Ecofin Water & Power - Monthly Update

RNS Number:8468L
Ecofin Water & Power Opps PLC
15 January 2008

Ecofin Water & Power Opportunities Plc

December 2007 Review

Performance1
As at 1 month 3 months 12 months Since launch2
31 December, 2007

Net Assets £592,201,000 4.1% 9.8% 26.6% 251.4%
Income Shares
Income Share Price 103.00p 0.0% 0.2% -4.6% 3.0%
Income Share NAV3 94.70p 0.5% 1.5% 6.1% 45.7%
Premium/ (Discount) 8.8%
Dividend Yield4 8.2%
Capital Shares
Capital Share Price 807.50p 3.9% 17.5% 46.8% 707.5%
Capital Share NAV5 899.80p 5.3% 13.1% 38.8% 469.5%
Premium/ (Discount) (10.3%)
Ordinary Shares6
Ordinary Share Price 190.75p 2.6% 10.9% 7.9% 90.8%
Ordinary Share NAV 214.14p 3.8% 9.1% 24.3% 104.1%
Premium/ (Discount) (10.9%)
Dividend Yield4 3.2%

1. Adjusted for a £50 million capital increase on 29th June, 2005, and a £108.2 million capital
increase on 3rd January, 2007.

2. Company launched on 28 February, 2002. Performance figures are based on initial share prices
of 100p and initial NAVs per share, net of expenses associated with the organisation of, and placement
of share in, the Company. Performance of Ordinary Shares is since their issue on 29 June, 2005.

3. Including undistributed current period revenue. Initial NAV per share on 28 February, 2002,
was 65p.

4. Total dividends paid over last 12 months / share price.

5. Initial NAV per share on 28 February, 2002, was 158p.

6. First issued on 29 June, 2005 at 100p per share and an initial NAV per share of 104.91p.

7. The net assets, NAVs per share and shareholders' funds shown above have been prepared
valuing the Company's investment portfolio on the basis of bid-prices. The share prices shown for the
Company's Income, Capital and Ordinary Shares are mid-prices.

Capital Structure as at 31 December, 2007
Gross Assets less Current Liabilities £861,719,000
Bank debt £269,518,000
Shareholders' Funds (Income Shares) £30,704,000
Shareholders' Funds (Capital Shares) £170,588,000
Shareholders' Funds (Ordinary Shares) £390,909,000
Total Shareholders' Funds £592,201,000
£861,719,000
Gearing (debt/shareholders' funds) 45.5%
Bank debt as % of Gross Assets 31.3%
Effective gearing on Ordinary Shares 2.2x

Analysis by Sector % of portfolio Analysis by Country % of
portfolio

Electricity 70.2 United Kingdom 13.5
Gas transportation 9.8 Other Europe 46.0
Utility-related 9.3 France 16.5
Multi-utility 5.9 Ireland 8.6
Water 4.8 Spain 7.4
Italy 5.6
100.0 Germany 3.5
Belgium 2.7
Switzerland 1.7
Other
United States 25.2
Other 15.3

100.0

Analysis by Market Capitalisation of Companies in Portfolio % of Portfolio
Less than £ 200 million 1.6
£200 to £1,000 million 11.7
£1,000 million to £5,000 million 29.6
£5,000 million to £10,000 million 10.3
Above £10,000 million 37.8
Unquoted 9.0
100.0

Top Ten Investments % of Sector Country
portfolio
Airtricity 6.5 Electricity Ireland
Electric Power Development 5.0 Electricity Japan
FPL Group 4.9 Electricity USA
ITC Holdings 4.4 Electricity USA
EDF 3.7 Electricity France
Iberdrola Renovables 3.5 Electricity Spain
Poweo 3.5 Multi-utility France
Pennon 3.4 Water UK
Iberdrola 2.8 Electricity Spain
Williams 2.5 Gas USA
40.2
* Unquoted

REVIEW OF DECEMBER

In December, the Company's net assets rose by 4.1%. In comparison, the FTSE All
Share index rose by 0.2% and the Dow Jones Euro Stoxx index and the US S&P 500
index both rose by 2.1% in sterling terms. In the utilities sector, the FTSE
Utilities index rose by 0.3% and the Dow Jones Euro Utilities index and the US S
&P 500 Utilities index rose by 3.5% and 3.0%, respectively, all in sterling
terms.

