eastern Utilities Associates and Niagara Mohawk Power. In addition,
during 2002, large private equity groups acquired two major natural gas
pipelines. In prior years, private equity groups acquired two small electric
utilities.
LET'S TALK STOCKS
The following are stock specifics on selected holdings of our Trust.
Favorable earnings prospects do not necessarily translate into higher stock
prices, but they do express a positive trend that we believe will develop over
time.
CH ENERGY GROUP INC. (CHG - $46.63 - NYSE) is the last small electric utility in
New York State, now that RGS Energy has been acquired by Energy East (EAS -
$22.09 - NYSE). CH Energy serves the territory directly north of New York City
that is mainly rural and suburban. There are several potential buyers for whom
CH Energy would be a good fit, including Consolidated Edison (ED - $42.82 -
NYSE), Energy East, KeySpan (KSE - $35.24 - NYSE), National Grid (NGG - $36.79 -
NYSE) or Public Service Enterprise Group (PEG - $32.10 - NYSE). The buyer could
create significant savings by rationalizing outside plant operations and
eliminating all of the corporate, finance, regulatory and public company
overhead, for the benefit of shareholders and customers. Although it is tough to
predict when a deal might happen, we would point out that National Grid
completed its takeover of Niagara Mohawk several months ago and Grid has
typically waited less than a year between takeovers in the U.S. (where it has
already bought three utilities). Con Edison meanwhile, having done a terrific
job in the aftermath of September 11 and maintained a strong balance sheet and
premium stock price valuation, might be ready to make an offer for CH Energy.
CINERGY CORP. (CIN - $33.72 - NYSE) is another consolidation play. Cinergy has
terrific physical assets (low-cost generating plants) in a strategic location.
Cinergy's Midwest location enables it to market its low-cost power into several
different regions. Furthermore, many of the utilities around Cinergy have grown
much larger in recent years through acquisitions while Cinergy has remained
relatively the same size. Cinergy's power plants in the state of Ohio are
deregulated, giving the company an opportunity to earn higher returns. In
addition, over the past few years, Cinergy's senior management team has
accumulated a hefty position in the common stock and in its options. This should
make them more willing to talk with potential acquirers. Just to the south of
Cinergy's territory is the state of Kentucky, where the giant German utility
E.ON has acquired the largest utility in Kentucky, the former LG&E. E.ON has
stated its intention to acquire other U.S. utilities and Cinergy would be a
great fit with LG&E.
DPL INC. (DPL - $15.34 - NYSE) is another consolidation play in the Midwest. DPL
is the holding company for the small utility, Dayton Power & Light. DPL shares
fell in mid-2002 after the management lowered EPS guidance and also indicated
that it would write down the value of some of its non-utility investment
portfolio. As one of the smallest utilities in the region, and one whose state
(Ohio) has deregulated its low-cost generating plants, we believe that DPL is a
prime target for acquisition by a larger electric company.
10
DQE INC. (DQE - $15.24 - NYSE) is a consolidation play whose stock price fell
sharply in the second quarter when the company came to market with a very large
equity offering. The Fund made additional purchases of DQE stock in the fourth
quarter. DQE is the holding company for the electric utility in Pittsburgh
called Duquesne Light. The company sold off nearly all of its power plants when
the state of Pennsylvania moved toward utility deregulation a few years ago.
DQE's back-to-basics strategy involves divesting non-utility businesses. DQE has
an agreement to sell off its water utility business and plans to use the
proceeds to pay down debt. DQE closed on the sale of its propane business in
December 2002. The company is surrounded by several utilities that are much
larger and we think that its relatively low stock price makes it an attractive
takeover target.
EL PASO ELECTRIC CORP. (EE - $11.00 - NYSE) is a financial comeback story. A few
years ago, this small electric utility serving portions of southwest Texas and
New Mexico, was coming out of bankruptcy. Over the past few years, management
has continued to create shareholder value by utilizing the company's free cash
flow to pay down debt and repurchase large amounts of common stock. Eventually,
due to the company's relatively small size, we believe that El Paso Electric is
a takeover candidate.
GREAT PLAINS ENERGY INC. (GXP - $22.88 - NYSE) is an excellent value for
dividend yield. GXP has one of the highest secure dividends in the sector. The
company completed a major issuance of common equity in the fourth quarter of
2002 that strengthened its balance sheet. GXP is the holding company that owns
Kansas City Power & Light, an electric utility that operates in two states that
have avoided deregulation entirely. In addition, GXP owns one of the few
successful and profitable retail electricity marketing companies in the U.S. The
relatively small size of GXP's utility operation (less than one million
customers) makes it a potential takeover target.
NICOR INC. (GAS - $34.03 - NYSE) is a natural gas utility that serves the area
around the city of Chicago and surrounding counties. The company has relatively
strong fundamentals and a solid track record of good financial performance.
Nevertheless, the share price fell sharply during the third quarter when state
regulators announced a review of the business at a small subsidiary of the
company. This over-reaction by the stock market made the stock very cheap and
the Fund added Nicor to its portfolio during the third quarter when this buying
opportunity arose. Nicor has one of the highest yields among the regulated
natural gas distribution stocks.
NSTAR (NST - $44.39 - NYSE) is a consolidation play in the New England region.
The Fund increased its position in NSTAR during the fourth quarter. NSTAR is
primarily an electric transmission and distribution utility serving the Boston
and Cape Cod regions of Massachusetts. NST also owns a small gas utility. The
Northeast region of the U.S. has been the most active area for consolidation
activity among utilities. There are several potential acquirers for NST,
including National Grid, who recently completed a takeover of Niagara Mohawk and
Consolidated Edison, who could use its relatively high stock price and strong
balance sheet to make another acquisition. KeySpan is another potential acquirer
who already owns a gas utility in the same region.
ONEOK INC. (OKE - $19.20 - NYSE) is pronounced "wun-oke" not "oh-nee-ock." The
name is supposed to mean, "One company, in Oklahoma." This is a natural gas
utility. Westar Energy (WR - $9.90 - NYSE), an electric utility holding company
in neighboring Kansas, has owned 45% of ONEOK for the past few years. In June
2002, Westar announced that it plans to sell its stake in ONEOK. ONEOK had the
right to buy back these shares from Westar at a price of $21.77 per OKE share
for a total cost of $971.1 million. However, because this is quite a lot of cash
for a company like ONEOK to come up with and to do so would create a huge jump
in its financial leverage and threaten its credit ratings, OKE decided not to
exercise its option. Instead, ONEOK decided to become bigger by acquiring a
natural gas utility in Texas for $420 million in December 2002. Therefore,
Westar Energy is now looking for a buyer for this large block of OKE shares. A
likely scenario is that a buyer that wants to take control of ONEOK might make
an offer to Westar to purchase the OKE shares that it now holds.
SCANA CORP. (SCG - $30.96 - NYSE) is a mid-cap electric and gas utility serving
a large portion of South Carolina and small areas of North Carolina and Georgia.
SCANA is either surrounded by, or is in close proximity to, several of the
largest utilities in the U.S. Any one of them could afford to pay a generous
premium to acquire this well-run, financially strong company.
