INNERGEX POWER INCOME FUND

Transcription

1 Consolidated Financial Statements of INNERGEX POWER INCOME FUND December 31, 2008

2 RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The consolidated financial statements of Innergex Power Income Fund (the Fund ) accompanying this annual report and all of the information herein concerning the Fund are the responsibility of Innergex Renewable Energy Inc. as manager of the Fund (the Manager ). These consolidated financial statements were prepared by the Manager in accordance with Canadian generally accepted accounting principles by applying the detailed accounting policies set out in the notes to the financial statements. The Manager is of the opinion that the consolidated financial statements were prepared based on reasonable and material criteria and using justifiable and reasonable estimates. The Fund s financial information, presented elsewhere in this annual report, is consistent with that presented in the financial statements. The Manager maintains efficient and highquality internal control systems and communication procedures for accounting and management while ensuring that costs are reasonable. These systems provide assurance that material information related to the Fund and its subsidiaries is communicated to senior management, financial information is relevant, accurate and reliable, and that the Fund s assets are correctly accounted for and adequately protected. The Board of Trustees of Innergex Power Trust is responsible for ensuring that the Manager fulfils its financial reporting responsibilities. In addition, the Board is ultimately responsible for reviewing and approving the Fund s consolidated financial statements. The Board fulfils this responsibility through its Audit Committee. The Audit Committee is appointed by the Board and all of its members are external independent trustees. The Audit Committee meets with the Manager and the external auditors for the purposes of discussing internal controls relating to the financial reporting process, audit of financial information and other financial issues and to make sure that each party is properly discharging its responsibilities. In addition, the Audit Committee reviews the annual report, the consolidated financial statements and the external auditors report. The Audit Committee submits its findings to the Board for review and for approval of the consolidated financial statements prior to their submission to the unitholders. The Audit Committee also determines whether to retain the external auditors services and to renew their mandate, which is subject to Board review and unitholders approval. These financial statements were approved by Innergex Power Trust s Board of Trustees. The Fund s financial statements were audited by its external auditors, KPMG LLP, in accordance with Canadian generally accepted auditing standards and on the unitholders behalf. KPMG LLP enjoys full and unrestricted access to the Audit Committee. [S] Michel Letellier Michel Letellier, MBA President and Chief Executive Officer Innergex Renewable Energy Inc. Fund Manager Longueuil, Canada March 16, 2009 [S] Jean Perron Jean Perron, CA, CMA Vice President and Chief Financial Officer Innergex Renewable Energy Inc. Fund Manager AUDITORS REPORT TO THE UNITHOLDERS We have audited the consolidated balance sheets of Innergex Power Income Fund (the Fund ) as at December 31, 2008 and 2007 and the consolidated statements of income, comprehensive income, changes in unitholders equity and cash flows for the years then ended. These financial statements are the responsibility of Innergex Renewable Energy Inc., the Fund Manager. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. KPMG LLP Chartered Accountants Montreal, Canada CA Auditor permit no February 23, 2009 Innergex Power Income Fund

3 Consolidated financial statements Consolidated balance sheets December 31, 2008 December 31, 2007 Assets Current assets Cash and cash equivalents Accounts receivable (Note 4) Funds held in trust (Note 5) Current portion of reserve accounts (Note 6) Current future income tax assets (Note 13) Other current assets Reserve accounts (Note 6) Property, plant and equipment (Note 7) Intangible assets (Note 8) Derivative financial instruments (Note 9) Future income tax assets (Note 13) Goodwill (Note 3 (a)) $ 8,636,864 7,411,947 1,585, , ,412 2,496,718 $ 12,150,357 20,888,600 1,822, ,291 1,778 2,394,284 $ 21,149,053 $ 38,157,450 $ 14,632, ,218, ,577,067 7,484,770 3,041,471 8,905,029 $ 14,258, ,672, ,677,761 7,109,119 2,680,644 $ 530,007,626 $ 547,555,957 Liabilities and Unitholders Equity Current liabilities Accounts payable and accrued liabilities Distributions payable to unitholders Demand notes (Note 3 (b)) Derivative financial instruments (Note 9) $ 11,535,154 2,449,376 4,590,761 $ 13,454,194 2,364,604 14,008, ,276 Current portion of longterm debt (Note 11) 2,563,035 4,500,563 $ 21,138,326 $ 34,858,204 Derivative financial instruments (Note 9) Longterm debt (Note 11) Asset retirement obligations (Note 12) Future income tax liabilities (Note 13) Minority interest (Note 14) Unitholders equity (Note 15) $ 18,903, ,866, ,252 69,532, ,665,658 $ 1,251, ,013, ,352 59,923,679 14,388, ,288,745 Commitments (Note 20) $ 530,007,626 $ 547,555,957 See notes to the audited consolidated financial statements. Approved on behalf of the Fund by: [S] Jean La Couture Jean La Couture, FCA Chairman, Board of Trustees Innergex Power Trust [S] Gilles Lefrançois Gilles Lefrançois, CA Trustee Innergex Power Trust Innergex Power Income Fund 3

