MERRILL
LYNCH
UTILITY
INCOME
FUND, INC.
Quarterly Report May 31, 1994
This report is not authorized for use as
an offer of sale or a solicitation of an
offer to buy shares of the Fund unless
accompanied or preceded by the Fund's
current prospectus. Past performance
results shown in this report should not
be considered a representation of future
performance. Investment return and
principal value of shares will fluctuate
so that shares, when redeemed, may be
worth more or less than their original
cost.
Merrill Lynch
Utility Income Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
MERRILL LYNCH UTILITY INCOME FUND, INC.
DEAR SHAREHOLDER
Inflationary concerns persisted during the May quarter. The Federal Reserve
Board followed up its initial increase in the Federal Funds rate with three
subsequent monetary policy tightening moves. At the same time, investors
viewed signs of economic strength as an indication that the rate of inflation
would soon accelerate. Among the most troublesome statistics released was the
mid-May rise in the Commodity Research Bureau's inflation index. However, by
quarter-end this index had declined back to the levels at which it began the
year.
Despite an upward revision in gross domestic product growth to 3.0% for
the first quarter of the year, later economic data releases suggest a
moderating trend. Disposable income fell 0.5% in April, consumer spending
dropped 0.4% after adjusting for inflation, and sales of new homes also
fell. Consumer confidence declined for the first time in three months,
reflected in sluggish retail sales. However, employment data for May sent
somewhat conflicting signals. The unemployment rate dropped sharply in
May from 6.4% to 6.0%, but at the same time business payrolls grew
only modestly.
In the weeks ahead, investors are likely to continue to focus their
attention on the direction of the economy and inflationary trends.
Evidence of stable and moderate economic growth, combined with subdued
inflationary pressures, would be a positive development for the
financial markets. The absence of these trends, along with continued
monetary policy tightening by the central bank, would likely lead to
continued volatility in stock and bond prices over the near term.
Portfolio Matters
The environment for US electric utility investments remained somewhat
difficult during the quarter ended May 31, 1994. Rising long-term interest
rates coupled with regulatory and company announcements served to increase
investor concerns surrounding the electric utility industry, which in turn
resulted in lower stock prices and depressed valuations.
<PAGE>
On April 20, 1994, the California Public Utility Commission announced a
proposal that would restructure the electric utility industry in California
by allowing customers to choose among different electricity suppliers to
secure the lowest possible prices. The Commission outlined a rather
aggressive timetable for further study of the proposal and its
implementation. The initial reaction to the announcement was negative,
since the proposal essentially speeds up the transition from a
monopolistic industry to a more competitive one. Moreover, some viewed
California's plan as a precursor to possible actions taken in other states
given that the bulk of regulatory actions are done on a state-by-state
basis. The Commission has tried to allay investors' concerns by meeting
with the investment community and by seeking comments from all interested
parties. The bottom line appears to be that the California Commission
wants lower prices but plans to protect utility shareholders during
this process.
On May 9, 1994, FPL Group, Inc., a Fund holding, surprised the industry
and the investment community by announcing that it was cutting its annual
dividend by 32%, from $2.48 to $1.68 per share. The management of FPL
said that it took this action from a 'position of strength' and that it
wants to position itself as a growth company given the changing
environment and the increasing competitiveness of the industry. While
FPL's dividend payout ratio was above the industry average, the company
has a strong balance sheet and is viewed as having limited exposure to
competitive risk given its customer base and service territory. This is
certainly not the first time that an electric utility has cut its
dividend, but it is a first for a company that is not experiencing
regulatory, plant or financial difficulties as was the case for
companies in the 1970s and 1980s.
With the confluence of events that took place in the industry during the
May quarter and the volatility these events created, we made few changes
to the portfolio's holdings. However, we reduced the Fund's exposure to
electric utility stocks from 72.7% at the end of the February quarter to
62.8% at the end of the May quarter. We also increased the Fund's cash
position from 1.2% of net assets to 10.8% over the same period. We
modestly reduced our position in PECO Energy Co. given the stock's
below average yield and our intention to increase the portfolio's cash
position.
