Innergex Power Income Fund I Third Quarter 2006

Transcription

1 Innergex Power Income Fund I Third Quarter

2 MESSAGE TO UNITHOLDERS On behalf of the Board of Trustees, we are pleased to present the financial results of Innergex Power Income Fund for the third quarter and for the ninemonth period ended. Third Quarter Results Our growth and diversification strategy continue to bear fruit. The 49.9 MW Rutherford Creek facility, acquired on December 15,, continues to contribute to the increase in the Fund s results. The total hydroelectric production of 165,814 MWhr represents an increase of 108% compared to the third quarter of. The Rutherford Creek facility alone produced 66,484 MWhr of electricity, representing 40% of the Fund s total production. However, hydrology conditions at the Chaudière and Rutherford Creek facilities were lower than the historical average for the quarter. Gross revenues totalled $10.2 million, an 81% increase compared to. The earnings before interest, provision for income taxes, depreciation and amortization, other expenses and revenues, and noncontrolling interest ( EBITDA ) doubled compared to last year, and stood at $8.2 million. Net income increased by 128% compared to and totalled $2.5 million ($0.10 per unit, representing an increase of 91%). Without taking into consideration the acquisition of Rutherford Creek facility, the gross revenues for the quarter totalled $6.6 million compared to $5.6 million in. This increase can be explained by the good performance of other facilities such as StPaulin and Windsor facilities. The growth in the results also stems from the fact that hydrology conditions at the Fund s facilities in were below the historical averages. Period Results Since January, the facilities have produced 496,987 MWhr, an increase of 64% compared to the corresponding period in. The contributions made by the Rutherford Creek facility and hydrology conditions that were 4% higher than the Fund s historical average allowed the Fund to post 52% higher gross revenues at $32.3 million, 60% higher EBITDA at $25.8 million, and a 62% higher net income at $10.4 million ($0.42 per unit, an increase of 36%), compared to last year. Net Distributable Cash and Distribution Payout Ratio For the quarter, net distributable cash increased by 72%, standing at $7.3 million (or $0.29 per unit, an increase of 44%). Since the beginning of the year, the net distributable cash has totalled $21.1 million, representing an increase of 47% compared to the same period in (or $0.86 per unit, representing an increase of 23%). The Fund s distribution payout ratio stands at 84% for the ninemonth period compared to 101% in. This decrease of the ratio can be partly explained by the acquisition of the Rutherford Creek facility which largely contributes to the Fund s results during the period from May to August, and by better hydrology conditions. Minister Flaherty Announcement on October 31, The Minister of Finance of Canada, Mr. Jim Flaherty, has proposed tax measures related to publicly traded income trusts and limited partnerships. These measures result in the application of a tax similar to that of corporations and making taxable distributions considered as dividends. These measures will become effective as of January 1, 2011 for the Fund. The Fund is currently evaluating the potential impact of this announcement. Preliminary estimates are presented in the Management Discussion and Analysis ( Outlook section) of the quarterly report. [Signed] Gilles Lefrançois, CA President and Chief Executive Officer Innergex Management Inc. Manager of the Fund [Signed] Jean La Couture, FCA Chairman of the Board of Trustees Innergex Power Trust November 2, Innergex Power Income Fund Third Quarter 2

3 SUMMARY TABLE OF FACILITIES Facility Installed Capacity (MW) Expected Annual Production (MWhr) Electricity Purchaser Expiry of Power Purchase Agreement StPaulin ,082 HydroQuébec 2014 Windsor ,000 HydroQuébec 2016 Chaudière ,651 HydroQuébec 2019 Portneuf ,003 HydroQuébec 2021 Portneuf ,024 HydroQuébec 2021 Portneuf ,670 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 TOTAL ,168 (1) British Columbia Hydro and Power Authority (2) Ontario Electricity Financial Corporation REMAINING WEIGHTED AVERAGE LIFE OF POWER PURCHASE AGREEMENTS 15.8 YEARS HIGHLIGHTS ThreeMonth ThreeMonth Power generated (MWhr) 165,814 79, , ,648 Gross revenues $ 10,193,008 $ 5,640,321 $ 32,341,253 $ 21,244,430 EBITDA 8,216,346 4,123,851 25,815,471 16,139,162 Net income 2,508,647 1,100,265 10,356,175 6,387,320 Distributable cash from operating activities $ 6,410,397 $ 3,163,121 $ 20,366,047 $ 13,768,190 Net cash released from levelization reserve 850,281 1,069, , ,219 Net distributable cash $ 7,260,678 $ 4,232,747 $ 21,142,047 $ 14,431,409 Net distributable cash per unit $ $ $ $ Distributions declared $ 5,954,043 $ 4,877,823 $ 17,862,128 $ 14,633,467 Distributions declared per unit $ $ $ $ Distribution payout ratio 82% 115% 84% 101% Innergex Power Income Fund Third Quarter 3