WESTAR ENERGY INC. (WR - $9.90 - NYSE) is a stock with a very low valuation
relative to the sum of its parts. Westar's share price has fallen sharply over
the past 12 months because the company failed to execute its plans to sell the
electric utility operations to PNM Resources (PNM - $23.82 - NYSE) and also due
to disappointing rate orders from regulators in Kansas. During the
11
fourth quarter of 2002, Westar's top two officers resigned, prompting the hiring
of a new CEO and COO. Both of these individuals are experienced utility
executives who we think can turn the company around and, in particular, improve
Westar's relationship with state regulators. We think that Westar's ongoing
effort to divest its 45% ownership stake in ONEOK is a smart move. We would
expect Westar to use the profits from the ONEOK sale to pay off a large portion
of the holding company's debt. We also think that Westar is going to divest much
or all of its 85% ownership stake in Protection One (POI - $2.00 - NYSE), the
nation's second largest monitored security company. The loss on the sale of the
Protection One shares could be used to offset Westar's taxable gain on the sale
of the ONEOK shares.
WWW.GABELLI.COM
Please visit us on the Internet. Our homepage at www.gabelli.com contains
information about Gabelli Asset Management Inc., the Gabelli Mutual Funds, IRAs,
401(k)s, quarterly reports, closing prices and other current news. You can send
us e-mail at closedend@gabelli.com.
In our efforts to bring our shareholders more timely portfolio
information, Gabelli Fund's portfolio managers regularly participate in chat
sessions as reflected below.
FEBRUARY MARCH APRIL
-------- ----- -----
1st Tuesday Howard Ward Howard Ward Howard Ward
1st Wednesday Walter Walsh & Laura Linehan Caesar Bryan Charles Minter & Martin Weiner
2nd Wednesday Caesar Bryan Susan Byrne Susan Byrne
3rd Wednesday Elizabeth Lilly Henry Van der Eb Ivan Arteaga
4th Wednesday Barbara Marcin Barbara Marcin Walter Walsh & Laura Linehan
5th Wednesday Barbara Marcin
All chat sessions start at 4:15 PM (Eastern Time). Please arrive early, as
participation is limited.
You may sign up for our e-mail alerts at www.gabelli.com and receive early
notice of chat sessions, closing mutual fund prices, news events and media
sightings.
Sincerely,
/S/ MARIO J. GABELLI
MARIO J. GABELLI, CFA
Portfolio Manager and Chief Investment Officer
February 1, 2003
--------------------------------------------------------------------------------
SELECTED HOLDINGS
DECEMBER 31, 2002
-----------------
CH Energy Group Inc. Nicor Inc.
Cinergy Corp. NSTAR
DPL Inc. ONEOK Inc.
DQE Inc. SCANA Corp.
El Paso Electric Corp. Westar Energy Inc.
--------------------------------------------------------------------------------
NOTE: The views expressed in this report reflect those of the portfolio manager
only through the end of the period stated in this report. The manager's views
are subject to change at any time based on market and other conditions.
12
THE GABELLI UTILITY TRUST
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2002
MARKET
SHARES COST VALUE
------ ---- ------
COMMON STOCKS -- 77.0%
AGRICULTURE -- 0.0%
20,000 Cadiz Inc.+ ..........$ 88,214 $ 11,000
------------ -------------
COMMUNICATIONS EQUIPMENT -- 0.1%
70,000 Furukawa Electric
Co. Ltd. ........... 702,425 146,878
------------ -------------
ENERGY AND UTILITIES: ELECTRIC -- 19.6%
165,000 AES Corp.+ ........... 1,119,383 498,300
20,000 Calpine Corp.+ ....... 52,600 65,200
55,000 Cinergy Corp. ........ 1,727,502 1,854,600
20,000 Cleco Corp. .......... 364,947 280,000
80,000 DPL Inc. ............. 1,547,470 1,227,200
16,000 DTE Energy Co. ....... 684,940 742,400
72,000 Edison International+ 765,788 853,200
160,000 El Paso Electric Co.+ 1,462,191 1,760,000
22,000 FPL Group Inc. ....... 1,192,216 1,322,860
44,000 Great Plains
Energy Inc. ........ 919,607 1,006,720
51,000 Maine Public
Service Co. ........ 1,632,100 1,632,000
170,000 Northeast Utilities .. 3,354,148 2,578,900
58,000 SCANA Corp. .......... 1,787,080 1,795,680
120,000 TECO Energy Inc. ..... 1,909,491 1,856,400
23,000 UIL Holdings Corp. ... 1,010,038 802,010
20,000 Unisource Energy Corp. 236,625 345,800
------------ -------------
19,766,126 18,621,270
------------ -------------
ENERGY AND UTILITIES: INTEGRATED -- 29.0%
165,000 Allegheny Energy Inc. 1,637,980 1,247,400
13,000 Allete Inc. .......... 222,463 294,840
75,000 Alliant Energy Corp. . 1,256,310 1,241,250
120,000 Aquila Inc. .......... 345,295 212,400
38,000 CH Energy Group Inc. . 1,780,400 1,771,940
100,000 CMS Energy Corp. ..... 1,018,184 944,000
75,000 Constellation Energy
Group Inc. ......... 2,109,100 2,086,500
6,000 Dominion Resources Inc. 305,423 329,400
160,000 DQE Inc. ............. 2,842,715 2,438,400
150,000 Duke Energy Corp. .... 2,884,145 2,931,000
100,000 El Paso Corp. ........ 1,389,913 696,000
13,000 Empire District
Electric Co. ....... 259,961 236,600
8,000 Entergy Corp. ........ 224,663 364,720
8,979 FirstEnergy Corp. .... 287,099 296,038
67,666 Florida Public
Utilities Co. ...... 806,757 1,004,840
1,000 Green Mountain
Power Corp. ........ 19,770 20,970
30,000 MGE Energy Inc. ...... 816,100 803,130
130,000 Mirant Corp.+ ........ 1,212,342 245,700
5,000 NiSource Inc. ........ 103,120 100,000
45,000 NiSource Inc.+ ....... 90,000 99,900
56,900 NSTAR ................ 2,415,114 2,525,791
2,000 Otter Tail Corp. ..... 58,760 53,800
48,000 PG&E Corp.+ .......... 596,347 667,200
10,000 PNM Resources Inc. ... 185,900 238,200
18,000 Progress Energy Inc. . 773,719 780,300
40,000 Progress Energy
Inc., CVO+ ......... 20,800 6,400
10,000 Puget Energy Inc. .... 219,642 220,500
30,000 Sierra Pacific
Resources .......... 227,798 195,000
30,000 TXU Corp. ............ 483,015 560,400
10,000 Unitil Corp. ......... 271,147 248,000
10,000 Vectren Corp. ........ 245,531 230,000
195,000 Westar Energy Inc. ... 3,041,497 1,930,500
10,000 Wisconsin Energy Corp. 257,794 252,000
7,000 WPS Resources Corp. .. 204,319 271,740
185,000 Xcel Energy Inc. ..... 3,237,518 2,035,000
------------ -------------
31,850,641 27,579,859
------------ -------------
MARKET
SHARES COST VALUE
------ ---- ------
ENERGY AND UTILITIES: NATURAL GAS -- 14.9%
35,000 AGL Resources Inc. ...$ 854,800 $ 850,500
13,800 Cascade Natural
Gas Corp. .......... 295,986 276,000
2,000 Chesapeake Utilities
Corp. .............. 36,525 36,600
33,000 Delta Natural
Gas Co. Inc. ....... 552,849 709,170
40,000 Dynegy Inc., Cl. A ... 250,000 47,200
1,000 EnergySouth Inc. ..... 26,780 28,200
30,000 National Fuel Gas Co. 726,101 621,900
90,000 Nicor Inc. ........... 1,982,877 3,062,700
15,000 NUI Corp. ............ 174,468 258,900
65,000 ONEOK Inc. ........... 1,121,404 1,248,000
19,000 Peoples Energy Corp. . 665,481 734,350
23,000 Piedmont Natural Gas
Co. Inc. ........... 687,398 813,050
3,000 RGC Resources Inc. ... 59,164 55,200
120,000 SEMCO Energy Inc. .... 1,606,944 732,000
100,566 Southern Union Co.+ .. 1,432,351 1,659,339
130,000 Southwest Gas Corp. .. 3,288,133 3,048,500
------------ -------------
13,761,261 14,181,609
------------ -------------
ENERGY AND UTILITIES: WATER -- 4.8%
12,000 American States
Water Co. .......... 266,713 277,800
11,000 Artesian Resources
Corp., Cl. A ....... 257,250 326,150
20,500 BIW Ltd. ............. 385,069 376,175
20,520 California Water Service
Group .............. 566,928 485,298
7,500 Connecticut Water Service
Inc. ............... 146,455 189,232
44,000 Middlesex Water Co. .. 895,303 922,680
11,466 Pennichuck Corp. ..... 285,503 331,826
15,000 Philadelphia
Suburban Corp. ..... 228,883 309,000
16,200 SJW Corp. ............ 1,596,874 1,264,410
5,513 Southwest Water Co. .. 52,062 73,041
------------ -------------
