Power Income Fund. Renewable energy. Sustainable presence.

Transcription

1 Power Income Fund Renewable energy. Sustainable presence. Third Quarter

2 MESSAGE TO UNITHOLDERS On behalf of the Board of Trustees, we are pleased to present the financial results of ( Innergex Power or the Fund ) for the third quarter and the ninemonth period ended. Results Despite very poor water conditions during the quarter ended, the Fund announces gross revenues only 3.3% lower compared to the same quarter of and higher by 13.8% compared to the corresponding ninemonth period in. This excellent performance, considering poor water conditions, is mainly due to the fact that the three facilities located on the Portneuf River benefit from a virtual energy clause and the contribution of the Horseshoe Bend facility. In addition, the average electricity selling price increased because of the Horseshoe Bend facility s contribution and the minimum indexation included in the power purchase agreements with HydroQuébec. During the third quarter of, net income stood at $1.10 million, compared to $1.54 million in. For the ninemonth period, net income increased to $6.39 million from $6.18 million in. The Fund declared distributions of $ per unit during the quarter, 1% more than. For the ninemonth period ended, the Fund declared distributions of $ per unit or 2% more than for the corresponding period in. Thanks to the high level of cash available accumulated to date on its balance sheet, the Fund did not have to rely on its $6.17 million hydrology reserve for its monthly distributions. Announcement of the acquisition of a facility in British Columbia On September 16,, the Fund announced that it will add a tenth facility to its portfolio. The Rutherford Creek facility has an installed capacity of 49.9 MW and an expected annual production of 180 GWhr. This acquisition represents an investment of $ million including the assumption of a $50.00 million debt. The Fund issued 4,033,000 subscription receipts at a price of $13.85 for net proceeds of $53.06 million. The net proceeds from the offering closed on October 5, will be used by the Fund to partially finance the acquisition, to increase the Fund s hydrology reserve and to pay the expenses related to the acquisition. The Rutherford Creek facility will increase the installed capacity of the Fund by 62% and gross revenues by 32%. Closing of the transaction is expected to occur on or about November 15,. This acquisition is in line with the Fund s investment strategy since in addition to the diversification of its watersheds, it should be accretive to unitholders, raising distribution per unit by 2 to $0.965 on an annualized basis. [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

3 SUMMARY TABLE OF FACILITIES Facility Installed Capacity (MW) Expected Annual Production (GWhr) Electricity Purchaser Expiry of Power Purchase Agreement StPaulin HydroQuébec 2014 Windsor HydroQuébec 2016 Chaudière HydroQuébec 2019 Portneuf HydroQuébec 2021 Portneuf HydroQuébec 2021 Portneuf HydroQuébec 2021 Montmagny HydroQuébec 2021 Batawa OEFC (1) 2029 Horseshoe Bend Idaho Power Company 2030 TOTAL (1) Ontario Electricity Financial Corporation REMAINING WEIGHTED AVERAGE LIFE OF POWER PURCHASE AGREEMENTS 15.6 YEARS HIGHLIGHTS ThreeMonth ThreeMonth NineMonth NineMonth Power generated (MWhr) 79,748 95, , ,535 Gross revenues $ 5,640,321 $ 5,831,520 $21,244,430 $ 18,670,631 EBITDA 4,123,851 4,416,756 16,139,162 14,665,251 Net income 1,100,265 1,540,249 6,387,320 6,181,688 Distributable cash from operating activities $ 3,163,121 $ 3,710,236 $13,768,190 $ 12,820,907 Net cash released from levelization reserve 1,069,626 1,781, ,219 1,757,326 Net distributable cash $ 4,232,747 $ 5,491,940 $14,431,409 $ 14,578,233 Net distributable cash per unit Distributions declared 4,877,823 4,535,478 14,633,467 13,294,019 Distributions declared per unit Distribution payout ratio 115% 83% 101% 91% 3

