MERRILL LYNCH
UTILITY INCOME
FUND, INC.
FUND LOGO
Annual Report
August 31, 1998
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
Printed on post-consumer recycled paper
MERRILL LYNCH UTILITY INCOME FUND, INC.
DEAR SHAREHOLDER
Mounting evidence of a slowing economy and the prospect of lower
corporate earnings growth led to greater volatility in the US
financial markets during the quarter ended August 31, 1998. At the
same time, greater economic and political uncertainties in Asia and
Russia led investors to become concerned about the outlook for
economic activity worldwide. Although these developments were
negative for stock markets, they generally were beneficial to bond
prices, especially as inflationary trends remained subdued. As was
widely anticipated, the Federal Reserve Board did not move to
tighten monetary policy. However, shortly after the August quarter's
close, Federal Reserve Board Chairman Alan Greenspan indicated that
the central bank's focus had shifted from inflationary concerns to
the threat posed to the US economy by the increasing financial
troubles in other countries.
In the United States, gross domestic product rose at a rate of 1.4%
for the second calendar quarter, down from the 5.5% rate for the
first three months of the year. The economic slowdown in Asia
negatively impacted US exports, and the protracted strike at General
Motors Corporation also was a negative factor for economic activity.
However, the US dollar remained strong, especially relative to the
Japanese yen. The weakness of the Japanese economy continues to be a
source of concern not only for Asia, but also for the rest of the
world.
In the months ahead, investors will continue to focus on the
economic outlook in Asia and its impact on worldwide economic
activity and corporate earnings results. If there were evidence of
more buoyant yet moderate US economic growth and a pick-up in
corporate profits growth, we would expect stability to return to the
financial markets on a global basis. Absent these developments,
market volatility is likely to continue.
Portfolio Matters
For the quarter ended August 31, 1998, investors in domestic
electric utility and water utility stocks and bonds fared
significantly better than investors in telecommunications issues and
the broader market averages in general. Total returns for Merrill
Lynch Utility Income Fund, Inc.'s Class A, Class B, Class C and
Class D Shares were +2.24%, +2.04%, +1.94% and +2.18%, respectively,
for the three-month period ended August 31, 1998. (Fund results
shown do not reflect sales charges and would be lower if sales
charges were included. For complete results, see pages 3 and 4 of
this report to shareholders.) The broad stock market, as measured by
the unmanaged Standard & Poor's 500 Composite Index (S&P 500), had a
total return of -11.93% for the same period. The average total
return of the 100 utility funds tracked by Lipper Analytical
Services, Inc. (Lipper) was -6.13% for the August quarter.
Amidst the increased market volatility of the August quarter, we
maintained our investment strategy of seeking investments in the
utility sector that generate high current income, primarily domestic
electric utility equities. This higher-yield, more defensive
strategy resulted in the Fund outperforming the unmanaged S&P 500
and the average total return of the 100 utility funds tracked by
Lipper for the quarter ended August 31, 1998.
The Fund finished the August quarter with nearly 71% of its net
assets invested in utility stocks, about 14% invested in utility
bonds, and almost 14% in short-term securities. The breakdown of the
Fund's equity investments as of August quarter-end was 63.4% of net
assets in domestic electric utilities, 5.8% in natural gas local
distribution companies and 1.9% in water utilities. The average
current yield of the Fund's holdings in electric utility stocks was
5.7% as of August 31, 1998, as compared to 5.5% for its gas utility
stocks and 5.0% for the water utility holdings. The electric utility
stocks were spread across 26 companies, representing several
different regulatory jurisdictions as well as geographic regions.
The Fund's bond holdings were segmented in the following utility
categories: 2.6% of net assets in the electric utility sector, 6.4%
in natural gas and 5.4% in telecommunications. We had no holdings in
telecommunication equities because of their low relative yields. Our
bond position offered us the opportunity to diversify the Fund and
to participate in the growing telecommunications sector.
