MERRILL LYNCH
UTILITY INCOME
FUND, INC.
FUND LOGO
Quarterly Report
November 30, 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
During the quarter ended November 30, 1998, stock and bond market
volatility reflected shifting investor perceptions regarding global
economic prospects. Early in the period, the deteriorating outlook
for corporate profits amid signs of a weakening economy led to lower
share prices in world stock markets. At the same time, the uncertain
economic picture and the resulting flight to quality by investors
pushed the 30-year US Treasury bond to record low yields. Yields
also declined in sovereign bond markets of other major
industrialized countries. In contrast, corporate bonds, mortgage-
backed securities and emerging markets debt underperformed US
Treasury securities by a wide margin. Although a one-quarter point
cut in the Federal Funds rate in late September did not restore
investor confidence, an unexpected one-quarter point cut in October
sparked a rally in stock and bond prices. The rally was fueled
further by another easing of monetary policy in mid-November.
However, by November quarter-end, share prices had resumed their
decline amidst renewed investor uncertainties regarding global
economic prospects.
As long as worldwide economic conditions appear fragile, it is
likely that stock and bond market volatility will continue. For the
overall global economy, the deepening recession in Japan is of great
concern as well as the difficulties in emerging economies such as
Russia and Brazil. The announcements of banking system reform and
fiscal stimulus packages in Japan provided some encouragement to
investors, but the effectiveness of these programs remains to be
seen. A multilateral aid package to Brazil initially bolstered
investor confidence regarding the prospects for this country and
other emerging markets. Further progress in easing strains within
the global financial system, combined with continued monetary easing
on the part of the Federal Reserve Board, would likely provide an
important element of stability to the volatile investment
environment.
Portfolio Matters
For the three-month period ended November 30, 1998, total returns
for Merrill Lynch Utility Income Fund, Inc.'s Class A, Class B,
Class C, and Class D Shares were +5.18%, +5.09%, +5.00% and +5.11%,
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 and 4 of this report to shareholders.) This performance was
in line with similar high-yield utility funds tracked by Lipper
Analytical Services, Inc.
During the quarter ended November 30, 1998, there were significant
capital inflows into the Fund. We welcome our new shareholders, and
reiterate our investment objective: to seek high current income
through the investment of at least 65% of assets in both equities
and bonds of companies in the electric, telecommunications, natural
gas and water sectors. At November 30, 1998, the Fund's equity
holdings were all US-based companies, though the Fund has the
flexibility to invest up to 20% of its total assets in securities of
foreign issuers. Electric utility stocks were the largest industry
representation at 55.5% of net assets spread across 28 companies.
The Fund had 5.7% of its net assets invested in natural gas and 1.3%
in water utilities. Also, nearly 28% of the Fund's net assets were
invested in utility bonds, with the dominant sector being
telecommunications. The yields on the stocks of telecommunications
companies were too low to meet the investment objective of the Fund.
However, telecommunication bonds offered attractive yields and
allowed for further diversification.
The investment outlook is different for the four utility sectors in
which we invest. The electric utility sector is being driven by
continued restructuring and actions taken by regulators, which has
resulted in some improved valuation targets. Moreover, merger and
acquisition activity is becoming more significant.
Merrill Lynch Utility Income Fund, Inc.
November 30, 1998
Telecommunications companies' fortunes are being driven by increased
demand for services as a result of greater usage of the Internet,
home offices and mobile telephony. Natural gas, the sector most
impacted by the weather, is also a part of the merger and
acquisition investment theme. Investments in this sector have
primarily centered on local distribution companies with little
sensitivity to the change in natural gas prices. Furthermore, they
tend to be more regulated, which may provide greater stability in
revenues and earnings and allow for higher dividend payments. The
water utility sector, which is the smallest in terms of market
capitalization, also offers attractive potential returns. Many
consider water to be the last monopoly-based sector in the utility
industry, but companies within the sector operate with rates that
are determined by state regulators.
Investment Activities
During the November quarter, the Fund significantly increased its
fixed-income position through the acquisition of seven bond issues.
Also, we purchased shares of three new electric utility equities,
and added KeySpan Energy Corporation, a gas utility company, to the
portfolio. This company distributes natural gas through its
principal subsidiary, Brooklyn Union Gas Co. to more than 1.1
million customers in New York City's boroughs of Staten Island,
Queens and Brooklyn. KeySpan merged with the electricity-generation
and natural-gas operations of Long Island Lighting Co. in June 1998.
Eastern Utilities Associates was also added to the portfolio during
the quarter. The company supplies retail electric service to
approximately 294,000 customers in 33 communities in Rhode Island
and southeastern Massachusetts. Rochester Gas & Electric
Corporation, another investment during the November quarter,
produces and distributes electricity and distributes natural gas in
parts of nine counties in and around Rochester, New York.
