MERRILL
LYNCH
UTILITY
INCOME
FUND, INC.
Annual Report August 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>
DEAR SHAREHOLDER
Concerns of increasing inflationary pressures
continued to prompt volatility in the US stock and
bond markets during the three months ended
August 31, 1994. In addition, the weakness of the
US dollar in foreign exchange markets prolonged
stock and bond market declines during July. While
the immediate concerns regarding the US dollar
had diminished by late July, the possibility of
continued tightening by the Federal Reserve
Board resurfaced after Chairman Alan Greenspan
gave his most recent Congressional testimony.
However, a lower-than-expected rate of growth
reported for the US economy during the second
calendar quarter allayed inflationary concerns to
some degree, despite the fifth increase in short-
term interest rates made by the Federal Reserve
Board in mid-August.
While the economic recovery is continuing, data
suggest that it is losing some momentum. Con-
sumer spending is increasing, but at a relatively
slow pace, and existing home sales may have
peaked. In the industrial sector, capital goods
spending is still on the rise, but the gain for the
second quarter was revised downward to 6.5%. On
balance, growth in US industry is progressing at a
steady, modest rate.
Despite evidence of a moderating trend in the US
economy, Chairman Greenspan indicated in his
July Humphrey-Hawkins testimony that the
central bank would prefer to err on the side of too
much monetary tightening rather than too little.
In the weeks ahead, investors will continue to
assess economic data and inflationary trends in
order to gauge whether further increases in
short-term interest rates are imminent. Continued
indications of moderate and sustainable levels of
economic growth would be positive for the US
capital markets.
<PAGE>
Portfolio Matters
Investors in utility stocks fared better in the
quarter ended August 31, 1994 compared to the
May 31, 1994 quarter. Most of the gains in the
utility stock prices during the quarter occurred
during the month of July and were related to a
rally in bond prices. On a total rate of return
basis, electric utility stocks as measured by the
unmanaged Standard & Poor's Electric Utility
Index rose 2.17%. Investors in Merrill Lynch
Utility Income Fund, Inc. did even better since
the Fund's total rate of return for Class A and
Class B Shares outperformed the Index at 2.49%
and 2.30%, respectively. Total rate of return is
important given the Fund's focus on enhancing
current income.
As was expected and discussed in the most recent
shareholders' report, SCEcorp, a California-based
electric utility company, reduced its dividend.
There was virtually no impact on the stock's
price given that a cut was expected and already
reflected in the share price. However, there was
an unexpected action taken by another electric
utility company that raised investors' concerns
much the same way that FPL Corp.'s dividend
reduction did in the May quarter. On August 10,
1994, New York State Electric & Gas Corporation
(NGE) announced that it was reviewing its current
dividend level given its close to 90% payout ratio,
the more competitive environment and a sluggish
economy. This announcement followed a state-
ment on May 13, 1994 from the company in the
wake of FPL's actions that it planned to maintain
its dividend level. After the August announce-
ment, NGE's stock price closed down 4 5/8 points.
While actions such as these may very well be
necessary for the future success of the individual
companies, over the near term it creates uncer-
tainty for investors which leads to increased stock
price volatility.
In addition to electric utility stocks being adversely
impacted by negative announcements concerning
dividends, the stocks are also being hit by regu-
latory and court decisions. For example, General
Public Utilities' stock price declined 7% on the day
that a court reversed a rate order that was backed
by state regulators. In our view, the stock price
action was extreme, and we used the weakness in
the stock to add it to the Fund's portfolio. The
stock closed the August quarter up from our
purchase price.
<PAGE>
To help cushion the Fund from such actions, we
have increased the number of issues in the
portfolio and as a result lowered the weighting
of individual security issues. In fact, we increased
the number of equity holdings in the portfolio
from 27 at the end of the May quarter to 34 at the
end of August. This was achieved through the
purchase of eight new names and the elimination
of one issue. The new purchases comprised seven
electric companies including Central & Southwest
Corp., Entergy Corp., General Public Utilities
Corp., Allegheny Power System, Inc., Western
Resources, Inc., Northern States Power Co. and
Wisconsin Energy Corp. These companies offer the
Fund more diversification in terms of service
territories, thereby spreading regulatory risk. For
instance, out of the seven new electric utility
purchases, Western Resources gives the Fund
new exposure to the state of Kansas; Northern
States Power provides exposure to the states of
Minnesota, North Dakota and South Dakota; and,
both Central & Southwest and Entergy give new
exposure to Louisiana and additional exposure
to the states of Arkansas and Texas. For the most
part, the yields on the electric utility stocks
added to the portfolio during the quarter were
similar to the industry average of around 7%.