4 CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, (Audited) Assets Current assets Cash and cash equivalents Receivables Funds held in trust Current portion of reserve accounts Current portion of future income taxes Other current assets $ 8,802,850 3,846,660 1,552, ,327 65,063 2,985,617 $ 4,320,526 7,645,249 1,547, ,925 67,700 2,463,665 $ 17,938,509 $ 16,946,535 Reserve accounts Capital assets Intangible assets Future income taxes $ 12,958, ,142,163 92,534,787 3,240,330 $ 13,093, ,749,675 97,535,707 3,489,649 $ 349,813,990 $ 358,814,872 Liabilities and Unitholders Equity Current liabilities Accounts payable and accrued liabilities Distribution payable to unitholders Balance of acquisition price Current portion of longterm debt $ 5,972,046 1,984,681 2,642, ,408 $ 7,554,527 1,943,540 2,642, ,118 $ 11,172,172 $ 12,679,222 Longterm debt Future income taxes Noncontrolling interest Unitholders equity $ 106,664,630 2,915,820 11,906, ,154,942 $ 107,727,516 2,771,603 10,989, ,647,096 See accompanying Notes to Unaudited Consolidated Financial Statements. $ 349,813,990 $ 358,814,872 Innergex Power Income Fund Third Quarter 4

5 CONSOLIDATED STATEMENTS OF INCOME For the ThreeMonth and Periods Ended September 30 (Unaudited) ThreeMonth ThreeMonth Gross revenues $ 10,193,008 $ 5,640,321 $ 32,341,253 $ 21,244,430 Operating expenses 1,388,953 1,032,903 4,712,096 3,623,576 Operating income $ 8,804,055 $ 4,607,418 $ 27,629,157 $ 17,620,854 General and administrative expenses 587, ,567 1,813,686 1,481,692 Earnings before interest, provision for income taxes, depreciation and amortization, other expenses and revenues and noncontrolling interest ( EBITDA ) $ 8,216,346 $ 4,123,851 $ 25,815,471 $ 16,139,162 Interest on longterm debt 1,691, ,211 5,085,593 2,290,954 Depreciation and amortization 3,120,860 2,336,126 9,364,043 6,997,708 Other expenses and (revenues) (Note 2) 460,271 (179,027 ) (673,102 ) (457,126 ) Income before provision for income taxes and noncontrolling interest $ 2,944,129 $ 1,193,541 $ 12,038,937 $ 7,307,626 Provision for income taxes Current Future Income before noncontrolling interest 239, , , , , , , ,806 $ 410,768 $ 303,395 $ 765,771 $ 868,899 $ 2,533,361 $ 890,146 $ 11,273,166 $ 6,438,727 Income (loss) allocated to noncontrolling interest 24,714 (210,119 ) 916,991 51,407 Net income $ 2,508,647 $ 1,100,265 $ 10,356,175 $ 6,387,320 Weighted average number of trust units outstanding 24,679,867 20,646,867 24,679,867 20,646,867 Net income per trust unit $ 0.10 $ 0.05 $ 0.42 $ 0.31 See accompanying Notes to Unaudited Consolidated Financial Statements. Innergex Power Income Fund Third Quarter 5

6 CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS EQUITY For the September 30 (Unaudited) Number of Units Amount Number of Units Amount Unitholders capital account beginning and end of period 24,679,867 $ 248,070,369 20,646,867 $ 195,913,770 Cumulative translation adjustment beginning of period Translation adjustment for the period $ (4,118 ) 13,799 $ (3,758 ) Cumulative translation adjustment end of period $ 9,681 $ (3,758 ) Deficit beginning of period $ (23,419,155 ) $ (12,954,445 ) Net income 10,356,175 6,387,320 Distributions declared to unitholders (17,862,128 ) (14,633,467 ) Deficit end of period $ (30,925,108 ) $ (21,200,592 ) Unitholders equity end of period 24,679,867 $ 217,154,942 20,646,867 $ 174,709,420 See accompanying Notes to Unaudited Consolidated Financial Statements. Innergex Power Income Fund Third Quarter 6

