N-CSRS 1 e600820_ncsrs-utilandtele.txt SEMI-ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06180 Name of Fund: Merrill Lynch Utilities and Telecommunications Fund, Inc. Fund Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Robert C. Doll, Jr., Chief Executive Officer, Merrill Lynch Utilities and Telecommunications Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 11/30/06 Date of reporting period: 12/01/05 - 05/31/06 Item 1 - Report to Stockholders Semi-Annual Report May 31, 2006 Merrill Lynch Utilities and Telecommunications Fund, Inc. Merrill Lynch Utilities and Telecommunications Fund, Inc. Announcement to Shareholders On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co., Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's investment management business, Merrill Lynch Investment Managers, L.P. and certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch Investment Managers International Limited), to BlackRock to create a new independent company ("New BlackRock") that will be one of the world's largest asset management firms with approximately $1 trillion in assets under management (based on combined assets under management as of March 31, 2006) (the "Transaction"). The Transaction is expected to close in the third quarter of 2006, at which time the new company will operate under the BlackRock name. The Fund's Board of Directors has approved a new investment advisory agreement with BlackRock Advisors, Inc. or its successor on substantially the same terms and for the same advisory fee as the current investment advisory agreement with the Investment Adviser. If the new agreement is approved by the Fund's shareholders, BlackRock Advisors, Inc. or its successor is expected to become the investment adviser of the Fund upon the closing of the Transaction. Industry Classification as a Percentage of Total Investments as of May 31, 2006 A pie graph depicting Industry Classification as a Percentage of Total Investments as of May 31, 2006. Electric Utilities 25.8% Diversified Telecommunication Services 18.8% Multi-Utilities 15.5% Wireless Telecommunication Services 11.5% Independent Power Producers & Energy Traders 11.1% Oil, Gas & Consumable Fuels 6.3% Gas Utilities 4.3% Energy Equipment & Services 3.7% Media 1.2% Commercial Services & Supplies 0.4% Electrical Equipment 0.4% Construction & Engineering 0.3% Other* 0.7% * Includes portfolio holdings in short-term investments. For Fund compliance purposes, the Fund's industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine industry sub-classifications for reporting ease. 2 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 A Letter From the President Dear Shareholder You may be aware that changes are on the horizon at Merrill Lynch Investment Managers ("MLIM"). Earlier this year, Merrill Lynch announced plans to combine its investment advisory business, including MLIM, with another highly regarded investment manager -- BlackRock, Inc. ("BlackRock"). At the completion of the transaction, which is expected at the end of the third quarter of this year (subject to regulatory and shareholder approvals), the resultant firm will be a top-10 investment manager worldwide with approximately $1 trillion in assets under management.* The combined company will provide a wider selection of high-quality investment solutions across a range of asset classes and investment styles. MLIM and BlackRock possess complementary capabilities that together create a well-rounded organization uniting some of the finest money managers in the industry. At the same time, the firms share similar values and beliefs -- they are focused on delivering excellence on behalf of clients, and both make investment performance their single most important mission. In short, the combination only reinforces our commitment to shareholders. Most of MLIM's investment products -- including mutual funds, separately managed accounts, annuities and variable insurance funds -- eventually will carry the "BlackRock" name. As a shareholder in one or more MLIM-advised mutual funds, you recently were mailed a proxy package asking you to vote on proposed changes that affect those funds. The proposals vary based on the funds in which you invest. However, all shareholders are asked to vote on a new investment advisory agreement with BlackRock Advisors, Inc. Your Fund's Board of Directors has approved, and recommends that you approve, the new agreement. Your Fund's Board also has approved, and recommends that you approve, a contingent subadvisory agreement that will serve to ensure that management services can continue during the course of completing the transaction. It is important that you exercise your right as a mutual fund shareholder by voting on the proposals that are presented to you in your funds' proxy statements. Your participation -- via phone, mail, online or in person -- is critical. (Refer to your proxy card for detailed voting procedures and deadlines.) You should know that your vote on these proposals will not affect your brokerage account or change your relationship with your financial advisor. If you are a client of Merrill Lynch, you will remain a client of Merrill Lynch. Should you have any questions or concerns, please do not hesitate to call 1.866.752.6486. As always, we thank you for entrusting us with your investment assets, and we look forward to continuing to serve your investment needs with even greater strength and scale as the new BlackRock. Sincerely, /s/ Robert C. Doll, Jr. Robert C. Doll, Jr. President and Chief Investment Officer Merrill Lynch Investment Managers * $1.039 trillion in assets under management as of March 31, 2006. MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 3 A Discussion With Your Fund's Portfolio Manager The Fund outperformed the broader stock market and the S&P Utility Index for the period, benefiting from favorable stock selection and sector weightings. How did the Fund perform during the period in light of the existing market conditions? For the six-month period ended May 31, 2006, Merrill Lynch Utilities and Telecommunications Fund, Inc.'s Class A, Class B, Class C and Class I Shares had total returns of +5.93%, +5.65%, +5.61% and +6.06%, respectively. (Fund results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 6 and 7 of this report to shareholders.) For the same period, the Fund's benchmarks, the Standard & Poor's (S&P) 500 Index and the S&P Utility Index, posted respective returns of +2.60% and +3.14%, while the Lipper Utility Funds category recorded an average return of +5.82%. (Funds in this Lipper category invest at least 65% of their equity portfolios in utility shares. The Fund also invests in telecommunication services stocks, in which many funds in the Lipper group have no position.) Both our diversification of holdings away from the traditional electric utility companies and good stock selection within this sector contributed to the Fund's performance relative to the benchmark S&P Utility Index during the period. Moreover, an underweight position and strong security selection in the multi-utilities subsector also enhanced Fund returns. The Fund's holdings in oil, gas and consumable fuels and wireless telecommunications also contributed positively to returns for the period. Finally, performance benefited from an increased weighting in the telecommunication sector, as well as AT&T, Inc.'s bid for BellSouth Corp., one of the portfolio's top-10 largest holdings. The share prices of the more traditional electric utility companies came under some pressure early in 2006 as the yield on the 10-year U.S. Treasury note rose above 5%. Furthermore, the volatility in natural gas prices, along with headlines of rising utility bills, resulted in the potential for increased regulatory oversight. Therefore, some natural gas stocks came under some price pressure. Conversely, the telecommunications sector in the United States had third quarter 2005 earnings results that indicated an inflection point. It was at that point that earnings revisions started to turn upward after several years of declining. It is also important to note that the two largest telecommunications companies in the United States are in the process of integrating companies that they acquired and, therefore, the opportunity for better-than-expected operating synergies is a possibility. What changes were made to the portfolio during the period? The most significant change during the period was an increase in the portfolio's exposure to the telecommunication services sector. After the three large telecommunications companies -- Verizon Communications, Inc., AT&T Corp. (formerly SBC Communications) and BellSouth Corp. -- announced their third quarter 2005 results, we found more stability in operating measurements such as fixed telephone access lines. Growth in broadband lines, digital subscriber lines (DSL) and wireless subscribers continued. These factors, coupled with operating costs that appeared to be under control, led us to believe that the recurring downward bias in earnings revisions was nearing an end. In the subsequent months, we added to our holdings in these stocks. Also within telecommunications, we added exposure to our tower-related holdings. Companies in the tower business benefit from the continued demand for wireless services and quality of service improvements. Our initial focus and largest holding in this space is American Tower Corp., which has the most geographic diversification and also had a stock buyback program. We also established new positions in SBA Communications and Crown Castle International Corp., which provides further diversification for the portfolio and, we believe, additional growth opportunities. To fund these purchases, we reduced or eliminated some of our holdings in utilities, foreign telecommunications and energy companies. These stocks were no longer as attractive to us compared to the improving fundamentals of the companies that we added to the portfolio, particularly in the telecommunication services sector. 4 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 How would you characterize the Fund's position at the close of the period? At May 31, 2006, the portfolio consisted of 104 holdings across 14 countries. The utilities sector remains the most heavily weighted, followed by telecommunication services. In terms of our utility holdings, we have been adding companies that we believe have more growth prospects with little or no dividend yield. We expect these companies should perform better in a rising interest rate environment, as their growth potential (rather than their yields) is likely to attract investors. Moreover, many of these companies have a greater proportion of non-regulated assets, which should be a positive in an environment of increased price scrutiny by regulators of the hometown integrated utility companies. We also have focused on companies such as TXU Corp. that have mitigated many of the risks of higher natural gas prices but have outlined future growth plans. Finally, several of our utility holdings provide investments in alternative energy sources. Companies such as FPL Corp., Iberdrola S.A. and Scottish Power Plc are big in the wind-related energy business. Ormat Technologies, Inc. is a geothermal company, while Energy Conversion Devices provides us with an investment opportunity in the solar sector. At the end of the period, the telecommunication services sector accounted for just over 30% of the Fund's net assets. Our focus remains on the continued growth prospects for the wireless telecommunications sector. Because there are fewer pure play wireless companies in the marketplace, we have focused on the integrated companies, such as AT&T and Verizon, that have significant exposure to the wireless sector. In addition, our holdings in tower companies also provide growth opportunities in the wireless sector. We continue to look for companies within our two primary sectors, utilities and telecommunications, that offer the right balance of investment risk and return. The majority of the stocks in the portfolio continue to have dividend yields. Several of the non-dividend-paying stocks may reinstate the dividends in the future or begin to pay a dividend as cash flow begins to grow faster than capital expenditures. Kathleen M. Anderson Vice President and Portfolio Manager June 21, 2006 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 5 Performance Data About Fund Performance Investors are able to purchase shares of the Fund through multiple pricing alternatives: o Class A Shares incur a maximum initial sales charge (front-end load) of 4% and an account maintenance fee of 0.25% per year (but no distribution fee). o Class B Shares are subject to a maximum contingent deferred sales charge of 4% declining to 0% after six years. In addition, Class B Shares are subject to a distribution fee of 0.50% per year and an account maintenance fee of 0.25% per year. These shares automatically convert to Class A Shares after approximately ten years. (There is no initial sales charge for automatic share conversions.) o Class C Shares are subject to a distribution fee of 0.55% per year and an account maintenance fee of 0.25% per year. In addition, Class C Shares are subject to a 1% contingent deferred sales charge if redeemed within one year of purchase. o Effective December 28, 2005, Class I Shares are no longer subject to any front-end sales charge. Class I Shares bear no ongoing distribution or account maintenance fees and are available only to eligible investors. Had the sales charge been included, the Fund's Class I Shares' performance would have been lower. None of the past results shown should be considered a representation of future performance. Current performance may be lower or higher than the performance data quoted. Refer to www.mlim.ml.com to obtain performance data current to the most recent month-end. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Figures shown in each of the following tables assume reinvestment of all dividends and capital gain distributions, if any, 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. Recent Performance Results