The Fund's eighth new purchase was Pacific
Telesis Group, one of the Bell operating companies.
Pacific Telesis' principal service territory is
California and the company also services part of
Nevada. The stock has an above-average yield
(6.98%) for the telephone sector that is comparable
to that of electric utility issues, and therefore
meets the Fund's high current income objective.
The yield of Pacific Telesis is above the telephone
industry's average because the company spun off
its high-growth cellular operations into a new
entity called AirTouch Communications. Thus, the
price of Pacific Telesis' stock reflects a company
that remains in a relatively mature, regulated
industry. In addition to the high current yield that
the stock offers, we believe there is opportunity
for some capital appreciation given the company's
ability to cut costs. Expansion plans in the deploy-
ment of technological advances via fiber optic net-
works and personal communications networks
licenses are high on management's agenda for
future growth.
<PAGE>
During the August quarter, we eliminated Potomac
Electric Power Co. from the portfolio. A high
dividend payout ratio along with slowing earnings
growth, potential problems in its diversified
activities and a difficult regulatory environment
led us to eliminate the position. Moreover, we did
not believe that these factors were reflected in
the share price. While we believe that the com-
pany is committed to maintaining its dividend, it
may be forced to make a cautionary statement or
take direct action and lower its dividend in the
current environment.
Investment Outlook
Although the industry outlook has not changed
much since our last report to shareholders,
individual companies continue to make announce-
ments concerning their competitive environment
and dividend policy. While it is not possible to
accurately predict when these announcements
may occur, we are taking defensive action to
improve the risk/potential reward ratio of our
investments. First, we are increasing the number
of holdings in the Fund, as noted earlier. This
action serves to reduce the impact of too much
reliance on any one company or regulatory body.
Second, we have begun to move into slightly
lower-yielding utilities with lower payouts that
may also offer the potential for dividend growth
(such as Wisconsin Energy, for example).
<PAGE>
Fiscal Year in Review
The primary investment strategy for Merrill Lynch
Utility Income Fund, Inc. is to seek high current
income. Therefore, we have concentrated invest-
ments in domestic electric utility stocks, because
their yields exceed those of other utility sectors,
and in utility bonds. The Fund commenced opera-
tions on October 29, 1993 with the initial portfolio
consisting of 19 equity issues and three bond
issues. At the end of August, the portfolio con-
sisted of 34 equity positions and seven bond
holdings. The Fund began operations shortly after
the high reached on September 17, 1993 by
Standard & Poor's 24 Electric Power Index, which
has since then declined about 27%. Over that
same period, the price of the US 30-Year Treasury
bond decreased about 20%, leading us to con-
clude that most of the decline in utilities was
related to rising interest rates. With the decline
experienced within the electric utility equity
sector over the course of the fiscal year, the Fund's
Class A and Class B Shares had negative total
returns for the period. However, relative to the
unmanaged Standard & Poor's Electric Utility
Index, the Fund has performed well. Since incep-
tion through August 31, 1994 the Fund's Class A
and Class B Shares' total returns were -11.84%
and -12.34%, respectively (prior to the deduction
of the applicable sales charges, which lower
returns), compared to a -17.37% total return for
the Index (complete performance information can
be found on pages 4 and 5). While the current
gross yield of our equity and bond investments has
basically held steady in the 7% range, industry
actions have resulted in a modest shift of our
investment strategy. We have been lowering the
weightings in the portfolio of individual holdings
by increasing the number of holdings. This strat-
egy should help to better cushion the portfolio
from adverse regulatory and specific company
announcements. In summary, the domestic
electric utility industry is in transition from a
franchised regulated monopoly business to a more
competitive marketing-driven one, and these
changes have exacerbated the normal interest
rate-induced correction that has been occurring
since the Fund's inception.