4 CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, (Audited) ASSETS Current assets Cash and cash equivalents Receivables Current portion of reserve accounts Current portion of future income taxes Other current assets $ 4,417,902 2,725,846 4,267, ,820 1,560,968 $ 9,077,432 3,580,118 3,427, , ,306 $ 13,082,561 $ 17,226,608 Reserve accounts Capital assets Intangible assets Future income taxes $ 11,077, ,543,030 67,337,008 3,541,983 $ 12,324, ,773,133 71,053,029 3,849,799 $ 255,582,216 $ 268,227,506 LIABILITIES AND UNITHOLDERS EQUITY Current liabilities Operating loan Accounts payable and accrued liabilities Distribution payable to unitholders Current portion of future income taxes $ 7,502,678 1,625, ,635 $ 465,152 10,954,878 1,608,391 Current portion of longterm debt 528, ,566 $ 9,774,404 $ 13,524,987 Longterm debt Future income taxes Noncontrolling interest Unitholders equity $ 57,856,757 2,684,547 10,557, ,709,420 $ 58,692,076 2,545,437 10,505, ,959,325 See accompanying Notes to Unaudited Consolidated Financial Statements. $ 255,582,216 $ 268,227,506 4

5 CONSOLIDATED STATEMENTS OF INCOME F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30 (UNAUDITED) ThreeMonth ThreeMonth NineMonth NineMonth Gross revenues $ 5,640,321 $ 5,831,520 $ 21,244,430 $ 18,670,631 Operating expenses 1,032, ,648 3,623,576 2,808,479 Operating income $ 4,607,418 $ 4,834,872 $ 17,620,854 $ 15,862,152 General and administrative expenses 483, ,116 1,481,692 1,196,901 Earnings before interest, provision for income taxes, depreciation and amortization, investment income, exchange gain, and noncontrolling interest ( EBITDA ) $ 4,123,851 $ 4,416,756 $ 16,139,162 $ 14,665,251 Interest on longterm debt 773, ,419 2,290,954 1,891,180 Depreciation and amortization 2,336,126 2,254,826 6,997,708 6,448,917 (Investment income) (125,832 ) (84,399) (387,352) (256,346 ) (Exchange gain) (53,195 ) (69,774) Income before provision for income taxes and noncontrolling interest $ 1,193,541 $ 1,532,910 $ 7,307,626 $ 6,581,500 Provision for income taxes Current (Recoverable) Future 120, ,639 21, , ,806 (10,490 ) 162,746 $ 303,395 $ 21,878 $ 868,899 $ 152,256 Income before noncontrolling interest $ 890,146 $ 1,511,032 $ 6,438,727 $ 6,429,244 (Loss) Income allocated to noncontrolling interest (210,119 ) (29,217) 51, ,556 Net income $ 1,100,265 $ 1,540,249 $ 6,387,320 $ 6,181,688 Weighted average number of trust units outstanding 20,646,867 19,407,267 20,646,867 19,027,887 Net income per trust unit $ 0.05 $ 0.08 $ 0.31 $ 0.32 See accompanying Notes to Unaudited Consolidated Financial Statements. 5

6 CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS EQUITY F OR THE N INEMONTH P ERIODS E NDED S EPTEMBER 30 (UNAUDITED) NineMonth NineMonth Unitholders capital account, at the beginning of period Issued trust units Issuance costs Number of Units Amount Number of Units Amount 20,646,867 $ 195,913,770 18,357,267 1,050,000 $ 169,427,161 12,337,500 (402,377 ) Unitholders capital account, at the end of period 20,646,867 $ 195,913,770 19,407,267 $ 181,362,284 Cumulative foreign currency translation adjustment, beginning of period Foreign currency translation adjustment $ (3,758 ) $ Cumulative foreign currency translation adjustment, end of period $ (3,758 ) $ Deficit, beginning of period $ (12,954,445 ) $ (3,790,405 ) Net income 6,387,320 6,181,688 Distributions declared to unitholders (14,633,467 ) (13,294,019 ) Deficit, end of period $ (21,200,592 ) $ (10,902,736 ) Unitholders equity, end of period 20,646,867 $ 174,709,420 19,407,267 $ 170,459,548 See accompanying Notes to Unaudited Consolidated Financial Statements. 6