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
During the August quarter, we added two new holdings and introduced
the water utility sector to the Fund's portfolio. E'Town
Corporation, the parent company of Elizabethtown Water Company, is
the sixth-largest investor-owned water utility in the United States,
based on gallons of water pumped annually. The company provides
water service to a population of half a million people in central
New Jersey. The yield on the stock is competitive with the electric
utility sector and, in our view, offers the potential for growth. We
also purchased shares of United Water Resources Inc., the nation's
second-largest investor-owned water services company. The company
provides water and wastewater services through its regulated
utilities and non-regulated municipal contract operation to about
2.5 million people in 13 states. With the additional contract
operations of its 50%-owned affiliate, United Water Services, the
company currently serves a total of more than six million people in
19 states and does business in Canada, Mexico and the United
Kingdom. We eliminated our holding in Entergy Corp. over concerns of
a possible dividend cut. Subsequent to our sale, the company did
reduce its dividend and is undergoing a restructuring of operations.
Fiscal Year in Review
For the year ended August 31, 1998, total returns for the Fund's
Class A, Class B, Class C and Class D Shares were +23.30%, +22.38%,
+22.19% and +23.08%, respectively. These total returns exceeded the
+8.09% total return of the unmanaged S&P 500 and the +17.06% total
return average for the 100 utility funds tracked by Lipper.
Domestic-based electric utility stocks, the Fund's largest
concentration of net assets, benefited during the year from overall
market volatility, a decline in the yield of the 30-year US Treasury
bond and an improved fundamental outlook for the electric utility
sector. Market volatility caused many investors to demand more
defensive investments. More specifically, during this volatile time,
investors sought out companies whose prospects for profits were less
susceptible to the economic and financial events in emerging
markets. The yield on the 30-year US Treasury bond declined from
6.6% on August 31, 1997 to 5.3% by August 31, 1998, making the 4.8%
yield on the utility sector more attractive relative to US Treasury
bonds.
More regulatory jurisdictions have made announcements during the
past year as to how they will handle the move toward a more
competitive environment for the electric utility industry. The sales
of electric generating plants continue at prices above book value.
Moreover, merger and acquisition activity has continued to increase
during 1998, albeit at a slower pace than in 1996 and 1997. However,
there are several major mergers and acquisitions awaiting approval
in 1998. We believe that more regulatory approvals in shorter time
periods will result in increased activity. The Edison Electric
Institute has put together a study on merger and acquisition
activity in the industry. The results conclude that between 1992 and
the first half of 1998, 28 transactions were completed, 11 were
withdrawn and 9 were pending; the average premium to market at
announcement for select merger and acquisition activity from 1995 to
1998 was 25.5%; and the number of approvals compared to
announcements has been increasing.
In Conclusion
We continue to believe that the current composition of the portfolio
will support the objective of the Fund, which is seeking to generate
high current income. In the coming fiscal year, we intend to
continue to seek high-yielding utility stocks that we believe have
the appropriate balance between yields and risk/reward ratios. This
year that strategy delivered well-above-average total returns
compared with other utility funds.
We thank you for your interest in Merrill Lynch Utility Income Fund,
Inc., and we look forward to reviewing our outlook with you in our
upcoming quarterly report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Walter D. Rogers)
Walter D. Rogers
Senior Vice President and Portfolio Manager
October 5, 1998
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
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 10 years. (There is no initial sales charge for
automatic share conversions.)
* 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. Figures shown in the "Recent Performance
Results" and "Average Annual Total Return" 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.
<TABLE>
Recent Performance Results*
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Utility Income Fund, Inc. Class A Shares +23.30% +2.24% +45.36%
ML Utility Income Fund, Inc. Class B Shares +22.38 +2.04 +39.98
ML Utility Income Fund, Inc. Class C Shares +22.19 +1.94 +63.14
ML Utility Income Fund, Inc. Class D Shares +23.08 +2.18 +67.27
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's inception dates are Class A & Class B Shares, 10/29/93 and
Class C & Class D Shares, 10/21/94.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
PERFORMANCE DATA (concluded)
Total Return Based on a $10,000 Investment
A line graph depicting growth of an investment in the Fund's
Class A Shares and Class B Shares compared to growth of an
investment in the Composite Index and S&P 500 Index.
Beginning and ending values are:
10/29/93** 8/98
ML Utility Income Fund++--
Class A Shares* $ 9,600 $13,952
ML Utility Income Fund++-- $10,000 $13,998
Class B Shares*
Composite Index++++ $10,000 $14,881
S&P 500 Index++++++ $10,000 $22,827
A line graph depicting growth of an investment in the Fund's
Class C Shares and Class D Shares compared to growth of an
investment in the Composite Index and S&P 500 Index.