<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
September 26, 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 re-
deemed, may be worth more or less than their original cost.
GRAPHIC MATERIAL APPEARS HERE. SEE APPENDIX,
GRAPHIC AND IMAGE MATERIAL: Item 1.
Aggregate Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/29/93)
through 6/30/94 -15.94% -21.40%
[FN]
*Maximum sales charge is 6.5%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Inception (10/29/93) through 6/30/94 -16.31% -20.31%
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0% after
4 years.
**Assuming payment of applicable contingent deferred sales charge.
PERFORMANCE DATA (concluded)
<TABLE>
Recent Performance Results
<CAPTION>
Since Inception 3 Month
8/31/94 5/31/94 10/29/93** % Change % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund Class A Shares* $8.44 $8.37 $10.00 -15.60% +0.84%
ML Utility Income Fund Class B Shares* 8.44 8.37 10.00 -15.60 +0.84
ML Utility Income Fund Class A Shares--Total Return* -11.84(1) +2.49(2)
ML Utility Income Fund Class B Shares--Total Return* -12.34(3) +2.30(4)
<FN>
*Investment results shown do not reflect any sales charges; results
shown would be lower if a sales charge was included.
**Commencement of Operations.
(1)Percent change includes reinvestment of $0.388 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.136 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.337 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.120 per share ordinary
income dividends.
</TABLE>
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
<PAGE>
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
PORTFOLIO INFORMATION (unaudited)
Percent of
Ten Largest Holdings Net Assets
ENSERCH Corp., 6.375% due 2/01/2004 4.3%
American Electric Power Company, Inc. 4.1
Southern Co. 3.6
Public Service Enterprise Group Inc. 3.5
Texas Utilities Company 3.5
Tele-Communications, Inc., 9.80%
due 2/01/2012 3.3
El Paso Natural Gas Co., 7.75%
due 1/15/2002 3.2
Duke Power Co. 3.1
Enron Corp., 6.75% due 7/01/2005 2.9
Southwestern Bell Capital Corp.,
7.00% due 7/01/2015 2.8
For the quarter ended August 31, 1994
Additions
Allegheny Power System, Inc.
Central & Southwest Corp.
Entergy Corp.
General Public Utilities Corp.
Northern States Power Co.
Pacific Telesis Group
Western Resources, Inc.
Wisconsin Energy Corp.
Deletions
Potomac Electric Power Co.
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Value Percent of
Industries Shares Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Communications 20,000 Pacific Telesis Group $ 623,700 $ 660,000 2.1%
Utilities--Electric 22,500 Allegheny Power System, Inc. 483,750 506,250 1.6
40,900 American Electric Power Company, Inc. 1,519,871 1,288,350 4.1
16,000 Baltimore Gas & Electric Co. 396,848 368,000 1.2
18,000 Boston Edison Co. 498,793 481,500 1.5
26,000 Carolina Power & Light Co. 774,899 689,000 2.2
22,000 Central & Southwest Corp. 475,750 495,000 1.6
26,600 Commonwealth Edison Co. 785,722 638,400 2.0
29,100 Consolidated Edison Company of New York 980,888 796,613 2.5
18,400 Detroit Edison Co. 595,472 501,400 1.6
20,800 Dominion Resources, Inc. 980,112 782,600 2.5
25,300 Duke Power Co. 1,101,816 980,375 3.1
18,100 Entergy Corp. 466,075 450,238 1.4
23,500 FPL Group, Inc. 919,184 737,313 2.3
20,500 General Public Utilities Corp. 527,875 535,562 1.7
23,300 Houston Industries, Inc. 1,097,517 809,675 2.6
32,000 Long Island Lighting Co. 769,920 576,000 1.8
27,000 New York State Electric & Gas Corp. 780,994 560,250 1.8
17,900 Niagara Mohawk Power Corp. 385,366 266,262 0.8
35,700 Northeast Utilities Co. 907,836 830,025 2.6
11,000 Northern States Power Co. 479,160 475,750 1.5
24,900 Ohio Edison Co. 559,888 482,437 1.5
21,000 Oklahoma Gas & Electric Co. 757,886 719,250 2.3
34,800 PacifiCorp 680,713 595,950 1.9
20,400 PECO Energy Co. 624,518 555,900 1.8
30,000 Pennsylvania Power & Light Co. 778,050 633,750 2.0
20,000 Public Service Company of Colorado 636,200 542,500 1.7
40,400 Public Service Enterprise Group Inc. 1,319,991 1,121,100 3.5