<PAGE>
We eliminated our second-largest holding, Pacific Gas & Electric Co.,
given the initial uncertainty related to changes in California regulation,
which we believed was not reflected in the stock price at the time the
sale of the security was made. The sale of Pacific Gas & Electric appears
to be well-timed given the subsequent weakness in its stock price. We
maintained our position in our other major California-based electric
utility holding, SCEcorp., because the stock price and its high
current yield largely reflect industry and company-specific risk, in
our view. In addition, we kept our position in FPL given the weakness
in the stock price following the aforementioned surprise company
announcement. We estimate that FPL's future earnings will grow at a
well above-average 5% rate per year, and the potential for future
dividend growth is good. The company also announced a stock repurchase
program which we expect will help support the stock price during
this transition period.
Investment Outlook
Even though the US electric utility industry is mature, electricity usage
continues to increase steadily. Competition in the industry is not a new
concept. For example, self-generation has been a competitive threat for
a long time, and regions are consistently competing against one another
to attract more industrial customers to their region by offering special
rates. On the other hand, while competition in the industry is not new,
the potential acceleration of the trend away from monopoly-driven revenue
bases to competitive-driven revenue bases is a more recent threat. However,
we believe that this transition may prove to be difficult to implement
given the number of regulators and industry issues involved. Utility rates,
which are determined for the most part by individual state regulators, are
expected to decline initially in a more competitive environment. However,
over the long term, this trend may reverse because plant aging may reduce
capacity, and competition may prevent utilities from adding new capacity.
On the cost side, given the monopolistic structure of the industry and
returns based on expenses, most companies are not as efficient as they
could be, in our view.
<PAGE>
In Conclusion
We thank you for your investment in Merrill Lynch Utility Income Fund,
Inc., and we look forward to reviewing our investment strategy and
outlook with you in future shareholder reports.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Walter D. Rogers)
Walter D. Rogers
Vice President and Portfolio Manager
June 21, 1994
PERFORMANCE DATA
None of the past results shown should be considered a representation
of future performance. Investment return and principal value of
Class A and Class B Shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
<TABLE>
Recent Performance Results*
<CAPTION>
Since Inception 3 Month
5/31/94 2/28/94 10/29/93** % Change % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund Class A Shares $8.37 $9.20 $10.00 -16.30% -9.02%
ML Utility Income Fund Class B Shares 8.37 9.19 10.00 -16.30 -8.92
ML Utility Income Fund Class A Shares--Total Return -13.98(1) -7.47(2)
ML Utility Income Fund Class B Shares--Total Return -14.31(3) -7.55(4)
<FN>
*Investment results shown for the 3-month and since inception periods are before
the deduction of any sales charges.
**Commencement of Operations.
(1)Percent change includes reinvestment of $0.252 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.151 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.216 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.134 per share ordinary income dividends.
</TABLE>
<PAGE>
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/29/93)
through 3/31/94 -11.01% -16.79%
[FN]
*Maximum sales charge is 6.5%
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (10/29/93)
through 3/31/94 -11.23% -15.23%
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to
0% after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Walter D. Rogers, Vice President and Portfolio Manager
Gerald M. Richard, Treasurer