4 Consolidated financial statements Consolidated statements of income December 31, 2008 December 31, 2007 Gross operating revenue $ 59,430,461 $ 40,371,641 Operating expenses 9,062,110 6,377,941 Operating income $ 50,368,351 $ 33,993,700 General and administrative expenses 3,270,855 2,700,467 Earnings before interest, provision for income taxes, depreciation and amortization, other expenses and revenues and minority interest (EBITDA) $ 47,097,496 $ 31,293,233 Interest on longterm debt 12,930,125 7,168,294 Depreciation and amortization 20,612,011 12,990,524 Other expenses and (revenues) (Note 16) 21,290,085 (2,871,629) (Loss) earnings before provision for income taxes and minority interest $ (7,734,725 ) $ 14,006,044 Provision for income taxes (Note 13) Income taxes payable Future income taxes $ 2,141,333 (7,567,637 ) $ 505,738 40,625,227 $ (5,426,304 ) $ 41,130,965 Loss before minority interest Earnings allocated to minority interest (Note 14) $ (2,308,421 ) 929,749 $ (27,124,921) 1,245,106 Net loss $ (3,238,170 ) $ (28,370,027) Weighted average number of trust units outstanding 29,404,276 25,016,400 Net loss per trust unit $ (0.11 ) $ (1.13) See the notes to the audited consolidated financial statements. Innergex Power Income Fund 4

5 Consolidated financial statements Consolidated statements of comprehensive income December 31, 2008 December 31, 2007 Net loss $ (3,238,170 ) $ (28,370,027 ) Other comprehensive income Unrealized foreign exchange gain on translation of selfsustaining foreign subsidiary $ 715,806 $ 502,484 Unrealized foreign exchange loss on portion of the US$ denominated debt designated as a hedge of the investment in a selfsustaining foreign subsidiary (708,209 ) (419,592 ) $ 7,597 $ 82,892 Comprehensive income $ (3,230,573 ) $ (28,287,135 ) Consolidated statements of changes in unitholders equity December 31, 2008 December 31, 2007 Number of units beginning of year Trust units issued December 6, 2007 private offering 29,404,276 24,679,867 4,724,409 Number of units end of year 29,404,276 29,404,276 Unitholders capital account beginning of year $ 309,681,275 $ 248,070,369 Trust units issued: December 6, 2007 private offering Issue expenses 61,700,782 (89,876 ) Unitholders capital account end of year $ 309,681,275 $ 309,681,275 Deficit beginning of year $ (84,482,827 ) $ (35,336,063 ) Cumulative effect of changes in accounting policies on prior years (Note 2 (b)) 3,419,356 Deficit as restated $ (84,482,827 ) $ (31,916,707 ) Net loss Distributions declared to unitholders (3,238,170 ) (29,392,514 ) (28,370,027 ) (24,196,093 ) Deficit end of year $ (117,113,511 ) $ (84,482,827 ) Cumulative other comprehensive income beginning of year Other comprehensive income $ 90,297 7,597 $ 7,405 82,892 Cumulative other comprehensive income end of year $ 97,894 $ 90,297 Total deficit and cumulative other comprehensive income $ (117,015,617 ) $ (84,392,530 ) Unitholders equity end of year $ 192,665,658 $ 225,288,745 See the notes to the audited consolidated financial statements. Innergex Power Income Fund 5

6 Consolidated financial statements Consolidated statements of cash flows December 31, 2008 December 31, 2007 Cash flows from operating activities Net loss Adjustments for: Depreciation of property, plant and equipment Amortization of intangible assets Accretion expense on asset retirement obligations (Note 12) Provision for future income taxes Unrealized loss (gain) on derivative financial instruments Earnings allocated to minority interest (Note 14) Unrealized foreign exchange loss (gain) Effect of exchange rate fluctuations Change in noncash working capital items (Note 18) Cash flows from financing activities Distributions paid to unitholders (Note 17) Trust unit issue expenses Proceeds from issue of longterm debt Financing fees (Note 11) Repayment of longterm debt Cash flows from investing activities Additions to property, plant and equipment Business acquisitions, net of cash acquired (Note 3) Proceeds of disposition of property, plant and equipment Surplus from hydrology/wind power reserve (Note 6) Net funds withdrawn from the levelization reserve (Note 6) Funds withdrawn from major maintenance reserve (Note 6) Investments in other reserve accounts (Note 6) $ (3,238,170) $ (28,370,027 ) 11,423,184 9,188,827 69,900 (7,567,637) 21,192, , , ,989 (306,316) 6,306,929 6,683,595 4,625 40,625,227 (1,601,744) 1,245,106 (351,112) 21,487 1,575,908 $ 32,352,902 $ 26,139,994 $ (29,307,742) $ (23,816,170) (89,876) 70,800,000 3,200,000 (842,690) (59,186,612) (1,060,316) $ (18,537,044) $ (21,766,362) $ (3,370,690) (14,481,924) 35, , , ,577 (968,210) $ (206,449) 2,855, ,765 (2,765,154) $ (17,426,414) $ 754,812 Translation adjustment on cash and cash equivalents $ 97,063 $ (292,595 ) Net change in cash and cash equivalents $ (3,513,493) $ 4,835,849 Cash and cash equivalents beginning of year 12,150,357 7,314,508 Cash and cash equivalents end of year $ 8,636,864 $ 12,150,357 Cash and cash equivalents: Cash Shortterm investments $ 5,017,655 3,619,209 $ 6,028,759 6,121,598 $ 8,636,864 $ 12,150,357 Supplemental cash flow information: Interest paid Income taxes paid Spare parts transferred to property, plant and equipment (Note 2(a)) Unpaid additions to property, plant and equipment (Note 18) See the notes to the audited consolidated financial statements. $ 13,688,370 $ 544,912 $ 535,057 $ 1,101,013 $ 7,058,211 $ 508,459 $ $ 3,769,679 Innergex Power Income Fund 6