7 CONSOLIDATED STATEMENTS OF CASH FLOWS F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30 (UNAUDITED) ThreeMonth ThreeMonth NineMonth NineMonth CASH FLOWS FROM OPERATING ACTIVITIES : Net income Adjustments for: Depreciation of capital assets Amortization of intangible assets Provision for future income taxes (Loss) Income allocated to noncontrolling interest Unrealized exchange gain Changes in noncash working capital $ 1,100,265 1,122,535 1,213, ,639 (210,119 ) (139,223 ) 189,718 $ 1,540,249 1,064,462 1,190,364 21,878 (29,217 ) 511,469 $ 6,387,320 3,355,647 3,642, ,806 51,407 (71,608 ) (3,250,427 ) $ 6,181,688 3,063,950 3,384, , ,556 (294,001 ) $ 3,459,406 $ 4,299,205 $ 10,840,206 $ 12,746,906 CASH FLOWS FROM FINANCING ACTIVITIES: Distributions paid to unitholders Net proceeds from issuance of trust units Reimbursement of operating loan Reimbursement of longterm debt $ (4,877,823 ) (125,391 ) $ (4,535,478 ) 228,638 (115,493 ) $(14,615,917 ) (465,152 ) (368,571 ) $ (13,195,703 ) 11,935, ,638 (228,646 ) $ (5,003,214 ) $ (4,422,333 ) $(15,449,640) $ (1,260,588 ) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of capital assets Business acquisition, net of cash acquired Net cash released from levelization reserve Investments in other reserve accounts Cash released from Horseshoe Bend site work reserve $ (254,701 ) 1,069,626 (106,567 ) 45,078 $ 1,781,704 (126,545 ) $ (435,950 ) 663,219 (322,443 ) 45,078 $ (11,500 ) (7,657,666 ) 1,757,326 (3,365,000 ) $ 753,436 $ 1,655,159 $ (50,096 ) $ (9,276,840 ) Net (decrease) increase in cash and cash equivalents $ (790,372 ) $ 1,532,031 $ (4,659,530 ) $ 2,209,478 Cash and cash equivalents, beginning of period 5,208,274 4,207,904 9,077,432 3,530,457 Cash and cash equivalents, end of period $ 4,417,902 $ 5,739,935 $ 4,417,902 $ 5,739,935 Supplemental cash flow disclosure : Interest paid Unpaid capital assets additions $ 881,284 $ 50,400 $ 751,363 $ $ 2,414,052 $ 50,400 $ 1,950,319 $ See accompanying Notes to Unaudited Consolidated Financial Statements. 7

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

9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30, (UNAUDITED) 3. LongTerm Debt During the quarter, the longterm debt credit facilities 1 and 2 were renegotiated to extend their maturity by two years to July 4, 2009 and reduce their applicable margins. 4. Financial Instruments: During the quarter, the Fund entered into two SWAP contracts maturing in June This effectively fixes its exposure to variable interest rates on additional amounts of longterm debt of $5 million each and increases the total amount of SWAP contracts outstanding to $30 million. The Fund designates these interest rates SWAP contracts as hedge of the underlying debt. The two contracts for notional amount of $5 million each allow the Fund to pay a fixed interest rate of 4.08% and 3.96% increased by a margin until their maturity. As at, the fair market value of all SWAP contracts was ($25,758). 5. Segmented Information: The Fund has operations in Canada and the United States. The information by geographic region is as follows: ThreeMonth ThreeMonth NineMonth NineMonth GROSS REVENUES: Canada $ 4,231,706 $ 5,831,520 $ 18,197,321 $ 18,670,631 United States 1,408,615 3,047,109 $ 5,640,321 $ 5,831,520 $ 21,244,430 $ 18,670,631 December 31, CAPITAL ASSETS: Canada $ 154,664,597 $ 157,550,240 United States 5,878,433 6,222,893 $ 160,543,030 $ 163,773,133 INTANGIBLE ASSETS: Canada $ 65,111,720 $ 68,682,813 United States 2,225,288 2,370,216 $ 67,337,008 $ 71,053, Subsequent Event to the Balance Date: On September 16,, the Fund announced that it will add a tenth facility to its portfolio. The Rutherford Creek facility, of an installed capacity of 49.9 MW, represents an investment of $ million, including the assumption of a $50.00 million debt. The Fund issued 4,033,000 subscription receipts at a price of $13.85 for net proceeds of $53.06 million. The net proceeds of this offering, closed on October 5, will be used by the Fund to partially finance the acquisition, to increase the Fund s hydrology reserve and to pay the expenses related to the acquisition. Each subscription receipt will be converted into a trust unit on the closing of the acquisition expected to occur on or about November 15,. This facility sells its production to British Columbia Hydro and Power Authority under a power purchase agreement maturing in