42,200 SCEcorp 887,436 574,975 1.8
60,400 Southern Co. 1,362,076 1,140,050 3.6
33,000 Texas Utilities Company 1,412,932 1,105,500 3.5
12,600 Union Electric Co. 513,993 450,450 1.4
20,000 Western Resources Co. 562,500 575,000 1.8
18,400 Wisconsin Energy Corp. 477,204 478,400 1.5
------------ ------------ ------
25,501,235 21,743,825 68.7
Total Stocks 26,124,935 22,403,825 70.8
<PAGE>
<CAPTION>
Face Amount Corporate Bonds
<S> <C> <S> <C> <C> <C>
Telecommuni- $ 1,000,000 Southwestern Bell Capital Corp., 7.00%
cations due 7/01/2015 1,034,480 892,160 2.8
1,000,000 Tele-Communications, Inc., 9.80% due
2/01/2012 1,263,890 1,055,460 3.3
1,000,000 United Telephone of Florida, 6.875%
due 7/15/2013 1,019,950 873,970 2.8
------------ ------------ ------
3,318,320 2,821,590 8.9
Utilities-- 1,000,000 Public Service Company of Colorado, 6.375%
Electric due 11/01/2005 991,300 883,090 2.8
Utilities--Gas 1,000,000 El Paso Natural Gas Co., 7.75% due 1/15/2002 1,090,950 1,001,310 3.2
1,000,000 Enron Corp., 6.75% due 7/01/2005 1,023,800 907,720 2.9
1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,344,975 4.3
------------ ------------ ------
3,605,780 3,254,005 10.4
Total Corporate Bonds 7,915,400 6,958,685 22.1
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Value Percent of
Face Amount Short-Term Securities Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Commercial $ 1,317,000 General Electric Co., 4.75% due 9/01/1994 $ 1,317,000 $ 1,317,000 4.1%
Paper* 1,000,000 Unilever Capital Corp., 4.575% due
9/12/1994 998,602 998,602 3.1
Total Short-Term Securities 2,315,602 2,315,602 7.2
Total Investments $ 36,355,937 31,678,112 100.1
============
Liabilities in Excess of Other Assets (45,433) (0.1)
------------ ------
Net Assets $ 31,632,679 100.0%
============ ======
<FN>
*Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
See Notes to Financial Statements.
<PAGE>
</TABLE>
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1994
<CAPTION>
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$36,355,937) (Note 1a) $ 31,678,112
Cash 483
Receivables:
Securities sold $ 598,180
Beneficial interest sold 388,219
Dividends 187,400
Investment adviser (Note 2) 149,301
Interest 79,860 1,402,960
------------
Deferred organization expenses (Note 1f) 75,500
------------
Prepaid registration fees and other assets (Note 1f) 123,565
------------
Total assets 33,280,620
------------
Liabilities: Payables:
Securities purchased 1,234,084
Beneficial interest redeemed 353,707
Distributor (Note 2) 18,364 1,606,155
------------
Accrued expenses and other liabilities 41,786
------------
Total liabilities 1,647,941
------------
Net Assets: Net assets $ 31,632,679
============
<PAGE>
Net Assets Class A Shares of Common Stock, $.10 par value; 100,000,000
Consist of: shares authorized $ 50,192
Class B Shares of Common Stock, $.10 par value; 100,000,000
shares authorized 324,500
Paid-in capital in excess of par 36,276,972
Undistributed investment income--net 183,101
Undistributed realized capital losses on investments--net (524,261)
Unrealized depreciation on investments--net (4,677,825)
------------
Net assets $ 31,632,679
============
Net Asset Value: Class A--Based on net assets of $4,237,655 and 501,916 shares
outstanding $ 8.44
============
Class B--Based on net assets of $27,395,024 and 3,244,996 shares
outstanding $ 8.44
============
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Period
October 29, 1993++
to August 31, 1994
<S> <S> <C>
Investment Dividends $ 1,052,833
Income Interest and amortization of premium and discount earned 565,056
(Note 1e): ------------
Total income 1,617,889
------------
<PAGE>
Expenses: Distribution fees--Class B (Note 2) 163,778
Investment advisory fees (Note 2) 138,575
Registration fees (Note 1f) 84,441
Printing and shareholder reports 49,555
Accounting services (Note 2) 32,035
Directors' fees and expenses 26,974
Transfer agent fees--Class B (Note 2) 22,176
Professional fees 18,474
