Last printed 28/07/2008 4:22:00 PM Quarter_2008_Q2_V6.doc. Innergex Power Income Fund

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1 Last printed 28/07/2008 4:22:00 PM Quarter_2008_Q2_V6.doc Innergex Power Income Fund Second Quarter Report 2008

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3 Summary Table of Facilities Facility Percentage Owned Installed Capacity (MW) Expected Annual Production (MWhr) Electricity Purchaser Expiry of Power Purchase Agreement SaintPaulin % ,082 HydroQuébec 2014 Windsor % ,000 HydroQuébec 2016 Chaudière % ,651 HydroQuébec 2019 Portneuf % ,822 HydroQuébec 2021 Portneuf % ,496 HydroQuébec 2021 Portneuf % ,379 HydroQuébec 2021 Montmagny % 2.1 8,000 HydroQuébec 2021 Rutherford Creek % ,000 BCHPA (1) 2024 Batawa % ,938 OEFC (2) 2029 Horseshoe Bend % ,800 Idaho Power Company 2030 BaiedesSables 38.0 % 41.6 (3) 113,360 (3) HydroQuébec 2026 AnseàValleau 38.0 % 38.2 (3) 113,240 (3) HydroQuébec 2027 TOTAL ,768 (1) British Columbia Hydro and Power Authority (2) Ontario Electricity Financial Corporation (3) Represents the percentage of the facilities owned by the Fund Faits saillants REMAINING WEIGHTED AVERAGE LIFE OF POWER PURCHASE AGREEMENTS 15.9 YEARS Highlights Power generated (MWhr) 244, , , ,919 Gross operating revenues $ 15,804,751 $ 12,239,364 $ 29,401,672 $ 19,370,769 EBITDA $ 12,755,376 $ 9,741,413 $ 23,643,559 $ 14,926,416 Net earnings (net loss) $ 7,507,371 $ (41,458,353 ) $ 6,746,378 $ (40,520,875 ) Net distributable cash $ 8,302,806 $ 6,573,481 $ 13,743,675 $ 10,821,216 Net distributable cash per trust unit $ $ $ $ Distributions declared $ 7,348,129 $ 5,954,042 $ 14,696,257 $ 11,908,085 Distributions declared per trust unit $ $ $ $ Distribution payout ratio 89% 91% 107% 110% Innergex Power Income Fund 2008 Second Quarter Report 2

4 Consolidated Financial Statements Consolidated Balance Sheets (Unaudited) December 31, 2007 (Audited) Assets Current assets Cash and cash equivalents Accounts receivable Funds held in trust Shortterm portion of reserve accounts Other current assets $ 7,030,613 8,759,346 1,563, ,614 3,098,086 $ 12,150,357 20,888,600 1,822, ,291 2,396,062 $ 21,284,680 $ 38,157,450 Reserve accounts Property, plant and equipment Intangible assets Derivative financial instruments (Note 4) Future income tax assets Goodwill (Note 3a) $ 14,927, ,644, ,865,010 7,379,681 2,705,382 13,018,583 $ 14,258, ,672, ,677,761 7,109,119 2,680,644 $ 541,824,600 $ 547,555,957 Liabilities and Unitholders Equity Current liabilities Accounts payable and accrued liabilities Distributions payable to unitholders Demand notes Derivative financial instruments (Note 4) Current portion of longterm debt Future income tax liabilities $ 9,260,205 2,449,376 1,280,946 2,471, ,556 $ 13,454,194 2,364,604 14,008, ,276 4,500,563 $ 16,449,269 $ 34,858,204 Derivative financial instruments (Note 4) Longterm debt (Note 6) Asset retirement obligations Future income tax liabilities Minority interest (Note 3a) Unitholders equity Commitment (Note 11) $ 3,140, ,419, ,952 78,609, ,340,095 $ 1,251, ,013, ,352 59,923,679 14,388, ,288,745 $ 541,824,600 $ 547,555,957 See accompanying notes to unaudited consolidated financial statements. Innergex Power Income Fund 2008 Second Quarter Report 3

5 Consolidated Financial Statements Consolidated Statements of Income (unaudited) Gross operating revenues $ 15,804,751 $ 12,239,364 $ 29,401,672 $ 19,370,769 Operating expenses 2,194,659 1,571,515 4,082,958 2,946,842 Operating income $ 13,610,092 $ 10,667,849 $ 25,318,714 $ 16,423,927 General and administrative expenses 854, ,436 1,675,155 1,497,511 Earnings before interest, provision for income taxes, depreciation and amortization, other revenues and expenses and minority interest (EBITDA) $ 12,755,376 $ 9,741,413 $ 23,643,559 $ 14,926,416 Interest on longterm debt 3,177,785 1,671,654 6,248,530 3,356,563 Depreciation and amortization 5,124,937 3,110,807 10,225,201 6,224,739 Other (revenues) and expenses (Note 8) (1,615,540) (1,589,407 ) 1,665,149 (2,276,532 ) Earnings before provision for income taxes and minority interest $ 6,068,194 $ 6,548,359 $ 5,504,679 $ 7,621,646 Provision for income taxes Income taxes payable Future income taxes Earnings (loss) before minority interest $ 316,157 (2,140,953) $ 205,469 47,183,037 $ 409,269 (2,580,717 ) $ 160,259 47,262,706 $ (1,824,796) $ 47,388,506 $ (2,171,448 ) $ 47,422,965 $ 7,892,990 $ (40,840,147) $ 7,676,127 $ (39,801,319 ) Earnings allocated to minority interest 385, , , ,556 Net earnings (net loss) $ 7,507,371 $ (41,458,353) $ 6,746,378 $ (40,520,875 ) Weighted average number of outstanding trust units 29,404,276 24,679,867 29,404,276 24,679,867 Net earnings (net loss) per trust unit $ 0.26 $ (1.68) $ 0.23 $ (1.64 ) See accompanying notes to unaudited consolidated financial statements. Innergex Power Income Fund 2008 Second Quarter Report 4