10 MANAGEMENT S DISCUSSION AND ANALYSIS F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30, Overview (the Fund ) is an unincorporated openended income trust that indirectly owns nine hydroelectric power generating facilities with a total installed capacity of 80 MW. The facilities are operated and managed by Innergex Management Inc. (the Manager ) under longterm agreements with the Fund. The objective of the Fund is to distribute the resulting cash flows of the Fund to unitholders on a monthly basis. The following Management Discussion and Analysis dated November 8, should be read in conjunction with the accompanying unaudited consolidated financial statements of the Fund for the threemonth period ended September 30, and the notes thereto as well as the Fund s Annual Report for the year ended December 31,. Key Performance Indicators The Fund measures its performance through key indicators that include power generated in megawatthours (MWhr), distributable cash from operating activities, net distributable cash, net distributable cash per unit and EBITDA defined as earnings before interest, provision for income taxes, depreciation and amortization, investment income, exchange gain and noncontrolling interest. These indicators are not measures recognized under Canadian Generally Accepted Accounting Principles ( GAAP ). Consequently, these measures might not be comparable to measures reported by other companies. The Fund believes that these measures constitute important additional information giving the reader an indication on the level of production, available distributable cash and the capacity of the Fund to meet its objectives of cash distributions to its unitholders. Seasonality The results of the Fund have a seasonal character due to the variations of water conditions from one quarter to the next during a typical year. The third quarter is the period when the gross revenues are generally lower. Operating Results During the quarter ended, the Fund generated gross revenues of $5.64 million compared to gross revenues of $5.83 million in. Heavy precipitations but less frequent during the quarter created hydrology conditions that were under historical average. During the quarter, the Fund produced 79,748 MWhr of electricity or 16% less than the production of 95,115 MWhr during the third quarter in. It is important to note that the level of production realized during the third quarter of was 21% higher than the historical average. The average electricity selling price increased compared to the corresponding quarter in. This increase can be explained mainly by the contribution of the Horseshoe Bend facility and by the 3% minimum increase of electricity selling prices included in longterm power purchase agreements with HydroQuébec. Gross revenues for the ninemonth period were higher than the corresponding period in. Indeed, gross revenues increased by 14% to $21.24 million and production increased by 7% to 303,648 MWhr. These results reflect the contribution of the Windsor and Horseshoe Bend facilities acquired in April and December respectively, as well as the stability of the revenues from the three facilities located on the Portneuf River. Operating Expenses Operating expenses of $1.03 million were 4% higher than the operating expenses of the third quarter of which stood at $1.00 million. Increase in operating expenses is related to the preventive maintenance program scheduled at the Fund s facilities. For the ninemonth period, operating expenses increased to $3.62 million compared to $2.81 million for the corresponding period in. The 29% increase in operating expenses is mainly due to the addition of the Horseshoe Bend facility to the Fund s portfolio, expenses related to the scheduled maintenance program as well as the repairs of the turbine blade positioning system at the Batawa facility at the end of June. 10

