The Gabelli Utilities Fund

Transcription

1 The Gabelli Utilities Fund Shareholder Commentary June 30, 2015 Mario J. Gabelli, CFA Portfolio Manager To Our Shareholders, For the quarter ended June 30, 2015, the net asset value ( NAV ) per Class AAA Share of The Gabelli Utilities Fund decreased 2.8% compared with a decrease of 5.8% for the Standard & Poor s ( S&P ) 500 Utilities Index. See page 2 for additional performance information. Mid-Year Outlook 2015 At June 30, 2015 the S&P 500 Utilities Index had declined 16% from its January 29, 2015 peak. Year to date, the index is down 11%. This correction is not surprising, considering that utility stocks were among the best performers in 2014 and early 2015, with the S&P Utilities Index returning 29% (24.3% in price) in 2014, including 12% in the fourth quarter, and growing another 5% through January 29 of this year. We believe utility stocks had gotten ahead of themselves as they benefited from a drop in the 10 year U.S. Treasury yield to 1.7%. In addition to interest rates and strong fundamentals, we believe utility stock valuations were temporarily boosted by global money favoring the sector s low risk and U.S. dollar denominated dividend yields. Following the correction in the first half of 2015, utility stocks trade at more reasonable valuations, including 16x and 15x 2016 and 2017 earnings, respectively. Although impacted by interest rates, we emphasize that utility stocks are more than just bond proxies, and we continue to expect the utility sector to provide a low risk 8%-10% annual total return over the long term. The median current return is 3.9%, and most utilities forecast 4%-6% annual earnings and dividend growth. Solid fundamentals include healthy balance sheets, credit ratings, improved regulatory principles, focused strategies, low natural gas prices, and opportunities to invest in infrastructure. The utility and energy sectors remain in the midst of one of the most aggressive investment cycles seen in decades, leading to dramatic changes in the way that natural gas is drilled and transported and power is generated, transmitted, and delivered. The investment opportunities and fragmented structure combine to make the group ripe for corporate restructuring, including mergers, company spin-offs, yieldcos/master Limited Partnerships (MLPs), and potentially Real Estate Investment Trusts (REITs).

2 Comparative Results Average Annual Returns through June 30, 2015 (a) Since Inception Quarter 1 Year 5 Year 10 Year (8/31/99) Class AAA (GABUX) (2.83)% (5.95)% 10.17% 6.69% 7.59% S&P 500 Utilities Index (5.80) (2.90) S&P 500 Index Lipper Utility Fund Average (3.95) (5.20) Class A (GAUAX) (2.80) (5.89) With sales charge (b) (8.38) (11.30) Class C (GAUCX) (3.07) (6.70) With contingent deferred sales charge (c) (4.04) (7.63) Class I (GAUIX) (2.75) (5.71) In the current prospectuses dated April 30, 2015, the expense ratios for Class AAA, A, C, and I Shares are 1.36%, 1.36%, 2.11%, and 1.11%, respectively. Class AAA and Class I Shares do not have a sales charge. The maximum sales charge for Class A Shares and Class C Shares is 5.75% and 1.00%, respectively. (a) Returns represent past performance and do not guarantee future results. Total returns and average annual returns reflect changes in share price, reinvestment of distributions, and are net of expenses. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. Current performance may be lower or higher than the performance data presented. Visit for performance information as of the most recent month end. Returns would have been lower had Gabelli Funds, LLC, the Adviser not reimbursed certain expenses of the Fund for periods prior to December 31, The Fund imposes a 2% redemption fee on shares sold or exchanged within seven days after the date of purchase. Performance returns for periods of less than one year are not annualized. Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. The prospectuses contain information about these and other matters and should be read carefully before investing. To obtain a prospectus, please visit our website at The value of utility stocks generally changes as long term interest rates change. Funds investing in a single sector, such as utilities, may be subject to more volatility than funds that invest more broadly. The utilities industry can be significantly affected by government regulation, financing difficulties, supply or demand of services or fuel, and natural resources conservation. The Class AAA Share NAVs are used to calculate performance for the periods prior to the issuance of Class A Shares and Class C Shares on December 31, 2002 and Class I Shares on January 11, The actual performance of the Class A Shares and Class C Shares would have been lower due to the additional fees and expenses associated with these classes of shares. The actual performance of the Class I Shares would have been higher due to lower expenses related to this class of shares. The S&P 500 Utilities Index is an unmanaged market capitalization weighted index of large capitalization stocks that may include facilities generation and transmission or distribution of electricity, gas, or water. The S&P 500 Index is a market capitalization weighted index of 500 large capitalization stocks commonly used to represent the U.S. equity market. The Lipper Utility Fund Average reflects the average performance of mutual funds classified in this particular category. Dividends are considered reinvested. You cannot invest directly in an index. (b) Performance results include the effect of the maximum 5.75% sales charge at the beginning of the period. (c) Assuming payment of the 1% maximum contingent deferred sales charge imposed on redemptions made within one year of purchase. We have separated the portfolio manager s commentary from the financial statements and investment portfolio due to corporate governance regulations stipulated by the Sarbanes-Oxley Act of We have done this to ensure that the content of the portfolio manager s commentary is unrestricted. The financial statements and investment portfolio are mailed separately from the commentary. Both the commentary and the financial statements, including the portfolio of investments, will be available on our website at 2

