MERRILL LYNCH
UTILITY INCOME
FUND, INC.
FUND LOGO
Quarterly Report
May 31, 1996
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
One Heritage Drive, P2N
North Quincy, MA 02171
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
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.
Statements and other information herein are as dated and are subject
to change.
Merrill Lynch
Utility Income Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH UTILITY INCOME FUND, INC.
<PAGE>
DEAR SHAREHOLDER
Conflicting economic indicators created greater uncertainty in the
investment outlook during the quarter ended May 31, 1996. With
reports of stronger-than-expected employment data, investors began
to anticipate renewed economic growth. Long-term interest rates
rose, and the Federal Reserve Board left monetary policy on hold.
However, revised data indicate the US economy actually grew more
slowly in the first quarter of 1996 than had been originally
reported. In addition, consumer sentiment does not appear to be
improving markedly.
Investors also became concerned that inflationary pressures would
increase because of higher prices for agricultural commodities and a
sharp upturn in the price of crude oil. Nevertheless, other
wholesale and consumer price increases remain subdued. More
importantly, wage increases--a significant factor in the inflation
outlook--continue to be well-contained.
Investors are likely to continue to focus on the probable direction
of economic activity and Federal Reserve Board monetary policy in
the weeks ahead. At this time, it appears that the economy is not on
the verge of overheating. Nevertheless, it is likely that any
further near-term indication of stronger-than-expected economic
activity may increase investor apprehension concerning the outlook
for higher inflation and interest rates.
Portfolio Matters
For the three months ended May 31, 1996, total returns for the
Fund's Class A, Class B, Class C and Class D Shares were -3.49%, -
3.57%, -3.69% and -3.54%, respectively. (Fund results shown do not
reflect sales charges and would be lower if sales charges were
included. For complete performance information, including average
annual total returns, see pages 3--5 of this report to
shareholders.)
During the May quarter, Merrill Lynch Utility Income Fund, Inc.
underperformed relative to other utility funds in general. This
relative underperformance can be attributed to the fact that we
invest predominantly in domestic utility stocks with above-average
current yields. The yield on the Standard & Poor's (S&P) Electric
Utility Index closed the May quarter at 6.09% as compared to 2.20%
for the S&P 500 Composite Index and 1.85% for the S&P 400 Industrial
Index.
<PAGE>
Our focus on income resulted in an overweighted position in some of
the highest-yielding electric utility stocks where we are confident
about the safety of the current dividend. Most electric utility
stocks, however, tend to underperform during periods of rising
interest rates. When investors conclude that interest rates may have
peaked and will start to decline, this historically has been one of
the best-performing segments of the stock market. Moreover,
investors appear to have begun to sell the higher operating cost
utility stocks and/or those with nuclear exposure because of some
recent problems at specific companies. At the present time, we
believe that several of these stocks are oversold and appear
somewhat undervalued versus the lower-yielding electric utility
stocks.
While we are not forecasters of interest rates, several experts have
suggested that at the current yield level of 7%, long-term interest
rates as measured by the 30-year US Treasury bond are near their
peak. This could be positive for the Fund's performance and for
investor perceptions of the utility sector. However, as has been the
case for the last several years, rising interest rates have almost
no impact on the fundamentals of the electric utility industry. The
construction phase is long since over, free cash flow is growing,
and companies are distancing themselves from the regulatory arena by
not seeking rate increases when interest rates move up. In terms of
other fundamental issues impacting the domestic electric utility
sector, recent Federal rules regarding the recovery of stranded
costs have been a positive. Regulation on the state level has
remained evolutionary rather than revolutionary. This should give
the higher-cost electric producers more time to address the
competition issue before their markets are fully opened.
On the issue of nuclear power and the recent problems that have
surfaced, we believe that most of the issues are company specific.
The negative stock market reaction to companies with high levels of
nuclear power surfaced when Northeast Utilities Co. was ordered by
the Nuclear Regulatory Commission to temporarily shut down three
units at the Millstone nuclear plant. A few other companies with
high nuclear exposure also experienced negative investor reaction as
a result of Northeast Utilities' problems as well as some of their
own operating difficulties. We believe nuclear power generation of
electric power is not in jeopardy over these operating issues,
simply because they are much more company specific rather than
industrywide.
During the three-month period ended May 31, 1996, we made several
changes to the Fund's portfolio. We reduced our equity weighting in
the telecommunications sector from 8.2% of net assets to 2.1%. This
was the result of selling the holdings in GTE Corp. and BellSouth
Corp., which reached our target valuation levels and whose current
yields became too low as a result of price appreciation. In addition
to reducing our holdings in low-yielding telephone stocks, we
reduced our holdings in low-yielding electric utility stocks. The
proceeds of the stock sales were primarily used to add to several
existing holdings. However, we did not add to our positions in New
York or California utility issues where the pace and direction of
regulatory change is being actively addressed at the present time.
The net effect of these transactions was to raise the current
average yield on the Fund, which pays a monthly dividend to
shareholders.