11 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30, General and Administrative Expenses General and administrative expenses of $0.48 million were $0.06 million higher than the expense of $0.42 million in. For the ninemonth period, the general and administrative expenses were $1.48 million compared to $1.20 million for the same period in. This increase is mainly due to the addition of the Windsor and Horseshoe Bend facilities to the Fund s hydroelectric power stations. EBITDA For the quarter, due to hydrology conditions lower than historical average, the Fund posted EBITDA of $4.12 million compared to EBITDA of $4.42 million in. EBITDA for the ninemonth period increased by 10% to stand at $16.14 million compared to $14.67 million for the corresponding period in. Interest Expense The Fund took advantage of the low interest rates environment and increased to 66% the proportion of its longterm debt bearing fixed rates or being hedged by fixed interest rate SWAP contracts for periods up to For the quarter, the interest expense on long term debt of $0.77 million was higher than the interest expense for the corresponding quarter in which stood at $0.71 million. The interest expense for the ninemonth period increased to $2.29 million compared to $1.89 million for the corresponding period in. This increase is mainly due to the assumption of a 8.25% fixed rate debt along with the acquisition of the Windsor facility in April. Net Income For the quarter, the Fund recorded a net income of $1.10 million or $0.05 per unit, compared to the net income of $1.54 million or $0.08 per unit in. The Fund saw its provision for income taxes increase to $0.30 million for the third quarter of compared to $0.02 million for the corresponding period in. For the third quarter of, the loss allocated to the noncontrolling interest held by Hydro IHI inc. into Holding Innergex LP represented $0.21 million compared to $0.03 million for the threemonth period ended. The net income of the ninemonth period increased to $6.39 million or $0.31 per unit compared to $6.18 million or $0.32 per unit for the corresponding period of. For the ninemonth period, the provision for income taxes increased to $0.87 million compared to $0.15 million for the ninemonth period of. This increase in fiscal expenses is mainly due to the addition of the Horseshoe Bend facility. For the ninemonth period, the income allocated to the noncontrolling interest held into Holding Innergex LP stands at $0.05 million compared to an income of $0.25 million for the ninemonth period of. As at, as well as December 31,, the Fund had 20,646,867 units outstanding compared to 19,407,267 units outstanding as at. Liquidity and Capital Resources For the quarter, cash flows from operating activities amounted to $3.46 million compared to $4.30 million in. For the ninemonth period, they totalled $10.84 million compared to $12.75 million for the corresponding period of. During the quarter, the Fund bought two double regulated units in view of the replacement of two existing simple regulated units currently in operation at the Montmagny facility in order to increase the facility s utilization factor. The cost of these turbines in addition to the cost of some other equipment totalled $0.31 million. As at, the Fund had cash and cash equivalents of $4.42 million. The working capital was $3.31 million representing a working capital ratio of 1.34:1, compared to the working capital of $3.70 million that represented a working capital ratio of 1.27:1 as at December 31,. During the ninemonth period, the Fund s longterm debt, of which a portion is denominated in US dollars and converted into Canadian dollars for accounting purposes, decreased by $0.80 million to $58.38 million. At the end of the quarter, the Fund had also a $5 million unused credit facility, giving the Fund access to additional cash that can be used if needed. As at, the Fund s assets totalled $ million. The longterm debttoenterprise value ratio decreased from 18.0% as at December 31, to 17.1 % as at. 11

12 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30, The Fund calculates net distributable cash as follows: N ET DISTRIBUTABLE CASH ThreeMonth ThreeMonth NineMonth NineMonth EARNINGS BEFORE INTEREST, PROVISION FOR INCOME TAXES, DEPRECIATION AND AMORTIZATION, INVESTMENT INCOME, EXCHANGE GAIN AND NONCONTROLLING INTEREST EBITDA $ 4,123,851 $ 4,416,756 $ 16,139,162 $ 14,665,251 Add (Deduct) : (Interest on long term debt) (773,211 ) (713,419 ) (2,290,954 ) (1,891,180 ) (Major maintenance reserve account) (106,567 ) (77,500 ) (322,443 ) (220,000 ) Investment income 125,832 84, , ,346 (Realized exchange loss) (86,028 ) (1,834 ) (Current) Recoverable income taxes (120,756 ) (143,093 ) 10,490 DISTRIBUTABLE CASH FROM OPERATING ACTIVITIES $ 3,163,121 $ 3,710,236 $ 13,768,190 $ 12,820,907 Add : Net cash released from levelization reserve 1,069,626 1,781, ,219 1,757,326 NET DISTRIBUTABLE CASH $ 4,232,747 $ 5,491,940 $ 14,431,409 $ 14,578,233 Weighted average number of units outstanding 20,646,867 19,407,267 20,646,867 19,027,887 Net distributable cash per unit $ $ $ $ Distributions declared $ 4,877,823 $ 4,535,478 $ 14,633,467 $ 13,294,019 Distributions declared per unit $ $ $ $ DISTRIBUTION PAYOUT RATIO 115 % 83 % 101 % 91 % Distributable cash from operating activities for the third quarter stood at $3.16 million, lower than the $3.71 million for the corresponding quarter in. For the ninemonth period, distributable cash from operating activities increased at $13.77 million which was 7% higher than the results for the same period in. This increase is mainly due to the acquisition of the two facilities in. The Fund released a smaller net amount from the levelization reserve during the threemonth and ninemonth periods in, compared to the corresponding periods in. This results mainly from the acquisition of the Horseshoe Bend facility that positively contributes to this reserve account. Due mainly to hydrology conditions being lower than historical average, net distributable cash for the quarter was $4.23 million compared to $5.49 million in the corresponding quarter of and $14.43 million for the ninemonth period compared to $14.58 million for the same period in. 12

