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Ecofin Water & Power Opportunities Plc

March 2011 Review

In March, the net assets attributable to the Company's Ordinary Shares rose by 1.5% and the total net assets of the Company, including those attributable to its Zero Dividend Preference Shares, rose by 1.4%. In comparison, the FTSE All Share index declined by 1.3%, the Euro Stoxx index rose by 1.3% and the US S&P 500 index rose by 1.3%, all in sterling terms. In the utilities sector, the FTSE Utilities index declined by 0.3%, the Euro Stoxx Utilities index rose by 1.0% and the US S&P 500 Utilities index rose by 1.2%, all in sterling terms. Over the course of the month, sterling declined by 1.4% against the US dollar and declined by 3.9% against the Euro.

Pan-European utilities were down 3.3% for the month and the European market was down 3.7% in March. Nuclear stocks were severely affected by the Fukushima accident in Japan. Our positions in regulated utilities proved defensive in such a context. We remain exposed to commodity strength through names with a high fixed cost base that are able to pass through power price increases to their customer base. The French environmental groups have suffered from the announcement that they would pay their dividends partly in scrip, however, we still believe in such business models. We continue to play Infrastructure groups which benefit from the relative strength in the Northern European economies.

The S&P 500 Utilities index was slightly down in March, as was the broad S&P 500 index. The relatively flat performance of the broader markets belies the volatility experienced following the earthquake and subsequent nuclear crisis in Japan as well as the conflict in Libya. Utilities underperformed again in March, while energy continues to outperform the general market. Local distribution companies, small/mid cap utilities and water utilities were the better performers in March while integrated utilities lagged given the combination of nuclear concerns and proposed EPA air regulations which were perceived to be less onerous on coal plants than previously anticipated. We maintain a cautious pro-cyclical bias in North America although Middle Eastern political unrest and high oil prices remain issues, as do higher interest rate concerns. In terms of the utility sector, the Fukushima Daiichi crisis has increased the re-licensing risk for some US nuclear facilities as the Nuclear Regulatory Commission is conducting a thorough safety review. Natural gas still has short term issues given the abundance of shale supply, but the long-term outlook is supported by several promising demand trends (coal plant retirements, export opportunities, pressure on nuclear facilities and increased petrochemical demand). We are constructive on natural gas and natural gas liquids infrastructure as a result. 

Chinese March Purchasing Managers' Index (PMI) rose to 53.4 from 52.2 in February and 52.9 in January. Both manufacturing and non-manufacturing PMIs point to a recovery of growth momentum and an easing of inflationary pressure. Pressure for monetary tightening should taper off in the coming months. China trade data was generally positive for the equity markets in the first quarter.

Premier WEN Jiapao hosted a State Council meeting to review China's nuclear policy after the Fukushima accident in Japan. The meeting decided to suspend the approval of all new nuclear power plants and to start a comprehensive safety review of all nuclear plants under construction. Apparently the nuclear target for 2020 is also under discussion for possible revision. This news resulted in a sell off in power equipment manufacturers. We are increasingly confident about wind and solar, however, as their outlook should improve due to concerns regarding nuclear macro risks.

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