Beginning and ending values are:
10/21/94** 8/98
ML Utility Income Fund++--
Class C Shares* $10,000 $16,314
ML Utility Income Fund++-- $ 9,600 $16,058
Class D Shares*
Composite Index++++ $10,000 $17,353
S&P 500 Index++++++ $10,000 $22,343
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including 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 composite Index is
comprised of the S&PElectric Utility Index (75%), representing 25
electric utility companies, and the Merrill Lynch C5GO High and
Medium Quality Utilities Index (25%), representing US corporate
utility and phone bonds maturing in 1-10 years. The starting date
for the Index in the Class C & Class D Shares graph is from 10/31/94.
++++++This unmanaged broad-based Index is comprised of common
stocks.
Past performance is not predictive of future performance.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 6/30/98 +24.98% +19.98%
Inception (10/29/93)
through 6/30/98 + 8.47 + 7.53
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 6/30/98 +24.03% +20.03%
Inception (10/29/93)
through 6/30/98 + 7.65 + 7.65
[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 6/30/98 +24.00% +23.00%
Inception (10/21/94)
through 6/30/98 +14.43 +14.43
[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 6/30/98 +24.76% +19.77%
Inception (10/21/94)
through 6/30/98 +15.14 +13.88
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Value Percent of
Industries Held Stocks Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Utilities--Electric 39,000 Allegheny Energy, Inc. $ 895,450 $ 1,038,375 2.6%
25,600 Ameren Corp. 1,038,273 1,012,800 2.5
24,600 American Electric Power Company, Inc. 892,569 1,113,150 2.8
33,000 Baltimore Gas & Electric Co. 844,868 1,016,812 2.5
11,000 CINergy Corp. 284,857 382,250 1.0
36,000 Central and South West Corporation 988,020 940,500 2.4
45,000 Conectiv, Inc. 924,651 916,875 2.3
29,100 Consolidated Edison Co., Inc. 980,888 1,376,794 3.5
31,400 DTE Energy Company 984,627 1,322,725 3.3
20,800 Dominion Resources, Inc. 980,112 867,100 2.2
41,900 FirstEnergy Corp. 936,783 1,209,863 3.0
34,000 Florida Progress Corp. 1,105,601 1,434,375 3.6
27,500 GPU, Inc. 767,170 1,032,969 2.6
15,300 Houston Industries, Inc. 296,223 440,831 1.1
52,000 Nevada Power Co. 1,249,626 1,290,250 3.2
26,000 New Century Energies, Inc. 841,935 1,199,250 3.0
23,000 New England Electric System 766,360 928,625 2.3
28,600 Northern States Power Co. 659,908 757,900 1.9
35,800 PacifiCorp 706,649 807,737 2.0
33,500 Potomac Electric Power Company (PEPCO) 835,322 820,750 2.1
29,400 Public Service Enterprise Group, Inc. 947,445 1,076,775 2.7
35,000 Puget Sound Energy, Inc. 995,169 879,375 2.2
43,400 Southern Company (The) 923,826 1,220,625 3.1
21,000 Texas Utilities Company 715,885 892,500 2.2
32,600 Unicom Corp. 954,082 1,161,375 2.9
9,000 Washington Water Power Co. 172,012 152,438 0.4
----------- ----------- ------
21,688,311 25,293,019 63.4
Utilities--Gas 40,300 AGL Resources Inc. 741,707 737,994 1.9
10,000 New Jersey Resources Corp. 282,913 336,875 0.8
48,000 ++Sempra Energy (a) 1,165,493 1,221,000 3.1
----------- ----------- ------
2,190,113 2,295,869 5.8
Utilities--Water 9,400 E'Town Corporation 379,991 391,275 1.0
20,500 United Water Resources Inc. 380,330 363,875 0.9
----------- ----------- ------
760,321 755,150 1.9
Total Stocks 24,638,745 28,344,038 71.1
Face
Amount Corporate Bonds
Telecommunications $1,000,000 Southwestern Bell Corp., 7% due
01/2015 1,034,480 1,043,190 2.6
1,000,000 United Telephone of Florida,
875% due 7/15/2013 1,019,950 1,093,380 2.8
----------- ----------- ------
2,054,430 2,136,570 5.4
Utilities--Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 1,022,980 2.6
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Industries Amount Corporate Bonds Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Utilities--Gas $1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 $ 1,491,030 $ 1,519,500 3.8%
1,000,000 El Paso Natural Gas Co., 7.75% due
15/2002 1,090,950 1,048,160 2.6
----------- ----------- ------
2,581,980 2,567,660 6.4
Total Corporate Bonds 5,627,710 5,727,210 14.4
Short-Term Securities
Commercial Paper* 1,000,000 Concord Minuteman Capital Corp.,
55% due 9/10/1998 998,612 998,612 2.5
1,000,000 Corporate Asset Funding Co., Inc.,
55% due 9/08/1998 998,921 998,921 2.5
1,436,000 General Motors Acceptance Corp.,
81% due 9/01/1998 1,436,000 1,436,000 3.6
US Government 2,000,000 Federal Home Loan Mortgage
Obligations* Corporation, 5.47% due 9/08/1998 1,997,873 1,997,873 5.0
Total Short-Term Securities 5,431,406 5,431,406 13.6
Total Investments $35,697,861 39,502,654 99.1
===========
Other Assets Less Liabilities 355,417 0.9
----------- ------
Net Assets $39,858,071 100.0%
=========== ======
<FN>
(a)Enova Corp. merged with Pacific Enterprises to become Sempra
Energy.