Although the Company's year-end is 31 March, the Company's net assets rose by
26.6%, on an unaudited basis, in calendar 2007. This compared to a growth of
2.0% in the FTSE All Share index, 14.6% in the Dow Jones Euro Stoxx index and
1.2% in the US S&P 500 in calendar 2007, all in sterling terms. The FTSE
Utilities index rose by 6.9% in calendar 2007 while the Dow Jones Euro Utilities
index and the US S&P 500 Utilities index rose by 35.4% and 13.3%, respectively,
all in sterling terms.

United Kingdom

Oil prices corrected their end November slide, to creep up from $89/bbl early in
December to end the year at $96/bbl. OPEC decided not to increase its output
quotas, at least before the next meeting on 1st February 2008, so intermittent
geopolitical risks with limited signs of economic slowdown buoyed the oil
market, especially with many financial players using oil as a hedge against a
weak dollar and/or inflation. Coal also staged a recovery, moving up over
December by $7.5/t to $117.5/t delivered into Europe. This rise in delivered
coal prices was despite a slide in freight rates which dropped to 17% below
their mid-November peak. CO2 put on €1/t to €22/t early in December as UN
negotiators saw progress towards a long-term agreement on combating climate
change, but subsequently the CO2 price eased to end the month at €22/t, in part
as EU Environment Ministers voted to soften the impact of including aviation in
the trading scheme.

UK gas and power markets recovered alongside crude oil markets during December.
New Norwegian gasfield supplies failed to materialize on schedule and continuing
strong Asian demand for LNG meant that December saw few LNG deliveries.
Meanwhile, concern about sufficient power to meet peak requirements in France
this winter resulted in power supplies from the Continent to the UK only being
available at off peak times. Annual contracts for UK gas were up 7%, and for UK
power were up 8%, over December.

UK economic conditions were seen to be deteriorating significantly. The
cumulative effect of monetary tightening (rate increases of 125 basis points
between August 2006 and July 2007) brought evidence of declining house prices
and forecasts of GDP growth running at less than 2% by the second half of 2008,
from quarterly growth consistently above 3% over the past 18 months. Fearful
that weak economic conditions will be compounded by tighter credit markets, the
Bank of England cut interest rates from 5.75% to 5.5% in mid-December.

Amidst general concern about the UK economy going into 2008, the safest names
were amongst the strongest performers, with Scottish & Southern Energy, National
Grid and United Utilities faring relatively well. Scottish & Southern Energy and
National Grid were also helped by eliminating the uncertainty surrounding their
gas network tariffs as each chose to accept the regulator's proposals. These
proposals centered on a 4.3% allowed cost of capital with seemingly tough
targets for operating and capital costs. United Utilities fared well as the
stockmarket absorbed the planned one-off return of capital plus a rebased
(lower) ongoing dividend policy (announced at the end of November).

M&A interest continued in the sector. Biffa revealed that it has opened up its
books to Montagu Partners and Hg Capital, after the private equity consortium
indicated it was prepared to raise its indicative bid to 350p/share. There is no
timetable for the consortium to complete due diligence but a formal offer seems
likely early in 2008. Elsewhere, the bid for Kelda (announced at the end of
November) is thought to have secured debt syndication, bringing a minor rally in
some of the other quoted UK water companies. Pennon also kept attention on its
leading UK waste management company, Viridor, by announcing the bolt-on £81
million acquisition of Grosvenor Waste Management , a recycling and collection
company in the UK.

British Energy, though, was the strongest performer amongst the UK utilities
over December. The company highlighted it has agreement for grid connections for
new nuclear power stations at three of its sites, although it is also clear that
British Energy is not the only holder of sites that would be suitable for new
nuclear power stations, after the State-owned British Nuclear Fuels Ltd was
encouraged by a local council to put its Sellafield reprocessing site forward
for consideration. Nevertheless, the shares put on 5% over the month with the
stockmarket being optimistic that the first weeks of the New Year will see the
UK government give a formal commitment to new nuclear power stations.

December's sharpest UK utility stock price move was the 11% drop in Drax after
it revealed that debt market conditions were not as strong as anticipated - and
hence it was not going to refinance its debt as it had earlier indicated it
would. Drax also guided analysts towards slightly disappointing full year
EBTIDA. As a result, year-end cash balances are put by the company at £55-60m
and the resulting special final dividend may be less than 10p/share, whereas
some commentators were looking for up to 60p/share. Centrica, too, indicated it
might struggle to meet consensus expectations for full year EPS, but this was
hardly surprising given the increase in wholesale gas costs in the UK forward
market. Indeed, the limited reduction required to 2007 estimates came as some
relief, although the outlook for 2008 is more significant and, until tariffs
across the industry are reset, remains uncertain.