6 Consolidated Financial Statements Consolidated Statements of Comprehensive Income (unaudited) Net earnings (net loss) $ 7,507,371 $ (41,458,353 ) $ 6,746,378 $ (40,520,875 ) Translation adjustment (37) (10,208 ) 1,229 (10,310 ) Comprehensive income $ 7,507,334 $ (41,468,561 ) $ 6,747,607 $ (40,531,185 ) Consolidated Statements of Changes in Unitholders Equity (unaudited) Number of trust units at beginning and end 29,404,276 24,679,867 Unitholders capital account $ 309,681,275 $ 248,070,369 Deficit at beginning $ (84,482,827) $ (35,336,063 ) Cumulative effect of changes in accounting policies on prior years 3,419,356 Restated deficit $ (84,482,827) $ (31,916,707 ) Net earnings (net loss) Distributions declared to unitholders 6,746,378 (14,696,257) (40,520,875 ) (11,908,085 ) Deficit at end $ (92,432,706) $ (84,345,667 ) Accumulated other comprehensive income at beginning $ 90,297 $ 7,405 Translation adjustment 1,229 (10,310 ) Accumulated other comprehensive income at end $ 91,526 $ (2,905 ) Unitholders equity at end $ 217,340,095 $ 163,721,797 See accompanying notes to unaudited consolidated financial statements. Innergex Power Income Fund 2008 Second Quarter Report 5

7 Consolidated Financial Statements Consolidated Statements of Cash Flows (unaudited) Cash flows from operating activities Net earnings (net loss) Adjustments for: Depreciation of property, plant and equipment Amortization of intangible assets Accretion expense on asset retirement obligations Provision for future income taxes Unrealized (gain) loss on derivative financial instruments Earnings allocated to minority interest Unrealized foreign exchange (gain) loss Effect of exchange rate fluctuations Change in noncash working capital items (Note 9) $ 7,507,371 2,843,160 2,281,777 17,300 (2,140,953 ) (541,178 ) 385,619 (24,107 ) (4,076 ) (3,667,679 ) $ (41,458,353 ) 1,484,603 1,626,204 47,183,037 (1,140,499 ) 618,206 (257,926 ) (107,586 ) (1,036,451 ) $ 6,746,378 5,658,160 4,567,041 34,600 (2,580,717 ) 1,088, ,749 70,736 52,301 (2,365,568 ) $ (40,520,875 ) 2,970,911 3,253,828 47,262,706 (1,580,173 ) 719,556 (290,909 ) (118,244 ) (1,384,424 ) $ 6,657,234 $ 6,911,235 $ 14,200,781 $ 10,312,376 Cash flows from financing activities Distributions paid to unitholders Proceeds from issue of longterm debt (Note 6) Financing fees (Note 6) Repayment of longterm debt (Notes 5 & 6) $ (7,348,129 ) 70,800,000 (842,690 ) (56,873,795 ) $ (5,954,042 ) (144,795 ) $ (14,611,485 ) 70,800,000 (842,690 ) (57,974,355 ) $ (11,908,085 ) (286,644 ) $ 5,735,386 $ (6,098,837 ) $ (2,628,530 ) $ (12,194,729 ) Cash flows from investing activities Additions to property, plant and equipment Business acquisitions (Note 3a) Net investments in the Levelization reserve Investments in other reserve accounts $ (1,647,517 ) (14,431,924 ) (672,055 ) (240,492 ) $ (19,617 ) (1,067,033 ) (142,760 ) $ (1,666,216 ) (14,431,924 ) (112,701 ) (481,154 ) $ (148,500 ) (273,892 ) (287,750 ) $ (16,991,988 ) $ (1,229,410 ) $ (16,691,995 ) $ (710,142 ) Net change in cash and cash equivalents $ (4,599,368 ) $ (417,012 ) $ (5,119,744 ) $ (2,592,495 ) Cash and cash equivalents at beginning 11,629,981 5,139,025 12,150,357 7,314,508 Cash and cash equivalents at end $ 7,030,613 $ 4,722,013 $ 7,030,613 $ 4,722,013 Cash and cash equivalents are comprised of: Cash Shortterm investments $ 6,830, ,770 $ 1,928,985 2,793,028 $ 6,830, ,770 $ 1,928,985 2,793,028 $ 7,030,613 $ 4,722,013 $ 7,030,613 $ 4,722,013 Supplemental cash flow information: Interest paid Income taxes paid Unpaid additions to property, plant and equipment $ 3,584,453 $ 195,472 $ 2,407,939 $ 1,710,024 $ 37,233 $ 979,485 $ 6,825,773 $ 494,461 $ 2,407,939 $ 3,424,598 $ 218,998 $ 979,485 See accompanying notes to unaudited consolidated financial statements. Innergex Power Income Fund 2008 Second Quarter Report 6