Approximately two-thirds of the company's revenue comes from the
sale of electricity, and the rest is derived from the sale of
natural gas. Over one-half of the company's electricity comes from
nuclear sources. Finally, we added shares of WPS Resources Corp. to
the Fund's domestic utility electric holdings. This Wisconsin-based
company is a regulated electric and gas utility. The company's
strategy is to provide reliable service and new products, to
maintain and grow its customer base, and to reduce costs to maintain
its advantage of low prices in the region. In addition to these new
positions, we added to several existing holdings. Our focus remained
on expanding attractively valued positions with yields higher than
the Standard & Poor's Electric Utility Index.
The utility sector continues to await an acquisition of a US-based
utility company by a foreign utility. We agree with industry experts
that such activity would signal a new round of mergers and
acquisitions in the domestic electric utility sector. Such actions
become more realistic as the US electric utility industry continues
to restructure, and companies are compelled to define themselves as
either a distributor, transmitter or generator of electricity
instead of a fully integrated company offering all three services.
This distinction becomes increasingly important as distribution and
transmission continue to be viewed as more stable businesses subject
to regulatory returns, while generation is perceived as a commodity
business.
In Conclusion
We thank you for your investment 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,
(Arthur Zeikel)
Arthur Zeikel
President
(Walter D. Rogers)
Walter D. Rogers
Senior Vice President and Portfolio Manager
January 5, 1999
Merrill Lynch Utility Income Fund, Inc.
November 30, 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
% Change % Change Total Return
<S> <C> <C> <C>
ML Utility Income Fund, Inc. Class A Shares +14.95% +5.18% +52.89%
ML Utility Income Fund, Inc. Class B Shares +14.20 +5.09 +47.11
ML Utility Income Fund, Inc. Class C Shares +13.92 +5.00 +71.30
ML Utility Income Fund, Inc. Class D Shares +14.76 +5.11 +75.82
<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 11/30/98 and Class C & Class D Shares, from 10/21/94 to
11/30/98.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
November 30, 1998
PERFORMANCE DATA (concluded)
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/98 +23.92% +18.97%
Inception (10/29/93)
through 9/30/98 + 9.04 + 8.14
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/98 +22.98% +18.98%
Inception (10/29/93)
through 9/30/98 + 8.21 + 8.21
[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 9/30/98 +22.80% +21.80%
Inception (10/21/94)
through 9/30/98 +14.70 +14.70
[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 9/30/98 +23.70% +18.75%
Inception (10/21/94)
through 9/30/98 +15.43 +14.24
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PORTFOLIO INFORMATION
As of November 30, 1998
Percent of
Ten Largest Holdings Net Assets
WorldCom Inc., 7.75% due 4/01/2007 3.4%
The Williams Companies, Inc., 6.625%
due 11/15/2004 3.3
U.S. West Capital Funding Inc., 6.375%
due 7/15/2008 3.2
GTE Corp., 6.36% due 4/15/2006 3.2
Consumers Energy, 6.375% due 2/01/2008 3.0
Ameren Corporation 2.7
New England Electric System 2.7
Dominion Resources, Inc. 2.6
Allegheny Energy, Inc. 2.5
FirstEnergy Corp. 2.5
Stock Portfolio Changes
For the Quarter Ended November 30, 1998
Additions (Equity Investments)
Eastern Utilities Associates
KeySpan Energy Corporation
Rochester Gas & Electric Corporation
WPS Resources Corp.
Deletion (Equity Investments)
Washington Water Power Co.
Merrill Lynch Utility Income Fund, Inc.