Amortization of organization expenses (Note 1f) 15,100
Custodian fees 6,013
Transfer agent fees--Class A (Note 2) 2,793
Pricing fees 1,792
Other 4,301
------------
Total expenses before reimbursement 566,007
Reimbursement of expenses (Note 2) (287,875)
------------
Total expenses net of reimbursement 278,132
------------
Investment income--net 1,339,757
------------
Realized & Un- Realized loss from investments--net (524,261)
realized Gain on Unrealized depreciation on investments--net (4,677,825)
Investments--Net ------------
(Notes 1e & 3): Net Decrease in Net Assets Resulting from Operations $ (3,862,329)
============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
For the Period
October 29, 1993++
Increase (Decrease) in Net Assets: to August 31, 1994
<S> <S> <C>
Operations: Investment income--net $ 1,339,757
Realized loss on investments--net (524,261)
Unrealized depreciation on investments--net (4,677,825)
------------
Net decrease in net assets resulting from operations (3,862,329)
------------
<PAGE>
Dividends to Investment income--net:
Shareholders Class A (172,046)
(Note 1g): Class B (984,610)
------------
Net decrease in net assets resulting from dividends to shareholders (1,156,656)
------------
Capital Share Net increase in net assets derived from capital share transactions 36,551,664
Transactions ------------
(Note 4):
Net Assets: Total increase in net assets 31,532,679
Beginning of period 100,000
------------
End of period* $ 31,632,679
============
<FN>
*Undistributed investment income--net $ 183,101
============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 29, 1993++ to
August 31, 1994
Increase (Decrease) in Net Asset Value: Class A Class B
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00
Operating ------------ ------------
Performance: Investment income--net .40 .35
Realized and unrealized loss on investments--net (1.57) (1.57)
------------ ------------
Total from investment operations (1.17) (1.22)
------------ ------------
Dividends to shareholders:
Investment income--net (.39) (.34)
------------ ------------
Total dividends (.39) (.34)
------------ ------------
Net asset value, end of period $ 8.44 $ 8.44
============ ============
<PAGE>
Total Investment Based on net asset value per share (11.84%)+++ (12.34%)+++
Return:** ============ ============
Ratios to Expenses, net of reimbursement and excluding distribution fee .44%* .46%*
Average ============ ============
Net Assets: Expenses, net of reimbursement .44%* 1.21%*
============ ============
Expenses 1.58%* 2.35%*
============ ============
Investment income--net 5.92%* 5.22%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 4,238 $ 27,395
Data: ============ ============
Portfolio turnover 8.50% 8.50%
============ ============
<FN>
++Commencement of Operations.
+++Aggregate total investment return.
*Annualized.
**Total investment returns exclude the effects of sales loads.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Utility Income Fund, Inc. (the "Fund")
is registered under the Investment Company Act of
1940 as a diversified, open-end management invest-
ment company. Prior to commencement of operations
on October 29, 1993, the Fund had no operations
other than those relating to organizational matters
and the sale of 5,000 Class A and 5,000 Class B
Shares of common stock of the Fund to Merrill Lynch
Asset Management, L.P. ("MLAM") for $100,000. The
Fund offers both Class A and Class B Shares. Class A
Shares are sold with a front-end sales charge. Class B
Shares may be subject to a contingent deferred sales
charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same
terms and conditions, except that Class B Shares
bear certain expenses related to the account main-
tenance and distribution of such shares and have
exclusive voting rights with respect to matters
relating to such expenditures. On September 27, 1994,
shareholders approved the implementation of the
Merrill Lynch Select Pricing SM System, which will
offer two new classes of shares, Class C and Class D.
