Power Income Fund. Renewable energy. Sustainable presence.

Transcription

1 Power Income Fund Renewable energy. Sustainable presence. Second Quarter 2005

2 MESSAGE TO UNITHOLDERS On behalf of the Board of Trustees, we are pleased to present the financial results of ( Innergex Power or the Fund ) for the second quarter of 2005 and the sixmonth period ended. Results The acquisitions of Windsor and Horseshoe Bend facilities in 2004 maintain their positive impact on the Fund s results. Actually, the earnings before interest, provision for income taxes, depreciation and amortization, investment income, exchange gains and noncontrolling interests ( EBITDA ) increased by 15% to $7.14 million, compared to the results of 2004, and the net income was higher by 9% compared to 2004 to stand at $3.28 million or $0.16 per unit. The growing results are mainly due to the addition of the two facilities as well as good water conditions. These two factors allowed the Fund to increase production by 17% to 147,534 MWhr, compared to the corresponding quarter of The increase in production as well as the rise in the electricity selling price resulted in gross revenues increase of 21% to $9.26 million, compared to It is important to note that the Windsor facility, acquired on April 27, 2004, had only 65 days of operation during the second quarter of For the sixmonth period, the 23% increase in the installed capacity due to the acquisitions of 2004 resulted in a 22% increase in gross revenues at $15.60 million and 17% in EBITDA at $12.02 million, compared to the corresponding period of The net income was $5.29 million, an increase of 14%, or $0.26 per unit, compared to the first sixmonth period of Net Distributable Cash and Distribution Payout Ratio Net distributable cash for the quarter was $5.28 million or $0.26 per unit, representing an increase of 9% and 2% respectively compared to For the sixmonth period, net distributable cash was $10.20 million or $0.49 per unit, representing an increase of 12% and 2% respectively compared to the corresponding period of The Fund s distribution payout ratios for the quarter and the sixmonth period stood at 92% and 96% respectively which confirms that the Fund generates more cash than necessary to ensure the distributions to its unitholders, and retains a portion of its distributable cash. In addition, the increase in reserve accounts which totalled $16.38 million as at also contributes to ensure the stability of the distributions to the unitholders in the future. Innergex Power intends to maintain a stable distribution to its unitholders while pursuing its selective acquisition strategy that allows the Fund to enhance its distributable cash. [Signed] Gilles Lefrançois, CA President and Chief Executive Officer Innergex Management Inc. Manager of the Fund [Signed] Jean La Couture, FCA Chairman of the Board of Trustees Innergex Power Trust August 2005

3 SUMMARY TABLE OF FACILITIES FACILITY INSTALLED CAPACITY (MW) EXPECTED ANNUAL PRODUCTION (GWHR) ELECTRICITY PURCHASER EXPIRY OF POWER PURCHASE AGREEMENT StPaulin HydroQuébec 2014 Windsor HydroQuébec 2016 Chaudière HydroQuébec 2019 Portneuf HydroQuébec 2021 Portneuf HydroQuébec 2021 Portneuf HydroQuébec 2021 Montmagny HydroQuébec 2021 Batawa OEFC (1) 2029 Horseshoe Bend Idaho Power Company 2030 TOTAL (1) Ontario Electricity Financial Corporation REMAINING WEIGHTED AVERAGE LIFE OF POWER PURCHASE AGREEMENTS 15.8 YEARS HIGHLIGHTS THREEMONTH PERIOD ENDED JUNE 30, 2005 THREEMONTH PERIOD ENDED JUNE 30, 2004 SIXMONTH PERIOD ENDED JUNE 30, 2005 SIXMONTH PERIOD ENDED JUNE 30, 2004 Power generated (MWhr) 147, , , ,420 Gross revenues $ 9,264,396 $ 7,669,757 $ 15,604,109 $ 12,839,111 EBITDA 7,140,081 6,198,761 12,015,311 10,248,495 Net income 3,279,067 3,004,294 5,287,055 4,641,439 Distributable cash from operating activities $ 6,429,786 $ 5,581,845 $ 10,605,069 $ 9,110,671 Net investments in levelization reserve (1,151,392 ) (749,061) (406,407 ) (24,378) Net distributable cash $ 5,278,394 $ 4,832,784 $ 10,198,662 $ 9,086,293 Net distributable cash per unit Distributions declared 4,877,822 4,518,011 9,755,644 8,758,541 Distributions declared per unit Distribution payout ratio 92% 93% 96% 96% 3