Thomas D. Jones, III, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Percent of
Industries Shares Held Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Utilities--Electric 40,900 American Electric Power Company, Inc. $ 1,519,871 $ 1,186,100 4.1%
16,000 Baltimore Gas & Electric Co. 396,848 364,000 1.2
12,000 Boston Edison Co. 336,932 331,500 1.1
26,000 Carolina Power & Light Co. 774,899 633,750 2.2
26,600 Commonwealth Edison Co. 785,722 661,675 2.3
29,100 Consolidated Edison Company
of New York 980,887 803,887 2.7
18,400 Detroit Edison Co. 595,472 473,800 1.6
20,800 Dominion Resources, Inc. 980,112 821,600 2.8
25,300 Duke Power Co. 1,101,816 910,800 3.1
23,500 FPL Group, Inc. 919,184 746,125 2.6
23,300 Houston Industries, Inc. 1,097,517 751,425 2.6
32,000 Long Island Lighting Co. 769,920 644,000 2.2
27,000 New York State Electric & Gas Corp. 780,994 678,375 2.3
17,900 Niagara Mohawk Power Corp. 385,366 295,350 1.0
35,700 Northeast Utilities Co. 907,836 812,175 2.8
18,900 Ohio Edison Co. 444,028 330,750 1.1
21,000 Oklahoma Gas & Electric Co. 757,886 645,750 2.2
34,800 PacifiCorp. 680,714 613,350 2.1
20,400 PECO Energy Co. 624,518 555,900 1.9
30,000 Pennsylvania Power & Light Co. 778,050 663,750 2.3
30,000 Potomac Electric Power Co. 776,424 588,750 2.0
20,000 Public Service Company of Colorado 636,200 520,000 1.8
40,400 Public Service Enterprise Group Inc. 1,319,991 1,121,100 3.8
42,200 SCEcorp. 887,436 590,800 2.0
60,400 Southern Co. 1,362,076 1,117,400 3.8
33,000 Texas Utilities Company 1,412,932 1,089,000 3.7
12,600 Union Electric Co. 513,993 423,675 1.5
----------- ----------- ------
22,527,624 18,374,787 62.8
Total Stocks 22,527,624 18,374,787 62.8
<PAGE>
<CAPTION>
Face Amount Corporate Bonds
<S> <C> <S> <C> <C> <C>
Utilities-- $1,000,000 Southwestern Bell Corp.,
Communications 7.00% due 7/01/2015 1,034,480 903,530 3.1
1,000,000 Tele-Communications, Inc.,
9.80% due 2/01/2012 1,263,890 1,026,940 3.5
1,000,000 United Telephone of Florida,
6.875% due 7/15/2013 1,019,950 911,920 3.1
----------- ----------- ------
3,318,320 2,842,390 9.7
Utilities-- 1,000,000 Public Service Company of
Electric Colorado 6.375% due 11/01/2005 991,300 882,540 3.0
Utilities-- 1,000,000 El Paso Natural Gas Co.,
Gas 7.75% due 1/15/2002 1,090,950 992,110 3.4
1,000,000 Enron Corp., 6.75% due 7/01/2005 1,023,800 904,860 3.1
1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,343,580 4.6
----------- ----------- ------
3,605,780 3,240,550 11.1
Total Corporate Bonds 7,915,400 6,965,480 23.8
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Percent of
Face Amount Short-Term Securities Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Commercial Paper* $1,157,000 General Electric Capital Corp.,
4.22% due 6/01/1994 $ 1,157,000 $ 1,157,000 4.0%
US Government & 1,000,000 Federal Home Loan Bank,
Agency Obligations* 3.82% due 6/01/1994 1,000,000 1,000,000 3.4
1,000,000 Federal National Mortgage
Association, 4.19% due 6/27/1994 996,974 996,974 3.4
----------- ----------- ------
1,996,974 1,996,974 6.8
Total Short-Term Securities 3,153,974 3,153,974 10.8
Total Investments $33,596,998 28,494,241 97.4
===========
Other Assets Less Liabilities 771,315 2.6
----------- ------
Net Assets $29,265,556 100.0%
=========== ======
Net Asset Value: Class A--Based on net assets of
$3,504,888 and 429,324 shares outstanding $ 8.37
===========
Class B--Based on net assets of
$25,670,668 and 3,067,120 shares outstanding $ 8.37
===========
<FN>
*Commercial Paper and US Government & Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid at the time
of purchase by the Fund.
<PAGE>
PORTFOLIO INFORMATION
For the Quarter Ended May 31, 1994
Percent of
Ten Largest Holdings Net Assets
ENSERCH Corp., 6.375% due 2/01/2004 4.6%
American Electric Power Company, Inc. 4.1
Public Service Enterprise Group Inc. 3.8
Southern Co. 3.8
Texas Utilities Company 3.7
Tele-Communications, Inc., 9.80%
due 2/01/2012 3.5
El Paso Natural Gas Co., 7.75%
due 1/15/2002 3.4
United Telephone of Florida, 6.875%
due 7/15/2013 3.1
Duke Power Co. 3.1
Enron Corp., 6.75% due 7/01/2005 3.1
Deletion
Pacific Gas & Electric Co.
</TABLE>