*Commercial Paper and certain USGovernment Agency Obligations are
traded on a discount basis; the interest rates shown reflect the
discount rate paid at the time of purchase by the Fund.
++Non-income producing security.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$35,697,861) (Note 1a) $39,502,654
Cash 220
Receivables:
Capital shares sold $ 359,551
Dividends 97,974
Interest 60,233
Investment adviser (Note 2) 20,390 538,148
-----------
Deferred organization expenses (Note 1f) 2,970
Prepaid registration fees and other assets (Note 1f) 22,986
-----------
Total assets 40,066,978
-----------
Liabilities: Payables:
Capital shares redeemed 126,403
Distributor (Note 2) 22,211 148,614
-----------
Accrued expenses and other liabilities 60,293
-----------
Total liabilities 208,907
-----------
Net Assets: Net assets $39,858,071
===========
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 19,116
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 294,930
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 25,848
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 21,361
Paid-in capital in excess of par 34,193,303
Undistributed investment income--net 132,395
Undistributed realized capital gains on investments--net (Note 6) 1,366,325
Unrealized appreciation on investments--net 3,804,793
-----------
Net assets $39,858,071
===========
Net Asset Value: Class A--Based on net assets of $2,109,611 and 191,156
shares outstanding $ 11.04
===========
Class B--Based on net assets of $32,540,580 and 2,949,299
shares outstanding $ 11.03
===========
Class C--Based on net assets of $2,846,280 and 258,480
shares outstanding $ 11.01
===========
Class D--Based on net assets of $2,361,600 and 213,609
shares outstanding $ 11.06
===========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations for the Year Ended August 31, 1998
<S> <S> <C> <C>
Investment Dividends $ 1,724,188
Income Interest and amortization of premium and discount earned 550,914
(Notes 1d & 1e): -----------
Total income 2,275,102
-----------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 231,489
Investment advisory fees (Note 2) 213,013
Registration fees (Note 1f) 56,631
Professional fees 52,535
Accounting services (Note 2) 47,814
Transfer agent fees--Class B (Note 2) 42,657
Printing and shareholder reports 37,209
Account maintenance and distribution fees--Class C (Note 2) 31,990
Amortization of organization expenses (Note 1f) 18,170
Directors' fees and expenses 16,151
Custodian fees 7,617
Transfer agent fees--Class C (Note 2) 5,483
Account maintenance fees--Class D (Note 2) 4,873
Transfer agent fees--Class D (Note 2) 2,237
Transfer agent fees--Class A (Note 2) 2,195
Pricing fees 280
Other 4,900
-----------
Total expenses before reimbursement 775,244
Reimbursement of expenses (Note 2) (269,595)
-----------
Total expenses after reimbursement 505,649
-----------
Investment income--net 1,769,453
-----------
Realized & Realized gain on investments--net 2,638,989
Unrealized Gain on Change in unrealized appreciation on investments--net 3,189,795
Investments--Net -----------
(Notes 1b, 1c, Net Increase in Net Assets Resulting from Operations $ 7,598,237
1e & 3): ===========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
For the Year Ended
August 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 1,769,453 $ 1,905,999
Realized gain (loss) on investments and foreign currency
transactions--net 2,638,989 (522,898)
Change in unrealized appreciation on investments and foreign
currency transactions--net 3,189,795 1,806,214
----------- -----------
Net increase in net assets resulting from operations 7,598,237 3,189,315
----------- -----------
Dividends to Investment income--net:
Shareholders Class A (103,403) (111,824)
(Note 1g): Class B (1,459,293) (1,638,691)
Class C (190,662) (108,910)
Class D (101,671) (93,142)
----------- -----------
Net decrease in net assets resulting from dividends to
shareholders (1,855,029) (1,952,567)
----------- -----------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (257,080) (8,197,559)
(Note 4): ----------- -----------
Net Assets: Total increase (decrease) in net assets 5,486,128 (6,960,811)
Beginning of year 34,371,943 41,332,754
----------- -----------
End of year* $39,858,071 $34,371,943
=========== ===========
<FN>
*Undistributed investment income--net $ 132,395 $ 217,971
=========== ===========
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived Oct. 29,
from information provided in the financial statements. 1993++ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1998++++ 1997++++ 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.46 $ 9.17 $ 9.15 $ 8.44 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .57 .55 .60 .60 .40