4,681,040 4,555,612
------------ -------------
ENVIRONMENTAL SERVICES -- 0.0%
18,000 Catalytica Energy Systems
Inc.+ .............. 179,986 49,680
------------ -------------
METALS AND MINING -- 0.5%
24,000 Fording Inc. ......... 502,541 503,040
------------ -------------
SATELLITE -- 0.6%
50,000 General Motors Corp.,
Cl. H+ ............. 870,553 535,000
------------ -------------
TELECOMMUNICATIONS -- 6.7%
50,000 BellSouth Corp. ...... 1,690,556 1,293,500
155,000 Broadwing Inc.+ ...... 1,187,470 545,600
30,000 BT Group plc, ADR .... 1,094,015 939,900
30,000 CenturyTel Inc. ...... 1,147,440 881,400
15,000 Citizens
Communications Co.+ 102,130 158,250
4,000 Commonwealth Telephone
Enterprises Inc.+ .. 130,004 143,360
14,388 D&E Communications Inc. 173,414 120,283
10,000 Deutsche Telekom
AG, ADR ............ 182,487 127,000
4,000 France Telecom SA, ADR 72,559 71,080
50,000 Touch America
Holdings Inc.+ ..... 138,048 19,500
52,000 Verizon Communications
Inc. ............... 1,997,037 2,015,000
1,045 WilTel Communications
Inc.+ .............. 42,437 16,505
------------ -------------
7,957,597 6,331,378
------------ -------------
See accompanying notes to financial statements.
13
THE GABELLI UTILITY TRUST
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2002
MARKET
SHARES COST VALUE
------ ---- ------
COMMON STOCKS (CONTINUED)
WIRELESS COMMUNICATIONS -- 0.8%
40,000 mm02 plc, ADR+ .......$ 422,426 $ 286,000
38,000 Nextel Communications Inc.,
Cl. A+ ............. 514,540 438,900
------------ -------------
936,966 724,900
------------ -------------
TOTAL COMMON
STOCKS .............. 81,297,350 73,240,226
------------ -------------
PREFERRED STOCKS -- 0.9%
TELECOMMUNICATIONS -- 0.9%
18,000 Citizens Communications Co.,
5.000% Cv. Pfd. .... 844,116 855,000
------------ -------------
PRINCIPAL
AMOUNT
---------
CORPORATE BONDS -- 0.5%
ENERGY AND UTILITIES: INTEGRATED -- 0.5%
$ 1,100,000 Mirant Corp., Sub. Deb. Cv.,
2.500%, 06/15/21 ... 828,247 413,875
------------ -------------
U.S. GOVERNMENT OBLIGATIONS -- 12.6%
12,000,000 U.S. Treasury Bills,
0.800%++, 01/09/03 . 11,997,867 11,997,867
------------ -------------
PRINCIPAL MARKET
AMOUNT COST VALUE
--------- ---- ------
REPURCHASE AGREEMENT -- 9.2%
$ 8,765,000 Agreement with State Street
Bank and Trust Co.,
1.050%, dated 12/31/02,
due 01/02/03,
proceeds at maturity,
$8,765,511 (a) .....$ 8,765,000 $ 8,765,000
------------ -------------
TOTAL INVESTMENTS -- 100.2% .......$103,732,580 95,271,968
============
OTHER LIABILITIES IN
EXCESS OF ASSETS -- (0.2)% ..................... (160,888)
------------
NET ASSETS -- 100.0%
(15,180,492 shares outstanding) ................$ 95,111,080
============
NET ASSET VALUE
($95,111,080 (DIVIDE) 15,180,492
shares outstanding) ........................... $6.27
=====
---------------
For Federal tax purposes:
Aggregate cost ......................$103,152,535
============
Gross unrealized appreciation .......$ 4,754,509
Gross unrealized depreciation ....... (12,635,076)
------------
Net unrealized depreciation .........$ (7,880,567)
============
---------------
(a) Collateralized by U.S. Treasury Note, 8.875%, due 2/15/19, market value
$8,947,275.
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
ADR - American Depository Receipt.
CVO - Contingent Value Obligation.
See accompanying notes to financial statements.
14
THE GABELLI UTILITY TRUST
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2002
ASSETS:
Investments, at value (Cost $103,732,580) .. $ 95,271,968
Cash ....................................... 613
Dividends and interest receivable .......... 352,366
Receivable for investments sold ............ 9,030,858
-------------
TOTAL ASSETS .................................. 104,655,805
-------------
LIABILITIES:
Payable for investments purchased .......... 8,979,580
Payable for investment advisory fees ....... 80,193
Payable for audit and legal fees ........... 36,100
Other accrued expenses ..................... 448,852
-------------
TOTAL LIABILITIES .......................... 9,544,725
-------------
NET ASSETS applicable to 15,180,492
shares outstanding ....................... $ 95,111,080
=============
NET ASSETS CONSIST OF:
Shares of beneficial interest, at par value $ 15,180
Additional paid-in capital ................. 102,976,468
Accumulated net realized gain on investments 580,044
Net unrealized depreciation on investments . (8,460,612)
-------------
TOTAL NET ASSETS ........................... $ 95,111,080
=============
NET ASSET VALUE
($95,111,080 / 15,180,492 shares outstanding;
unlimited number of shares authorized of
$0.001 par value) ........................ $6.27
=====
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
INVESTMENT INCOME:
Dividends (net of foreign taxes $4,040) $ 2,733,728
Interest .............................. 407,884
------------
TOTAL INVESTMENT INCOME ............... 3,141,612
------------
EXPENSES:
Investment advisory fees .............. 878,549
Shareholder communications expenses ... 276,386
Shareholder services fees ............. 242,855
Payroll ............................... 145,000
Trustees' fees ........................ 46,126
Legal and audit fees .................. 39,382
Custodian fees ........................ 17,143
Miscellaneous expenses ................ 49,899
------------
TOTAL EXPENSES ........................ 1,695,340
------------
LESS: CUSTODIAN FEE CREDIT ............ (2,352)
------------
NET EXPENSES .......................... 1,692,988
------------
NET INVESTMENT INCOME ................. 1,448,624
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments ...... 3,644,126
Net change in unrealized depreciation
on investments ...................... (11,989,550)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS ...................... (8,345,424)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ..................... $ (6,896,800)
============
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
OPERATIONS:
Net investment income ................................................. $ 1,448,624 $ 1,341,543
Net realized gain on investments ...................................... 3,644,126 2,449,730
Net change in unrealized appreciation/depreciation on investments ..... (11,989,550) (6,032,844)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS .................. (6,896,800) (2,241,571)
------------ ------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
Net investment income ................................................. (1,475,143) (2,323,380)
Net realized gain on investments ...................................... (4,760,629) (5,448,776)
Return of capital ..................................................... (3,261,058) --
------------ ------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ...................... (9,496,830) (7,812,156)
------------ ------------
TRUST SHARE TRANSACTIONS:
Net increase in net assets from common shares issued in rights offering 27,737,239 --
Net increase in net assets from Trust common shares issued upon
reinvestment of dividends and distributions ......................... 1,570,081 1,581,923
------------ ------------
NET INCREASE IN NET ASSETS FROM TRUST SHARE TRANSACTIONS .............. 29,307,320 1,581,923
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS ................................. 12,913,690 (8,471,804)
------------ ------------
NET ASSETS:
Beginning of period ................................................... 82,197,390 90,669,194
------------ ------------
End of period (including undistributed net income of
$0 and $26,387, respectively) ....................................... $ 95,111,080 $ 82,197,390
============ ============
See accompanying notes to financial statements.