7 CONSOLIDATED STATEMENTS OF CASH FLOWS For the ThreeMonth and Periods Ended September 30 (Unaudited) ThreeMonth ThreeMonth Cash Flows from Operating Activities: Net income Adjustments for: Depreciation of capital assets Amortization of intangible assets Provision for future income taxes Loss on disposal of capital assets Unrealized loss (gain) on derivative instruments Income allocated to noncontrolling interest Unrealized exchange loss (gain) Changes in noncash working capital items $ 2,508,647 1,482,426 1,638, , ,265 24,714 6,809 3,233,827 $ 1,100,265 1,122,535 1,213, ,639 (210,119 ) (139,223 ) 189,718 $ 10,356,175 4,448,076 4,915, , (53,163 ) 916,991 (43,773 ) 1,742,261 $ 6,387,320 3,355,647 3,642, ,806 51,407 (71,608 ) (3,250,427 ) $ 9,787,168 $ 3,459,406 $ 22,538,355 $ 10,840,206 Cash Flows from Financing Activities: Distributions paid to unitholders Repayment of operating loan Repayment of longterm debt $ (5,954,043 ) (136,136 ) $ (4,877,823 ) (125,391 ) $ (17,820,987 ) (400,155 ) $ (14,615,917 ) (465,152 ) (368,571 ) $ (6,090,179 ) $ (5,003,214 ) $ (18,221,142 ) $ (15,449,640 ) Cash Flows from Investing Activities: Acquisition of capital assets Proceeds of disposal of capital assets Net cash released from levelization reserve Investments in the major maintenance reserve account Cash released from Horseshoe Bend site work reserve $ (17,924 ) 850,281 (142,944 ) $ (254,701 ) 1,069,626 (106,567 ) $ (187,442 ) 6, ,000 (430,047 ) $ (435,950 ) 663,219 (322,443 ) 45,078 45,078 $ 689,413 $ 753,436 $ 165,111 $ (50,096 ) Net increase (decrease) in cash and cash equivalents $ 4,386,402 $ (790,372 ) $ 4,482,324 $ (4,659,530 ) Cash and cash equivalents, beginning of period 4,416,448 5,208,274 4,320,526 9,077,432 Cash and cash equivalents, end of period $ 8,802,850 $ 4,417,902 $ 8,802,850 $ 4,417,902 Supplemental cash flows disclosure : Interest paid Unpaid additions to capital assets $ 1,729,190 $ 6,825 $ 881,284 $ 50,400 $ 5,162,116 $ 6,825 $ 2,414,052 $ 50,400 See accompanying Notes to Unaudited Consolidated Financial Statements. Innergex Power Income Fund Third Quarter 7

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the ThreeMonth and Periods Ended September 30 (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 its operations on July 4, 2003, was established to acquire and own interests in renewable power generating facilities (the ''Facilities'') and to acquire loans relating to some of the Facilities. As at, the Fund owned interests in: i. Innergex, Limited Partnership, which owns the three Portneuf facilities, the Chaudière facility and the SaintPaulin facility; ii. TrentSevern Power, Limited Partnership, which owns the Batawa facility; iii. Innergex Montmagny, Limited Partnership, which owns the Montmagny facility; iv. HydroWindsor, Limited Partnership, which owns the Windsor facility; v. Horseshoe Bend Hydroelectric Company, which owns the Horseshoe Bend facility; and vi. Rutherford Creek Power, Limited Partnership, which owns the Rutherford Creek facility. Innergex Management Inc. (the Manager ) administers the Fund and manages Innergex Power Trust, a whollyowned subsidiary of the Fund, which owns the assets and investments of the Fund. The Manager also provides management services to the operators of the Fund Facilities. 1. Basis of Presentation: The interim consolidated financial statements included in this report reflect normal and recurring adjustments which are, in the opinion of the Fund s Manager, considered necessary for a fair presentation. These financial statements have been prepared in conformity with Canadian Generally Accepted Accounting Principles. The same accounting policies and methods of application, as described in the Fund s latest annual report, have been used. However, these consolidated financial statements do not include all disclosures required under Canadian Generally Accepted Accounting Principles and accordingly should be read in conjunction with the consolidated financial statements and the notes thereto included in the Fund s latest annual report. The Fund s revenues are variable with each season and as a result, earnings of any one interim period should not be considered as indicative of results for an entire year. These interim financial statements have neither been audited nor reviewed by our external auditors. Some of the comparative figures have been reclassified to conform to the current year s presentation. 2. Other expenses and revenues: The following items are included under Other expenses and (revenues): ThreeMonth ThreeMonth Investment income $ (234,222) $ (125,832 ) $ (567,817 ) $ (387,352 ) Unrealized loss (gain) on derivative instruments 721,265 (53,163 ) Loss on disposal of capital assets Exchange gain 492 (26,772 ) (53,195 ) (52,614 ) (69,774 ) $ 460,271 $ (179,027 ) $ (673,102) $ (457,126 ) Innergex Power Income Fund Third Quarter 8

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the ThreeMonth and Periods Ended September 30 (Unaudited) 3. Segmented Information: The Fund has operations in Canada and the United States. The information by geographic region is as follows: ThreeMonth ThreeMonth Gross Revenues: Canada $ 8,821,830 $ 4,231,706 $ 29,262,736 $ 18,197,321 United States 1,371,178 1,408,615 3,078,517 3,047,109 $ 10,193,008 $ 5,640,321 $ 32,341,253 $ 21,244,430 December 31, Capital Assets: Canada $ 217,513,940 $ 221,761,693 United States 5,628,223 5,987,982 $ 223,142,163 $ 227,749,675 Intangible Assets: Canada $ 90,482,055 $ 95,332,328 United States 2,052,732 2,203,379 $ 92,534,787 $ 97,535,707 Innergex Power Income Fund Third Quarter 9