8 Notes to Consolidated Financial Statements For the threemonth and sixmonth periods ended (unaudited) Innergex Power Income Fund (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, which began operations on July 4, 2003, was established to indirectly acquire and own interests in renewable powergenerating facilities (the ''Facilities'') and to indirectly acquire loans relating to some of the Facilities. As at, the Fund indirectly held interests in: (i) Innergex, Limited Partnership ("Innergex LP"), 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; (v) Horseshoe Bend Hydroelectric Company, which owns the Horseshoe Bend facility; (vi) Rutherford Creek Power, Limited Partnership, which owns the Rutherford Creek facility; (vii) Innergex BDS, Limited Partnership ( BDS LP ), which as undivided joint owner owns 38% of the BaiedesSables wind farm; (viii) Innergex AAV, Limited Partnership ( AAV LP ), which as undivided joint owner owns 38% of the AnseàValleau wind farm. Innergex Renewable Energy Inc., formerly known as Innergex Management Inc. (the Manager ), administers the Fund and manages Innergex Power Trust ("IPT"), 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 s 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 accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The same accounting policies and methods of application as described in the Fund s latest annual report have been used, with the exception of the changes described in Note 2. 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 vary by season and, as a result, the earnings of interim periods should not be considered indicative of results for an entire year. These interim financial statements have neither been audited nor reviewed by our external auditors. 2. Changes in Accounting Policies CICA Handbook Section 1535, Capital Disclosures, requires an entity to disclose information that enables users of its financial statements to evaluate its objectives, policies and processes for managing capital. This Section applies to interim and annual financial statements for fiscal years beginning on or after October 1, The application of this Section has required the presentation of additional information (see Note 7). CICA Handbook Section 3064, Goodwill and Intangible Assets, replaces Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section, issued in February 2008, will be applicable to financial statements relating to fiscal years beginning on or after October 1, Accordingly, the Fund will adopt the new standard for its fiscal year beginning January 1, The Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profitoriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section The Fund is currently assessing the future impact of this new standard on its consolidated financial statements. The Accounting Standards Board of Canada has announced that accounting standards in Canada, as used by public companies, will be converged to International Financial Reporting Standards ( IFRS ). The official changeover date from current GAAP to IFRS is for interim and annual financial statements relating to fiscal years beginning on or after January 1, The Fund will convert to these new standards according to the timetable set with these new rules. The Fund is currently assessing the future impact of these new standards on its consolidated financial statements. Innergex Power Income Fund 2008 Second Quarter Report 7

9 Notes to Consolidated Financial Statements For the threemonth and sixmonth periods ended (unaudited) 3. Business acquisitions a) Acquisition of IHI Hydro Inc. ("IHI") On May 29, 2008, the Fund acquired 100% of the outstanding shares of IHI for a consideration of $14,431,924 including acquisition costs of $323,750. This acquisition was financed through a bank loan. The principal asset of IHI was an ownership interest of % in Innergex Holding, Limited Partnership ( Innergex Holding LP ). IPT already owned the other % of Innergex Holding LP, which was fully consolidated in the financial statements of the Fund with a minority interest in counterpart entries. Innergex Holding LP has a 90% ownership interest in Innergex LP. The acquisition of IHI has been accounted for by the purchase method of accounting as at May 29, The results of IHI have been consolidated with the results of IPT since that date. In the allocation of the purchase price, the minority interest, consisting of the ownership interest that IHI had in Innergex Holding LP, has been eliminated. Furthermore, the purchase portion of the assets already included in the consolidation have been revalued at their fair market value at the date of acquisition and the income taxes related to the assets purchased have been recognized. The total purchase price was initially allocated as follows: Allocation of the IHI Purchase Price Net working capital $ 372,109 Property, plant and equipment 7,188,376 Goodwill 13,018,583 Minority interest 15,318,747 Future income tax liabilities (including a shortterm portion of $987,556) (21,465,891) $ 14,431,924 Offsetting of IHI s loans IPT is a creditor of IHI; distributions received by IHI from its interest in Innergex Holding LP are used to service IHI s loans. Since these loans are now between Fund subsidiaries, they are eliminated during consolidation. Until its acquisition by the Fund, IHI s loan amounts were offset against IHI s interest in Innergex Holding LP, which was accounted for as debt owed to IHI. b) Acquisition of AAV LP and BDS LP During the quarter, an adjustment was made to the purchase price allocation of AAV LP and BDS LP. The Fund revised its allocation of the purchase price and made the following adjustments: a $282,621 increase in property, plant and equipment, an $842,985 increase in future income tax liabilities and a $294,636 drop in intangible assets. Furthermore, accounts payable and accrued liabilities increased $662,621, accounts receivable increased $380,000, and demand notes payable to the vendor, Innergex II Income Fund, a subsidiary of the Manager, fell $1,137,621. During the quarter, the Fund reimbursed $11,590,000 of its demand notes to Innergex II Income Fund, bringing the demand note balance to $1,280, Derivative Financial Instruments During the second quarter, the Fund cancelled a bond forward contract in a notional amount of $32,500,000. An amount of $830,700 was received and recorded as a realized gain on a derivative financial instrument. During this second quarter, the Fund entered into two swap transactions, one for $52,600,000 and one for $30,000,000, both maturing in June For all practical purposes these transactions will enable the Fund to limit its exposure to variable interest rates, paying fixed interest rates of 4.27% and 4.41%, respectively, plus an applicable margin on those rates until maturity. Innergex Power Income Fund 2008 Second Quarter Report 8

10 Notes to Consolidated Financial Statements For the threemonth and sixmonth periods ended (unaudited) 4. Derivative Financial Instruments (Cont d) These two new swap contracts brought the total amount of swap contracts to $153,682,000, as follows: Notional Amount of Interest Rate Hedge Agreements December 31, 2007 Interest rate swaps, rates ranging from 3.96% to 4,09%, plus an applicable credit margin, expiring in June 2015 $ 15,000,000 $ 15,000,000 Interest rate swap, 4.27%, plus an applicable credit margin, expiring in November ,000,000 3,000,000 Amortizing interest rate swap, 4.93%, plus an applicable credit margin, amortized until March ,082,000 54,025,000 Interest rate swap, 4.41%, plus an applicable credit margin, expiring in June ,000,000 Interest rate swap, 4.27%, plus an applicable credit margin, expiring in June ,600,000 $ 153,682,000 $ 72,025, Bank Credit Facility During the second quarter of 2008, certain terms of the bank credit facility were renegotiated. This facility, which consists of an operating loan maturing in May 2013, was reduced from $15,000,000 to $10,000,000 as part of longterm debt refinancing. The credit facility is secured by a firstranking hypothec covering IPT's assets and various security interests granted by some of its subsidiaries. Use of this facility is subject to certain financial and nonfinancial covenants. Advances made under this facility take the form of bankers' acceptances, primerate advances or letters of credit. The interest charged on the bankers' acceptances is calculated at the prevailing bankers' acceptance rate plus an applicable credit margin based on the ratio of consolidated total debt to adjusted consolidated earnings before interest, taxes, depreciation and amortization recorded by certain IPT subsidiaries. The interest charged on prime rate advances is equivalent to the bank's prime rate plus an applicable credit margin established on the basis of this same ratio. As at, no amounts were outstanding under this facility ($3,200,000 as at December 31, 2007). An amount of $832,200 ($3,382,200 as at December 31, 2007) under the bank credit facility was used to secure a letter of credit, bringing the unused portion of the available credit facility to $9,167,800. Innergex Power Income Fund 2008 Second Quarter Report 9