15
THE GABELLI UTILITY TRUST
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION. The Gabelli Utility Trust (the "Utility Trust") is a
closed-end, non-diversified management investment company organized as a
Delaware business trust on February 25, 1999 and registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), whose primary objective is
long-term growth of capital and income. The Utility Trust had no operations
prior to July 9, 1999, other than the sale of 10,000 shares of beneficial
interest for $100,000 to The Gabelli Equity Trust Inc. (the "Equity Trust") at
$10.00 per share. On July 9, 1999, the Utility Trust had a 4 for 3 stock split
making the balance of Utility Trust shares held by the Equity Trust as 13,333.
On July 9, 1999, the Equity Trust contributed $79,487,260 in cash and securities
in exchange for shares of the Utility Trust, and on the same date distributed
such shares to Equity Trust shareholders of record on July 1, 1999 at the rate
of one share of the Utility Trust for every ten shares of the Equity Trust.
Investment operations commenced on July 9, 1999.
Effective August 1, 2002, the Fund modified its non-fundamental investment
policy to increase, from 65% to 80%, the portion of its assets that it will
invest, under normal market conditions, in common stocks and other securities of
foreign and domestic companies involved in providing products, services or
equipment for (i) the generation or distribution of electricity, gas and water
and (ii) telecommunications services or infrastructure operations (the "80%
Policy").
The 80% Policy may be changed without shareholder approval. However, the Fund
has adopted a policy to provide shareholders with at least 60 days' notice of
the implementation of any change in the 80% Policy.
2. SIGNIFICANT ACCOUNTING POLICIES. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Utility Trust in the preparation of its financial statements.
SECURITY VALUATION. Portfolio securities listed or traded on a nationally
recognized securities exchange, quoted by the National Association of Securities
Dealers Automated Quotations, Inc. ("Nasdaq") or traded in the U.S.
over-the-counter market for which market quotations are readily available are
valued at the last quoted sale price on that exchange or market as of the close
of business on the day the securities are being valued. If there were no sales
that day, the security is valued at the average of the closing bid and asked
prices or, if there were no asked prices quoted on that day, then the security
is valued at the closing bid price on that day. If no bid or asked prices are
quoted on such day, the security is valued at the most recently available price
or, if the Board of Trustees so determines, by such other method as the Board of
Trustees shall determine in good faith, to reflect its fair market value.
Portfolio securities traded on more than one national securities exchange or
market are valued according to the broadest and most representative market, as
determined by Gabelli Funds, LLC (the "Adviser"). Portfolio securities primarily
traded in foreign markets are generally valued at the preceding closing values
of such securities on their respective exchanges or markets. Securities and
assets for which market quotations are not readily available are valued at their
fair value as determined in good faith under procedures established by and under
the general supervision of the Board of Trustees. Short term debt securities
with remaining maturities of 60 days or less are valued at amortized cost,
unless the Board of Trustees determines such does not reflect the securities
fair value, in which case these securities will be valued at their fair value as
determined by the Board of Trustees. Debt instruments having a maturity greater
than 60 days for which market quotations are readily available are valued at the
latest average of the bid and asked prices. If there were no asked prices quoted
on such day, the security is valued using the closing bid price on that day.
Options are valued at the last sale price on the exchange on which they are
listed. If no sales of such options have taken place that day, they will be
valued at the mean between their closing bid and asked prices.
REPURCHASE AGREEMENTS. The Utility Trust may enter into repurchase
agreements with primary government securities dealers recognized by the Federal
Reserve Bank of New York, with member banks of the Federal Reserve System or
with other brokers or dealers that meet credit guidelines established by the
Adviser and reviewed by the Board of Trustees. Under the terms of a typical
repurchase agreement, the Utility Trust takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and the Utility
Trust to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Utility Trust's holding period. The Utility
Trust will always receive and maintain securities as collateral whose market
value, including accrued interest, will be at least equal to 102% of the dollar
amount invested by the Utility Trust in each agreement. The Utility Trust will
make payment for such securities only upon physical delivery or upon evidence of
book entry transfer of the collateral to the account of the custodian. To the
extent that any repurchase transaction exceeds one business day, the value of
the collateral is marked-to-market on a daily basis to maintain the adequacy of
the collateral. If the seller defaults and the value of the collateral declines
or if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Utility Trust may be delayed or
limited.
SECURITIES SOLD SHORT. A short sale involves selling a security which the
Utility Trust does not own. The proceeds received for short sales are recorded
as liabilities and the Utility Trust records an unrealized gain or loss to the
extent of the difference between the proceeds received and the value of the open
short position on the day of determination. The Utility Trust records a realized
gain or loss when the short position is closed out. By entering into a short
sale, the Utility Trust bears the market risk of an unfavorable change in the
price of the security sold short. Dividends on short sales are recorded as an
expense by the Utility Trust on the ex-dividend date and interest expense is
recorded on the accrual basis.
FOREIGN CURRENCY TRANSLATION. The books and records of the Utility Trust
are maintained in United States (U.S.) dollars. Foreign currencies, investments
and other assets and liabilities are translated into U.S. dollars at the
exchange rates prevailing at the end of the period, and purchases and sales of
investment securities, income and expenses are translated at the exchange rate
prevailing on the
16
THE GABELLI UTILITY TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
respective dates of such transactions. Unrealized gains and losses, which result
from changes in foreign exchange rates and/or changes in market prices of
securities, have been included in unrealized appreciation/depreciation on
investments and foreign currency transactions. Net realized foreign currency
gains and losses resulting from changes in exchange rates include foreign
currency gains and losses between trade date and settlement date on investment
securities transactions, foreign currency transactions and the difference
between the amounts of interest and dividends recorded on the books of the
Utility Trust and the amounts actually received. The portion of foreign currency
gains and losses related to fluctuation in exchange rates between the initial
trade date and subsequent sale trade date is included in realized gain/(loss) on
investments.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Securities transactions are
accounted for as of the trade date with realized gain or loss on investments
determined by using the identified cost method. Interest income (including
amortization of premium and accretion of discount) is recorded as earned.