10 MANAGEMENT S DISCUSSION AND ANALYSIS For the ThreeMonth and the Periods Ended This Management Discussion and Analysis ( MD&A ) was prepared as of November 2,. Overview Innergex Power Income Fund ( Innergex Power or the Fund ) is an unincorporated openended income trust that indirectly owns ten hydroelectric power generating facilities with a total installed capacity of MW. The facilities are operated and managed by Innergex Management Inc. (the Manager ) under longterm agreements with the Fund. The objective of the Fund is to distribute the resulting cash flows of the Fund to unitholders on a monthly basis. Standard & Poor s Rating Service ( S&P ) has assigned a stability rating of SR2 (Stable) 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 Innergex Power for the threemonth and ninemonth periods ended. This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements of the Fund for the threemonth and ninemonth periods ended, and the notes thereto, as well as the Fund s Annual Report for the year ended December 31,. The consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ( GAAP ). The Fund reports its results in Canadian dollars. Disclosure Controls and Procedures In accordance with Regulation regarding the certification of disclosure in issuers annual and interim filings, the President and Chief Executive Officer and the Executive VicePresident and Chief Financial Officer of the Manager have designed such disclosure controls and procedures or caused them to be designed under their supervision, to provide reasonable material assurance that material information relating to the Fund, including its consolidated subsidiaries, is disclosed to them by other persons within those entities, particularly during the period in which the interim filings are being prepared. ForwardLooking Statements In the interest of providing unitholders and potential investors with information regarding Innergex Power, including management s assessment of future plans and operations, certain statements in this MD&A are forwardlooking statements 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. Although the Fund believes that the expectations conveyed by the forwardlooking statements are reasonable, based on the information available on the date that such forwardlooking statements were made, there can be no assurance that such expectations will prove to be correct. All subsequent forwardlooking statements, whether written or orally attributable to the Fund or to a person acting on its behalf, are expressly qualified in their entirety by these cautionary statements. Key Performance Indicators The Fund measures its performance through key indicators that include power generated in megawatthours (MWhr), distributable cash from operating activities, net distributable cash, net distributable cash per unit, and EBITDA, which is defined as earnings before interest, provision for income taxes, depreciation and amortization, other expenses and revenues, and noncontrolling interest. Other expenses and revenues include investment income, unrealized loss or gain on derivative instruments, exchange loss or gain, and loss on disposal of capital assets. These indicators are not recognized measures under Canadian GAAP. Consequently, they may not be comparable to those presented by other companies. The Fund believes that these indicators are important since they provide the reader with additional information about production, available distributable cash, and the Fund s ability to meet its cash distribution objectives. Seasonality The results of the Fund have a seasonal character due to variations in the water conditions from one quarter to another during a typical year. The second and third quarters of the year are generally those in which gross revenues are higher. The results of a quarter should not be considered to be representative of the results of a full year. Innergex Power Income Fund Third Quarter 10

11 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) For the ThreeMonth and the Periods Ended OPERATING RESULTS Gross Revenues In the third quarter, gross revenues increased by 81% compared to the third quarter of, and stood at $10.2 million. This growth is mainly due to the Rutherford Creek facility, which contributed 40% of the Fund s production for the quarter, and to the exceptional performance of the StPaulin facility. The Fund s total production stood at 165,814 MWhr for the quarter, compared to 79,748 MWhr for the third quarter of. However, this production level is 6% lower than the historical average. For the first nine months of, gross revenues totalled $32.3 million, an increase of 52% compared to the same period in. The contributions made by the Rutherford Creek facility and hydrology conditions that were 4% higher than the historical average explain this growth. The Fund has produced 496,987 MWhr since the beginning of the year, compared to 303,648 MWhr produced in, an increase of 64%. The Portneuf facilities are exempted from annual hydrology variations pursuant to virtual energy clauses in the longterm Power Purchase Agreements ( PPA ) entered into with HydroQuébec. These three facilities represent approximately 25% of the Fund s forecasted total annual production. In addition, the results for benefited from increases linked to inflation, by a minimum 3%, in electricity rates under the longterm PPAs with HydroQuébec. Inflation had a positive impact on the Fund s results, as the related increase in revenues is greater than the increase in operating costs. Production in MWhr ThreeMonth Periods % Historical Average % StPaulin 13,363 3, % 8, % Portneuf ,352 42, % 42, % Chaudière 13,555 10, % 17,642 77% Batawa 3,951 1, % 3, % Montmagny % 1,044 85% Windsor 8,208 5, % 5, % Rutherford Creek 66,484 80,000 83% Horseshoe Bend 16,018 15, % 16,694 96% 165,814 79, % 175,467 94% Production in MWhr Periods % Historical Average % StPaulin 41,606 29, % 31, % Portneuf , , % 111, % Chaudière 99,341 71, % 84, % Batawa 25,515 21, % 23, % Montmagny 4,893 4, % 5,718 86% Windsor 27,936 23, % 23, % Rutherford Creek 139, ,700 90% Horseshoe Bend 43,356 39, % 41, % 496, , % 476, % Operating Expenses and General and Administrative Expenses Operating expenses for the quarter stood at $1.4 million compared to $1.0 million in, representing a growth of 34%. The increase in operating expenses is due to the Rutherford Creek facility. General and administrative expenses increased by 22%, from $0.5 million to $0.6 million. For the ninemonth period, operating expenses stood at $4.7 million compared to $3.6 million in, and general and administrative expenses stood at $1.8 million compared to $1.5 million in. This increase in operating expenses and in general and administrative expenses is mainly due to the acquisition of the Rutherford Creek facility. Innergex Power Income Fund Third Quarter 11