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.60 .29 .02 .59 (1.57)
-------- -------- -------- -------- --------
Total from investment operations 2.17 .84 .62 1.19 (1.17)
-------- -------- -------- -------- --------
Less dividends from investment
income--net (.59) (.55) (.60) (.48) (.39)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.04 $ 9.46 $ 9.17 $ 9.15 $ 8.44
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 23.30% 9.36% 6.61% 14.68% (11.84%)+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .59% .59% .56% .49% .44%*
Net Assets: ======== ======== ======== ======== ========
Expenses 1.29% 1.51% 1.52% 1.87% 1.58%*
======== ======== ======== ======== ========
Investment income--net 5.26% 5.79% 5.56% 6.60% 5.92%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 2,110 $ 1,376 $ 2,108 $ 3,253 $ 4,238
Data: ======== ======== ======== ======== ========
Portfolio turnover 13.36% 5.50% 25.98% 12.59% 8.50%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class B
For the
Period
The following per share data and ratios have been derived Oct. 29,
from information provided in the financial statements. 1993++ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1998++++ 1997++++ 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.45 $ 9.17 $ 9.15 $ 8.44 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .49 .47 .46 .49 .35
Realized and unrealized gain (loss) on
investments and foreign currency
transactions--net 1.60 .28 .09 .63 (1.57)
-------- -------- -------- -------- --------
Total from investment operations 2.09 .75 .55 1.12 (1.22)
-------- -------- -------- -------- --------
Less dividends from investment
income--net (.51) (.47) (.53) (.41) (.34)
-------- -------- -------- -------- --------
Net asset value, end of period $ 11.03 $ 9.45 $ 9.17 $ 9.15 $ 8.44
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 22.38% 8.39% 5.86% 13.72% (12.34%)+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.37% 1.36% 1.34% 1.27% 1.21%*
Net Assets: ======== ======== ======== ======== ========
Expenses 2.06% 2.28% 2.29% 2.66% 2.35%*
======== ======== ======== ======== ========
Investment income--net 4.52% 5.00% 4.79% 5.75% 5.22%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 32,540 $ 27,259 $ 35,702 $ 37,498 $27,395
Data: ======== ======== ======== ======== ========
Portfolio turnover 13.36% 5.50% 25.98% 12.59% 8.50%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (continued)
<TABLE>
Financial Highlights (continued)
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1998++++ 1997++++ 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.44 $ 9.15 $ 9.14 $ 8.17
Operating -------- -------- -------- --------
Performance: Investment income--net .48 .47 .43 .42
Realized and unrealized gain on investments and
foreign currency transactions--net 1.59 .29 .10 .90
-------- -------- -------- --------
Total from investment operations 2.07 .76 .53 1.32
-------- -------- -------- --------
Less dividends from investment income--net (.50) (.47) (.52) (.35)
-------- -------- -------- --------
Net asset value, end of period $ 11.01 $ 9.44 $ 9.15 $ 9.14
======== ======== ======== ========
Total Investment Based on net asset value per share 22.19% 8.48% 5.65% 16.50%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement 1.40% 1.42% 1.40% 1.32%*
Net Assets: ======== ======== ======== ========
Expenses 2.08% 2.30% 2.34% 2.77%*
======== ======== ======== ========
Investment income--net 4.39% 4.79% 4.75% 5.56%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 2,846 $ 4,104 $ 2,107 $ 1,377
Data: ======== ======== ======== ========
Portfolio turnover 13.36% 5.50% 25.98% 12.59%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights (concluded)
<CAPTION>
Class D
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++ to
For the Year Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1998++++ 1997++++ 1996 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.47 $ 9.18 $ 9.15 $ 8.17
Operating -------- -------- -------- --------
Performance: Investment income--net .54 .52 .47 .51
Realized and unrealized gain on investments and
foreign currency transactions--net 1.61 .29 .13 .85
-------- -------- -------- --------
Total from investment operations 2.15 .81 .60 1.36
-------- -------- -------- --------
Less dividends from investment income--net (.56) (.52) (.57) (.38)
-------- -------- -------- --------
Net asset value, end of period $ 11.06 $ 9.47 $ 9.18 $ 9.15
======== ======== ======== ========
Total Investment Based on net asset value per share 23.08% 9.08% 6.46% 17.03%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement .84% .84% .82% .74%*
Net Assets: ======== ======== ======== ========
Expenses 1.54% 1.76% 1.75% 2.10%*