7 Innergex Power Income Fund (the Fund ) is an unincorporated openended trust established on October 25, 2002 under the laws of the Province of Quebec. 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 power generating facilities (the Facilities ) and to indirectly acquire loans relating to some of the Facilities. As at December 31, 2008, the Fund indirectly held interests in the following subsidiaries: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Innergex, Limited Partnership ( Innergex LP ), which owns the three Portneuf facilities, the Chaudière facility, and the SaintPaulin facility. TrentSevern Power, Limited Partnership ( Trent LP ), which owns the Batawa facility. Innergex Montmagny, Limited Partnership ( Innergex Montmagny LP ), which owns the Montmagny facility. HydroWindsor, Limited Partnership ( HydroWindsor LP ), which owns the Windsor facility. Horseshoe Bend Hydroelectric Company ( Horseshoe Bend ), which owns the Horseshoe Bend facility. Rutherford Creek Power Limited Partnership ( Rutherford LP ), which owns the Rutherford Creek facility. Innergex BDS, Limited Partnership ( BDS LP ), which as undivided joint owner owns 38% of the Baiedes Sables wind farm. Innergex AAV, Limited Partnership ( AAV LP ), which as undivided joint owner owns 38% of the Anseà Valleau wind farm. Innergex Renewable Energy Inc., (the Manager ), administers the Fund and manages Innergex Power Trust ( IPT ), a wholly owned subsidiary of the Fund; IPT indirectly owns the Fund s assets and investments. The Manager also provides management services to the operators of the Fund s Facilities. 1. Significant accounting policies: (a) (b) (c) (d) Basis of consolidation: The consolidated financial statements include the Fund s accounts and those of all its subsidiaries and joint ventures. The investments over which the Fund has effective control are fully consolidated. The Fund s interests in joint ventures are accounted for using the proportionate consolidation method. Significant intercompany balances and transactions have been eliminated. Revenue recognition: Revenue is recognized on an accrual basis upon delivery of electricity at rates provided for under the Power Purchase Agreements entered into with the purchasing utilities. Cash and cash equivalents: Cash and cash equivalents include cash on hand, bank balances and shortterm liquid investments with maturities of three months or less, in addition to bank overdrafts whenever they are an integral part of the Fund s cash management process. Property, plant and equipment: Property, plant and equipment, which consist of hydroelectric facilities, wind farms, main spare parts and the safety parts inventory are stated at cost. Hydroelectric facilities are depreciated on a straightline basis over their remaining useful life (ranging from 40 to 50 years) as of the date they are commissioned. Wind farms are depreciated on a straightline basis over their remaining useful life (25 years) as of the date they are commissioned. Other equipment is depreciated on a straightline basis over a fiveyear period. Depreciation of main spare parts and the safety parts inventory is calculated using the same method as the property, plant and equipment to which they are related. Innergex Power Income Fund 7

8 Improvements that prolong the useful life or increase the capacity of property, plant and equipment are capitalized. Maintenance and repair costs are expensed as they are incurred. The useful life used to calculate depreciation of property, plant and equipment is as follows: Type of property, plant and equipment Expiry of depreciation period Useful life used for calculating depreciation Hydroelectric facilities 2034 to to 49 years Wind farms 2031 to to 25 years (e) Intangible assets: Intangible assets consist of various licenses and agreements relating to the hydroelectric facilities and wind farms, and they are stated at cost. They are amortized on a straightline basis over their remaining useful life until the expiry of the first of the licenses and agreements for each facility. Intangible assets also include extended warranties for wind farm equipment, which are amortized between the third and fifth year after the commissioning date of wind farms. The estimated useful life used to calculate the amortization of intangible assets is as follows: Intangible assets associated with the following assets Expiry of amortization period Useful life used for calculating amortization Hydroelectric facilities 2014 to to 26 years Wind farms 2026 to to 20 years Extended warranties 2011 to years (f) Goodwill: Goodwill represents the excess of the purchase price of acquired businesses over the fair value of net identifiable assets acquired. Goodwill is not amortized, but should be tested for impairment annually or more frequently if an event has occurred or circumstances have changed from the most recent fair value determination that would indicate that the asset might be impaired. When the carrying value exceeds the fair value, an impairment loss should be recorded in the statement of income for an amount equal to the excess. (g) Impairment of longlived assets: Longlived assets should be tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment loss is recognized if the carrying value of an asset exceeds the future undiscounted cash flows expected to result from the use of the asset and its expected disposition. The impairment loss is an amount equal to the excess of carrying value of the asset over its fair value. (h) (i) Income taxes: Under the Income Tax Act (Canada), the Fund, as a trust, is not subject to taxes on income earned prior to 2011 insofar as its taxable income and capital gains are paid or payable to the unitholders. In addition, the Fund is contractually required to distribute to its unitholders all or virtually all of its taxable income and capital gains that would otherwise be taxable to the Fund. Accordingly, these financial statements do not include any provision for income taxes with respect to current earnings of the Fund. However, a provision for future income taxes for the periods beginning on or after January 1, 2011 was recorded following the adoption of changes to the taxation of public trusts. Asset retirement obligations: The Fund recognizes a liability for an asset retirement obligation arising from acquisitions, construction or development or in the normal course of business. An asset retirement liability is initially recognized at its fair value during the year in which the Fund incurs a legal asset retirement obligation and when a reasonable estimate of the fair value can be made. The corresponding cost is capitalized as part of the related asset and amortized over the asset s estimated useful life. In subsequent years, this liability is adjusted for changes resulting from the passage of time and for revisions to the timing or amount of the original estimate of the undiscounted future cash flows. Any increase in the liability up to fair value resulting from the passage of time is charged to income. Innergex Power Income Fund 8