11 Notes to Consolidated Financial Statements For the threemonth and sixmonth periods ended (unaudited) 6. Long term debt Longterm debt December 31, 2007 Bank credit facility (Note 5) Bankers' acceptances, 5.35%, maturing in January 2008 $ 3,200,000 Facility 1 Primerate advances, 4.88% (6.00% in 2007) Bankers' acceptances, 4.27%, maturing in July 2008, renewable until May 2013 (5.35% in 2007) LIBOR advances, 3.61%, US$5,000,000, maturing in July 2008, renewable until May 2013 (5.73%, US$5,000,000 in 2007) Facility 2 $ 93,000 51,200,000 5,098,500 93,000 33,000,000 4,956,500 LIBOR advances at an average rate of 3.90%, US$8,872,875, maturing in September 2008, renewable until May 2013 (5.79%, US$8,872,875 in 2007) 9,047,670 8,795,681 Facility 3 Bankers' acceptances, 4.28%, maturing in July 2008, renewable until May 2013 (nil in 2007) 52,600,000 Term loans 8.25% fixedrate loan maturing in % fixedrate loan maturing in 2024 Floatingrate loan maturing in 2026 Floatingrate loan maturing in 2026 Deferred financing costs 7,603,840 50,000,000 53,082,000 (834,372 ) $ 227,890,638 7,915,048 50,000,000 53,528,464 54,025,000 $ 215,513,693 Current portion of longterm debt (2,471,186 ) (4,500,563 ) $ 225,419,452 $ 211,013,130 Facilities 1, 2 and 3 During the quarter, certain terms of Facilities 1 and 2 were renegotiated and Facility 3 was added. Financing costs of $842,690 were incurred and subtracted from longterm debt, amortized using the effective interest method over the expected term of the debts concerned. Facility 1 consists of a term loan whose maturity has been extended to May This facility is secured by firstranking hypothecs on all IPT's assets and by a hypothecsecured guarantee granted on their assets by some of its subsidiaries. Use of this facility is subject to certain financial and nonfinancial covenants. Advances are made in the form of bankers' acceptances ($51,200,000, $33,000,000 before), primerate advances ($93,000, unchanged) or LIBOR advances (US$5,000,000, unchanged), each with an applicable credit margin based on the ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization recorded by certain IPT subsidiaries. Facility 2 consists of a term loan granted to a US subsidiary of the Fund, maturing on the same date as Facility 1. This facility is guaranteed by a security interest granted by IPT and, consequently, benefits from the same collateral as Facility 1. In addition, the borrower granted a hypothec on the shares it holds in its US subsidiary. Use of this facility is subject to certain financial and nonfinancial covenants. Advances are made in the form of LIBOR advances (US$8,872,875, unchanged), plus an applicable credit margin based on the ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization recorded by certain IPT subsidiaries. Innergex Power Income Fund 2008 Second Quarter Report 10

12 Notes to Consolidated Financial Statements For the threemonth and sixmonth periods ended (unaudited) 6. Long term debt (Cont d) Facility 3 consists of a term loan to a Fund subsidiary to mature on the closer of two dates: May 31, 2013 or, in the event of a default by IPT, 365 days following the date on which the lenders declare bankers' credit facilities 1 and 2 payable. This facility is guaranteed by a security interest granted by IPT and, consequently, benefits from the same collateral as Facility 1, in addition to collateral on this subsidiary's assets. Use of this facility is subject to certain financial and nonfinancial covenants. Advances are made in the form of bankers' acceptances ($52,600,000), plus an applicable credit margin based on the ratio of consolidated total debt to adjusted consolidated earnings before interest, taxes, depreciation and amortization recorded by certain IPT subsidiaries. Interest on primerate advances is paid monthly, whereas interest on bankers acceptances and LIBOR advances is paid upon renewal. The total amount outstanding under Facility 1 may not exceed CA$59,300,000 and the total amount outstanding under Facility 2 may not exceed CA$12,000,000. As at, the Canadian dollar equivalent of the total amount outstanding under Facilities 1 and 2 was $56,400,000 and $9,000,000, respectively. The bank credit facility and Facilities 1, 2 and 3 include crossdefault provisions and are secured by assets with a carrying value of approximately $327,000,000. These facilities also include certain financial and nonfinancial covenants that may restrict the use of the borrower s cash flows. Term loan As part of the acquisition of BDS LP, the Fund assumed a $53,528,464 debt bearing interest at a floating rate and maturing in October This debt was secured by the assets of the borrower, BDS LP, by its partners' interests and by all other assets needed for project maintenance and operation. In the second quarter of 2008 the balance of the longterm debt, in an amount of $52,564,235, was paid from the proceeds of Facility 3. No changes have been made to the other term loans. 7. Capital Disclosures With respect to capital management, the Fund s primary objective is to ensure the stability and sustainability of the net distributable cash payable to its unitholders and, whenever possible, to increase the amount of net distributable cash per unit. The Fund seeks to achieve its objectives by: Maintaining the generating capacity and enhancing the operation of its hydroelectric facilities and wind farms; and Acquiring new electricitygenerating facilities. The Fund maintains its generating capacity by investing the necessary sums to maintain and continually upgrade its equipment. Following the acquisition of wind farm facilities, the Fund invests approximately $980,000 on an annual basis in a Major maintenance reserve account in order to fund any major plant repairs which may be required to preserve the Fund s generating capacity. The Fund determines the capital required, and its allocation between debt and equity, for an acquisition of new energygenerating facilities by considering the specific characteristics of stability and growth of each facility. This determination is made in order to increase the net distributable cash per unit while maintaining an acceptable level of indebtedness. The Fund has a Hydrology/Wind reserve account. This account could be used in the event that the net distributable cash for any given year is lower than expected, due to normal changes in hydrology or wind conditions or other unpredictable factors. Finally, the Fund has a Levelization reserve account, established to increase the net distributable cash for a certain number of years. Innergex Power Income Fund 2008 Second Quarter Report 11