======== ======== ======== ========
Investment income--net 4.97% 5.47% 5.37% 6.14%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 2,362 $ 1,633 $ 1,416 $ 558
Data: ======== ======== ======== ========
Portfolio turnover 13.36% 5.50% 25.98% 12.59%
======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
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 investment company. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing SM System. Shares of
Class A and Class D are sold with a front-end sales charge. Shares
of Class B and Class C may be subject to a contingent deferred sales
charge. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions,
except that Class B, Class C and Class D Shares bear certain
expenses related to the account maintenance of such shares, and
Class B and Class C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and
distribution expenditures. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
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. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.
(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 settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Forward foreign exchange contracts--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 discount is amortized over the life of the
contracts.
* Options--The Fund is authorized to write covered call and put
options and purchase put and call 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 premium paid (or
received) is added to (or deducted from) the basis of the security
acquired or deducted from (or added to) the proceeds of the security
sold. When an option expires (or the Fund enters into a closing
transaction), 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 exceeds the premium
paid or received).
Written and purchased options are non-income producing investments.
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction 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.
(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). Interest 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 dates.
Dividends from foreign securities where the ex-dividend date may
have passed are subsequently recorded when the Fund has determined
the ex-dividend date.
(f) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense over a period
not exceeding five years. Prepaid registration fees are charged to
expense as the related shares are issued.
(g) Dividends and distributions--Dividends from net investment are
declared and paid monthly. Distributions of capital gains are
recorded on the ex-dividend date.
2. Investment Advisory Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of
Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, 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. For the year
ended August 31, 1998, MLAM earned fees of $213,013, all of which
was voluntarily waived. MLAM also voluntarily reimbursed the Fund
for additional expenses of $56,582.
Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:
Account Distribution
Maintenance Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
For the year ended August 31, 1998, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class A and Class D Shares as follows:
MLFD MLPF&S
Class A $ 79 $ 776
Class D $446 $6,167
For the year ended August 31, 1998, MLPF&S received contingent
deferred sales charges of $66,923 and $18,888 relating to
transactions in Class B and Class C Shares, respectively. In
addition, MLPF&S received $2,874 in commissions on the execution of
portfolio security transactions for the Fund for the year ended
August 31, 1998.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
During the year ended August 31, 1998, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $483 for security
price quotations to compute the net asset value of the Fund.
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 MLAM, PFD, FDS, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1998 were $4,737,453 and $9,701,396,
respectively.
Net realized gains for the year ended August 31, 1998 and net
unrealized gains as of August 31, 1998 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $ 2,638,989 $ 3,804,793
----------- -----------
Total $ 2,638,989 $ 3,804,793
=========== ===========
As of August 31, 1998, net unrealized appreciation for Federal
income tax purposes aggregated $3,804,793, of which $4,211,473
related to appreciated securities and $406,680 related to
depreciated securities. At August 31, 1998, the aggregate cost of
investments for Federal income tax purposes was $35,697,861.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $257,080 and $8,197,559 for the years ended August 31, 1998 and
August 31, 1997, respectively.