Dividend income is recorded on the ex-dividend date.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Distributions to shareholders
are recorded on the ex-dividend date. Income distributions and capital gain
distributions are determined in accordance with Federal income tax regulations,
which may differ from accounting principles generally accepted in the United
States.
For the year ended December 31, 2002, reclassifications were made to
increase accumulated net investment income for $3,261,190 and to decrease
accumulated net realized gain on investments for $132, with an offsetting
adjustment to additional paid-in capital.
The tax character of distributions paid during the fiscal year ended
December 31, 2002 and December 31, 2001 were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
DISTRIBUTIONS PAID FROM:
Ordinary income
(inclusive of short term
capital gains) .......................... $1,498,709 $6,012,331
Net long term capital gains ............... 4,737,063 1,799,825
Non-taxable return of capital ............. 3,261,058 --
---------- ----------
Total distributions paid .................. $9,496,830 $7,812,156
========== ==========
PROVISION FOR INCOME TAXES. The Utility Trust intends to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. As a result, a Federal income tax provision is
not required.
Dividends and interest from non-U.S. sources received by the Utility Trust
are generally subject to non-U.S. withholding taxes at rates ranging up to 30%.
Such withholding taxes may be reduced or eliminated under the terms of
applicable U.S. income tax treaties, and the Utility Trust intends to undertake
any procedural steps required to claim the benefits of such treaties.
As of December 31, 2002, the components of accumulated earnings/(losses)
on a tax basis were as follows:
Net unrealized depreciation ......... $(7,880,567)
-----------
Total accumulated loss .............. $(7,880,567)
===========
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES. The Utility Trust has entered
into an investment advisory agreement (the "Advisory Agreement") with the
Adviser which provides that the Utility Trust will pay the Adviser on the first
business day of each month a fee for the previous month equal on an annual basis
to 1.00% of the value of the Utility Trust's average daily net assets. In
accordance with the Advisory Agreement, the Adviser provides a continuous
investment program for the Utility Trust's portfolio and oversees the
administration of all aspects of the Utility Trust's business and affairs.
During the year ended December 31, 2002, Gabelli & Company, Inc. and its
affiliates received $123,636 in brokerage commissions as a result of executing
agency transactions in portfolio securities on behalf of the Utility Trust.
The cost of calculating the Trust's net asset value per share is a Trust
expense pursuant to the Investment Advisory Agreement between the Trust and the
Adviser. During fiscal 2002, the Gabelli Utility Trust reimbursed the Adviser
$34,800 in connection with the cost of computing the Trust's net asset value.
4. PORTFOLIO SECURITIES. Cost of purchases and proceeds from sales of
securities, other than short-term securities, for the year ended December 31,
2002 aggregated $50,891,174 and $20,001,636, respectively.
5. CAPITAL. The Board of Trustees of the Utility Trust has authorized the
repurchase of its shares on the open market when the shares are trading at a
discount of 10% or more (or such other percentage as the Board of Trustees may
determine from time to time) from the net asset value of the shares. During the
year ended December 31, 2002, the Utility Trust did not repurchase any shares of
beneficial interest in the open market.
On May 22, 2002, the Utility Trust distributed one transferable right for each
of the 11,294,893 common shares outstanding to shareholders of record on that
date. Three rights were required to purchase one additional common share at the
subscription price of $7.50 per share. The subscription period expired on June
27, 2002. The rights offering was fully subscribed resulting in the issuance of
17
THE GABELLI UTILITY TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3,764,965 common shares and proceeds of $28,237,239 to the Utility Trust, prior
to the deduction of estimated expenses of $500,000. The net asset value per
share of the Utility Trust common shareholders was enhanced by approximately
$0.15 per share as a result of the issuance of shares above net asset value.
Transactions in shares of beneficial interest were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------- -------------------
Shares Amount Shares Amount
--------- ----------- ------- ----------
Shares issued in rights offering ....3,764,965 $27,737,239 -- --
Shares issued upon reinvestment
of dividends and distributions .... 185,730 1,570,081 190,378 $1,581,923
--------- ----------- ------- ----------
Net increase ........................3,950,695 $29,307,320 190,378 $1,581,923
========= =========== ======= ==========
6. INDUSTRY CONCENTRATION. Because the Utility Trust primarily invests in common
stocks and other securities of foreign and domestic companies in the utility
industry, its portfolio may be subject to greater risk and market fluctuations
than a portfolio of securities representing a broad range of investments.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A UTILITY TRUST SHARE OF BENEFICIAL INTEREST
OUTSTANDING THROUGHOUT EACH PERIOD:
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 1999 (A)
------------ ------------ ------------ ------------
OPERATING PERFORMANCE:
Net asset value, beginning of period ........... $ 7.32 $ 8.21 $ 7.62 $ 7.50
------- ------- ------- -------
Net investment income .......................... 0.11 0.12(e) 0.15 0.08
Net realized and unrealized gain
(loss) on investments ........................ (0.62) (0.32)(e) 1.44 0.19
------- ------- ------- -------
Total from investment operations ............... (0.51) (0.20) 1.59 0.27
------- ------- ------- -------
CHANGE IN NET ASSET VALUE FROM TRANSACTIONS IN
SHARES OF BENEFICIAL INTEREST:
Increase in net asset value from shares
issued in rights offering .................... 0.15 -- -- --
Increase in net asset value from
Trust share transactions ..................... 0.03 0.01 -- --
------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income .......................... (0.11) (0.21) (0.06) (0.08)
Net realized gain on investments ............... (0.36) (0.49) (0.94) (0.07)
Return of capital .............................. (0.25) -- -- --
------- ------- ------- -------
Total distributions ............................ (0.72) (0.70) (1.00) (0.15)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD ................. $ 6.27 $ 7.32 $ 8.21 $ 7.62
======= ======= ======= =======
Net asset value total return+ .................. (6.79)% (3.15)% 22.01% 3.62%
======= ======= ======= =======
Market value, end of period .................... $ 8.72 $ 9.33 $ 8.75 $ 7.63
======= ======= ======= =======
Total investment return++ ...................... 1.70% 15.82% 29.95% 3.70%
======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $95,111 $82,197 $90,669 $83,330
Ratio of net investment income to
average net assets (c) ....................... 1.65% 1.57% 1.88% 2.27%(b)
Ratio of operating expenses to
average net assets (c)(d) .................... 1.93% 2.00% 1.95% 1.85%(b)
Portfolio turnover rate ........................ 29% 41% 92% 37%
--------------------------
+ Based on net asset value per share, adjusted for reinvestment of
distributions. Total return for the periods of less than one year is not
annualized.
++ Based on market value per share, adjusted for reinvestment of distributions,
including the effect of shares issued pursuant to rights offering, assuming
full subscription by shareholder. Total return for the periods of less than
one year is not annualized.
(a) The Gabelli Utility Trust commenced operations on July 9, 1999.
(b) Annualized.
(c) During the period ended December 31, 1999, the Utility Trust's administrator
voluntarily reimbursed certain expenses. If such reimbursement had not
occurred, the annualized ratios of net investment income and operating
expenses to average net assets would have been 1.85% and 2.17%,
respectively.
(d) The ratios do not include a reduction of expenses for custodian fee credits
on cash balances maintained with the custodian. Including such custodian fee
credits for the year ended December 31, 2002, 2001 and 2000, the expense
ratios would be 1.93%, 2.00% and 1.93%, respectively.