6-Month 12-Month 10-Year Standardized As of May 31, 2006 Total Return Total Return Total Return 30-day Yield =============================================================================================================================== ML Utilities and Telecommunications Fund, Inc. Class A Shares* +5.93% +14.47% +141.55% 1.60% ------------------------------------------------------------------------------------------------------------------------------- ML Utilities and Telecommunications Fund, Inc. Class B Shares* +5.65 +13.78 +129.20 1.15 ------------------------------------------------------------------------------------------------------------------------------- ML Utilities and Telecommunications Fund, Inc. Class C Shares* +5.61 +13.83 +128.87 1.10 ------------------------------------------------------------------------------------------------------------------------------- ML Utilities and Telecommunications Fund, Inc. Class I Shares* +6.06 +14.66 +147.64 1.92 ------------------------------------------------------------------------------------------------------------------------------- S&P 500(R) Index** +2.60 + 8.64 +122.91 -- ------------------------------------------------------------------------------------------------------------------------------- S&P Utilities Index*** +3.14 + 9.45 +101.73 -- -------------------------------------------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included. Cumulative 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 S&P 500 Index covers 500 industrial, utility, transportation and financial companies of the U.S. markets (mostly NYSE issues). The unmanaged Index represents about 75% of NYSE market capitalization and 30% of NYSE issues. *** This unmanaged capitalization Index is comprised of all stocks designed to measure the performance of electric and natural gas utilities within the S&P 500 Index. S&P 500 is a registered trademark of the McGraw-Hill Companies. 6 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Performance Data (concluded) Average Annual Total Return -------------------------------------------------------------------------------- Return Without Return With Sales Charge Sales Charge** ================================================================================ Class A Shares* ================================================================================ One Year Ended 5/31/06 +14.47% + 9.89% -------------------------------------------------------------------------------- Five Years Ended 5/31/06 + 4.33 + 3.48 -------------------------------------------------------------------------------- Ten Years Ended 5/31/06 + 9.22 + 8.77 -------------------------------------------------------------------------------- * Maximum sales charge is 4%. ** Assuming maximum sales charge. -------------------------------------------------------------------------------- Return Return Without CDSC With CDSC** ================================================================================ Class B Shares* ================================================================================ One Year Ended 5/31/06 +13.78% + 9.78% -------------------------------------------------------------------------------- Five Years Ended 5/31/06 + 3.78 + 3.43 -------------------------------------------------------------------------------- Ten Years Ended 5/31/06 + 8.65 + 8.65 -------------------------------------------------------------------------------- * Maximum contingent deferred sales charge is 4% and is reduced to 0% after six years. ** Assuming payment of applicable contingent deferred sales charge. -------------------------------------------------------------------------------- Return Return Without CDSC With CDSC** ================================================================================ Class C Shares* ================================================================================ One Year Ended 5/31/06 +13.83% +12.83% -------------------------------------------------------------------------------- Five Years Ended 5/31/06 + 3.73 + 3.73 -------------------------------------------------------------------------------- Ten Years Ended 5/31/06 + 8.63 + 8.63 -------------------------------------------------------------------------------- * Maximum contingent deferred sales charge is 1% and is reduced to 0% after one year. ** Assuming payment of applicable contingent deferred sales charge. -------------------------------------------------------------------------------- Class I Shares Return ================================================================================ One Year Ended 5/31/06 +14.66% -------------------------------------------------------------------------------- Five Years Ended 5/31/06 + 4.59 -------------------------------------------------------------------------------- Ten Years Ended 5/31/06 + 9.49 -------------------------------------------------------------------------------- Portfolio Information as of May 31, 2006 Percent of Geographic Allocation Equities -------------------------------------------------------------------------------- United States .................................................... 72.0% Canada ........................................................... 8.0 United Kingdom ................................................... 5.5 Spain ............................................................ 3.4 Germany .......................................................... 2.6 Brazil ........................................................... 2.5 France ........................................................... 2.1 Mexico ........................................................... 1.2 Italy ............................................................ 0.7 Norway ........................................................... 0.5 Austria .......................................................... 0.5 Finland .......................................................... 0.4 South Korea ...................................................... 0.3 Belgium .......................................................... 0.3 -------------------------------------------------------------------------------- Ten Largest Holdings Percent of (Equity Investments) Net Assets -------------------------------------------------------------------------------- TXU Corp. ........................................................ 4.9% Exelon Corp. ..................................................... 3.2 BellSouth Corp. .................................................. 2.9 AT&T, Inc. ....................................................... 2.9 PPL Corp. ........................................................ 2.9 Verizon Communications, Inc. ..................................... 2.8 Duke Energy Corp. ................................................ 2.8 Dominion Resources, Inc. ......................................... 2.5 Alltel Corp. ..................................................... 2.3 FirstEnergy Corp. ................................................ 2.2 -------------------------------------------------------------------------------- MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 7 Disclosure of Expenses Shareholders of this Fund may incur the following charges: (a) expenses related to transactions, including sales charges, redemption fees and exchange fees; and (b) operating expenses including advisory fees, distribution fees including 12b-1 fees, and other Fund expenses. The following example (which is based on a hypothetical investment of $1,000 invested on December 1, 2005 and held through May 31, 2006) is intended to assist shareholders both in calculating expenses based on an investment in the Fund and in comparing these expenses with similar costs of investing in other mutual funds. The first table below provides information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Period." The second table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in this Fund and other funds, compare the 5% hypothetical example with the 5% hypothetical examples that appear in other funds' shareholder reports. The expenses shown in the table are intended to highlight shareholders' ongoing costs only and do not reflect any transactional expenses, such as sales charges, redemption fees or exchange fees. Therefore, the second table is useful in comparing ongoing expenses only, and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher.
Expenses Paid Beginning Ending During the Period* Account Value Account Value December 1, 2005 to December 1, 2005 May 31, 2006 May 31, 2006 =========================================================================================================== Actual =========================================================================================================== Class A $1,000 $1,059.30 $6.31 ----------------------------------------------------------------------------------------------------------- Class B $1,000 $1,056.50 $8.97 ----------------------------------------------------------------------------------------------------------- Class C $1,000 $1,056.10 $9.23 ----------------------------------------------------------------------------------------------------------- Class I $1,000 $1,060.60 $5.03 =========================================================================================================== Hypothetical (5% annual return before expenses)** =========================================================================================================== Class A $1,000 $1,018.77 $6.19 ----------------------------------------------------------------------------------------------------------- Class B $1,000 $1,016.17 $8.80 ----------------------------------------------------------------------------------------------------------- Class C $1,000 $1,015.92 $9.05 ----------------------------------------------------------------------------------------------------------- Class I $1,000 $1,020.01 $4.94 -----------------------------------------------------------------------------------------------------------
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class (1.23% for Class A, 1.75% for Class B, 1.80% for Class C and .98% for Class I), multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period shown). ** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in the most recent fiscal half year divided by 365. 8 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Schedule of Investments (in U.S. dollars) Shares Country Industry Common Stocks Held Value =============================================================================== Austria--0.4% Diversified Telecommunication Services--0.4% Telekom Austria AG (b) 14,000 $ 628,600 ------------------------------------------------------------------- Total Common Stocks in Austria 628,600 =============================================================================== Belgium--0.2% Wireless Telecommunication Services--0.2% Mobistar SA 4,500 359,307 ------------------------------------------------------------------- Total Common Stocks in Belgium 359,307 =============================================================================== Brazil--2.5% Diversified Telecommunication Services--0.6% Brasil Telecom Participacoes SA (b) 18,000 550,800 Tele Norte Leste Participacoes SA (b) 28,000 367,360 ------------ 918,160 ------------------------------------------------------------------- Electric Utilities--1.1% CPFL Energia SA (b) 23,700 879,033 EDP--Energias do Brasil SA 53,900 655,462 ------------ 1,534,495 ------------------------------------------------------------------- Independent Power Producers & Energy Traders--0.0% Tractebel Energia SA 200 1,485 ------------------------------------------------------------------- Oil, Gas & Consumable Fuels--0.4% Petroleo Brasileiro SA (b) 5,900 512,415 ------------------------------------------------------------------- Wireless Telecommunication Services--0.4% Tim Participacoes SA (b) 22,500 545,175 ------------------------------------------------------------------- Total Common Stocks in Brazil 3,511,730 =============================================================================== Canada--7.8% Diversified Telecommunication Services--4.8% BCE, Inc. 101,700 2,465,208 TELUS Corp. 50,500 2,100,822 TELUS Corp. (Non-Voting Shares) 56,224 2,264,893 ------------ 6,830,923 ------------------------------------------------------------------- Oil, Gas & Consumable Fuels--2.0% Cameco Corp. 19,400 796,300 Husky Energy, Inc. 11,000 646,442 Suncor Energy, Inc. (b) 10,100 819,413 Talisman Energy, Inc. 35,400 651,006 ------------ 2,913,161 ------------------------------------------------------------------- Wireless Telecommunication Services--1.0% Rogers Communications, Inc. Class B 32,300 1,347,879 ------------------------------------------------------------------- Total Common Stocks in Canada 11,091,963 =============================================================================== Finland--0.3% Diversified Telecommunication Services--0.3% Elisa Corp. 26,000 508,542 ------------------------------------------------------------------- Total Common Stocks in Finland 508,542 =============================================================================== France--2.1% Electric Utilities--0.5% Electricite de France 11,900 650,275 ------------------------------------------------------------------- Multi-Utilities--1.6% Suez SA 33,200 1,281,347 Veolia Environnement 18,800 1,049,853 ------------ 2,331,200 ------------------------------------------------------------------- Total Common Stocks in France 2,981,475 =============================================================================== Germany--2.5% Electric Utilities--1.8% E.On AG 21,900 2,545,175 ------------------------------------------------------------------- Multi-Utilities--0.7% RWE AG 12,300 1,057,627 ------------------------------------------------------------------- Total Common Stocks in Germany 3,602,802 =============================================================================== Italy--0.7% Diversified Telecommunication Services--0.7% FastWeb SpA 14,000 692,706 Telecom Italia SpA (RNC) 115,000 294,195 ------------------------------------------------------------------- Total Common Stocks in Italy 986,901 =============================================================================== Mexico--1.2% Wireless Telecommunication Services--1.2% America Movil, SA de CV (b) 53,100 1,734,246 ------------------------------------------------------------------- Total Common Stocks in Mexico 1,734,246 =============================================================================== Norway--0.5% Diversified Telecommunication Services--0.5% Telenor ASA 56,700 718,483 ------------------------------------------------------------------- Total Common Stocks in Norway 718,483 =============================================================================== South Korea--0.3% Wireless Telecommunication Services--0.3% SK Telecom Co., Ltd. (b) 14,200 370,620 ------------------------------------------------------------------- Total Common Stocks in South Korea 370,620 =============================================================================== Spain--3.3% Diversified Telecommunication Services--0.5% Telefonica SA 43,288 710,300 ------------------------------------------------------------------- Electric Utilities--2.3% Endesa SA 45,100 1,515,205 Iberdrola SA 56,400 1,814,196 ------------ 3,329,401 ------------------------------------------------------------------- Wireless Telecommunication Services--0.5% Telefonica