13 Notes to Consolidated Financial Statements For the threemonth and sixmonth periods ended (unaudited) 8. Other (Revenues) and Expenses The item Other (revenues) and expenses includes the following: Other (Revenues) and Expenses Investment revenues Unrealized (gain) loss on derivative financial instruments Realized (gain) loss on derivative financial instruments Realized foreign exchange (gain) loss Unrealized foreign exchange (gain) loss $ (216,780 ) (541,178 ) (830,700 ) (2,775 ) (24,107 ) $ (198,132 ) (1,140,499 ) 7,150 (257,926 ) $ (505,478 ) 1,088,101 1,001,325 10,465 70,736 $ (415,245 ) (1,580,173 ) 9,795 (290,909 ) $ (1,615,540 ) $ (1,589,407 ) $ 1,665,149 $ (2,276,532 ) 9. Changes in Noncash Working Capital Items Accounts receivable Funds held in trust Other current assets Accounts payable and accrued liabilities Demand notes $ 8,233,244 (11,656 ) (472,716 ) 173,449 $ (1,147,780 ) 95,548 (640,215 ) 655,996 $ 12,964, ,119 (703,802 ) (3,294,956 ) $ (405,900 ) 79,138 (597,845 ) (459,817 ) (11,590,000 ) (11,590,000 ) $ (3,667,679 ) $ (1,036,451 ) $ (2,365,568 ) $ (1,384,424 ) 10. Segment Information The Fund has nine hydroelectric facilities and two wind farms in Canada, and one hydroelectric facility in United States. Gross operating revenues, property, plant and equipment, and intangible assets by geographic areas are as follows: Gross Operating Revenues Canada United States $ 14,859,314 $ 11,014,349 $ 28,166,180 $ 17,711, ,437 1,225,015 1,235,492 1,659,335 $ 15,804,751 $ 12,239,364 $ 29,401,672 $ 19,370,769 Innergex Power Income Fund 2008 Second Quarter Report 12

14 Notes to Consolidated Financial Statements For the threemonth and sixmonth periods ended (unaudited) 10. Segment Information (Cont d) Property, Plant and Equipment and Intangible Assets December 31, 2007 Property, plant and equipment Canada United States Intangible assets Canada United States $ 343,783,060 4,860,982 $ 341,863,607 4,809,036 $ 348,644,042 $ 346,672,643 $ 132,130,254 $ 136,952,992 1,734,756 1,724,769 $ 133,865,010 $ 138,677,761 The Fund has two reportable segments: hydroelectric production and wind power production. The Fund acquired the wind farms on December 6, Therefore, there were no reportable segments for the threemonth and sixmonth periods ended. The hydroelectric segment sells electricity generated by its hydroelectric facilities to public utilities. The wind power segment sells electricity generated by its wind farms to public utilities. The accounting policies for the reportable segments are identical to those described in the summary of significant accounting policies in the Fund's most recent annual report. The Fund evaluates the total return based on earnings before interest, provisions for income taxes, depreciation and amortization, other revenues and expenses and minority interest ( EBITDA ). The Fund s reportable segments conduct their operations using different means of production and types of activities managed by different teams, since each segment has different operating skill requirements. Reportable Segments Hydroelectric Production Wind Power Production Total Gross operating revenues from external clients $ 12,745,296 $ 3,059,455 $ 15,804,751 Operating expenses 1,754, ,425 2,194,659 Operating income $ 10,991,062 $ 2,619,030 $ 13,610,092 General and administrative expenses 602, , ,716 EBITDA $ 10,388,485 $ 2,366,891 $ 12,755,376 Gross operating revenues from external clients $ 21,395,741 $ 8,005,931 $ 29,401,672 Operating expenses 3,184, ,498 4,082,958 Operating income $ 18,211,281 $ 7,107,433 $ 25,318,714 General and administrative expenses 1,348, ,380 1,675,155 EBITDA $ 16,862,506 $ 6,781,053 $ 23,643,559 As at Longterm assets $ 338,088,308 $ 182,451,612 $ 520,539,920 Total assets $ 351,253,705 $ 190,570,895 $ 541,824,600 Acquisition of property, plant and equipment $ 21,854 $ $ 21,854 As at December 31, 2007 Longterm assets $ 320,447,355 $ 188,951,152 $ 509,398,507 Total assets $ 337,411,374 $ 210,144,583 $ 547,555,957 Innergex Power Income Fund 2008 Second Quarter Report 13