9 (j) (k) (l) Income per trust unit: The net income per trust unit is computed by dividing net income by the weighted average number of trust units outstanding. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. During the reporting period, management made a number of estimates and assumptions pertaining primarily to the fair value calculation of the assets acquired and liabilities assumed in business acquisitions, the useful lives and recoverability of property, plant and equipment, future income taxes, as well as the fair value of financial assets and liabilities. These estimates and assumptions are based on current conditions, management s planned course of action and assumptions about future business and economic conditions. Changes in the underlying assumptions and estimates could have a material impact on the reported amounts. These estimates are reviewed periodically. If adjustments prove necessary, they are recognized in income in the period in which they are made. Hedging relationships: Derivative financial instruments are utilized by the Fund to manage its interest rate exposure on debt financing. The Fund s policy is not to utilize derivative financial instruments for trading or speculative purposes. The Fund also formally assesses, both at the hedge s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items. Derivatives used as economic hedges that do not qualify for hedge accounting are recognized on the balance sheet at fair value and changes in fair value are recorded in income. When financial instruments that qualify for hedge accounting mature or become ineffective before maturity and are not replaced in accordance with the Fund s documented hedging strategy, the deferred gains or losses on these hedges continue to be deferred and charged to income in the same period as the corresponding gains or losses on the hedged items. Gains or losses realized subsequent to the hedge s maturity date or to the hedge s becoming ineffective are charged directly to income. If the hedged item ceases to exist due to maturity, expiry, cancellation or exercise before the hedge s maturity date, the deferred gains or losses are charged to income. The Fund does not use hedge accounting for its financial instruments. (m) Foreign currency translation: Foreign currency accounts and transactions Transactions originating in foreign currencies are translated at the rates in effect on the transaction date. Monetary assets or liabilities denominated in foreign currencies are translated at exchange rates in effect at the balance sheet dates. Unrealized gains or losses arising from the translation of monetary assets or liabilities are included in net income for the period. Foreign operation The Fund translates the financial statements of its selfsustaining foreign operation using the current rate method. Under this method, all assets and liabilities denominated in a foreign currency are translated at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Translation gains or losses are included in other comprehensive income.. The Fund designates a portion of its US dollardenominated debt to hedge its investment in its selfsustaining foreign operation. Translation gains or losses on the portion of the debt designated as a hedge are included in other comprehensive income. The Fund formally documents this hedge. On a quarterly basis, the Fund reviews the hedge to ensure that it effectively offsets the translation gains or losses arising from its investment in its selfsustaining foreign operation. Innergex Power Income Fund 9

10 2. Changes in accounting policies: (a) Changes made in 2008: Section 1535 of the CICA Handbook, Capital Disclosures, requires an entity to disclose information to allow its financial statement users to evaluate its objectives, policies and procedures for managing capital. The Section applies to interim and annual financial statements relating to fiscal years beginning on or after October 1, The application of this Section required additional disclosure in note 22. Section 3031 of the CICA Handbook, Inventories, establishes standards for the measurement of inventories. The adoption of these standards on January 1, 2008 did not require any adjustment to the opening balance for the deficit but required a reclassification of other current assets into property, plant and equipment for an amount of $535,057. Annual depreciation has consequently increased by $13,279. (b) Changes made in 2007: (i) Section 3855 Financial Instruments Recognition and Measurement applies to fiscal years beginning on or after October 1, This Section establishes standards for recognizing and measuring financial assets, financial liabilities and nonfinancial derivatives. All financial assets and derivatives must be measured at fair value or at amortized cost. All financial liabilities must be measured at fair value if they are classified as held for trading; otherwise, they must be measured at amortized cost. (ii) Section 1530 Comprehensive Income and Section 3251 Equity apply to fiscal years beginning on or after October 1, Comprehensive income is the change in net assets of an enterprise during a period from transactions and other events and circumstances from nonowner sources. Comprehensive income includes items that would normally be excluded from net income, e.g., changes in translation adjustments arising from selfsustaining foreign operations and unrealized gains or losses on investments available for sale. This Section establishes standards for reporting and disclosing comprehensive income and its components. Section 3251, Equity, which replaces Section 3250 Surplus, establishes new standards for the presentation of equity and changes in equity steming from the new requirements in Section 1530, Comprehensive Income. Following the adoption of these standards, the consolidated financial statements include a statement of comprehensive income. (iii) Section 3865 Hedges applies to fiscal years beginning on or after October 1, This Section establishes standards for when and how hedge accounting may be applied. The purpose of hedge accounting is to ensure that all gains, losses, revenues and expenses relating to a hedge and the item being hedged are recognized in the income statement during the same period. The adoption of this Section had no impact on the financial statements because derivatives are held for trading purposes. These new sections apply to the Fund as of the period beginning January 1, The Fund reviewed all of its material contracts and elected to record as assets and liabilities all embedded derivatives that must be separated from the host contracts. The impact of the changes recorded as at January 1, 2007 was as follows: Balance sheets accounts Cost of intangible assets Cumulative amortization of intangible assets Derivative financial instruments (Note 9) Future income tax liabilities Minority interest Increase in unitholders equity Assets $ (659,562 ) 142,014 4,917,731 Liabilities and unitholders equity $ 42, ,414 3,419,356 Total $ 4,400,183 $ 4,400,183 Innergex Power Income Fund 10

