MERRILL LYNCH
UTILITY INCOME
FUND, INC.
[FUND LOGO]
STRATEGIC
Performance
Quarterly Report
May 31, 1997
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 #16856 -- 5/97
[RECYCLE LOGO OMITTED]
Printed on post-consumer recycled paper
MERRILL LYNCH UTILITY INCOME FUND, INC.
DEAR SHAREHOLDER
Stock and bond market turbulence increased during the three-month period
ended May 31, 1997. Mounting evidence of stronger-than-expected economic
growth suggested to investors that the Federal Reserve Board (FRB) would
make a preemptive strike to contain inflationary pressures. These
concerns were heightened by statements made by FRB Chairman Alan
Greenspan, and culminated in an increase in the Federal Funds rate of
0.25% to 5.50% on March 25. As investors became concerned that this
might prove to be only the first in a series of monetary policy
tightening moves, interest rates rose and stock and bond prices declined.
Following the FRB's action, investor sentiment fluctuated from negative
to more positive, depending upon whether the latest economic data
releases were perceived to suggest an overheating or moderating trend.
Stock prices were given a boost following a series of strong corporate
earnings reports and the likelihood that a capital gains tax cut would
be part of the Federal balanced budget agreement. Nonetheless, clear-cut
signs of continued low inflation and moderate economic growth, as well
as no further indications of monetary policy tightening, are probably
needed to bring stability to the financial markets. Another potential
positive for the US financial markets would be a successful conclusion
to the Federal budget agreement currently under discussion by Congress
and the Clinton Administration.
On the international front, the US dollar weakened relative to the yen
and the Deutschemark, although it gradually recovered during May.
Uncertainty over the progress of the European Monetary Union helped
stabilize the US dollar relative to the Deutschemark and other European
currencies.
Portfolio Matters
For the three months ended May 31, 1997, total returns for Merrill Lynch
Utility Income Fund, Inc.'s Class A, Class B, Class C and Class D Shares
were -1.15%, -1.44%, -1.35% and -1.21%, 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, the Fund's performance was
primarily impacted by rising long-term interest rates, which climbed to
over 7% for the 30-year US Treasury bond. A more robust stock market, as
measured by the +7.75% total return for the unmanaged Standard & Poor's
(S&P) 500 Index for the three-month period ended May 31, 1997, also had
a negative impact on the utility sector. During the May quarter, the
total return of the unmanaged S&P Utility Index declined 0.51% and the
unmanaged S&P Electric Utility Index had an estimated price decline of
4.3% and an implied total return of -2.8%.
We continued our investment strategy of being nearly fully invested
during the May quarter. The Fund's assets were distributed among 33
equity holdings and five bond holdings. With our investment objective
being high current income, we remained holders of several high-yielding
US-based electric utility stocks. As of May 31, 1997, approximately 41%
of the Fund's net assets was invested in domestic electric utility
stocks which had current yields of 6.6% or higher. The average market
yield on the Fund's bond holdings, which accounted for 15.9% of net
assets, was 7.7% as of May 31, 1997.
During the May quarter, various news items impacted the domestic
electric utility sector and the holdings in the Fund. In terms of merger
and acquisition activity, in early April Fund holding Allegheny Power
System, Inc. announced a merger with Pennsylvania-based DQE, Inc. In
addition, the merger between Wisconsin Energy Corp. and Northern States
Power Co. was called off when the Federal Energy Regulatory Commission
(FERC) ruled to reject the merger, citing too much concentration in the
generation market in the upper midwest region. The companies could have
sold off some of their generating assets to receive FERC approval, but
the two managements concluded this would not be the appropriate economic
solution nor in the best interests of their shareholders. Northern
States Power has since indicated that it could achieve cost savings
similar to those anticipated with the merger on a stand-alone basis. As
a result of this stance, coupled with a more attractive portfolio of
assets, we decided to retain our position in Northern States Power (2.8%
of net assets as of May 31, 1997) but eliminate our holding in Wisconsin
Energy Corp. In our view, the merger was more important for Wisconsin
Energy's future than it was for Northern States Power's.