3 Investment Outlook Mergers, yieldcos, spin-offs, and the growth of large scale and rooftop solar lend sex appeal to the sector, but the bulk of earnings power will continue to be driven by investment in the traditional regulated utility business. Infrastructure to address climate change and to move inexpensive natural gas supplies from shale regions to population centers leads to rate base growth. The formula driving our strong fundamental outlook for utilities is: Investment Opportunities + Constructive Regulation = Earnings Growth. Over the past few years, public and political support of investment, combined with the low cost of natural gas, has allowed for an increasingly constructive regulatory environment, which includes numerous adjustments and mechanisms to address infrastructure investment as well as rate design changes to address efficiency and distributed generation. As a result, investors can take comfort that utilities should earn healthy and low risk returns on investment and enjoy significant investment opportunities. Furthermore, the utility business model (rate base/rate of return) continues to attract large private equity investors, infrastructure funds, and larger utilities. Utility stocks provide a platform for larger entities, such as infrastructure funds and private equity, to earn healthy returns on investment. As a result, we continue to expect utility stocks to provide a median 3.7% current return, 4%-6% earnings and dividend growth, and the potential further upside associated with consolidation or restructuring. Potential for Higher Interest Rates Given that U.S. Treasury yields have been in a long term decline since 1981, when they peaked at 15%, many believe that a period of higher rates is inevitable. Similar to most equity investments, utility stocks are negatively impacted when interest rates rise. The current 3.9% utility dividend return is 163% of the 2.4% rate on the 10 year U.S. Treasury. Should U.S. Treasury rates continue to rise, the utility dividend return becomes less compelling. In addition, the present value (or stock price) is often determined by the present value of future cash flows. As such, the higher the interest rate (discount rate), the lower the present value of an equity (or fixed income) investment, assuming all other variables are held constant. Utility stocks often appear to be more sensitive to interest rates than other stocks because the variables impacting changes in utility revenues, expenses, etc., are less sensitive to other factors. However, utility stocks pay higher dividends than other sectors, and thus the present value of the dividend stream is less impacted by changes in interest rates. In addition, utility cost-of-capital, including equity returns (ROEs), is set by state public utility commissions (PUCs) and will increase as interest rates rise. Further, improved and more frequent rate adjustments associated with capital investment may mitigate inflation risk. A primary reason for the long term decline in interest rates has been the Federal Reserve s aggressive stance towards inflation. The Fed has been active with its various tools, including the ability to move benchmark rates, control inflation, and encourage growth. Should economic growth accelerate, the Fed s long term fight against inflation would likely continue to slow inflation potential via hikes in the short term benchmark rates. The Fed s supervision provides some comfort that the low rate environment will continue. 3

4 Awaiting Final EPA Rules on GHG; MATS to be Reconsidered During the second half of 2015, we expect final rules of the Environmental Protection Agency s (EPA s) Clean Power Plan (CPP), which will set greenhouse gas (GHG) emission standards for existing power plants. Given the impact that the CPP will have on the future of power generation and the significant dollars involved, we expect CPP clarity to lead to a heightened level of activity, including power plant retirements, renewable development, Federal Energy Regulatory Commission (FERC) transmission projects, and corporate restructuring. Utilities, regulators, and regional transmission operators have delayed decisions and actions until the course outlined by the CPP is finalized. The CPP was scheduled to be finalized by June 2015, with state plans due in 2016 and the first compliance period in In June 2014, the EPA proposed standards as part of its CPP that calls for CO 2 emissions reductions of 30% from 2005 levels by 2030 (19% from 2012 levels). The EPA will set carbon targets, and the individual states will submit plans to implement and comply with interim targets between 2020 and Given that carbon reduction technology does not exist, compliance plans would involve improved efficiency at existing coal plants, retiring coal units, increasing gas and renewable generation, and improving demand side efficiency. However, some important political groups consider the rule an overreach of the federal government, and the proposal is fraught with ambiguity. Some states appear likely to refuse to comply, including Oklahoma, and the pending rule faces legal and legislative challenges. On June 29, 2015, the Supreme Court ruled that the EPA must reconsider the Mercury and Air Toxics Standards (MATS) because it didn t properly take into account the costs of the regulations before deciding to adopt them. The ruling means that the agency will have to redesign the rules. However, the MATS rules were adopted in 2012, and compliance was required this year without cost consideration. Most utilities have already installed high tech scrubbers to remove the pollutants. While there are several issues associated with finalizing the CPP and MATS, utilities have aggressively steered a course toward more environmentally friendly generation, including coal plant reductions, regardless of the regulation. Other Important Trends, Themes and Issues As noted, the pending EPA rules are significant and will likely outline the course of management decisions, including mergers, rate base investment, and financial engineering. Deals, Deals, and More Deals Over the past few years, utility mergers have involved U.S. electric and gas utilities, Canadian utilities, and private equity with motives ranging from gaining size to potential strategic rights of way. Larger European utilities had retrenched to focus on local issues, but Spanish-based Iberdrola (0.1% of net assets as of June 30, 2015) recently announced a creative way to increase its U.S. presence. Since 1995, the electric utility sector has experienced over 125 acquisition announcements and nearly 100 completed deals. Consolidation activity peaked from , when it appeared that the industry would deregulate. We expect consolidation to continue for years to come, driven by ongoing challenges related to climate change and earnings growth. 4

5 On February 25, 2015, UIL Holdings (0.4%) of New Haven, Connecticut and Iberdrola USA agreed to combine and form a separate publicly traded utility. UIL shareholders would receive one share of the NEWCO for each share held plus $10.50 cash per share. The transaction proposes a total value to UIL of $52.75 per share, a 25% premium to the previous close. The value represented a 21.1X P/E to UIL s 2015 EPS guidance of $2.50 per share and 11.2X EV/2014 EBITDA and 9.8X EV/2015E EBITDA. At closing, UIL will own 81.5% of NEWCO and Iberdrola will own 18.5%. The combination includes Iberdrola USA s utilities (New York State Electric & Gas, Rochester Gas and Electric, and Central Maine Power) and UIL s utilities (The United Illuminating Company, The Southern Connecticut Gas Company, The Connecticut Natural Gas Corporation, and The Berkshire Gas Company). The combined utility rate base would be $8.3 billion and serve 3.1 million electric and gas customers in New York, Connecticut, Maine, and Massachusetts. The following are high profile acquisition announcements made over the past eighteen months: On June 29, 2015, WEC Energy Group (1.7%) completed its acquisition of Integrys Energy Group (TEG). The agreement valued TEG at $9.1 billion enterprise value and consisted of stock, cash, and the assumption of $3.3 billion of debt. Each TEG share received shares of WEC and $18.58 per share in cash. On April 2, 2015, Dynegy (DYN) purchased 12,500 megawatts (MW) of coal and gas-fired capacity from Duke Energy (DUK) (1.1%) and Energy Capital Partners, LLC for a total of $6.25 billion. The assets are located in the Midwest, and they make DYN one of the nation s larger non-regulated power companies with 26,000-MW. On December 3, 2014, Hawaiian Electric Industries (HE) (1.2%) announced an agreement to sell its utility operations to NextEra Energy (NEE) (4.2%) for $4.3 billion (including $1.7 billion of debt) and spin off its banking business, American Savings Bank (ASB), to shareholders. HE shareholders will receive: shares of NEE ($25.19 at NEE closing price), a $0.50 per share special dividend and shares of ASB valued at ~$8.00 (1.75x tangible book of $464 million). The total value of the transaction ($33.69) represents 19.8x our 2015 earnings estimate of $1.70 per share and 8.2x our 2015 EBITDA estimate of $506 million. The $25.69 per share of utility value represented 20.6x our 2015 utility earnings estimate of $1.25 per share (includes allocated parent expenses) and 9.5x our 2015 utility EBITDA estimate of $434 million. On October 20, 2014, CLECO Corp. (1.3%) announced an agreement to be purchased for $55.37 per share in cash by Macquarie Infrastructure (0.1%) and Real Assets (group of investors). The purchase price represented a 15% premium to the previous day s close and 10.0x EV/EBITDA. On September 3, 2014, TECO Energy (TE) (0.7%) closed on the acquisition of New Mexico Gas (NMGC) for $950 million, which represented 11.0x NMGC s 2012 EBITDA of $86 million, from privately held Continental Energy. New Mexico Gas serves 509,000 retail gas customers in the Central Rio Grande Corridor of New Mexico. The agreement was announced on May 28,