15 Notes to Consolidated Financial Statements For the threemonth and sixmonth periods ended (unaudited) 11. Commitment Separation Agreement As an undivided owner of a 38% interest in the BaiedesSables and AnseàValleau wind farms, the Fund is indirectly a party to a separation agreement that sets out the process to be followed if one of the owner asks for the separation of all the wind projects held in joint ownership. Following the completion of these two projects, the Separation Agreement allows any one of the coowners to request a separation of all the wind farm projects held in undivided joint ownership if the request is made within 60 days of total completion of the second project (the AnseàValleau wind farm). The Fund may not trigger application of the agreement without the Manager's agreement. If a separation request is presented, the Fund will become owner of the wind farm with a lower market value (either the BaiedesSables wind farm or the AnseàValleau wind farm). The parties will then each pay an amount to compensate for the difference in value. 12. Comparative Figures Some of the comparative figures have been reclassified in accordance with the current year s presentation. Innergex Power Income Fund 2008 Second Quarter Report 14

16 For the threemonth and sixmonth periods ended This Management s Discussion and Analysis ( MD&A ) was prepared as of August 6, OVERVIEW Innergex Power Income Fund (the Fund ) is an unincorporated openended income trust that owns ten hydroelectric power generating facilities and two wind farms, with a total net installed capacity of 210 MW. The hydroelectric facilities and wind farms are managed by Innergex Renewable Energy Inc. (the Manager ) under longterm agreements with the Fund. The objective of the Fund is to make monthly distributions of the cash flows it generates to its unitholders. Standard & Poor s Rating Service ( S&P ) has assigned a stability rating of SR2 ("stable, with a moderate distribution profile") to the Fund s units, indicating a very high level of cash distribution stability. The purpose of this MD&A is to provide the reader with an overview of the financial position, operating results, and cash flows of the Fund for the second quarter of 2008 and the sixmonth. This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements of the Fund for the second quarter and the six months ended, and the notes thereto, as well as the Fund s 2007 Annual Report. The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ( GAAP ). The Fund reports its results in Canadian dollars. Certain amounts included in this MD&A are rounded, to make reading easier. These rounded numbers may affect certain sums. EFFECTIVENESS OF CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING The President and Chief Executive Officer and the Vice President and Chief Financial Officer of the Manager have designed, or have caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that material information relating to the Fund, including its consolidated subsidiaries, is made known to the President and Chief Executive Officer and to the Vice President and Chief Financial Officer of the Manager by others within those entities, particularly during the period in which the interim filings are being prepared. INTERNAL CONTROL OVER FINANCIAL INFORMATION The President and Chief Executive Officer and the Vice President and Chief Financial Officer of the Manager have designed, or have caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance that the reliability of the financial reporting and the preparation of financial statements for external purposes is in accordance with generally accepted accounting principles. FORWARDLOOKING STATEMENTS In the interest of providing unitholders and potential investors with information regarding the future outlook of the Fund, this MD&A may contain forwardlooking statements, as defined by securities legislation. These forwardlooking statements express the estimates, forecasts, projections, expectations, and opinions of the Manager with regard to future events and results, as of the date of the present MD&A. These forwardlooking statements are subject to risks, uncertainties, and other important factors that could cause the Fund s actual performance to differ materially from that expressed in, or implied by, such forwardlooking statements. The significant risks and uncertainties that could cause actual results and future events to differ materially from current, stated expectations are reviewed in the Risks and Uncertainties section of this MD&A. Although the Manager believes that the expectations conveyed by the forwardlooking statements are based on relevant and reasonable concepts and hypotheses, there is a risk that such forwardlooking statements could prove to be incorrect. Readers of this MD&A are therefore advised not to unduly depend on such forwardlooking statements. All forwardlooking statements, whether written or orally attributable to the Fund or to a person acting on its behalf, are expressly subject to these cautionary statements. The Fund does not, in any way, undertake to update or revise these forwardlooking statements to take into consideration any events or circumstances subsequent to the date of this MD&A, or resulting from unforeseen events, unless required to do so by law. KEY PERFORMANCE INDICATORS The Fund measures its performance through key indicators, including the following: power generated in megawatthours (MWhr); net distributable cash; net distributable cash per trust unit; and EBITDA (earnings before interest, provision for income taxes, depreciation and amortization, other revenues and expenses and minority interest). Other revenues and expenses include investment revenues, realized or unrealized losses and gains on derivative financial instruments and realized or unrealized foreign exchange losses and gains. These indicators are not recognized measures under Canadian GAAP. Consequently, they may not be comparable to those presented by other issuers. The Fund nevertheless believes that these indicators are important, since they provide the reader with additional information about production, available cash and the Fund s ability to meet its cash distribution objectives to unitholders. Innergex Power Income Fund 2008 Second Quarter Report 15

17 For the threemonth and sixmonth periods ended SEASONALITY The Fund's results have a seasonal aspect due to variations in water and wind conditions from one quarter to the next in the course of a typical year. The second and fourth quarters of the year are generally when gross operating revenues are at their highest. Quarterly results should not be considered representative of the results of a full year. The complementary nature of production from hydroelectric facilities and wind farms mitigates seasonal variations. The following chart shows the expected annual production, the expected net distributable cash and the expected distributions to unitholders broken down by quarter for a typical year. The first and third quarters do not benefit from sufficient gross operating revenues to generate a level of net distributable cash equal to, or higher than, distributions to unitholders. This explains why the distribution payout ratio is normally higher for these quarters. However, during the second and fourth quarters, expected net distributable cash exceeds the distributions to unitholders; this usually results in a distribution payout ratio below 100% for these two quarters. A distribution payout ratio below 100% means that the Fund is in a position to accumulate cash and cash equivalents on the balance sheet. 15,0 14,0 13,0 12,0 11,0 10,0 9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 Seasonnality Profile for a Typical Year $ million Quarterly production (MWhr) MWhr Q1 Q2 Q3 Q4 Q = Quarter Net distributable cash ($ million) Distribution ($ million) OPERATING RESULTS Production periods (MWhr) (MWhr) Compared to Longterm Average (MWhr) Compared to the LongTerm Average SaintPaulin 16,550 14, % 15, % Portneuf ,363 45, % 50, % Chaudière 43,843 41, % 40, % Batawa 10,113 7, % 8, % Montmagny 2,803 2, % 3, % Windsor 8,136 7, % 7, % Rutherford Creek 55,202 61, % 63, % Horseshoe Bend 16,256 19, % 16, % BaiedesSables 1 20,458 24, % AnseàValleau 1 18,654 24, % 1 Representing the 38% portion of the wind farm held by the Fund. 244, , % 257, % Innergex Power Income Fund 2008 Second Quarter Report 16