Other announcements made during the May quarter that had an impact on
the Fund included regulatory news from two states. Legislative efforts
in Illinois and Texas have failed to produce a settlement or conclusion
on industry restructuring. We have 2.2% of the Fund's net assets
invested in one of the primary Illinois-based companies, Unicom Corp. We
expect to see positive legislative action in Illinois late this fall,
given that the majority of the parties involved originally agreed to the
restructuring bill but the state legislature decided to give large
industrial customers more time to negotiate the legislation. With this
expected outcome in mind, and the stock's attractive valuation, we
continued to hold our position in Unicom whose shares rose 2.2% during
the May quarter.
The Fund had a setback in the 4.3% of net assets invested in the two
primary Texas-based electric utility companies, Houston Industries, Inc.
(3.8% of net assets) and Texas Utilities Company (0.5% of net assets).
Unlike Illinois, where the legislation may be addressed in November, the
next meeting of the Texas legislators on this restructuring issue is not
until 1999. Although the next meeting is two years away, the companies
have made progress with the Public Utility Commissioners in terms of
setting rates and other regulatory issues. Thus, while the timing is
disappointing, there is still the possibility of upside in valuation as
discussions progress over the next two years.
During the May quarter, we eliminated our bond holding in Enron Corp.
and our equity positions in IPALCO Enterprises, Inc., SCANA Corporation
Holding Company and Wisconsin Energy Corp. We reduced our holdings in
several other electric utility companies and in our natural gas
positions. We added a position in Texas Utilities Company. The stock had
come under pressure as a result of concerns regarding legislation. As we
discussed earlier, we see upside potential in this Texas-based company.
Furthermore, the pending merger with the natural gas company, Enserch
Corp., should also be a positive for the company.
Investment Outlook
Legislative and regulatory events will probably continue to dominate the
news for the domestic electric utility sector. We have already heard
from most of the big states such as California, New York and
Pennsylvania. Legislation is currently pending in several jurisdictions.
While it is not possible to know the outcomes, what is clear is that the
electric utility industry is becoming deregulated and competition will
intensify. Valuation methodologies may shift as a result of the new
operating environment, from a yield focus to asset valuation as
companies begin to put their electric generation assets up for sale and
new price levels are established.
New England Electric System, a Fund holding, is the first company to
formally hold an auction for its generation assets and to date appears
to have attracted quite a bit of interest both locally and from abroad.
Generating plants in California are also being put on the market for
bids. It is expected that the first generating plants sold to outsiders
will attract the highest prices. This, in turn, may result in an
acceleration of restructuring plans. To date, the process of
restructuring and the introduction of competition have proceeded more
slowly than news reports imply. Mergers and acquisitions may continue to
be announced, and there is always the possibility that some pending
mergers may be terminated as a result of adverse rulings. However, it
appears that many managements are now focused on shareholder value in
deciding what actions to take.
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,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/WALTER D. ROGERS
Walter D. Rogers
Vice President and Portfolio Manager
June 24, 1997
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select PricingSM System, which offers four pricing alternatives:
[bullet] 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.
[bullet] 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. (There is
no initial sales charge for automatic share conversions.)
[bullet] 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.
[bullet] 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. Figures shown in the "Average Annual Total Return"
tables as well as the total returns and cumulative total returns in the
"Performance Summary" tables assume reinvestment of all dividends and
capital gains distributions at net asset value on the ex-dividend date.