Moviles, SA 45,200 623,430 ------------------------------------------------------------------- Total Common Stocks in Spain 4,663,131 =============================================================================== United Kingdom--5.3% Diversified Telecommunication Services--0.3% BT Group Plc 90,000 396,311 ------------------------------------------------------------------- Electric Utilities--2.2% Scottish & Southern Energy Plc 41,400 876,145 Scottish Power Plc 165,793 1,734,834 Scottish Power Plc (Preference 'B' Shares) 69,633 471,048 ------------ 3,082,027 ------------------------------------------------------------------- MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 9 Schedule of Investments (continued) (in U.S. dollars) Shares Country Industry Common Stocks Held Value =============================================================================== United Kingdom (concluded) Independent Power Producers & Energy Traders--1.2% International Power Plc 311,500 $ 1,689,220 ------------------------------------------------------------------- Multi-Utilities--0.5% National Grid Plc 69,918 794,421 ------------------------------------------------------------------- Wireless Telecommunication Services--1.1% Vodafone Group Plc (b) 69,500 1,598,500 ------------------------------------------------------------------- Total Common Stocks in the United Kingdom 7,560,479 =============================================================================== United States--69.9% Commercial Services & Supplies--0.4% Synagro Technologies, Inc. 126,000 565,740 ------------------------------------------------------------------- Construction & Engineering--0.3% InfraSource Services, Inc. (a) 25,000 460,000 ------------------------------------------------------------------- Diversified Telecommunication Services--10.5% AT&T, Inc. 158,800 4,138,328 BellSouth Corp. 123,600 4,173,982 Citizens Communications Co. 80,700 1,023,276 Qwest Communications International Inc. (a) 75,000 525,750 Time Warner Telecom, Inc. Class A (a) 51,300 781,299 Valor Communications Group, Inc. 22,500 277,200 Verizon Communications, Inc. 128,400 4,007,364 ------------ 14,927,199 ------------------------------------------------------------------- Electric Utilities--17.6% Allegheny Energy, Inc. (a) 17,000 619,820 American Electric Power Co., Inc. 37,000 1,267,990 DPL, Inc. 57,900 1,551,720 Edison International 58,100 2,279,844 Entergy Corp. 36,900 2,587,059 Exelon Corp. 80,800 4,574,088 FPL Group, Inc. 44,600 1,776,418 FirstEnergy Corp. 60,000 3,145,200 ITC Holdings Corp. 26,800 694,388 Mirant Corp. (a) 54,800 1,363,424 Northeast Utilities 29,600 598,808 PPL Corp. 137,200 4,084,444 The Southern Co. 17,900 572,263 ------------ 25,115,466 ------------------------------------------------------------------- Electrical Equipment--0.4% Energy Conversion Devices, Inc. (a) 12,600 500,850 ------------------------------------------------------------------- Energy Equipment & Services--3.6% ENSCO International, Inc. 11,000 549,890 GlobalSantaFe Corp. 14,800 889,924 Halliburton Co. 19,900 1,484,341 Transocean, Inc. (a) 18,000 1,464,660 Weatherford International Ltd. (a) 14,900 775,396 ------------ 5,164,211 ------------------------------------------------------------------- Gas Utilities--4.2% AGL Resources, Inc. 33,100 1,210,467 Energen Corp. 17,200 582,736 Equitable Resources, Inc. 17,200 578,780 New Jersey Resources Corp. 25,000 1,123,000 Questar Corp. 21,500 1,584,335 UGI Corp. 42,000 976,920 ------------ 6,056,238 ------------------------------------------------------------------- Independent Power Producers & Energy Traders--9.0% The AES Corp. (a) 32,500 598,000 Constellation Energy Group, Inc. 59,300 3,065,810 NRG Energy, Inc. (a) 24,700 1,228,825 Ormat Technologies, Inc. 25,300 942,931 TXU Corp. 122,200 7,002,060 ------------ 12,837,626 ------------------------------------------------------------------- Media--1.2% Cablevision Systems Corp. Class A 19,700 387,302 Comcast Corp. Special Class A (a) 41,200 1,318,400 ------------ 1,705,702 ------------------------------------------------------------------- Multi-Utilities--12.3% Ameren Corp. 26,700 1,321,383 CMS Energy Corp. (a) 47,800 613,752 Dominion Resources, Inc. 50,037 3,631,686 Duke Energy Corp. 140,732 3,971,457 MDU Resources Group, Inc. 10,100 358,348 NSTAR 38,600 1,067,676 PG&E Corp. 55,000 2,182,400 Public Service Enterprise Group, Inc. 42,900 2,734,017 Sempra Energy 19,900 894,903 Wisconsin Energy Corp. 19,100 761,517 ------------ 17,537,139 ------------------------------------------------------------------- Oil, Gas & Consumable Fuels--3.7% Chevron Corp. 5,000 298,950 ConocoPhillips 11,000 696,190 EOG Resources, Inc. 15,600 1,024,296 Peabody Energy Corp. 15,000 935,100 Valero Energy Corp. 12,400 760,740 Williams Cos., Inc. 71,800 1,622,680 ------------ 5,337,956 ------------------------------------------------------------------- Wireless Telecommunication Services--6.7% Alltel Corp. 52,945 3,274,648 American Tower Corp. Class A (a) 43,500 1,347,195 Crown Castle International Corp. (a) 10,100 320,877 NII Holdings, Inc. (a) 7,000 381,220 Nextel Partners, Inc. Class A (a) 28,400 806,560 SBA Communications Corp. Class A (a) 30,600 700,434 Sprint Nextel Corp. 127,625 2,706,926 ------------ 9,537,860 ------------------------------------------------------------------- Total Common Stocks in the United States 99,745,987 =================================================================== Total Common Stocks (Cost--$95,377,197)--97.0% 138,464,266 =============================================================================== 10 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Schedule of Investments (concluded) (in U.S. dollars) Face Country Industry Trust Preferred Amount Value =============================================================================== United States--0.7% Independent Power Producers & Energy Traders--0.7% AES Trust III, 6.75% due 10/15/2029 $1,092,450 $ 1,008,175 ------------------------------------------------------------------- Total Trust Preferred (Cost--$664,068)--0.7% 1,008,175 =============================================================================== Short-Term Beneficial Securities Interest =============================================================================== Merrill Lynch Liquidity Series, LLC Cash Sweep Series I, 4.85% (c)(d) 964,646 964,646 ------------------------------------------------------------------- Total Short-Term Securities (Cost--$964,646)--0.7% 964,646 =============================================================================== Total Investments (Cost--$97,005,911*)--98.4% 140,437,087 Other Assets Less Liabilities--1.6% 2,230,436 ------------ Net Assets--100.0% $142,667,523 ============ * The cost and unrealized appreciation (depreciation) of investments as of May 31, 2006, as computed for federal income tax purposes, were as follows: Aggregate cost ............................................ $97,005,911 =========== Gross unrealized appreciation ............................. $44,283,821 Gross unrealized depreciation ............................. (852,645) ----------- Net unrealized appreciation ............................... $43,431,176 =========== (a) Non-income producing security. (b) Depositary receipts. (c) Investments in companies considered to be an affiliate of the Fund, for purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as follows: -------------------------------------------------------------------------- Net Interest Affiliate Activity Income -------------------------------------------------------------------------- Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $(5,511,367) $77,115 -------------------------------------------------------------------------- (d) Represents the current yield as of 5/31/2006. o For Fund compliance purposes, the Fund's industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine industry sub-classifications for reporting ease. Industries are shown as a percent of net assets. See Notes to Financial Statements. MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 11 Statement of Assets and Liabilities As of May 31, 2006 =============================================================================================================================== Assets ------------------------------------------------------------------------------------------------------------------------------- Investments in unaffiliated securities, at value (identified cost--$96,041,265) $ 139,472,441 Investments in affiliated securities, at value (identified cost--$964,646) ..... 964,646 Foreign cash (cost--$28,875) ................................................... 29,163 Cash ........................................................................... 283 Receivables: Securities sold ............................................................. $ 2,607,314 Dividends ................................................................... 402,762 Capital shares sold ......................................................... 25,609 Interest .................................................................... 10,534 3,046,219 ------------- Prepaid expenses ............................................................... 32,804 ------------- Total assets ................................................................... 143,545,556 ------------- =============================================================================================================================== Liabilities ------------------------------------------------------------------------------------------------------------------------------- Payables: Securities purchased ........................................................ 355,011 Capital shares redeemed ..................................................... 337,295 Other affiliates ............................................................ 64,010 Investment adviser .......................................................... 61,606 Distributor ................................................................. 46,063 863,985 ------------- Accrued expenses ............................................................... 14,048 ------------- Total liabilities .............................................................. 878,033 ------------- =============================================================================================================================== Net Assets ------------------------------------------------------------------------------------------------------------------------------- Net assets ..................................................................... $ 142,667,523 ============= =============================================================================================================================== Net Assets Consist of ------------------------------------------------------------------------------------------------------------------------------- Class A Shares of Common Stock, $.10 par value, 100,000,000 shares authorized .. $ 629,824 Class B Shares of Common Stock, $.10 par value, 100,000,000 shares authorized .. 201,570 Class C Shares of Common Stock, $.10 par value, 100,000,000 shares authorized .. 118,224 Class I Shares of Common Stock, $.10 par value, 100,000,000 shares authorized .. 195,857 Paid-in capital in excess of par ............................................... 110,820,082 Undistributed investment income--net ........................................... $ 1,064,953 Accumulated realized capital losses--net ....................................... (13,794,884) Unrealized appreciation--net ................................................... 43,431,897 ------------- Total accumulated earnings--net ................................................ 30,701,966 ------------- Net Assets ..................................................................... $ 142,667,523 ============= =============================================================================================================================== Net Asset Value ------------------------------------------------------------------------------------------------------------------------------- Class A--Based on net assets of $78,596,442 and 6,298,235 shares outstanding ... $ 12.48 ============= Class B--Based on net assets of $25,079,748 and 2,015,703 shares outstanding ... $ 12.44 ============= Class C--Based on net assets of $14,562,778 and 1,182,238 shares outstanding ... $ 12.32 ============= Class I--Based on net assets of $24,428,555 and 1,958,570 shares outstanding ... $ 12.47 =============
See Notes to Financial Statements. 12 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Statement of Operations For the Six Months Ended May 31, 2006 =============================================================================================================================== Investment Income ------------------------------------------------------------------------------------------------------------------------------- Dividends (net of $88,415 foreign withholding tax) ............................. $ 2,753,951 Interest (including $77,115 from affiliates) ................................... 115,855 ------------- Total income ................................................................... 2,869,806 ------------- =============================================================================================================================== Expenses ------------------------------------------------------------------------------------------------------------------------------- Investment advisory fees ....................................................... $ 441,491 Account maintenance and distribution fees--Class B ............................. 101,019 Account maintenance fees--Class A .............................................. 100,146 Account maintenance and distribution fees--Class C ............................. 60,010 Transfer agent fees--Class A ................................................... 52,741 Accounting services ............................................................ 48,764 Professional fees .............................................................. 29,391 Printing and shareholder reports ............................................... 26,071 Registration fees .............................................................. 24,174 Directors' fees and expenses ................................................... 23,289 Transfer agent fees--Class B ................................................... 20,836 Custodian fees ................................................................. 18,443 Transfer agent fees--Class I ................................................... 16,526 Transfer agent fees--Class C ................................................... 11,441 Pricing fees ................................................................... 1,726 Other .......................................................................... 12,308 ------------- Total expenses ................................................................. 988,376 ------------- Investment income--net ......................................................... 1,881,430 ------------- =============================================================================================================================== Realized & Unrealized Gain (Loss)--Net ------------------------------------------------------------------------------------------------------------------------------- Realized gain (loss) on: Investments--net ............................................................ 9,384,111 Foreign currency transactions--net .......................................... (6,378) 9,377,733 ------------- Change in unrealized appreciation/depreciation on: Investments--net ............................................................ (2,783,458) Foreign currency transactions--net .......................................... 641 (2,782,817) ------------------------------- Total realized and unrealized gain--net ........................................ 6,594,916 ------------- Net Increase in Net Assets Resulting from Operations ........................... $ 8,476,346 =============