11 Under these standards, the Fund is required to classify all financial assets and liabilities into categories. The Fund made the following classification: Cash and cash equivalents and funds held in trust were designated as assets or liabilities held for trading. Funds held in reserve, excluding reserve amounts invested in bonds, are also included in this category. The carrying value of these assets or liabilities held for trading and designated by the Fund is $24,390,240 ($27,260,801 in 2007). The derivative financial instruments were classified as held for trading in accordance with Section The net carrying value of these assets or liabilities held for trading purposes is negative by an amount of $15,865,797 ($5,326,994 in 2007) (see note 9). These items are measured at fair value; gains or losses arising from the revaluation at the end of each period are recorded in consolidated income. Reserve amounts invested in bonds are classified as assets held to maturity. They were initially measured at fair value and are now measured at amortized cost. Accounts receivable as classified as loans and receivables. They were normally measured at cost, which corresponds to their fair value when initially recorded; they are now measured at amortized cost. Accounts payable and accrued liabilities, distributions payable to unitholders, demand notes and longterm debts are classified as other financial liabilities. They were initially measured at fair value and are now recorded at amortized cost. (iv) Section 1540 Cash Flow Statements CICA issued changes to CICA Handbook Section 1540, Cash Flow Statements which apply to interim periods ending on or after March 31, These changes deal with the information that must be disclosed concerning cash distributions and financial instruments classified as equity. Pursuant to the trust indenture, the Fund s Trustee may declare distributions payable to the Fund s unitholders, at its discretion. However, the trust indenture stipulates that the distribution amount declared during the fiscal year must at least equal the Fund s annual taxable income. The distributions declared for the reporting period totalled $29,392,514 ($24,196,093 in 2007). (v) Adoption of new accounting policies CICA Handbook Section 3862 Financial Instruments Disclosures establishes disclosure standards for financial instruments, including information concerning fair value and related credit, liquidity and market risks. Section 3863 Financial Instruments Presentation establishes standards for presentation of financial instruments and nonfinancial derivatives. Both of these sections apply to interim and annual financial statements for fiscal years beginning on or after October 1, The Fund adopted these standards prospectively on December 31, Due to the adoption of Section 3862, additional information was presented in note 21 Financial Instruments. (c) New accounting policy applicable as of the next fiscal year: 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 related to standardization were made to other sections of the CICA Handbook. The new section, issued in February 2008, will apply to the financial statements of fiscal years beginning on or after October 1, Consequently, the Fund will adopt the new standard for its fiscal year beginning on January 1, This Section provides new guidelines for the recognition, measurement, presentation and disclosure of goodwill after initial recognition and intangible assets of profitoriented organizations. The goodwill standards are the same as the standards in the old Section The Fund is currently evaluating the future impact of this new standard on its consolidated financial statements. The CICA Handbook EIC173, Risk and the Fair Value of Financial Assets and Financial Liabilities states that the credit risk of counterparties should be taken into account in determining the fair value of derivative financial instruments. The Fund has already considered the effect of EIC173 in measuring its derivative financial instruments for the year ended December 31, Innergex Power Income Fund 11