(e) 2001's Net investment income per share and Net realized and unrealized gain
(loss) on investments were originally presented in the Financial Highlights
without regard to character of distributions paid during the year. Amounts
as previously reported of $0.61 and $(0.81), respectively, have been revised
to reflect reclassification of amounts based on the character of 2001
distributions.
See accompanying notes to financial statements.
18
THE GABELLI UTILITY TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
The Gabelli Utility Trust
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights, after the revision described
in the financial highlights, present fairly, in all material respects, the
financial position of The Gabelli Utility Trust (the "Trust") at December 31,
2002, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended and for the
period July 9, 1999 (commencement of investment operations) through December 31,
1999, in conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2002 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
/S/ PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York, NY 10036
February 13, 2003
19
THE GABELLI UTILITY TRUST
ADDITIONAL FUND INFORMATION (UNAUDITED)
The business and affairs of the Trust are managed under the direction of
the Trust's Board of Trustees. Information pertaining to the Trustees and
officers of the Trust is set forth below. The Fund's Statement of Additional
Information includes additional information about The Gabelli Utility Trust
Trustees and is available, without charge, upon request, by calling 800-GABELLI
(800-422-3554) or by writing to The Gabelli Utility Trust at One Corporate
Center, Rye, NY 10580.
TERM OF NUMBER OF
OFFICE AND FUNDS IN TRUST
NAME, POSITION(S) LENGTH OF COMPLEX
ADDRESS 1 TIME OVERSEEN BY PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
AND AGE SERVED 2 TRUSTEE DURING PAST FIVE YEARS HELD BY TRUSTEE
----------------- -------- -------------- ---------------------- --------------------
INTERESTED TRUSTEES 3:
---------------------
MARIO J. GABELLI Since 1999** 22 Chairman of the Board and Chief Executive Director of Morgan Group
Trustee, President and Officer of Gabelli Asset Management Inc. and Holdings, Inc. (holding
Chief Investment Officer Chief Investment Officer of Gabelli Funds, company); Vice Chairman
Age: 60 LLC and GAMCO Investors, Inc.; of Lynch Corporation
Chairman and Chief Executive Officer of (diversified manufacturing)
Lynch Interactive Corporation (multimedia
and services)
JOHN D. GABELLI Since 1999* 10 Senior Vice President of Gabelli & --
Trustee Company, Inc., Director of Gabelli Advisers, Inc.
Age: 58
KARL OTTO POHL Since 1999* 31 Member of the Shareholder Committee of Director of Gabelli Asset
Trustee Sal Oppenheim Jr. & Cie (private invest- Management Inc. (investment
Age: 73 ment bank); Former President of the management); Chairman,
Deutsche Bundesbank and Chairman of its Incentive Capital and
Central Bank Council (1980-1991) Incentive Asset Management
(Zurich); Director at Sal
Oppenheim Jr. & Cie, Zurich
NON-INTERESTED TRUSTEES:
-----------------------
THOMAS E. BRATTER Since 1999** 3 Director, President and Founder, The John --
Trustee Dewey Academy (residential college
Age: 63 preparatory therapeutic high school)
ANTHONY J. COLAVITA Since 1999*** 33 President and Attorney at Law in the law firm --
Trustee of Anthony J. Colavita, P.C.
Age: 67
JAMES P. CONN Since 1999* 11 Former Managing Director and Chief Investment Director of LaQuinta Corp.
Trustee Officer of Financial Security Assurance Holdings (hotels) and First Republic
Age: 64 Ltd. (1992-1998) Bank
VINCENT D. ENRIGHT Since 1999** 11 Former Senior Vice President and Chief --
Trustee Financial Officer of KeySpan Energy
Age: 59 Corporation
FRANK J. FAHRENKOPF JR. Since 1999*** 3 President and Chief Executive Officer of the --
Trustee American Gaming Association since June
Age: 63 1995; Partner of Hogan & Hartson (law
firm); Chairman of International Trade
Practice Group; Co-Chairman of the
Commission on Presidential Debates;
Former Chairman of the Republican
National Committee
ROBERT J. MORRISSEY Since 1999*** 9 Partner in the law firm of Morrissey, --
Trustee Hawkins & Lynch
Age: 63
ANTHONY R. PUSTORINO Since 1999* 17 Certified Public Accountant; Professor --
Trustee Emeritus, Pace University
Age: 77
SALVATORE J. ZIZZA Since 1999*** 9 Chairman, Hallmark Electrical Supplies Corp.; Director of Hollis Eden
Director Former Executive Vice President of FMG Pharmaceuticals
Age: 57 Group (OTC), a healthcare provider; Former
President and Chief Executive Officer of the
Lehigh Group Inc., an interior construction
company, through 1997
20
THE GABELLI UTILITY TRUST
ADDITIONAL FUND INFORMATION (CONTINUED) (UNAUDITED)
TERM OF NUMBER OF
OFFICE AND FUNDS IN TRUST
NAME, POSITION(S) LENGTH OF COMPLEX
ADDRESS 1 TIME OVERSEEN BY PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS
AND AGE SERVED 2 TRUSTEE DURING PAST FIVE YEARS HELD BY TRUSTEE
----------------- -------- -------------- ---------------------- --------------------
OFFICERS:
--------
BRUCE N. ALPERT Since 1999 -- Executive Vice President and Chief Operating --
Vice President and Officer of Gabelli Funds, LLC since 1988 and
Treasurer an officer of all mutual funds advised by
Age: 51 Gabelli Funds, LLC and its affiliates
Director and President of the Gabelli
Advisors, Inc.
DAVID I. SCHACHTER Since 1999 -- Vice President of the Trust since 1999. --
Vice President Research Analyst of Gabelli & Company, Inc.
Age: 49 since 1999. Prior to October 1999, Mr. Schachter
worked for Thomas J. Herzfeld Advisors, an
investment advisor specializing in closed-end funds.
JAMES E. MCKEE Since 1999 -- Vice President, General Counsel and Secretary --
Secretary of Gabelli Asset Management Inc. since 1999
Age: 39 and GAMCO Investors, Inc. since 1993; Secretary
of all mutual funds advised by Gabelli Advisers,
Inc. and Gabelli Funds, LLC.
--------------------------------------------------------------------------------
1 Address: One Corporate Center, Rye, NY 10580, unless otherwise noted.
2 The Trust's Board of Trustees is divided into three classes, each class having
a term of three years. Each year the term of office of one class expires and
the successor or successors elected to such class serve for a three year term.
The three year term for each class expires as follows:
* - Term expires at the Trust's 2003 Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
** - Term expires at the Trust's 2004 Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
*** - Term expires at the Trust's 2005 Annual Meeting of Shareholders and until
their successors are duly elected and qualified.
3 "Interested person" of the Trust as defined in the Investment Company Act of
1940. Messrs. M. Gabelli, J. Gabelli and Pohl are each considered an
"interested person" because of their affiliation with Gabelli Funds LLC which
acts as the Trust's investment adviser. Mario J. Gabelli and John D. Gabelli
are brothers.
21
--------------------------------------------------------------------------------
THE GABELLI UTILITY TRUST INC.
AND YOUR PERSONAL PRIVACY
WHO ARE WE?