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*
Year Ended 3/31/97 +1.67% -2.40%
Inception (10/29/93)
through 3/31/97 +3.16 +1.94
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/97 +0.87% -2.96%
Inception (10/29/93)
through 3/31/97 +2.39 +2.14
* 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 3/31/97 + 0.93% - 0.03%
Inception (10/21/94)
through 3/31/97 +10.12 +10.12
* 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 3/31/97 + 1.53% -2.54%
Inception (10/21/94)
through 3/31/97 +10.83 +8.99
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
<TABLE>
<CAPTION>
Performance Summary -- Class A Shares
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
1996 10.05 9.56 -- 0.596 + 1.24
1/1/97 -- 5/31/97 9.56 9.21 -- 0.251 - 1.03
Total $1.880
Cumulative total return as of 5/31/97: +13.23%**
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class B Shares
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
1996 10.05 9.56 -- 0.522 + 0.46
1/1/97 -- 5/31/97 9.56 9.20 -- 0.221 - 1.46
Total $1.634
Cumulative total return as of 5/31/97: +10.08%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class C Shares
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
1996 10.04 9.54 -- 0.517 + 0.31
1/1/97 -- 5/31/97 9.54 9.19 -- 0.218 - 1.39
Total $1.224
Cumulative total return as of 5/31/97: +28.48%***
</TABLE>
<TABLE>
<CAPTION>
Performance Summary -- Class D Shares
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
1996 10.06 9.57 -- 0.572 + 0.99
1/1/97 -- 5/31/97 9.57 9.22 -- 0.242 - 1.13
Total $1.350
Cumulative total return as of 5/31/97: +30.62%**
* Figures may include short-term capital gains distributions.
** Figures do not include sales charge; results would be lower if sales charge was included.
*** Figures do not reflect deduction of any sales charge; results would be lower if sales charge was
deducted.
</TABLE>
<TABLE>
<CAPTION>
Recent Performance Results*
12 Month 3 Month
5/31/97 2/28/97 5/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Utility Income Fund Class A Shares $9.21 $9.44 $9.21 0.00% -2.44%
ML Utility Income Fund Class B Shares 9.20 9.44 9.21 -0.11 -2.54
ML Utility Income Fund Class C Shares 9.19 9.42 9.19 0.00 -2.44
ML Utility Income Fund Class D Shares 9.22 9.45 9.22 0.00 -2.43
ML Utility Income Fund Class A Shares -- Total Return +6.01(1) -1.15(2)
ML Utility Income Fund Class B Shares -- Total Return +5.06(3) -1.44(4)
ML Utility Income Fund Class C Shares -- Total Return +5.12(5) -1.35(6)
ML Utility Income Fund Class D Shares -- Total Return +5.74(7) -1.21(8)
* 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 $0.545 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.121 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.471 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.103 per share ordinary income dividends.
(5) Percent change includes reinvestment of $0.466 per share ordinary income dividends.
(6) Percent change includes reinvestment of $0.102 per share ordinary income dividends.
(7) Percent change includes reinvestment of $0.521 per share ordinary income dividends.
(8) Percent change includes reinvestment of $0.115 per share ordinary income dividends.
</TABLE>
PORTFOLIO INFORMATION
For the Quarter Ended May 31, 1997
Percent of
Ten Largest Holdings Net Assets
ENSERCH Corp., 6.375% due 2/01/2004 4.3%
Houston Industries, Inc. 3.8
OGE Energy Corporation 3.5
American Electric Power Company, Inc. 3.5
Enova Corp. 3.4
Public Service Company of Colorado 3.1
El Paso Natural Gas Co., 7.75%
due 1/15/2022 3.1
Allegheny Power System, Inc. 3.0
Florida Progress Corp. 3.0
MDU Resources Group, Inc. 2.9
Addition (Equity Investments)
Texas Utilities Company
Deletions (Equity Investments)
IPALCO Enterprises, Inc.
SCANA Corporation Holding Company
Wisconsin Energy Corp.