12 (d) International Financial Reporting Standards: The Canadian Accounting Standards Board has announced the convergence of Canadian GAAP with International Financial Reporting Standards ( IFRS ) for publiclylisted companies. The official changeover date for using IFRS, replacing Canadian GAAP, is for interim and annual financial statements relating to fiscal years beginning on or after January 1, The Fund has begun assessing major items requiring adjustment in connection with the adoption of IFRS. A schedule has been prepared of the steps to be followed by the Fund in order to meet the changeover date. 3. Business acquisitions (a) Acquisition of IHI Hydro Inc. ("IHI") On May 29, 2008, the Fund indirectly acquired 100% of the outstanding shares of IHI for a consideration of $14,481,924 including an additional amount of $50,000 to cover higher acquisition costs and revised to $373,750. This acquisition was financed through a bank loan. The principal asset of IHI is an ownership interest of 24.9% in Innergex Holding, Limited Partnership ( Innergex Holding LP ). IPT already owned the other 75.1% of Innergex Holding LP, which was fully consolidated in the financial statements of the Fund and recorded a minority interest for the portion relating to IHI. Innergex Holding LP has a 90% ownership interest in Innergex LP. The acquisition of IHI has been accounted for by the purchase method as at May 29, The results of IHI have been consolidated with the results of the Fund since the date of acquisition. 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 portion purchased of the assets already included in the consolidation has been revalued at the fair market value at the date of acquisition and the income taxes related to the assets purchased have been recognized. During the fourth quarter of 2008, a change was made in the allocation of the purchase price of IHI. Net working capital was decreased by $1,272,111 while the goodwill and future tax liability were reduced by $4,113,554 and $5,435,665 respectively. The total purchase price of IHI was preliminary allocated as follows: Net working capital (Note 18) $ (900,002) Property, plant and equipment 7,188,376 Goodwill 8,905,029 Minority interest 15,318,747 Future income tax liabilities (including a current portion of $732,977) (16,030,226) $ 14,481,924 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) Acquisitions of AAV LP (and its general partner, Innergex AAV Inc. and 50% of its operator, Cartier Wind Energy (AAV) Inc.), collectively referred to as AAV, and of BDS LP (and its general partner, Innergex BDS Inc., and 50% of its operator, Cartier Wind Energy (BDS) Inc.), collectively referred to as BDS, undivided coowners of 38% of the AnseàValleau and BaiedesSables wind farms. On December 6, 2007, the Fund issued 4,724,409 trust units at a price of $13.06 each for a total of $61,700,782 as payment for the acquisition of AAV and BDS. The Fund incurred issue expenses totalling $89,876. The Fund used the proceeds from a $3,200,000 longterm loan to invest $2,200,000 in the hydrology/wind power reserve account. Innergex Power Income Fund 12

13 The total acquisition cost of AAV and BDS was as follows: 4,724,409 units issued at $13.06 each $ 61,700,782 Acquisition expenses incurred 551,000 $ 62,251,782 The acquisition of AAV and BDS was accounted for using the purchase method on December 6, AAV s and BDS s results have been consolidated with the Fund s results since the acquisition date. During 2008, an adjustment was made to the purchase price allocation of AAV and BDS. 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 decrease in intangible assets. Furthermore, accounts payable and accrued liabilities increased by $662,621, accounts receivable increased by $380,000, and noninterest bearing demand notes payable to the vendor, Innergex II Income Fund, a subsidiary of the Manager, fell by $1,137,621. This reduced the notes from $14,008,567 to $12,870,946. The total purchase price of AAV and BDS was allocated as follows: Cash and cash equivalents $ 3,406,650 Net working capital (Note 18) (996,650) Property, plant and equipment 132,082,582 Intangible assets 54,911,147 Asset retirement obligations (826,727) Longterm derivative financial instruments (1,015,247) Longterm debt (108,028,464) Future income tax liabilities (17,281,509) $ 62,251,782 The AAV and BDS acquisitionrelated cash flows were as follows: Cash and cash equivalents acquired $ 3,406,650 Acquisition expenses incurred (551,000) $ 2,855,650 The net working capital assumed included noninterest bearing demand notes totalling $12,870,946 payable to the vendor, Innergex II Income Fund. The notes were paid during the second and third quarters of 2008 ($11,590,000 and $1,280,946 respectively) primarily upon receipt of the payment receivable for property, plant and equipment and the sales taxes recoverable described in note 4. The net working capital assumed on December 6, 2007 included $2,841,350 for unpaid property, plant and equipment. 4. Accounts receivable: December 31, 2008 December 31, 2007 Trade accounts receivable $ 7,411,947 $ 7,654,310 Payment receivable for property, plant and equipment 7,428,889 Sales taxes recoverable 5,805,401 $ 7,411,947 $ 20,888,600 Innergex Power Income Fund 13