See Notes to Financial Statements. MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 13 Statements of Changes in Net Assets
For the Six For the Months Ended Year Ended May 31, November 30, Increase (Decrease) in Net Assets: 2006 2005 =============================================================================================================================== Operations ------------------------------------------------------------------------------------------------------------------------------- Investment income--net ......................................................... $ 1,881,430 $ 2,895,587 Realized gain--net ............................................................. 9,377,733 14,086,694 Change in unrealized appreciation/depreciation--net ............................ (2,782,817) 5,837,960 ------------------------------- Net increase in net assets resulting from operations ........................... 8,476,346 22,820,241 ------------------------------- =============================================================================================================================== Dividends to Shareholders ------------------------------------------------------------------------------------------------------------------------------- Investment income--net: Class A ..................................................................... (659,329) (1,690,691) Class B ..................................................................... (143,990) (498,453) Class C ..................................................................... (81,241) (231,125) Class I ..................................................................... (237,198) (605,203) ------------------------------- Net decrease in net assets resulting from dividends to shareholders ............ (1,121,758) (3,025,472) ------------------------------- =============================================================================================================================== Capital Share Transactions ------------------------------------------------------------------------------------------------------------------------------- Net decrease in net assets derived from capital share transactions ............. (11,906,071) (13,372,133) ------------------------------- =============================================================================================================================== Net Assets ------------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets ........................................ (4,551,483) 6,422,636 Beginning of period ............................................................ 147,219,006 140,796,370 ------------------------------- End of period* ................................................................. $ 142,667,523 $ 147,219,006 =============================== * Undistributed investment income--net ...................................... $ 1,064,953 $ 305,281 ===============================
See Notes to Financial Statements. 14 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Financial Highlights
Class A ---------------------------------------------------------------------- The following per share data For the Six For the Year Ended and ratios have been derived Months Ended November 30, from information provided in May 31, ----------------------------------------------------- the financial statements. 2006 2005 2004 2003 2002 ================================================================================================================ Per Share Operating Performance ---------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ... $ 11.88 $ 10.38 $ 8.23 $ 7.40 $ 9.67 --------------------------------------------------------------------- Investment income--net*** .............. .17 .24 .20 .19 .26 Realized and unrealized gain (loss)--net .53 1.51 2.14 .85 (2.14) --------------------------------------------------------------------- Total from investment operations ....... .70 1.75 2.34 1.04 (1.88) --------------------------------------------------------------------- Less dividends and distributions: Investment income--net .............. (.10) (.25) (.19) (.21) (.28) Realized gain--net .................. -- -- -- -- (.11) --------------------------------------------------------------------- Total dividends and distributions ...... (.10) (.25) (.19) (.21) (.39) --------------------------------------------------------------------- Net asset value, end of period ......... $ 12.48 $ 11.88 $ 10.38 $ 8.23 $ 7.40 ===================================================================== ================================================================================================================ Total Investment Return** ---------------------------------------------------------------------------------------------------------------- Based on net asset value per share ..... 5.93%+ 16.95% 28.82% 14.26% (19.83%) ===================================================================== ================================================================================================================ Ratios to Average Net Assets ---------------------------------------------------------------------------------------------------------------- Expenses ............................... 1.23%* 1.23% 1.28% 1.33% 1.26% ===================================================================== Investment income--net ................. 2.68%* 2.07% 2.11% 2.42% 3.13% ===================================================================== ================================================================================================================ Supplemental Data ---------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 78,596 $ 79,008 $ 73,286 $ 60,142 $ 34,038 ===================================================================== Portfolio turnover ..................... 19.58% 25.48% 10.89% 21.20% 31.16% ===================================================================== Class B ----------------------------------------------------------------------- The following per share data For the Six For the Year Ended and ratios have been derived Months Ended November 30, from information provided in May 31, ----------------------------------------------------- the financial statements. 2006 2005 2004 2003 2002 ================================================================================================================= Per Share Operating Performance ----------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ... $ 11.84 $ 10.35 $ 8.19 $ 7.37 $ 9.61 --------------------------------------------------------------------- Investment income--net*** .............. .13 .18 .14 .16 .22 Realized and unrealized gain (loss)--net .54 1.49 2.16 .82 (2.13) --------------------------------------------------------------------- Total from investment operations ....... .67 1.67 2.30 .98 (1.91) --------------------------------------------------------------------- Less dividends and distributions: Investment income--net .............. (.07) (.18) (.14) (.16) (.22) Realized gain--net .................. -- -- -- -- (.11) --------------------------------------------------------------------- Total dividends and distributions ...... (.07) (.18) (.14) (.16) (.33) --------------------------------------------------------------------- Net asset value, end of period ......... $ 12.44 $ 11.84 $ 10.35 $ 8.19 $ 7.37 ===================================================================== ================================================================================================================= Total Investment Return** ----------------------------------------------------------------------------------------------------------------- Based on net asset value per share ..... 5.65%+ 16.26% 28.30% 13.47% (20.16%) ===================================================================== ================================================================================================================= Ratios to Average Net Assets ----------------------------------------------------------------------------------------------------------------- Expenses ............................... 1.75%* 1.75% 1.81% 1.86% 1.77% ===================================================================== Investment income--net ................. 2.12%* 1.56% 1.58% 2.08% 2.63% ===================================================================== ================================================================================================================= Supplemental Data ----------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 25,080 $ 28,298 $ 31,935 $ 41,317 $ 74,822 ===================================================================== Portfolio turnover ..................... 19.58% 25.48% 10.89% 21.20% 31.16% =====================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. *** Based on average shares outstanding. + Aggregate total investment return. See Notes to Financial Statements. MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 15 Financial Highlights (concluded)
Class C ----------------------------------------------------------------------- The following per share data For the Six For the Year Ended and ratios have been derived Months Ended November 30, from information provided in May 31, ----------------------------------------------------- the financial statements. 2006 2005 2004 2003 2002 ================================================================================================================ Per Share Operating Performance ---------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ... $ 11.73 $ 10.25 $ 8.13 $ 7.31 $ 9.55 --------------------------------------------------------------------- Investment income--net*** .............. .13 .17 .14 .15 .21 Realized and unrealized gain (loss)--net .53 1.50 2.12 .83 (2.11) --------------------------------------------------------------------- Total from investment operations ....... .66 1.67 2.26 .98 (1.90) --------------------------------------------------------------------- Less dividends and distributions: Investment income--net .............. (.07) (.19) (.14) (.16) (.23) Realized gain--net .................. -- -- -- -- (.11) --------------------------------------------------------------------- Total dividends and distributions ...... (.07) (.19) (.14) (.16) (.34) --------------------------------------------------------------------- Net asset value, end of period ......... $ 12.32 $ 11.73 $ 10.25 $ 8.13 $ 7.31 ===================================================================== ================================================================================================================ Total Investment Return** ---------------------------------------------------------------------------------------------------------------- Based on net asset value per share ..... 5.61%+ 16.34% 28.03% 13.62% (20.27%) ===================================================================== ================================================================================================================ Ratios to Average Net Assets ---------------------------------------------------------------------------------------------------------------- Expenses ............................... 1.80%* 1.80% 1.85% 1.91% 1.84% ===================================================================== Investment income--net ................. 2.10%* 1.49% 1.53% 1.93% 2.55% ===================================================================== ================================================================================================================ Supplemental Data ---------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 14,563 $ 14,789 $ 11,898 $ 10,994 $ 10,545 ===================================================================== Portfolio turnover ..................... 19.58% 25.48% 10.89% 21.20% 31.16% ===================================================================== Class I ----------------------------------------------------------------------- The following per share data For the Six For the Year Ended and ratios have been derived Months Ended November 30, from information provided in May 31, ----------------------------------------------------- the financial statements. 2006 2005 2004 2003 2002 ================================================================================================================ Per Share Operating Performance ---------------------------------------------------------------------------------------------------------------- Net asset value, beginning of period ... $ 11.87 $ 10.37 $ 8.22 $ 7.39 $ 9.66 --------------------------------------------------------------------- Investment income--net*** .............. .18 .26 .22 .21 .29 Realized and unrealized gain (loss)--net .54 1.51 2.14 .84 (2.15) --------------------------------------------------------------------- Total from investment operations ....... .72 1.77 2.36 1.05 (1.86) --------------------------------------------------------------------- Less dividends and distributions: Investment income--net .............. (.12) (.27) (.21) (.22) (.30) Realized gain--net .................. -- -- -- -- (.11) --------------------------------------------------------------------- Total dividends and distributions ...... (.12) (.27) (.21) (.22) (.41) --------------------------------------------------------------------- Net asset value, end of period ......... $ 12.47 $ 11.87 $ 10.37 $ 8.22 $ 7.39 ===================================================================== ================================================================================================================ Total Investment Return** ---------------------------------------------------------------------------------------------------------------- Based on net asset value per share ..... 6.06%+ 17.25% 29.16% 14.54% (19.64%) ===================================================================== ================================================================================================================ Ratios to Average Net Assets ---------------------------------------------------------------------------------------------------------------- Expenses ............................... .98%* .98% 1.03% 1.07% 1.00% ===================================================================== Investment income--net ................. 2.92%* 2.32% 2.36% 2.77% 3.39% ===================================================================== ================================================================================================================ Supplemental Data ---------------------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $ 24,429 $ 25,125 $ 23,677 $ 22,514 $ 20,342 ===================================================================== Portfolio turnover ..................... 19.58% 25.48% 10.89% 21.20% 31.16% =====================================================================