4 CONSOLIDATED BALANCE SHEETS June 30, 2005 (Unaudited) December 31, 2004 (Audited) ASSETS Current assets Cash and cash equivalents Receivables Current portion of reserve accounts Current portion of future income taxes Other current assets Reserve accounts Capital assets Intangible assets Future income taxes $ 5,208,274 4,196,420 3,187, , ,205 $ 9,077,432 3,580,118 3,427, , ,306 $ 13,197,138 $ 17,226,608 $ 13,187, ,678,434 68,671,063 3,850,523 $ 12,324, ,773,133 71,053,029 3,849,799 $ 260,584,616 $ 268,227,506 LIABILITIES AND UNITHOLDERS EQUITY Current liabilities Operating loan Accounts payable and accrued liabilities Distribution payable to unitholders $ 7,777,637 1,625,941 $ 465,152 10,954,878 1,608,391 Current portion of longterm debt 517, ,566 $ 9,920,983 $ 13,524,987 Longterm debt Future income taxes Noncontrolling interest $ 58,687,162 2,724,977 10,767,207 $ 58,692,076 2,545,437 10,505,681 Unitholders equity 178,484, ,959,325 $ 260,584,616 $ 268,227,506 See accompanying Notes to Unaudited Consolidated Financial Statements. 4

5 CONSOLIDATED STATEMENTS OF INCOME F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED J UNE 30 (UNAUDITED) ThreeMonth ThreeMonth SixMonth SixMonth Gross revenues $ 9,264,396 $ 7,669,757 $ 15,604,109 $ 12,839,111 Operating expenses 1,593,153 1,068,971 2,590,673 1,811,831 Operating income $ 7,671,243 $ 6,600,786 $ 13,013,436 $ 11,027,280 General and administrative expenses 531, , , ,785 Earnings before interest, provision for income taxes, depreciation and amortization, investment income, exchange gains, and noncontrolling interest ( EBITDA ) $ 7,140,081 $ 6,198,761 $ 12,015,311 $ 10,248,495 Interest on longterm debt 766, ,243 1,517,743 1,177,761 Depreciation and amortization 2,327,625 2,184,138 4,661,582 4,194,091 (Investment income) (130,747 ) (86,337 ) (261,520 ) (171,947 ) (Exchange gains) (10,349 ) (16,579 ) Income before provision for income taxes and noncontrolling interest $ 4,186,911 $ 3,464,717 $ 6,114,085 $ 5,048,590 Provision for income taxes Current (Recoverable) Future Income before noncontrolling interest 22, ,951 (10,490 ) 80,179 22, ,167 (10,490 ) 140,868 $ 460,988 $ 69,689 $ 565,504 $ 130,378 $ 3,725,923 $ 3,395,028 $ 5,548,581 $ 4,918,212 Income allocated to noncontrolling interest 446, , , ,773 Net income $ 3,279,067 $ 3,004,294 $ 5,287,055 $ 4,641,439 Weighted average number of trust units outstanding 20,646,867 19,314,959 20,646,867 18,836,113 Net income per trust unit $ 0.16 $ 0.16 $ 0.26 $ 0.25 See accompanying Notes to Unaudited Consolidated Financial Statements. 5

6 CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS EQUITY F OR THE S IXMONTH P ERIODS E NDED J UNE 30 (UNAUDITED) SixMonth SixMonth Unitholders capital account, at the beginning of period Issued trust units Issuance costs Number of Units Amount Number of Units Amount 20,646,867 $ 195,913,770 18,357,267 1,050,000 $ 169,427,161 12,337,500 (402,377 ) Unitholders capital account, at the end of period 20,646,867 $ 195,913,770 19,407,267 $ 181,362,284 Cumulative foreign currency translation adjustment, beginning of period Foreign currency translation adjustment $ (6,449 ) $ Cumulative foreign currency translation adjustment, end of period $ (6,449 ) $ Deficit, beginning of period $ (12,954,445 ) $ (3,790,405 ) Net Income 5,287,055 4,641,439 Distributions declared to unitholders (9,755,644 ) (8,758,541 ) Deficit, end of period $ (17,423,034 ) $ (7,907,507 ) Unitholders equity, end of period 20,646,867 $ 178,484,287 19,407,267 $ 173,454,777 See accompanying Notes to Unaudited Consolidated Financial Statements. 6