<PAGE>
We added one new company to the portfolio during the May quarter,
Florida Progress Corp. This holding company owns Florida Power
Corp., which provides electric service to more than 1.2 million
customers in 32 of Florida's 67 counties. In 1995, Florida Power
accounted for 74% of total revenues and 91% of earnings. Moreover,
Florida Progress Corp. offers a high current yield, and the company
just recently raised its dividend.
In Conclusion
We thank you for your investment in Merrill Lynch Utility Income
Fund, Inc., and we look forward to reviewing our future prospects
with you in upcoming shareholder reports.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Walter D. Rogers)
Walter D. Rogers
Vice President and Portfolio Manager
June 24, 1996
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load)
of 4% and bear no ongoing distribution or account maintenance fees.
Class A Shares are available only to eligible investors.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 10 years.
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should 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. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
<PAGE>
Year Ended 3/31/96 +18.94% +14.18%
Inception (10/29/93)
through 3/31/96 + 3.78 + 2.05
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/96 +18.02% +14.02%
Inception (10/29/93)
through 3/31/96 + 3.02 + 2.22
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/96 +17.77% +16.77%
Inception (10/21/94)
through 3/31/96 +16.95 +16.95
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 3/31/96 +18.60% +13.85%
Inception (10/21/94)
through 3/31/96 +17.74 +14.46
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
PERFORMANCE DATA (continued)
<TABLE>
Performance Summary--Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/29/93--12/31/93 $10.00 $ 9.81 -- $0.043 - 1.46%
1994 9.81 8.28 -- 0.496 -10.59
1995 8.28 10.05 -- 0.494 +28.26
1/1/96--5/31/96 10.05 9.21 -- 0.303 - 5.48
------
Total $1.336
Cumulative total return as of 5/31/96: +6.81%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
<TABLE>
Performance Summary--Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/29/93--12/31/93 $10.00 $ 9.80 -- $0.037 - 1.63%
1994 9.80 8.28 -- 0.429 -11.19
1995 8.28 10.05 -- 0.425 +27.28
1/1/96--5/31/96 10.05 9.21 -- 0.271 - 5.78
------
Total $1.162
Cumulative total return as of 5/31/96: +4.78%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Performance Summary--Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $ 8.17 $ 8.27 -- $0.062 + 1.99%
1995 8.27 10.04 -- 0.427 +27.35
1/1/96--5/31/96 10.04 9.19 -- 0.270 - 5.90
------
Total $0.759
Cumulative total return as of 5/31/96: +22.21%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<TABLE>
Performance Summary--Class D Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $ 8.17 $ 8.28 -- $0.065 + 2.15%
1995 8.28 10.06 -- 0.471 +28.07
1/1/96--5/31/96 10.06 9.22 -- 0.293 - 5.57
------
Total $0.829
Cumulative total return as of 5/31/96: +23.54%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date, and do not
include sales charge; results would be lower if sales charge was
included.
</TABLE>
PERFORMANCE DATA (concluded)
<PAGE>
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month
5/31/96 2/29/96 5/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund Class A Shares $9.21 $9.67 $9.08 +1.43% -4.76%
ML Utility Income Fund Class B Shares 9.21 9.66 9.08 +1.43 -4.66
ML Utility Income Fund Class C Shares 9.19 9.65 9.07 +1.32 -4.77
ML Utility Income Fund Class D Shares 9.22 9.68 9.08 +1.54 -4.75
ML Utility Income Fund Class A Shares--Total Return +7.74(1) -3.49(2)
ML Utility Income Fund Class B Shares--Total Return +6.97(3) -3.57(4)
ML Utility Income Fund Class C Shares--Total Return +6.77(5) -3.69(6)
ML Utility Income Fund Class D Shares--Total Return +7.57(7) -3.54(8)
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.578 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.125 per share
ordinary income dividends.
(3)Percent change includes reinvestment of $0.510 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.107 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.502 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.106 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.553 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.120 per share ordinary
income dividends.
</TABLE>
PORTFOLIO INFORMATION
For the Quarter Ended May 31, 1996
Percent of
Ten Largest Holdings Net Assets
<PAGE>
Southern Co. 4.6%
Allegheny Power System, Inc. 3.8
American Electric Power Company, Inc. 3.7
Houston Industries, Inc. 3.4
ENSERCH Corp., 6.375% due 2/01/2004 3.1
Boston Edison Co. 3.0
Texas Utilities Co. 2.8
Florida Progress Corp. 2.5
Public Service Enterprise Group, Inc. 2.4
Tele-Communications, Inc., 9.80%
due 2/01/2012 2.4
Addition
Florida Progress Corp.
Deletions
BellSouth Corp.
CILCORP, Inc.
Duke Power Co.
FPL Group, Inc.
GTE Corp.
Kansas City Power & Light Co.