12 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) For the ThreeMonth and the Periods Ended EBITDA For the third quarter, earnings before interest, provision for income taxes, depreciation and amortization, other expenses and revenues, and noncontrolling interest ( EBITDA ) posted a growth of 99% totalling $8.2 million, compared to $4.1 million for the third quarter of. For the ninemonth period, the Fund posted an EBITDA of $25.8 million, compared to $16.1 million. These increases are mainly due to the contribution of the Rutherford Creek facility. The Fund calculates the EBITDA as follows: ThreeMonth ThreeMonth Net income $ 2,508,647 $ 1,100,265 $ 10,356,175 $ 6,387,320 Add (deduct): Interest on long term debt 1,691, ,211 5,085,593 2,290,954 Depreciation and amortization 3,120,860 2,336,126 9,364,043 6,997,708 Other expenses and (revenues) 460,271 (179,027 ) (673,102 ) (457,126 ) Provision for income taxes 410, , , ,899 Income (loss) allocated to noncontrolling interest 24,714 (210,119 ) 916,991 51,407 EBITDA $ 8,216,346 $ 4,123,851 $ 25,815,471 $ 16,139,162 Interest Expenses For the quarter, the $1.7 million interest expense on the longterm debt was higher than the $0.8 million interest expense in. The increase in the interest expense is due to the Fund s additional indebtedness of $50.0 million following the Rutherford Creek facility acquisition. The average effective interest rate for the quarter in was 6.26% compared to 5.22% in. For the ninemonth period, the interest expenses related to the longterm debt were $5.1 million compared to $2.3 million in. The average effective interest rate for the ninemonth period was 6.25% compared to 5.16% in. Innergex Power s longterm debt amounts to $106.7 million. It consists of a $48.6 million term loan maturing in July 2009 and bearing interest at variable rates, a $8.1 million term loan bearing interest at a fixed rate of 8.25% with principal repayment until December 2016, and a longterm debt of $50.0 million bearing interest at a fixed rate of 6.88% until its maturity in June Principal repayment on this last debt will begin only in The Fund entered into SWAP transactions to eliminate the interestrate risk on a total of $30.0 million of longterm debt. Taking into account these SWAP contracts and the debt bearing fixed interest rates, the interest rate on 83% of the Fund s long term debt is effectively fixed at a weighted average rate of 6.29%, including the prevailing applicable margin. Depreciation and Amortization Depreciation and amortization for the third quarter of totalled $3.1 million, 34% higher than the depreciation and amortization of $2.3 million in. For the ninemonth period, depreciation and amortization totalled $9.4 million compared to $7.0 million in. This increase is mainly due to the acquisition of the Rutherford Creek facility in December. Other Expenses and Revenues Other expenses and revenues include investment income, unrealized loss or gain on derivative instruments, exchange loss or gain, and loss on disposal of capital assets. Investment income consists of interest on the reserve accounts and cash on hand. Innergex Power Income Fund Third Quarter 12