7 CONSOLIDATED STATEMENTS OF CASH FLOWS F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED J UNE 30 (UNAUDITED) ThreeMonth ThreeMonth SixMonth SixMonth CASH FLOWS FROM OPERATING ACTIVITIES : Net income Adjustments for: Depreciation of capital assets Amortization of intangible assets Provision for future income taxes Income allocated to noncontrolling interest Unrealized exchange losses Changes in noncash working capital $ 3,279,067 1,117,015 1,210, , ,856 45,423 (624,758 ) $ 3,004,294 1,036,265 1,147,873 80, ,734 (229,999 ) $ 5,287,055 2,233,112 2,428, , ,526 67,615 (3,440,145 ) $ 4,641,439 1,999,488 2,194, , ,773 (805,470 ) $ 5,913,164 $ 5,429,346 $ 7,380,800 $ 8,447,701 CASH FLOWS FROM FINANCING ACTIVITIES: Distributions paid to unitholders Net proceeds from issuance of trust units Reimbursement of operating loan Reimbursement of longterm debt $ (4,877,822 ) (465,152 ) (122,839 ) $ (4,419,695 ) 11,935,123 (113,153 ) $ (9,738,094 ) (465,152 ) (243,180 ) $ (8,660,225 ) 11,935,123 (113,153 ) $ (5,465,813 ) $ 7,402,275 $(10,446,426) $ 3,161,745 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of capital assets Business acquisition, net of cash acquired Net investments in levelization reserve Investments in other reserve accounts $ (16,569 ) (1,151,392 ) (108,136 ) $ (7,657,666 ) (749,061 ) (3,127,569 ) $ (181,249 ) (406,407 ) (215,876 ) $ (11,500 ) (7,657,666 ) (24,378 ) (3,238,455 ) $ (1,276,097 ) $(11,534,296 ) $ (803,532 ) $(10,931,999 ) Net (decrease) increase in cash and cash equivalents $ (828,746 ) $ 1,297,325 $ (3,869,158 ) $ 677,447 Cash and cash equivalents, beginning of period 6,037,020 2,910,579 9,077,432 3,530,457 Cash and cash equivalents, end of period $ 5,208,274 $ 4,207,904 $ 5,208,274 $ 4,207,904 Supplemental cash flow disclosure : Interest paid : $ 786,970 $ 666,509 $ 1,532,768 $ 1,198,956 See accompanying Notes to Unaudited Consolidated Financial Statements. 7

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED J UNE 30, 2005 (UNAUDITED) (the ''Fund'') is an unincorporated openended trust established on October 25, 2002, under the laws of the Province of Québec. An unlimited number of trust units may be issued pursuant to the trust indenture. The Fund began its operations on July 4, 2003 and has been established to indirectly acquire and own interests in renewable power generating facilities (the ''Facilities'') and to indirectly acquire loans relating to some of the Facilities. As at, the Fund indirectly owned interests in: i. Innergex, Limited Partnership which owns the three Portneuf facilities, the Chaudière facility and the SaintPaulin facility; ii. TrentSevern Power, Limited Partnership which owns the Batawa facility; iii. Innergex Montmagny, Limited Partnership which owns the Montmagny facility; iv. HydroWindsor, Limited Partnership which owns the Windsor facility; and v. Horseshoe Bend Hydroelectric Company which owns the Horseshoe Bend facility. Innergex Management Inc. (the Manager ) administers the Fund and manages Innergex Power Trust, a whollyowned subsidiary of the Fund, which indirectly owns the assets and investments of the Fund. The Manager also provides management services to the operators of the Fund Facilities. 1. Basis of Presentation: The interim consolidated financial statements included in this report reflect normal and recurring adjustments which are, in the opinion of the Fund s Manager, considered necessary for a fair presentation. These financial statements have been prepared in conformity with Canadian Generally Accepted Accounting Principles. The same accounting policies and methods of their application as described in the Fund s latest annual report have been used. However, these consolidated financial statements do not include all disclosures required under Canadian Generally Accepted Accounting Principles and accordingly should be read in conjunction with the consolidated financial statements and the notes thereto included in the Fund s latest annual report. The Fund s revenues are variable with each season and as a result, earnings of any one interim period should not be considered as indicative of results for an entire year. These interim financial statements have neither been audited nor reviewed by our external auditors. Some of the comparative figures have been reclassified to conform to the current year s presentation. 2. Accounting Policy: Accounts and operations concluded in foreign currency Transactions denominated in foreign currency are accounted for at prevailing exchange rate at the date of the transaction. The monetary assets or liabilities denominated in foreign currency are converted at the prevailing exchange rate at the balance sheet date. Unrealized exchange gains or losses on monetary assets or liabilities are included in the net income for the period. The Fund designates a portion of its US $ denominated debt as a hedge of its investment in its selfsustaining foreign subsidiary. The gain and loss on conversion on the portion of the debt designated as a hedge are deferred and presented in the balance sheet in the foreign currency translation adjustment as part of the unitholder s equity. The Fund maintains a documentation in proper form concerning this hedge. The Fund determines at each quarter if the hedge relation effectively compensates the gain or loss on conversion of its investment in its selfsustaining foreign subsidiary. 8