Continental Europe

Continental European utilities outperformed the market in December, driven by a
continued flight to quality (E.ON) and the defensive characteristics of the
sector. Although oil, coal and power prices were muted for most of the month,
hydro generators performed well (BKW, Verbund, Fortum). The long-awaited IPO of
Iberdrola Renovables paced the performance of renewable energy stocks, while
favorable legal developments in France benefited Gaz de France and Poweo. In
Spain, however, utilities were negatively affected by an adverse ruling on CO2,
while construction companies (ACS, Ferrovial) suffered from a sharp slowdown in
activity, despite their utility and concession holdings.

In France, EDF posted a subdued performance during the month following the
government's 2.5% placement. But the other French utilities fared better,
particularly Gaz de France, which benefited from a series of positive
developments. Importantly, the State Council ruled that gas tariffs, which had
been frozen for two years, should allow for the full pass-through of procurement
costs. This will ensure the economic viability of the company's supply business,
and potentially the recovery of the €1bn revenue shortfall it incurred in 2006.
Additionally, Gaz de France was granted a 4% tariff increase at the end of the
year -a first step to bring tariffs in line with costs.

The merger with Suez is now likely to complete in Q2, since the labor unions at
Gaz de France have yet to provide an opinion on the transaction. Gaz de France
has started legal proceedings to request such an opinion in order to accelerate
the process. Finally, the Board approved the start of share buy-backs programmed
for 2.5% of capital, running through to late November 2008. This decision was
well received by shareholders of both Gaz de France and Suez, supporting
expectations of a generous dividend policy for the combined entity.

Legal developments in France also benefited Poweo, as the National Assembly
voted in favor of the full reversibility of residential electricity tariffs, and
as the French competition commission approved EDF's proposal to provide
alternative suppliers with over 10TWh of nuclear power annually at cost under
long-term contracts. These two rulings, combined with Poweo's acquisition of a
direct sales force, should enable the company to reach its customer acquisition
targets at a lower cost.

Regulatory decisions were less favorable in Spain, where the government passed a
decree-law resulting in a partial claw-back of CO2 allowances over the period
2008-12. The generation margin of the Spanish utilities will therefore be
reduced by the cost of CO2, which puts them at a disadvantage to their European
peers. Enagas and Red Electrica also suffered from regulatory uncertainty as
their compensation mechanisms have yet to be confirmed.

The IPO of Iberdrola Renovables was priced in mid-December at the bottom of the
range, with the stock having a mixed start of trading, ending up less than 7%
during the month. This had a knock-on effect on the other listed wind developers
EDF Energies Nouvelles and Acciona, whose shares drifted in December. It also
impacted Iberdrola, whose performance was further negatively affected by news
that Albert Frere had disposed of his 5% stake in the company.

In Germany, the utilities were once again criticized for maintaining high
end-user prices as a result of market dominance and ahead of January tariff
increases. Notwithstanding, both E.ON and RWE announced changes to their
management teams, while the press also revealed that RWE was in talks with the
US LNG operator Excelerate to take a 50% stake in the company. Excelerate is the
main partner of Belgian LNG shipper Exmar, who would benefit indirectly from the
presence of RWE in the capital of Excelerate.

The Italian municipal utilities AEM, Acea and Hera performed strongly in
December, spurred by the completion of the merger of AEM Milan and ASM Brescia.
The combined entity started trading on 2 January under the name A2A. This
transaction will possibly accelerate the process of consolidation that is
currently under way among the Italian municipal utilities. As for Enel, it
provided, jointly with Acciona, an update on the integration process of Endesa,
providing little new information on the impact of this transaction. Separately,
Enel and EDF finalised an agreement that had been under negotiation for several
years that gives Enel access to French power generation capacity, both nuclear
and thermal.

North America

The broader markets continued to be affected by recession concerns principally
driven by housing weakness and financial sector liquidity issues. During the
month, the Energy Bill was finally passed by the House and Senate and approved
by the President which included a $21 billion tax package as well as a renewable
electricity requirement. Energy commodities finished December higher with the
front-month crude contract rising 7.5% and the front-month natural gas contract
rising 3.7%.

The FOMC reduced the Fed Funds rate by 25bps on December 11th to 4.25% and also
reduced the discount rate by 25bps to 4.75%. A rate cut had been widely
anticipated, but there was some disappointment around the size of the discount
rate cut. Additionally, the FOMC's comments on current market conditions caused
further concerns among investors: "recent developments, including the
deterioration in financial market conditions, have increased the uncertainty
surrounding the outlook for economic growth and inflation." Following the FOMC
meeting, the Fed announced it would provide liquidity to the interbank markets
via new auction-style Term Auction Facilities which provide $20 billion of loans
biweekly. The Fed has promised to continue these as long as is necessary. The
ECB also provided a massive €350 billion of liquidity to the banking system.