* Annualized. ** Total investment returns exclude the effects of sales charges. Effective December 28, 2005, Class I Shares are no longer subject to any front-end sales charge. *** Based on average shares outstanding. + Aggregate total investment return. See Notes to Financial Statements. 16 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Notes to Financial Statements 1. Significant Accounting Policies: Merrill Lynch Utilities and Telecommunications Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with U.S. generally accepted accounting principles, which may require the use of management accruals and estimates. Actual results may differ from these estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim period. All such adjustments are of a normal, recurring nature. The Fund offers multiple classes of shares. Effective December 28, 2005, Class I Shares are no longer subject to any front-end sales charge. Shares of Class A are sold with a front-end sales charge. Shares of Class B and Class C may be subject to a contingent deferred sales charge. Class I Shares are sold only to certain eligible investors. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class A, Class B and Class C 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 (except that Class B shareholders may vote on certain changes to the Class A distribution plan). Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses are allocated daily to each class based on its relative net assets. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of securities -- Equity securities that are held by the Fund that are traded on stock exchanges or the Nasdaq National Market are valued at the last sale price or official close price on the exchange, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available asked price for short positions. In cases where equity securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market by or under the authority of the Board of Directors of the Fund. Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap or Bulletin Board are valued at the last available bid price or yield equivalent obtained from one or more dealers or pricing services approved by the Board of Directors of the Fund. Short positions traded in the OTC market are valued at the last available asked price. Portfolio securities that are traded both in the OTC 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 OTC market, the last asked price. Options purchased are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Swap agreements are valued based upon quoted fair valuations received daily by the Fund from a pricing service or counterparty. Financial futures contracts and options thereon, which are traded on exchanges, are valued at their last sale price as of the close of such exchanges. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless the Investment Adviser believes that this method no longer produces fair valuations. Valuation of other short-term investment vehicles is generally based on the net asset value of the underlying investment vehicle or amortized cost. Repurchase agreements are valued at cost plus accrued interest. The Fund employs pricing services to provide certain securities prices for the Fund. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund, including valuations furnished by the pricing services retained by the Fund, which may use a matrix system for valuations. The procedures of a pricing service and its valuations are reviewed by the officers of the Fund under the general supervision of the Fund's Board of Directors. Such valuations and procedures will be reviewed periodically by the Board of Directors of the Fund. Generally, trading in foreign securities, as well as U.S. government securities, money market instruments and certain fixed income securities, is substantially completed each day at various times prior to the close of business on the New York Stock Exchange ("NYSE"). The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates also are generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that may not be reflected in the computation of the Fund's net asset value. If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to materially affect the value of such securities, those securities may be valued at their fair value as determined in good faith by the Fund's Board of MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 17 Notes to Financial Statements (continued) Directors or by the Investment Adviser using a pricing service and/or procedures approved by 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 U.S. dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. The Fund invests in foreign securities, which may involve a number of risk factors and special considerations not present with investments in securities of U.S. corporations. (c) Derivative financial instruments -- The Fund may engage in various portfolio investment strategies both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movements and movements in the securities markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. o Options -- The Fund may purchase and write call options and put 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. o Financial futures contracts -- The Fund may purchase or sell financial futures contracts and options on such futures contracts. 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. o Forward foreign exchange contracts -- The Fund may enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. The contract is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. o Foreign currency options and futures -- The Fund may also purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. (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 substantially 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, dividends 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). 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 dates. Interest income is recognized on the accrual basis. 18 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Notes to Financial Statements (continued) (f) Prepaid registration fees -- Prepaid registration fees are charged to expense as the related shares are issued. (g) Dividends and distributions -- Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. (h) Securities lending -- The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. Where the Fund receives securities as collateral for the loaned securities, it collects a fee from the borrower. The Fund typically receives the income on the loaned securities but does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Merrill Lynch Investment Managers, L.P. ("MLIM"). The general partner of MLIM 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 Plan with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. MLIM 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 .60%, on an annual basis, of the average daily value of the Fund's net assets. MLIM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of MLIM, pursuant to which MLAM U.K. provides investment advisory services to MLIM with respect to the Fund. There is no increase in the aggregate fees paid by the Fund for these services. Pursuant to the Distribution Plan 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 A ..................................... .25% -- Class B ..................................... .25% .50% Class C ..................................... .25% .55% -------------------------------------------------------------------------------- Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of MLIM, 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 A, Class B and Class C 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. For the six months ended May 31, 2006, FAMD earned underwriting discounts and MLPF&S earned dealer concessions on sales of the Fund's Class A and Class I Shares as follows: -------------------------------------------------------------------------------- FAMD MLPF&S -------------------------------------------------------------------------------- Class A .............................. $ 548 $6,288 Class I .............................. $ 444 $ 7 -------------------------------------------------------------------------------- For the six months ended May 31, 2006, MLPF&S received contingent deferred sales charges of $14,966 and $927, relating to transactions in Class B Shares and Class C Shares, respectively. MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 19 Notes to Financial Statements (continued) The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to MLPF&S or its affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by MLIM, LLC or in registered money market funds advised by MLIM. In addition, MLPF&S received $14,809 in commissions on the execution of portfolio security transactions for the Fund for the six months ended May 31, 2006. For the six months ended May 31, 2006, the Fund reimbursed MLIM $1,586 for certain accounting services. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. Certain officers and/or directors of the Fund are officers and/or directors of MLIM, PSI, MLAM U.K., FDS, FAMD, ML & Co., and/or MLIM, LLC. In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to contribute ML & Co.'s investment management business, including MLIM, to the investment management business of BlackRock, Inc. The transaction is expected to close in the third quarter of 2006. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended May 31, 2006 were $27,930,641 and $35,474,189, respectively. 4. Capital Share Transactions: Net decrease in net assets derived from capital share transactions was $11,906,071 and $13,372,133 for the six months ended May 31, 2006 and for the year ended November 30, 2005, respectively. Transactions in capital shares for each class were as follows: ------------------------------------------------------------------------------- Class A Shares for the Six Months Dollar Ended May 31, 2006 Shares Amount ------------------------------------------------------------------------------- Shares sold ............................ 91,570 $ 1,133,611 Automatic conversion of shares ......... 150,872 1,858,143 Shares issued to shareholders in reinvestment of dividends ......... 42,047 513,552 ------------------------------- Total issued ........................... 284,489 3,505,306 Shares redeemed ........................ (636,331) (7,878,438) ------------------------------- Net decrease ........................... (351,842) $ (4,373,132) =============================== ------------------------------------------------------------------------------- Class A Shares for the Year Dollar Ended November 30, 2005 Shares Amount ------------------------------------------------------------------------------- Shares sold ............................ 465,190 $ 5,276,033 Automatic conversion of shares ......... 283,666 3,199,572 Shares issued to shareholders in reinvestment of dividends ......... 116,214 1,322,524 ------------------------------- Total issued ........................... 865,070 9,798,129 Shares redeemed ........................ (1,275,616) (14,475,156) ------------------------------- Net decrease ........................... (410,546) $ (4,677,027) =============================== ------------------------------------------------------------------------------- Class B Shares for the Six Months Dollar Ended May 31, 2006 Shares Amount ------------------------------------------------------------------------------- Shares sold ............................ 73,931 $ 912,903 Shares issued to shareholders in reinvestment of dividends ......... 8,470 103,190 ------------------------------- Total issued ........................... 82,401 1,016,093 ------------------------------- Automatic conversion of shares ......... (151,354) (1,858,143) Shares redeemed ........................ (304,759) (3,766,394) ------------------------------- Total redeemed ......................... (456,113) (5,624,537) ------------------------------- Net decrease ........................... (373,712) $ (4,608,444) =============================== ------------------------------------------------------------------------------- Class B Shares for the Year Dollar Ended November 30, 2005 Shares Amount ------------------------------------------------------------------------------- Shares sold ............................ 309,576 $ 3,457,354 Shares issued to shareholders in reinvestment of dividends ......... 31,715 359,265 ------------------------------- Total issued ........................... 341,291 3,816,619 ------------------------------- Automatic conversion of shares ......... (284,614) (3,199,572) Shares redeemed ........................ (754,153) (8,527,451) ------------------------------- Total redeemed ......................... (1,038,767) (11,727,023) ------------------------------- Net decrease ........................... (697,476) $ (7,910,404) =============================== 20 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Notes to Financial Statements (concluded) ------------------------------------------------------------------------------- Class C Shares for the Six Months Dollar Ended May 31, 2006 Shares Amount ------------------------------------------------------------------------------- Shares sold ............................ 74,014 $ 903,824 Shares issued to shareholders in reinvestment of dividends ......... 5,403 65,173 ------------------------------- Total issued ........................... 