MERRILL LYNCH
UTILITY INCOME
FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Quarterly Report
May 31, 1998
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MERRILL LYNCH UTILITY INCOME FUND, INC.
DEAR SHAREHOLDER
Increasing volatility characterized the capital markets during the three-month
period ended May 31, 1998. At times, US stock and bond prices reflected
expectations that the slowdown in Asian economic growth would lead to a sharp
decline in US business activity and, ultimately, a deflationary environment. The
deterioration of economic conditions in Japan was of particular concern, and
caused a sharp drop in the yen's value relative to the US dollar. During other
periods, US investors appeared to expect that the positive trends of a
moderately expanding economy, declining unemployment, enhanced productivity and
corporate profits growth would continue, unimpeded by the developments in Asia.
To date, there have been only a few signs that Asia's troubles are influencing
US economic activity. In Europe, the major event was greater progress toward
achieving European Monetary Union, although concerns have arisen that interest
rates will have to be increased to curtail inflationary pressures.
As 1998 progresses, it is likely that investor focus will remain on developments
in Asia. For those economies that continue to expand, investors will watch for
signs that inflation is still not a threat. Evidence of ongoing, noninflationary
economic growth should continue to exert a positive influence on the capital
markets worldwide.
Portfolio Matters
During the quarter ended May 31, 1998, Merrill Lynch Utility Income Fund, Inc.
continued to focus on investments that provided high current income. Total
returns for the Fund's Class A, Class B, Class C and Class D Shares for the
quarter were +1.71%, +1.43%, +1.47% and +1.65%, respectively. (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 share-
holders.) For the same three-month period, this performance lagged the total
return of +3.83% for the Standard & Poor's (S&P) Utility Index, which is heavily
weighted in low-yielding telecommunications stocks. The Fund focused on
higher-yielding domestic electric stocks and, to a lesser extent, utility bonds.
Domestic electric utility stocks in the S&P Utility Index had an average current
yield of 4.90% as of May 31, 1998, well above the 2.30% yield for telephone
company stocks, the 3.19% yield for natural gas stocks, and the 3.01% yield for
the overall S&P Utility Index.
For the three-month period ended May 31, 1998, there was a significant total
return performance differential between the higher-yielding electric utility
stocks and lower-yielding domestic electric utility stocks in the S&P Utility
Index. The average total return for the 13 higher-yielding stocks was +0.55%,
compared to the +7.68% average total return on the remaining 12 dividend paying
stocks. It is important to note that in the fourth calendar quarter of 1997,
there was significant outperformance of higher-yielding stocks relative to the
lower-yielding domestic electric utility stocks. At that time, investors sought
out defensive investments with dividend support. The valuation levels of the
higher-yielding domestic electric utility stocks were more attractive, and the
higher upfront yield was appealing to investors.
Looking ahead, the current outlook for the domestic electric utility sector
remains positive. Valuation levels appear to be attractive relative to the broad
stock market historical averages, and the yield on the 30-year US Treasury bond.
Following the recent rally in some higher-quality, lower-yielding stocks, the
more attractive investments appear to be in higher-yielding domestic electric
utility stocks. Moreover, restructuring news and the potential for regulatory
change continue to dominate the sector. While only one merger was announced in
the first part of 1998--Nevada Power Co. and Sierra Pacific Resources--activity
in this area is expected to pick up later in the year. This, in turn, should
help to highlight the attractive value of the sector.
1
<PAGE>
Merrill Lynch Utility Income Fund, Inc. May 31, 1998
During the quarter ended May 31, 1998, we eliminated positions in stocks whose
yields fell too low and whose valuations appeared to be too expensive. Two new
positions were added to the Fund during the quarter. The first was Puget Sound
Energy, Inc., a result of the combination of Puget Sound Power & Light Company
and Washington Energy Company. As of May 31, 1998, Puget's stock had a current
yield of 7.04%. The company's management believes that it can maintain the
current dividend level. It is estimated that the company's electric business
will grow at a rate of 3% per year, and that its gas business will grow at an
annual rate of 4% until the year 2000. Moreover, savings created from the merger
should become evident in 1998. Our other addition was Central & South West
Corporation, a Texas-based company whose stock also offered an above-average
yield. The company is slated to be acquired by American Electric Power Company,
Inc., also a Fund holding. We view the dividend to be safe at the current price
throughout the duration of the merger, which is expected to be completed in late
1999. Two additions to existing Fund holdings were also made during the quarter.
We added to our holding in Nevada Power Co. because of its strong and growing
service territory and its above-average current yield. We also increased our
position in Ameren Corp., which also has an above-average yield and excellent
earnings potential.