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED J UNE 30, 2005 (UNAUDITED) 3. Financial Instruments: During the quarter, the Fund entered into a swap transaction maturing in June 2015, fixing its exposure to variable interest rates on an additional amount of $5 million of longterm debt which increased the total amount of swap contracts outstanding to $20 million. The Fund also designates this interest swap contract as a hedge of the underlying debt. The contract for a notional amount of $5 million allows the Fund to pay a fixed rate of 4.09% increased by a margin until the maturity of the contract. As at, the fair market value of this contract was ($23,787). 4. Segmented Information: The Fund has operations in Canada and the United States. The information by geographic region is as follows: ThreeMonth ThreeMonth Period Ended SixMonth Period Ended SixMonth Period Ended GROSS REVENUES: Canada $ 8,160,545 $ 7,669,757 $ 13,965,615 $ 12,839,111 United States 1,103,851 1,638,494 $ 9,264,396 $ 7,669,757 $ 15,604,109 $ 12,839,111 December 31, 2004 CAPITAL ASSETS: Canada $ 155,433,465 $ 157,550,240 United States 6,244,969 6,222,893 $ 161,678,434 $ 163,773,133 INTANGIBLE ASSETS: Canada $ 66,302,084 $ 68,682,813 United States 2,368,979 2,370,216 $ 68,671,063 $ 71,053,029 9

10 MANAGEMENT S DISCUSSION AND ANALYSIS F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED J UNE 30, 2005 Overview (the Fund ) is an unincorporated openended income trust that indirectly owns nine hydroelectric power generating facilities with a total installed capacity of 80 MW. The facilities are operated and managed by Innergex Management Inc. (the Manager ) under longterm agreements with the Fund. The objective of the Fund is to distribute the resulting cash flows of the Fund to unitholders on a monthly basis. The following Management Discussion and Analysis dated August 9, 2005 should be read in conjunction with the accompanying unaudited consolidated financial statements of the Fund for the threemonth period ended June 30, 2005 and the notes thereto as well as the Fund s Annual Report for the year ended December 31, Key Performance Indicators The Fund measures its performance through key indicators that include power generated in megawatthours (MWhr), distributable cash from operating activities, net distributable cash, net distributable cash per unit and EBITDA defined as earnings before interest, provision for income taxes, depreciation and amortization, investment income, exchange gains and noncontrolling interest. These indicators are not measures recognized under Canadian Generally Accepted Accounting Principles ( GAAP ). Consequently, these measures might not be comparable to measures reported by other companies. The Fund believes that these measures constitute important additional information giving the reader an indication on the level of production, available distributable cash and the capacity of the Fund to meet its objectives of cash distributions to its unitholders. Seasonality The results of the Fund have a seasonal character due to the variations of water conditions from a quarter to another during a typical year. The Fund s facilities generally produce more electricity in the second quarter of the year thanks to a more important hydrology input. Operating Results The contribution of the Windsor and Horseshoe Bend facilities acquired in 2004 is the main factor feeding the growth of 2005 financial results. Actually, for the second quarter of 2005, the Fund had gross revenues of $9.26 million, or 21% more than the revenues of the corresponding quarter of Superior water conditions at the Chaudière facility and the addition of the last two acquisitions contributed to an increase in production of 17%, from 126,574 MWhr in 2004 to 147,534 MWhr in The average electricity selling price increased by the minimum of 3% as per our agreements with HydroQuébec compared to the corresponding period in Furthermore, thanks to the addition of Horseshoe Bend facility, the average electricity selling price for the Fund s facilities in aggregate stands at $61.02/MWhr, or 4% more than in Consequently, gross revenues for the sixmonth period were 22% higher than revenues of the corresponding period in 2004, totalling $15.60 million. These results reflect a production of 223,900 MWhr or 18% more than For the sixmonth period, the average electricity selling price rose to $67.35/MWhr, or 4% more than the corresponding period of For the threemonth and sixmonth periods, the Fund counted on the virtual energy from the Portneuf facilities. Indeed, HydroQuébec diverted a part of the Portneuf River to the Bersimis River and modulates water feed at the Portneuf facilities. Since then, the Fund receives a payment from HydroQuébec based on a 20year hydrology history, which ensures the stability and predictability of the revenues for 35% of the Fund s production. Operating Expenses The addition of the Windsor and Horseshoe Bend facilities to the Fund s projects portfolio also contributed to increase the operating expenses. They were $1.59 million for the second quarter of 2005 compared to $1.07 million for the same period of A second factor that contributed to the increase of the operating expenses was the repairs of the turbine blade positioning system at the Batawa facility at the end of June For the sixmonth period, the expenses totalled $2.59 million compared to expenses of $1.81 million for the same period in