79,417 968,997 Shares redeemed ........................ (158,140) (1,938,439) ------------------------------- Net decrease ........................... (78,723) $ (969,442) =============================== ------------------------------------------------------------------------------- Class C Shares for the Year Dollar Ended November 30, 2005 Shares Amount ------------------------------------------------------------------------------- Shares sold ............................ 372,824 $ 4,174,489 Shares issued to shareholders in reinvestment of dividends ......... 16,623 187,409 ------------------------------- Total issued ........................... 389,447 4,361,898 Shares redeemed ........................ (288,951) (3,263,839) ------------------------------- Net increase ........................... 100,496 $ 1,098,059 =============================== ------------------------------------------------------------------------------- Class I Shares for the Six Months Dollar Ended May 31, 2006 Shares Amount ------------------------------------------------------------------------------- Shares sold ............................ 86,719 $ 1,075,203 Shares issued to shareholders in reinvestment of dividends ......... 16,628 202,927 ------------------------------- Total issued ........................... 103,347 1,278,130 Shares redeemed ........................ (260,578) (3,233,183) ------------------------------- Net decrease ........................... (157,231) $ (1,955,053) =============================== ------------------------------------------------------------------------------- Class I Shares for the Year Dollar Ended November 30, 2005 Shares Amount ------------------------------------------------------------------------------- Shares sold ............................ 260,026 $ 2,946,308 Shares issued to shareholders in reinvestment of dividends ......... 45,445 516,186 ------------------------------- Total issued ........................... 305,471 3,462,494 Shares redeemed ........................ (472,012) (5,345,255) ------------------------------- Net decrease ........................... (166,541) $ (1,882,761) =============================== 5. Short-Term Borrowings: The Fund, along with certain other funds managed by MLIM and its affiliates, is a party to a $500,000,000 credit agreement with a group of lenders, which expires November 2006. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of .07% per annum based on the Fund's pro rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate equal to, at each Fund's election, the federal funds rate plus .50% or a base rate as defined in the credit agreement. The Fund did not borrow under the credit agreement during the six months ended May 31, 2006. 6. Capital Loss Carryforward: On November 30, 2005, the Fund had a net capital loss carryforward of $23,172,617, of which $20,663,752 expires in 2010 and $2,508,865 expires in 2011. This amount will be available to offset like amounts of any future taxable gains. MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 21 Disclosure of Investment Advisory Agreement Activities and Composition of the Board of Directors All but one member of the Board of Directors is an independent director whose only association with Merrill Lynch Investment Managers, L.P. (the "Investment Adviser") or other Merrill Lynch affiliates is as a director of the Fund and as a trustee or director of certain other funds advised by the Investment Adviser or its affiliates. The Chairman of the Board is also an independent director. New director nominees are chosen by a Nominating Committee comprised of independent directors. All independent directors also are members of the Board's Audit Committee, and the independent directors meet in executive session at each in-person Board meeting. The Board and the Audit Committee meet in person for at least two days each quarter and conduct other in-person and telephone meetings throughout the year, some of which are formal Board meetings and some of which are informational meetings. The independent counsel to the independent directors attends all in-person Board and Audit Committee meetings and other meetings at the independent directors' request. Investment Advisory Agreement -- Matters Considered by the Board Every year, the Board considers approval of the Fund's investment advisory agreement (the "Investment Advisory Agreement"). The Board also annually reviews and considers approval of the sub-advisory agreement on behalf of the Fund between the Investment Adviser and Merrill Lynch Asset Management U.K. Limited (the "sub-adviser"). The Board assesses the nature, scope and quality of the services provided to the Fund by the personnel of the Investment Adviser, the sub-adviser and their affiliates, including administrative services, shareholder services, oversight of fund accounting, marketing services and assistance in meeting legal and regulatory requirements. The Board also receives and assesses information regarding the services provided to the Fund by certain unaffiliated service providers. At various times throughout the year, the Board also considers a range of information in connection with its oversight of the services provided by the Investment Adviser and its affiliates, including the sub-adviser. Among the matters considered are: (a) fees (in addition to management fees) paid to the Investment Adviser and its affiliates by the Fund, such as transfer agency fees and fees for marketing and distribution; (b) Fund operating expenses paid to third parties; (c) the resources devoted to and compliance reports relating to the Fund's investment objective, policies and restrictions, and its compliance with its Code of Ethics and compliance policies and procedures; and (d) the nature, cost and character of non-investment management services provided by the Investment Adviser and its affiliates. The Board believes that the Investment Adviser is one of the most experienced global asset management firms and considers the overall services provided by the Investment Adviser to be of high quality. The Board also believes that the Investment Adviser is financially sound and well managed and notes that the Investment Adviser is affiliated with one of America's largest financial firms. The Board works closely with the Investment Adviser in overseeing the Investment Adviser's efforts to achieve good performance. As part of this effort, the Board discusses portfolio manager effectiveness and, when performance is not satisfactory, discusses with the Investment Adviser taking steps such as changing investment personnel. Annual Consideration of Approval by the Board of Directors In the period prior to the Board meeting to consider renewal of the Investment Advisory Agreement and the sub-advisory agreement, the Board requests and receives materials specifically relating to the Investment Advisory Agreement and/or the sub-advisory agreement. These materials include (a) information compiled by Lipper Inc. ("Lipper") on the fees and expenses and the investment performance of the Fund as compared to a comparable group of funds as classified by Lipper; (b) sales and redemption data for the Fund; (c) a discussion by the Fund's portfolio management team regarding investment strategies used by the Fund during its most recent fiscal year; (d) information on the profitability to the Investment Adviser and its affiliates of the Investment Advisory Agreement, the sub-advisory agreement and other relationships with the Fund; and (e) information provided by the Investment Adviser concerning investment advisory fees charged to a retail insurance fund under a similar investment mandate. Since the sub-advisory services are provided by an affiliate of the Investment Adviser, and no additional fee is paid for these services, the Board considered the sub-advisory agreement and Investment Advisory Agreement together. The Board also considers other matters it deems important to the approval process, such as payments made to the Investment Adviser or its affiliates relating to the distribution of Fund shares, services related to the valuation and pricing of Fund portfolio holdings, allocation of Fund brokerage fees (including the related benefits to the Investment Adviser of "soft dollars"), the Fund's portfolio turnover, and direct and indirect benefits to the Investment Adviser and the sub-adviser and their affiliates from their relationship with the Fund. The Board did not identify any particular information as controlling, and each member of the Board may have attributed different weights to the various items considered. Certain Specific Renewal Data In connection with the most recent renewal of the Fund's Investment Advisory Agreement and the sub-advisory agreement in May 2006, the independent directors' and Board's review included the following: 22 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Services Provided by the Investment Adviser -- The Board reviewed the nature, extent and quality of services provided by the Investment Adviser and the sub-adviser, including the investment advisory services and the resulting performance of the Fund. The Board focused primarily on the Investment Adviser's investment advisory services and the Fund's investment performance. The Board compared Fund performance -- both including and excluding the effects of the Fund's fees and expenses -- to the performance of a comparable group of mutual funds and the performance of a relevant index or combination of indexes. While the Board reviews performance data at least quarterly, consistent with the Investment Adviser's investment goals, the Board attaches more importance to performance over relatively long periods of time, typically three to five years. According to Lipper's ranking of all retail and institutional utility funds for the periods ended February 28, 2006, the Fund's performance after fees and expenses ranked in the second quintile for each of the one- and five-year periods and in the third quintile for the three-year period. The Board also considered the Fund's performance based on annualized total return and noted that the Fund's total return was in the second quintile for each one-year period ended February 28, 2006 and 2005, in the fourth quintile for one-year period ended February 28, 2004, in the third quintile for the one-year period ended February 28, 2003, and in the first quintile for the one-year period ended February 28, 2002. Considering these factors, the Board concluded that the Fund's performance supported the continuation of the Investment Advisory Agreement. The Investment Adviser's Personnel and Investment Process -- The Board reviews at least annually the Fund's investment objectives and strategies. The Board discusses with senior management of the Investment Adviser's equity investing group the strategies being used to achieve the stated objectives. Among other things, the Board considers the size, education and experience of the Investment Adviser's investment staff, its use of technology, and the Investment Adviser's approach to training and retaining portfolio managers and other research, advisory and management personnel. The Board also reviews the Investment Adviser's compensation policies and practices with respect to the Fund's portfolio managers. The Board also considered the experience of the Fund's portfolio managers and noted that Ms. Anderson, the Fund's senior portfolio manager, has more than eleven years of experience in analyzing and investing in equity securities. The Board considered that the Investment Adviser and its investment staff have extensive experience in analyzing and managing the types of investments used by the Fund. The Board concluded that the Fund benefits from that experience. Management Fees and Other Expenses -- The Board reviews the Fund's contractual management fee rate and actual management fee rate as a percentage of total assets at common asset levels -- the actual rate includes advisory and administrative service fees and the effects of any fee waivers -- compared to the other funds considered in its Lipper category. It also compares the Fund's total expenses to those of other comparable funds. The Board considered the services provided to and the fees charged by the Investment Adviser to a retail insurance fund with a similar investment mandate. It was noted that the fees charged by the Investment Adviser to the retail insurance fund were identical to those being charged to the Fund. The Board noted that the Fund's actual and contractual management fees and actual total expenses including investment-related expenses were below the median of expenses of comparable funds as classified by Lipper. The Board concluded that the Fund's management fee rate and overall expense ratio are acceptable compared to those of other comparable funds. Profitability -- The Board considers the cost of the services provided to the Fund by the Investment Adviser and the Investment Adviser's and its affiliates' profits relating to the management and distribution of the Fund and the MLIM/FAM-advised funds. As part of its analysis, the Board reviewed the Investment Adviser's methodology in allocating its costs to the management of the Fund and concluded that there was a reasonable basis for the allocation. The Board also considered federal court decisions discussing an investment adviser's profitability and profitability levels considered to be reasonable in those decisions. The Board believes that the profits of the Investment Adviser and its affiliates are acceptable in relation to the nature and quality of services provided and given the level of fees and expenses overall. Economies of Scale -- The Board considered the extent to which economies of scale might be realized as the assets of the Fund increase and whether there should be changes in the management fee rate or structure in order to enable the Fund to participate in these economies of scale. While there was no evidence to date that the Fund's assets have reached a level where such economies are effectively available, the Board noted that they would continue to seek information relating to economies of scale. The Board determined that no changes were currently necessary. Conclusion After the independent directors deliberated in executive session, the entire Board, including all of the independent directors, approved the renewal of the existing Investment Advisory Agreement and sub-advisory agreement, concluding that the advisory fee was reasonable in relation to the services provided and that a contract renewal was in the best interests of the shareholders. MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 23 Disclosure of New Investment Advisory Agreement New BlackRock Investment Advisory Agreement -- Matters Considered by the