Transactions in shares for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 157,097 $ 1,700,920
Shares issued to share-
holders in reinvestment
of dividends 7,017 75,684
----------- ------------
Total issued 164,114 1,776,604
Shares redeemed (118,479) (1,288,076)
----------- ------------
Net increase 45,635 $ 488,528
=========== ============
Class A Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 20,399 $ 187,890
Shares issued to share-
holders in reinvestment
of dividends 8,334 77,642
----------- ------------
Total issued 28,733 265,532
Shares redeemed (113,140) (1,047,248)
----------- ------------
Net decrease (84,407) $ (781,716)
=========== ============
Class B Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 1,048,694 $ 11,448,291
Shares issued to share-
holders in reinvestment
of dividends 90,666 971,229
----------- ------------
Total issued 1,139,360 12,419,520
Automatic conversion
of shares (7,602) (83,415)
Shares redeemed (1,065,628) (11,501,723)
----------- ------------
Net increase 66,130 $ 834,382
=========== ============
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
Class B Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 442,701 $ 4,126,710
Shares issued to share-
holders in reinvestment
of dividends 113,728 1,060,681
----------- ------------
Total issued 556,429 5,187,391
Automatic conversion
of shares (10,234) (95,906)
Shares redeemed (1,557,581) (14,591,097)
----------- ------------
Net decrease (1,011,386) $ (9,499,612)
=========== ============
Class C Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 530,142 $ 5,643,805
Shares issued to share-
holders in reinvestment
of dividends 13,662 144,789
----------- ------------
Total issued 543,804 5,788,594
Shares redeemed (720,156) (7,839,162)
----------- ------------
Net decrease (176,352) $ (2,050,568)
=========== ============
Class C Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 344,100 $ 3,206,197
Shares issued to share-
holders in reinvestment
of dividends 8,267 77,322
----------- ------------
Total issued 352,367 3,283,519
Shares redeemed (147,723) (1,372,843)
----------- ------------
Net increase 204,644 $ 1,910,676
=========== ============
Class D Shares for the Year Dollar
Ended August 31, 1998 Shares Amount
Shares sold 433,020 $ 4,680,930
Automatic conversion
of shares 7,589 83,415
Shares issued to share-
holders in reinvestment
of dividends 7,030 75,680
----------- ------------
Total issued 447,639 4,840,025
Shares redeemed (406,403) (4,369,447)
----------- ------------
Net increase 41,236 $ 470,578
=========== ============
Class D Shares for the Year Dollar
Ended August 31, 1997 Shares Amount
Shares sold 124,751 $ 1,173,521
Automatic conversion
of shares 10,218 95,906
Shares issued to share-
holders in reinvestment
of dividends 3,969 37,053
----------- ------------
Total issued 138,938 1,306,480
Shares redeemed (120,738) (1,133,387)
----------- ------------
Net increase 18,200 $ 173,093
=========== ============
5. Subsequent Event:
On September 2, 1998, the Fund's Board of Directors declared an
ordinary income dividend in the amount of $.043132 per Class A
Share, $.036220 per Class B Share, $.035637 per Class C Share and
$.040944 per Class D Share, payable on September 10, 1998 to
shareholders of record as of September 1, 1998.
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
To 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 investments, of Merrill Lynch
Utility Income Fund, Inc. as of August 31, 1998, the related
statements of operations for the year then ended and changes
in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the
four-year period then ended and the period October 29, 1993
(commencement 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 financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at August
31, 1998 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Utility Income Fund, Inc. as of August 31, 1998, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 7, 1998
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
Of the ordinary income distributions paid monthly by Merrill Lynch
Utility Income Fund, Inc. during its fiscal year ended August 31,
1998, 97.742% qualifies for the dividends received deduction for
corporations.
Additionally, there were no long-term capital gains distributions
made by the Fund during the year.
Please retain this information for your records.
Merrill Lynch Utility Income Fund, Inc.
August 31, 1998
PORTFOLIO INFORMATION
For the Quarter Ended August 31, 1998
Percent of
Ten Largest Holdings Net Assets
ENSERCH Corp., 6.375% due 2/01/2004 3.8%
Florida Progress Corp. 3.6
Consolidated Edison Co., Inc. 3.5
DTE Energy Company 3.3
Nevada Power Co. 3.2
Sempra Energy 3.1
Southern Company (The) 3.1
FirstEnergy Corp. 3.0
New Centuries Energy, Inc. 3.0
Unicom Corp. 2.9
Additions (Equity Investments)
E'Town Corporation
United Water Resources Inc.
Deletions (Equity Investments)
Entergy Corp.
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
Walter D. Rogers, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President
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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