Northeast Utilities Co.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Percent of
Industries Held Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Telecommunications 20,000 NYNEX Corp. $ 763,940 $ 922,500 2.1%
<PAGE>
Utilities--Electric 57,500 Allegheny Power System, Inc. 1,293,200 1,689,063 3.8
40,900 American Electric Power Company, Inc. 1,519,871 1,641,113 3.7
33,000 Baltimore Gas & Electric Co. 844,868 903,375 2.0
54,000 Boston Edison Co. 1,387,453 1,323,000 3.0
26,000 CINergy Corp. 673,299 770,250 1.7
26,000 Carolina Power & Light Co. 774,899 939,250 2.1
29,100 Consolidated Edison Company of New York 980,888 811,163 1.8
31,400 DTE Energy Co. (a) 984,627 918,450 2.1
45,000 Delmarva Power & Light Co. 924,651 883,125 2.0
20,800 Dominion Resources, Inc. 980,112 787,800 1.8
57,200 Edison International (b) 1,132,086 943,800 2.1
48,000 Enova Corporation 1,165,492 1,044,000 2.3
34,100 Entergy Corp. 887,035 895,125 2.0
34,000 Florida Progress Corp. 1,136,351 1,122,000 2.5
27,500 General Public Utilities Corp. 767,170 921,250 2.1
69,600 Houston Industries, Inc. 1,542,820 1,522,500 3.4
40,000 MDU Resources Group, Inc. 852,367 840,000 1.9
23,000 New England Electric System 766,360 773,375 1.7
27,000 New York State Electric & Gas Corp. 780,994 617,625 1.4
19,000 Northern States Power Co. 864,640 893,000 2.0
41,900 Ohio Edison Co. 936,783 916,562 2.0
27,000 Oklahoma Gas & Electric Co. 991,971 1,029,375 2.3
26,900 PECO Energy Co. 810,158 662,412 1.5
40,000 Pacific Gas & Electric Co. 1,005,375 930,000 2.1
44,800 PacifiCorp 883,813 901,600 2.0
27,000 Public Service Company of Colorado 873,745 894,375 2.0
40,400 Public Service Enterprise Group, Inc. 1,319,991 1,070,600 2.4
88,400 Southern Co. 1,939,156 2,044,250 4.6
31,000 Texas Utilities Co. 1,211,235 1,267,125 2.8
32,600 Unicom Corp. 954,082 900,575 2.0
22,600 Union Electric Co. 912,093 889,875 2.0
20,000 Western Resources Co. 562,500 577,500 1.3
18,400 Wisconsin Energy Corp. 477,204 515,200 1.2
----------- ----------- ------
33,137,289 32,838,713 73.6
Utilities--Gas 50,300 AGL Resources Inc. (c) 925,172 886,537 2.0
32,000 New Jersey Resources Corp. 924,858 880,000 2.0
----------- ----------- ------
1,850,030 1,766,537 4.0
Total Stocks 35,751,259 35,527,750 79.7
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Percent of
Industries Amount Corporate Bonds Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Telecommunications $1,000,000 Southwestern Bell Corp., 7.00% due
7/01/2015 $ 1,034,480 $ 951,030 2.1%
1,000,000 Tele-Communications, Inc., 9.80% due
2/01/2012 1,263,890 1,067,410 2.4
1,000,000 United Telephone Company of Florida,
6.875% due 7/15/2013 1,019,950 912,970 2.0
----------- ----------- ------
3,318,320 2,931,410 6.5
Utilities--Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 921,650 2.1
<PAGE>
Utilities--Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,386,255 3.1
1,000,000 El Paso Natural Gas Co., 7.75% due
1/15/2002 1,090,950 1,018,950 2.3
1,000,000 Enron Corp., 6.75% due 7/01/2005 1,023,800 940,420 2.1
----------- ----------- ------
3,605,780 3,345,625 7.5
Total Corporate Bonds 7,915,400 7,198,685 16.1
Short-Term Securities
Commercial Paper* 2,076,000 General Electric Capital Corp., 5.40%
due 6/03/1996 2,075,377 2,075,377 4.7
Total Short-Term Securities 2,075,377 2,075,377 4.7
Total Investments $45,742,036 44,801,812 100.5
===========
Liabilities in Excess of Other Assets (203,486) (0.5)
----------- ------
Net Assets $44,598,326 100.0%
=========== ======
Net Asset Class A--Based on net assets of $2,503,961 and
Value: 271,907 shares outstanding $ 9.21
===========
Class B--Based on net assets of $38,280,153 and
4,158,242 shares outstanding $ 9.21
===========
Class C--Based on net assets of $2,266,742 and
246,577 shares outstanding $ 9.19
===========
Class D--Based on net assets of $1,547,470 and
167,828 shares outstanding $ 9.22
===========
<FN>
*Commercial Paper is traded on a discount basis; the interest rate
shown is the discount rate paid at the time of purchase by the Fund.
(a)Formerly Detroit Edison Co.
(b)Formerly SCEcorp.
(c)Formerly Atlanta Gas Light Co.
</TABLE>