11 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED J UNE 30, 2005 General and Administrative Expenses General and administrative expenses amounted to $0.53 million for the second quarter, compared to $0.40 million for the corresponding quarter of For the six month period, the general and administrative expenses were $1.00 million compared to $0.78 million for the same period in EBITDA For the quarter, EBITDA increased by 15% compared to the corresponding quarter of 2004 to stand at $7.14 million. EBITDA for the sixmonth period increased at $12.02 million or 17% more than the corresponding period in Interest Expenses The interest expenses on long term debt for the quarter increased at $0.77 million, compared to $0.64 million for the corresponding quarter in 2004, due to the additional debt assumed by the Fund following the purchase of the Windsor facility. The interest expenses have also increased compared to last year s sixmonth period to stand at $1.52 million, due to the additional debt assumed by the Fund following the purchase of the Windsor facility. The average interest rate for the second quarter was 5.08% compared to the average interest rate of 4.47% in For the sixmonth period, the average interest rate was 5.01% compared to the rate of 4.39% for the same period in In aggregate, 48% of the Fund s debt bears interest at a fixed rate or is hedged by fixed interest rate swap contracts. Net Income The net income follows EBITDA growth and stands at $3.28 million or 9% more than the net income of the second quarter of The net income per unit amounts to $ or 2% more than last year s corresponding quarter. The net income for the sixmonth period has also increased to stand at $5.29 million or 14% more than the corresponding period of The net income per unit amounts to $ or 4% higher than last year s corresponding period. The gain allocated to the noncontrolling interest into Holding Innergex LP stood at $0.45 million for the second quarter of 2005 compared to $0.39 million for the second quarter of 2004, and to $0.26 million for the first sixmonth period of 2005 compared to $0.28 million for the same period in The Fund saw its provisions for future income taxes increase at $0.44 million and $0.54 million for the second quarter and the first sixmonth period of 2005 respectively, following the acquisition of Horseshoe Bend facility. As at, the Fund had 20,646,867 units outstanding compared to 19,407,267 units outstanding as at June 30, There were no material capital expenditures at the facilities during the threemonth or sixmonth periods. Liquidity and Capital Resources For the quarter, cash flows from operating activities stood at $5.91 million compared to $5.43 million in For the sixmonth period, they totalled $7.38 million compared to $8.45 million for the corresponding period of As at, the Fund had cash and cash equivalents of $5.21 million. The working capital was $3.28 million representing a working capital ratio of 1.33:1, compared to the working capital of $3.70 million that represented a working capital ratio of 1.27:1 as at December 31, During the sixmonth period, the Fund s longterm debt, from which a portion is denominated in US dollars and converted in Canadian dollars for accounting purposes, remained stable at $59.20 million. At the end of the quarter, the Fund had also a renewable unused short term credit facility of $5 million, giving the Fund access to additional cash that can be used if needed. As at, the Fund s assets totalled $ million. The longterm debttoenterprise value ratio decreased from 18.0% as at December 31, 2004 to 17.3 % as at. 11