<TABLE>
<CAPTION>
Merrill Lynch Utility Income Fund, Inc. May 31, 1997
SCHEDULE OF INVESTMENTS
Shares Percent of
Industries Held Stocks Cost Value Net Assets
<S> <C> <C> <C> <C> <C>
Utilities -- Electric 39,000 Allegheny Power System, Inc. $895,450 $1,018,875 3.0%
28,400 American Electric Power Company, Inc. 1,037,871 1,157,300 3.5
33,000 Baltimore Gas & Electric Co. 844,868 866,250 2.6
34,000 Boston Edison Co. 840,040 875,500 2.6
26,000 CINergy Corp. 673,299 910,000 2.7
18,000 Carolina Power & Light Co. 536,468 625,500 1.9
29,100 Consolidated Edison Company of New York 980,888 847,538 2.5
31,400 DTE Energy Co. 984,627 836,025 2.5
45,000 Delmarva Power & Light Co. 924,651 781,875 2.3
20,800 Dominion Resources, Inc. 980,112 720,200 2.1
24,200 Edison International 437,106 565,675 1.7
48,000 Enova Corp. 1,165,493 1,134,000 3.4
34,100 Entergy Corp. 887,035 899,388 2.7
34,000 Florida Progress Corp. 1,105,601 998,750 3.0
27,500 GPU, Inc. 767,170 962,500 2.9
60,600 Houston Industries, Inc. 1,324,863 1,257,450 3.8
40,000 MDU Resources Group, Inc. 852,367 970,000 2.9
23,000 New England Electric System 766,360 796,375 2.4
27,000 New York State Electric & Gas Corp. 780,994 587,250 1.7
19,000 Northern States Power Co. 864,640 931,000 2.8
27,000 OGE Energy Corporation 991,971 1,161,000 3.5
41,900 Ohio Edison Co. 936,783 890,375 2.7
26,900 PECO Energy Co. 810,158 511,100 1.5
44,800 PacifiCorp 883,813 890,400 2.7
26,000 Public Service Company of Colorado 841,935 1,049,750 3.1
29,400 Public Service Enterprise Group, Inc. 947,445 727,650 2.2
43,400 Southern Co. 923,825 922,250 2.7
5,000 Texas Utilities Company 170,925 171,875 0.5
32,600 Unicom Corp. 954,082 741,650 2.2
22,600 Union Electric Co. 912,093 827,725 2.5
17,000 Western Resources Co. 478,125 554,625 1.7
------------ ------------ -----------
$26,501,058 26,189,851 78.3
Utilities -- Gas 40,300 AGL Resources Inc. 741,707 770,737 2.3
26,000 New Jersey Resources Corp. 750,192 809,250 2.4
------------ ------------ -----------
1,491,899 1,579,987 4.7
Total Stocks 27,992,957 27,769,838 83.0
<CAPTION>
Face
Amount Corporate Bonds
<S> <C> <C> <C> <C> <C>
Telecommunications $1,000,000 Southwestern Bell Corp., 7% due
7/01/2015 1,034,480 957,380 2.9
1,000,000 United Telephone Company of Florida,
6.875% due 7/15/2013 1,019,950 944,140 2.8
------------ ------------ -----------
2,054,430 1,901,520 5.7
Utilities -- Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 950,440 2.8
Utilities -- Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,431,885 4.3
1,000,000 El Paso Natural Gas Co., 7.75% due
1/15/2002 1,090,950 1,024,660 3.1
------------ ------------ -----------
2,581,980 2,456,545 7.4
Total Corporate Bonds 5,627,710 5,308,505 15.9
Short-Term Securities
Commercial Paper* 643,000 General Motors Acceptance Corp., 5.62%
due 6/02/1997 642,799 642,799 1.9
Total Short-Term Securities 642,799 642,799 1.9
Total Investments $34,263,466 33,721,142 100.8
============
Liabilities in Excess of Other Assets (255,315) (0.8)
------------ -----------
Net Assets $33,465,827 100.0%
============ ===========
<CAPTION>
<S> <C> <C>
Net Asset Value: Class A -- Based on net assets of $1,559,155
and 169,368 shares outstanding $9.21
============
Class B -- Based on net assets of $28,806,758
and 3,130,082 shares outstanding $9.20
============
Class C -- Based on net assets of $1,455,397
and 158,378 shares outstanding $9.19
============
Class D -- Based on net assets of $1,644,517
and 178,393 shares outstanding $9.22
============
* 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.
</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
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
