MERRILL LYNCH
UTILITY INCOME
FUND, INC.
FUND LOGO
Quarterly Report
May 31, 1999
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
There were some conflicting signals regarding the future direction
of the US economy during the quarter ended May 31, 1999. However, on
balance the economic outlook continued to be positive. The US
economic expansion is ongoing, especially in the consumer sector.
Economic growth is not occurring at inflationary rates, although the
Organization of Petroleum Exporting Countries (OPEC) successfully
engineered a near-term increase in the price of crude oil. Against
this backdrop, the US Federal Reserve Board kept monetary policy on
hold, but comments by Chairman Alan Greenspan suggested that
tightening may occur if there are increasing signs of economic
overheating. Outside of the United States, signs of growth are less
apparent in other major industrial economies. Although the crisis in
Yugoslavia has raised serious geopolitical concerns, it was not a
significant factor in the economic or investment outlook. In Japan,
there are not yet clear signs that Japan's economy is improving.
There were growing signs of improvement in some emerging economies
(most notably South Korea and Mexico), although concerns remain for
others (such as Brazil and Argentina).
In the US capital markets, long-term interest rates rose during the
May quarter. Although the spread between yields on Treasury
securities and corporate issues of similar maturities has narrowed
somewhat, it remains wide by historic standards. Although the US
stock market exhibited greater price volatility, its advances
broadened beyond relatively few growth stocks to the previously
languishing cyclical sectors.
Investment Environment
During the three-month period ended May 31, 1999, merger and
acquisition activity--along with regulatory news from key states
such as Texas--continued to dominate the outlook for the domestic
electric utility sector. Furthermore, during the May quarter, the
rise in long-term interest rates, as measured by the 30-year US
Treasury bond, also had an impact on the performance of equities as
well as utility bonds. In addition, domestic electric utility stocks
in the Standard & Poor's Electric Index with yields higher than the
average of 4.26% had much lower price appreciation than the domestic
electric utility stocks that yielded below the average. Valuation
levels have modestly improved for the sector from the recent bottom
in terms of price/earnings multiples, but the group still offers
attractive relative valuation, in our view.
Although Merrill Lynch Utility Income Fund, Inc.'s current holdings
are almost all domestic utility companies, we may seek to increase
non-US investments as a result of recent merger and acquisition
activity (the Fund may invest up to 20% of its assets in foreign
companies). Historically, we have concentrated on the domestic
electric equity sector because of its above-market average yields.
This is in keeping with the Fund's investment objective of
generating high current income. There have been a number of cross-
border transactions announced that may impact the Fund's holdings.
For example, Scottish Power PLC is in the process of acquiring US-
based PacifiCorp., a Fund holding. PacifiCorp., with its above-
average dividend yield, has been underperforming its allowed
regulated rates of return and has significant upside potential. In
our view, Scottish Power is a well-run utility company that is very
shareholder focused. We believe the acquisition of PacifiCorp. by
Scottish Power should be positive for bottom-line company results as
well as shareholder returns.
In another transaction involving a UK company, the shareholders of
New England Electric System (also a Fund holding) approved National
Grid Group PLC's merger proposition in early May. New England
Electric expects to benefit from the operating expertise of National
Grid as the US electric markets become more competitive. In both the
PacifiCorp. and New England Electric transactions, further
regulatory approvals are needed, making the exact timing of closing
unknown. Moreover, the two acquirers are well-managed highly
successful companies that are shareholder focused.
Merrill Lynch Utility Income Fund, Inc.
May 31, 1999
This consolidation trend in the industry across states and borders
will play an important role in the future of the domestic electric
utility sector. As we have discussed in many previous letters to
shareholders, competition is increasing and regulatory scrutiny is
lessening. We believe that managements must prepare themselves for
the new operating environment. This realization appears to be
turning into reality as companies exit the regulated generation
business by selling production assets to others, and as merger and
acquisition activity gets completed.
Portfolio Matters
For the three-month period ended May 31, 1999, total returns for
Merrill Lynch Utility Income Fund, Inc.'s Class A, Class B, Class C
and Class D Shares were +5.70%, +5.50%, +5.50% and +5.72%,
respectively. (Fund results shown do not reflect sales charges and
would be lower if sales charges were included. For complete
performance information, see pages 3 and 4 of this report to
shareholders.)
During the May quarter, we maintained our weighting in utility bonds
because of their above-average yields. Furthermore, the bonds are
diversified across the various utility sectors, which helps to
reduce sector-specific risk. The bonds came under pressure as a
result of rising long-term interest rates. The Fund's equity
holdings remained fairly steady, with most of our investments in the
domestic electric sector with current yields that are at or above
average levels. We have continued to focus our investment strategy
on holdings that offer an attractive level of current income.