6 On September 2, 2014, Laclede Group (0.4%) closed on the acquisition of Alabama Gas Corporation (Alagasco) from Energen Corporation (EGN) (0.1%) for $1.6 billion. Alagasco is the largest gas local distribution company in the state, serving over 420,000 customers in central and north Alabama, including Birmingham. The agreement was announced on April 7, On August 15, 2014 Canadian utility Fortis Inc. (FTS.TO) (0.1%) closed on the acquisition of the Tucson, Arizona electric utility, UNS Energy, for $60.25 per share, a 31% premium to the previous day s close. The agreement was announced on December 11, On April 30, 2014, Exelon Corporation (EXC) (0.9%) agreed to acquire Pepco Holdings, Inc. (POM) for $11.9 billion, or $27.25 per share, which represented a 20% premium over the previous day s closing price. The agreement will bring together Exelon and Pepco s gas and electric utilities, creating the leading Mid-Atlantic electric and gas utility, serving ten million customers. On March 3, 2014, UIL Holdings Corp announced that it won the bid for Philadelphia Gas Works (PGW), a municipal gas utility that serves 500,000 customers, at $1.9 billion. On December 4, 2014, UIL terminated its agreement after failing to get city council support. On December 19, 2013, NV Energy was acquired by MidAmerican Energy Holdings Co. for $23.75 in cash. The deal was announced on May 30, 2013, and the offer price represented a 23% premium to the previous day s closing price. Financial Engineering (MLPs, Yieldcos, and REITs) In addition to mergers, integrated or diversified electric and gas utilities have created significant value over the past decade by forming MLPs with pipelines and/or midstream assets. More recently, electric utilities have engineered the corporate structure to form a new equity known as yieldcos, which serve a similar purpose, achieving a lower cost of capital (higher valuation) by separating more stable and tax advantaged cash flows into an income paying publicly traded vehicle. We have listed some higher profile MLP and yieldco issuances below: October 15, 2014, Dominion Resources (D) (0.5% of net assets as of June 30, 2015) IPO d Dominion Midstream (DM) (less than 0.1%), an MLP with an initial asset of a preferred interest in the Cove Point LNG facility. D estimates that Cove Point and its Blue Racer JV would have up to $1 billion of EBITDA by In addition, D had roughly $1 billion of EBITDA potential to drop down from other assets at Dominion East Ohio, Dominion Transmission, and the Iroquois Pipeline. On June 26, 2014, NextEra Energy (4.2%) issued 16.3 million shares, approximately 20% of its newly created yieldco, NextEra Energy Partners, LP (NEP) (0.1%), at $25 per share. The IPO raised $405 million and was priced at the high end of the $23-$25 per share range (raised from the initial $19-$21 per share range). NEE also has incentive distribution rights and 100% of the special voting units. 6

7 On July 16, 2013, NRG Energy (NRG) (0.2%) spun off a portion of its contracted generation capacity into a separate company called NRG Yield (NYLD) via a $430 million IPO. NYLD is a dividend oriented company that owns, operates, and acquires contracted renewable and conventional generation and thermal infrastructure assets. NYLD shares were priced at $22 per share and currently trade at $51.20 per share. Additionally, the January 30, 2015 IPO of InfraREIT (HIFR), priced at $23 per share (20 million of million shares outstanding). The company is headquartered in Dallas, Texas and is an externally managed REIT that owns 620 miles of electric transmission assets and distribution assets with 50,000 delivery points. Roughly 75% of InfraREIT s existing rate base is transmission, and the remaining 25% of rate base is spread across four distribution service areas. This IPO could spur other larger utilities with FERC regulated transmission assets to pursue a REIT structure. In 2014, the IRS clarified the definition of real property, which allows transmission assets to become REITs, but most are reluctant, given that any benefits would be passed onto customers by regulators. Many utilities have the potential to form transmission REITs, including Ameren Corp. (0.9%), American Electric Power (1.8%), Centerpoint (0.1%), FirstEnergy Corp. (0.7%), Great Plains Energy (1.3%), ITC Holdings (0.1%), Eversource Energy (1.9%), WEC Energy Group, and Westar Energy (1.4%). Business Separation Finally, some diversified utilities recognized that investors value non-regulated businesses separately from regulated businesses and have opted to create value by separating into distinct business units. Examples include: On July 2, 2015 NiSource (NI) (0.5% of net assets as of June 30, 2015), a diversified energy company, split into two publicly traded companies, an electric and gas utility and a pure-play gas pipeline, midstream, and storage company. The utilities, which serve 3.4 million natural gas customers in seven states, (Ohio, Pennsylvania, Massachusetts, Virginia, Kentucky, Maryland, and Indiana) and 450,000 electric customers (Indiana) kept the name NiSource. NiSource shareholders received one share of Columbia Pipeline Group common stock for every one share of NiSource common stock held as of the record date. The gas pipelines, with headquarters in Houston, Texas, trade as Columbia Pipeline Group on the NYSE under the ticker "CPGX. Columbia Pipeline Group owns 15,700 miles of natural gas transmission pipeline stretching from Louisiana to New York, with 300 billion cubic feet of underground storage. On February 11, 2015, NiSource IPO d 53.8 million common units of MLP, Columbia Pipeline Partners LP (CPPL). CPPL received net proceeds of $1.2 billion for 53.5% of the partnership s outstanding limited partnership interests. The assets of CPPL consist of a 15.7% limited partnership interest in Columbia OpCo, which substantially consists of the operations of Columbia Pipeline Group. 7