In Conclusion
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 annual report
to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Walter D. Rogers
Walter D. Rogers
Senior Vice President and Portfolio Manager
June 25, 1998
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<PAGE>
Merrill Lynch Utility Income Fund, Inc. May 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:
o 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.
o 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.)
o 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.
o 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 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 3/31/98 +33.58% +28.24%
- --------------------------------------------------------------------------------
Inception (10/29/93)
through 3/31/98 + 9.38 + 8.37
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
================================================================================
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 3/31/98 +32.55% +28.55%
- --------------------------------------------------------------------------------
Inception (10/29/93)
through 3/31/98 + 8.55 + 8.55
- --------------------------------------------------------------------------------
* 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 3/31/98 +32.44% +31.44%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/98 +16.19 +16.19
- --------------------------------------------------------------------------------
* 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 3/31/98 +33.18% +27.85%
- --------------------------------------------------------------------------------
Inception (10/21/94)
through 3/31/98 +16.91 +15.53
- --------------------------------------------------------------------------------
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
3
<PAGE>
Merrill Lynch Utility Income Fund, Inc. May 31, 1998
PERFORMANCE DATA (concluded)
Recent Performance Results*
<TABLE>
<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 +25.56% +1.71% +42.17%
- ---------------------------------------------------------------------------------------------
ML Utility Income Fund, Inc. Class B Shares +24.62 +1.43 +37.18
- ---------------------------------------------------------------------------------------------
ML Utility Income Fund, Inc. Class C Shares +24.56 +1.47 +60.03
- ---------------------------------------------------------------------------------------------
ML Utility Income Fund, Inc. Class D Shares +25.33 +1.65 +63.71
=============================================================================================
</TABLE>
* 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 and Class B Shares,
10/29/93; and Class C and Class D Shares, 10/21/94.
PORTFOLIO INFORMATION
For the Quarter Ended May 31, 1998
Percent of
Ten Largest Holdings Net Assets
ENSERCH Corp., 6.375% due 2/01/2004 .................................. 4.0%
Florida Progress Corp. ............................................... 3.8
Consolidated Edison Company of New York .............................. 3.4
FirstEnergy Corp. .................................................... 3.3
DTE Energy Co. ....................................................... 3.3
Nevada Power Co. ..................................................... 3.3
Enova Corp. .......................................................... 3.3
New Century Energies Corp. ........................................... 3.2
Southern Co. ......................................................... 3.1
Unicom Corp. ......................................................... 3.0
Additions (Equity Investments)
Central & South West Corporation
Puget Sound Energy, Inc.
Deletions (Equity Investments)
Boston Edison Co.
Carolina Power & Light Co.
MDU Resources Group, Inc.
New York State Electric & Gas Corp.
OGE Energy Corp.
PECO Energy Co.
Western Resources Co.