In late March, Fund holdings Northern States Power Company and New
Century Energies announced their intention to merge. Northern States
Power, based in Minneapolis, is an electric provider to customers in
Minnesota, Wisconsin, North Dakota, South Dakota and Michigan. The
company also distributes natural gas in Minnesota, Wisconsin, North
Dakota and Michigan. New Century Energies is also a generator and
distributor of electricity and natural gas. The company offers
electricity to customers in Colorado, Wyoming, Texas, New Mexico and
Oklahoma. Natural gas is sold to customers in Kansas, Colorado and
Wyoming. As with virtually all transactions announced between
electric companies, it is expected that this one will take from 12
months to 18 months to close. We viewed this as an attractive
transaction and added to our holdings in New Century Energies.
We also eliminated one position during the May quarter, Conectiv,
Inc. The company reduced its dividend by 43% in order to enter
related businesses with higher growth.
In Conclusion
We thank you for your interest in Merrill Lynch Utility Income Fund,
Inc., and we look forward to assisting you with your financial needs
in the months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Walter D. Rogers)
Walter D. Rogers
Senior Vice President and Portfolio Manager
June 29, 1999
Merrill Lynch Utility Income Fund, Inc.
May 31, 1999
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
% Change % Change Total Return
<S> <C> <C> <C>
ML Utility Income Fund, Inc. Class A Shares +9.05% +5.70% +55.03%
ML Utility Income Fund, Inc. Class B Shares +8.32 +5.50 +48.60
ML Utility Income Fund, Inc. Class C Shares +8.20 +5.50 +73.15
ML Utility Income Fund, Inc. Class D Shares +8.86 +5.72 +78.12
<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 since inception periods are Class A & Class B Shares, from
10/29/93 to 5/31/99 and Class C & Class D Shares, from 10/21/94 to
5/31/99.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
May 31, 1999
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/99 - 2.88% -6.76%
Five Years Ended 3/31/99 +10.15 +9.26
Inception (10/29/93)
through 3/31/99 + 7.00 +6.20
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/99 -3.61% -7.21%
Five Years Ended 3/31/99 +9.31 +9.31
Inception (10/29/93)
through 3/31/99 +6.20 +6.20
[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 3/31/99 - 3.69% - 4.59%
Inception (10/21/94)
through 3/31/99 +11.38 +11.38
[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 3/31/99 - 3.11% - 6.99%
Inception (10/21/94)
through 3/31/99 +12.07 +11.04
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PORTFOLIO INFORMATION
As of May 31, 1999
Percent of
Ten Largest Holdings Net Assets
Williams Companies Inc., 6.625% due
11/15/2004 3.4%
New England Electric System 3.4
MCI WorldCom Inc., 7.75% due 4/01/2007 3.4
GTE Corp., 6.36% due 4/15/2006 3.2
US West Capital Funding Inc., 6.375% due
7/15/2008 3.1
Consumers Energy, 6.375% due 2/01/2008 3.1
Eastern Utilities Associates 3.0
Ameren Corporation 2.9
Allegheny Energy, Inc. 2.8
FirstEnergy Corp. 2.7
Stock Portfolio Changes for the Quarter
Ended May 31, 1999
Deletion
Conectiv, Inc.
Merrill Lynch Utility Income Fund, Inc.
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Shares Percent of
Industries Held Stocks Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Utilities--Electric 49,000 Allegheny Energy, Inc. $ 1,231,050 $ 1,708,875 2.8%
43,600 Ameren Corporation 1,782,353 1,784,875 2.9
24,600 American Electric Power Company, Inc. 892,569 1,067,025 1.7
36,000 Central & South West Corporation 988,020 927,000 1.5
11,000 Cinergy Corp. 284,857 375,375 0.6
29,100 Consolidated Edison, Inc. 980,888 1,413,169 2.3
47,000 Constellation Energy Group 1,286,708 1,465,813 2.4
31,400 DTE Energy Company 984,627 1,367,863 2.2
36,800 Dominion Resources, Inc. 1,737,197 1,589,300 2.6
65,000 Eastern Utilities Associates 1,671,525 1,876,875 3.0
52,900 FirstEnergy Corp. 1,280,193 1,682,881 2.7
34,000 Florida Progress Corporation 1,105,601 1,425,875 2.3
27,500 GPU, Inc. 767,170 1,197,969 1.9
52,000 Nevada Power Company 1,249,626 1,306,500 2.1