8 On June 1, 2015, PPL Corporation (PPL) (0.7%) spun off its non-regulated generation subsidiary via a distribution; PPL share received shares of new company, Talen Energy (TLN) (0.1%) to existing shareholders. The company combined its power plants with those of private equity firm Riverstone Holdings to form Talen Energy Corporation. TLN owns approximately 15,000 MW (PPL-10,000 MW, Riverstone-5,300 MW) of unregulated generation in PJM (Pennsylvania, New Jersey, Maryland, etc.) and ERCOT (Electric Reliability Council of Texas). PPL shareholders received shares on a tax free basis and own 65% of the company. We view the transaction favorably, as it transitions PPL from the non-regulated competitive power business, which is a higher risk business, and allows management to focus on the core regulated utility businesses. On February 2, 2014, ONE Gas (OGS) (0.3%), with two million customers in Oklahoma, Kansas, and Texas, began trading as a separate independent gas utility after being distributed to shareholders by ONEOK (OKE) (0.9%). Rate Base Growth: Are We Near the End of a Capital Investment Cycle? As we stated previously, the formula driving our strong fundamental outlook for utilities is: Investment Opportunities + Constructive Regulation = Earnings Growth. Investor concern that post-2015 MATS investment could moderate has been alleviated by the CPP, FERC Order 1000, and smart grid investment opportunities, as well as new platforms into gas infrastructure. Capital investment doubled from $41 billion in 2004 to $83 billion in 2008, with major spending on environmental control equipment, generation projects, and transmission. In 2014, utility capital expenditures were $98.3 billion, compared to $90.3 billion in The Edison Electric Institute currently projects industry spending at $108 billion in 2015, $100 billion in 2016, and $92 billion in We continue to believe electric and gas utilities will have abundant infrastructure investment opportunities for the foreseeable future and funding appears manageable. In 2014, the industry s average credit rating moved to BBB+, after holding at BBB for the past ten years. Rating agencies cite state level regulation improvement, including numerous transparent and timely cost recovery mechanisms. The constructive rate treatment and ability to fund the significant investment opportunity both support our forecasted 4%-6% annual earnings growth. FERC Order 1000 Moving Slowly The FERC s favorable incentive oriented regulation continues to make transmission investment one of the more compelling uses of capital for electric utilities. The favorable regulatory treatment is designed to help the nation repair, upgrade, and expand its aging transmission network. Allowed ROEs have ranged as high as roughly 14%, though recent FERC rate decisions reset the benchmark at a lower level. In June of 2014, FERC lowered New England transmission base ROEs to 10.57% from 11.14% and capped incentive ROEs at 11.74%. Nonetheless, transmission growth opportunities command premium multiples and are among the more desirable projects sought by utility management teams. The Brattle Group estimates $240-$320 billion of necessary transmission investment through We have been disappointed in the pace of acceleration for transmission projects under FERC Order 1000, which 8

9 opens transmission projects to a competitive bidding process. Until the CPP is finalized, ISOs are challenged to determine future plant retirements and additions, and therefore the location of new transmission lines. Over the new few years, we expect transmission development to accelerate as projects are identified to integrate new generation, specifically renewables, and to ensure reliability as older base load coal plants are retired. Gas Pipelines and Reserves in Rate Base Electric utilities are becoming increasingly dependent on natural gas-to-fire generation, and they are eager to minimize price and reliability risk associated with the commodity. Partially driven by the 2013/2014 polar vortex as well as size and scale, some electric utilities are building and developing natural gas pipelines and investing in natural gas reserves. Some examples follow: Access Northeast ($3 billion; November 2018) Eversource Energy teamed up with Spectra Energy (SE) (0.8% of net assets as of June 30, 2015) to enhance the Algonquin and Maritimes pipelines, which would help alleviate congestion for the winter of 2016/2017. Atlantic Coast Pipeline ($5 billion) D, DUK, AGL Resources (GAS) (0.2%), and Piedmont Natural Gas (PNY) (0.1%) have ventured to build a pipeline that runs from West Virginia through Virginia to North Carolina. Sabal Trail ($3 billion) NEE and SE plan to build a 465 mile interstate pipeline that would originate in Alabama and transport gas to Georgia and Southeast Florida. The pipeline would include a Southeast connection built by NEE, which would run an additional 126 miles to the Martin Energy Center. Southeast Supply Header: SE and Centerpoint Energy (CNP) (0.1%) plan to build a 286 mile pipeline from east Texas and northern Louisiana to Mississippi and Alabama. Southeast Pipeline: EQT Corp. (EQT) and NEE plan to build a 330 mile pipeline to connect the Utica/Marcellus to Southeast (West Virginia). In addition, some electric and gas utilities are pursuing the inclusion of natural gas reserves in rate base. The benefit of such a move is to secure gas supply and minimize price risk. Three utilities in the western U.S., including Questar Corp. (STR) (less than 0.1% of net assets), Northwestern Corp. (NWE) (1.4%), and Northwest Natural Gas (NWN) (0.8%), have implemented these programs. While NWE and NWN s programs are relatively new, STR s program has been successful in saving customers approximately $1.1 billion cumulatively since Recently, NEE s Florida Power & Light received Federal Public Service Commission (FPSC) approval for a $500 million per year natural gas reserve program. As more commissions become comfortable with the program, we expect additional or expanded programs to help drive rate base growth. Black Hills Corp. (BKH) (1.1%) and NEE are already actively pursuing initiatives, and other companies exploring this notion include DTE Energy (DTE) (less than 0.1%), Duke Energy, Alliant Energy (LNT) (0.2%), Portland General Electric (POR), and Xcel Energy (XEL) (0.5%). 9