November 30, 1998
<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 $ 1,653,750 2.5%
43,600 Ameren Corporation 1,782,353 1,795,775 2.7
24,600 American Electric Power Company, Inc. 892,569 1,140,825 1.7
47,000 Baltimore Gas & Electric Co. 1,286,708 1,442,312 2.2
11,000 CINergy Corp. 284,857 380,187 0.6
36,000 Central and South West Corporation 988,020 990,000 1.5
45,000 Conectiv, Inc. 924,651 1,035,000 1.6
29,100 Consolidated Edison, Inc. 980,888 1,478,644 2.2
31,400 DTE Energy Company 984,627 1,369,825 2.1
36,800 Dominion Resources, Inc. 1,737,197 1,699,700 2.6
65,000 Eastern Utilities Associates 1,671,525 1,604,687 2.4
52,900 FirstEnergy Corp. 1,280,193 1,636,594 2.5
34,000 Florida Progress Corp. 1,105,601 1,453,500 2.2
27,500 GPU, Inc. 767,170 1,204,844 1.8
45,300 Houston Industries, Inc. 1,274,853 1,432,612 2.2
52,000 Nevada Power Co. 1,249,626 1,231,750 1.9
26,000 New Century Energies, Inc. 841,935 1,249,625 1.9
42,500 New England Electric System 1,588,405 1,774,375 2.7
56,600 Northern States Power Co. 1,443,838 1,538,812 2.3
70,800 PacifiCorp. 1,375,936 1,327,500 2.0
54,500 Potomac Electric Power Company 1,408,427 1,420,406 2.2
29,400 Public Service Enterprise Group, Inc. 947,445 1,146,600 1.7
35,000 Puget Sound Energy, Inc. 995,169 949,375 1.5
50,000 Rochester Gas & Electric Corporation 1,571,501 1,537,500 2.3
43,400 The Southern Company 923,825 1,280,300 1.9
21,000 Texas Utilities Company 715,885 935,813 1.4
32,600 Unicom Corp. 954,082 1,228,613 1.9
20,000 WPS Resources Corp. 673,700 675,000 1.0
----------- ----------- ------
31,882,036 36,613,924 55.5
Utilities--Gas 40,300 AGL Resources Inc. 741,707 868,969 1.3
44,000 KeySpan Energy Corporation 1,344,960 1,306,250 2.0
10,000 New Jersey Resources Corp. 282,913 389,375 0.6
48,000 Sempra Energy 1,165,493 1,203,000 1.8
----------- ----------- ------
3,535,073 3,767,594 5.7
Utilities--Water 9,400 E'town Corporation 379,991 395,975 0.6
20,500 United Water Resources Inc. 380,330 425,375 0.7
760,321 821,350 1.3
----------- ----------- ------
Total Stocks 36,177,430 41,202,868 62.5
Face
Amount Corporate Bonds
Industrial--Energy $2,150,000 The Williams Companies, Inc.,
6.625% due 11/15/2004 2,214,994 2,205,298 3.3
Telecommunications 2,000,000 GTE Corp., 6.36% due 4/15/2006 2,113,280 2,086,780 3.2
1,000,000 Southwestern Bell Corp., 7% due
7/01/2015 1,034,480 1,090,910 1.6
2,000,000 U.S. West Capital Funding Inc.,
6.375% due 7/15/2008 2,135,760 2,109,180 3.2
1,000,000 United Telephone of Florida, 6.875%
due 7/15/2013 1,019,950 1,042,740 1.6
2,000,000 WorldCom Inc., 7.75% due 4/01/2007 2,268,560 2,249,860 3.4
----------- ----------- ------
8,572,030 8,579,470 13.0
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
November 30, 1998
<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 $ 973,210 1.5%
2,000,000 Consumers Energy, 6.375% due 2/01/2008 2,035,100 2,026,150 3.0
1,000,000 Public Service Company of Colorado,
6.375% due 11/01/2005 991,300 1,046,520 1.6
----------- ----------- ------
4,012,060 4,045,880 6.1
Utilities--Gas 1,500,000 ENSERCH Corp., 6.375% due 2/01/2004 1,491,030 1,552,575 2.4
1,000,000 El Paso Natural Gas Co., 7.75% due
1/15/2002 1,090,950 1,046,460 1.6
1,000,000 KN Energy, Inc., 6.65% due 3/01/2005 1,019,850 1,001,590 1.5
----------- ----------- ------
3,601,830 3,600,625 5.5
Total Corporate Bonds 18,400,914 18,431,273 27.9
Short-Term Securities
Commercial Paper* 2,202,000 Ford Motor Credit Company, 5.51%
due 12/01/1998 2,202,000 2,202,000 3.3
US Government 5,000,000 Federal National Mortgage Association,
Agency Obligations* 4.97% due 1/07/1999 4,974,460 4,974,460 7.6
Total Short-Term Securities 7,176,460 7,176,460 10.9
Total Investments $61,754,804 66,810,601 101.3
===========
Liabilities in Excess of Other Assets (886,934) (1.3)
----------- ------
Net Assets $65,923,667 100.0%
=========== ======
Net Asset Value: Class A--Based on net assets of $3,783,333 and 329,545
shares outstanding $ 11.48
===========
Class B--Based on net assets of $51,561,110 and 4,492,651
shares outstanding $ 11.48
===========
Class C--Based on net assets of $5,881,571 and 513,475
shares outstanding $ 11.45
===========
Class D--Based on net assets of $4,697,653 and 408,421
shares outstanding $ 11.50
===========
<FN>
*Commercial Paper and certain US Government 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.
</TABLE>
Merrill Lynch Utility Income Fund, Inc.
November 30, 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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