30,000 New Century Energies, Inc. 986,106 1,213,125 2.0
42,500 New England Electric System 1,588,405 2,127,656 3.4
56,600 Northern States Power Company 1,443,838 1,475,137 2.4
70,800 PacifiCorp. 1,375,936 1,287,675 2.1
54,500 Potomac Electric Power Company 1,408,427 1,682,687 2.7
29,400 Public Service Enterprise Group Incorporated 947,445 1,232,962 2.0
35,000 Puget Sound Energy, Inc. 995,169 912,187 1.5
45,300 Reliant Energy, Inc. 1,274,853 1,381,650 2.2
50,000 Rochester Gas and Electric Corporation 1,571,501 1,396,875 2.2
43,400 The Southern Company 923,825 1,231,475 2.0
21,000 TXU 715,885 945,000 1.5
32,600 Unicom Corporation 954,082 1,379,387 2.2
20,000 WPS Resources Corporation 673,700 640,000 1.0
30,000 Western Resources, Inc. 976,800 871,875 1.4
----------- ----------- ------
32,078,356 36,967,086 59.6
Utilities--Gas 40,300 AGL Resources Inc. 741,707 760,663 1.2
44,000 KeySpan Energy 1,344,960 1,188,000 1.9
10,000 New Jersey Resources Corporation 282,913 377,500 0.6
48,000 Sempra Energy 1,165,493 1,032,000 1.7
----------- ----------- ------
3,535,073 3,358,163 5.4
Utilities--Water 9,400 E'Town Corporation 379,991 402,438 0.7
20,500 United Water Resources Inc. 380,330 445,875 0.7
----------- ----------- ------
760,321 848,313 1.4
Total Stocks 36,373,750 41,173,562 66.4
Face
Amount Corporate Bonds
Industrial--Energy $2,150,000 Williams Companies Inc., 6.625% due 11/15/2004 2,214,995 2,130,908 3.4
Telecommunications 2,000,000 GTE Corp., 6.36% due 4/15/2006 2,113,280 1,948,680 3.2
2,000,000 MCI WorldCom Inc., 7.75% due 4/01/2007 2,268,560 2,125,800 3.4
1,000,000 Southwestern Bell Corp., 7% due 7/01/2015 1,034,480 1,010,900 1.6
2,000,000 US West Capital Funding Inc., 6.375% due 7/15/2008 2,135,760 1,922,540 3.1
1,000,000 United Telephone of Florida, 6.875% due 7/15/2013 1,019,950 995,720 1.6
----------- ----------- ------
8,572,030 8,003,640 12.9
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Percent of
Industries Amount Corporate Bonds Cost Value Net Assets
<S> <C> <S> <C> <C> <C>
Utilities--Electric $1,000,000 Alabama Power Co., 5.375% due 10/01/2008 $ 985,660 $ 920,700 1.5%
2,000,000 Consumers Energy, 6.375% due 2/01/2008 2,035,100 1,922,038 3.1
1,000,000 Public Service Company of Colorado, 6.375% due
11/01/2005 991,300 985,050 1.6
----------- ----------- ------
4,012,060 3,827,788 6.2
Utilities--Gas 1,500,000 ENSERCH Corporation, 6.375% due 2/01/2004 1,491,030 1,484,025 2.4
1,000,000 El Paso Natural Gas, 7.75% due 1/15/2002 1,090,950 1,033,040 1.7
1,000,000 KN Energy, Inc., 6.65% due 3/01/2005 1,019,850 996,190 1.6
----------- ----------- ------
3,601,830 3,513,255 5.7
Total Corporate Bonds 18,400,915 17,475,591 28.2
Short-Term Securities
Commercial Paper* 887,000 General Electric Capital Corp., 4.93% due
6/01/1999 886,636 886,636 1.4
1,216,000 Metropolitan Life Insurance Company, 4.83%
due 6/11/1999 1,213,879 1,213,879 2.0
US Government 1,000,000 Federal Home Loan Mortgage Corporation,
Agency Obligations* 4.72% due 6/10/1999 998,427 998,427 1.6
Total Short-Term Securities 3,098,942 3,098,942 5.0
Total Investments $57,873,607 61,748,095 99.6
===========
Other Assets Less Liabilities 249,673 0.4
----------- ------
Net Assets $61,997,768 100.0%
=========== ======
Net Asset Value: Class A--Based on net assets of $3,527,462 and 316,570 shares
outstanding $ 11.14
===========
Class B--Based on net assets of $47,728,627 and 4,284,427 shares
outstanding $ 11.14
===========
Class C--Based on net assets of $6,038,907 and 543,188 shares
outstanding $ 11.12
===========
Class D--Based on net assets of $4,702,772 and 421,204 shares
outstanding $ 11.17
===========
<FN>
*Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis; the interest rates shown reflect the
discount rates paid at the time of purchase by the Fund.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
May 31, 1999
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Arthur Zeikel, Director
Walter D. Rogers, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Ira P. Shapiro, 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
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(800) 637-3863