10 Allowed ROEs Decline - But Not As Fast as Cost of Capital Allowed ROEs have gradually declined over the past two decades to slightly below 10.0%. The average allowed ROE in 2014 (58 rate cases) was 9.89%, which compares to the 2013 average awarded ROE of 10.01% (46 rate cases). We emphasize that the absolute decline in profit levels has not been as significant as the decline in utility cost of capital, and thus the favorable spread has benefited utilities. The fourth quarter 2014 (current) spread between the average allowed ROE of 9.78% and the 10 year U.S. Treasury yield of 2.36% is over 700 basis points. While this level is below the 880 bps spread seen in 2012, it still represents a fairly significant increase from the bps spread levels seen in the 1990s. In addition, many regulatory jurisdictions encourage investment through annual, semiannual, or even quarterly riders for various items, including distribution pipe replacement, environmental investment, healthcare costs, property taxes, pension costs, efficiency spending, etc. Further, utilities and PUCs are making considerable efforts toward rate design and/or decoupling sales from revenues. The improved regulatory treatment results in a greater opportunity to earn the ROEs allowed and results in stair-step earnings growth. When combined with opportunities to invest and earn returns on a growing rate base, we consider the allowed ROEs to be more than adequate to grow earnings and dividends at or above the consensus growth rates. Potential Recovery in Power Markets We believe power markets, especially those in the Northeast and Texas, are poised for a more meaningful rebound over the next few years. The May 2014 PJM Interconnection power capacity results were modestly encouraging. While we await clarity on the specific targets of the EPA s CPP, we believe it is inevitable that the new standards will require the shutdown of a meaningful number of merchant coal power plants. We expect the impact of EPA mandated coal unit retirements will combine with the natural retirements of aging nuclear and gas/oil fired power plants to result in improved ERCOT, PJM, and New England power markets over the next few years. The polar vortex of 2013/2014 exposed New England to power supply and pipeline congestion concerns. On June 9, 2015, the FERC approved PJM s proposed capacity performance (CP) product, which allows for a premium (and penalty) for reliability and performance. The new product may increase the 2015 PJM auction capacity pricing by $20-$40 MW/day and will favor generators with dual fuel capabilities to ensure that supply issues do not incur the larger penalties for non-performance. Due to the delay in the decision process on the inclusion of the CP product, the traditional May PJM auction process has been moved to August We consider ERCOT to be a potentially volatile market, given low capacity cushion that could lead to higher spot prices during a hot summer, unusual weather conditions, or supply outages. However, volatility has been mitigated over the past few years by relatively mild summer weather and the addition of significant wind generation in the region. Additionally, ERCOT is still contemplating initiating a capacity market, which would allow for increased earnings for generators in the region. Retail Electric Sales Recovering Since the beginning of the Great Recession in 2008, U.S. electric demand growth has been relatively anemic, with an average growth rate of less than 1% per annum, though it varies by region. Historically, electric 10

11 demand has been highly correlated with GDP growth. Conservation, efficiency, and distributed generation (e.g., solar panels, micro-turbines, and fuel cells) have played a role in mitigating growth, but unusual weather patterns have combined with exaggerated price elasticity during the weak economic times to impact demand data. After a dramatic decline in the housing market, it appears that many housing markets have improved. The U.S. industrial revolution, which is being fueled by low cost natural gas, has resulted in strong retail electric industrial sales growth. More recently, residential and commercial electric sales are experiencing a modest recovery. While our financial and valuation forecasts are based on the new consensus of lower electric demand growth (we assume approximately 1% per annum), we suspect that electric demand growth will return to historical trends as consumers budgets and outlooks improve. Importantly, state PUCs are working toward separating electric sales from revenue to encourage conservation, efficiency, and the development of distributed generation, particularly rooftop solar. Distributed Generation Distributed generation (DG) systems, such as rooftop solar, are small scale, onsite power sources located at or near customers home or businesses. According to Bloomberg New Energy Finance (BNEF), at the end of 2014, there was close to 8.5 gigawatts (GW) of capacity from operating solar DG systems, representing roughly 0.8% of total U.S. installed power capacity of 1,100 GW. Approximately 7.4 GW were built from 2010 to 2014, including 2.5 GW in New installations are expected to grow from 2.5 GW in 2014 to 3.5 GW in 2015, resulting in total solar DG capacity of ~12 GW by the end of this year. The rapid growth in DG has been driven by federal tax incentives, lower installation costs, state and utility incentives, higher electric bills, and attractive financing. Including utility scale solar, California (~10 GW) and Arizona (~2 GW) represent ~60% of the total U.S. solar capacity, and, according to the Solar Energy Industries Association (SEIA), Arizona ranks second among solar capacity per capita at 316 watts per capita, only behind Hawaii at 321 watts per capita. The high penetration of DG in Arizona has led the state s utilities to request a reassessment of the rate design, due to the increasing effect of DG systems on net metering. Generally, in the current net metering structure, customers with DG sell any excess electricity to the respective electric company at the full retail rate. The full retail rate includes all of the fixed costs of poles, wires, meters, and other infrastructure to manage and service the grid, therefore electricity sold at the retail rate essentially allows DG customers to avoid paying their share of the fixed costs related to maintaining the grid. As a result, customers without a DG system, many of whom are low-income, pay a disproportionally high amount of the fixed costs associated with operating the grid. To mitigate the effects of the rising proliferation of DG, Arizona utilities have requested a monthly fixed charge for new DG system customers to access the grid. Obviously, solar generation only works when the sun shines, so customers remain dependent on the utility grid. Economically viable battery storage would represent a significant technology to alter the traditional method of utility service. Tesla recently announced production of a household battery storage product, named Powerwall, with capacity ranging from 7 kwh ($3,000) to 10 kwh ($3,500). In order to put the Powerwall s capacity in perspective, a single use of a washer and dryer consumes roughly 5.6 kwh of energy. In the near to mid-term, we do not believe DG systems will be able to compete with the reliability of the grid until the storage 11