18 For the threemonth and sixmonth periods ended Production periods (MWhr) (MWhr) Compared to Longterm Average (MWhr) Compared to the LongTerm Average SaintPaulin 28,675 22, % 22, % Portneuf ,685 64, % 69, % Chaudière 81,436 63, % 66, % Batawa 20,217 18, % 19, % Montmagny 3,962 3, % 4, % Windsor 19,613 17, % 17, % Rutherford Creek 55,868 69, % 74, % Horseshoe Bend 21,537 26, % 24, % BaiedesSables 1 54,778 60, % AnseàValleau 1 47,546 59, % 405, , % 421, % 1 Representing the 38% portion of the wind farm held by the Fund. Production The Fund s facilities produced 244,378 MWhr during the second quarter of 2008, as compared to 201,411 MWhr during the corresponding quarter of The production level for the second quarter of 2008 is 21% higher than the corresponding quarter of 2007, and 5% below than the longterm average. The Fund s facilities produced 405,317 MWhr during the six months ended, as compared to 286,919 MWhr during the corresponding period of The production level was 41% higher than the corresponding period of 2007, and 4% below than the longterm average. The acquisition of an interest in two wind farms, concluded in December 2007, as well as the good production levels at the Chaudière, Batawa and SaintPaulin facilities, which produced 7%, 28% and 11% more, respectively, than the previous year, were key factors in the production growth experienced during the second quarter of However, production at the Rutherford Creek facility was affected by colder than normal weather that delayed spring runoff in this area of British Columbia. Due to slower than predicted wind conditions and to the recent commissioning of the AnseàValleau wind farm, production of the two wind farms fell below expectations. Production at the Portneuf facilities was 14% greater than the corresponding quarter of 2007 and 4% higher than the longterm average. These three facilities are exempt from annual hydrological variations pursuant to virtual energy provisions in the longterm Power Purchase Agreements ("PPA") with HydroQuébec. However, these facilities must remain in operation in order to receive financial compensation, which was not the case in 2007 since HydroQuébec was upgrading its substation. Operating Results Gross operating revenues $ 15,804,751 $ 12,239,364 $ 29,401,672 $ 19,370,769 Operating expenses 2,194,659 1,571,515 4,082,958 2,946,842 General and administrative expenses 854, ,436 1,675,155 1,497,511 EBITDA $ 12,755,376 $ 9,741,413 $ 23,643,559 $ 14,926,416 Interest on longterm debt 3,177,785 1,671,654 6,248,530 3,356,563 Depreciation and amortization 5,124,937 3,110,807 10,225,201 6,224,739 Other (revenues) and expenses (1,615,540 ) (1,589,407 ) 1,665,149 (2,276,532 ) (Recovery) provision for income taxes (1,824,796 ) 47,388,506 (2,171,448 ) 47,422,965 Earnings allocated to minority interest 385, , , ,556 Net earnings (net loss) $ 7,507,371 $ (41,458,353 ) $ 6,746,378 $ (40,520,875 ) Innergex Power Income Fund 2008 Second Quarter Report 17

19 For the threemonth and sixmonth periods ended Gross Operating Revenues This growth in production combined with an increase in prices resulted in a 29% increase in gross operating revenues for the second quarter of 2008, as compared to the corresponding quarter of During the second quarter of 2008, the Fund generated $15.8 million in gross operating revenues as compared to $12.2 million in the second quarter of As for the sixmonth, gross operating revenues attained $29.4 million as compared to $19.4 million posted for the corresponding period of This represents a 52% increase. Excluding the growth attributable to the acquisition of the two wind farms, gross operating revenues for the Fund's hydroelectric power plants grew 10%. In addition to increased production from the acquisition of the BaiedesSables and AnseàValleau wind farms, the results for 2008 have benefited from increases linked to the electricity rate inflation clauses under the longterm PPAs with HydroQuébec and the British Columbia Hydro and Power Authority. With regard to the hydroelectric facilities in Quebec, PPAs provide for rate increases based on changes in the Consumer Price Index ("CPI") for a minimum of 3% and a maximum of 6% per year. The PPA for the Rutherford Creek facility in British Columbia includes electricity rate adjustments of 50% of the increase in the CPI. Lastly, the PPAs for the two wind farms located in Quebec include electricity rate adjustments of approximately 18% of the increase in the CPI. Inflation has a positive impact on the Fund s results since the related increase in revenues exceeds the increase in operating costs. The BaiedesSables and AnseàValleau wind farms benefit from a subsidy under the Government of Canada's ecoenergy program for renewable energy. A 75% portion of this subsidy is payable to HydroQuébec. The net amounts of this subsidy are included in gross operating revenues. EXPENSES Operating Expenses Operating expenses for the quarter stood at $2.2 million as compared to $1.6 million for the second quarter in 2007, or a 40% increase. For the sixmonth, operating expenses stood at $4.1 million as compared to $2.9 million for the same period in These increases in operating expenses were primarily due to the acquisition of an interest in the BaiedesSables and Anseà Valleau wind farms. General and Administrative Expenses General and administrative expenses for the quarter totalled $0.9 million, virtually the same as in In the second quarter of 2007, a $0.3 million charge was incurred for expenses related to the review of a potential acquisition that had not been completed. For the sixmonth, general and administrative expenses stood at $1.7 million as compared to $1.5 million for the same period in This increase was due to the acquisition of an interest in the BaiedesSables and AnseàValleau wind farms and to a rise in the incentive fees paid to the Manager resulting from the increase in the monthly distributions to unitholders. Interest on LongTerm Debt For the quarter and the sixmonth, interest expenses stood at $3.2 million and $6.2 million, respectively, as compared to interest expenses of $1.7 million for the second quarter of 2007 and $3.4 million for the sixmonth June 30, These increases were mainly due to higher debt servicing charges incurred as a result of the acquisition of an interest in the BaiedesSables and AnseàValleau wind farms. Also, an additional $15.0 million in debt was used to complete the IHI Hydro Inc. acquisition on May 29, Because of the low interest rates on the debt associated with the BaiedesSables and AnseàValleau wind farms and because of a general decline in market interest rates, the average interest rate was 5.79% for the quarter, as compared to an average rate of 6.24% in June For the sixmonth, the average interest rate was 5.75% as compared to 6.25% for the same period in As at, interest rates on 93% of the Fund's total debt were fixed or hedged against movements in interest rates. Depreciation and Amortization For the second quarter and the sixmonth, depreciation and amortization totalled $5.1 million and $10.2 million, respectively, as compared to $3.1 million for the corresponding quarter and $6.2 million, for the same sixmonth period of This increase was due to the acquisition of an interest in the two wind farms in December Innergex Power Income Fund 2008 Second Quarter Report 18

