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Analysis - UTG Rights Offering

July 8, 2012

Details of this offering are straight forward - shareholders on Thur 7/5/12 (x-Rights Date) get 1 right for every share held. Notice that the closing price on 7/3 was \$27.97 and opening price on 7/5 was \$27.05 - so at that time the market valued the rights at ~ \$0.92 each. We get the rights on Mon 7/9 (Record Date). With 3 rights one can purchase a new share at a discounted price. The rights are transferable and therefore can ostensibly be traded under the stock symbol UTG RT according to the Reaves Prospectus. As of today, I have found a quote for them under Yahoo! Finance using the symbol UTG-RWI and also a blank for them at Schwab using the symbol UTG/RTWI - no info here yet but the symbol is there. BUT Schwab knows little of this offering, and trading them therefore might be problematic, ie, will Schwab even recognize that I now 'own' these rights.

Using the info in the news release, I put together a calculation for the value of a right. These I intend to sell if I can do so at fair value. As of today, I put a value on them of \$0.87 each. The corresponding market quote is \$0.78 on Yahoo! They are also indicating a traded volume of 2650 rights even though it is not suppose to have started trading yet. So it appears that discounting of the rights has already begun.

My calculation for the value of the rights is as follows:-

Assuming that the NAV remains BELOW the market price:-

Vr = (Pc - (0.95 x NAV)) / 3

- Vr is the \$ value of a right, Pc is the quoted market price per share and NAV is the correspondingly dated net asset value per share

Do not assume you can do nothing. According to Reaves, the rights expire at or around Wed 8/8. (Note: the offer can be extended, but is not likely to be. The only rationale I can find for extension is - " . . . if, after the effective date of the Fund's registration statement relating to this Offer, the Fund's net asset value declines more than 10% from the Fund's net asset value as of that date. If this occurs, the Expiration Date will be extended . . . " [ Source : UTG Rights Offering - PROSPECTUS; Reaves Utility Income Fund; July 2 2012. ] After this date - the Expiration Date - the rights are worthless.

My rating of UTG is sell. It's hard for me to construe this rights offering as 'customer oriented' in any way. First to consider is the dilution effect. Since new shares are being sold at 95% of their NAV (continuing the assumption from above) and assuming transaction costs at 0.25%, dilution can be worked out at ~ 1.3%, if all of the rights are exercised:-

New Value = increase in value / increase in the no of shares

= (1 + ((0.95 - 0.0025) x 0.33)) / 1.33 = 0.987

This means an immediate decrease in NAV of 1.3%. Whether this will translate in a like decrease of the market value is debatable. My outlook on this is not positive, but that's just my opinion. However, in addition, and what is not debatable, is the effect of all that new cash rolling in - close to \$ 200 mm by my calculations. (Reaves's appears to me to be overly optimistic.) This ETF has enjoyed it's premium and performance due to its dividend return, more than 6% based on when I bought in. I cannot see a method of investment available to them for all this new cash that will allow them to maintain this level of return without an inordinate increase in the level of risk they take on. Net effect - they are about to lose their edge. This fact more than any other points my outlook south.

Disclosure: I am long UTG.