The Gabelli Utility Trust Inc. (the "Trust") is a closed-end investment
company registered with the Securities and Exchange Commission under the
Investment Company Act of 1940. We are managed by Gabelli Funds LLC, which
is affiliated with Gabelli Asset Management Inc. Gabelli Asset Management
is a publicly-held company that has subsidiaries that provide investment
advisory or brokerage services for a variety of clients.
WHAT KIND OF NON-PUBLIC INFORMATION DO WE COLLECT ABOUT YOU IF YOU BECOME A
GABELLI CUSTOMER?
When you purchase shares of the Trust on the New York Stock Exchange, you
have the option of registering directly with our transfer agent in order,
for example, to participate in our dividend reinvestment plan.
o INFORMATION YOU GIVE US ON YOUR APPLICATION FORM. This could include your
name, address, telephone number, social security number, bank account
number, and other information.
o INFORMATION ABOUT YOUR TRANSACTIONS WITH US. This would include information
about the shares that you buy or sell, it may also include information
about whether you sell or exercise rights that we have issued from time to
time. If we hire someone else to provide services--like a transfer
agent--we will also have information about the transactions that you
conduct through them.
WHAT INFORMATION DO WE DISCLOSE AND TO WHOM DO WE DISCLOSE IT?
We do not disclose any non-public personal information about our customers
or former customers to anyone, other than our affiliates, our service
providers who need to know such information and as otherwise permitted by
law. If you want to find out what the law permits, you can read the privacy
rules adopted by the Securities and Exchange Commission. They are in volume
17 of the Code of Federal Regulations, Part 248. The Commission often posts
information about its regulations on its web site, WWW.SEC.GOV.
WHAT DO WE DO TO PROTECT YOUR PERSONAL INFORMATION?
We restrict access to non-public personal information about you to the
people who need to know that information in order to provide services to
you or the Fund and to ensure that we are complying with the laws governing
the securities business. We maintain physical, electronic, and procedural
safeguards to keep your personal information confidential.
--------------------------------------------------------------------------------
22
THE GABELLI UTILITY TRUST
INCOME TAX INFORMATION (UNAUDITED)
DECEMBER 31, 2002
CASH DIVIDENDS AND DISTRIBUTIONS
TOTAL AMOUNT ORDINARY LONG-TERM NON TAXABLE DIVIDEND
PAYABLE RECORD PAID INVESTMENT CAPITAL RETURN OF REINVESTMENT
DATE DATE PER SHARE INCOME GAINS CAPITAL PRICE
------- ------ ------------ ---------- --------- ----------- ------------
SHARES OF BENEFICIAL INTEREST
01/25/02 01/10/02 $0.06000 $0.01265 $0.02891 $0.01844 $9.08205
02/22/02 02/07/02 0.06000 0.00920 0.03000 0.02080 9.21528
03/25/02 03/11/02 0.06000 0.00920 0.03000 0.02080 9.41494
04/24/02 04/10/02 0.06000 0.00920 0.03000 0.02080 9.32011
05/24/02 05/10/02 0.06000 0.00920 0.03000 0.02080 8.41713
06/26/02 06/19/02 0.06000 0.00920 0.03000 0.02080 8.30315
07/25/02 07/11/02 0.06000 0.00920 0.03000 0.02080 7.58109
08/26/02 08/12/02 0.06000 0.00920 0.03000 0.02080 8.65469
09/24/02 09/10/02 0.06000 0.00920 0.03000 0.02080 8.17024
10/25/02 10/11/02 0.06000 0.00920 0.03000 0.02080 7.60039
11/22/02 11/08/02 0.06000 0.00920 0.03000 0.02080 8.20022
12/24/02 12/10/02 0.06000 0.00920 0.03000 0.02080 8.45501
A Form 1099-DIV has been mailed to all shareholders of record for the
distributions mentioned above, setting forth specific amounts to be included in
the 2002 tax returns. Ordinary income distributions include net investment
income and realized net short-term capital gains. 84.48% of the long-term
capital gains paid by the Utility Trust in 2002 was classified as "20% Rate
Gains" subject to a maximum tax rate of 20% (or 10% depending on an individual's
tax bracket). Capital gain distributions are reported in box 2a of Form
1099-DIV. 14.52% of the long-term capital gains paid by the Gabelli Utility
Trust in 2002 was classified as "Qualified 5-year gains" and reported in box 2c
of Form 1099-DIV.
NON-TAXABLE RETURN OF CAPITAL
The amount received as a non-taxable (return of capital) distribution should
be applied to reduce the tax cost of shares. There was $0.2469 per share return
of capital in 2002 reported in box 3 of Form 1099-Div.
CORPORATE DIVIDENDS RECEIVED DEDUCTION AND U.S. GOVERNMENT SECURITIES INCOME
The Utility Trust paid to common shareholders ordinary income dividends
totalling $0.11385 per share in 2002. The percentage of such dividends that
qualifies for the dividends received deduction available to corporations is
99.45% for all such dividends paid in 2002. The percentage of the ordinary
income dividends paid by the Utility Trust during 2002 derived from U.S.
Government Securities was 2.48%. However, it should be noted that the Utility
Trust did not hold more than 50% of its assets in U.S. Government Securities at
the end of each calendar quarter during 2002.
HISTORICAL DISTRIBUTION SUMMARY - SHARES OF BENEFICIAL INTEREST
SHORT- LONG-
TERM TERM NON TAXABLE
INVESTMENT CAPITAL CAPITAL RETURN OF TOTAL
INCOME GAINS(A) GAINS CAPITAL DISTRIBUTIONS
---------- -------- ------- ----------- -------------
2002 (b) ..... $0.11175 $0.00210 $0.35900 $0.24690 $0.72000
2001 ......... 0.20835 0.33142 0.16023 -- 0.70000
2000 ......... 0.05620 0.14020 0.80360 -- 1.00000
1999 ......... 0.08049 0.00090 0.06861 -- 0.15000
--------------------------
(a) Taxable as ordinary income.
(b) On May 22, 2002, the Trust also distributed Rights equivalent to $0.085 per
share based upon full subscription of all issued shares.
23
AUTOMATIC DIVIDEND REINVESTMENT
AND VOLUNTARY CASH PURCHASE PLAN
ENROLLMENT IN THE PLAN
It is the policy of The Gabelli Utility Trust ("Utility Trust") to
automatically reinvest dividends. As a "registered" shareholder you
automatically become a participant in the Utility Trust's Automatic Dividend
Reinvestment Plan (the "Plan"). The Plan authorizes the Utility Trust to issue
shares to participants upon an income dividend or a capital gains distribution
regardless of whether the shares are trading at a discount or a premium to net
asset value. All distributions to shareholders whose shares are registered in
their own names will be automatically reinvested pursuant to the Plan in
additional shares of the Utility Trust. Plan participants may send their stock
certificates to EquiServe Trust Company ("EquiServe") to be held in their
dividend reinvestment account. Registered shareholders wishing to receive their
distribution in cash must submit this request in writing to:
The Gabelli Utility Trust
c/o EquiServe
P.O. Box 43011
Providence, RI 02940-3011
Shareholders requesting this cash election must include the shareholder's
name and address as they appear on the share certificate. Shareholders with
additional questions regarding the Plan may contact EquiServe at 1 (800)
336-6983.
SHAREHOLDERS WISHING TO LIQUIDATE REINVESTED SHARES held at EquiServe must do
so in writing or by telephone. Please submit your request to the above mentioned
address or telephone number. Include in your request your name, address and
account number. The cost to liquidate shares is $2.50 per transaction as well as
the brokerage commission incurred. Brokerage charges are expected to be less
than the usual brokerage charge for such transactions.