13 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) For the ThreeMonth and the Periods Ended During the third quarter, the Fund recognized an unrealized loss on derivative instruments, that totalled $0.7 million, which represents the change in market value of the three SWAP contracts entered into during. The unrealized gain on derivative instruments since the beginning of the year totalled $0.05 million. The Fund does not have or issue financial instruments for speculation purposes. The loss on derivative instruments does not affect the Fund s liquidities. Noncontrolling Interest The noncontrolling interest represents the share of pretax earnings attributable to IHI Hydro Inc. ( IHI ), a subsidiary of TD Capital Group Limited, which holds a 24.9% interest in Innergex Holdings LP, an Innergex Power subsidiary. Due to the performance of the Chaudière, StPaulin and Portneuf facilities, the income allocated to the noncontrolling interest for the third quarter was $0.02 million compared to a loss of $0.2 million in, and for the first nine months of the year, the income allocated totalled $0.9 million compared to $0.05 million in. Provision for Income Taxes For the quarter, the provision for income taxes, including current and future income taxes, was $0.4 million compared to a provision of $0.3 million in. For the ninemonth period in, the provision for income taxes was $0.8 million, down from $0.9 million in. This decrease for the ninemonth period stems from a reduction in Canadian income tax rates for corporations. Following the announcement of this reduction, the Fund showed a reversal of the provision for future income taxes during the second quarter of. Net Income Mainly due to the Rutherford Creek acquisition, the Fund recorded a net income of $2.5 million, or $0.10 per unit, for the third quarter of compared to a net income of $1.1 million, or $0.05 per unit, recorded in. For the first ninemonth period of, net income stood at $10.4 million, or $0.42 per unit, compared to $6.4 million, or $0.31 per unit, in. As at, the Fund had a total of 24,679,867 units outstanding, compared to 20,646,867 units outstanding, as at. LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operating Activities During the third quarter, the Fund generated cash flows from operating activities, totalling $9.8 million, compared to $3.5 million in. Changes in the noncash working capital items, totalling $3.2 million, were mainly the result of a decrease in accounts receivable, offset by a decrease in accounts payable. For the third quarter of, changes in the noncash working capital items, totalling $0.2 million, were mainly the result of a decrease in accounts receivable, offset by an increase in other current assets. For the ninemonth period, the Fund generated cash flows from operating activities, that totalled $22.5 million, compared to a cash flow of $10.8 million in. Changes in noncash working capital items, totalling $1.7 million, were mainly the result of a decrease in accounts receivable, offset by a decrease in accounts payable. For the ninemonth period in, changes in the noncash working capital items, totalling $3.2 million, were mainly the result of a decrease in accounts payable and accrued liabilities and an increase in other current assets, partially offset by a decrease in accounts receivable. Cash Flows from Financing Activities Cash flows used for financing activities for the third quarter totalled $6.1 million. This amount includes $6.0 million paid out to unitholders during the period, and the net repayment of longterm debt, which amounted to $0.1 million. Cash flows used for financing activities in the third quarter of totalled $5.0 million. This amount included $4.9 million paid out to unitholders during the period and $0.1 million used for the net repayment of longterm debt. For the ninemonth period, cash flows used for financing activities totalled $18.2 million. This amount includes $17.8 million paid out to unitholders during the period, and the repayment of longterm debt, which amounted to $0.4 million. Cash flows used for financing activities for the corresponding period in totalled $15.4 million. This amount included $14.6 million paid out to unitholders during the period, $0.5 million for the repayment of the operating loan, and $0.4 million used for the repayment of longterm debt. Innergex Power Income Fund Third Quarter 13

14 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) For the ThreeMonth and the Periods Ended The table below summarizes the distributions to date. D ISTRIBUTIONS Record Date Payment Date Amount Amount per Unit January 31, February 24, $ 1,984,681 $ February 28, March 24, 1,984, March 31, April 25, 1,984, April 28, May 25, 1,984, May 31, June 22, 1,984, June 30, July 25, 1,984, July 31, August 25, 1,984, August 31, September 25, 1,984, September 29, October 25, 1,984, $ 17,862,128 $ Cash Flows from Investing Activities During the quarter, a sum of $0.8 million was withdrawn from the levelization reserve to levelize monthly cash distributions which is consistent with initial forecasts. In addition, $0.1 million was invested in the major maintenance reserve accounts. For the same quarter in, the Fund released an amount of $1.1 million from the levelization reserve and invested an amount of $0.1 million in the major maintenance reserve accounts. For the ninemonth period, the Fund invested $0.4 million in the major maintenance reserve accounts and withdrew $0.8 million from the levelization reserve. During the same period in, the Fund invested $0.3 million in the major maintenance reserve accounts and released $0.7 million from the levelization reserve. No significant acquisition of assets occurred during the third quarter of. During the first nine months of, $0.2 million was used, mainly to pay for assets acquired in. During the third quarter and during the ninemonth period of, cash and cash equivalents increased by $4.4 million and $4.5 million, respectively. As at, the Fund held cash and cash equivalents of $8.8 million. Reserve Accounts As at, the reserve accounts stood at $13.6 million, including $3.8 million in the levelization reserve, $8.6 million in the hydrology reserve, and $1.3 million in the major maintenance reserve. As at December 31,, the reserve accounts stood at $14.0 million, including $4.6 million in the levelization reserve, $8.6 million in the hydrology reserve, and $0.8 million in the major maintenance reserve. Since the initial public offering on July 4, 2003, no amount has been released from the hydrology or major maintenance reserve accounts. Sums were added to the hydrology reserve following each acquisition carried out since the initial public offering. An amount of $0.65 million was invested following the acquisition of the Windsor facility in April 2004; an amount of $1.5 million was invested following the acquisition of the Horseshoe Bend facility in December 2004; and, an amount of $2.4 million was invested following the acquisition of the Rutherford Creek facility in December. Assets and Financing Sources As at, total assets of the Fund amounted to $349.8 million. Working capital stood at $6.8 million, with a working capital ratio of 1.61:1, compared to total assets of $358.8 million, working capital of $4.3 million, and a working capital ratio of 1.34:1 as at December 31,. The Fund considers its current working capital sufficient to meet all of its shortterm needs. If necessary, the Fund can use a bank credit facility amounting to $5.0 million which was unused as at. Total debt was $107.2 million and the debttoenterprise value ratio was 24.2% compared to a total debt of $108.3 million, and a debttoenterprise value ratio of 24.9% as at December 31,. Since the beginning of, the Fund has met all conditions related to its indebtedness. Innergex Power Income Fund Third Quarter 14