The following is a summary of significant accounting
policies followed by the Fund.
<PAGE>
(a) Valuation of Securities--Securities traded in the
over-the-counter market are valued at the last avail-
able bid price or yield equivalents obtained from one
or more dealers in the over-the-counter market prior
to the time of valuation. Portfolio securities which
are traded on stock exchanges are valued at the last
sale price on the principal market on which such
securities are traded, as of the close of business on
the day the securities are being valued or, lacking any
sales, at the last available bid price. Options written
are valued based upon the last asked price in the
case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the
average of the last asked price as obtained from one
or more dealers. Options purchased by the Fund are
valued at their last bid price in the case of exchange-
traded options or in the case of options traded in the
over-the-counter market, the average of the last bid
price as obtained by two or more dealers. Other
investments, including futures contracts and related
options, are stated at market value. Securities with
remaining maturities of sixty days or less are valued
at amortized cost, which approximates market value.
Securities and assets for which market quotations
are not readily available are valued at fair value as
determined in good faith by or under the direction of
the Directors of the Fund.
(b) Foreign Currency Transactions--Transactions
denominated in foreign currencies are recorded at
the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are
valued at the exchange rate at the end of the period.
Foreign currency transactions are the result of set-
tling (realized) or valuing (unrealized) receivables or
payables expressed in foreign currencies into US
dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange
rates on investments.
The Fund is authorized to enter into forward foreign
exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts
are not entered on the Fund's records. However, the
effect on operations is recorded from the date the
Fund enters into such contracts. Premium or dis-
count is amortized over the life of the contracts.
<PAGE>
(c) Options--When the Fund writes an option, an
amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked
to market to reflect the current market value of the
option written. When a security is purchased or sold
through an exercise of an option, the related pre-
mium paid (or received) is deducted from (or added
to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transac-
tion), the Fund realizes a gain or loss on the option
to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing
transaction is less than or exceeds the premiums
paid or received).
Written and purchased options are non-income pro-
ducing investments.
(d) Income Taxes--It is the Fund's policy to comply
with the requirements of the Internal Revenue
Code applicable to regulated investment companies
and to distribute all of its taxable income to its
shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign
tax law, a withholding tax may be imposed on
interest and capital gains at various rates.
(e) Security Transactions and Investment Income--
Security transactions are recorded on the dates the
transactions are entered into (the trade dates). Inter-
est income (including amortization of discount)
is recognized on the accrual basis. Realized gains
and losses on security transactions are determined
on the identified cost basis. Dividend income is
recorded on the ex-dividend date, except that if the
ex-dividend date has passed, certain dividends from
foreign securities are recorded as soon as the Fund is
informed of the ex-dividend date.
(f) Deferred Organization Expenses and Prepaid
Registration Fees--Deferred organization expenses
are charged to expense over a five-year period.
Prepaid registration fees are charged to expense as
the related shares are issued.
<PAGE>
(g) Dividends and Distributions--Dividends from
net investment income, excluding transaction
gains (losses), are declared and paid monthly. Dis-
tribution of capital gains are recorded on the
ex-dividend date.
(h) Financial Futures Contracts--The Fund is
authorized to engage in transactions in stock index
futures and financial futures and related options on
such futures. A futures contract is an agreement
between two parties to buy and sell a security or, in
the case of an index-based futures contract, to make
and accept a cash settlement for a set price on a
future date. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial mar-
gin as required by the exchange on which the trans-
action is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract
at the time it was opened and the value at the time it
was closed.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory
Agreement with MLAM. Effective January 1, 1994,
the investment advisory business of MLAM was
reorganized from a corporation to a limited partner-
ship. Both prior to and after the reorganization,
ultimate control of MLAM was vested with Merrill
Lynch & Co., Inc. ("ML & Co."). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an
indirect wholly-owned subsidiary of ML & Co. The
limited partners are ML & Co. and Merrill Lynch
Investment Management, Inc. ("MLIM"), which is
also an indirect wholly-owned subsidiary of ML & Co.