12 capacity of household batteries significantly improves. Given that these states have decoupled revenues from sales, the lower demand does not negatively impact revenues, but rather becomes a cost-sharing challenge. Despite the rapid growth, DG systems represent less than 0.1% of the U.S. s total electric generation. We expect widespread penetration of DG systems to be constrained in the near term, due to high installation costs for the average household, expiration of federal tax incentives at the end of 2016, potential changes to rate design, reliability concerns, and limited energy storage technology. Nonetheless, more progressive utilities have embraced the technology and are pursuing network upgrades to incorporate new technologies, as well as changes to rate design, to better align bills with cost structures and send more realistic price signals to customers (higher fixed charges). Gas Prices The abundance of shale gas supply and sustained period of low prices is transforming the energy and utility industry. Natural gas prices remain at historically inexpensive levels, and this has significant financial and operational implications. Regulated utilities pass-on fuel prices to customers via frequent adjustments to customer bills, and thus changes in gas prices are margin neutral. However, lower gas prices result in lower customer bills and thus create a more favorable environment for base rate increases. Natural gas has become the fuel of choice for electric generation, and the multi-year price declines have minimized net retail electric rate increases and depressed wholesale power prices. The low wholesale power prices continue to depress non-regulated coal and nuclear generation. As a result, utilities have updated investment plans to include new gas fired generation, accelerated retirement of smaller and older coal plants, and the reconsideration of the development of new nuclear plants. Valuation High On Absolute Basis but Reasonable Relative to Interest Rates Our electric utility universe trades at 15.7x forward earnings, which compares to the 20 year range of 10-19x trailing twelve months earnings. However, utility stocks appear inexpensive relative to interest rates, specifically the 10 year Treasury yield. Given that long term interest rates (specifically the 10 year and 30 year U.S. Treasury yields) were in a long term secular decline from the late 1980s, we measure the earnings yield as a percent of the 10 year U.S. Treasury yield to gauge interest rate adjusted valuations. Should the twenty year relationship hold, the 10 year Treasury yield could rise 110 basis points without negatively impacting P/E multiples. Our Approach For several decades, utility companies have acquired other utilities and utility assets for the sake of gaining economies of scale and efficiency. The same forces that resulted in more than one hundred utility takeover announcements over the past two decades remain in place, and new forces have come into play that continue to drive this long term trend. Climate change and environmental policy have pressured marginal players. The electric and gas utility sector remains fragmented, with roughly sixty electric utilities and thirty gas utilities. This is fifty more than we need from the standpoint of economic efficiency. Our investments in regulated companies have primarily, though not exclusively, focused on fundamentally sound, reasonably priced, mid and small-cap utilities that are likely acquisition targets for large utilities seeking 12

13 increased scale. We prefer utilities that operate in more constructive regulatory environments, possess lower carbon footprints, and/or have access to strategic geographies. In addition, we favor utilities with pending transmission line developments, and we 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. Let s Talk Stocks The following are stock specifics on selected holdings of our Fund. 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. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the share prices are listed first in United States dollars (USD) and second in the local currency, where applicable, and are presented as of June 30, AES Corp. (1.9% of net assets as of June 30, 2015) (AES $13.26 NYSE) is a global power company that owns distribution and generation assets on four continents in 18 countries, with a generating capacity of over 36,000 MW and distribution networks in eight countries, including larger utilities in the U.S. and Brazil. Since late 2011, AES has been undergoing a transformation to narrow the strategic focus, allocate capital efficiently, and improve existing operations. As a result, AES has sold ~$3 billion in non-core assets and repurchased stock and debt. In early 2013, the company formed six strategic business units to include six focus regions consisting of the U.S., Andes (Chile, Columbia, Argentina), Brazil, MCAC (Mexico, Central America, and the Caribbean), EMEA (Europe, Middle East, and Africa), and Asia. Future capital investments and growth projects will be focused in areas where a platform already exists. The company offers a 3% current return on a $0.40 per share annual dividend, which management expects to grow 10% annually. With this focused approach to management, we regard AES as one of the better securities to allow the Fund to gain exposure to utility markets both inside and outside of the U.S. American Electric Power Company Inc. (1.8%) (AEP $52.97 NYSE) is one of the nation s largest electric utilities, serving more than 5.3 million retail customers in eleven states (Ohio and Texas the largest), owns approximately 38,000 megawatts (MW) of generating capacity, 40,000 miles of transmission lines (nation s largest) and 221,000 miles of distribution lines. AEP is focused on becoming a premier regulated utility and plans to invest $12 billion over the time period in regulated assets, driving 7.5% CAGR in net regulated plant. Management expects 4%-6% annual earnings growth, driven by a recovering economy, cost controls, and rate recovery of capital investment. Some of the growth will come from AEP Transco, a transmission development subsidiary that contributed $0.31 per AEP share in 2014, which plans to grow its total capital investment to $6.4-$8.2 billion and generate $0.66-$0.81 per share by AEP also currently pays roughly 60% of earnings to shareholders in the form of dividends and expects to increase the payout to 60%-70%. Cleco Corp. (1.3%) (CNL $53.85 NYSE), based in Pineville, Louisiana, is a public utility holding company that serves ~481,000 electric customers in Louisiana and holds 3,340 MW of owned generation. On October 20, 2014, CNL announced an agreement to be purchased for $55.37 per share in cash by Macquarie Infrastructure and Real Assets (group of investors) at a total value of ~$4.7 billion. The purchase price 13