13 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30, The table below summarizes the distributions to date. D ISTRIBUTIONS Record Date Payment Date Amount Amount per Unit January 31, February 25, $1,625,940 $ February 28, March 24, $1,625,941 $ March 31, April 25, $1,625,941 $ Total, threemonth period ended March 31, $4,877,822 $ April 29, May 25, $1,625,940 $ May 31, June 23, $1,625,941 $ June 30, July 25, $1,625,941 $ Total, threemonth period ended June 30, $4,877,822 $ July 29, August 25, $1,625,941 $ August 31, September 23, $1,625,941 $ October 25, $1,625,941 $ Total, threemonth period ended $4,877,823 $ Total, ninemonth period ended $14,633,467 $ During the quarter, distributions declared to unitholders were $4.88 million or $ per unit. For the ninemonth period, distributions declared to unitholders amounted to $14.63 million or $ per unit, which in both cases represents a distribution of $0.945 per unit on an annualized basis. Thanks to the sums accumulated to date in the form of cash or cash equivalents on the balance sheet, the Fund did not have to rely on its hydrology reserve in order to make its monthly distributions. Reserves As anticipated, the Fund released $1.07 million from the levelization reserve and invested $0.11 million in the major maintenance reserve. Thus, as at, reserve accounts amounted to $15.34 million and were allocated as follows: Allocation of the Reserve Accounts 6.17 M$ 4.82 M$ Levelization Reserve Major Maintenance Reserve 3.60 M$ 0.75 M$ Horseshoe Bend Site Work Reserve Hydrology Reserve 13

14 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30, Segmented Information The Fund operates eight hydroelectric facilities in Canada and one in United States. The allocation of the gross revenues by geographic region for the third quarter and the ninemonth period of as well as the capital and intangible assets as at can be found below. Third Quarter Gross Revenues $1.41 M; 25% 9Month Period $3.05 M; 14% Capital and Intangible Assets as at $8.10 M; 4% United States Canada $4.23 M; 75% $18.20 M; 86% $ M; 96% Subsequent Event to the End of the Quarter On September 16,, the Fund announced that it will add a tenth facility to its portfolio. The Rutherford Creek facility, of an installed capacity of 49.9 MW, represents an investment of $ million, including the assumption of a $50 million debt. The Fund issued 4,033,000 subscription receipts at a price of $13.85 for net proceeds of $53.06 million. The net proceeds from the offering closed on October 5,, will be used by the Fund to partially finance the acquisition, to increase the hydrology reserve of the Fund and to pay the expenses related to the acquisition. The Rutherford Creek facility will increase the installed capacity of the Fund by 62% and gross revenues by 32%. Closing of the transaction is expected to occur on or about November 15,. This acquisition is in line with the Fund s investment strategy since it diversifies its watersheds and should be accretive to unitholders, raising distribution per unit by 2 to $0.965 on an annualized basis. Related Party Transactions The Manager The Manager offers services to the Fund and its subsidiaries under three agreements having initial terms of 20 years, namely a Management Agreement, an Administration Agreement, and a Services Agreement. For the quarter ended, the Manager was paid an amount of $0.26 million for the services rendered under the three agreements, including an amount of $0.03 million for incentive fees, compared to a total sum of $0.20 million, including incentive fees of $0.02 million for the quarter ended. For the ninemonth period, the Manager received the sum of $0.81 million including incentives fees of $0.10 million compared to a sum of $0.69 million, including reimbursement of expenses related to acquisitions of $0.13 million as well as incentive fees of $0.03 million for the corresponding period in. IHI Hydro Inc. IHI Hydro Inc. owns a minority interest in subsidiaries of the Fund. IHI Hydro Inc. is also indebted to another subsidiary of the Fund. The obligations of IHI Hydro Inc. are secured in part against assets of subsidiaries of the Fund. In consideration for allowing security on their assets, the subsidiaries are entitled to a guarantee fee currently equal to 10% of the annual capital and interest amounts paid by IHI Hydro Inc. (other than a portion of $3.0 million debt). The guarantee fee is payable until a date falling due between and 2009, depending on the facilities. For the quarters ended and, the guarantee fee was $0.26 million and for the ninemonth periods of and, it amounted at $0.79 million, and was included as gross revenues in the statement of income. 14