The Fund has also entered into a Distribution Agree-
ment and a Distribution Plan with Merrill Lynch
Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of MLIM.
<PAGE>
MLAM is responsible for the management of the
Fund's portfolio and provides the necessary person-
nel, facilities, equipment and certain other services
necessary to the operation of the Fund. For such
services, the Fund pays a monthly fee of 0.55%, on an
annual basis, of the average daily value of the Fund's
net assets. The most restrictive annual expense limi-
tation requires that the Investment Adviser reim-
burse the Fund to the extent the Fund's expenses
(excluding interest, taxes, distribution fees, broker-
age fees and commissions, and extraordinary items)
exceed 2.5% of the Fund's first $30 million of average
daily net assets, 2.0% of the next $70 million of aver-
age daily net assets, and 1.5% of the average daily net
assets in excess thereof. The Investment Adviser's
obligation to reimburse the Fund is limited to the
amount of the investment advisory fee. No fee pay-
ment will be made to the Investment Adviser during
any fiscal year which will cause such expenses to ex-
ceed the most restrictive expense limitation at the
time of such payment. For the period ended August 31,
1994, MLAM earned fees of $138,575, all of which
were voluntarily waived. MLAM also voluntarily reim-
bursed the Fund for additional expenses of $149,300.
NOTES TO FINANCIAL STATEMENTS (concluded)
Pursuant to a distribution plan (the "Distribution
Plan") adopted by the Fund in accordance with
Rule 12b-1 under the Investment Company Act of
1940, the Fund pays the Distributor an ongoing
account maintenance fee and distribution fee, which
are accrued daily and paid monthly at the annual
rates of 0.25% and 0.50%, respectively, of the aver-
age daily net assets of the Class B Shares of the
Fund. Pursuant to a sub-agreement with the Distrib-
utor, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), a subsidiary of ML & Co., also pro-
vides account maintenance and distribution services
to the Fund with respect to Class B Shares. The
ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account main-
tenance services to Class B shareholders. The
ongoing distribution fee compensates the Distributor
and MLPF&S for providing shareholder and distri-
bution services and bearing certain distribution-
related expenses of the Fund. For the period
October 29, 1993 to August 31, 1994, MLFD earned
$163,778 under the Plan, all of which was paid to
MLPF&S pursuant to the agreement.
<PAGE>
For the period October 29, 1993 to August 31, 1994,
MLFD earned underwriting discounts of $1,787, and
MLPF&S earned dealer concessions of $251,010 on
sales of Class A Shares. MLPF&S also received con-
tingent deferred sales charges of $73,597 relating to
Class B Share transactions.
Financial Data Services, Inc. ("FDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by
MLAM at cost.
Certain officers and/or directors of the Fund are
officers and/or directors of MLFD, MLIM, PSI, MLAM,
MLPF&S, FDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-
term securities, for the period October 29, 1993 to
August 31, 1994 were $36,632,417 and $2,068,040,
respectively.
Realized and unrealized gains (losses) as of August
31, 1994 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (524,043) $ (4,677,825)
Short-term investments (218) --
------------ ------------
Total $ (524,261) $ (4,677,825)
============ ============
As of August 31, 1994, net unrealized depreciation
for Federal income tax purposes aggregated $4,677,825,
of which $99,433 related to appreciated securities
and $4,777,258 related to depreciated securities. At
August 31, 1994, the aggregate cost of investments
for Federal income tax purposes was $36,355,937.
4. Capital Share Transactions:
Net increase in net assets derived from capital share
transactions was $36,551,664 for the period ended
August 31, 1994. Transactions in capital shares were
as follows:
<PAGE>
Class A Shares for the Period October Dollar
29, 1993++ to August 31, 1994 Shares Amount
Shares sold 896,487 $ 8,334,878
Shares issued to shareholders
in reinvestment of dividends 12,806 113,825
------------ ------------
Total issued 909,293 8,448,703
Shares redeemed (412,377) (3,586,609)
------------ ------------
Net increase 496,916 $ 4,862,094
============ ============
[FN]
++Prior to October 29, 1993 (commencement of operations), the
Fund issued 5,000 Class A Shares to MLAM for $50,000.