14 represents a 15% premium to the previous day s closing price and 10X EV/EBITDA. The transaction is expected to close in the second half of Edison International (2.0%) (EIX $55.58 NYSE), through Southern California Edison (SCE), is one of the nation s largest regulated electric utilities serving 14 million residents (5 million customers) in central, coastal, and southern California. In early 2014, EIX completed the sale of its bankrupt non-regulated generation business, Edison Mission Energy (EME) to NRG Energy. In addition, the company continues to move forward on plans to permanently retire Units 2 (1,100MW; 2022) and 3 (1,100 MW; 2022) of its 78% owned (SRE owns 20%) San Onofre Nuclear Generating Station (SONGS). On March 27, 2014, EIX reached a settlement agreement regarding recovery of the SONGS units, helping to eliminate a large uncertainty for the company. As a result, EIX is a high quality regulated utility operating in a constructive California regulatory environment. The company continues to await a decision on its GRC, but note that rates will be retroactive to January 1, We continue to expect the utility to benefit from rate cases, ongoing constructive California regulatory mechanisms, and 7%-9% projected average annual rate base growth driven by an $11.8 billion $13.4 billion capital program through Eversource Energy (1.9%) (ES $45.41 NYSE) is New England s largest electric and gas distribution utility and delivery system. ES (formerly known as Northeast Utilities (NU) is the product of the April 2012 merger between Northeast Utilities, headquartered in Hartford, Connecticut with NSTAR, headquartered in Boston, Massachusetts creating a premier New England distribution utility. ES serves 3.6 million customers in Connecticut, New Hampshire, and Massachusetts. We consider ES to be one of the better long-term growth stories driven by transmission investment, cost-cutting opportunities and oil-to-gas heat conversions in the Northeast. The company targets 6%-8% long-term earnings growth rate. ES formed a joint venture with Spectra Energy to construct a $3 billion gas pipeline to supply the region s electric generators with natural gas. Construction is expected to begin in 2017 with an in service date by the winter of In addition, ES expects its 180 mile, $1.4 billion Northern Pass electric transmission line will now be completed in mid 2019 with construction to begin following a final environmental impact statement in early 2016 and New Hampshire siting approval. The company expects further transmission development as aging nuclear and coal facilities are replaced. National Fuel Gas Co. (5.7%) (NFG $58.89 NYSE) is a diversified natural gas company. NFG owns a regulated gas utility serving the region around Buffalo, New York, gas pipelines that move gas between the Midwest and Canada and from the Marcellus to the Northeast, gathering and processing systems and an oil and gas exploration and production business. NFG s regulated utility and pipeline businesses, as well as its California oil production business, provide stable earnings and cash flows to support the dividend, while the natural gas production business offers significant upside potential. NFG s ownership of 800,000 net acres in Pennsylvania, including 780,000 acres in in the Marcellus shale holds enormous natural gas reserve potential. We continue to expect above-average long term earnings and cash flow growth from rapidly growing gas production and expansion of the strategically located pipeline network. The company has increased its dividend for over forty consecutive years. In addition, NFG is considering corporate restructuring alternatives, including an MLP of its midstream assets. 14

15 NextEra Energy Inc. (4.2%) (NEE $98.03 NYSE) is the holding company for Florida Power & Light (FP&L), the largest electric utility in Florida, and NextEra Energy Resources (NER), a leading wholesale power generator. In mid 2014, NEE IPO d 20% of a new publicly traded yieldco (NextEra Energy Partners) to help drive non-regulated renewable generation growth. We regard NEE as one of the better positioned electric companies to grow earnings and dividends over the next several years. FP&L operates one of the premier utility franchises in the nation, with favorable long term demographics and above average rate base growth potential due to the power plant rate adjustments, flexible amortization and other regulatory mechanisms. FP&L operates under a four year ( ) plan premised on an allowed ROE of 10.5% (+/-100-basis points). Importantly, FP&L can raise rates to recognize $3.5 billion of power plant modernization projects. NEE also agreed to purchase Hawaiian Electric Industries (HE) on December 3, 2014 while spinning off American Savings Bank to shareholders. NEE will finance the deal with shares of NEE per HE share and the assumption of tax liabilities related to the spin-off. Additionally, NER owns and operates the nation s largest renewable power portfolio, with a significant pipeline of future growth opportunities. Many of these projects and opportunities are likely to be dropped down into NEP. In addition, NEE entered into a Joint Venture with Spectra Energy on a 465-mile, $3 billion (NEE to fund $1 billion) intrastate pipeline from Alabama through Georgia to southern Florida. The project includes an associated $550 million 126 mile expansion to FPL s Martin Energy Center. PNM Resources Inc. (1.7%) (PNM $24.60 NYSE) is a public utility holding company headquartered in Albuquerque, New Mexico. Regulated electric utility subsidiaries include Public Service Company of New Mexico (PSNM) and Texas-New Mexico Power Company (TNMP). PNM expects rate base growth of 5%-7% per annum at both PSNM and TNMP. PNM s capital plan totals $2.2 billion, including $568 million in 2015, $515 million in 2016, $444 million in 2017, $302 million (excludes $165 million for PV 3) in 2018 and $382 million in PNM is awaiting a final decision from the New Mexico Public Regulation Commission (NMPRC) regarding the final environmental retrofit plan and ownership changes for the San Juan coal units. Additionally, PSNM plans to refile an important New Mexico rate case using a forward-looking 2016 test year to recognize a comprehensive environmental plan, including selective non-catalytic reduction (SNCR) equipment on San Juan Units 1 & 4, Palo Verde 2 lease-purchase (64-MW; $134 million), the addition of a 40 MW solar facility ($66 million; 2016), 40 MW gas peaker ($50 million; 2016), and other investments. The original request includes a $107.4 million, or 8%, rate increase to recognize $2.4 billion of rate base, based on a 50% common equity ratio and 10.5% allowed ROE. TNMP benefits from annual distribution and transmission rate adjustments, as well as well above average sales growth, but it may file a general rate request in the near future. Assuming fair regulatory treatment, PNM targets 7%-9% annual earnings growth, which includes a 2016 earnings power of $1.90-$1.97 per share. Southwest Gas Corp. (2.6%) (SWX $53.21 NYSE) is a natural gas distribution utility serving 1.9 million customers in geographically diverse portions of Arizona (1.0 million, or 54%), Nevada (688,000, or 36%), and California (185,000, or 10%). From 2008 to 2010, customer growth slowed due to the overall slowdown in the new housing market and the increase in idle/vacant homes resulting from foreclosures and challenging economic conditions. However, customer growth is improving, over the long term, we expect that the service area will return to higher growth rates as the favorable regional climate and lower housing prices attract 15