14 Substantially all of the Fund s trade receivables relate to electricity sold to public utilities, including HydroQuébec, Ontario Electricity Financial Corporation, British Columbia Hydro and Power Authority and Idaho Power Company. HydroQuébec currently has a credit rating of A+ from Standard & Poor s ( S&P ). The Ontario Ministry of Energy has stated that the province of Ontario, which currently has a credit rating of AA from S&P, will honour Ontario Electricity Financial Corporation s obligations under the Power Purchase Agreements to which it is a party. British Columbia Hydro and Power Authority currently has a credit rating of AAA from S&P. Idaho Power Company currently has a credit rating of BBB from S&P. The payment receivable for property, plant and equipment was also receivable from a public utility. The sales taxes recoverable were receivables from the federal and provincial governments following construction of the AnseàValleau wind farm. The Fund recorded no provision for bad debts since, in its experience, the related risk is negligible. The Fund holds no specific guarantees for the various receivables. There were no receivables that were past due. 5. Funds held in trust: Rutherford LP holds $1,585,550 (2007 $1,535,240) in trust to pay the holdback amounts for the construction of the Rutherford Creek facility. During the year, AAV LP paid the holdback amounts for the construction of the AnseàValleau wind farm and no longer holds any amount in trust (2007 $286,900).This brings the total funds held in trust to $1,585,550 (2007 $1,822,140). 6. Reserve accounts: The funds in the reserve accounts are available to the Fund for distribution to the unitholders, at the discretion of IPT s Trustees, (a) in order to levelize the distributions based on the Manager s current estimates of distributable cash shortfalls, (b) to be used as a general hydrology/wind power reserve in the event that the distributable cash for any year is less than the expected amount of Fund distributions in a given period. A third reserve, the major maintenance reserve, will be used for major maintenance which may be needed to maintain the assets generating capacity in the future. In accordance with the Manager s instructions, a portion of the reserve accounts is currently invested in shortterm investments having original or remaining maturities of one year or less, as well as in bonds fully guaranteed by governments and Crown corporations. During the year, the funds held in the levelization reserve generated investment income totalling $77,366 (2007 $114,722), for a weighted average global return of 3.47% ( %). During the same period, investments totalling $900,291 (2007 $870,765) in the levelization reserve were liquidated and used as distributable cash. During the year, the amounts held in the hydrology/wind power reserve generated income of $288,212 (2007 $369,636) for an overall average weighted return of 2.88% ( %). Further to the purchase of AAV and BDS, the Fund invested $2,200,000 in the hydrology/wind power reserve in During the year, amounts held in the major maintenance reserve generated investment income of $65,781 (2007 $68,958) for an overall average weighted return of 2.7% ( %). In addition, the major maintenance reserve had financing amounting to $968,210 in 2008 (2007 $565,154). Innergex Power Income Fund 14

15 The changes in the reserve accounts were as follows: Levelization reserve Hydrology/ wind power reserve Major maintenance reserve For the year ended December 31, 2008 Total For the year ended December 31, 2007 Reserves beginning of year Investments in the reserves $ 2,428,799 $ 10,774,548 $ 1,955, ,210 $ 15,158, ,210 $ 13,305,086 2,765,154 Net withdrawals Impact of foreign exchange fluctuations (900,291) (247,542) 247,542 (211,577) 81,600 (1,359,410) 329,142 (870,765) (40,844) Reserves end of year $ 1,528,508 $ 10,774,548 $ 2,793,517 $ 15,096,573 $ 15,158,631 The Fund used a portion of the cash held in the reserve accounts to purchase investments aimed at generating additional revenues for distribution purposes. As at December 31, 2008, the carrying values and market values of these investments were as follows: Total Reserve account investments Governmentbacked securities Shortterm investments Cash and cash equivalents Maturity Market value Carrying value 2009 to 2011 $ 1,706,483 $ 1,688, ,716,278 12,716, , ,541 $ 15,114,302 $ 15,096,573 Less: Current shortterm portion to be withdrawn from the levelization reserve (464,562) $ 14,632,011 The market value of the securities backed by the Canadian government, the US government or a provincial government is determined by referring directly to the published active market prices. Shortterm investments are held at major financial institutions. The Fund recorded no impairment of these financial instruments since the counterparties have high credit ratings. 7. Property, plant and equipment: Land Hydroelectric facilities Wind farms Other equipment December 31, 2008 December 31, 2007 Cost Accumulated depreciation Net carrying value Net carrying value $ 85,665 $ $ 85,665 $ 69, ,307,494 27,432, ,874, ,000, ,709,289 5,720, ,988, ,428, , , , ,293 $ 378,607,396 $ 33,389,171 $ 345,218,225 $ 346,672,643 Innergex Power Income Fund 15

16 8. Intangible assets: The Fund s intangible assets are related to the following assets: December 31, 2008 December 31, 2007 Cost Accumulated amortization Net carrying value Net carrying value Hydroelectric facilities $ 108,113,535 $ 30,580,561 $ 77,532,974 $ 83,652,621 Wind farms 51,205,235 2,813,377 48,391,858 51,319,228 Extended warranties 3,705,912 53,677 3,652,235 3,705,912 $ 163,024,682 $ 33,447,615 $ 129,577,067 $ 138,677, Derivative financial instruments: Pursuant to the implementation of Section 3855 Financial Instruments Recognition and Measurement, the Fund recorded embedded derivatives separately from the host contracts. These financial instruments relate to provisions establishing minimum inflation rate at 3% of the selling prices provided for under the power purchase agreements entered into with HydroQuébec. The fair value of these financial instruments is based on revenue estimates based on longterm production averages estimated for each facility. It varies based on the difference between the 3% minimum inflation rate and the longterm inflation rate, which is estimated at 2.4% over the remaining terms of these agreements, discounted at a rate of 5.9%. The expected impact of a 0.1 % increase in the longterm inflation rate would reduce the fair value of these financial instruments by $1,200,000; a 0.1 % drop in the longterm inflation rate would increase fair value of these financial instruments by $1,300,000. The Fund holds swap contracts that enable it to eliminate its exposure to the floating interest rates payable on the portion of its longterm debt, which is hedged by such contracts. During the year, the Fund entered into two swap contracts, one amounting to $52,600,000 and the other amounting to $30,000,000, which will both mature in June 2018, allowing it to reduce its exposure to floating interest rates on the amounts. These swaps allow the Fund to pay interest at fixed rates equivalent to 4.27% and 4.41% respectively. The counterparties to the swap contracts are major financial institutions; the Fund does not anticipate any payment defaults on their part. The estimated impact of an increase in swap rates curve of 0.1% would increase the fair value of these financial instruments by $1, On the other hand, a decrease in swap rates curve of 0.1% would result in a reduction of $1,100,000 of the fair value of these financial instruments. The Fund also held a bond forward contract with a nominal value of $32,500,000, which was cancelled during the year giving rise to a realized loss of $1,001,325 in the statement of income. Innergex Power Income Fund 16