Board In connection with the Transaction between Merrill Lynch and BlackRock, the Fund's Board of Directors considered a new investment advisory agreement (the "New Investment Advisory Agreement") between the Fund and BlackRock Advisors, Inc. or its successor ("BlackRock Advisors"). If the New Investment Advisory Agreement is approved by the Fund's shareholders, it will become effective upon the closing of the Transaction, which is expected in the third quarter of 2006. The Board discussed the New Investment Advisory Agreement at telephonic and in-person meetings held during April and May 2006. The Board, including the independent directors, approved the New Investment Advisory Agreement at a meeting held on May 12, 2006. To assist the Board in its consideration of the New Investment Advisory Agreement, BlackRock provided materials and information about BlackRock, including its financial condition and asset management capabilities and organization, and Merrill Lynch provided materials and information about the Transaction. The independent directors, through their independent legal counsel, also requested and received additional information from Merrill Lynch and BlackRock in connection with their consideration of the New Investment Advisory Agreement. The additional information was provided in advance of the May 12, 2006 meeting. In addition, the independent directors consulted with their counsel and Fund counsel on numerous occasions, discussing, among other things, the legal standards and certain other considerations relevant to the directors' deliberations. At the Board meetings, members of the Board discussed with Merrill Lynch management and certain BlackRock representatives the Transaction, its strategic rationale and BlackRock's general plans and intentions regarding the Fund. At these Board meetings, representatives of Merrill Lynch and BlackRock made presentations to and responded to questions from the Board. The directors also inquired about the plans for and anticipated roles and responsibilities of certain employees and officers of the Investment Adviser and certain affiliates being transferred to BlackRock in connection with the Transaction. The independent directors of the Board also conferred separately and with their counsel about the Transaction and other matters related to the Transaction on a number of occasions, including in connection with the April and May 2006 meetings. After the presentations and after reviewing the written materials provided, the independent directors met in executive sessions with their counsel to consider the New Investment Advisory Agreement. In connection with the Board's review of the New Investment Advisory Agreement, Merrill Lynch and/or BlackRock advised the directors about a variety of matters. The advice included the following, among other matters: o that there is not expected to be any diminution in the nature, quality and extent of services provided to the Fund and its shareholders by BlackRock Advisors, including compliance services; o that operation of New BlackRock as an independent investment management firm will enhance its ability to attract and retain talented professionals; o that the Fund should benefit from having access to BlackRock's state of the art technology and risk management analytic tools, including investment tools, provided under the BlackRock Solutions(R) brand name; o that BlackRock has no present intention to alter any applicable expense waivers and reimbursements currently in effect and, while it reserves the right to do so in the future, it would seek the approval of the Board before making any changes; o that BlackRock and Merrill Lynch will enter into an agreement, for an initial three-year period and automatically renewable from year to year thereafter, in connection with the Transaction under which Merrill Lynch-affiliated broker-dealers will continue to offer the Fund as an investment product; o that BlackRock Advisors will have substantially the same access to the Merrill Lynch sales force when distributing shares of the Fund as is currently provided to the Investment Adviser and that other arrangements between the Investment Adviser and Merrill Lynch sales channels will be preserved; o that the Fund will have access to BlackRock's network of third party brokers, retirement plan platforms and registered investment advisers; o that under the Transaction Agreement, Merrill Lynch and BlackRock have agreed to conduct, and use reasonable best efforts to cause their respective affiliates to conduct, their respective businesses in compliance with the conditions of Section 15(f) of the Investment Company Act of 1940 (the "1940 Act") in relation to any public funds 24 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 advised by BlackRock or the Investment Adviser (or its affiliates), respectively; and o that Merrill Lynch and BlackRock would derive benefits from the Transaction and that, as a result, they have a different financial interest in the matters that were being considered than do Fund shareholders; The directors considered the information provided by Merrill Lynch and BlackRock above, and, among other factors, the following: o the potential benefits to Fund shareholders from being part of a combined fund family with BlackRock-sponsored funds, including possible economies of scale and access to investment opportunities; o the potential for expanding distribution of Fund shares through improved access to third party distribution; o the reputation, financial strength and resources of BlackRock and its investment advisory subsidiaries and the anticipated financial strength and resources of New BlackRock; o the compliance policies and procedures of BlackRock Advisors; o the terms and conditions of the New Investment Advisory Agreement, including the fact that the schedule of the Fund's total advisory fees will not increase by virtue of the New Investment Advisory Agreement, but will remain the same; o that within the past year the Board performed a full annual review of the investment advisory agreement currently in effect for the Fund (the "Current Investment Advisory Agreement") as required by the 1940 Act and has determined that the Investment Adviser has the capabilities, resources and personnel necessary to provide the advisory and administrative services currently provided to the Fund; and that the advisory and/or management fees paid by the Fund, taking into account any applicable agreed-upon fee waivers and breakpoints, represent reasonable compensation to the Investment Adviser in light of the services provided, the costs to the Investment Adviser of providing those services, economies of scale, the fees and other expenses paid by similar funds (including information provided by Lipper, Inc. ["Lipper"]), and such other matters as the directors have considered relevant in the exercise of their reasonable judgment (the Board had most recently performed a full annual review of the Current Investment Advisory Agreement in May 2005); and o that Merrill Lynch agreed to pay all expenses of the Fund in connection with the Board's consideration of the New Investment Advisory Agreement and related agreements and all costs of shareholder approval of the New Investment Advisory Agreement and as a result the Fund would bear no costs in obtaining shareholder approval of the New Investment Advisory Agreement. Certain of these considerations are discussed in more detail below. In its review of the New Investment Advisory Agreement, the Board assessed the nature, scope and quality of the services to be provided to the Fund by the personnel of BlackRock Advisors and its affiliates, including administrative services, shareholder services, oversight of fund accounting, marketing services and assistance in meeting legal and regulatory requirements. In its review of the New Investment Advisory Agreement, the Board also considered a range of information in connection with its oversight of the services to be provided by BlackRock Advisors and its affiliates. Among the matters considered were: (a) fees (in addition to management fees) to be paid to BlackRock Advisors and its affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c) the resources devoted to and compliance reports relating to the Fund's investment objective, policies and restrictions, and its compliance with its Code of Ethics and BlackRock Advisors' compliance policies and procedures; and (d) the nature, cost and character of non-investment management services to be provided by BlackRock Advisors and its affiliates. In the period prior to the Board meetings to consider renewal of the Current Investment Advisory Agreement, the Board had requested and received materials specifically relating to the agreement. These materials included (a) information compiled by Lipper on the fees and expenses and the investment performance of the Fund as compared to a comparable group of funds as classified by Lipper; (b) a discussion by the Fund's portfolio management team on investment strategies used by the Fund during its most recent fiscal year; (c) information on the profitability to the Investment Adviser of the Current Investment Advisory Agreement and other payments received by the Investment Adviser and its affiliates from the Fund; and (d) information provided by the Investment Adviser concerning services related to the valuation and pricing of Fund portfolio holdings, allocation of Fund brokerage fees, the Fund's portfolio turnover statistics, and direct and indirect MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 25 Disclosure of New Investment Advisory Agreement (continued) benefits to the Investment Adviser and its affiliates from their relationship with the Fund. In their deliberations, the directors considered information received in connection with their most recent continuation of the Current Investment Advisory Agreement, in addition to information provided by BlackRock and BlackRock Advisors in connection with their evaluation of the terms and conditions of the New Investment Advisory Agreement. The directors did not identify any particular information that was all-important or controlling, and each director attributed different weights to the various factors. The directors, including a majority of the independent directors, concluded that the terms of the New Investment Advisory Agreement are appropriate, that the fees to be paid are reasonable in light of the services to be provided to the Fund, and that the New Investment Advisory Agreement should be approved and recommended to Fund shareholders. Nature, Quality and Extent of Services Provided -- The Board reviewed the nature, extent and quality of services provided by the Investment Adviser, including the investment advisory services and the resulting performance of the Fund, as well as the nature, quality and extent of services expected to be provided by BlackRock Advisors. The Board focused primarily on the Investment Adviser's investment advisory services and the Fund's investment performance, but also considered certain areas in which both the Investment Adviser and the Fund receive services as part of the Merrill Lynch complex. The Board compared the Fund's performance -- both including and excluding the effects of the Fund's fees and expenses -- to the performance of a comparable group of mutual funds, and the performance of a relevant index or combination of indexes. While the Board reviews performance data at least quarterly, consistent with the Investment Adviser's investment goals, the Board attaches more importance to performance over relatively long periods of time, typically three to five years. In evaluating the nature, quality and extent of the services to be provided by BlackRock Advisors under the New Investment Advisory Agreement, the directors considered, among other things, the expected impact of the Transaction on the operations, facilities, organization and personnel of New BlackRock and how it would affect the Fund; the ability of BlackRock Advisors to perform its duties after the Transaction; and any anticipated changes to the current investment and other practices of the Fund. The directors were given information with respect to the potential benefits to the Fund and its shareholders from having access to BlackRock's state of the art technology and risk management analytic tools, including the investment tools provided under the BlackRock Solutions brand name. The directors were advised that, as a result of Merrill Lynch's equity interest in BlackRock after the Transaction, the Fund will continue to be subject to restrictions concerning certain transactions involving Merrill Lynch affiliates (for example, transactions with a Merrill Lynch broker-dealer acting as principal) absent revised or new regulatory relief. The directors were advised that a revision of existing regulatory relief with respect to these restrictions was being sought from the Securities and Exchange Commission and were advised of the possibility of receipt of such revised regulatory relief. There can be no assurance that such relief will be obtained. Based on their review of the materials provided and the assurances they had received from the management of Merrill Lynch and of BlackRock, the directors determined that the nature and quality of services to be provided to the Fund under the New Investment Advisory Agreement were expected to be as good or better than that provided under the Current Investment Advisory Agreement. It was noted, however, that it is expected that there will be changes in personnel following the Transaction and the combination of the operations of the Investment Adviser and its affiliates with those of BlackRock. The directors noted that if current portfolio managers or other personnel cease to be available, the Board would consider all available options, which could include seeking the investment advisory or other services of BlackRock affiliates. Accordingly, the directors concluded that, overall, they were satisfied at the present time with assurances from BlackRock and BlackRock Advisors as to the expected nature, extent and quality of the services to be provided to the Fund under the New Investment Advisory Agreement. Costs of Services Provided and Profitability -- It was noted that, in conjunction with the recent review of the Current Investment Advisory Agreement, the directors had received, among other things, a report from Lipper comparing the Fund's fees, expenses and performance to those of a peer group selected by Lipper, and information as to the fees charged by the Investment Adviser or its affiliates to other registered investment company clients for investment management services. The Board reviewed the Fund's contractual management fee rate and actual management fee rate as a percentage of total assets