Utility Week was held in NYC early in the month, with Exelon, Xcel and
FirstEnergy (which raised its dividend by 10%) hosting analyst meetings in NYC
and providing growth expectations. The successful IPO of Iberdrola Renovables
in Spain focused attention on whether FPL Group would follow suit with a partial
spin off of its wind division.

Independent power producers had an active month, with Dynegy providing 2008
guidance below expectations which pressured the stock. NRG underperformed
mid-month after its consent solicitation expired which jeopardized the holding
company structure; however, it makes stock repurchases more likely than
dividends. The tender offer was part of NRG's plan to move to a new holding
company structure that would have enabled the company to introduce a dividend.
Meanwhile a settlement was reached in Calpine's ongoing bankruptcy proceedings
with existing equity holders taking warrants. The various parties involved
continue to push towards an emergence from bankruptcy before an early February
expiration of favorable DIP financing.

One of the main pieces of company specific news centered on ITC's acquisition of
IP&L's transmission assets. ITC received approval from the Minnesota Public
Utility Commission thereby reversing an earlier administrative legal
recommendation which put the stock in a 13% freefall in November. ITC
subsequently recovered and closed on the IPL acquisition two days later. We look
forward to an update on the earnings accretion related to the acquisition, a
potential JV with AEP for a 765 kV line in Michigan and project opportunities in
Kansas.

In other company news, the Georgia PUC approved a three-year settlement with
Southern Company which raised rates by $99 million and creates an Environmental
Compliance Cost Recovery tariff (ECCR), allowing annual recover of $222 million
for three years. CenterPoint received a negative circuit court ruling in its
longstanding stranded cost true-up process, which raised the likelihood of a
prolonged appeal process and pressured the shares on the day.

ERCOT provided an update on the Texas reserve margins which projects 2010
reserve margins at 14.0% versus 8.2% in the prior forecast. This shift was the
result of additional plants coming on-line. While some noise was generated
around the report, we continue to believe that power markets in Texas and other
regions of the US will be capacity constrained in the next five years, providing
rate uplift.

On the regulatory front, Ohio's regulatory debate around the transition to
market rates after the current Rate Stabilization Plan continued without major
resolution. New York Governor Eliot Spitzer and Attorney General Andrew Cuomo
created some unwanted headlines by filing with the NRC to halt relicensing for
the Indian Point nuclear power plant. Subsequently, S&P came out and said that
opposition from the New York Governor and Attorney General in the relicensing of
Indian Point is an unfavorable event for Entergy's credit quality but would not
immediately affect the company's ratings. Potentially impacting CEG, the
Maryland Public Service Commission issued a report to the State Legislature
recommending that utilities enter into long term contracts for new generation in
the state. Special deal long term contracts designed outside of the wholesale
market would satisfy incremental demand with new plants although existing plants
would not receive the new 'incentive' prices; problematic for entrenched supply.

The news flow regarding nuclear project development continued, with FPL Group
receiving approval for a 400 Mw uprate to its Florida nuclear plant. Exelon
placed an order with GE-Hitachi for major components for a nuclear plant in
Texas (Exelon has not filed permits yet). An industry nuclear report raised some
concerns as the report highlighted the design application logjam at the Nuclear
Regulatory Commission, suggesting potential delays in the development of new
nuclear plants.

In other infrastructure developments, AEP and MidAmerican Energy Holdings Co.
completed the transaction establishing Electric Transmission Texas, LLC (ETT) as
a joint venture to build transmission projects within ERCOT. PG&E filed an
updated request with the California PUC for approval of its $600 million
advanced metering initiative. Dominion announced it will spend $500 million on
cooling towers at a coal facility to reduce water usage.

In M&A news, in addition to the approval of ITC's acquisition of IP&L's
transmission business discussed above, PSE&G announced that it would continue to
sell its international asset portfolio (Chilean distribution company) thereby
providing cash for share buybacks and debt pay down. PG&E announced its
intention to acquire a 25.5% stake in El Paso's Ruby Express pipeline project,
which will start in Wyoming and terminate at an Oregon interconnect. DTE Energy
announced the sale of core Barnett Shale natural gas acreage for $260 million
gross proceeds.

Japan

Investors in Japan have experienced a market sell down in the past few weeks due
to concerns about a potential US recession. In the utilities sector, the
environment has been harsh as fuel costs have continued to rise while the
regulator has not allowed much room for EPCOs to raise end user tariffs. With
the index hitting an 18-month low, we believe the market is oversold as the
Japanese economy is expected to continue its steady recovery trend in 2008. The
decoupling of the Japanese trade balance with the US market and double digit
export growth rates to Europe and Asian countries should continue to support the
trade balance growth in 2008.