12 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED JUNE 30, 2005 The Fund calculates net distributable cash as follows: N ET DISTRIBUTABLE CASH ThreeMonth ThreeMonth SixMonth SixMonth Earnings before interest, provision for income taxes, depreciation and amortization, investment income, exchange gains and noncontrolling interest (EBITDA) $ 7,140,081 $ 6,198,761 $ 12,015,311 $ 10,248,495 Add (Deduct) : (Interest on long term debt) (766,641 ) (636,243 ) (1,517,743 ) (1,177,761 ) (Major maintenance reserve account) (108,136 ) (77,500 ) (215,876 ) (142,500 ) Investment income 130,747 86, , ,947 Realized exchange gains 55,772 84,194 (Current) Recoverable income taxes (22,037 ) 10,490 (22,337 ) 10,490 Distributable cash from operating activities $ 6,429,786 $ 5,581,845 $ 10,605,069 $ 9,110,671 (Deduct): Net investments in levelization reserve (1,151,392 ) (749,061 ) (406,407 ) (24,378 ) Net distributable cash $ 5,278,394 $ 4,832,784 $ 10,198,662 $ 9,086,293 Weighted average number of units outstanding 20,646,867 19,314,959 20,646,867 18,836,113 Net distributable cash per unit $ $ $ $ Distributions declared $ 4,877,822 $ 4,518,011 $ 9,755,644 $ 8,758,541 Distributions declared per unit $ 0,2363 $ $ $ Distribution payout ratio 92% 93% 96% 96% Distributable cash from operating activities which stood at $6.43 million was 15% higher than the results of the corresponding quarter in For the sixmonth period, distributable cash from operating activities increased at $10.61 million which was 16% higher than the results for the same period in These increases are mainly due to the acquisition of the two facilities in The table below summarizes the 2005 distributions to date D ISTRIBUTIONS Record Date Payment Date Amount Amount per Unit January 31, 2005 February 25, 2005 $1,625,940 $ February 28, 2005 March 24, 2005 $1,625,941 $ March 31, 2005 April 25, 2005 $1,625,941 $ Total, threemonth period ended March 31, 2005 $4,877,822 $ April 29, 2005 May 25, 2005 $1,625,940 $ May 31, 2005 June 23, 2005.$1,625,941 $ July 25, 2005 $1,625,941 $ Total, threemonth period ended $4,877,822 $ Total, sixmonth period ended $9,755,644 $ During the quarter, distributions declared to unitholders were $4.88 million or $ per unit. For the sixmonth period, distributions declared to unitholders amounted to $9.76 million or $ per unit, which in both cases represents a distribution of $0.945 per unit on an annual basis. 12

13 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED J UNE 30, 2005 Reserves As anticipated, the Fund invested $1.15 million in the levelization reserve and $0.11 million in the major maintenance reserve. Thus, as at, reserve accounts amounted to $16.38 million and are allocated as follows: Allocation of the Reserve Accounts Levelization Reserve $6.18 M $5.90 M $3.66 M $0.64 M Major Maintenance Reserve Horseshoe Bend Site Work Reserve Hydrology Reserve Segmented Information The Fund operates eight hydroelectric facilities in Canada and one in United States. The allocation of the gross revenues by geographic region for the second quarter and the sixmonth period of 2005 as well as the capital and intangible assets as at can be found below. Second Quarter $1.10 M; 12% Gross Revenues 6Month Period $1,64 M; 11% Capital and Intangible Assets as at June 30 $8.61 M; 4% United States Canada $8.16 M; 88% $13.96 M; 89% $ M; 96% Related Party Transactions The Manager The Manager offers services to the Fund and its subsidiaries under three agreements having initial terms of 20 years, namely a Management Agreement, an Administration Agreement, and a Services Agreement. For the quarter ended, the Manager was paid an amount of $0.27 million for the services rendered under the three agreements, including an amount of $0.03 million for incentive fees, compared to a total sum of $0.32 million, including acquisitions fees of $0.13 million as well as incentive fees of $0.01 million for the quarter ended. For the sixmonth period, the Manager received the sum of $0.55 million including incentives fees of $0.07 million compared to a sum of $0.49 million, including acquisition fees of $0.13 million as well as incentive fees of $0.01 million for the corresponding period in IHI Hydro Inc. IHI Hydro Inc. owns a minority interest in subsidiaries of the Fund. IHI Hydro Inc. is also indebted to another subsidiary of the Fund. The obligations of IHI Hydro Inc. are secured in part against assets of subsidiaries of the Fund. In consideration for allowing security on their assets, the subsidiaries are entitled to a guarantee fee currently equal to 10% of the annual capital and interest amounts paid by IHI Hydro Inc. (other than a portion of $3.0 million debt). The guarantee fee is payable until a date falling due between 2005 and 2009, depending on the facilities. For the quarters ended and 2004, the guarantee fee was $0.26 million and for the first sixmonth periods of 2005 and 2004, it amounted at $0.52 million, and was included as gross revenues in the statement of income. 13