at common asset levels -- the actual rate includes advisory fees and the effects of any fee waivers -- compared to the other funds in its Lipper category. They also compared the Fund's total expenses to those of other comparable funds. The information showed that the 26 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Fund had fees and expenses within the range of fees and expenses of comparable funds. The Board considered the services to be provided by and the fees to be charged by BlackRock Advisors to other funds with similar investment mandates and noted that the fees charged by BlackRock Advisors in those cases, including fee waivers and expense reimbursements, were generally comparable to those being charged to the Fund. The Board also noted that, as a general matter, according to the information provided by BlackRock, fees charged to institutional clients were lower than the fees charged to the Fund, but BlackRock Advisors provided less extensive services to such clients. The Board concluded that the Fund's management fee and fee rate and overall expense ratio are reasonable compared to those of other comparable funds. In evaluating the costs of the services to be provided by BlackRock Advisors under the New Investment Advisory Agreement, the directors considered, among other things, whether advisory fees or other expenses would change as a result of the Transaction. Based on their review of the materials provided and the fact that the New Investment Advisory Agreement is substantially similar to the Current Investment Advisory Agreement in all material respects, including the rate of compensation, the directors determined that the Transaction should not increase the total fees payable, including any fee waivers and expense reimbursements, for advisory and administrative services. The directors noted that it was not possible to predict how the Transaction would affect BlackRock Advisors' profitability from its relationship with the Fund. The directors discussed with BlackRock Advisors its general methodology to be used in determining its profitability with respect to its relationship with the Fund. The directors noted that they expect to receive profitability information from BlackRock Advisors on at least an annual basis and thus be in a position to evaluate whether any adjustments in Fund fees and/or fee breakpoints would be appropriate. Fees and Economies of Scale -- The Board considered the extent to which economies of scale might be realized as the assets of the Fund increase and whether there should be changes in the management fee rate or structure in order to enable the Fund to participate in these economies of scale. The Board determined that changes were not currently necessary and that the Fund appropriately participated in these economies of scale. In reviewing the Transaction, the directors considered, among other things, whether advisory fees or other expenses would change as a result of the Transaction. Based on the fact that the New Investment Advisory Agreement is substantially similar to the Current Investment Advisory Agreement in all material respects, including the rate of compensation, the directors determined that as a result of the Transaction, the Fund's total advisory fees would be no higher than the fees under its Current Investment Advisory Agreement. The directors noted that in conjunction with their most recent deliberations concerning the Current Investment Advisory Agreement, the directors had determined that the total fees for advisory and administrative services for the Fund were reasonable in light of the services provided. It was noted that in conjunction with the recent review of the Current Investment Advisory Agreement, the directors had received, among other things, a report from Lipper comparing the Fund's fees, expenses and performance to those of a peer group selected by Lipper, and information as to the fees charged by the Investment Adviser to other registered investment company clients for investment management services. The directors concluded that, because the rates for advisory fees for the Fund would be no higher than its current fee rates, the proposed management fee structure, including any fee waivers, was reasonable and that no additional changes were currently necessary. Fall-Out Benefits -- In evaluating the fall-out benefits to be received by BlackRock Advisors under the New Investment Advisory Agreement, the directors considered whether the Transaction would have an impact on the fall-out benefits received by the Investment Adviser by virtue of the Current Investment Advisory Agreement. Based on their review of the materials provided, including materials received in connection with their most recent approval or continuance of the Current Investment Advisory Agreement, and their discussions with management of the Investment Adviser and BlackRock, the directors determined that those benefits could include increased ability for BlackRock to distribute shares of its funds and other investment products and, where applicable, to obtain research services using the Fund's portfolio transaction brokerage commissions. The directors noted that any such benefits were difficult to quantify with certainty at this time, and indicated that they would continue to evaluate them going forward. Investment Performance -- The directors considered investment performance for the Fund. The directors compared the Fund's performance -- both including and excluding the effects of the Fund's fees and expenses -- to the performance of a comparable group of mutual funds, and the performance of a relevant index or combination of indexes. The comparative information received from Lipper showed Fund performance at various levels within the range of performance of MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 27 Disclosure of New Investment Advisory Agreement (concluded) comparable funds over different time periods. While the Board reviews performance data at least quarterly, consistent with the Investment Adviser's investment goals, the Board attaches more importance over relatively long periods of time, typically three to five years. The directors believed the Fund's performance was satisfactory. Also, the directors took into account the investment performance of funds currently advised by BlackRock Advisors. The Board considered comparative information from Lipper which showed that the performance of the funds advised by BlackRock Advisors was within the range of performance of comparable funds over different time periods. The Board noted BlackRock's considerable investment management experience and capabilities, but were unable to predict what effect, if any, consummation of the Transaction would have on the future performance of the Fund. Conclusion -- After the independent directors of the Fund deliberated in executive session, the entire Board, including the independent directors, approved the New Investment Advisory Agreement, concluding that the advisory fee rate was reasonable in relation to the services provided and that the New Investment Advisory Agreement was in the best interests of the shareholders. In approving the New Investment Advisory Agreement, the Board noted that it anticipated reviewing the continuance of the agreement in advance of the expiration of the initial two-year period. Contingent BlackRock Subadvisory Agreement -- Matters Considered by the Board At the telephonic and in-person meetings held during April and May 2006 at which the Board of Directors discussed and approved the New Investment Advisory Agreement, the Board, including the independent directors, also discussed and approved a contingent subadvisory agreement (the "Contingent Subadvisory Agreement") between the Investment Adviser and BlackRock Advisors (the "BlackRock The Contingent Subadvisory Agreement is intended to ensure that the Fund operates with efficient portfolio management services until the closing of the Transaction, in the event that the Board deems it necessary and in the best interests of the Fund and its shareholders that the BlackRock Subadviser assist in managing the operations of the Fund during the interim period until the closing of the Transaction. If shareholders approve the Contingent Subadvisory Agreement, it will take effect only upon recommendation from the Investment Adviser and upon subsequent approval of the Board in the period up to the closing of the Transaction. The effectiveness of the Contingent Subadvisory Agreement, therefore, would be contingent on further Board approval after shareholders approve it. Pursuant to the Contingent Subadvisory Agreement, the BlackRock Subadviser would receive a monthly fee from the Investment Adviser equal to 50% of the advisory fee received by the Investment Adviser. The Investment Adviser would pay the BlackRock Subadviser out of its own resources. There would be no increase in Fund expenses as a result of the Contingent Subadvisory Agreement. In making its approval, the Board considered the Contingent Subadvisory Agreement in conjunction with the New Investment Advisory Agreement and reviewed the same information and factors discussed above, and came to the same conclusions. The Board also considered in conjunction with the Contingent Subadvisory Agreement the necessity of ensuring that the Fund operates with effective management services until the closing of the Transaction. In reviewing the subadvisory fee rate provided in the Contingent Subadvisory Agreement, the Board took note of the fact that both the Investment Adviser and the BlackRock Subadviser would have significant responsibilities under their respective advisory agreements. The Investment Adviser would remain responsible for oversight of the Fund's operations and administration and the BlackRock Subadviser would provide advisory services to the Fund under the Contingent Subadvisory Agreement. The Board also took into account the expected short duration of the term of any Contingent Subadvisory Agreement and the fact that total advisory fees paid by the Fund would not increase as a result of the Contingent Subadvisory Agreement. Under all of the circumstances, the Board concluded that it was a reasonable allocation of fees for the BlackRock Subadviser to receive 50% of the advisory fee paid by the Fund to the Investment Adviser. After the independent directors deliberated in executive session, the entire Board, including the independent directors, approved the Contingent Subadvisory Agreement, concluding that the advisory fee was reasonable in relation to the services provided and that the Contingent Subadvisory Agreement was in the best interests of shareholders. 28 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Officers and Directors Robert C. Doll, Jr., President and Director Ronald W. Forbes, Director Cynthia A. Montgomery, Director Jean Margo Reid, Director Roscoe S. Suddarth, Director Richard R. West, Director Edward D. Zinbarg, Director Donald C. Burke, Vice President and Treasurer Kathleen M. Anderson, Vice President and Portfolio Manager Jeffrey Hiller, Chief Compliance Officer Alice A. Pellegrino, Secretary Custodian JPMorgan Chase Bank, N.A. 3 Chase MetroTech Center Brooklyn, NY 11245 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 800-637-3863 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 29 Availability of Quarterly Schedule of Investments The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. 30 MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 Electronic Delivery The Fund offers electronic delivery of communications to its shareholders. In order to receive this service, you must register your account and provide us with e-mail information. To sign up for this service, simply access this Web site at http://www.icsdelivery.com/live and follow the instructions. When you visit this site, you will obtain a personal identification number (PIN). You will need this PIN should you wish to update your e-mail address, choose to discontinue this service and/or make any other changes to the service. This service is not available for certain retirement accounts at this time. MERRILL LYNCH UTILITIES AND TELECOMMUNICATIONS FUND, INC. MAY 31, 2006 31 [LOGO] Merrill Lynch Investment Managers www.mlim.ml.com -------------------------------------------------------------------------------- Mercury Advisors A Division of Merrill Lynch Investment Managers www.mercury.ml.com 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. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-637-3863; (2) at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Information about how the Fund voted proxies relating to securities held in the Fund's portfolio during the most recent 12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Merrill Lynch Utilities and Telecommunications Fund, Inc. Box 9011 Princeton, NJ 08543-9011 #11693 -- 5/06 Item 2 - Code of Ethics - Not Applicable to this semi-annual report Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual report Item 4 - Principal Accountant Fees and Services - Not Applicable to this semi-annual report Item 5 - Audit Committee of Listed Registrants - Not Applicable Item 6 - Schedule of Investments - Not Applicable Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies - Not Applicable Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not Applicable Item 9 - Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers - Not Applicable Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable Item 11 - Controls and Procedures 11(a) - The registrant's certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to us by others particularly during the period in which this report is being prepared. The registrant's certifying officers have determined that the registrant's disclosure controls and procedures are effective based on our evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report. 11(b) - There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12 - Exhibits attached hereto 12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report 12(a)(2) - Certifications - Attached hereto 12(a)(3) - Not Applicable 12(b) - Certifications - Attached hereto Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Merrill Lynch Utilities and Telecommunications Fund, Inc. By: /s/ Robert C. Doll, Jr. ----------------------- Robert C. Doll, Jr., Chief Executive Officer of Merrill Lynch Utilities and Telecommunications Fund, Inc. Date: July 21, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Robert C. Doll, Jr. ----------------------- Robert C. Doll, Jr., Chief Executive Officer of Merrill Lynch Utilities and Telecommunications Fund, Inc. Date: July 21, 2006 By: /s/ Donald C. Burke ----------------------- Donald C. Burke, Chief Financial Officer of Merrill Lynch Utilities and Telecommunications Fund, Inc. Date: July 21, 2006