20 For the threemonth and sixmonth periods ended Other Revenues and Expenses Other revenues and expenses include investment revenues, realized or unrealized losses or gains on derivative financial instruments and realized or unrealized foreign exchange losses or gains. Investment revenues consist of interest on the reserve accounts and cash on hand. Other (Revenues) and Expenses Investment revenues Unrealized (gain) loss on derivative financial instruments Realized (gain) loss on derivative financial instruments Realized foreign exchange (gain) loss Unrealized foreign exchange (gain) loss $ (216,780 ) (541,178 ) (830,700 ) (2,775 ) (24,107 ) $ (198,132 ) (1,140,499 ) 7,150 (257,926 ) $ (505,478 ) 1,088,101 1,001,325 10,465 70,736 $ (415,245 ) (1,580,173 ) 9,795 (290,909 ) $ (1,615,540 ) $ (1,589,407 ) $ 1,665,149 $ (2,276,532 ) For the second quarter of 2008, investment revenues totalled $0.2 million and were relatively unchanged from the corresponding period of During the second quarter of 2008, the Fund posted a $0.5 million unrealized gain on derivative financial instruments, as compared to the $1.1 million gain posted for the same period in This gain primarily represents a change in the fair market value of derivative financial instruments tied to PPAs signed with HydroQuébec and has no impact on the Fund s distributable cash. The Fund realized a $0.8 million gain on derivative financial instruments in the second quarter of 2008 because a bond forward contract matured. The Fund recorded a $0.02 million unrealized foreign exchange gain for the quarter as compared to the $0.3 million gain posted for the same quarter in 2007 due to a revaluation of debts denominated in US dollars following the appreciation of the Canadian dollar in For the sixmonth, the Fund posted investment revenues of $0.5 million as compared to $0.4 million for the corresponding period of The Fund recorded a $1.1 million unrealized loss on derivative financial instruments for the sixmonth period ended as compared to the $1.6 million gain posted for the corresponding period of The Fund also realized a $1.0 million net loss on the settlement of derivative financial instruments on bond forward contracts used as protection against changes in interest rates. The Fund recorded a $0.07 million unrealized foreign exchange loss for the sixmonth, as compared to a $0.3 million unrealized foreign exchange gain posted for the same period in 2007 due to a revaluation of debts denominated in US dollars following the appreciation of the Canadian dollar in It is important to point out that these derivative financial instruments provide the Fund with an economic asset coverage and ensure stability in its longterm cash flows. The coverage program protects the Fund against variations in longterm interest rates and provides stability in the borrowing costs associated with its projects. The Fund does not hold or issue derivative financial instruments for speculation purposes. Provision for Income Taxes For the second quarter of 2008 and the sixmonth, the Fund posted an income tax recovery of $1.8 million and $2.2 million, respectively, as compared with income tax provisions of $47.4 million for each of the corresponding periods in These recoveries are the result of a reduction in the Fund's future income tax rate following the Government of Canada's adoption of Bill C50 in June The provision recorded in 2007 was attributable to the Government of Canada's adoption of legislation under which trusts would be taxed. The recording of this income tax provision has no impact on the Fund's distributable cash, nor on distributions to unitholders or the Fund's cash position until 2011, and it is nonrecurring. Earnings Allocated to Minority Interest On May 29, 2008, the Fund completed its acquisition of IHI Hydro Inc. ("IHI"). IHI held a 22.4% net interest in five of the Fund's hydroelectric facilities: the SaintPaulin and Chaudière facilities and the three Portneuf facilities. The minority interest represented the share of pretax earnings attributable to IHI. For the quarter ended, the Fund allocated a $0.4 million portion of the quarter's earnings from the five facilities until the acquisition of the minority interest. This compares with $0.6 million in earnings allocated to the minority interest in the corresponding quarter of For the sixmonth, $0.9 million in earnings were allocated to the minority interest, as compared to $0.7 million for the corresponding period of This was due to the good results posted in the first quarter of Since acquiring IHI on May 29, 2008, the Fund no longer allocates earnings to the minority interest. Innergex Power Income Fund 2008 Second Quarter Report 19