15 MANAGEMENT S DISCUSSION AND ANALYSIS (CONTINUED) F OR THE T HREEMONTH AND N INEMONTH P ERIODS E NDED S EPTEMBER 30, Selected Quarterly Financial Information For the threemonth periods ended: Power generated (MWhr) Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, , ,534 76,366 92,949 95, ,574 62, ,599 Gross revenues $5.6 M $9.3 M $6.3 M $6.5 M $5.8 M $7.7 M $5.2 M $6.7 M EBITDA $4.1 M $7.1 M $4.9 M $5.5 M $4.4 M $6.2 M $4.0 M $5.3 M Net income $1.1 M $3.3 M $2.0 M $2.8 M $1.5 M $3.0 M $1.6 M $3.2 M Net income per unit $0.05 $0.16 $0.10 $0.14 $0.08 $0.16 $0.09 $0.18 Distributable cash from operating activities $3.1 M $6.4 M $4.2 M $5.1 M $3.7 M $5.6 M $3.5 M $4.7 M Net (investments) releases in levelization reserve $1.1 M $(1.2 M) $0.7 M $1.8 M $(0.8 M) $0.7 M Net distributable cash $4.2 M $5.2 M $4.9 M $5.1 M $5.5 M $4.8 M $4.2 M $4.7 M Net distributable cash per unit $ $ $ $ $ $ $ $ Distributions declared $4.9 M $4.9 M $4.9 M $4.8 M $4.5 M $4.5 M $4.2 M $4.2 M Distributions declared per unit $ $ $ $ $ $ $ $ Distribution payout ratio 115% 92 % 99 % 96 % 83 % 93 % 100 % 90 % Risk Management Interest Rates The Manager reduced the Fund s risk of an unforeseen upward movement in shortterm interest rates by entering into SWAP transactions with a major Canadian bank. This strategy allowed the Manager to effectively fix the interest rate on 25% of the Fund s consolidated longterm debt until September 2007 and 25% until In addition, the interest rate on approximately 16% of the consolidated longterm debt of the Fund is fixed until Exchange Rate The Manager reduced the risks incurred by the Fund regarding the variations of exchange rates on its investment in its American subsidiary by converting a portion of its long term debt into US dollars. Risks and Uncertainties For an overview of the risks and uncertainties associated with the conduct of the Fund s business, reference is made to the Risk and Uncertainties section found in the Fund s Annual Report for the period ended December 31,. It is the view of the Manager that the risk factors discussed in the Annual Report have remained substantially unchanged. Outlook The Manager believes that the Fund will continue to generate stable operating cash flow. The financial results of the Fund remain in line with our expectations. Forwardlooking Statements Investors should take note that certain statements in this Management s Discussion and Analysis are forwardlooking and may not give full weight to all of the potential risks and uncertainties. Forwardlooking statements are subject by their nature to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the forwardlooking statements. Any forwardlooking statements speak only as of the date made. The Fund is not undertaking to update any forwardlooking statements. 15

16 INVESTOR INFORMATION Transfer Agent, Registrar and Trustee: National Bank Trust Inc. 1100, University Street, 9th floor, 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: 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