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Merrill Lynch Utility Income Fund, Inc. May 31, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Shares Percent of
Industries Held Stocks Cost Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utilities--Electric 39,000 Allegheny Energy, Inc. $ 895,450 $ 1,094,438 2.9%
25,600 Ameren Corp. 1,038,273 1,001,600 2.7
24,600 American Electric Power Company, Inc. 892,569 1,116,225 3.0
33,000 Baltimore Gas & Electric Co. 844,868 1,004,438 2.7
11,000 CINergy Corp. 284,857 355,438 1.0
36,000 Central & South West Corporation 988,020 951,750 2.6
45,000 Conectiv Inc. (a) 924,651 919,688 2.5
29,100 Consolidated Edison Company of New York 980,888 1,245,844 3.4
31,400 DTE Energy Co. 984,627 1,242,263 3.3
20,800 Dominion Resources, Inc. 980,112 825,500 2.2
48,000 Enova Corp. 1,165,493 1,227,000 3.3
22,900 Entergy Corp. 598,635 602,556 1.6
41,900 FirstEnergy Corp. 936,783 1,243,906 3.3
34,000 Florida Progress Corp. 1,105,601 1,402,500 3.8
27,500 GPU, Inc. 767,170 1,058,750 2.8
15,300 Houston Industries, Inc. 296,223 437,963 1.2
52,000 Nevada Power Co. 1,249,626 1,241,500 3.3
26,000 New Century Energies Corp. 841,935 1,196,000 3.2
23,000 New England Electric System 766,360 960,250 2.6
14,300 Northern States Power Co. 659,908 813,312 2.2
35,800 PacifiCorp 706,649 825,637 2.2
33,500 Potomac Electric Power Company (PEPCO) 835,322 818,656 2.2
29,400 Public Service Enterprise Group, Inc. 947,445 972,037 2.6
35,000 Puget Sound Energy, Inc. 995,169 914,375 2.5
43,400 Southern Co. 923,825 1,152,812 3.1
21,000 Texas Utilities Holding Co. 715,885 829,500 2.2
32,600 Unicom Corp. 954,082 1,120,625 3.0
9,000 Washington Water Power Co. 172,012 194,062 0.5
----------- ----------- ------
23,452,438 26,768,625 71.9
- ------------------------------------------------------------------------------------------------------------------
Utilities--Gas 40,300 AGL Resources Inc. 741,707 806,000 2.1
10,000 New Jersey Resources Corp. 282,913 359,375 1.0
----------- ----------- ------
1,024,620 1,165,375 3.1
- ------------------------------------------------------------------------------------------------------------------
Total Stocks 24,477,058 27,934,000 75.0
- ------------------------------------------------------------------------------------------------------------------
<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 1,062,230 2.9
1,000,000 United Telephone Company of Florida,
6.875% due 7/15/2013 1,019,950 1,049,930 2.8
----------- ----------- ------
2,054,430 2,112,160 5.7
- ------------------------------------------------------------------------------------------------------------------
Utilities--Electric 1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 1,013,840 2.7
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
Merrill Lynch Utility Income Fund, Inc. May 31, 1998
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Face Percent of
Industries Amount Corporate Bonds Cost Value Net Assets
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utilities--Gas $1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 $ 1,491,030 $ 1,492,845 4.0%
1,000,000 El Paso Natural Gas Co., 7.75%
due 1/15/2002 1,090,950 1,047,970 2.8
----------- ----------- ------
2,581,980 2,540,815 6.8
- ------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds 5,627,710 5,666,815 15.2
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Short-Term Securities
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial Paper* 1,000,000 Corporate Asset Funding Co., Inc., 5.53%
due 6/02/1998 999,539 999,539 2.7
1,152,000 General Motors Acceptance Corp., 5.69%
due 6/01/1998 1,151,636 1,151,636 3.1
1,300,000 Times Mirror Company (The), 5.50%
due 6/01/1998 1,299,603 1,299,603 3.5
- ------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities 3,450,778 3,450,778 9.3
- ------------------------------------------------------------------------------------------------------------------
Total Investments $33,555,546 37,051,5939 9.5
===========
Other Assets Less Liabilities 186,424 0.5
----------- ------
Net Assets $37,238,017 100.0%
=========== ======
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value: Class A--Based on net assets of $2,048,191 and
187,445 shares outstanding $ 10.93
===========
Class B--Based on net assets of $30,488,729 and
2,790,798 shares outstanding $ 10.92
===========
Class C--Based on net assets of $2,665,831 and
244,454 shares outstanding $ 10.91
===========
Class D--Based on net assets of $2,035,266 and
185,915 shares outstanding $ 10.95
===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
(a) Delmarva Power & Light Co. merged with Atlantic Energy, Inc. to become
Conectiv Inc.
6
<PAGE>
Merrill Lynch Utility Income Fund, Inc. May 31, 1998
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
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
7
<PAGE>
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 accompa nied 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--5/98
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