14 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND S IXMONTH P ERIODS E NDED J UNE 30, 2005 Selected Quarterly Financial Information For the threemonth periods ended: Power generated (MWhr) June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, ,534 76,366 92,949 95, ,574 62, ,599 66,103 Gross revenues $9.3 M $6.3 M $6.5 M $5.8 M $7.7 M $5.2 M $6.7 M $4.1 M EBITDA $7.1 M $4.9 M $5.5 M $4.4 M $6.2 M $4.0 M $5.3 M $3.1 M Net income $3.3 M $2.0 M $2.8 M $1.5 M $3.0 M $1.6 M $3.2 M $1.3 M Net income per unit $0.16 $0.10 $0.14 $0.08 $0.16 $0.09 $0.18 $0.07 Distributable cash from operating activities $6.4 M $4.2 M $5.1 M $3.7 M $5.6 M $3.5 M $4.7 M $2.6 M Net (investments) withdrawals in levelization reserve $(1.2 M) $0.7 M $1.8 M $(0,8 M) $0.7 M $1.4 M Net distributable cash $5.2 M $4.9 M $5.1 M $5.5 M $4.8 M $4.2 M $4.7 M $4.0 M Net distributable cash per unit $ $ $ $ $ $ $ $ Distributions declared $4.9 M $4.9 M $4.8 M $4.5 M $4.5 M $4.2 M $4.2 M $4.1 M Distributions declared per unit $ $ $ $ $ $ $ $ Distribution payout ratio 92% 99% 96% 83% 93% 100% 90% 100% Risk Management Interest Rates The Manager reduced the Fund s risk of an unforeseen upward movement in shortterm interest rates by entering into swap transactions with a major Canadian bank. This strategy allowed the Manager to effectively fix the interest rate on 25% of the Fund s consolidated longterm debt until September 2007 and 8% until In addition, the interest rate on approximately 15% of the consolidated longterm debt of the Fund is fixed until Exchange Rate The Manager reduced the risks incurred by the Fund regarding the variations of exchange rates on its investment in its American subsidiary by converting a portion of its long term debt into US dollars. Risks and Uncertainties For an overview of the risks and uncertainties associated with the conduct of the Fund s business, reference is made to the Risk and Uncertainties section found in the Fund s Annual Report for the period ended December 31, It is the view of the Manager that the risk factors discussed in the Annual Report have remained substantially unchanged. Outlook The Manager believes that the Fund will continue to generate stable operating cash flow. The financial results of the Fund remain in line with our expectations. Forwardlooking Statements Investors should take note that certain statements in this Management s Discussion and Analysis are forwardlooking and may not give full weight to all of the potential risks and uncertainties. Forwardlooking statements are subject by their nature to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the forwardlooking statements. Any forwardlooking statements speak only as of the date made. The Fund is not undertaking to update any forwardlooking statements. 14

15 INVESTOR INFORMATION Transfer Agent, Registrar and Trustee: National Bank Trust Inc. 1100, University Street, 9th floor, Montreal, Quebec H3B 2G7 Investors Relations: Jean Trudel, Vice President, Finance or Michel Letellier, Executive Vice President and Chief Financial Officer Innergex Management Inc. Exchange Listing: s units are listed on the Toronto Stock Exchange ( TSX ) and trade under the symbol IEF.UN. POWER INCOME FUND 1111, SaintCharles Street West East Tower, Suite 1255 Longueuil, Quebec J4K 5G4 Telephone : (450) Fax : (450) info@innergex.com