Class B Shares for the Period October Dollar
29, 1993++ to August 31, 1994 Shares Amount
Shares sold 4,113,267 $ 39,423,027
Shares issued to shareholders
in reinvestment of dividends 66,851 590,131
------------ ------------
Total issued 4,180,118 40,013,158
Shares redeemed (940,122) (8,323,588)
------------ ------------
Net increase 3,239,996 $ 31,689,570
============ ============
[FN]
++Prior to October 29, 1993 (commencement of operations), the Fund issued 5,000
Class B shares to MLAM for $50,000.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Utility Income Fund, Inc.:
We have audited the accompanying statement of
assets and liabilities, including the schedule of invest-
ments, of Merrill Lynch Utility Income Fund, Inc.
as of August 31, 1994, the related statements of opera-
tions and changes in net assets, and the financial
highlights for the period October 29, 1993 (com-
mencement of operations) to August 31, 1994. These
financial statements and the financial highlights are
the responsibility of the Fund's management. Our
responsibility is to express an opinion on these finan-
cial statements and the financial highlights based
on our audit.
<PAGE>
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reason-
able assurance about whether the financial state-
ments and the financial highlights are free of material
misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and dis-
closures in the financial statements. Our procedures
included confirmation of securities owned at August
31, 1994 by correspondence with the custodian and
brokers. An audit also includes assessing the account-
ing principles used and significant estimates made by
management, as well as evaluating the overall finan-
cial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such financial statements and finan-
cial highlights present fairly, in all material respects,
the financial position of Merrill Lynch Utility Income
Fund, Inc. as of August 31, 1994, the results of its
operations, the changes in its net assets, and the
financial highlights for the period October 29, 1993
to August 31, 1994 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
September 29, 1994
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION
Of the ordinary income distributions paid monthly by
Merrill Lynch Utility Income Fund, Inc. during the
fiscal year ended August 31, 1994, 78.58% qualifies
for the dividends received deduction for corporations.
Additionally, there were no long-term capital gains
distributed during the year.
The law varies in each state as to whether and what
percentage of dividend income attributable to Federal
obligations is exempt from state income tax. We
recommend that you consult your tax adviser to
determine if any portion of the dividends you received
is exempt from state income tax.
<PAGE>
Listed below are the percentages of total assets of
the Fund invested in Federal obligations as of the
end of each quarter of the fiscal year:
Percentage of
For the Quarter Ended Federal Obligations*
November 30, 1993 20.82%
February 28, 1994 0.00%
May 31, 1994 3.19%
August 31, 1994 0.00%
Of the Fund's dividends declared monthly to share-
holders from ordinary income during the fiscal year
ended August 31, 1994, 2.09% was attributable to
Federal obligations. In calculating the foregoing
percentages, Fund expenses have been allocated
on a pro rata basis.
Please retain this information for your records.
*For purposes of this calculation, Federal obligations include
US Treasury Notes, US Treasury Bills, and US Treasury
Bonds. Also included are obligations issued by the following
agencies: Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Land Banks, Federal Home Loan Banks,
and the Student Loan Marketing Association. Repurchase agreements
are not included in this calculation.
APPENDIX: GRAPHIC AND IMAGE MATERIAL.
<PAGE>
Item 1:
Total return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's
Class A and Class B Shares compared to growth of an investment in
the S&P Electric Utility Index and the S&P 500 Index. Beginning
and ending values are:
10/29/93** 8/31/94
ML Utility Income Fund, Inc.++--
Class A Shares* $ 9,350 $ 8,243
ML Utility Income Fund, Inc.++--
Class B Shares* $10,000 $ 8,429
S&P Electric Utility Index++++ $10,000 $ 8,263
S&P 500 Index++++++ $10,000 $10,405
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses included advisory fees.
**Commencement of Operations.
++ML Utility Income Fund, Inc. invests at least
65% of its total assets in equity and debt securities
which are, in the opinion of the Fund's management,
primarily engaged in the ownership or operations of
facilities used to generate, transmit or distribute
electricity, telecommunications, gas or water.
++++This unmanaged market value-weighted Index is comprised
of 24 electric utility companies.
++++++This unmanaged broad-based Index is comprised of common
stocks.