Other Developed and Emerging Markets

The Hong Kong/China market experienced another volatile month in December.
Electricity consumption rose 15% in the first 11 months of 2007 in China and
full year growth is expected to be around 15%. Electricity demand growth
forecast for 2008 remains high at around 14%. In the meantime, the government
announced that it had closed down 14.4GW of small and inefficient coal-fired
power generation capacity in 2007 and that it will continue to implement the
policy in 2008. Currently, coal price negotiations are taking place between IPPs
and coal suppliers, and it is likely that the contract coal price will be raised
by 5%-10% for next year, while power generators are bargaining with the
regulator to obtain a 3% wholesale tariff increase in order to cover fuel cost
increases. Following the government's new energy policy, the first nuclear power
plant using 3G technology designed by Westinghouse will commence construction in
March 08 and is scheduled to be completed by Aug 2013. We are positive on the
power equipment makers in China as they will benefit from the construction of
alternative electricity generating facilities in the coming few years.

SP Ausnet withdrew its plans to acquire the ex-Alinta assets from its parent
Singapore Power citing the increasing cost of debt, although key shareholders
were not likely to have supported the transaction in any case. A recommendation
to remove retail electricity price caps in Victoria is currently under
consultation (due to end February 2008), however customers will see a 17%
increase in prices in January 08, positive for retailers such as AGL, Truenergy
and Infratil's retail subsidiary.

Special Situations

On 22nd November 2007, Airtricity announced it was commencing a sale of
Airtricity Holdings Limited, owner of its remaining European and Chinese
operations. This decision was taken following a comprehensive strategic review
following the sale of its North American portfolio to E.ON AG for an enterprise
value of approximately $1.4bn which was announced on 4th October 2007 and has
since closed.

On Friday 4th January, following a competitive auction process, Scottish and
Southern Energy PLC was announced as the winning bidder offering €1,080 million
for the equity and assuming €375 million of debt giving an overall enterprise
value of €1,455 million. This equates to an EV of €2.9million / MW of installed
and in construction capacity and compares well to recent transactions. Together
with the proceeds from the North America sale and following certain closing
adjustments, the full sales price is expected to be approximately €33/share. The
sale is subject to usual regulatory approvals and clearances and is expected to
close in 1Q 2008.

Airtricity Europe has over 300MW of capacity in operation, over 150MW currently
under construction and a significant pipeline. It has an Irish retail supply
business and employs over 300 persons in Ireland. The Airtricity brand will be
retained and will be a readily identifiable and distinct business unit within
SSE.

The Company invested in Airtricity in July 2006 at a price of €16.43 per share.
Ecofin has been an active Board member of Airtricity since its investment and
has witnessed the increasing acceptance of wind energy by mainstream utility
companies culminating in a number of recent sales in the sector. We are pleased
to support the sale of Airtricity to SSE and believe it optimal for all of the
company's stakeholders.

December also witnessed the stock market debut of Iberdrola Renewables (see
Europe section). In addition, The Chinese wind turbine manufacturer Goldwind
raised $244 million on the Shenzhen Stock Exchange to expand its production
capacity and invest in R&D. Goldwind's operations are predominantly based in
China where it has a 33% market share of China's wind power equipment market and
benefits from significant first mover advantage. China is forecast to have a 54%
increase in its wind capacity in the five years to 2010 - one of the fastest
rates in the world.

ITC Corp received approval from the Minnesota Public Utilities Commission and
successfully closed the transaction to purchase 6,800 miles of transmission
lines and stations in Iowa, Illinois, Minnesota and Missouri from Interstate
Power and Light. The Minnesota Public Utility Commission approval reversed an
Administrative Law Judge ruling in mid November which sent the stock down 13%.
It is expected that ITC will launch a road show to market equity/debt mid
January which we expect will generate high investor demand. During the road show
we look forward to updates on earnings accretion from the IPL acquisition,
progress on the joint venture with AEP for building a 765 KV line in Michigan
and developments in Kansas for cap-ex projects. Intermediate term, we anticipate
a Strategic Plan which will refresh cap-ex projections and provide a step
function revaluation of the stock.

Ecofin Water & Power Opportunities plc. Registered in England 4134479.
Registered Office: Springfield Lodge, Colchester Road, Chelmsford, Essex CM2
5PW, United Kingdom

This information is provided by RNS
The company news service from the London Stock Exchange
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