15 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) For the ThreeMonth and the Periods Ended DISTRIBUTABLE CASH AND CASH DISTRIBUTIONS Each month, the Fund distributes cash, consisting of distributable cash from operating activities plus an amount drawn from (or reinvested into) the levelization reserve, as per the initial forecast, and adjusted to take acquisitions into account. For the quarter, the distributable cash from operating activities totalled $6.4 million. The Fund released $0.9 million from the levelization reserve account, thereby generating net distributable cash of $7.3 million. Cash distributions declared totalled $6.0 million or $0.24 per trust unit. For the third quarter of, the Fund generated distributable cash from operating activities that totalled $3.1 million, and released $1.1 million from the levelization reserve. Net distributable cash was $4.2 million and cash distributions declared totalled $4.9 million or $0.24 per trust unit. For the ninemonth period of, distributable cash from operating activities totalled $20.4 million and the Fund drew $0.8 million from the levelization reserve, resulting in net distributable cash of $21.1 million. Cash distributions declared were $17.9 million or $0.72 per unit. For the ninemonth period in, distributable cash from operating activities totalled $13.8 million and the release from the levelization reserve amounted to $0.7 million, resulting in net distributable cash of $14.4 million. Cash distributions declared totalled $14.6 million or $0.71 per unit. For the third quarter of, the distribution payout ratio stood at 82% compared to 115% in. For the ninemonth period, the distribution payout ratio stood at 84% in compared to 101% in. This decrease in the distribution payout ratio is due to results that were lower than expected, to betterthanexpected hydrology conditions for the ninemonth period in, and to the seasonal character of the Fund s production. It is important to note that a distribution payout ratio that is lower than 100% allows the Fund to accumulate cash and cash equivalents on its balance sheet, thereby giving the Fund greater longterm flexibility and stability. The Fund calculates net distributable cash as follows: N ET DISTRIBUTABLE CASH ThreeMonth ThreeMonth Earnings before interest, provision for income taxes, depreciation and amortization, other expenses and revenues and noncontrolling interest ( EBITDA ) $ 8,216,346 $ 4,123,851 $ 25,815,471 $ 16,139,162 Add (deduct) : (Interest on longterm debt) (1,691,086 ) (773,211 ) (5,085,593 ) (2,290,954 ) (Major maintenance reserve account) (142,944 ) (106,567 ) (430,047 ) (322,443 ) Investment income 234, , , ,352 Realized exchange gain (loss) 33,581 (86,028 ) 8,841 (1,834 ) (Current income taxes) (239,722 ) (120,756 ) (510,442 ) (143,093 ) Distributable cash from operating activities $ 6,410,397 $ 3,163,121 $ 20,366,047 $ 13,768,190 Add: Net amount released from levelization reserve 850,281 1,069, , ,219 Net distributable cash $ 7,260,678 $ 4,232,747 $ 21,142,047 $ 14,431,409 Number of units outstanding 24,679,867 20,646,867 24,679,867 20,646,867 Net distributable cash per unit $ $ $ $ Distributions declared $ 5,954,043 $ 4,877,823 $ 17,862,128 $ 14,633,467 Distributions declared per unit $ $ $ $ Distribution payout ratio 82% 115% 84% 101 % Innergex Power Income Fund Third Quarter 15

16 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) For the ThreeMonth and the Periods Ended Segmented Information The Fund has nine hydroelectric power plants in Canada and one in the U.S. The information by geographic region is as follows: ThreeMonth ThreeMonth Gross Revenues: Canada $ 8,821,830 $ 4,231,706 $ 29,262,736 $ 18,197,321 United States 1,371,178 1,408,615 3,078,517 3,047,109 $ 10,193,008 $ 5,640,321 $ 32,341,253 $ 21,244,430 December 31, Capital Assets: Canada $ 217,513,940 $ 221,761,693 United States 5,628,223 5,987,982 $ 223,142,163 $ 227,749,675 Intangible Assets: Canada $ 90,482,055 $ 95,332,328 United States 2,052,732 2,203,379 $ 92,534,787 $ 97,535,707 Related Party Transactions The Manager The Manager provides services to the Fund and its subsidiaries under the initial terms of three 20year agreements, namely a Management Agreement, an Administration Agreement, and a Service Agreement. The Manager is also entitled to incentive fees corresponding to 25% of the annual distributable cash per trust unit exceeding $0.925 per trust unit. For the quarter ended, the Manager received $0.34 million for the services provided under the three agreements, including an amount of $0.08 million for incentive fees. For the quarter ended, the Manager received the sum of $0.26 million for the services provided under the three agreements, including an amount of $0.03 million for incentive fees. Innergex Power Income Fund Third Quarter 16