17 Inflation provisions Interest rate swap contracts Forward contract on bonds Assets Derivative financial instruments Balance as at December 31, 2006 $ $ 407,427 $ $ 407,427 Adjustment resulting from changes in accounting policies as at January 1, 2007 (Note 2 (b)) Change for the year 4,917,731 1,704,289 79,672 Total 4,917,731 1,783,961 Balance as at December 31, 2007 in longterm assets Change for the year $ 6,622,020 1,006,913 $ 487,099 (487,099) $ $ 7,109, ,814 Balance as at December 31, 2008 $ 7,628,933 $ $ $ 7,628,933 Less: Current portion included in other current assets (144,163) (144,163) Balance as at December 31, 2008 in longterm assets $ 7,484,770 $ $ $ 7,484,770 Liabilities Derivative financial instruments Balance as at December 31, 2006 $ $ $ $ Amount added upon acquisitions of AAV and BDS 1,015, ,661 1,599,908 Change for the year 236,602 (54,385) 182,217 Balance as at December 31, 2007 $ $ 1,251,849 $ 530,276 $ 1,782,125 Change for the year 22,242,881 (530,276) 21,712,605 Balance as at December 31, 2008 $ $ 23,494,730 $ $ 23,494,730 Less: Current portion (4,590,761) (4,590,761) Longterm liability balance as at December 31, 2008 $ $ 18,903,969 $ $ 18,903,969 The increase in the interest rate swap liability mainly arises from the significant decrease in reference interest rates. 10. Bank credit facility: The bank credit facility consists of a $10,000,000 operating loan maturing in May This credit facility is secured by a firstranking hypothec on IPT s assets and by various security interests granted by some of its subsidiaries. Use of the bank credit facility is subject to certain financial and nonfinancial covenants. Advances are made in the form of bankers acceptances, primerate advances or letters of credit. In the case of bankers acceptances, interest is calculated at the prevailing bankers acceptance rate, plus an additional margin based on IPT s adjusted ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization recorded by certain IPT subsidiaries. In the case of primerate advances, interest is charged at bank prime rate, plus a margin based on the same ratio. As at December 31, 2008, no amount was due under this facility ($3,200,000 as at December 31, 2007).and an amount of $832,200 ($3,382,200 as at December 31, 2007) was used as security for a letter of credit. The unused and available portion of the bank credit facility amounted to $9,167,800. It should be noted that certain terms and conditions of the bank credit facility were renegotiated during the second quarter of Upon the Fund s request, the facility was decreased from $15,000,000 to $10,000,000 in order to reduce commitment fees. Innergex Power Income Fund 17

18 11. Longterm debt: December 31, 2008 December 31, 2007 Bank credit facility (Note 10) Bankers' acceptances, matured in January 2008 (5.35% as at December 31, 2007) $ $ 3,200,000 Facility 1 Primerate advances renewable until May 2013 (3.63%; 6.00% in 2007) Bankers' acceptances renewable until May 2013 (2.78%; 5.35% in 2007) LIBOR advances, US$5,000,000 renewable until May 2013 (average rate of 5.35%; US$5,000,000, 5.73%, in 2007) Facility 2 93,000 51,200,000 6,090,000 93,000 33,000,000 4,956,500 LIBOR advances, US$8,872,875 renewable until May 2013 (average rate of 2.97%; US$8,872,875, 5.79%, in 2007) 10,807,161 8,795,681 Facility 3 Bankers' acceptances renewable until May 2013 (2.78%) 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 7,279,574 50,000,000 52,110,000 (750,362) $ 229,429,373 7,915,048 50,000,000 53,528,464 54,025,000 $ 215,513,693 Current portion of longterm debt (2,563,035) (4,500,563) $ 226,866,338 $ 211,013,130 Facilities 1, 2 and 3 During the year, certain terms of facilities 1 and 2 were renegotiated and facility 3 was added. Financing costs of $842,690 were presented as a reduction to longterm debt and amortized by using the effective interest rate method over the expected term of the related debt. Facility 1 consists of a term loan whose maturity was extended during the year to May This facility is secured by firstranking hypothecs on all IPT's assets and by a hypothecsecured guarantee granted on the assets of 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 as at December 31, 2008; $33,000,000 as at December 31, 2007), primerate advances ($93,000 as at December 31, 2008 and December 31, 2007) or LIBOR advances (US$5,000,000 as at December 31, 2008 and December 31, 2007), each with an applicable credit margin based on the adjusted 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, as at December 31, 2008 and December 31, 2007), plus an applicable credit margin based on the adjusted ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization recorded by certain IPT subsidiaries. Innergex Power Income Fund 18