16 customers to inhabit vacant homes. SWX also owns Centuri Construction Group, a full service underground piping contractor that provides trenching and installation, replacement, and maintenance services for energy distribution systems. The pipeline construction business is growing strongly, given the industry s focus on safety related pipeline replacement programs. The 2014 acquisition of Link-Line Group s pipeline construction business expanded the scope and scale of the business, allowing the potential for some type of financial engineering. We consider SWX to be a high quality gas utility with a focused, low risk strategy and solid earnings outlook driven by recent and future rate increases, expanded infrastructure tracking mechanisms, customer growth and cost controls. Westar Energy Inc. (1.4%) (WR $34.22 NYSE) is an electric utility serving 700,000 customers in central and northeastern Kansas. WR is well positioned to grow its earnings given a constructive regulatory environment, which allows for annual rate adjustments outside of a general rate case to recognize environmental and transmission investment. WR is expanding its 6,200 miles of transmission infrastructure by constructing smaller transmission projects in Kansas, and plans to spend $200 million per year on transmission projects despite the recently lowered allowed ROE for transmission. The company filed a General Rate Case on March 2, 2015 to recognize investment in the system, including $610 million for environmental controls to the La Cygne Generating Station (1,578 MW). A decision is expected by late October July 7, 2015 Top Ten Holdings (Percent of Net Assets) June 30, 2015 National Fuel Gas Co. 5.7% NextEra Energy Co. 4.2% Southwest Gas Corp. 2.6% Edison International 2.0% Eversource Energy 1.9% Cablevision Systems Corp. 1.9% AES Corp. 1.9% American Electric Power Company Inc. 1.8% WEC Energy Group Inc. 1.7% PNM Resources Inc. 1.7% Note: The views expressed in this Shareholder Commentary reflect those of the Portfolio Manager only through the end of the period stated in this Shareholder Commentary. The Portfolio Manager s views are subject to change at any time based on market and other conditions. The information in this Portfolio Manager s Shareholder Commentary represents the opinions of the individual Portfolio Manager and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Views expressed are those of the Portfolio Manager and may differ from those of other portfolio managers or of the Firm as a whole. This Shareholder Commentary does not constitute an offer of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this Shareholder Commentary has been obtained from sources we believe to be reliable, but cannot be guaranteed. 16

17 Minimum Initial Investment $1,000 The Fund s minimum initial investment for regular accounts is $1,000. There are no subsequent investment minimums. No initial minimum is required for those establishing an Automatic Investment Plan. Additionally, the Fund and other Gabelli/GAMCO Funds are available through the no-transaction fee programs at many major brokerage firms. The Fund imposes a 2% redemption fee on shares sold or exchanged within seven days after the date of purchase. See the prospectuses for more details. Please visit us on the Internet. Our homepage at contains information about GAMCO Investors, Inc., the Gabelli/GAMCO Mutual Funds, IRAs, 401(k)s, current and historical quarterly reports, closing prices, and other current news. We welcome your comments and questions via at info@gabelli.com. The Fund s daily net asset value is available in the financial press and each evening after 7:00 PM (Eastern Time) by calling 800-GABELLI ( ). The Fund s Nasdaq symbol is GABUX for Class AAA Shares. Please call us during the business day, between 8:00 AM 7:00 PM (Eastern Time), for further information. You may sign up for our alerts at and receive early notice of quarterly report availability, news events, media sightings, and mutual fund prices and performance. e-delivery We are pleased to offer electronic delivery of Gabelli fund documents. Direct shareholders of our mutual funds can elect to receive their Annual and Semiannual Reports, Manager Commentaries, and Prospectuses via e- delivery. For more information or to sign up for e-delivery, please visit our website at Multi-Class Shares The Gabelli Utilities Fund began offering additional classes of Fund shares on December 31, Class AAA Shares are no-load shares offered directly through selected broker/dealers. Class A and Class C Shares are targeted to the needs of investors who seek advice through financial consultants. Class I Shares are available directly through the Fund s distributor or brokers that have entered into selling agreements specifically with respect to Class I Shares. The Board of Trustees determined that expanding the types of Fund shares available through various distribution options will enhance the ability of the Fund to attract additional investors. 17

18 Gabelli/GAMCO Funds and Your Personal Privacy Who are we? The Gabelli/GAMCO Funds are investment companies registered with the Securities and Exchange Commission under the Investment Company Act of We are managed by Gabelli Funds, LLC and GAMCO Asset Management Inc., which are affiliated with GAMCO Investors, Inc. GAMCO Investors, Inc. 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 fund shareholder? If you apply to open an account directly with us, you will be giving us some non-public information about yourself. The non-public information we collect about you is: 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. Information about your transactions with us, any transactions with our affiliates, and transactions with the entities we hire to provide services to you. This would include information about the shares that you buy or redeem. 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 website, 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. 18

19 THE GABELLI UTILITIES FUND One Corporate Center Rye, NY Portfolio Manager Biography Mario J. Gabelli, CFA, is Chairman and Chief Executive Officer of GAMCO Investors, Inc. that he founded in 1977 and Chief Investment Officer Value Portfolios of Gabelli Funds, LLC and GAMCO Asset Management Inc. Mr. Gabelli is a summa cum laude graduate of Fordham University and holds an MBA degree from Columbia Business School and Honorary Doctorates from Fordham University and Roger Williams University. 19

20 THE GABELLI UTILITIES FUND One Corporate Center Rye, NY t 800-GABELLI ( ) f e info@gabelli.com GABELLI.COM Net Asset Value per share available daily by calling 800-GABELLI after 7:00 P.M. BOARD OF TRUSTEES Mario J. Gabelli, CFA Chairman and Chief Executive Officer, GAMCO Investors, Inc. Anthony J. Colavita President, Anthony J. Colavita, P.C. Vincent D. Enright Former Senior Vice President and Chief Financial Officer, KeySpan Corp. Mary E. Hauck Former Senior Portfolio Manager, Gabelli-O Connor Fixed Income Mutual Fund Management Co. Kuni Nakamura President, Advanced Polymer, Inc. Werner J. Roeder, MD Former Medical Director, Lawrence Hospital OFFICERS Bruce N. Alpert President Andrea R. Mango Secretary Agnes Mullady Treasurer Richard J. Walz Chief Compliance Officer DISTRIBUTOR G.distributors, LLC CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company LEGAL COUNSEL Skadden, Arps, Slate, Meagher & Flom LLP THE GABELLI UTILITIES FUND Shareholder Commentary June 30, 2015 This report is submitted for the general information of the shareholders of The Gabelli Utilities Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. GAB470Q215SC