17 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) For the ThreeMonth and the Periods Ended For the ninemonth period ended, the Manager received the sum of $1.2 million, including an amount of $0.25 million for incentive fees and $0.15 million for fees related to the financing and acquisition of the Rutherford Creek facility, carried out in December. For the same period in, the Manager received the sum of $0.81 million, including $0.10 million for incentive fees. IHI Hydro Inc. IHI Hydro Inc. owns a minority interest in subsidiaries of the Fund. IHI Hydro Inc. is also indebted towards another subsidiary of the Fund. The obligations of IHI Hydro Inc. are secured in part against the assets of the subsidiaries of the Fund. In consideration for allowing security on their assets, the subsidiaries are entitled to a guarantee fee equal to 10% of a portion of the annual capital and interest amounts paid by IHI Hydro Inc. The guarantee fee is payable until 2009, depending on the facility. For the quarters ended and, the guarantee fees were $0.09 million and $0.26 million, respectively, and were included as gross revenues on the income statement. For the ninemonth periods of and, the guarantee fees were $0.27 million and $0.79 million, respectively. Quarterly Financial Information For the threemonth periods ended: CDN $ millions Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 Dec. 31 (except otherwise noted) 2004 Power generated (MWhr) 165, , , ,971 79, ,534 76,366 92,949 Gross revenues EBITDA Net income Net income per unit ($/unit) Distributable cash from operating activities Net releases (investments) from (in) levelization reserve 0.9 (1.1) (1.2) 0.7 Net distributable cash Net distributable cash per unit ($/unit) Distributions declared Distributions declared per unit ($/unit) Distribution payout ratio 82% 80% 92% 89% 115% 92% 99% 96% Risk Management The Fund uses derivative financial instruments to manage its exposure to interestrate risk on debt financing. The Fund does not have or issue financial instruments for speculation purposes. As at, the Fund held a total of $30.0 million in SWAP contracts ($30.0 million as at December 31, ), with a fair market value of $0.3 million ($0.3 million as at December 31, ). For the third quarter of, the loss on the variation in fair market value of the SWAP contracts shown on the statements of income was $0.7 million (nil in ). The gain since the beginning of the year stood at $0.05 million (nil in ). Taking into account these SWAP contracts and the debt bearing fixed interest rates, 83% of the Fund s long term debt is effectively fixed at a weighted average rate of 6.29%, including the prevailing applicable margin. Innergex Power Income Fund Third Quarter 17

18 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) For the ThreeMonth and the Periods Ended Risks and Uncertainties For an overview of the risks and uncertainties associated with the Fund s business, reference is made to the Risk and Uncertainties section found in the Fund s Annual Report for the period ended December 31,. It is the view of the Manager that the risk factors discussed in the Annual Report have remained substantially unchanged. Outlook The Manager believes that the Fund will continue to generate stable operating cash flows. The financial results of the Fund remain in line with our expectations. The acquisition of the Rutherford Creek facility on December 15,, will continue to result in the growth of gross revenues, EBITDA, and net distributable cash. On October 31,, the Minister of Finance of Canada, Mr. Jim Flaherty, has proposed tax measures related to publicly traded income trusts and limited partnerships. These measures result in the application of a tax similar to that of corporations and making taxable distributions considered as dividends. These measures will become effective as of January 1, 2011 for the Fund. The Fund currently evaluates the impact of these measures using the hypothesis that 2011 results would be identical to and that the taxable portion of the distributions would be the same at 35%. The consequences for a unitholder that would have received a $1 distribution would be as follows: Taxable Investor Nontaxable Investor Actual Tax Measures Proposed Tax Measures Actual Tax Measures Proposed Tax Measures Distributable $1.00 $1.00 $1.00 $1.00 amount before tax Tax paid by the $0.00 $0.11 $0.00 $0.11 Fund (a) Distribution $1.00 $0.89 $1.00 $0.89 after the Fund s tax Tax paid by the $0.16 $0.05 $0.00 $0.00 unitholder (b) Net amount (c) $0.84 $0.84 $1.00 $0.89 (a) (b) (c) 31.5% on a taxable portion of 35% of the distribution. Tax payable on the disposal of unit would not be modified. These measures do not have a force of law and could be modified or not adopted. The Fund recommends that unitholders consult their tax advisors regarding the tax implications of this proposition. Additional Information and Updates Updated information on the Fund is available through its regular press releases, quarterly financial statements, annual reports and annual information forms on the Fund s Web site at or on the SEDAR Web site at Innergex Power Income Fund Third Quarter 18

19 INVESTOR INFORMATION Transfer Agent, Registrar and Trustee: Computershare Trust Company of Canada 1100, University Street, local 1200, Montreal, Quebec H3B 2G7 Investor Relations: Jean Trudel, Vice President, Finance and Investor Relations, or Michel Letellier, Executive Vice President and Chief Financial Officer Innergex Management Inc. Exchange Listing: Innergex Power Income Fund s units are listed on the Toronto Stock Exchange ( TSX ) and trade under the symbol IEF.UN. POWER INCOME FUND 1111, SaintCharles Street West East Tower, Suite 1255 Longueuil, Quebec J4K 5G4 Telephone : (450) Fax : (450) info@innergex.com