If your shares are held in the name of a broker, bank or nominee, you should
contact such institution. If such institution is not participating in the Plan,
your account will be credited with a cash dividend. In order to participate in
the Plan through such institution, it may be necessary for you to have your
shares taken out of "street name" and re-registered in your own name. Once
registered in your own name your dividends will be automatically reinvested.
Certain brokers participate in the Plan. Shareholders holding shares in "street
name" at participating institutions will have dividends automatically
reinvested. Shareholders wishing a cash dividend at such institution must
contact their broker to make this change.
The number of shares of Common Stock distributed to participants in the Plan
in lieu of cash dividends is determined in the following manner. Under the Plan,
whenever the market price of the Utility Trust's Common Stock is equal to or
exceeds net asset value at the time shares are valued for purposes of
determining the number of shares equivalent to the cash dividends or capital
gains distribution, participants are issued shares of Common Stock valued at the
greater of (i) the net asset value as most recently determined or (ii) 95% of
the then current market price of the Utility Trust's Common Stock. The valuation
date is the dividend or distribution payment date or, if that date is not a New
York Stock Exchange trading day, the next trading day. If the net asset value of
the Common Stock at the time of valuation exceeds the market price of the Common
Stock, participants will receive shares from the Utility Trust valued at market
price. If the Utility Trust should declare a dividend or capital gains
distribution payable only in cash, EquiServe will buy Common Stock in the open
market, or on the New York Stock Exchange or elsewhere, for the participants'
accounts, except that EquiServe will endeavor to terminate purchases in the open
market and cause the Utility Trust to issue shares at net asset value if,
following the commencement of such purchases, the market value of the Common
Stock exceeds the then current net asset value.
The automatic reinvestment of dividends and capital gains distributions will
not relieve participants of any income tax which may be payable on such
distributions. A participant in the Plan will be treated for Federal income tax
purposes as having received, on a dividend payment date, a dividend or
distribution in an amount equal to the cash the participant could have received
instead of shares.
The Utility Trust reserves the right to amend or terminate the Plan as
applied to any voluntary cash payments made and any dividend or distribution
paid subsequent to written notice of the change sent to the members of the Plan
at least 90 days before the record date for such dividend or distribution. The
Plan also may be amended or terminated by EquiServe on at least 90 days' written
notice to participants in the Plan.
VOLUNTARY CASH PURCHASE PLAN
The Voluntary Cash Purchase Plan is yet another vehicle for our shareholders
to increase their investment in the Utility Trust. In order to participate in
the Voluntary Cash Purchase Plan, shareholders must have their shares registered
in their own name.
Participants in the Voluntary Cash Purchase Plan have the option of making
additional cash payments to EquiServe for investments in the Utility Trust's
shares at the then current market price. Shareholders may send an amount from
$250 to $10,000. EquiServe will use these funds to purchase shares in the open
market on or about the 1st and 15th of each month. EquiServe will charge each
shareholder who participates $0.75, plus a pro rata share of the brokerage
commissions. Brokerage charges for such purchases are expected to be less than
the usual brokerage charge for such transactions. It is suggested that any
voluntary cash payments be sent to EquiServe, P.O. Box 43011, Providence, RI
02940-3011 such that EquiServe receives such payments approximately 10 days
before the 1st and 15th of the month. Funds not received at least five days
before the investment date shall be held for investment in the following month.
A payment may be withdrawn without charge if notice is received by EquiServe at
least 48 hours before such payment is to be invested.
For more information regarding the Dividend Reinvestment Plan and Voluntary
Cash Purchase Plan, brochures are available by calling (914) 921-5070 or by
writing directly to the Utility Trust.
----------------------------------------------------------------------
The Annual Meeting of the Utility Trust's stockholders will be
held at 11:00 A.M. on Monday, May 12, 2003, at
The Bruce Museum, One Museum Drive in Greenwich, Connecticut.
----------------------------------------------------------------------
24
TRUSTEES AND OFFICERS
THE GABELLI UTILITY TRUST
ONE CORPORATE CENTER, RYE, NY 10580-1422
TRUSTEES
Mario J. Gabelli, CFA
CHAIRMAN AND CHIEF INVESTMENT OFFICER,
GABELLI ASSET MANAGEMENT INC.
Dr. Thomas E. Bratter
PRESIDENT, JOHN DEWEY ACADEMY
Anthony J. Colavita
ATTORNEY-AT-LAW,
ANTHONY J. COLAVITA, P.C.
James P. Conn
FORMER MANAGING DIRECTOR AND CHIEF INVESTMENT OFFICER,
FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.
Vincent D. Enright
FORMER SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER,
KEYSPAN ENERGY CORP.
Frank J. Fahrenkopf, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
AMERICAN GAMING ASSOCIATION
John D. Gabelli
SENIOR VICE PRESIDENT,
GABELLI & COMPANY, INC.
Robert J. Morrissey
ATTORNEY-AT-LAW
MORRISSEY, HAWKINS &LYNCH
Karl Otto Pohl
FORMER PRESIDENT, DEUTSCHE BUNDESBANK
Anthony R. Pustorino
CERTIFIED PUBLIC ACCOUNTANT,
PROFESSOR EMERITUS, PACE UNIVERSITY
Salvatore J. Zizza
CHAIRMAN, HALLMARK ELECTRICAL SUPPLIES CORP.
OFFICERS
Mario J. Gabelli, CFA
PRESIDENT & CHIEF INVESTMENT OFFICER
Bruce N. Alpert
VICE PRESIDENT & TREASURER
David I. Schachter
VICE PRESIDENT & OMBUDSMAN
James E. McKee
SECRETARY
INVESTMENT ADVISOR
Gabelli Funds, LLC
One Corporate Center
Rye, New York 10580-1422
CUSTODIAN
Boston Safe Deposit and Trust Company
COUNSEL
Skadden, Arps, Slate, Meagher & Flom, LLP
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company
STOCK EXCHANGE LISTING
COMMON
------
NYSE-Symbol: GUT
Shares Outstanding: 15,180,492
The Net Asset Value appears in the Publicly Traded Funds column, under the
heading "Specialized Equity Funds," in Sunday's The New York Times and in
Monday's The Wall Street Journal. It is also listed in Barron's Mutual
Funds/Closed End Funds section under the heading "Specialized Equity Funds."
The Net Asset Value may be obtained each day by calling (914) 921-5071.
-----------------------------------------------------------------
For general information about the Gabelli Funds, call
1-800-GABELLI (1-800-422-3554), fax us at 914-921-5118, visit
Gabelli Funds' Internet homepage at: HTTP://WWW.GABELLI.COM or
e-mail us at: closedend@gabelli.com
-----------------------------------------------------------------
-----------------------------------------------------------------
Notice is hereby given in accordance with Section 23(c) of the
Investment Company Act of 1940, as amended, that the Utility
Trust may, from time to time, purchase its shares in the open
market when the Utility Trust shares are trading at a discount
of 10% or more from the net asset value of the shares.
-----------------------------------------------------------------
THE GABELLI UTILITY TRUST
ONE CORPORATE CENTER, RYE, NY 10580-1422
PHONE: 1-800-GABELLI (1-800-422-3554)
FAX: 1-914-921-5118 INTERNET: WWW.GABELLI.COM
E-MAIL: CLOSEDEND@GABELLI.COM
GBFUF-AR-12/02